Eley Griffiths Group

Aventus listed on the ASX at $2 last October to a largely unreceptive audience, as other more beguiling IPO’s caught investor’s attention. Our confidence in the property trust sector had been building at this time, prompting a closer look, and eventually, participation in the initial public raising. We were attracted to the story by its prized east coast land holdings (1.1million m2 in total, 470k m2 GLA), progressive management and a superior outlook for earnings and distribution growth. Eley Griffiths Group went on to add to its holding in the weeks after the float and in the recent raising. Aventus comprises a portfolio of 15 (soon to be 20) large format retail (LFR) property assets, predominantly in metropolitan/major regional areas in the SE corner of Australia. The nation’s leading retailers comprise 83% of the property portfolio.

It is the third vehicle Brett Blundy has floated in the current stockmarket advance and in this entity he has teamed up with seasoned retail property investor/manager, Darren Holland.  Central to their growth strategy is the acquisition of LFR centres in what is a highly fragmented industry. They will look to enhance value through redevelopments,  optimized centre utilizations and favourable rent reviews across these acquisitions and with existing centres.

This month, AVN announced the acquisition of a portfolio of 5 LFR’s from international investor, Blackstone Group for $236.0m, with an equity raising of $105m accompanying the deal. The raising was done at $2.03 per share (~3% premium to Pro-forma NTA) and was essentially a ‘re-IPOing’  of the business, as it introduced new holders to the register at close to the IPO price.

Supposedly, it is unusual to see > 2 LFR’s in a sale-portfolio, so securing five was very opportune. The transaction was struck at a 7.38% cap rate (yield), with anecdotes suggesting 6% cap rates were more typical in recent individual LFR transactions. The deal has resulted in upgraded earnings and distribution guidance but has also pushed borrowings to the upper end of management's preferred range (30%-40%).  Likely property revaluations over the months ahead should assist with lowering balance sheet gearing to more reasonable levels and provide some flexibility for future acquisitions. In any event, the absolute level gearing (post-Blackstone) is broadly in line with sector averages of ~ 34%.

Across the portfolio, exposures to distressed operators, Masters and Dick Smith, are in hand with a Woolworths lease guarantee for the former and 2/3 Dick Smith sites being re-tenanted.

Eley Griffiths Group has always been attracted to well-managed, conservatively financed, small REITs that operate in distinctive market segments. All the better when they exhibit above-average earnings growth prospects and the likelihood of being the driver of rational industry consolidation.

The secret is knowing what sort of premium to pay for the exposure. At $2.19, AVN sits at a 10.5% premium to pro forma NTA. Modest, when looking across the current listed AREIT landscape.

On a current FY17 PE of ~ 12x, the company also screens cheaply when compared to much of the AREIT universe.

It is reasonable to expect unit earnings growth moving forward, enhanced by acquisitions and a lower cost of debt following the RBA’s recent interest rate cut and move to a more accommodative stance. Given h1 FY17 guidance of 7.75cpu, investors might assume a full year FY17 distribution yield of 7.1% based on a $2.19 share price.



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