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IPO watch: petrol stations a source of high yield

APN Funds Management has launched a prospectus for new real estate investment trust, designed to deliver a high, reliable and growing income stream with a yield of 6.5 per cent at the outset.

The key to the fund’s yield is long-term leases and contracted rent increases.

Convenience Retail REIT, which will be listed on the Australian Securities Exchange, has been set up to invest in Australian convenience retail commercial property, leased to companies operating petrol stations, fast food outlets and convenience stores.

“Investors are attracted to petrol stations because of the long-term lease covenants to some of Australia’s most successful retailers, which include the supermarket majors and their partners in the fuel market,” the fund’s prospectus says.

Aiming to raise up to $162 million through an issue of 54.1 million stapled securities, at listing the trust is expected to have a total of 78.9 million stapled securities on issue and a market capitalisation of $236.8 million.

The fund will have gearing of 30 per cent at listing. It will use a mix of debt and equity to finance its activities and has adopted a target gearing range with an upper limit of 40 per cent.

It has forecast a distribution yield of 6.5 per cent in the current financial year, rising to 6.75 per cent in 2018/19.

Distributions will include a significant tax deferred component in the current financial year and in 2018/19.

The manager intends to pay distributions quarterly, with the distribution payout expected to be between 95 per cent and 100 per cent of income.

Initially, the trust will have 66 properties worth $307.6 million, with 99.4 per cent occupancy and a weighted average lease expiry of 13.6 years.

The bulk of the income (78 per cent) is subject to contracted rent increases of three per cent a year and the balance is linked to annual CPI reviews. The average fixed rental growth of the initial portfolio is 2.9 per cent a year.

The initial portfolio also includes three additional properties “in respect of which documentation relating to their acquisition has been entered into.” Those deals are expected to be completed by October.

Properties are leased to Puma Energy Australia (which accounts for 69 per cent of portfolio income), Woolworths (20 per cent of income), 7-Eleven (six per cent) and Viva Energy (one per cent).

Property outgoings, repairs and maintenance are the responsibility of the tenants, with the landlord responsible for capital and structural repairs. Environmental liabilities are the responsibility of the tenants.

Growth opportunities include participation in Puma’s national expansion plans. Puma Energy Australia, which has operated in Australia since 2013, is owned by the Singapore fuel marketing company Puma Energy Holdings. Puma is an investor in the fund and will hold between five and 10 per cent as a strategic stake.

Puma has operations in Africa, Latin America, Europe, the Middle East and sia Pacific.

The fund manager and responsible entity, APN Funds Management, is a wholly owned subsidiary of APN Property Group, which manages around $2.4 billion of real estate and real estate securities on behalf of institutional and retail investors. It was established in 1996 and is listed on the ASX.

“The manager intends to take an active approach to asset and portfolio management and value accretive expansion of the portfolio. This includes an intention to pursue strategic acquisitions and development opportunities, both with Puma Energy Australia and other parties.

“While Convenience Retail REIT will be tenant agnostic, with many growth opportunities in the fragmented retail and service station property market, the REIT and Puma Energy Australia have agreed a strategic partnership.”

Puma plans to increase its Australian network from 260 sites to more than 300. The fund will have first right of refusal over any site Puma wishes to acquire.

The management fee is 65 basis points, falling to 60 bps if the asset value exceeds $500 million and 55 bps if the asset value exceeds $1 billion.

A risk is the level of concentration, with two tenants (Puma and Woolworths) accounting for 89 per cent of income.

Other risks include the possibility that expiring leases will not be renewed, that capital expenditure above forecasts will be required.

The proceeds of the offer will be used to provide cash to existing unitholders, fund the acquisition of the properties in the initial portfolio and the additional properties, and pay for the transactions costs of the listing.