8-Dec-2020:  Ord Minnett: APN Convenience Retail REIT: AQR goes shopping to mitigate FY22 risks

Broker:  Leanne Truong, Senior Research Analyst, phone: (02) 8216 6367, email: lTruong@ords.com.au

• Last Price: A$3.65 ($3.60 on Fri 11-Dec-2020)
• Target Price: A$3.87 (Previously A$3.82)
• Recommendation: Accumulate
• Risk: Medium
• ASX Code: AQR
• 52 Week Range ($): 2.47 - 4.02
• Market Cap ($m): 400.4
• Shares Outstanding (m): 109.7
• Av Daily Turnover ($m): 0.0
• 3 Month Total Return (%): -4.7
• 12 Month Total Return (%): 3.7
• Benchmark 12 Month Return (%): -0.3
• NTA FY21E (¢ per share): 364.8
• Net Debt FY21E ($m): 176.3

AQR goes shopping to mitigate FY22 risks

AQR today announced a $30m institutional placement and a $5m security purchase plan to partly fund the acquisition of 12 service stations. While the acquisitions are forecast to be slightly dilutive to FY21 FFO/share, we expect earnings accretion from FY22. Acquisitions for FY21 now total over $126m (excludes fund-throughs). We believe AQR has accelerated its acquisitions to offset any downtime/rental reversions from expiring leases. The incremental earnings from the acquisitions should now safeguard FY22 FFO/share growth despite large expiries in FY22.

• Acquisitions provide diversification and extends WALE
  • AQR today announced the acquisition of 12 service station sites for $75.3m (9 are in exclusive due diligence). The acquisitions include seven metro sites and 5 regional sites. The acquisitions reduce AQR’s exposure to QLD from 59% to 53% and increases AQR’s WALE from 11.1 to 11.7 years.
  • The acquisitions will be partly funded by debt and equity. As a result, gearing post the $5m SPP will increase to 30.5%, at the lower end of AQR’s target gearing range of between 25% and 40%.
  • Driven by the strong demand for service stations, yields continue to compress. AQR acquired today’s assets at a 6.1% yield (majority offmarket), below the 6.2% yield achieved during FY20. We expect yields to continue to tighten and have reduced our acquisition yield to 6.0%.
• Acquisitions to be accretive to FFO/share from FY22
  • Although Management has reaffirmed FY21 guidance (FFO/Share and DPS of between 21.8 and 22.0cps), we expect the acquisitions to be slightly dilutive to FY21 FFO/Share (21.9cps), driven by the timing of the equity raising and acquisitions.
  • From FY22, we expect the acquisition to be 4% accretive (includes Shell Bellevue and Chevron Balcatta acquisitions).
  • AQR’s pro-forma NTA reduces from $3.27/share at 30 June 2020 to $3.24/share post today’s institutional placement.
• Acquisitions to mitigate losses from FY22 expiries
  • We believe the acquisitions should safeguard FY22 FFO/share growth and provide a reasonable buffer for any downtime or rental reversions from expiring leases in FY22. We assume over renting of 20% for the EG Group leases and no downtime (100% renewal).
  • We maintain our accumulate recommendation on AQR. Our TP increases 1% noting the acquisitions are accretive to earnings from FY22.

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