I am learning how to analyse REITs as a possible long-term low risk investment.

Dexus Convenience REIT (DXC) owns "high quality Australian service stations and convenience retail assets.". One could argue it is going to take many years before service stations become obsolete (if they ever do) due to lack of action from our elected officials on transitioning to EV.

Current share price: $3

Current NTA: $4.03

WALE: 10.8 yrs

Occupancy: 99.7%

FFO and distribution: 23.1c

Price to FFO: 13

Distribution Yield: 7.7%

Discount to Current NTA: ~25%

Forecast FFO FY23: 21-22c

I might prefer industrial REITs than 'convenience' REITS because of LT thematics, but DXC would look enticing at a share price less than $2.80 based off Price to FFO, Yield, and historical valuation levels. Nice discount to NTA but this might be usual for these types of REITs or REITs in general.

Other things to take into consideration:

1. Company is doing a share buy-back so management have to believe the company is undervalued
2. They have made some acquisitions and disposals during the year.
3. Upgraded guidance during the year.

AQR is a REIT that owns and leases petrol stations, and so is quite boring. It does however have leases with major companies with a WALE of 11.8 years, meaning it delivers a consistent return above 6%, and will do for years, so it is like a very good bond yield. It is currently trading slightly below NAV.

I suspect most think petrol stations will be a 'thing of the past' once EV's take off, reducing interest in this stock, and I agree with that projection, but the locations of the properties it owns will be highly sought as future residential or commercial sites, giving it a strong exit value. 

Held IRL.

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: [email protected]

• 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.

--- click on the link at the top for the full OM report on AQR ---