Shares of Viva Energy REIT (ASX: VVR) have enjoyed a strong debut on the ASX. The shares were offered at $2.20 apiece and climbed to a high of $2.52 in initial trade.
The Viva Energy REIT is unique because it will give investors exposure to a portfolio of 425 service station sites located throughout Australia. The properties in the portfolio have been independently valued at $2.1 billion and the distribution of the petrol station sites is highlighted below:
All of the service stations are tenanted by Viva Energy Group and are currently Coles Express branded and Shell branded stations.
The tenant, Viva Energy Group, owns and operates an integrated fuel manufacturing and supply business. In 2015 it sold 14.7 billion litres of fuel products, generated sales of $16.5 billion and delivered pro forma EBITDA of $622 million.
Viva Energy Group will maintain a 40% interest in the REIT and the relationship between Viva Energy Group and the REIT is summarised in the graph below:
According to the prospectus, the terms of the leases of properties in the portfolio between Viva Energy REIT and Viva Energy range between 10 and 18 years, with a Weighted Average Lease Expiry (WALE) of 15.3 years.
Importantly, annual rent increases of 3% are built into the leases and are structured as triple net leases which means that the tenant is responsible for all property outgoings.
The REIT will also have the opportunity to increase the number of sites in the portfolio as it has entered into a site acquisition and leasing agreement with Viva Energy Group for future acquisitions. With that said, the REIT may also acquire service stations that compete with Viva Energy.
Because the REIT is being created as a new standalone entity, there is no previous trading history or historical financial statements for investors to work off. According to the prospectus, however, the REIT is expected to generate rental income of $155 million and net profit of $117.6 million for the 12 months ending December 2017.
From an income point of view, investors can expect to receive a distribution yield of 5.94% for the corresponding period.
Although the opportunity to invest looks quite compelling, I think it is important for investors to note that the offer was already priced at a premium to the net tangible asset (NTA) value of $2 per security. After today's strong share price performance they are now trading at a premium of around 25%. As a result, I wouldn't be rushing out to buy the REIT at current prices, but a move back towards the NTA would certainly grab my attention.
