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Should income investors buy Viva Energy REIT Ltd for its 6.5% yield?

Viva Energy REIT Ltd (ASX: VVR) is an ASX 200 stock that owns and leases out Shell branded service stations. These service stations are typically operated by Wesfarmers Ltd (ASX: WES) as Coles Express stations.

Viva Energy REIT recently released its 2017 annual results, its first full year results since listing in August 2016. Here are the highlights:

  • The REIT now has a $2.28 billion portfolio made up of 438 service stations
  • The portfolio has a weighted average capitalisation rate (WACR) of 5.8%
  • The portfolio has a weighted average lease expiry (WALE) of 13.7 years with fixed 3% per annum rental increases
  • 100% occupancy on all properties
  • Net asset value (NAV) per security of $2.19 which means the REIT’s current share price of $2.01 is trading at an 8% discount to NAV.
  • Net profit of $170.5 million
  • Total 2017 distribution per security of 13.2 cents per security, a yield of 6.5% based on the current share price

Since its IPO in August 2016, Viva Energy REIT’s share price has dropped over 20%, a fate shared by other real estate securities such as BWP Trust (ASX: BWP) and Scentre Group (ASX: SCG).

Given that it’s now trading at a discount to its NAV, income investors might be wondering whether now is the time to buy shares in Viva Energy REIT.

I think there a few things to consider:

  • Income growth. Given the current 100% occupancy and fixed 3% annual rental increases across the portfolio, there is not much room for additional income growth. Management have flagged that they aim to use debt funded acquisitions to grow income in the business. Given the REIT has an undrawn debt facility of $160 million and a 32% gearing ratio that is below the 35%-45% target range, this is certainly possible.
  • Interest rates. Even though REIT share prices have come down recently, if interest rates increased faster than expected, this could further impact on valuations.

Overall, I think the unique nature of Viva Energy REIT’s service station exposure could warrant inclusion in an income portfolio but at this stage I would keep this to a smaller part of my portfolio until the REIT has a more established track record.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended BWP Trust and Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.