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Why I like this property business for its near 7% yield

Lately, I’ve noticed a couple of real estate investment trusts trading at attractive prices. With the concerns over rising interest rates, some of these stocks are being shunned by investors. 

But I think for a savvy, long term investor looking for income, this can provide an attractive entry point. 

Consider for a moment, Viva Energy Reit Ltd (ASX: VVR) – it owns service stations across Australia. Its portfolio of properties is currently valued at around $2.3 billion, and it has a 100% occupancy rate.

Most of the service stations are well located in the metropolitan areas of our cities. Not only that, but the weighted average lease expiry (WALE) is currently a whopping 13 years. Also, these service stations are leased to a blue-chip customer in Shell. 

So the rental income is effectively locked in over that time, and rent increases are fixed at 3% per annum. That sets the foundations for a pretty tidy income stream. 

Currently, the share price is hovering around $2. And management recently guided for a full-year distribution of 13.81-13.91 cents, an increase of around 3.5% on 2017. This means the stock is sitting on a forecast yield of almost 7%. 

The company has moderate gearing of 32%, and it’s run with low management costs of 0.24% per annum. 

Now, clearly there’s a risk here, an elephant in the room if you will… 

Primarily, whether we even need service stations in the future. With the electric car industry taking off and clean energy a talking point around the globe, it’s with good reason that investors may be wary of Viva Energy.

Let’s say they’re right. And let’s say that as the leases finish, those properties no longer serve their purpose as petrol stations anymore.

What happens then? 

Well, I believe, due to the metropolitan locations of these assets, the properties could eventually be sold off (at a very decent price) to a developer and be re-purposed – converted into shops, restaurants, offices or apartments. 

Viva Energy is also making something of a transition through focusing more on the ‘last mile’ convenience and ‘click and collect’ features through its properties.

While some folks will be quick to call the death of the petrol station business, the truth is, it’s likely to be a rather slow demise. And that’s provided it’s unable to pivot to services other than selling petrol and convenience stores. 

Another sweetener, Viva Energy trades at a discount to the value of its assets. Recently, management noted the net value of the portfolio (NTA) is $2.12 per share, after the recent distribution. With the share price currently around $2, you can buy this income-producing property portfolio at a 5% discount. 

So even if interest rates rise slowly from here, and service stations become less important in the future, I still think this REIT should be able to provide a growing income stream over time.

Essentially, it’s the extra-long leases and the fixed rental increases that underpins the case for value here, in my view. 

For income investors, it’s certainly fuel for thought.

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Motley Fool contributor David Gow owns shares in Viva Energy Reit. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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