When the independent directors of the Aventus Retail Property Fund pitched the idea to securityholders that the trust buy out its manager for $143 million, the key message was how the deal would drive the growth of the homemaker centre landlord and its $1.9 billion portfolio of 20 malls.
“The internalisation of Aventus management is expected to have immediate benefits to earnings and value, as well as long-term strategic advantages for the competitiveness and growth prospects of the group,” Aventus chairman Bruce Carter said in August.
The deal, which promised to deliver a 1.1 per cent boost to earnings this financial year while also bringing the trust in line with the structure of other large A-REITs, was duly backed by securityholders though not without a protest vote of 28 per cent.
The beneficiaries were the founders of the trust’s manager, the Aventus Property Group. Retail billionaire Brett Blundy took home $96.5 million, mostly in securities, lifting his leading stake in the trust to 32 per cent, and co-founder Darren Holland, the Aventus CEO, whose $46.6 million payout was split between cash and shares.
Mr Blundy, who laid the foundation for his $1.7 billion fortune on the success of retail chains such as Adairs, Lovisa and Bras N Things, created (with Mr Holland) the listed Aventus vehicle after stapling a number of unlisted homemaker centre trusts together and floating them in October 2015.
Following the successful internalisation of management, Mr Holland also pushed the message of growth, telling The Australian Financial Review: “We are at a size now where our new structure will enable us to grow more efficiently in the medium term, to compete effectively and to continue to consolidate and dominate a highly fragmented [large format retail property] sector.”
Growth certainly has been a feature of Aventus, since it floated three years ago.
The A-REIT has more than doubled the value of its portfolio over that time through a series of acquisitions including the landmark deal to buy the Castle Hill and Marsden Park homemaker centres from LaSalle for $436 million in May last year – funded by a well-supported $215 million equity raising.
Over the same period, funds from operations (the key earnings number for listed trusts) has also more than doubled to $89 million while the trust has delivered an average annual total return of 12.7 per cent, beating the 9.5 per cent total return from the S&P/ASX 200 A-REIT index.
This outperformance is notable coming at a time when investor sentiment has swung heavily against retail property trusts amid the weak retailing environment and growth of online sales. Last week 76-year-old budget menswear retailer Roger David was added to the long list of retailers that have failed to survive to tough conditions.
Anchored by online-resilient bulky goods retailers such as Bunnings, Harvey Norman, Freedom and JB Hi-Fi Home, Aventus has maintained near fully leased malls in a sector that accounts for 30 per cent of the retail market, but remains highly fragmented.
Astutely, Aventus has added an increasing number of non-household goods tenants like gyms, supermarkets and childcare centres to the retail mix. These not only pay higher rents and increase weekday visitation, but have left its malls less exposed to the slowdown in the housing market, which is a major driver of spending on bulky goods like furniture, white goods and electronics.
With 37 per cent of its income coming from non-household goods retailers, the homemaker centre landlord delivered like-for-like net operating income growth of 3.3 per in 2017-18, the highest in the retail A-REITs sector.
It has also continued to report both positive rental growth and positive leasing spreads (meaning new leases are struck at higher rent than the previous tenant paid), whereas its bigger rivals such as Scentre Group and Vicinity have had to cut rents to secure new tenants and offer more short-term leases.
And while the Aventus unit price has not shot the lights out – it closed at $2.14 on Friday, just 7 per cent higher than its $2-per-security float in 2015 – it has been one of the better performers in a basket of retail or housing-exposed REITs on a comparative basis.
Certainly Mr Holland remains highly confident Aventus can weather the retail malaise even though the Aventus unit price has retreated since the manager buyout.
“Large format retail centres have very different characteristics to traditional shopping centres and are therefore uniquely positioned to manage the headwinds in the retail sector, so we look forward to continuing to achieve consistent, sustainable and strong returns for our investors,” Mr Holland said.
But CLSA analysts Sholto Maconochie and Stephen Lam, who urged securityholders to reject the internalisation proposal before the vote in September, are not quite as bullish.
In a note titled “Don’t like overpaying? Push back”, they argued the $143 million buyout was overpriced and that the 1.1 per cent boost to earnings in 2018-19 (that would come from not having to pay Mr Blundy and Mr Holland management and performance fees) was “merely a temporary boost from increased leverage and not value creation”.
The CLSA analysts slapped an “underperform” rating on Aventus and a 12-month price target of $2.25.
They warned that internalisation would dilute future earnings because in order to maintain a prudent level of gearing in the current point in the property cycle the trust would be forced to sell some of its assets – gearing increased to 39.3 per cent post-internalisation, near the top of Aventus’ 30-40 per cent target range.
The analysts flagged possible sales of three of its smaller malls – Highlands Hub, Warner Bay Home and Ballarat Home – valued at a combined $111 million, or some of its larger assets in Western Australia or South Australia.
A decline in earnings might not be the only headwind facing Aventus in the coming few years.
There is also a potential correction in real estate values looming in the large-format sector with major new player Home Consortium boosting retail space through the conversion of former Masters DIY warehouses into new homemaker centres at a time when the housing downturn is gathering pace and demand from retailers might start to fall.
There are already signs of a potential weakening in values with Altis Property Partners recently selling $282.4 million worth of homemaker centres on behalf of First State Super at a yield around mid-7 per cent. The Aventus portfolio currently trades on a cap rate of 6.7 per cent.
Also to be kept in mind is the Aventus unit price, which at $2.14 trades at about a 10 per cent discount to the net value of its portfolio – an indication perhaps that the market believes the portfolio might be overvalued.
However, Aventus directors will point to the quality of its east coast-centric fortress malls, the backing of Mr Blundy and his midas touch in all things retail, and the fact that it has only 2 per cent exposure to fashion and apparel plus no department stores (the retail categories struggling the most against the growth of online retail and the expansion of global brands like Uniqlo and H&M) as signs it can continue to outperform.
Macquarie’s September Listed Property Sector wrap, published after the 2017-18 reporting season, noted the “healthy” net property income growth being achieved by Aventus – in contrast to a bearish view on retail property in general as its analysts instead favoured office, industrial and diversified trusts such as Dexus, Goodman, Mirvac and Charter Hall.
“We think the retail space will remain challenging due to structural headwinds compounded with cyclical headwinds (rising rates, political uncertainty etc),” said the Macquarie team led by senior analyst Rob Freeman.
Whether Aventus can continue to swim against the retail property tide and also deliver the growth and value creation that its directors have promised shareholders who backed the internalisation process, remains to be seen.