REITs: Proposed merger of HDN & AVN
About the author:
- Author name:
- By Fiona Buchanan
- Job title:
- Co-Head of Research, Senior Analyst
- Date posted:
- 19 October 2021, 11:00 AM
- Sectors Covered:
- Property, AREITS
- HomeCo Daily Needs REIT (ASX:HDN) has announced a proposed merger with Aventus Group (ASX:AVN) to create a portfolio of Large Format Retail, convenience and health services assets across Australia.
- The combined HDN/AVN portfolio is valued at $4.1bn with exposure to ‘last mile’ logistics, as well as a significant land bank with future development potential (38% site coverage with +$300m of future expansion opportunities).
- The merged group will be managed by Home Consortium (HMC) which is expected to hold a 13.5% co-investment.
- In our view, the merged group will own a high-quality portfolio of assets with national tenants which will continue to deliver stable distributions to investors. We expect the significant land bank will also provide medium and long term growth opportunities which offers FFO and NTA upside.
- A key positive is the retention of management from AVN who will transfer to the merged group.
HMC/HDN has announced it will acquire all AVN securities via a Scheme of Arrangement. Under the terms, AVN securityholders will receive consideration with an implied value of $3.82 (+15.3% to the last close pre announcement and 41.9% premium to NTA).
The consideration comprises 2.20 HDN units for every 1 unit in ARPF (holds all AVN’s real estate) which will be paid by HDN (93% of the total consideration) and $0.285 cash or 0.038 HMC securities for every 1 share in AHL (management company) which will be paid by HMC (7% of total consideration).
Both boards unanimously support the merger (bid is subject to AVN and HDN security holder approval with a meeting to be held in late January 2022). Brett Blundy Retail Capital (BBRC) currently holds a voting interest in approx. 22.6% of AVN securities and has confirmed that it intends to vote in favour of the Scheme in the absence of a superior proposal.
Following implementation, Darren Holland and Lawrence Wong of AVN will be offered roles as CEO/CFO of HDN respectively. We see this as a key positive given Mr Holland’s extensive experience in the industry and known track record.
Key portfolio & financial impacts
The merged portfolio will be valued at $4.1bn with exposure to daily needs (34%); LFR (50%); and health services (16%). HMC expects the portfolio to reweight to Daily Needs over the medium term via tenant remixing and developments. Portfolio metrics remain solid: WACR 5.85%; WALE 5.3 years; occupancy 99%; and WARR 3.6%.
Average gross rent is $331/sqm. 84% will be national tenants and 70% of tenants have click & collect. The merged group also has $50m of active developments and planning underway: HDN has ~$30m of brownfield developments + AVN has $20m of near-term active developments. Longer term the pipeline is valued at +$300m.
The merged group’s gearing will be 34.5%. Post the merger, HMC’s AUM will increase to around $5bn (12 months ahead of its current guidance). As a result, HMC has upgraded its FY22 pre-tax FFO guidance to 26c (+41% on previous guidance/+89% on the pcp). DPS guidance of 12c remains unchanged.
HMC will have a 13.5% interest in the merged group following implementation and contributing 7% of the total consideration. HDN: the merged entity would result in FY22 FFO accretion of 4.0% to 8.9c (FY impact and includes property management synergies).
Assuming a 90% payout ratio this would equate to a distribution yield of around 5%. Post merger NTA falls to $1.24 (from $1.35) however we expect further valuation gains in the near term. AVN has today provided FY22 FFO guidance of 20.3c (or 20.5c including one-off items) which implies 4.6% growth on the pcp.
Last stated NTA is $2.69, therefore the bid price at $3.82 implies a c42% premium to NTA.
Figure 1: HDN/AVN merger metrics
Source: company reports
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