Viva Energy REIT Ltd (ASX: VVR) listed on the stock exchange in August this year, surging over 16 percent on debut from its issue price of $2.20 per stapled security. Securities in Viva REIT traded as high as $2.63 in their initial week's trade, before plumbing post-IPO lows of $2.30 earlier this week.
With the Viva REIT offering an impressive growth trajectory and displaying defensive characteristics, I thought it was time to take a closer look at the company.
About the REIT
Viva REIT operates as a stapled structure and is managed by responsible entity VER Manager Pty Ltd, a wholly-owned subsidiary of Viva Energy.
Under the Master Management Agreement, the Viva REIT acquired all 425 petrol station sites from Viva Energy, the exclusive licensee of Royal Dutch Shell products in Australia, and leased them back to Viva Energy for use as petrol stations.
In addition, Viva Energy indemnified the Viva REIT to pay all taxes, maintenance costs and insurances applicable for operating the sites as petrol stations, making the Viva REIT relatively risk-free.
Defensive business
Like fellow listed retail-REITs BWP Trust (ASX: BWP), Shopping Cntrs Austrls Prpty Gp Re Ltd (ASX: SCP) and Scentre Group (ASX: SCG), Viva offers investors the proposition of reliable income and stable growth through its business of holding parcels of land which are leased to long-term anchor tenants.
However, unlike most other REITs (and with the possible exception of SCA Property Group), Viva offers investors a unique defensive trait by virtue of its key tenant being Viva Energy (aka Shell petrol stations). Although most Shell petrol stations are operated by Wesfarmers Limited (ASX: WES) as Coles Express services station, demand for petrol remains inelastic, meaning Viva REIT operates in a consumer staple industry (as every car owner needs petrol from somewhere).
This augurs well for long-term growth and stability.
Growth path
Under the terms of the Master Management Agreement, each lease to Viva Energy is between 10 and 18 years in duration, giving the Viva REIT a weighted average lease expiry of about 15.3 years (at the time of listing). Importantly, Viva Energy has seven 10-year leases to extend each lease, with rental increases being pre-determined at 3% per annum during the term of each lease, subject to market rent reviews whenever an option is exercised.
This means investors are all but guaranteed to enjoy 3% growth for the next 70 years (assuming each option is renewed at or above the previous lease's asking rent price).
The kicker to growth will be the acquisition of more sites by Viva REIT, which would grow earnings and increase distributions over time.
Accordingly, Viva REIT's security price should naturally be a lot higher than it is today, in the long-run, making it a compelling business to own.
Foolish takeaway
According to its IPO prospectus, the Viva REIT is forecast to provide an annualised distribution of about 13.07 cents per stapled security in 2017. At the current price of $2.36, that equates to a robust 5.5% unfranked yield, easily trumping bank deposit rates.
This yield, alongside sound growth prospects and a defensive business model makes the Viva REIT one stock which should be on your buy list today, in my opinion.
