The one segment of the market that hasn’t had any difficulty raising capital has being the real estate investment trust sector.
This has been the biggest year for A-REIT capital raisings since the sector was recapitalised during the financial crisis, with about $7 billion raised so far and demand for such issues outstripping supply.
The appeal of commercial real estate is yield, especially in an interest-rate environment where relatively attractive and secure yields are scarce. The average distribution yield for the sector is, according to UBS, 4.6 per cent. That compares with a 10-year bond yield of only just over one per cent, the widest spread since 2012.
Caltex undertook a review of its retail network this year, including evaluating its portfolio of about 700 retail sites to identify its best-performing. It whittled the list down to 500 freehold and leasehold sites before isolating its best 250 freehold properties.
It is those sites that it will sit within a property trust which will be 51 per cent owned by Caltex and 49 per cent by new investors. The trust will have long-term leases over the sites.
The continuing majority ownership is one of the differentiating features of the proposal. Investors have become wary of floats where the vendors are private equity firms or hedge funds with no substantial continuing exposure to the success, or otherwise, of the entity.
The sites are the core of Caltex’s retail network and the trust will be a vehicle that, if successful, could be used to access capital on attractive terms by vending in more existing sites, acquiring sites now currently held as leasehold or developing new greenfield properties.
It is instructive that Caltex and its advisers at UBS are choosing an IPO rather than a demerger of the interest in the sites to its existing shareholders. That’s because the sites should be far more attractive to pure property investors than they would be to investors in Caltex.
Caltex said the trust will receive rental payments of between about $80 million and $100 million a year.
At the multiple of eight times earnings before interest, tax, depreciation and amortisation (EBITDA) that Caltex shares trade on, the income from those sites would be worth between $640 million and $800 million.
For a property investor, a capitalisation rate (broadly equivalent to a yield) of about five per cent or even less would value that same income stream at between about $1.6 billion to $2 billion.
That’s a lot of latent value Caltex can unlock.
The 49 per cent being offered will, assuming the IPO is successful, raise somewhere between about $800 million and $980 million for Caltex before taxes and the cost of the raising are included.
Moreover, it should see a similar value uplift for Caltex’s residual 51 per cent interest.
What is essentially an arbitrage opportunity, capitalising on the different investors’ views of property, could add $1 billion of value to Caltex once those 250 sites are valued on a standalone basis rather than submerged within Caltex.
The group said funds released could be used to strengthen its balance sheet, fund growth opportunities or be returned to shareholders. With around $1 billion of franking credits to play with, capital returns are an attractive way to release value for shareholders.
Caltex presumably looked at outright sales and leasebacks of its properties as part of the retail network review but those sites are key to the convenience store strategy Caltex is pursuing. A partnership with Woolworths and its “Metro” small store format and supply chain is a part of that strategy.
The enhanced retail offer, as it is rolled out, could add an element of upside to the IPO if the convenience store strategy is successful.
The IPO may be the last big decision overseen by long-serving chief executive Julian Segal, who gave notice earlier this year of his intention to retire after a decade in the role. It is also the first big transaction for his chief financial officer, Matt Halliday, who joined Caltex in April after a number of CFO roles at divisional level within Rio Tinto.
Halliday has come from an environment driven increasingly by a focus on capital efficiency and returns and would have quickly seen the opportunity to substantially increase the returns from the 250 sites earmarked for the IPO – without sacrificing any strategic objectives – as low-hanging fruit.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.