Ludovic Theau from Australian Ethical speaks to Laurence Parker-Brown from The Inside Network on what has changed across this investment theme in the last few years. The Inside Adviser
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Charter Hall’s Long WALE Fund gets ‘Recommended’ rating
Property fund manager Charter Hall’s Direct Long WALE fund has received a “Recommended” rating from Zenith Investment Partners. Standing for “weighted average lease expiry,” the fund is managed by a five-person investment team responsible for the full suite of Charter Hall’s direct unlisted property funds.
The focus is on identified well-tenanted, long-term direct property assets with a focus on essential services like industrial and logistics, convenience and social infrastructure assets. The strategy is ‘conservatively’ geared at around 33% and offers a current yield of close to 6% per annum supported by estimated rental growth of 2.6% each year.
The team is headed by Direct CEO, Steven Bennett, who has over 19 years’ experience in property funds management. Reporting to Bennett is fund manager, Miriam Patterson, who takes overall responsibility for the fund.
Reporting on its recent review, Zenith says, “the fund currently comprises a pool of 11 (now 12) direct assets with a moderate level of gearing at 34%, against a target of 30% to 45%. Portfolio metrics are solid with a WALE profile of 8.0 years by income and occupancy of 97%.”
The post-pandemic period has been a great hunting ground for experienced investors, with Charter Hall not wasting it. Transaction manager Ceanda Mah recently announced the latest transaction, the acquisition of Woolworths’ Coffs Harbour store for $19.5 million. Mah says, “It’s a stand-alone supermarket, 100% occupied by Woolworths and includes a BWS liquor store with a current WALE of 8.8 years. I view this as an ideal investment for the fund.”
A non-discretionary supermarket is a very defensive asset class that is classified as essential services. That means, during a pandemic-forced lockdown, essential service stores such as Woolworths can remain open for businesses.
What is appealing about this transaction is the high-quality tenant, which underpins the income security, and the fact that returns and sales productivity at this store is above the average benchmark. “A good store will do about $30 million-$40 million; a strong-performing store will do sales in about the $50 million range. This store is well above the $50 million mark in terms of sales and is exceptional store and has strong sales productivity,” says Mah.
Mah says she often gets asked what to look for when reviewing acquisition opportunities: she says the four main factors in her view are:
- Who is the tenant? Tenant security underpins income security.
- Location and surroundings – Is it in a prime location? Ideally, you want it to be the dominant player in the catchment. Woolworths is the dominant player in the area.
- Turnover – What sales the store is generating? This provides a good indication of the sustainability of tenant being able to make rental payments.
- Lease structure – “Like many commercial leases we can recover operating expenses from the tenant. This minimises any income leakage risks in case there is a spike in operating expenses. A landlord-friendly lease provides investors with a stable positive income return,” Mah says.
Charter Hall says the fund was designed for investors looking for stable, resilient income with moderate capital growth during volatile and uncertain times. Confirming this, Zenith’s opinion is that “the fund may be suitable for investors seeking long-term, stable income with a capital growth component, and who can accept the risks of gearing and potentially low liquidity. Zenith believes that unlisted property should only be utilised in well-diversified portfolios in order to reduce the potential impact of illiquidity risk. Zenith believes the fund is best suited to investors with long-term investment horizons (seven years and over).”
Zenith also says the fund “could be used to reduce volatility and provide diversification within an investor’s growth-orientated portfolio, whilst also providing attractive returns.”
