Australia | Dec 13 2019
Property fund manager Charter Hall and its convoy of investment vehicles have alighted at some significant property, including the Huntingwood site of the famous Arnott's Biscuits in Sydney.
-Are concerns regarding Charter Hall's performance fees justified?
-Valuation of CLW becoming a hurdle for Macquarie
-CQR preferred by Morgan Stanley because of non-discretionary retail bias
By Eva Brocklehurst
Charter Hall Group ((CHC)), the property fund management company, and its convoy of listed investment vehicles have been busy, totting up $1.25bn in acquisitions recently.
Three vehicles has combined to acquire some significant property on a sale and lease-back arrangement via a managed partnership of 49% of 225 convenience retail petrol stations from BP Australia. BP Australia retains the other 51%.
The Huntingwood manufacturing site of the famous Arnott's Biscuits company in Sydney has also come under the group's purview, with Charter Hall Long WALE REIT ((CLW)) and Charter Hall Prime Industrial Fund (unlisted) taking a 50% stake each.
UBS upgrades CHC to Buy, increasingly convinced of the company's ability to raise and deploy third-party equity/debt. Over FY20 to date Charter Hall Group has raised more than $2bn and increased assets under management by around $7bn to $38bn. The broker suggests concerns regarding peak performance fees in FY20 and the fundamentals of the Sydney/Melbourne office market are unjustified, given the momentum across the broader platform.
Macquarie, however, suspects growth in earnings per share may become more challenging in FY21, depending on the outcome for performance fees, although acknowledges the low interest rate environment is supportive of the deployment of funds into real estate.
Funds under management growth has averaged 18% since 2014 for CHC and UBS suspects it could beat the 30% now flagged in new guidance for FY20. The broker is comfortable assuming 6-8% growth, which incorporates $800m per annum in net equity being raised.
The weighted average lease expiry (WALE) of the petrol stations is 23.4 years and the BP tenant covenant, as well as triple net leases, allows the acquisition to be funded by debt at 50% leverage. Citi considers the PE (price/earnings) multiple of CHC, at 18x, undemanding for a business that can generate more than 20% growth, allocating the stock as a top pick for the sector.
FNArena's database has three Buy ratings and one Hold for CHC. The consensus target is $12.84, suggesting 13.2% upside to the last share price.
So, which owns what?
In what UBS describes as a “Jatz Cracker of an acquisition” CLW has bought a 50% share in Huntingwood for $199m, as well as a 50% share in the managed partnership of the BP Australia service stations for $420m.
As a result of the transactions, CLW's weighting to the east coast rises to 74% and CPI-based rent reviews increase to 44% from 34%. UBS had suspected it may be difficult for CLW to acquire assets accretively without increasing risk/leverage but this acquisition is 1% accretive in FY21-24.
CLW will partially fund its acquisitions by a $350m institutional capital raising. Macquarie considers these good transactions in isolation, although finds the valuation of the stock a hurdle.
Citi notes investor concerns regarding the rents at the Arnott's site but points out the facility includes office, cold storage and high-bay industrial buildings that generate higher rents per square metre vs traditional industrial uses.
The broker reiterates a Buy rating, noting the asset base of CLW has grown to $3.6bn – and up 71% in the last six months – which highlights the potential for significant ongoing growth.
There are two Buy, one Hold (UBS) and one Sell (Macquarie) ratings for CLW on the database. The consensus target is $5.60, suggesting 3.6% upside to the last share price. Dividend yield on FY20 and FY21 forecasts is 5.2% and 5.5% respectively.
BP Australia Sites
The managed partnership consists of CHC (20%), CLW (50%) and Charter Hall Retail REIT ((CQR)) with 30%. The partnership's 49% interest is valued at $840m at a passing yield of 5.5%. CQR's stake takes its weighted average lease expiry of the portfolio to 7.2 years from 6.5 years.
Gearing at the partnership level is 50%, which means CQR's equity commitment is $137m, of which $117m will come from the divestment of five shopping malls, in order to maintain gearing within its 30-40% target range.
CQR has announced plans for a further $100m in non-core asset sales, without which Macquarie assesses 'look-through' gearing would be 39%, and upgraded FY20 guidance for earnings per share to growth of 2.2%.
Morgan Stanley, despite the “good” news is Underweight on the stock because of a bearish view on the retail sub-sector under coverage. CQR is still preferred amongst the retail pure-plays because of a bias towards non-discretionary retailers and a distribution yield of 6.4%.
Macquarie is attracted to the sustainable free cash flow yield but, given the limited growth profile, also retains an Underperform rating while Citi assesses the announcements are broadly neutral for both earnings and the valuation, particular once the additional disposals are completed.
The database has three Hold and three Sell ratings for CQR. The consensus target is $4.12, signalling -10.0% downside to the last share price. The dividend yield for FY20 and FY21 is 6.4% and 6.5% respectively.
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