Charter Hall has used its round-about again this week announcing that its Retail Fund has acquired a 52% interest in Coles leased industrial asset from one of its closed end funds in a deal worth $111.8M.
The transaction takes the REIT away from a pure play retail REIT to one with co-mingled industrial assets. Charter Hall describes the move as consistent with CQR’s strategy is to be the leading owner and manager of property for convenience retailers, however I don't see the linkage.
The distribution facility is located in the Adelaide’s prime industrial precinct of Edinburgh Park, South Australia, approximately 25km from Adelaide CBD. The facility consists of a modern distribution centre of 67,944sq m that Goodman purpose-built for Coles in 2007 and remains their sole distribution centre to service all of its retail stores in South Australia and the Northern Territory.
The property has been owned by the Charter Hall Direct CDC Trust (52%), Charter Hall Direct Fund No 2 (24%) and Charter Hall Direct Fund No. 3 (24%). The CDC Trust reached the end of its defined investment term, triggering a need to divest the interest in the asset which is the sole asset in the Trust. The Trust held the asset at a value of $108m.
Charter Hall claim that the opportunity provided a mutually beneficial outcome for the CDC syndicate investors to exit, whilst providing CQR a resilient exposure to logistics, leased to one of its major convenience retail customers in Coles. Charter Hall have not provided any guidance on the relative pricing of the asset nor how they have dealt with the conflicts of interest that naturally arise when dealing assets between funds within the same group.
Charter Hall acquired the asset from Goodman Group for about $157.2 million in 2014. A 52% interest would have cost the CDC Trust $81m. The property was reported to have been acquired at that time on an initial yield of 7.51%.
Late last year, Charter Hall and Coles agreed to extend the lease from February 2027 to December 2034. Assuming other provisions of the lease were unchanged, the lease rent was to have increased by 2.75% per annum and currently be approximately $13.3m p.a. If that were the case, the transaction would reflect a passing yield of 6.2% which appears softer than what the market would price this asset at.
Nevertheless, the result appears to be a good result for CDC investors with our estimates suggesting the investment was likely to provided a 7 year IRR in excess of 20%. Considering performance fees for the Fund are equal to 15% of the proceeds above a 10% return, the sale is likely to generate an additional $4.5m in performance fees to the Group.
Charter Hall Retail REIT’s CEO, Greg Chubb said “Today’s acquisition continues CQR’s longstanding partnership with Coles, one of our leading Major tenants. This acquisition increases the certainty of income through a long 14.5 year lease, provides growth for CQR investors through fixed rental escalations, and improves the resilience and security of income by further increasing CQR’s exposure to Coles. Today’s acquisition fits in our Long WALE Retail property category and is consistent with CQR’s strategy is to be the leading owner and manager of property for convenience retailers.”
Related Articles
