Second Time Lucky for Charter Hall REIT float
After one failed attempt, the Charter Hall long WALE REIT (CLW) listed on the ASX yesterday and had a fairly uneventful day of trading. The IPO was priced at $4 and finished trading yesterday at $3.96, down just 1%. Yesterday's listing makes CLW the largest diversified real estate trust to list on the ASX with a value of $827m at the IPO price. The size was reduced from the $1.1bn float planned originally which was pulled at the last minute due to fears that there was insufficient investor interest. As a result of these fears, the offer was restructured to include 23% gearing which sweetened the distribution yield to 6.3% from 5.3% previously.
The REIT holds a portfolio of property assets with long weighted average lease expiries (average of 12.5 years) implying that there is good security of rental income. The properties are all commercial and include 66 office, industrial and retail properties located in six Australian states. Considering the very low level of interest rates at the moment, a 6.3% yield is quite attractive. As a comparison, gross rental yields on Sydney residential properties are currently below 4% (Source: SQM Research). After costs, this could easily fall below 3% depending on the property.
Charter Hall were hoping to emulate the success of the recent Viva Energy REIT IPO (VVR) which listed a few months ago and started trading at 10% above its IPO price. Unfortunately for Charter Hall, the listed property sector lost some of its lustre in the last month as fears of an increase in US interest rates puts pressure on fixed income and property sectors. As a result, the original IPO was cancelled as the institutional book-build (the process where institutional investors bid for an allocation in the IPO) failed to generate enough interest for the IPO to proceed. In hindsight, having seen how the repriced offer has traded so far, Charter Hall probably made the right decision to pull the first IPO. With the distribution yield set at 5.3% in the initial offering, the share price would very likely have dropped upon listing.
The biggest risk to CLW (and all REIT's for that matter) is the prospect of rising interest rates. While that isn't currently a serious prospect in Australia, the US Federal Reserve has been talking about raising interest rates for a long time now and indications are that they will hike by another 25 basis points in December this year. The Reserve Bank of Australia won't increase rates here just because they are increasing in the US however it will be closely watching how inflation progresses here. The most recent CPI release (proxy for inflation) indicated that inflation was picking up and running a little bit higher than expected. This is only one number and shouldn't be extrapolated too far but investors in yield products like CLW should keep an eye on future CPI releases.
Overall, CLW is good for relatively conservative investors looking for a stable distribution yield. The properties have long lease terms and commercial tenants.
This article was written by William O'Loughlin – Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via [email protected] or by phoning +612 8302 3600.