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Charter Hall sees better value in logistics

by Jonathan Adams
logistics

The Charter Hall-managed fund acquired a $111.8 million or 52 per cent interest in a $215 million Adelaide distribution facility leased for 14.5 years to Coles

In a move that will reverberate across the retail property landscape, Charter Hall Retail REIT (CQR) has seen better value in buying a half-share in a warehouse leased to anchor tenant Coles than adding to its $4 billion supermarket-anchored mall portfolio.

The Charter Hall-managed fund, which hasn’t made a mall acquisition in almost a year and this week sold 50 per cent interests in two malls to Primewest, acquired a $111.8 million or 52 per cent interest in a $215 million Adelaide distribution facility leased for 14.5 years to Coles.

While some may view CQR’s latest acquisition as a sign of the wider global investor shift away from retail property towards logistics, which is underpinned by surging online sales, chief executive Greg Chubb told The Australian Financial Review it was a “logical extension” from its point of view.

This is not a reaction by us to the COVID situation, he said. We recently expanded the portfolio with our investment in the BP portfolio [of leased petrol stations].

This is a core piece of infrastructure for Coles … and we will continue to focus on convenience retailers and assets of all shapes and sizes, he said.

Mr Chubb said the key attributes of the distribution centre were the long lease to Coles with built-in annual fixed rent reviews.

We have considered these assets for some time. It’s not a response to the COVID environment whatsoever. The distribution centre will provide good strong, stable income, he said.

Mr Chubb said CQR continued to look at retail mall acquisitions – the last of these was in September last year, when the trust bought a 20 per cent interest in two Sydney malls from an unlisted Charter Hall fund.

The last time it bought a mall in its entirety was in April last year, when CQR bought the Rockdale Plaza in Sydney.

The Coles distribution facility in Edinburgh Park serves all of its retail stores in South Australia and the Northern Territory.

CQR’s 52 per cent interest was acquired from a Charter Hall partnership between three funds. The remaining 48 per cent interest continues to be held by two Charter Hall Direct-managed funds.

CQR’s equity investment is about $60 million.

Jefferies analyst Sholto Maconochie told the Financial Review that following the BP acquisition, the Coles distribution centre deal was another sign of CQR’s “strategy drift, which has not been articulated that well”.

However, CQR has flagged they will look at these types of assets and will not shy away from them, Mr Maconochie said.

It seems like the Coles Distribution Centre belongs in the Charter Hall Long WALE REIT, but it did not have the balance sheet for it, while CQR did.

What is concerning is that CQR has taken an equity stake in a highly leveraged vehicle. It’s also a related party transaction which complicates CQR and may result in it trading at a deeper than necessary discount to its asset backing.

In a note titled “Moving with the Times”, Macquarie Equities Research said a move into an anchor tenant distribution centre made strategic sense.

We believe shifting the mandate to include distribution centres to select tenants reflects the structural headwinds facing retail malls and the shift of spending to online, Macquarie said.

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