Security price: $4.02
Industry: Property
Forecast distribution: 28 cents per unit
Global discounter Aldi Supermarkets is spreading rapidly across Australia and challenging the dominance of Coles and Woolworths. Aldi has a strong presence along Australia’s east coast, but it’s now teaming up with property owners and REITs to expand into Western Australia.
One REIT Aldi is partnering with in WA is shopping centre operator, Charter Hall Retail REIT (CQR), which recently announced its first Aldi supermarket lease.
CQR’s Secret Harbour mall development in Perth will include an Aldi; it’s the start of an ongoing relationship that should help fuel CQR’s growth.
While the retail environment remains subdued, CQR is adding value by actively managing its portfolio through acquisitions and redevelopments. We think that strong management and an attractive yield makes this REIT an attractive option for income investors.
CQR is managed by diversified property group, Charter Hall, and it now has 78 properties totalling around $2.2 billion throughout Australia.
CQR focuses on retail centres anchored by a high-quality supermarket. Woolworths and Wesfarmers (which owns Coles) provide a strong base and generate just over 50 per cent of CQR’s revenue; though management says Aldi will be a “growth engine”.
The company recently announced a solid full-year result with operating earnings up 5.2 per cent to $110.8 million.
CQR’s strategy is to offload non-core properties and reinvest in higher-growth properties. It sold six non-core holdings during 2015 and bought two supermarket-anchored shopping centres in high-growth corridors in Queensland and South Australia.
When handing down its full-year results, CQR announced a $50 million placement to help fund the acquisition of Goulbourn Plaza in NSW and Katherine Central in the Northern Territory (which is the only shopping centre in its region and supported by Tindal RAAF Base). Those two purchases should boost earnings in 2017.
CQR is also adding value through a number of redevelopments of its shopping centres.
After a debt restructure, CQR’s gearing is a healthy 31.3 per cent, and the units are underpinned by net tangible assets of $3.59 per unit.
But its yield is particularly attractive. CQR has announced a full-year distribution of 27.5 cents per unit for 2015.
The REIT has forecast operating earnings for 2016 of between 30.35 cents and 30.75 cents per unit. It says it expects to pay out between 90 per cent and 95 per cent of those earnings in distributions to unit holders.
That suggests a full-year 2016 distribution of around 28 per cent, which gives a strong prospective yield of almost 7 per cent.
At $4.02, Charter Hall is trading above our valuation of $3.65 and the retail environment is subdued. But with investors hungry for income in this low-return environment, a strong yield should continue to underpin the unit price.
So along with strong management, we think the yield makes it a good option for income-focussed investors seeking retail property exposure.