Charter Hall's Commitment to IPO of Long WALE REIT Supports Long Tail of Fees

Leading Independent Investment Research, Morningstar, Inc.

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Equity Bottom-Up

Due to inadequate institutional demand for the AUD 350 million institutional component of the initial public offering, or IPO, of the Long WALE REIT, or LWR, Charter Hall won't be proceeding with the IPO as scheduled. Charter Hall advised it had received significant retail demand, but the institutional offer “did not attract the sufficient quality of support that the Group deemed appropriate to create an orderly market.” The offer price was AUD 4.00, a 3.1% premium to LWR’s expected net tangible assets of AUD 3.88 per security. The firm will instead explore alternative options for the assets earmarked for the LWR.In addition to the reputational damage from cancelling the IPO, there are direct sunk IPO costs, that we estimate exceed AUD 22.6 million or AUD 0.055 per security. Other negatives include the foregone future LWR management fees (estimated at AUD 5.6 million per year) and fees of 1% of the value of each acquired or disposed property, given LWR’s stated strategy to acquire further assets through increased leverage. LWR’s initial gearing was an extremely low 11.3% on a look-through basis, compared with LWR’s target balance sheet gearing range of 25%-35%. Charter Hall is also likely to have foregone (or delayed) other transaction and/or performance fees from investment entities it manages (that is, Direct Industrial Fund) selling assets to LWR. Analyst: Tony Sherlock

Due to inadequate institutional demand for the AUD 350 million institutional component of the initial public offering, or IPO, of the Long WALE REIT, or LWR, Charter Hall won't be proceeding with the IPO as scheduled. Charter Hall advised it had received significant retail demand, but the institutional offer “did not attract the sufficient quality of support that the Group deemed appropriate to create an orderly market.” The offer price was AUD 4.00, a 3.1% premium to LWR’s expected net tangible assets of AUD 3.88 per security. The firm will instead explore alternative options for the assets earmarked for the LWR.In addition to the reputational damage from cancelling the IPO, there are direct sunk IPO costs, that we estimate exceed AUD 22.6 million or AUD 0.055 per security. Other negatives include the foregone future LWR management fees (estimated at AUD 5.6 million per year) and fees of 1% of the value of each acquired or disposed property, given LWR’s stated strategy to acquire further assets through increased leverage. LWR’s initial gearing was an extremely low 11.3% on a look-through basis, compared with LWR’s target balance sheet gearing range of 25%-35%. Charter Hall is also likely to have foregone (or delayed) other transaction and/or performance fees from investment entities it manages (that is, Direct Industrial Fund) selling assets to LWR. Analyst: Tony Sherlock

Long Wail as IPO Gets Pulled. Charter Hall Fair Value Falls