Department store chain David Jones collapsed into administration, raising the prospect of store closures that would hit landlords. Charter Hall Long WALE (ASX: CLW) owns a 50% stake in the David Jones flagship store in Sydney’s central business district.

Why it matters: The store contributes about 4% of Charter Hall Long WALE’s net property income, but we expect even less impact on its near-term earnings. The REIT holds a bank guarantee covering 12 months’ rent against the lease.

  • We keep our fiscal 2027 operating earnings forecast unchanged at 25.5 cents per security, with a 100% dividend payout. We assume the flagship David Jones store will remain open given its prime location and high productivity, but probably with a reduced footprint.
  • We cut our occupancy forecast for Charter Hall Long WALE in fiscal 2028 to 98%, from 99% previously. The REIT should be able to find new tenants relatively quickly as the retail location is sought-after. But we expect some downtime and extra fitout expenses as it repurposes the space.

The bottom line: We reduce our fair value estimate by 2% to $4.50 per share for no-moat Charter Hall Long WALE, reflecting the forecast occupancy cut and higher maintenance expenditure expected in fiscal 2028 and 2029. Our unchanged distribution forecast of AUD 25.5 cps implies an unfranked yield of 7.2%.

  • The securities are materially undervalued. Investors underappreciate Charter Hall Long WALE’s income resilience, which is supported by long leases, fixed or inflation-linked rent reviews, and a portfolio diversified across geography, asset type, and tenant mix.
  • With long leases, its property values are more sensitive to interest rate changes, because rents are typically locked in for extended periods and unable to adjust to market rates quickly.

Between the lines: Lease expiries peak in fiscal 2029, when more than 10% of leases are up for renewal. We expect slightly higher lease incentives and maintenance capital spending.

Limited fallout for Charter Hall Long WALE From David Jones’ collapse

The investment objective of Charter Hall Long WALE REIT is to earn stable and secure income. Its rents are secured with long leases, geography and sector diversification, and solid tenants. The portfolio’s weighted average lease expiry of 9.2 years as of June 30, 2026, is longer than most REIT’s. Majority of the assets are located on the Eastern Seaboard of Australia, with half in New South Wales and Victoria. The sector exposure is diversified: almost 50% of the properties are retail (pubs, service stations and department stores mostly), a fourth industrial and logistics, 15% offices, and the rest data centers and social infrastructure. Top 10 tenants, government, publicly listed, and multinational and national businesses, make up of vast majority of the rental income.

Charter Hall Long WALE’s lease structure also reduces capital intensity and supports rent growth. Half the tenancy agreements are triple net, where occupiers pay all outgoings such as insurance and utilities, and maintenance expenses, on top of rents. This reduces the maintenance capital expenditure required from Charter Hall Long WALE. In addition, half the leases are subject to inflation-linked annual rent reviews and half to fixed increases (typically 3%). We expect Charter Hall Long WALE’s rent growth to average around 3% in midcycle.

The REIT expands by actively acquiring long-lease assets that are established. Occasionally, it undertakes development on behalf of the tenants, who would subsequently occupy the property under a long-term leasehold agreement. Historically, the REIT bought assets using a combination of debt and equity raising. But security issuance is less favorable when the REIT’s security prices are lower than the net tangible assets backing, which has been the case since early 2022.

Sale-and-leaseback is another strategy Charter Hall Long WALE likes to deploy. The REIT has successfully implemented several large-scale deals such as the bp service station portfolio and Telstra’s telephone exchanges, and leased them back to the occupying tenants. If the tenants decide to exit when the lease terms conclude, Charter Hall Long WALE can redevelop these sites for higher intensity uses.

Bulls say

  • Charter Hall Long WALE’s income is relatively predictable for the next decade, secured by long-term tenancy agreements. Half the leases have inflation-linked rental uplifts baked in.
  • Charter Hall Long WALE’s portfolio is resilient even during economic downturn, thanks to long leases and solid tenants, most of whom we view as unlikely to miss a rent payment.
  • Charter Hall’s scale and record of managing sale-and-leasebacks puts Charter Hall Long WALE in a strong position to acquire similar assets in future.

Bears say

  • Long WALE assets lack flexibility. Charter Hall Long WALE’s rents may lag prevailing market rates, causing the portfolio to underperform.
  • Charter Hall Long WALE has been actively acquiring long-lease assets. These assets and tenants are typically attractive, and many other REITs also vie for them.
  • Charter Hall is Australia’s largest pub landlord. The pub industry is under pressure as concerns for alcohol abuse and problem gambling mount. This could limit Charter Hall Long WALE’s future earnings growth.