Orchard's big move

As the listed property trust market comes under increased criticism from market analysts for its heightened gearing levels, one of the biggest names in the unlisted market has chosen a curious time to jump into the LPT sector. But a decision by the $3.5 billion Orchard Funds Management group to float its first ASX-listed property trust is clearly a first step to becoming a new force in the market.

The float comes in tandem with a name change at the group, which has been well-known to financial advisers as the former SAITeysMcMahon. Now rebadged as Orchard and led by former Becton executive David Hinde, the group is directly targeting retail investors.

Hinde's first move is to launch a “domestic only” industrial property fund, the Orchard Industrial Property Fund, with a $205 million public float as part of a wider $815 million market capitalisation. What's the deal? Read on'¦

The interview

James Kirby: You’re running a $3.5 billion unlisted funds group and now you’ve chosen to launch a listed property trust. Why now?

David Hinde: There are a couple of reasons. First, it’s an evolution in our business to go out there and attract an alternative source of capital and we’ve been very successful over the last few years in attracting capital from unlisted sources, if you like. So firstly, just to reiterate that point: we’re going into new markets, a source of new capital for us.

So tell us about the nature of this fund. What’s in it?

The fund consists of 28 different industrial properties located around Australia. Very well located, strategic locations in and around Australia for the major retailers like Woolworths and other key tenants such as Toll and others.

So it’s strictly a domestic fund? Is it the case that more than half the fund is dependent upon a single tenant?

Yes that’s right – 64% of the income does come from Woolworths: a very well credentialed tenant and we’re certainly very happy to have them as our prime tenant in the fund.

Would it be comparable in some ways to the Bunnings Property Trust?

Certainly when we did our peer comparisons we did look at Bunnings. A similar credit rating. Wesfarmers have an A-minus S&P rating. So do Woolworths. So, yeah, certainly from that point of view the underlying strength of that tenant is very similar.

Now David, just as you enter the LPT market, Deutsche Bank has released a report that is quite critical of LPTs. It suggests basically that they’re not as defensive as they used to be. Is that true?

Well we think our LPT actually stands apart. It’s the only domestic-focused industrial fund in the market. A lot of our competitor LPTs have moved offshore and they also contain some element of, say, retirement or development business, which is not traditionally a defensive class. So, you know, those stapled products are trying to drive earnings but a lot of those earnings aren’t coming from the underlying property returns.

Not everybody is happy with the gearing rate on your fund. It’s at 62%. Is that gearing level higher than the average gearing level at LPTs?

Yes, look it is higher but it’s appropriate when you balance out the very long-term nature of the leases that underpin the income. So 12 years in total, and the obviously exceptional tenant quality that we’ve got, with Woolworths being the prime source of the income, we’re very comfortable with that gearing rate and it’s a deliberate strategy that we’ve employed there to try and drive return on equity.

What sort of yields could investors expect from this fund?

We’ve got a forecast there of 8.1% in the first year, rising to 8.45% in the second year and both those distribution rates will be 100% tax-deferred, which is certainly very attractive from a retail investor point of view.

And when does the float close?

The fund’s closing on June 21, so it’s our anticipated end of the capital raising period.

So this is the first public listing from the Orchard Group. It might be seen as a toe in the water perhaps for you. Where will you go from here?

Well, it’s probably a little bit more than a toe in the water. We’re making a significant commitment with the people that we’ve employed, with the independent directors that we’ve brought on board to make it a very big success. Certainly as Orchard grows and our requirement for further equity increases, we will look to elicit markets in the future.