Charter Hall Education Trust is a social infrastructure real estate investment trust (REIT) with a $1.18bn portfolio of childcare centres located across Australia and New Zealand, and a robust development pipeline. It is the largest childcare centre owner in Australia, with significant management expertise in the childcare sector and proven capability in asset selection, portfolio optimisation and development. Ord Minnett has initiated coverage of the stock with a Hold recommendation and a target price of $3.65.
Charter Hall Education’s management has a strong track record in acquisitions and developments, having more than doubled its portfolio value over the past four years. We forecast the trust will deliver a three-year EPS compound annual growth rate of 5.7% driven by a robust development pipeline and accretive acquisitions. Following the recent capital raising, the trust has balance sheet capacity to debt fund development and acquisitions over the next two years, driving earnings growth of 9.2%-plus in FY20E and 5.6%-plus in FY21E – well above its comparable group averages of 5.8% and 1.5%, respectively.
The trust’s leases are triple net (whereby sole responsibility is with the tenant for all costs relating to the asset, in addition to rent) with long lease terms (10.5-year weighted average lease expiry), regular tenant reporting and five-year option notice periods. Charter Hall Education does not pay incentives or capital expenditure. Increasingly, it is moving away from CPI-based to fixed annual rent reviews, further derisking rental income.
Following the acquisition of its management platform by Charter Hall Group (CHC, Accumulate), we expect Charter Hall Education to leverage its improved access to transaction markets and joint venture opportunities to expand and diversify its portfolio, and generate strong EPS growth. Management has a solid track record in acquisitions and developments, having more than doubled its portfolio value over the past four years. We forecast the trust will deliver a three-year EPS compound annual growth rate of 5.7% driven by a robust development pipeline and accretive acquisitions.
Charter Hall Education is trading on higher multiples than its small-cap peers, although we see this as justified given the trust’s strong growth profile, high-quality portfolio, favourable lease terms, strong management and ability to leverage the broader Charter Hall platform.