The intricate details which combine to create yield opportunities for infrastructure investors are hard to picture, and often best described through real-life, relatable examples.
We have previously discussed that a benefit of investing in infrastructure includes the prospect of long-term income yield1. Here, we will expand further on this theme providing some examples of infrastructure assets that can provide strong income yields in a low-yield environment.
One of the key reasons that infrastructure assets can provide reliable long-term income yields is that their revenues are often underpinned by regulation or long-term contracts, which provide a high level of visibility of future cashflows from the asset.
In this article we will outline three infrastructure assets AMP Capital manages on behalf of its investors and how they can provide reliable yield in a low-yield environment.
Schools are part of what is commonly referred to as “social infrastructure”, a sector which also includes assets like hospitals, corrections facilities and carparks. The SA Schools project consists of six schools – three primary schools, two high schools, and one special needs school. They collectively accommodate more than 4,600 students.
SA Schools is structured as a Public Private Partnerships or ‘PPP’. This type of structure is often used by governments to deliver infrastructure projects such as roads, hospitals, schools and public transport systems.
We invested in the SA Schools under a long-term contract that runs to 2039. SA Schools provides and maintain the physical facilities (i.e. the classrooms, halls, playground etc.), while the state education department employs and provides teachers to teach the students.
For its provision and maintenance of the facilities, SA Schools is paid by the South Australian Government. The requirement of SA Schools is then to keep the facilities open and available for use during school hours and other agreed times outside school hours.
SA School’s performance in making the facilities available is measured against 294 key performance indicators or ‘KPIs’. If it fails to meet any KPIs, the government can abate (or reduce) SA School’s revenue payments. However, we believe the risk of this is low because the KPI regime is readily achievable, we have long-term experience in managing these types of assets and the majority of the KPI risk is passed on to the facilities management subcontractor.
SA Schools has delivered a stable cash yield. We consider the revenues it generates to be secure and stable based on the fact that they are availability based – this means we take no patronage or usage risk (in fact, we would be paid even if there were no students enrolled at the schools) - and the revenues come from the AA-rated SA Government.
In addition to the investment benefits of social infrastructure, these types of assets can deliver strong social and community outcomes. During the past eight years, year 12 completion rates have almost doubled from 57% in 2010 to 100% in 2018.
Australian National University – Purpose-Built Student Accommodation
The Australian National University (ANU) is Australia’s top-ranked university. Its reputation attracts students from a wide geographic area (both domestically and internationally) and therefore the provision of on-campus accommodation is fundamental to the university achieving its strategic goals.
AMP Capital’s recent investment consists of a concession to run the largest portfolio of on-campus purpose-built student accommodation (PBSA) in Australia until 2053. This consists of 4,184 beds spread across 10 existing residences. In addition, AMP Capital has over the opportunity to work with the university on future PBSA projects. AMP Capital assumes full occupancy risk and receives the revenue from the accommodation for the 34-year period. Rent increases on an inflation-linked basis, with market rent reviews every fifth year. The facilities management has been outsourced over the duration of the concession under a fixed price
The investment is underpinned by very strong demand and supply fundamentals, which has been evidenced by a proven track record with occupancy of above 98% for the last five years and 99.8% in 2018.
On the supply side, the contract includes strong protections against the ANU introducing competing supply. Specifically, occupancy test and demand test thresholds apply, with the objective to ensure demand exceeds expanded supply with a sufficient buffer to support strong long-term occupancy. Additionally, the accommodation is subject to limited competition, as it is protected by rents that are substantially below market.
On the demand side, there is excess demand for on campus accommodation at ANU of approximately 1,700 beds (26% of current supply). In fact, 500 ANU students are currently housed at the University of Canberra campus six kilometres away.
We expect the ANU PBSA to provide a stable cash yield in high single digits. Cashflows from the asset are expected to be stable due to the strong demand for student accommodation on campus at ANU and the strong supply-side protections.
Macarthur Wind Farm
Macarthur Wind Farm, which AMP Capital recently came to manage on behalf of investors, is the largest operating wind farm in the southern hemisphere and is comprised of 140 turbines totalling 420MW of capacity. Macarthur delivers enough green energy to power the equivalent of 180,000 Australian homes. This wind farm project is structured similarly to a public private partnership due to its CPI-linked revenue, together with no exposure to price, volume or facilities management risk.
The project has offtake, operations and maintenance, asset management, and connection agreements with one of Australia’s largest electricity retailers, AGL. These agreements are in place until 2038, after which there is an opportunity to extend the operations.
The offtake contract with AGL is fixed-price fixed-volume and has approximately 19 years remaining. This contract has wrapped the operational risks typical of a wind farm such as electricity market price risk, generation volume risk, change in legislation for renewable energy, availability risk and transmission connection congestion risk. Additionally, Macarthur has limited operational risk in the contracted phase. It has a 25-year fixed profile of operation and maintenance costs paid to AGL.
The counterparty to the contract, AGL, operates Australia’s largest electricity generation portfolio with 10.6GW of installed capacity and is the largest listed renewable energy investor on the ASX. AGL is rated Baa2 (Stable Outlook) by Moody’s and has maintained a credit rating of BBB (or comparable) since S&P initiated coverage in 2006.
We expect Macarthur to generate a stable cash yield in high single digits. Similar to SA Schools, we consider these revenues to be secure and stable as they are availability based; that is, the payments received from AGL are contracted and will be received regardless of the amount of wind at the site or the spot price of electricity.
These case studies show the various factors at play with infrastructure investments which can contribute to the hunt for yield in what is a low growth and lower-for-longer environment in Australia and abroad.
Subscribe below to Market Watch to receive my latest articlesRory Shapiro, Assistant Fund Manager - Infrastructure
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
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