Weighted Average Lease Expiry (or weighted average lease to expiry), is a metric used to measure a property portfolio's risk of going vacant. It is measured in years, and is more commonly referred to by its abbreviation, WALE.
One of the bigger risks of managing commercial properties is vacancy. When a property, or parts of a property, is left vacant for too long, property income and distribution to shareholders will be affected. This is where the metric WALE comes in handy as an assessment tool.
WALE is used to measure the overall tenancy risks of a particular property with multiple tenants and is used by REIT investors to assess the likelihood of a property or a group of properties in being vacated. In other parts of the world, other abbreviations such as WALT (Weighted Average Lease Term) and WAULT (Weighted Average Unexpired Lease Term) are sometimes used but they practically refer to the same concept. In the Asia Pacific region, investors are more accustomed to WALE.
WALE is measured across all tenants’ remaining lease in years and is weighted with either the tenant’s occupied area or the tenant’s income against the total combined area or income of the other tenants.
An anchor tenant that occupies large sections of a building can skew the WALE for the property either upwards or downwards, depending on how long a lease the tenant has agreed to. Consider an example of a building with 3 different tenants, each with differing lease terms:
Tenant 1: Occupies 10% of rentable area (lease expires in 5 years)
Tenant 2: Occupies 70% of rentable area (lease expires in 6 years)
Tenant 3: Occupies 20% of rentable area (lease expires in 3 years)
Therefore the Weighted Average Lease to Expiry for this property is:
(0.1 x 5) + (0.7 x 6) + (0.2 x 3) = 5.3 years
As can be seen from this example, tenants that occupy the larger spaces in a property and sign on very long leases in the building can greatly skew WALE upwards. This is why anchor tenants also receive the best rental rates in a REIT or collective property investment.
Note that Weighted Average Lease to Expiry can also be measured in terms of revenue from the building in place of rentable area. However in a majority of financial reporting by REITs and listed real estate securities, rentable area is used.
Properties with long WALEs face the least risk of vacancy. For this reason, most REIT investors are of the opinion that the longer the WALE, the better. But depending on your investment objectives, this may not necessarily be the case:
Commercial buildings with long WALE, typically of being 5 years or more, usually have the commitments of large tenants such as government departments or multinational corporations. They have little to worry about in terms of vacancy risk but larger tenants would usually mean that the property will not be able to negotiate for rent hikes as much as it can with smaller tenants. Therefore there will be a limitation in terms of internal growth.
Commercial buildings with shorter WALE, typically of between 1 to 4 years, usually have smaller businesses as their tenants who do not commit to lease terms of longer than 5 years. There is higher vacancy risk as compared to a property with larger tenants. But commercial properties like these are generally able to manifest more robust growth internally through periodic rent hikes, resulting in better growth in property income.
But do bear in mind that commercial properties with shorter WALE may face higher costs in terms of leasing agent fees, advertising fees and legal fees.
So if robust internal income growth is your preference, REITs with long WALE may not exactly work in your favour. But if you are after predictability and stability of income, REITs with longer WALE may be your best bet.