Charter Hall Retail Sales & Rental growth uphold Valuations


Charter Hall Retail REIT announced its FY19 results for the year ended 30 June 2019 with statutory profits down 64% due to mark to market derivatives adjustments and limited valuation gains as compared to the previous year. Net Property Income was also down slightly due to timing adjustments between acquisitions and disposals.

Key financial results:

  • Statutory profit of $53.1 million, down 64%

  • Operating earnings of $128 million or 31.12cpu up 2% on prior corresponding period (pcp)

  • Distribution of 28.76cpu up 2% on pcp

  • Balance sheet gearing of 32.9% with $143 million of undrawn debt capacity

  • Weighted average debt maturity of 4.9 years, no debt maturing until FY22

  • Successful completion of $150 million institutional placement and $14.7m unit purchase plan to support the acquisition of Rockdale Plaza, NSW and strengthen the balance sheet

Operating highlights:

  • Portfolio occupancy maintained at 98.1%

  • Portfolio WALE stable at 6.5 years following ten major lease extensions

  • Like-for-like net property income (NPI) growth of 2.1%, up from 1.8% on pcp

  • 175 specialty leases renewals and 191 new lease delivering positive specialty leasing spreads of 0.8%

  • Portfolio value increased by $189 million. Valuations across the portfolio remained stable. The entire portfolio was externally revalued in FY19, with income growth offsetting portfolio cap rate expansion of 3bps to 6.18%

  • Acquired three high-quality convenience-plus assets with Gateway Plaza, Vic; Campbellfield Plaza, Vic and Rockdale Plaza, NSW while disposing two smaller regional assets

Charter Hall’s Retail CEO, Greg Chubb said: “CQR continues to focus on curating a portfolio of convenience and convenience-plus assets in metropolitan markets, that are the dominant convenience centres in their catchments. We successfully added three centres to the portfolio this year that have enhanced the portfolio’s future income growth potential. We will continue to opportunistically look to sell assets and take advantage of opportunities to improve the portfolio. CQR is delivering reliable net property income growth and steady and consistent growth in operating earnings and distributions.”

Investment strategy

The REIT has continued its disciplined investment strategy to provide a resilient and growing income stream for investors through active asset management, portfolio enhancement and prudent capital management.

During the period, the REIT acquired Gateway Plaza in Leopold, Victoria in Joint Venture with the Charter Hall Prime Retail Fund (CPRF) for $117 million; acquired Campbellfield Plaza in Melbourne’s northern suburbs for $74 million and acquired Rockdale Plaza, NSW for $142 million.

CQR also divested two lower growth assets, Coomera Square, QLD and a freestanding Woolworths asset at Young, NSW for a total consideration of $76.1 million. These sales were consistent with the REIT’s strategy to divest smaller assets and recycle capital into centres which are the dominant convenience-based offering in their respective catchments and offer better prospects for long-term income and capital growth. CQR has also contracted to divest a further three regionally located properties for a total of $60.7 million with settlements in FY20.

The REIT’s portfolio increased in value by $189 million due to development and transaction activity. Valuations across the portfolio remained stable. The entire portfolio was externally revalued during the year with 83% externally revalued at both December 2018 and June 2019. The defensive nature of the portfolio has been evident through the valuation process, with income growth off setting portfolio cap rate expansion of 3bps from 6.15% to 6.18% over the year.

An active management approach delivering a convenient shopping experience The REIT’s convenience supermarket-anchored retail portfolio delivered continued stable occupancy of 98.1% and like for like NPI growth of 2.1%, up from 1.8% at June 2018.

With a firm focus on strong tenant relationships and creating convenient shopping experiences, CQR had an active leasing period with 366 specialty leases completed during the period at an average positive spread of 0.8%. This was made up of 191 new specialty leases completed at average leasing spread of 2.4% and 175 renewals completed at an average 0.0% leasing spread. The portfolio continues to be heavily weighted towards high quality tenants.

Major tenants Woolworths, Coles, Wesfarmers and Aldi represent 46% of rental income. Aldi continues to increase in importance. Aldi is now the fifth largest tenant customer with representation increasing from six to nine stores. The acquisition of Gateway Plaza, Vic and Campbellfield Plaza, Vic also introduced the first Bunnings and Officeworks into the portfolio, further improving the tenant mix. 93% of rental income is generated from convenience based non-discretionary retailers.

The portfolio’s exposure to Victoria increased 4% over the period and the portfolio is now 80% weighted to the eastern seaboard. The total portfolio WALE remains stable at 6.5 years following 10 new major leases and extensions. Supermarkets in the portfolio continued to perform well with 56% of supermarket tenants paying turnover rent . Supermarkets across the portfolio delivered 3.7% MAT growth whilst supermarkets in turnover delivered 4.0%4 . Coles, Woolworths and Aldi refurbished 13 stores over the last 12 months or 30% of the portfolio over the last 24 months.

Proactive capital management focused on a strong and flexible balance sheet CQR has continued to focus on diversifying and extending the debt profile and ensuring a sound capital footing for the REIT.

The following initiatives have been completed over FY19:

• Raised $165 million of equity to fund the Rockdale Plaza, NSW acquisition and reduce gearing

• Refinanced $445 million of bank debt

• New facilities with additional and existing banks maturing over FY23 to FY25

• Increased near term hedging and extended the average swap portfolio maturity by 12 months

These capital management initiatives mean the weighted average debt maturity is now 5 years , with an average hedge maturity of 3.9 years. Balance sheet gearing remains at the lower end of the target 30-40% range at 32.9%, with undrawn debt capacity of $143 million.

FY19 operating earnings guidance

Barring unforeseen events and subject to the timing of acquisitions and divestments, the REIT’s FY20 guidance is for operating earnings to grow by 1.5% to 2.0% over FY19.

CQR Trading Chart vs ASX200 AREIT Blue - CQR, Purple ASX200 AREIT Last 12 months

#CharterHall

Capital Management Australia

PO Box R1254

SYDNEY   NSW   1225

Tel: +61 412 173 476

Email: warwick@cmaust.com

ABN: 32 610 910 819

AFSL: 493605

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