Charter Hall Long WALE lowers guidance as higher costs dampen returns
9 August 2022
Charter Hall’s Long WALE REIT has enjoyed strong rental growth in FY22 but has lowered guidance as rates increase.
The fund grew operating earnings per security in FY22 by 4.5% to 30.5cps thanks to strong rental growth (3.4% higher on a like-for-like basis) however Charter Hall has lowered earnings guidance for FY23 by -8% to 28.0cps as the cost of interest and operating costs begins to dampen returns over the forecast period.
The Funds’ weighted average cost of debt moved from 2.1% (in FY21) to 2.8% in FY22 and is expected to push higher over the forecast period due to a 100bps increase in the BBSW rate and an increase in the Fund hedging profile from 53% of debt to 77%.
To help offset the higher costs, Charter Hall have also sought to increase the Funds’ exposure to CPI linked rental reviews from 40% of leases to 49% of leases as a result of further acquisitions during the year, lifting the weighted average rent review from 3.0% to 4.6%.
Avi Anger, Charter Hall Long WALE REIT Fund Manager commented: “FY22 has seen CLW continue to grow in a measured way, enhancing portfolio quality and improving asset and tenant diversification. During the year we successfully completed the acquisition of the ALE Property Group in partnership with Hostplus.”
“We also completed three high-quality Industrial & Logistics acquisitions, two of which were secured off-market. From a tenant perspective, we have continued our successful partnership with Metcash, securing a 10-year lease extension at our Canning Vale Distribution Centre in Perth, with an agreement to expand this facility to meet Metcash’s long term operating requirements. Through active management and portfolio curation, the CLW portfolio has grown from $5.6 billion to $7.1 billion and the portfolio quality has been recognised in net tangible assets growing 18.2% over the year.
Looking forward, 49% of CLW’s leases are inflation-linked, providing a significant opportunity for strong rental growth in the year ahead.”
Portfolio update
During FY22, CLW completed $871 million of net property acquisitions which contributed to enhancing portfolio quality, sector diversification and strengthening the quality and diversification of tenants.
These transactions included:
Acquisitions:
- $814 million of Long WALE Retail acquisitions comprised of a 50% interest in the ALE Property Group, acquired in partnership with Hostplus. The ALE Property Portfolio consists of 78 high quality pub properties, including 74 bottle stores in 99% metropolitan locations and 94% located on Australia’s East Coast. The properties are all NNN leases, significantly under- rented and leased to the ASX-listed Endeavour Group, Australia’s largest pub operator and liquor retailer.
- $88 million of Industrial and Logistics acquisitions, comprised of an industrial facility constructed in 2018 and located in Sydney’s core industrial precinct of Wetherill Park, leased to Cleanaway and ResourceCo; a distribution centre completed in 2005 and located in Brendale, Brisbane leased to Modern Star; and a distribution centre completed in 2011 and located in Larapinta, Brisbane leased to Toyota Material Handling.
Divestments:
- Following a successful leasing campaign and in response to an unsolicited offer, CLW divested 56 Edmondstone Road, Bowen Hills QLD for $70.9 million.
Leasing:
CLW secured a long-term lease extension with Metcash at Canning Vale in Perth, taking the lease expiry from January 2024 to October 2033. The lease extension continues on the existing terms with annual CPI increases. As part of the lease extension, CLW has also agreed to undertake an expansion of the existing cold storage facilities on the site. Metcash also retains an option to further expand its existing ambient storage facilities at this site. In addition, CLW has committed to install a 1.6MWh solar PV system to improve the environmental credentials of this property and to assist Metcash in meeting its environment and climate targets.
Following this lease extension, CLW has no major leases expiries in the portfolio until FY26.
Valuations:
Overall, the total property portfolio has increased by approximately $1.57 billion to $7.1 billion for the period, driven by $871 million of net acquisitions, $670 million in net property revaluation uplift and $25 million of capitalised costs.
At the end of the period, the REIT’s diversified portfolio is 99.9% occupied and comprised 549 properties with a long WALE of 12 years. The portfolio weighted average capitalisation rate is 4.35% as at 30 June 2022.
Capital position
During FY22, CLW completed $1.7 billion of debt capital management initiatives, including:
- $1.0 billion of bank debt refinanced with an average term extension of 1.5 years
- $355 million of new facilities established with an average term of 6.1 years
- $357 million of increased capacity within existing facilities
- Moody’s Baa1 investment grade issuer rating maintained
Following these capital management initiatives, CLW has a weighted average debt maturity of 5.2 years with staggered maturities over a nine-year period. Post balance date, CLW has entered into $650 million of new interest rate swaps, increasing the REIT’s hedged debt from 53% to 77%. CLW has a weighted average hedge maturity of 2.9 years. Pro-forma balance sheet gearing of 29.9% is within the target 25 – 35% range and look-through gearing is 37.1%.
FY23 Guidance
Based on information currently available and barring any unforeseen events, CLW provides FY23 Operating EPS guidance of 28.0 cents and distribution per security guidance of 28.0 cents. Based upon yesterday’s closing price, this represents a 6.4% distribution yield.
Further Information
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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