Charter Hall Long WALE Solid first half results

8 February 2021

Charter Hall’s Long WALE REIT continue to attract strong interest from investors with a diverse portfolio of quality tenants providing a stable yield of 6% pa.

The REIT’s operating earnings were up up 3.6% on the prior corresponding period with the portfolio growing through $697 million of property acquisitions and $150 million of valuation uplift. The REIT currently trades at or near NTA.

Avi Anger, Charter Hall Long WALE REIT Fund Manager commented: “During 1H FY21 we further diversified and improved the resilience of CLW’s portfolio and increased the portfolio WALE. We extended our partnership with bp, acquiring an interest in 70 Long WALE triple-net (NNN) convenience retail properties in New Zealand. In December, we further expanded our telco exchange portfolio with the acquisition of Telstra’s Pitt Street, Sydney CBD telco exchange. At the end of the period, we also agreed to acquire a 50% interest in the David Jones flagship Elizabeth Street store in the Sydney CBD.

Financial highlights:
• Operating earnings of $73.6 million, or 14.5cps, up 3.6% on the prior corresponding period (pcp)
• Statutory profit of $198.6 million
• Distributions of 14.5cps, up 3.6% on pcp
• NTA of $4.70, up 5.1% from $4.47 at 30 June 2020
• Balance sheet gearing of 29.0% and look through gearing of 39.3%
• $388 million of new equity raised

Operating highlights:
• Portfolio weighted average lease expiry (WALE) of 14.1 years, up from 14.0 years at 30 June 2020
• $4.5 billion property portfolio, up from $3.6 billion as at 30 June 2020
• $697 million of property acquisitions
• $150 million net property valuation uplift
• Portfolio cap rate firmed 24 bps from 5.42% at 30 June 2020 to 5.18%

“Collectively these acquisitions further diversify the CLW portfolio and continue our focus on NNN lease properties with high underlying land value which should provide long term growth prospects for our investors. The sourcing of high quality transactions and the active asset management of properties in CLW’s portfolio is the result of the strength, ability and depth of expertise of the Charter Hall management platform which the REIT benefits from”.

During 1H FY21, CLW announced $697 million of new property acquisitions which contributed to extending the portfolio WALE, enhancing sector diversification and strengthening the quality and diversification of tenants. These transactions comprised:

  • NZD $130.8 million (AUD $122.2 million) acquisition of a 50% interest in a Charter Hall managed partnership that acquired a 49% interest in a portfolio of 70 long WALE NNN convenience retail properties in New Zealand, 100% leased to BP Oil New Zealand Limited (bp) on a 6.25% initial yield, with 20 year WALE and annual NZ CPI rental increases, plus up to 0.5% in the first 5 years;
  • $281.5 million acquisition of the Telstra telephone exchange and data centre located at 76-78 Pitt Street, Sydney on a 10 year NNN lease, with fixed 2.5% annual rent reviews;
  • $28.1 million acquisition of a new Bunnings property to be developed in Caboolture, QLD, with Bunnings to occupy the property on an initial 12 year lease term with annual CPI rent reviews on completion (estimated December 2021);
  • $9.8 million acquisition of a 49.9% interest in The Parap Tavern, Darwin leased to Endeavour Group on an initial 15 year NNN lease with long-term options; and
  • $255.0 million2 acquisition of a 50% interest in David Jones flagship “Elizabeth Street” store located at 86-108 Castlereagh Street, Sydney on a 20 year NNN lease, with minimum 2.5% per annum annual rent increases supplemented by an agreed turnover rent linked to sales performance.

Overall, the total property portfolio has increased by approximately $852 million for the period to $4.5billion as at 31 December 2020, driven by $696 million of net acquisitions, $150 million in net property revaluations and capex.

At the end of the period, the REIT’s diversified portfolio is 97.5% occupied and comprised 459 properties with a long WALE of 14.1 years. The portfolio weighted average capitalisation rate firmed 24 bps during the period to 5.18% as at 31 December 2020.

The REIT reaffirms its FY21 Operating EPS guidance of no less than 29.1 cents per security, reflecting Operating EPS growth over FY20 of no less than 2.8%, based on information currently available and barring any unforeseen events.

Our Views

Charter Hall have developed an excellent portfolio of well located, well leased properties. The diverse tenant base comprises a quality list of government, ASX listed and multi-national groups which underpin the long term cash flows to the group.

These tenants align to our preferred tenant sectors (ie those who rely on non discretionary consumer expenditure [or their supply chains]).

Some of the underlying assets have limited alternative uses and may become obsolete as they near lease expiry. I would prefer to see assets not in deep market segments with less than 10 years to run, sold out of the portfolio with capital recycled into new long wale assets.

The REIT is on our current recommend list.