Facing increasing pressure on their balance sheets, Charter Hall Retail REIT has been forced to raise $300m in equity as COVID19 impacts rental income and valuations and threatens debt covenants.
Today, Charter Hall Retail REIT announced a fully-underwritten institutional placement of $275 million and a unit purchase plan to raise up to $25 million. The proceeds from capital raising will be used to repay debt and strengthen CQR's balance sheet.
The Group confirmed that whilst the sales performance of CQR’s anchor tenants was significantly elevated during March and their centres experienced a large increase in visitation and foot traffic, up to 30% of their tenants are likely to be lining up for rental relief.
CQR indicated that 60% of the portfolio's supermarkets are currently paying turnover rent with major tenants Woolworths, Coles, BP, Wesfarmers and Aldi representing 51% of rental income, which provides a solid platform to income. The Group also confirmed that as at 24 April 2020, tenants representing 87% of portfolio income were open and trading.
However, CQR advised that 25% – 30% of tenants by portfolio income would be defined as Small to Medium Enterprises (SMEs) under the Commercial Code and able to negotiate reduced rental arrangements during the COVID19 period, however the Group stopped short of providing any sense of how deep rental incomes were going to be impacted.
Last week, Jefferies analysts' were reported to expect rents (mostly for shopping centres) to fall between -20% and -30% over the next 12 to 24 months whilst Macquarie analysts are factoring in a 15% fall over the longer term. On our analysis, if net incomes fell across all tenancies by -20% and cap rates were to soften by 100Bps, valuations will fall by approx -30% and result in 6 out of 20 major AREIT's failing their key LVR debt covenant.
Charter Hall Retail REIT do not provide details of their ICR or LVR covenants, however a typical REIT would hold banking covenants of 50% Loan to Value Ratio and 2.5x Interest Cover Ratio. Prior to today's capital raising, Charter Hall Retail REIT's look through gearing was at 36.7% and their interest cover ratio was 5.1x. The high LVR would have placed the Trust in jeopardy if rents and valuations fell significantly.
Todays' capital raising, reduced CQR's gearing to 28% and lifts their pre-COVID ICR to 7.8x and effectively removes the likelihood of a potential breach in covenants.
The capital raising however comes at a cost to the existing shareholders with the placement priced at $2.90 which represents a -7.9% discount to the last close price of $3.15 on 24 April 2020 and an -8.4% discount to the 5 day VWAP of $3.167 on 24 April 2020. The issue price reflects -42% discount on the pre- COVID19 high of $5.05 on the 19th February.
Charter Hall reported the NTA would fall from $4.09/unit (as at Dec 19) to a pro forma $3.91, however this does not reflect any revaluations of the portfolio. A -30% fall in portfolio wide valuation (which is unlikely given the high weighting to Supermarkets), would likely reduce the NTA to $2.70 per unit.
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