As Charter Hall Retail REIT moves towards exposure to the full convenience retail supply chain, growth in EPS has not been able to keep up with growth in AUM.
Charter Hall have grown the Retail REIT Assets under Management by $270m, up +9% over FY20, however distributions per unit have declined by -14.7% as a result of addition equity raisings and a desire to hold more cash at year end.
Charter Hall’s Retail CEO, Greg Chubb said: “It’s been another year of portfolio curation to enhance the portfolio quality of CQR extending our breadth of exposure to convenience retailing, in a year where convenience retailing has demonstrated resilience and relative stability. We’ve actively worked to maintain the resilience, improve the anchor tenant proportion of CQR income, extend the portfolio WALE and navigate the challenges of COVID-19 on our tenant customers. As result, I am pleased to see the security of CQR’s income improve from growing the proportion of income from our major leading convenience retailers, partnering with them to meet their property needs.
“The defensive and resilient nature of CQR’s portfolio has been demonstrated through the COVID-19 period, with our major tenants all having traded through the year to June 2020. The non-discretionary and essential nature of many of our specialty retailers also meant many of these traded through mandated closure periods. We’ve partnered with our tenants to ensure they have been supported through this challenging trading period, while also ensuring our centres have adapted to meet social distancing and increased health and safety requirements. Pleasingly for CQR unitholders, as at 30 June 2020, footfall at most centres was back to pre-COVID-19 levels with the majority of specialty tenants open and trading, while tenant support continues to reduce on a month-on-month basis.”
Key financial results:
• Statutory profit of $44.2 million, down 16.8% on FY19 primarily due to valuation movements
• Operating earnings of $142.7 million or 30.56 cents per unit (cpu), down 1.8% (cpu) on FY19
• Net cashflow from operating activities of $132.9 million or 28.45 cents per unit (cpu)
• COVID-19 tenant support of $10.7 million provided during the period
• Distribution of 24.52cpu, down 14.7% on FY19
• Portfolio look-through gearing of 32.3% comprising shopping centre convenience retail portfolio gearing of 25.3% and Long WALE convenience portfolio gearing of 45.5%
• Weighted average debt maturity of 3.9 years, no debt maturing until FY22
• Moody’s affirmed Baa issuer rating with stable outlook
• Liquidity of $434 million consisting of cash and undrawn debt facilities
Operating highlights:
• 5.2% Supermarket MAT growth, up from 4.0% at June 2019
• Supermarkets in turnover increased to 61% , up from 56% at June 2019
• Total MAT growth3 of 3.8%, up from 2.8% at June 2019
• Contribution from major tenants to portfolio income 51.4%, up from 46% at June 2019
• Major tenant WALE 11.5 years, increased from 10.4 years at June 2019
• 196 specialty leases renewals and 149 new leases delivering positive specialty leasing spreads of 0.9%
• A further 69 speciality lease extensions (average 19 months) completed as part of COVID-19 tenant support negotiations
• Portfolio cap rate of 6.03%, compressed from 6.18% at June 2019 primarily due to changes in portfolio composition
• Acquired interest in two Sydney metropolitan convenience plus centres, comprising the Coles and Aldi anchored Pacific Square, Maroubra and the Woolworths, Aldi and K Mart anchored Bass Hill Plaza
• Additionally, acquired 47.5% interest in the BP portfolio partnership which owns a 49% interest in the BP Australia portfolio of 225 Long WALE retail assets, in joint venture with BP
The REIT has continued its investment strategy to provide a resilient and growing income stream for investors through active asset management, portfolio enhancement and prudent capital management.
In September 2019 the REIT acquired a 20% interest in Pacific Square, Maroubra and Bass Hill Plaza, Sydney. Both centres are well established and strongly trading Sydney metropolitan convenience plus shopping centres. Each centre benefits from being the dominant convenience centre in their respective catchments and present strong income growth prospects for the fund.
COVID Impacts
CQR provided $10.7 million in COVID-19 tenant support during 4th quarter FY20. 70% of this support was provided as rent-free incentives. The level of tenant support reduced each month over the quarter as footfall and sales progressively improved.
As at 30 June 60% of FY20 COVID-19 tenant support had been agreed. Following agreements reached in July 85% of FY20 COVID-19 tenant support has now been agreed.
CQR collected 79% of rent due in the 4th quarter, with 15% of rent provided as tenant support and 6% of rent unpaid at the end of the period. Following collections in July only 3% of Q4 rent now remains unpaid.
As at 6 August 2020, two CQR shopping centres in Victoria were subject to stage 4 restrictions and two centres remain under stage 3 restrictions. Shops closed across these assets represent 2.5% of annual portfolio income.
Acquisitions & Divestments
In December 2019 CQR acquired an initial interest in the BP portfolio partnership and further increased this to a 47.5% stake in February 2020. The portfolio consists of the majority of BP’s owned convenience retail properties in Australia. The portfolio has a WALE of 19.4 years and triple-net lease structure with annual CPI increases. BP retains a 51% interest in the portfolio and is a new major partner for CQR.
Post balance date, CQR has also acquired a 52% interest in the Coles Adelaide Distribution Centre, located in the prime industrial precinct of Edinburgh Park, approximately 25kms from Adelaide CBD. This asset is utilised by Coles as its sole distribution centre to service all of its retail stores in South Australia and the Northern Territory.
During the period, CQR also divested nine smaller lower growth assets at a 1.9% premium to book value and which delivered a weighted IRR of 12% to CQR unitholders.
Charter Hall's ongoing program of asset recycling aims to re-weight the CQR portfolio into more metropolitan locations, growing the proportion of income from major tenants and improving the resilience of income by increasing portfolio WALE.
During the period, the total portfolio cap rate moved from 6.18% at June 2019 to 6.03% at June 2020 primarily due to changes in portfolio composition.
Looking specifically at valuations within the second half of FY20, with 67% of the portfolio by value externally revalued, the decline for the shopping centre convenience retail portfolio was $70 million (-2.4%), offset by a $26 million (6.2%) gain in the BP Long WALE retail valuation.
The shopping centre convenience retail portfolio cap rate softened in the second half by 4bps to 6.19% while the BP Portfolio cap rate firmed from 5.50% to 5.00%.
The total portfolio WALE has increased to 7.2 years following the addition of the BP Portfolio and majors WALE has increased to 11.5 years.
Supermarkets in the portfolio continued to perform well with 61% of supermarket tenants paying turnover rent and those within 10% of turnover thresholds representing 17% of supermarkets. Supermarkets across the portfolio delivered 5.2% MAT growth. CQR completed five new supermarket leases or extensions during the year, while Coles and Woolworths refurbished seven stores over the period. Click and Collect installations were completed or are underway at 47 Coles and Woolworths supermarkets across the portfolio. Contactless pick-up has been rolled out at 23 supermarket locations since the commencement of the COVID-19 period.
CQR had an active leasing period with 345 specialty leases completed during the year at an average positive spread of 0.9%. This was made up of 149 new specialty leases completed at an average leasing spread of 0.5% and 196 renewals completed at an average 1.1% leasing spread. An additional 69 lease extensions were completed as part of COVID-19 tenant support negotiations with an average extension of 19 months.
Progress on our solar strategy continues with 8.5MW of solar installation completed at 11 assets and a further 3.9MW of installations at four assets nearing completion. Solar installations complete and nearing completion represent 60% of CQR’s contracted solar power purchasing program. Energy contracted from the power purchasing program equates to 46% of CQR’s current energy needs. Charter Hall is targeting net zero carbon emissions by 2030.
Outlook
CQR has $434 million of liquidity and capacity to further enhance portfolio quality where deemed appropriate, given gearing remains at the low end of our long term target range.
In light of current COVID-19 uncertainty and associated impacts, CQR will not provide FY21 earnings guidance.
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