Charter Hall Social Infrastructure REIT Lifts Earnings & Guidance11 February 2021
Charter Hall’s Social Infrastructure REIT has grown earnings by 14% as a result of increased rents and lower interest costs, enabling the group to increase distribution guidance for FY21.
During the period, CQE has continued delivering on strategy, improving portfolio quality and metrics. CQE has increased the portfolio’s weighting to larger social infrastructure assets, diversifying from a pure childcare social infrastructure focus.
The re-work of the portfolio has taken the WALE from 12.7 years to 14.0 years, with fixed rent reviews now comprising 63.3% (up from 53.6% in June) and lease expiries within the next five years at 4.7% of rental income.
Charter Hall Social Infrastructure REIT’s Fund Manager, Travis Butcher said: “Consistent with CQE’s strategy, our focus during the period has been on enhancing income sustainability and resilience by improving the quality of tenants and leases within the portfolio. This has included the extension of 58 leases to an average 20 years with CQE’s major tenant, Goodstart and the acquisition of two new social infrastructure properties with strong tenant covenants. CQE is well positioned in the current economic environment with low gearing and $130 million of investment capacity to deliver secure income and capital growth to investors”.
CQE will continue with its strategy and has increased its distribution guidance from 15.0 cpu to 15.7 cpu, but slightly below FY20’s distribution of 16.0cpu.
- Statutory profit of $57.8 million
- Operating earnings of $29.1 million, up 14% on pcp
- Operating earnings of 8.0 cents per unit, down -5.9% on pcp
- Distribution of 7.5 cents per unit, down – 10.2% on pcp
- NTA of $3.03 per unit, up 3.7%
- Balance sheet gearing of 24.8% with investment capacity of $130 million
- 99.6% of rent collected in the period
- Weighted Average Lease Expiry (“WALE”) increased by 1.3 years to 14.0 years
- Extension of 58 Goodstart lease expiries by an average of 12 years
- Acquisition of Mater Health corporate headquarters and training facilities for $122.5 million
- Acquisition of South Australian Emergency Services Command Centre for $80 million
- Divestment of 30 existing childcare assets for $55.6 million including remaining 20 New Zealand assets and interest in the unlisted Charter Hall CIB Fund for $18.4 million
- Net property valuation increase of $25.3 million or 2.2%
During the period, CQE acquired two social infrastructure properties with on-completion value of $202.5 million, providing improved income quality and diversification to the portfolio.
In October 2020, CQE agreed to acquire a 100% freehold interest in an A-grade, 11-storey building located in Newstead in a sale and leaseback transaction with Mater Misericordiae Limited, Queensland’s largest Catholic, not-for-profit health provider.
The purchase price of $122.5 million on completion reflects a passing yield of 4.84%, underpinned by a new 10-year lease to Mater and fixed annual rental increases of 3.0%. The building is currently under construction with settlement to occur following practical completion, expected to be in the June 2021 quarter.
In November 2020, CQE contracted to purchase the new purpose-built South Australian Emergency Services Command Centre and adjacent multi-deck carpark currently under construction. On completion, it will be leased to the South Australian Government (85% of property’s total income) and
occupied by four Government emergency services agencies on a 15-year lease, with fixed 2.5% annual rent escalations and two 5-year options.
The settlement of land and works completed to date totalling $23.0 million occurred in December 2020 and CQE will fund the remainder of the development on a progressive basis for a total consideration of $80 million. Completion is expected in October 2021. The purchase price reflects a passing yield of 4.8%.
The key drivers of increasing childcare demand remain and there has not been any structural change to the market as a result of COVID-19. Childcare continues to be both an essential labour supply mechanism to the Australian economy, whilst providing significant learning benefits to young children.
There has been a strong recovery in childcare attendances post the COVID-19 pandemic and associated restrictions with operator’s occupancy levels returning to pre COVID-19 levels.
Government funding, which was critical to support the operators during the pandemic period continues to grow, underlining the importance to the economy and educational and learning benefits being provided.
As at 31 December 2020, there are 8,188 LDC centres in Australia, a net increase of 294 (3.7%) for CY20. The annual growth rate of 3.7% has moderated from 4.2% growth which occurred in CY19.
Key leasing activity for CQE during the period was the agreement on 58 new leases with Goodstart, which extended the average term on these leases by 12 years to 20 years and included fixed annual increases. In addition, 4 of 5 five-year options due to be exercised were renewed by the tenants.
Childcare acquisition activity during the period included the settlement of 2 existing childcare properties for $8.4 million at a purchase yield of 6.5% with a further childcare property contracted for $4.2 million at a purchase yield of 6.3%. These acquisitions are all leased to ASX listed tenants on
average lease expiries of 20 years.
CQE continued to divest non-core assets to recycle capital into properties with more favourable property fundamentals. During the period, there were 30 property divestments totalling $55.6 million which included the remaining 20 New Zealand assets, which will settle in June 2021. The New
Zealand portfolio consists of properties which have a WALE of 6.6 years as at 31 December 2020.
The sale price of NZD40.1 million represents an initial yield of 6.1% and is equal to the 30 June 2020 book value for these properties.
CQE’s childcare development pipeline comprises 19 properties with a forecast completion value of $123.0 million. Five developments were completed in HY21 with a completion value of $31.6 million at a yield on cost of 6.2%. Another 2 developments have completed since 31 December 2020 with a forecast completion value of $12.1 million. It is forecast that a further 3 developments will complete in FY21 which will improve the quality of the portfolio and add to the earnings profile of CQE.
During the period, 340 childcare properties were valued, which resulted in a valuation increase of 2.9% over 30 June 2020 values and a passing yield of 6.1%.
Transaction yields continue to compress with transactions of $132 million since June 2020 at a weighted average yield of 5.8%, reflecting limited supply and ongoing strong demand for long WALE assets in ‘essential nature’ industries with stable income.
Charter Hall’s move to include other social infrastructure is all about increasing Funds under management. The average deal size in the broader social infrastructure market is larger and will enable the trust to grow at a faster rate for Charter Hall. Whilst the various types of assets in the Trusts do have similar characteristics; supporting social needs, long WALEs and fixed rental increases, I would have thought that Charter Hall would have been better growing these sector separately.
In 2019, the NTA yield in CQE (Dividends divided by NTA/Unit) was 6.1%, based on forecast for FY21, this will drop to 5.1%, which is really reflective of the compression in cap rates in the market as mentioned above.
We favour Childcare assets at this point in the cycle. Childcare tenants receive on average 75% of their trading revenue from Government via the childcare subsidy scheme (supported by both Labor and Liberal governments) and they typically sign up to long term leases with predictable rental increases.
Chauvel Capital Partners (of which I am associated) have partnered with a developer of Childcare assets to deliver a series of Funds in the space. Fund 1 is forecast to provide a distribution yield of 8% per annum and a total return over 5 years of 11.4% – 14.5% net of fees. The Fund is illiquid so there is a natural premium for illiquidity.
Chauvel Capital Partners deliver these assets on a yield on cost of 6.8% (as compared to CQE at 6.2%). These metrics will outperform CQE as a result of Chauvel’s preferred delivery arrangements and target markets.