Earnings growth in Charter Hall Social REIT12 August 2021
Charter Hall Social Infrastructure REIT released its results for FY20 with a 13% increase in earnings flowing from rental growth and confidence in the sector.
Charter Hall Social Infrastructure REIT’s Fund Manager, Travis Butcher said: “CQE has continued delivering on its strategy of enhancing income resilience and capital growth. It has been an active year which has included the acquisition of two new social infrastructure properties with strong tenant covenants and the extension of 106 leases to an average 20 years with CQE’s major tenant customer, Goodstart. CQE is well positioned with low gearing and $207 million of investment capacity to deliver
secure income and capital growth to investors”.
During the year, 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 focus, resulting in the following:
• Increase in WALE to 15.2 years from 12.7 years;
• 100% occupancy;
• Majority of leases (73.2%) now on fixed rent reviews up from 53.6% as at 30 June 2020 resulting in a forecast WARR of 2.9%; and
• Lease expiries within the next five years at 3.4% of rental income.
Childcare transaction volumes remain strong with approximately $550 million in sales during FY21. Childcare property yields continue to compress, reflecting limited supply and ongoing strong demand for long WALE assets in ‘essential’ sectors with stable income. The average yield covering 61 transactions ($289 million) during the last six months was 5.5%, with the average yield on transactions within metropolitan Melbourne at 5.2%.
The essential nature of childcare has been demonstrated with centres remaining open during the COVID-19 pandemic and associated restrictions. Childcare continues to be an essential labour supply mechanism to the Australian economy, in addition to providing significant learning benefits to young children. Importantly, there has not been any structural change to the market as a result of COVID-19 and occupancy for operators has returned 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. The Federal Government through the Child Care Subsidy provides funding of approximately $9.0 billion per annum and as announced in May 2021, additional funding of $1.7 billion per annum will be provided to improve childcare affordability commencing in FY23. The additional funding is targeted at lower-middle income families and expected to benefit approximately 250,000 families.
As at 30 June 2021, there are 8,332 LDC centres in Australia, a net increase of 297 (3.7%) for FY21. The annual growth rate of 3.7% has moderated from 3.8% growth which occurred in FY20. The softening in supply growth is evidenced by 159 new centres opening between January and June 2021, being lower than the corresponding period in previous years (2020: 181; 2019: 204).
CQE is well positioned, with resilient and growing income, low gearing and $207 million of investment capacity. CQE will continue to execute on its strategy to pursue new social infrastructure opportunities. Recent acquisitions and completion of developments will continue to drive earnings and distribution growth in future years.
CQE is pleased to announce that based on information currently available, continued tenant performance and barring any unforeseen events or a further deterioration in the COVID-19 environment, the FY22 forecast distribution guidance is 16.7 cpu, an increase of 6.4% from FY21. CQE will continue to pay quarterly distributions.
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The REIT commenced the year with a security price of $2.33 against a NAV of $2.92 (20% discount to NAV) and closed the year at $3.48 with a NAV of $3.25 (7% premium to NAV). The REIT provided a 19.7c distribution for FY21, which included a one off special distribution of 4c. The special distribution was announced in June and was due to the REIT taxable income for the year ended 30 June 2021 exceeding the total cash distribution paid to unitholders. Based on the total distributions, the distribution yield equates to 8.45% yield (or 6.7% without the Special Distribution). With with a 49% lift in unit price the total return for investors was 56%.
Key financial and operational highlights for the period are:
- Operating earnings of $58 million up 13.5% on the prior corresponding period (pcp), or 16cpu, down -3% on the pcp
- Statutory profit of $174.1 million, up 103% on the pcp
- Ordinary Distributions of 15.7cpu, down -1.9% on pcp
- Special Distribution of 4.0cpu
- NTA of $3.25 up 11.3% from $2.92 at 30 June 2020
- Balance sheet gearing of 24.5%, up from 18% on pcp
- 107 new leases with average expiry of 20 years (average increase of 13 years)
- 4 acquisitions and 10 completed developments with average lease terms of 17 years
- Divestment of 44 non-core childcare assets for $85.3 million which included the remaining 20 New Zealand assets
- 6 of 8 five year options renewed
- Lease expiries within next 5 years reduced to 3.4%
Social Infrastructure Acquisitions:
During the period, CQE acquired two social infrastructure properties with a combined on-completion value of $202.5 million, providing improved income quality and diversification. In June 2021, CQE settled the acquisition of the Mater Misericordiae Limited (“Mater”) corporate headquarters and training facilities located in Newstead, approximately 2.6 kilometres north-east of the Brisbane CBD. The purchase price of $122.5 million reflects a passing yield of 4.84%, underpinned by a new 10-year lease to Mater and fixed annual rental increases of 3.0%.
CQE acquired the property in a sale and leaseback transaction with the Mater, Queensland’s largest Catholic, not-for-profit health provider, with net assets of over $1 billion.
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 for a total consideration of $80 million. On completion, it will be leased to the South Australian Government (85% of the 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 occurred in December 2020. As at 30 June 2021 CQE had funded $50.4 million of the development with the remaining $29.6 million of development funding to be provided on a progressive basis through to completion which is expected to occur in November 2021. The total fixed cost of $80 million reflects a passing yield of 4.8%.
Childcare acquisition activity during the year included the settlement of 3 brand new childcare properties for $12.6 million at a purchase yield of 6.4%. These acquisitions are all leased to ASX listed tenants on average lease expiries of 20 years and are well-located for childcare and to also deliver long term capital growth.
CQE continued to divest non-core assets to recycle capital into properties with more favourable property fundamentals to improve the quality of the portfolio. During the period, there were 44 property divestments totalling $85.3 million which included the remaining 20 New Zealand assets. These divestments comprised smaller centres (average of 67 places), short WALE (average 6.6 years) and lower socio-economic locations. The average yield achieved on these divestments was 5.9% resulting in a 5.7% premium to book value.
Ten developments were completed in FY21 with a completion value of $69.7 million at a yield on cost of 6.1%. CQE’s childcare development pipeline comprises a further 14 projects, of which 9 are forecast to be completed during FY22, contributing to continued improvement in the quality of the portfolio and adding to the earnings profile of CQE.
Revaluations of the property portfolio completed through FY21 resulted in an aggregate valuation uplift of $119.4 million over 30 June 2020 values, reflecting a 11.1% increase net of capital expenditure and a passing yield of 5.6%.
In June 2021, CQE increased its debt facilities to $600 million with the additional $100 million being provided by a new financier, further diversifying CQE’s funding sources. This will provide CQE with investment capacity of $207 million after adjusting for contractual commitments.
As at 30 June 2021, CQE’s balance sheet gearing is 24.5% and look-through gearing is 25.6%. CQE has diversified funding sources with no debt maturity until May 2024 and a weighted average debt maturity of 4.1 years.
The REIT reconfirms that based on information currently available and barring any unforeseen events or further COVID-19 impacts, FY22 distribution is forecast to be 16.7 cpu, a growth of no less than 6.4% over FY21. This equates to a forecast FY22 distribution yield of 4.8% based on the closing price as at 1 July 2021 of $3.48.
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