Charter Hall’s Convenience Retail REIT shows local dominance

16 February 2021

Charter Halls Retail Convenience REIT has proven to be far more resilient to COVID and other forces than their larger counterparts.

In issuing the REITs results this week, Charter Hall’s Retail CEO, Greg Chubb said: “It’s been another period where CQR’s portfolio has demonstrated its resilience and the strength of its defensive characteristics.”

The Group lifted operating earnings in 1H FY21 to $75.2 million up $5 million or 7.1% on 1H FY20 of $70.2 million and announced a distribution of 10.7cpu up 7.0% from 10.0 cpu on 2H FY20.

Other major retail landlords are reporting negative earning variances on the prior corresponding period, significant arrears and negative leasing spreads on new leases. The Charter Hall Retail REIT has the complete opposite and is a reflection of the attraction the local neighbourhood malls enjoy as more people have been forced to work from home.

Greg Chubb said: “We saw very strong MAT growth from our supermarkets of 8.2%, up from an already strong 5.2% at June. This lifted the percentage of supermarkets paying turnover rent to 65%, reflecting the quality of the CQR’s convenience retail centres and their dominant positions within their respective catchments. The gradual normalisation of conditions also saw leasing activity recover strongly, with a record 224 specialty leases completed at an average +2.5% leasing spread. Pleasingly, we also saw occupancy lift to 97.8%, up from 97.3% at June 2020. Importantly, COVID-19 related tenant support progressively diminished over the period.”

CQR provided $5.8 million or 4% of 1H FY21 rent as tenant support for COVID-19 affected retailers. $133 million or 94% of rent for the period was successfully collected and only $2.5 million, or 2% of 1H FY21 rent remained outstanding for collection at 31 December 2020. Following collections in January, outstanding rent has now been reduced to less than 1% of rent for the six month period.

“We were also delighted to expand our partnership with bp by acquiring a 24.5% interest in 70 triple net leased (NNN) long WALE convenience retail properties leased to bp in New Zealand. This aligns with our strategy of partnering with leading convenience retailers to deliver a resilient and growing income stream for CQR unitholders. Following this transaction, major retailers now make up 54% of CQR’s portfolio income. The security and steadily growing nature of this income underpins CQR’s future growth in distributions.”

Financial Highlight

  • Operating earnings of $75.2 million up $5 million or 7.1% on 1H FY20 of $70.2 million
  • Operating earnings of 13.17 cents per unit (cpu) down 17.1% on 1H FY20 of 15.88 cpu
  • Statutory profit of $82.8 million, up $16.1 million or 24.1% on 1H FY20 of $66.7 million
  • Net cashflow from operating activities of $75.7 million up $6.5 million or 9.4% on 1H FY20 of $69.2 million
  • Net cashflow from operating activities of 13.26 cpu down 15.4% on 1H FY20 of 15.67 cpu
  • Distribution of 10.7cpu up 7.0% from 10.0 cpu on 2H FY20
  • COVID-19 tenant support of $5.8 million provided during the period down from $10.7 million for 2H FY20
  • Portfolio look-through gearing of 34.6%1 up from 32.3% at 30 June 2020
  • NTA per unit of $3.77
  • Weighted average debt maturity of 3.8 years, no debt maturing until FY22
  • Moody’s affirmed Baa1 issuer rating with stable outlook
  • Liquidity of $304 million consisting of cash and undrawn debt facilities

Operating highlights:

  • 8.2% Supermarket MAT growth, up from 5.2% at June 2020
  • Supermarkets in turnover increased to 65%, up from 61% at June 2020
  • Total MAT growth3 of 7.1%, up from 3.9% at June 2020
  • Contribution from major tenants to portfolio income 54.1%, up from 51.4% at June 2020
  • Shopping centre portfolio occupancy of 97.8%, up from 97.3% at June 2020
  • Specialty leasing spreads of +2.5% with 119 specialty lease renewals (+0.6% leasing spread) and 105 new leases (+5.9% leasing spreads)
  • Specialty tenant retention rate normalised to 82%, up from 72% at June 2020
  • Portfolio cap rate of 6.03%, unchanged from June 2020
  • Expansion of bp partnership with acquisition of 70 Long WALE convenience retail properties leased to bp in New Zealand

The REIT has continued its disciplined investment strategy to provide a resilient and growing income stream for investors through active asset management, portfolio enhancement and prudent capital management.

In December, CQR expanded its partnership with bp by acquiring a 24.5% interest in an AUD$500 million portfolio of 70 Long WALE NNN Convenience Retail properties leased to bp in New Zealand.

The portfolio, consisting of the majority of bp’s owned Convenience Retail properties in New Zealand, was acquired in a sale and leaseback transaction with a 20-year WALE at acquisition with annual CPI rent increases (plus up to 0.5% in the first five years) on a 6.25% initial yield.
This purchase further deepens CQR’s partnership with bp, while providing income security and growth in an effective NNN lease structure. Following the acquisition, bp is CQR’s third largest tenant customer and represent 12.3% of portfolio income.

The defensive and resilient nature of the CQR’s portfolio was also evident in the fund’s property valuations. 59% of the portfolio by value was externally revalued during the period. The REIT’s total portfolio increased in value by $252 million with net acquisitions of $207 million, capital investments of $30 million and a valuation uplift of $15 million. The total portfolio cap rate was stable at 6.03%.

Looking at the component parts of the portfolio, the REIT’s shopping centre portfolio valuation increased by +1.2% or $34 million including capital investment, with the shopping centre portfolio cap rate softening from 6.19% to 6.21% between June and December 2020.

The REIT’s Long WALE convenience retail portfolio valuation increased by 2.4%, or $11 million, while the cap rate moved from 5.00% to 5.28% reflecting the acquisition of the Coles Adelaide Distribution Centre and the bp New Zealand portfolio.

Summary and outlook

CQR’s portfolio continues to offer defensive and resilient earnings through its focus on meeting the property needs of convenience retailers. We continue to expect that supermarket sales and convenience retail sales will continue to be strong, driven by customers preference to shop closer to home and focus on everyday needs. Visitations to CQR centres have normalised in most regions and highlight the essential need associated with convenience retail.

Our strategy remains focused on partnering with non-discretionary convenience retailers and providing income resilience and growth through a continuation of our acquisition and divestment strategy.

Barring any unforeseen circumstances or further extended COVID-19 lockdowns and government mandated restrictions, CQR provides FY21 operating earnings guidance no less than 27.3 cents per unit and expects the 2H FY21 distribution to be no less than 12.7 cents per unit.

Our Views

Charter Hall Retail REIT are trading at a -7% discount to NTA as at 15/2 but closed the gap slightly following the results announcement.

We like the Neighbourhood Convenience Retail investment strategy. It has proven through these results to be far more resilient and to be less affected by on-line retail trends. The positive leasing spreads are good news for the sub sector.

We feel that Neighbourhood Centres are being unfairly treated with caution, simply due to the association with other malls, whereas the drivers behind the income and sales in the Neighbourhoods are far less riskier than their larger counterparts.

Charter Hall have diversified this REIT by including fuel stations and several large supermarket logistics assets which are commensurate with a REIT which focus on the supply chain of consumer convenience, non discretionary spend.

We like the thematic and CQR is on our recommend list.