Charter Hall Retail REIT FY19 Results ASX Announcement

Charter Hall Retail REIT (ASX:CQR) (CQR or the REIT) today announced its FY19 results for the year ended 30 June 2019.

 Key financial results:

• Statutory profit of $53.1 million

• Operating earnings of $128 million or 31.12cpu up 2% on prior corresponding period (pcp)

• Distribution of 28.76cpu up 2% on pcp

• Balance sheet gearing of 32.9% with $143m of undrawn debt capacity

• Weighted average debt maturity of 4.9 years, no debt maturing until FY22

• Successful completion of $150 million institutional placement and $14.7m unit purchase plan to support the acquisition of Rockdale Plaza, NSW and strengthen the balance sheet

 Operating highlights:

• Portfolio occupancy maintained at 98.1%

• Portfolio WALE stable at 6.5 years following ten major lease extensions

• Like-for-like net property income (NPI) growth of 2.1%, up from 1.8% on pcp

• 175 specialty leases renewals and 191 new lease delivering positive specialty leasing spreads of 0.8%

• Portfolio value increased by $189 million. Valuations across the portfolio remained stable. The entire portfolio was externally revalued¹ in FY19, with income growth offsetting portfolio cap rate expansion of 3bps to 6.18%

• Acquired three high-quality convenience-plus assets with Gateway Plaza, Vic; Campbellfield Plaza, Vic and Rockdale Plaza, NSW while disposing two smaller regional assets

Charter Hall’s Retail CEO, Greg Chubb said: “CQR continues to focus on curating a portfolio of convenience and convenience-plus assets in metropolitan markets, that are the dominant convenience centres in their catchments. We successfully added three centres to the portfolio this year that have enhanced the portfolio’s future income growth potential. We will continue to opportunistically look to sell assets and take advantage of opportunities to improve the portfolio. CQR is delivering reliable net property income growth and steady and consistent growth in operating earnings and distributions.”

Investment strategy

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. During the period, the REIT acquired Gateway Plaza in Leopold, Victoria in Joint-Venture with the Charter Hall Prime Retail Fund (CPRF) for $117 million; acquired Campbellfield Plaza in Melbourne’s northern suburbs for $74 million and acquired Rockdale Plaza, NSW for $142 million. These investments were all high-quality convenience-plus assets that improve the portfolio’s positioning and provide future potential income growth.

During the period, the REIT acquired Gateway Plaza in Leopold, Victoria in Joint-Venture with the Charter Hall Prime Retail Fund (CPRF) for $117 million; acquired Campbellfield Plaza in Melbourne’s northern suburbs for $74 million and acquired Rockdale Plaza, NSW for $142 million. These investments were all high-quality convenience-plus assets that improve the portfolio’s positioning and provide future potential income growth.

CQR also divested two lower growth assets, Coomera Square, QLD and a freestanding Woolworths asset at Young, NSW for a total consideration of $76.1 million. These sales were consistent with the REIT’s strategy to divest smaller assets and recycle capital into centres which are the dominant conveniencebased offering in their respective catchments and offer better prospects for long-term income and capital growth. CQR has also contracted to divest a further three regionally located properties for a total of $60.7 million with settlements in FY20.

The REIT’s portfolio increased in value by $189 million due to development and transaction activity. Valuations across the portfolio remained stable. The entire portfolio was externally revalued during the year with 83% externally revalued at both December 2018 and June 2019. The defensive nature of the portfolio has been evident through the valuation process, with income growth off setting portfolio cap rate expansion of 3bps from 6.15% to 6.18% over the year.

An active management approach delivering a convenient shopping experience

The REIT’s convenience supermarket-anchored retail portfolio delivered continued stable occupancy of 98.1% and like for like NPI growth of 2.1%, up from 1.8% at June 2018. With a firm focus on strong tenant relationships and creating convenient shopping experiences, CQR had an active leasing period with 366 specialty leases completed during the period at an average positive spread of 0.8%. This was made up of 191 new specialty leases completed at average leasing spread of 2.4% and 175 renewals completed at an average 0.0% leasing spread.

The portfolio continues to be heavily weighted towards high quality tenants. Major tenants Woolworths, Coles, Wesfarmers and Aldi represent 46% of rental income. Aldi continues to increase in importance. Aldi is now the fifth largest tenant customer with representation increasing from six to nine stores. The acquisition of Gateway Plaza, Vic and Campbellfield Plaza, Vic also introduced the first Bunnings and Officeworks into the portfolio, further improving the tenant mix. 93% of rental income is generated from convenience based non-discretionary retailers.

The portfolio’s exposure to Victoria increased 4% over the period and the portfolio is now 80% weighted to the eastern seaboard. The total portfolio WALE remains stable at 6.5 years following 10 new major leases and extensions.

Supermarkets in the portfolio continued to perform well with 56% of supermarket tenants paying turnover rent². Supermarkets across the portfolio delivered 3.7% MAT growth³ whilst supermarkets in turnover delivered 4.0%⁴. Coles, Woolworths and Aldi refurbished 13 stores over the last 12 months or 30% of the portfolio over the last 24 months.

Proactive capital management focused on a strong and flexible balance sheet

CQR has continued to focus on diversifying and extending the debt profile and ensuring a sound capital footing for the REIT. The following initiatives have been completed over FY19:

• Raised $165 million of equity to fund the Rockdale Plaza, NSW acquisition and reduce gearing

• Refinanced $445 million⁴ of bank debt

• New facilities with additional and existing banks maturing over FY23 to FY25

• Increased near term hedging and extended the average swap portfolio maturity by 12 months 

These capital management initiatives mean the weighted average debt maturity is now 5 years5, with an average hedge maturity of 3.9 years. Balance sheet gearing remains at the lower end of the target 30-40% range at 32.9%, with undrawn debt capacity of $143 million.

Head of Retail Finance and Deputy Fund Manager CQR, Christine Kelly commented: “We continue to proactively manage our capital and debt position to ensure a prudent capital structure. We have refinanced our existing facilities ensuring we have no debt maturing until FY22. The equity raising associated with the acquisition of Rockdale has also de-geared the balance sheet and provided an opportunity to extend and increase our hedging and lock in lower effective swap rates.”

FY19 operating earnings guidance

Barring unforeseen events and subject to the timing of acquisitions and divestments, the REIT’s FY20 guidance is for operating earnings to grow by 1.5% to 2.0% over FY19. The distribution payout ratio range is expected to remain between 90% and 95% of operating earnings.

¹Excluding assets held for sale

²Includes supermarkets with fixed rent reviews

³Comparable sales, noting some major tenants reported a 53 week year for FY19 (estimated to be approximately 2.0% when adjusted to 52 weeks)

⁴Comparable sales, for stores in turnover, noting some major tenants reported a 53 week year for FY19 (estimated to be approximately 2.3% when adjusted to 52 weeks)

⁵Includes CHRP2 post balance date (August 2019) refinance increasing existing debt facilities from $105 million to $110 million and extended maturity to July 2024

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