Charter Hall Retail REIT FY11 Results

Charter Hall Retail REIT (ASX:CQR) (the ‘REIT’) today announced its results for the year to 30 June 2011.

Key financial results:

• Statutory profit of $62.9 million
• Operating earnings of $85.2 million, 27.96 cents per unit
• Distribution of $75.4 million, 24.80 cents per unit, representing a payout ratio of 89%
• Balance sheet gearing of 39.1%
• Portfolio value of $1,931 million
• Net tangible assets (NTA) at $1,070 million, $3.54 per unit

Portfolio operating performance:

• Australian and European portfolio same property net operating income (NOI) growth of 3.4%, with total portfolio growth of 3.1%
• Australian and European portfolio occupancy of 98.7%, with total portfolio occupancy of 97.5%
• Total portfolio weighted average anchor lease duration of 10.6 years

Commenting on the results, the REIT’s Chief Executive Officer, Steven Sewell, said:

“The REIT’s portfolio, which now consists of mainly Australian supermarket anchored shopping centres, performed well during the year reinforcing the value of our strategy to reweight to Australia and highlighting the operating resilience of this asset class. Pleasingly, the REIT acquired or contracted to acquire ten properties since January 2011 comprising the eight property Woolworths portfolio, Gordon Shopping Centre and Albany Creek Shopping Centre, all of which are anchored by a dominant full line Coles or Woolworths supermarket. These centres have substantially improved the overall quality and growth potential of our Australian portfolio, resulting in a substantial lift in the Australian portfolio’s forecast five-year unlevered internal rate of return from 9.5% at 30 June 2010 to 10.6% today”.

Strong portfolio performance

The REIT’s total portfolio occupancy increased to 97.5% at 30 June 2011 from 97.2% at 31 December 2010, with same property NOI growth of 3.1%, following a continued focus on active asset management in Australia and Europe.

The Australian portfolio performed slightly ahead of expectations across the year, with same property NOI growth of 3.8%, stable occupancy of 98.8% and a busy period of leasing activity with 93 renewals and 86 new lease transactions resulting in a rental rate growth of 7.3%.

In Europe, the Polish and German properties delivered a solid overall performance with occupancy of 98.3% and same property NOI growth of 2.5%.

The value of the REIT’s portfolio at 30 June 2011 increased 0.6% over the prior book value¹ to $1,931 million following external revaluations on 29% of the portfolio by book value. The revaluations saw the portfolio’s overall weighted average capitalisation rate in Australia and Europe tighten marginally from 8.11% to 8.07%. Excluding the impact of acquisition costs², the value of the Australian portfolio increased by 1.3% or $18.1 million over the prior book value, demonstrating the defensive and stable fundamentals of this niche asset class that is core to the REIT’s strategy.

Key capital management objectives achieved

The REIT continued to proactively extend the term of its debt facilities and reduce the REIT’s future interest expense. Key achievements include:

• In April 2011 the REIT announced it had secured a conditional funding commitment from UniSuper to repay its Australian commercial mortgage backed security facility in September 2011, twelve months ahead of its maturity in September 2012;
• Documentation was finalised in June 2011 to extend the Polish debt facility to July 2014 (from its previous December 2011 maturity), with a reduction in margin; and
• In August 2011 the REIT received credit approval, subject to documentation, from National Australia Bank for a second tranche of the Australian multi-currency debt facility, increasing the total limit by $20 million to $285 million to partially fund the acquisition of Albany Creek Shopping Centre.

These initiatives will extend the REIT’s weighted average debt maturity to 3.7 years as at 30 June 2011.

Over the last six months an on-market buy-back was undertaken of $20 million of units, providing both earnings and NTA benefit to FY12 and beyond. A further $20 million has been allocated to the buy-back at a price up to the REIT’s NTA, currently $3.54. Any buy-back activity will be subject to receiving proceeds from the sale of the REIT’s United States wholly owned disposal transactions and a review of alternative investment opportunities at the time.

At 30 June 2011, the REIT had cash and undrawn facilities of $87.3 million, with balance sheet gearing forecast to be 38.4% post the completion of announced transactions, within the target gearing range of 30% to 40%.

Australian portfolio now represents 86% of NTA

Ten Australian shopping centres were acquired or contracted since January 2011 for a total purchase price of $373.13³ million, funded with equity realised from asset sales, surplus cash and undrawn facilities.

The offshore asset disposals completed in the last six months included several assets from the United States and New Zealand portfolios which released A$135.8 million of net proceeds. When the sale of a further six United States assets completes later this year as expected, the remaining United States portfolio will consist of only two wholly owned assets and four assets held in joint venture with Regency Centers. At this point, the non-core portfolio investments will represent less than 2% of the REIT’s NTA, or A$17 million in net equity. Management will continue to pursue opportunities to dispose of these assets as conditions stabilise across the relevant sub-markets in the United States.

The REIT has also announced that it intends to repatriate equity currently invested in Europe over the next three years as conditions in capital and real estate transaction markets permit, in order to invest further into Australia to achieve enhanced returns through the identified capital management initiatives.

Strategy and outlook

The REIT is committed to further enhancing unitholder return on equity through various initiatives, including:

• Buy-back of units with a further allocation of $20 million at a price up to NTA, once equity is realised from the sale of United States assets;
• Redevelopment and enhancement of the existing portfolio; and
• Selectively acquiring quality Australian supermarket anchored shopping centres, generally with an individual asset value of between $20 million and $80 million.

Mr Sewell said:

“The strategy and market positioning for Charter Hall Retail REIT is to be a specialist owner of supermarket anchored neighbourhood and sub-regional shopping centres in Australia. We have substantially focused the portfolio to Australia, realising the majority of our invested equity from offshore non-core markets and effectively redeploying that equity into high quality grocery anchored Australian shopping centres. The quality assets we have been able to acquire, combined with a pipeline of asset enhancing redevelopment projects, positions the REIT well to enhance the returns on invested equity for our unitholders. We expect income and capital growth prospects will continue to be underpinned by the strength and resilience of the Australian supermarket anchor tenants, and the management teams’ capability and track record in managing returns from the neighbourhood and sub-regional retail asset class”.

Forecast FY12 operating earnings are expected to be in the range of 28.5 to 29.0 cents per unit⁴, with distributions to reflect a payout ratio of between 85% and 95% of operating earnings. This operating earnings forecast represents a yield of 8.1%⁵ at the stated NTA per unit of $3.54.

View CQR FY11 Results Presentation

View CQR FY11 Financial Report

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