Charter Hall Retail REIT FY15 Results

Charter Hall Retail REIT (ASX:CQR) (the REIT) today announced its results for the year to 30 June 2015.

Key financial results:

• Statutory profit of $162.5 million
• Operating earnings of $110.8 million, 29.7 cents per unit
• Distributions of $102.9 million, 27.5 cents per unit, representing a payout ratio of 92.6%
• Look through gearing of 33.6%
• Portfolio value of $2.16 billion, up 8.7% over the period
• Net tangible assets (NTA) per unit up 5.6% to $3.59
• Completion of debt restructure, increasing the weighted average debt maturity to 5.8 years¹
• Moody’s Baa1 credit rating assigned to the REIT
• Cash and undrawn debt capacity of $142 million²

Portfolio operating performance:

• Same property net operating income (NOI) growth of 2.4%
• Specialty rent growth of 1.5% achieved from 122 renewals and 185³ new leasing transactions
• Occupancy of 98.4%
• Weighted average anchor lease duration of 10.7 years
• Completed 15 anchor lease deals in the year, including the first leasing transaction with Aldi Supermarkets

Scott Dundas, Fund Manager of the REIT, said:

“Our performance during the period is underpinned by a focus on active asset management, enhanced portfolio quality and prudent capital management. We are proud to have delivered a sound result for the year, reporting operating earnings of 29.7 cents per unit, a distribution of 27.5 cents per unit and stable performance across our portfolio. This result ensures we continue to deliver a secure income stream for our investors. 2015 has been a very active year for the REIT. We have worked to address the REIT’s debt funding platform and continued to enhance the quality of the portfolio through strategic acquisitions, divestments and redevelopments".

Positive Portfolio Performance

Active management of the portfolio is a key focus for the REIT. During the period occupancy has remained stable at 98.4%, despite the continued trend of softer leasing conditions. Specialty rent growth was 1.5% with 185 new leases and 122 renewals completed and portfolio WALE is 7.0 years.

Specialty MAT growth increased to 2.8% for the period, continuing the positive momentum for specialty tenants in the REIT’s portfolio. Supermarket MAT growth was 1.0%, reflecting the more subdued trading conditions for the REIT’s supermarket tenants.

Portfolio property valuations increased by $86.7 million or 4.2% over the year, with total weighted average cap rates continuing to firm, demonstrating strong investor interest in the asset class. Woolworths and Wesfarmers anchor tenant leases continue to provide 52% of annual base  rent with an anchor WALE of 10.7 years.

Enhancing the Portfolio Quality

In line with its disciplined investment strategy, the REIT has continued to focus on recycling from noncore properties into larger, higher growth potential properties.

During the period the REIT acquired two supermarket anchored shopping centres for a total purchase price of $97.1 million at an average initial yield of 7.2%. Coomera City Centre, Qld and Brickworks Marketplace, SA are both located in high growth corridors and are within the REIT’s investment criteria.

Two major redevelopments at Caboolture Square Qld and Lansell Square Vic were completed during the year. Lansell is trading in line with expectations and is 95.5% leased, with Caboolture Square taking longer to lease than originally expected, given a delay in the completion of the major’s refurbishment.

The REIT has also completed the sale of a number of non-core retail properties for a combined sale price of $37.6 million and a yield of 8.2%. These include the sale of three properties in Central Western NSW, with the $21.6 million sale price reflecting a 3.5% premium to the June 2014 book value. The net proceeds were utilised to retire $18.5 million of CMBS notes and pay down approximately $2.6 million of the REIT’s revolving bank debt facility.

The REIT also completed the sale of Windsor Marketplace, NSW in June and, as a result of these transactions and the redevelopment pipeline, the average asset value has increased from $28.6 million at June 2014 to $32.7 million at June 2015.

Diversifying the portfolio’s debt platform

Prudent capital management has seen the REIT weighted average debt maturity increase from 3.7 years to 5.8 years following the completion of several key initiatives to restructure its debt funding platform during the period:

• US$200 million (A$252 million) US Private Placement (USPP) issuance: 12 year duration with a fixed US$ coupon of 3.55% which is 100% hedged in Australian dollars (principal and interest) and represents a margin of 194 basis points over BBSW.
• Transition to a fully unsecured debt facility: To complete on 28 September 2015.
• Restructured syndicated bank debt facility with tranches of 18 months ($150 million), 3 years ($150 million) and 5 years ($285 million) for a total facility limit of $585 million, from a previous limit of $535 million.

On 22 July Moody’s assigned a definitive issuer credit rating of Baa1, reflecting the REIT’s strong balance sheet position.

The REIT’s existing CMBS facility remains in place until 28 September 2015 and will be repaid from the proceeds of the USPP issuance. The USPP was successfully funded on 22 July 2015 and the revised unsecured bank debt facility was effective from this date.

Phil Schretzmeyer, Deputy Fund Manager, said: “The response from US investors to this inaugural issue was very positive with the offering being approximately six times oversubscribed. This is a reflection of the quality of the REIT’s non-discretionary focused portfolio and reflects the REIT’s focus on prudent capital management”.

Equity Raise

The REIT also announced today that it has contracted to acquire a portfolio of two high quality subregional shopping centres located in regional NSW and the Northern Territory (the Portfolio).

The Portfolio is consistent with the REIT’s strategy to acquire supermarket anchored shopping centres with strong income and capital growth potential and comprises Goulburn Plaza, NSW and Katherine Central, NT.

The Portfolio will be acquired for a combined acquisition price of $94.9 million, or $102.0 million post acquistion costs, reflecting a 7.2% initial yield⁴.

The acquisition of the Portfolio will be funded by:

• a fully underwritten institutional placement of $50 million (the Offer), at an offer price of $4.02 per unit
• utilising $21 million of net proceeds from the sale of Bathurst, Narromine and Wellington
• debt funding of $31 million, utilising the increased debt capacity from the REIT’s recent debt restructure.

Key acquisition metrics of the Portfolio are set out below:

Impact on the REIT

The Portfolio acquisition and the Offer are expected to be neutral to FY16 operating earnings5 per unit, when considered net of the non-core disposal activity in FY15. The transaction will be accretive to NTA and is expected to be accretive to FY17 operating earnings per unit, based on the higher growth potential of the acquisitions.

Additional information regarding the Portfolio and the Offer is contained in the investor presentation released to the ASX today.

Phil Schretzmeyer, Deputy Fund Manager of the REIT said:

“The acquisition of the Portfolio is in line with the REIT’s strategy of acquiring supermarket anchored centres that enhance the quality of the REIT’s already strong property portfolio. These centres are strategically located, the dominant offerings within their respective trade areas and anchored by good performing supermarkets. In the case of Katherine Central, it is the only convenience-based shopping centre in the region and is well supported by Tindal RAAF Base".

Strategy and FY16 operating earnings guidance

This reporting period has seen the REIT focused on driving value from its supermarket anchored portfolio and its strong balance sheet. The REIT’s strategy is delivered through:

• Active asset management, maintaining strong tenant relationships, optimising tenancy mix through proactive leasing and enhancing the overall shopper experience.
• Enhancing the portfolio quality, through value enhancing redevelopments, selective acquisitions and non-core disposals.
• Prudent capital management, with a focus on a strong and flexible balance sheet complemented with a sustainable payout ratio.

Barring unforeseen events, the REIT’s FY16 guidance for operating earnings is between 30.25 and 30.75 cents per unit.

Distribution payout ratio range is expected to remain between 90% and 95%.

Mr Dundas said:

“Despite the challenging trading conditions, the active management of our portfolio is a key focus and we will continue to work with our customers to deliver vibrant shopping centre experiences while focusing on leasing and development to maximise property returns. Ongoing investor interest in this asset class has resulted in yields for high quality assets tightening sharply over the past twelve months and as such we are expecting to see growth in the value of the REIT’s portfolio over the 2016 financial year”.

View CQR FY15 Results Presentation

View CQR FY15 Financial Report

View CQR FY15 Webcast