Charter Hall Retail REIT FY16 Results

Charter Hall Retail REIT (ASX:CQR) (CQR or the REIT) today announced its results for the full year to 30 June 2016. Key financial and operational highlights for the year are:

Key financial results:

• Statutory profit of $180.7 million, an 11.2% increase from prior corresponding period (pcp)
• Operating earnings of $120.3 million, 30.40 cents per unit a 2.4% increase from pcp
• Full year distributions of 28.10 cents per unit, up 2.2% from pcp
• Increased debt diversity for the REIT, with weighted average debt maturity at 6.2 years
• Look through gearing of 35.9% remains in the middle of target range
• Net tangible assets up 5.6% to $3.79 per unit from June 2015
• Cash and undrawn debt capacity of $151 million¹

Portfolio operating performance:

• 74 retail assets with a portfolio value of $2.55 billion, up 17.9% from $2.16 billion in June 2015
• Same property net operating income (NOI) growth of 2.2%
• Executed 10 major tenant lease deals (43,196sqm)
• Specialty rent growth of 1.4% achieved from 136 renewals at 1.0% and 54 new leases at 3.0% (16,688sqm)
• Occupancy stable at 98.0%
• Weighted average anchor lease duration of 10.6 years
• Acquired four shopping centres for $227.8 million and divested two shopping centres for $20.3 million

Value enhancing redevelopment:

$179.2 million of development projects completed or underway, including one major project at Secret Harbour with a total value of $58.9 million announced and forecast for completion in April 2017.

Scott Dundas, Fund Manager of the REIT, said:

“We are pleased to announce a solid set of financial results for 2016, reporting year on year earnings growth of 2.4%. We have continued to grow the fund reporting statutory profit of $180.7 million, operating earnings of $120.3 million and a 17.9% increase in portfolio value to $2.55 billion.  We have continued to create value for our unitholders delivering a final dividend of 14.10 cents per share for the half year ended 30 June 2016, bringing the full year dividend to 28.10 cents per share, an increase of 2.2%. We are delivering secure long term sustainable returns for our unitholders by focusing on active management, enhancing portfolio quality and prudent capital management.”

Positive portfolio performance delivered by an active management approach

With a firm focus on strong tenant relationships, the REIT’s $2.55 billion national portfolio of 74 supermarket anchored shopping centres delivered stable occupancy of 98.0% and same property NOI growth of 2.2%. CQR’s active asset management approach and focus on optimising tenancy mix achieved specialty rent growth of 1.4% with 54 new leases and 136 renewals completed in the year.

Specialty MAT growth increased to 4.9% from 3.5% for the year, with an 87% retention rate across specialty retailers and the improved performance of national specialty tenants who represent 59% of the REIT’s specialty portfolio. Supermarket MAT growth stabilised from the prior corresponding year, following more subdued trading conditions for the REIT’s supermarket tenants.

Strong investor interest in the non-discretionary retail asset class has further increased the REIT’s property valuations by $91.3 million or 3.7% over the year, with the total weighted average capitalisation rate firming by 44 basis points to 6.71%.

Mr Dundas said:

“With continued investor demand for high quality assets in the non-discretionary retail supermarket anchored sector, we expect to see yields continue to tighten which will see further increase in the value of the REIT’s portfolio into FY17".

Proactive capital management focused on a strong and flexible balance sheet

The REIT announced further enhancements to its debt funding platform during the year, which will see no debt maturing until FY19.

Since the completion of the partial restructure of the REIT’s debt platform in July 2015, management has focused on diversifying and extending the REIT’s debt profile. The expiry of the $150 million syndicated bank debt tranche which was due to mature in January 2017, represented an opportunity to further implement this strategy and the following initiatives have been completed:

• Refinanced bank debt facility well ahead of expiry: During the year, the REIT completed a ten year US$125 million (A$177.4 million) US Private Placement (USPP) which will mature in May 2026. The notes were issued with a fixed US$ coupon of 3.76% which is 100% hedged in Australian Dollars and represents a margin of 2.55% over the bank bill swap rate (BBSW).
• Improved and diversified liquidity sources: Entered into an A$50 million five year bi-lateral bank debt facility with an international lender.
• Restructured hedge book reducing overall cost of debt: The extension and restructure of the REIT’s interest rate hedge book has resulted in the weighted average maturity of the REIT’s interest rate swap portfolio increasing to 4.0 years with an average FY17 hedge rate of 72%.

The REIT has enhanced its debt platform by completing these prudent capital initiatives which increased the REIT’s weighted average debt maturity from 5.8 years to 6.8 years post restructure. This provides increased liquidity, enabling the REIT to capitalise on acquisition and redevelopment opportunities.

Commenting on the enhanced debt platform, Head of Retail Finance, Christine Kelly said:

A disciplined investment strategy that is enhancing the portfolio quality

The REIT has continued its disciplined investment strategy to enhance the quality of the portfolio through strategic acquisitions and divestments during the year, recycling out of non-core properties into larger assets with forecast higher growth characteristics.

During the year, the REIT contracted to sell $20.3 million of non-core properties at an average yield of 6.5%. These sales include two West Australian centres in Collie and Ballajura, reflecting a 4.7% premium to the June 2015 book value. Post balance date the REIT is actively marketing additional non-core properties.

The REIT further diversified its geographic exposure selectively acquiring four supermarket anchored shopping centres. These are located in either high growth corridors or operate as the dominant shopping centre in the region and are in line with the REIT’s investment criteria. The four new centres, Brickworks Marketplace, SA, Goulburn Plaza, NSW, Katherine Central, NT and Bateau Bay Square, NSW were purchased for a total price of $227.8 million at an average initial yield of 7.0%.

Value enhancing redevelopments that create larger assets with forecast higher growth characteristics is a key element of the REIT’s growth strategy. Two major projects with a total value of $106.8 million are now underway across the portfolio and due for completion in 2017 and 2018.

The REIT has lodged a Development Application with Lake Macquarie City Council, which will see an investment of approximately $48 million to deliver a major redevelopment of the Lake Macquarie Fair and Mount Hutton Plaza shopping centres. The redevelopment will include a new full line Coles supermarket, additional retail space, improved centre amenities and the integration of both centres into a double supermarket, DDS anchored centre with improved access and parking.

The redevelopment of Secret Harbour Shopping Centre in Perth, Western Australia is progressing ahead of schedule, with 77% of total specialty retail space currently leased or under offer. The redevelopment will improve the food and beverage offering and deliver a more enjoyable and convenient shopping experience through the construction of:

• A new 4,050sqm Coles supermarket
• A new 1,550sqm Aldi
• A new 1,225sqm Dan Murphy’s
• Refurbishment of the existing centre

Following acquisitions, disposal of non-core assets and completed redevelopments the REIT’s average asset value has increased from $32.7 million at June 2015 to $39.7 million at June 2016.

Strategy and FY17 operating earnings guidance

The REIT will continue its focus on driving long term income growth. This will be achieved by further recycling of capital from divesting low income growth assets and replacing them with higher growth redevelopments and acquisitions. This portfolio reconstruction may impact earnings growth in FY17 before higher growth redevelopments and acquisitions drive stronger income growth in subsequent years.

Management will ensure that the timing of any divestments will have minimal earnings impact, with capital from sales deployed immediately into replacement assets or redevelopments. Barring unforeseen events and subject to the timing of acquisitions and divestments, the REIT’s operating earnings for FY17 are expected to be in line with FY16.

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

View CQR FY16 Results Presentation

View CQR FY16 Appendix 4E

View CQR FY16 Webcast

¹ _{Includes $9.0 million raised from the August 2016 DRP.}