Charter Hall Retail REIT HY19 Results

Charter Hall Retail REIT (ASX:CQR) (CQR or the REIT) today announced its 1H FY19 results for the period 1 July 2018 to 31 December 2018.

Key financial results:

• Operating earnings of 15.61cpu and distribution of 14.28cpu, both up 2% on pcp
• Statutory profit of $55.5m or 13.89cpu
• Net tangible assets (NTA) maintained at $4.22 per unit
• Balance sheet gearing of 32.2% with $233m of cash and undrawn debt capacity
• Weighted average debt maturity of 5.3 years, no debt maturing until FY22.

Operating highlights:

• Stable occupancy at 98.1%
• Entire portfolio externally revalued1 to $2.76 billion, with portfolio cap rate firming to 6.14%
• Like-for-like net property income (NPI) growth of 2.1%, up from 1.8% at June 2018
• 55% supermarkets in turnover2, up from 53% at 30 June 2018
• Lake Macquarie Fair redevelopment substantially completed with new Coles opened 24 January 2019
• 172 specialty leases completed delivering positive specialty leasing spreads of 1.9% up from 1.3% at 30 June 2018.

Charter Hall’s Retail CEO, Greg Chubb said: “We are pleased to deliver these results which reflect stable growth across key metrics, the result of diligent execution of our strategy. Our portfolio continues to deliver reliable earnings growth for investors, underpinned by our focus on convenience and convenience-plus centres that cater for everyday needs retail.”

A disciplined investment strategy

The REIT has continued its disciplined investment strategy to enhance portfolio quality and earnings. This has been achieved through active asset management, strategic redevelopments, the divestment of lower growth properties, and selective asset acquisitions with potential for higher growth.

During the period, the REIT executed an unconditional contract to acquire Campbellfield Plaza in Melbourne’s northern suburbs for a total consideration of $74 million. The strategic acquisition of Campbellfield Plaza provided the opportunity to acquire a high quality dominant convenience-plus- shopping centre, underpinned by a secure income profile. The investment aligns with the REIT’s investment strategy and follows other acquisitions in fast growing metropolitan locations.

CQR 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 convenience-based offering in their respective catchments and offer better prospects for long-term income and capital growth.

During the period CQR also extended its joint venture relationship with MTAA Super, divesting 47.5% of Salamander Bay, NSW for a consideration of $83.1 million. This divestment reduces CQR’s single asset exposure, while retaining majority ownership of a high-quality convenience plus centre and providing future financial flexibility for the REIT.

Across the REIT’s 58 property portfolio, property values increased $15 million, predominantly driven by income growth across the portfolio. 100% of the portfolio was externally revalued during the period and the portfolio cap rate tightened marginally from 6.15% to 6.14%, reflecting the high-quality nature of the portfolio and its defensive characteristics.

“We believe our focus on convenience and convenience plus assets will deliver long-term sustainable growth in earnings for investors. This stable growth is underpinned by the strength of our supermarkets, retail services and convenience-based food offering. This in turn is reflected in the growth in our asset values.” said Mr Chubb.

An active management approach delivering a convenient shopping experience

The REIT’s convenience-based supermarket-anchored shopping centres 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 172 specialty leases completed at average leasing spread of 1.9%, up from 1.3% at June 2018.

Supermarkets in the portfolio continued to perform well with 55% of supermarket tenants now paying turnover rent, up from 53% at June 2018. With 74% of major tenant rental income generated by supermarkets, supermarkets in turnover delivered 2.7% MAT growth3.

92% of rental income is derived from convenience based non-discretionary retailers with 48% of rental income generated by major tenants Woolworths, Coles, Wesfarmers and ALDI. Coles is now the second largest retail group in the portfolio following the demerger from Wesfarmers. Additionally, the first Bunnings retail outlet was added to the portfolio following the acquisition of Gateway Plaza.

Re-developments continue to focus on enhancing convenience and essential services based on consumer demand. During the period, the $60 million major redevelopment of Lake Macquarie Fair, NSW was substantially completed with a new expanded Coles supermarket opening in January 2019.

The REIT also completed the $11 million redevelopment of Wanneroo Central, WA. The expansion of the centre includes a new full line ALDI supermarket, additional specialty food, services and retail space providing shoppers with a greater level of amenity and transforming the centre into an exciting retail precinct.

Proactive capital management focused on a strong and flexible balance sheet

The REIT has continued to focus on diversifying and extending the debt profile and the following initiatives have been completed:

• Refinanced $335 million of bank debt due to mature in FY21
• The FY21 debt facility was replaced with a $40 million facility maturing in FY22 and a $170 million facility maturing in FY23.
• Extended two existing interest rate swaps and increased near term hedging volumes.

These capital management initiatives have maintained the weighted average debt maturity at 5.3 years, with an average hedge maturity of 3.7 years. Balance sheet gearing remains at the lower end of the target 30-40% range at 32.2%, with cash and undrawn debt capacity of $233 million.

Head of Retail Finance and Deputy Fund Manager CQR, Christine Kelly commented: “Consistent with our strategy of prudent capital management, we have maintained our weighted average debt maturity ensuring we have no debt maturing until FY22. The new facilities are with the existing banks and on attractive terms, with no material pricing impact to investors.”

FY19 operating earnings guidance

Barring unforeseen events, the REIT’s FY19 guidance is for operating earnings to grow by 2% over FY18. The distribution payout ratio range is expected to remain between 90% and 95% of operating earnings.

To read the document, click on the download link above.

^{View the CQR HY19 Results Presentation}

^{View the CQR HY19 Interim Financial Report}

^{View the CQR HY19 Appendix 4D}