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Charter Hall Social Infrastructure REIT (“CQE”) today announced its results for the half year ended 31 December 2019. Key financial and operational highlights for the period are:
Travis Butcher, Charter Hall Social Infrastructure REIT Fund Manager commented:
“CCS funding has been a positive for the industry through increased usage and overall affordability. This has provided additional confidence in the market, which has allowed CQE to negotiate 45 new leasing transactions for between 15 and 20 years, reducing the reliance on CPI for rental growth. We will continue to assess the pipeline of opportunities to provide investors with stable and secure income and capital growth."
Property Portfolio Performance
During the period, CQE has focussed on improving portfolio quality and tenant covenants through a combination of new leasing transactions, acquisitions, disposals and completion of developments.
This included securing 40 new 20-year leases2 with Goodstart on improved terms for both parties, including fixed annual increases and 5 new 15-year leases with other tenants. In addition, 37 of 40 five-year options were renewed by operators, demonstrating the low substitution risk of these assets.
Combined with other portfolio activity, this has resulted in a significant improvement in the portfolio metrics as follows:
Acquisitions / Development Program
Acquisition activity during the period included the settlement of 7 existing childcare properties for $41.6 million at a purchase yield of 6.3% with a further 8 existing childcare properties contracted for $45.9 million at a purchase yield of 6.5%. All of the contracted properties are expected to settle in the second half of FY20. These acquisitions are all in strategic locations with strong childcare fundamentals and have strong lease covenants with quality tenants and average lease expiries of 16.5 years.
CQE’s development pipeline comprises 30 properties with a forecast completion value of $184.8 million. It is forecast that 9 developments will complete in the second half of FY20 and 20 in FY21 which will improve the quality of the portfolio and add to the earnings profile of CQE.
Moving forward, CQE’s strategic preference is for existing centres and turnkey assets which provide immediate accretion. We are continually assessing a pipeline of both childcare and social infrastructure opportunities consistent with CQE’s existing property attributes
During the period, 361 properties were valued, which resulted in a $1.3 million or 2.8% increase in valuations. Overall yield compression of 10 basis points was achieved across the portfolio decreasing the portfolio yield from 6.2% at June 2019 to 6.1% at December 2019.
During the period, CQE adopted a 2-year independent revaluation cycle down from 3 years.
In February 2020, CQE increased its debt facilities to $5005 million providing undrawn capacity of $179.5 million to fully fund contracted existing property acquisitions ($45.9 million) and the future development pipeline ($72.8 million).
CQE has diversified funding sources with no debt maturity until February 2023 and a weighted average debt maturity of 4.35 years including a $100 million, institutional facility with AustralianSuper.
The new Child Care Subsidy (“CCS”) introduced in July 2018 has been a positive for the industry through increased usage and overall affordability. Long day care (“LDC”) usage increased by 4.0% (29,930 children) from September 2018 to September 2019 and is up 12.5% since the CCS was introduced6. After the initial 11.8% fall in national childcare costs (impact of CCS) in the September 2018 quarter, childcare prices have climbed by 8.6% to the December 20197 quarter.
As at 31 December 2019, there are 7,8948 LDC centres in Australia, an increase of 319 (4.2%) in CY19. Rolling annual growth since December 2015 in LDC centres has been 3.7%6, consistent with the growth in children using LDC centres of 3.7%6
over the corresponding period. Notwithstanding short-term fluctuations, the childcare market continues to remain well balanced with underlying demand meeting new supply.
Strategy and Outlook
CQE will continue with its strategy to provide investors with stable and secure income and capital growth. As part of this strategy, CQE continues to focus on enhancing income sustainability and resilience by improving the quality of tenants and leases within the diversified portfolio. New acquisitions will be consistent with the following attributes:
CQE reaffirms that based on continued tenant performance and barring any unforeseen events and no material change in current market conditions, CQE’s guidance for FY20 operating earnings remains unchanged at 17.0 – 17.2 cents per unit, which represents 3% – 4% annual growth on FY19 operating earnings per unit. The FY20 distribution guidance is 16.7 cents per unit with CQE continuing to pay quarterly distributions.
2 Subject to documentation of Goodstart leases.