Charter Hall Long WALE REIT (CLW or the REIT) has had another year of strong operating performance. In FY20, we have delivered stable and secure income and achieved both income and capital growth. CLW reported operating earnings of 28.3 cents per security for FY20, up 5.2% from FY19 and distributions per security for FY20 of 28.3 cents, also up 5.2% on FY19, representing a 100% payout ratio.
It is important to note that this result was delivered against the backdrop of COVID-19 and the dislocation this has caused to the economy and the property sector in particular. CLW was one of very few A-REITs or stocks listed on the ASX to maintain guidance throughout the FY20 period. The deliberate focus on high quality tenants with the vast majority operating in non-discretionary industries, combined with the resilience of long leases to these tenants, has resulted in CLW delivering certainty and growth in earnings which few other A-REITs were able to.
Active management by the Charter Hall Group has enabled the REIT to continue to grow. This year, the REIT invested a further $1.4 billion across office, industrial, long WALE single tenant retail and telephone exchange properties. We also successfully raised $875 million of equity whilst maintaining balance sheet gearing at the lower end of our target gearing range.
Our commitment to value and WALE enhancing transactions for our securityholders has been demonstrated by the significant transactions completed during the period. As a result of WALE enhancing transactions and lease extensions with existing tenants, the WALE of the REIT has been extended to 14 years at year end, up from 12.5 years at 30 June 2019.
As a result of active management and selective acquisitions, we were able to upgrade our earnings guidance twice during the year. In addition to earnings growth of 5.2%, the focus on secure properties to high quality tenants also saw the Net Tangible Assets of the REIT rise from $4.09 as at 30 June 2019 to $4.47 at the end of FY20.
Active portfolio management
approach increases WALE
As a result of our active management of the portfolio, we have been able to extend the portfolio WALE, improve the tenancy profile, increase diversification and deliver earnings growth.
We continue to diversify our portfolio by tenant, industry, geography and property type and this, in turn, contributes to the stability of our cash flows and the defensiveness of the portfolio. At year end, the vast majority of our properties were leased to tenants operating in defensive, non-discretionary sectors. We have also strengthened the quality and diversity of our portfolio, welcoming new tenants such as BP Australia and Arnott’s, while increasing our exposure to existing tenants including Telstra, the Australian Tax Office, Bunnings and Suez. Our rental revenue is now well diversified across sectors, with our largest weightings being to industrial and logistics (29%) and long WALE retail (27%) at year end.
Strategic Long WALE acquisitions
Diversified, value-creating and accretive acquisitions are an important part of our strategy to grow and enhance CLW’s portfolio. The REIT was very active in FY20 with acquisitions of $1.4 billion.
The new property acquisitions were spread across industrial and logistics, long WALE single tenant retail, telco exchanges and office and increased our exposure to strong listed companies and government tenants. Importantly, a number of these acquisitions were secured off-market, demonstrating the strength and benefits of being part of the Charter Hall platform. Pleasingly, a number have triple net leases, where the tenant bears all the outgoings and other costs of maintenance and capital expenditure associated with the properties, thereby enabling the REIT to avoid such expenditure.
At the start of the financial year, CLW acquired a 50% interest in a Charter Hall managed partnership that acquired a 49% interest in a portfolio of 36 key telecommunication exchange properties leased to Telstra on triple net leases with a 21 year WALE at acquisition. This portfolio introduced further diversification by way of the new subsector of telecommunications for the REIT. Moreover, the quality of the portfolio was further enhanced by high underlying land values, an 86% weighting to the eastern seaboard and major exposure to core Sydney and Melbourne CBD markets.
During the year, the REIT acquired a 50% interest in a Charter Hall managed partnership that acquired a 49% interest in a portfolio of 225 long WALE convenience retail properties leased to BP Australia Pty Ltd on triple net leases with a 20 year WALE at acquisition. The portfolio consists of the majority of BP’s owned convenience retail properties in Australia. The portfolio is geographically diversified across seven Australian states and territories with 80% by value located on the eastern seaboard and 87% in major metropolitan locations.
In the long WALE retail sector, the REIT also acquired a new large format Bunnings store in Palmerston, Darwin. The construction of this centre is expected to complete post balance date in August 2020 and is now the second Bunnings store in the CLW portfolio. In addition, CLW also furthered its relationship with Endeavour Drinks with the acquisition of the Indooroopilly Hotel, Brisbane.
In the industrial and logistics sector, CLW acquired a 50% interest in the Arnott’s Biscuits facility in Huntingwood, Sydney. This property is Arnott’s primary national manufacturing and distribution facility and features a triple net lease with an initial lease term of 32 years. The facility is critical to the production of leading brands including Shapes, Tim Tams and Jatz.
In the office sector, the CLW acquired a 50% interest in a newly completed office development “The Glasshouse” at Macquarie Park. This new office building is predominantly leased to the NSW Government on a 12 year lease. CLW was also able to further extend its relationship with major tenant Telstra, with the acquisition of a 15% interest in Telstra’s global headquarters at 242 Exhibition Street, Melbourne, as well as an A-grade office building in Upper Mount Gravatt, Brisbane, leased to the Australian Tax Office.
Finally, the REIT also furthered its partnership with waste management and recycling tenant Suez, acquiring a waste transfer facility in North Ryde, Sydney. The property was acquired from Suez on a sale and leaseback basis, with a new 20 year, triple net lease from settlement.
These new properties contribute to our long WALE, strong tenants and quality properties strategy and add further strength and diversification to the REIT’s portfolio.
Strong tenant customer relationships
Partnering with our tenant customers is an integral part of the success of CLW. During the period we further deepened our relationships with a number of important tenants through acquiring additional properties leased to them and completing several lease extensions.
In December, we announced a 6.6 year lease extension at the Coles Distribution Centre, Perth, increasing the remaining lease term at that property to 15 years. Charter Hall actively engaged with Coles to agree a lease extension to help Coles achieve its portfolio and business objectives while providing CLW investors with stable, long term income.
Finally, as well as acquiring an additional Suez property through a sale and leaseback transaction, post balance date, CLW completed a 2,100sqm warehouse expansion at the existing CLW SUEZ leased property in Welshpool, Perth. Upon completion, the lease term of the new warehouse and the existing facility has been reset from 11.5 years to 15 years.
High quality diversified portfolio
The REIT has a diversified portfolio with a long dated lease expiry profile. Following the FY20 acquisitions, at year end the REIT has 386 properties valued at $3.63 billion with a WALE of 14.0 years.
During the year, the percentage of properties with triple net leases has increased from 40% to 46%. In addition, the proportion of CLW’s portfolio weighted to the East Coast of Australia has increased from 66% to 73%, improving portfolio diversity. The tenant roster also continues to improve with approximately 99% of the REIT’s portfolio leased to ASX listed, Government and multinational tenants.
Finally, the portfolio has occupancy of 99.8% with no major lease expiries until FY24.
Prudent capital management
The REIT’s balance sheet remains sound at year end, with balance sheet gearing of 24.2% at 30 June which is below our target range of 25–35%. Look-through gearing was 37.8% at year end, with the properties with relatively higher debt levels featuring long WALE leases to investment grade tenants operating in defensive sectors, and having associated debt facilities that are non-recourse to the REIT.
We further diversified the REIT’s debt platform by establishing a total of $800 million of new balance sheet and joint venture debt facilities. These were with major Australian and international banks, further diversifying the REIT’s lender pool.
Together these activities have resulted in a weighted average cost of debt of 3.1% for FY20 and a weighted average debt maturity of 3.9 year as at 30 June 2020.
The REIT was also active in managing the interest rate swap profile to minimise interest rate volatility, reflect the new additional debt in the REIT and take advantage of the historically low interest rate environment. As a result, 72% of our debt is hedged with a weighted average hedge maturity of 4.4 years. This hedging has the result of protecting earnings and distributions from interest rate movements within this time period.
Sustainability remains a critical part of enhancing our portfolio quality and is central to Charter Hall’s approach to property management. Across our platform, we continue to explore opportunities to introduce sustainability initiatives that will deliver long-term outcomes that are positive to our securityholders, tenants and the communities in which our properties are located.
Across our portfolio, we have developed climate change adaption plans for our industrial properties in NSW, Victoria, South Australia and Tasmania. We’ve also been active in working with our tenants to install solar panels in some of our properties and now have 1.4MW of solar installed across our office and industrial portfolios. This has the potential to generate 1,854 MWh of energy, equivalent to powering 124 homes over a twelve month period.
The CLW Portfolio was awarded an A rating in public disclosure by GRESB, a leading organisation for assessing Environment, Social and Governance performance for real estate and infrastructure companies globally. CLW was also ranked 3rd in the NABERS Office
Energy Sustainable Portfolios Index. CLW’s office portfolio has been awarded a 4 Star Green Star Performance rating and CLW’s industrial portfolio has been awarded a 2 Star Green Star Performance rating.
Based on information currently available (including with respect to the COVID-19 pandemic) and barring any unforeseen events, guidance for FY21 Operating EPS is no less than 29.1 cents per security, reflecting Operating EPS growth over FY20 of no less than 2.8%. The REIT maintains a target distribution payout ratio of 100% of operating earnings.
The REIT remains somewhat unique in the listed property sector, offering a broadly diversified portfolio across multiple property types, strong tenants and with the security of long leases. The REIT’s financial results has demonstrated the benefits of these attributes in such uncertain times.
On behalf of the Board and Executive Team, I would like to thank our Securityholders for their continued support. We understand that performance is important. As we continue to manage and grow the portfolio, we will endeavour to continue to provide you with stable and secure income targeting income and capital growth over the long term. Thank you for your continued support.
Peeyush Gupta AM