Charter Hall Long WALE REIT (CLW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Long WALE REIT 2020 Full Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Friday, 7 August 2020. I would now like to hand the conference over to your host today, Mr. Avi Anger, Fund Manager, CLW. Thank you, sir. Please go ahead.

Good morning, everyone, and welcome to the Charter Hall Long WALE REIT results presentation for the full year to 30 June 2020. Presenting with me today is Scott Martin, Head of Finance for Long WALE REIT. The format for today's presentation is that I will start with key highlights for the year. You will then hear from Scott, who will provide an overview of the financial performance of the REIT. I will then return to provide an operational update and portfolio overview for the period and provide an update regarding earnings guidance for FY '21. We will then offer the opportunity for questions. Turning now to Slide 4 and key highlights for the period. We completed a year of strong operating performance, delivering operating EPS of $0.283 per security, up 5.2% from FY '19, and delivered distribution per security of the same amount. As a result of acquisitions and lease extensions agreed during the year, our WALE is now 14 years, up from 12.5 years 12 months ago despite the passage of time. 46% of our portfolio consists of triple net leases. This is a very important and unique feature of our portfolio, given that under triple net leases, the tenant is responsible for all outgoings, maintenance and capital expenditure. During the year, we invested $1.4 billion in 268 properties across office, industrial, long WALE, single-tenant retail and Telco Exchanges. Balance sheet gearing of 24.2% is below our target gearing range of 25% to 35%. And we have $290 million of available investment capacity following the sale of our interest in Waypoint REIT. Turning to Slide 5. We have actively managed the portfolio to extend the portfolio WALE, improve the tenancy profile, improve diversification and deliver earnings growth. We have increased the WALE of our portfolio with a positive impact coming from the 18.7-year WALE of our new acquisitions. At the start of FY '20, the portfolio WALE was 12.5 years. And as a result of WALE-enhancing transactions such as the Telco Exchanges, BP Portfolio and Arnott's acquisitions, together with the Coles and SUEZ lease extensions, we've increased the portfolio WALE to 14 years at year-end. Our portfolio continues to be diversified by tenant, industry, geography and property types, which contributes to the stability of our cash flow. We've expanded the number in properties in the portfolio to 386 at year-end with the proportion of properties in our portfolio located along the Eastern Seaboard of Australia increasing to 73%. At year-end, our properties were leased to 54 tenants across a broad range of industries. We've strengthened the quality and diversity of our tenants with new tenants, including BP, Arnott's and the New South Wales Government, and increased the number of properties leased to Telstra, the Federal Government and Bunnings. Our tenant base generally operates in nondiscretionary defensive industries. We upgraded our FY '20 earnings guidance twice during the year as a result of accretive acquisitions and have delivered our upgraded guidance of $0.283 per security. Our portfolio WALE, together with the stability of our rental income derived from a diverse range of high-quality tenants, means that we've had very little impact to-date from COVID-19. Turning to Slide 6. We outline on this slide some further information in relation to COVID-19 and its impact on our portfolio. We have experienced very little impact as a result of COVID-19 as it relates to rent collection and our ability to meet our forecast earnings for this financial year. Negligible rent relief of 0.2% of net rent for FY '20 was provided to tenants in the form of rent deferral and rent-free. We've received 100% of rent across all our Endeavour-leased pubs. Importantly, we have 50 Dan Murphy's or BWS bottle shops across our portfolio of 60 Endeavour-leased properties. Also, our BP portfolio of 225 service stations continue to operate and pay rent throughout COVID-19. The only material COVID-19 issue we are dealing with is the Virgin building in Brisbane. This represents approximately 3% of the REIT's income. Security we have under this lease has resulted in no impact to FY '20 operating earnings. We've taken a conservative position in relation to the valuation of this property and have assumed a vacant possession value for this property at the present time. In summary, we've delivered results consistent with our revised FY '20 earnings and distribution forecast and recorded net valuation uplift of 2.7% over FY '20, notwithstanding the impacts of COVID-19. Turning to Slide 7. As mentioned earlier, we have delivered OEPS and EPS of $0.283 per security in FY '20, which represents a 5.2% increase over FY '19. This is consistent with our track record since IPO in November 2016 of delivering consistently growing distributions per security each year. Turning to Slide 8. On this slide, we'd like to highlight the transformation of our portfolio since IPO in November 2016. Over the past 3.5 years, we've grown the portfolio from $1.25 billion of property to $3.6 billion today with the addition of high-quality, long WALE assets. Triple net leases as a proportion of our portfolio has increased from 23% at IPO to 46% of the portfolio today. The WALE of the portfolio has increased from 12.1 years at IPO to 14 years today, notwithstanding the passage of time. We've increased our investments located on the Eastern Seaboard of Australia with proportion increasing from 48% at IPO to 73% today. And finally, as outlined on the present -- on the previous slide, we've increased our distributions every year since IPO. I'd now like to hand over to Scott, who will provide an overview of the financial performance of the REIT.

Thank you, Avi. The REIT's key financial metrics for the year ended 30 June 2020 are set out on Slide 10. In FY '20, the REIT delivered operating earnings of $121.9 million or $0.283 per security and similarly declared a distribution per security of $0.283 for the same period. Balance sheet gearing as at 30 June 2020 was 24.2%, which has been adjusted to include the committed acquisition of the Bunnings Palmerston development and the divestment of the REIT's 5% interest in Waypoint. The gearing remains below the target range of 25% to 35%. Movements in all other key metrics shown on this slide result from portfolio-enhancing activities undertaken during the period. Turning to Slide 11 and the REIT's FY '20 full year results. Net property income has increased 63.1% compared to the prior reporting period and has been driven by like-for-like rental growth of 2.6% and $53 million of net acquisition activity. In FY '20, the REIT successfully completed $1.4 billion of new property acquisitions. Operating expenses increased by 70.2% due to portfolio growth and new acquisitions and we have also seen a 37.5% increase in finance costs year-on-year as a result of partially debt funding the REIT's acquisition activity. As touched on by Avi earlier in the presentation, there has been no impact on the REIT's FY '20 operating earnings as a result of the COVID-19 pandemic. Operating earnings per security and distribution per security have both increased by 5.2% on the prior corresponding period at $0.283 per security, in line with our guidance range. Turning to Slide 12 and the REIT's balance sheet position at 30 June. Investment properties and equity account investments increased by $524.2 million and $516.1 million, respectively, due to acquisition activity and valuation growth of $96 million. Other assets include the $101.2 million interest in Waypoint REIT, which has subsequently been disposed of in July. The $12.3 million increase in the provision for quarterly distribution results from the growth in operating earnings arising from acquisition activity and annual rent escalations. Acquisitions were funded through a combination of debt and equity. During the year, balance sheet-drawn debt increased by $305 million, and $875 million of equity was raised. NTAs increased 9.3% from $4.09 at 30 June 2019 to $4.47 at 30 June 2020, primarily driven by equity-raising activities, net valuation gains and movements in derivatives. A summary of debt and hedging is presented on Slide 13. During the current reporting period, the REIT increased its balance sheet debt capacity by $350 million from $680 million to $1.03 billion with the addition of 3 new bilateral facilities. Following the sale of the interest in Waypoint REIT, CLW has cash and undrawn debt capacity of approximately $290 million. In addition to the balance sheet debt facilities, the REIT's share of joint venture debt facilities increased by $487 million from $210 million to $698 million as a result of the investment activity undertaken in joint venture with other Charter Hall-managed funds. At 30 June, the REIT had $1.5 billion of drawn debt calculated on a look-through basis. Balance sheet gearing was 24.2% and look-through gearing was 37.8%, which have both been calculated based upon drawn debt at 30 June, adjusted for the funding of the committed acquisition of the Bunnings Palmerston development and the divestment of the REIT's 5% interest in Waypoint. The difference between the balance sheet and look-through gearing ratios relates to the REIT's share of joint venture debt facilities, each secured by long WALE assets and strong covenants. During the current reporting period, 3 new joint venture debt facilities were secured to assist with the acquisition of each of 242 Exhibition Street, the Telstra Exchanges portfolio and the BP long-WALE convenience portfolio. The increase in balance sheet debt, together with the addition of 3 new joint ventures and debt facilities, has increased the REIT's facility limits to $1.7 billion on a look-through basis. The weighted average cost of debt for the year ended 30 June was 3.1% and the weighted average debt maturity is 3.9 years. The level of hedging at 30 June 2020 was $1.1 billion, calculated on a look-through basis, which reflected a hedge position of 71.7% and a weighted average hedge maturity of 4.4 years. In light of the sale of the Waypoint stake, the REIT has taken the opportunity to review and restructure its hedging. As a result of the sale of the Waypoint stake and the swap restructure, the weighted average cost of debt for FY '21 is forecast to be 2.5% and the hedge position of the REIT has increased from 71.7% to 75.7%. Turning to Slide 14, which provides further detail on the debt composition of the REIT and provides further detail on the components of the look-through gearing calculation. The key driver of the look-through gearing calculation is the REIT's share of debt in a number of joint ventures which have separate property-level finance facilities. These joint ventures have highly rated investment-grade tenants in defensive sectors, are majority triple net leases and are on long lease terms with a current combined WALE of 17.1 years, which is in excess of the average portfolio WALE of 14 years. The long-term leases and stable income streams of these assets are able to support gearing levels in excess of the target balance sheet gearing range of 25% to 35%. The property-level finance facilities are nonrecourse to CLW and had an average gearing ratio of 46.5% at 30 June 2020 with significant headroom in both gearing and ICR covenants attached to their respective facilities. When blended with the REIT's balance sheet gearing of 24.2%, which sits below our target range of gearing, the REIT's combined look-through gearing is 37.8% and the portfolio WALE is 14 years. I will now hand back to Avi to provide an operational update and portfolio overview.

Thank you, Scott. Turning now to Slide 16. An important part of our strategy is to grow and enhance our portfolio through accretive acquisitions. During the year, we acquired $1.4 billion of property diversified across real estate sectors, including investments in office, industrial, long WALE, single-tenant retail and Telco Exchange properties. The combined acquisitions this year featured an accretive average WALE of 18.7 years. The largest acquisitions completed this year include the 21-year WALE triple net lease Telstra Exchange portfolio of 36 Telco Exchanges, the 20-year WALE triple net lease BP Portfolio of 225 convenience retail properties and the 32-year WALE triple-net lease Arnott's manufacturing and distribution facility in Huntingwood in Sydney. These properties are all highly critical to the tenant's operations, supporting their future growth plans. And these acquisitions demonstrate our focus on transactions offering attractive, long-term, risk-adjusted returns, but also mindful of downside protection, investing in critical properties with strong tenant credit, favoring large companies and in industries resilient to an economic downturn. Importantly, a number of the acquisitions completed this year were secured off-market, demonstrating the strength and benefits which the Charter Hall platform brings to CLW. We also announced an extension of our relationship with some existing portfolio tenants with the acquisition of properties leased to SUEZ, Endeavour Drinks and Bunnings. Turning now to Slide 17. We actively manage the portfolio to enhance value and secure long-term income for our investors. In November, we announced a lease extension with Coles at our Coles Perth Distribution Center. The 6.6-year lease extension increased the remaining lease term at this property to 15 years from 1 January 2020. We also completed a warehouse expansion at our SUEZ Perth property with the lease term at this property reset to 15 years remaining from July 2020. These lease extensions further demonstrate Charter Hall's strong relationship with our tenant customers and our ability to work with tenants to achieve mutually beneficial outcomes. I'd like to thank our asset management team in achieving these great results. Turning now to Slide 18. In the following slides, I'd like to provide an overview of our portfolio and outline some key attributes of the portfolio. Slide 18 is our portfolio overview. During the period, we were able to grow and enhance the portfolio through acquisition and positive valuation movements. The value of the portfolio is now approximately $3.6 billion. During the period, we further enhanced the portfolio with $1.4 billion of acquisitions. These acquisitions have increased the number of properties of the REIT to 386. Our WALE has increased as a result of accretive acquisitions and lease extensions completed in the period with a long-dated portfolio WALE of 14 years at year-end. The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked. Our average fixed reviews are 3.1%, whilst our CPI-linked leases provide a hedge against the potential of an increase in inflation in the future. Our portfolio has occupancy of 99.8% and the portfolio average cap rate is 5.42%. Turning now to Slide 19 and an outline of our tenant customers and the tenant diversification of the REIT. The portfolio features a high-quality portfolio of long WALE properties leased to high-quality tenants, including Commonwealth and State Governments, Telstra, Woolworths, BP, Inghams and Coles. The acquisitions completed during the period further diversified the tenants in the portfolio and introduced additional high-quality tenants to the portfolio. Turning now to Slide 20. On the following 2 slides, I'd like to outline the resilience and strength of the tenants in our portfolio. Slide 20 outlines the credit rating of tenants in our portfolio. 75% of the parent entity of tenants in our portfolio are independently rated as investment grade. The vast majority of nonrated tenants consist of government, ASX-listed and large corporations. Turning to Slide 21 and the industry diversification of our tenant customers. Within our overall portfolio, approximately 99.6% of tenants are ASX-listed, government or multinational corporations with the vast majority of these tenants operating in nondiscretionary industries. For example, the government, including ATO and Australia Post, are an example of our nondiscretionary tenant exposure. We also have a high proportion of tenants operating in the nondiscretionary grocery and food sectors such as Woolworths, Coles, Inghams, Arnott's and Metcash. Turning to Slide 22. As can be seen from the chart on this slide, the REIT's portfolio has a long-dated lease expiry profile and reflects a low-risk position relative to our peers. Our portfolio WALE has increased from 12.5 years to 14 years over the past 12 months despite the passage of time. As can be seen from this chart, our portfolio has very little expiry over the next 3 years, and we continue to work to push out our expiry profile as far as possible to the right of this chart, both through acquisitions and negotiating lease extensions with our tenant customers. Turning now to Slide 23 and sustainability. We are very focused on implementing our climate change strategy across our portfolio. This includes investing in properties to ensure they are resilient to future impacts. We're partnering with our tenant customers on renewable energy initiatives, including solar, which has been installed at 3 of our larger office and industrial properties. Another important initiative is our focus on modern slavery. We are reviewing the suppliers in our supply chain to identify where potential risks lie and how we address these risks. These proceeding slides demonstrates the resilience and strength of our portfolio. Our portfolio WALE, quality of tenants and proportion of triple net leases provides better downside protection and lower volatility in our cash flow. Our approach has clearly produced more resilient income streams resulting in higher-quality earnings. This, together with our focus on maintaining a strong and flexible balance sheet, has put us in a very strong position today. Turning now to Slide 25. I would now like to provide an update on our earnings guidance for FY '21. The REIT confirms that based on information currently available, including with respect to the COVID-19 pandemic, and barring any unforeseen events, CLW provides FY '21 operating EPS guidance of no less than $0.291 per security, reflecting operating EPS growth over FY '20 of no less than 2.8%. The target distribution payout ratio remains at 100% of operating earnings. That concludes the presentation. And I would now like to invite questions.

[Operator Instructions] Your first question comes from Darren Leung with Macquarie.

Good results. Three quick questions for me. So one, Avi, just on Virgin's head office. So you mentioned you're preparing for vacant measure. Our understanding is that that's a rental assistance -- or sorry, the rent guarantee ends up by about 2020. How do we think about the plans of this building of -- once the tenant departs?

Look, at this stage, Darren, we're receiving -- the receivers in occupation and Virgin's in occupation of the building and they're still there and paying rent at the moment. We haven't received any formal notification in relation to what their future plans are. We're looking -- we obviously -- we always have a mind to the future and looking at a range of options, but at this stage, we really -- we have a lease in place and that's our current situation with -- as it stands with the administration process.

Okay. And if that leaves by early 2021, what would your plans be?

Well I think that's a high-quality office building. We've got 3 separate buildings there, each approximately 3,500 square meters. They can be let together or separately and we'll go-to-market and lease them.

Okay. Second one was just on acquisitions. So there's obviously a lot of media press around acquisitions. Can we get an update just on sort of the first 3 major ones? So that acquisition about Waypoint divestment, so why did CLW deem that investment no longer relevant?

Just -- I think you can just take a view that when we acquired it, it was offered by Viva Energy in a block trade and we decided that it was no longer core to our book and have better places to use the capital.

Should we think of that as an asset last call? And does that apply to the BP Portfolio more broadly?

No. No. We're very positive on the asset on these -- on that sector. The BP Portfolio has been a fantastic investment for us. And we're -- I think we're not adverse to doing more in that sector if the opportunities arise.

Okay. That leads me to the second part of that question. Well any comments or thoughts around the Ampol portfolio?

No. I don't have any comments on that, mate. It's -- yes, no comment. But I think it's a good portfolio.

Yes. The other acquisition one was just around the Telstra DC that's in Clayton and Melbourne. Was that an opportunity you guys have reviewed? And if so, where are you sort of there in terms of pricing?

Look, we don't really comment on things we do and don't look at. But look, I think it's a great result and very good for the rest of our book, given the 4.2% cap rate that was printed on that property. Our average cap rate of 5.6%, I think, bodes well for us in the future for our book.

Okay. Just final one for me, just around the financial covenants. So in your annual report, you've got them all listed out. I assume that relates to CLW's balance sheet debt facilities. One of the ones I'd like to focus on is just the liabilities versus total tangible assets, over 50%. So that's pretty clear for the balance sheet debt. What about for the equity-accounted investments, so stuff like LWIP properties? Are they on similar covenants?

So they're all detailed in the appendix. We've actually provided that additional detail because there has been some questions we've received from the market around that. So we've provided on Slide 30 details around all of those.

Your next question comes from Suraj Nebhani with Citigroup.

Good results. Just wanted to take a quick one here. Just in relation to the investment capacity, the $290 million, can you just clarify, if you were to invest all of that, where would the gearing be? And what's the level of comfort with gearing if you were to invest all of that?

Yes. No, look, we're comfortable with where that would get to. I think -- so yes, it'd be just over 40% probably in the look-through gearing. But look, there's a -- yes, whether we invest all of that or whether we invest part of it and then raise equity for future investments, that's all -- we have those options available to us, I think.

And I'm assuming, Avi, all of that is debt capacity, right?

That's existing debt facilities, existing capacity, yes and cash -- and some cash, combined.

Fair enough. On the guidance, are you able to clarify, maybe in terms of cost, but are you able to clarify the CPI and the debt cost assumptions in guidance, please?

Yes. I would hand over to Scott. He can provide that detail for you.

So the debt assumptions in the guidance is the new weighted average cost of debt as a result of the restructure that we've done of 2.5%. That rate restructure of the fixed rate takes effect from September, so we'll see that flowing through. But yes, the 2.5% covers that off and then...

Okay. And then what about CPI, please?

CPI? Avi, we got that number. 1%, I think?

1%. 1%, yes.

Yes, 1%.

Okay. That's helpful. Just one more on Virgin. Sorry to harp on about it, but just wanted to check. I understand that you haven't got any notice from them, but if they were to end the tenancy, would you expect some sort of lease termination income to come from that or not really?

Look, it's a -- we're in -- it's a sensitive situation, given it's an administration process. And we're in discussions at the moment with the administrator regarding the possible outcome, so that's really all I can say at this point.

Got it. All right. And just finally, are you able to clarify any -- is there any impact from the Melbourne lockdowns that have been announced a few days ago?

No. We've had no impact to-date as a result of that. So -- and as you can see from the last round of lock -- of sort of lockdowns earlier this year, we had very little impact.

Fair enough. No worries. All good. Sorry, just one final one. In terms of the guidance again, do you assume that the rent -- like, you get out of the rent through the year or that the building is wakened after the bank guarantee expires?

Look, at the moment, the building is occupied and the administrator is paying rent. We've made a pretty conservative set of assumptions in our numbers around what we are likely to get in FY '21, and that's been reflected in the guidance we've provided.

So would you say it's fair to assume that all of the income from Virgin is in guidance or not at this point?

No. No, that's not. That's not -- we've made a pretty conservative set of assumptions in our guidance.

[Operator Instructions] Your next question comes from Suraj Nebhani with Citigroup.

Okay. Just wanted to follow-up with another one, please. Avi, any comments on acquisition appetite more generally? Obviously, you have given an investment capacity number, but any type of products that look more appealing currently? And pricing, any comments on that more generally?

Look, we -- yes, look, we're pretty positive on the opportunities to continue to grow this financial year coming. So as you can see from our results and the activity that we've completed in FY '20, sale and leaseback is obviously a very large part of what we've done to-date and I think that will continue to be a feature going forward, particularly as corporates seek to rationalize the assets they may have on their balance sheet. So that's obviously a very active area across sectors for us. And yes, I think we'll look to continue to grow across all our major asset classes. And we are seeing opportunities in the market in all those main areas, industrial, the single-tenant, long-lease retail. So there are a few areas we definitely focus on at the moment.

Got it. And would you say like either one of those type of opportunities are more appealing, for example, sale-leaseback or something like that, more appealing than the others?

Look, we -- look, we're a diverse fund because we see value in all asset classes. I wouldn't call out any particular one as being more appealing. It's all about the particular opportunity and the counterparty and the properties and the lease structure, et cetera. So we're -- and of course, the WALE. So we're open to looking across sectors.

One thing that probably we have got some questions on is that, obviously, the vehicle has been very active on the acquisition side. But asset pricing, I'm not sure how that ends up moving. But the kind of assets that CLW is looking to acquire, they may be in high demand. I'm just wondering, how do you compete in that scenario? And any kind of thoughts you can provide on that?

Well I think, look, the market is always competitive. I don't think there's been any -- we've always had a lot of competition for all the assets we're looking at, so that's not new. I think we are well placed to continue to compete and look at opportunities in the market and we've been able to source opportunities through the platform. We see a lot of off-market deals and we have a very strong relationship with a number of tenants that are also an important source of deal flow. So I'm pretty confident that we'll be able to continue to grow.

[Operator Instructions] We are showing no further questions at this time. I'll now hand back to Mr. Anger for closing remarks.

Thanks, everyone, for joining the call today and for your support during the year. We look forward to catching up with you in one-on-one meetings over the course of the next few weeks. Thank you.