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 Annual General Meeting. There will be introductory remarks and then the formal business of the meeting today. Securityholders are able to ask questions via the webcast. [Operator Instructions] Please note that this virtual meeting is being recorded today, Thursday, the 22nd of October 2020. I will now hand the conference over to your host for today, Mr. Peeyush Gupta, Independent Chair of Charter Hall Long Wale REIT. Thank you, sir, and please go ahead.

Thank you. Good afternoon. On behalf of the Board of Directors, it is my pleasure to welcome you all to the 2020 Annual Securityholders' Meeting of Charter Hall Long WALE REIT. My name is Peeyush Gupta, and I'm the Chair of Charter Hall Long WALE REIT Board of Directors. Could I request that everyone now take a moment to ensure that your audio connection is on mute? It's now just gone past midday, and as the necessary quorum is present, I declare this meeting properly constituted and open. This afternoon, I will provide a brief overview of the REIT's delivery against strategy, some observations on COVID-19 in relation to its impact on the REIT and our performance since listing. Long WALE REIT Fund Manager, Avi Anger, will then provide an update on the operational and financial performance for FY '20 and an update on achievements to date in the financial year 2021. We will then move to the formal business of the meeting and the resolutions for your consideration. There are 2 resolutions for consideration today. The first involves the reelection of Glenn Fraser as a director. When the time comes, I will ask Glenn to say a few words and provide some personal background and the reasons he believes he should be reelected. The second resolution is that ratification of the institutional placement that took place on the 10th of September 2020. That institutional placement was undertaken to help fund the acquisition of the bp New Zealand portfolio. This acquisition further enhanced the quality and WALE of CLW's portfolio, and our fund manager, Avi Anger, will speak more about this in his address. Today's meeting is being held to ratify that placement and has the effect of the securities issued in that placement not reducing CLW's ability to issue a further 15% of units on issue in a 12-month window. The passing of Resolution 2 will provide CLW with maximum flexibility to manage its future capital requirements in the best interest of securityholders. I would now like to introduce my fellow board members: firstly, Glenn Fraser, Non-Executive Director, who is the Chair of our Audit, Risk and Compliance Committee; secondly, Ceinwen Kirk-Lennox, who is an Independent Non-Executive Director; and finally, David Harrison, who is an Executive Director and the Charter Hall's Group Managing Director and Group CEO. Also present online today, and I welcome Avi Anger, our Fund Manager for the Long WALE REIT; Daryll Chua, Deputy Fund Manager for Long WALE REIT; Scott Martin, the Head of our Long WALE REIT Finance; and Charisse Nortje and Mark Bryant, our joint company secretary. James Dunning and his colleague, Max, from our auditors, PricewaterhouseCoopers, will also be available to answer any questions about their audit of the financial statement from unitholders. So it's my pleasure to address this meeting today. Since CLW's listing on the ASX in November 2016, the management and Board have been focused on executing the REIT strategy of providing investors with stable, secure and growing income. This income is derived from high-quality properties with long leases to high-quality tenants. The income continues to grow from either fixed annual rental escalations or CPI-based increases. In doing this, the trust also delivers capital growth as that growing income is captured in the property valuation. In the last year, management and Board have been focused on growing the portfolio in a measured and sustainable way that further improves diversification. We have actively managed the portfolio to increase both the asset and tenant diversity while ensuring that the weighted average lease expiry, or WALE, continues to be maintained and extended. During FY '20, the portfolio WALE increased from 12.5 years to 14 years. This was a result of acquisitions that enhanced the portfolio's tenant and asset composition, along with actively re-leasing the existing portfolio. Post-balance date, this has been further increased to 14.2 years with the acquisition of the bp New Zealand portfolio. The acquisitions we undertook in FY '20 also expanded the REIT's portfolio from an interest in 118 properties to 386 properties, further diversifying REIT's exposure to any one single asset. The acquisitions added new investment-grade tenants and further increased the portfolio's exposure to the key Eastern Seaboard markets of Sydney, Melbourne and Brisbane, where the REIT now has 73% of its portfolio in these key markets. Our new tenants introduced were predominantly nondiscretionary and defensive industries and included household names such as Telstra, bp, Arnott's and the New South Wales Government. Importantly, the addition of these tenants and properties to the portfolio delivered tangible benefits to securityholders in the form of earnings growth. CLW upgraded FY '20 Operating Earnings Per Security guidance twice during the year as a result of earnings accretive transactions, ultimately delivering earnings growth of 5.2% per security in FY '20 over FY '19. So while we have grown the REIT through equity raisings and acquisitions, diversified across assets, asset classes and tenants, we have also maintained our focus on long leases to high-quality tenants. It's important to note that these achievements and results were delivered against the backdrop of COVID-19 and that the dislocation that this has caused to the economy and the property sector in particular. CLW was one of the very few A-REITs or stocks listed on the ASX to maintain guidance throughout the FY '20 period. The deliberate focus on high-quality tenants with the vast majority operating in nondiscretionary industries, combined with the resilience of our long leases to these tenants, has resulted in CLW delivering certainty and growth in earnings, which few other A-REITs were able to deliver. Despite this, we were not entirely immune from the impacts of COVID-19. A very small percentage of tenants in the portfolio were provided with rent relief in FY '20 equivalent to some 0.2% of the fund's income. These tenants consisted mainly of retail tenancies that operate in some of our office buildings as well as car park operators affected by reduced traffic. We also were impacted by our exposure to airline operator, Virgin Australia. The REIT owns the former head office of Virgin in Brisbane, and following the entry of the airline into Voluntary Administration, the REIT subsequently lost that tenant in the portfolio, which represented approximately 3% of our fund's income. We held a bank guarantee as part of the security arrangement under the Virgin lease, which we have drawn down. We have also taken the prudent step of revaluing the property to account for this tenant's departure and adopted a valuation consistent with vacant position. Management is continuing to assess future options for this property, including looking at re-leasing or, alternatively, selling this property. That program is underway, and we expect that the Board will revisit the conclusions of that program in the coming weeks. Whilst it's unfortunate to lose a tenant in these circumstances, CLW's focus on diversification across tenant, property and industries resulted in a relatively small net impact to investors. The REIT was able to maintain guidance and deliver earnings per security growth as previously guided. Overall, the impact of COVID-19 on CLW has been very limited in comparison to others, as the REIT's strategy of diversification across property types, geography and tenants has continued to deliver resilient earnings growth. For investors in CLW, this earnings growth translates into a steady and growing income stream of distribution. Since our IPO, the REIT has consistently delivered year-over-year growth in distributions per security, and as you continue slide, approximately 3% per annum average since we first listed. As I've explained, 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 our portfolio. Ultimately, this translates into steady and reliable growth in distributions for our investors. The Board also remains committed to ensuring we retain a prudent capital management position. We are mindful of our self-mandated limit of balance sheet gearing of between 25% to 35% at the headstock level. Whilst the nature of individual assets within the REIT is such that they can support higher gearing, we continue to maintain gearing at a level that does not impact on REIT stability. As the portfolio has grown, we have expanded our banking relationships to introduce new lenders to the REIT and ensure a diversity of debt providers. We also have existing capacity for additional debt-funded acquisitions should appropriate opportunities arise. In closing, I would also like to acknowledge that the achievements I've outlined today in improving asset and tenant diversification, increasing our portfolio WALE, expanding our banking relationships, have all been achieved through the management of the REIT by the Charter Hall Group and its people. Investors in CLW received the benefit of the full suite of Charter Hall's capabilities, including acquisitions, property management, tenancy management, finance, legal and treasury services. I would like to assure investors that your directors are ever mindful of our responsibilities as independent directors to act in your interest and in the interest of all securityholders, and we endeavor to ensure that CLW continues to provide a steady and growing income stream through exposure to high-quality properties and tenants on long leases. I will now hand over to Avi Anger, our Fund Manager for the Charter Hall Long WALE REIT, to review the year's financial and operating performance, our achievements year-to-date and to discuss the outlook for FY '21.

Thank you, Peeyush. I'd like to start by briefly discussing the financial performance of the REIT in FY '20 and some of the highlights from the year. CLW delivered operating earnings per security and distributions per security of $0.283. This was up 5.2% from FY '19. As a result of the acquisitions and lease extensions agreed during the year, our WALE at the end of FY '20 was 14 years, up from 12.5 years at the start of FY '20 despite the passage of time. 46% of our portfolio consists of triple net leases at the end of FY '20. This is a very important and unique feature of our portfolio given that under a triple net lease structure, 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 and our 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 at the start of FY '21, we had $290 million of available investment capacity following the sale of our interest in Waypoint REIT. Turning to Slide 10. In September 2020, we announced the acquisition of the bp New Zealand portfolio, the portfolio of 70 Long WALE triple net lease convenience retail properties in New Zealand. The bp portfolio featured attractive initial yield of 6.25%, 100% leased with a weighted average lease expiry of 20 years and staggered lease expiries across the portfolio varying from 18 to 22 years; triple net lease structure with annual CPI-linked rent increases; the portfolio is geographically diversified with 78% weighting to metro and commuter metro locations, including a 51% weighting into Auckland, New Zealand's largest city; and the portfolio also comprises the majority of bp's owned convenience retail properties in New Zealand. Settlement of the acquisition is subject to New Zealand Overseas Investment Office approval. Associated with this transaction, CLW undertook a fully underwritten $60 million institutional placement to partially fund the acquisition and associated transaction costs and a non-underwritten security purchase plan. Both the placement and the security purchase plan attracted strong investor demand. The security purchase plan, which was initially intended to raise up to $10 million, received approximately $88.4 million of valid applications. The Board exercised its discretion and implemented a scale back, which increased the size of the SPP offer to $66.1 million. Following the acquisition of the bp New Zealand portfolio, the impact on CLW will include the following: increases the number of properties of the REIT to 456 and value of the REIT's portfolio to $3.75 billion; it increases the proportion of triple net lease properties in the portfolio to 48% of the portfolio; and increases the portfolio WALE as measured at June 30, 2020, to 14.2 years. Turning to Slide 12 and our track record since IPO. Over the past 4 years, we've grown the portfolio from approximately $1.25 billion of property to $3.75 billion of property 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 48% today. The WALE of the portfolio has increased from 12.1 years to 14.2 years even with the passage of time. We've increased our investments located on the Eastern Seaboard of Australia with a proportion increasing from 48% to 71% of the portfolio. And finally, and importantly, we've increased our distributions every year since IPO. In closing, I would like to thank the Board for their ongoing guidance and support in the running of CLW, and you, our securityholders, for your support in our efforts to grow and improve CLW. We remain focused on delivering the highest quality portfolio of long-leased assets and tenants to provide steady and reliable income growth. I'd now like to hand back to our Chair, Peeyush, to conduct the formal business.

Thank you, Avi. I'll now pause to ask if there are any questions from investors on the webcast. And while we're waiting for those, I'd like to address a question that was submitted prior to the meeting. So we received the question, which I'll read out, which goes as follows. Given the current gearing of CLW being quite conservative, did the management not consider funding the acquisition with some debt for the balance that couldn't be met with the SPP? Why was the SPP allocation so low? So I think the heart of the question, there are 2 issues. One is the role that debt plays, and the second is whether the Board is attentive to the dilutionary impact, particularly on retail investors when we do new capital raising. Turning to the debt side first. As we covered in our briefing earlier, CLW has a policy of maintaining its look-through gearing -- sorry, its balance sheet gearing to between 25% and 35%. And we're quite mindful of staying within our policy range because through the long history of such REITS, there have been periods in the past where REIT's overgeared. And clearly, if you go through hard times, that can come back to bite you. So we maintained discipline in our gearing policy. When we do acquisitions, we typically always use a mixture of both equity as well as debt to fund those acquisitions, and that was the case as well with the bp New Zealand portfolio acquisition. The second part of the question was why was the SPP allocation so low. Now we -- I'd like to assure all of our investors that we are quite mindful of the composition of our register and particularly of protecting our retail shareholders' interest. Currently, retail shareholders account for some 16.6% of the register. In structuring our SPP, where we allocated initially $10 million out of the $70 million, that was approximately 14% of the equity, so roughly in line with the retail percentage of our register. Not only that, in the terms of the SPP, there was roughly only 3% of our register, retail register that could have potentially been diluted. 97% of retail investors, if they wanted to take up their allocation, would not have been diluted. So the Board was and is always quite mindful that we structure these things so as not to unduly advantage one group over another. Having said that, it's important for our investors to bear in mind that one of the competitive advantages that we have is our brand reputation of being able to complete acquisitions successfully. In other words, confidence by vendors that when they deal with the Charter Hall Group in the main and CLW in particular, that they can be sure that, subject to confirmatory due diligence, not uncovering anything untoward, that we will be there to close out a transaction. So when we commit to doing an acquisition, it's important for the Board and for CLW to know that we can actually complete that transaction. And that's where the role of underwritten institutional placement comes into play. We need to ensure that we have locked in funding so that we're able to enter into unconditional contracts, which allows us to secure the transaction and often at favorable terms. It may surprise people on the call to know that, quite often, we are not necessarily the highest bidder, but because of our reputation of being able to complete transactions because of the group's positive reputation of being a good landlord and so on, that is what allows us to get such quality transactions in the first place. So the role of institutional placements that are underwritten is to guarantee that we can complete the transaction. In this particular instance, as it so happened and as Avi has already taken us through, we actually ended up getting quite a lot of demand for the SPP well in excess of the $10 million from $88 million-odd, and we did exercise positive discretion this time to uplift the acceptances to $66.1 million. In so doing, though, we were also mindful of some retail unitholders not getting a disproportionate advantage over others. So we kept the amount available to any investor under the SPP to know greater than their initial holdings, as there were some investors who did for more stock at the slight discount in excess of their initial shareholding. So from all perspectives, be it institutional versus retail, be it retail within retail, we have always sought to protect and fairly treat all of our register whilst giving us the confidence that we can bid for assets on an unconditional basis. So that was the answer to the question prior to the meeting. Have we any further questions that we received? Okay. We have no further questions that have been received, in which case I will now proceed to the formal business of the meeting. Today is the first time that CLW has conducted a meeting online. As this technology is still relatively new, I would like to ensure that you are familiar with the way that we will proceed today. There are 2 resolutions for today's meeting, which we'll come to shortly. For those shareholders participating in the meeting via the online platform, you can cast your direct vote using the electronic voting card that you received when you validated your registration. If you have not done so, at the bottom of the web page, you should see that there are 3 boxes: Get a Voting Card, Ask a Question and Downloads. To register to vote, click on the Get a Voting Card box at the top of the web page or below the videos. You will need to register by providing your details as either an individual or proxy holder. And once you have registered, your voting card will appear with today's resolutions to be voted on. Securityholders and proxies can either submit a full vote or a partial vote. You can move between the 2 tabs by clicking on the full vote or partial vote at the top of the voting card. Once you have finished voting on the resolution, scroll down to the bottom of the box and click the Submit Vote button. If you'd like to ask a question, you will only be able to ask a question after you have registered to vote. If you'd like to ask a question, click on the Ask a Question box either at the top or the bottom of the web page. And if you would like to view the Notice of Extraordinary General Meeting, click on the Downloads button. With these procedural matters out of the way, I would now like to move to today's formal business. I now table the Notice of Meeting dated September 30, 2020, which contains the 2 resolutions up for consideration today. A copy of this Notice of Meeting would have been made available to you by e-mail, mail or, as previously mentioned, is now available to view on the web page. I will now take the Notice of Meeting as read and move to Resolution 1 in the Notice of meeting, being the reelection of our independent director, Glenn Fraser. Before I open the poll, I would like to ask Glenn to say a few words detailing his background and experience for the benefit of securityholders.

Thanks, Peeyush. And to all our Charter Hall Long WALE REIT securityholders online, I also thank you for taking time out to join us today. By way of background, I've been a professional Non-Executive Director for the last 15 years, serving on a range of ASX-listed and small and large private companies. My executive career was largely spent in the infrastructure, project finance and property industries. My last executive role was as the Chief Financial Officer of Transfield Holdings. At the time of that appointment, Transfield Holdings was Australia's largest privately owned construction and maintenance company, had over 8,000 employees and turnover exceeding $1 billion per annum. In that role, I was instrumental in financing and implementing the $650 million Wharf Bay urban redevelopment project in joint venture with Mirvac. That project involved hundreds of waterfront apartments, 3 offices, a public theater and a range of related infrastructure. In addition, with my time at Transfield, I was heavily involved in the ASX listing of both Charter Hall itself and Transfield Services, which were both significant -- had significant Transfield shareholdings at the time. In total, I spent 17 years on the Transfield Holdings Advisory Board. I'm a chartered accountant by original profession and commenced my career at Arthur Young, spending 5 years in the audit division before joining Southern Pacific Hotels as their Treasurer. I've spent 10 years as the Principal of a boutique infrastructure project finance business that was involved in the financing of some landmark projects in Australia, including the first major infrastructure -- private land infrastructure project in the country being the $700 million Sydney Harbor Tunnel. I've been associated with Charter Hall since 2004 when I joined its Board. And at that time, it had just 12 staff members. I was also a Founding Non-Executive Director of the listed Charter Hall Group from 2005 to 2012. I've had the very good fortune to serve on Boards chaired by outstanding directors, including David Gonski, Tony Shepherd, [ Elizabeth Noseworthy ], Gerry Gleeson, Kerry Roxburgh and now Peeyush Gupta. I've learned an extraordinary amount from them and both from the challenging and difficult times like the GFC. I'm very grateful to have had the opportunity to bring those learnings and my property and finance experience to the Charter Hall Long WALE REIT. I'm privileged to work with such a professional and competent team at Charter Hall, and I look forward to making further contributions to the development and steady growth of the Charter Hall Long WALE REIT.

Thank you, Glenn. As explained in the Notice of Meeting, only the directors or shareholders of the company may appoint a director. Accordingly, it is noted that today's resolution is advisory only and nonbinding. Notwithstanding this, directors will, of course, give due consideration to the results of the resolution. This resolution is an ordinary resolution and, as you can see, is displayed on the screen. There are some voting exclusions that apply, and these were outlined in the Notice of Meeting. I now declare the poll open and ask all securityholders who have not already voted or submitted their vote via proxy to review the resolution currently displayed on the screen. I will now display the respective proxy votes received on the screen. So for, 96.03%; open of 0.06%; and against of 3.9%. If you haven't already done so, I would encourage you to fill out the online voting form if you're voting online. [Voting]

I now declare the poll closed. Before we move to Resolution 2, we've had one additional question come through, which is that is the current 2021 guidance of $0.291 still the current guidance to market. And the answer to that is, yes, the Board has not revised its -- that guidance. That remains the current guidance to the market in terms of 2021 earnings. We will now move to Resolution 2, which is the ratification of the institutional placement. This resolution is also an ordinary resolution and, as you can see, is now displayed on the screen. There are some voting exclusions that apply, and these were outlined in the Notice of Meeting. I now declare the poll open and ask all securityholders who have not already voted or submitted vote by proxy to review the resolution currently displayed on screen. We will now display the proxy votes received on the screen. [Voting]

So for, 99.84%; open, 0.09%; and against, 0.06%. If you haven't already done so, I would encourage you to fill out the online voting form if you're voting online. Link Market Services is assisting us today to -- with the voting process as well as the counting of online votes, and they will scrutinize the voting. As there is no other business to be considered -- and we have one more question. So the question, which I'll get our Fund Manager, Avi Anger, to address, is to provide an update on the current status of rent relief, moratoriums and tenant negotiations for our portfolio, given COVID.

Thanks, Peeyush. Thank you for that question. I think probably the best way to answer that question would be to refer everyone back to Slide 6 of the pack from today, which summarizes the impact of COVID on the portfolio. Look, there's really been no material change to the situation in relation to COVID impacts than there was at the end of FY '20 when we first published this slide. We're in the very fortunate position in CLW to have the vast majority of our income from tenants that are very resilient and have really been able to not have any material change to their ability to pay rent or the impact to their business as a result of COVID. So our top tenants are the likes of federal and state government, Woolworths, Coles, Metcash, Telstra, bp, Arnott's, Inghams and Westpac. So when you go through that, at least all those tenants have paid rent all the way through COVID without any impact. The impact we did see was in relation to some of the retail tenants at the bottom of their office buildings where they either had to close or their business was significantly impacted because there just wasn't any foot traffic or a couple of car parks that operate for casual parking in CBDs, where they just weren't getting the foot traffic, and we've provided some rent relief in a couple of instances. But again, it's been fairly negligible. Those numbers are pretty consistent that we provided FY '20 into FY '21, and we'll provide a further update at our half year results in February in relation to the latest statistics in relation to rent relief granted, but it's not significant. I'll hand back to you, Peeyush.

Are there any further questions that we received? No further question. I'd like to acknowledge and encourage investors to ask questions or that concern you. And the first question on EPS guidance was from Mr. [ John Parrett ]. And the question on rent relief and so on was from Mr. [ Robert Cran ]. So thank you for those questions. As there are no further questions and as there is no other business to be considered, I now declare the formal business of the meeting closed. The poll will remain open for a further 5 minutes, and securityholders who have not already voted may lodge their online votes during that time. The results of the poll will be made available to the ASX and put up on our website and as Link has finished declaring the results. Thank you for your attendance today and, most importantly, for your ongoing support of CLW. Thank you, and we now conclude.