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 Extraordinary General Meeting. There will be introductory remarks and then the formal business of the meeting. Security holders are able to ask questions via the webcast. [Operator Instructions] Please note, this virtual meeting is being recorded today, Friday, the 5th of February 2021. I'd now like to 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's my pleasure to welcome you all to this Extraordinary General Meeting of Charter Hall Long WALE REIT. My name is Peeyush Gupta. I'm the Chair of the Charter Hall Long WALE REIT Board of Directors. It is now past 1:30 p.m., and as the necessary quorum is present, I declare this meeting properly constituted and open. This afternoon, we will consider the formal business of the meeting, being an ordinary resolution for your consideration relating to the ratification of the institutional placement that was announced on the 9th of December 2020. The institutional placement was undertaken to support the acquisition of the Telstra Telco Exchange at 76 to 78 Pitt Street, Sydney; a new Bunnings center under development at Caboolture in Queensland; and a 50% interest in the Parap Tavern in Darwin. These acquisitions further improve CLW's portfolio, diversifying it across additional assets while increasing the quality and resilience of income from major tenants Telstra, Bunnings and the Endeavour Group. The placement also positions CLW to continue executing on strategy and to maintain a prudent capital position. Today, the meeting is being held to ratify that placement and has the effect of refreshing CLW's ability to issue up to 15% of securities on issue in a 12-month window. The passing of resolution 1 will provide CLW with maximum flexibility to manage its future capital requirements in the best interests of security holders. I should point out that CLW has no current plan to raise further capital, although it may do so in the future. By way of reminder, I'd like to remind everyone of our -- of my fellow Board members and directors being Glenn Fraser, who is a Nonexecutive Director and Chair of the Audit, Risk and Compliance Committee, an independent; Ceinwen Kirk-Lennox, Nonexecutive Director and Independent Director; David Harrison, who is an Executive Director and the Charter Hall Group's Managing Director and Group CEO; and finally, Carmel Hourigan, who is the Executive Director and Charter Hall Group's Office CEO. Also present online today, and I welcome Avi Anger, our Fund Manager for the Long WALE Group; Darryl Chua, our Deputy Fund Manager for the Long WALE REIT; Scott Martin, the Head of Finance; and Charisse Nortje and Mark Bryant, our Joint Company Secretaries. Today is the second time that CLW has conducted a meeting online. As the technology is still relatively new, I would like to ensure that you're familiar with the way we will proceed today. There is only one resolution for today's meeting, which we'll come to shortly. Security holders may vote and submit questions using the online platform. Today's resolution to be put to the meeting today will be decided on a poll. I now declare the poll open. For those security holders 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, at the bottom of the web page, you should see that there are 3 boxes: Get a Voting Card, Ask a Question or Downloads. To register to vote, click on the Get a Voting Card 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 a proxy. Once you have registered, your voting card will appear with today's resolution to be voted on. Security holders and proxies can either submit a full vote or a partial vote. You can move between the 2 tabs by clicking on 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 want to ask a question, you will only be able to ask a question after you have registered to vote. [Operator Instructions] And if you would like to view the notice of meeting, click on the Downloads button. With those procedural matters out of the way, and before we proceed to the formal business of today's meeting, I'd like to address any questions from investors. I'll now pause to allow you to ask any questions online. And while I'm waiting for any questions that you might have, I'd like to address the questions that we've received that were submitted prior to the meeting. The following questions were received from security holders prior to the meeting.

The first one was from Radley Investment Proprietary Limited. And the question was, "Why have you made a share placement to institutional investors only at a discount to the share price without giving small investors, who own nearly 50% of CLW shares, the chance to participate in the placement through an SPP?" This is a good question. And the CLW Board always thinks carefully about the optimum capital-raising structure, balancing the speed and certainty of execution an institutional placement offers against the slower, less certain path an entitlement offer or SPP involves. We were also conscious of the fact that retail participation in our October equity raise meant that retail security holders had actually diluted institutional investors in the last raising. Retail security holders had been overfilled on oversubscription and issued $66.1 million of stock in October versus institutions who received $60 million of stock. Proportionately, retail security holders in the October placement had received 52% of the stocks in that raise, but they only represent closer to 15% of our register, not 50%. In other words, in normal raisings, wherever we're trying to balance the interests of institutional versus retail security holders, we would normally raise $6 for every -- institutionally for every $1 raised from a retail security holder. In the October placement, we raised almost -- we raised slightly more from retail shareholders, $66 million, than we did from institutional. In other words, retail shareholders were 6x overallocated in the October raise. Now the October raising was also heavily oversubscribed by institutions, but they have -- were not allocated additional stock reflecting their demand. Instead, retail investors received approximately 3x their weighted allowance in this issue -- in that raise. Another consideration for the December raise was that ASX listing rules state that retail security holders cannot participate in SPP beyond the prescribed $30,000 limit over a 12-month period. Given the heavy participation of retail security holders in the October raise who took the full $30,000 limit, there was potentially also an issue where many retail investors would not have been able to participate even if an SPP had been offered. When you take the 2 capital raises together, October and December, allocations across both were broadly in line -- in total, I mean -- were broadly in line with the retail-institutional split of CLW register, and neither group was unduly advantaged or disadvantaged. So it was for these reasons that the Board decided not to offer an SPP as part of the December equity raise. We had another question received before the meeting, which I'll read out now. "Do you think it is fair and reasonable to dilute the value of the shares held by small investors who have seen the price of CLW drop from $4.88 on 9 December 2020, the date of the placement, to $4.40 today, this was on the 11th of January this year, a drop of 9.8%? P.S., my loss of share value is equivalent to losing my CLW dividend over the next 15 months, and I'm sick of seeing this happen to my shares. Every time that it happens, I vote against the resolution to let you know my displeasure as a shareholder." I can fully empathize with the person that asked the question, but let me try and provide some context and background. As I previously outlined, the decision not to offer an SPP was something the Board considered at length in December, and our decision reflected the heavy retail participation and oversubscription to retail shareholders in the October SPP. As to the drop in CLW's security price, we also share your disappointment. With the exception of our new Director, Carmel Hourigan, who only joined the Board late last year, all other Board members own significant amounts of CLW stock. So we are also personally exposed to the fall in security price. Unfortunately, we don't control the price of CLW. This is set by the market. The management team continues to promote the benefits of investing in CLW to new and existing security holders, with the aim of seeing CLW trade more in line with its intrinsic value. I'd also reflect on the fact that the price has recovered somewhat since the time of your question in early January, early to mid-January, and that the loss you refer to is a loss only if you sell your stock and crystallize it. While I can't make any guarantees as to the CLW security price, I do think that the portfolio of assets that CLW owns will increase in value over time and that CLW investors will be rewarded for owning them, both by way of steady distribution, which you can rely on; as well as, we hope, by future growth or price appreciation. Finally, I would note that since the December placement through to yesterday, the CLW share price performance has been in line with the All Ordinaries Index performance. We were down about minus 1.6% over that period, with the stock exchange index being down over 2% over that period. So we performed broadly in line with our other markets' performance. There was another question we received from [ Stephen Philip McCarthy ] and [ Joanne McCarthy ]. "Why wasn't the SPP offered -- an SPP offered to retail investors?" I think I've already addressed this question in my answer to the previous question. So I'll move on to the next question, which comes from [ Paul and Linda Jardine ]. "The unit price is dropping badly due to poorly considered acquisitions. Could you please confirm that there will be no more acquisitions until the unit price recovers by at least 15%?" So my answer is that, as we just discussed, while I acknowledge that the security price has dropped since the time of the equity raise, I'd also note that it has recently recovered. I don't believe that the change in price that occurred is due to poorly considered acquisitions. We see the acquisitions of the Telstra Telco Exchange on Pitt Street, Sydney, the brand-new Bunnings currently being constructed in Caboolture, Brisbane; and the Parap Hotel in Darwin, all of which the December equity raise funded, have been excellent additions to the portfolio. We think these assets will increase in value over time, offering highly resilient and growing income streams for CLW investors and will support future growth in distribution. Likewise, we believe the acquisition of the David Jones flagship Elizabeth Street store represents a highly valuable Sydney CBD property in a very desirable location, with a long-term lease in place that will deliver ongoing growth in earnings for CLW. So my Board and I don't believe the change in CLW's security prices reflect poorly considered acquisitions. I would point out that CLW is an A-REIT, Australian Real Estate Investment Trust, and has a diverse register of security holders, the majority of which are institutional investors, about 85%, who trade in and out of securities for a variety of reasons. Between the 9th of December and the 1st of February, including the December distribution, the CLW total return was minus 2%. By comparison, the ASX 200 A-REIT Accumulation Index, which is a benchmark comprised of CLW A-REIT performance, returned minus 3%. So in relative terms to our industry sector, CLW has actually outperformed for that period. Hence, while none of us have enjoyed the recent pullback in CLW's price, I don't think it necessarily reflects poorly considered acquisitions when other A-REIT peers have suffered larger [ falls ] during the same time period without any corresponding acquisitions. More generally, on the issue of additional acquisition, the Board carefully considers any acquisition that the management team recommends and assesses their impact on the portfolio and likely outlook -- future outlook for our portfolio and for our security holders. Central to our consideration is the quality of the property being considered, its future outlook and the price at which we can obtain it, and the proposed funding structure and the blend of equity and debt and its impact on our capital structure. While I can make no guarantees about where the CLW security price will be at any time of any future acquisitions, I can assure you that when assessing acquisitions, the CLW Board is and will be focused on whether the acquisitions are additive to the portfolio's future value, to the earning sector and after diversification, and contributing to maintaining a long WALE. The Board also considers CLW's capital structure and maintaining a prudent balance sheet position. I hope this addresses your concerns and the question you asked. We had another question submitted prior, which was, "Recent acquisitions are outside the long WALE thesis of the REIT and appear very speculative. Could you please direct your executives to return -- to revert to the original long WALE theme? Are you concerned you are misleading investors with claims to be a long WALE REIT?" As we've discussed, I don't believe that the recent acquisitions could be considered outside the long WALE investment thesis of CLW. The Pitt Street, Sydney Telstra Telco Exchange has a 10-year lease to Telstra. The Bunnings, Caboolture, Brisbane acquisition will have a 12-year lease on completion of construction to Bunnings, which is obviously owned by Wesfarmers. The Parap Tavern in Darwin has a 15-year lease to the Endeavor Group, majority owned by Woolworths. And the David Jones flagship store, Elizabeth Street in Sydney, has a 20-year lease -- triple net lease in place to David Jones. All of these acquisitions are consistent with the long WALE investment thesis of CLW. So given these facts, I don't believe our recent acquisitions are either speculative or inconsistent with our long WALE investment proposition. There's another question from Mr. [ Victor Brewer ] asking for Avi Anger, our manager -- Fund Manager's views on the UBS research report dated 9/12/20, where the heading was, "A Growing Portfolio, But What About the Earnings?" So Avi, can I ask you to please address Mr. [ Brewer's ] question?

Certainly, Peeyush. The acquisitions undertaken in -- sure, sorry. Yes. Yes. Thanks. Thank you, Peeyush. So having reviewed the research note, I believe [ Victor's ] question might relate to whether these acquisitions were accretive to earnings at the time of acquisition. So if you look at the equity raising in December, the $250 million, versus the value of assets acquired of $319 million, CLW raised more equity relative to its existing capital structure, approximately 78% equity, 22% debt, versus our look-through gearing of close to 39% pre-raise and balance sheet of about 26%. Effectively, we de-geared through that raising. So in the absence of additional acquisitions, this made the December raising mildly dilutive. Despite this, the Board chose to hold the existing guidance. This was because of the pipeline of our potential acquisitions at the time, which meant that the Board was comfortable these additional proceeds could be successfully deployed and guidance maintained. As the UBS note points out, guidance has assumed an additional circa $250 million acquisition at about a 5% cap rate. And as you would have seen, after the December equity raising, we successfully negotiated the acquisition of the David Jones flagship Elizabeth Street store, and this has effectively deployed these additional equity raising proceeds and allowed us to maintain our guidance of no less than $0.291 per security. Would you like me to...

Yes. So we have another question asking our Fund Manager to explain how unitholders have actually benefited from recent acquisitions, on both earnings and more importantly in distribution terms.

Yes. So the acquisitions undertaken in the first half FY '21 will be accretive to full year earnings for CLW security holders in FY '22 and beyond once we get the impact of the full year period. The inbuilt growth characteristics of these assets, offered through their either fixed or CPI-linked rental increases will deliver security holders a growing stream of future earnings and distributions. It's always challenging to secure good-quality assets with long WALEs to high-quality tenants. And this means there are occasions where there are small mismatches between the timing of equity raising and deployment. Importantly, we continue to look to secure CLW security holders with assets that will add to future earnings, distributions and offer good potential to future capital growth.

Thank you, Avi. We have another question that came in. "Is it in the best interest of all unitholders to fill SPP applications in full, considering that CLW is likely to be in perpetual raising mode?" So as previously explained, the CLW Board carefully considers the optimum raising structure at the time of each equity raise. There are particular challenges with SPP given the limit of $30,000 per REIT security holder in any 12-month period. Historically, there has been some disappointment when investors weren't able to participate or were scaled back in subsequent SPPs because they had already [ hit the ] 12-month $30,000 limit. Given this, the Board decided to try and fill as much of the retail demand as practical in the September SPP, as it had been more than 12 months since the last retail raising and all retail security holders were starting with a $30,000 limit. The view was that this was the right thing to do to reward retail security holders for their support and avoid unduly scaling them back. And indeed, we took in a very significant amount of over subscriptions in that raise for retail unitholders. As I've mentioned, normally, based on our register, we would raise $6 of institutional money for every $1 on retail money. In that October placement, we raised $66 million from retail unitholders and only $60 million from intuitional. In other words, $1 for $1, not $6 for $1. So retail unit owners were significantly advantaged in the October capital raising. The December capital raising merely balanced out -- that out. So if you look at the 2 recent raisings, October and December together, the allocations were broadly in line with our registry. So those are the questions that were raised with us prior to the meeting. We now have a number of questions that have come through online. So thank you for those, and we'll go through those in turn now. The first one is from Vishad Sharma from the Australian Shareholders' Association. "Can the Chair please provide a rationale for why was the capital raising a placement-only offer with no entitlement offer?" Mr. Sharma, I think we've addressed that question comprehensively over the course of this discussion, and I trust that you've received a satisfactory answer. Another question comes from Mr. Robert [ Crohn ]. "Do you intend to raise capital again via SPP once Resolution 1 is carried? Transaction since 9th January has not been well-regarded, especially DJ aren't revenue accretive, hence, major selling with CLW. You destroyed value. CLW stock price dropped 9% versus A-REIT sector of 4.5%. How do you explain this in being in the best interests of shareholders?" Mr. [ Crohn ], again, we've covered this a little bit, but I do not agree with the premise of your question. Firstly, performance measurement is very time-dependent. At the time that you posed your question, I'm not sure which dates you chose. As I say, if we look at the performance of CLW from the 9th December capital raising to the close of business yesterday, CLW has performed in line or slightly better than both the All as well as the A-REIT sector. But these are very short-term time frames. So even of themselves, their data is meaningless. The relevant question is whether the acquisitions were in the interests of our security holders long term. In the case of the David Jones building, that is a prime location. It is our property manager's view that, that location is one of the very rare ones, that comes to market not very often, that the redevelopment prospects are very significant should the tenant ever not renew, et cetera. And we were delighted to be able to add a property and a positioning of that profile to the portfolio, which we do believe will be in the interests of unitholders in the longer term. We are really not here to try and deliver performance in the very short term. That's really outside of our control. But what we can do is to compile the portfolio with sound tenants, long leases, potential redevelopment opportunities in that portfolio that, over time, should deliver to security holders. And indeed, since the time of our IPO some 4 years ago now, we have consistently delivered to our thesis. Avi, was there anything else you might like to say with regard to this question?

Yes. Sure, Peeyush. Yes. I think you've made those -- some very good points there, and I'll just emphasize that in -- particularly in relation to the David Jones building, as you have pointed out, that's a really unique property. It's about a 3,500 square meter site in the core of the Sydney CBD, has light on 3 sides, a wonderful outlook to Hyde Park and the harbor. It's a unique building, a really unique architecture, had the owner -- the tenant has spent hundreds of millions of dollars extensively refurbishing the building. And it's got wonderful long-term prospects. The price that we paid, we believe, is less than the value of the land and the buildings combined. We think we bought it very well, and we think it will add value to investors over time. Given that it will only contribute to part of FY '21, given we're already more than halfway through FY '21, the earnings impact is not significant, as the investor has pointed out, for '21. However, it will be accretive to '22 and beyond.