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 2022 Half Year Results Briefing. [Operator Instructions] Please note this conference is being recorded today, Tuesday, 8th of February 2022. I would now like to hand the conference over to your host today, Mr. Avi Anger, Fund Manager, CLW. Thank you. Please go ahead.

Good morning, everyone, and welcome to the Charter Hall Long WALE REIT results presentation for the FY '22 half year ending 31 December 2021. Presenting with me today is Scott Martin, Head of Long WALE REIT Finance. I'd like to commence today's presentation with an acknowledgment of country. Charter Hall is proud to work with our customers and communities to invest in and create places on lands across Australia. We pay our respects to the traditional owners, their elders past and present, and value their care and custodianship of these lands. The format for today's presentation is that I will start with an overview of CLW and key highlights for the period. 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 '22. We will then offer the opportunity for questions. Turning now to Slide 5. Today, CLW is Australia's largest diversified long WALE REIT. The REIT is included in the ASX 200 Index and is a top 10 listed A-REIT by market capitalization. Since listing on the ASX 5 years ago, CLW has delivered long-term profitable growth, consisting of 13.3% compound annual return on equity, 3.7% compound annual distribution per security growth and 53.5% NTA per security growth, representing annual growth of 8.7%. And based on CLW's closing price yesterday of $4.86, CLW offers an attractive 6.3% distribution yield. Turning to Slide 6. In November 2021, CLW reached a significant milestone of 5 years since listing on the ASX, and CLW has delivered strong returns to its investors over this period. Over the 5-year period to 31 December 2021, CLW has delivered a total shareholder return of 11.6% per annum, significantly outperforming the S&P/ASX 200 Property Accumulation Index over the same period. Over the same period, CLW has delivered an annual net total return of 13.2% versus the MSCI Core Wholesale Index, which delivered an annual net total return of 7.4%. The MSCI Index tracks performance of Australia's leading unlisted wholesale funds. Turning to Slide 7. We actively manage the portfolio to extend portfolio WALE, improve the tenancy profile, improve diversification and deliver earnings growth. Over recent years, the quality and diversity of CLW's property portfolio has changed significantly. Today, CLW has a best-in-class $7 billion diversified real estate portfolio, consisting of 549 properties with a very long-dated average lease term of 12.2 years. 52% of the income of the REIT comes from triple net lease properties. This is an important feature of our portfolio given that under a triple net lease structure, the tenant is responsible for all outgoings, maintenance and capital expenditure. In addition, 79% of our portfolio is now located in markets on the Eastern Seaboard of Australia. These factors enhance the security and continuity of income of CLW. Turning to Slide 8. Our portfolio continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of our cash flow. CLW has a high-quality income stream generated from blue-chip tenants with 99% of the tenants of the REIT consisting of government, ASX-listed multinational or national businesses. Our largest tenants are government, Telstra, BP and Endeavour Group. Our properties were leased to 82 tenants across Australia and New Zealand and diversified across long WALE retail, office, industrial, social infrastructure and agri-logistics sectors. All the leases in our portfolio have annual rent increases, providing strong year-on-year income growth. This consists of a mix of fixed and CPI-linked to annual increases. Our income growth benefits from increases in inflation with 46% of rent increases across our portfolio linked to CPI. This is particularly attractive in the current inflation environment with an average 3.3% increase in first half FY '22 achieved. The average fixed increase across our portfolio was a high 3.1%. Turning to Slide 9. CLW has a track record of attractive distribution growth with average distribution growth since IPO of 3.7% per annum. These highlights and the performance of CLW have only been possible due to the significant benefit that CLW receives by being part of the Charter Hall platform. The Charter Hall Group provides the REIT with access to a high-caliber team of experts across all areas of the REIT's management and provides CLW with a competitive advantage in unlocking value-enhancing growth opportunities. Turning now to Slide 10 and the key highlights for the period. I'm pleased to report that we achieved strong operating performance over the period, delivering operating EPS of $0.1531 per security. This represents growth of 5.6% over first half FY '21. Consistent with the FY '21 results, there was negligible impact on the REIT's first half FY '22 financial earnings as a result of the COVID-19 pandemic given the very small exposure to tenants entitled to rent relief. Our exposure to major national tenants in nondiscretionary and defensive industries means CLW is well insulated against mandated COVID-19 shutdowns. Our NTA at 31 December is $5.89 per security, up 12.8% from $5.22 at 30 June 2021. Over the period, we delivered $532 million of net valuation uplift for our investors, demonstrating the quality and resilience of the portfolio. We achieved valuation uplifts across our portfolio, including a pub, BP Australia and New Zealand, industrial and logistics, and Telstra exchanges portfolios vindicating our focus on long WALE real estate. CLW has a long WALE of 12.2 years, providing security and continuity of income to our investors. 52% of the income of CLW is from triple net leases. And during the period, we've completed some significant capital management achievements. We refinanced and expanded $1.5 billion of debt facilities in the period. Balance sheet gearing is 30.8% within our target gearing range of 25% to 35%, and CLW has a weighted average debt maturity of 5.5 years. Turning to Slide 11. During the period, CLW completed the acquisition of a 50% interest in the ALE Property Group together with the investment partner, Hostplus, one of Australia's largest industry superannuation funds. The national portfolio of 78 high-quality pubs and bottle shops is located in predominantly metro locations along the East Coast of Australia. The properties feature triple net leases to best-in-class ASX-listed tenant, Endeavour Group, with the portfolio featuring predominantly uncapped annual CPI reviews and an open market review in 7 years. The large landholdings and significant under-rented portfolio provide the opportunity for income and capital growth well into the future. 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 FY '22 half year are set out on Slide 13. As Avi has just touched on, the REIT delivered operating earnings of $97.8 million or $0.1531 per security and declared a distribution per security of $0.1524 for the same period. NTA per security at 31 December 2021, was $5.89, representing a 12.8% increase over the 30 June 2021 NTA of $5.22 per security. Movements in all other key metrics shown on this slide result from portfolio-enhancing activities undertaken during the period, which Avi will cover in his presentation. Turning to Slide 14, which provides a summary of the REIT's earnings for the FY '22 half year. Net property income has increased by 31.7% compared to the prior reporting period and has been driven by a combination of like-for-like rental growth of 3.2% from the stabilized portfolio and net acquisition activity. The 3.2% like-for-like rental growth comprises an average of approximately 3.1% on fixed rent reviews and a weighted average CPI print for the REIT CPI-linked leases of 3.3%. The increase in operating expenses has been driven by portfolio growth and new acquisitions, and finance costs have also increased period-on-period as a result of partially debt funding the REIT's acquisition activity. Operating earnings per security for the period have increased by 5.6% to $0.1531 per security, and distributions per security for the period have increased by 5.1% to $0.1524 per security, in line with our guidance released to the market. Turning to Slide 15 and the REIT's balance sheet position at 31 December 2021. The $1.5 billion increase in total assets represents an increase of 32.2% since 30 June 2021, and has been driven by acquisitions transacted during the year and $532 million of property revaluation gains. The $8.2 million increase in the provision for the 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 period, balance sheet drawn debt increased by $544 million, and $458 million of equity was issued. NTAs increased 12.8% from $5.22 per security at 30 June 2021, to $5.89 per security at 31 December 2021, driven by the $532 million of increase in property valuations. Turning to Slide 16, which provides a summary of the REIT's capital management initiatives. Balance sheet gearing was 30.8%, which remains within the REIT's target gearing range of 25% to 35%, and look-through gearing was 38.1%. The REIT has continued to work closely with the Charter Hall treasury team on a range of debt initiatives that have continued to strengthen the REIT's balance sheet position through extension of debt maturities and a reduction of margins. During the current reporting period, the REIT completed $1.5 billion of debt initiatives. The REIT successfully refinanced $750 million of existing facilities with an average extension term of 1.5 years and also secured an increase of $350 million to existing facilities. The REIT also secured $355 million of new facilities with an average term of 6.1 years to partially fund acquisition activity. In total, these debt initiatives represent close to 50% of the REIT's debt platform and provide the REIT with secure long-term financing. The REIT has total facilities, calculated on a look-through basis, of $3.1 billion, which are drawn to $2.8 billion at 31 December 2021. The REIT has a weighted average debt maturity of 5.5 years and a weighted average cost of debt of 2%. The REIT has 35% of debt sourced from capital markets' long-term issuances and 65% from foreign and domestic banks with staggered maturities over a 9-year period from FY '24 to FY '32. The level of hedging at 31 December 2021 calculated on a look-through basis was $1.6 billion and reflects a hedge position of 56% and a weighted average hedge maturity of 3.6 years. I will now hand back to Avi to provide an operational update and portfolio overview.

Thank you, Scott. Turning now to Slide 18. An important part of our strategy is to grow and enhance our portfolio through accretive acquisitions. In addition to the previously mentioned acquisition of 50% of the ALE Property Group, during the period, we also acquired 3 modern industrial and logistics facilities for a total consideration of $88 million. The acquisition include one of Australia's largest waste-to-energy facilities located in Sydney and leased to a joint venture between Cleanaway and ResourceCo. The property was acquired off market and features a long 16.4-year WALE. The Modern Star distribution center in Brisbane was acquired with a 7.5-year WALE. Modern Star is a leading partner and supplier of educational resources and early childhood services. And the Toyota Material Handling distribution center in Brisbane, this property was acquired off market with a 6-year WALE and features a high 3.5% annual rent increases. All properties acquired in the period were independently valued at the end of the period, materially higher than the purchase price. The ALE Group and industrial acquisitions demonstrate our focus on transactions offering attractive, long-term risk-adjusted returns but also mindful of downside protection, investing in properties strategically important to our tenants with strong tenant credit favoring large companies and properties with high underlying land value. Given Charter Hall's strong reputation and strong relationships in the marketplace, we continue to see most deals in the market and also have access to many off-market opportunities as a result of existing relationships across the Charter Hall Group. We were able to secure deals not solely based on price but also based on our ability to provide certainty of completion and ease of execution to the vendors. Turning now to Slide 19. In the following slides, I'd like to provide an overview of our portfolio and outline some key attributes of the portfolio. Slide 19 is our portfolio overview. During the period, we were able to grow and enhance the portfolio through acquisitions and positive valuation movements. The value of the portfolio is now approximately $7 billion. During the period, we have further enhanced the portfolio with $923 million of acquisitions. These acquisitions have increased the number of properties of the REIT to 549. The portfolio has a long-dated WALE of 12.2 years at December. 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 delivered a high level of growth in the period of 3.3%. Our portfolio has occupancy of 99.9%, and the portfolio average cap rate is 4.38%. Turning now to Slide 20 and an outline of our tenant customers and the tenant diversification of the REIT. Our portfolio of long WALE properties is leased to high-quality tenants, including Endeavour Group, government, Telstra, BP, Ingham's and Coles. The acquisitions completed during the period further increased our exposure to the high-quality, best-in-class Endeavour Group, whilst the introduction of new tenants in the period further diversifies our tenant base. Turning to Slide 21 and the industry diversification of our tenant customers. Within our overall portfolio, approximately 99% of tenants are ASX-listed government or multinational or national corporations with the vast majority of these tenants operating in nondiscretionary industries. During the period, we increased our exposure to the pubs and bottle shop sector with best-in-class operator, the $11 billion Endeavour Group through the ALE acquisition. The government, including the ATO and Australia Post, are another example of our nondiscretionary tenant exposures. In the telecommunications sector, we have partnered with another best-in-class operator, the $48 billion Telstra Corporation, which includes our portfolio of 37 exchange properties on long triple net leases. We also have a high proportion of tenants operating in the nondiscretionary grocery and food sectors such as Woolworths, Coles, Ingham's, Arnott's and Metcash. And our BP Australia and New Zealand portfolio of 295 properties on long triple net leases provides us with exposure to the resilient fuel and convenience retail sector. Importantly, all the tenants mentioned above and the vast majority of tenants in our portfolio performed well through COVID-19 and paid rent through the period of lockdowns. 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 in the sector. Our portfolio WALE is a long-dated 12.2 years. We continue to work to push out our expiry profile as far as possible to the right of this chart both through acquisition and negotiating lease extensions with our tenant customers. Turning now to Slide 23 and environmental, social and corporate governance. We are very focused on implementing sustainability initiatives across our portfolio. This includes climate resilience, social and community policy, and responsible business and governance. As a business, we are taking accelerated action to create climate resilience, which includes our ongoing commitment to net zero carbon for Scope 1 and Scope 2 emissions by 2030, as well as powering our operations by clean energy. 75% of CLW's electricity is powered by grid-supplied renewables for properties where we have operational control. As part of our overall approach, we use independent ratings tools to measure our operational performance. This is evidenced by our Green Star and NABERS ratings as well as continued performance in GRESB, the global ESG benchmark rating. Finally, I'd like to highlight CLW's participation in sustainable finance initiatives. During the period, we finalized the 242 Exhibition Street Climate Bond Initiative, a certified $466 million green loan facility. This is another demonstration of our focus on measuring operational performance and continuously decarbonizing the build form within our operational control. These preceding slides demonstrate 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 cash flows. 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 '22. The REIT reconfirms that based on information currently available and barring any unforeseen events, CLW provides FY '22 operating EPS guidance of no less than $0.305, reflecting growth of no less than 4.5% over FY '21 operating EPS. That concludes the presentation, and I would now like to invite questions.

[Operator Instructions] Your first question comes from Stuart McLean from Macquarie.

First question was just around LEP. I'm just looking at Slide 8 of today -- sorry, Slide 11 of today's presentation. There's a comment there that passing rents is 26% below market rent levels. When I compare that to the presentation provided in September, the September presentation says 37%. I was wondering what the difference between those 2 numbers is, please.

Yes. Thanks, Stuart. Thanks for the question. Look, basically, the difference is just the way that we defined it versus the way that LEP defined it previously. So the market convention is sort of the way we've used it. So market convention is effectively passing rent over market rent. So passing rent over market rent is about 74%. So we're 26% under-rented. The way that LEP previously defined it was the inverse of that. So they've done market rent over passing. So that got them to that sort of circa 37%. So that's the difference.

Okay, okay. So it's not like you've done a review of the portfolio and that's come down by 11%.

No. We're just using the standard market convention in our -- in the way that we've defined it.

Okay. And then in regards to the ability to actually achieve that rental relief -- sorry, the rental upside, do we need to wait until 2028? Is LEP looking to bring -- are you able to bring forward that rental uplift that's available in LEP?

Look, we've only -- as you know, we only just settled on the portfolio at the end of last year. So it's early days, yes. But under the leases, that market review happens in 2028, and that's the current situation with which we're operating.

And will you look to bring that forward? Or do we just assume 2028 is all that's featured there?

I think you have to assume 2028 at this stage. But having said that, we've got an excellent relationship with Endeavour Group. They're a very important tenant customer ready for CLW in our existing LWIP portfolio. We've got a very strong cooperative and collaborative relationship with them, and we'll continue to work with them on this portfolio and our existing portfolio. So that's sort of -- yes, that's where it sits.

Second question is just around the balance sheet. How comfortable are you with balance sheet gearing at 30%? Does that still provide scope for CLW to acquire assets?

Absolutely. So we've got circa $300 million of investment capacity at the moment. So we could use that to -- for some or all of that for future acquisitions and still be well within those bands.

And a follow-up question to that. With CLW trading at a 17% discount to NTA, how do you assess a buyback in -- amongst potential acquisition opportunities?

Look, the whole sector sort of traded down at the moment. CLW is clearly not immune from that. We're seeing a real disconnect between what's happening in the direct physical market versus listed markets, where the direct market asset pricing is strong. There's a lot of demand for assets. And the sector -- I think in the listed market, the sector is concerned around -- potentially around interest rates, and it's quite volatile of late. So we -- the Board has -- discusses all capital management initiatives, and we'll continue to do that. But I think our view is it's -- that the sector has been oversold at the moment, and we'll wait for things to sort of stabilize, and we'll consider -- continue to consider capital management options in the future, but there's nothing immediate.

Okay. And so you're more likely -- it sounds like you're more likely to acquire assets even at today's pricing than buy back CLW stock despite the steep discount.

Look, as I said, we'll consider all options. We will look at acquisitions if they make sense for CLW and they're additive to our earnings and portfolio and they're long WALE and high quality. And likewise, we'll consider other capital management initiatives as well. The Board has discussed and will continue to discuss all those options.

And just a final one from me. Just given the potential outlook for interest rates, hedging is still 56% on a look-through basis. I was wondering if there was an appetite to increase that.

Look, I think we're appropriately hedged at the moment. I think we've got some good -- we've done over $500 million of hedging in the 6-month period. So it's not -- we haven't been sitting on our hands, and we think it's a reasonable level of hedging for our portfolio and our debt book and where we sit and particularly factoring in the cost of doing so. And our view of where interest rates are and could go and where the long-term rates are, we think we're appropriately hedged. But as hedges roll off and -- we'll continue to monitor that and top up our hedge book where appropriate.

Your next question comes from Richard Jones from JPMorgan.

Avi, just interested in your high-level thoughts on asset pricing in, I guess, an environment where the market is starting to price higher bond yields?

Look, we -- as I mentioned in the previous question, Richard, we're still seeing a very strong market for assets. We haven't seen any change or turnaround in -- where assets are trading or what people are prepared to pay. In fact, it continues to remain very strong, and it is very strong. So no, we're not seeing what's currently happening in the bond market translate to any change in sentiment towards real estate or asset pricing.

Okay. Excellent. And just any updates or thoughts on the litigation on the LEP rent determinations?

No. We got nothing to add on that but...

Okay. And I guess the only kind of lease that you've got coming up of any note in the next sort of 4 or 5 years is Metcash at Canning Vale. Just your latest thoughts on how that leasing discussions are going there and maybe just an update. Obviously, we're seeing decent strength in industrial rents, including in Perth. Just kind of where the latest market versus passing sits on in your view on that asset.

Yes. Look, as I mentioned previously, we've got an excellent relationship with Metcash across the Charter Hall business. We've got their distribution facilities, not just the one that CLW owns in Perth, but we also have Brisbane, Melbourne, Adelaide. So we've got a great relationship with them, and we continue to talk to them about the requirements nationally, including Perth. We've still got 2 years left on that lease. We meet with them regularly to talk about their requirements, and we'll continue to progress discussions in relation to Perth. And I'm hopeful we'll have some news to the market in the near term but nothing at this point.

And passing and market?

Yes. We're very comfortable with where the rents are. In our latest val, market is equal to passing. So we're comfortable with where the rents sit there.

Your next question comes from Mollie Urquhart from Barrenjoey.

Avi, can you just talk to the acquisition outlook, where you see good opportunities lying? And are there some sectors where you think returns are looking particularly appealing or, inversely to that, challenging in this environment?

Yes. Thanks, Mollie. Look, we're very active, as you -- across sectors in CLW, particularly in the sale and leaseback space has been an area for us that's been very active and we continue to see opportunities there in that space across sectors where we can partner with corporates on sale and leaseback opportunities. And that's an area that we're very focused on. Other than that, across the board, we -- there will be opportunities for us to acquire more in the -- well, the pubs, we've done ALE. But Bunnings, we could do more in that retail space, industrial and logistics, even offer selectively for very high-quality long WALE. We're active in all those areas, and I'm sure we'll continue to see opportunities.

Brilliant. And then you've reiterated your earnings guidance, and I've noted in your press that all the CPI reviews have been done for the year. Can you just give a bit more color as to what's in guidance for rent review expectations for the second half and any acquisitions?

Yes. So as we have mentioned, we've seen very strong CPI, but all our CPI reviews are in June and September. So we've realized those, and we achieved a very strong 3.3% increase across those reviews. So almost 50% of our book is CPI. So we've got a very strong exposure to that increase. So that's sort of flowing through. And as I mentioned in the presentation, we've got average 3.1% fixed reviews. So they'll continue. They're staggered throughout the year, but the CPI has all occurred in June and September for this financial year.

And there's no further acquisitions built into FY '22 forecast.

No, there isn't.

Your next question comes from Lou Pirenc from Jarden.

Maybe just following up on the previous question about your second half implied slowdown in growth in the first half. It sounds like that's a little bit less rental growth. Any other changes in kind of cost of debt? Or are your acquisitions just less accretive more recently?

Thanks, Lou. It's Scott here. No, look, there's no -- the cost of debt, we've assumed we've got a WAC of debt of 2% at 31 December, and we're confident that, that is a reliable forecast for the balance of FY '22. In respect to the skew, first half to second half, earnings continue to grow on a total dollar basis in the second half, but there's more weighted average units on issue, which pulls the -- our EPS number back in the second half to back to that $0.305.

Okay. And then I mean I know the questions have been asked before, but just with where you trade, it must make it less likely that you use as much equity for future acquisitions than you have done in the last few years. Is that a fair assumption?

Look, I think, as I mentioned, we've got some investment capacity and we'll -- we think that the current trading down in our share price is temporary. The whole market has been impacted recently, and we'll just reassess that in due course, Lou, but that's sort of where we sit at the moment.

Your next question comes from Grant McCasker from UBS.

A quick one and just to follow on from a previous question. 56% debt hedging, that's as of December. Can you provide that number for FY '23 and '24, please?

We'll -- we might take that one off-line, Grant. We can do that when we catch up with you one-on-one.

[Operator Instructions] Your next question comes from Simon Chan from Morgan Stanley.

I just got one question this morning. With ALE all done now, have you guys given any thought to portfolio exposure to gaming and alcohol tenants and where you like to see that sit as a proportion of your tenants going forward?

Yes. Look, of course, we think about these things, Simon. So look, first and foremost, they're triple net leases where we don't have any operational control over the property. So we see these properties as long-term, high-quality land banks with a tenant where these properties just are strategic to their use and they'll be there for a long time paying rent that's growing by CPI. So they're really high-quality, income-producing land banks. It's -- we see this as an extension to our existing LWIP portfolio. But importantly, as CLW continues to grow, those will become a smaller portion of our overall portfolio. So we're comfortable with the current exposure to Endeavour and those properties. And yes, we really see them as very high-quality -- long-term, high-quality assets.

Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

Thanks, everyone, for joining the call today. I really appreciate your time and your interest in CLW, and I look forward to catching up with many of you for one-on-ones.

Thank you. That does...