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

Ladies and gentlemen, good afternoon. On behalf of the Board of Directors, it's my pleasure to welcome you all to the 2023 Annual Security Holders' 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. It's now midday and as the necessary quorum is present, I declare this meeting properly constituted and open. I'd like to commence today's presentation with acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to the elders past and present and recognize their continued care and contribution to country. This afternoon, I'll provide a brief overview of the REIT's strategy and some commentary on our performance and growth over FY '23. The Charter Hall Long will REIT Fund Manager, Avi Anger, will then provide a more detailed update on the operational and financial performance for FY '23. We will then move to the formal business of the meeting and the resolution for your consideration. There is one resolution for consideration today, and that involves the reelection of Mr. Glenn Fraser. I will ask Glenn to say a few words at that time, providing some personal background and reasons why he believes he should be reelected. But first, I'd like to introduce my fellow Board members. So firstly, Glenn Fraser, who is a Nonexecutive Director and the Chair of our Audit, Risk and Compliance Committee; Ceinwen Kirk-Lennox, one of our Independent Nonexecutive Directors; Carmel Hourigan, an Executive Director and Charter Hall Group's CEO office; David Harrison, Charter Hall's Group Managing Director and Group CEO, who can't be here in person today, but who is with us online. And I'd also like to welcome key members of our management team being Avi Anger, Fund Manager for the Long WALE REIT; Darryl Chua, who is the Deputy Fund Manager for our Long WALE REIT; Scott Martin, who is the Head of our Long WALE REIT Finance; and then Mark Bryant, our Company Secretary. Ryan McMahon, who is our auditor from PricewaterhouseCoopers, will also be available to answer any questions about their audit of the financial statements from security holders. So it's my pleasure to address this meeting today. And let me start by acknowledging that it's been a very challenging year for the Australian real estate investment trust market, including for CLW. I'd like to spend some time discussing CLW's attributes and performance before I hand over to Avi Anger. Now CLW is one of the top 10 Australian real estate investment trusts or AREITs as they're called, listed on the ASX. And it is Australia's largest diversified long WALE REIT investing in properties primarily leased to major corporates and government tenants on long-term leases. This year has presented significant economic challenges with rapidly rising inflation, which resulted in a historic interest rate rising cycle by the RBA, unprecedented in its scope and speed. CLW's portfolio continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of cash flow. CLW's properties were leased to 84 tenants across Australia and New Zealand and diversified across the long WALE lease expiry across retail, office, industrial, social infrastructure and agri-logistics sectors. So a well-diversified portfolio across those sectors. At year-end, the REIT held 549 properties valued at $6.8 billion with an average WALE of 11.2 years. 52% of the income of the REIT comes from triple net lease properties, which 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, some 79% of our portfolio is located in markets on the Eastern Seaboard of Australia. The quality of our tenants means that we've had no major defaults and net property income from tenants has risen over the year by 4.4%. 51% of the CLW's leases are CPI linked, and so had benefited from the current high inflation rate at rent review time. Now notwithstanding all of that, the performance of the REIT sector in aggregate has been very disappointing this past year with many AREITs trading at substantial discounts to their underlying NTAs or net tangible assets. And CLW has not been immune from these trends, and we are currently trading at over 40% discount to the appraised value of our portfolio. At our current trading price, some $3.16 at the moment. CLW currently offers an attractive 8.2% yield -- forward-looking yield for this year. And I think it's important to acknowledge that interest costs or rising interest costs have had a negative impact on the operating earnings and distributions per security that CLW has been able to deliver, both for FY '23 and our forecast earnings for FY '24. The unprecedented rate rising cycle we have just witnessed this past year has seen interest rate costs more than offset the earnings growth that CLW's underlying portfolio has delivered. This is disappointing, given that the underlying portfolio itself continues to generate strong net property income growth. In FY '23, CLW's portfolio delivered 4.4% and like-for-like income growth. When combined with the acquisitions that we did, net property income increased by some 10.6%. CLW's underlying portfolio continues to generate strong rental growth in FY '23 attributable to the quality of its properties and our tenant customers as well as our long WALE. We have a high-quality income stream generated from blue-chip tenants like -- with 99% of the tenants of the REIT consisting of government, ASX-listed multinationals or national businesses. Our largest tenants are government, Telstra, BP and the Endeavour Group. All the leases in our portfolio have annual rent increases, providing strong year-on-year income growth. These leases consist of a mix of fixed escalators or CPI-linked annual increases, roughly 50-50, CPI 52%, fixed escalators 48%. And our income growth benefits from increases in inflation with 51% of rent increases across our portfolio linked to CPI. And this is particularly attractive in the current inflation environment with a weighted average increase in income across the CPI leased portion of our portfolio of 7.1% in FY '23. The average fixed increase across our portfolio was at 3.1%. And so the combined was the 4.4% that I referred to earlier. Now as a Board and as a management team, we continue to focus on what is within our control in order to navigate the current challenging economic environment and rising interest rates. I have noted that the underlying portfolio has and will continue to deliver consistent rental income earnings growth. And it is unfortunate that rising interest costs have more than offset this growth this past year and which has meant that it hasn't translated into operating earnings per security growth. From a balance sheet perspective, we've taken additional interest rate hedging and our interest rate exposure is 80% hedged for FY '24 and currently 64% hedged for FY '25. These hedges remove much of the risk associated with any further increases in interest rates. As we look further forward, we will continue to selectively put in place further hedging for FY '26 and beyond while also being mindful of preserving some exposure should any rate cuts occur in future years. In response to the market concerns about CLW levels of gearing, we have also noted that we entailed to sell some of the assets to lower gearing. Let's spend a little bit of time on our ESG, governance and performance. So we also remain focused on implementing sustainability initiatives across our portfolio. And as we consider ESG as a driver of long-term value for investors and tenant customers. As a business, we've taken accelerated climate action. Charter Hall recently announced that it was targeting net-zero carbon by 2025, having accelerated our Scope 1 and Scope 2 energy targets by 5 years. Additionally, CLW has been focused on clean energy. With 2 megawatts of solar installed across the portfolio, an increase of 400 kilowatts since FY 2022. Further, the office properties in the portfolio have 100% grid-supplied electricity sourced from renewable sources. CLW's predominantly modern office portfolio features high environmental credentials, including 5.3 star NABERS Energy and 5.2 stars NABERS Water ratings. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved the score of 79 in 2022, GRESB assessment, an increase of 7 points compared to the prior period, evidencing our commitment to continuous improvement. Good governance is an important element of ESG, and it's something that your Board of Directors is focused on. Our role as directors is to ensure management adhere to the strategy of the REIT and to manage all aspects of the REIT's operations professionally. I'd like to assure securityholders that your directors are over mindful of their responsibilities to act in the interest of all securityholders, and we endeavor to ensure that CLW continues to provide investors with stable and secure income and the potential for both income and capital growth over time, through an exposure to a portfolio of high-quality properties and high-quality tenants with long underlying lease structures. The Board remains committed to aligning with best practice frameworks to support transparency and disclosure. Now it is not possible to predict when sentiment towards the sector might change. and attract renewed investor support. Most likely, the trigger will be when the market believes that Central Bank's interest rate rises are over. Share prices in the sector might rally as investors realize that REITs can be bought cheaply relative to their fundamental value. In the meantime, the current yield and offer of around 8.2% provides some cushion and relief from the disappointing share price performance over the past year. Finally, I would like to thank you for your ongoing support and interest in CLW. I will now hand over to Avi Anger, Fund Manager for the Charter Hall Long WALE REIT to review the year's financial and operating performance and to discuss the outlook for FY '24. Thank you. Avi?

Thank you, Peeyush. I'm pleased to report that we delivered operating earnings per security of $0.28 in line with FY '23 operating earnings guidance. This was driven by net property income increasing by 10.6% compared to the prior reporting period and was driven by a combination of like-for-like growth of 4.4% from the stabilized portfolio and net acquisition activity. Finance costs also increased period-on-period, driven by a 0.8% increase in the REIT's weighted average cost of debt from 2.3% in FY '22 to 3.1% in FY '23. This was a significant headwind for operating EPS and resulted in negative year-on-year growth in operating earnings per security. Our NTA at 30 June was $5.63 per security. The portfolio delivered a weighted average rent review of 5.1%, benefiting from the 51% of income of the REIT being CPI linked with the weighted average increase from our CPI-linked leases of 7.1% in FY '23. As Peeyush noted, CLW has a long way of 11.2 years, providing security and continuity of income to our investors with a portfolio occupancy of 99.9% at year-end. We completed $223 million of transaction activity during the year with $114 million of strategic divestments which were recycled into $109 million of portfolio-enhancing investments. We remained focused on prudent capital management with 80% of drawn debt being hedged, providing protection against the risk of rising interest rates. Moody's has reaffirmed its Baa1 investment-grade credit rating for the REIT and at year-end, our weighted average debt maturity is 4.5 years, with staggered maturities to a diversified lender pool. CLW continues to actively manage its balance sheet in order to remain defensive in a high interest rate environment. Balance sheet gearing of 32.9% is within our target range of 25% to 35%, and our look-through gearing is 40.1%. On the 15th of June 2023, we released updated property valuations, which resulted in a $417.7 or 5.8% net decrease from prior book values. The valuation impact represented a 9.6% decline in NTA per security from $6.23 in June to $5.63 at the end of December -- sorry, versus $5.63 at the end December. Whilst any increase in valuations is disappointing, our portfolio curation strategy is designed to ensure resilience throughout the property cycle and it's clear that the sector is navigating its way through a challenging period. At year-end, the REIT consisted of 549 properties valued at approximately $6.8 billion, with 100% of the portfolio independently valued at June. The average cap rate of the portfolio is 4.77%, and the portfolio is virtually fully occupied with an occupancy of 99.9%, with a long-dated average lease term of 11.2 years. The properties in the portfolio feature a blend of annual lease review structures both fixed and CPI-linked. Our average fixed reviews 3.1% and whilst our CPI-linked leases delivered strong growth of 7.1% in FY '23. This resulted in a weighted average rent review for the year of 5.1%. During the year, we undertook portfolio curation, divesting some short WALE properties at book value and investing in high -- in new high quality Long WALE investments. The divestments consisted of 2 short WALE industrial facilities at prevailing book values. The Woolworths Distribution Centre at Hoppers Crossing was sold to $74 million, reflecting a 4.5% cap rate. the property had a 3-year lease term remaining at the time of settlement. The Toll Altona property was sold for $38.3 million reflecting a 4.75% cap rate. The property had a 2.9-year lease term remaining at the time of settlement. These sales provided support for our book values and the sale proceeds were recycled into new portfolio-enhancing long WALE investments. These investments were 25% interest in the Geoscience Australia headquarters in Canberra for $91 million. The property is a life sciences complex, comprising office, specialized laboratory, storage and warehousing. The property was acquired in October '22 and featured a 9.6-year WALE at acquisition with 3% annual reviews and yielded acquisition of 7.4%. We also further extended our relationship with Endeavour Group acquiring 4 Endeavour leased pubs, Emu Hotel in South Australia, the Horse & Jockey, Marine Hotel and Rainbow Beach Hotels, all in Queensland. The pubs are leased to Endeavour Group with new 15-year triple net leases with uncapped CPI increases. The total combined acquisition price of those pubs was $17.9 million for CLW's 49.9% interest, reflecting a blended 5% cap rate. The Geosciences and Endeavor pub acquisitions demonstrate our focus on transactions, offering attractive long-term risk-adjusted returns, but also mindful of downside protection. Investing in properties that are strategically important to our tenants with strong credit, favoring government and large companies and properties with high underlying land value. Our portfolio of long WALE properties has leased to high-quality tenants, including government, Endeavor, Telstra, BP, Ingham's and Coles. The acquisitions completed during this year further increased our exposure to high-quality tenants in government and best-in-class Endeavour Group. CLW'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 quality of tenants and proportion of triple net leases provides better downside protection and more resilient income streams for our investors. Within our overall portfolio, approximately 99% of tenants are ASX-listed, government or multinational and national corporations with the vast majority of those tenants operating in nondiscretionary industries. During the year, we increased our exposure to government tenants. We also increased our exposure to the pub and bottle shop sector with best-in-class Endeavor Group. In the telecommunications sector, we've partnered with another best-in-class operator, Telstra Corporation, which includes our portfolio of 37 telephone exchange properties also 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 portfolios of 292 properties on long triple-net leases provides us with exposure to the resilient fuel and convenience retail sector. The REIT's portfolio has a long-dated lease expiry profile which reflects a low-risk position relative to our peers in the sector. Our portfolio WALE is a long-dated 11.2 years. We have minimal expiries in the next 2 years and we are in discussions with a number of tenants with expiries in FY '26 and beyond regarding lease renewals and extensions. We continue to work to push out our expiry profile through acquisition and negotiating lease extensions with our tenant customers. Our portfolio WALE, quality of tenants and proportion of triple net leases provides better downside protection and more resilient income streams for our investors. I'd now like to reaffirm our FY '24 earnings guidance. Based on information currently available, including current interest rate, and inflation expectations and barring any unforeseen events, CLW provides FY '24 operating EPS guidance of $0.26 and DPS guidance of $0.26. Based on yesterday's closing price, the CLW, this represents an 8.2% distribution yield. In closing, I would like to thank the directors of CLW for their ongoing guidance and support in the running of CLW and you our securityholders for your trust and support. We remain focused on delivering a long WALE resilient portfolio leased to high-quality tenants and providing investors with both income and capital growth over the long term. I'd now like to hand over to Peeyush, our Chair to conduct the formal business.

Thanks, Avi. Before we turn to the formal resolution of the meeting, I think we'll take questions at this juncture. If you hold a yellow or blue card, you may ask questions. And if you hold a red card, you're very welcome as a guest, but you may -- you are not entitled to ask questions. And in the process of asking a question, perhaps if you could just introduce yourself and let us know where you're from and then -- and we'll now stop and take questions.

[indiscernible]. Unfortunately, I'm one of those securityholders [indiscernible] and I thought at that time Charter Hall top property manager all good. But since then share is at $5.18 and the price -- current price $3.16. So that's a fall from early time of 38.6%, which is very disappointing. The distributions with CLW [indiscernible]. The -- I just noticed in the Annual Report that the Charter Hall fees has gone up by $40 million from '22 to '23 million from $52 million to $92 million, that's [ $40 million ] [indiscernible]. And also the directors' fees have gone up from $505,000 to $520,000. So it seems to me that the only people who are missing our share are the securityholders and just is very disappointing. And [indiscernible].

Thank you, Mr. [indiscernible]. Well, I'm not sure if there's a question in there. I think we share a sense of disappointment that you feel. But you're well versed in equity markets. We are not immune. The entire sector at the moment. So AREITs often trade like bond proxies, and they are vulnerable to rising interest rates, which is the current cycle that we're in. The things that we can control are the portfolio quality, the management of our tenants, the structure of our leases, the capital structure of the balance sheet and the hedging. I think we have done a few of those things exceptionally one -- well, and then a few of the things with a benefit of hindsight, we might have done better. So for example, we didn't anticipate, and I think we were in good company hearing that most of the market didn't anticipate the rapidity and the scope of interest rate rises. So we went into this phase somewhat underhedged. Even though the property portfolio -- the underlying property portfolio has performed well, 99.9% still tenanted, 4.4% year-on-year like-for-like income growth. The sad fact of the matter is that rising interest rate costs have overwhelmed that. And so that explains the decrease that you've seen in DPU for this year. Who knows what the -- your former listed vehicles trading price might have been. But may I suggest that H2 would not have been immune from the current cycle. As to fees, fees we do -- the Board does carefully review, particularly the independent directors. We benchmark them periodically to market. I'd note that for an externally managed vehicle, CLW's base fee is amongst the lowest in the market. And those minor fee increases that you referred to, such as director fees and so on, from time to time, and we don't do this often. We do review directors' fees as well. And it may be the last time when we reviewed fees, but I'm sure that's the underlying reason why they might have gone up slightly. So I'm not sure if I've addressed your concern. I share your concern.

I mean as a gesture it will be nice if the directors' fees stay constant. This is to say the distribution [indiscernible] mean, I know it's -- doesn't affect the bottom line, but securityholders [indiscernible].

Okay. Thank you. Nice suggestion. In the back. Thank you. Sir.

[indiscernible] I just have a quick question. What was the average interest rate we are paying every month of the balance that we...

Okay. So weighted average cost of debt, Avi?

3.9% is our weighted average cost of debt at the moment because we've got hedges in place over 80% of our debt.

And so the main issue at the moment is with hedging, how do you see that?

No. We probably were underhedged going into this interest rate cycle. With the benefit of hindsight, we could have been more hedged. So currently, for FY '24, our hedge profile sits at about 80-odd percent. We have a program of asset sales underway to reduce gearing. We know we can look forward to continuing rental increases from the structure of the leases. So it's a combination of the asset sales that we've got underway as well as the known rental increases that should come through by calendar year-end. We have an active watching brief over the residual portion that is not currently hedged, which is about 20%. And we think it's a combination of both the asset sales we hope to achieve and rising rentals that the risk to any further interest rate rises this year of the unhedged portion to be low. But we will continue to monitor that, and it may be that we increase hedging further, but for FY '24, we sort of are comfortable with our current position. And clearly, for longer-dated periods, we need to continue to actively monitor our hedge position.

With cost of debt, you mentioned 3.9% average.

Currently, yes.

Congratulations on that. I was expecting more than that [indiscernible] higher interest rate from the March start, but do you see that eventually going up in the near future?

Thank you. Well, the answer to that is that's the current average weighted cost of our debt. The average tenor of our debt is about 4.4 years. And whether our costs will go up or not is a function of, firstly, what will happen to interest rates. And secondly, how we manage the treasury function, how we do our hedging or not. The market, particularly given recent geopolitical events and thinking of the Middle East here and the consequent impact on oil prices, which feeds into then underlying manufactured good prices, transport costs and the like. So it's inflationary in nature, in other words. We note our new RBA governor's recent and first speech in which there was continuing caution from the RBA about their need to be vigilant about inflation and the distinct possibility that they may feel the need to raise interest rates further. So it's still a moving feast. And as our current hedges roll off and we swap over to current variable rates, our interest rate costs will rise. And so we will need to manage that through a combination of asset sales and reducing gearing as well as continuing an active hedge program. Other questions, sir?

So you might have [indiscernible] this before analysts are suggesting that due to the higher interest rates that some of the funds will have to divest [indiscernible]. I'm just wondering what your view is of that and whether the REIT model is something that do you consider [indiscernible].

Yes, it's a good question. The short answer is that we are contemplating and are currently have an active program of selling -- or attempting to sell some assets. We're not doing that with a fire-sale mentality. And pleasingly, a couple of the assets that we have up for sale, the offers that we have on them are close to our book value, and that's an encouraging sign. But with any transaction, it's not a done deal until it's a done deal. So all we can say at this stage is we have an active asset sales program. We hope to be able to announce to the market some sales by year-end, which will help establish the market clearing Price. The current price relative to our carrying value. But we are not a forced seller and we are not in the mindset of a distressed seller at the moment. We've had a careful look at and stress testing of our covenants -- our banking covenants. We have reasonable headroom both at the asset level and at the income level. But it is prudent in this current environment for us to seek to reduce gearing somewhat. And so we will -- we are attempting to do that. Other questions? Madam.

[indiscernible] I may have some basic question because I certainly apologize if I ask.

No, not at all.