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 2024 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, the 8th February, 2024. I would now like to hand the conference over to your host, Mr. Avi Anger, Fund Manager. Thank you. Sir, please go ahead.

Good morning, everyone, and welcome to the Charter Hall Long WALE REIT results presentation for the first half of financial year 2024. Presenting with me today is Scott Martin, Head of Long WALE REIT Finance. I would like to commence today's presentation with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders, past and present, and recognize their continued care and contribution to country. 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 and provide an update on guidance for the FY '24. We will then offer the opportunity for questions. Turning to Slide 4. Today, CLW has a best-in-class $6.5 billion diversified real estate portfolio consisting of 546 properties. Our portfolio continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of our cash flow. Our properties were leased to 84 tenants across Australia and New Zealand and diversified across Long WALE Retail, Office, Industrial, Social Infrastructure and Agri-logistics sectors. 53% of the income of the REIT comes from triple net leased 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, 78% of our portfolio is located in markets on the Eastern Seaboard of Australia. Turning now to Slide 5. The portfolio features a long-dated average lease term of 10.8 years, which enhances the security and continuity of income of CLW. 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. 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 annual increases. Our income growth benefits from increases in inflation, with 52% of rent increases across our portfolio linked to CPI. This is particularly attractive in the current inflation environment with a weighted average increase income across our CPI-linked leases of 5.4% in FY '24. The average fixed increase across our portfolio was a high 3.1%. Turning now to Slide 6 and key highlights for the period. I'm pleased to report that we delivered operating EPS of $0.13 per security for the first half in line with FY '24 operating earnings per security guidance provided of $0.26 for the full year. Our NTA at 31 December is $5.14 per security. The portfolio delivered a weighted average rent review of 4.3%, benefiting from the 52% of income of the REIT being CPI linked. CLW has a long WALE of 10.8 years, providing security and continuity of income to our investors. The portfolio is sitting at an occupancy level of 99.9%. We transacted $145.8 million of divestments during the half with the proceeds to be used to reduce debt. And we remain focused on prudent capital management. During the half, we refinanced and extended $820 million of debt which added 2.2 years of additional term to these facilities. At 31 December, the REIT has a weighted average debt maturity of 4.7 years with staggered maturities to a diversified lender pool. 82% of drawn debt of the REIT is hedged, providing protection against the risk of rising interest rates. Turning now to Slide 7 and Environmental, Social and Corporate governance. We remain focused on implementing sustainability initiatives across our portfolio and 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 is targeting Net Zero carbon by 2025, having accelerated our Scope 1 and Scope 2 targets by 5 years. Additionally, CLW has been focused on clean energy, with 2.5 megawatts of solar installed across its portfolio, an increase of 500 kilowatts since FY '23. 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 star NABERS Water ratings. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved a score of 77 in the 2023 GRESB assessment, which ranks CLW first amongst its peers, demonstrating our commitment to transparency and continual improvement in ESG performance of the fund. I would now like to hand over to Scott, who will provide an overview of the financial performance of the REIT.

Thank you, Avi, and good morning to everyone on the call. Turning to Slide 9, which provides a summary of the REIT's earnings for the FY '24 half year. Net property income has increased by 4% compared to the prior reporting period, which has been driven by the portfolio's contracted rent reviews, which was partially offset by divestment activity which occurred in the prior corresponding period. Operating expenses have remained stable period-on-period. However, finance costs have continued to increase, driven by a 1% increase in the REIT's weighted average cost of debt, from 3% in first half FY '23 to 4% in first half FY '24. Both operating earnings per security and distributions per security for the half year were $0.13, in line with our guidance released to the market. Turning to Slide 10 and the REIT's balance sheet position at 31 December 2023. During the current reporting period, the REIT divested the Australia Post property in Kingsgrove for a total consideration of $39.25 million, which represented a 9.3% premium to the prevailing book value. A further $105.3 million of investment properties have been contracted post reporting date, with settlement forecast to occur in the March 2024 quarter. These investment properties were carried at their contracted sale price as at reporting date. The REIT independently revalued 94% of its investment property portfolio in the current reporting period, with a net property valuation decrement of $306 million recognized as at 31 December 2023, representing a net valuation movement of 4.5%. The net property valuation movement has been the main driver of the movement in NTA, which has decreased by 8.7% from $5.63 per security at 30 June 2023, to $5.14 per security at 31 December 2023. Turning to Slide 11, which provides a summary of the REIT's capital management initiatives. The REIT continues to have a mix of debt funding, with approximately 1/3 of debt sourced from capital markets long-term issuances and the remaining 2/3 from foreign and domestic banks. Moody's has reaffirmed its Baa1 investment grade credit rating for the REIT. The REIT has total facilities calculated on a look through basis of $3.1 billion, which will be drawn to $2.7 billion post the settlement of the contracted divestments at 31 December 2023, which Avi will cover later in his presentation. During the current reporting period, the REIT completed $820 million of look through debt initiatives, including $270 million of balance sheet debt facilities were extended by 2.1 years from FY '26 to FY '29. A further $500 million of balance sheet debt facilities were extended post reporting date by 2.3 years from FY '27 to FY '29. And the debt facility for the LWIP portfolio was extended by 1.9 years from FY '27 to FY '29. These debt initiatives have extended the weighted average debt term from 4.5 years at June 2023, to 4.7 years at December 2023, with staggered maturities over a 6-year period from FY '27 to FY '32. Balance sheet gearing was 34.5% and look through gearing was 41.2%, which have been calculated to include the impact of unconditional or settled divestments, which have occurred post 31 December 2023. As at 31 December 2023, the REIT's weighted average cost of debt was 3.9%, based upon look through drawn debt of $2.7 billion, and look through hedging of $2.2 billion at an average hedge rate of 1.9% for FY '24. During the current reporting period, the REIT took out a further $300 million of hedging with a forward start date of June 2026, to increase its hedging profile in FY '26 and FY '27. As at the reporting date, the REIT has 82% of drawn debt hedged with a weighted average hedge maturity of 2.1 years. I will now hand back to Avi to provide an operational update and portfolio overview.

Thank you, Scott. Turning now to Slide 13 and recent portfolio transaction activity highlights. During the half, we undertook some portfolio curation, divesting $145.8 million of property with an excess of $500 million of divestments in due diligence. The divested properties were across Industrial, Office and Retail sectors. We've capitalized on the strong investor demand for industrial properties selling 3 properties at attractive pricing being Australia Post facility in Kingsgrove, Coates Hire in Kingston and Veolia facility in Campbellfield. Notwithstanding the tougher market for office transactions, we sold the office building at 40 Tank Street in Brisbane, with some additional office properties included in the additional $500 million-plus currently in due diligence. Whilst there is a lower level of investor interest for office properties at the moment, the quality of CLW's portfolio means that there are still attractive properties for investors in the office portion of our portfolio. We also disposed the [ Redbank ] Travel Center in Brisbane, which is considered as non-core to our portfolio and assists in providing liquidity to reduce debt. Turning now to Slide 14. In the following slides, I would like to provide an overview of our portfolio and outline some key attributes of the portfolio. Slide 14 is our portfolio overview. At 31 December, the REIT consists of a portfolio of 546 properties, valued at approximately $6.5 billion, with 94% of the portfolio independently valued at December. The portfolio average cap rate is 5.08%, this compares to a cap rate of 4.41% in December '22, a change of 67 basis points over the 12-month period. The portfolio is virtually fully occupied with an occupancy of 99.9%, with a long-dated WALE of 10.8 years 31 December. The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked, resulting in a weighted average rent review for FY '24 of 4.3%. Turning now to Slide 15 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 Government, Endeavour Group, Telstra, BP, Ingham's and Coles. The REIT's largest tenant exposures are to government tenants and best-in-class pub and bottle shop operator, the $10 billion Endeavour Group. In the telecommunications sector, we've partnered with another best-in-class operator, the $46 billion Telstra Corporation, which includes our portfolio of 37 exchange properties on long triple net leases. Our BP Australia and New Zealand portfolio of 290 properties on long triple net leases provides us with exposure to the resilient fuel and convenience retail sector. 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. Turning to Slide 16 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. The REIT's major sector exposures are to government, pubs and bottle shops, telecommunications, grocery, fuel and food manufacturing. Turning to Slide 17. 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 10.8 years. We have minimal lease expiries in the medium term, 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 as far as possible to the right of this chart, both through portfolio curation and negotiating lease extensions with our tenant customers. These proceeding 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 more resilient income streams for our investors. Turning now to Slide 19. I would now like to provide an update on earnings and distribution guidance for FY '24. Based on information currently available and barring any unforeseen events, CLW reaffirms its FY '24 operating earnings guidance of $0.26 per security and distribution guidance of $0.26 per security. Based on yesterday's closing price, this represents a distribution yield of 6.9%. Finally, I would also like to acknowledge and thank the teams of people across the Charter Hall platform that contribute to the performance of CLW and the results today. 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 provide CLW with access to a best-in-class management platform. That concludes the presentation, and I would now like to invite questions.

[Operator Instructions] Our first question comes from the line of Steven Tjia with Barrenjoey.

Avi, Scott. Just wanted to talk about what your guidance may be factoring in regards to potential further asset sales. Should we expect any impact in FY '24? Or is that something that could come through in FY '25?

Steven, Avi here. Look, we're not anticipating any -- we've reaffirmed guidance today for FY '24. So we're not anticipating any impact to delivering on that from those asset sales. It will depend on timing. But at this stage, the ones that are in due diligence will settle towards the end of the year. So we're not expecting any impact.

Sure. And just another question for me, if I can. Can you just talk about what asset classes may be within that $500 million that are within DD, and probably early days but expectations around premium discount to book. Should we expect something similar to what's been achieved over the first half?

Yes. Look, it's -- we're not going to give details of the properties that are in due diligence. So I can say that there is a diverse range of properties across most of our asset classes actually that, that involves. But we'll provide more details around those sales and the metrics around those when they actually exchange.

Our next question comes from the line of Simon Chan with Morgan Stanley.

Avi. Scott. I just got a follow-up question on the asset sales. What sort of -- how do you come up with the list of assets to sell? I mean, the reason for the question is, I look at the stuff that you sold, and a few of them seem to be very short WALE, short by your standards, right, like 1 year, 2.7 years, et cetera. Is that a strategic choice like deter some shorter WALE assets or it just sort of happens that they were the ones that you could find a buyer for?

I think it's mix in that, Chaney, probably, as you say, some of those -- we've achieved really good appreciation in those -- some of those industrial assets, and we're happy to move those on at a very attractive pricing, and there are certainly buyers for short WALE industrial. Some of the office assets we're selling are also short WALE and there are buyers for that at the moment as well. So it will be a mix in terms of the portfolio going forward that we're selling of some short WALE and some long WALE. It's -- but obviously, we sold some short WALE assets, it improves our WALE as well, which is a benefit to the REIT.

Can you perhaps give us a bit of a comment on like bidding tension just for the assets that you sold, like the type of players, are they overseas, domestic, syndicators, high net worth? And what was the other room like?

Look, of the assets we sold that we announced today, $146 million-odd, they're all institutional-type buyers other than the small Veolia, the $7 million, $7.1 million asset was a private. But other than those, they're all institutional scale buyers. And there was good interest, particularly Industrial, there's very strong interest for Industrial at the moment.

Our next question comes from the line of David Pobucky with Macquarie Group.

Can you hear me okay?

Yes. Loud and clear.

Maybe just following up from the prior few questions around the divestments or potential divestments. Would you mind just expanding on potential timeframe there? And I know you just mentioned the strength in Industrial at the moment. But if you could also touch on the depth of the transactional market across the different subsectors, please?

Yes, sure. So the first part of that question, David, the assets that we've -- so we've sold and settled the Kingsgrove asset prior to 31 December as we announced. The balance of $146 million is either -- has either settled or will settle over the course of the next month. And then all the assets in due diligence, we'd expect those to settle by at the latest, say, 30 June, if all those transactions proceed. In terms of the transaction market, we've had -- I think there's good interest at the moment. I think, as I mentioned in my speaker notes earlier, we -- the type of office assets we own, even though you'd say the office market is a little bit more subdued than it was. There's still -- we're still getting quite a good level of interest in some of our office assets given the type of assets we own, which is encouraging. The Industrial transaction market has been strong last year and has come back into the new year very strong. There's a range of buyers looking for Industrial -- quite a deep pool of buyers at the moment looking for Industrial. And across the other asset classes we have as well given the quality and type of assets we own, there is good interest for many of the type of assets that we do own.

Maybe just a couple more, if I may, please. Rent reviews appeared to have remained strong. Is there any further insight you can provide on like-for-like NPI growth, please?

Well, yes, I mean, for the full year, we said FY '24, we're looking at 4.3% average rent reviews, which is a combination of that fixed and CPI, and with the strong CPI, we're able to deliver that level of growth. So it will be somewhat a function of where CPI goes from here, but it's nice that we have that mix, roughly half fixed, half CPI. So we benefit when there's high CPI and we also benefit previously in a lower inflation environment by having a reasonable portion of fixed. So we also have, as you're probably aware, large market rent review coming up in a few years' time on our pubs. So that will also provide some strong income growth when we are able to realize that as well. So there's some upside in that income going forward.

And just last one for me. You refinanced some debt this half. If you could just give a little bit more color around how the conversations are going with lenders in terms of that, please?

Yes. David. Look, the conversations were very easy. We've got a great relationship with our lenders. So those extensions went through without any issue. So it was a really straightforward process from our perspective.

Our next question comes from the line of Grant McCasker with UBS.

Just following on that question. Can you talk about pricing of the extension? Was is it in line with the existing debt facilities?

They're broadly in line, Grant, maybe 5 basis points across the platform, so -- but very much in line.

Okay. And then touching on the asset sales. So you've got $500 million in DD. Is that a target? Or like what's the end goal here? Where do you want to see leverage as we move through the cycle?

Yes. Look, Avi here, Grant. I think if we're -- should that $500 million complete, which all indications at this stage that it will, that will take our look through gearing to circa 37%. So I think that creates plenty of headroom and gets us in a really comfortable position going forward. So for this type of portfolio, we will be very comfortable around those levels.

Okay. Great. And then just one further question. you spent $20 million on the portfolio and investing cash flows. So where are you spending money on the portfolio at the moment?

Yes. Grant, there's like -- of that $20 million, there's a $6 million of maintenance CapEx for the period. And then the balance is development CapEx, largely related to the Metcash facility, which should be fully completed by June of this year. So moving forward into FY '25, you got that back to that annual run rate of sort of $8 million to $10 million of maintenance CapEx.

Our next question comes from the line of Richard Jones with JPMorgan.

Sorry to harp on the asset sales, but it's obviously not an easy market for transactions. We've seen a number of your peers kind of have exchange contracts that have taken a long time to settle. Some have fallen over. I'm just interested in how confident you are in the progress of the $500 million assets in DD that you've called out?

Look, as you say, we're not -- we can't bank it until it's exchanged unconditionally. So -- but we are very encouraged by the progress being made by the quality of those buyers and their substance and their track record. So at this stage, there's no indications that they won't complete but we need to complete those deals, and we're working hard to do that. And we're reasonably confident at this stage that they will complete.

Can you call out what the largest dollar value is on one of those assets?

I'd prefer not to at this stage. I'm not giving details around that portfolio. So...

Okay. But it's fair to say that the liquidity is better in that kind of [ $30 million to $60 million ] basket? Is it? Is it fair?

Yes. Yes, there's obviously the smaller assets is more liquidity. Yes.

And just a final question. Just in terms of your annual escalations, can you just remind us that the timing from a subsector perspective, and how that impacted valuations in the first half across the different asset classes?

So are you referring to when the CPI reviews happen when the fixed reviews happen. Is that the question?

Correct. Yes. I'm just interested in the valuation by subsector, which vary quite a lot.

Yes. So you probably see there we had a small uplift in the pub and bp portfolios as a result of the strong rent review that we achieved in September. They're both CPI portfolios. So they have September rent reviews that are based on a September CPI, which then flowed through to the December valves. So that's probably -- that's the impact there. But yes, the vast majority of our CPI reviews are based off a September and December prints. So they will happen in the first half.

Okay. And any comments then on obviously Office and Industrial, weren't there a lot more than those too, just any feedback there?

In terms of the rent reviews that we get in our portfolio, what's the question?

The sales and also, I guess, the impact that obviously rent growth is strong in Industrial, but you've got a long WALE. So the impact of mark-to-market is a long way off. Just kind of any comments from the valuations across Industrial?

Yes. Well, Industrial valves, we've -- they've already come -- the cap rates have come back on those and the valves have adjusted. So we've seen -- we've had that over the last 2 periods in June and December valves. But the market rents across those portfolios are still growing strongly, and the values do take that into account in their DCFs, obviously, when they do the 10-year DCFs, and in the cap rates, they apply as well to those portfolios given the quality of tenants and that reversion that will come at lease end. But as you say, there's some of those are longer-dated leases, it will take a bit longer to realize. But that value is still going to be there. And -- those -- and Industrial portfolio, when you look at it, and the quality of the tenants, location of those assets, in many instances, their strategic value to those tenants -- they're very valuable assets that will continue to grow in value over time.

Our next question comes from the line of Ben Brayshaw with Barrenjoey.

Yes. Avi. Scott mentioned on the call that the hedging profile has been topped up for, I think you said the next couple of years. But the average hedge duration hasn't really changed over the last 6 months. So I was wondering if you could just talk maybe philosophically about how you're looking to position the hedge book and whether you see opportunities to extend that into the future?

Ben, look, obviously, we do have high levels of hedging in place for FY '24 and '25. And you're right, we did start to address our hedging profile in '26 and beyond by taking out some forward start swaps at market. We'll continue to look at opportunities there. So I think you'll see the hedging profile increase in those outer years. I think the other thing to factor in is that the $500 million of asset sales, once they push through, our hedge percentage increases in those outer years as well. So it's a work in progress, and we continue to monitor it.

Yes. Okay. Great. And just on valuations, Avi, could you maybe provide some feedback on the weighted average discount rate across the portfolio based on the most recent valuations, just where that sits, please, just in the context of obviously higher bond rates now and a focus on unleveraged required returns?

Average discount rate across the portfolio is about 6.5%. So that expanded over the period by about 25 basis points. So that -- as across the whole portfolio. So bearing in mind, we have some of those assets are almost -- Telstra -- things like Telstra Exchange is a virtually infrastructure-like assets with their CPI plus 0.5% growth profile and very long-dated leases. So you have to take that in the context of the overall portfolio, but that's where we're sitting at the moment.

And just on the Industrial and Logistics portfolio, the average cap rates circa 4.7%, where does it stand from an initial yield or passing income perspective?

Sorry, which one was that, the Industrial?

Industrial & logistics.

Yes. So I'd say, look, at the moment, it's probably -- given the income growth or the rent growth you're seeing in the market and the fact that our rents were set some time ago given the long-dated nature of leases, I'd say our portfolio is under-rented in the industrial. And as those leases come to maturity, I'm sure there's going to be upside in those rents.

[Operator Instructions] Our next question comes from the line of Alexander Prineas with Morningstar.

Just following up on some of the comments about parts of the portfolio that are potentially under rented. You've said Industrial is one, also potentially the pubs area of the portfolio. First of all, wondering if -- we've seen some of the other REITs kind of quantify that in terms of making estimates of how under or over-rented a portfolio is. Wondering if you're able to quantify that to any degree? And secondly, if you can just comment on sector by sector through the portfolio similar to the comments you've made, whether that's subsectors in the portfolio are overall under rented?

Look, I think we haven't given the proportion or split by sector in terms of the level of under renting. But I will -- I'd like to make this comment. When we -- many of the portfolios that we acquired like the Telstra Exchanges, the pubs, they are -- and the BPs as well, we acquired those at levels that represent very high underlying land value and where we feel the rents were set at sort of below market or at or below market. And they've since -- given rental growth and land value increases, they're probably below market. So we like -- that's what we look for. We like to acquire properties where we're buying things with high underlying land value where that's going to grow over time and we've getting, effectively, income-producing land banks where we're getting a good income stream that's growing in many instances by CPI or CPI plus 0.5%. And at the same time, that land is appreciating over a long period as well. So that's sort of how we like to think about those portfolios and how we're going to realize value for our investors over the long term in those.

Okay. All right. And second question, just around the asset sales that were contracted but haven't yet settled, but you commented that the disposal prices were in line with the December book values. Can you just comment on how much those book values moved over the 6-month period, for the -- just for the assets that were disposed of?

No. Well, we're not -- no, I don't have that calc --, but you can -- I mean, you can see what's in our book today and then what the June -- you can have a look at the June results, you should be able to -- that's clear what the movement has been.

Okay. So they are disclosed on an individual asset basis in the disclosure?

They are. Yes.

I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

Thank you, everyone, for joining today. I appreciate your interest and questions. I look forward to catching up with many of you for one-on-one meetings over the course of the next couple of weeks. Thank you.