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

Good afternoon, ladies and gentlemen. On behalf of the Board of Directors, it is my pleasure to welcome you to the 2024 Annual Securityholders' Meeting of Charter Hall Long WALE REIT or CLW as we call it for short. My name is Glenn Fraser, and I'm the Chair of the Charter Hall Long WALE REIT Board of Directors. As it is now midday and as the necessary quorum is present, I declare this meeting properly constituted and open. I would like to commence today's presentation with an acknowledgment of country. Charter Hall Long WALE REIT acknowledges the Traditional Custodians of the lands on which we work and gather. We pay our respects to Elders, past, 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 performance over FY '24. The Charter Hall Long WALE REIT Fund Manager, Avi Anger, will then provide an update on the operational and financial performance. We'll then move to the formal business of the meeting and the resolutions for your consideration. There are 2 resolutions for consideration today and that involves election of Mr. Ray Fazzolari and the reelection of Ms. Ceinwein Kirk-Lennox. I'll ask Ray and Ceinwein to say a few words at that time, providing some personal background and reasons why they believe they should be elected and reelected respectively. I just apologize, I have had a cold for a week and today is the first time I've left my house in 7 days. So I may have to stop and get my throat going properly. I would now like to introduce my fellow Board directors. Ray Fazzolari, Non-Executive Director, who is Chair of the Audit, Risk and Compliance Committee; Ceinwen Kirk-Lennox, Non-Executive Director; David Harrison, Charter Hall Group's Managing Director and Group CEO; and Carmel Hourigan, Executive Director and Charter Hall Group CEO of Office. Also present today, and I welcome Avi Anger, Diversified CEO and Fund Manager of the Long WALE REIT; Darryl Chua, Deputy Fund Manager for the Long WALE REIT; Scott Martin, Head of Long WALE REIT Finance; and Mark Bryant, our Company Secretary. Klynton Hankin from our auditor, PricewaterhouseCoopers, will be available to answer questions about their audit of our financial statements. I'd like to start by acknowledging the contribution made by our former Chair, Peeyush Gupta AM. In April this year, after 8 years, Peeyush resigned as a Director and Chair of the Board to pursue a directorship with another ASX-listed REIT. Peeyush made a significant contribution to CLW from its inception in 2016 and we thank Peeyush for his dedication, leadership and guidance as Chair. Following Peeyush's resignation, I was appointed as Chair. I have also been on the Board of CLW since its inception. Consequently, my appointment ensured a seamless transition and continuity for CLW securityholders. At the same time, the Board also appointed Ray Fazzolari as a Non-Executive Director. Ray brings over 40 years' experience across all aspects of real estate funds management through multiple property cycles and his expertise will no doubt assist the Board to continue executing on strategy. CLW is Australia's largest diversified long WALE REIT with a market-leading defensive 10.5-year WALE. It invests in commercial properties primarily leased to major corporates and government tenants on long-term leases. The FY '24 financial year saw a continuation of the economic challenges of recent years in Australia. During the year, the Reserve Bank's cash rate rose yet again from 4.1% to 4.35% and it remains there today. The outlook for future interest rates remains uncertain with persistent inflation leading to a higher for longer interest rate environment. The commercial property sector and CLW was not immune to the adverse consequences with higher interest costs negatively impacting both sector earnings and property valuations. CLW's operating earnings were down 7% from the FY '23 financial year to $0.26 per security, primarily as a result of higher interest costs and the impact of the asset sales more than offsetting the portfolio's net property income growth. Pleasingly though, and in line with our guidance, distributions per security of $0.26 per share were paid to our shareholders, representing a 100% payout ratio. CLW continues to actively manage its balance sheet to remain defensive in this high interest rate environment. As flagged at our '23 AGM, CLW implemented an asset sale program to reduce gearing throughout the financial year. Management has worked extremely hard during a very difficult market conditions to execute 12 separate successful sales across all areas of our portfolio. Persistently high interest rates also saw capitalization rates across the portfolio move from a weighted average of 4.8% last year to 5.4% at 30 June. CLW booked $626 million of net fair value movements across the portfolio as a consequence. Looking forward, our FY '25 operating earnings guidance of $0.25 reflects the impact of the divestments that CLW made during the year and a gradual increase in our finance costs as interest rate hedging rolls off. We continue to actively manage the portfolio to ensure long-term performance. While we've not been unaffected during this turbulent period, the robustness of our portfolio continues to provide a strong foundation for future growth. Notwithstanding higher interest costs, CLW's underlying portfolio continues to deliver strong consistent rental growth, reflecting the quality of the properties and our tenant covenants and our 10.5-year WALE. Importantly, we have managed a balanced mix of rental growth with 51% of our leases featuring annual rent reviews linked to CPI and the remainder of leases being fixed with average fixed annual increases of 3.1%. This blend of exposure to CPI-linked and fixed annual rent increases provides a growing rental stream and resilience in both low and high inflation scenarios. This combination delivered a 4.7% like-for-like rental growth in FY '24. Our portfolio has an occupancy level of 99.9% and continues to be diversified by tenant, industry, geography and property type, which contributes to the stability of our income stream. At 30 June '24, CLW had 55% of its income coming from triple net lease properties. This is an important differentiating feature of the CLW portfolio, given that under a triple net lease structure, the tenant is responsible for all outgoings, all maintenance and all capital expenditure. The security of the income of CLW is also reinforced by the high-quality income stream generated from its blue-chip tenant base. 99% of our tenants consist of either government, ASX-listed companies, multinational or national businesses. Our largest tenants are the Endeavour Group, federal and state governments, Telstra and BP. We completed a number of debt capital initiatives during the year in order to hedge some of the impact of rising interest rates, while continuing to position our REIT for long-term growth. As we look forward, we continue to selectively put in place further hedging into FY '26 and beyond, while also being mindful of preserving some exposure to any rate cuts that may occur in future years. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for investor and tenant customers. This year, we achieved net zero Scope 1 and Scope 2 emissions for assets under our operational control, supported by our approach to renewables and execution of our nature-based offset strategy. We also set long-term and interim targets for Scope 3 emissions. CLW has 6.5 megawatts of on-site solar installed across its portfolio, an increase of 4.5 megawatts since FY '23, 100% of which directly supplies our tenants. CLW continues to enjoy strong environmental credentials for its portfolio with a portfolio rating of 5.3 Stars for NABERS Energy and 5 Stars for NABERS Water ratings. Good governance is an important element of ESG and is something your Board of Directors is focused on. Our role as directors is to ensure management adhere to the strategy of the REIT and manage all aspects of the REIT's operations professionally. I would like to assure securityholders that your directors are ever mindful of their responsibilities to act in the interests of all securityholders. We endeavor to ensure CLW continues to provide investors with stable and secure income and the potential for both income and capital growth through an exposure to a portfolio of high-quality properties and tenants with a long WALE. The Board remains committed to aligning best practice frameworks to support transparency and disclosure. Whilst valuations have been a persistent challenge for the commercial property sector over the last 2 years, I'm encouraged by general market views that the Australian commercial property sector is approaching a trough of valuations and that the prospects for real estate are much stronger than they were 12 months ago. With this backdrop, I'd like to thank you for your attendance today and your ongoing support and interest in CLW. I'll now hand over to Avi Anger, Fund Manager of CLW, to review this year's financial and operating performance and discuss the outlook for FY '25.

Thank you, Glenn. I'd like to start by briefly discussing the financial performance of the REIT in FY '24 and some of the highlights for the year. Slide 8, FY '24 full year highlights. I'm pleased to report that we delivered operating earnings per security of $0.26 per security, in line with FY '24 operating earnings guidance provided. Our NTA, net tangible assets per security at 30 June 2024 is $4.66. The portfolio delivered 4.7% like-for-like net property income growth benefiting from the 51% of the REIT being CPI-linked. During the year, we completed $762 million of divestments with the proceeds received being used to reduce debt. The portfolio is sitting at a very high occupancy of 99.9% and CLW has a long WALE of 10.5 years, providing security and continuity of income to our investors. We remain focused on prudent capital management. Balance sheet gearing after completion of the current divestment program is at 30.1% in the middle of the target range of 25% to 35% and look-through gearing post asset sales is 37.6%. 72% of drawn debt of the REIT is hedged, providing protection against interest rate volatility. In July 2024, Moody's reaffirmed its Baa1 investment-grade credit rating, demonstrating its support of CLW's derisked credit profile. Slide 9. Central to our achievements in FY '24 was the completion of CLW's strategic asset divestment program. In totality, CLW completed $762 million of property sales, strengthening the REIT's balance sheet and delivering capacity for capital management initiatives. The disposed properties represent approximately 11% of the portfolio with some of the properties disposed having near-term lease expiries, reducing the near-term expiry risk for our investors. The remaining portfolio delivers investors' high exposure to prime quality assets in core markets, low capital-intensive triple net leases and CPI-linked rent reviews. The majority of the proceeds of the asset sales have been used to repay debt, thereby reducing gearing. In addition, we've also been able to use the sale proceeds to undertake a buyback of up to $50 million of CLW securities. We see this as an important capital management initiative to take advantage of CLW's current attractive trading price, significant discount to net tangible assets and an opportunity to deliver earnings accretion to our investors. Today, we are approximately 45% of the way through the buyback and are pleased with the positive response to date. Moreover, we have taken the opportunity to enter into a zero cost hedge restructure to increase the REIT's hedge profile beyond FY '25. As Glenn has already noted, we will look to selectively put in place further hedging in FY '26 and beyond, while still preserving some exposure to any rate cuts that may occur. Slide 10. Similarly, as Glenn has outlined, we are encouraged by the general market views that the Australian commercial property market is approaching a trough in valuations. As we look forward to where CLW's portfolio may go in future years, it is instructive to look at how CLW's portfolio values have moved in the past by reviewing CLW's portfolio sector cap rates over the past 4 years. The cyclical nature of the property cycle is demonstrated by the movement in capitalization rates across CLW's portfolio. On a like-for-like basis, across CLW's diversified real estate portfolio, sector cap rates have on average expanded over the past 2 years by the same amount that they compressed during the period of June '20 to June '22. So despite cap rate expansion over the past 2 years, like-for-like capital values across CLW's portfolio are on average 14% higher in 2024 compared to 2020, driven by the contracted and market rental growth in the portfolio. Our demonstrated focus on properties with long leases to the best quality tenants with structural rent increases has served us well. Slide 11. During the year, CLW continued delivering on strategy, improving both the quality and metrics of our portfolio. At the end of the year, the REIT had 540 properties valued at $5.8 billion with a WALE of 10.5 years and a 99.9% portfolio occupancy. The percentage of the REIT's properties with triple net leases was 55% of the portfolio net income. At the end of the period, the portfolio weighted average cap rate was 5.4%, up from 4.8% in 2023, reflecting the high quality of the property's income security afforded by the tenants and desirable locations of the assets. Slide 12. CLW's best-in-class tenant register provides portfolio quality and diversity. 99% of the REIT's portfolio is leased to government, ASX-listed multinational and national tenants. Importantly, these blue-chip tenants are in resilient industries and the REIT continues to generate strong rental growth. We also have a high proportion of tenants operating in the nondiscretionary grocery and food sectors such as Woolworths, Coles, Arnott's and Metcash. And our BP Australia and New Zealand portfolios are on long triple net leases, providing us with exposure to the resilient fuel and convenience retail sectors. On Slide 13, I'd like to reaffirm our FY '25 earnings guidance. Based on information currently available, including current interest rates and inflation expectations and barring unforeseen events, CLW provides for FY '25 operating earnings per security guidance of $0.25 and distribution per security guidance of $0.25. Based on Friday's closing price, this represents a 6.1% distribution yield. In closing, I'd like to thank the directors of CLW for their ongoing guidance and support in the running of CLW and to 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 would now like to hand back to our Chair to conduct the formal business of the meeting.

Thank you, Avi. Prior to moving to the formal resolutions for the meeting today, I'll pause and ask if there are any questions from investors here today. If you hold a yellow or blue card, you may ask questions. And if you hold a red card, you are welcome as a guest but not entitled to ask a question. If you could please introduce yourself and if representing a company, advise where you are from.

My name is [ Dushyant Punjabi ]. And on your valuation of office values have gone down by 13%. So do you intend to add more office buildings in your portfolio or you want to reduce it in the future?

I think in respect of Office, Office is experiencing probably the most difficult time it's experienced over a number of decades. We have a portfolio that includes Avi, 16%, 17% at current. We're comfortable with that level. During our divestment sales program over the last 12 months, we did sell some small office buildings that had short leases remaining. So in a sense, we've improved the quality of the office portfolio that we retained. And we still see prospects for that sector, but it wouldn't be the first asset on our list to buy would be an office. I think opportunities are reviewed on their merits by the management team. But I would think in the short term, I wouldn't expect us to be increasing office. But that doesn't mean we won't look at opportunities.

My name is [ Joanna Chong ]. I have to ask you a question regarding -- I'm a shareholder of Hotel Property Investments. Is it really Charter Hall Group that is standing as, I assume retail shareholders of HPI offers to buy out shares? Or is that a scam e-mail?

No, that's not a scam e-mail. I think Charter Hall Group has made a bid for HPI, but the Charter Hall Group is not part of this business here today.

I might just add -- the public documents clearly state that the bid for HPI is from a Charter Hall managed fund. That fund is owned 50% by another Charter Hall REIT called Charter Hall Retail REIT, ticker code CQR and one of Australia's largest superannuation funds, Hostplus. So they are the joint bidders with the cash offer for HPI. I know it's a little confusing because this REIT, CLW some years ago, joined with Host Plus to buy another pub REIT called ALE. But Charter Hall Group is not the bidder. It is the manager of a fund that is owned 50-50 by CQR and Hostplus. Nothing to do with CLW.

Okay. I'm still confused. So I don't think...

We might get someone talk...

When we finish doing this afterwards for a cup of tea and we'll explain it.

Glenn, just -- sorry, [indiscernible] Investments. I noticed there's no list of properties in the annual report, which is odd. I know it's 540 properties, but there's no actual list of properties, if I'm not mistaken.

The properties are noted in the presentation -- results presentation for the full year. They're not in the accounts, but they're in the presentation that's public information.

Okay.

So we launch with our results that are released in August each year, we give a complete rundown of the portfolio.

I was just curious, the lady mentioned CQR. Is there a comparison within Charter Hall of the different funds, the performances? And how does CLW stack up with all the other Charter Hall funds?

That's a good question, but that's not something we've actually looked at. The CQR is an office REIT.

Not just CQR, there's several.

I agree. We have 3 managed REITs. CLW is a diversified REIT, has a whole range of different sectors from industrial, social infrastructure, office and convenience retail. And we have a convenience retail REIT, which is called CQR. And then we have a social infrastructure REIT whose ticket code to CQE. So we've got 2 REITs that are sector-specific, social infrastructure or convenience retail. CLW provides investors a diversification across all of those sectors.

How does the performance compare?

We can give you performance, but it depends on which time frame over the last 5, 8, 10 years. CQR has been listed for 23 years. CQE has been listed for about 18 years. And as the Chair outlined, CLW was listed 8 years ago. So it depends on the time frame.

And one last point. Looking forward to the distributions not falling, flattening out and hopefully, increasing over time.

Me too.

We're all shareholders. We're all aligned there.

Nice to see the share price pull back from the [indiscernible]. It was testing [ $3 ] and it's about $4.10 the last time I looked.

Yes. I think it's a much more comfortable Annual General Meeting when your shares have gone up 30% in a year. But to be fair, we made comments last year how we felt that the market wasn't paying due attention to the quality of the CLW portfolio and that we would address gearing and we did through a divestment program. So I think it's not surprising to us that the share price has responded in the way it has. And we feel that the future outlook is -- in terms of our portfolio, we're very comfortable with the quality of our portfolio. The biggest factor in the short term is going to be what happens with interest rates in the world and over what time frame. And that will be the biggest determinant of what our distributions are in the very short term. But we focus on what we can control and we can control our portfolio. And we're very happy with where it sits, how diversified it is, how long the WALE is, how good our quality of tenants are. And we've got a growing property income line. And so throughout the cycles, wherever we -- wherever we find ourselves within the cycles, we focus on where does our portfolio sit because that's what we can control. Any other questions?

Sorry, it's Joanna Chong again. So this is the AGM of CLW.

Correct.

I've never -- I'm also a shareholder of CQE. I've never had any announcement of any AGL (sic) [ AGM ] by CQE.