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 2025 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Friday, the 7th February, 2025. I would now like to hand the conference over to your host today, Mr. Avi Anger, diversified CEO. Thank you, sir. Please go ahead.

Good morning, everyone, and welcome to the Charter Hall Long WALE REIT results presentation for the first half FY '25. 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 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 half. 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, portfolio overview and provide an update on guidance for FY '25. We will then offer the opportunity for questions. Turning now to Slide 4. Today, CLW has a best-in-class $5.5 billion diversified real estate portfolio secured by long leases to blue-chip tenants with a weighted average lease term or WALE of 9.7 years. Our portfolio has an occupancy level of 99.8% and continues to be diversified by tenant, industry, geography and property type which contributes to the stability of our cash flow. Our portfolio has delivered strong like-for-like net property income growth of 3.5% over the prior corresponding period. As at 31 December, CLW had 53% of income from triple net lease properties. This is an important feature of our portfolio, given that under triple net lease structure, the tenant is responsible for all outgoings, maintenance and capital expenditure. The security of income of the REIT is also reinforced by the 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 Endeavour Group, federal and state governments, Telstra and BP. Turning now to Slide 5 and key highlights for the half year. I'm pleased to report that we delivered operating earnings of $0.125 per security for the half year, in line with guidance for the full year of $0.25 per security. Our net tangible assets 31 December, 2024 is $4.62 per security, which is consistent with NTA reported at June with minor impacts from valuation and swap movements. The portfolio delivered 3.5% like-for-like net property income growth benefiting from the 54% of income of the REIT being CPI-linked. During the past 6 months, we completed our asset sales program with the settlement of the remaining $300 million of the previously announced contracted divestments. The portfolio is sitting at a very high occupancy level of 99.8%, and CLW has a long WALE of 9.7 years, providing security and continuity of income to our investors. We completed the $50 million buyback of CLW securities that was announced at the FY '24 full year results last August. We remain focused on prudent capital management, with balance sheet gearing after the completion of the divestment program at 31.8% within the target range of 25% to 35%. In December 2024, Moody's reaffirmed CLW's Baa1 investment-grade credit rating. Turning now to Slide 6. This slide provides a review of CLW's portfolio sector cap rates over the past 4.5 years. On a like-for-like basis, across CLW's diversified real estate portfolio, portfolio value is, on average, 17% higher in December 2024 compared to June 2020, driven by contracted and market rental growth underpinned by CLW's best-in-class diversified tenant base. Notwithstanding recent cap rate movement over the past 2 years, when viewed over a longer time horizon, CLW's portfolio cap rate is similar to what it was 4.5 years ago. For all the concerns around recent cap rate movements on a like-for-like basis, CLW's portfolio is higher than it was 4.5 years ago. 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 8, which provides a summary of the REIT's earnings for the first half FY '25. The REIT achieved like-for-like net property income growth of 3.5% or $5 million compared to the prior corresponding period, which has been offset by the impact of divestment activity, which occurred throughout both the current and prior reporting periods. The 17.5% reduction in operating expenses and 15.6% reduction in finance costs has been a direct result of this divestment activity. The savings in finance costs have been partially offset by a minor increase in the REIT's weighted average cost of debt from 4% in first half FY '24 to 4.1% in first half FY '25. Both operating earnings per security and distributions per security for the current reporting period were $0.125 per security, in line with our guidance released to the market. Turning to Slide 9 and the REIT's balance sheet position. During the current reporting period, the REIT completed $289 million of net property divestments. The net proceeds have been utilized to complete the $50 million on market security buyback which we announced in August 2024 and completed in December 2024, with the balance of proceeds utilized to repay balance sheet debt. The REIT's NTA per security of $4.62 as at 31 December 2024, has remained relatively stable. The $0.04 movement in NTA per security since 30 June, 2024 has primarily been driven by 2 items: firstly, a $0.02 reduction in NTA per security as a result of the revaluation of the Telstra head office in Canberra due to an impending lease expiry at the property; and secondly, a further $0.02 reduction in NTA per security as a result of the mark-to-market of interest rate swaps. Turning to Slide 10, which provides a summary of the REIT's capital management initiatives. The successful completion of the asset divestment and deleveraging program over the last 18 months has strengthened the balance sheet with all gearing metrics materially reduced. Balance sheet gearing sits at 31.8% and look-through gearing sits at 39% as at the reporting date, with material headroom to debt gearing covenants. During the current reporting period, the REIT successfully refinanced $310 million of balance debt, extending the term by 2.8 years from FY '27 to FY '30. The REIT has total facilities calculated on a look-through basis of $2.5 billion with a weighted average debt maturity of 4 years, with staggered maturities over a 6-year period from FY '27 to FY '32. Moody's has reaffirmed its Baa1 investment-grade credit rating for the REIT. And the REIT has $266 million of cash and undrawn balance sheet debt capacity. As at 31 December 2024, the REIT's weighted average cost of debt was 4.1% based upon look-through drawn debt of $2.2 billion and look-through hedging of $1.4 billion at an average rate of 1.5%. The REIT has 64% of its look-through debt hedged with a weighted average hedge maturity of 1.6 years. I will now hand back to Avi to provide an operational update and portfolio overview.

Thank you, Scott. In the following slides, I would like to provide an operational update overview of our portfolio and outline some key attributes of the portfolio. Turning now to Slide 12. During the half year, we settled the sale of the Inghams portfolio and the Australian Red Cross property, which completed CLW's divestment program. The divestment program and result in debt reduction has strengthened the REIT's balance sheet and delivered capacity for capital management initiatives, including the recently completed buyback. The divestment program has also resulted in increasing the overall portfolio quality of CLW with a number of the properties divested considered to be higher risk and lower quality properties. We have also been active in curating our existing long WALE partnerships, completing 3 recent transactions. In our BP Australia portfolio, we've sold a service center in WA. And in our ALE portfolio, we completed 2 strategic acquisitions, being accommodation adjoining the portfolio's existing Narrabeen Sands Hotel and the BWS bottle shop in Crows Nest adjacent to the portfolio's existing Crows Nest Hotel. Both properties were acquired on a sale and leaseback with Endeavour Group with an average WALE of 9.5 years. Turning to Slide 13. We are pleased to announce that we have agreed a lease extension and warehouse expansion with Coles at its Western Australian distribution center in Perth. As part the deal, we will construct an additional warehouse of 11,040 square meters with the cost of the expansion being rentalised for the remaining lease term. In addition, Coles has agreed to reset the lease term over the whole property to 12 years from completion of the expansion works. This deal demonstrates Charter Hall's deep tenant customer relationships and how these benefits CLW investors. Across the Charter Hall platform, we own many properties with long leases to Coles across industrial, retail and office. This strong relationship has contributed to our ability to negotiate this facility expansion and lease extension with Coles, which has resulted in a mutually beneficial outcome for both CLW investors and Coles. Slide 14 is our portfolio overview. As of 31 December, the REIT consisted of a portfolio of 513 properties valued at approximately $5.5 billion. Property valuations were predominantly flat overall, with the movement in the portfolio valuation between June and December driven by divestments. The portfolio average cap rate is 5.4%. This compares to a cap rate of 4.4% in June 2022, a change of 100 basis points over the past 2.5 years. The average portfolio cap rate was flat over the 6-month period. The portfolio is virtually fully occupied with an occupancy of 99.8% with a long-dated WALE of 9.7 years at 31 December. The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked. Of the 54% CPI-linked reviews, 9% is CPI plus 1% or plus 0.5%, whilst 11% related to the ALE portfolio, where we have annual CPI reviews plus significant market reversion event occurring in 2028. The mix of annual rent reviews results in a weighted average rent review for FY '25 of 3.1%. 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 are leased to high-quality tenants, including Endeavor Group, government, Telstra, BP, Metcash and Coles. The REIT's largest tenant exposures are to government tenants and best-in-class pub and bottle shop operator, the $7.5 billion Endeavor Group. In the data center and telecommunications sector, we have a partnership 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 289 properties on long triple net leases provide 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, Metcash and Arnott's. Turning to Slide 16 and the industry diversification of our tenant customers. Within our overall portfolio, approximately 99% of tenants are ASX-listed, government, multinational or national corporations with the vast majority of these tenants operating in nondiscretionary defensive industries. The REIT's major sector exposures are to convenience retail, government, data centers and telecommunications, grocery 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, which reflects a low-risk position relative to our peers in the sector. Our portfolio WALE is a long-dated 9.7 years. We have minimal lease expiries in the near 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 creation and negotiating lease extensions with our valued tenant customers. Turning now to Slide 18 in 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. CLW has maintained Net Zero Scope 1 and Scope 2 emissions for assets that fall under the operational control of Charter Hall. Additionally, CLW has been focused on clean energy generation with 8.3 megawatts of solar installed across its portfolio, an increase of 28% over the past 6 months. CLW's predominantly modern office portfolio features high environmental credentials include 5.4 star NABERS Energy and 4.8 star NABERS Water ratings. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved a score of 78 in the 2024 GRESB assessment which ranked CLW first amongst its peers, demonstrating our commitment to transparency and continual improvement in ESG performance of the fund. 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 20. I would now like to provide an update on earnings and distribution guidance for FY '25. Based on information currently available and barring any unforeseen events, CLW reaffirms its FY '25 operating earnings per security guidance of $0.25 and distribution per secured guidance of $0.25. Based on yesterday's closing price, this represents a distribution yield of 6.4%. 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 delivered 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 like to now invite questions.

[Operator Instructions] Our first question comes from the line of Cody Shield with UBS.

Just looking at the buyback, you've completed that first half, not factored into guidance and your $0.25 is unchanged. Is there a moving part here that's a little bit weaker?

No. Look, the guidance includes the impact of that buyback. It was done at around the 6.4% yield, debt funded. It has an immaterial impact. So it doesn't change that overall $0.25 guidance. Hopefully, we see, when we move to FY '26, we're not providing guidance on that today, but you'll see the full impact of it in FY '26.

Okay. I was just looking at the '24 full year result transcript, and it says that the buybacks in that -- sorry, just a little confused. Just moving on to covenants. The slide on debt covenants is not in the [present] anymore. I mean, has there been a change to these? And if not, where are you sitting against those covenants?

Look, no, they haven't -- thanks for the question. Look, we disclosed balance sheet and look through gearing metrics, which continue to be our main gearing metric that we monitor to manage the REIT on a daily basis. These metrics have materially reduced, obviously, over the last 18 months since we've done the sales program. Avi's outlined today that valuations have remained relatively stable. So there's really no material change to covenant metrics since those last reported at June. So looking to sort of streamline our disclosures. That's really the rationale behind it.

Can I ask, where the look-through ICR is sitting?

Still at circa 3x.

[Operator Instructions] Our next question comes from the line of Simon Chan with Morgan Stanley.

Just on the buyback. Did you guys give any thought to extending it? Because you've cleaned up the $50 million already, and Scotty, by your admission, DPS 6.4%, which is pretty good right for the yield and you're still trading at 15% discount to NTA. Just -- did you guys give sort of upsizing it, extending it?

Simon, Avi here. Look, we announced results in August that we were going to do $50 million buyback. We said that at the time, we sold more properties in our divestment program than we expected. And with that excess proceeds, some of those proceeds that are in addition to what we expected we would use to undertake the buyback. So we did that, and that's had a positive impact. But there's no intention to, at this stage, to do anything further. Reminding you that we do that, it has an impact on gearing, as you would have seen between June and December. So we're mindful of that impact as well.

Okay. Cool. Can you give us a bit of an indication as to the yield and the costs required for the Perth Airport shed expansion, the 11,000 square meters there?

Yes. So look, that's a really good deal for both us and Coles. It sort of signifies that they have a long-term intention at the property and that it's their main WA distribution center. They will be extending their lease for 12 years from completion of these works, which is also future-proofs the asset. We -- the cost of that expansion for our 49.9% is just under $30 million. We're not disclosing the yield on cost of that. That's commercial and confidence between us and Coles. But I can tell you that it's well above our cost of debt. So it's a positive impact to CLW.

Our next question comes from the line of Suraj Nebhani with Citi.

A couple of quick ones, please. Maybe one for Scott. What are the debt costs assumed in guidance for this year, Scott, please?

Yes. Thanks, Suraj. We've rolled 3 quarters of our floating rate debt exposure at around that 4.4%. We've got one quarter to go, which rolls in March of this year. That will be a function of where rates get to at that point. And then you've got that hedge -- average hedge rate of 1.5% on the fixed debt. That's the debt assumption. So we're not forecasting a material reduction in that Q4 debt roll, but we'll see where we get to in a month's time.

Okay. That makes sense. And I guess the other thing was on the ALE portfolio under renting. Where does it stand currently? And is there any expectation for you guys to change the timing on that or move it forward or something like that?

I'll answer that one, Suraj. Avi here. Look, with the underrenting of that ALE portfolio at the time that we did the ALE transaction in late 2021, we had disclosed the valuations that the ALE Trust had done at that time indicated that rents were about 37% below market levels. And we haven't updated the market on anything since that disclosure. I'd say that they're at least that today. Those properties are performing really well and you'd say market rents would have grown since over that time. Look, those -- that lease expiry or that market rent review is coming up -- coming very much closer now, it's in 2028. So we are -- there's no further update in relation to discussions with Endeavour. But if those come -- if those get brought forward, fine. Otherwise, we'll realize it in 2028.

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

Just wanted to clarify just on the extension of the Coles facility in WA. Has that been reflected in the 31 December carrying value for the asset?

No. That will get reflected on completion as we spend the money it will add to the cost base of that asset it will get reflected, and we'll get it valued on completion of the works as well.

Yes. Okay. Great. And just your, I guess, reference to date centers, I think that's potentially the first time that you've included that in your presentation material. Are we to interpret that you will be looking to put capital into potentially data centers going forward as opposed to the telco exchange assets that you currently own?

So Ben, we're always -- we're a long WALE REIT. We'll certainly look at data center assets if those get put to us. I guess the reference to that is really a reflection of the fact that those exchange properties that we do own are -- do have a lot of exchange equipment in them and also some sort of data type equipment for Telstra. It also reflects the fact that Telstra had announced a few years back that they're looking at how they can utilize their exchange properties for their Edge computing rollout, which we understand is still being pursued by Telstra, and we understand that a number of our exchange properties would be utilized for that purpose as that rollout happens. So that's why that comment has now been adopted in our disclosures.

Okay. So just one other question. Just on the balance sheet. You mentioned in the presentation that your divestment program has now completed. Do you have a target loan-to-value ratio that you're comfortable to maintain going forward on a look-through basis? Just any feedback or color you could I guess, provide on the look-through loan-to-value ratio?

Yes. As you know, since IPO, we haven't given a firm number that we're going to be targeting for look through. It's going to be something that we manage over time depending on market conditions and the opportunities that present themselves to us. But I am encouraged by the fact that valuations are relatively flat between June and December and we see this being a trough period at the moment. And we've already seen some of our asset classes like our convenience retail. In fact, cap rates flat and rental growth resulting in valuation increases. So I can see that playing out more broadly across the portfolio in future periods, and that will create more capacity for us as well.

[Operator Instructions] Our next question comes from the line of Richard Jones with JPMorgan.

Just a couple more to clarify. Just on the Coles DC. Can you outline what the new rent will be on the 80,000 square meters existing facility relative to the old rent?

The existing facility rent doesn't change. It just keeps growing in line with the reviews under the lease of 3.5%. The new rent will be determined based on the final cost of the facility. So it's a yield on cost equation.

Okay. And then just a comment around the yield on cost being greater than your cost of debt. I assume that's a 4.1 reference. Just does the yield on cost also exceed your marginal cost of debt, which I imagine in the mid-5s?

Yes.

Okay. Good. And just any broad comments, Avi, on institutional demand for long WALE assets and how that may be shifting?

Yes. Well, I think it's certainly shifting. I think that with 2 things -- 2 major things that are happening at the moment which is sort of related. First one being, there's an expectation now that rates are going to come down in the near term, whether it's February or May or July, but it's coming. I think there's a broad acceptance of that. And I think that's giving people a lot more confidence that we're sort of -- we're probably at the top of the raising cycle and rates will come down so that you can better price long WALE assets and have confidence where your cost of debt is what the highest amount is going to be for the cost of debt, and it's going to be improving from here. And we've seen cap rates stabilize now as well, as you've seen in our results for long WALE assets, which is encouraging and again, gives people the confidence to look at long WALE assets. I think also with the short WALE assets, in particular, in sectors like industrial, you've seen a real ramp-up of the pricing based on some very high market rental growth expectations. And I think the relative value in long WALE is playing out now as well where people are looking at the certainty and quality of some long WALE assets and looking at the yields that those are reflecting and I think it's a relatively good value.

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

Just the first one around guidance. Operating expenses and finance costs did a bit better than we thought. Obviously due to that divestment activity like you noted. So you'd expect that benefit to flow through to the second half. What was that quantum of costs and finance costs expected when you set full year guidance, just noting the guidance was reaffirmed?

Yes. Look, it's all falling into place as we had expected. And we haven't seen a material additional saving in finance costs or operating expenses, it's all per our original sort of full year forecast.

Just a second question, more around the strategy. So the asset sale program is complete. The buyback is complete. The stock is still trading at a meaningful discount to NTA. So if you could just talk a bit more about the strategy going forward to help close that gap? It doesn't sound like a further buyback is on the cards right now.

Yes. Well, I think that the whole sector will benefit from rates coming down. So I think that's going to be a driver for us and for others in terms of pricing rerate. I think there's now more confidence around valuations as well, as I mentioned earlier, with our valuations relatively flat over the 6 months. So I think that also gives the market a lot of confidence that NTA is valuations are troughed, and that's reflected in the NTA and therefore, the value of the where we should be trading. And we're going to be working on initiatives to grow our earnings over the coming period. So we're going to be looking at opportunities to -- whether those acquisitions or recycling, how we can grow earnings in the existing portfolio and also as rates come down, benefiting from that as well and flowing through. So there's a few initiatives there that we'll need to work on in the coming periods and get the -- drive earnings and create value for investors that will get reflected in the share price.

And just the last one from me. If you could talk a bit more about how the pub assets are trading at the moment, please?

Look, we don't get trading data directly on those. But I can tell you that based on the Endeavour results that I do follow, hotels are trading very well. We've got -- across our 2 portfolios in CLW, we've got about just 146 hotels. Their whole portfolio of Endeavor is about 350. So we've got about 40% of their portfolio across our funds. And according to their results, hotels are the best-performing part of their business and have had sales growth with all aspects of the hotels, liquor sales, food, gaming, all performing well according to their disclosures. And as I mentioned earlier, also there have been undertaking a refurbishment program as well across a number of large -- they've got a program across their portfolio, which includes a number of our properties. So that's also really good for us. So yes, I think they're performing very well. And as I mentioned earlier, I think we're looking forward to realizing that in our market rent review in 2028.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Avi for closing remarks.

Thanks, everyone, for joining the call today. I appreciate your interest in CLW. Look forward to catching up with many of you over the coming days and weeks for meetings. And if anyone has any questions as well, please feel free to come through to our Investor Relations and myself, I'm happy to take any questions post the call. Thank you very much.