Charter Hall Retail REIT (CQR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Charter Hall Retail REIT 2020 Annual Unitholders' Meeting. There will be introductory remarks and then the formal business of the meeting. [Operator Instructions] Please note, this virtual meeting is being recorded today, Tuesday, 10th of November 2020. I would now like to hand the meeting over to your host today, Mr. Roger Davis, Independent Chair, Charter Hall Retail REIT. Thank you. Sir, please go ahead.

Thank you very much, and good afternoon, ladies and gentlemen. On behalf of the Board of Directors, it's my pleasure to welcome you all to the 2020 Annual Unitholder Meeting of Charter Hall Retail REIT. My name is Roger Davis, and I am the Chairman of the Charter Hall Retail REIT Board of Directors. Could I request that you now take a moment to ensure that your audio connection is on mute? It is now 3:30 p.m. And as the necessary quorum is present, I declare this meeting properly constituted and open. This afternoon, I will provide a brief overview of the fund's strategy, some observations on our business and achievements during financial year ended 2020. Retail CEO and Executive Director, Greg Chubb, will then provide an update on the operational and financial performance for FY '20 and an update of the first quarter of the FY '21 period to date. We'll then move to the formal business of the meeting and the resolution for your consideration. As there is only one question today, and that involves the reelection of Michael Gorman to the Board, I will also ask Michael to say a few words of introduction and to provide some personal background at that time. I would now like to introduce my fellow Board members: Sue Palmer, Independent Director, who is Chair of the Audit Risk and Compliance Committee; Michael Gorman, Independent Director and a member of the ARC, who is standing for reelection today; Greg Chubb, Retail CEO; and David Harrison, Charter Hall Managing Director and Group CEO. Also present today and I welcome Mark Bryant and Charisse Nortjé, our joint Company Secretaries; Christine Kelly, our Head of Retail Finance and Deputy Fund Manager of CQR; and Ryan McMahon from auditor PricewaterhouseCoopers, who will be available to answer any questions about the audit of the financial statement from unitholders. It's my pleasure to now address this meeting today. This is now my second year presiding at the AGM as Chair of the Charter Hall Retail REIT or CQR, to use its ASX sticker code. Fiscal year 2020 was a busy period for CQR and, similar to many, was a year that won't be quickly forgotten. The financial year began with a backdrop of subtrend economic and wages growth. Against this background, drought and a terrible bushfire season ravaged much of the country, providing significant hardship for many Australians. In isolation, these events would have marked FY '20 as a challenging year, with a corresponding impact on confidence, employment and spending behaviors that would ultimately be reflected in the sales at our centers. As it was, all this took place before the COVID-19 global pandemic. The impacts of COVID-19 have been significant and continue to be felt today. In late March, the federal government mandated store closures for many of our specialty tenants and restricted trading conditions for others. In April, the federal government introduced the National Cabinet Mandatory Code of Conduct, the Commercial Code, which provided a framework for landlords to work with their small and medium enterprise tenants, SMEs, to provide rental relief through rent reductions consistent with the decline in revenue experienced, structured as a blend of rebates and deferred rent. These moves were unprecedented and provided significant challenges for landlords in implementing the code and retailers in dealing with the shutdowns. However, it has been this environment that has demonstrated the resilience of the CQR portfolio. CQR's focus on being the leading owner and manager of property for convenience retailers saw our centers remain open during the crisis. This was due to them being classified as essential services, thereby highlighting the important role our centers play in servicing local communities. Many of our tenants, our SME tenants were restaurants and specialty stores, however, adversely affected by the shutdowns. However, the nondiscretionary nature of the majority of our retailers also meant that tenants representing approximately 87% of the portfolio income were open and trading throughout the worst of the government-mandated shutdowns back in April. In partnership with our tenant customers, CQR has proactively managed social distancing measures and government regulations with a priority on the health, safety and well-being of our communities and those who work in and visit our centers. CQR recognized the importance of partnering with our tenants in these challenging times to ensure long-term sustainable outcomes for both our tenants and unitholders. CQR provided support to our most affected specialty tenants under the terms of the Commercial Code. The resilient nature of the CQR portfolio has seen this support progressively reduced from a peak in April to a more modest position in June as customer footfall and trading in our centers recovered. Pleasingly, that trend has continued in FY '21 and seen support further diminish in the first quarter of the new financial year. Importantly, our major tenants, Coles; Woolworths; Wesfarmers; ALDI; and BP, who, after the acquisition of the BP New Zealand portfolio, will collectively represent 54% of portfolio income, continued to remain open for trade throughout the pandemic period and did not require any rental support. Throughout all of this, our strategy remained unchanged. Our goal is to provide investors with a resilient and growing income stream through being the leading owner and manager of property for convenience retailers. We achieve this through the 3 key strategic pillars of active asset management, enhancing portfolio quality management and prudent capital management. In practice, this means that we endeavor to ensure that we have the right mix of retailers in our centers, that we work with our tenants to provide the best offering possible and that we make our centers as attractive as possible, all within an appropriate capital structure. We look to actively manage our portfolio by recycling out of lower-growth properties into higher-growth properties and focus on growing the resilience and defensiveness of CQR's income. This has seen CQR intensively recycling assets for several years. Looking forward, we expect this pace of activity will slow and become more opportunistic, reflecting new higher-growth opportunities being added to the portfolio funded through selective disposals. We remain comfortable with our current target gearing range, and we'll continue to operate within it. Prudent capital management remains a key focus of CQR and ensures that we can successfully execute our growth strategy and deliver a secure and growing income stream to unitholders. During FY '20, CQR successfully raised equity twice. In February, CQR raised $100 million of new equity via a fully underwritten institutional placement to increase our investment in the BP portfolio, growing its exposure to this important tenor and improving the defensiveness and resilience of CQR's income stream. In April, CQR raised additional equity of $304.5 million with a $275 million via a fully underwritten institutional placement and $29.5 million via a unit purchase plan from retail investors. This equity raise was undertaken to ensure the balance sheet was in a sound position to weather any valuation or earnings impact from COVID-19 and position CQR for growth as the effects of COVID-19 diminish. A strong balance sheet clearly provides us with the flexibility and optionality to respond to opportunities as they present themselves. Our focus on partnering with leading convenience retailers has seen the portfolio evolve through time. At its core, the CQR portfolio of convenience centers are dominant in their catchments and provide essential everyday goods and services to the communities in which we operate. We partner with major market-leading convenience retailers and align our capital works to their store refurbishments to provide the latest store formats. We proactively enable our major convenience retailers with the facilitation of omnichannel servicing through last-mile home delivery, click and collect and, more recently, contactless pickup. These initiatives continue to ensure CQR centers maintain their position as the most dominant convenience center in their catchments. More recently, we've expanded that convenience focus to capture the growing fuel and convenience market. Through the BP partnership, we've added another market-leading convenience retailer to the portfolio and expanded our reach to consumers to include a strong network of 225 fuel and convenience locations across Australia and a further 70 locations across New Zealand. Convenience comes in many forms, and this segment of the market continues to evolve and grow as a channel for essential goods and services. In July, we also extended our partnership with Coles to include their South Australian supply chain facility. This is essential infrastructure central to servicing their supermarkets and ultimately CQR customers. Our strategy is to partner with the leading convenience retailers, growing with them to further meet their property needs. This has seen us broaden our focus upstream into those retailers' supply chains and horizontally into a wider definition of convenience retail so as to capture the growing fuel and convenience market. Sustainability remains a critical part of enhancing our portfolio quality and is central to Charter Hall's approach to property management. As part of CQR's solar power purchase agreement or PPA, 15 of 27-asset solar installations have now been completed or nearing completion. The energy generator from the PPA program will represent 46% of CQR's energy needs. We continue to target Scope 1 and Scope 2 net 0 carbon emissions by 2030 across the Charter Hall platform. And we also aim to ensure our centers provide support and engage with the communities we operate within. During the year, the Charter Hall Retail team volunteered 2,000 hours as part of our ongoing partnership with the Two Good Co, supported an additional 22 local community initiatives and donated $1 million in community space across our retail portfolio. Our focus on owning and managing property for convenience retailers with a resilient, nationally diversified portfolio will continue to deliver long-term sustainable growth in earnings for our unitholders. This growth is underpinned by the scale, scope and size of our supermarket activities, our ongoing partnerships with our major convenience retailers and the resilience in our core nondiscretionary retail offerings. The portfolio has proven its resilience in the face of the COVID-19 challenge with minimal tenant assistance required for retailers during the worst of the mandated closure window, a robust recovery in footfall and a tenant assistance program and profile that is steadily diminished as stores have reopened. The portfolio's 14% weightings to Victoria has also limited the impact of the more recent closures there. Overall, the strong operating performance of our assets since the advent of COVID-19 has demonstrated the essential nature of our properties and their role in meeting the everyday needs of Australians. Going forward, we maintain our commitment to shape the portfolio to deliver resilient and defensive earnings growth for our unitholders. I would like to extend on behalf of the Board our thanks to the hardworking team that manages our portfolio on a day-to-day basis. I'm proud to see how the team has managed the challenges that COVID-19 has presented and the support that they have shown to our retailers and communities. Finally, I would like to thank you, our unitholders, for your continuing investment in CQR. Our dedicated team along with the Board understand that we are here to protect and enhance your investment by delivering long-term sustainable growth in earnings. And we remain committed to this goal. I'll now hand over to Greg Chubb, CEO, Retail and Executive Director, to review the year's financial and operating performance and to provide an update on operating conditions. Greg?

Thank you, Roger, and good afternoon, ladies and gentlemen. I'll start on Slide 9. And as Roger has outlined, FY '20 was a year of many challenges. The COVID-19 pandemic created unprecedented challenges for our industry, communities and our tenant customers. Responding to these challenges, our retail team did an exceptional job in managing daily uncertainty, operational challenges and increased tenant customer support requirements. Additionally, our team have played a pivotal role in continuing to safeguard the health and well-being of the communities in which we operate. As we move through this pandemic and to the other side, I'm confident that the focused, hands-on team that we have and the way that we actively partner with our tenant customers and manage our centers will ensure our shoppers continue to have ongoing access to essential goods, services and everyday needs. Against that backdrop, the CQR portfolio continues to demonstrate resilience. Supermarkets are the foundation of our convenience and convenience-plus centers. Our portfolio of supermarkets delivered strong moving annual turnover sales growth of 5.2% over the financial year '20 period. The total number of supermarkets paying turnover rent was 61%, and this is a record high for the portfolio and a result of the ongoing portfolio curation. Total comparable MAT growth across the portfolio for FY '20, when including specialty sales, was 3.9%. And this was up from 2.8% in financial year '19. Majors WALE or weighted average lease expiry increased to 11.5 years. And this was up from 10.4 years following the addition of the BP portfolio. We completed some 345 specialty tenant leases during FY '20 that saw positive leasing spreads of 0.9%, with new leases at 0.5%, higher than the previous leases and renewing leases at 1.1% higher than the expiring leases. Now this demonstrates a sustainable basis of CQR's rents and the resilience despite the backdrop. And despite the challenges FY '20 directed at us, the focus on partnering with the leading nondiscretionary convenience retailers delivered sound operational performance from CQR's assets. Operating earnings finished the year at $0.3056 per unit, a solid achievement given the difficult operating environment and when accounting for the additional units on issue. Now Slide 10. So FY '20 also saw CQR undertake a major new investment in the BP portfolio partnership to acquire a 47.5% interest in a portfolio of 225 long-WALE convenience retail properties. The initial portfolio consisted of the majority of BP's owned convenience retail properties across Australia. This is really well geographically diversified, with 80% by value located on the eastern seaboard and 87% in major metropolitan locations. This portfolio is a capital-efficient investment for CQR unitholders, with the leases being triple net, meaning that BP Australia is responsible for all outgoings, repairs, maintenance and capital expenditure associated with the properties. Pleasingly, we've been able to further extend that partnership post-balance date. And in September this year, we were able to secure a 24.5% interest in 70 BP properties in New Zealand. The BP New Zealand portfolio features an initial yield of 6.25%, a weighted average lease expiry of 20 years, a triple net lease structure with annual CPI-linked rent increases and is geographically diversified with a 78% weighting to metro and commuter metro locations, including a 51% weighting to Auckland, New Zealand's larger city. The portfolio consists of the majority of BP's owned convenience retail properties in New Zealand. The settlement of this acquisition is subject to New Zealand Overseas Investment Office or OIO approval. Post-settlement, major tenants will represent 54% of CQR's portfolio income, further enhancing the resilience of CQR's growing income stream. Now Slide 11, and we'll have a look at Q1 of FY '21 and an operational update. Over the quarter, all states and territories saw operations moving back to more normalized conditions. And obviously, this is with the exception of Victoria given the significant trading restrictions that have applied there, especially in Metropolitan Melbourne. Irrespective, CQR has seen strong trading performance across its portfolio driven by resilient footfall and repeat visitation to our centers. Major tenant sales continue to grow with 8.8% growth for the quarter. Supermarket growth reflects ongoing strength of our in-home consumption, while majors trading more broadly also reflects improving sales from Big W and ongoing strength from Kmart. The mini majors category saw sales strength. And this has been a notable driver of quarterly growth. Specialty sales were up 1.4% for the quarter and, when excluding Victoria, was up 4%. Leasing activity for specialty tenants has returned to more normalized levels and is consistent with Q1 of FY '20. And pleasingly, leasing spreads across renewals and new leases conducted over the period remain positive. Occupancy across the portfolio remained stable at 97.3%. And we continue to look for opportunities to enhance the portfolio and partner with our major tenants, aligning capital works alongside their refurbishment activity. Four supermarket refurbishments were completed in the quarter, and works are underway at a further 3. During the period, we also completed the conversion of a Target to a Kmart store at Dubbo in New South Wales. Now Slide 12 and a Q1 COVID-19 update. And with respect to the ongoing impacts of COVID-19 on the portfolio, rent collections continue to return to pre-COVID levels, reflecting the improved trading conditions. 92% of Q1 financial year '21 rents have been collected, with 5% of these Q1 rents provided as tenant support and 3% of these Q1 rents now remain outstanding for collection. With the exception of Victoria, tenant support across the portfolio continues to diminish, reflecting resilient footfall and improved trading conditions, noting that CQR has 4 assets in Victoria, and that represents some 14% of the portfolio total. Tenant support for Q1 was approximately $3.7 million, as I said earlier, representing some 5% of the first quarter rents. Of this, tenant support to Victorian retailers was approximately $1.4 million or 38% of the support provided in the quarter. This compares to the $10.7 million of support provided across the portfolio in the fourth quarter of financial year '20. And this represented some 15% of Q4 rents. Now less than 1% of Q4 FY '20 remains outstanding for collection. As at the end of September, 96.5% of shops were opened nationally. And when we exclude Victoria, it was 99.6%. Now with the trading restrictions in Victoria lifted, all retailers in Victoria have now reopened for trade. Importantly, the resilience of the portfolio and improved rent collection supports the provisioning for the expected credit loss made at 30 June of approximately $1.5 million. And we remain comfortable with this level of provisioning. Now on to Slide 13 for summary and outlook. And it's our expectation that supermarkets and convenience retail sales will continue to be strong. This is driven by customers' preference to shop closer to home and focus on everyday needs. CQR remains well positioned to benefit from this trend. Across the portfolio, visitations have normalized in most regions, highlighting the essential need associated with convenience retail. We'll continue to focus on improving the resilience of the CQR income and growth. Opportunistic divestments will be used to fund acquisition opportunities that further enhance the portfolio with a focus on partnering with nondiscretionary convenience retailers. Now in light of current cash collection, CQR expects the first half FY '21 distribution to be approximately $0.107 per unit. Now assuming there are no further lockdowns or government-imposed trading restrictions, it is expected that the second half FY '21 distribution will be greater than the first half distribution. And on that note, I'll now hand back to Roger. Thank you.

Thank you, Greg. I will now pause to take any questions. While I'm waiting for those, I'd like to address the questions submitted prior to the meeting. Have we got any questions that have been submitted prior to the meeting? Are there any other questions that have come through? There being no further questions, I will now proceed to the formal business of the meeting. Today is the third time that CQR has conducted a meeting online. However, as the technology is still relatively new, I would like to ensure you are familiar with the way we will proceed today. There is one resolution for today's meeting, which we will come to shortly. Securityholders may vote and submit questions about each item of business using the online platform. All resolutions to be put to the meeting today will be decided on a poll. I now declare that poll open. For those shareholders participating in the meeting via the online platform, you can cast your direct vote using the electronic voting card that you received when you validated the registration. If you have not, at the bottom of the web page, you should see that there are 3 boxes: 1, Get a Voting Card; 2, Ask a Question; and 3 for downloads. To register the vote, click on Get a Voting Card box at the top of the web page or below the videos. You will need to register by providing your details as either an individual or proxy. Once you have registered, your voting card will appear with today's resolution to be voted on. Securityholders and proxies can either submit a full vote or a partial vote. You can move between the 2 tabs by clicking on full vote or partial vote at the top of the voting card. Once you have finished voting on the resolution, scroll down to the bottom of the box and click Submit Vote button. [Operator Instructions] And if you'd like to view the Notice of the Annual General Meeting, click on the Downloads button. With those procedural matters out of the way, I'd now like to move to today's formal business. I now table the Notice of Meeting dated the 16th of October 2020, which contains the resolution up for consideration today. A copy of the Notice of Meeting would have been made available to you by e-mail or, as previously mentioned, is available to view on the web page. I will now take the Notice of Meeting as read and move to resolution 1 in the Notice of Meeting, the reelection of Independent Director, Michael Gorman. I'd now like to ask Michael to say a few words to unitholders detailing his background and experience for the benefit of securityholders. Michael?

Thank you, Mr. Chairman. It is my great privilege to stand for reelection today. I joined the Board over 3 years ago after a long career in real estate funds management, including running one of the largest listed shopping center REITs in the country. I believe I've been able to use that experience to help unitholders in my role as a nonexecutive director at CQR. Over the past 3 years, management and the Board have had great success in improving the quality of the portfolio of shopping centers and also strengthening the balance sheet. These actions have placed the trust in a very good position. I very much enjoyed working with my fellow nonexecutive directors, the executive directors and the wider management team. And if reelected, I look forward to continuing to work on behalf of unitholders. And with that, I hand you back to our Chairman.

Thank you, Michael. As explained in the Notice of Meeting, only the directors or shareholders of the company may appoint a director. Accordingly, it is noted that today's resolution is advisory only and nonbinding. Notwithstanding this, directors will, of course, give due consideration to the results of the resolution. This resolution is an ordinary resolution and, as you can see, is displayed on the screen. Securityholders who have not already voted or submitted their vote via proxy to review the resolution currently displayed on the screen. I will now display the respective proxy votes received on this resolution on the screen. As you can see, there are a large number of positive votes in favor of the reelection of Mr. Michael Gorman. The results of the proxies being received and for your consideration, if you haven't already done so, I therefore encourage you to submit your vote now. And as there is no other business to be considered, I now declare the formal business of the meeting closed. The poll will remain open for a further 5 minutes, and securityholders who have not already voted may lodge their online voting during that time. The results of the poll will be made available to the ASX and put up on our website later today. I thank you all for your attendance today and your ongoing support of CQR. Good afternoon.