Charter Hall Social Infrastructure REIT (CQE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Social Infrastructure REIT 2025 Full Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Monday, 11th of August 2025. I would now like to hand the conference over to your host today, Mr. Travis Butcher, Fund Manager. Thank you. Sir, please go ahead.

Good morning, everyone, and welcome to CQE's results presentation for the full year ended 30 June 2025. Presenting with me today is Erin Kent, Head of Social Infrastructure Finance. I'd like to formally introduce Erin, having joined Charter Hall in July of this year, and we welcome Erin to the team. Before starting today's presentation, I would like to commence 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. Turning now to Slide 4. Key highlights for FY '25 were as follows: CQE delivered operating earnings of $0.153 per unit and distributions paid during the year were $0.152 per unit, consistent with the upgraded FY '25 distribution guidance provided in February. NTA per unit as at 30 June 2025 was $3.86 per unit, which is up 1% from 30 June 2024, demonstrating the resilience of CQE's Social Infrastructure properties. In July 2025, CQE successfully refinanced its debt facilities, which included the introduction of Asian Term Loan facilities, and this has now seen CQE's debt maturity extending to a very strong 4.9 years. CQE has continued to be active with its accretive portfolio curation during FY '25 and post 30 June, with acquisitions totaling $144 million at an average yield of 6.7%. Key acquisitions have included the Pathology lab in Perth totaling $47 million. And secondly, in July, we've added an interest in the Western Sydney University campus in Parramatta, totaling $68 million. These acquisitions are consistent with CQE's strategy of adding properties to the portfolio leased to high-quality tenants that are providing essential services to the community. During the year, we also contracted to divest 30 early learning properties for total consideration of $151 million. Pleasingly, these were completed at a premium of 8.3% to their previous carrying value at an average yield of 4.4%. CQE delivered strong rental growth during the year with like-for-like weighted average rent reviews being achieved of 4.2%. A key component of this rental growth was the completion of 69 early learning market reviews during the year, resulting in a 10.5% uplift in rents, which continued to demonstrate the under-rented nature of CQE's early learning portfolio. CQE's portfolio is very well positioned with strong property fundamentals with a WALE of 11.6 years and 100% occupancy. We're also pleased to announce today that based on information currently available and barring any unforeseen events, the FY '26 forecast distribution guidance is $0.168 per unit, an increase of 10.5% from FY '25. Moving to Slide 5 and further details on CQE's acquisitions. In July 2025, CQE acquired a 22.5% interest in the Western Sydney University campus in Parramatta. This modern purpose-built university campus was completed in 2017 and provides essential higher education learning through specialized technology-enabled learning studios, unique study spaces and other student amenities, including a library and student services hub. The campus is located in the heart of Parramatta CBD, providing strong transport links. The property features approximately 26,500 square meters NLA with 80% of this educational uses. The asset has extremely strong property fundamentals with a long lease of 16.6 years remaining, a well-capitalized tenant who is also a co-owner of the asset and importantly, annual rental reviews of 3.75%. The 22.5% interest in the property was acquired for $68.4 million on an initial yield of 6.2%. Moving to Slide 6 and further details on the other acquisitions completed by CQE. As announced at the February half year results, CQE acquired a specialized pathology lab located in Osborne Park, Western Australia. This facility, significantly refurbished by the tenant in 2014, is situated in a prominent mixed-use business park, just 8 kilometers northwest of Perth CBD. Settlement occurred in January 2025 for a total consideration of $47 million, reflecting an attractive 6.4% initial yield. The property is leased to Clinipath Pathology, who is a 100% owned subsidiary of ASX-listed Sonic Healthcare Group with a market cap exceeding $13 billion. We're also attracted to the large strategic landholding in the property with the 1.5-hectare site presenting significant future development and expansion potential. Secondly, in July 2025, CQE up weighted its interest in the Geosciences Australia facility by 8.3% to now own 33.3% of the asset. Total consideration for the increased interest was $28.7 million, reflecting an 8.4% initial yield. This property was purpose-built and subsequently refurbished in 2017 and includes specialized laboratories leased to an Australian federal government agency. Geosciences Australia provides key information, advice and services across geological and geographical areas that are critical to shape a strong economy and sustainable environment for Australia. Moving to Slide 7 and CQE's strategy. CQE's strategy remains unchanged, which is to provide investors with resilient income and capital growth through exposure to a diversified social infrastructure portfolio. We do this by focusing on enhancing income sustainability and resilience of the assets we own, targeting ongoing capital growth and undertaking continual portfolio curation. We see the attributes of social infrastructure assets such as strategic locations, long leases, predictable income growth and sectors providing essential services as all critical components to CQE delivering on its strategy. Turning to Slide 8 and the key investment features of CQE. CQE has a diversified portfolio of 328 properties in Australia across various social infrastructure subsectors, providing essential services to the community. In addition to the long WALE and 100% occupancy, CQE benefits from 74% of its leases being NNN leases where the tenant is responsible for all property outgoings and capital expenditure. CQE has a strong financial position with a resilient property portfolio and valuations benefiting from long leases and predictable annual growth. The early learning property market, which comprises 69% of CQE's portfolio by income, continues to allow for active portfolio curation. Total national early learning property transactions in the last 12 months exceeded $750 million, highlighting the ongoing demand for these assets. As a result of the successful debt refinance, CQE's weighted average debt maturity sits at a very healthy 4.9 years and balance sheet gearing sits at the lower end of our gearing range of 30% to 40% at 30.5%, positioning CQE well for future growth opportunities. CQE offers attractive growth prospects through a combination of 67% of lease income subject to annual fixed escalators of an average of 3% and the balance being inflation-linked and market rent reviews. Income subject to market reviews amounts to 28% over the next 3 years, which will provide future rental growth for CQE due to the current under-renting across the portfolio. I'd like now to hand over to Erin, who will provide an overview of the financial performance of CQE.

Thanks, Travis, and good morning to everyone on the call. A summary of CQE's earnings for the full year can be found on Slide 10. In FY '25, CQE achieved like-for-like net property income growth of 3.3%, which has been marginally offset by the impact of net divestment activity, which occurred throughout the current and prior reporting periods. Finance costs have increased due to CQE's higher weighted average all-in cost of debt over FY '25 of 5.3% compared to 4.5% in FY '24, which was partly offset by lower average debt drawn compared to the prior reporting period. This has resulted in CQE delivering operating earnings of $57 million, which equates to $0.153 per unit. Distribution per unit of $0.152 is in line with our upgraded guidance provided to the market at our FY '25 half year result and represents a distribution payout ratio of 99%. Turning to Slide 11, which provides a summary of CQE's balance sheet position at 30 June 2025. During the year, CQE delivered on its social infrastructure portfolio diversification strategy. New assets totaling $53.7 million were acquired during the year, the most significant being the $47 million Pathology Lab in Perth, which Travis spoke to earlier. In addition, CQE has settled the divestment of 29 early learning centers for a total consideration of $137.6 million. The divestment of a further 3 early learning centers equating to $21 million are due to complete by December 2025. 100% of CQE's portfolio was independently valued throughout FY '25, resulting in a total portfolio net valuation uplift of $28 million or 1.4%, reflecting the resilient nature of CQE's portfolio. CQE's NTA per unit is $3.86 at 30 June 2025, representing a $0.04 or 1% increase on 30 June 2024, driven by portfolio revaluations, offset partly by the mark-to-market of interest rate derivatives. In February 2025, CQE announced the initiation of an on-market unit buyback program of up to $25 million, of which $7 million was completed in the second half of FY '25. The buyback period is for 12 months and remains open until February 2026. Turning to Slide 12, which provides a summary of CQE's capital management position. In July 2025, CQE has completed the successful refinance of its entire debt platform, adding diversification, scale, improved pricing, longer tenor and increased covenant headroom. CQE has entered the Asian Term Loan market via $450 million of syndicated facilities split evenly across a 5- and 6-year term. All balance sheet bilateral facilities were also refinanced. As at 30 June 2025, CQE's weighted average cost of debt was 5% based upon 62% balance sheet hedging at an average fixed rate of 3%. The reduction in CQE's cost of debt is primarily driven by lower floating rates, combined with improved pricing as a result of the refinancing initiatives. CQE's weighted average debt maturity was extended by 2 years to 4.9 years with no facilities now expiring until FY '30. CQE's debt platform was also upsized by $50 million to $900 million, providing further funding flexibility. CQE's balance sheet gearing was 30.5% at 30 June 2025, increasing to approximately 33% on a pro forma basis, including the impact of the acquisitions completed in July post balance date as well as the divestment of assets contracted to complete by December 2025. CQE's gearing remains at the lower end of the target 30% to 40% range and provides considerable headroom to gearing covenants. In July 2025, CQE executed additional hedging, resulting in an increased hedge percentage for the FY '26 guidance year of 72%, while maintaining a fixed hedged rate of 3%. CQE's weighted average cost of debt and hedge profile has it well positioned for sustainable future earnings growth. I will now hand back to Travis to provide a portfolio update.

Thanks, Erin. On Slide 14, we summarize CQE's portfolio. CQE's portfolio has a property passing yield of 5.4%, an 11.6-year WALE and 100% occupancy. Weighted average like-for-like rental growth for the year to 30 June 2025 was very strong at 4.2%, which primarily reflects the completion of 69 market reviews in the year, resulting in a 10.5% uplift in rent on these properties. Market reviews accounting for 28% of CQE's income are due in the next 3 years, providing the potential for further increases in rent. As previously mentioned, accretive portfolio curation continues to be a key focus for CQE during the year to drive earnings and distribution growth. Acquisitions contracted during the year and including the transactions completed in July amounted to $144 million and an acquisition yield of 6.7%. Consistent with our strategy, all of these properties are leased to sector-leading corporate and government tenants, providing essential services to the community. During the year, CQE contracted to dispose of 30 early learning properties for total consideration of $151 million at an average yield of 4.4% and an 8.3% premium to previous carrying value, demonstrating the superior quality of CQE's portfolio. Divestment of properties with lower yields with multi-holding land tax leakage continues to be a focus with the yield received by CQE on these divested assets being on average 4.2%. Moving to Slide 15. CQE's portfolio WALE remains strong at 11.6 years. Lease expiries for the next 5 years remain low at 3.5% of CQE's total lease income with 1.4% of these expiries in FY '30. The long WALE highlights the importance of the property and the lease term to the tenant's operations and also the option notice period required under the leases, which typically ranges between 3 and 5 years for early learning properties. It's also worth noting that only 1.9% of lease income is true expiries where there are no tenant options. Turning to Slide 16. Whilst CQE has a long WALE of 11.6 years, there are opportunities throughout the lease terms for market rent reviews. And this slide provides further detail of the market rent review outcomes and future rental growth profile. During the year, 69 market reviews were completed with an average 10.5% increase achieved across these properties. This was split between a 17.7% uplift achieved on the 19 uncapped reviews and 6.7% uplift achieved on the 50 capped reviews. These reviews translate to an additional $1.6 million of rental income on an annualized basis. In relation to the 50 capped reviews, the majority of these were completed in the second half and the increase of 6.7% was close to the maximum increase, noting that the caps are a mixture of 5% and 7.5% increases. Over the next 3 years, 28% of CQE's rental income or 149 properties are subject to market reviews. These reviews are all early learning properties and will allow CQE to capture rental growth from under-renting across the portfolio. Market rents are set with reference to operators' fees in that particular location. Operator fees have historically seen strong growth. And based on our tenant data to March 2025, grew by 8.6% year-on-year. This further highlights the positive market rent growth in CQE's portfolio, which is supported by CQE's net rent to revenue calculation, which currently sits at 9.7%, clearly below market parameters. The graph on the right of this page sets out CQE's rent review profile for the next 3 years. As you can see for FY '26, 67% of income is subject to fixed reviews, which averaged 3% -- 23% linked to CPI or inflation, with the remaining 10% subject to market reviews. The high proportion of fixed reviews will provide CQE a favorable organic rental growth position as inflation or CPI eases with the latest annual print at 2.1%. We have set out the market review profile for the next 3 years, noting that CQE's ability to extract full market rents is partially restricted by a 7.5% cap in the majority of market rent reviews. However, these reviews occur every 5 years, providing regular opportunities to capture this under-renting. Turning now to Slide 17 and ESG. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for the fund. Key items we want to focus on are the social impact of CQE's portfolio. CQE's early learning portfolio plays an important role in Australia's education system with over 28,000 licensed places available across the 318 early learning properties on a daily basis. Aside from the critical labor supply mechanism, the benefits of early learning have proven to be critical to setting children up to be well functioning and positive contributors to society. The early learning sector is currently facing some challenging events, and we support policy and regulation changes to enhance the safety of children attending early learning centers in Australia. Whilst we do not have operational control of these assets, we will continue to support our tenant customers during this period. Finally, we continue the successful partnership with major tenant customer Goodstart and their Early Learning Fund that provides families and children facing hardship with fee relief for early learning and care. Charter Hall's partnership with the Early Learning Fund, which enables 20 children to access early learning, continues to drive meaningful change, ensuring more children get the best start they deserve. Moving to Slide 19 and the outlook and guidance. We'll continue to execute CQE's strategy to actively manage the diversified social infrastructure portfolio, which delivers essential community services. We continue to see social infrastructure as a growing asset class with long-term opportunities for future investment for CQE. Key thematics driving this are both a growing and aging population, which will require significant social infrastructure investment. We're announcing today that based on information currently available and barring any unforeseen events, the FY '26 forecast distribution guidance is $0.168 per unit, an increase of 10.5% from FY '25. This has been driven by a combination of positive yield spread in the portfolio curation, positive market review outcomes and CQE's cost of debt reducing through both the successful debt refinancing and lower forecast variable rates. That concludes the formal component of our presentation. I'll now hand back to the operator and open the line for your questions. Thank you.

[Operator Instructions] First question comes from Ben Brayshaw from Barrenjoey.

Travis, congrats on this result. I was wondering if you could just comment on the asset sales in terms of the weighted average disposal yield in the low 4s. It does seem strong. In particular, just how have those assets been rented relative to market? So I can see that the reversion in terms of your rent review profile to a market rent has declined marginally over the last 6 months.

Yes. Thanks, Ben. I think when we're selling assets, and we're really focusing on those lower-yielding assets. We're focused on the Queensland, where there's the multi-holding land tax. There's really strong demand still for those assets at that price point. There's probably like of the 30, there's probably 3 or 4 in there that were passing was under market. But generally, it's just that liquidity. You look, typically, the average sale, these are $3 million. There's still that ongoing demand for those assets from buyers.

And just how do you see the pace of the rollout of the buyback, just in the context of stock still at a material discount to its NTA?

Yes, Ben, so we've done -- we announced that in Feb of this year. We've done $7 million out of the $25 million. We've got till Feb next year to, that's the period that's open until. I think for us; it's all just weighing up what's the best use of CQE's capital. Obviously, we announced the acquisitions. That was at a yield of 6.7%. So really, we're focused on earnings and distribution growth. So it really comes down to what's the best use of capital from an accretion point of view.

Great. And on the refinance of the facility, I noticed you've adjusted the covenants, both the LVR and the ICR to increase the headroom. Could you perhaps just discuss the facility itself, the process that you ran through and the outcome there around the increased flexibility?

Yes. So Ben, we're coming up to a point that we needed to -- if we hadn't have refinanced, we would have been sub 3 years at June. So we looked at our debt book, obviously, working closely with the Charter Hall treasury team. The debt size now is at a point where we're looking for some diversification. We've had -- Charter Hall has had a lot of success with the Asian Term Loan market through a number of other funds. So we looked at -- we went over there, presented to a number of financiers in that market, along with our current financiers. So we're really, really happy with the result we ended up with, obviously, better covenants, longer maturity, better pricing and really having that diversification. So I think it was a really strong outcome for CQE.

Next, we have Solomon Zhang from JPMorgan.

Just on the $900 million debt refinance, you mentioned some improved margins. Could you just talk to where the average margins are today versus where they were in FY '25?