Charter Hall Long WALE REIT (ASX: CLW)
Last Price: AUD: 4.02|Fair Value: AUD: 5.10
Business Strategy & Outlook
Charter Hall Long Wale REIT’s, or CLW’s, portfolio is high-quality. Liquor retailer and pub operator Endeavour Group is the largest tenant at 18% of passing income. At least four fifths of passing income comes from tenants as unlikely to miss a rent payment, including Endeavour Group, government agencies, Telstra, BP, Inghams, Coles, Metcash, Arnotts, Bunnings, Westpac, and Linfox. External fund manager Charter Hall has a strong track record and good relationships with tenants. But continued acquisitions may have diluted CLW’s portfolio, particularly as long-WALE assets have been in high demand, and thereby came with a hefty price tag. CLW has been acquisitive, buying properties and other REITs, using debt, and issuing new equity. It issued circa AUD 386 million of new equity in fiscal 2019 to fund acquisitions, including various offices, a bus terminal in Eagle Farm, Brisbane, and several agricultural logistics properties from Inghams on a sale-and-leaseback arrangement.
In fiscal 2020 it issued AUD 850 million of equity to purchase telco exchanges, a Brisbane office building, Telstra’s Melbourne headquarters, and BP service stations in Australia. In fiscal 2021 it issued AUD 626 million of equity, using the proceeds to purchase Telstra exchanges, a portfolio of offices, and BP sites in New Zealand, taking its BP portfolio to circa AUD 500 million in Australia and New Zealand. CLW has issued substantial new equity every year since its 2016 listing, with the number of securities on issue tripling from circa 208 million in June 2017 to 720 million at March 2022. Higher interest rates are likely to slow the group’s expansion and weigh on earnings, given the group’s relatively high gearing.
Financial Strengths
CLW is in reasonable financial health. Interest cover is a solid 5.4 times, compared with a covenant of two times. To breach that, earnings would have to fall by more than 60%, other things equal, unlikely given revenue is underpinned by long leases. A breach arising from increased finance costs is also unlikely, as it would require finance costs to roughly triple. That sounds like a massive increase, and while it can be viewed as extremely unlikely, it’s not impossible considering a low average cost of debt of 2.8% as at 30 June, 2022. However, under that scenario management would likely respond, for example, by selling assets. Admittedly though under that scenario, asset sales would probably be at much lower prices than present, given the higher property capitalization rates that would be implied by substantially higher interest rates. Reassuringly, CLW has debt locked in with an average maturity of 5.2 years, and maturities are well staggered, with no outsize expiries until fiscal 2027. About 75% of existing debt is fixed or hedged, which limits the impact of interest rate moves on finance costs, at least in the near term. The group has additional debt and covenants pertaining to underlying joint venture vehicles. Loan-to-valuation ratios there are reasonable, with the largest exposure being a debt facility that funds the BP Australia portfolio, with an LVR of 39%, versus a covenant of 60%. That implies the asset values would have to fall by one third for a breach. All that said, a rise in interest rates could increase finance costs, and pressure valuations on CLW’s long-lease assets. That means gearing could elevate at the same moment that buying opportunities might arise in property markets, limiting opportunity to buy assets during downturns, or limiting income growth.
Bulls Say
Company Description
Charter Hall Long WALE REIT is a diversified property trust, with assets in Australia and New Zealand. Occupancy is near 100%, and weighted average lease length is a long 12.0 years (as at June 30, 2022). More than half the REIT’s leases are triple-net, where tenants pay rates, maintenance and most outgoings. The REIT’s circa AUD 7 billion portfolio of 550 properties spans offices, industrial, retail, social infrastructure, and agricultural logistics assets, with more than three quarters of the portfolio on Australia’s eastern seaboard. Leases are evenly spread between CPI-linked (6.3% average rent increase expected in 2023) and fixed uplifts (average 3.1% uplift expected). The tenant profile is strong, with almost all occupiers being government, multinational or national businesses.
(Source: Morningstar)
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