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Date : 09/08/2023

Charter Hall Long WALE REIT

ASX :

CLW

Market Cap : $2.91 Billion

Dividend Per Share : $0.28

Dividend Yield : 7.37 %

Buy

52 Week Range : $3.790 - $4.775

Share Price : $3.80

CLW reported FY23 earnings in line with guidance. We maintain our 'Buy' recommendation as dividends remain attractive despite FY24 dividend guidance missing expectations.

Company Analysis

Charter Hall Long WALE REIT (ASX: CLW) reported FY23 results in line with market expectations. However, soft commentary on its outlook and lower than expected FY24 dividend guidance has resulted in a negative market reaction. Consequently, CLW shares closed over -5%.

FY23 net property income increased by 10.6%, driven by like-for-like growth of 4.4%, with the balance driven by acquisition activity. CLW’s portfolio witnessed strong rental growth as a result of the high proportion of CPI-linked leases, high levels of occupancy and quality of tenants. CLW reported an operating expenses increase attributable to the full-year impact of FY22 acquisitions. Finance costs increased as expected, driven by higher interest rates. Ultimately, the company delivered operating EPS of 28.0 cents per security, in line with guidance.

Highlights from the FY23 results include:

  • Operating earnings of $202.4 million, which is 28.0 cents per security (cps)
  • Distributions of 28.0 cps
  • Net Tangible Asset (NTA) of $5.63 per security
  • Statutory loss of $189.0 million
  • $6.8 billion diversified property portfolio
  • 5.1% weighted average rent review
  • Balance sheet gearing of 32.9%, within the target 25% – 35% range.

Driving the statutory loss were valuation losses amounting to $362.7 million, or 3.9%, across its $6.8 billion portfolio of office, industrial, retail, social infrastructure and agricultural assets. The hardest hit was its small exposure to agri-logistics, which suffered a 15.7% write-down. Its $1.3 billion portfolio of office assets was written down by 9.1%, while retail real estate was written down by 5.3%.

However, all of this was priced in. As we said in our earlier coverage of CLW, the company was expected to deliver an EPS of 28 cents and pay 28 cents in full-year FY23 dividends.

CLW’s Portfolio Update

Portfolio curation remains a key strength of the Charter Hall platform. During FY23, CLW completed $223 million of transactions consisting of $114 million1 of divestments and $109 million of income enhancing property acquisitions which contributed to improving portfolio quality, sector diversification and lengthening the portfolio WALE.

Acquisitions:

  • $90.9 million acquisition of Geosciences Australia headquarters, a life sciences complex comprising an office, specialised laboratory, storage and warehousing for the Commonwealth Government’s technical adviser on all geoscience, geographical and geological matters. Geosciences was acquired in October 2022 on a 7.4% initial yield with a 9.6-year WALE at acquisition and 3% annual fixed rent increases, and a net lease structure where the tenant is responsible for all property outgoings.
  • $17.9 million3 acquisition of four Endeavour Group leased pubs; the Emu Hotel, SA, the Horse & Jockey, QLD, the Marine Hotel, QLD and the Rainbow Beach Hotel, QLD. Acquired on a blended 5.0% cap rate, the pubs have new 15-year, CPI-linked leases and further extend CLW’s relationship with Endeavour Group.

Divestments:

  • $74 million divestment of Woolworths Distribution Centre, Hoppers Crossing, VIC, at the prevailing book value with a 4.50% cap rate and a 3-year lease term remaining.
  • $38.3 million divestment of Toll Distribution Facility, Altona North, VIC, at the prevailing book value with a 4.75% cap rate and a 2.9-year lease term remaining. At the end of the period, the REIT’s diversified portfolio was 99.9% occupied and comprised 549 properties with a long WALE of 11.2 years.

100% of properties were independently valued with FY23 property valuations resulting in a net valuation decrease of $363 million over prior book values. The portfolio weighted average capitalisation rate is 4.77% as of 30 June 2023

At the end of the period, CLW’s portfolio value sits at $6.8 billion. It is highly diversified across 549 properties, 79% of which are located in the Eastern Seaboard. With a strong and stable tenant base of government, ASX-listed, multinational and national tenants, CLW has the best in class tenant register and continues to maintain 99.9% occupancy rates across its portfolio. It still offers long-term income security with a WALE of 11.2 years. As for protection from inflation, 51% of CLW’s leases are linked to CPI with a 7.1% weighted average increase of CPI linked leases in FY23, and 49% of leases are fixed with an average fixed increase of 3.1%.

CLW’s Balance Sheet

During FY23, CLW refinanced and extended the syndicated debt facility for the bp Australia portfolio by four years. CLW’s share of this facility is $225 million. CLW has a weighted average debt maturity of 4.5 years with staggered maturities over a nine year period from FY24 to FY32. With the exception of an $88 million capital indexed bond maturing in FY24, CLW has no other debt expiries until FY27.

CLW’s drawn debt is 80% hedged on average across FY24 with a weighted average hedge maturity of 2.3 years. Balance sheet gearing of 32.9% is within the target 25 – 35% range, and look-through gearing is 40.1%. CLW has $296 million of cash and undrawn debt as of 30 June 2023.

Outlook

CLW’s ~33% gearing means it is susceptible to the effects of rising interest rates. The market appears to have accounted for this risk, as the stock continues to trade well below its NTA value of $5.63 per share.

The primary risk we currently observe is the potential increase in interest rates. However, the RBA has already hit a pause on interest rate hikes. Given the last couple of inflation prints, we can expect the RBA to maintain interest rates – alleviating some of CLW and REIT headwinds.

We also find reassurance in CLW’s long weighted average lease expiry of 12 years, its significant government and large corporate tenant base, and the robust management track record that Charter Hall has demonstrated. It is worth noting that across the 5 sectors that CLW’s clients come from, 4 boast a 100% occupancy rate, while the Office sector sits at 99.7%. This takes the weighted average occupancy to 99.9%.

In its earnings report, CLW said, “Based on information currently available, including the current interest rate and inflation expectations and barring any unforeseen events, CLW provides FY24 operating earnings per security guidance of 26.0 cents and distributions per security guidance of 26.0 cents.”

The 26 cents guidance means that CLW’s EPS and dividend per share are expected to decline by 7% in FY24. This has been the reason why CLW shares were sold-off following the announcement. Markets expected another 28 cents in dividend in FY24, and CLW to report flat earnings growth and dividends.

Based on today’s share price of ~$3.8, the 26 cents dividend means CLW is trading with a forward FY24 dividend yield of 6.8%.

Recommendation

Charter Hall Long WALE REIT delivered an FY23 result in line with market expectations. Both EPS and dividend per share for FY23 are 28 cents. CLW’s debt levels are within its target range. The company maintains $294 million in cash and has a well-balanced and long-term debt maturity profile.

While all of this was priced in, CLW’s dividend guidance for FY24 came in 7% below market expectations – leading to a negative market reaction. The 26 cents dividend implies a forward dividend yield of 6.8% – still a considerably attractive yield.

Sinking property values and a higher interest rate environment has meant that the CLW share price is trading at a considerable 48% discount to its NTA value per share of $5.63. As we reach the end of the interest rate hiking cycle and with macroeconomic headwinds expected to subside in FY24 onwards, we anticipate a potential rebound in CLW’s share price towards its NTA. Thus, CLW comes with an attractive dividend and share price growth potential. We maintain our ‘Buy’ rating.


Source: Tradingview.com

 

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