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Date : 14/11/2021

Charter Hall Retail REIT



Market Cap : $2.42 Billion

Dividend Per Share : $0.234

Dividend Yield : 5.70 %


52 Week Range : $3.36 - $4.28

Share Price : $4.13

CQR is a solid REIT company operating in the resilient non-discretionary space. A “buy” from us.

Company Analysis

Charter Hall Retail REIT (ASX: CQR) is an excellent REIT investment that is managed by Charter Hall Group which is one of Australia’s leading property groups with over 30 years of experience managing a high-quality office, industrial & logistics, retail, and social infrastructure property on behalf of institutional, wholesale, and private investors.

CQR invests in high-quality supermarkets and sub-regional shopping centres in Australia. It manages a $3,647 million portfolio of convenience retail shopping centres and long Weight Average Lease Expiry (WALE) convenience assets across Australia and New Zealand. By partnering with leading convenience retailers, Charter Hall has proved to be capable of delivering a resilient and growing income stream, optimising returns to investors and its shareholders.

In a nutshell, Charter Hall can be summarised in four solid key metrics that set the group ahead of its competitors:

  1. Wide range of diversified properties: Charter owns more than 346 high-quality properties.
  2. High-value portfolio: Charter’s portfolio of assets is estimated to be worth more than $3.6 billion.
  3. High occupancy: More than 98.3% of Charter’s properties are rented.
  4. Long-term cash flows: Charter exhibits a long-term Weight Average Lease Expiry of 7.5 years.

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Source: CQR

FY21, a strong year of profits for Charter Hall despite the impact of COVID-19 in the retail sector

FY21 has seen a strong demonstration of the resilience of the CQR portfolio. In FY21 we’ve seen net operating earnings grow, portfolio occupancy improving, positive leasing spreads, valuation gains and net tangible asset growth. Where COVID-19 mandated closures and restrictions have occurred, we’ve seen tenants trading rebound quickly in the period that follows. Charter’s strategy of partnering with the leading convenience retailers gives the company a highly defensive and resilient income stream, with 53.5% of the portfolio income coming from these major retailers. Charter’s portfolio remains in a strong position to continue, and we strongly believe that it will keep delivering resilient and sustainable income growth in the future.

The impacts of COVID-19 persisted throughout FY21, with rolling lockdowns expected until most Australians have been vaccinated. Thankfully, across most of the country, there were periods of reprieve, with normal trading and reduced restrictions seeing sales and trading activity recover quickly across CQR’s portfolio. The need for tenant support reduced as government restrictions eased and sales progressively improved, and with that, Charter’s tenant support program tapered to June 2021 as business stabilised for the company’s tenant customers.

The group provided $6.7 million, or 2.3% of FY21 rent in tenant support during the period, down from $10.7 million of tenant support in the 4th quarter of FY20. Only $1.8 million or 0.6% of FY21 rent remained outstanding as of the end of the financial year. Additionally, 60% of total COVID-19 related deferred rent from FY20 and FY21 had already been repaid as of the end of FY21. This period, though proving unpredictable, demonstrated the continued resilience of Charter’s portfolio. The company focuses on being the leading owner of property for convenience retailers and saw its centres remain open due to the essential role centres play in servicing local communities. With non-discretionary retailers making up most of the company’s customers, trading volumes remained relatively high during lockdown periods, whilst trading conditions for Charter’s tenants recovered quickly following the easing of COVID-19 mandated closures and trading restrictions.

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Source: CQR

Charter Hall’s transactional activity this year continued to enhance its portfolio quality by focusing on the resilience and defensiveness of the company’s income. To this end, we have seen Charter divest West Ryde Marketplace, expand its BP partnership with the addition of 70 locations and increase its partnership with Coles Group through the acquisition of Coles Adelaide Distribution Centre.

These transactions align with the company’s approach of curating a portfolio of centres in growth markets that are the leading convenience centres in their respective catchments. FY21 also saw CQR increase its portfolio value by $395 million, or plus 12%, driven by expanded partnerships with BP along with Coles Group and improving valuations. Following on from CQR’s initial investment in the BP portfolio partnership in FY20, Charter built upon the success of its Australian partnership and in December 2020 expanded the BP portfolio to another 70 properties in New Zealand with initial lease terms ranging from 18 to 22 years.

This takes the total BP portfolio to 295 properties demonstrating conviction in triple net leased (NNN) Long WALE convenience retail. Under the NNN lease, BP is responsible for all outgoings, maintenance and capital expenditure associated with the properties delivering a highly capital-efficient investment for CQR unitholders. Furthermore, Charter’s expanded partnership with Coles Group comes as a result of its acquisition of a 52% interest in a high-quality purpose-built distribution centre facility in Adelaide fully leased to the Coles Group. Coles had a remaining lease term of 14.5 years at acquisition plus multiple options and the lease has fixed annual rental escalations of 2.75%, providing a resilient and growing income stream for the company. The distribution facility is in Adelaide’s prime industrial precinct of Edinburgh Park, South Australia, approximately 25 kilometres from Adelaide Central Business District plays a key role in Coles’ supply chain, servicing all its retail stores in South Australia and the Northern Territory.

This acquisition extends Charter’s relationship with Coles from supermarkets to provide the critical infrastructure that supports their supermarket network. We see this as the formation of an important part of Charter’s strategy and provides a significant opportunity for the company to participate across the value chain of its major convenience retail tenant partners. These acquisitions are consistent with Charter’s strategy to be the leading owner and manager of property for convenience retailers. It is important to highlight that both investments have shown resilience throughout a year that was challenging for the broader retail market. This resilience has been reflected in the strong valuation gains on these assets, with both valued significantly higher than at acquisition.

Overall, we are pleased to see that Charter Hall has expanded its partnerships with two high quality, long-term tenants and continues to grow its exposure to its major tenant customers.

Charter’s strategy is absolutely clear. It is to provide investors with a resilient and growing income stream by being the leading owner of property for convenience retailers. Central to this strategy is partnering with major convenience retailers to meet their property needs across their value chain.

CQR’s major tenants include market-leading businesses Coles, Woolworths, BP, Wesfarmers, and ALDI. Throughout the last few years, we have been pleased to see that Charter actively and successfully manages its portfolio to increase the percentage of its earnings and extend WALE with its major tenants, thereby improving the resilience and dependability of income for the company’s unitholders. Furthermore, Charter has been active in re-shaping its portfolio to deliver this objective by increasing the percentage of major tenants’ income from 51.4% of portfolio income in FY20 to 53.5% in FY21 with a major WALE of 11.4 years.

Coles are now the equal largest portfolio tenant customer at 16.6% of rental income following the acquisition of the Coles Adelaide Distribution Centre. During the year Charter completed ten supermarket new leases and term extensions. Additionally, 14 supermarkets or 20% of supermarkets in the portfolio were refurbished over the period by Coles, Woolworths, and Aldi.

Additionally, Target store conversions are now all re-leased to tenants including Woolworths, Aldi, Kmart, Dan Murphy’s, Harvey Norman and The Reject Shop with openings to progressively occur. Click and Collect and Direct to Boot facilities, a key service providing customer amenity during the COVID-19 pandemic, are operating at 49 Coles and Woolworths supermarkets across the portfolio, with another five planned. Supermarkets remain the foundation of Charter’s portfolio.

The number of supermarkets in the portfolio remained constant at 70 this year. Charter’s portfolio of supermarkets continued to demonstrate resilience with Moving Annual Total (MAT) sales growth of 4.3% over the period and 10.3% over the last two years. The total number of supermarkets paying turnover rent was 66%, up from 61% in FY20. In addition, a further 17% of supermarkets are within 10% of their turnover threshold, indicating good potential for future rental growth. Despite the challenging retail conditions, Charter completed a record 457 specialty tenant leases during the financial year and saw a positive leasing spread of 1.6%, with new leases 3.8% higher than the previous year, and renewing leases 0.2% higher than expiring leases.

Moreover, sales productivity of specialty tenants improved from $9,557 to $10,213 per square metre, which is a 7% gain in productivity, while occupancy costs decreased from 11.8% to 11.2% of sales. Portfolio occupancy has risen from 97.3% to 98.3% this year, with total like-for-like portfolio Moving Annual Total sales (MAT) growth of 5.4% reflecting the defensive nature of Charter’s assets along with customer preference to shop closer to home and the quick recovery in sales and trading activity post-COVID-19 mandated closures and trading restrictions.

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Source: CQR

In FY21, Charter Hall achieved a statutory profit of $291 million with rental income being supplemented by positive valuation movements. Charter’s operating earnings of $156 million include $6.7 million of COVID-19 tenant support. The company’s distribution of 23.40 cents per share reflects an 85.7% payout ratio and takes account of COVID-19 tenant support provided. We appreciate seeing that Charter is demonstrating prudent capital management which remains the company’s core focus and ensures, so far, a successfully executed growth strategy along with the delivery of a secure and growing income stream. Due to refinancing activity during the year, there are no debt maturities until FY24.

As of the end of FY21, the total portfolio gearing was about 33% at the lower end of the 30% to 40% target range. This strong balance sheet and available liquidity of $308 million, means that Charter Hall is relatively well placed to enhance portfolio quality and fund future activity. The portfolio valuation increase over FY21 was $188 million, with 100% of it externally revalued at least once over the year. The shopping centre portfolio valuation increased by $92 million or 3.3%, including $57 million in capital investment during the period. The Long Weight Average Lease Expiry (WALE) of the convenience retail portfolio valuation increased by $96 million or 14.2%, primarily driven by capital rate compression. The portfolio cap rate firmed from circa 6% to 5.8% over the year. Charter’s cap rates on its shopping centre portfolio compressed by seven basis points in FY21, from 6.19% to 6.12% and the cap rates compressed on its Long WALE convenience portfolio by 30 basis points from 5% to 4.7%. These revaluation outcomes for FY21 reflect the quality, defensive nature and income growth attributes of Charter’s portfolio and reinforce our confidence in the active asset management strategy undertaken by the company.

Charter Hall intends to become a “Net Zero” company by 2025, a necessary step to stay ahead of future regulations. Hence, sustainability remains a critical part of enhancing Charter’s portfolio quality and is central to the company’s approach to property management. We continue to see the company exploring opportunities to introduce sustainability initiatives, and deliver long-term outcomes that are positive to unitholders, tenants and the communities in which Charter’s assets are located. In this regard, we are pleased to witness that Charter has brought forward its commitment to 100% net-zero carbon emissions across its portfolio by 2025, with electricity supply across the portfolio to be 100% renewable by 2025. We continued to see Charter making significant progress towards this goal over the last 12 months. To date, the company completed 16.7MW of solar installations across 23 assets and pleasingly, 2.9MW of solar installations were completed by Coles and Woolworths. Furthermore, Charter continues to focus on improving its ratings across a few sustainability benchmark measures, including GRESB and DJSI. Charter has a 4.6 Star average NABERS energy rating and 4.1 Star NABERS water rating across its assets over 15 thousand square metres and is committed to expanding its NABERS footprint to over 80% of its assets in FY22. Charter expects soon to complete its net-zero developments at two new childcare centres at Secret Harbour and Wanneroo Square, both in WA. To offset the construction and embodied carbon emissions from these developments, the group secured carbon offsets from the Paroo River Native Forest Regeneration project in Qld which is restoring native forests on degraded agricultural land as well as generating income for landholders and Traditional Owners.

Company Updates


FY22 onward outlook: CQR’s portfolio continues to offer defensive and resilient earnings

Charter’s portfolio continues to offer defensive and resilient earnings through its focus on meeting the property needs of convenience retailers. Notwithstanding some of the uncertainty created by COVID-19 and subsequent lockdowns, the operational and financial performance in FY21 has put the REIT group in a strong position heading into FY22. As we commence FY22, we expect that supermarket sales will continue to be strong, driven by customers’ preference to continue shopping closer to home and focus on everyday needs.

Charter’s strategy remains focused on partnering with non-discretionary convenience retailers and providing income resilience and growth through a continuation of acquisitions and divestments strategy. We believe that the company’s strategy of owning property for convenience retailers along with a resilient nationally diversified portfolio will continue to support the firm in delivering long-term sustainable earnings growth. This growth is underpinned by the scale, scope and size of Charter’s supermarket activities, ongoing partnerships with major convenience retailers and the resilience in the company’s core non-discretionary retail offerings.

Charter Hall’s operational and financial strength over FY21 was demonstrated through strong sales performance, positive leasing outcomes, active asset management and valuation uplift. Thus, we think that the company is entering FY22 in a strong and resilient position. Moreover, we saw specialty sales; foot traffic and trading conditions recovered quickly after COVID-19 mandated closures ended and our expectation is that this pattern will continue onward FY22. As such, we are confident in Charter Hall to continue to deliver robust and defensive earnings growth whilst being strongly capable of actively managing any operational challenges associated with the COVID-19 pandemic.

Source: CQR

Industry Analysis

While the current lockdowns have injected an element of uncertainty into the outlook for FY22, there are reasons to be positive about the prospects for real estate and particularly the real estate in the retail sector. At this stage, the lockdowns appear likely to slow but not derail the broader economic recovery. Much depends on their duration. The year ahead is still expected to be a year of improving occupier demand for real estate in most sectors and markets. In addition, investment demand for quality real estate is likely to remain supported by low-interest rates. Our key assumptions over the next 12 months are:

  • Business confidence to be impacted by lockdowns but bouncing back later in the second half of FY22 onward.
  • Export income will benefit from a strengthening global economy with the mining and agricultural industries benefiting.
  • Housing and infrastructure construction will positively contribute to growth.
  • Retail spending will benefit from low-interest rates, rising house prices and accumulated savings.
  • The opening of international borders will be gradual, limiting international travel until FY23.
  • Short-term interest rates will remain low through FY22 however markets will begin to price in modest interest rate rises on a 2-to-3-year timeframe.

In our view, there are four key themes for investors to consider onward FY22:

  1. Leasing markets should generally improve in all sectors, helped by positive business conditions.
  2. Growth prospects in the industrial and healthcare sectors are better than for office and retail, where vacancies will take time to absorb.
  3. A climate of improving occupier demand at a time of low-interest rates is expected to be good for property values.
  4. Yield spreads over 10-year bonds have narrowed for industrial but remain wide for other sectors.

Activity in the retail sector received a boost during 2020, with online sales and total sales both running ahead of average. The growth rates are now converging back to more normal levels, whilst the total retail turnover rose by 7.7% in the year. This high growth rate reflects the low base of last May as Australia’s lockdown commenced. The more modest monthly growth rate of 0.4% indicates a return to more normal trading conditions, albeit the short-term outlook in NSW and Victoria has been clouded by recent lockdowns. After peaking at over 60% per annum growth last year, online sales growth appears to be returning to the 10% to 15% per annum, considered normal before the pandemic. Shopping centres have not been able to capitalise on all the growth in spending in the past year given a proportion was in the household goods category which is dominated by standalone and bulky goods premises.

Last year it was the smaller convenience centres anchored by supermarkets which performed well as people kept spending on essential items. This year, the outlook for the performance of larger shopping centres should improve, benefitting from a 14.5% jump in discretionary spending in the year to May 2021. Sales growth, particularly for discretionary goods and services, is expected to remain positive in the year ahead, buoyed by high consumer confidence, an improving jobs market, low-interest rates and above-average levels of household savings. Hence, these conditions are expected to give a boost to Charter’s earnings. However, city retail remains challenged as companies continue to navigate their return to Central Business District locations and tourism is constrained by border closures. We will continue to see a gap in the performance of shopping centres depending on their trade area and level of competition.

A long-term investment opportunity is looming in the retail REIT sector

Overall, we think that the Recovery from the effects of COVID-19 provides a long-term investment option in the real estate sector. Fifty years ago, GPT Group (ASX: GPT) changed the landscape of property income investors. Since then, Australia has become a global leader in listed commercial property. Local and offshore investors have been attracted to the relatively high income of Australian Real Estate Investment Trusts and the competitive risk-adjusted returns. Then came COVID-19 last year and an altogether different environment to disrupt the sector. In late February 2020, the ASX300 A-REIT index fell 37% during March 2020 as investors tried to comprehend the implications of the pandemic.

Shopping-centre stocks were among the hardest hit, notably the large mall landlords Scentre Group (ASX: SCG) down by 55% and Vicinity Centres (ASX: VCX) down by 52%, as investors panicked over whether their shopping centres would ever re-open. The forlorn outlook many experts predicted then did not happen, with Australia’s largely successful control of the pandemic getting much of the credit. Those investors that ran for the hills last March have since turned tail, realising Australia was a better place to invest in a pandemic.

The Australian retail real estate sector has since recovered significant ground with the vaccine announcement delivering a further boost. Still, the sector continues to trail the broader Australian equity market recovery, which in our opinion is an opportunity for investors focussing on the long term. The structural concerns that first surfaced as the pandemic took hold, along with the absence of international tourists and immigration, explain much of the performance gap.

The Government-mandated Leasing Code of Conduct was also a significant burden for landlords. The code removed a tenant’s obligation to meet contracted rental payments under the lease contract, meaning landlords were having to support their business partner or tenants, which created great uncertainty for investors. As some support is still being provided, this continues to weigh on the sector’s recovery. Thus far, landlords such as Charter Hall have provided more than $1 billion in support under the code, with more than 90% delivered by owners of retail properties, notably large shopping malls. The unintended consequence is that those businesses most affected by the pandemic – namely large mall landlords Scentre and Vicinity and Charter Hall have provided the highest levels of tenant support. The impact on these companies’ bottom line has been pronounced and prolonged.

Although the Australian retail real estate sector has recovered remarkably from its March 2020 lows, it is in the dispersion of that performance where opportunities lie. Stocks in the REIT sector are currently trading well below their 2020 pre-pandemic highs include Vicinity down by circa 36%, Scentre Group, down by about 26%, and GPT along with Charter down by almost 20%. All of which were burdened with additional COVID-19 impacts, lockdowns, and the leasing code. However, as always, there is a caveat. The retail real estate sector performance is inextricably linked to the Australian economy. On that score, we think that the ongoing recovery will be boosted by six factors:

  1. A return to the office will assist struggling Central Business District retail as foot traffic rises.
  2. Price growth in residential property and ongoing construction will boost retail, especially do-it-yourself and homeware categories. Consumers’ willingness to spend, a key plank in the path for a return to pre-COVID life, should gather pace.
  3. The vaccine rollout will further lift business and consumer confidence.
  4. The return of international tourism potentially exceeds prior levels as per the phenomenon of “revenge travel” as consumers look to catch up.
  5. The return of international students will also boost confidence, with residential and retail property benefiting. Overseas students can also help Australia address current labour shortages.
  6. The return of immigration will be a major economic driver. As with foreign students, residential real estate will be a major beneficiary, with flow-on benefits for office, retail, and other real estate sectors.

These factors point to the Australian retail property market performing well over the coming years, in our view. Between 2010 and 2019, the Australian REIT returned 11.6% each year, mainly from income. Over the past 20 years, Australia’s retail property market has delivered an average return of 9.6% a year, including an average distribution yield of 6.9% each year. It is worth noting that the income that investors received is almost 50% higher than equities over this period. Hence, this is a key takeaway for income investors and it is the income component of the real estate sector returns that is the most predictable.

Investment Thesis

Charter Hall exhibits strong revaluation of its investment properties

The REIT recorded a statutory profit for the year of $291.2 million compared to $44.2 million during FY20. The increase in statutory profit was predominantly driven by positive net revaluation gains on investment properties over the period. Operating earnings for the year were $156.2 million compared to $142.7 million during the previous period with FY21 net cash flow from operating activities $154.5 million well above 2020 $132.9 million. This reflects the reduction in COVID–19 tenant support over the period combined with strong cash collections. Importantly, the $13.5 million increase in operating earnings was due to:

  • $18.1 million increase in income from Long WALE convenience assets driven by acquisitions over the year being the Coles Distribution Centre in Adelaide and the BP New Zealand portfolio.
  • $5.3 million reductions in income from the convenience retail assets driven by same property income growth offset by the divestment of assets in the prior year.
  • $3.3 million reduction in finance costs due to the continuation of the lower interest rate environment and reduced leverage during the period due to equity raised in April 2020,
  • and other expenses increasing $2.6 million due to the increase in management fee driven by the portfolio valuation increase comprising the net acquisitions over the year and valuation increases.

COVID-19 mandated temporary trading restrictions and closures over the period impacted sales. The longest trading restriction over the period impacted Charter’s four centres in Victoria with other states also having shorter periods of trading restrictions. For all states, once COVID -19 trading restrictions were eased, sales improved in the centres to levels in line or higher than those pre-COVID-19. Despite periods of restricted trade, sales continue to remain strong with shopping centres moving annual turnover growth for the period of 5.4% demonstrating the essential nature of shopping centres and shopper customers’ preference to shop closer to home. During these periods of temporary disruption and restricted trade, support continued to be provided to speciality tenants in line with the State Governments’ legislation Code of Conduct. Tenant support equated to $5.4 million in rental relief in the form of rent-free incentives and deferrals – look through including the REIT’s share of convenience retail joint ventures of $6.7 million. This is less than the tenant support provided to speciality tenants in the three months to 30th of June last year of $8.2 million in the form of rent-free incentives and deferrals – look through including the REIT’s share of convenience retail joint ventures of $10.7 million.

Easing of trading restrictions and subsequent strong sales recovery resulted in the reduction in tenant support from June last year. Despite the strong performance of Charter’s shopping centres during the period, the uncertainty of future operating conditions remains due to COVID-19. Over the last 12 months, Charter’s portfolio valuation uplift was $130 million or 3.7%. The valuation uplift comprised $35 million or 1.2% on the shopping centre portfolio and $95 million or 14.1% on the long WALE convenience portfolio. Over the 12 months to the 30th of June 2021, 100% of Charter Hall’s portfolio was externally revalued at least once, including joint ventures.

Joint Ventures: July last year, Charter increased its long WALE retail investments by acquiring a 52% interest in the Charter Hall Direct CDC Trust from a Charter Hall managed fund, for a gross price of circa $60 million. The CDC Trust owns a $218 million distribution facility in Edinburgh Park, SA fully leased to Coles Group Limited. CHRP1 divested West Ryde Marketplace, NSW for a gross price of $56.5 million. Proceeds from the sale were used to fund a $49 million return of capital paid in August last year. Charter’s share of capital return proceeds was $24.5 million. In December 2020, Charter paid $122.5 million to acquire 50% of the units in CH Dartmouth NZ Wholesale Fund (CDNZW). CDNZW has a 49% indirect interest in 70 long WALE convenience retail assets leased to BP in New Zealand.

Acquisitions: In June 2021, Charter Hall exchanged contracts to acquire Butler Central Shopping Centre in WA for a total consideration of $51.2 million. Settlement commenced during September 2021.

Financing: In August last year, Charter extended two of its bilateral facilities that were due to mature in FY22 with $120 million to mature in August 2024 and $75 million to mature in August 2025. In November 2020, the company increased one of its bilateral facilities limits due to maturity in August 2025 from $115 million to $130 million. The maturity was unchanged. In March 2021, the company extended one of its bilateral facilities due to mature in FY23 with $150 million to mature in February 2025. In June 2021, Charter entered a new bilateral facility for $100 million due to mature in March 2026. These proceeds were used to reduce another bilateral facility from $150 million to $50 million. The remaining $50 million, due to mature in FY25, was extended to mature in July 2026. In addition, the company extended another one of its bilateral facilities, of which $40 million was due to mature in FY23 and $90 million was due to mature in FY26. Both are now due to mature in July 2026.

Over the last 4-year period, Charter Hall has significantly improved its capital structure. The capital structure is how the company funds its overall operations and growth. There are two possibilities for the company to finance its operations, through equity or through debt. We are pleased to see that the company has considered reducing its exposure to debt instruments, hence as of FY21, Charter’s total liabilities went down to 31% compared to FY18’s 38.7%. This reflects a robust balance sheet geared towards potential future expansion.

Furthermore, looking at Charter’s operating income and cash from operating expenses we could say that the company is delivering consistent and reliable income which is according to our conservative projection likely to continue onward FY22. We expect Charter’s operating income to be stable above $107 million per year from FY22 to FY24. What we also like about Charter is the return to ROE growth. This year, the ROE jumped to 13% compared to the last three years’ single-digit reading. We conservatively estimate that the ROE will be superior to 8% onward FY22.

CQRs business strategies and prospects aligned to remain the leading retail REIT of the region

Charter Hall’s strategy is to be the leading owner of property for convenience retailers, and this is through its convenience and convenience plus shopping centres and its long WALE retail properties with long leases to non-discretionary retailers. When acquiring these properties, Charter’s investment criteria include the following considerations:

  • Exposure to predominantly non-discretionary retailing.
  • Investing in regions with sound, long term demographic growth.
  • Consideration of the geographic diversity of the REIT’s portfolio.
  • The resilience of the income to be generated from the property; and
  • Potential future value-adding opportunities.

The shopping centres in the portfolio typically range in an area up to 25 thousand square metres and have capital and income growth potential. The long WALE retail properties in the portfolio have long leases to major convenience retailers with contracted rental increases. Charter aims to maintain and enhance the portfolio through active asset and property management and proactively manage its equity and debt. Hence, the company has a target look through portfolio gearing range of 30 to 40% and a target interest cover ratio of at least 2.5 times. The REIT maintains an investment-grade credit rating of Baa1 with a stable outlook with Moody’s.

Valuation: Charter Hall, a very stable and predictable REIT long-term play

Overall, we could say that Charter Hall is a stable company with a consistent cash flow and earnings. The business exhibits a resilient and reliable operating activity. Hence, revenues since FY18 have been steady at around $200 million per annum. In terms of dividends, the company is also consistent with its distribution policy and furthermore, since February 2021, dividends are now back to their growth trajectory. Considering all these positive aspects, we believe that Charter share prices drop during the peak of the COVID-19 crisis in March 2020 was primarily due to market risk and not business-related. Therefore, we have based our valuation of Charter Hall using a weighted average of three valuation models, the Price-to-sales-multiples, the P/E multiples, and the price-to-book multiples. Our idea is to value Charter Hall against its competitors in the same space.

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We have selected five companies that we believe are competing more or less in the same REIT space:

  1. National Storage REIT: ASX: NSR
  2. Charter Hall Long WALE REIT: ASX: CLW
  3. BWP Trust: ASX: BWP
  4. Scentre Group: ASX: SCG
  5. Carindale Property Trust: ASX: CDP

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According to our analysis, we are projecting the long-term Price-to-sales to be 6.6 times, along with the price-to-earnings towards FY24 to be 12.5 times. However, we assume that Charter’s price to book value will remain unchanged at 1x. For the “price to sales multiple” model, we came up with an implied CQR share price of $4.13, while for the “P/E multiple” valuation and the “price to book multiple” valuation to an implied share price of $6.29 and $4.23, respectively. This brought us a weighted average implied value of $4.88. Considering CQR at the current price of $4.10 apiece, it is a potential upside of circa 19%. This coincides with the pre-COVID-19 high.


Charter Hall Retail REIT is managed by Charter Hall and it offers investors exposure to Supermarket and shopping centre real estate assets. If you are looking for a long-term stable real estate sector play, we believe CQR is the one to pick among the leading Australian REITs. It is a company with stable and consistent earnings, and on top of that, it operates in a resilient space which is the non-discretionary space. Compared to its peers, CQR appears to be undervalued, hence there is an opportunity to seize as CQR presents a potential upside of 19% according to our valuation. This coincides with the company’s pre-COVID-19 share prices. Overall, CQR is a solid REIT company operating in the resilient non-discretionary space. A “Buy” from us.

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