There were several aspects, both positive and negative, to the Charter Hall Long WALE REIT’s ((CLW)) first half results, although an attractive distribution yield stands out for most brokers.
Ord Minnett considers the stock resilient in the current environment amid negligible rent relief and further valuation gains. The majority of the industrial assets experienced yield compression in the half year.
An additional two-month benefit of income from Bowen Hills and other leasing outcomes were partially offset by a dilutive equity raising. Subdued inflation has also limited underlying growth, Macquarie points out, with 43% of leases linked to the CPI. The remaining 57% have fixed reviews and this is a positive.
The company has maintained FY21 earnings guidance of more than 29.1c per security and the broker finds the ability to achieve growth is a positive aspect relative to peers. Macquarie now forecasts FY21 operating earnings per share of 29.3c.
UBS notes operating earnings growth of 4-5% expected in FY22 is solid too, reflecting no leasing risk and 2.2% in rental escalations, with a full year of contracted acquisitions. This offsets the 97.5% current occupancy in the portfolio, which has dropped because of the exit of Virgin Australia’s lease at Bowen Hills in Brisbane.
Macquarie considers an outcome on Bowen Hills is a key catalyst for the outlook as a bank guarantee will cease at the end of February 2021, estimating a 50% lease -up of the asset would be 1.4% accretive to earnings. Offers have been received for the asset at around book value, so the trust is not inclined to sell immediately and may look to retain the asset or sell after leasing.
David Jones
FY21 guidance was unchanged, as management noted uncertainty regarding the timing of the David Jones acquisition and the vacancy at Bowen Hills. Macquarie does not consider exposure to the former necessarily positive, given the headwinds facing department stores.
Still the asset has recently been refurbished, which implies David Jones is unlikely to vacate, while there is significant development upside if conversion to an office is required. Management’s view is that this is an attractive site with a long lease.
Ord Minnett notes the David Jones acquisition is slightly outside the company’s historical strategy as the trust has usually acquired assets backed by investment-grade or government tenants. David Jones has no credit rating, the broker reminds the market.
Gearing
Charter Hall Long WALE REIT has historically funded transactions with debt and equity and Macquarie notes gearing is elevated relative to prior periods, although the interest cost is low. Gearing has increased to 29%.
This could increase the probability of further equity raising, although the company has indicated there are no additional acquisitions in the pipeline. Citi envisages upside amid accretion from the $700m in acquisitions that were made during the first half amid lower debt costs.
The main concern going forward is ongoing equity issuance and the rise in long-term bond yields. UBS believes the company has done a good job in improving its portfolio and tenant relationships and further material debt-funded acquisitions are unlikely. Furthermore, the company will find it difficult to acquire assets accretively without increasing risk and leverage.
Assets
The extension of the weighted average lease expiry to 14.1 years compares with 12.1 years at the IPO in 2016. The extension has been achieved with the acquisition of the Telstra exchanges, the BP portfolio and David Jones’ Sydney HQ.
Morgan Stanley notes, surprisingly, pandemic-related rent relief was $494,000 in the half-year, versus $296,000 in the June half also pointing out that $235,000 of the $494,000 of rent deferral has been provisioned.
Macquarie found the quantum of rent relief subdued relative to other A-REITs (Australian Real Estate Investment Trusts), which the company has indicated stemmed from timing of rent negotiations rather than tenant duress during the period.
Citi envisages plenty of upside as minimal rental abatements highlight the security of the income. This is underpinned by the WALE (weighted average lease expiry) and high-quality tenants.
These sorts of assets continue to be in demand and, combined with a low interest-rate environment, mean the outlook for values remains positive. The company has indicated that in some instances, assets have been selling in the direct market at rates under 4%.
Macquarie considers the yield spread to value reflected in the distribution attractive, given the strength of the tenant covenants. The lease to Metcash ((MTS)) in Canning Vale expires in three years and the company is confident the asset will be renewed.
The Metcash distribution centre comprises around 4% of portfolio value. Around 89% of the portfolio was independently revalued in December, resulting in a 4.5% uplift half on half.
FNArena’s database has three Buy ratings and two Hold. The consensus target is $5.21, suggesting 11.1% upside to the last share price. The dividend yield on consensus forecasts for FY21 and FY22 is 6.2% and 6.6%, respectively.
