Ladies and gentlemen, thank you for standing by, and welcome to Charter Hall Long WALE REIT 2023 full year results briefing. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to queue for a question, you need to press star followed by one, one on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Tuesday, 08 August 2023. I would now like to hand the conference over to your host today, Mr. Avi Anger, fund manager. Thank you, sir. Please go ahead.
Good morning, everyone, welcome to the Charter Hall Long WALE REIT results presentation for the full year FY 2023. Presenting with me today is Scott Martin, Head of Long WALE REIT Finance. I would like to commence today's presentation with an acknowledgement 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. The format for today's presentation is that I will start with an overview of CLW and key highlights for the year. You will hear from Scott, who will provide an overview of the financial performance of the REIT. I will then return to provide an operational update and portfolio overview and provide guidance for FY 2024. We will then offer the opportunity for questions. Turning now to slide five.
Today, CLW has a best-in-class AUD 6.8 billion diversified real estate portfolio consisting of 549 properties. Our portfolio continues to be diversified by tenant, industry, geography, and property type, which contributes to the stability of our cash flow. Our properties were leased to 84 tenants across Australia and New Zealand and diversified across Long WALE retail, office, industrial, social infrastructure, and Agri-Logistics sectors. 52% of the income of the REIT comes from triple net lease properties. This is an important feature of our portfolio, given that under a triple net lease structure, the tenant is responsible for all outgoings, maintenance, and capital expenditure. 79% of our portfolio is located in markets on the eastern seaboard of Australia. Turning now to slide 6.
The portfolio features a very long-dated average lease term of 11.2 years, which enhances the security and continuity of income of CLW. CLW has a high-quality income stream generated from blue-chip tenants, with 99% of the tenants of the REIT consisting of government, ASX-listed, multinational or national businesses. Our largest tenants are government, Telstra, bp, and Endeavour Group. All the leases in our portfolio have annual rent increases, providing strong year-on-year income growth. This consists of a mix of fixed and CPI-linked annual increases. Our income growth benefits from increases in inflation, with 51% of the rent increases across our portfolio linked to CPI. This is particularly attractive in the current inflation environment, with a weighted average increase in income across our CPI-linked leases of 7.1% in FY 2023. The average fixed increase across our portfolio was a high 3.1%.
Turning now to slide 7 and the key highlights for the year. I am pleased to report that we delivered operating EPS of AUD 0.28 per security, in line with FY 2023 operating earnings guidance provided. Our NTA at June 30, 2023 is AUD 5.63 per security. The portfolio delivered a weighted average rent review of 5.1%, benefiting from the 51% of income of the REIT being CPI linked, with a weighted average increase from our CPI linked leases of 7.1% in FY 2023. CLW has a long WALE of 11.2 years, providing security and continuity of income to our investors. The portfolio is sitting at an occupancy level of 99.9% at year-end.
We completed AUD 223 million of transaction activity during the year, with AUD 114 million of strategic divestments, which were recycled into AUD 109 million of portfolio-enhancing investments. We remain focused on prudent capital management, with 80% of drawn debt being hedged, providing protection against the risk of rising interest rates. Moody's has reaffirmed its Baa1 investment-grade credit rating for the REIT, and our weighted average debt maturity is 4.5 years, with staggered maturities to a diversified lender pool. Turning now to slide 8, Environmental, social, and corporate governance. We remain focused on implementing sustainability initiatives across our portfolio and consider ESG as a driver of long-term value for investor and tenant customers. As a business, we've taken accelerated climate action.
Charter Hall recently announced that it is targeting net zero carbon by 2025, having accelerated our Scope 1 and Scope 2 targets by 5 years. Additionally, CLW has been focused on clean energy, with 2 MW of solar installed across the portfolio, an increase of 400 kW since FY 2022. Further, the office properties in the portfolio have 100% grid-supplied electricity sourced from renewable sources. CLW's predominantly modern office portfolio features high environmental credentials, including 5.3-star NABERS energy and 5.2-star NABERS water ratings. CLW remains committed to aligning with best practice frameworks to support transparency and disclosure. The fund achieved a score of 79 in the 2022 GRESB assessment, an increase of 7 points compared to the prior period, evidencing our commitment to continuous improvement.
I would now like to hand over to Scott, who will provide an overview of the financial performance of the REIT.
Thank you, Avi. Good morning to everyone on the call. Turning to slide 10, which provides a summary of the REIT's earnings for the FY 2023 full year. Net property income has increased by 10.6% compared to the prior reporting period, and has been driven by a combination of like-for-like growth of 4.4% from the stabilized portfolio and net acquisition activity. The increase in operating expenses has been driven by the full year impact of the REIT's acquisition activity in FY 2022. Finance costs have also increased period on period, driven by a 0.8% increase in the REIT's weighted average cost of debt, from 2.3% in FY 2022 to 3.1% in FY 2023.
Both operating earnings per security and distributions per security for the year were AUD 0.28, in line with our guidance released to the market. Turning to slide 11 and the REIT's balance sheet position as at 30 June 2023. The AUD 279 million movement in total assets has been driven by AUD 109 million of property acquisitions, AUD 114 million of property divestments, which were sold at their prevailing book value, together with a net property valuation decrement of AUD 363 million. The net property valuation movement has been the main driver of the movement in NTA, which has decreased by 8.8% from AUD 6.17 per security at 30 June 2022, to AUD 5.63 per security at 30 June 2023.
Turning to Slide 12, which provides a summary of the REIT's capital management initiatives. The REIT continues to have a mix of debt funding, with 35% of debt sourced from capital markets long-term issuances, and 65% from foreign and domestic banks. The REIT has total facilities calculated on a look-through basis of AUD 3.1 billion, which were drawn to AUD 2.8 billion at 30 June 2023. During the current reporting period, the REIT refinanced and extended the syndicated debt facility for the bp Australia portfolio by four years. Balance sheet gearing was 32.9%, which remains within the REIT's target gearing range of 25%-35%, and look-through gearing was 40.1%.
The REIT has a weighted average debt maturity of 4.5 years, with no near-term debt maturities other than the ALE capital indexed bond, which will be refinanced with the AUD 296 million of available cash and undrawn debt capacity upon its maturity in November 2023. As at June 30, 2023, the REIT's weighted average cost of debt was 3.9%, based upon look-through drawn debt of AUD 2.8 billion and look-through hedging of AUD 2.4 billion. During the current reporting period, the REIT took out a further AUD 940 million of hedging, together with the extension of hedge maturities. These hedge initiatives have increased the level of hedging to AUD 2.4 billion as at June 30, 2023, with a weighted average hedge maturity of 2.3 years.
Importantly, the REIT has 80% of its FY 2024 debt hedged at an averaged hedge rate of 1.9%, which provides protection against rising interest rates. I will now hand back to Avi to provide an operational update and portfolio overview.
Thank you, Scott. Turning now to slide 14 and recent portfolio transaction activity highlights. During the year, we undertook some portfolio curation, divesting some short WALE properties at book value and investing in new, high-quality, long WALE investments. The divestments consisted of 2 shorter WALE industrial facilities at prevailing book values. The Woolworths Distribution Centre at Hoppers Crossing was sold for AUD 74 million, reflecting a 4.5% cap rate. The property had a 3-year lease term remaining at the time of settlement in December 2022. The Toll Altona North property was sold for AUD 38.3 million, reflecting a 4.75% cap rate. The property had a 2.9-year lease term remaining at the time of settlement in December 2022. These sales provided support for our book values, and the sale proceeds were recycled into new portfolio-enhancing, long WALE investments.
These investments were a 25% interest in the Geoscience Australia headquarters in Canberra for AUD 91 million. The property is a life sciences complex comprising office, specialized laboratory, storage, and warehousing. The property was acquired in October 2022 and featured a 9.6-year WALE with 3% annual rent reviews, and the yield at acquisition was 7.4%. We also further extended our relationship with Endeavour Group, acquiring four Endeavour Group leased pubs: the Emu Hotel in South Australia, the Horse and Jockey, Marine Hotel, and Rainbow Beach Hotel, all in Queensland. All pubs are leased to Endeavour Group with new 15-year triple net leases with uncapped CPI increases. The total combined acquisition price was AUD 17.9 million for CLW's 49.9% interest, reflecting a blended 5% cap rate.
The Geoscience and Endeavour Pub acquisitions demonstrate our focus on transactions offering attractive, long-term, risk-adjusted returns, but also mindful of downside protection, investing in properties strategically important to our tenants, with strong tenant credit favoring government and large companies, and properties with high underlying land value. Turning now to slide 15. In the following slides, I would like to provide an overview of our portfolio and outline some key attributes of the portfolio. Slide 15 is our portfolio overview. At year-end, the rate consisted of 549 properties, valued at approximately AUD 6.8 billion, with 100% of the portfolio independently valued at June. The portfolio average cap rate is 4.77%. The portfolio is virtually fully occupied, with an occupancy of 99.9%, with a long-dated WALE of 11.2 years at year-end.
The properties in the portfolio feature a blend of annual lease review structures, both fixed and CPI-linked. Our average fixed reviews are 3.1%, whilst our CPI-linked leases delivered strong growth, with 7.1% growth in FY 2023. This results in a weighted average rent review for FY 2023 of 5.1%. Turning now to slide 16, and an outline of our tenant customers and the tenant diversification of the REIT. Our portfolio of long WALE properties is leased to high-quality tenants, including government, Endeavour Group, Telstra, bp, Inghams, and Coles. The acquisitions completed during the year further increase our exposure to high-quality tenants in government and best-in-class Endeavour Group. Turning to slide 17 and the industry diversification of our tenant customers.
Within our overall portfolio, approximately 99% of tenants are ASX-listed government or multinational or national corporations, with the vast majority of these tenants operating in non-discretionary industries. During the year, we increased our exposure to government tenants. We also increased our exposure to the pubs and bottle shop sector with best-in-class operator, the AUD 11 billion Endeavour Group. In the telecommunications sector, we have partnered with another best-in-class operator, the AUD 49 billion Telstra Corporation, which includes our portfolio of 37 exchange properties on long triple net leases. We also have a high proportion of tenants operating in the non-discretionary grocery and food sectors, such as Woolworths, Coles, Inghams, Arnott's, and Metcash. Our bp Australia and New Zealand portfolios of 292 properties on long triple net leases provides us with exposure to the resilient fuel and convenience retail sector.
Turning to slide 18, and as can be seen from the chart on this slide, the REIT's portfolio has a long-dated lease expiry profile and reflects a low-risk position relative to our peers in the sector. Our portfolio WALE is a long-dated 11.2 years. We have minimal lease expiries in the next two years, and we are in discussions with a number of tenants with expiries in FY 2026 and beyond regarding lease renewals and extensions. We continue to work to push out our expiry profile as far as possible to the right of this chart, both through acquisition and negotiating lease extensions with our tenant customers. These preceding slides demonstrate the resilience and strength of our portfolio. Our portfolio WALE, quality of tenants, and proportion of triple net leases provides better downside protection and more resilient income streams for our investors.
Turning now to slide 20, I'd now like to provide guidance for FY 2024. Based on information currently available, including current interest rate and inflation expectations, barring any unforeseen events, CLW provides FY 2024 operating EPS guidance of 26 cents and DPS guidance of 26 cents. That concludes today's presentation, I'd now like to invite questions.
Thank you. As a reminder, if you'd like to ask questions via the phone, please press star one one and wait for your name to be announced. If you'd like to cancel your request, you can press star one one again. Please stand by while we compile the Q&A roster. One moment for the first question. First questions comes from Richard Jones from JP Morgan. Please go ahead.
Okay, Avi. Just wondering if you can provide just some color on what's in the, the guidance, just in terms of, where the WACD goes and, and, and perhaps whether you are assuming any asset sales in that number?
Hi, Richard. Thanks for the question. No asset sales are assumed in that number. You know, as we've outlined in the presentation, we're at 80% hedging at present. We've provided that average cost of debt at the present time, you know, 3.9% for our weighted cost of debt. 80% of it's hedged, 20%'s floating just based on the current interest rate curve. You know, how's view in relation to CPI assumptions, and that's basically what we've put in the forecast.
Okay, can you talk about the investment market at the moment, and, and what you're seeing for assets with long duration leases?
Yeah, look, it's, it's mixed obviously across the different asset classes. You know, we're still seeing quite a lot of transactional evidence in things like petrol stations and, and pubs, that's, that's quite supportive of, of where we see value. Similarly in industrial, you know, it's quite an active industrial market at the present time for industrial assets. There's a lot of investors looking to increase their exposure to that, that asset class. You know, across our book more broadly, you know, even, you know, assets like the Telstra Exchange portfolio, now that's got, you know, infrastructure-like characteristics and very strong, you know, rent reviews of sort of CPI plus 0.5%, which is, which is very attractive.
I'd say for the sort of assets we own in the main, the investment market is, is, is strong and supportive.
Okay, just one final question. I think most in the market would be expecting there'll be further devaluations in the next 12 months. Just wondering what impact that has on your portfolio composition and, you know, I guess, if you are or were looking to move some assets on, what part of the portfolio do you think would be, you know, where you might look to sell assets?
Yeah, well, look, as you saw last year, you know, we sold AUD 114 million of property, a couple of industrial and a few small retail properties. You know, we recognize that in the short term there'd be some benefit in potentially some asset sales, so we're certainly looking at that. That can, could come from, you know, a broad range across our portfolio.
Okay. Thanks, Cheers.
Pleasure, Richard. Thanks.
Thank you for the questions. Next questions comes from the line of Suraj Nebhani from Citi. Please go ahead.
Well, hi, good morning, guys. Thanks for the opportunity. Again, it's just following on from what Richard was saying. I think, how you mentioned capital recycling. Yeah, is it, is it fair to say that, you know, the acquisition markets, you know, are, are probably not that supportive currently, so maybe not many acquisitions in, in the near term?
Yeah. No, fair to say, acquisitions is not our primary focus at the moment, Suraj. I think, you know, we're focused on extracting the maximum value out of our portfolio as it stands at the moment, and, and as I mentioned in Richard's question, you know, potentially some selective, you know, divestments.
Okay. maybe, secondly, on the ALE portfolio, is there any further clarity or update that you can provide us on the rental upside that was due in, in a, in a few years' time?
Look, in relation to that portfolio, and as I mentioned, you know, previously, our relationship with Endeavour Group is very strong across our, our business and, and in relation to those, that portfolio, you know, that we enjoy strong, you know, uncapped CPI rent reviews across that portfolio. That open market review is getting ever closer. You know, it's now only 5 years away, and it'll, it'll come around pretty quickly. We're working with Endeavour in relation to that, and, you know, we still, you know, think that's a very high quality portfolio of, you know, what we see as an income producing land bank of, you know, really high quality assets to a best-in-class tenant.
Okay, and that sounds good. Just finally, on the debt cost side, I can see the hedge, like you've done a lot of hedging this, this period. I'm just wondering, you know, like, what's the view on, on interest rates at the moment? Clearly, you know, hedge rates are around 2%, whereas spot market is around 5%-6%, including margin. Should we expect more hedging to be put in place over the next 12 months? Or like, you know, what's the sort of approach that I guess, you know, seems more plausible based on how things are looking currently?
Yeah, I mean, we've, as, you know, you've seen today's presentation, we have taken out more hedges. We're now very well hedged for the next 2 years. We'll look at, you know, continuing to build that hedge profile in later years over the course of the, you know, the next few months and, and beyond. We think that's, you know, a prudent approach in the current, you know, volatile interest rate environment. Yeah.
Okay, thank you.
Thank you for the questions. One moment for the next questions. From the line, we have the questions from David Pobucky from Macquarie Group. Please go ahead.
Good morning and where it currently sits in the context recycling. How do you think about that? Do you need to push through divestments and hold back recycling to manage gearing?
I didn't quite catch that question, David. I might get you to repeat it. I think your line's a bit, not very, not very good.
Apologies for that. I'll, I'll try again. Just in terms of gearing and capital recycling initiatives, do you need to push through more divestments and potentially hold back recycling the proceeds to manage?
Yeah, I think your question's around if we were to sell assets, how we'll deal with the proceeds. Look, I think it's fair to say that, you know, if we are able to, or if we are able to, you know, sort of sell assets at pricing we feel is reasonable, you know, we'll look to do that. You know, in the short term, definitely, you know, look to pay down some debt and, and that'll build capacity for the future when we come out of the, the other side of this current interest rate cycle. No, absolutely, we'll, if we, you know, asset sales will be used to retire debt in the short term.
Mark, if I may, what's driving the difference between where operating cash sits at the year versus operating earnings, please? Just any color you can provide there.
Look, historically, they're pretty much matched off. I think previously we've used some of the operating cash flows from our pub portfolio investment to fund the acquisition of new pubs. That's really been the delta, moving in the past and also moving forward. It's all dependent on if we're funding acquisition activity.
Thank you. I'm, I'm, just the last one, 19%. What's your view on, on the New South Wales gaming reforms from earlier in the year and the Victoria one more recently? Can you talk to the potential risk, around that? Do you think it's manageable?
Well, I think, yeah, the question again, I think your line has, was breaking up there. I think the question in relation to gaming reforms in New South Wales, well, that's not proceeding any longer under the new government in Victoria. Endeavour Group have come out and said that they're going to meet the Victorian changes well ahead of schedule, and they were anticipated by Endeavour. In any event, you know, we're very comfortable with Endeavour as a partner and very comfortable... We don't take, you know, operating risk. We've got triple net leases to, you know, a best-in-class operator. We're very comfortable with their business and, and, and, you know, and where our assets sit and the quality of our portfolio.
Right. Thank you.
Thank you for the questions. Allow me to move on to the next questions. Next question comes from Simon Chen of Morgan Stanley. Please go ahead.
Hi, good morning, Avi and Scott. Thanks for taking my question. Avi, during this conference call, in the Q&A section, you mentioned asset sales. You're looking at recycling, you know, several times. Can we just ask, how serious or how active are those asset divestment programs at the moment in your company? I'm asking this because if I look at FY 2023, your gearing, your look-through gearing as it relates to debt covenant is, like, 42.3%, right? Versus a covenant of 50. If you cop another similar deval to what you did in the last 6 months, it's gonna take you close to 48%. Just wondering, you know, is it, how big is your divestment program, potentially?
I guess the second part of the question is, you know, what, what other strategies do you have in place, you know, to deal with the impact of further devals?
Thanks, Simon. Look, in relation to asset values and sort of where we are relative to covenants, you know, I think we've still got a very good buffer to where covenants sit. Asset values need to decline, yeah, a lot, a lot more than what we saw recently for us to be anywhere near covenants. You know, having said that, you know, we are, as I mentioned, you know, you've, you've said, I've mentioned a few times, we are looking at some divestments. There's a couple of things we've progressed on at the moment. Not something I can talk about now because it's still very conditional. You know, we are serious about it. It's something we're looking at, you know, making some progress towards in the coming months.
Having said that, you know, we, we, you know, we're comfortable with where we sit at the moment, and, and where we are relative to covenants.
Fair enough. next question: Hey, can you give us an update on Tank Street? I think that's like, that's really the only refi risk you have over the next 12 months, isn't it?
Yeah, it is, and it's very small. We're in, we're in constructive dialogue with that tenant, hopeful of, of extending that lease.
Great. Just the last one, I, I think Scott kind of covered it in, in, in his presentation. Just on slide 10, operating expense is up a fair bit. What's the mechanics behind it? The, the, the footnotes or whatever on the side says a full year impact of FY 2022 acquisitions. Is, is that just simply due to part year, those assets coming in part year in FY 2022, and then you copped a full year impact in FY 2023?
That's right. you know, we bought, you know, use the ALE portfolio as the example. We bought that in December 2021. half year impact in, in 2022 numbers, and then full year impact in, in FY 2023.
If, if that's the case, how come NPI didn't have, didn't see similar % increase then?
Oh, you've seen, seen strong, you know, 10.6% increase in, in NPI as well. Like, it's not... I'd have to, I'd have to break that down further for you. I can take that offline, but yeah, they're also a different basis of calculation as well. That's, that's the key driver.
Okay. Okay. All right. Thanks, guys. Thanks, Avi. Thanks, Scott.
Thanks, Simon.
Thank you for the questions. One moment for the next question. Next up, we have the lines from Alexander Prineas, from Morningstar. Please go ahead with your question.
Thank you. Good morning. Just a question on the, you know, the office section of the portfolio includes a lot of the, a lot of the shorter leases in the portfolio. When I say short, obviously, that's relative. They're still long leases, but as they are, you know, sort of overweight among the, the expiries over the next 5 years or so. Can you just provide a bit more commentary on, you know, strategy there and a bit of commentary about the specific assets and how you're, how you, how you're looking at, you know, renewals or what you're, what you're thinking about those assets?
Yeah, look, we're working with those tenants well ahead of expiries on extensions and renewals at a number of our office assets at the moment. You know, the office assets are well occupied. Yeah, we, the, we, we, we're very comfortable with that portfolio. They're generally modern assets, well located, high proportion of government tenants. You know, it's, yeah, we're very comfortable with that portfolio. Without absent, you know, stepping through one, each one and their characteristics, I think that's probably, you know, the answer.
Thank you, and just to, on, CPI leases, any sort of change... Have you observed any sort of different willingness from tenants to sign CPI leases? You know, presumably it was, it was easy to get CPI lease agreed back when inflation was low, but is there any resistance now that we've, now that we've seen, you know, what inflation can do?
Look, we've within CLW, we actually, you know, haven't had to sign any new leases, given the long-dated nature of our portfolio. The lease structures that are in our leases, remain those structures, and, and, we haven't had any tenants, you know, asking us to review that. We're very com- you know, that's sort of where we sit on, on CPI.
Okay, thanks.
Thank you for the questions. As a reminder, to ask question, please press star one, one. One moment for the next questions. Next questions comes from the line of Leanne Truong from Ord Minnett. Please go ahead.
Good morning, everybody. Just a follow-up in terms of your hospitality portfolio. It looks like you've devalued those assets by about 10%. What's been the driver of that?
Thanks, Leanne. Look, the main driver of that is actually those the assets, the both the hospitality assets and also our our bp service station assets have a CPI review in the second half of this calendar year that's based off the September print. When the value is valued, those assets in June, they didn't take into account the upcoming review. When we get those assets revalued in the coming months, that review will get picked up. That was the main reason for the the the larger variance in June on on those on that those portfolios.
Yep, that's it for me. Thanks.
Questions? One moment for the next questions. We have the questions from the line of Grant McCasker from UBS. Please go ahead.
Thank you. Avi, I was cut off, so I might have... This question may have been asked, but I just want to check how you're funding the ALE index-linked bond, and if that is done from the, the balance sheet debt facilities, because that would add 200 basis points to your gearing, wouldn't it? Just checking.
Thanks, Grant. Look, it's funded from our AUD 296 million of available debt capacity at the CLW balance sheet. It shouldn't have an impact to gearing. Our equity accounted investment in that ALE portfolio will increase by AUD 88 million because the debt at that level is gone, and then the debt is now put on the balance sheet. It shouldn't have a material impact to gearing at all.
You're using the, the balance sheet debt, which goes up, which is, that's how the covenant's calculated. That's, I, I just wanted to clarify. On the covenant, have you started or commenced discussions with your lenders to give you extra headroom?
No, absolutely not.
No.
We're very comfortable with the headroom, with both ICR and gearing covenants. There's no need to be renegotiating those with the bank.