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Yield Appeal The Deal For Charter Hall Retail

Australia | Aug 18 2020

This story features CHARTER HALL RETAIL REIT, and other companies. For more info SHARE ANALYSIS: CQR

Charter Hall Retail provided a mixed message in its FY20 results and a lack of outlook or guidance has left the focus on rental collections in the wake of the pandemic.

-Surprisingly small amount of uncollected rent expensed in FY20
-Acquisition of Coles distribution centre consistent with strategy
-Defensible income stream and attractive distribution yield

 

By Eva Brocklehurst

As the coronavirus pandemic plays havoc with the financial results of retail landlords, a lack of guidance from Charter Hall Retail ((CQR)) was disappointing while relief was palpable on the restated intention to pay a distribution in line with 100% of operating cash flow.

Macquarie points out cash drives distributions and the current distribution policy includes an allowance for maintenance capital and tenant incentives. That provides the positive outlook.

Yet, without guidance, Charter Hall Retail has left investors more focused on the downside risk and questioning the underlying story, and given such uncertainty Citi downgrades to Sell from Neutral. The broker estimates earnings will probably settle -15-20% below FY20.

Ord Minnett forecasts a drop of -13% in FY21 funds from operations (FFO) because of dilution from the recent capital raising. The distribution is also expected to be down -7%, with the assumed pay-out ratio in line with adjusted FFO, and allowing for the assumed $5m of rental support.

Rental Shortfall

Operating earnings of $142.7m in FY20 incorporated a -$1.5m negative impact from coronavirus-related provisions. Cash collection appears slightly superior to peers, with a shortfall of -$15m, which UBS attributes to the portfolio weighting to longer WALE (weighted average lease expiry) convenience retail assets.

Morgan Stanley finds it interesting that such a small amount of uncollected rent was expensed but acknowledges there may be expiry extensions applied to some leases so the treatment can be different.

The broker highlights the fact that GPT Group ((GPT)) and SCA Property ((SCP)) wrote off or expensed 70% and 90% of uncollected rent, respectively. However, UBS considers the comparison with SCA Property unwarranted even if both are focused on grocery-anchored convenience retail.

Instead, the disclosures show vastly different accounting methods and, while Charter Hall Retail collections appear better, the SCA Property disclosure was much clearer. Since June 30 both have collected around 50% of the remaining outstanding rent reflected in FY20 earnings.

Citi points out A-REITs are likely to take several approaches to accounting for the impact of the pandemic and this will materially influence how their financial reports appear.

Charter Hall Retail seems to be much less conservative than its peers, which has contributed to a beat on estimates, yet the broker observes the market tends to react favourably to those results that provide some certainty in the form of FY21 guidance or a conservative measure of earnings that can be used as a reliable "base".

Leasing

Commentary has indicated that new lease deals were being struck with negative leasing spreads and Charter Hall Retail is prepared to meet the market to maintain occupancy.

Macquarie highlights the Target ((WES)) stores are a headwind, as this chain represents 2.2% of income. Some positive outcomes in this regard have occurred, with Target conversions to Kmart stores and supermarkets but this predominantly relates to Target Country stores.

While there are no immediate lease expiries, the broker suspects discussions with Target may result in income downtime as well as increased incentives to attract new tenants.

Vacancy rates increased 80 basis points because of the closure of 40 stores over the period, largely related to the pandemic. Moreover, given the likelihood of further devaluation, Macquarie assesses there is limited room for acquisition-led growth, at least in the short term.

Acquisitions

Ord Minnett was somewhat surprised the investment mandate was broadened, although the latest acquisitions are considered low-risk and fairly valued. The broker observes the portfolio has proven fairly resilient, with more than 50% of income exposure to supermarkets and BP service stations. There has also been re-waiting to metro.

A stake was acquired in BP service stations in 2019 and more recently a 52% interest in the Coles ((COL)) distribution centre in Adelaide. Charter Hall Retail has noted the acquisition of the Coles distribution centre was consistent with participation in the supply chain of anchor tenants.

In this way, traditional asset classes such as convenience shopping centres, petrol stations and distribution centres are in the frame, provided traditional anchors are the tenants.

Moelis believes the uncertainty around the strategic direction based on these two recent acquisitions is one of the reasons why the stock is currently trading at a discount. Nevertheless, Charter Hall Retail remains an attractive value proposition with a defensible income stream and attractive distribution yield.

FNArena's database has three Buy ratings, one Hold and two Sell. The consensus target is $3.37, suggesting 3.7% upside to the last share price. The distribution yield on FY21 and FY22 forecasts is 6.9% and 7.4%, respectively. Moelis, not one of the seven stockbrokers monitored daily on the database, has a Buy rating and $3.65 target.

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CHARTS

COL CQR GPT WES

For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

For more info SHARE ANALYSIS: CQR - CHARTER HALL RETAIL REIT

For more info SHARE ANALYSIS: GPT - GPT GROUP

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED