This article might help some understanding the results, in particular EPS guidance being below expectations and look-through gearing.
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Charter Hall fund flags asset sales as gearing rises
ASX-listed landlord Charter Hall Long WALE REIT has flagged the prospect of asset sales to reduce its debt load, after portfolio writedowns pushed its gearing level higher and led to a $189 million statutory loss for its 2023 financial year.
The statutory result was driven by a $362.7 million valuation writedown recorded against its $6.8 billion diversified portfolio of office towers, warehouses, social infrastructure such as childcare centres, agricultural assets and retail, including pubs and petrol stations. A year earlier, when the property trust posted a $911.9 million profit, it booked a $625.9 million portfolio revaluation gain.
Managed by its parent Charter Hall, the fund’s result will amplify what is expected to be a dominant theme in the current reporting season, with a wave of writedowns expected across the sector. Last week, Bunnings landlord BWP Trust reported a 2.2 per cent fall in its portfolio values.
But the Charter Hall Long WALE REIT caught investors by surprise when it revealed its 2024 guidance for operating earnings per share and distributions would dip to 26¢, down from the 28¢ it achieved in 2023. That guidance was about 7 per cent below the consensus expectation.
Operating earnings, which factor out the effect of valuation losses, fell 2.3 per cent to $202.4 million for the 2023 year.
Its stock had dropped 22¢, or 5.5 per cent, by lunchtime on Tuesday.
Fund manager Avi Anger flagged the likelihood of future asset sales, after divesting $114 million of industrial and retail property in the 2023 financial year.
“We recognise that in the short term, there’d be some benefit in potentially some asset sales. So, we’re certainly looking at that. And that could come from a broad range across our portfolio,” Mr Anger told analysts on Tuesday.
“Absolutely, asset sales will be used to retire debt in the short term.”
The downturn in valuations, a reality faced across the listed property sector, is the consequence of rising interest rates, which in turn leads to higher yields, or capitalisation rates, required by investors. As a result, book values fall, all else being equal, and landlords may then need to address rising gearing levels.
The Charter Hall-run property trust’s balance sheet gearing is 32.9 per cent, up from 30.2 per cent six months earlier, and within its target range of 25 per cent to 35 per cent.
But its look-through gearing is 42.3 per cent, up from 39.3 per cent six months earlier and edging closer to the 50 per cent gearing covenant imposed by its lenders.
Quizzed by analysts on how further writedowns in the year ahead could push the trust to the critical 50 per cent gearing covenant, Mr Anger was quick to hose down any concerns.
“We’ve still got a very good buffer to where covenants sit. Asset values [would] need to decline a lot more than what we saw recently for us to be anywhere near covenants,” he said.
“We are looking at some divestments. There are a couple of things we are progressed on at the moment. [They are] still very conditional. It’s something we’re looking at making some progress towards in the coming months. But having said that, we’re comfortable with where we sit at the moment and where we are relative to covenants”.
The overall writedown amounts to 3.9 per cent of its total portfolio. Hardest hit was the fund’s small exposure to agri-logistics, which suffered a 15.7 per cent writedown. Its $1.3 billion portfolio of office assets was written down by 9.1 per cent, while retail real estate was written down by 5.3 per cent.
Jarden analyst Lou Pirenc noted the property trust’s stock was “somewhat supported” by a 6.5 per cent distribution yield and its discount to net tangible assets, “but given concerns about high gearing and limited funds from operations momentum, we believe the shares will struggle to outperform”.
“With low cap rates and relatively high gearing, we think it is good to see that Charter Hall Long WALE REIT has started recycling assets, selling lower yielding assets. But given pressure on asset values, we are surprised Charter Hall Long WALE REIT is not selling more assets,” Mr Pirenc wrote in a client briefing.
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