CLW's debt profile as per their latest HY report shows only 85m of debt expiring in 2024 which is nothing for concern and then majority expiring in 2027.
The biggest worry for CLW is whether the company will breach its debt covenants which will result in firesales or deep discounted capital raising when the share price is already at deep discount to NTA.
CLW and other REITs, having learnt hard lessons during the 2008 global financial crisis, now have lower levels of debt, more diverse funding sources and are likely to be able to avoid raising capital at deep discounts to meet their debt obligations. Looking at CLW, they not only have debt from local banks, but also Bonds and borrowings from international banks. With the quality of their assets, the sources of funding can be greatly diversified.
Unlike the GFC era, when debt levels of 50-60 per cent and higher pulled down players such as Macquarie DDR Trust and Centro Properties Group, REITs now have less debt. Few would have gearing – or debt as a proportion of asset value – over 40 per cent. And debt is less concentrated than it was before the GFC triggered defaults.
Plus, we are in a cycle of "knowns" instead of unknowns like the GFC when things happened very quickly over a very short period of time, now, we know what RBA thinks, we know our position and we know what to expect.
In a recent interview with AFR, Centuria capital said “Both Centuria Industrial REIT and Centuria Office REIT are sector-specific, pure-play, rent collecting A-REITs that maintain comfortable headroom to debt covenants. I believe the same can be said for CLW, CLW is also a pure play, rent collecting A-REITS with superior quality assets to Centuria office reit or industrial REIT, so I would think they are also comfortable within their debt covenants.
This was quoted in the AFR Article:
“Their nature as rent collecting vehicles, with underlying high-quality assets, means they do not have a consistent requirement to fund development pipelines, and therefore have less debt funding pressure than some peers.”
Again, that was referring to Centuria's REITs but same thing applies to CLW.
This was quoted again in AFR Article:
Even if a REIT had to generate cash, most would be able to do so more effectively by selling assets than raising capital, Mr Pirenc said.
“Given most companies are trading at such discounts to their book values … selling assets is still a less dilutive way of dealing with the debt issue than raising capital,” he said.
Selling assets could likely be done at a smaller discount to book value, which could improve a company’s balance sheet. But there was a caveat, Mr Pirenc said.
“You need to ensure demand is there for the assets you’re trying to sell,” he said.With regards to the caveat above, I'm not sure about other REITs but I'm sure if CLW were to sell, the quality of their portfolio will ensure there is always a demand.
To Summaries, I think CLW is worth a punt for the following reasons:
1. We are trading at deep discount to NTA, which means the share price has priced in a lot of negatives such as potential capital raising, rising interest rate etc.
2. There are many ways CLW can avoid breaching debt covenants even if interest rate kept on rising, including selling assets to repay debt
3. Not ruling out capital raises to benefit the manager(CHC) at the expense of shareholders, but how likely is that going to happen ? They have no debt expiring soon and they are comfortably within the covenants, for them to do such a thing will totally destroy their own brand and shareholder trust.
4. Sky rocketing building costs will mean NTA may kept of going up and with less supply coming onto the market, there will be more demand for our properties
5. strong population growth and with the diversified portfolio of ours, our properties will be in high demand, more people, more spending at pubs/retail/petrol stations.
DYOR
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