Charter Hall REIT lifts hedges to beat rate rises
Charter Hall Long WALE REIT’s move to hedge more than three-quarters of its debt, totalling $2.1 billion, while also increasing the proportion of its leases pegged to inflation has helped it deliver earnings in line with guidance.
Operating earnings for financial year 2022 rose 4.5 per cent to $207.2 million, equivalent to 30.5¢ per unit, while total distributions also rose 4.5 per cent to 30.5¢. Led by Avi Anger, the $3 billion property trust has flagged lower earnings and distributions for the 2023 fiscal year, both at 28¢.
But that dip on profit forecast for the coming year was also well within market expectations. As a result, stock in the Charter Hall-managed REIT traded through unscathed on Tuesday – it closed 17.1¢, or 1.2 per cent higher at $14.46 – in a market where nervy investors are quick to punish earnings misses and disappointing forecasts.
Property trusts are particularly vulnerable to interest rate rises – which chew into their cost of borrowings – and inflation spikes, which can race ahead of rental income.
But Mr Anger and finance head Scott Martin had been busy over the past year weather-proofing the $7.1 billion portfolio and its financial infrastructure, in time for the current volatility.
Those efforts include increasing the proportion of leases linked to CPI from 40 per cent to 49 per cent. The remainder of the leases are fixed with average fixed increases of 3.1 per cent.
Matching the pace of inflation is critical for a portfolio where the distinguishing feature is the length of its leases, which now average around 12 years.
The property trust also struck $650 million of new interest rate swaps, increasing its hedged debt from 53 per cent to 77 per cent. The average length of those hedges, which reduce the exposure of the REIT’s finances to rising rates, is 2.9 years.
“We think it’s a reasonable level of hedging for our portfolio and our debt book,” Mr Anger told analysts on Tuesday. “As hedges roll off, we will continue to monitor that and top up our hedge book where appropriate.”
With 549 properties, the REIT’s portfolio ranges across the office, social infrastructure, hospitality, convenience retail and logistics sectors. The portfolio enjoyed a $670 million uplift in valuation over the year, equivalent to a 10.4 per cent gain. That increase contributed to a 47.5 per cent lift in statutory profit to $911.9 million.
“The key positive from today’s result is the healthy rent growth expectations for FY23 – the 49 per cent of leases linked to CPI will attract a 6.3 per cent uplift; with the remainder fixed at 3.1 per cent,” Morgan Stanley analysts wrote in a client note on Tuesday.
In its biggest acquisition of fiscal 2022, the Charter Hall-run REIT partnered with industry fund Hostplus to buy-out ASX-listed ALE Property Group in a $1.68 billion deal. The transaction made Charter Hall the biggest pub landlord in the country.
