After releasing its FY20 results yesterday, the Charter Hall Retail REIT (ASX: CQR) share price fell 2.9%. Nonetheless, the real estate investment trusts REIT's share price is still up 6.5% since last Friday.
Charter Hall Retail specialises in convenience retail properties, often in regional and sub-regional locations. Supermarkets are the anchor clients of these properties. Additionally, it has diversified to the point where 5 major tenants take up 53% of its portfolio.
In FY20, Charter Hall recorded $142.7 million in operating earnings, 11.3% higher than FY19. However, after booking a value reduction of $41 million from investment properties, it ended with a statutory profit of $44.2 million, down 16.8% on FY19.
Operational highlights
Charter Hall's business mix includes convenience stores such as supermarkets and chemists, as well as speciality retail. During the initial lockdown convenience sales and footfall improved as customers shopped closer to home. In fact, the growth in moving average total for convenience was 5.2%, up from 4% in FY19. Nevertheless, this was offset by tenant assistance of $10.7 million in rent support for speciality retailers during the lockdown.
In December 2019, proceeds from the sale of shopping centre assets were used to purchase of a 30% stake in a portfolio of BP service stations. Charter Hall raised $100 million of equity in February 2020 to increase its stake to 47.5%. In total, the company's property portfolio increased by $270 million. Lastly, post FY20, the REIT also purchased a 52% stake in a high quality distribution facility leased to Coles Group Ltd (ASX: COL) for 14 years.
During the same period, most retail REITs were devaluing properties – by as much as 11% in the case of Vicinity Centres (ASX: VCX). Meanwhile, Charter Hall saw its shopping centres reduce in value by a mere 2.4%, which was then partially offset by a 6% increase in the valuation of BP assets.
Capital management
Due to uncertainty around the impact of COVID-19, Charter Hall also raised $304.2 million in equity during April to reduce gearing and provide stability. Accordingly, the company has reduced its overall gearing to 32.3%, as opposed to 35.9% in FY19. Consequently, net borrowings stand at $750 million, as opposed to $946 million last financial year. Lastly, the company has cash and undrawn liquidity of $443 million.
The purchase of the BP portfolio of convenience petrol stations has helped the company to increase its weighted average lease expiry (WALE) from 6.5 years to 7.2 years.
The future of the Charter Hall share price
At the close of business on Thursday, the Charter Hall share price was $3.30. This is 88% of the company's net tangible asset value (NTA) per unit. So without considering any future performance, the company is selling at a discount to the assets it owns, minus debts. However, it is the future performance that is really interesting to me.
The REIT has accumulated a portfolio of convenience shopping centres and petrol stations that are provably resilient to the impacts of the pandemic. In the report, the company stated that property worth approximately 2.5% of annual revenues was in lockdown in Victoria, which has the harshest lockdowns the country has seen to date. Moreover, it has started to purchase long WALE assets such as the Coles distribution centre and the BP portfolio. This gives the company more predictable earnings over a far longer period of time.
I think the decline in share price yesterday was due to a pullback in the distribution. This has reduced from a payout ratio of 92.4% of earnings to 80.2% of earnings to reflect reduced cash flow generated during the period. Personally, I think this is a financially wise move given the times we live in.
Foolish takeaway
I think the Charter Hall share price remains a very good investment. Specifically, as it is currently selling at a discount to NTA per unit I think it is fair to expect capital growth over the next 2–3 years. The final distribution of 10 cents per unit in August provides a yield of 3% at the current price. When combined with the interim distribution, this raises the trailing 12 month distribution yield to 7%.
With such a resilient portfolio, I think it is very likely the dividend will either stay as it is, or increase further. All of these factors make this an excellent medium-term investment in my assessment.
