Rental Uplifts and Asset Sales Provide Covenant Headroom for Charter Hall Long Wale REIT

Charter Hall Long Wale REIT’s portfolio is high-quality. Liquor retailer and pub operator Endeavour Group is the largest tenant at 19% of passing income. At least four fifths of passing income comes from tenants we view as unlikely to miss a rent payment, including Endeavour Group, government agencies, Telstra, BP, Inghams, Coles, Metcash, Arnotts, Bunnings, and Westpac. External fund manager Charter Hall has a strong record and good relationships with tenants. Continued acquisitions may have diluted CLW’s portfolio, particularly as long-WALE assets have been in high demand and thereby came with a hefty price tag. CLW has been acquisitive, buying properties and other REITs by using debt and issuing new equity. It issued about AUD 386 million of new equity in fiscal 2019 to fund acquisitions, including various offices, a bus terminal in Eagle Farm, Brisbane, and several agricultural logistics properties from Inghams on a sale-and-leaseback arrangement. In fiscal 2020, it issued AUD 850 million of equity to purchase telco exchanges, a Brisbane office building, Telstra’s Melbourne headquarters, and BP service stations in Australia. In fiscal 2021, it issued AUD 626 million of equity, using the proceeds to purchase Telstra exchanges, a portfolio of offices, and BP sites in New Zealand, taking its BP portfolio to about AUD 500 million in Australia and New Zealand. CLW issued substantial new equity every year since its 2016 listing, with the number of securities on issue tripling from about 208 million in June 2017 to 720 million at March 2022. Higher interest rates are likely to slow the group’s expansion and weigh on earnings, given the group’s relatively high gearing.