Charter Hall Long Wale REIT: Property Revaluation and Rental Uplifts Adds Some Covenant Headroom

Charter Hall Long Wale REIT’s, or CLW’s CLW, market update this week revealed a 4.1% valuation increase for its BP Australia portfolio and a 2.2% uplift for its Long Wale Investment Partnership pub assets. These assets collectively account for about one-fifth of CLW’s property portfolio. The increases were driven by inflation-linked rent increases, based on the recently released September Consumer Price Index numbers. We had previously highlighted that CPI clauses in the leases could provide some support to valuations, and this news vindicates that view. We had also previously noted that CLW’s gearing is higher than we’d prefer, so the valuation increases provide welcome additional headroom with respect to its debt covenants. We still think the REIT has too much debt, and the devaluation of other assets in the portfolio remains a risk.

Even factoring in these risks, we view the REIT as materially undervalued versus our unchanged fair value estimate for no-moat-rated Charter Hall Long Wale REIT of AUD 5.10 per security. Management reaffirmed fiscal 2024 guidance of operating earnings per security of AUD 0.26, and we make no change to our forecasts, which are in line with guidance.

CLW continues to look for asset divestment opportunities which, if it can achieve disposal prices near book value, would provide further relief on gearing metrics. No transactions were announced in the update, but we note some deals at rival REITs offer some inspiration. ASX-listed Vicinity Centres recently sold two smaller retail properties in Victoria with 5% and 9% premiums to book values. CLW has over one-fifth exposure to industrial property and more than one-third to retail property, sectors where we think there are reasonable prospects of selling, particularly on smaller assets.