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Charter Hall Retail REIT Earnings: Inflation-Linked Leases Ease the Pain of Higher Finance Costs

Illustration of a black two story house outlined in blue and part of a black two story house outlined in yellow in front of a black background depicting the real estate industry

No-moat Charter Hall Retail CQR REIT’s fiscal 2023 earnings were marginally below our expectations and guidance for fiscal 2024 was marginally ahead by a similar amount. Our fair value estimate rises 4% to AUD 4.30 due to the time value of money. Operating earnings per security, rose 1.1% to AUD 28.7 cents per security, and distributions were up 5.3% to AUD 25.8 cents. Management guidance is for operating earnings to decline in fiscal 2024 to AUD 27.4 cents per security. We assume a distribution of AUD 25.5 cents per security, around the midpoint of guidance of a 90%-95% payout ratio.

The main takeaway from the result is that growth in property income is largely being offset by rising finance costs. That’s likely to remain the case until debt costs peak, which we expect to occur by fiscal 2027, given the REIT’s hedging and fixed-rate debt should have largely expired by then. The REIT’s average cost of debt was 4.3% as of June 30, 2023, and we assume it gradually rises as hedges expire, toward our long-term estimated cost of debt of 6.5%. We expect roughly flat earnings over that period, but revenue growth should drive low-single-digit earnings growth once the interest rate headwind abates.

Charter Hall Retail REIT has slightly stronger revenue tailwinds than some rivals. First, 24% of rent is linked to inflation, which is currently elevated, and another 35% is indirectly linked to inflation via sales turnover clauses in the leases. Around one-third of major tenants have triple-net leases, meaning those tenants pay property costs, mitigating some of the cost impacts of inflation.

Charter Hall Retail REIT securities are down 24% from their 2022 peak and now screen as undervalued. Our estimates put the REIT on a 7.5% fiscal 2024 distribution yield. That looks attractive considering a 10-year bond yield of 4.3% at the time of writing, and our assumption of approximately flat earnings with moderate downside risk, followed by growth once interest costs peak.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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