Charter Hall announces $115m capital raise and trading update

Jason Roberts

May 05, 2020

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Charter Hall Social Infrastructure REIT (CQE) has announced that it intends to raise $115m by way of the sale of new units to both institutional and retail investors as it aims to shore up its balance sheet by paying down debt in light of the COVID-19 pandemic and create a foundation for it to be able to continue to execute on their strategy after the pandemic has passed.

This move comes after CQE formally withdrew their FY20 earnings and distribution guidance in late March 2020 and has since sold 26 of its early childhood education and care centres in New Zealand to an undisclosed buyer.

As part of the capital raise, the trust also provided a detailed operational update, the first of its kind from early childhood education and care (ECEC) focussed REITS that provides an insight as to how the ongoing pandemic, and associated policy responses, has impacted the operational environment.

Operational update provides insights to operating in COVID-19 pandemicSince the COVID-19 pandemic has begun, CQE has not experienced a centre closure amongst its portfolio of centres and notes that it received 100 per cent of rental payments in March and 90 per cent of rental payments in April.

With respect to future rental payment flows, the Trust noted that approximately 15 to 20 per cent of its tenants by rental income would be defined as small and medium sized businesses under the Government preferred definition, and therefore be covered by the National Cabinet Mandatory Code of Conduct under which landlords are obliged to provide rental relief in proportion to reductions in their revenues.

It is unclear what the precise impact of the application of the Code of Conduct will have on their rental receipts, but it is understood that all things remaining equal receipts from the small and medium sized business cohort will reduce going forward.

That being said, the Trust has indicated that it will work with its tenants to provide short term relief, looking to claw back any concessions over the long term via adjustments in commercial terms that may include lease extensions.

Notably, the company also confirmed that they had, effective 1 May 2020, executed 40 new 20 year lease agreements with their largest tenant, Goodstart Early Learning on improved terms, including fixed annual increases, for both parties.

Capital raise to consist of institutional and retail componentsThe equity raising is being conducted to strengthen CQE’s balance sheet and ensure it can withstand any unexpected cash flow and valuation impacts from an extended COVID-19 pandemic and also create some flexibility to continue executing on its strategy once the COVID-19 pandemic has ended.

A total of $115 million will be raised by way of placing $100 million of new units to institutional investors via placement, and a further $15 million of new units to retail investors via a unit purchase plan (UPP).

The placement will be issued as $2.20 per share which represents a 7.6 per cent to the closing price of $2.38 on 1 May 2020.

The UPP will be priced at the lower of the placement price and 2.0 per cent discount to the 5 day volume weighted average price (VWAP) up to the UPP offer closing date and 2.0 per cent of the closing price on the UPP offer closing date.

Balance sheet strength and financial flexibility shored up post raiseFollowing the capital raise CQE will see a substantial reduction in balance sheet gearing and an increase in cash and undrawn assets available.

It is forecast that pro forma balance sheet gearing will fall to 16.7 per cent down from 24.9 per cant as at 31 December 2019, and that cash and undrawn facilities will increase to $291.5 million.

The proceeds from the institutional placing will be used to pay down $86.5 million of debt and $12.0 million of other liabilities with the balance of $1.5 million used to pay for the placement fees.

Following the transaction CQE will have debt of $328.1 million with an average cost of debt of 2.1 per cent and cash of $119.6 million on balance sheet.

To read CQE’s presentation please click here.

Please note the institutional placement has now been completed. To read the details please click here.

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