Charter Hall Social Infrastructure REIT reports FY22 results, operating profits rise amidst pause in ECEC transaction activity

Charter Hall Social Infrastructure Fund REIT (CQE) has reported its Full Year 2022 results outlining a year on year rise in operating earnings along with a substantial moderation in acquisitions in its early childhood education and care (ECEC) portfolio in the second half of the financial year. 

 

Net property income was up 17.4 per cent to $84.5 million and operating earnings up 8.4 per cent to $62.9 million in FY22 with earnings per share and distribution per share up similar amounts to 17.3 cents and 17.2 cents respectively. 

 

The REIT’s acquisition activity in its ECEC division, an important driver for revenue and earnings, was limited to the first six months of the financial year when 23 centres were acquired and added to the portfolio. 

 

The second half saw no new ECEC acquisitions, four disposals and six development sites being onboarded and perhaps reflects management’s more cautious outlook on the space amidst uncertainty on the duration and quantum of the recent upward pulse in interest rates and interest rate expectations. 

 

That being said, CQE did confirm the purchase of two non ECEC assets, a TAFE campus and a specialised emergency medical facility, soon after its financial year end as it continues to execute on its broader social infrastructure strategy. 

 

“CQE has continued to actively manage the portfolio and increase its weighting towards larger-scale social infrastructure assets,” CQE Fund Manager Travis Butcher said. 

 

“This has delivered an improvement in portfolio and tenant quality and diversification providing improved security of income and long-term capital growth for Unitholders.” 

 

ECEC portfolio benefits from further upward revaluation as yields drop again

 

FY22 was a period of substantial revaluation gains for CQE with its 337 centre like for like ECEC portfolio now valued at $1,657.7 million, 19.4 per cent higher than last year but also substantially higher than the valuation reported at its Half Year 2022 results when the portfolio was valued at $1,370.5 million. 

 

Passing yields for the portfolio now sit at cycle lows of 4.7 per cent, 30 basis points lower than 31 December 2021 and a full 100 basis points lower than this time last year. 

 

CQE noted that robust revaluation activity reflected “ongoing strong demand for long WALE assets in ‘essential’ sectors with stable income” with like-for -like rental growth up to 3.4 per cent, the highest level recorded for at least eight years. 

 

Market review rental growth was up slightly more at 3.5 per cent, although materially high levels of growth were recorded from 2015 through to 2019.

ECEC development pipeline falls to another new low

 

The CQE ECEC development pipeline has fallen again in FY22 and stood at just eight centres as at year end, down from a peak of 31 centres reported in its June 2019 results.

 

Although six development assets were completed in FY22, with a total value of $42.3 million and long average leases of 16.7 years, there has been little appetite on behalf of the REIT to rebuild its pipeline, instead preferring to acquire completed assets to bolt on to its portfolio. 

 

The completed sites provided a valuation uplift upon completion of $8.6 million or 25.5 per cent and a yield on cost of 5.8 per cent. 

 

Over the course of FY23 five of the eight greenfield sites will be completed. 

 

In addition, CQE confirmed that it continued to divest non core assets with four centres with short lease expiries sold realising $16.5 million. Notably, these divestments achieved a 69 per cent premium to prior valuations and provided CQE the ability to recycle capital into higher quality assets.

 

Gearing remains elevated relative to history as balance sheet scales

 

The Trust’s balance sheet gearing (total borrowings divided by total assets, adjusted for contracted childcare acquisitions and disposals, the completion of the childcare development pipeline and payment of June quarter distribution), now stands at 29.8 per cent, marginally lower than that recorded at the half year mark but elevated compared to the last seven years. 

 

Notably, drawn down debt has reduced fractionally since December 2021 suggesting the company had paid down around $12 million of debt in the second half but overall levels are still around 84 per cent higher than last year’s $300 million. 

 

At this juncture 56 per cent of debt is hedged at an average rate of 0.54 per cent with the duration of the hedges at 3.6 years. 

 

With a total debt facility of $800 million CQE still has substantial headroom should it wish to draw down additional capital to fund growth however with key balance sheet metrics at relatively elevated levels their ability to do so may be limited somewhat unless a corresponding equity capital injection was to accompany it. 

 

As interest rates in Australia continue to track higher, CQE, and peer ECEC REIT Arena’s, balance sheet’s will remain a key focus for investors and the sector at large. 

 

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