Charter Hall Social REIT divests Arena shareholding amidst surge in finance costs

Charter Hall Social Infrastructure Fund REIT (CQE) has reported its Half Year 2022 results in which it confirmed the sale of a long held investment in Arena REIT, its early childhood education and care (ECEC) REIT peer, and a larger than expected jump in finance costs. 

 

Net property income for Charter Hall’s flagship social infrastructure fund rose 19 per cent year on year to $47.1m as property acquisitions combined with rental increases boosted returns, however it also experienced a 23 per cent increase in operating expenses and a 159 per cent increase in finance costs which combined saw operating earnings fall year on year to $29.6 million. 

 

“CQE continues to execute on its strategy with another period actively curating the portfolio, divesting non-core assets and reinvesting in larger social infrastructure assets that have greater earnings resilience and improve the portfolio’s quality,” Charter Hall Social Infrastructure REIT’s Fund Manager, Travis Butcher said.

 

“We have acquired some excellent social infrastructure assets that perform critical roles in the community, are well located and are difficult to replace. CQE unitholders have benefitted from the Charter Hall platform, securing these assets with other Charter Hall managed funds.”

 

Sale of Arena REIT units yields substantial return since 2015 acquisition 

 

On 27 January 2023, CQE sold 11.6 million units in Arena REIT for proceeds of $43.7 million.

 

CQE acquired the approximately three per cent stake in 2015 for around $15.9 million with the sale of the units marking the end of an almost eight year holding period and producing a substantial capital return, not including dividends, of nearly 300 per cent. 

 

Although expectations amongst the financial community were that the sale was to be expected its timing appears to signal a quasi cash raising exercise in light of a spike in interest costs and associated balance sheet measures of risk. 

 

Balance sheet gearing, as measured at the end of the reporting period, touched the highest level since at least 2019 of 33.7 per cent reflecting an increase in liabilities relative to assets not seen for a number of years. 

 

 

With the cost of debt rising to 4.1 per cent and interest cover, an important gauge of financial risk, moving down from 6.8x at the full year 2022 results to 3.5x as at the half year, overall conditions were ripe for the senior leadership to raise cash levels via the Arena unit sale. 

 

ELC portfolio size still trending lower as development pipeline falls again

 

The CQE portfolio of early learning centres fell to 359 as at the end of December 2022, still substantially lower than the 391 centres it owned in 2019, with the trend lower in ELC assets a broader reflection of the group’s commitment to repositioning its broader asset mix away from a heavy ELC reliance. 

 

In the reporting period $157.8 million was spent on the acquisition of the Geosciences Australia property in Canberra and the Innovation Quarter in Western Sydney compared to $28.9 million spent on four new early learning centres. 

 

From a development perspective CQE has just five centres in its pipeline, a record low for the REIT and in stark contrast to the high levels of development activity conducted by the Group prior to 2019. 

 

 

The strategy being deployed by CQE is in contrast to Arena REIT who have to grow their ELC portfolio, via acquisition and their development pipeline, in recent years. 

 

Fixed nature of leases constraining upward movement in rental income 

 

CQE reported a 3.7 per increase in like-for like rental growth across its whole portfolio and confirmed that 78 per cent of lease income on fixed rent reviews that averaged 3.0 per cent, a mix which limits participation in upward rental reviews driven by CPI increases. 

 

Despite that CQE noted that the passing rent for its childcare portfolio was assessed at approximately 5 per cent under market rent and that rent to revenue metrics were at manageable levels of 12.1 per cent.

 

Passing yields across the broader portfolio rose slightly to 4.8 per cent, 10 basis points higher than June 2022 with overall revaluations lifting the portfolio value by just over 0.8 per cent. 

 

Looking ahead the senior leadership confirmed it will continue to execute on its diversified social infrastructure strategy and also actively curate the portfolio to larger scale assets with stronger tenant and property fundamentals. 

 

To review all of Charter Hall Social Infrastructure fund’s half year results releases please visit their website.