Company Overview: Charter Hall Retail REIT (ASX: CQR) is a leading owner and manager of property for convenience retailers. CQR is managed by Charter Hall Group, which is a leading property group in Australia with over 29 years' experience managing high-quality office, industrial & logistics, retail and social infrastructure property. The company’s Australian portfolio is geographically diverse and is exposed to key markets along the eastern seaboard and across a number of high growth regions in Western Australia and Queensland. 

CQR Details

Focused on Prudent Capital Management: Charter Hall Retail REIT (ASX: CQR) is Australia's leading fully integrated property group that mainly invests in high-quality Australian supermarket anchored convenience and convenience-plus shopping centres. As on 11 February 2021, the company’s market capitalisation stood at ~$1.97 billion. During FY20, the company was focused on actively managing its portfolio by recycling out lower growth properties into high growth properties. As a result of the company’s asset recycling strategy, its operating earnings, grew by 11.5% YoY to $142.7 million in FY20. Despite the COVID-19 pandemic, the company’s centres were open throughout the period as they were classified as essential services, highlighting the important role CQR’s centres play in servicing local communities. Over the past five years, the company has remained profitable and maintained a decent track record of paying distributions to its shareholders.

Five-Year Financial Analysis (Source: Company Report, Thomson Reuters)

Currently, the company is experiencing normalised visitations in most regions, highlighting the essential need associated with convenience retail. Looking ahead, the company is focused on shaping the portfolio to deliver resilient and defensive earnings growth for its unitholders. CQR intends to enhance its portfolio quality by partnering with major tenants to meet their property needs. CQR’s focus on prudent capital management ensures that it successfully execute its growth strategy and deliver a secure and growing income stream to unitholders.

FY20 Result Highlights: During FY20, the company’s portfolio of supermarkets delivered strong MAT (Moving Annual Turnover) sales growth of 5.2%. The total number of supermarkets paying turnover rent was 61% in FY20, a record high for the portfolio. Including specialty sales, the total comparable MAT growth was 3.9%, up from 2.8% in FY19. Following the addition of the bp portfolio, Majors WALE (Weighted Average Lease Expiry) increased to 11.5 years, up from 10.4 year. In FY20, CQR achieved a statutory profit of $44.2 million and operating earnings of $142.7 million. During the year, the company completed 345 specialty tenant leases and saw positive leasing spread of 0.9%, with new leases 0.5% higher than previous leases.

FY20 Results (Source: Company Reports)

Key Metrics: Gross margin and EBITDA margin for FY20 stood at 67.1% and 59.1%, respectively. Current ratio for FY20 stood at 1.06x, higher than 0.91x in FY19, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity multiple stood at 0.39x in FY20, lower than 0.54x in FY19.

Profitability and Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 50.46% of the total shareholding while the top four constitutes the maximum holding. Charter Hall Co-Investment Trust and Pendal Group Limited are holding a maximum stake in the company at 10.07% and 9.66%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Decent Track Record of Rewarding its Shareholders: The company has a decent track record of paying a distribution to its shareholders. For FY20, the company paid a distribution of 24.52cpu, reflecting an 80.2% payout ratio on operating earnings of 30.56 cents per unit. At CMP of $3.48, the company’s annual dividend yield stood at 5.98%. For the first half of FY21, the company declared a distribution of 10.7 cents per unit. The distribution is payable on 26 February 2021 with record date 31 December 2020. For the second half FY21, CQR expects distribution to be greater than the first half distribution, assuming there is no further lockdown or government-imposed trading restrictions.

Distribution Per Share (cents), Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Q1FY21 Result Highlights: During Q1FY21, the company witnessed improved trading performance across its portfolio driven by resilient foot fall and repeat visitation to its centres. Supermarket sales growth increased to 8.9% in Q1FY21, reflecting the continued strength of in-home consumption. Occupancy across the portfolio remained stable at 97.3%. Over the quarter, the company completed refurbishments of four supermarkets. During the quarter, the rent collections also returned towards pre-COVID levels reflecting the improved trading conditions. Notably, 92% of Q1 FY21 rents have been collected with 5% of Q1 rents provided as tenant support, and 3% of Q1 rent remains outstanding for collection.

Q1FY20 Performance Summary (Soured: Company Reports)

NZ Portfolio Acquisition: In September 2020, Charter Hall Retail Management Limited, as responsible entity of CQR, announced an investment in a Charter Hall managed fund which is going to acquire a 49% interest in a portfolio of 70 Long WALE triple net leased (NNN) Convenience Retail properties leased to bp in New Zealand. CQR has committed to pay NZD $130.8 million for the transaction. On 22 December 2020, New Zealand Overseas Investment Office (OIO) gave its approval for the acquisition, following which the settlement took place. It is expected that this transaction will have a positive impact on CQR’s earnings.

Rise in Portfolio Valuation: Following the independent revaluations of 59% of CQR’s total portfolio (by value), the like-for-like portfolio valuation increased by $44 million for the period from 30 June 2020 to 31 December 2020. This is expected to have a positive impact on net tangible assets. As at 31 December 2020, the total portfolio cap rate stood at 6.02%. CQR’s shopping centre convenience retail portfolio valuation grew by $33 million over the period, with the like-for-like cap rate moving from 6.20% to 6.21%.

Portfolio Value (Source: Company Reports)

Outlook: Moving forward, CQR will continue to look for opportunities to enhance its portfolio. Further, it intends to continue its partner with its major tenants and keep working of refurbishment activities. CQR expects that its supermarket and convenience retail sales will continue to be strong, driven by customers preference to shop closer to home and focus on everyday needs. Looking ahead, the company is focused on improving the resilience of its income and growth. CQR intends to use opportunistic divestments to fund acquisition opportunities, which will further enhance the portfolio, with a focus on partnering with non-discretionary convenience retailers. For the second half FY21, CQR expects distribution to be greater than the first half distribution, assuming there is no further lockdown or government-imposed trading restrictions.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of CQR has corrected by 10.72% in the last three months and is trading lower than the average 52-weeks price level band, offering investors a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$3.38 and resistance ~$3.96. We have valued the stock using Price to Earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer median P/E (NTM trading multiple), considering the resilience of the company’s portfolio, improved rent collections, and also taking into account the that the company has been commanding a premium in the past 3-years over its peer median. We have taken peers like Shopping Centres Australasia Property Group Re Ltd (ASX: SCP), Vicinity Centres (ASX: VCX), Scentre Group (ASX: SCG), etc. Considering the company’s decent performance in Q1FY21, improved rent collection, expected growth in supermarket and convenience retail sales, rise in portfolio valuation, distribution outlook, and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.480, by 0.578% as on 11 February 2021.

CQR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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