Charter Hall Retail REIT (ASX:CQR) fund manager, Scott Dundas, talks 1H17 results, recent acquisitions and strategy.
Carolyn Herbert: Hello, I'm Carolyn Herbert from the Finance News Network. Joining me from the Charter Hall Retail REIT is fund manager Scott Dundas. Scott, welcome back.
Scott Dundas: Hi Carolyn.
Carolyn Herbert: Can you start by giving us an introduction to the Charter Hall Retail REIT?
Scott Dundas: The REIT now has been listed in the Australian market for 22 years, with approximately $2.7 billion worth of assets under management. We focus on the non-discretionary end of the market. We source about 50% of our income from Coles and Woolworths leases, having an unexpired term of around about 10.7 years, which is a standout in the industry. Our strategy is to be the leading owner and manager of supermarket-anchored shopping centres in the Australian market, and we do this through a strategy of three obvious planks. Firstly, active asset management. Secondly, improving portfolio quality by buying and selling assets. And thirdly, prudent capital management. Our board is quite diverse, and has a majority of independent directors on the board, with key skills in accounting, property, and REIT operations.
Carolyn Herbert: Scott, now to your first half 2017 results. What were the highlights?
Scott Dundas: I guess the standout was the increase in statutory profit, which went up 71% to $179 million. Our earnings and distributions of 15.2c and 14.1c were directly in line with guidance. And our net operating income growth was 2.4%. Sales growth from specialty tenants was 1.2%, and from major tenants was 2.8%. At the half, we had debt and undrawn capacity of about $128 million. And, pleasingly, our total return over the 12-month period to investors was 17.2%.
Carolyn Herbert: And Scott, now to the portfolio, what is the geographic spread and what size shopping centres do you own?
Scott Dundas: Carolyn, we've got a very defensive portfolio. We have shopping centres in every State and Territory of the country, but with a bias towards the eastern seaboard. So, over the years, we've recycled out of smaller assets, which is a continuing theme. And, today, we have average asset size in the portfolio of about $43 million.
Carolyn Herbert: How has the portfolio been performing?
Scott Dundas: The portfolio's performed really well over the half, Carolyn. We've had same-property net operating income (NOI) growth of 2.8%. Our supermarket sales are up around 2.8% for properties in turnover rent. And our average specialty shop sales are around 1.2%. All in all, the portfolio has been trading up to expectation, and we've had an increase in our net tangible assets from $3.79 to $4.10 over the period.
Carolyn Herbert: And Scott, can you tell us about any recent acquisitions and disposals?
Scott Dundas: Sure, Carolyn. In the first half we have and had a strategy of recycling out of smaller non-core assets into larger higher-growth properties. We sold three assets in Victoria and Queensland for a total of $72 million, at an average cap rate of 5.6%. Then we immediately reinvested into a property in metropolitan Brisbane at a price of $67 million, reflecting a cap rate of 6%. So, there was a great arbitrage for us. It improved the asset quality. It grew the average asset size. And it gave us more exposure to Coles, Kmart and ALDI, who supply 56% of the base rent of that asset.
Carolyn Herbert: Still on the topic of ALDI, what kind of exposure do you have to it as well as other specialty retail groups?
Scott Dundas: Over the last few years, we've had a conscious bias towards putting ALDI into our redevelopments or buying shopping centres with ALDI as a second supermarket. We regard them highly because they bring a whole new demographic into your centre, and they're very complementary to Coles and Woolworths businesses. So, after the recent redevelopments we've done, including the acquisition of Arana Hills in Brisbane, they will become our eighth-largest tenant by base rent in the second half of FY17. So, a big tick for the fund. The other question around what other specialty retailers we're exposed to – we've had a strategy of putting in service-type uses, so that we like to get uses into our centres that you can't do on the internet, or are not badly affected by the internet. So, you can't get your hair done on the internet, you can't get your nails done on the internet. So, they're the type of uses that we're concentrating on, and also casual dining has been a big incremental boost to the fund.
Carolyn Herbert: And, finally, Scott, what's your guidance for the second half?
Scott Dundas: In the second half, we're guiding the market towards 15.2c per unit of earnings, with a distribution payout ratio somewhere between 90% and 95%. Now, that's barring unforeseen events, but that's the guidance we have in the market at present.
Carolyn Herbert: Scott Dundas, thanks for the update.
Scott Dundas: Thanks very much, Carolyn.