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Annual Report 2017

LONG TERM
PERFORMANCE

WHAT SETS
CLW APART

Charter Hall Long WALE REIT (ASX: CLW), is a $1.4 billion diversified Australian Real Estate Investment Trust which listed on the Australian Stock Exchange on 8 November 2016. The REIT is focused on providing investors with stable and secure income and targeting income and capital growth through an exposure to long WALE properties. The REIT’s diverse portfolio is predominantly leased to tenants with strong covenants on long term leases.

2017
HIGHLIGHTS

AUSTRALIAN PROPERTIES

801

OCCUPANCY

100%

PORTFOLIO WALE

11.81yrs

5.1yrs

weighted average debt maturity

29.9%

gearing within target range of 25% – 35%

66.0%

of debt hedged with weighted average hedge duration of 5.7yrs

  1. Includes Bunnings South Mackay which was acquired post balance date.

OUR
STRATEGY

We aim to provide investors with stable and secure income and target income and capital growth through an exposure to a portfolio of long Weighted Average Lease Expiry (WALE) properties.

We are growing the portfolio across multiple real estate sectors for diversification benefits with a clear focus on high quality assets leased to tenants with strong covenants on long term leases.

FINANCIAL
PERFORMANCE

16.2c
operating EPU
1.5% above PDS FY17 forecast
$3.93
NTA per unit
2.3% increase from IPO
10.0%
total annualised property return1

PORTFOLIO
PERFORMANCE

11.82yrs WALE
100% occupancy
$104.82m
of new property acquisitions since IPO
$37.8m
gross property valuation uplift

CAPITAL
MANAGEMENT

29.9% gearing
within target range of 25% – 35%
5.1yrs
weighted average debt maturity
66% of debt hedged
with weighted average hedge duration 5.7yrs
  1. Calculated as the growth in NTA per unit plus distributions per unit divided by the opening NTA per unit adjusted for contributed equity for the period from Allotment to 30 June 2017
  2. Includes Bunnings South Mackay which was acquired past balance date

PEEYUSH
GUPTA

Chair

AVI
ANGER

Fund Manager

CHAIR AND FUND
MANAGER’S REPORT

We are pleased to report that the Charter Hall Long WALE REIT (‘CLW’ or ‘the REIT’) has performed strongly in its first eight months as a listed entity1, delivering a statutory profit of $35.2 million and operating earnings of $33.6 million for the period.

This positive performance was primarily driven by the $104.8 million2 in asset acquisitions we have secured since listing, underpinned by strong net property income from a high quality portfolio that is 100% occupied.

VIEW THE REPORT

  1. From 10 November 2017, being the date of allotment of shares following initial listing on the Australian Securities Exchange.
  2. Includes Bunnings South Mackay which was acquired post balance date.

We are pleased to report that the Charter Hall Long WALE REIT (‘CLW’ or ‘the REIT’) has performed strongly in its first eight months as a listed entity, delivering a statutory profit of $35.2 million and operating earnings of $33.6 million for the period.”

OPERATING EPU

16.2c

NTA PER UNIT

$3.93

TOTAL ANNUALISED
PROPERTY RETURN1

10.0%

  1. From 10 November 2017, being the date of allotment of shares following initial listing on the Australian Securities Exchange.
  2. Includes Bunnings South Mackay which was acquired post balance date.
  3. Calculated as the growth in NTA per unit plus distributions per unit divided by the opening NTA per unit adjusted for contributed equity for the period from Allotment to 30 June 2017.

CHAIR AND FUND
MANAGER’S REPORT

Dear Securityholders,

We are pleased to report that the Charter Hall Long WALE REIT (‘CLW’ or ‘the REIT’) has performed strongly in its first eight months as a listed entity1, delivering a statutory profit of $35.2 million and operating earnings of $33.6 million for the period.

As a result, securityholders received distributions for the period to 30 June 2017 of 16.2 cents per unit, which was 1.5% above the 16.0 cents per unit guidance we provided ahead of our November 2016 listing and in line with the updated guidance provided in February 2017.

This positive performance was primarily driven by the $104.8 million2 in asset acquisitions we have secured since listing, underpinned by strong net property income from a high quality portfolio that is 100% occupied.

Net tangible assets per unit rose from $3.84 at listing to $3.93 at 30 June 2017.

High quality, resilient portfolio

CLW’s portfolio is strategically diversified by geography, tenant, industry and property type. This diversification should provide enhanced predictability and stability of returns across property market cycles. At 30 June 2017, the REIT had an ownership interest in 802 properties across retail, office and industrial markets, with a weighted average lease term of 11.8 years – the longest diversified A-REIT WALE.

The REIT is well positioned to deliver long-term, resilient growth in income, with the leases across the portfolio having a weighted average annual rent increase of 2.9%. The long average lease term provides a relatively secure income stream, with the portfolio’s first major lease expiry not occurring until the 2021 financial year. The quality of the portfolio is further reflected in our high quality tenants including Woolworths/ALH Group, Australian Tax Office, Coles, Metcash, Westpac, SUEZ and Australia Post.

The majority of CLW’s tenants operate in non-discretionary sectors, such as food and liquor, government and logistics. The value of such tenants is that they should be more resilient over time, reducing the risk of CLW’s future income rental streams.

For the period from listing to 30 June 2017, the REIT reported a gross property valuation uplift of $37.8 million which contributed towards the net tangible assets per unit increasing from $3.84 at listing to $3.93 at 30 June 2017.

Prudent capital management

At year-end, CLW’s balance sheet gearing stood at 29.9%, within our target range of 25% to 35% and the REIT’s weighted average debt maturity stood at 5.1 years, with 66% of debt hedged.

We have provided our securityholders with an opportunity to increase their securityholding in the REIT through the distribution reinvestment plan (‘DRP’), with approximately one third of securityholders participating in the DRP.

The Long WALE Investment Partnership (‘LWIP’) is a 57-property hospitality portfolio leased to ALH Group, in which CLW has a 45% interest alongside Hostplus and Charter Hall Group. During the period, LWIP issued a A$200 million debt private placement. The transaction comprised a 10-year, A$200 million note priced at an all-in cost of debt of 5.00% per annum fixed for 10 years, providing both CLW and LWIP with long-term debt funding security.

CLW also included a second leading Australian domestic bank in the REIT’s syndicated balance sheet debt facility and increased the balance sheet debt facility to $450 million.

Disciplined acquisitions

During the period, we acquired or committed to acquire 14 new properties in three separate transactions, for a combined $104.8 million. This is consistent with CLW’s investment strategy of acquiring assets with long leases to high quality tenants.

In December 2016, we purchased a 10 property industrial portfolio leased to SUEZ. This portfolio was acquired with a portfolio WALE of 15 years, a triple net lease structure and 3% annual rental increases.

In May 2017, we acquired a Bunnings Warehouse retail property located in South Mackay, Queensland. The freestanding warehouse, on a 2.96 hectare property, is leased to Bunnings Group Limited on a 12-year net lease plus options, with the lease commencing in December 2014. In May, LWIP also expanded its hospitality portfolio with the acquisition of a further three hotels for $23.2 million. The hotels are leased to ALH Group for 15 years on triple net leases.

Additionally, post 30 June 2017 LWIP contracted to acquire the Bridge Inn Hotel in Victoria for a purchase price of $21.2 million reflecting a capitalisation rate of 6.00%. The acquisition will be in conjunction with the disposal of LWIP’s Prestons Hotel in Victoria for $9.2 million, reflecting a capitalisation rate of 5.50%. Settlement of both transactions is expected in October 2017, with the Bridge Inn Hotel benefitting from a new 15 year, triple net lease to ALH Group upon settlement.

These quality acquisitions demonstrate Charter Hall’s ability to identify and execute transactions to support the REIT’s investment strategy, leveraging its extensive relationships with both tenants and the broader market.

Leveraging scale and experience

CLW continues to benefit from the scale and expertise of its manager, Charter Hall Group, which is one of Australia’s leading, fully integrated property groups, with over 25 years’ experience managing high quality property on behalf of institutional, wholesale and retail clients. As at 30 June 2017, Charter Hall has $19.8 billion of funds under management across the office, retail and industrial sectors.

Charter Hall employs over 450 people to deliver exceptional results for its investors, with CLW drawing from Charter Hall’s expertise across funds management, asset management, finance, marketing, human relations, investor relations and corporate services.

Trust structure simplification

Post balance date, Management also announced the proposal to simplify the REIT’s seven trust stapled structure to a three trust stapled structure. The proposal was approved at the general meeting of securityholders on 15 September 2017. The simplification, completed on the 22 September, 2017 will deliver simplified securityholder reporting and operating cost savings as a result of less reporting obligations.

Outlook

In the year ahead, our aim is to continue to deliver on our strategy to own and actively manage a high quality, diversified portfolio of assets with long leases to high quality tenants.

Barring any unforeseen events and no material change in current market conditions, CLW’s guidance for FY18 operating earnings per unit is 26.4 cents, with a target distribution payout ratio of 100% of operating earnings. This reflects growth of 3.9% on FY17 annualised operating earnings per unit.

We are positioned well to execute on opportunities as and when they arise. We would like to thank our securityholders for your ongoing support and trust in our team.

PEEYUSH
GUPTA
Chair AVI
ANGER
Fund Manager

CASE
STUDIES

ACCESSING THE BENEFITS
OF DIVERSIFICATION

A high quality, diversified property portfolio leased to strong tenants has the benefit of reducing volatility of returns and enabling a greater consistency of performance through economic cycles.”

DARRYL CHUA,
SENIOR FUND EXECUTIVE
QUALITY ACQUISITIONS TO MAINTAIN PORTFOLIO RESILIENCE

The acquisitions we have made this year are consistent with our strategy of acquiring high quality properties with long term leases to strong tenant covenants.”

KERRI LEECH,
HEAD OF LONG WALE REIT FINANCE

A high quality, diversified property portfolio leased to strong tenants has the benefit of reducing volatility of returns and enabling a greater consistency of performance through economic cycles.”

DARRYL CHUA,
SENIOR FUND EXECUTIVE

ACCESSING THE BENEFITS
OF DIVERSIFICATION

CLW is strategically diversified, by geography, tenant, industry and property type.

We believe diversification is important, as it should provide a more predictable and lower risk cashflow to deliver sustainable returns to securityholders.

This is further strengthened through CLW’s focus on providing investors with stable and secure income through an exposure to properties that have a relatively high proportion of long term leases in place.

TENANT DIVERSIFICATION AND MAJOR TENANTS1

CLW has a focus on securing properties that are leased to high quality tenants, with an emphasis on those operating in non-discretionary sectors.

GEOGRAPHIC DIVERSIFICATION2

Since listing, CLW has increased its exposure to the eastern seaboard of Australia, with 51% of the portfolio by income located in this region.

  1. Includes Bunnings South Mackay which was acquired post balance date. Weighted by gross passing income as at 30 June 2017 (REIT ownership interest).
  2. Percentages per state refers to weighting by property valuations as at 30 June 2017, including valuations for Woolworths Distribution Centre on a lease commencement basis (REIT ownership interest) and Bunnings South Mackay which was acquired 3 July 2017.

The acquisitions we have made this year are consistent with our strategy of acquiring high quality properties with long term leases to strong tenant covenants.”

KERRI LEECH,
HEAD OF LONG WALE REIT FINANCE

QUALITY ACQUISITIONS TO MAINTAIN PORTFOLIO RESILIENCE

Throughout the 2017 financial year, we continued to build upon the underlying strength of the CLW portfolio, adding 14 new properties in three separate transactions, for a combined $104.8m.

The largest of these transactions was executed in December 2016, shortly after listing, when we acquired a portfolio of industrial properties from SUEZ on a sale and long-term leaseback basis for $65.9 million.

The second acquisition of a freestanding Bunnings Warehouse retail property in South Mackay, Queensland, for $28.5 million was secured in May 2017.

THE SUEZ PORTFOLIO

This transaction added 10 industrial assets to the CLW portfolio, with the assets located throughout Queensland, New South Wales, Victoria and Western Australia.

At the time of acquisition, the properties provided an attractive 15 year weighted average lease expiry, coupled with a triple net lease structure and 3% annual rental increases.

INDUSTRIAL PROPERTIES

10

OCCUPANCY

100%

WEIGHTED AVERAGE LEASE EXPIRY

15.0yrs

ANNUAL RENTAL INCREASES

3.0%

BUNNINGS WAREHOUSE, SOUTH MACKAY

Bunnings is one of Australia’s great retail success stories, benefiting from the nation’s love affair with DIY and home renovation.

The South Mackay Bunnings Warehouse property is a 2.96 hectare property, leased to Bunnings Group Limited on a 12-year net lease, plus options. On settlement in July 2017, 9.4 years remained on the lease.

The lease features attractive 3.0% annual rental increases, and provides a compelling investment opportunity underpinned by resilient rental income, generated from a high quality tenant that holds a dominant position in the hardware sector.

Charter Hall has a strong relationship with Bunnings and currently has an ownership interest across its managed funds platform in 35 Bunnings Warehouse stores, valued at approximately $1 billion.

CAPITALISATION RATE

6.0%

ANNUAL RENTAL INCREASES

3.0%

INITIAL LEASE TERM

12.0yrs

PORTFOLIO
PERFORMANCE

Since listing, CLW has increased its exposure to the eastern seaboard of Australia, with 51% of the portfolio by income located in this region.

PORTFOLIO WALE
11.81yrs
TOTAL ASSETS
801
PORTFOLIO OCCUPANCY
100%
NEW PROPERTY ACQUISITIONS OF
$104.8m
TOTAL PORTFOLIO VALUE
$1.40b
PORTFOLIO WEIGHTED AVERAGE CAP RATE
6.2%
  1. Includes Bunnings South Mackay which was acquired post balance date.

WALE

SECTOR WEIGHTING (%)
TENANT RENT REVIEWS STRUCTURE
TENANT INDUSTRY WEIGHTING (%)

OUR BOARD
AND MANAGEMENT