Banner image
Annual Report 2017

SECURITY
STABILITY
RESILIENCE

WHAT SETS
US APART

Charter Hall Retail REIT invests in high quality convenience and community based supermarket anchored shopping centres that aim to provide a secure and growing income stream to unitholders.

2017
HIGHLIGHTS

STATUTORY PROFIT

$251.3m

39.1%

PORTFOLIO VALUE

2.8b

8.4%

TOTAL UNITHOLDER RETURN

17.1%

3.7%

STABLE OCCUPANCY

98%

MAJORS MAT GROWTH1

4.0%

NTA PER UNIT

$4.13

9.0%

1. For stores in turnover

OUR
STRATEGY

Our goal is to maintain our position as the leading owner and manager of convenience based shopping centres in the Australian market and provide a secure and growing income stream for our investors.

#1
ACTIVE
MANAGEMENT

Maintaining strong tenant relationships, optimising tenancy mix through proactive leasing and enhancing the overall shopper experience.

98.0%
occupancy
156
lease renewals and 79 new leases
4.0%1
Majors MAT growth
6.8yrs
specialty MAT growth
1. For stores in turnover

#2
ENHANCE
PORTFOLIO
QUALITY

Through value enhancing redevelopment, selective acquisitions of higher growth properties and low growth disposals.

$2.8b
portfolio value
3 forecast higher growth
properties acquired for
$282.6m at a yield of 6.0%
8 lower growth
properties divested for
$157.2m at an average yield of 6.5%
$253m
redevelopment pipeline

#3
PRUDENT CAPITAL MANAGEMENT

With a focus on a strong and flexible balance sheet, prudent gearing and a sustainable payout ratio.

6.1yrs
weighted average debt maturity
33.1%
balance sheet gearing
36.2%
look through gearing
5
bank lenders delivering
increased debt diversity

JOHN
HARKNESS

Chair

SCOTT
DUNDAS

Fund Manager

CHAIR AND FUND
MANAGER’S REPORT

We are pleased to report that Charter Hall Retail REIT has delivered earnings and distributions for FY17 in line with guidance. This financial year has been marked by the strategic reshaping of the portfolio to ensure the delivery of long-term resilience and improved investment performance in future years.

The result of delivering on our three strategic drivers of active asset management, enhancing portfolio quality and prudent capital management was a total unitholder return of over 17% for the 2017 financial year.

VIEW THE REPORT

We are pleased to report that Charter Hall Retail REIT has delivered earnings and distributions for FY17 in line with guidance. This financial year has been marked by the strategic reshaping of the portfolio to ensure the delivery of long-term resilience and improved investment performance in future years.”

DEBT MATURITY PROFILE

  1. Divestments calculated at 100% values and includes acquisitions and divestments settling post balance sheet date.
  2. Value is 100% share of development cost

CHAIR AND FUND
MANAGER’S REPORT

Dear Unitholders,

We are pleased to report that Charter Hall Retail REIT has delivered earnings and distributions for FY17 in line with guidance. This financial year has been marked by the strategic reshaping of the portfolio to ensure the delivery of long-term resilience and improved investment performance in future years.

In our 22nd year as an ASX-listed REIT, we delivered a 9% increase in NTA per unit to $4.13, with a 2.5% increase in operating earnings to $123.3 million. Earnings were 30.4 cents per unit and Unitholders have been paid a full year distribution of 28.1 cents per unit, in line with guidance, representing a payout ratio of 92.4%.

The result of delivering on our three strategic drivers of active asset management, enhancing portfolio quality and prudent capital management was a total unitholder return of over 17% for the 2017 financial year.

Reshaping the portfolio

Charter Hall Retail REIT is the leading owner and manager of convenience based supermarket-anchored shopping centres in Australia. The property portfolio comprises 71 community focused convenience based shopping centres, valued at $2.8 billion.

Our strategy purposefully focuses on the non-discretionary retail sector because it relies predominantly on the provision of food and services to local communities, making it more resilient through market cycles.

To improve the portfolio quality, in FY17 we sold eight lower growth assets for $157.2 million at an average yield of 6.5%1. Two of these divestments settled post 30 June, in July 2017; the remaining two assets settled in September 2017.

We also acquired three higher-growth, multi-tenanted assets for a total consideration of $282.6 million. All three assets characteristically possess strong underlying fundamentals, including good population growth and a dominant position for convenience based shopping in their respective local markets. The three acquisitions were: Salamander Bay Centre, NSW, for $174.5 million; Arana Hills Plaza, Qld, for $67.1 million; and Highfields Village, Qld, for $41.0 million.

We continue to transition the portfolio from lower growth assets into centres where we can add value through active management. The focus of the portfolio continues on non-discretionary retail uses driven by Australia’s leading supermarket brands. Our transactions during the year demonstrate our ability to execute on this strategy.

Active Management

The REIT’s active asset management approach and focus on optimising tenancy mix delivered stable occupancy of 87%, with total NPI growth of 2.5%.

The REIT’s supermarkets continued to perform well with 38% of supermarket tenants now paying turnover rent, up from 31% at June 2016. A further 14% are within a 10% margin of their turnover threshold. Supermarket moving annual turnover (MAT) growth for stores paying turnover rent was 3.8% over the course of FY17, with our anchor tenant Weighted Average Lease Expiry (WALE) at 10.4 years.

Including the REIT’s Discount Department Stores, anchor tenant MAT growth has continued to strengthen, increasing to 4.0% for stores paying turnover rent.

Specialty MAT growth was 0.2% for the year, reflecting subdued trading conditions for specialty retailers, however, the REIT’s rental structure continued to reflect an affordable occupancy cost of 10%.

Throughout the year, our skilled team of retail property professionals secured 79 new leases and 156 lease renewals, maintaining occupancy at 98%.

All major tenants which account for 50% of the base rent from our portfolio, and include supermarkets and discount department stores, recorded MAT growth of 2.0%. Pleasingly, we have seen a particularly strong rebound in performance from Woolworths.

In addition to maintaining our exposure to our largest tenants by base rent, Wesfarmers and Woolworths, we are also encouraging growth in Aldi store numbers, with Aldi now our seventh largest tenant by base rent. The Aldi brand continues to grow its Australian footprint and with broad customer appeal is playing a significant role in improving foot traffic in our centres.

Continued investor interest in the non-discretionary sector, from both domestic and offshore interests, has again had a positive impact on asset valuations. In the 12 months to 30 June 2017, the REIT’s property valuations increased $118 million, or 4.5%, underpinned by a 40 basis point firming in capitalisation rates to 6.31%.

The REIT property portfolio value is now $2.8 billion, up 8.4% from June 2016.

Proactive capital management

Since inception, the REIT has focused on maintaining prudent capital management, with conservative levels of gearing.

Throughout the year, we improved the diversity of our debt profile by adding two banks to the REIT’s panel of bank lenders, bringing total panel numbers to five. This assisted to improve the weighted average debt maturity from 6.0 years at December 2016 to 6.1 years at 30 June 2017, and gearing remained in the middle of the target range of 30% to 40%.

Over the period, we continued to take advantage of the low interest rate environment by extending our hedging profile. As at 30 June, the weighted average hedge maturity was extended to 4.4 years, with a forecast medium term weighted average swap rate of 2.2%. Our debt is 59% hedged for the next 12 months, and 50% for the next five years.

We will continue our focused and disciplined investment strategy to enhance the quality of the portfolio through strategic acquisitions, redevelopments and divestments. In the year ahead, we have identified over $100 million in lower growth asset divestments, which are forecast to complete in the first half of the 2018 financial year.

Value enhancing redevelopments

Redevelopment will always form a strategic component of our active asset management strategy, driving value enhancements across our portfolio. This is a key element of our future growth strategy to ensure we provide an enjoyable and convenient shopping experience for our customers and deliver a secure and growing income stream for our investors.

In FY17, we completed a $63 million redevelopment of the Secret Harbour Shopping Centre, which included the opening of one of Aldi’s first supermarkets in Western Australia. Other highlights included the expansion of the existing Woolworths store, a new Coles supermarket, additional car parking with shading, installation of WiFi capability and new dining options.

Our committed and planned $253 million major projects redevelopment pipeline includes a $58 million expansion of Lake Macquarie Fair in NSW and a $21 million2 upgrade to Wanneroo Central in WA, both of which will commence in the 2018 financial year.

The current $253 million redevelopment pipeline for project starts, is forecast to produce a stabilised yield of 7%.

Following acquisitions, divestment of lower growth assets, revaluations and completed redevelopments the REIT’s average asset value has increased from $39.7 million at June 2016 to $44.7 million at June 2017.

Board enhancements

The REIT continues to enjoy the benefits of highly experienced senior management and Board membership, providing experienced and stable leadership.

In November 2016, we announced the appointment of Michael Gorman as an Independent Non-Executive Director to the REIT’s Board. Michael brings more than 30 years of extensive experience in both real estate and the public equity and debt markets. In his 11 years with Novion Property Group, an ASX top 50 entity, Mr Gorman held a number of executive positions including Deputy Chief Executive Officer, Chief Investment Officer and Fund Manager. In these roles, Mr Gorman was directly responsible for raising several billion dollars of equity in the domestic and US markets.

Also in November 2016, investors ratified the election of Sue Palmer as an Independent Director, by way of a resolution at the REIT’s Annual General Meeting. Sue has been a Director of REIT since 2015.

Alan Rattray-Wood will step down from the Board at the conclusion of the Unit Holders meeting to be held on 31 October 2017. Alan has been a member of the REIT’s Board since 1996. His knowledge of the REIT’s asset class has been invaluable and we thank Alan for his many contributions during his period of service.

Outlook

Supermarkets continue to be the standout performers in our portfolio, despite recent market concern regarding ‘supermarket price wars’. We are seeing continued growth from our supermarkets, with solid sales growth and margins remaining healthy relative to global peers.

We have witnessed conditions that are more challenging for speciality retailers, particularly single store operators. However, within the REIT’s portfolio, more than 60% of our specialty retailers are national operators, who are largely well capitalised, with extensive and efficient distribution networks.

In the year ahead, we will continue to execute on our low growth asset divestments to enhance the portfolio quality. Consistent with our strategy, sale proceeds from divestments will be allocated to optimise returns via acquisitions, redevelopment, buy back or return of capital.

We continue to re-weight the portfolio towards higher growth non-discretionary focused assets. We believe this will position the portfolio to optimise long-term growth prospects.

Barring unforeseen events and subject to the timing of the various elements of the portfolio reconstruction, the REIT’s FY18 guidance for operating earnings is expected to be 30.2 to 30.6 cents per unit, with an expected distribution payout ratio range of between 90% and 95% of operating earnings.

We thank you for your ongoing support and trust in the team.

JOHN
HARKNESS
Chair SCOTT
DUNDAS
Fund Manager

CASE
STUDIES

INVESTING IN HIGHER GROWTH ASSETS

Convenience shopping has long been a mainstay in the Australian retail market; a cornerstone investment due to its longer-term resilience through market cycles.

ASSET EFFICIENCY BUILDS STRONGER PERFORMANCE

Energy, waste and water can’t be ignored. If we do the best we can in the built environment, then this will create shared value opportunities for our investors, tenant customers and the community.”

CHRIS LUSCOMBE,
HEAD OF OPERATIONS
AND SUSTAINABILITY – RETAIL

Convenience shopping has long been a mainstay in the Australian retail market; a cornerstone investment due to its longer-term resilience through market cycles.

AVERAGE ASSET VALUE AT 30 JUNE 2016

$39.7m

AVERAGE ASSET VALUE AT 30 JUNE 2017

$44.7m

INVESTING IN HIGHER GROWTH ASSETS

The centres that we favour dominate their respective catchment, and mostly comprise anchor tenants and specialty retailers who provide essential goods and services that have proven more resilient in times of market challenge and opportunity.

We regularly evaluate the performance of our assets, and have a clear strategy in place to reduce our exposure to low growth freestanding and smaller neighbourhood assets in favour of acquiring higher growth assets. In turn, we seek to increase the average asset size within the portfolio.

In 2017, we sold eight lower growth assets and replaced them with three higher growth, multi-tenanted assets. The common characteristics of these assets are that they comprise the dominant convenience based shopping centre within their respective catchments, and are forecast to produce significantly higher income growth than recent divestments.

HIGHFIELDS VILLAGE, QLD

Highfields Village is a strongly performing convenience-based centre located at Highfields, a major residential expansion corridor approximately 8 kilometres north of the Toowoomba CBD. Competition within the main trade area is limited, and the Centre has future expansion potential, with three pad sites.

HIGHLIGHTS
Purchased: July 2017
Price: $41.0 million
Capitalisation rate: 6.0%
Centre size: 6,366 sqm GLA
Major tenants: Woolworths
Others: 20 specialty stores, 1 mini major, 1 kiosk, 6 ATMs

ARANA HILLS, QLD

Arana Hills Plaza is strategically located in the fast-growing metropolitan Brisbane suburb of Arana Hills and provides the dominant supermarket-anchored offering within its trade area. The centre provides for very accessible on-grade car parking for 822 vehicles. The property also has potential for future development.

HIGHLIGHTS
Purchased: December 2016
Price: $67.1 million
Capitalisation rate: 6.0%
Centre size: 16,406 sqm GLA
Major tenants: Coles, Kmart, Aldi
Others: 23 specialty stores, 4 kiosk, 2 ATMs

SALAMANDER BAY CENTRE, NSW

Located in the Port Stephens region of NSW, northeast of Newcastle, the Salamander Bay Centre is a single level shopping centre that benefits from low levels of direct competition, with its captive trade area along with a resident population of 36,000 and strong tourism sector trade. The major anchors are either trading with turnover in excess of their percentage rent thresholds or are expected to pay percentage rent within the initial investment horizon.

HIGHLIGHTS
Purchased: July 2017
Price: $174.5 million
Capitalisation rate: 6.0%
Centre size: 23,869 sqm GLA
Major tenants: Coles, Woolworths, Kmart, Aldi and Target Country
Others: 64 specialty stores, 9 kiosks, 6 ATMs

Energy, waste and water can’t be ignored. If we do the best we can in the built environment, then this will create shared value opportunities for our investors, tenant customers and the community.”

CHRIS LUSCOMBE,
HEAD OF OPERATIONS AND SUSTAINABILITY – RETAIL

3.5 STAR AVERAGE NABERS ENERGY RATING

GREEN STAR PERFORMANCE RATING

62

CLIMATE RISK RATING

72

LIGHT REPLACEMENT PROGRAMME SAVED ENERGY

1.469Gwh

ASSET EFFICIENCY BUILDS STRONGER PERFORMANCE

As energy prices in Australia rise and the nation makes a steady transition to renewables, our long-term focus on portfolio resilience through active asset management continues to deliver benefits.

At year end, our portfolio enjoyed an average 3.5 star average NABERS1 Energy rating. NABERS is an industry tool used to measure the energy efficiency of our property assets.

Our rating shows we are actively working to reduce the amount of energy our shopping centres consume. This has the combined benefits of reducing operational overheads – savings that we can pass on to our tenants – as well as reducing our grid consumption, which is good for all Australians.

In 2017, we replaced inefficient light bulbs across our portfolio with energy efficient LED lighting, delivering energy savings of some 1.469 GwH – which is enough to power 293 average Australian households for a year.

At Singleton Square, in NSW, we are installing a 250Kwh solar system, which is expected to deliver around 20% of the base building’s energy requirements. In addition, we are undertaking detailed reviews of 17 assets where similar systems may be installed.

Across the portfolio, we have systems in place to monitor the ongoing performance of our buildings, through which we can actively identify inefficiencies and opportunities. That has led to 62 of our assets receiving Green Star performance ratings – industry ratings that show the effectiveness of our monitoring programme. By aligning to Green Star, we can provide valuable information back to planners, architects, engineers and other industry participants on how our buildings perform, so that continuous improvement can be achieved industry-wide. We are committed to undertaking Green Star performance ratings across all retail assets, and in all future redevelopments, such as Lake Macquarie, we have targeted a minimum 4 star Green Star design and as-built rating.

We also leverage our substantive buying power to actively manage our energy pricing – capitalising upon opportunities as and when they are identified.

Since we are long term investors, the REIT has undertaken to have all our retail assets rated for climate risk. This is critical to enable us to understand the impacts that climate change may have on our assets, such as exposure to floods, heatwaves, storms and other natural events. It allows us to better design for the future, and to ensure asset resilience is always front of mind in our decision-making processes.

  1. The National Australian Built Environment Ratings System (NABERS) is a performance-based environmental impact rating system for existing buildings.

PORTFOLIO
PERFORMANCE

Our geographically diverse portfolio benefits from exposure to high growth corridors and operate as the dominant shopping centre in each region.

Total value
of property portfolio

$1,214.7m

Total value
of property portfolio

$509.7m

Total value
of property portfolio

$420.0m

Total value
of property portfolio

$135.7m

Total value
of property portfolio

$30.1m

Total value
of property portfolio

$279.8m

OCCUPANCY
BY STATE

NSW 98.4%
ACT 96.8%
QLD 97.2%
VIC 98.6%
SA 97.0%
WA 97.6%
NT 94.4%
TAS 100.0%
RETAIL SALES
$5.0b+
PORTFOLIO OCCUPANCY
98.0%
TENANTS
1,880
CUSTOMER VISITS ANNUALLY
>150m
GROSS LETTABLE AREA (GLA)
>560,000
SPECIALTY LEASE EXPIRY RETENTION RATE
TOP 10 TENANTS (BY SHARE OF BASE RENT)

OUR BOARD
AND MANAGEMENT