Release Date: August 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- CQE delivered operating earnings of $0.16 per unit, consistent with FY24 distribution guidance.
- The fund successfully divested 12 childcare properties for $40 million at a premium of 4.1% to the previous carrying value.
- CQE's portfolio boasts a strong WALE of 12.4 years and 99.8% occupancy.
- The fund is well-hedged with 86% of current drawn debt hedged, providing protection against interest rate volatility.
- CQE's portfolio is diversified with 355 properties across Australia, heavily weighted to metropolitan locations.
Negative Points
- NTA per unit decreased by 5.4% from $4.04 to $3.82 due to revaluation decrements.
- Finance costs increased, driven by a 0.4% rise in the weighted average cost of debt from 4.1% to 4.5%.
- The fund's distribution guidance for FY25 is lower at $0.15 per unit.
- The portfolio saw a like-for-like valuation decrease of 2.2%, with the average passing yield increasing from 5% to 5.2%.
- The fund temporarily suspended its distribution reinvestment plan due to trading at a discount to NTA.
Q & A Highlights
Q: Could you talk about your expectations for FY25 leasing spreads in your portfolios by 10% under-rented, but you got a 5.8% spread in '24?
A: Yes, Steve, just be -- I suppose with the four we got this year, each of those places have individual circumstances are those ones had say were only five years into their lease term. So had been reset a lot of close to the market. In terms of the 14% going '25. A lot of those relate back to properties that have been the lease commencement was in sort of two thousands. So we expect as we sort of detail through a number of metrics on in terms of the underwriting 10% rental revenue, the CBRE assessment and by 14%. But the other thing I suppose to note is the restriction with the caps, but we'd expect on average get pretty close to the caps on 7.5 on most of those leases, obviously subject to negotiation. But I think as I've I detailed and in the presentation, there's quality evidence to say the portfolio is under-rented.
Q: Can you just talk about what your FY25 guidance could have been if you hadn't restructured, and I guess just some of the key drivers is the decision to kind of book to smooth out your earnings?
A: Yes, Steve. Look, we're not providing earnings guidance today. Obviously, we've set TPU it at $0.15. I think I called out in the call that the levers that we've moved so that that fixed rates gone gone up circa 40 basis points in FY25 over an average of $600 million of hedge debt.
Q: You've talked about moving to an unsecured debt platform, what kind of costs you're saving there?
A: I think when we flagged when we move to that unsecured platform at the half year that there was circa of 5 to 10 basis points increase in the average margin, that we're paying there. But we would have been paying an additional margin with a new secured platform. So it's probably an extra 10 basis points.
Q: Just on the DRP suspension, could you just elaborate on your thinking there. You've had it on for a while. Why suspend it now and you called out it being temporary. So what would cause you to flick it back on?
A: Solomon, we see the values in the DRP that the retail investors place on, so we were reluctant to suspended obviously [Safeway's] trade at a discount to NTA for a considerable period now. So that was sort of the key decision around suspending that does that discount to NTA. Obviously, we're hopeful that gap will close over time. And then in that point, we'd look to turn it back on -- But I think it's a variable too and retail investors really value it. I'm so reluctant to do it, but just that discount to NTA was sort of the key decision.
Q: Just on that visitation spread that's opened up between your long well as Social Infra assets and your childcare initial yields, you see many opportunities to recycle childcare assets into Social Infra, is still pretty hard to acquire from some of those social insurance assets right now.
A: The other thing on that point, I think where we've been really successful sort of the $40 million divestments we did in FY24 subsequent $28 million subsequent to 30 June. At the moment, we're getting some really good accretion earnings accretion just through repaying debt and reducing gearing at the moment. So that's working well from sort of financial metrics point of view, probably your second question around opportunities. I think you've just got to look at current cost of capital and where we are at the moment. That make it challenging to make acquisitions. So I think at the moment, the sort of portfolio curation of recycling will be just focused on debt reduction and reducing gearing.
Q: I was wondering if you would consider the potential sale of one or more of the social infrastructure assets? Because, I guess just on the presentation, you've divested a number of childcare assets this period and contracted to settle more in FY25. But the contribution to a reduction in Group gearing and improvement in overall flexibility would be less than the potential divestment of one of the larger most relevant social infrastructure assets. So I was just wondering if you could perhaps comment on that.
A: Ben, I think, the fortunate thing with childcare is has Ben, property cycles that liquidity has held up well, I've seen it back to JC days, where we were able to sell those assets through those periods. So that's been a consistent theme. And that's really just been price point driven largely, I think with some of those larger long WALE social infrastructure assets. This really where the interest rate cycle is at the moment in the property cycle is probably not the best interest for CQE to sell some of those larger ones just because it's not that by demands at this point in time for them and the price you would get them obviously wouldn't be a great outcome for CQE investors. So we always review all of our assets and look at what's the best outcome for CQE. So it's certainly we look at them, but I think as we sit here today, the childcare is getting nice sub 5% results because it's giving is that better some outcome in terms of that portfolio curation?
Q: How attractive you might view a potential share buyback given that based on your revised NTA stocks, 34% below its stated asset backing and there is implied value in the share price?
A: Yes, with the buyback, it's something we will always consider not off the table. But at the moment, as I sort of said previously, I think we're getting a key focus is using those proceeds of disposals to reduce debt and reduce gearing at the moment, but somebody would consider down the track.
Q: I was wondering whether you could just put a bit more color around your comfort levels on -- as it relates to gearing, you've obviously mentioned that you're looking to get gearing a bit lower than where it is now. Where would you like to see that number? And I guess, how do you see that capital management piece playing out over the course of the next two years?
A: Yeah. Thanks, Murray. Look, I think our target gearing range of 30% to 40% where at the low end of that range. I think for every sort of $30 million of divestments we're doing at the moment, that's about 1% reduction in gearing if we can get that around 30%, but something we feel very comfortable with yet with us with a strong headroom to covenants. And at the moment, we're getting the added benefit of the childcare divestments are accretive as a result of using those proceeds to retire debt.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
