Charter Hall Retail REIT (CQR) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Retail REIT 2026 Full Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Friday, the 7th August 2026. I would now like to hand the conference over to your host today, Mr. Ben Ellis, Retail CEO and Executive Director, CQR. Thank you, sir. Please go ahead.

Good morning, and welcome to Charter Hall Retail REIT's FY '26 full year results presentation. My name is Ben Ellis. I'm the Retail CEO of Charter Hall and an Executive Director of CQR. I'm joined today by Joanne Donovan, Head of Retail Finance at Charter Hall. I would like to begin today's presentation with an Acknowledgment of Country. Charter Hall acknowledges the Traditional Custodians of the lands on which we work and gather. We pay our respects to Elders past and present and recognize their continued care for and connection to Country. Now turning to Slide 4 and our FY '26 highlights. Today, we are pleased to provide an update on our FY '26 results and our outlook for FY '27. FY '26 was another strong year for CQR with the REIT continuing to execute its strategy to deliver the highest income and earnings growth from the Convenience retail sector. CQR upgraded operating earnings during FY '26 to $0.264 per unit, an increase of 4% over FY '25 OEPS. During FY '26, CQR delivered same-property NPI growth of 3%, driven by 3% like-for-like growth across both the Shopping Center and net lease portfolios. The growth in NTA has also been very strong, increasing to $5.03 per unit, up 8.4% over June 2025. This was driven by strong income growth, the CapEx efficiency of our portfolio and continued tenant and investor demand for high-quality assets in the Convenience retail sector. The combination of strong NPI growth and valuation growth across FY '26 has resulted in CQR's property portfolio delivering a 12-month total return of 15.8%. CQR's balance sheet gearing is 30.9%. Over FY '26, we successfully transitioned to a secured debt platform, resulting in a significant reduction in our debt margin by 40 basis points to 1.25%. We also achieved significant improvement in headroom to all debt covenants and all off-balance sheet debt is neither cross-collateralized nor is there any recourse to CQR's balance sheet. Our portfolio performance remains strong with occupancy reaching a record 99.1%. As we'll touch on later in the presentation, collectively, our portfolio metrics are amongst the strongest in the REIT's history. As a result of the performance of our portfolio, CQR expects FY '27 operating earnings of no less than $0.273 per unit, representing growth of no less than 3.5% on FY '26 and distributions per unit to be no less than $0.264 per unit, also representing growth of no less than 3.5% over FY '26. Turning to Slide 5 and the REIT strategy. CQR's strategy remains focused on delivering the highest property income and earnings growth from the Convenience retail sector. We do this by investing in dominant Convenience retail properties, including convenience-based shopping centers and net lease retail assets anchored by major leading tenants. Our convenience-based assets are dominant in their catchments and are focused on nondiscretionary goods and services, delivering resilient performance throughout all economic cycles. Additionally, the net lease portfolio benefits from capital-efficient triple net and double net leases, strong tenant covenants, long WALE and inflation-linked annual rent reviews. Turning to Slide 6. Charter Hall has Australia's largest Convenience retail platform with 169 retail specialists around Australia, managing approximately $18 billion of Convenience retail assets across more than 900 properties. I'm proud of our team's dedication and their disciplined focus on maximizing asset productivity and driving strong income and value growth for CQR's unitholders. We believe Charter Hall's integrated platform of property, finance, and investment specialists focused on the objective of driving income, earnings, and valuation growth for our investors is a clear competitive advantage to CQR's unitholders. Now turn to Slide 7. CQR remained disciplined in its capital recycling program, strategically reallocating capital into high-quality Convenience retail assets offering attractive income growth and enhanced capital efficiency. During the period, CQR increased its investment in the Charter Hall Ampol Partnership #1 to 49.9% and invested $251 million across the high-quality shopping center portfolio of Gympie Central, Whitsunday Plaza and Armidale Central at an average yield of 6.7%. Post balance date, CQR further expanded the portfolio through the acquisition of the exceptionally strong trading Woolworths-anchored Yeppoon Central in Queensland for $65.3 million at a yield of 6.5%. During the period, CQR also completed the sale of its interest in Retail Partnership #6 to CCRF and finalized the divestment of Lansell Square. Post balance date, CQR settled the previously disclosed sale of Arana Hills in Queensland, Kings Langley in New South Wales, Butler Shopping Center in WA for $210 million at an average yield of 5.3%. Turning to Slide 8. CQR continued to execute on its portfolio curation strategy throughout FY '26, further enhancing the quality, resilience and diversification of the portfolio. In 2015, CQR's portfolio was entirely neighborhood shopping centers and was valued at $2.2 billion. Today, CQR's Convenience retail portfolio has grown to approximately $5.3 billion and has been strategically curated to approximately 50% high-quality shopping centers and 50% net lease Convenience retail assets that benefit from inflation-linked annual rent reviews, long WALE, high-quality tenant covenants and CapEx-efficient triple net leases. As a result of this deliberate portfolio transformation, CQR now offers stronger income growth potential throughout all economic cycles, lower capital expenditure and outgoing leakage, greatly enhanced tenant covenant quality and a greater diversification than all sector peers. Turning to Slide 9. Slide 9 highlights how CQR's long-term portfolio curation strategy has enhanced portfolio quality and delivered sector-leading income and earnings growth. In the 5 years prior to our portfolio curation, CQR predominantly consisted of neighborhood shopping centers with poorer lease structures and a lower proportion of anchor tenants paying percentage rental. Over the same 5-year period to FY '19, the average NPI growth of the portfolio was a modest 1.9% per annum. It was also CapEx steady with an average capital expenditure of $75 million per annum, representing approximately 2.8% of the total portfolio value. Through Charter Hall's active management and disciplined capital recycling, Convenience retail Shopping Center NPI growth has increased to 3% in FY '26. This improvement has been driven by a combination of factors, including the disposal of lower growth assets, increasingly stronger supermarket lease structures and a sector-leading percentage of supermarkets paying turnover rental. The addition of net lease Convenience retail assets has not only further strengthened the portfolio performance through strong net effective annual rent growth linked to inflation, but, because of their triple and double net lease structures have significantly reduced capital expenditure requirements, for the CQR portfolio. Today, we not only benefit from stronger NPI growth, but our portfolio capital expenditure has reduced to just 0.5% of portfolio value. The result is a portfolio generating higher income growth with significantly lower capital intensity, supporting stronger and more sustainable earnings growth for CQR investors. Turning to Slide 10. Not only has our strategic portfolio curation driven an acceleration in income growth and CapEx efficiency for CQR unitholders, it's also created significant equity value growth. CQR's original invested equity on a like-for-like basis in the net lease portfolio has grown by 35% or $317 million, delivering an equity IRR of over 18%. These returns demonstrate that the net lease retail portfolio has not only improved CQR's income quality and resilience, but has also been a meaningful driver of NTA growth and total value creation for unitholders. No other portfolio in the sector can speak to these results. Importantly, it is the access to off-market deals generated by the Charter Hall platform that has delivered these opportunities to CQR. Access to the Charter Hall platform is a unique benefit to CQR and its shareholders, and I'd like to thank the Charter Hall team for their ongoing expertise and support in driving market-leading property returns for CQR unitholders. Turning to Slide 11. Slide 11 again demonstrates the benefits of CQR's ongoing portfolio curation to higher growth, higher-quality assets in both the net lease and convenience-based shopping center sectors. Whilst cap rates remained relatively stable from June 2020 through to June 2026, CQR's portfolio value on a like-for-like basis has increased by 32.9%, demonstrating both the quality of our portfolio and the benefit of portfolio curation towards assets with stronger income growth and CapEx efficiency. Put simply, CQR's valuations have grown by 32.9% through genuine rental growth rather than cap rate compression. This NTA growth delivered for CQR unitholders is a demonstration of our stated strategy in action, which is to deliver the highest income and earnings growth from the Convenience retail sector. I'll now hand over to Joanne to talk through the financial results for the period before moving on to the operational performance in some more detail.

Thanks, Ben, and good morning. Our operating earnings can be found on Slide 13. CQR delivered same-property NPI growth of 3%, supported by 3% like-for-like growth across both the Shopping Center and net lease retail portfolios. Finance costs increased during the period, largely reflecting acquisition activity, while CQR's weighted average cost of debt is 5%. Operating earnings were $0.264 per unit for the year, up 4% on FY '25. Distributions were $0.255 per unit, up 3.3% on FY '25. Turning now to Slide 14 and the balance sheet. NTA per unit increased by 8.4% to $5.03. This was largely driven by favorable net valuation uplift. Strong valuation and income growth has delivered a 12-month levered portfolio IRR of 15.8%. Our key valuation metrics are shown on Slide 15. The portfolio has delivered a net valuation increase of $248 million or 4.9%. This reflects Shopping Center net valuation uplift of $147 million, together with net lease valuation growth of $101 million. The portfolio weighted average cap rate is 5.45%, firming 29 basis points over the year or 16 basis points on a like-for-like basis. This reflects the continued tenant and investor demand for high-quality Convenience retail assets. At 30 June 2026, 71% of the portfolio was externally revalued. The remaining Energy and fuel portfolio will be revalued following the annual rent review based on the September 26 CPI print. This will further support both income and valuation growth. Slide 16 highlights our capital management. CQR completed the refinance of its balance sheet debt to a secured debt platform in February 2026. The refinance reduced debt margins by 40 basis points to 125 basis points and extended the weighted average debt maturity, while also providing greater financial flexibility and covenant headroom. Covenant LVR is now 65% and is on a balance sheet basis. All off-balance sheet debt is neither cross-collateralized nor is there any recourse to CQR's balance sheet. Balance sheet gearing is 30.9% on a pro forma basis. CQR remains highly hedged with 67% hedging in FY '27 and 46% in FY '28, supporting earnings visibility in the current interest rate environment. I'll now hand back to Ben to provide the operational update.

Thanks, Joanne. Turning now to Slide 18 and the portfolio summary. Our diversified Convenience retail portfolio has grown to $5.3 billion. Portfolio WALE has increased to 7.1 years with major tenant WALE of 8.9 years. As noted earlier in the presentation, portfolio occupancy has reached a record high of 99.1% and is now broadly balanced between convenience-based Shopping Centers and the net lease portfolio. Turning to Slide 19 and our strong tenant covenants. The portfolio remains underpinned by strong tenant covenants and broad retail category diversification heavily weighted to nondiscretionary spend. CQR's top 10 tenant customers are now all major anchor tenants, representing 61% of total portfolio rent. The quality of this roster is market-leading and underpins CQR's earnings resilience. Turning now to Slide 20 and our net lease portfolio. At financial year-end, the Convenience net lease retail assets represented 49% of CQR's total portfolio by income. These assets are all triple or double net leased, meaning they are free of any material capital expenditure and provide a true net effective yield for CQR investors. They continue to complement CQR's convenience-based shopping center portfolio, providing diversification benefits, enhanced tenant covenant quality and greater income security. No other Australian REIT offers this compelling mix of a true net lease long WALE Convenience retail asset portfolio alongside high-quality convenience-based shopping centers. It is also worth noting, as Joanne touched on, that the majority of our Energy and Convenience assets have their annual rent review based upon the September 2026 CPI print. Following this rent review, the Energy and Convenience portfolio will be revalued and is anticipated to deliver not only strong inflation-linked rental growth, but also further NTA growth for CQR unitholders. Moving to Slide 21 and our supermarket anchors. Across the supermarket operators, we remain well balanced between Coles and Woolworths and continue to partner with ALDI. Strong trading supermarkets remain the foundation of CQR's convenience-based shopping center portfolio. During the period, supermarkets delivered strong MAT growth of 3.6%, up from 2.5% in June 2025. Supermarkets in turnover within 10% of reaching the sales threshold is now at 89%, an all-time portfolio record high. This achievement supports stronger long-term rental growth for CQR and shows the benefit of active portfolio curation to drive the highest income and earnings growth from the Convenience retail sector. Turning to Slide 22 and our specialty tenants. Over the period, specialty tenant sales productivity reached an all-time high of $11,748 per square meter with occupancy costs reducing to 10.9%, showing the strong sales growth of our tenants and providing capacity for ongoing and consistent rental growth. Notably, CQR specialty shop retention rate increased to 86%, setting another record for the REIT and reinforcing the value of our portfolio to our retailers. We completed 416 leasing transactions, achieving positive leasing spreads of 4.1% across the specialty tenant portfolio. CQR specialty leasing spreads continue to compare favorably with our retail peers, demonstrating the strength of tenant demand given the growing productivity of our convenience-based shopping center portfolio. I'd like to take the opportunity to thank the Charter Hall retail team for another strong year. It is the quality, talent and culture within the team that allows us to achieve these results. Slide 23 looks at our ESG highlights for the period. CQR has operated at net zero Scope 1 and 2 emissions since 1 July 2025, with sustainability initiatives continuing to support customer outcomes, capital attraction and long-term value creation. Across the portfolio, 19.5 megawatts of solar is installed across 76% of suitable shopping center roof space, supported by 15.4 megawatt hours of battery capacity across 8 sites, which is an increase of 4.1 megawatt hours over FY '25. We also recognize the important role our centers play in the local communities. We remain focused on creating shared social value through national and local initiatives, including support for vulnerable women, First Nations engagement and broader community partnerships. Finally, turning to Slide 25 for outlook and guidance. CQR has now curated the portfolio to its target mix of approximately 50% high-quality Shopping Centers and 50% high-quality net lease retail assets. This balance provides a stronger and more resilient platform for earnings growth through increasingly strong tenant covenant quality, a diversification of rent review structures linked to inflation and CapEx-efficient lease structures, allowing us to achieve our stated strategy to deliver the highest income and earnings growth within the Convenience retail sector. Based on the information currently available and barring any unforeseen events, CQR expects FY '27 operating earnings to be no less than $0.273 per unit, representing growth of no less than 3.5% on FY '26. Distributions per unit are expected to be no less than $0.264 per unit, also representing growth of at least 3.5% over FY '26. At CQR's closing security price on the 6th of August 2026 of $4.06, this FY '27 distribution guidance represents a distribution yield of 6.5%, which remains attractive in the context of CQR's income resilience and growth profile. In closing, I'd like to add the following remarks. The outlook for Convenience retail remains highly compelling. Australia's population is expected to grow by more than 1 million people over the next 3 years, while new retail supply is forecast to reach a 30-year low. This imbalance between demand and supply is already evident, with Convenience retail portfolios across the country operating at near full occupancy and tenant demand for space in high-quality locations continuing to increase. Supported by these market dynamics, CQR's portfolio is strategically positioned to capture the benefits of population growth, urban densification and constrained supply, underpinning further growth in asset productivity and reinforcing the strength of the results delivered today. That ends the formal presentation. And with that, I now invite questions.

[Operator Instructions] Our first question comes from the line of Solomon Zhang with UBS.

I just wanted to ask about your EPS guidance in the baseline of 3.5% growth. Just wanted to understand whether this includes any net acquisitions or capital recycling initiatives at positive spreads between your acquisitions and divestments or if that presents upside risk?

Solomon, no, we are not forecasting any acquisitions or divestments in that 3.5%.

Great. And just on your payout ratio, you've effectively held it from FY '26. I just wanted to confirm, is this going to be the new normal going forward given the net lease capital drag is lower? And would you provide a bit of a range, would it be 95% or 97%? Just any comments there would be great.

No, I think where it is more than appropriate. And you're exactly right, Solomon, except there is no capital drag from the net lease portfolio, pure net effective rent growth and 100% payout to investors, which is incredibly invaluable. Particularly given we're heading into a period where 82% of our portfolio has got its rent review in the net lease sector off this upcoming September CPI print, which is going to be really strong.

Our next question comes from the line of Howard Penny with Citi.

Just on portfolio curation, just the trend moving forward. We've seen it obviously move from 39% net lease retail in '25 up to 53%. Just thinking about the incremental new dollar invested from a CQR perspective, could we expect that to continue to be pushing a higher ratio of net lease retail, by any chance?

Yes. Thanks, Howard. Look, we currently sit at about 49% by income in that net lease space. And as I just said in the previous question, that's really valuable considering the CPI to come through driving really strong EPS growth without any capital drag for CQR investors. In terms of incremental dollar, look, the reality is we will always invest money where it's best to grow accretion for CQR unitholders. And we are diversified, and we're able to look at multiple sources of property transactions underpinned by the Charter Hall transaction team that we get access to. So the opportunity is there across all of them, and there's no set parameter, which way we look, it's all about accretion to earnings.

One of the themes we're picking up from the retail side is in pubs in particular, there seems to be a potential opportunity for the owners of these pubs to sell down the property side and create value for their own investors. That's been an area where CQR has invested previously. Are you seeing opportunities in that space at the moment?

Look, we've obviously been very defined in anything we do in the net lease space, Howard. We always partner with best-in-class covenants and quality retailer. And like you said, there's been a very successful transition in respect to sale and leaseback portfolios. And as we said in the presentation today, CQR has benefited from 35% growth in invested equity in sale and leaseback transactions with major retailers across the service station and the hotel investment sector that's been absolutely market-leading. So we see that sale and leaseback opportunity as a huge plus for CQR given Charter Hall is the market leader by a long way in sale and leaseback transactions.

Congrats on a great set of results.

Our next question comes from the line of Simon Chan with Morgan Stanley.

Ben, good result in the supermarkets, in particular, the turnover rent part. I just wonder what portion of the turnover rent that you're collecting now are within touching distance of being capitalized into the base rent and therefore, will become more secure going forward?

Look, to be honest, Simon, it's a rolling 5-year basket. So it all comes down to when lease expiries are. It's not quite linear, but you could assume that effectively 1/5 every 5 years capitalizes into base rent.

Okay. That's clear. In your closing remarks before, you talked about how retail supply is low. How has that manifested in your lease negotiations, I guess, in particular with the anchor tenants? Like can you just swing your weight around a little bit more now going forward in that whole gross lease net lease argument? Or do you think we're actually not there yet?

Look, I think it's a topic that's going to be discussed a lot. Obviously, we've been pretty active in renegotiating our anchor tenant lease over a long period of time away from those gross leases that you see other portfolios. My view on that, Simon, is that as time goes on and the scarcity of these sites increase and lease expiries come around, then there will be more discussions to be had with the major tenants about improving the recovery rate and growth rate for investors in the sector. So I see that as a potential tailwind.

And my last one is just on the specialty tenants performance. Perhaps you can explain this to me. Occupancy cost stepped down a bit, which is great. I think it was 11.5% at the half year, is now 10.9%. But your MAT growth is only 3%. Average rental increase is 4%. Leasing spreads like almost 5%. Just mathematically, like it's come down 50 bps, 60 bps, just bit funny.

It's just compositional too. It depends on what has come in and out of the portfolio over the periods.

Okay. So it's not a like-for-like comp...

Well, it is like-for-like. But every time you get through a period where something comes into like-for-like basket or comes out of it, it obviously comes through that number. But the reality is it's a snapshot point in time. The simple fact is we have got a more productive portfolio. It's a record sales density and occupancy costs forever has sat around that sort of high tens, low elevens number, and nothing is going to change. It actually shows the sustainability of this portfolio to capture rent growth as and when it comes through. And as you touched on earlier, the scarcity of supply is not just a discussion for anchor tenants. It's going to be a massive discussion for specialty retailers seeking out high-quality locations that trade at these sort of levels. So we see that as another tailwind.

Our next question comes from the line of Tom Bodor with Jarden.

Just one for me on this September CPI print, which you sort of mentioned a couple of times and how it's going to be quite positive for ALDI and the like. Look, I look at your Convenience portfolio, cap rates are clearly tight sort of 4.78% for BP, 4.89% for Ampol, 4.92% for Endeavour LWIP2. And the 10-year bond yield's at 4.97%. So I'd just be interested in -- I appreciate the rent growth will be strong, but how are you thinking about cap rates in light of the tenure being more elevated more recently?

Sales evidence drives valuations and current sales evidence through all the net lease sector shows that, if anything, our cap rate is on the high side, to be frank. Now, we've actually demonstrated over the 6-year period that, that net lease portfolio has had the most resilient cap rates over that whole period. You can see that in the slide. Yet, we've generated nearly 40% valuation growth across net lease because there's no CapEx, there's absolute rent growth through inflation. And I think that, that's a very strong and compelling factor. And private investment market, which is the major investor in these type of assets, look at the underlying risk associated with an asset. They look at the rent growth. And our net lease portfolio is right up the alley for all of those people, and that will continue to drive interest and valuation growth beyond just, obviously, rent growth is going to come through with the September CPI print.

And then I guess the flip side of a high inflation is the debt cost part of the P&L. And just be interested in your thoughts around how you're thinking about managing that big step down in hedging into FY '28?