Stable Occupancy And CPI-linked Rents Will Secure Future Success

Key Takeaways

• Reliable revenue growth is supported by a stable occupancy rate and long lease expiries, with CPI-linked income acting as an inflation hedge.
  
• Portfolio quality improvements and sustainability initiatives may boost valuations and attract high-quality tenants, enhancing revenue stability and growth.
  
• Dependence on stable rates and CPI-linked rent poses risks, alongside high tenant concentration and conservative asset management potentially hindering revenue growth.

Catalysts

An Australian Real Estate Investment Trust (REIT) listed on the ASX and investing in high quality Australasian real estate assets that are predominantly leased to corporate and government tenants on long term leases.

• The portfolio's stable occupancy rate of 99.8% and a weighted average lease expiry of 9.7 years indicate a reliable revenue stream, supporting future revenue growth.
  
• The high proportion (54%) of CPI-linked income provides a hedge against inflation, likely driving future revenue increases as rental income adjusts upwards with inflation.
  
• Recently completed divestments of lower-quality assets have improved the overall portfolio quality, which could lead to higher valuations and enhanced net margins.
  
• The agreed lease extension and warehouse expansion deal with Coles, which involves a significant rentalised cost for expansion, will likely contribute positively to future earnings.
  
• The ongoing sustainability initiatives and high environmental ratings in the portfolio are expected to enhance tenant satisfaction and attract new high-quality tenants, positively influencing revenue stability and growth.

Charter Hall Long WALE REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Charter Hall Long WALE REIT's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -82.8% today to 55.3% in 3 years time.
• Analysts expect earnings to reach A$177.7 million (and earnings per share of A$0.28) by about May 2028, up from A$-201.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from -14.1x today. This future PE is greater than the current PE for the AU REITs industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 1.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Charter Hall Long WALE REIT Future Earnings Per Share Growth

Risks

• The REIT's financials are highly dependent on stable or decreasing interest rates, as any increase in interest rates could lead to higher financing costs, which would negatively impact net margins due to increased interest expenses.
  
• The portfolio relies heavily on CPI-linked rent increases. If inflation rates were lower than expected or decreased, it could result in lower rent escalations, affecting revenue growth.
  
• A significant portion of the portfolio's valuation increase over recent years has been due to contracted and market rental growth. Any slow down in rental market growth could lead to stagnation or reduction in property valuations, impacting NTA and potentially leading to lower earnings.
  
• The divestment of higher-risk properties for lower-yield capital management could lead to an overly conservative portfolio that misses out on higher yield opportunities, potentially affecting future revenue generation.
  
• High tenant concentration with large entities like Endeavour Group, BP, and government bodies could present risks if any of these tenants reduce or terminate their leases, directly impacting occupancy rates and overall revenue.

Valuation

• The analysts have a consensus price target of A$3.931 for Charter Hall Long WALE REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.5, and the most bearish reporting a price target of just A$3.54.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$321.2 million, earnings will come to A$177.7 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of A$4.0, the analyst price target of A$3.93 is 1.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.