Long-Lease Social Infrastructure And Rental Reversion Will Drive Durable Earnings Visibility

Catalysts

About Charter Hall Social Infrastructure REIT

Charter Hall Social Infrastructure REIT owns and manages a diversified portfolio of long-lease, essential social infrastructure properties across Australia.

What are the underlying business or industry changes driving this perspective?

• Material under-renting across the early learning portfolio, with recent market reviews delivering a 10.5 percent uplift and a further 28 percent of income due for review in the next 3 years, supports ongoing rental reversion that should accelerate revenue growth and earnings.
• Embedded annual fixed rent escalators averaging 3 percent, alongside additional income linked to inflation and regular market reviews, create a compounding base of contractual rental growth, improving like-for-like net property income and operating margins over time.
• Exposure to essential services underpinned by a growing and aging population, including early education, higher education and government-backed research facilities, provides resilient demand for space that supports high occupancy, stable cash flows and long-term earnings visibility.
• Accretive portfolio curation, selling lower-yielding early learning assets around the mid 4 percent range and recycling capital into higher-yielding, long-WALE corporate and government-tenanted assets at about 6.7 percent, should widen portfolio yield spreads and enhance net operating income and distributions.
• A strengthened balance sheet, with gearing at the lower end of the target range, extended 4.9-year debt maturity and lower margins from Asian Term Loan refinancing, increases capacity to pursue growth opportunities, enabling earnings per unit and distribution per unit accretion as capital is deployed.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Charter Hall Social Infrastructure REIT's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 55.1% today to 69.6% in 3 years time.
• Analysts expect earnings to reach A$97.9 million (and earnings per share of A$0.27) by about December 2028, up from A$71.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$136.7 million in earnings, and the most bearish expecting A$66.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 15.8x today. This future PE is lower than the current PE for the AU Specialized REITs industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The early learning sector is currently facing challenging events and heightened regulatory scrutiny around child safety. If new regulations increase operator costs or reduce centre profitability, operators may be less able or willing to absorb further rent increases. This could limit the uplift from under-rented assets and put pressure on revenue growth and net margins.
• CQE is deliberately recycling out of low-yielding early learning assets into higher-yielding corporate and government properties. If transaction liquidity in childcare moderates, or if buyers no longer pay sub-5 percent yields, future divestments could be less accretive. This may constrain capital recycling and slow growth in earnings and distributions.
• Long WALE leases with fixed average escalators of around 3 percent underpin predictable income. However, if structural inflation or tenant pricing power in sectors such as early learning and higher education weaken over the long term, market rent growth could fall below expectations. This may reduce the upside from future market reviews and dampen revenue and earnings growth.
• CQE has increased its debt platform to 900 million Australian dollars and pro forma gearing to about 33 percent. If long-term interest rates or credit spreads move higher again when current hedges roll off, the cost of debt could rise from the current 5 percent level. This would compress net interest margins and limit growth in operating earnings and distributions.
• A large portion of income still comes from a single broad theme: early learning and education. If demographic patterns, government funding policy, or parental workforce participation trends shift in a way that reduces long-term demand for centres or university space, occupancy resilience and bargaining power on rent reviews could erode. This could negatively affect rental revenue and long-term earnings visibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$3.55 for Charter Hall Social Infrastructure REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$140.7 million, earnings will come to A$97.9 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of A$3.02, the analyst price target of A$3.55 is 14.9% higher.
  
• 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.