Diversifying With HPI Acquisition Will Strengthen Future Income Streams

Key Takeaways

• Diversifying its convenience-based portfolio and strategic acquisitions are expected to drive revenue growth and secure inflation-linked long-term income.
  
• High occupancy rates and strategic asset management optimize rental income, supporting robust revenue and earnings increases.
  
• Rising finance costs and high gearing levels could lead to asset divestments, impacting long-term growth and necessitating tenant mix adjustments.

Catalysts

Charter Hall Retail REIT is the leading owner of property for convenience retailers.

• Charter Hall Retail REIT's strategy of diversifying its convenience-based portfolio, particularly with a 4.5% NPI growth from net lease convenience assets, is expected to drive higher revenue and earnings growth by focusing on non-discretionary goods and services and securing long-term income with inflation-linked annual rent reviews.
  
• The successful acquisition of a significant stake in Hotel Property Investments (HPI), with its $1.3 billion portfolio of hospitality assets, is projected to deliver long-term rental growth of 3.6% per annum, bolstering both revenue and earnings.
  
• CQR's focus on enhancing portfolio quality through asset management and expansion of its convenience-based shopping centers on low site coverage offers potential for increased net operating income and earnings growth by optimizing rental income streams without additional capital expenditure.
  
• Strong consumer demand in convenience shopping centers, as reflected in the high MAT growth of 3.4%, and extremely high occupancy rates at 98.7%, are expected to continue supporting robust revenue growth.
  
• The strategy of targeted acquisitions and divestments, such as the sale of Lake Macquarie Square and the acquisition of newer, high-performing assets like Glebe Hill Village, aligns the portfolio with high-growth segments, improving net margins and earnings.

Charter Hall Retail REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Charter Hall Retail REIT's revenue will decrease by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 57.0% today to 78.4% in 3 years time.
• Analysts expect earnings to reach A$209.8 million (and earnings per share of A$0.39) by about March 2028, up from A$167.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$295.8 million in earnings, and the most bearish expecting A$152.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the AU Retail REITs industry at 12.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Charter Hall Retail REIT Future Earnings Per Share Growth

Risks

• The increase in finance costs due to a rise in CQR's weighted average cost of debt from 4.3% to 5% could impact net margins and overall earnings.
  
• High gearing levels at 38% may necessitate further asset divestments, which could affect long-term revenue and growth opportunities.
  
• A slowdown in discretionary tenant sales by 1.7%, particularly apparel, could limit overall rental growth potential from specialty tenants, impacting revenue.
  
• The ongoing curation of lower-growth assets and discretionary tenants like Mosaic could lead to short-term revenue loss and impact earnings before positive tenant mix changes fully materialize.
  
• Despite expected rental growth from the HPI acquisition, the presence of any unidentified curation needs within the HPI portfolio may require additional capital outlays or divestments, affecting overall earnings growth.

Valuation

• The analysts have a consensus price target of A$3.786 for Charter Hall Retail REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$267.6 million, earnings will come to A$209.8 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.3%.
• Given the current share price of A$3.38, the analyst price target of A$3.79 is 10.7% 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.