Distribution Cut and Valuation Losses Highlight Risks in Charter Hall Long WALE REIT’s Recovery

A Return to Profitability

Charter Hall Long WALE REIT (ASX: CLW) has delivered a notable turnaround in its financial performance for the half year ended 31 December 2024, posting a statutory profit of $51.3 million compared to a significant loss of $258.4 million in the same period last year. This recovery reflects improved operational results despite ongoing challenges in the property market and broader economic environment.

The REIT’s operating earnings, a key internal measure that excludes non-cash and unrealised items, were $89.8 million, down slightly from $94.0 million in the prior corresponding period. This modest decline was accompanied by a declared distribution of 12.50 cents per stapled security, marginally below the 13.00 cents paid in H1 2023, signalling the REIT’s commitment to delivering consistent income to investors amid market volatility.

Portfolio Valuations and Market Conditions

The statutory profit includes several unrealised, non-cash adjustments that weighed on the half-year results. Notably, the REIT recorded a net fair value loss of $13.7 million on investment properties and a $22.2 million loss on derivative financial instruments. These reflect ongoing valuation pressures in the real estate sector and the impact of hedging activities amid fluctuating interest rates.

External valuations conducted on 82% of the portfolio at year-end underpin these figures, with capitalisation rates and discount rates remaining key drivers of property valuations. The REIT’s portfolio benefits from inflation-linked lease structures and interest rate hedging, which provide some resilience against the current high inflation and interest rate environment in Australia.

Capital Management and Asset Activity

During the period, Charter Hall Long WALE REIT made strategic acquisitions including a 50% interest in Narrabeen Sands Accommodation and BWS in Crows Nest, NSW, while divesting the Ingham’s portfolio and a 50% interest in the Red Cross property in Alexandria. These moves reflect an active portfolio management approach aimed at optimizing asset quality and returns.

The REIT also repurchased and cancelled approximately 12.8 million stapled securities on market for $50 million, a move that reduces equity and enhances earnings per security metrics. On the debt front, the REIT cancelled $500 million in debt facilities and extended $310 million of debt to August 2029, reflecting prudent capital management amid uncertain market conditions.

Balance Sheet and Distributions

Net tangible asset backing per stapled security stood at $4.62, slightly down from $4.66 at the previous financial year-end. The REIT’s gearing remains moderate, with total debt to total assets (net of cash) at 31.8%, providing a buffer for future market fluctuations.

Distributions totaling $89.3 million were declared for the half year, supported by operating earnings and cash flows. The Distribution Reinvestment Plan (DRP) remains in place but was not activated during the period.

Looking Ahead

While the REIT has navigated a challenging macroeconomic backdrop to return to profitability, the Directors caution that ongoing geopolitical uncertainties, inflationary pressures, and interest rate volatility could impact future performance. The REIT’s inflation-linked leases and hedging strategies are expected to mitigate some risks, but investors should remain attentive to market developments.