BUY – Charter Hall Social Infrastructure REIT (ASX:CQE)
We believe childcare stocks are undervalued and that the long-term sector outlook is little changed by recent developments due to COVID-19 restrictions. Capital raisings undertaken by childcare providers earlier in the year also provide appropriate insulation from near-term risks.
Currently delivering reliable 6.25% yield in a low rate environment, Charter Hall Social Infrastructure (ASX:CQE) is one of Australia’s largest childcare centre landlords with a conservative balance sheet and exposure to the longer-term structural dynamic of dual-income working families.
The current COVID-19 restrictions have had an effect on childcare attendance, however, the Federal Government has announced significant support for what we believe is a highly political and economic necessity. CQE’s major tenants are the largest, most secure operators (Good Start and G8 Education), and we believe current price weakness represents an opportunity to gain exposure to a quality operator for longer-term growth and income reasons.
This week/month they announced FY20 profit results that were in-line with market expectations. Pleasingly, they’ve recycled some property assets, extending lease terms across the portfolio while net property valuations rose by 4.4%. The company also cited stable valuations in market transactions over the past few months.
Given the specialist use assets, with limited competition and low substitution risk, this helped drive high tenant retention rates. On this front, CQE has been able to improve tenant terms by offering short term rent relief in exchange for negotiated longer lease terms. Major tenant, Goodstart, has signed new 20 year leases on 40 properties and 15 years on some others. The Weighted Average Lease Expiry (WALE) across the group has risen from 9.9 years to 12.7 years. Importantly, over 50% of the leases are now on fixed price annual reviews from FY21 (away from inflation-linked), and less than 5% of leases are up for review in the next five years, so this adds some longer-term certainty.
Despite having a prudent balance sheet before the COVID-19 crisis hit, the company raised funds in May, and gearing now sits at a low 16.4%. CQE is well capitalised to manage the ongoing impact of the COVID-19 pandemic and to take advantage of any attractive long WALE social infrastructure opportunities that may arise in the future. The company also confirmed that, based on information currently available (including with respect to the COVID-19 pandemic), continued tenant performance and (barring any unforeseen events) the FY21 forecast distribution guidance is estimated to be 15 cents per unit (paid quarterly). Based on these forecasts and at prices around $2.40 per share (*at the time of writing) the stock offers investors a highly attractive 6.25% yield.
Capitalised at $870M, CQE is a Specialised Real Estate Investment Trust and provides investors with a stable and secure income, and capital growth through exposure to social infrastructure property.
Read a recent in-depth report on the childcare sector by Morningstar, ‘Australia’s childcare industry is too important to fail: Appealing value within the childcare sector’.
Disclosure of interest
Baker Young Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting, and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.