CQR shares (ASX CQR) recently announced that it will take action to divest two underperforming historical neighbourhood properties: Springfield Fair in Queensland and Goonellabah in New South Wales. This divestment should boost earnings for CQR stock.
With this transaction, CQR is able to improve its portfolio quality as well as the average asset value from $44.7 million as at 30 June 2017 to $50 million.
Charter Hall Retail REIT, formerly known as Macquarie CountryWide Trust, is managed by Charter Hall Group (ASX: CHC), an Australian listed real estate investment trust (A-REIT). The firm currently has 93 properties valued at $517m under management.
Divesting Underperforming Properties Crucial For ASX CQR
Commercial property for Australia has been unfavourable as the ASX S&P 200 Australia Real estate Investment Trust (A-REIT) index had fallen by 10% in FY17, while the market grew 10%. Due to this, divesting non-core or underperformance properties in the portfolio and focusing on core locations is crucial for CQR.
Additionally, 24.9% of the sales on the retail property are of the neighbourhood type, indicating the industry currently does not view the neighbourhood type sector favourably, a sector that CQR is actively divesting from.
Focus On Non-Discretionary An Advantage
CQR’s portfolio mainly focused on supermarket-anchored neighbourhood and sub-regional shopping centre markets in Australia. Their emphasis on non-discretionary retail sector relies predominantly on the provision of food and services to local communities.
Charter Hall Retail REIT’s focus on non-discretionary tenants provides a buffer against weaker consumer sentiment.
CQR has performed quite better relative to last year, delivering operating earnings of $123.3 million, a 2.5% increase on the previous year. Charter Hall Retail REIT also experienced a further 9% increase in Net Tangible Assets (NTA) per unit to $4.13 which is higher than its peers BWP Trust (ASX: BWP) at $2.74 and Scentre Group (ASX: SCG) at $3.67. Additionally, CQR’s portfolio has improved by recycling capital from lower growth properties to higher growth ones which led to an 8.4% growth ($2.76 billion) over the year.
In terms of portfolio specifics, the active asset management approach has successfully delivered a total Net Profit Interest (NPI) growth of 2.5% and an occupancy rate of 98%, outperforming the market.
Moreover, CQR’s portfolio has achieved a Weighted Average Lease Expiry (WALE) of 6.8 years, with major tenants such as Wesfarmers (ASX WES) and Woolworth (ASX WOW) of 10.4 years.
ASX CQR is Undervalued Compared To Its Peers
CQR shares Price To Earnings (PE) ratio at 14.3 times is lower than the industry at 15.6 times, including its industry peers such as Westfield Corporation (22.8), which implies that investors are undervaluing CQR’s earnings.
CQR stock Portfolio Weighted Average Capitalization Rate (WACR) firmed by 29 basis points (bps), from 6.71% to 6.42%. Considering that the WACR for Australia market in sub-regional and neighbourhood areas are 6.14% and 6.11% respectively, CQR’s higher WACR could indicate an undervaluation of the firm’s portfolio.
In terms of CQR shares ability to generate return for shareholders, although CQR’s Return On Equity (ROE) of 15.67% is slightly less than the industry’s average of 15.74% for the past 12 months, the cost of equity of 8.55% is well below ROE. CQR stock Debt-to-Equity (D/E) ratio currently stands at a reasonable level of 54.40%, with a lower debt burden compared to peers such as Scentre Group (ASX: SCG) at 59%.
CQR stock earnings per share (EPS) growth of 38.76% is much higher than BWP’s (4.28%) and SCG’s(9.39%). If CQR can maintain EPS growth momentum, Charter Hall Retail REIT has a much stronger future growth potential.[wd_hustle id=subscribe-now type=embedded]
CQR has announced that it would continue the strategy of divesting their non-core, free-standing and smaller neighbourhood assets for portfolio quality improvement. Proceeds from the divestment would be used to fund future potential development as well as share repurchase.
With CQR shares outstanding results last year and competitive prospect on peers, we feel Charter Hall Retail REIT has a strong future ahead of it.
Disclosure: MF & Co. Asset Management and the author does not own CQR.
Research contributions by Xiaoqing Xu, Junqiang Lao, Yuejun Huang and Jiawei Yu.
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