Charter Hall, Region boosted by food as apparel demand wanes
Signs are emerging that shoppers are tightening their belts as retail landlords warn the rate of sales growth has dipped as the cost of living pressures increase across their apparel and more discretionary-style tenants.
Even though food tenants are powering along, as are nail bars and chemists, there have been warning bells sounding for apparel and specialty stores sales, suggesting consumers are being more selective in their purchases.
ASX-listed Charter Hall Retail REIT and Region Group, formerly SCA Property, reported their full-year earnings on Tuesday, saying while the outlook was positive, there were economic and cost headwinds.
Region Group collected more turnover rent from its Coles and Woolworths anchor supermarket tenants.
Both landlords have a high proportion of supermarkets and general food tenants, with Charter Hall also benefitting from pubs revenue through its Endeavour assets and petrol via its service station properties.
Region’s chief executive Anthony Mellowes said,“we are focussed on non-discretionary retailers, which has made Region more immune to economic headwinds”.
“With our range of tenants, we don’t go down when things are bad, and while there are signs there of some softening in sales growth for the discretionary tenants, we are not seeing an elevated level of defaults,” Mellowes said.
“But there has been a softening in the sales figures for July in apparel, where demand has started to come off.”
Region has a market value of $2.68 billion and invests in retail properties predominantly anchored by non-discretionary retailers, with long leases to tenants such as Woolworths, Coles and companies in the Wesfarmers group.
For the year, the group reported funds from operations, the more accurate measure for real estate investment trusts as its excludes one-off items of $192.5 million, down 0.1 per cent in the prior year. Region’s annual distribution was 15.2¢ per share, with the final instalment of 7.7¢ payable on August 31.
“We have delivered 4.5 per cent sales growth across all categories, with supermarket sales increasing by a steady 3.4 per cent as cost of living pressures and lower consumer sentiment sees Australians prioritising life’s essentials, with our specialty tenants remaining resilient,” Mellowes said.
UBS analyst Grant McCasker said Region’s rent metrics were solid but debt costs and expense inflation remain a headwind, with property expenses escalating when compared to property income.
Mellowes said the group had saved about 17 per cent in energy costs due to its commitment to install large-scale solar panels and other emission reducing initiatives across the portfolio.
Region will be disciplined in buying new assets but sees strong demand for some of its non-core centres valued at less than $20 million.
Ben Ellis, chief executive of Charter Hall Retail REIT, said its blend of long-leased tenants and convenience retail assets helped to underpin like-for-like net property income growth of 3.3 per cent for the 2023 financial year.
The trust has a market value of $2.07 billion and is focused predominantly on grocery-anchored neighbourhood and subregional shopping centres. It reported operating earnings of $166.9 million, up 1.5 per cent. The annual distribution was 25.8¢ per share, with the final instalment of 12.8¢ payable on August 31.
Charter Hall Retail REIT has a stake in a portfolio of convenience retail properties leased to BP Australia. Credit:
“Positive leasing spreads, high occupancy levels and moving annual turnover growth are expected to continue. Portfolio income is expected to benefit from direct and indirect inflation-linked rental growth, which will also underpin asset values,” Ellis said.
He said the group also saw a softening in sales growth in the discretionary categories, but demand was still higher for supermarkets and food-related businesses. In the year the trust also increased its footprint in service stations in New Zealand.
Saranga Ranasinghe, vice president, Moody’s Investors Service, said the trust’s results for the year ended June 2023 are credit positive.
“We expect non-discretionary retail to withstand challenging retail conditions. The trust’s specialty tenants tend to trade in categories that are less discretionary than the portfolios of other rated REITs and are thus better positioned to face macro headwinds impacting consumer sentiment and discretionary spending.”
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