Charter Halls’ broad scale investment platform and access to tenants continues to support its access to capital and continued growth in EPS.
Whilst Funds Under Management have grown by $6Bill, the Groups’ limited divestments have reduced the ability to capture performance and transaction fees as they did in previous years. In FY20, these fees accounted for 72% of total management revenue, however in FY21 these fees were down -85% reducing total first half earnings down 45% on the pcp.
The Groups statutory profit after tax fell from $313m in FY20 to just $173m in FY21.
Charter Hall’s Managing Director and Group CEO, David Harrison focused on the strengths of the business, saying: “It’s been another successful six-month period for Charter Hall. Notwithstanding the challenges presented by COVID-19, we have been well insulated by our on-going focus on long WALE properties leased to high quality tenants.”
David Harrison has seen strong support from their Wholesale Partnerships including with sovereign wealth fund GIC to house the Ampol portfolio, an expansion of their Aldi supermarket logistics partnership with Allianz, PGGM undertaking a new logistics partnership and QuadReal investing in a new development project at North Quay in Brisbane.
“These partnerships reflect Charter Hall’s well-established relationships with global capital providers. We now have close to 100 investors across our Wholesale platform. These investors, as well as our Charter Hall Direct investors, continue to be attracted by the performance of Charter Hall’s funds and the on-going attractive relative return available in Australian real estate”, said Mr Harrison
Financial highlights:
- Operating earnings of $129.3 million, or OEPS post-tax of 27.8cps
- Statutory profit of $173.2 million, after tax attributable to stapled security holders
- Distributions of 18.6cps
- Return on Contributed Equity of 13.1%
Operating highlights:
- Access: $2.8 billion of gross equity allotted and $2.4 billion of net inflows generated
- Deploy: $6.2 billion of gross transactions
- Manage: $46.4 billion of FUM at 31 December 2020, with $5.8 billion of FUM growth in the 6- month period
- Invest: Property Investments stable at $2.0 billion, delivering a 10.9% return for the 6-month period
Investments
During the period, the Property Investment portfolio of $2.0 billion generated a 10.9% Total Property Investment Return.
Direct Property Investment holdings generated $60.4M in earnings, up 6% on the pcp and accounted for 36% of total earnings.
Unlike the variability of the Property Funds Management earnings, The earnings resilience and diversification of the Property Investment portfolio continues to remain a key strength, with the top 10 asset exposures representing only 10.4% of earnings and the portfolio 80% weighted towards East Coast markets.
Portfolio occupancy remained strong at 97.1% and the Weighted Average Lease Expiry (WALE) improved from 8.7 to 9.1 years.
Property Funds Management
Charter Hall’s Fund Management portfolio is well-diversified across five sectors and is 8.5 million sqm in size. The portfolio WALE increased from 8.6 to 9.1 years as a result of transactional activity and delivered more than $2.3 billion dollars of net rental income.
As mentioned above, the Group’s managed funds grew by $5.8 billion in 6 months to $46.4 billion driven by $3.5 billion of net acquisitions ($6.2 billion gross transactions), positive revaluation of $1.1 billion and capex spend on developments of $1.2 billion.
The Group experienced $2.8 billion of gross equity allotment comprising $766 million in Wholesale Pooled Funds, $1.1, billion in Wholesale Partnerships, $392 million allotted in Listed Funds and $520 million in Direct Funds.
“Despite the transactional activity in the first half, the Group platform still enjoys $6.4 billion of investment growth capacity plus committed and uncalled equity. This leaves us well positioned to continue growing via our development pipeline as well of taking advantage of strategic opportunities as they arise.” Mr Harrison added.
Development activity and pipeline
Development activity continues to drive asset creation and attract capital. Development completions have totalled $1.8 billion of FUM in the last 12 months. Notwithstanding these completions, the $6.6billion pipeline continues to be re-stocked.
The Group continues to use its cross-sector tenant relationships and the scale of its portfolio to create investment grade opportunities. This generates significant value through enhancing both income yield and total returns for its funds. Development activity is predominantly undertaken by funds /partnership with the majority of committed projects being de-risked through pre-leases and fixed price building contracts.
Maintaining a strong balance sheet
Capital management remains a key focus with $3.7 billion of new and refinanced debt facilities during the period and no material maturities in FY21 or FY22. The Group maintains financial flexibility and substantial funding capacity across the fund’s platform with $6.4 billion of available investment capacity. The weighted average gearing across the fund platform remains conservative at 28%.
Strategy and Outlook
The Group’s previous FY21 guidance was for post-tax operating earnings per security (OEPS) growth of approximately 53.0cps. FY21 guidance is for post-tax operating earnings per security of no less than 55cps, excluding any accrued performance fees.
FY21 distribution per security guidance is unchanged at 6% growth over FY20
Our Views
Charter Hall continues to dominate the listed and unlisted markets. As mentioned above, their broad scale investment platform and access to tenants continues to support its access to capital and continued growth in EPS.
Its pre-tax distribution for the first half of FY21 is 6% higher at 18.6cps as compared to the previous corresponding period. Earnings per share is much higher at 33.6cps with Charter Hall holding back 45% of earnings.
The Distribution yield is just 2.7% reflecting the lower payout ratio and higher growth expectation from the trust.
NTA is just $4.28 reflecting the fact that much of the REITs earnings come from funds management activities and performance fees as opposed to just rental income from its assets.
In previous years, Charter Hall have used their “transaction roundabout” to move assets within the group, presumably at arms length, but in the process earning transaction fees to for the group. We don’t support this practice as it create significant conflicts of interest. These conflicts can be managed but are often unexplained. These movements were far less in the last 6 months, accounting for the much lower Property Funds Management revenues.
Performance Fees and transaction fees are likely to reduce in the periods ahead as valuation growth slow.
Despite the low yield, Charter Hall are on our recommend list for its long term growth in values and earnings.
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