Charter Hall Group (CHC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2020 Full Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, 20th August. I would now like to hand the conference over to your host today, Mr. David Harrison, Managing Director and Group CEO. Thank you, sir. Please go ahead.

Good morning, and welcome to the Charter Hall Group 2020 Full Year Results Presentation, marking our 15th annual result as a listed A-REIT, having listed on the ASX in June 2005. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our Chief Investment Officer; and Russell Proutt, our Chief Financial Officer. Slide 4 highlights another financial year of growth and resilience. Operating earnings post-tax was $323 million, equating to $0.693 per security, up 46.2% on FY '19. The total platform return or the gain in NTA plus distributions was 18.8% for the year, continuing our sector-leading return on contributed equity, something we will discuss later. The group's property investment portfolio increased 10% this year to $2 billion and provided a total property return of 10%, inclusive of 6.2% PI yield. It was a record year for FUM growth, up 33.2% or $10.1 billion to finish the year at $40.5 billion. We've also continued this momentum growing FUM a further $1.3 billion since 30 June. The growth reflects our continued focus on partnering with our tenant and investor customers, delivering positive outcomes for them, which ultimately translates into attractive returns for securityholders. That growth saw us undertake $8.3 billion of gross transactions as we continue to actively curate our portfolio to drive performance via acquisitions, divestments and developments. The group's balance sheet remains resilient with 0% net gearing and significant liquidity, whilst 9.6% NTA growth was also pleasing. Finally, the group's investment capacity of cash and undrawn debt exceeds $5 billion, up from $4.1 billion in December 2019, with recent equity commitments accelerating this capacity with the completion of a recent $1.25 billion CPIF equity raising, a majority of which will be deployed in FY '21. The deployment of capital into pre-lease developments and acquisitions continues to utilize capacity, whilst continued equity flows more than replenish the overall capacity. Our focus remains on delivering sustainable growth for securityholders, replenishing dry powder, strengthening resilience and a vigilant focus on property fundamentals. Slide 5 outlines our strategy of using our property expertise and customer relationships to create value and generate superior returns for our investors. Access, deploy, manage and invest has not changed for over 10 years as we execute upon these strategic pillars. We raised $5.1 billion of gross equity during the year. All equity sources delivered strong net inflows, but it's worth calling out that it was a record period for our direct business and our wholesale partnerships. Of the $8.3 billion of gross transactions this period, we acquired $7.3 billion and divested a further $1 billion of assets. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from the assets we manage. Finally, we continue to focus on investing alongside our capital partners. The CHC Property Investment, or PI, portfolio grew $184 million, and delivered a 10% return during FY '20 for CHC securities holders. Turning to Slide 6 and the impacts of COVID. There is no doubt that COVID-19 has had a profound effect on the property industry for both many of our tenant customers and community stakeholders who have been deeply impacted. However, Charter Hall is a resilient business and has been well placed to withstand these impacts. We've seen investor demand for industrial and logistics accelerate, something we are well placed to meet with strong inflows, accelerating pre-lease development work in progress and an ever-growing market share of logistics assets leased to essential service customers and those critical to the supply chain the economy relies on. COVID has also seen corporate Australia continue to pursue sale and leaseback transactions, something Charter Hall is uniquely positioned to fund with $8.5 billion track record over the last 5 years, embedding us as the leader in the Long WALE triple net lease sector. Looking specifically at our tenant exposures across the funds' platform, Charter Hall's sector-leading WALEs and focus on strong tenant covenants means the impact of tenant relief has been modest relative to some. The proportion of rent from SME tenants across our more than $40 billion portfolio is approximately 10%. 97.3% of collectible rent for the fourth quarter has been collected. Finally, looking at the PI portfolio, we have a highly diversified portfolio with the top 10 assets representing only 7.4% of group rental income. Incremental investments have been weighted towards industrial and logistics and Long WALE portfolios, further improving the resilience of the PI portfolio income stream. Slide 7 highlights pre- and post-tax OEPS growth, but we also highlight growth ex the CHOT performance fee. Pleasingly, over a long period of time, we have delivered consistent OEPS growth for securityholders. Turning to Slide 8. As I mentioned at the beginning of the presentation, FY '20 is Charter Hall's 15th year as a listed company. There have been many milestones over this period. This time frame selects a few highlights from across a year to showcase the evolution of the group into the manager of one of the largest portfolio of sector-diversified assets in Australia. Our 2 flagship pooled funds, CPOF and CPIF, both launched early in our journey in 2006 and 2007, have now grown to be 2 of the largest sector-specific and best-performing pooled funds in the wholesale sector, as measured by MSCI. The 2010 acquisition of the Macquarie real estate platform established our presence as a manager of listed A-REITs, which has now evolved into an $8.5 billion 3 REIT portfolio, including CLW, CQR and CQE, representing 20% of the group funds under management of just under $42 billion. 2012 saw the creation of the wholesale partnership with GIC and PSP, known as CHOT, one of our most successful partnerships, delivering a 20%-plus IRR over that 8-plus year period. 2016 saw the IPO of the Long WALE REIT, or ticker code CLW, now a $3.7 billion asset value A-REIT with an impressive 14-year WALE and high-quality portfolio of diversified property assets. 2017 saw us reach the $20 billion milestone of funds under management. And just 3 years later, we've now doubled that to over $40 billion through organic growth, and of course, the $2.6 billion FUM acquisition of the Folkestone platform that cemented our position as a leading owner of social infrastructure assets. Throughout the years, we have been consistent in our approach to partner with leading tenants, looking to grow alongside them, and curate portfolios that are resilient and deliver sector-leading returns for our investors. It's in our DNA to manage other people's capital. Also on Slide 9, this partnership approach with tenants and investors delivered select sector-leading earnings growth and security price performance. We combine our access, deploy, manage and invest philosophy by a partnership approach with our tenant and investor customers. The result is resilient portfolios with sector-leading WALEs and exposures to high-quality covenant tenants that delivers repeat business with both leasing and sound leaseback opportunities. We have been pleased to deliver for CHC securityholders, outperforming the A-REIT sector index over every time period since listing. Importantly, we are also focused on the return on contributed equity per security that has provided a growing cash return to our shareholders over this period. Just looking at Slide 11. I'll summarize activity in the group funds management platform, and then Sean will summarize the PI portfolio metrics. We continue to remain well diversified by equity source and by sector. The PFM platform comprised of over 1,100 properties, generates rental income from over 4,000 tenancies and delivers more than $2 billion of net rental income. We continue to focus on delivering a sustainable and resilient return through property sector diversity with a focus on Long WALE properties and funds, something that is evident when you see that our WALE has increased to 8.6 years at a group FUM level. The weighted average cap rate across the platform firmed to 5.27%, reflecting the quality of our core portfolio and additions with longer weighted average lease terms and fixed rent increases across the majority of the portfolio. Slide 12 provides a summary of our FUM growth split by sources of equity. FY '20 was a large year for acquisitions. Despite this, we continue to also be an active seller of assets, constantly looking to improve portfolios and deliver growth. Whilst overshadowed somewhat by acquisitions during the year, the growth from our development completions is also a meaningful contributor to resilient core real estate and growth in our funds under management. Our focus on delivering total returns also saw net valuations lift significantly, driven by income growth and cap rate compression, particularly in industrial, Bunnings and Long WALE retail portfolios. As indicated in the graph on the right-hand side of the slide, we've seen a compound annual growth rate of 24.4% in funds under management since June 2015. What's particularly impressive is that the growth has been consistent across our equity sources with no one source dominating the growth. Turning to Slide 13 and transaction activity. Strong equity flows saw us active in deploying equity into both pre-leased developments and acquisitions. We are active across all our sectors, but some of the highlights included the office acquisitions of Chifley Tower in Sydney and 242 Exhibition Street in Melbourne, the global headquarters of Telstra. In industrial and logistics, the recently announced $648 million ALDI portfolio, the Arnott's distribution facility at Huntingwood in Sydney just before Christmas were both significant transactions notable for their size and scale. In Long WALE retail, the BP service station partnership portfolio was one of the largest off-market sale and leaseback transactions in 2019. We have recently extended our reach into this sector with the acquisition of the recently announced Ampol portfolio for $682 million with long-term capital partner, GIC. And similarly, in social infrastructure, the Telstra $1.43 billion telco exchange portfolio, which saw us acquire a 49% interest in that portfolio, was further evidence of Charter Hall's ability to secure and execute complex sale and leaseback transactions in a timely manner that delivered certainty for the vendor. Active asset management is an integral part of our business. We continue to see opportunities to transact favorably for our investors given our broad reach into transaction markets, both on and off market. Importantly, our strong tenant relationships continue to provide us with access to off-market transaction opportunities, which are mutually beneficial to ourselves and our tenant customers. Repeat customer transactions are a healthy sign of delivering on our customer-centric objectives, many of which reflect our capacity to deal with customers in multiple sectors. Turning to Slide 14 and our development book. The group continues to progress various developments across its portfolio, creating investment-grade properties and adding significant value through enhancing both income yield and total return for our partnership and fund investors. Notwithstanding a significant level of completions over the last 12 months, our total development pipeline continues to be robust at $6.8 billion, up from $6.5 billion in June '19, and $3.5 billion 3 years ago. The completion of the $750 million premium-grade office project in Melbourne, known as Wesley Place, or 130 Lonsdale Street, leased to high-quality tenants such as Telstra Super, Cbus, AustralianSuper, Uniting Church, AFCA and Vanguard, with an 11-year WALE has been a fantastic addition to the CPOF portfolio. This quality asset is almost impossible to secure unless you have a developed core capability. Our industrial and logistics pipeline continues to grow with $1.3 billion of pre-leased projects under construction with an average WALE of approximately 12 years. The forward pipeline of committed projects will generate high quality, long lease assets for our funds and partnerships, while providing attractive incremental FUM growth for CHC and enhancing our credentials to attract capital. Just talking to the important equity flows on Slide 15. 24 funds across the platform generated net inflows during the year to secure our highest year of gross and net inflows to date. Our strategy of accessing multiple sources of capital continues to deliver growth in all segments. Our pooled funds continue to generate strong investor interest as evidenced by CPOF and CPIF, both closing equity raisings during FY '20. And as mentioned earlier, CPIF has closed a further $1.25 billion equity raising in FY '21, with $1 billion of that yet to be allotted and will be allotted during the course of FY '21. Our wholesale partnerships were also very active. We've newly created partnerships for the acquisition of the $630 million 201 Elizabeth Street, Sydney; the $900 million interest in Chifley Tower, partnering with GIC; the $830 million Telstra headquarters at 242 Exhibition Street; and as mentioned earlier, the $700 million interest in the Telstra exchange trust. The listed REITs also grew during the year via equity-funded acquisitions pre-COVID. Finally, as I've previously mentioned, our direct business has enjoyed a record 12-month period and continues to enjoy strong support from investors given the performance of the funds, consistent high-quality portfolio curation and multiple offerings available to meet investor demand. I'll also note that they maintain the common themes that we have across the group around Long WALE, currently averaging around 10 years in the direct business; quality tenant customers; and solid rental growth escalators. I'll now hand over to Sean McMahon, our Chief Investment Officer.

Thanks, David, and good morning, everyone. As David has discussed, our property investment portfolio provides a strong alignment of interest with our investor customers, but also ensuring that securityholders benefit from our property expertise. Over the period, our investments have grown to $2 billion. Occupancy is broadly stable. And through active asset management and reinvestment, the portfolio WALE has increased to 8.7 years, a 14% increase year-on-year. Our weighted average rent review remained strong at 3.3%, and the weighted average cap rate has firmed to 5.25%, reflecting the quality of the assets we have invested in. The portfolio remains well diversified across sectors and by investment with an 81% weighting to the core East Coast markets. We continue to allocate incremental group capital to investments in Long WALE retail and industrial and logistics assets, providing greater diversification and earnings resilience. Now let's turn to the property investment portfolio movement. During the period, our investment property portfolio grew to $2 billion, driven by $143 million of new net investments and $68 million of revaluations, as you can see in the chart on the left-hand side. Our ability to recycle capital to support new fund initiatives and drive returns for securityholders is an important part of the success of the group. The chart on the right-hand side shows the growth of our total property investment, whilst the PI yield has slightly fallen in line with cap rates, with significant improvement in the asset quality. WALE and composition of several funds has contributed to this slight firming in the resultant PI yield. Please turn to Slide 19 and our earnings resilience. As can be seen in these 3 charts on this page, our Property Investment earnings are characterized by the high quality of the tenants that provide that income, the diversity of sectors which produce them and the lack of concentration risk or single asset exposure in deriving them. With our largest single asset exposure being 1.4% of group earnings and our top 10 assets only representing 7.4% of group earnings generated, the CHC Property Investments provide a very defensive, well-diversified core investment portfolio. And more broadly, across the platform, we enjoy very strong tenant customer relationships. These relationships often span asset sectors and multiple properties, which is a significant competitive advantage of the Charter Hall diversified platform. 74% of our tenant customers lease more than one tenancy from us, and this also drives tenant retention with 86.5% of tenants re-leasing with us during the year. This also naturally feeds back into transactions, with our significant sale and leaseback activity providing off-market opportunities to also grow our funds. These transactions occur as a result of our ongoing focus on our tenant customers. Now please turn to Slide 20, ESG. Sustainability, community and governance are embedded in everything we do at Charter Hall. Pleasingly, Charter Hall already has the largest Green Star-rated platform in the country, and we continue to look for opportunities to improve. We have set a target of net 0 emissions across the assets we have operational control over by 2030. And our work on solar rollout continues with 21 megawatts of solar installed across our assets, which, when fully operational, generates the equivalent of enough power for 2,150 homes. We're also very conscious of our place in the communities we operate in. We continue with our pledge 1% commitment and donated $933,000 this year, including $500,000 for bushfire relief and recovery. We also remain committed to engaging with the communities in which we operate, donating staff, time and resources in support of initiatives that are of benefit to those in need and that directly benefit the communities in which we operate. Finally, we continue to focus on ensuring we operate with the highest level of governance, recognizing our responsibilities to our investors and the community. We are working on aligning TCFD reporting and have made significant progress on addressing human rights issues and modern slavery risks in our supply chains. I will now hand over to Russell to provide details on the financial results.

Thank you, Sean, and good morning to everyone on the line. As shown on Slide 22, FY '20 has been a very successful year for the business with all segments performing well. Our Property Investments provided a 6.2% yield and generated $120 million of earnings, while our development investment earnings contributed a further $17 million. However, it was our Property Funds Management segment that had an extremely strong year, earning nearly $290 million of EBITDA. Overall, our OEPS was $0.693 per security or 46% higher than FY '19. If excluding the CHOT performance fee recorded in FY '19 and '20, that growth was 37%. And consistent with guidance, a distribution of $0.357 per security was paid, which was 6% higher than in FY '19 and included a $0.075 per security of franking credits. Now moving to the next slide. As mentioned, the Property Funds Management segment had a very strong financial result, driven by nearly 70% growth in investment management revenue. FUM growth of 33% underpinned the 34.5% growth of fund management fees. In a year of more than $8 billion transactions and strong performance fees, we saw transaction performance fee revenues more than double those recognized in FY '19. Total PFM revenue growth was approximately 57% over FY '19, and the segment generated a 70% EBITDA margin. In terms of the resilience of this growth and profitability, I would highlight the rate of expense growth in FY '20, which was less than half the growth in FUM and base management fees. This positive margin improvement reflects the benefits of scale and our investment strategy. Now on Slide 24, and then with respect to our operating cash flow, the significant difference between cash flow and earnings largely relates to the receipt of the CHOT performance fee during the period. And as you can see, the distributions paid were well covered by cash flow. Our ability to drive earnings in excess of our distribution will enable the business to continue to retain earnings to invest and fund growth. Now moving forward to Slide 25. The composition of the balance sheet is largely unchanged. And from a capital management perspective, our strategy is simple: maintain a strong defensive position, while also being able to support the continued growth of the business by deploying capital to create value for our investors. To summarize, we ended FY '20 with a $2 billion diversified investment portfolio in Charter Hall managed funds, no net balance sheet gearing, more than $400 million of available liquidity in cash and undrawn lines at head stock. We had our Baa1 credit rating affirmed by Moody's and $5 billion of investment capacity across the platform. And as shown in the table, we were able to continue the trend of strong investment returns by all measures. We achieved this by growing profitably and keeping a keen focus on and respect for our capital. Now on Slide 26. And finally from me, we are providing an update in relation to the debt funding profile across the group. With a debt book of $16.5 billion across more than 40 balance sheets, the group has a very well-informed view of the domestic and offshore market conditions. And currently, all of these markets continue to be highly supportive of our business. The table on the left provides liquidity measures regarding the mix of cash and undrawn lines. Also shown is the average debt maturity of 4.2 years, the average cost of debt of 2.5% and the hedging levels at 30 June of 61%. On the right-hand side, with this new chart, we wanted to provide some further insight as to the nature of the look-through gearing of the group. We consistently communicate to our investors that we finance our business appropriately with consideration of both the nature of the assets and the nature of our investors. As you can see it, overall, we are conservatively managing the gearing of the business, with our wholesale partnerships tending to utilize higher gearing levels than other equity sources. This approach taken with our wholesale partners is completely reasonable as these investors are large pension and sovereign capital sources who have ready access to capital and see leverage at these levels appropriate for the risk profile of these investments. And to further remind investors, all fund and partnership financings are completed on a nonrecourse basis and are not cross-collateralized or otherwise linked to any of the group's financings. I will now hand the presentation back to David to wrap up and provide our commentary relating to the FY '21 outlook and guidance.

Thank you, Russell. We thought it important to provide a year-to-date activity slide given the intensity of activity within the group since 1 July. So Slide 28 highlights that we'd continue to be active in this financial year with a number of transactions already completed. FUM stands at $41.8 million following the $1.3 billion of net acquisitions completed or committed. I've mentioned multiple times already, sale and leaseback activity continues to be an important feature of our transactional activity. The sale and leaseback transaction with Ampol and Visy through the acquisition of the Owens-Illinois, which Visy has acquired the business, are also major contributors for the growth since 1 July. I expect that will continue to be a prominent feature of our activity this year, particularly as corporate Australia and government entities continue to respond to COVID and look to release assets off their balance sheets. Turning to Slide 29 and our operating earnings guidance. Based on no material change in current market conditions, FUM growth already achieved in FY '21 and assuming the COVID-19 operating environment does not deteriorate markedly from here, FY '21 guidance is for post-tax operating earnings per security of approximately $0.51 per security. FY '21 distribution security guidance is for 6% growth over FY '20. That now ends the prepared remarks, and I'll now invite questions.

[Operator Instructions] Your first question comes from Suraj Nebhani with Citigroup.

Good result. I just had a couple of questions. So equity flows were obviously very strong this year. You did highlight the CPIF equity raising, but just wondering if you can comment more broadly across what your expectations are for '21, please, on the equity flow side.

Well, we don't provide guidance on expected equity flow. All I can say is, given that we've already articulated closing a $1.25 billion equity raising in CPIF and $1 billion of that is yet to be allotted, and therefore, I'll remind everyone that our equity flow charts reflect allotted equity not committed equity. We would expect things to not be at the volumes we saw in FY '20, given the impacts of COVID, but we're pretty confident that equity is going to continue to flow across our direct business. We've got a market-leading position there. I'm pleased to see monthly inflows have sort of kicked back, not quite to COVID -- pre-COVID levels, but not too far away. And as reflected in the CPIF raising globally and domestically, there's still strong demand for investing in high-quality industrial and logistics real estate. And in particular, that CPIF portfolio's got a WALE of over 10 years. It's got a fantastic tenant register. But I think you'll see us continue to drive growth in wholesale partnerships. You've already seen the announcement of the Ampol acquisition with our longstanding partner, GIC. And I think that's indicative of further inflows that we're going to see during FY '21 in wholesale partnerships.

Yes, makes sense. And just around the revaluation outcomes in the second half. Can -- would you be able to break it down by asset class base, like which asset class was better and probably which was not so good...

I'll just give you a broad overview. Industrial and logistic assets have continued to have positive valuations in June over December. Our office portfolios had had about 1% reduction in net valuations from June -- or from December to June. Some of that is a reflection of margin recognition in the completion of Wesley Place. But I think that's pretty indicative of the sort of valuation movements you've seen across office reported by others. I'd just note we've got, in my opinion, the longest office WALE in the sector. We've got some office portfolios that have got typically higher proportions of government and blue-chip less impacted tenants than other office portfolios. And I think CPOF rolling 12 months has topped the office MSCI/IPD Index, reflecting the features of the portfolio I just talked about. And you're already aware through CQR's results, the sort of valuation impacts we're seeing in convenience, shopping center retail, and it should be no surprise to anyone that virtually all of our triple net lease or Long WALE assets have gone up June over December in line with income. So hopefully, that gives you a good summary of the apportionment of valuation impacts across our portfolio.

Okay. Fair enough. And would you be able to comment on what you see as the outlook near term, maybe across the asset classes more broadly? Obviously, industrial logistics is positive, but just thinking about office and maybe retail.

I've been a licensed valuer for 32 years, and I gave up crystal-balling a long time ago. So all I would say is that the trends that you've just seen me outline on valuations in the last 6 months, I have no reason why we're not going to continue to see that sort of trend continue. At the end of the day, valuations are a function of the outlook and certainty of income of your underlying cash flows. So as we're all aware, e-commerce is driving growth in logistics and industrial, which is reflected in still very low vacancies. And there's no doubt, vacancy rates in office markets have risen. But as I've been quoted as saying, sub-8% vacancy rates in prime markets like Sydney and Melbourne are still okay. I think we just need to work through the next 6 to 12 months to really see the ultimate outcome on office markets, but I've got a high conviction around the resilience of office markets and office valuations. And I think there's a little bit of media hysteria or an analyst hysteria around the future of office when -- if you look back 4 or 5 months ago and see what's unfolded, anyone that's projecting out 12 months and thinks they know what's going to happen, I think they're kidding themselves. So we are one of the largest owners of real estate, and therefore, we've got the largest exposure to the real tenant base and the people that are doing their planning going forward. And what I can say is people are just in a watch-and-see mode at the moment. No long-term strategic decisions are being made, and I don't see that happening for the rest of this calendar year.

Okay. Fair enough. And just one final one for me. On the guidance. Just wondering like what's sort of weighing down on the guidance. So you talked about Property Investment yield being pretty strong and debt costs have obviously declined as well to 2.5%, down 100 bps and you -- I mean, obviously, you don't get the performance fee that you got from CHOT. So that was an exception. But even backing that out, FUM is already up versus June. So I'm just wondering, like what's sort of stopping you from being more positive on the guidance?

I don't think guidance has weighed down at all. In fact, our guidance is well above consensus. You articulated a couple of the things. Clearly, the CHOT performance fee was recognized over the last 2 financial years and other performance fees were recognized in FY '20 that won't exist in FY '21. So -- and you can't grow your FUM by $10 billion unless we think we're going to do another $10 billion this year, and replicate the same sort of transactional revenue and other revenue that gets generated from that sort of acquisition and developed a core growth. So it's really that simple.

Your next question comes from Stuart McLean with Macquarie.

First question is just around Property Investment earnings and any impacts of COVID there. Just wondering if there's any capitalized deferred rent or rent not yet to be received or waived. Is there something that hasn't been taken in that PI number?

Yes, Stuart, it's Russ, here. I'll just give you a sense of the numbers that everybody has been kind of referring to with respect to COVID. For fiscal '20, our collections are 98%. And for the COVID -- 4-month COVID period, as has been cited, we're at 93%. So on a look-through basis for our home business, it's only about $2 million through the -- that's in the PI that would be the differential from -- between the various, I think, accounting for FFO in the market. So it's pretty negligible. Otherwise, it's unaffected.

Okay. Fantastic. And also sticking to the P&L. Russ, you talked about margin expansion, which appears even significant once you back out performance fees. Can this expansion continue or does CHC start to need to invest in the cost base in order to continue to fund growth?

We actually -- if you look at the depreciation line this year, you'll see a higher level of depreciation. Part of that is amortization of prior investment in systems and processes, so that we do have the scalability in the platform to handle increased growth. So I do think we can continue to expand our margins and focus on growing expenses at a much lesser rate than our revenue growth.

Great. And a final one, just on the -- I think you said $1 billion of capacity for CPIF. Just wondering about the ability to deploy that and ability to hit return hurdles given the cap rates in the sector are getting down towards 4.5% or pretty confident that, that stacks up as a return hurdle for the underlying investors.

Yes. I think you're dealing with pretty sophisticated global and domestic institutions investing in our wholesale funds. When we do a raising, we provide target returns. They're comfortable with those target returns. Clearly, the target IRRs in industrial are going to be lower than they were 2 years ago or 5 years ago. One of the things that I think our investors are very confident about is that Charter Hall has got one of the biggest industrial development books in the market with $1.3 billion of pre-leased industrial development. I think we've announced a number of major pre-leases in the last 6 months to Coles, Bridgestone, Uniqlo, Toll. So I think people feel quite comfortable at our ability to deploy through develop decor. And additionally, you would have also seen some pretty large sale and leaseback transactions that we've been able to secure, a $648 million portfolio of sale and leaseback from ALDI, which means we're now the largest landlord to the 4 big supermarket operators in this country, Woolworths, Coles, ALDI and Metcash. I think in total, the distribution centers, at least those 4 supermarket operators, are about $3.8 billion out of our $11-odd billion of industrial. And I think the fact that we're able to do other off-market sale and leaseback transactions like the Owens-Illinois transaction to run simultaneous with Visy buying that business gives our wholesale investors a lot of comfort that we are going to be able to deploy. So -- and that -- those equity commitments are drawn on a staggered basis. So it's not like the listed world, where you raise the money and you deploy it straight away. These commitments get deployed as the ROE of that fund sees the deployment opportunities and then they generally call that equity in 2 calls over the sort of space of the 12-month period.

Your next question comes from Grant McCasker with UBS.

David and Russell, just a quick one on the P&L, firstly. So the big skew in the second half for the Property Investment earnings. Is that just given your Property Investment dollars investment is roughly the same? Does that reflect lower cost of debt or stabilization of developments? Are you able to provide more clarity there?

I would say the weighting shift is really about timing of investments as well. You got to remember, during the course of the year, we have a lot of movement within the portfolio as well as what you just mentioned, there was a decrease in our overall cost of funds and the underlying investments, which would have come up through the various investments. And lastly, like you said, again, of developments coming online and contributing to earnings.

Yes. I think the other thing is you've got a 6-month contribution from Viva or what they call it now, Waypoint, from our $100 million investment, which we've now sold out of that works out to be about $3.5 million of the $10 million delta.

Okay. And then just thinking about development earnings. It's not an immaterial amount. Now that's $7 million, $8 million. How does that -- with the -- sort of as we move into FY '21, what has to be realized or what's expected to be realized?

Grant, we expect development investment earnings to be a regular contribution. The model of that was created well before we bought Folkestone. And typically, what we're doing is using our balance sheet to secure generally capital-light opportunities, where once the development is stabilized or pre-leased, it gets offered to our funds and partnerships. So I think you'll see that continue. I had previously guided to investors and analysts, if you sort of think about us looking to target at least a 20%-plus return on invested capital WIP, that's a pretty good starting point. But clearly, as we get it off our balance sheet and effectively we're generating an investment earnings in development with a capital-light structure, those yields, if you like, actually escalate. So -- and we've got a number of projects. We've got a couple of office projects that have already been presold to our funds and partners. We've also got an industrial project that has also been presold to a fund and another project that's been realized in industrial. And then obviously, we've got a variety of projects that are still being harvested from the old Folkestone business. Some of them were completely harvested in FY '20. There's still projects that will develop -- sorry, contribute development investment earnings in '21 and '22 and '23. So as I said earlier, I think you should expect to see that as a regular contribution. And obviously, from a return on equity point of view, we see that being a relatively high return on equity. But the main thing is it's providing product to then drive the growth of our funds and partnerships and give those investors the opportunity to get derisked and pre-leased projects that they may not otherwise have gotten.

And then, finally, you've often talked about real estate adjacencies. You've done telco exchanges and assets. Is there anything else as we move through over the next 12 months that can fit with the existing capital that you manage?

Well, I think now we're seeing data centers called industrial, anything is possible. I think we've been pretty clear in the fact that when we bought the Folkestone business, we saw a pretty big universe of social infrastructure assets evolving, not just early learning but education all the way through to university. So we've obviously been doing quite a bit of work in the university space, and we expect that to be quite a large opportunity emerging going forward, where I think universities around the country are, frankly, asset rich and income poor, and they're going to need to do sale and leaseback of their assets. And the telco exchanges are another example of essentially CBD sites with long-term leases to Telstra. We see more and more opportunities evolving with government and semi-government leases on assets that broadly fit that social infrastructure space. We've already acquired a bus depot with a 20-year lease to Brisbane City Council. There's probably other opportunities emerging. So that's sort of where we see the space. I know I've been asked, because we looked at Hastings previously, are we going to go into core infrastructure. We -- it's got to be a scalable opportunity and it's got to be in line with our capital-light sort of funds management strategy. So -- and we -- as you can see, we're not short of opportunities. So we don't see the need to go overreaching for sort of segments of the market that are off piece. And so I guess that's the best clarity I can give you.

Your next question comes from James Druce with CLSA.

Just on thinking about the core investment in incremental FUM, how should we be thinking about that going forward?

I've been pretty blunt over the last few years saying we're not raising equity. So you should think that our co-investment as a percentage stake in overall FUM will go down over time as it has this year. We see the capacity to continue to recycle capital out of co-investments. I think once you've proven yourself with partners and whether they're partnerships or funds over a long period of time, you're able to reduce your actual percentage stake, which is what we've done, frankly, right across the business. And so that's the way I would look at it. I think if you look at $42 billion and a $2 billion net balance sheet as a percentage of equity under management, if you like, if you take off sort of sub-30% average gearing, you can pretty quickly see we're down around 6% to 7% of total equity under management, and I expect that to keep going lower. Things like CPIF because of the strong equity flow, I think we're down to about a 3% stake in CPIF. So that's directionally the guidance I can give you.

Fantastic. And just on the direct side, the same thing implies there. Just wondering if you can give some color on the products being demanded there.

Well, for FY '20, it was very evenly split across the sort of 3 major funds that were open, which were 2 office funds and an industrial fund, and then we've got a diversified smaller opportunity. As COVID hit and as we sort of have emerged from that, surprise, surprise, the strongest inflows are for industrial. So DIF4s receiving good inflows. But we're still getting inflows into office funds, and we're still pleasingly seeing an acceleration of flow into a couple of diversified offerings we've got. So I think one of the things that you need to have is a diverse sector specialization, so that the capital, whether it's high net worths or advisers or even self-managed super, they can pick and choose to -- if it suits their portfolio. If they want a diversified opportunity, they've got an opportunity to invest with us. If they want office or industrial, they've got that opportunity. So I think that is the secret to being able to continue to generate the sort of inflows that we've generated. And I think also for that segment of the market, knowing that they're investing with a manager that's the largest manager of super fund pension fund capital invested in direct real estate in Australia is a legitimacy that gives them a great deal of confidence. And so all of those things are important in continuing to attract those inflows. It also helps when some of your competition blows themselves up as well.

[Operator Instructions] Your next question is from Suraj Nebhani with Citigroup.

Just a follow-up. Looking at the slide with the time lines around the acquisition. You obviously had a large platform acquisition in 2010 with the Macquarie that was coming out of the GFC. Just thinking if you see similar opportunities post-COVID as well in the near term?

Look, the vast majority of the growth in this business has been organic. If you think about the Macquarie acquisition, it was $7 billion going back to $4 billion because we got rid of $3 billion of offshore assets under management, which we always intended to. So if you look at that net $4 billion and the $2.6 billion with Folkestone, it's a relatively small part of the $42 billion. So our focus is organic growth. If opportunities emerge that are well priced and are strategically important for us and our capital partners and doesn't distract us, we may look at them. But it's fair to say the M&A is not always that easy to execute. And you -- I think you've got to have a pretty good look at the price before you go down that path. So yes, it's not that we haven't done stuff like that before, as everyone is aware, but I think our focus is to continue to do what we're doing. We're certainly not needing to do M&A for scale when we're at the scale we're at. So that's the best direction I can give you.

Your next question comes from Shane Solly with Harbour Asset.

And thank you for a fantastic rundown. Just, David, the lead time on sale and leaseback transactions, do you get the sense that's expanding? Or is that actually starting to compress? Are you seeing an accelerating sale and leaseback process?

Look, Shane, from our perspective, we can do things very quickly. It's usually the other side that protracts it. Look, it's fair to say, if you're doing an off-market transaction, it can be done very efficiently and quickly. If it's a process driven by an intermediary, they've got to earn their money. So you go through sometimes efficient, sometimes protracted processes. As I've indicated before, both pre-COVID and post-COVID, my view is that corporates and governments around the world are going to accelerate their scrutiny of whether they need to own real estate on their balance sheet. I think the conclusion out of that will be that there'll be more and more assets sold. Governments around the world need to fund the deficits that they're having to fund out of the sort of rightful subsidies and support they're providing to the community to get us through COVID. So yes, I think it's going to be very much split. We are finding and have for the history of this business, where we've still more or less been sourcing half of our transactions off-market and half on-market, plenty of people who don't want to the public visibility of a 3-month process and all of the media attention that comes with that. So I think we'll continue to do a combination of off-market and on-market transactions. We're certainly continuing to do a lot of repeat business with existing customers where we have multiple leases across multiple sectors, and they see it as being an efficient way to do more transactions without all the rigmarole of an open market process. So hopefully, that answers your question. I think the only other thing I'd say is we have had a patch of a few months of having quite a competitive advantage with offshore capital not being able to directly come in to Australia and do due diligence and invest. So the other trend that I see emerging is more and more capital partnering with local experienced managers that are experienced at managing wholesale capital and wanting to sort of partner that way because they just can't physically try to get in and buy real estate directly. And it's quite a complement to the Australian property markets that there's still quite strong demand from offshore capital to invest in this market. They don't have to invest in Australia. They're going to invest in any part of the world. So that's sort of where I see it going.

Okay. Thanks, and well done.

Thank you. How are things across the ditch?

A little bit of lockdown, but we're getting there. We're getting there.

Your next question comes from Michelle Wigglesworth with Milton Corporation.

I was just wondering if you could share with us in your forward guidance what you've assumed on revaluations, like even if they're positive or negative, if you can't give an exact number.

I don't know if you heard my call before about being a valuer for 32 years and predicting future valuations. But it's fair to say we're pretty conservative about our valuations. Obviously, our base management fees are calculated as a percentage of gross assets or valuations. So when we look at FY '21, 100% of our assets or the big proportion of them will be independently revalued at December. Obviously, we need to form a view as to what they might be and that -- what impact that has on revenue, base fee revenue in our budgets. But I think as you've just seen from 30 June, you've going to have some unders and overs. You're going to have really strong resilient sectors, triple net lease, Long WALE, industrial, logistics. Many parts of our office portfolio are Long WALEs with 3.5%, 3.7% fixed increases. A lot of that stuff, I think, will be resilient, and we're going to see continued valuation growth in line with those sort of fixed escalators. And then you're going to have some other sectors, as we've all just seen things like shopping center retail, where a big proportion of the income is pretty resilient, and part of it's a little unknown depending on the level of trading activity. But most of our portfolios are in that sort of Long WALE resilient space. So we're certainly not being aggressive about future valuations, but nor do we really see sort of material negative valuations coming forward.

So could I assume overall flat?

That would be me giving you guidance. All I will say is we are not expecting material movements one way or the other.

There are no further questions at this time. I'll now hand back to Mr. Harrison for closing remarks.

Okay. Look, thanks, everyone, for your time, and particularly to my team. I'd also just like to acknowledge all of the community that has been dealing with really challenging times through COVID, particularly to my team in Victoria with an extended lockdown. They've been doing a fantastic job. Frankly, it's a complement to the office sector that we've all been able to continue to work from home efficiently and effectively. Many of our clients, particularly those investment banks, have still managed to do what they do, partly working from home and partly working from the office. But I, like other CEOs, are looking forward to seeing the CBD office populations getting back to some sort of normalcy over a period of time. But I just think it's important to -- as you saw and as Sean outlined in our 1% pledge, that we need to always be ready to acknowledge that there's a lot of people out there doing it pretty tough, and where possible, we'll try to support that in the way we give back to the community, either in cash or in kind. So thanks, everyone, for their time. And as usual, yes, look forward to catching up with one-on-one calls over the next couple of weeks. Thank you.