Charter Hall Group (CHC) Earnings Call Transcript & Summary

Gentlemen. Thank you for standing by, and welcome to the Charter Hall Group 2022 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Friday, February 25, 2022. I'd 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, everyone, and welcome to the Charter Hall Group Half Year FY '22 results. My name is David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our Group CIO; and Russell Proutt, our Group CFO. I'd like to commence today's presentation with an acknowledgment of country. Charter Hall is proud to work with our customers and communities to invest in and create places on lands across Australia. We pay our respects to the traditional owners, their elders past and present and value their care and custodianship of these lands. Turning now to Slide 5 and the highlights for the half year. Slide 5 highlights the continuation of growth and resilience across our business. Operating earnings post-tax was $264 million or $0.566 per security, up 104% compared to prior corresponding period. Our return on contributed equity was 24.4%, a leading return within both the AREIT sector and the ASX 100. The group's property investment portfolio grew to $2.8 billion as we continue investing alongside our partners and within our funds. The group delivered a 25.5% property investment return, inclusive of an attractive 6% PI yield. Fund growth continues to be strong with Property Pharma up 17.2% in the period or an additional $9 billion of FUM. While we also entered into a new partnership with Paradice Investment Management, the Tax Group Fund to $79.5 billion. The growth is a result of our ongoing partnerships with tenant and investor customers, delivering positive outcomes for them, which ultimately translates into attractive returns for security holders. That growth to us undertake $6.8 billion of gross transactions as we continue to actively curate our portfolios to drive performance via net acquisitions and a growing development work in progress. The group's balance sheet remains resilient and low gearing. And a Baa1 credit rating Together with the 23% NTA growth reflects the quality of our long-leased investments, asset and sector selection, particularly industrial and triple net lease portfolios. Finally, the group's investment capacity of cash and undrawn debt stands at $6.7 billion. We note that this does not include committed but uncalled equity commitments, which further increases its capacity, nor does it include partnerships where we match new transactions with additional equity commitments, such as the recently announced additional partnership with PSP Investments for a new office development in Brisbane. Our focus remains on delivering sustainable growth for securityholders, replenishing dry powder, strengthening resilience and a vigilant focus on property fundamentals. Slide 6 outlines our strategy. We use our expertise and customer relationships to create value and generate superior returns for our investors. We allotted $2.8 billion of gross equity during the 6-month period. I note all of our equity sources delivered strong net inflows. Of the $6.8 billion of gross transactions this period, we acquired $5.4 billion and divested a further $1.3 billion of assets as we actively curate our portfolios. Additionally, we invested $1.1 billion in our development pipeline, providing our investor customers access to new investment product and enabling them to deploy capital into unique opportunities not available in the open market. 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, deploying an additional $432 million during the half. The CHC Property Investment, or PI portfolio delivered a 25.5% return this half for our CHC security holders. Slide 7 highlights the consistent growth in earnings and distributions Charter Hall is delivered for investors, including our revised earnings guidance today and over a 5-year period, this will have averaged 25.6% annual growth in post-tax earnings while we continue to deliver sector-leading annual distribution growth. Turning to Slide 8. Our heritage of partnering with Capital has assisted in delivering consistent OEPS growth, and this has translated into a significant out performance of our total shareholder return for shareholders. compared with the AREIT index over all time periods. We're proud to have delivered our security holders out performance over every time period since our listing in 2005. And we thank you for the ongoing support of Charter Hall. This out performance has been delivered through a clear and consistent strategy of accessing capital, deployment by developed core strategies and selective acquisitions, whilst resourcing appropriately a high-quality team to manage Australia's largest property portfolio. Turning to Slide 10, which depicts the FUM growth over the last 6 months and split by sources of equity over the last 5 years. Portfolio curation is an important driver of fund performance. We continue to be an active buyer and seller of assets, constantly looking to improve portfolios and deliver growth. Our development completions and the growing pipeline of captive development projects also provides a pathway to deploy our investment capacity, which we replenish regularly from new equity flows. Our focus on well-located modern assets leased to high-quality tenants on long leases with in-built rental growth is a simple formula. It is, however, becoming even more critical to modernize our office and logistics markets to cater for changing tenant appetite. Importantly, it translates into assets to provide ongoing capital growth, and this period was no exception with net revaluation again, contributing to fund growth of $3.9 billion over the period. This period was also significant as we invested in the Paradice Investment Management, listed equities business. which builds upon our core strategy of partnering wholesale and retail investor customers. The PIM FUM of $18.2 billion increases group fund of $79.5 billion extends our relationship with new institution and retail customers, but also provides the opportunity for Charter Hall to introduce customers to PIM. As indicated in the graph on the right-hand side of the slide, we've seen a compound annual growth of 28.5% in property funds under management since June 2017. The growth has been consistent across our equity sources, providing all equity investors access to our growth opportunities and diversity of investment opportunities with both sector-specific and diversified offerings. Turning now to Slide 11, which summarizes the group FUM portfolio. From a group fund perspective, we've significantly increased our exposure to listed equities providing a useful diversification from our property sector exposures, and providing a further avenue of deployment opportunities to present to our investor partners. The diversity and breadth of the expanded investor base, combined with the property sector diversification provides enhanced diversification and scale benefits. Turning to Slide 12, where we summarize activity in the group's property funds management portfolio. We remain well diversified by equity source and by sector, where we've selected and curated portfolios, which have captured strong growth in logistics and triple net lease assets, whilst the sector-leading WALE of our national office portfolio has driven resilience and growth in asset valuations. The strength of our long WALE retail and convenience shopping center retail assets has also demonstrated the team's focus on relatively low occupancy cost retail assets and the benefits of cross-sector tenant relationships. The group's [indiscernible] WALE remains strong at 8.8 years despite the passage of time through lease extensions and new assets that have combined to drive growth in this key metric. Weighted average cap rate across the platform firmed to 4.47% and reflecting the quality of improvements in the portfolio and exposure to logistics and triple net sectors that have shown the greatest yield conversion. Slide 13 outlines our tenant customers. We see our customers has invested in tenants, many of whom are also ownership partners or potential vendors of sale and lease assets. Our top 20 tenants make up almost 60% of platform net rental income. These tenant customers include high proportions within essential and nondiscretionary retail industries. Whilst the industry diversification across the platform provides us great insights into the broader economy. 24% of our platform's property leases are triple-net, and cross-sector relationships continue to drive platform growth. 25% of the platform property net income is from CPI-linked leases providing our investors good protection in a high inflationary environment. Importantly, 37% of platform rental income is generated from net effective leases, i.e., no incentive leases, delivering our investors an attractive income and capital growth profile. The resilience of our major tenant customers and our concentration towards essential industries underpins the defensive nature of our portfolios and their ongoing performance. Turning to Slide 14, in transactional activity. Strong equity flows for us active in deploying equity into development acquisitions, predominantly off-market or portfolios, while sale and leaseback transactions continue to grow. Notwithstanding the challenges presented by COVID-19, we're active across all of our sectors, and we're quick to seize on opportunities that presented themselves. 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 across the property industry. Turning to Slide 15 and our sale and leaseback activity. Charter Hall continues to be a leader in partnering with corporate Australia to meet their property needs. We see ourselves as a capital provider and property specialists that can assist corporates and government tenants to achieve their strategies. Importantly, this provides our investors with investment opportunities that are difficult to access and that don't require competing in the open market to secure. For our tenant customers, it's an opportunity to unlock capital management opportunities while retaining control of critical infrastructure and property assets. For Charter Hall is an integral part of our business, central to our growth and a clear expression of our partnering with tenants and investors. And that's why we've been successful in executing over $11 billion of sale and leaseback transactions. Turning to Slide 16 in 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 returns. The development book has grown strongly during the period and now stands at $13.2 billion of committed and uncommitted pipeline. Industrial development continues to grow with the total industrial pipeline growing from $3 billion to $5.5 billion in the half with the value of committed projects up from $1.5 billion to $2.2 billion, while restocking in our land bank has lifted uncommitted projects from $1.5 billion to $3.3 billion. Our office pipeline has also grown with the addition of our new Chifley South Tower having receive New South Wales government determination approval to proceed and as such, has been added to our uncommitted pipeline. I also note that 30% of the office space is pre-leased on long-term leases. The forward pipeline of committed projects will generate high-quality, long-leased assets for our funds and partnerships while providing attractive incremental fund growth for CHC and enhancing our credentials to attract capital. Importantly, our sector-leading performance in our wholesale pool funds have seen both CPOF and CPIF continue to drive very strong long-term returns that have been delivered through active developed core strategies. Turning to Slide 17 and our equity flows. Our strategy of access seen multiple sources of capital continues to deliver growth in all segments. Our pooled funds continue to generate strong investor interest with CPOF currently undertaking an equity raise, which closed about $700 million in the first half prior to Christmas, demonstrating strong investor demand for continued investment in the alpha sector. It's 16% rolling 12-month return, which clearly outperform the office peer subsector as measured by [indiscernible] by at least 25% has assisted in continuing to bring capital into CPOF. Our wholesale partnerships have also been very active with the highlight being hosts investment alongside CLW and the successful acquisition of the ALE Property Group. Meanwhile, our direct business continues to enjoy strong support from investors with inflows having increased to approximately $110 million a month during the first half of FY '22. In summary, we continue to enjoy the support of capital partners, given our ability to successfully deploy capital in attractive acquisitions and development opportunities, investing alongside them to cement strong alignment of interest and generate healthy returns for both partners and CHC shareholders. I'll now hand over to Sean McMahon, 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 while also ensuring that security holders benefit from our property expertise. Our property investment portfolio value has increased to $2.85 billion, and occupancy is stable with the portfolio while remaining strong at 8.6 years. Our weighted average rent review remained strong at 3.2% and benefits from the strong significant exposure we have to CPI-linked rental increases. Our weighted average cap rate has firmed to 4.62%, reflecting the quality of the assets we have invested in. The portfolio remains well diversified across sectors and by investment with an over 80% weighting to the East Coast core markets. We continue to allocate incremental group capital to investments in longwall retail, social infrastructure and industrial and logistics assets. The growth in the property investment portfolio reflects the group's desire to continue to invest alongside our investor customers and ensure a strong alignment of interest. Now turning to the property investment portfolio movement. During the period, our investment property portfolio grew to $2.85 billion with increased valuations and additional new investments. Our ability to recycle capital to support new 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. Pleasingly, despite cap rate compression across the assets we invest in, our PI yield remains attractive at 6%. Let's move now to Slide 22 and the resilience of our PI earnings. As can be seen 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. 75% of PI income comes from the leases that grew at fixed annual increases of 3.3% a year delivering annual income growth at a rate above the RBA's inflation target band. The remaining 24% of leases are CPI-linked, ensuring good exposure to additional rental growth and an elevated inflationary environment. No single asset contributes more than 5% of property portfolio investments, and our tenants are heavily weighted towards nondiscretionary industries. More broadly, across the platform, we enjoy strong tenant customer relationships. These relationships often span asset sectors and multiple properties. 70% of our tenant customers lease more than 1 tenancy from us, and over 1/3 of our tenants are customers across more than 1 asset class. This also feeds back into transactions, with our significant [indiscernible] leaseback activity providing off-market opportunities to also grow our funds. Let's now move to ESG on Slide 22. As a business, we remain very focused on ESG as a strategic differentiator. We believe that delivering environmental and social value in partnership with our tenant and investor customers, will support long-term sustainable growth and returns. During the period, we've completed $1.3 billion in sustainable finance transactions, up from $100 million at full year '21 to total $1.4 billion. This reflects our approach to using independent rating tools for our assets and portfolios and overall ESG progress. We continue our focus on renewables and climate action. We remain committed to growing our investment in clean energy and net 0 carbon in our operational road map. Year-to-date, we've added an additional 5 megawatts of on-site renewables, taking our platform-wide installed solar to 46 megawatts. Additionally, we've seen a 47% reduction in our Scope 1 and Scope 2 emissions supported by our entire office platform, switching to grid supply and renewables from first of July 2021. Our entire business will be fully pound by 100% renewable electricity by 2025. Today, a total of 61% of operations are now powered by renewables. We remain committed to engaging with the communities in which we operate, a hallmark of our approach to sustainability at Charter Hall. In addition to our 2-year partnerships focused on employment opportunities for vulnerable youth in the communities in which we operate, we've used our 1% pledge to provide more than $879,000 in community investment in partnership to address issues created by the pandemic. Our partnership with Food Bank, for example, provided crisis food hampers to Victorian and New South Wales families the equivalent to feeding 7,500 families for a week. Additionally, we were proud to support UNICEF's give the world a shot program to provide 55,900 people in developing countries support to access vaccines for COVID-19. Transparency and disclosure are a continued focus. In the period, we released our second climate response aligned with the TCFD and our second modern slavery statement. With Australia's largest footprint of green building certified space, we will continue to adopt independent assessments and rating tools to support risk and opportunity assessment and measure our ESG progress. Finally, as we look forward, areas of continued focus must be on operating a net 0 carbon business, driving tenant partnership to support clean energy and Scope 3 emission reductions and implementing our recently endorsed reflect reconciliation action plan as well as retaining talent and continuing to ensure leading levels of employee engagement. I will now hand over to Russell to provide details on the financial results.

Thank you, Sean, and good morning to everyone on the call. Starting on Slide 24, our property investment, development investment and funds management segments all reported very strong financial performance for the past. The Property Investment segment reported growth in EBITDA of 18.5% over the prior comparable period. This earnings growth has resulted from the business continuing to generate strong earnings at a 6% yield across a more substantial investment portfolio. At the end of the half, the investment portfolio was more than $800 million greater than it was at the end of the first half in fiscal '21. The development investment EBITDA of $27 million was also significantly higher than the first half of FY '21. The most significant contributor in the period came from the substantial progress at our $450 million premium-grade office development at 60 King William and Adelaide. Also during the half, the Western Sydney University anchored office development at 6 Hassall Street in Parramatta reached practical completion. All on-balance sheet development projects in delivery phase have been forward sold on a fund-through basis to Carroll managed funds or partnerships. And at our FY '21 earnings results, we indicated an expectation of EBITDA from this segment of between $30 million and $40 million, and we would expect this now to be at the upper end of this range for the year. The Funds Management segment reported $256.5 million of EBITDA in the half and accounted for more than 70% of the group's EBITDA. This represented a 164% increase over last year, and I'll go into greater detail regarding the segment on the next slide. Overall, the strong performance across all 3 segments has resulted in reported first half operating earnings of $263.9 million or $0.566 per security. And consistent with our guidance, a $0.197 per security distribution was announced for the half, representing growth of 6% per security over last year. Now turning to Slide 25 and reviewing our funds management segment in greater detail. Investment management continues to be an engine of our growth. The base management fees increased 28.5% from the first half of last year. reflecting the growth in fee-bearing capital between the periods. Transaction and performance fees were very strong, elevated by equity flows and available liquidity, supporting transaction activity, with strong fund performance generating performance fees. EBITDA margin in the period was 78%, supported by the contribution to earnings of performance fees. Excluding transaction performance fees, EBITDA margin for the segment was approximately 53%. Regarding the increase in operating costs, there was a combination of factors, including the return to a more normal operating environment. To provide some context, FY '21 was actually 10% lower than the first half of FY '20. If we were to compare this half operating costs to FY '20, they would be up only about 12%, which is considerably behind or less than the growth in FUM. As such, there's also a naturally increased expenditures required to support the continued fund growth and operations. This is typically reflecting additional headcount as well as, as we highlighted at the AGM, there was higher rent increases during the period across the business. With respect to corporate costs, the increase was approximately equal to the increase in LTIP as well as the implementation of retention and outperformance plan, which wasn't in existence last year at this time. While these costs are accrued in the current period and charge to operating earnings, they remain subject to achieving performance hurdles in the future. Now turn to Slide 26 and our financial position. The balance sheet composition remains largely consistent with prior periods. It is worthy of note that the overall growth in total assets includes one of the $400 million increase in the investment portfolio from the end of last fiscal year. And as discussed, this growth has come from a combination of valuation gains and additional investments during the period. It is worth also noting that our recently announced investment in the Paradice Investment Management partnership is included separately in other assets. At the head stock, there were no new debt facilities engine in the half, and the business maintains $200 million of undrawn lines. When combined with available cash on hand, investment capacity at the end of the half was $429 million that headstock, resulting in relatively modest balance sheet gearing of 7.2%. As we have mentioned on prior calls, the return on capital metrics are fundamental to assessing our ability to employ capital effectively to generate earnings and earnings growth for our investors. As shown in the table, all return metrics presented are very strong. and these are calculated on a trailing 12-month basis. And these measures will continue to be a key focus of the business. And now finally for me, on Slide 27, a profile of our platform borrowings and liquidity are summarized. Our approach to capital management has 4 key pillars: One, we typically finance consistent with investment-grade metrics, whether formerly rated or not. Number two, we maintain liquidity to meet obligations and provide financial flexibility to pursue growth. Thirdly, we minimize risk by extending facilities and diversifying capital sources. And finally, we enhance our returns by using leverage at appropriate levels, acceptable cost and structure. In the first half of fiscal '22, we successfully met each of these aims by increasing our borrowing capacity to $23.4 billion, maintaining liquidity of $6.7 billion, and pursuing new channels for debt capital, including $1.4 billion of green financing. We extended our maturities to 4.7 years with an average cost of 2.3%. And we played gearing levels which were appropriate for each fund in partnership with an overall weighted average gearing of 28%. No material change from the strategy is expected at this time. Thank you. and I'll now pass to David to provide an updated outlook and guidance for the fiscal '22 period.

Thank you, Russell. Just turning to Slide 23 and our outlook and earnings guidance. Based on no material adverse change in current market conditions, FY '22 guidance has been upgraded to post-tax operating earnings per security of no less than $0.112. And FY '22 distribution per security guidance is for 6% growth over FY '21. That now ends the prepared remarks, and I now invite your questions.

[Operator Instructions] And our first question today will come from Sholto Maconochie with Jefferies.

Just a couple of quick ones. On the performance fee, you break out what was accrued this period in the transactional performance fees?

Yes. Thanks, Cole. Just to hand over to Russell, I just wanted to mentioned that in addition to Russell, Sean and myself in the room of other questions. We've got our office CEO, Carmel Hourigan, as well. I'm sure there might be some questions in regard to the office [indiscernible], but Russ, do you want to answer Sholto's questions?

Yes, sure, absolutely. There were several funds that actually were measured and tested in the first half, and there was some of the performances, which will be measured and tested in particular, Long WALE Hardware Partnership and which were partially accrued in the first half, but the -- we're not fully recruited, obviously, because they're still subject to testing in the second half.

And did -- when you gave guidance on the 13th of December, was the performance fees unchanged between now and then for this upgrade?

Yes, I think it's fair to say that we had pretty good visibility on December valuations. So as Russell said, we would accrue some of the performance fees for CPF and LWHP. And as -- just in case you ask any more questions, holder, you know we do not be a compositional analysis of split between performance fees and transaction fees.

Yes. Understood. Understood. But it seems that the business had a quite strong result across all segments. So as a broad the upgrade was driven from, obviously, performance fees but also stronger performance across the other segments, too.

I think it's the latter.

Okay. All right. That's very good. And just Carmel on the phone, just on office market, there's lot of -- you've got a attractive development at Chifley 30% pre-commit . Can you sort of to a lot of supply with our competitors that are in Sydney or moved to supply. You talk about the tenant market, what you're seeing in office right now. in terms of demand for quality space, any changes you've seen post-COVID in terms of people wanting to have more space or less or anything to emerge?

Yes [indiscernible]. Okay. Yes, look, detailed questions, lots in that. So look, I'd say that we're getting really strong inquiry on blue chip is a great example. And we -- as David just mentioned, we do have a 30% precommitment on that tower. But it's in the early stages of DA approval. So we don't see it. We think that will be quite slow from here, but we got a lot of activity. And I think the issue there, what it's actually showing to us is -- and you've heard it before on many of these calls, but the flight to quality is real. But that has been happening for a long time, but what we're seeing is tenants are looking at the flight to sort of experience. So it's all about the ESG, it's all about what are we doing in terms of flex and so on. I think on growth activity in the market, it's actually stronger than what you would think. If I look at what we've seen already this year, to last night, I had a look at it last night. We've already received 160,000 square meters nationally of RFIs, which is quite strong considering last year, we ended up about $750 million I think the interesting thing about that is the private sector is dominating those inquiries this year, and we've seen a particular increase in Sydney. And when I look at inquiries, we're starting to see more inquiry over 3,000 square meters, whereas -- and that's on the private sector, which wasn't really there. The large inquiries last year are being dominated by a public sector, the Feds and some of the states which is, I think, really positive for the market. So look, I think we're not really seeing -- when all of those inquiries, most of them are sort of staying the same size or there are some slight increases. So there's not a lot of -- we're not really seeing an indication that they're taking less space. But what we are seeing is they are demanding more flexibility in their lease structures, and that would include expansion flows, contraction floors and so on. So that's sort of more of the conversation we're having. And there's a lot going on in terms of substituting maybe expansion space for flex space, so owners providing fixed base.

Yes. I'll just wrap up, Sholto. There is no doubt we're seeing a continued bifurcation of the office market where both corporate and government tenants want brand-new buildings or completely refurbished stock. If you look at the announcements we've made in the last 12 months with virtually a whole building precommitment to Australia Post Swan Street in Richmond, 70% precommitment to government for 60 King William Street in Adelaide. There's a whole variety of announced and pending government inquiries for new buildings. And as you've seen with something like Chifley South, we still put it in the uncommitted bucket because it needs its final DA approval even though we've got New South Wales Gateway determination. And once we get that final approval, that will move from uncommitted to committed. And I think our office portfolio was one of the youngest portfolios of the large office portfolios in the country. It's certainly got the longest WALE of any of the sort of large office portfolios, and we're going to continue to do that. And hence, that developed the core strategy, both in office and logistics is going to pay dividends because we'll have a very young portfolio. We'll have very good quality government and corporate tenants that want to be in new space. So this is the bifurcation of the office market. We've been talking about for a few years. And our view is that the vacancy in those prime particularly brand-new buildings is going to be much lower than 34-year-old buildings that are going to struggle a bit. So that's a strategy we have been harnessing for some years, and I think we will continue to see that, which is why you've seen such a big increase in our total development pipeline from just under $9 billion to $13.5 billion.

Yes. Okay. And just one last one for me, if I may. Just on -- you had a very strong transaction half net gross rate of $6.8 billion. What sort of essence are you looking at to expanding this half? Is there any sort of more triple-net or a bit of color on what you're sort of looking at any alternative asset classes. Obviously, you bought PIM. Are you looking at anything else that's outside of your current sort of expertise?

Look, this business is still the vast majority of property funds management business. There's been a lot of discussion and reaction in the market. Our investments forecast to deliver a 10% after-tax yield on our investment in PIM. If you look at that on an annualized basis, it's a bit over $20 million out of the $540-odd million after tax that we've guided today. So I think we'll continue to grow in the property space. There's no current plans to look at other asset classes. As you know, we've sort of looked at infrastructure in the past with Hastings and pulled out of that because we didn't like what we saw. And as you've just pointed out, we're certainly not ex growth in property in Australia. I think we'll continue to expand using the great partnerships we've got with capital. You're well aware that we've been granted exclusive due diligence on Irongate in a partnership with PGGM. And I would suggest to you that from a sector perspective in property, you'll see much of the same that you've seen for the last 5 years in terms of us focusing on high-quality tenant covenants that are best of breed in each of the sectors. I pointed out that 37% of the total platform income is net effective. We all know that we prefer to be doing deals in sectors with no incentives. And so that long way triple-net thematic will permeate through all of the sectors. And obviously, we're continuing to grow. Our strategy is in social infrastructure. We think that's a particularly attractive growth corridor for us. And as you're seeing across all of our property sectors. We've got multiple pools of capital that are interested in all of those sectors. And we're proud of the outperformance we've delivered for our fund and partnership investors and we don't intend changing that. So we'll be focused on maximizing the IRR for those investors, and ultimately, that will be of benefit to CHC shareholders.

And guidance, is it?

No.

Our next question will come from James Druce with CLSA.

Sort of a little bit of detail on the paradigm. I don't want to go over it in 1 month because you sort of deal with it a little bit last year. But can you just talk a little bit more about how that fits into the evolution of Charter Hall business model. You noted that you previously looked at infrastructure. You also previously looked at debt. Are there alliances with other sectors more opportunity left or are they part of the just of an evolving plan, can you get some more color on that, please?

Yes. I'm not prone to alliances, James. So let me start at first principles. For a decade, this business has articulated to the market that its strategic pillars are to access capital deploy through developed core strategies and selective acquisitions, manage a high-quality portfolio, which can only have a high-quality management team, which we think we have a charter hall and to align with our investment partners in funds and partnerships, we use our balance sheet to co-invest. So if you start with those first principles and you look at 70-odd percent of our total equity under management is in the wholesale space. We think it's strategic to offer both our wholesale partners and our partners in the retail, high net worth space, multiple investment opportunities. The world is more and more focusing on scale. You only have to look at the merger activity in Australian superannuation going on at the moment. And increasingly, our global and domestic clients will get bigger and they want investment choice. So for me, it's absolutely on strategy for us to have made the investment in the Paradice business. The majority of that capital is institutional. However, we believe that we can work with the Paradice team to grow its retail book as well. And as I said before, we're quite proud of the history that we've offered all of the segments of equity that we have partnered with unlisted wholesale I listed retail and through our listed multiple opportunities. And those opportunities will, in our opinion, give our clients choice. It will give us multiple opportunities to present and open doors to some of our institutional clients to the Paradice business. But equally, there's a lot of clients they have that are not currently invested with Charter Hall. So that's the strategy. And we're well aware that the market was a little surprised about us moving into a different asset class. But from our perspective, it's a funds management business, we're a funds management business, and we think it is on strategy and time will tell whether our strategy, which I think for the last 17 years, has proven to be pretty successful when you look at the TSR performance we've delivered for our shareholders versus the index. I wouldn't say and I wouldn't characterize it as a delounce or an opportunistic land investment.

I definitely agree. Your track record is very, very good. The other thing I was wondering about is just sort of how we think about capital from the balance sheet. I mean you're paying out, let's call it, $200 million in the distribution generating $500 million sort of cash. This half, you put about $150 million into the direct portfolio. So if you annualize that, you're basically putting most of the capital back into the direct portfolio of your funds. So I'm just wondering, how do we think about that going forward? I mean, obviously, you've got some growth initiatives thinking about as well. But can you just comment on that, please?

I think it's a dangerous assumption just to double the investment we made in the direct portfolio. If you track the history of this business, there's been negligible amounts of balance sheet capital invested in our direct business. The way we're able to support those funds is to provide equity investments that get repaid to us as inflows come in at the election of the direct Board. And we particularly like the high government weighting of the PFA fund and of, if you look at the slides, you can see they've both been strong performers versus their relevant benchmarks. And -- so we wouldn't see it as something that we're going to increase our exposure, but we have been conscious of the fact that the vast majority of our balance sheet has been co-invested in our listed REITs and our unlisted wholesale funds and partnerships. So we see it as a bit of a rebalancing, but I certainly think it's a dangerous assumption to think it's going to double again.

Yes, what I'm sort of getting at is, is there any opportunity -- I mean you guys have been at a lot of cash. Have you guys considered anything about a couple of turns to shareholders if you do have excess funds? Or would you rather say that warehousing growth initiatives?

I'll give you the same view and the answer that we should be giving to all investors across our REITs on this whole subject of buybacks you need to -- I've never seen a buyback actually deliver any long-term benefit to shareholders in my 35 years. So for Charter Hall that clearly is a growth company, we certainly don't need to be buying back our stock. We think we can deliver a very strong return on invested capital. I think we've just reported a 12-month railing trailing return on contributed equity of about 25%, which most ASX 100 company CEOs to be proud of. So I don't think there's a shortage of investment opportunities for us, and I certainly don't. I think you're alluding to, I think we've got a lazy balance sheet. So we'll continue to retain earnings. We think we can reinvest them at attractive returns for our shareholders, and that's what we'll continue to do.

Our next question will come from Lourens Pirenc with Jarden.

A few questions. I assume the upgrade does reflect the paradice decreasing, you talked about in December?

Russell?

Yes. Yes, it does. The pickup of earnings in the second half only.

Right. And even if this is a new acquisition Can you just talk a bit more about the fundamentals of the Paradice business in terms of some growth in the last 12 months? And also, are you planning to co-invest in the Paradice funds like you do in your profit?

So Lou, this is a 6-month result. There was no earnings from Paradice in the 6 months. It's very early for us to be providing any great color and I don't intend to in the future, like our funds management business, you've got to walk a fine line between annoying your wholesale investors and giving color to the listed world. So all I'd say is it's early days. When we get to the full year results, we'll obviously report FUM numbers. And as I said earlier, it's a relatively small contribution to our overall earnings. All I would say is that the investment style of the PIM team, I think, will prosper in -- as it has for 20 years, and we think they will continue to deliver strong performance for their investors, but I'm not going to give you any more color.

Okay. And Russell, you talked about the corporate overhead inflation in the second half. Is that a good base to use going forward? Or do you expect more cost inflation going forward?

No, that's probably a fair representation for the full year. There is still some non kind of employee costs that are probably more weighted to the second half as we were not as mobile, obviously, are active as we would be in a more natural environment in the first half. But as far as further significant step-ups in like REM or associated costs, I think the first half is a good representation.

Our next question will come from Stuart McLean with Macquarie.

And just one for me on the strategy paradice. Things you said before it's a relatively small part of the P&L. You also said wholesale partners want scale. Is there a need to increase your equity exposure over time from $18 billion and double that triple if it's as trying to toggle it's small, but investors want scale comment?

Well, I think in the context of Australian equity -- listed equities managers, PIM does have scale. It's obviously got 1/3 of its funds invested in global listed equities, which, as we all know, is a very big universe, all their strategies are available on the website, so I don't intend to go through here. And no, we don't see, to Lou's previous question, we don't see the need for us to be co-investing in their funds and partnerships they have delivered alignment over many years to their investors through promote structure. So we -- as we articulated in December, we see this as an attractive additional investment for the business. And I'm not going to give any FUM targets, I learned from a competing CEO about 8 years ago that came out with some targets and never got there not to give fund targets. So all I would say is I expect their business to grow as I expect Charter Halls property fund management business to grow. There's a lot of cultural alignment with effectively a privately owned business. And as I said earlier, I think we're going to extract value both ways going forward.

So we should expect that any growth in -- on the equity side has been more organic as opposed to acquisition of additional platform? Is that fair?

That's a very good summary.

Okay. Second question is just around equity flows for the real estate business just in the higher interest rate environment that we're currently in at the moment. Just wondering how conversations are flowing with potential capital partners going forward?

So over 35 years, I've seen plenty of disconnected cycles between unlisted capital and listed. And this is another one. We have not seen any slowdown in demand for real estate. I'd point you to the Irongate transaction as another example. And obviously, we closed in the first half, the ALE property group transaction. In addition to that, we're continuing to see good flows, $700 million or $800 million in CPOF in the first half and that equity raising is continuing. We will also launch another raising for CPIF in this half. And as announced in the last couple of days, we did another transaction where we attracted capital at the same time as securing an investment in Brisbane with our long-term great partner, PSP from Canada. So you'll just see that continuing. As you can also see in the equity flow numbers, the direct business continues to accelerate its inflows. And I think one thing that the listed market sort of often misses when we have these sort of market corrections is that the volatility sends a lot of capital, Mum and dad investors through to the top end town towards low vol unlisted investments. So I've seen it in plenty of cycles. So I've got no expectation for any slowdown in our rate of equity flows or, in fact, inbound demand from existing and new partners who want to partner with us in real estate.

Okay. And just a final question on development. It normally hovered around about $1 billion of completion. With the growth in that pipeline now sitting at a $13 billion Is there a way that we should be thinking about a $2 billion of completions year or $3 billion of completions a year to ramp up there?

I think there's no doubt there's a ramp up. If you look at the I'll split it between logistics and office. If you look at logistics, we've got a significant increase in both committed and uncommitted projects. As you all know, the length of time to complete a logistics project is roughly 1/3 of the time it takes to complete one of these major office projects. And -- as I've just alluded to, we secured 4 or 5 large sites that will deliver bigger states in logistics prior to 31 December, and that appetite to keep replenishing new land is significant because the absorption we've experienced and the market is experienced in logistics has been the strongest in both my career and Sean's career and he likes to say that he's done a few more industrial pre-leases than me, probably has, but it's a very strong market. And on office, we've got some fantastic projects underway with the Amazon and Aware Super pre-committed project, a 555 Collins Street in Melbourne. We've talked about Chifley because it takes a bit more time for planning to be finally secured there and then another 3-year building program, that will be a feature of our committed pipeline for a few years. So I think I won't give you a number, but you can certainly do the math on how completions are going to ramp up. And they're always a bit lumpy. So in the next 6 months or 9 months, we'll finish the federal police, 30-year government pre-leased office project at 140 Lonsdale Street. So that will be a lumpy completion, whether it fits into this 6 months or the next 6 months. And then obviously, you've got some major other projects like the $500 million King William Street project, which will complete next year. And then the Aussy Post project, I mentioned, 555 Colin Street and several others that are pending. So yes, I think it's fair to assume you're going to have a pretty big step-up in annual completions. And we don't intend to change that momentum. We've got one of the biggest development platforms in both office and logistics in this country. And at $13.5 billion, there's not too many we've a bigger pipeline than that, and we'll continue to do that in our funds and partnerships where developed the core is a key strategy within those funds. So I won't give you a specific number, but I don't think you're on the wrong track with the sort of numbers that you're talking about.

Our next question will come from Suraj Nebhani with Citigroup.

A couple of questions have been just wanted to check on the fund management yield calculation that I believe has been shown for the first time on Slide 5, the 11.4% number. I was just wondering what that represents and the reasons for doing that calculation now?

Yes. So Suraj, I don't recall this for the first time or not, but it's a measure we use when we're considering the return that's generated in our funds management business on the capital employed. So what is the yield for our -- effectively, our funds management platform -- and the definition is an incredibly small font on the bottom of the page in footnote 6. And we do allocate about half of the debt costs to the earnings to try and get a yield because how we -- when we're looking at investing our own capital, we're looking at not just the return in the property investment that we undertake, but also with the associated fee generation and profitability. And we use this kind of as a measure together when we're looking at our total economic return when we invest capital.

And it has been in our results before we've called it PFM yield. It's effectively the PI yield is the actual distribution we get like everyone else on our invested capital. in the funds and partnerships. And then the funds management yield is the total funds management profit as a yield on invested capital. So if you have those together, you're getting a total annual if you like, income yield and both of them exclude any sort of NTA growth. So hopefully, that explains it.

Yes. Okay. Fair enough. Maybe another one, if you can make some cross comments trying to - I know performance fees has been a feature of the business over the last few years, a pretty strong future. Looking forward, performance is reasonably strong. Are you able to give us a sense of any sort of buckets of performances that may be coming through over the near term? Or how large it's going to be?

So I'll give you 2 answers to that. And the last one, no, I won't give you any quantum forecast. And the first one is for years, we have identified the date of each fund and partnership that will generate or could generate a performance fee at 41, I think. And clearly, we've made it clear at both the full year and this announcement that we're expecting both CPF and LWHP to generate performance fee in FY '22. CLP, which is another large logistics portfolio is due to be tested in FY '23. And then there's a number of other funds and partnerships we've identified there in case someone picks it up. Over time, you'll see additional partnerships come onto this list as we create partnerships or form a view that there's a potential for them to generate a performance fee down the track. So that's all I'll say in terms of giving you guidance as to when performance fees may be generating revenue over subsequent years. But what I'd also say is a business like ours has both long-term co-mingled or pooled funds like CPIF, for example, where it's taken us 15 years to grow was close to and growing towards a $10 billion logistics portfolio with a 10-year WALE, one of the highest quality portfolios in the country. And that has a 3-year rolling performance calculation, so it will be tested this financial year and again in FY '25. And then a number of the partnerships have ongoing performance fees on different periods of testing as outlined on that slide.

Our next question will come from Richard Jones with JPMorgan.

Just further on that comment, sorry, David, just to the 2 main time contributing called out the Long WALE Hardware Partnership and CPIF. And you're saying I think Russell said that you've accrued part of the fee in the first half and the full test is in the second half? Is that what you're saying?

Yes, that's correct.

Okay. So just in terms of the development segment, that's generated obviously a good profit in the first half, just based on accounts. It looks like it's mainly from profit, not fee. So the balance sheet development. not you did call out the tire full year, but thanks for that. But just interested what the, I guess, outlook is for this segment earnings beyond '22, I'm not asking for a dollar number. But just interested, if I look at the balance sheet, it looks like you've only got about $90 million of segment assets in development. So what is the thinking around either restocking that? Or does it just become more of a development management segment moving forward?

Richard, I'll give you some color on how this is different to pure development management fees in where we're paid to do the development management for the funds and the partnerships, which is obviously in the PFM revenue line. this development investment earnings segment represents almost 3 buckets of balance sheet development. But I use that word balance sheet very carefully because in many cases, we have no balance sheet capital invested in it. So the first bucket was what we inherited from the folks in business, which was a number of development inventory opportunities, a big resi land subdivision in given in Brisbane and Melbourne that has been very successful and has, I guess, accelerated our expectations. Another example, apart from what was focus in business is -- there's been a number of opportunities in both logistics and office where Charter Group was able to warehouse and opportunity, get the planning, get the pre-leasing and then we have sold the project to our funds 60 King William Street is an example of that, whereas prior to land settlement, we worked for 1.5 years, optioned up the land, got a planning approval, got the precommitment from the government. And then on land settlement, the funds actually settle it. So the dollars invested in something like that is 0, and the earnings come as we deliver the project and lease up if there's a residual in that case, it was originally 70% leased to the government, and then we got Telstra to a lease for half the remaining space for 10 years. And in all cases, virtually there is no risk because any rent guarantees we provide less than the forecast profit. So you'll see over time this being a regular contribution in terms of earnings. But as you alluded to, it will have very little invested capital, mostly invested capital that you're still seeing on the balance sheet is a residual from the folks in business, but that tails off pretty quickly. But there's always going to be opportunities where we -- these opportunities are generated and then we can provide a derisked opportunity to our core funds. So I think it will continue. Do I think it's going to absorb an increasing amount of our balance sheet capacity. I don't. And as I said earlier, as that capital diminishes the 0, we might replenish a little bit of it, but I certainly wouldn't be thinking there's any more than what you're currently seeing on our balance sheet invested in that segment. And you can do the math, it's providing us a very high return on invested capital.

Our next question will come from Grant McCasker with UBS.

Just some very quick ones. David. Firstly, more a question for Russell. Just can you remind us outline the hedging levels 12 months and 24 months forward across the funds platform?

I'll get that for you. But across the funds platform, generally, we're anywhere between 55% and 65% depending on the fund. And I think at the half, we're about 62% -- 56% and 62% last year. But -- and that typically is up to about 24 months on average to 30%. At the headstock, we typically remain unhedged until -- because we have a high degree of cash on hand.

Yes. And then secondly, it's only a very small fleet listed equities are part of the property investment earnings and allocation. Just what example is that?

That would relate to the property securities funds that are managed by Maxim. We characterize those in the property section, but none of the paradice funds are.

Okay. So was that a reclassification because it was 6 months ago?

It was actually always in there, but it's just a sorry, Phil is trying to speak to me, but it's -- well the answer for -- it was -- sorry, that's right. Sorry, Grant. It was in social infrastructure other because it was relatively minor. However, this reporting period, obviously, with the addition of Paradice investment, listed equities had a significant amount. So we called it out separately within the property mix.

[Operator Instructions] Our next question will come from Alex Prineas with Morningstar.

Just sorry to ask about sort of Paradice related question again. But I was interested in Paradice having investment people offshore and investing offshore. Is that something that we might expect for the property side of the business in terms of how an investment stuff offshore or property investments or property partnerships in offshore assets?

I think I've been pretty clear over many years, not on my watch.

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

Okay. Thank you, everyone, and in particular, thank you to the Charter Hall team. A lot of hard work. And I think the result speaks volumes of the commitment our people have made to driving returns for our investors. So I'm sure we'll get an opportunity to speak further if you require a one-on-one. So thanks for your attention this morning.