Charter Hall Group (CHC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2023 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Monday, 20th February 2023. 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 Half Year FY '23 results. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our CIO; and Russell Proutt, our CFO. I'd like to commence today with an acknowledgment of country. Charter Hall is proud to work with our customers and communities to invest in, develop and manage properties on land across Australia. We pay our respects to the Traditional Owners, their Elders past, present and emerging and recognize their continuing culture and contribution to this country. Slide 5 and the group highlights. So it's been another half year of ongoing growth and resilience. Operating earnings post-tax was $240 million or [ $0.507 ] per security. For the 12 months to the end of December 22, that equates to a return on contributed equity of 28%, a metric we continue to focus on closely as we lead the sector with its metric for long-term investors. The group's property investment portfolio has grown to $3 billion as we've looked to reinvest, retain earnings and deliver an attractive 10.4% investment return, inclusive of the 4.8% yield. FUM growth continues to be strong with total farm up 10.1% over the 6 months to $88 billion and Property FUM, up 11.2% to $73 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 our security holders. That growth saw us undertake a record first half of transaction activity with $7.9 billion of gross transactions as we continue to actively curate our portfolios to drive performance via acquisitions, divestments and developments. -- noting a record level of development completions and a committed development pipeline. The group's balance sheet remains resilient with 3% net gearing and significant liquidity -- whilst the 4.4% NTA growth reflects the quality of our long-term investments and retained earnings. Finally, the group's investment capacity of cash and undrawn debt stands at $6.5 billion, and that excludes committed but uncalled equity commitments, which provides further capacity to this metric. Our focus remains on delivering sustainable growth for securityholders, replenishing dry powder, strengthening resilience and a vigilant focus on property fundamentals, given our leading scale in most sectors we choose to participate in. Slide 6 outlines our strategy, which remains unchanged. We use our expertise and customer relationships to create value and generate superior returns for our investors. $2.1 billion of gross equity was allotted during the half with our wholesale partnerships being particularly active in this period. Of the $7.9 billion of gross transactions during the period, we acquired $6.1 billion and divested a further $1.8 billion of assets. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from assets we manage. Finally, we continue to focus on investing alongside our capital partners and delivering enhanced returns. Slide 7 highlights our post-tax operating earnings per security and distribution per security growth. We've consistently delivered earnings growth through investors. And based upon our no less than $0.90 OEPS guidance, we deliver -- we will deliver a 5-year compound annual OEPS growth rate of 19%. Similarly, we delivered a continued 6% annual distribution growth CAGR for investors, a leading long-term distribution growth rate in the AREIT sector with franking credits providing significant additional tax benefits for our securityholders. Importantly, we've been able to deliver that growth in returns for our investors, whilst also retaining significant investment capacity to fund new growth initiatives and invest alongside our capital partners. We've retained more than $850 million in earnings since FY '18, and that is being used to support new fund creation and invest alongside our capital partners, providing alignment of interest and delivering future earnings growth for securityholders. Turning now to Slide 9 and our FUM growth. As mentioned, the period was a record half for transaction activity. Net property revaluations continue to be a positive contributor to FUM growth as the strength of income growth across our assets mitigates cap rate expansion. It was particularly pleasing to see our Long Wale triple net lease portfolios predominantly exposed to CPI rental increase recognized with continued ongoing valuation growth. Similarly, the attractiveness of our industrial and logistics portfolio is also evident with strong market rental growth being reflected in our valuations. The platform's development book was also a significant contributor to FUM growth with our flagship Chifley South project being added to committed developments post gazettal of its upzoning and floor space to create a twin tower complex that will total more than 115,000 square meters of lettable premium-grade space over 2 towers. When property FUM growth of $7.3 billion is combined with our investment in the PIM partnership, we ended calendar year 2022 with $88 billion of group FUM. On Slide 10, you can see the breakout of that $88 billion of FUM by equity source or segment and by property subsector. We continue to remain well diversified across external equity sources and across property sectors and join the support of our investor partners across all segments in which we operate. On Slide 11, we break out our property FUM in more detail. The PFM platform comprises over 1,600 properties and delivers more than $3.1 billion of net rental income. We continue to focus on delivering a sustainable and resilient return through property sector diversity with a focus on diversity of rental escalators, market rent growth profiles and long lease assets to high-quality tenant customers, noting our sector-leading property platform WALE of 8.2 years. The weighted average cap rate across the platform of 4.5% reflects the quality of our core portfolio with long weighted average lease terms and attractive rent structures in markets with good market growth fundamentals. On Slide 12, we provide some more detail on the major tenant customers across the platform. Our top 20 tenants make up almost 60% of platform rent. These tenant customers are heavily concentrated in nondiscretionary industries and sectors, whilst we expect the high-caliber tenant roster will drive resilience but also provide growth as these customers expand their businesses. 21% of platform leases are triple net and 20% of platform net income is CPI linked, providing strong rental growth and CapEx efficient portfolios for our investors. Importantly, we continue to partner with our tenants, and this is reflected in the fact that 71% of our tenants have more than one lease with us, while 28% of our tenants work with us across multiple sectors. The resilience of our major tenant customers and our concentration towards these essential industries underpins the defensive nature of our portfolios and their ongoing outperformance. On Slide 13, we provide more color on our recent office leasing successes. Active asset management sits at the heart of Charter Hall's business. This means working with our tenants to provide attractive solutions, thought leadership and flexibility, which drives greater tenant retention and sourcing of new tenant commitments. As the largest office landlord in Australia, we're able to provide multi-location space opportunities to an increasing volume of repeat business customers, also welcoming new customers to our platform. First half FY '23 saw us execute a record 258,000 square meters of leasing deals in office. We had a very strong 81% retention rate with our existing office tenant customers, a reflection of our partnership approach with our tenants. Pleasingly, we executed a significant quantum of leasing at our new office development. Further advancing these projects and continuing our track record of delivering new office stock for our investors that is predominantly fully leased on completion. Most pleasing is the high-quality nature of renewals and new leasing to blue-chip corporate tenants and government tenants, which combined comprises the overwhelming majority of our leasing. We achieved a 7.9 year WALE across all deals nationally, and our office portfolio occupancy sits at a healthy 96.2%, significantly ahead of the national average of 85.4%. [ Slide 14 ] demonstrates our leasing success in industrial and logistics. Similar to office, it's been an exceptionally busy period with 470,000 square meters of leasing deals achieved. We also continue to enjoy exceptionally strong retention rates with our existing customers as our partnership approach these tenant customers look for ongoing relationships with Charter Hall. Developments also form a significant part of our activity as we continue to complete new developments, commit new pre-leases and curate further developed to core opportunities. Densification of sites continues with recent planning approvals and 85% pre-leasing of a multilevel logistics facility in South Sydney as an example of greater site densification. The outcome of our active asset management is that our industrial and logistics portfolio enjoys exceptionally high occupancy of 99.5% and a sector-leading 10.3 year WALE. Turning to Slide 15 and our equity flows. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle. During the period, wholesale partnerships were particularly active with successful completion of the Irongate, REIT privatization and several office partnership transactions. We enjoy strong working partnerships with approximately 100 wholesale capital partners and expect these investor customers will continue to be active in periods ahead. Australian real estate continues to screen attractively to global investors, offering attractive rental structures, good governance and transparent rule of law. 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 create a strong alignment of interest. Just on Slide 16, we outline our transactional activity. First half '23, saw us active in deploying equity into developments and acquisitions. Our strong tenant relationships continue to provide us with access to some leaseback off-market opportunities, which are mutually beneficial. Example of this during the period included the Z Energy and [ Gold ] New Zealand portfolios. We're also very active with a number of significant office transactions, including Southern Cross and the 50% divestment of our $800 million plus 555 Collins Street development in Melbourne, along with value-add opportunities at 383 Kent and 74 Castlereagh Street in Sydney CBD. We continue to actively curate our portfolios to drive long-term returns for our investors. Now turning to Slide 17 and our development book. The group continues to progress various developments across its portfolio, creating investment grade and institutional quality properties, adding significant value through enhancing both income yield and total returns. It's been a strong period for completions with $2 billion of developments delivered in the last 12 months. Notwithstanding completions, our total development pipeline continues to be robust at $15.4 billion, which I note more than 50% of which is committed development. Our committed projects continue to grow with Chifley South having now moved into our committed projects stream. This development is a great example of our ability to provide our investor customers access to new investment product and enabling them to deploy capital into unique opportunities. Our ability to deploy capital in our industrial and logistics pipeline also continues to be a key advantage of the group and drive significant capital inflows. 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 further capital. 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 while also ensuring that securityholders benefit from our property expertise. Our property investment portfolio has grown to $3 billion, predominantly as a result of new incremental investment. Occupancy continues to remain high at 97.4%, and the WALE is a very attractive 7.7 years. Our weighted average rent review has risen to 3.7%, reflecting our underlying exposure to CPI-linked leases. The weighted average cap rate remains a firm 4.61%, also reflecting the attractive characteristics of the assets we own. The portfolio remains well diversified across sectors and by investment with an 82% weighting to the core East Coast markets. We continue to allocate incremental group capital to investments that support new fund creation and the ongoing growth of our existing funds. 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 Slide 20, the property investment portfolio movement. During the period, we made net investments of $132 million in our property portfolio. Our investment portfolio has delivered an impressive 13.7% 4.5-year compound annual return for Charter Hall security holders. Our property investment portfolio yield at 4.8% continues to remain significantly greater than the distribution yield to the MSCI core funds. As David explained earlier, we've retained over $850 million of earnings since FY '18 that have been used to invest alongside our capital partners and support new fund initiatives. This has delivered significant returns for securityholders and is an important part of the success of the group. Let's turn to Slide 21 and our earnings resilience. As can be seen on this page, our property investment earnings are characterized by the high quality of the tenants that provide that income, and the diversity of sectors which produce them. No single asset is more than 5% of the group's property investment portfolio and government makes up an impressive 20% of portfolio income. 16% of the property net income is also from CPI-linked leases. And as I explained before, this CPI exposure has seen the weighted average rent review lift to 3.7%. The property investment portfolio can be considered a very defensive, well-diversified core investment portfolio. Let's now move to ESG on Slide 22. Climate resilience, recognizing the role we play in communities and responsible business are embedded in everything we do at Charter Hall. During the period, we brought forward our commitment to net zero Scope 1 and Scope 2 carbon emissions by 5 years to 2025. We now have 47.8 megawatts of installed solar across the grid platform, an increase of 600 kilowatts since June 2022. We've also undertaken another $900 million of sustainable finance transactions, which recognizes the ESG performance of our assets and their attractive environmental credentials. We also remain committed to engaging with the communities in which we operate and donated over $700,000 during the half, much of it going towards disaster recovery in flood-affected communities. And we also facilitated 117 employment outcomes in partnership with social enterprises as part of our goal of providing 1,200 employment outcomes for vulnerable youth by 2030. 17 of our funds scored in the top 20% of GRESB with 3 funds recognized as global and regional sector leaders. 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 launched our third modern slavery statement outlining our efforts to prevent occurrences of modern slavery in our supply chain. 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. Slide 24 presents a summary of earnings for the first half of fiscal year 2023. As David highlighted, the group reported statutory earnings of $226.5 million and operating earnings of $239.9 million. In the following slides, I will discuss the key metrics impacting each of our 3 reported segments. Operating earnings and group EBITDA were 9% and 8% down, respectively, compared to first half of last fiscal year. The difference between the periods was a result of reductions in our property investment segment as well as Funds Management. The Property Investment segment EBITDA reduction of about $5 million can be largely attributed to higher finance costs in the underlying funds and partnerships. As noted on a later slide, while we are about 55% hedged across the platform, we did experience an average increase in cost of debt of about 70 basis points compared to the first half of last year. Development income was $3.5 million higher and in line with expectation. By its nature, this segment can vary from period to period depending on project activity. For our Funds Management segment, we reported $229 million of EBITDA and whilst down from the prior comparable period, reflects a very strong period of performance. I'll expand further on this segment on the following slides. We continue to size our distributions based on target growth rate of 6% per annum and distributed [ $0.208 ] per security, representing a 41% payout ratio and retainer operating earnings of about $140 million. Turning to Slide 25 and looking at the funds management business in more detail. The Funds Management segment continues to drive our growth. The base fund management revenues increased more than 30%, reflecting the growth in FUM during the year. It is worth noting that in the half, these fees represented 2x total operating expenses. And at $96 million, transaction and performance fee revenues were strong in the half, reflecting our transaction activity and performance fee realization from outperformance in our group funds and partnerships. Property Services revenue were up 60% as the scale of the business grows, and activity levels increase, particularly in providing development management and leasing services to our funds. With respect to the 6% increase in operating expenses, growth in head count and wage levels is the most significant contributor to this increase. However, with the changing economic climate, we have been very focused on managing costs and scrutinizing all spending throughout the business. The chart on Slide 26 illustrates the evolution of the platform and the value of scale in driving profitability and quality of earnings. The top black line shows the absolute earned EBITDA margin, including all transaction performance fees showing the first half's margin achieved of 75%. Now adjusting for transaction and performance fees, the second line shows that the EBITDA margin achieved has increased to 64% in the half. I would highlight that we would expect this margin level to moderate somewhat from this level for the full year. The combination of scale and investment performance provides a greater potential for transaction performance fees in the future. Now moving forward to Slide 27. Our balance sheet as at 31 December, as you can see, the group continues to be in a very sound financial position. We continue to maintain a strong liquidity position with modest net leverage, which was 3% at the half, which translates into investment capacity at the headstock of $567 million, and this is exclusive of any capital recycling and retained earnings in future periods. And as has been mentioned, the investment portfolio has increased in the [ half to $3 billion ]. As we have highlighted previously and most importantly, the returns on capital metrics continue to be strong and reflects our continuing ability to invest capital effectively. Maintaining strong return on capital metrics is fundamental to ensuring the business employs capital effectively and to generate earnings growth on a per security basis. Now finally, on Slide 28, we provide an update in relation to the debt funding across the business. Our approach to financing has not changed. Our strategy is tailored to the particular investment vehicles and the nature of the assets and investor profiles. And more than $28 billion of total facilities, including $5.2 billion executed during the half, we have grown our borrowing capacity in line with our overall business growth. Across the group, average giving was approximately 30%, and the platform's average cost of funding was 3.8%, with, as I mentioned, 55% of drawn debt hedged. The business continues to diversify debt capital sources and will access bank and capital markets in multiple jurisdictions. We've also completed nearly $3.5 billion of sustainable financing across multiple funds, representing about 12% of our total book. And as has been referenced earlier, the group had approximately $6.5 billion of available liquidity or investment capacity at 31 December and is well positioned to continue to support further growth. Now I will hand back to David to wrap up and comment on guidance for FY '23.

Thank you, Russell. Now turning to Slide 30 and our earnings guidance. Based on no material adverse change in current market conditions, we reaffirm that FY '23 guidance is for post-tax operating earnings per security of no less than $0.90 per security. The FY '23 distribution security guidance is for 6% growth over FY '22. That now ends the prepared remarks, and I now invite your questions.

[Operator Instructions] And I show our first question comes from the line of James Druce from CLSA.

David and team, a pretty good result with $4 billion worth of net acquisitions first half. How we sort of think about the second half now?

I assume the questions in relation to transactions.

Yes.

Look, there's no doubt that transaction volumes will slow down. We're not expecting to replicate the first half, which obviously included the Irongate REIT privatization. However, I would expect, as we've done for many periods to continue to sort of judiciously look at opportunities. We've got dry powder across the platform. You've probably seen various sort of recent media articles on our continued activity in most sectors, I would expect us to continue to focus on CPI linked, Long-WALE acquisitions. I think we've got a very robust office and industrial development book, so we'll be focusing on developing that out. And as and when opportunities emerge, we've got over 100 wholesale investors that have thankfully enjoyed pretty strong returns with Charter Hall over many years, and we expect to continue to partner with them on interesting acquisitions as they emerge. So hopefully, that gives you a bit of color.

That's helpful. And also just thinking about the second half SKU in earnings if you're just thinking about guidance, how should we think about performance fees and development income for the second half?

Look, you can do the math yourself. Obviously, we're looking at a first half SKU. That's not surprising given the volume of transactions in the first half. I don't really think there will be a great deal of difference between sort of first half, second half performance fees. And as I've said for -- I think this is now 18 years, it's very difficult to forecast transaction activity. So we've always been sort of conservative around looking forward on transaction activity. So -- and there's no doubt the whole sectors got headwinds in terms of rolling or sort of rising weighted average cost of debt. So I think if you look at all of those things, that gives you an idea why we've guided the way we have.

Okay. And one more, if I may. The committed development pipeline is up to $8 billion now, so it's getting pretty big. I think it's a great credit to the team. Just thinking about the run rate for replenishing industrial. Are you still seeing plenty of opportunity there.

Yes. Fortunately, we have a very large land bank within our existing funds and partnerships. So unlike others, we're not out chasing record land prices in most of the prime markets. We're in the course of pre-leasing great infill sites in Sydney, Melbourne, Brisbane. So I think that will continue. I'd also just point out that, as we've said many times, a lot of the development is being funded in wholesale funds and partnerships. The dry powder exceeds what we've talked about in terms of investment capacity because a lot of our wholesale partnerships have committed equity that will get drawn over time for a particular project. So that's over and above our stated platform capacity. So -- but the reality is that construction costs have risen over the last couple of years. We're just starting to see that plateau out in certain sectors. And fortunately, in really tight markets, as you mentioned, with industrial. Our tenant customers are needing to pay higher rents, economic rents have risen. And therefore, if you want space delivered for your operations, you're going to have to pay market rents, which are significantly above where they were a year or 2 years ago. So we're still comfortable we're going to get an attractive yield on cost and enhanced IRR doing developed decor in our funds and partnerships, and I'd expect that will continue. But I'd also say in the office portfolios, we've been talking about the bifurcation of tenant demand toward modern assets for some time. And it's playing out most of our office projects that we've delivered in the last few years have been practically 100% leased at completion. That momentum is continuing with our current developments, 60 King William Street in Adelaide is virtually 100% leased and will be completed in '23. And we're seeing very similar momentum in our major office projects, 555 Collins Street, where we've recently announced Allianz Australia is joining what is a very high-caliber tenant roster, and I think we'll see a similar momentum in our other office projects. So I think it will continue to be a feature. As I said on the call, we've stepped up the total volume of completions you can do the maths yourself and look at that committed development book and then divide it over the likely development period, both in logistics and office, and you'll see that our development completions will continue to rise given the sort of pre-leasing I just talked about and particularly the large value of some of those projects, such as Chifley South and our other office projects that are going to be completed over the next couple of years.

And I show our next question comes from the line of Sholto Maconochie from Jefferies.

Just on the equity inflows. It looked like they were down about -- on a net basis, [ 33% ] year-on-year and 38% sequentially. What was driving that? Look, it implies about [ $1 billion ] of redemptions. So what was driving that lower number besides the lower gross headline number?

So in any particular period, we might have a liquidity event in one of our funds part of the I think the features of our 2 wholesale pooled funds, the office and the industrial fund, is that unlike some of our peers, we've been able to bring both existing and new capital in to meet the demand for secondaries over the last 6 months. So where -- when there's not a liquidity window, investors, if they want to lighten up their investments, we'll request secondary sales, and we fortunately have been able to get both existing investors and new investors to fund those. So obviously, that's a net neutral fund flow, so you'll have inflows equal to the outflows with secondaries. And that's why you're seeing sort of increase, if you like, in outflows. And therefore, that has an impact in reducing your net inflows.

Yes. Understood. And then I noticed PFA has got a review event this year on a performance fee but also for the -- I think, liquidity window any redemptions in the PFA fund and in CPOF coming to '24?

Well, CPOF doesn't have a liquidity window until '27. It's a 7-year liquidity window, PFA, yes, has gone through its liquidity window. And as is the case in virtually every liquidity window we've had in the direct funds, there are redemption requests and they generally met over a period of time. So PFA is no different. But the volume of redemptions is not materially different to anything that we've seen. And we sort of don't provide any greater detail on the volume of redemptions. What I would say is in all of our direct funds, whilst as you'd expect, net inflows are slowing down, we're still getting good inflows across all of those funds, including office funds, industrial, diversified. So we don't really see there's anything more than sort of business as usual. Having been running these things for well over a decade.

And then you got a lot of scale in office industry, you're pretty strong there. Is there any asset you look to classes you look to into that you're not already in to get some more scale you got a bit of dry powder? What sort of asset classes would you look at they don't currently have a scale in?

Look, I think if you look at the history of this group, we have tilted into different sectors over time. We've obviously grown our presence in social infrastructure. Originally with the acquisition of Folkestone. And as you know, we've got a listed social infrastructure REIT, and we've complemented that with other acquisitions like the Telstra Exchange portfolio. We are looking at aspects of the living sector that may provide some scale opportunities, but we're really going to look at how we can get scale in those sectors, and we'll announce something when we've got meaningful FUM actually complements the growth of the overall platform.

And then just finally, on the PIM, I think its 6-month contribution second half last year, it was [ 13.3 % ]. This period, it was [ 7% ]. Was that just a performance fee related impact on the half on half on the earnings for PIM?

Yes, that was primary difference between the comparable periods because they measure obviously, at the end of the fiscal year.

And I show our next question comes from the line of Lou Pirenc from Jordan Group.

Can you maybe talk given the concerns that the market has with office, just more about the rent kind of what are you seeing in terms of incentives in terms of effective rental growth in the renewals, new leasing and development markets?

Well, the most important thing love for us is that we're achieving above feasibility, both face and effective rents on pre-leasing. I think I've mentioned and other commentators have mentioned. There's pretty strong bifurcation of tenant demand toward modern assets and assets that have been completely retrofitted and a new amenity put into those complexes. I think we are seeing evidence of both face and effective rental growth. A bit like what I said before about industrial, the economic rent for new development in office is rising. Obviously, rising construction costs mean you're going to need higher rents to make new developments viable. And like we're seeing in logistics, I think people are prepared to pay for better quality. So I actually don't see a lot of weakness in the new development sector in office. I've been on public record of saying there's going to be quite a bifurcation. And I think the more modern assets are going to enjoy very low vacancies -- and older stock are going to actually experience the opposite. So -- and you don't have to listen to me. You don't have to look at the level of sort of pre-leasing we've been able to deliver on our office projects over many years, and that's continuing.

And then also a quick one on the look-through gearing clearly up quite a bit in the last 6 months. Are there any covenants based on look-through gearing? And is there a level where you kind of don't want to really get at?

Yes, sure. At the head stock, there are no look-through gearing covenants at all in the system. There's no cross defaults, no cross collateralization at all. So it's purely nonrecourse financing and every fund and partnership. It has increased a bit, but that is also a reflection of some of the development spend in some of the big larger pool funds like CPIF, which were low single digits historically gearing. So just flows through on the math, but there's no issues or problems with any [ LVRs ] within the system. I'd just add, Lee. If you look at the numbers, our property investment portfolio is virtually our NTA. So the little bit of gearing we've got on balance sheet is to fund the curation that we're doing in development investments, which generally gets recycled back to the balance sheet once we've curated or secured a planning approval or pre-leases. So I think the -- and this has been the case for the whole of the listed history of Charter Hall. There seems to be a -- because of what some other groups went through, we've looked through gearing covenants in the [ GFC ], there seems to be a sort of focus on it. It really has very little impact on the way we look at our balance sheet for the reasons Russell outlined.

And I show our next question comes from the line of Grant McCasker from UBS.

That's actually a follow-on question. If we look at the fund level, gearing has gone from under 27% to over 30% over the period, and you've talked about a large committed development pipeline, it would suggest a gearing is going to increase before we start talking about potential asset value movements. How should we think about gearing on the funds over the medium term? Where are you comfortable with them?

Well, as I said before, Grant, that you got to be careful a one-dimensional approach because a lot of our development is in partnerships where there'll be further committed equity drawn there has been an elevation in some of the fund gearing with acquisitions and further development during the period. We don't really think gearing in the sort of fund and partnership levels going to move much further than where it's at, and it generally gets replenished with continued sort of recycling. I think in both our pooled funds, CPOF and [ CPIF ], there's assets that will continue to be recycled. I think for the last 7 or 8 years, we've been reporting group divestments of close to $1 billion a year. I don't see any reason why that's not going to continue. So -- and as we put in our valuations announcements, at December, there's cap rate softening across the market. Fortunately, we have the combination of strong, both fixed and CPI-linked rent increases helping to offset that. And in a lot of our wholesale funds and partnerships, there's unrecognized development margins that get recognized as projects get completed, which also provides a bit of a buffer to any sort of cap rate expansion.

And I show our next question comes from the line of Richard Jones from JPMorgan.

Can you clarify whether the [ CHOT ] performance fee has been paid in the first half or is to come in the second half?

No, it's measured and paid in June. So the first half is an accrual based on where we think the overall performance fee will get measured and paid. There's a whole range of reasons why you only accrue a certain percentage of that, including the fact that the final performance fee is going to be determined by valuations at June this year. And as I said before, I gave up crystal [ balling ] future asset values a long time ago. So we would expect the full -- the 100% of that portfolio will get valued in June and the full performance fee will be payable in June.

Okay. And then just, Russell, just to clarify your comment just around the funds management margin will moderate in the second half. Was that a comment related to the margin inclusive of performance in transaction fees?

No. It was the one exclusive with the 64%. As said in the past that kind of the gold standard is getting to kind of a run rate [ ex ] transaction performance fees of around 60%. We have some costs in the second half some accruals, which would -- will moderate the full year. We hope to come in at around that level. But I just want to make sure people didn't think that trend line continues on for the second half. It was a little bit of a timing of costs in the fiscal year.

And I show our next question comes from the line of Stuart McLean from Macquarie.

Another one for Russell. Just regarding the interest costs coming through in the property investment line items, we've got 55% hedging. Can you just run through maybe how that rolls off over the next 2 to 3 years and then the swap rate as well, so we can have a better idea of [ what's coming the ] interest cost now property investment line item for you?

Yes, I'm going to have to come back to you on Stuart because that's a big calculation across the various funds. But you'd assume that it's reasonably hedged at those levels for the next 2 years. But I'll come back to you specifically because it -- it's based on our weighting of each particular fund. I don't have that in front of me.

Okay. Great. Second question, David commented on CPOF not quite being at [indiscernible] achieve our performance fee [indiscernible]. Do you have to provide an update there on CPOF [indiscernible]?

Yes. So our pooled funds have rolling 3-year performance tests, and they go back to inception of the funds. So CPOF started in June 2006. Unlike CPIF, it has yet to hit its performance fee hurdle. I guess I'd sort of take a view given the current environment, we're probably not thinking that, that is going to be something that gets paid at the next assessment date. However, as I said earlier, there's a lot of development margin we've been able to deliver in both CPIF and CPOF over the years for the benefit of our wholesale investors. And I think it's a fund that will eventually hit its performance fee target, but I sort of wouldn't like the market to be thinking there's a big performance fee coming at the next assessment date because there's too many variables out there, not the least of which none of us really can sort of predict where cap rates might be at a point in time.

Understand, it's clear. And just a final one on equity. Is there any planned raisings coming through over the next 6 months that we should be watching out for?

Well, a wholesale platform like ours is often in the market raising equity. So we don't often announce when we turn them on and off, as I said earlier, at any particular point in time, we've got equity flows coming into the platform. I'd expect equity flows to continue in our logistics fund. I also expect as we have shown in the last 6 months that we'll continue to generate both existing and new partnership inflows. So it's not just the pooled funds, but it's the partnerships. And as I've said before, the direct platform is continuing to raise monthly inflows. Yes, they're slower than they have been up until the steep rise in interest rates in the last 6 months -- but both in our direct platform and our wholesale platform, good quality real estate is still being sought after. I don't see any massive change in demand for real assets over the coming years. Yes, people are more cautious, but I would expect us to continue to be able to attract capital in all of those segments.

And I show our next question comes from the line of Ben Brayshaw from Barrenjoey.

David, congratulations on the results. I just had one question. Could you talk about unlevered IRR expectations and just broadly how you're seeing those in the current environment. I can see that the weighted average discount rate across the platform, sitting around [ 5% and 8% ]. It hasn't really moved much since bond rates have backed up. So just curious as to whether you think that is representative or independent valuers are lagging in long-term growth assumptions just in light of the shift in the environment?

Well, the first thing I'd say, Ben, is we've had a roller coaster of 10-year bond yields spiked to [ 4.2% ], went back to [ 3.2% ]. Now they're back around the midpoint of that. I think most particularly wholesale investors look at the risk premium they want on an unlevered IRR against what they think the average bond yield is going to be over the next 10 years, not what a particular spot rate is. Overall of my career, that spread for good quality real estate like Charter Hall [ loans ] has been anywhere between sort of [ $250 to $350 ] risk premium above the -- what the market expected long-term bond yield is. So all I would say to you is capital doesn't react as quickly as the liquid bond market does. So when it hits 3.2%, I think we're a spread that is sort of in that average. Obviously, it's narrowed a little bit now. I guess the other thing I would say is those weighted average discount rates that we quote and publish a values rates where they also are forecasting their valuations, the full impact of stamp duty. So if you're an investor in an existing platform, you go forward IRR is better than a valuation discount rate because they're not factoring in the other full impact of stamp duty on the valuation. So that's always been a little bit of a interesting differential between the way the values value things and then the way the market sort of values long-term IRRs. The other thing I'd say is that there is a different expectation of a risk premium to bond yields depending on your sector. So in logistics, for example, you don't have to be Einstein to work out. It's virtually sub-1% vacancy market in every major market in Australia. And therefore, the dynamic for an industrial or logistics investor to invest knowing that there's strong market rental growth ahead would -- and most of the time, I would say that the value is in predicting market rental growth below the generally accepted view among investors. So I think part of what's driving that discount rate is our high proportion of our portfolio in industrial and logistics, social infrastructure and other CPI-linked Long WALE retail investments. No surprise when you've just printed 7%, 7.5% rental growth that -- and you've got uncapped CPI on your leases, your valuers aren't blowing out their cap rates. So that's -- you've got to look at the composition, if you like, of our weighted average discount rate. And the other thing I would add, there's a lot of negativity around office. We're still averaging on both existing and new leasing, 3.5% fixed annual growth over long-term leases. So I can't find too many economists with 10-year CPI forecast above 3.5%. So you're not going to get too many valuers forecasting CPI above 3.5%. So it's still a pretty solid fixed rental growth profile for a modern office portfolio. So I know it's a long-winded answer, Ben, and I know what you want me to tell you, but I don't think there's as much pressure on a blowout on discount rates as some people think.

[Operator Instructions] I show our next question comes from the line of Alex Prineas from Morningstar.

Just are you able to just comment on sort of leasing conditions this calendar year. Is there any sign of improvement or deterioration in leasing conditions? And then secondly, you've made some comments in the past some interesting comments around things like workspace ratios and by [indiscernible] in the office market, sort of being supportive of [indiscernible] CBD office buildings. Just wondering if you can sort of provide an update on that or maybe a bit more of a medium-term outlook on office supply and demand?

So my comments around the bifurcation that tenant demand is not specifically directed at core CBD whilst I think core CBD will perform well. I think if you look at the vacancy rate in modern office buildings in all locations, city fringe, suburban and CBD, you'll find the extremely high occupancy levels compared to older stock. As I said earlier, if you look at the completion of new office buildings that we've done in the last 7 years, virtually all of them have been fully committed by completion. If I look at our current new office buildings, we've got a sort of $450 million project in Richmond in Melbourne, which was anchored by pre-leased Aussie Post. We've got 555 Collins Street in Melbourne, which the leasing is advancing at a pretty attractive velocity. And more importantly, what we've been most pleased about is the quality of the tenants that are committing to our projects. So we have been very careful in making sure that we can maintain that high tenant customer quality across our platform. So I don't think there's any doubt that in -- particularly in office markets, modern buildings are going to continue to attract tenants -- and I think the older stock is going to struggle. And I've said it many times, older stock that hasn't been completely retrofitted are going to suffer the highest vacancy rates and modern buildings are going to enjoy very low vacancy rates. And like we're seeing in logistics, if you got low vacancy rates, you've got a pretty good chance of driving effective rental growth. So it will be more difficult in older stock to drive real rental growth if vacancy rates are rising. And it's very different by market. There are some markets that we've completely avoided because we're really worried about new supply as a percentage of the total stock. And I think [indiscernible] you have to go through our property portfolio to work out which markets we like and which markets we're avoiding.

And any sort of signs of how leasing is progressing early in this year relative to last year at any numbers to sort of say whether it's improving or deteriorating?

Well, I think if you look at our slide deck, the sheer volume of leasing deals that we've been able to carry out in office industrial says it all. We're getting roughly 2/3 existing customers leasing our office space, 75% in industrial, and that's always a good sign of a healthy portfolio that a lot of your tenants want to renew with you. And I have to say in the first couple of months of this calendar year, tenant inquiry is better than it was in the previous 6 months, particularly for the new office buildings that we've got coming out of the ground. So notwithstanding all the rhetoric in the media around the return to work. I think we are seeing very strong evidence that governments, corporates being stronger in their encouragement that people do get back to the office environment, much more than they have in the past. And I think that acceleration is going to continue. I think what people have called densification or the percentage of your pre-COVID workforce that's back in the office -- is going to continue to rise. I think everyone forgets that pre-COVID densification was probably only about 85% anyway with the people out of the office and holidays and whatever. So I think it is definitely improving and you only have to look at the vibrancy in major capital city markets to see that is the case. Yes, Melbourne is a little slower than other states, but it's coming off a low base, and I don't see any reason why that won't continue. So we're pleased with the level of tenant demand. And in other sectors like logistics, it's still virtually zero vacancy market. So we're continuing to see strong tenant demand. And to your earlier point, yes, I think workspace ratios have increased. I think people want more space per [ FTE ] than they have in the past. And I think we're also seeing, particularly when we talk to major customers about how they're going to fit out new office space that they're pre-committing to with us. They're putting a lot more space aside for common areas and amenity and townhall space and client base. So that's -- they are all the factors that's increasing this workspace ratio I talk about.

I'm showing no further questions in the queue. At this time, I would like to turn the conference back to Mr. David Harrison, Managing Director and Group CEO, for closing remarks.

Okay. Thanks, everyone, for your time. As usual, reach out to Phil and the team if you want to have any one-on-one discussions and [indiscernible] we'll get to talk to everyone over the next couple of weeks. Thank you.