Charter Hall Group (CHC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2023 Full-Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded Monday, 21st of August, 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 FY '23 results. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon; our Chief Investment Officer; and Russell Proutt, our Chief Financial Officer. I'd like to commence today with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands in which we work and gather. We pay our respects to elders past and present and recognize their continued care and contribution to country. Turning to the Group's results. Operating earnings post-tax was $441 million or $0.933 per security, 3.7% above our guidance. For the 12-month period, that $0.933 per security equates to a return on contributed equity of 23.8%, a metric we believe is important for long-term shareholders like our management team. The Group's property investment portfolio is $3 billion, which has been stable over the period despite devaluations across the sector. FUM growth continues our long-term trend, up 9.4% for the year to $87.4 billion, driven primarily by property funds under management growth of 9.5% to $71.9 billion, whilst our PIM partnership FUM also grew by 10%. That growth saw us undertake $10.4 billion of gross transactions as we continued to actively curate our portfolios to drive performance via acquisitions, divestments and developments. The Group's balance sheet remains robust with 2.2% net gearing and significant liquidity. Finally, the Group's investment capacity of cash and undrawn debt stands at $7 billion currently and does not include committed but uncalled equity commitments, which further add to this capacity. Our focus remains on delivering sustainable growth for security-holders, replenishing dry powder, strengthening resilience and retaining a vigilant focus on market dynamics and property fundamentals. On Slide 6, our strategy has been very consistent for many years through multiple cycles. We use our expertise and customer relationships to create value and generate superior returns for our investors. $2.8 billion of gross equity was allotted during the year with our wholesale partnerships being particularly active in that period. Of the $10.4 billion of gross transactions this period, we acquired $7.6 billion and divested a further $2.8 billion of assets. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from the assets we manage. Finally, we continue to focus on investing alongside our capital partners. The CHC Property Investment or PI portfolio has delivered a 10.5% annual return for CHC security holders over the last 5 years. Slide 7 highlights our post-tax operating earnings per security and distribution per security growth. We've consistently delivered earnings growth for investors with a 10-year compound annual growth rate of 15.1% of operating earnings per security. We acknowledge the year-on-year growth is variable. However, the annuity revenue growth and earnings have been consistent, whilst in particular in years with strong transaction on performance fee revenue, we retain a larger proportion of earnings for organic reinvestment. Similarly, we've delivered 7.7% annual distribution growth for investors over the last 10 years with additional franking credits providing tax benefits for our security holders. 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. A cumulative retained earnings of more than $1 billion since FY '13 has been used to support new fund creation and growth in existing strategies by investing alongside our capital partners, providing alignment of interest and delivering future earnings growth for security holders. Slide 8 looks at that growth in more detail and highlights the quality of annuity revenue streams that underpins our OEPS growth. The annuity revenue compounded annual growth rate of 16.7% for 10 years highlights the benefits of scale, diversification and cross-sector relationships that have driven FUM growth and driven outperformance of funds through cycles. The co-investment model has attracted capital as we did not use our balance sheet to compete with our partners. Rather, where appropriate, we nurture opportunities that require derisking that deliver appropriate investments to the funds and partnerships. Turning now to Slide 10 and FUM growth. When property FUM growth of $6.2 billion is combined with our investment in the PIM partnership, which has grown its fund by 10% this year, we ended financial year 2023 with $87.4 billion of group FUM. These slides show the breakout of that $87.4 billion of FUM by equity source and by sector. We continue to remain well diversified by both equity sources and multi-sector market penetration that amplifies our opportunity set in pre-leasing and sale and leaseback investments. Slide 11. FUM growth was driven by net acquisitions, that is net of divestments of $4.8 billion. Development CapEx of $3 billion, offset by devaluations of $1.6 billion during the year, which was driven by cap rate expansion of 40 basis points, which is equivalent to 10% expansion of cap rates. However, market and passing rent growth have partially insulated the impact of cap rate expansion. Our development book continues to be a significant contributor to FUM growth. The success of the platform in driving enhanced returns for investors has been driven by all completed projects being profitable, delivering yields on cost and enhanced IRRs above stabilized returns. Completing $1.7 billion of new prime grade office buildings in Melbourne and Adelaide, 95% of which are pre-committed, has delivered fantastic new accommodation for our office tenant customers, including AFP, Amazon, Allianz Insurance, National Australia Bank, Telstra, plus 2 other large government repeat customers. Our Industrial & Logistics platform has completed 26 projects totaling $1.5 billion in value, 100% pre-leased for customers such as Coles, Bunnings, Coca-Cola, Australia Post, Toll and Cleanaway; all brand-new, state-of-the-art facilities to facilitate growth of their businesses. On Slide 12, we breakout our property FUM in more detail. This platform comprises over 1,600 properties and delivers more than $3.25 billion of net rental income. We continue to focus on delivering a sustainable and resilient return through property sector diversity with a focus on rental growth from well-leased assets as evidenced by our platform WALE of 8.2 years. The weighted average cap rate across the platform of 4.76%, together with a 3.7% weighted average rent review provides attractive total returns as we continue to modernize our portfolio as we reduce maintenance CapEx and obsolescence risk. This is particularly evident in our office portfolio, which now has a weighted average age of less than 9 years. In Slide 13, we provide some more detail on 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. Government and investment-grade tenant customers have always been our focus and we are happy that the development book continues to attract high-caliber tenants with strong credit credentials. 26% of platform leases are triple net and 21% of the 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 72% of our tenants have more than one lease with us, while 28% of tenants work with us across multiple sectors. Multi-asset tenant customers make up 65% of our total platform rental income. The resilience of our major tenant customers and our concentration towards these essential industries underpins the defensive nature of our portfolios and their ongoing performance, whilst also surfacing sale and leaseback investment opportunities, as highlighted with the extension of our Ampol relationship to partner to secure the Z Energy portfolio this year, partnering with the Platinum private equity firm in acquiring the Jeld-Wen industrial portfolio and the Bega 15-year sale and leaseback acquisition of the Port Melbourne iconic Vegemite facility. Slide 14 outlines some of our recent office leasing successes. Active asset management sits at the heart of the Charter Hall business. This means working with our tenants to provide attractive solutions that meet their property needs are critical. As the largest office owner in the country with a strong customer-centric approach as evidenced by our sector-leading Net Promoter Score ratings across all sectors, our leasing capability and relationships drive repeat business. FY '23 saw us execute a record 390,000 square meters of leasing across 222 deals or transactions, averaging 2,000 square meters per transaction, well above reported peers. We had a very strong 89% retention rate with our existing office tenant customers, a reflection of our partnership approach with our tenants. Recent large new customers attracted to the existing portfolio in leases over 5,000 square meters include the recently announced VCAT 14,000 square meter commitment at 300 La Trobe Street in Melbourne; global firm WPP committing to 13,000 square meters at 1 Shelley Street in the Sydney CBD, relocating from North Sydney, which I note we don't own any assets in that market; an 8,000 square meter new government lease at 275 George Street Brisbane. Pre-leasing of developments continues to evidence the flight to quality with pre-commitments in Brisbane at 360 Queen to QIC and Herbert Smith Freehills following the BDO and Hopgood's earlier commitments, which brings this to 70% pre-leased well before the 2025 completion. The recently announced Ericsson commitment at 555 Collins Street and National Australia Bank and Telstra preleases in Adelaide are all further evidence of high-quality tenant customers having faith in Charter Hall as their new or repeat ownership partner. We achieved a 6.9-year WALE across all leasing transactions nationally. And our office portfolio occupancy sits at a healthy 97%. And the occupancy is over 98% for our flagship wholesale fund, CPOF. Just turning to Industrial & Logistics. The leasing success in I&L has been equally impressive to that which we've seen in Office. Similar to Office, it's been an exceptionally busy period with just under 1 million square meters of leasing achieved across 82 transactions. We also continue to enjoy strong retention rates with our existing customers as our partnership approach sees tenant customers looking for an ongoing relationship with Charter Hall. Developments also form a significant portion of our activity as we continue to develop new products to meet both tenant and investor needs. The outcome of our active asset management is that our industrial and logistics portfolio enjoys a high occupancy of 99.1% with a blend of market reviews, CPI-linked and fixed rental growth across the portfolio. Our relatively large 200-plus hectare land bank of uncommitted sites provides further opportunity to access market rents as tenants are prepared to secure new modern facilities to accommodate their growth or facility consolidation strategies. Now on Slide 16, we look at equity flows. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle, albeit, not surprisingly, flows have slowed from previous years given rising interest rates. During the period, wholesale partnerships were particularly active with the successful completion of the Irongate REIT privatization and several office partnership transactions, combined with the continued focus on sale and leaseback in industrial. We enjoy strong working partnerships with over 100 wholesale capital partners and expect these investor customers will continue to be active in the period ahead, particularly as we craft new strategies and meet their risk profile appetite from core through to opportunistic. Australian real estate continues to screen attractively to global investors, offering attractive rental structures, good governance, relatively low vacancies and transparent rule of law. Population growth in Australia and an undersupply in many sectors provides an attractive relative investment destination for global investors, combined with an attractive currency conversion proposition. We continue to enjoy the support of capital partners given our ability to successfully deploy capital into attractive acquisition and development opportunities, investing alongside them to create strong alignment of interest. FY '23 saw us active in deploying equity into developments and acquisitions. Our strong tenant relationships continue to provide us with sale and leaseback off-market transactions, which are mutually beneficial to our customers and to our fund investors. We've undertaken multiple sale and leaseback acquisitions with CPI-linked rent reviews in retail and industrial markets, and that continues into this new year. Portfolio curation will continue combining both divestments and acquisitions as each portfolio curates by our active asset management to optimize returns for investors and maintaining gearing within target ranges. Turning to development activity on Slide 18. 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. It's been a strong period for completions with $3.1 billion of developments delivered in the last 12 months. Notwithstanding completions, our total development pipeline continues to be robust at just on $14 billion as we continue to source investment-grade developments for our funds. Our ability to deploy capital in our Industrial & Logistics pipeline also continues to be a key advantage of the group and drive significant capital inflow. The forward pipeline of committed projects will generate high-quality long lease assets for our funds and partnerships while providing attractive incremental FUM growth for CHC and enhancing our credentials to further attract 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 security holders 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 97.6% and the WALE is a very attractive 7.4 years. Our weighted average rent review was 3.6%, reflecting our underlying exposure to CPI-linked leases and fixed annual increases. The portfolio remains well diversified across sectors and by investment with an 80% 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. Turning to the property investment portfolio movement. During the period, we made net investments of $271 million in our property portfolio. Our investment portfolio has delivered an impressive 11.6% 5-year compound annual return for Charter Hall security holders. As David explained earlier, we've retained over $1 billion of earnings since FY '13 that have been used to invest alongside our capital partners and support new fund initiatives. This has delivered significant returns for security holders and is an important part of the success of the group. Now, turning to Slide 22 and our earnings resilience. As can be seen on this page, our property investment earnings are characterized by the diversity of income which produced them. No single asset is more than 4% of the group's property investment portfolio. 18% of the property net income is also from CPI-linked leases, which, blended with our fixed annual increases, produces an attractive 3.6% weighted average rent review. The property investment portfolio can be considered a very defensive, well-diversified core portfolio. Let's now move to ESG on Slide 23. Climate resilience, recognizing the role we play in communities and the responsible business are embedded in everything we do at Charter Hall. During the period, we brought forward our commitments to net zero Scope 1 and Scope 2 carbon emissions by 5 years to 2025. We've also established near-term and long-term Scope 3 targets using science-based methodologies. And it is our intention to obtain external verification of the baseline year and emissions inventory in the next 12 to 24 months. We now have 63 megawatts of installed solar across the group's platform, an increase of 15.8 megawatts in FY '23. We've also undertaken $900 million of sustainable finance transactions, which recognizes the ESG performance of our assets and their attractive environmental credentials. 17 of our funds scored in the top 20% of GRESB with 3 funds recognized as global and regional sector leaders. We remain committed to the communities in which we operate and donated over $1.4 million in disaster and hardship support. And we also facilitated 210 employment outcomes in partnership with social enterprises as part of our goal of providing 1,200 employment outcomes for vulnerable youths by 2030. Finally, we continue to focus on ensuring we operate with the highest level of governance, recognizing our responsibilities to our investors and the community. I will now hand over to Russell to provide details on the financial result.

Thank you, Sean, and good morning to everyone on the call. Slide 25 presents a summary of earnings for the 2023 fiscal year. As David highlighted, the Group reported statutory earnings of $196 million and operating earnings of $441 million. In the following slides, I will discuss the key drivers impacting each of our 3 reported segments. While our FY '23 earnings are lower than our recorded results in FY '22, this year's earnings reflect the underlying strength and resilience of our business. Whilst the business did face along with the rest of the sector, the headwinds of higher cost of capital, valuation pressures and slower activity levels, the impacts were effectively absorbed by the business. In terms of segment performance, the reduction in property investment segment EBITDA can largely be attributed to higher finance costs and the underlying funds and partnerships. Whilst we were well hedged across the platform, the increase in cost of our floating rate debt during the year more than offset growth in property income in our investments. Development income was in line with fiscal '22. And it's worth noting, by its nature, this segment can vary from period to period depending on project activity. And in terms of our Funds Management segment, we reported $423 million of EBITDA. And while EBITDA was down from FY '22, the result reflects a very strong period of performance. I will expand further on our Funds Management segment on the following slides. And as in prior periods, we've distributed based on an annual target growth rate of 6% and distributed $0.425 per security or a payout ratio of 46%. This enabled the business to retain approximately $240 million of operating earnings for reinvestment in the business. Now, turning to Slide 26 and looking at our funds management segment in greater detail. At $423 million or 70% of total EBITDA, Funds Management segment continues to be the largest contributor to our operating earnings. In FY '23, base fund management revenues increased 20% year-on-year, reflecting our growth in funds under management during the period. At $165.7 million, transaction performance fee revenue again contributed significantly to the segment profitability, however, at lower levels than FY '22, which was a record year for the business. Whereas, property services revenues were up 42%. This increase reflects the growth in the scale of our business and the increase in activity-driven revenues across property management, development and leasing. Despite our growth across the platform, operating expenses were restricted to just 3.8% higher than last year. This compares to revenue growth of 25% in the combined base fund management fees and property services revenues. FY '23's FM, or funds management EBITDA margin was 73%. And if we excluded the non-annuity transaction and performance fee revenues, the margin was 62%, again further reflecting the resilient profitability of the business. With the continuing uncertain economic climate, we are very focused on managing costs and prioritizing investments throughout the business. Now, moving forward to Slide 27, which shows our balance sheet at year-end. And as you can see, the Group continues to be in a very sound financial position. We continue to maintain an excellent liquidity position and have modest net leverage. This translates to investment capacity at headstock of approximately $700 million. And as we've noted previously, and to us most importantly, the return on capital metrics continue to be strong and reflects our ability to invest capital effectively. Maintaining strong return metrics is fundamental to ensuring that the business employs both our own and our partners' capital optimally. Ultimately, by focusing on return on capital measures, we believe this will generate long-term earnings growth and value for our investors. Now on Slide 28, we provide an update in relation to the debt funding across the business. With a book of nearly $30 billion across domestic and international banking capital markets, our ability to monitor and access markets is a critical and distinguishing strength of the business. Our approach to financing our funds of partnerships is specific to the particular investment vehicles, the nature of holdings and investor profiles. Leverage across the platform is predominantly maintained at investment-grade credit metric levels. We show our average debt maturity of 3.9 years. And it's worth noting that we've dealt with nearly all FY '24 maturities as of today and have relatively few in FY '25. Across the Group, average gearing was approximately 33% with hedging levels of 59%. The slide also references $6 billion of available platform liquidity as at 30 June, which is available to fund further investment and growth. But I would add that a further $1 billion of capacity was added in July with the $1.25 billion Asian term loan that was completed by the Charter Hall Prime Industrial Fund, or CPIF. As reflected by this recent financing, the business continues to diversify debt capital sources and will access banking capital markets as appropriate. Now, I will hand back to David to wrap up and comment on guidance for FY '24.

Thanks, Russell. Now, turning to our outlook statement and earnings guidance. We will continue to operate the same strategy executed for the last 18 years since our IPO in 2005, a capital-efficient partnership model, where the fully integrated platform can identify and exploit opportunities and trends before they become main stream. We've done this with an early entry and rapid growth in logistics to now being one of the largest logistics platforms in Australia. We've also accessed early the triple net CPI rental growth, which has been available from our sale and leaseback opportunities, which has driven over 20% of the platform income now linked to CPI growth. We continue to further grow our economic, resilient, social infrastructure and convenience retail portfolios. We will also continue the modernization of our office platform, where the sector-leading 98% occupancy in our flagship fund CPOF has contributed to its leading the MSCI office benchmark returns for the last 10 years. As one of the largest owners of real estate in Australia, we are well aware of submarket liquidity, market pricing and customer trends. We will continue to curate our portfolios and continue both selective acquisitions and what has now been over 8 years of repeated divestments annually, exceeding about $1.5 billion on average for the last 5 years as printing portfolios is a key ingredient of active asset management. CHC maintains the lowest balance sheet gearing in the A-REIT sector at 2.2%, has $600 million of liquidity, whilst the group's platform has $7 billion of liquidity, which will be used to fund both committed development pipeline and provide scope for further growth. Based on no material adverse change in current market conditions, FY '24 earnings guidance is for post-tax operating earnings per security of approximately $0.75 per security. FY '24 distribution per security guidance is for 6% growth over FY '23. That now ends the prepared remarks. And I'll now invite your questions.

[Operator Instructions] Our first question is going to come from the line of Sholto Maconochie with Jefferies.

Just a quick one on the guidance. Normally, you say no less than a number and now it's approximately -- if you just back on it a little bit, it doesn't seemed that demanding in terms of the growth in transaction. Can you sort of walk us through what sort of transactions and assumptions you're including in that $0.75, if you can?

So Sholto, I think the way I would characterize it is we clearly have a more conservative view on transaction volumes going forward. I wouldn't read too much into the approximately versus no less than. It was only a few years ago that we sort of moved from approximately to no less than. But like I said to you guys when you all asked me why we're not upgrading guidance at the half year, I think we're in pretty challenging conditions. So we're just going to be conservative. I'm not going to give sort of specific composition of guidance in terms of transactional revenue. I would say that with the amount of liquidity we've got at a platform level, we will look to take advantage of opportunities with our partners as they emerge. It's been well documented in the media. The volume of sale and leaseback transactions we've done in the last few months, we think there will be an acceleration of those opportunities. So sort of going into this financial year, I don't see a great deal of difference from previous years. So that's sort of where we've landed.

All right. And then just on the inflows. Obviously, you had the wholesale partnerships. But the pool and direct was a bit low. What's sort of your expectation of inflows, a little liquidity? What's the sort of expectation of inflows? And to that last question, do you think you'll start to see a bit of a pickup in transactions in the second half of the financial year?

Look, whilst -- if I sort of look at the various segments of our inflows, whilst the direct inflows are lower than they have been in previous years, anecdotally, we still think we're commanding a pretty big market share in terms of inflows in that space. I certainly know that we have been able to command a similar market share in terms of sort of wholesale partnerships and wholesale pool funds. You don't have to be Einstein to work out that inflows are going to be lower in a rising interest rate environment than when people think we've hit peak rates and people feel that the environment stabilized a bit more. I think if you look at the history of this group, we've always been able to secure some large portfolios during any particular year. I don't see the next 12 months as being any different. But we've been pretty conservative with our guidance.

Okay. And then, just finally, the property yield was down to 4.4% versus 5.6% last year, but you didn't disclose a return. I think the return last year was 23% and 10.4% in December. What was the PI return for the year? I couldn't see that in the presentation.

Yes. I thought we did disclose that at a…

I'll come back to it, anyway.

I think we did disclose the PI total return for our shareholders, but I'll come back to you.

Our next question is going to come from the line of Lou Pirenc with Jarden.

2 questions for me. First on, Russell, just the operating cash flow, about $100 million below the operating earnings. I know it can move around quite a bit, but anything there that we should be aware of?

No. And it was just timing, some of the collections and receivables. So there's no shortfall.

And David, clearly a lot of talk in the markets rightly wrongly about redemptions. Can you just talk through...

Lou, can you repeat your question? You got cut off.

Sorry. Yes. Just there's a lot of talk in the market around redemptions from funds, not specifically for you, but in Funds Management in general. So can you just kind of talk through what you're seeing in terms of who is redeeming, who is asking for money back and how you see the outlook there?

Well, I'll start with our direct business. There's been a media attention about a particular office fund, the PFA fund. We go through 5-year liquidity; limited liquidity windows for those funds have been for the last 15 years. We write to our investors after each window in the case of PFA, we funded 25% of the redemption request and said that the rest of that will come over the following 12 months. We've also had a liquidity -- 5-yearly liquidity window for our LWF fund, which we've written to investors and said that they will have 100% of their redemptions funded by Christmas. We don't have any liquidity windows in our wholesale pooled funds. I think CPOFs out to the back end of '27-'28. So I think as a general rule, if you're in a sort of closed in single asset syndicate. Obviously, unless the asset gets sold, those people are not getting their liquidity. We run multi-asset open-ended funds. We've announced sales like Kensington in the PFA fund. I don't think that this is a lot different to any other previous cycles. Obviously, it's a more challenging environment. And if you've got 10% of your investors either lightening up or wanting out of a fund, you also need to be very respectful of the other 90% that are ongoing investors. So we've been very clear that we'll go through an orderly process. We're not going to do fire sales. And then, if you sort of think about the wholesale sector, not our funds. But there's, other wholesale funds that have had liquidity windows for multiyear periods. And certainly, during COVID, some of them withheld funding redemptions until asset sales could appear now in the top end of the shopping center market, there's more liquidity. So some of those funds have been able to sell assets and provide funding for the redeeming investors. I think in most of the other wholesale funds, I'm aware of. There aren't sort of major liquidity windows. But there are secondaries where people put up their units for sale at a certain price. And if existing, investors take them up, great. If they don't, there's an opportunity for new investors to take them up. And if neither of those things occur, the secondary investor doesn't get to sell its assets. I think we just need to recognize that people invest in unlisted property for the long term. And if they want instant liquidity, they'll invest in rates. And if you're investing in REITs well, you'll take the market pricing at the time, which is generally particularly in challenging periods going to provide discounts to NTA, well below that, which you can get in the unlisted world.

Our next question is going to come from the line of James Druce with CLSA.

A pretty simple question to start with. How many transactions acquisitions are you starting the year with -- what's exchanged but not settled?

Look, we do a lot of transactions. I'm not going to give you a specific number. But what I would say is in addition to the ones that have been announced. There's probably another $400 million or $500 million of transactions that are exchanged or well advanced across the whole suite of the funds. I mentioned the Kensington South or PFA, there's, a number of industrial assets that we are pruning our various portfolios. But I think you'll see it across the sector. The child care sector continues to be quite liquid. And what I would say is the sort of price point of assets up to $50 million, which is where a lot of private investor and syndicate capital exist, that's still quite healthy. I think Bunzl has mentioned during the last 12 months, a couple of shopping center assets, we've been able to sell at book or above book. I think that will continue. So I'm sort of not really prepared to give compositional indications of what volume of assets we've sold to date or bought for that matter because, there has been some acquisitions as well.

Sure, sure. There are a couple of large office transactions in the market that just printed or about to print. How do you consider these when you're sort of thinking about guidance this year?

Well, the first thing I'd say is we're not predicating our guidance on particular sort of volumes of divestments. What I find interesting in the office market is a lot of talk about buildings built from 1967 to 1978 being sold at prices in line with June valuations, but everyone seems to pick up on what the discounts were to December '22. The reality is that we're going through a pretty strong tenant bifurcation in the office market where people want modern assets, prime quality and the sort of older assets, particularly stuff with the sort of ages and vintage that have been sold, got short WALE, arguably need a lot of CapEx because they're becoming obsolete. And I find it really interesting that the vendors of those assets are not selling their good kit. They're just selling these 1960s, 1970s, build assets. So I think that's where you're going to see things pan out. It's a little different in the industrial market where even older assets are getting good prices. We've just sold a couple of older assets that arguably anything approaching my age is pretty bloody old. So -- but there's very strong demand for those sort of assets. And then if I sort of think about other transaction markets, there's -- in the sort of neighborhood sub-regional shopping center market, there's some assets that have been built for 30 years but have had significant refurbishments and updating done to them. And they're still very relevant and generating really strong returns as been outlined in the CQR results. So it's very different by market because we're a pretty large player in every sector we're investing in. We're pretty close to the trends. And we'll continue to curate our portfolios I'm a strong believer in modernizing asset portfolios.

That's clear. And one more, if I may. And this has been asked a few times, I suppose, over the year. But you did mention that you're focused on return on contributed equity. You pointed out that your investment -- your property investments have grown at a 5-year CAGR at 11.6% over the past 5 years. I couldn't have under your stock has done a total return of 13% even with the 4 over the last 5 years. Can you put an argument that you're still better off putting some of that retained earnings back into the stock, especially where it's trading today and especially given your strong capital position.

You're talking about a buyback in CHC?

I'm trying not to use the word buyback. But yes.

I'm pretty sure that's my definition of your question. Look, I think there are 1 or 2 listed property companies in Australia that like us have had, a pretty strong view that they can have a modest payout ratio and reinvest retained earnings and grow their business organically. I think that's the right argument for CHC. I think depending on where pricing dislocation gets in other REITs. Yes, I think buybacks will emerge. I think there's a conundrum between sort of keeping your rating agencies happy and buying back your stock. The route is there's a lot of REITs out there that have got gearing that they can sell assets and retire floating rate debt and its EPS accretive. I think that's probably going to be the first step I see in the sector and buybacks might be a second step. Certainly, when you see the sort of earnings yield and discounts to NTA, it becomes more rationale for people to consider that. But as I said, I think my own personal view is the REIT sector seems to be one dimensionally focused on gearing. So I'm not sure too many buybacks make a difference. I've been tracking this for 35 years. And I haven't seen too many buybacks actually materially change a stock share price. So you really got to balance it between the short-term sugar hit and whether or not it's creating any long-term value. But from a CHC perspective, I think we've proven over nearly 20 years of a listed entity that we can reinvest our retained earnings and grow our business. And that's probably a better proposition than a short-term sugar hit using that liquidity to buyback our stock.

Our next question is going to come from the line of Ben Brayshaw with Barrenjoey.

I was wondering perhaps a question for yourself, Russell. Could you just clarify a couple of things on performance fees, whether they were cash backed in FY '23? And also in relation to CLP, the performance fee test date seems to have shifted into FY '24. Could you just clarify, please, what's happened there as well?

Yes. So the performance fees were all tested and accrued in FY '23. I believe there was some receivable over year-end. But I think further to Lou's question earlier about the delta between operating cash flow and operating earnings there's 2 differences. There was a higher investment receivables. And I can tell you right now, almost 100% of those have been collected since balance sheet date. And if you'd look in the statement of cash flow that was a little bit higher tax payments out the door and that relates to a higher FY '22 accrued tax. So it was actually largely paid in '23 with respect to CLP.

So Ben, what we had with CLP is we had a pretty interesting set of performance date. So we had a year 7 performance dates in 2020 in FY '20, which was -- and then another one in year 10, which was FY '23. And then because of the way that sequencing worked, there was going to be sort of irregular periods. So what we agreed with our investors in CLP is to have another performance measurement in FY '24 and then move to a 3-yearly regular performance testing regime, which is exactly like CPIF. So there'll be another year 11 performance fee in June '24. Obviously, you know the way the IRR works, you go back from year 11 to time zero. And given that we had a performance fee collected in FY '20 for year 7 and 1 in FY '23 for year 10, subject to where valuations get to, we'd expect it to be reasonably modest. And then we can sort of move it to a more regular 3-yearly testing regime like CPIF.

Yes. That's clear. And just on development inventory. Could you perhaps just touch on, I guess, some of the main assets that you're holding there to back the $130 million in carrying value. And just broadly, what are the prospects for, I guess, margin realization as we look forward?

Well, we would look at the carrying value of those investments, 60 King William Street in Adelaide is something that got completed post balance date. It's something that was 100% presold to our funds and partners. We'll go through an effectively a final payment process in this half for that. That's one that is not -- there's no dollars invested in that because we presold it. There's a couple of other DI projects that don't have dollars invested and then the other dollars are invested in a range of things from former FLK projects like a resi project in Guzman that has done very well and that cash will get realized over that period of time. There's, a couple of other DI investments that we would expect to get realized. So over the next 12 to 24 months, we're expecting virtually all of that capital invested to be repatriated to us. And hopefully, profits on top of that. But I don't also see that as a segment that's going away. We're going to continue to use our balance sheet as we have in the past to sort of invest in those opportunities that there might be opportunities that are not quite harvested that are appropriate for our funds. As I said on the call, we don't compete with our funds, but sometimes there's, opportunities where we can derisk a project. Sometimes it might be a joint venture investment with some of the funds. So I don't really see us changing our focus on that development investment segment. But we've also produced a pretty strong return on invested capital by being able to get in upfront, used our skill and capital to derisk something and then put it into a position that's appropriate for our sort of funds or partnerships. So I really don't expect that to be an earnings segment that won't continue with a similar run rate to what we've seen over the last few years.

And so just finally, gearing in the direct funds of 38%, it's ticked up a bit in the second half. I was wondering, Russell, if you could perhaps just talk through key drivers of the increase there, because if I look at the platform details of 2.8%, it would appear to be a bit above what those details would imply.

I think you'll find it. Again, the devaluations or the valuation changes are not evenly allocated across the various segments. So the primarily movement in the gearing and direct will be related to the reduction in value of some of the holdings.

Yes. I think also, no surprise, Ben; office assets have had a more pronounced impact. And depending on the age of the buildings, the quality of them, there will be a more pronounced impact in some office funds than others. No surprise, industrial has been pretty resilient. And then, as I mentioned earlier, there's some post balance date asset sales like the Kensington SAR, which will de-gear the PFA fund. And even when we're doing redemptions, we're not going to be using debt to fund redemptions. The redemptions will be funded out of asset sale proceeds, but obviously maintaining a gearing that we're comfortable with.

Our next question is going to come from the line of Suraj Nebhani with Citi.

Just a couple of questions. Can I just check what is the committed; but undrawn capital at 30 June, please, and how that has moved over the last 6 months?

Suraj, there are for 18 years, we have consistently said that we're not going to identify the committed equity that's un-allotted. So I'm not going to change it this year. All we've said is the $7 billion of liquidity excludes any committed and undrawn equity a lot that hasn't yet been allotted.

I guess enough. I guess the other one is on the office side. So obviously, pretty good performance there in the portfolio. I just -- can you clarify what sort of asset value movement, are you assuming in guidance or maybe directionally as well, if not quantum?

I've been a value for 33 years, Suraj, and I'm not going to start doing crystal balling on where office, industrial, retail, social infrastructure assets are going to end up in a year's time. All I would say is what our valuation performance has proven that if you can have up to 98% occupancy in our flagship office fund, one of the youngest, if not the youngest portfolio in the country at CPOFs under 9 years. You're going to perform better than some of the older assets that might even be in pretty good locations. The other thing I'd say is the volume of development that has still got unrecognized profit margins in them is going to help create NTA uplift in our high-quality wholesale funds. Most of our development is in CPOF and CPIF, but it also extends to our partnerships. So when you guys sort of look at differential valuation changes across different office portfolios, I think you need to recognize that, as I've said a number of times, development profits accrued to our funds and our partnership investors. And that's where we're creating some resilience. The other thing I'd say is that whilst in industrial, short WALE assets are getting pumped up by reversion opportunities in the office world, having modern assets, longer leases, rent reviews were sort of 3.5% plus fixed annual rental reviews. That's going to create more resilience for your portfolio than shorter-leased assets that are going to come up for downtime and lease incentives and increasingly, the older assets are going to require pretty significant lesser CapEx works. So that's why we have seen the outperformance of CPOF versus every other fund in the MSCI. And that's why I think we're going to continue to see more resilience in our office platform than possibly what you're seeing across the rest of the sector.

And one final one, just wanted to clarify on CLP. I think I missed the part earlier in response to one of the questions. So what exactly was it then moved to the performance fee into '24? And I guess; is there, any other funds where there is a similar likelihood of movement in the timing of performance fee calculation?

So first of all, the 10-year since inception, performance fee was tested in FY '23 and paid. As I said, the with mutual agreement with the CLP investors because it had an odd irregular performance fee because we started with year 7, year 10, and then you go on to another one 4 years later than 3 years later, we agreed that we would retest it again in FY '24. And then it would roll into a regular 3-year testing pattern exactly like CPIF. So there will be another test in June '24. These things work by going back to time 0. So that will be an 11-year since inception IRR test. And hopefully, if we continue to outperform, it will generate a performance fee. But given that we got paid an interim one in year 7 in FY '20, a 10-year performance fee in FY '23, I'd expect any sort of performance fee that might get paid in FY '24 as being modest.

And our next question is going to come from the line of David Pobucky with Macquarie Group.

Good morning.

It's nice of you to say good morning, David, but we missed the rest of the question. Can you repeat it?

Just in terms of equity, gross equity flows down sequentially at first half. Could you please provide a bit more color on how capital is viewing commercial real estate currently and where the options and the risks lie, please?

Look, we've recently released a white paper on called Why Australia. What it tells us is that there's significant global capital looking to invest in Asia Pac, generally, but particularly in Australia. Like most people, I think global capital is sort of looking to see whether debt rates sort of peak, stabilize. I think that I would characterize it as a lot of capital looking to deploy and just sitting on the side lines waiting for opportunities. We're seeing a range of demand from investors wanting to co-invest in joint ventures with our large funds through to continued appetite for partnerships where they may take a significant majority stake and Charter Hall Group takes a very small minority. We've done a number of those partnerships sort of ranging from sort of 5% to 15% stakes. I think there's a continued appetite for that. There's no doubt that if I compared all the sectors, the sector that's got pretty significant demand is logistics. However, we are starting to see quite a few both offshore and domestic investors looking at the differential cap rates in other sectors versus logistics and starting to think about whether there's some attractive pricing in other sectors, including good quality office. So whilst everyone wants to read the newspapers and talk up the office markets as being dead, our view is that good quality assets are still in demand. Yes, the demand is not as strong as it used to be. I personally think capital will follow the tenant demand. And we're seeing a very, very strong bifurcation of tenant demand. You only have to look at the level of pre-commitments that we've achieved in all of our office developments for the last few years and continue to achieve, for example, 70% on a Brisbane new premium-grade development that's not going to be completed until 2025. I think that's where we're going to see capital. There's no doubt there's demand for what some people call alternatives ranging from sort of all things social infrastructure. We're also starting to see institutional capital turn its attention to convenience retail, both the sort of shopping centers that we own and also the CPI-linked triple-net convenience retail. I think the reality is that, as Ben called out on the CQR call no CapEx leakage, no downtime. Compounding impact of uncapped CPI increases that is being seen as an interesting alternative investment for many of our, both domestic and global investors. And the other thing that we're starting to see is demand for whether some people call it value-add. Some people call it opportunistic. Some people call it special situations. I just see it as capital that's looking to take advantage of the expertise we've got in our platform to bring capital together and look at some value-add pricing. That could be a lease to core opportunity, where, there's a good quality asset that has got a shorter lease that capital wants to take advantage of. There's various components of developed a core that are still providing attractive returns. And what institutional capital has realized is that the access to capital for privates, private developers is very difficult at the moment, both debt and equity. So yes, I think there's a range of interesting views emerging out there. And clearly, what we do from myself down is stay close to our existing and prospective capital partners. So we can take advantage of those opportunities as they emerge. So I don't think that's going to be any different. And I think the back end of this financial year will start seeing quite a large volume of capital being deployed in across all the sectors.

Our next question comes from the line of Grant McCasker with UBS.

Just a quick one. Just on the capital position across the funds. Are you able to talk through the hedge duration? And then just talk about the expectations for interest coverage ratios, just to get a better understanding of the leverage of the funds. And when you're looking to finance transactions over the next 12 months? How are you thinking about gearing and hedging relative to sort of previous structures in place?

Yes. Sure, Grant. I'll start on that. Like I said before, it's a pretty varied platform. It really does depend, like, for example, our highest geared fund is actually the Telstra Exchanges, which is obviously as secure as can be and actually has the highest rating in the group at A minus. But with that being said, across the group, you have probably an average look-through gearing, excluding headstock, just under 3x. You've got covenants across the group anywhere from 1.25 ICR to the typical unsecured structures at will be about 2x ICRs. We've got headroom really across the group. I think we benefit, obviously, from the fact we're nearly 100% occupied, really no delinquent accounts, all collections. So we're in a pretty good state across pretty much all the funds of partnerships. I think we obviously have to be mindful of where ICR levels are when we do new transactions and new financings. But when we're typically around the 30% to 40% and probably lower band of that more frequently now, given the cost of capital, it still works because of the kind of assets we're buying. But if we were to buy, as David mentioned, maybe something that was sort of invest in and something that was more opportunistic or needed more activity and didn't have offer the secure cash flows, we'd finance it accordingly. But we really don't have any high-pressure situations that we have to worry about as we sit here today. And if you look at our maturity of our $30 billion book, all of FY '23 is taken care of and nearly all of FY '24 is taken care of as well. And we're already planning to deal with FY '26 and '27 with respect to maturities. And on hedging, I think we indicated nearly 60% at 30 June. You guys have seen the listed and listed vehicles and you see how we're pretty well set for '24 and '25. And we have a mix of cover in '26 and onwards. We just are looking at that opportunistically where there's, opportunities to what we think hedging is effective or valuable for those. But obviously, again, the types of investments we have are offering kind of stability of earnings. And we've been biasing toward the upper end of the treasury policies across those funds of partnerships.

I'd probably just add, Grant, you guys seem to be focused on direct, 38% gearing in direct. You've got to remember, they are all secured platforms with 60%, 65% LVR covenants. The same often is the case in our partnerships business where even with multiple assets; they have a secured platform, chats an example. So the sub-30% geared pooled funds are obviously unsecured, but sort of 20% to 28% gearing. I think we have a business that tailors our target tolerance for gearing, having regard to whether they're secured or unsecured platforms.

Sure. That's very clear. But I just want to check. So Russell, you said roughly the average is sort of sub-3x at the ICR across the platform with a cost of debt of 4.4%.

Yes.

So what's it look like in 2, 3 years' time assuming we're in this current interest rate environment?

We'd still be well north of 2x even on a fully adjusted basis. And that's not taking into account the growth in NPI over the next couple of years. But it's absolutely something, Grant, we all have to watch and I think everyone in the sector and beyond is watching.

I'd also say, Grant, there's a very big difference between funds with virtually minimal vacancy and locked in growth, whether it's fixed or whether it's uncapped CPI. Therefore, when you think about how ICR buffers are going to go, it will be very different depending on whether or not you've got locked in NPI growth.

Our next question is going to come from the line of Alexander Prineas with Morningstar.

Just following up on those last couple of questions. Can you just reiterate, so you've reiterated what your average rental growth or rental uplift was across the portfolio in FY '23 and whether you'd expect similar amounts in '24-'25?

I'll just give you a broad brush across each sector. As you're aware, in industrial, we're seeing quite a significant leasing spreads and market reversion opportunity. We've got several assets that we've been able to get even 35%, 40% increases in rent. But those portfolios also have a combination of sort of fixed growth. So in industrial, I'd be expecting a continuation of growth across the portfolios of circa 4% in our triple net portfolios. I don't see any difference much in the sort of growth that we're going to get going forward. Sure, we got a nice CPI print last year; most of our CPI-linked portfolios based off either the June or the September print. Telstra Exchanges, for example, were all based off the June print. So we know what the rent review is. Depending on your own view of what the September print is going to be, we'll continue to provide strong growth there. And then, in the office portfolio, as I said, we're very, very little lease expiry or vacancy over the next few years. I don't see why we're not going to continue to see the sort of 3.5% plus rental growth that we're seeing coming through. And then in the smaller parts of our portfolio like social infrastructure, pretty solid growth. We are a combination of fixed and CPI growth and once again, triple net leases and no downtime or CapEx. And then I think Ben outlined pretty well what we're seeing in CQR. So a combination of probably the highest percentage of our supermarkets ever being in turnover rent, which I think is a very positive metric combined with the triple-net CPI-linked exposure CQR has got. So it's not uniform. But we're pretty comfortable with the resilience of our NPI growth across the platform.

And just a quick second question. On Slide 41, the performance review testing milestones for years that are outlined there. Is it the -- is it still the case that the redemption windows line-up with the performance review testing?

No. It's never been the case. So the redemption, the liquidity windows, for example, in FY '28 for CPOF doesn't line up with the 3-yearly performance testing and either for. So typically the liquidity windows are 5 or 7 years. So in the case of CPOF, its 7 years, in the case of CPF, its 5 yearly, in the case of the direct funds, there 5 yearly. I just talked through the fact that we've gone through PFA and LWF. So yes, don't look at the performance fee schedule as some indication of liquidity windows.

And I'm showing no further questions at this time. And I would like to hand the conference back over to Mr. David Harrison for any closing remarks.

Okay. Well, thanks, everyone, for your attention. I'm sure we'll get to see you in the next week or 2. And as usual, reach out to our fantastic IR team if you've got any need to catch up with us. Thank you.