Charter Hall Group (CHC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2024 Full Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Wednesday, the 21st August, 2024. I would now like to hand the conference over to your host, Mr. David Harrison, Managing Director; and Group Chief Executive Officer. Thank you, sir. Please go ahead.

Good morning, and welcome to the Charter Hall Group Financial Year 2024 Results. I'm David Harrison, Managing Director and Group CEO of Charter Hall, presenting my 20th annual result presentation as CEO for the Group, post our inaugural results in financial year 2005. Presenting with me today is Sean McMahon, our Chief Investment Officer; and Anastasia Clarke, our Chief Financial Officer. I'd like to commence today with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders past and present and recognize their continued care and contribution to country. Just moving to our introduction, similar to the first half year results. For today's call, I will not be doing a page turn, but we'll instead make some opening remarks about the earnings result and then talk to FUM, equity flows, developments, valuations and the current operating environment. Sean will discuss transaction markets and Anastasia will discuss the financial highlights. We will then move on to the outlook and Q&A. Turning now to the Group's results. Whilst we acknowledge this year's operating earnings per security or OEPS is below FY '23, as guided in August 2023. We nonetheless have delivered slightly ahead of guidance at $0.758 per security. In a year where we have seen further cap rate softening driving devaluations of assets, the Group has been able to drive operational efficiencies and generate solid revenue to offset declining earnings in funds that we co-invest in due to rising interest expense in those funds. The Group's return on contributed equity still remains one of the highest in the sector at 24.9% pretax and 19.4% on a post-tax basis. Our 6% annual growth in distributions continues the long-term trend, which also provides attractive franking credits to our investors. Whilst Group FUM has fallen from $87.4 billion to $80.9 billion and property fund has fallen from $71.9 billion to $65.5 billion during FY '24, driven primarily by cap rate softening, driven devaluations and divestments to delever our funds and curate their portfolios. The continued $1.3 billion development completions offsets the impacts on our total FUM. Financial year '24 was also a year of reduced transaction activity with $4.1 billion of gross transactions reflecting subdued equity flows compared to prior years. While transaction markets were challenged, recent activity in all sectors, but particularly office, provides evidence of liquidity emerging and in many cases, a troughing of valuations. We divested $2.4 billion of assets and acquired $1.7 billion during FY '24 across the whole platform. With sale and leaseback transactions continuing to be a feature of our industrial and retail activity, whilst the 31-year WALE, 52 Martin Place acquisition by the Group and one of its office funds, CPOF is further evidence of the portfolio curation being conducted across the Group. We expect as the interest rate cycle peaks, appetite for Long WALE assets across all sectors will emerge as a more appropriate assessment of the low-risk profile, low CapEx drag and higher long-term rental growth profile of such assets emerges. Importantly, we remain disciplined. We're focused on building capacity in our funds and positioning ourselves to take advantage of opportunities as they emerge. This discipline has also been evident in our focus on cost control. Net operating expenses are down 5.2% year-on-year as we've looked to selectively take costs out and focus on operational performance. The benefits of this will also flow into future periods and demonstrates our ability to adjust our cost base to reflect changing market conditions. Our balance sheet remains in a strong position with 3% balance sheet gearing and a $2.8 billion investment portfolio that is well diversified by sector, tenant, WALE and lease expiry spread. The Group has just under $400 million of cash and nearly $700 million of investment capacity ready to deploy into new initiatives to support external equity-raising activities across the platform. More broadly, we continue to refresh investment capacity in despite the more subdued equity raising environment of $6.6 billion of liquidity or investment capacity to deploy into both our development pipeline and selective acquisitions. As always, we also have additional uncalled equity that sits behind that or this amount leaving us well placed to take advantage of opportunities to deploy quickly. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle. We indicated last August that we expected that wholesale partnerships would be the most active area of new equity allotments this year, and that was certainly the case in this period with $1.1 billion of new partnership inflows. We also raised $305 million of new equity for our pooled funds as we secured liquidity for investors looking to trade secondaries. Our direct funds had a quiet year as investors and advisers took advantage of high interest rates to deploy equity into alternative products. Notwithstanding this, flows did improve in the second half, and we expect these flows will continue to improve once the rate cut cycle begins. Importantly, based on rebased higher cap rate asset values, the denominator effect and evidence of central banks potentially having finished their rate tightening cycle have all combined to make wholesale capital more constructive on deploying new equity. We've already seen new wholesale capital deployed this calendar year across retail and industrial portfolios whilst we expect further inflows into office and social infrastructure. Industrial portfolios will take advantage of the rising appetite for data centers. And we, as such, we'll continue to increase our power bank, noting the platform owns 20 million square meters of industrial land nationally, heavily weighted [indiscernible] seaboard markets with some 3 million square meters or 300 hectares of development pipeline. 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 that meet their risk profile appetite from core through to opportunistic. Our ability to successfully deploy capital into attractive development opportunities also makes us an attractive investment partner for our wholesale capital. Development completions were $1.3 billion for the year with 17 new industrial and logistics facilities completed as well as the new headquarters for Australia Post at 480 Swan Street in Melbourne as part of our office development program. The market continues to remain strong for new industrial developments as tenants look to reduce costs through greater supply efficiencies as evidenced by 90% of our industrial development projects being preleased. In office, we continue to progress our Chifley Square South development as well as 360 Queen Street in Brisbane due for completion over the next 12 to 18 months. As we see ongoing tenant demand for new modern premises that meet today's tenant needs. We're particularly pleased with approximately 69% pre-commitment level in our office development pipeline, particularly given the early stages of a couple of those projects, particularly in Chifley. Our Group platform retains the largest footprint of commercial property in Australia, providing existing and new sector growth opportunities to prosecute a significantly higher prospective IRRs than available 2 years ago. Over the Group's history, we have seen the most exciting growth periods following correction events, and we see that the coming period is no exception as we partner with a broad range of existing and new investors to capitalize on opportunities that we can exploit. I'll now hand over to Sean to discuss the transaction markets in more detail.

Thanks, David, and good morning to everyone on the call. As David has discussed, it's been a slower period of transactional activity for the Group given the challenging market conditions. Notwithstanding this, we have made considerable progress in divesting $2.4 billion of assets as we've continued to curate our portfolios to provide fresh investment capacity for our funds and partnerships. At the half year, David called out the reversion romance that was occurring in the industrial and logistics market with buyers chasing short-leased assets, looking to capture rental reversions and paying premiums for secondary stock. We've been active in taking advantage of that strength in the market to divest older short WALE assets and reinvest in our prime development pipeline and sign on leaseback opportunities. The Group has a clear market leadership in the sale and leaseback space, having converted approximately $11 billion of transactions. While the current market has seen robust demand for industrial and logistics assets, we believe, similar to the office market, as vacancy rates normalize, a bifurcation will occur in both tenant demand and investor preference between older stock and new purpose-built facilities. In office, we've been curating portfolios and divesting where it made sense and also selectively acquiring. The market continues to normalize and transaction size and volume is improving, albeit gradually. And in the first half, the buyer pool was predominantly high net worth privates and domestic syndicators. But pleasingly, we're now seeing the initial signs of the buyer pool broadening with a greater interest from larger and more diverse groups. Our recent announcement of the sale of 333 George Street for $392 million to Deka is a good example of this broadening institutional buyer interest. With significant cap rate expansion having now been reflected in valuations, the prospective double-digit plus IRRs for office assets are more compelling, and we expect to see transactional activity pick up in financial year '25. Also of note during the period was the success of our ongoing portfolio curation of our social infrastructure portfolio. During the year, we sold 12 childcare assets at an average of 4.7% cap rate, achieving a 4.1% premium to book value. We continue to see social infrastructure as a growing asset class, with continued broad-based investor appetite attracted by strong sector thematics, high tenant retention, triple net leases and low CapEx as evidenced by our strong sales during the period. As David noted, we are seeing evidence of trough valuations across the sectors with the real estate markets at an inflection point with consensus now more so reflecting we're at peak interest rates, with cuts potentially late this year or early '25. We continue to drive our industry leadership across all facets of ESG demonstrated by recent GRESB global and regional awards with 15 of the Group's funds in the top quartile and our listed stocks achieving an A rating under the GRESB public disclosure rating. Pleasingly, we have now installed 80 megawatts of solar power across our platform, and this equates to efficient power for approximately 20,000 homes. So very good progress. Finally, we have also seen the reemergence this year of wholesale capital interested in deploying into convenience-based retail shopping centers with Mercer's recent investment in Eastgate, Bondi Junction shopping center with us and we expect that trend will also continue. I'll now hand over to Anastasia to discuss the financial results in more detail.

Thank you, Sean, and good morning. I have now been with Charter Hall for 6 months. And throughout this time, it has given me the opportunity to reexamine our financial results disclosure. There are reporting changes this period, and we have increased overall disclosure for the FY '24 result to provide consistency with previous reporting periods. Starting with the earnings summary on Slide 25. The earnings summary presents the EBITDA contribution of the 3 segments for the full year. In considering the property investments and development investments EBITDA, earnings contributions, the figures represented net income after interest expense as opposed to before interest expense. For this annual result, the figures stated are a true EBITDA, including restatement of the prior period. The PI and DI segment EBITDA reported today are earnings before interest expense. Correspondingly, finance costs have increased by the same amount of interest expense previously included in PI and DI net income. A further adjustment has been made to eliminate management fee expenses incurred in PI and DI against management fee revenue earned in FM EBITDA. This removes the effect of income and expense earned by Charter Hall that is also paid by Charter Hall principally through our co-investment stakes. The adjustments reflect how we monitor financial performance in 3 ways: Firstly, on an unlevered net property income and development yield on cost basis to assess the real estate income and returns. Secondly, on a capital basis of the amount of gearing and the cost of debt. And thirdly, on a look-through economic yield basis, which reflects enhanced PI returns from the Charter Hall capital-light business model. On to the result itself, PI EBITDA grew 9.1% over the prior comparative period to $271 million, reflecting 2 drivers: the first being high underlying fund portfolio occupancy and annual rent increases and property expense control, offset by divestments in underlying funds; and secondly, incremental net investment of $293 million during the period. Development EBITDA contributed $36.4 million, in line with prior year and largely reflects project completions that were reported in the first half. As widely expected, funds management segment income reduced by 27.7% due to prior year, including elevated earnings from transaction and performance fees. Depreciation was higher due to acceleration of our office fit-out write-off. Finance costs comprise both the Charter Hall interest expense of $19.8 million on balance sheet debt and now includes the co-investment look through proportionate interest expense of $86.2 million on co-investments. Together, higher in FY '24 and FY '23 due to the expiry of low rate swaps compared to market swap rates and floating interest rates. Tax expense has commensurately reduced by 21.1% in line with lower funds management EBITDA. The Group's operating earnings post-tax for FY '24 is $358.7 million, equating to $ 0.758 per security, resulting in total distribution for the year of $0.451 per security in addition to franking credits to shareholders of $0.131 per security. The decline in underlying portfolio valuations has resulted in statutory earnings of minus $222.1 million. Turning now to Slide 26 for additional detail on the funds management segment. During the half, base funds management revenue reduced modestly by 3.8%, reflecting the FUM reduction of 7.4% to $80.9 billion. As noted earlier, transaction and performance fees were elevated in the prior year and have reduced to $57 million in FY '24 due to lower transaction volumes and continued expansion of cap rates to 5.5% across the platform. Apart from leasing fees, all property services revenue lines grew in line with development completions of $1.3 billion over the past 12 months. Prior year leasing fees were elevated in both office and industrial volumes in FY '23, despite continued strong results in FY '24, resulting in all portfolios, maintaining a high occupancy level of 97.9% across the platform. As a result of the reduction in FUM, we have been actively curtailing operating expenses delivering a saving of 5.2%. This is predominantly net employee costs, down 9.2%, principally through disciplined cost recovery to properties and headcount reductions, offset by an increase in nonemployee costs. Turning to the balance sheet and return metrics. Total assets have reduced FY '24 and FY '23, in line with underlying valuation declines. Borrowings are flat and the Group continues to maintain a strong financial position with balance sheet gearing of 3% and no look through gearing covenants. The Group maintains an excellent liquidity position, which translates to head stock investment capacity of $683 million. Importantly, the return on capital metrics of circa 20% continue to demonstrate strong financial performance and management's ability to invest capital effectively. Maintaining strong return metrics is fundamental to ensuring the business deploys our own and our partners' capital optimally. The Group's disciplined focus on return on capital outcomes ultimately generates long-term earnings growth and value for our investors. Moving to Slide 28 to provide an update on the overall platform's capital position. The Group has $30 billion in loan facilities across domestic and international banks and debt capital markets, providing ongoing large-scale access to global markets. The platform maintained $6.6 billion in undrawn loans and cash being accumulative amounts across each fund and partnership to deploy into value-creating opportunities. The Group retained 6 investment-grade credit ratings with either S&P or Moody's, with platform average leverage stable at 34.9%, reflecting portfolio devaluations offset by divestment of assets, repaying debt. All balance sheets are prudently managed with $10.7 billion of new or refinanced loans, including $3 billion of new sustainable finance. Overall, maintaining a weighted average debt maturity of 3.7 years. The weighted average cost of debt of 4.4% includes an all-in average margin of 1.6% and a hedge level of 62% for the next 2 years. The debt capital markets and banking lender appetite is strong and is supportive of the Charter Hall platform. In summary, the Group continues to focus on terming out loan expiries and maintaining a competitive cost of debt, which in time will likely be supported by the RBA reducing interest rates, driving longer-term earnings growth and financial performance. I will now hand back to David to provide earnings guidance for the Group.

Thank you, Anastasia. Turning now to Slide 30 and our earnings guidance. Based on no material adverse change in current market conditions, financial year '25 earnings guidance is for post-tax operating earnings per security of approximately $0.79 or just over 4% growth on FY '24. Our FY '25 distribution per security guidance is for 6% growth over FY '24. That now ends the prepared remarks, and I now invite your questions.

[Operator Instructions] Our first question comes from the line of Simon Chan with Morgan Stanley.

My first question is just on your guidance of $0.79. Can you give us some insights into how we should think about the moving parts from '24 to '25? Because I mean one of them would be your AUMs come down by about 5%, 10%. So I imagine they will probably have a detrimental impact. But yet, like you said, your guidance implies 4% growth. So kind of what are the other moving parts other than just the AUM decline?

Thanks, Simon. I'm going to break my golden rule because I've never given compositional guidance. What I will give you is that we have not forecast any performance fees in our FY '25 guidance. To answer the rest of your question, you've got a combination of things happening. You get the full year impact of the cost restructuring we did during '24, so there's not a full year impact in '24 of that. We also have conviction around stabilization of asset values across virtually all sectors. And even the sector that some people call the unlucky seat, I think there's a very big body of sales evidence emerged, including some of our recent sales that's suggesting that the bifurcation that I've been talking about and the high-quality office assets are going to hold up in terms of evidence-based valuations during FY '24, we sold quite a lot of older secondary buildings, average age of 30 to 40 years. And as you would expect, they're going to print sort of higher cap rates than what you're seeing on prime stuff. But overall, we're pretty confident about the growth trajectory going forward and I'd argue without any performance fees. It's one of the highest quality composition guidances I've provided in the last 20 years.

Are there any one-offs that's going to come into FY '25 because I really appreciate the color you just gave, David, that was really good.

That's about as much as you're going to get Simon. And I don't think there's any one-offs that you're trying to identify. As I said, it's pretty clean.

Great. I'll just move on then. Can you give some color on some of the, I guess, alternative -- progress on the alternative asset classes that you've been looking at? I think in the slide, you dropped in data center. And I think in previous editions of results, you were talking about potentially build to rent and how you've formed the team, et cetera. Just wondering what progress is like on those 2 initiatives.

Well, look, let me start with our power bank and data centers. Look, as I said, we've got one of the largest, if not the largest industrial land area portfolios in the country. We'll continue to do what we've been doing for years is looking to increase the power bank for both more conventional tenant customers. And obviously, we already own data centers. We see it as an opportunity to continue to curate that portfolio. I'm not sure that I necessarily sort of put that in the alternative bucket. There's been a lot of talk about what is alternatives. I think over the course of the last 20 years, Charter Hall has institutionalized some subsectors of retail, for example, some would call them alternatives. I don't see our large Bunnings portfolio as an alternative. I said as a distinct strategy in its own rights, no different to net lease retail, which has been in CQR as outlined very well in the last week or so. In terms of the living sector, we're quietly going forward. We're submitting planning approvals or planning applications on various existing assets. I think I've said previously, we've identified a very large volume of potential living sector assets within our existing portfolio where we don't need to go out and buy new land and have it the land cost eating its head off while you're trying to get planning approvals. So it's one of those things that we will emerge and, sorry, evolve organically. I don't need to go out and put a FUM target on it. I've seen too many people make mistakes with that. So I suspect as you've seen with industrial being as big, if not larger than office now and convenience retail and social infrastructure being an important part of our platform, we'll continue to focus on growing those. And as I said earlier, we'll look at other sectors like living as an organic growth option for us.

Great. Just one last one then, David, are there any material new fund launches that could be happening in FY '25?

I'd tell you when they've been launched and successfully capital-raised, and you'll see it in our equity flows going forward.

Our next question comes from the line of David Pobucky with Macquarie Group.

Congratulations on the results and guidance. Maybe perhaps just one on the DPS growth guidance of 6%, which is above your EPS growth guidance of 4%. Perhaps as Bridge's please talk about that difference.

David, if you've been tracking us for the last 10 years, you all know that we have set a 6% DPS growth target long term. We don't focus on the payout ratio. We've always had a payout ratio well below our operating earnings. So there'll be years where EPS growth might be slightly under DPS growth as was the case with the FY '25 guidance, and then there'll be years where EPS growth is significantly exceeding DPS. It was only a couple of years ago. We had something like 50% growth. And we maintain in the EPS, and we had -- we maintained our 6% DPS growth. I think for us, having a sensible payout ratio, which means we can retain cash and earnings for future investment just gives us the capacity to grow the business organically without needing to raise equity. And that's why we haven't -- I don't think we've raised equity since 2017 or something. So that's the whole strategy behind that. So I wouldn't get too focused on the differential between DPS and EPS growth.

And just my second one on the transactional environment. I appreciate your comments earlier. But maybe if you could just talk through a bit further in terms of your expected timing or catalysts just to see that meaningful improvement in transactional volumes? And do you expect to be a net acquirer of assets in FY '25?

We certainly hope to be. Look, if you look at the history of the Group, we -- there's 2 types of transactions. There's the normal portfolio curation. And if you look at what CLW and CQR has just announced, we've been curating portfolios. Yes, some of its net divestment, but across the Group, the way I would categorize it as the portfolio curation and then there's net acquisition growth. And I think, obviously, we've got significant capacity with over $6 billion of undrawn debted cash. And as we continue to raise equity, that gives us the dry power to drive net acquisition growth. So I see it in 2 buckets. And clearly, if you look back to the last 5 or 6 years, we're going to have more net acquisition growth, the greater our net equity inflows are. So that's the way the business model works.

Our next question comes from the line of Suraj Nebhani with Citigroup.

Just a couple of quick ones. So firstly, I think, David, you mentioned double-digit returns in office. Obviously, sounds great. I guess I'm wondering which assets or which markets are you talking about?

I don't remember talking about double digit, but if you're talking about the way wholesale capital is looking at prospective IRRs going forward. I think there's general consensus that both unlevered and levered IRRs going forward look very attractive, probably more attractive than they've been for some time. And as I mentioned, I think we're also seeing the denominator effect take a lot of our pension funds, both domestic and offshore to being underweight their strategic asset allocation. So I think there is a lot of dry powder to deploy into property. If I go by sector, like be no surprise to anyone, logistics is still very much in favor. The logistics market in Australia is still -- globally one of the lowest vacancy factors. I think Sean eloquently outlined our cautious view on some aspects of going down the sort of reversion romance of sort of buying short WALE assets. We're starting to see, and you've started to see quite a lot of sales evidence emerge on the acquisition by both domestic super funds and international investors looking at buying long WALE industrial assets, we think where cap rates and prospective IRRs have got to that all of a sudden looks like a lot more attractive risk-adjusted investment thesis than buying some of the sort of shorter WALE assets. I think as Ben Ellis outlined, we have got high conviction for net lease and shopping center convenience retail. We think those cap rates have not only peaked. I think they've got overdone. And I think there's already evidence where we're seeing some cap rate compression in good quality neighborhoods and small subregionals and certainly in the net lease sector generally across sectors were pretty constructive. And as I said, I think it's a real bifurcation story on quality of office that there's no doubt in my mind, core Sydney CBD is the best prospective net effective rental growth market in the country. I'd call out Brisbane is probably one of the lowest prime vacancy rates of any national market. And if you sort of look at the assets that we've sold, and I won't go into a lot of detail, we have been quite purposeful in curating our portfolios across the business. And as I called out, a lot of the assets we've sold are 30-, 40-year-old buildings, which we think we can, on behalf of our investors, do better and more modern assets. That's why on all our slides, we're talking about modern high occupancy portfolios. So that's sort of the direction I would give you in terms of where our preferences are going to lie.

And just following up on the transactions piece as well there. Do you expect -- where do you expect the capital to come from? Is it majorly coming from offshore or do you expect all the domestic investors to be more active as well?

No. If you dissect the last 12 months of total transaction volumes in this country by sector, there's been a bias towards domestic capital. There's been a lot of domestic capital investing in the logistics sector, both undeveloped land and long-lease assets. I think we've seen a broad-based demand in the office markets. A lot of the assets we've sold in the last 12 months have been to domestic buyers. Now, there will be a few institutional-style foreign investors that acquire assets, including one we've recently contracted. But I think as we've seen in many cycles, you're going to have a combination of both domestic and international investors. Mirvac bring in Mitsui for 55 Pete is another example of conviction that's coming from foreign investors for good quality office in the core of Sydney CBD. So I don't think it's going to be much different to sort of previous cycles. And if and when rates come down, I think that demand is going to accelerate and probably accelerate quicker than people think because Australia is still seen as a very transparent, easy market to do business in. So from a global investors' point of view, it generally rates very highly on all those surveys that we see from the global real estate agents.

And I guess the reason why I was asking this is -- I'm just wondering to what extent is the expected transaction recovery dependent on rate cuts. Clearly, the timing of cuts keeps moving. So I'm just trying to understand that FY '25 transaction recovery comments a bit better.

Well, if you're asking whether my guidance relies on the reserve bank dropping rates, no, it doesn't. I think the last 35 years in my career, I've not actually seen too many economists get rate predictions and direction too accurate. So we're taking a sort of cautious view. I don't actually think the timing of an official cash rate movement is that relevant. Most people finance real estate on average based on 3-year swap rates. So I would be having a focus on that rather than the cash rate.

Okay. All right. And just one final one for Anastasia. Did the change in, I guess, the elimination of the revenue in defense management and moving it to property investment? Can you just talk to what does that mean from a financial perspective? Is it essentially result in lower tax expense that is that all?

Yes, it's our proportionate interest in fees where we've effectively paid ourselves. And what it really reflects is a change to report on the basis of how we think about the business. So we think about property investment yields on an unlevered basis, first and foremost, including developments we think about as a yield on cost. And then we look at the leverage structure, the level of gearing and the cost of debt quite separately in terms of them determining levered returns. And we felt that EBIT should actually be reported on that basis because that's how we think about the business. And then of course, the funds management fees is all about third-party paid fees, not fees that we've paid ourselves really, and that is what boosts the economic yield ultimately on the balance sheet.

Yes. And I'll just add Suraj. The way we operate the business is looking at the EBITDA on those 3 segments. So as we allocate capital, we'll look at the total return on equity or return on invested capital we can get in all 3 of those segments. So sort of having the proportionate stake in a fund and have our fees deducted from that, it just doesn't reflect the way we think about the business. So -- and the biggest delta there is your interest, your proportional interest expense, which is as Anastasia outlined is by doing the segment note the way we are you obviously got a rise in interest expense, but that's a look through interest expense on our proportionate interest in each of the funds. And that's the difference between the almost negligible sort of net interest expense we've had for years at a balance sheet level because we've had very little net balance sheet gearing.

Sure. Sure. I mean, I guess just your final thing, it does benefit tax so is that the way to think of it or marketing?

It's not a tax-driven segment, no.

No change to tax at all.

And I'd note that taxes given that there's peers quoting pretax numbers is $0.22. So we're getting towards a $1 pretax EPS given that you raised it.

Our next question comes from the line of Richard Jones with JPMorgan.

I know you love talking about guidance. So I'm just going to ask another question on it sorry...

We'll be ready for the answers.

Just the DI line, it's obviously not something we have much visibility on. Can you just give us a bit of a steer there as to what projects completing and how that may vary versus what you took this year?

So you're talking about the DI, Development Investment earnings segment?

Yes.

Yes. So look, if you look through the history of development investment earnings, it's generally been where we've curated a site got it approved, got it pre-leased, and we might sell it, and then depending on the risk profile, whether we provided rent guarantees to the fund buyer will determine whether those earnings are spread over a number of periods. I'd also add that when the opportunity to buy assets way below replacement cost emerges as it is at the moment, buying assets and de-risking them and extending lease terms and then bringing in partners for those sort of assets. That's a pretty attractive trading opportunity for us. And -- so I wouldn't -- going forward, just focus on all, that's all going to be just development. So there's being -- there'll be a number -- there will be a combination of trading opportunities and development-type investment earnings that will continue to be a feature of our earnings. And I -- the only guidance I will give you is that I'd expect that to continue to grow from the FY '25 result -- sorry, FY '24 results.

Good. Clarified, is invested capital changed in that segment?

No. It's been a very capital-light efficient structure for us. And I think I've provided this example before, if on 60 King William Street, which is a premium grade development, we originated, got approved, got pre-leased and then sold into the various funds. By the time we're underway on construction, quite often the Group's got its capital back. So there's other projects where it's taken us time to get our capital back some of the old folks and stuff that has taken time to curate things like GRESB have been attractive opportunities for us. And I don't see it really changing much. And as I said earlier, the prospective returns going forward on core real estate through to opportunistic are much higher than they have been for some time. So we see -- this has been a good window for us to put our foot on opportunities. We've got the largest transaction cross-sector transaction team in the market. As the largest property owner in Australia, we're going to see most things, particularly in sectors that we want to play in. So yes, I see quite a lot of opportunity for us to continue to grow that segment, but in a relatively capital-light fashion where we're not deploying our capital long term, and I certainly won't be going out and buying big chunks of land and sitting on it for years, hoping that I can get a return on capital. It's just not the way we've used our balance sheet. But as I said earlier, when we do deploy our balance sheet, we look at whether it's PI, DI or funds management. We look at all of it on a pretty disciplined return on capital basis. And they've got to make sense to us. They've got to make sense to us in terms of getting a reasonable return for the balance sheet, but it's also got to make sense to produce longer-term assets that will be attractive to our capital partners. So that's the way I'd sort of guide -- the way you guys should think about us continuing to grow that segment.

Okay. And just one question just for Anastasia. Can you just touch on the lag impact of the WALEs on the funds management margin ex kind of performance and transaction fees, how that might flow through in '25?

Well, I can say that as I remarked that the FUM reduction throughout FY '24 was over 7%, and yet you only saw top line base fees come down 3.8%. So yes, we will get the full year effect of that in FY '25. And ideally, we'll have a jaws effect from the cost out that we've been very focused on. And to David's earlier point that we'll get stabilization in valuations from here on in.

And Jones, I'd also say, I don't think we're going to sit still as someone asked me before, we see this as a good buying opportunity. So you're going to have a combination of sort of slight full year impact given the 6-month devals hit base fees, but then you've also got FUM growth that can offset that. So -- as I'm sure you appreciate, we don't sit on our hands and here at Charter Hall. So I think it will be a combination of those two, which is why we've got conviction on our guidance.

Our next question comes from the line of Ben Brayshaw with Barrenjoey.

Just a couple of questions on the financials, perhaps for Anastasia. I was wondering if you could discuss the payout ratios across the funds platform. I'm just interested as to how they compare with whether distributing all their funds from operations. Any comments or feedback on that, please?

There's been no change in the patterning been on any of the payout ratios across the listed that are reported to FY '24. There was some commentary given by CQR around a little -- holding the DPS flat. So, therefore, some a little bit higher going into FY '25. The wholesale funds have kept to their level, noting that there was an early in 2023 reduction in the payout ratio of the CPOF Wholesale Office Fund, but that's been all throughout 2024.

Yes. Great. Okay. So just on the hedging ratio across the platform, you mentioned at 62% at June. What does that track at for the next 2, 3 years? Are you able just to break down what that looks like in FY '26 -- FY '25, '26, and any hedging in place beyond that?

Sure. Ben, I won't give you exact specifics. But as you can imagine, it's a weighted average duration to give you a sense of it, so you can model it. But it's a straight-line linear reduction so you're hiring in '25, lower in '26 and lower in '27.

Yes. Great. And sorry, just my final question. David has called out that the balance sheet is having capacity to deploy your 3% gear. What level of gearing are you comfortable to, I guess, deploy into going forward?

For 10 years, we've set predominantly between 0 balance sheet gearing, I think we might have got as high as 10% at one stage. But every year, we are pretty active in recycling our co-invested capital. And I don't really see -- I wouldn't say we've got a balance sheet gearing target. We don't have looked through gearing covenants. We don't -- it's almost impossible for us to ever get the balance sheet gearing covenants at a headstock level. So I'd just say to you, I wouldn't expect it to be much more than the sort of average of the last 5 or 6 years. You would -- well, the way I see the world where -- and I think we've got a cap rate full year slide in the deck. If you're going to deploy, you're a lot better deploying now than you were 2 years ago. And I would say prospective returns look better than they did in June '20. So I certainly have no problem seeing our balance sheet gearing lift a bit by peer standards where it's predominantly tangible assets as opposed to intangibles. I think we've got a very sort of modest geared balance sheet, and I have no problem utilizing it. The only point I'd say is intra period, there might be points. And if you track us for the last 10 years, there might be points where we might increase our gearing in the half year and then it goes back down to the long-term average by the end of the year because we've sold down assets that we've warehoused for fund partners. So I know it's not giving you what you want because I don't actually have a balance sheet target in mind. And -- but we want to retain flexibility, and we've got plenty of firepower. So that's the way we'll look at sort of deployment going forward.

Our next question comes from the line of James Druce with CLSA.

David, I was curious if you could provide some color on redemptions for FY '25, whether those can be filled with new equity or asset sales?

Look, we're going to -- a small fund called PFA, they've got a lot of media during FY '24. We've sold 7 assets in that fund. There's certainly no restraint from us in selling assets to fund those redemptions. I think investors will get their money. I think any reward needs to be conducting asset sales to fund redemptions in an orderly fashion. They've got to protect the interest of the remaining investors as much as the redeeming investors and that's what we're doing. So we have liquidity reviews in various funds at various times. And until we go through that process, I've got no idea what redemption demand may be. What I would say to you in the wholesale world is that we've been pretty successful at being able to bring in new equity to fund redemption demand, whether it's at a liquidity window or if it's during a sort of 5- or 7-year liquidity window, investors can exit via secondaries, which means that we've got to find them new equity to buy their units. And I think across the peer group, we've been one of the most successful in facilitating secondaries, particularly across our industrial and office funds. So that's sort of the nature of that cycle. The other thing I would say is when prospective IRRs are much more attractive than they were a year or 2 years ago, I think investors are pretty sophisticated, and they'll look at if there's a liquidity window and they want to exit, they've got to look at the IRR they're walking away from and then what they can reinvest in elsewhere and all the friction costs, and I think people will be more constructive around, well, maybe I should stay invested. So that's the only commentary I'd give you on the -- the wind out of funds that might have live liquidity windows over the next few years.

Right. That's good. And just on -- I think Anastasia might have mentioned this, you invested $293 million in the investment portfolio. I think you retained about $150 million a year in earnings. Can you just talk through where that investment went to? And then will you be doing something similar this year?

Well, look, I won't go into war and peace on it. We have disclosed that the Group invested 25% in 52 Martin Place, which is a 31-year WALE prime Sydney core asset predominantly leased to the New South Wales government with very strong and attractive rent reviews, and that's in a joint venture with our wholesale fund CPOF, there's a variety of other things. I think when you look at those numbers, you've -- there's a net difference -- and that's what I said before. So we will have co-invested in some things. We were -- in the last 12 months, we've actually pulled money out of some partnerships where we've sold our units to existing wholesale partners. So it's -- you're never going to get a like-for-like answer, but prospectively, we're going to continue to look at all sectors. If I can buy 30-year government WALE prime, office opportunities that sets us up for bringing in wholesale capital later on here, I'll do that. I'll do the same thing in industrial and retail and social infrastructure. So I wouldn't like to get drawn on any preference per sector. It's a bit like the 4 children, and I've got -- I don't have a preference for any one of them. They've all got their different opportunities. But I think we will continue to see ourselves as a diversified platform. Yes, there will be some waiting changes as you're seeing offices down to 30% at a platform level. And directionally, I think you'll continue to see us upweight to logistics and all things sort of power banks and data centers within that logistics area. And I'm pretty high conviction on social infrastructure and convenience retail. So I think going forward, we'll continue to grow both our balance sheet exposure but also the platform's exposure to those sectors.

Our next question comes from the line of Tom Bodor with UBS.

Just a quick one for me. We talked about deploying your own balance sheet and sort of coming and going on your balance sheet capital on gearing. But just to be interested in understanding, you expect to be a larger cover investor in the period ahead given your conviction that the cycle has sort of reached a trough.

I wouldn't say we're going to increase our percentage stake in funds. Over the last 10 years, we've been very clear with our capital partners, they've got bigger balance sheets than us. So our percentage will continue to fall as an average percentage across our FUM as a co-investor. We will use the opportunity if something is attractive to deploy balance sheet capital to capture assets that we think are going to be attractive to our capital partners, whether they're partnerships or funds. So yes, I certainly have no problem increasing the dollars we've got invested on balance sheet in new vintage opportunities.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to David for closing remarks.

Okay. Thanks for everyone's time on the call. and particularly to the whole team at Charter Hall. And no doubt, in the next few days and weeks through Phil and the team will -- we'll get to have some one-on-one conversations. So until then, thank you.