Charter Hall Group (CHC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2025 Half Year Results Briefing. [Operator Instructions] Please note that this conference is being recorded today, Thursday, 20th of February 2025. I would now like to hand the conference over to your host today, 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 first half year results for FY '25. Presenting with me today is Sean McMahon, our CIO; and Anastasia Clarke, our CFO. 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. Similar to the full year results for today's call, I will not be doing a page turn, but will instead make some opening remarks about the earnings result and then talk to equity flows, valuations and the current operating environment. Sean will discuss our property investment and development activity and Anastasia will discuss the financial highlights. We'll then move to the outlook and Q&A. So, let's just turning to the group's results. Operating earnings for the half was $196 million, which translates to a half year OEPS or earnings per share of $0.415 per security. Our investment strategies are poised to deliver attractive growth in earnings and asset values, which we expect to generate compelling IRRs for our existing and new investment capital partners. The group's return on contributed equity still remains as one of the highest in the sector at 19.5% on a post-tax basis. Our strong annual growth in distributions continues the long-term trend and we also provide attractive franking credits to our investors. Group FUM rose from $80.9 billion to $83.4 billion during the first 6 months and property FUM has risen from $65.5 billion to $66.4 billion. Acquisitions and development activity more than offset divestments with stable net valuation movements across the platform with valuation growth in most sectors offset what we believe to be the last 6 months of office devaluations for this cycle. During recovery cycles, we typically see asset value growth first driven by rent growth, then further amplified by cap rate compression, typical in falling interest rate cycles. We see this cycle as being no different. Importantly, we remain disciplined. This is evident in our focus on cost control. Net operating expenses are down 12.3% over the last 12 months as we look to selectively take costs out and focus on operational performance. Our balance sheet remains strong with a net gearing of 5.9%, significant liquidity and a $2.8 billion co-investment portfolio that is well diversified by sector, tenant WALE and lease expiry, whilst both the balance sheet and platform has capacity and liquidity to drive earnings growth across our 3 earnings segments. I'd also note that a significant portion of our property investment portfolio is invested in listed equities, predominantly through our managed REITs, CLW, CQR, CQE. More broadly, we continue to refresh investment capacity and have $6 billion or $6.1 billion of investment capacity ready to deploy into our development pipeline and selective acquisitions. We also retain additional committed and uncalled equity from wholesale investor clients in addition to this investment capacity, leaving us very well placed to take advantage of opportunities quickly as they arise. The successful acquisition of HPI brings a further $1.3 billion of net lease convenience retail assets into the platform and is another example of how we match new equity inflows from our capital partners with acquisition opportunities. The Investment Management business secured $1.6 billion in gross equity flows for the half, which is equivalent to the total gross equity flows for the 12 months in FY '24. Acquisitions for the half were $2.2 billion, which significantly exceeds the $1.7 billion in acquisitions for the whole 12-month period FY '24. We've delivered strong EPS growth over the last 10 years. And as the chart on Slide 6 shows, our EPS has almost tripled over the last decade and distributions have grown at over 10% per annum compound. We also retain a significant proportion of annual operating earnings each year, which builds our balance sheet over time, providing us with capital to invest to grow our property and development investment and funds management earnings. Over $1.2 billion in historic operating earnings has been retained by the business in the last decade, funding our co-investment portfolio and broader platform growth initiatives. As seen with the recent results announcements for CLW, CQE and CQR and now today with CHC, the market feels to us like it's at an inflection point. A broad range of indicators are signaling the rotation towards the next growth cycle. Transaction volumes in all sectors are increasing, investor demand to allocate to real estate is increasing and forecast property returns remain attractive. A key difference between today and previous cycles is the recent rapid rise in construction costs. The majority of our portfolio is currently independently valued well below replacement cost with future supply forecast across office, industrial and retail markets being significantly below historic annual norms. This is anticipated to result in increased market rental growth rates for many of our assets and sectors. Population growth drives demand growth across all sectors, not just the widely reported residential sectors. This is going to increase demand from our tenant customers to provide property solutions for their businesses and will materially increase the investment opportunities we secure for our investor customers. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle. During the half, we raised a total of $1.6 billion in gross equity flows. This is clear evidence that our investor customers are attracted to the IRRs on offer in our various investment strategies and we have experienced an increase in demand to allocate new capital. For the half, we raised $450 million of new equity for our wholesale pooled funds, over $1 billion in our wholesale partnerships business and over $100 million in Charter Hall Direct. We enjoy strong working relationships or partnerships with over 100 wholesale capital partners and expect these investor customers will continue to be active in the cycle ahead. We see many investment opportunities ahead and are currently working on various equity raising initiatives across our wholesale pooled funds, wholesale partnerships and the Charter Hall Direct business. A noteworthy milestone for the business this half was that we have now seen our industrial business grow to become our largest sector exposure. Our industrial platform at $25.5 billion in assets and over 38% of our total funds under management. It's pleasing to see such a strong position that we find ourselves in, within the industrial sector, given that we identified the underweight investment to logistics prior to the financial crisis. While I'm calling out that industrial is now our largest asset sector exposure, the office sector remains a crucial key focus for the group. Return to the office mandates are accelerating as companies look to improve their team culture, staff retention, overall productivity and increasingly a higher workspace ratio or amount of office space per head of their workforce. Days worked in the office versus home continue to rise and there appears to be a recent acceleration in this trend, not just from domestic tenants, but multinationals. This will, over time, contribute to a reduction in vacancy rates, which we are already seeing in several markets. Office comprises $24 billion in value of our total FUM is 36% of our platform. As Sean will detail more fully in his address, we remain focused on expanding our office investment activity and note that compelling value is emerging in certain markets, locations and asset-specific events. I'll also highlight our increased exposure to the convenience net lease retail sector, which will be bolstered further upon the compulsory acquisition process of the $1.3 billion HPI portfolio, which has now commenced. The long leases available within this sector with strong fixed annual rent escalations and low CapEx leakage is attractive for all of our investors, particularly in the wholesale sector. Charter Hall is Australia's largest owner and manager of convenience retail assets and I anticipate this segment of the business to grow materially in future years. Transactions were strong over the half at a total of $4 billion, $4.1 billion. We were active across all sectors with acquisitions more than offsetting divestments. Net acquisitions were positive in the convenience net lease retail sector and in social infrastructure with the curation of the portfolio continuing in the Industrial and Office segments, improving overall quality and forecast IRRs. Our group platform retains the largest footprint of commercial property in Australia, providing existing and new sector growth opportunities to implement at 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 the coming period is no exception as we partner with a broad range of existing and new investors to capitalize on opportunities we can exploit. I'll now turn to Sean to run through our development activities in Charter Hall's property investment portfolio.

Thanks, David, and good morning to everyone on the call. Our development pipeline now totals $13.3 billion and our development capability and track record has been a key strength of the group for over 30 years. Developed to own next-generational assets are highly accretive to long-term returns for our investor customers. Development activity continues to drive modern asset creation, providing property solutions for our tenant customers and enhancing returns whilst attracting new capital to our funds and partnerships to deliver on strategic objectives. Development completions totaled $0.8 billion in the last 12 months. Notwithstanding completions, the pipeline continues to be restocked and is currently $13.3 billion, a $0.7 billion increase over the half. There are currently $5.3 billion in committed developments with 73% of committed office developments pre-leased and 91% of committed industrial and logistics developments pre-leased. Noting David's previous comments on Australia's strong forecast population growth, we expect that the creation of new investment stock for our investment platform will continue to feature prominently. Turning to Slide 21. Today, we call out our largest iconic development underway, Chifley Square in Sydney. The precinct, which includes the existing North Tower and the South Tower where construction is underway, will eventually have a combined value of approximately $4 billion. This project is Sydney's premier office address and will be Charter Hall Group's largest asset with a combined net lettable area of 110,000 square meters. The project is scheduled to complete in mid-2027 and is owned by various Charter Hall managed wholesale investment vehicles. Our wholesale clients are participating in the investment with the objective of long-term retention of this iconic asset. Now turning to Slide 22. As you can see, the group has been busy delivering new high-quality office developments across Australia, anchored by government and Tier 1 tenant covenants. I'll now go to Slide 23. And over the calendar year 2024, our industrial platform completed $806 million of developments with a WALE of 11 years. The assets were retained for long-term investment ownership. We currently have $2.5 billion in industrial development projects committed and underway. Our pipeline of future industrial investment-grade stock now sits at a material $6.8 billion. Charter Hall has one of the largest industrial footprints in the nation, comprising over 20 million square meters of land and we are focusing on efforts to maximize value for our investor customers from the land we own. Given the scale and diversity of our holdings, there are multiple key data center sites existing within this industrial land bank. There are a number of data center sites in focus that are located within availability zones and we're in the process of unlocking 1.5 gigawatts of power supply and associated planning approvals over the next few years. We retain optionality to sell this powered land at a premium to industrial land values or negotiate long-term ground leases with hyperscalers or alternatively develop powered data center shells on a selective basis. The group has been active in the digital infrastructure space over the last 5 years and currently has $1.9 billion of FUM in the digital infrastructure space, primarily comprising of a portfolio of 37 Telstra data exchanges and other data centers along the Eastern Seaboard. Now turning to our property investment portfolio. We currently are close to 97% occupied with a WALE of 7.1 years with weighted average fixed annual rent reviews of 3.2% and a weighted average cap rate of 5.7%. Valuations have an aggregate troughed in the half and we anticipate capital growth moving forward as rents continue to grow. Government tenants comprise over 25% of the portfolio and the portfolio remains broadly diversified by sector, asset, tenant and geographic location. Given the long leases we have in place with fixed or CPI annual rent reviews, the modern age of the portfolio, low vacancy and exposure to triple net lease assets, our balance sheet investment assets have lower capital expenditure leakage and lease incentive costs than our peer group. The group's co-investment portfolio is in excellent shape as we move into the next phase of the cycle. Now turning to Slide 26. We continue to drive our industry leadership across all facets of ESG, demonstrated by recent GRESB global and regional awards with 17 of the group's funds in the top quartile and our listed entities achieving A ranking under the GRESB public disclosure rating. Pleasingly, we now have installed 83 megawatts of solar power across our platform and this equates to sufficient power for approximately 20,000 homes and our green loans now exceed $9 billion. I'll now hand over to Anastasia to discuss the financial results in more detail.

Thank you, Sean, and good morning. Starting with the group's earnings summary on Slide 28. Operating earnings post tax for the first half is slightly positive on the comparable prior period, which is a strong result given the headwind of declining FUM leading into June 2024, driven by negative revaluations and asset divestments. We have been able to hold top line EBITDA earnings at $305 million through expense savings from disciplined cost control measures with the strongest growth coming from property investment EBITDA of 5.2%. Development investment EBITDA of $25.7 million contributes over 8% to the group's earnings and is down due to the prior period reporting an elevated first half skew. FM EBITDA, as I have touched on, has been particularly resilient considering the real estate valuation cycle, delivering 1.1% growth to which I'll provide further details shortly. Pleasingly, we are reporting statutory profit for the first half of $61.1 million post tax, which evidences the turning of the cycle where valuations have stabilized as foreshadowed by David for some time now. The group's operating earnings post tax for the 6 months is $0.415 per security, of which $0.234 per security is being distributed to investors, delivering growth of 6%. Shareholders will also receive franking credit tax offsets of $0.085 per security. The cash distribution is fully covered by operating cash flows in the half and represents a payout ratio of 56% of operating earnings. Turning now to funds management earnings on Slide 29. Despite lower fund management base fees during the first half due to lower opening FUM, we are reporting a strong recovery of 15% in transaction fees generated from equity inflows and resultant transaction activity. Property Services revenue has delivered growth of 5% with the highlight in the half being an increase in leasing volumes, but also consistent earnings across the platform from both development management and property and facilities management. As flagged at last results in August, we have taken deliberate actions to reduce our cost base, resulting in us reporting expense savings of 12% or $8 million, which is a permanent recurring expense reduction that will continue into the future. Overall, resulting in the group reporting a resilient growth in FM EBITDA of 1.1%. Now for some remarks on the balance sheet and return metrics. The group's balance sheet is broadly flat at 31 December 2024 on our last reporting date of 30 June 2024. There has been a modest reduction in total assets due to the timing of PI and DI divestments and reinvestments, offset by negative revaluations, albeit slowing to less than half the level in the prior period. The group continues to maintain a strong financial position with balance sheet gearing low at 5.9%. Testament to this is Moody's recently reaffirming the group's credit rating of Baa1 stable outlook in January this year. The group maintains an excellent liquidity position of available cash and undrawn lines, which translates to head stock investment capacity of approximately $700 million. Charter Hall continues to focus for our investors on driving a strong financial return on capital of 19.5%. 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. This is a good segue now to Slide 31 to provide an update on liquidity and investment capacity across the funds platform. The group maintains over $6 billion in liquidity, which alongside committed equity is available for investment opportunities. We have been active over the half, having raised and extended loan facilities of $7.4 billion of the circa $30 billion across the platform. New loans included $2.9 billion of sustainable finance, taking total sustainable funding to $9.3 billion. The credit appetite from our lending partners, including domestic and international banks remains robust. This is evidenced not only by the large new and extended loan volumes in the first 6 months, but also in lower credit margins achieved by approximately 15 basis points. Overall, the weighted average cost of debt increased 30 basis points to 4.7% during the half as a result of expiring lower rate hedges. The group retained 6 investment-grade credit ratings with either S&P or Moody's with platform average leverage stable at 36.4%. All balance sheets are prudently managed with gearing reduced through asset recycling. In summary, the group has delivered relatively strong earnings this first half and continues to focus on disciplined capital management across the platform in terms of both deployment into investments and modest gearing levels to drive sustainable 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 33 and our earnings guidance. I'm pleased to advise that due to strong performance within our Investment and Property Services businesses, today, we have announced an upgrade to our FY '25 OEPS guidance. Based on no material adverse change in current market conditions, FY '25 earnings guidance is for post-tax operating earnings per security of approximately $0.81, up from previous guidance of $0.79, which will represent a 6.9% growth over FY '24 earnings. And I would also note that our upgraded guidance does not include any performance fee revenue. FY '25 distribution per security guidance is for 6% growth over FY '24. That now ends the prepared remarks, and I'll now invite your questions.

Thank you. [Operator Instructions] Our first question comes from Simon Chan from Morgan Stanley.

David, I was wondering if you can give us some color on new fund initiatives. I think 6 months ago, you mentioned you were working on a few things. And I know since then, you've launched 1 or 2 new funds. Just how are they going? And I guess, were they primary contributors to your gross equity inflows in the first half?

No. The new fund initiatives I've sort of talked about are very likely to be second half and they certainly haven't contributed to the first half. I think all I'd say, Simon, is we've got a diversified source of equity across the group from retail, high net worth adviser-led equity that is invested in our direct business through to institutional wholesale capital with over 100 institutional investors, both domestic and offshore. So, we look at the opportunities. We present them across the sectors that we have high conviction on and we provide that opportunity to all of those sources of equity. I think the recent successful takeover of HPI is another example where one of our long-term super fund partners, Hostplus has partnered with CQR for that acquisition. And really, I'm sort of not in the game of predicting FUM growth or what we may be doing. I'd prefer to just wait until we do it and then it will form part of our 6 monthly announcements.

My second question, you guys did a very impressive volume of gross transactions in the first half, $4.1 billion worth, which is as much as what you did across FY '24. But it occurred to me that, David, your transaction fees line was only $18 million on the $4.1 billion of gross transactions. But last year, when you did $4.1 billion, the fees were $57 million. Is there some nuance in that? Or has there -- have some transactions been booked, but you haven't collected the fees yet?

Yes. Well, as you can see in the results, gross transactions includes both acquisitions and divestments. So typically, we would not generate the same sort of level of fees on divestments as we would on acquisitions. We've never provided sort of compositional guidance on the level of transaction fees and it varies across the equity source. So, there will be a variety of partnerships and funds that have low transaction fees, but an appropriate level of base fees. And then there'll be other partnerships we do with higher transaction fees and lower base fees. So that's part of the explanation. I think it's also sort of fair to say that as we're quite constructive on the way forward and as I said, we sort of feel like asset values have troughed, I think you'll see the composition of transactions going forward to be far more weighted to acquisitions and divestments. So that would give us an expectation that transaction revenue as a percent of transactions is going to rise, but that's the reason for the differential that you laid out.

Our next question comes from Tom Bodor from UBS.

I was just interested in your guidance, not including performance fees, but being DIF3, I think, above the hurdle. And just was interested in some comments around potential for transaction fees in '25? Or is it unlikely?

I think I made it clear that our guidance doesn't include performance fee revenue. And when we look forward, all of our performance fees are driven by asset value growth since inception of the fund or the partnership. So, we would be expecting given that every recovery cycle I've been through over 35 years sees asset value growth driven by rental growth initially and then it gets amplified by the combination of rental growth and cap rate compression that over the next few years during this cycle, we're expecting asset value growth to recover some of the last couple of years and put our funds and partnerships into sort of performance fee level. But as I said before, we don't predict FUM growth and I don't predict future valuations. So, the generation of those performance fees because they're staggered over a long period of time, it gives us opportunities in most years to generate performance fees. We're just calling out that this year, the guidance doesn't include any expectation of performance fee revenue.

Okay. That's clear. And then next question is just now that you're seeing volumes picking back up. The margin improvement was very impressive on the cost out. Is there some cost investment required to match that pickup in activity levels?

Look, we have, over the last 20 years since we listed, done a pretty good job of rightsizing the operating expense for the composition of our portfolio. I think as Sean pointed out, you're seeing an increase in the weighting of sort of net lease assets across the group, particularly in retail and industrial. That type of portfolio is less FTE intensive than other parts of our platform. So, we feel like we're in the right space. We also feel like we're well-resourced to deliver the sort of growth that we see going forward. And as I alluded to, asset value growth and FUM growth is going to be driven by new initiatives, new equity, new acquisitions, but also we also -- we will see the benefit of valuation growth flowing through to the funds platform. So yes, I'm pretty comfortable with where we're at with. We have roughly 600 people across the platform and as you'd expect in a large platform, that's got our resourcing across all disciplines from sort of property management, leasing, development, investment management and all of the cross-sector support functions that are needed to resource a platform of this scale.

Excellent. And maybe just a final one on the DCs. Just be interested in the time frames and how you're thinking about that from a capital perspective. Are you having conversations with the partners at this point?

Well, I put it into the same category of why I don't predict FUM growth. I think it's an evolving sector. We'll play it in a different way to others. But I think what Sean was outlining was that we're not newbies, we're already being invested in this sector and we'll look to exploit the opportunities as we always have. Like at the end of the day, a lot of our growth has always been predicated on external equity under management and I don't see it changing. We don't see the need to change our business model. So, if we've got external capital that wants to invest in built form data centers, well, we may go down that route. We've already taken advantage of some of the hype in the market and sold land at premiums to what I think you can make it work as a traditional industrial development. So, we'll just play it in a number of different ways, but I'm certainly not going to be providing any sort of predictions on growth in data center FUM.

Our next question comes from David Pobucky from Macquarie Group.

David, just the first one on guidance, if I may, please. You reiterated back in November at the AGM. In your opening remarks today, you mentioned strong performance in Investment and the Property Services businesses. So, just wondering if you could talk a bit more about the key drivers of the upgrade versus where you saw things in November, please?

Look, the majority of the performance to date and when we look forward to full year guidance is growth in our funds management EBITDA. We always use our balance sheet to secure assets, warehouse them for selling down to external equity. The first half was no different. Sometimes it's hard to predict how quickly you'll raise external equity and therefore, the cash comes back to the balance sheet. So, we were probably funnily enough, more successful in the first half of recycling our cash back to the balance sheet than we potentially thought. You've got a whole variety of examples, as you're well aware, the balance sheet, partner with CQR to buy the first 15% stake in HPI. And obviously, as part of that transaction, we sold our half to our partner, Hostplus. Then there's a variety of other things that we did to secure assets and then bring in external equity. With the sort of firepower we've got, I think we can drive all 3 segments, both property investments by further deployment of our capacity into good assets that ultimately may end up being like Hostplus, recycling all of our cash back for HPI or we'll keep a co-investment stake in new partnerships. As I've been saying for 6 months, we're pretty constructive about the growth going forward in all sectors, including the much maligned office sector. We think cap rates have been overdone, particularly for good quality assets and we'll continue to use our balance sheet to partner with external equity to take advantage of the early part of a recovery cycle. The best growth we've ever seen is the early part in the cycle, not the later part. So that's what we are saying to our capital partners across all the sectors that we have conviction on.

That's clear. And just my second and final question on transactional activity. Obviously, a big improvement there on gross transactions, HPI is in that. But I was just curious around what you're seeing in the market outside of HPI and then where you're seeing the opportunities, please?

Look, if you look at the growth of this business over the last 20 years, the vast majority of the growth has been in partnering with wholesale investors in both our pooled funds and partnerships. But we have executed on several take privates in the REIT space, obviously, HPI, ALE, Irongate, the Folkestone acquisition in '18 and then earlier on the sort of acquisition of the Macquarie platform in 2010. So, I don't ever sort of predict what other listed M&A could occur. I just see it as part of the natural growth of a platform of our scale. I think most of the growth going forward, frankly, is going to be the sort of organic growth that we've delivered over 2 decades, partnering with wholesale capital. So, I don't want everyone running around thinking I'm looking for the next big take private in the REIT sector. We have over a couple of decades, been able to secure a lot of assets off market. Sean mentioned sale and leaseback. I think that will continue to be a feature of the growth of our platform. And I think we will, as you've seen in our deck, continue to be one of the largest developers across industrial and office in this country. And then there'll be selective sort of expansions in our retail portfolios as well. I think one of the things, like Sean talked about 20 million square meters of land area in industrial, like across our platform, we've got a massive land bank. And within that land bank, we have lots of value-add opportunities to exploit as we have with the second Chifley Tower, where the best development returns I've ever seen is where you've never had to pay for the land or pay very little for the land. So that's how we will continue to extract value across our whole portfolio across all sectors.

Our next question comes from Richard Jones from JPMorgan.

Anastasia, are you able to clarify if the cost-out program the group has undertaken is done or is there more kind of carried forward into the second half?

Yes. The cost out that we've done in the first half will continue into the second half. So, you may have a slightly higher percentage annualized effect. But if you take our numbers, you'll get a very good guide. But what we're really saying is they're locked savings. They're not one-off movements.

Yes. No, that's clear. Dave, just interested in your views on large retail. It's obviously an asset class you haven't played in. It's obviously seeing a sort of turn in investment capital. Just wondering if your investment partners are discussing with you about whether you would participate in that space.

Look, I think what we've demonstrated over the history of Charter Hall is sticking to our knitting and having conviction in the sectors and the subsectors that we think meet our long-term strategic goals. It's well documented. We see ourselves as the biggest player in the country in convenience retail, both in convenience shopping center retail and net lease retail. I think there's other players that are really good at the top end of the mall space. So, I'm not sure turning up with my institutional partners and saying all of a sudden, we're going to do a better job than others. As you know, if you look at the MSCI unlisted index, the big mall funds have not had a great run for 15 years. They've had a bit of a resurgence in the last couple of years. I think there's value in a lot of those assets, but there's also a lot of risk in what I call the middle space between roughly sort of 25,000, 30,000 meter shopping centers, which we would typically say are sort of convenience, predominantly supermarket anchored up to the sort of 60,000, 70,000. There's a lot of those malls, large sub-regionals that potentially have performed the worst over the last 15 years. And then like any sector, the really good stuff at the top end is always going to perform pretty well. So, we'll continue to, if you like, stick to our knitting. If opportunities emerge and we think that we have got a value proposition with capital partners, we might look at them. But I don't see us straying too far away from sort of what we've done in the past.

Yes, clear. Makes sense. And just clarifying just further to Simon's question, just the compulsory acquisition of HPI went through post balance date. Does that mean the transaction fee impact is also post balance date?

No, it's spread over both halves. So, the reason why we included in our FUM numbers is post balance date, we've now gotten through 90%. But as I said, it will be spread over the first half, second half in terms of sort of transaction fees.

[Operator Instructions] Next question comes from Ben Brayshaw from Barrenjoey.

Just a question on the operating cash flow for the half year. I was wondering if you could just discuss the shortfall relative to the operating earnings just for the last 6 months and whether there's any timing differences that may have contributed to that?

I'll let Anastasia, but you always have this constant first half issue where STI payments are paid in the first half, but they are accrued and relevant to the prior financial year. But Anastasia might give more color.

And look, there has been quite a buildup of activity coming into the December period that has some accrued revenue in our operating results, but some outstanding collections as we'll do the billings. Things like HPI is a good example.

Okay. No problems. And just also, David, just on strategically how you're thinking about evolving the business. And is living something that you consider Charter Hall would potentially diversify into at some point? Just curious as to whether you could, I guess, share your current views on that and specifically in relation to BTR or retirement.

Look, we have for a couple of years, been working through how to exploit captive opportunities for the living sector, could be built to rent, could be built to sell. I think I've previously said we've identified quite a large potential pipeline of opportunities in the living space. As you guys know well, based on other people's results, the process to get planning in most states in this country is protracted. So, we've been going through a variety of planning approval processes. Quite a few of them are now DA approved or Stage 1 planning approvals have been secured. But a bit like I said before, until we are in construction mode with capital partners funding projects, we're just not going to call it out. But it is a sector we like. The reality is that I think there's an undersupply across all sectors. As I mentioned, residential gets a fair bit of airplay in the media, but this whole problem of replacement cost being well above the investment value of existing assets permeates all sectors, which is why most of our assets are in our books way below replacement cost. So, I think we will continue to sort of prosecute that thesis provided it can deliver a total return on equity that we expect to be getting on our invested capital. So, I think there will be more and more progress in the next half on what we're doing there. And a bit like what I said before, if we have strategic conviction on a sector, we'll look to grow into that space with external capital partners and which is what we've done for the last 2 decades. So, I would sort of say it's on the radar, but we'll talk about it once we've secured things that make any material impact to our group performance.

Our last question comes from [ David Calvity ] from CLSA.

It's actually James Druce. Just on Ben's question, I just wanted to confirm something. Traditionally, you haven't liked to take too much operating risk in your sort of real estate investments. Are you sort of saying for the right strategic deal that you would sort of tend to move away from that? Or is that still very much a core sort of philosophy that Charter Hall has?

Well, I think what I've said before is that if you look at our property funds management platform, virtually all of it's leased to tenants who are, if you like, best-of-breed in their sector, whether you sort of think about our convenience retail being anchored by Woolies and Coles and Aldi or our office sector with 35% leased to government tenants. We've always taken a security of tenure approach and have been very careful about getting exposed to either leases that where your tenant may have a lot of operating risk in their business, and therefore, that ultimately becomes a landlord problem if your tenant gets into trouble. One of the things that you need to think about in, for example, BTR, you're leasing -- everyone calls it an operating platform, but it's no different to shopping center management. You're still managing an asset with a larger number of tenants in a particular portfolio, but they're still rented. So, I think we see it very different doing management of real estate as opposed to going in and buying businesses and then taking real operating risk. And that's the distinction I'd make.

Yes. Okay. Fair enough. Just can you also provide a bit of color on the office divestment over the half? I think it was around $1.4 billion. Which funds and what were the main assets there? And do you expect to be a net divestor in the second half or next 12 months?

No. I think I've made it pretty clear. We don't see ourselves as being a net divestor any longer. It's all been in the media. There's been a variety of office assets. We've sold down 7 or 8 assets in the PFA office fund, our large wholesale pool fund has sold down a couple of assets, things like 333 George Street. We've also been able to bring in external equity partners for some of the assets that may have been sold by wholesale funds. So, it's sort of across the board. But I would say right across our business, Anastasia and our Treasurer, Darren Beatty and his treasury team have done a fantastic job in a whole bunch of refinancings, which have extended our debt maturity terms, have increased covenant levels from an LVR perspective or reduced ICR covenants. So, we've significantly improved buffers, which gives us comfort around our buffer levels. And therefore, I don't really see any great need to be doing sort of net divesting across the group. I would say, if you've sort of tracked our results for 20 years, I don't think there's many years that we haven't sold assets. So, pruning and curating portfolios has been a sort of feature of the platform and I don't really see that continuing. But I think going forward, we'll probably be seeing, as I alluded to, more acquisitions and investment in developed to core than divestments. So, I'm pretty comfortable that we'll be back into a positive net transaction growth trajectory.

Yes. Okay. That's clear. And one more, if I may. Can you just clarify your comment on just office values turning up over the next 6 months? Are you talking about your portfolio, the market or both?

Well, I don't really want to comment on the quality of other peers' portfolios. All I can say is that when I look at our office portfolio, which is the largest in the country, we're nearly 2x #3 or #4 in terms of scale and 20% above #2. We've got the most modern portfolio, the longest WALE, the highest credit quality, as I said, 35% leased to government. And then when I add institutional-grade tenants, we've got one of the -- if not the highest sort of tenant roster in that space. So, I think the whole bifurcation of office is well understood. Our capital partners understand that you want to be investing in modern, relevant office accommodation in good markets. And a lot of what we have divested has been older stock buildings 40, 50 years old that we feel has got more obsolescence risk. But I might have old buildings in an absolute cracking location in the core of Sydney CBD, which I'm not too worried about because they're basically yielding land banks. So, all I would say is we feel the valuation community probably overdid cap rate expansion. If you look at the 4.5-year cap rate asset value growth we've got in the appendix, it will show you that virtually every other sector other than office has cap rates back to their June '20 level, which if you look at relativities to bond yields, interest rates, et cetera, would suggest is probably right. But office has had an outsized expansion where it's sort of sitting 80 to 100 basis points above where like-for-like cap rates were in June '20. So, some assets across the markets may justify that, but we think the better quality, more modern prime assets are overdone. And therefore, we see, as I said earlier, asset value growth driven by income and high occupancy portfolios and then the acceleration in their growth will come from cap rate compression.

Thank you for all the questions. This concludes the Q&A session. I would now like to turn the conference back to David for closing remarks.

Okay. So once again, thanks for everyone's time. A particular thanks to our whole team at Charter Hall across the whole platform. It's always a lot of work coming into results season, particularly with listed REITs. And we look forward to sort of catching up with investors in the coming weeks. So thank you, and we'll obviously catch up shortly.