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Charter Hall Group (ASX: CHC) (“the Group”) today announced its full year results for the financial year ended 30 June 2010.
Key results for FY10 include:
Operating earnings in line with guidance
Charter Hall Group delivered operating earnings for the period of $34.9 million, compared to $34.8 million in 2009, in line with guidance provided on 12 February 2010.
Operating EPS of 4.11 cents and full year DPS of 3.20 cents are in line with guidance.
Expansion of funds management platform
In March this year, Charter Hall Group acquired the majority of Macquarie’s real estate funds management platform together with 7.5% of the total units on issue at the time in both Charter Hall Office REIT (ASX: CQO), formerly Macquarie Office Trust and Charter Hall Retail REIT3 (ASX: CQR), formerly Macquarie CountryWide Trust.
The transformational acquisition, which increased the Group’s funds under management to over $10 billion, was in line with the Group’s strategy, diversifying its equity sources to include listed funds and increasing its exposure to the unlisted retail investor market.
The Charter Hall and Macquarie platforms have successfully integrated, broadening the Group’s national and international reach, while enhancing the depth of its multi-disciplined property funds management business. The integration of these platforms provides scale for the Group to use its expertise across the risk/return spectrum to deliver upon the potential income and capital growth prospects presented by the current property cycle.
Enhancing the unlisted platform
Charter Hall remains focused on its unlisted property funds platform which is well positioned to take advantage of a recovery in property markets.
Unlisted wholesale platform
Following the successful implementation of a number of capital management initiatives, including asset sales and some limited equity raisings, the balance sheet and liquidity position of the Core Plus Office Fund (CPOF) and the Core Plus Industrial Fund (CPIF) have improved substantially over the year.
Charter Hall is currently seeking new equity commitments for CPOF and CPIF and has in aggregate secured approximately 50% of the targeted $300 million in total equity raisings. Further commitments are at an advanced stage. These equity raisings will be used for identified acquisitions and future opportunities sourced by the Charter Hall transaction team. New equity may also be utilised to fund the development pipeline identified within the portfolios.
The Charter Hall opportunistic funds (CHOF4 and CHOF5) have performed relatively well through a difficult period. During the year CHOF4 sold its 50% interest in 275 George Street in Brisbane (13% IRR) and its 50% interest in Alluvion, Mounts Bay Road in Perth (26% IRR), allowing equity capital and profits to be paid to investors. CHOF4 has now realised seven out of its eight projects and is on track to deliver an overall equity IRR of 20%.
The Group is continuing to seek new capital from investors for CHOF6.
Unlisted retail platform
The Group’s unlisted retail business, Charter Hall Direct expanded substantially following the acquisition of Macquarie’s real estate funds management platform. Charter Hall Direct now has $1.5 billion of assets under management across 12 funds, ranging from single asset syndicates to multi property sector specific and diversified property funds.
The Group has raised over $85 million of new equity for the 130 Stirling Street Trust and the Macquarie Martin Place Trust, which owns 50% of the $460 million No. 1 Martin Place office complex in the Sydney CBD. Charter Hall Direct has an opportunity to capture market share in the unlisted retail investor space due to the substantial reduction in competitors. Equity raised over the last year underpins the Group’s strategy to establish property investment products that deliver reliable income returns along with the potential for capital growth.
The Group also launched the Direct Industrial Fund (DIF) post year end, which is seeded by a new Melbourne logistics property leased to Toll Holdings for 15 years. The initial close for the DIF equity raising is scheduled for 30 September 2010. DIF will remain open for further equity subscription for a two year period or until $200 million of assets have been acquired.
The restructure of the Group’s Core Plus Retail Fund (CPRF) into the Direct Retail Fund (DRF) was announced in May this year to provide retail investors with an opportunity to invest in a portfolio of investment grade retail assets anchored by some of Australia’s leading household retailers, including Bunnings, Harvey Norman, JB Hi Fi, Spotlight, The Good Guys, Dick Smith; supermarkets leased to Woolworths, Coles, IGA and Franklins; together with BIG W and many other household names. The DRF equity raising will commence in October 2010 and will be structured similar to DIF, with equity raisings continuing for a period of two years with the aim of growing the portfolio based on equity inflows.
Strong results at a property level
Charter Hall continues to maintain its strong alignment of interest with investors through its $583 million of equity co-investments in the Group’s managed funds. We expect earnings and distributions from these funds to benefit from an improving property cycle and the recycling and value add initiatives designed to enhance NTA per unit across all funds.
The Group’s managed funds portfolio remains well diversified across the office, retail and industrial sectors, with 76% of the portfolio weighted to Australia. Strong occupancy of 94% was achieved at 30 June 2010 with the Australian portfolio in particular benefiting from increased leasing activity.
The portfolio has weighted average fixed rent reviews of 3.6%, with 92% of the portfolio having fixed or CPI increased rent reviews. Tenant quality remains high within the portfolio with 80% of net income being derived from Australian Government or leading national and international companies. The portfolio maintains a weighted average lease expiry of 6.6 years.
The Group’s development pipeline comprises 15 projects with an end value of $2.3 billion across a number of managed funds. Over the year the development services division has completed three projects with a value of $400 million.
Charter Hall's 50% investment in industrial developer, CIP, contributed $1.54 million to the Group’s net profit for the full year. The developer continues to provide the Group’s funds with access to a robust industrial pipeline of A-grade, long lease investment opportunities, with CIP currently developing facilities for major tenants such as Toll Holdings, Volkswagen, Brisbane City Council and P&O.
Capital management initiatives
Charter Hall has strengthened its capital position over the year. The stapled entity had no drawn debt and a substantial cash balance at 30 June 2010. Charter Hall implemented a number of capital management initiatives across its managed funds that have substantially improved the balance sheet and liquidity position of these funds, which combined with further new equity for acquisitions, will deliver growth in these funds.
Strategy and outlook
Commenting on the results and outlook, Joint Managing Director David Southon said: “Charter Hall’s improved result was in line with our earnings guidance provided earlier this year. We grew our funds management platform to include listed products, substantially increased our exposure to the unlisted retail investor sector and successfully raised over $85 million of capital for these funds. We expect equity flows to continue to improve into the next year, underpinning the growth of our managed funds business.
Joint Managing Director, David Southon, said:
“The Group’s outlook improved over the year with economic indicators pointing to a gradual recovery in the global economy. The Australian property market has seen increased demand and transaction activity, and we expect property values to increase on the back of income growth.".
Joint Managing Director, David Harrison, said:
“The next year will see us continue to focus on growing earnings in all funds. The managed REITs have announced clear and decisive plans to reweight their NTA further to Australian markets and to simplify their balance sheets and their derivative positions. Improving occupancy levels and driving property income growth will continue to be the focus across all managed funds, together with recycling capital toward the highest total return opportunities in the marketplace. Charter Hall is well positioned to take advantage of a continuing flow of capital from superannuation in Australia and we expect to capture these flows into the wholesale, retail and listed property sectors where our funds offer investment grade exposures for all investors".
Charter Hall Group currently expects FY11 EPS growth in the region of 20%, which would allow for an increase in FY11 DPS in the region of 25%.