Charter Hall Group FY11 Results

Charter Hall Group (ASX:CHC) (the ‘Group’ or ‘Charter Hall’) today announced its full year results for the 12 months to 30 June 2011.

Key results:

• Statutory net profit of $52.3 million
• Operating earnings of $60.4 million, 3% ahead of previous guidance
• Operating EPS of 20.60 cents per security (cps), an increase of 22% on the prior corresponding period (pcp)
• Full year distribution of 16.50 cps, an increase of 29% on the pcp
• Net tangible assets (NTA) of $2.21 per security
• Balance sheet gearing of 8.1% and look through gearing of 36.6%¹
• Funds under management increased to $10.7 billion

Charter Hall’s results are reported in three key earnings streams, being property investment, property funds management and development investment.

The following table sets out the FY11 earnings breakdown for each of the key earnings streams reported by EBITDA:

Property investment – EBITDA of $37.4 million

Property investment comprises the Group’s co-investments in its managed funds and one directly held property with a total book value of $594 million at 30 June 2011.

The Group’s managed fund investment portfolios are well diversified across the office, retail and industrial sectors with the Group generating $943 million of gross operating income across its $10.7 billion platform this year. Over 345,000 square metres of space was leased across the Group’s managed funds property portfolios, increasing Charter Hall’s total portfolio average occupancy to 94% and delivering a weighted average lease expiry of 6.5 years. This operational focus was a key contributor in enhancing the quality of earnings in these fund portfolios.

Charter Hall targets co-investment holdings of up to 20% of equity in its managed funds, thereby aligning interests with its investors. Charter Hall expects earnings and distributions from these coinvestments to benefit from the improving property market, higher occupancy, falling debt costs and initiatives being implemented to increase earnings and NTA per unit across each fund.

Property funds management – EBITDA of $20.7 million

The value of property funds under management increased from $10.2 billion to $10.7 billion over the twelve months to 30 June 2011. Negative foreign exchange movements and disposals of $1.1 billion were more than offset by revaluations of $467 million and property acquisitions of $1.1 billion. Major acquisitions by Charter Hall managed funds included Charter Hall Retail REIT (ASX:CQR) (‘CQR’) and Telstra Super’s purchase of the $266 million Woolworths portfolio and Charter Hall Core Plus Office Fund (‘CPOF’) and Telstra Super’s acquisition of the $363 million Brisbane Square.

During the year, Charter Hall raised $645 million in its unlisted wholesale and unlisted retail funds as well as through third party mandates. Revenue from the Group’s funds under management increased from 72 basis points (bps) in the first half to 80 bps for the full year due to increased activity across the portfolio which drove increased margins from the provision of in-house specialist property services. Charter Hall expects there to be continued margin expansion through scalability and further cost efficiencies.

Unlisted wholesale funds

Over the year, CPOF and the Charter Hall Core Plus Industrial Fund (‘CPIF’) acquired $328 million in office and industrial assets utilising a proportion of the $94 million and $73 million raised by the funds respectively. The Group’s third party mandate funds under management increased to $626 million.

The Group is continuing to pursue wholesale equity sources, through partnerships and/or separate mandates, for high quality development opportunities within Australia. The recently acquired 50% joint venture interest in the 685 La Trobe Street, Melbourne project is an example of the type of projects the Group is targeting to partner with institutional investors.

Unlisted retail funds

For the year ending 30 June 2011, Charter Hall Direct Property raised $95 million across its unlisted retail fund platform. Charter Hall Direct Property brought a number of new retail products to market during the year, with the reopening of the Charter Hall Direct Property Fund and the launch of the new Charter Hall Direct Retail Fund², Charter Hall Direct Industrial Fund (‘DIF’) and the Charter Hall Property Securities Fund.

DIF has raised approximately $50 million in equity since its launch and recently acquired its fourth asset, a 25% interest in a Coles Distribution Centre in Perth Airport, Western Australia for $29.6 million, bringing the fund’s portfolio value to $100 million.

Listed funds

CQR delivered on its strategy of reweighting to Australia during the year, with the Australian portfolio representing 86% of net tangible assets at 30 June 2011. This weighting is forecast to increase to 91% post contracted disposals of $73 million of United States, New Zealand and non-core Australian assets. In line with this strategy, CQR acquired an interest in nine retail centres for a total consideration of $200 million, comprising a 50% interest in the portfolio of eight shopping centres from Woolworths and the wholly owned Gordon Shopping Centre in Sydney, and more recently announced that it had executed a contract to acquire Albany Creek Shopping Centre, Brisbane for $40.1 million.

Charter Hall Office REIT (ASX:CQO) (‘CQO’) delivered strong operational results to 30 June 2011, recording the highest leasing levels across its Australian portfolio in six years with 110,000 square metres of leases agreed. In line with its strategy to reweight to Australia, CQO finalised the exit from non-core markets with the sale of its Japanese portfolio and the sale of the Atrium in Berlin, Germany (post balance date), while also executing a contract to sell 100% of the United States (US) portfolio to entities affiliated with Beacon Capital Partners, LLC for a gross sales price of US$1.71 billion or US$1.57 billion after estimated costs and adjustments on 3 August 2011. Following completion of the US asset sale, CQO will be a domestic only A-REIT with a portfolio of high quality, well-leased, Australian investment-grade office assets located in capital cities and mature commercial markets.

Development

The Group and its managed funds are currently undertaking 17 development projects (one on balance sheet), with an estimated on completion value of $1.3 billion, from its $1.9 billion development pipeline. Recently, the Group announced that Leighton Contractors had executed and agreed a lease for 21,149 square metres or 76% of the WorkZone office development in Perth, which will enable the project to proceed, subject to the finalisation of the construction debt finance³.

Development investment – EBITDA of $3.8 million

The Group’s development investment comprises:

• a 50% interest in Commercial & Industrial Property Pty Limited (‘CIP’), a national industrial prelease developer;
• a co-investment in both Charter Hall Opportunity Fund No 4 (‘CHOF4’) and Charter Hall Opportunity Fund No 5 (‘CHOF5’); and
• an on balance sheet investment (50/50 joint venture) in a site with planning approval for a 35,000 square metre office development at 685 La Trobe Street, Melbourne.

CIP provides Charter Hall with a strategic off market source of industrial investments for its funds and mandates, contributed $4 million of earnings after tax to the Group for the year ending 30 June 2011.

The Group’s co-investment in CHOF4 and CHOF5, which is diversified across seven projects, increased to $33 million. Charter Hall anticipates operating earnings contributions from these remaining development investments to begin to emerge from FY12.

In addition, the Group has invested $7.5 million for its 50% interest in the 685 La Trobe Street project being incubated on balance sheet with a view to raising third party capital to partner on this project.

Update on the Charter Hall Office REIT

Over the past six months, a group of US based activist hedge funds that together hold an interest of approximately 19.3% in CQO⁴ have been agitating against the Group’s management of CQO. In June 2011, the hedge funds group called a meeting of CQO unitholders to consider a resolution to remove a Charter Hall entity, Charter Hall Office Management Limited (‘CHOML’), as the responsible entity of CQO and replace with their nominee responsible entity. On 27 July 2011, 68% of voting CQO unitholders voted against the resolution to remove CHOML as responsible entity of CQO.

As noted above, CQO has entered into a contract to sell 100% of its interests in its US portfolio for a gross price of US$1.71 billion or US$1.57 billion after estimated costs and adjustments. Subject to satisfaction of all conditions precedent, closing of the sale of each of the properties is expected to take place between October 2011 and May 2012. The Group updates the estimates released on 31 May 2011 of the likely financial impacts associated with the US portfolio sale and CQO’s pro-rata special distribution of the net proceeds, as follows:

• A net reduction of $19.2 million in the intangible assets from $66.2 million at 31 December 2010 to $47.0 million at 30 June 2011
• A reduction in the Group’s net tangible assets of $7.0 million⁵ on receipt of its share of the proceeds of the CQO pro rata special distribution, anticipated to be lower than the book value of Charter Hall’s investment in CQO as at 31 December 2010, which has been offset by the contracted purchase of 3.3% of CQO post the US sale from Fir Tree at a 5.64% discount to pro forma NTA per unit
• Net income from the management activities of CQO’s US portfolio is expected⁶ to contribute approximately 1% of FY12 operating earnings of the Group⁷ and nil thereafter
• Receipt of approximately $53 million (being 10% of CQO’s estimated $532 million pro rata special distribution announced by CQO on 3 August 2011)⁸
• Payment after receipt of the majority of the pro rata special distribution of approximately $40 million to acquire additional CQO units under the Fir Tree Unit Transfer Agreement. This will increase Charter Hall’s interest in CQO to 13.3%

Charter Hall notes the outcome in FY12 will ultimately be determined by the exact timing of the progressive settlement of the US portfolio sale by CQO and the applicable AUD/USD exchange rate as the proceeds are unhedged.

Corporate responsibility

Charter Hall launched its new sustainability policy earlier this year, reinforcing the Group’s commitment to the implementation of sustainable business practices across all its funds and operations.

CQO maintained its inclusion on the FTSE4Good Index for the fourth consecutive year and its Australian portfolio achieved its minimum 4.5 Star NABERS Energy rating target, one year ahead of schedule. This improved NABERS Energy performance was demonstrated through a 10% improvement in the energy efficiency of CQO’s Australian portfolio since 30 June 2010.

Capital management initiatives

Charter Hall has low balance sheet gearing of 8.1%⁹ and a sound liquidity position to manage its working capital and investment requirements. The Group has increased its debt facility (expiring in mid2014) from $75 million to $100 million and at 30 June 2011, the Group had a total of $91.5 million liquidity comprising a combination of cash and undrawn debt facilities¹⁰.

The Group refinanced $3.5 billion across its managed funds during the year and implemented a number of capital management initiatives, continuing to improve the balance sheet strength, liquidity positions and debt duration.

Outlook

As a fully integrated property group with diversified sources of equity invested across the office, retail and industrial sectors, Charter Hall is well placed to benefit from a projected growth of superannuation inflows in Australia and offshore markets.

Charter Hall derives property income returns and capital growth through its co-investments in its managed funds. In addition, its vertically integrated business model allows Charter Hall to provide specialist property services across its platform generating fees from its managed funds. This ensures that Charter Hall’s return on equity is superior to other conventional REIT peers.

The Group remains focused on leveraging its fully integrated property services capabilities through initiating acquisition and developments, undertaking capital raisings for unlisted funds, external

mandates and partnerships, while also recycling capital to improve the return on equity from the coinvestment portfolio. For its listed funds, which are now primarily Australian asset owning REITs the Group will continue to implement strategies to increases earnings per share and to de-risk CQR and CQO. 

Joint Managing Director, David Harrison, said:

“As volatility continues in listed markets, Charter Hall is seeing equity flows increasing to unlisted real estate. Charter Hall is well positioned to benefit from these equity flows as wholesale investors further invest in low volatility direct property portfolios. Retail investor flows are expected to increase over time as investors seek a high quality manager with an integrated capability that delivers stable property investment returns from rental income and capital growth. The Group has sought to de-risk and stabilise the listed REITs by reweighting the portfolios to Australia. We expect these strategies will improve earnings visibility and stability, improving confidence for investors".

Subject to no unforeseen events, the Group expects FY12 operating earnings of between 24 to 25 cents per security. This includes approximately three cents per security relating to the expected net earnings associated with the CQO US asset disposal, costs associated with the closure of the US office and costs associated with retaining the CQO management rights.

View CHC FY11 Results Presentation

View CHC FY11 Appendix 4E

View CHC FY11 Webcast