Charter Hall Group HY12 Results

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Charter Hall Group (ASX:CHC) (the ‘Group’ or ‘Charter Hall’) today announced its half year results for the six months to 31 December 2011.

Key results:

Statutory profit after tax of $19.6 million, 58% down on prior corresponding period (pcp)
Operating earnings (pre net CQO fee and organisational restructure) of $33.2 million¹ (7.8% increase on pcp) and 11.24 cps (6.6% increase on pcp)
Operating earnings (post net CQO fee and organisational restructure) of $30.9 million (0.3% increase on pcp) and 10.47 cps (0.7% decrease on pcp)
Half year distribution of 9.10 cps, 13.8% increase on pcp
Net asset value (NAV) of $2.53 per security, 0.8% decrease on pcp
Net tangible assets (NTA) of $2.19 per security, 0.9% decrease on pcp
Balance sheet gearing of 8.4%² (0.3% increase on pcp) and look through gearing of 33.0% (3.6% decrease on pcp)
Funds under management of $10.1 billion, 5.2% decrease on pcp³

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 earnings breakdown for each of the key earnings streams reported by EBITDA as at 31 December 2011:

Key earnings stream	HY12 EBITDA⁴	Percentage (%)
Property Investment	$20.07m	57.6%
Property Funds Management	$13.47m	38.7%
Development Investment	$1.3m	3.7%
Total	$34.84m	100%

The difference between the operating earnings (post net Charter Hall Office REIT (ASX:CQO) (CQO) fee and the organisational restructure) of $30.9 million and the statutory net profit of $19.6 million (equating to $11.3 million) is predominantly comprised of non-cash items. These include net fair value adjustments ($0.6 million), security based benefits expense ($1.3 million), income tax expense associated with the Group and managed funds ($4.0 million), gains / loss on sale of derivatives, investments and property ($2.1 million) and amortisation and other expenses ($3.3 million).

Property investment – EBITDA of $20.1 million

Property investment comprises the Group’s $575.7 million⁵ co-investment in its managed funds providing alignment with third party investors, which are diversified across the office, retail and industrial sectors. Over the half year, the income yield from the Property Investment portfolio increased to 7.0% (annualised) from 6.4%.

The Group’s managed funds portfolio performed strongly with total portfolio average occupancy increasing to 97% and a weighted average lease expiry of 6.5 years. This strong operational performance, coupled with a reduced cost of debt and fixed rent reviews, were key contributors in enhancing the quality of earnings in these fund portfolios.

Property funds management – EBITDA of $13.5 million

The value of property funds under management is $10.1 billion at 31 December 2011 as compared to $10.7 billion at 30 June 2011, predominately reflecting the United States (US) asset sales of $0.5 billion. Charter Hall’s funds management EBITDA margin increased to 35.3% from 32.9% in the pcp, reflecting strong revenue growth and platform efficiency. Revenue from Charter Hall’s funds under management increased to 76 basis points⁶ (bps) (annualised) compared to 62 bps in the pcp.

Charter Hall continued to implement its organisational restructure, to further enhance effectiveness across the Group and right size the Australian operations post divestment of the CQO US platform.

Charter Hall’s operating expenses increased in the six months to 31 December 2011 relative to the pcp as property management services was internalised for our office and industrial portfolios from 1 January 2011.

Unlisted funds

Since 1 July 2011, Charter Hall has raised a total of $154 million in its Core Plus Office Fund (CPOF) and Core Plus Industrial Fund (CPIF), enabling the Group to continue to build its capacity to source earnings and value accretive acquisitions and pre-leased developments. This represents 92.5% of the total of Charter Hall’s fundraising into wholesale managed funds for FY11.

Charter Hall expects to see continued investment commitments from domestic and international wholesale clients as they take advantage of the current environment of low interest rates and strong market fundamentals with low vacancy levels, limited new supply and stable tenant demand in most metropolitan markets.

Within its retail fund platform, Charter Hall’s Diversified Property Fund sold three of its assets utilising the proceeds to repay debt, reduce gearing and provide working capital to investors. The Direct Industrial Fund was awarded the Best New Unlisted Property Fund of the Year at the Property Investment Research Annual Forum in October 2011.

Listed funds

Charter Hall Retail REIT (ASX:CQR) (CQR) continued to deliver on its strategic objective to build the quality and strength of its domestic portfolio, acquiring three Australian properties, all of which are anchored by dominant Coles or Woolworths supermarkets for a total of $90 million⁷. CQR’s Australian portfolio now represents 91% of NTA with balance sheet gearing of the Australian portfolio at 30.1%.

The Australian portfolio performed strongly with occupancy of 98.7% at 31 December 2011, same property NOI growth of 3.5%⁸ and specialty rental rate growth of 4.1% following 82 new lease and 77 renewal transactions completed in the half year.

Charter Hall Office REIT (ASX:CQO) (CQO) also delivered strong operational results within its Australian portfolio achieving occupancy of 97% and maintaining a weighted average lease expiry of 4.5 years. During the period, CQO also completed the sale of four of its 14 US assets as part of the sale of the entire US portfolio to entities affiliated with Beacon Capital Partners, LLC⁹. The unitholder meeting to vote on the privatisation of CQO is scheduled for 15 March 2012.

Over the half year to 31 December 2011, both CQO and CQR outperformed the S&P / A-REIT 200 Index.

Development Services

The Group has an active $1.4 billion development pipeline predominantly across a range of managed funds, with 13 development projects currently underway. The Group has also commenced undertaking development management projects for third party clients and expects to grow this revenue stream over the medium term.

Development investment – EBITDA of $1.3 million

The Group’s development investments comprise:

its 50% interest in Commercial & Industrial Property Pty Limited (CIP) (a national industrial prelease developer) which contributed $0.9 million of earnings after tax to the Group results for the half year ending 31 December 2011;
a co-investment in both Charter Hall Opportunity Fund No 4 (CHOF4) and Charter Hall Opportunity Fund No 5 (CHOF5); and
an incubated development at 685 La Trobe Street, Melbourne within the successful Docklands precinct.

Charter Hall is sourcing both pre-lease tenants and capital partners for the 685 La Trobe Street project which will accommodate a 38,000 square metre A-grade office tower.

Capital management initiatives

Charter Hall has low balance sheet gearing of 8.4%¹⁰ and a sound liquidity position to manage its working capital and investment requirements. The Group reduced its look through gearing from 36.6% at 30 June 2011 to 33.0% at 31 December 2011. At that date it had available liquidity of $85 million¹¹ comprising a combination of cash and undrawn debt facilities.

Charter Hall refinanced $1.1 billion across its managed funds during the half and implemented a number of capital management initiatives, continuing to improve the balance sheet strength, liquidity position and debt duration for its managed funds.

Outlook

Charter Hall aims to grow investor wealth by delivering smart property outcomes. The business is focused on generating a higher return on equity through:

Optimising returns from Charter Hall capital invested in funds and partnerships, recycling equity into higher return investments and improving earnings on underlying co-investments;
Growing its platform with a target assets under management growth of 6-10% (post the US asset sales), EBITDA expansion through scalability, operational excellence and cost control/margin efficiencies and to be a top quartile manager relative to the benchmark;
Reducing risk through diversifying its sources of debt and extending its debt expiry profile;
Demonstrating capability and high performance through its access to high quality asset transactions and multiple sources of equity;
Recruiting, retaining, developing and motivating a high performing and engaged team; and
Integrating long term sustainability practices across its platform, ensuring best practice corporate governance and strengthening corporate citizenship in the communities in which we operate.

While the global economic environment remains challenging, Charter Hall is focused on continuing to grow the Australian business, increasing funds under management and managing its cost base.

David Harrison, Joint Managing Director, said:

“We are pleased with the continued inflows from existing and new capital partners which positions Charter Hall and its investors to capitalise on attractive investment opportunities within our core focus sectors”.

David Southon, Joint Managing Director, said:

“Today’s result highlights the benefits of our fully integrated platform with the provision of in-house specialist skills enhancing value across the managed fund platform and generating incremental earnings for the Group. In addition, Charter Hall is implementing an organisational restructure creating efficiencies and contributing to the scalability that will further achieve margin expansion".

Subject to unforeseen events, Charter Hall expects FY12 operating earnings to be approximately 24 cents per security. Approximately 2 cents per security relates to the net earnings associated with CQO’s US portfolio disposal, costs associated with the closure of the US office, costs associated with retaining the CQO management rights and implementation of the efficiencies identified in the organisational restructure.

View CHC HY12 Results Presentation

View CHC HY12 Appendix 4D

View CHC HY12 Webcast

¹_{Pre CQO net earnings associated with the sale of its U.S. Platform, costs associated with the closure of its US office, costs of retaining management rights (net CQO fee) and organisational restructure costs.}

²_{Calculated as total debt net of cash divided by total assets net of cash, consolidating the Direct Retail Fund. On a net contribution (de-consolidated basis), Charter Hall has gearing of 1.4%.}

³_{The majority of the decrease in FUM of $0.6bn has been due to the sale of CQO’s US asset sales ($0.5bn).}

⁴_{The segment categories do not match the categories used in note 6 of Charter Hall’s interim financial report for the 6 months ending 31 December 2011. A reconciliation is contained in Appendix M of the Charter Hall results presentation.}

⁵ _{Calculated on a net contribution basis.}

⁶_{Excluding cost recoveries of $6.5 million.}

⁷_{Calculated on a 100% ownership basis.}

⁸ _{Calculated on a 12 month rolling basis.}

⁹ _{An additional 3 CQO US assets have settled in January 2012.}

¹⁰ _{Charter Hall has balance sheet gearing of 1.4% on a deconsolidated basis.}

¹¹ _{Excludes DRF cash balance and debt facilities and before 1HFY12 distribution.}