Financial year 2020 will be remembered by many as the year COVID-19 arrived and the significant changes this brought. As for many organisations, FY20 was a year of two halves for Charter Hall, with the first half characterised by strong FUM growth driven by acquisitions and net valuation increases, with the second half seeing more subdued acquisition led growth and stabilising valuations as a result of COVID-19. Pleasingly overall, FY20 delivered $10 billion of FUM growth, continued outperformance for our fund/partnership investors and strong earnings growth for shareholders.
Charter Hall has celebrated its 15th year as a publicly listed A-REIT where we have published investor returns since inception in the form of return on contributed equity (ROCE), which has outperformed all major indices.
Net equity inflows are a sign of healthy support from investors, with FY20 providing a record $5 billion of gross inflows and all our sources of capital contributing.
In fact, over the past 10 years the growth in FUM from each equity source has been consistently averaging 20-25% across each segment, ranging from wholesale unlisted fund/partnership inflows, through to listed A-REIT inflows and our market leading Direct business.
As we celebrate our 15th year as a listed company, our focus remains on delivering sustainable growth for securityholders and replenishing capital within funds and partnerships so we continue to deploy through develop-to-core strategies and selective acquisitions. Ultimately, we will curate and enhance portfolios through diversification, WALE enhancement and tenant composition diversity and improvement.
There is little doubt that COVID-19 has been a test for society and business this year. Charter Hall, along with other businesses, was forced to quickly adapt to the changing circumstances, enact our pandemic plan and move staff out of the offices to work from home. Fortunately, business continuity was not interrupted.
Charter Hall’s strategy of investing in long WALE assets leads to defensive and resilient portfolios. While Charter Hall has not been immune to the effects of COVID-19, the impacts have been limited through our focus on assets with long leases to high quality tenants in predominantly defensive industries. Small to medium enterprises (SMEs) represent only 10.2% of tenants across the funds platform, a much smaller proportion than other listed REITs.
More broadly, COVID-19 has seen accelerating demand for access to industrial & logistics assets, something we have actively pivoted towards. Flows into Charter Hall Direct funds have averaged $95 million a month during FY20, while wholesale pooled and partnership funds have also continued to see inflows. Momentum in sale and leaseback transactions continues to grow across corporate Australia and the Group is well positioned to take advantage of reduced buyer competition.
I am pleased to report a 46.2% increase in OEPS to 69.3 cents per security (cps). Further, we have continued to generate leading REIT sector distribution per security growth of 6.0% to 35.7cps, whilst retaining a significant proportion of earnings via a distribution payout ratio of 52%.
Importantly, the growth in earnings also comes after-tax. When compared to peers on a pre-tax basis, we have delivered sector-leading 25.8% OEPS growth rate (CAGR) annually over the last five years. Tax paid also delivers valuable franking credits for our securityholders.
Over the 15 years since listing, Charter Hall has generated a Total Shareholder Return (TSR) of 15.7% compounded annually versus the A-REIT index S&P/ASX 200 (GICS) Property Accumulation Index return of 3.1% over the same time period.
Quality property funds management portfolio
Our property funds management portfolio is well-diversified comprising over 1,300 properties, with over 4,000 tenancies delivering in excess of $2.1 billion of net rental income. Group FUM WALE has increased to 8.6 years and the weighted average cap rate firmed to 5.27%, reflecting the high quality and low risk profile of our portfolio.
Significant growth in funds under management
We have been active in acquiring and divesting assets during the period. Group FUM grew by a record $10.1 billion to $40.5 billion in 12 months, and a further $1.3 billion since 1 July 2020.
Furthermore, this growth reflects the trust placed in us as custodians of capital to wisely manage and invest on behalf of our investor customers.
Developments continue to be a meaningful contributor, while our focus on driving total returns has seen net revaluations also lift significantly during the period. Development capex of $1.3 billion and net revaluations of $1.4 billion have been meaningful drivers of FUM growth.
Active deployment of capital is an integral part of our business. This year we completed $8.3 billion of gross transactions. All our sectors have been busy, but activity has been led by our office and industrial & logistics sectors deploying capital after recent capital-raising activity.
Active development pipeline
The Group continues to progress various developments across its portfolios, creating investment grade properties and adding significant value through enhancing income yield and total returns. Our development completions have added $1.7 billion to FUM in the last 12 months. Our total development pipeline now stands at $6.8 billion and continues to attract capital and deliver FUM growth.
The Group’s $2.3 billion industrial & logistics development pipeline is predominantly pre-leased to high quality tenants and will generate institutional quality long-leased assets for our funds. It will provide attractive incremental FUM growth and enhances our credentials to attract capital. Our office pipeline also continues to deliver attractive development returns and new office buildings. The recent completion of Wesley Place created a $700 million premium grade office building, 100% pre-leased 12 months prior to completion, with an 11 year WALE leased to high quality tenants such as Telstra Super, Uniting Church, Vanguard, Commonwealth Government, CBUS and Australian Super.
Valued relationships with our tenants
Across the platform we enjoy strong tenant customer relationships. We’re always looking for new ways to support our tenants – actively partnering with them to provide innovative solutions to fulfil their exact needs.
In fact, 74% of our tenant customers lease more than one tenancy from us. That ability to partner with our tenants and meet their entire property needs drives tenant retention. Of the tenants who had a lease expiring with us in the past 12 months, 86.5% re-leased with us. Importantly, this benefits shareholders by producing earnings resilience across our property investment portfolio and also feeds back into transactions, with our significant sale and leaseback activity providing off-market opportunities to grow our funds.
A resilient property investment portfolio
Our property investment portfolio provides a strong alignment of interest with our investor customers, while also ensuring that securityholders benefit from our property expertise. Our earnings here are characterised by the high quality of our tenants, the diversity of sectors, and the lack of concentration risk, or single asset exposure.
The portfolio has grown to $2.0 billion, or 10% over the year, reflecting our on-going investment alongside our capital partners and growth in underlying asset values.
The portfolio has delivered an attractive 6.2% property investment yield, while there is also capacity for new investments from retained earnings and recycling co investment stakes into new growth.
Occupancy is broadly stable, and through active asset management the property investment portfolio WALE has increased to 8.7 years. Our weighted average rent review remains attractive at 3.3% and the number of properties has increased significantly to over 1,000, largely reflecting our investment in the bp portfolio.
With our largest single asset exposure being 1.4% of the Group’s balance sheet property investment portfolio and our top 10 assets only representing 7.4% of net income generated, we believe the Group’s Property Investment portfolio is a very defensive, well diversified, core investment portfolio.
Culture the bedrock of the business
This year, we continued to look for ways to improve wellbeing and resilience within our culture. We did this by increasing our diversity to give us a more informed and open minded workforce, and addressing pay equity gaps to ensure everyone feels valued. We empowered and encouraged those whose voices are most easily lost – the young, the vulnerable, our LGBTQ+ community – to feel safe and included.
Our employee engagement score for FY20 was higher than ever, which is especially pleasing given the challenges and disruptions that everyone has faced. The increase in engagement reinforces the importance of purpose and values in building a culture that nurtures people and helps them make the most of their potential. Our own surveys show that 97% of our people are proud to work here – a metric that the Executive Committee and I are very proud of.
We also pride ourselves on being an organisation that builds people up. Our particular way of developing talent – leveraged around our operating model, our purpose and our culture – is another reason people thrive at Charter Hall. This year we launched ‘Learning’, an integrated, personalised learning platform to help our people develop skills and capabilities aligned to their development goals and career aspirations. The new platform builds on all the experience-based opportunities we make available, enabling everyone to stay curious and continue to learn.
The platform really came into its own during lockdown, supporting us to be adaptable and efficiently embrace remote working, with valuable learning resources like creating a productive workspace and using videocalls, as well as providing self-care tips to nurture connection and support wellbeing.
Important progress towards sustainability
We stepped up our journey towards being a role model in the Australian property sector for sustainability. This year, we not only established climate resilience metrics that will progress us towards a low carbon economy, we also analysed our business to find out how resilient we would be in the face of a range of climate scenarios. On that basis, we confirmed our pathway to net zero by 2030 and developed the roadmap to align with the recommendations of the Taskforce on Climate-related Financial Disclosure.
Setting up a cross-business Energy Committee saw us tighten our procurement processes and make significant savings on our utility costs – a good first step in our goal to commit to renewable energy by 2025.
We already have Australia’s largest Green Star footprint. This year, we not only increased our Green Star and NABERS ratings across the Group, we also reduced our Scope 1 and 2 emissions by 8%, installed 21MW of solar power and our industrial & logistics portfolio committed to net zero Scope 1 and 2 emissions by as early as 2022. Our efforts were also recognised in the highly regarded NABERS Sustainable Portfolios Index which listed eight of our office funds in the top 11 in the Index.
Outlook and guidance
Since year end, we have grown FUM from $40.5 billion to $41.8 billion. Post balance date and considering recent transaction activity, investment capacity stands at over $5 billion, plus committed but undrawn equity commitments in wholesale funds and partnerships.
Based on no material change in current market conditions, FUM growth already achieved in FY21 and assuming the COVID-19 operating environment does not deteriorate markedly from here, FY21 guidance is for post-tax OEPS of 51.0cps. FY21 distribution per security guidance is for 6% growth over FY20.
My thanks, on behalf of the Executive Committee, to all our people for all their hard work this year. I would also like to thank the Charter Hall Group Board for their continued strategic guidance along with the Independent Directors of our Fund Responsible Entity Boards. Our strategy of using our property expertise to create value and generate superior returns for our customers underpins our ability to continue to deliver returns for securityholders.
Finally, thank you to all our tenant and investor customers for continuing to be part of our Charter Hall Group community.
Managing Director and Group CEO