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Edited Transcript of CHC.AX earnings conference call or presentation 20-Aug-19 12:00am GMT

Full Year 2019 Charter Hall Group Earnings Call

North Sydney, New South Wales Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Charter Hall Group earnings conference call or presentation Tuesday, August 20, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David William Harrison

Charter Hall Group - MD, Group CEO & Director

* Russell T. Proutt

Charter Hall Group - CFO

* Sean Thomas Patrick McMahon

Charter Hall Group - CIO

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Conference Call Participants

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* Benjamin J. Brayshaw

JP Morgan Chase & Co, Research Division - Analyst

* David Lloyd

Citigroup Inc, Research Division - Director & Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Stuart McLean

Macquarie Research - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2019 Full Year Results Briefing. (Operator Instructions) Please note that this conference is being recorded today, Tuesday, 20th of August 2019.

I would now like to hand the conference over to your host today, Mr. David Harrison, Managing Director and Group CEO. Thank you. Sir, please go ahead.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [2]

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Good morning, everyone, and welcome to the Charter Hall Group FY '19 Results Presentation. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our CIO; and Russell Proutt, our CFO.

Now turning to Slide 4 and group highlights. FY '19 was a year of significant activity growth and portfolio diversification and quality enhancements throughout the whole of the funds management platform and in particular, the group's balance sheet. Funds under management grew 31.1% or $7.2 billion to $30.4 billion in 12 months to 30 June and a further $4.2 billion since the 1st of July, which in total is some 50% rise in funds under management over the past 14 months.

We successfully completed the purchase and integration of Folkestone into the Charter Hall platform, giving us a leading position in the social infrastructure property market. We had a record year for transactions, completing $5 billion in gross transactions and continue to be active as both a buyer and seller of assets, major development work in progress and curating our portfolios to drive performance. The total platform return or the gain in NTA plus distributions was 11.1%, whilst we continue to deliver strong return on contributed equity.

Our property investment portfolio has grown to $1.8 billion or 8% over the year and provides an attractive 6.3% property investment yield, pleasingly maintaining capacity from retained earnings and recycling co-investment stakes into new growth. This growth and focus on returns has delivered securityholders OEPS growth of 25.5% and EPS growth of 6%. Importantly, this growth in returns have all been provided through a comprehensive set of risk filters. The group continues to maintain modest balance sheet gearing at 5.4% and 30.8% look-through gearing.

As of June, the group increased its investment capacity by $1 billion to $4.1 billion across the platform. Post balance date and in light of recent transaction activity of $4.2 billion in fund growth since the 30th of June, our investment capacity at the group level still stands at $3 billion complemented by further committed but undrawn equity commitments in our wholesale funds and partnerships, providing scope for us to drive further growth in the platform. Our focus remains on delivering sustainable growth to securityholders, replenishing dry powder, strengthening resilience and continuing our vigilant focus on property fundamentals, cycles and future return forecasts.

Turning to Slide 5 and our strategy. Our strategy of using our property expertise to create value and generate superior returns for our customers remains unchanged. It was a record year for equity flows where we accessed $3.4 billion of gross equity during the 12-month period, with all equity sources being active, more than doubling the inflows from -- or the net inflows from previous years. We continue to drive investment returns by the ongoing curation of the portfolios we manage. Of the $5 billion in total gross transactions for the year, we divested a further $800 million of assets.

Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from the assets we manage. This has delivered growth for our investors and continues to attract fund inflows. Finally, we continue to focus on investing alongside our capital partners. Our property investment portfolio grew $138 million and delivered a 9.1% return for the calendar year.

Turning to Slide 6, which shows our growth in EPS and distributions per security. 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 CHC securityholders. Importantly, that growth in earnings also comes after-tax. When compared to peers on a pretax basis, Charter Hall has delivered sector-leading 17.3% earnings CAGR over the last 5 years. The tax paid also delivers valuable franking credits for our securityholders. When we include the benefits of franking credits, the DPS growth is 12.4% per annum over the last 5 years.

Turning to Slide 8. Our property funds management portfolio is well diversified, comprising 844 properties with over 3,000 tenancies and delivering over $1.7 billion of annual net rental income. We continue to focus on delivering a sustainable and resilient return through property sector diversity. We're focused on long WALE properties, something that is evident when you see that our overall platform or group WALE has increased to 8.2 years. The weighted average cap rate across the platform firmed 8 point -- sorry, 5.58%, reflecting the quality of our core portfolio with longer weighted average lease terms and fixed rent increases across the majority of the portfolio.

Slide 9 shows our FUM growth split by sources of equity. As I mentioned earlier, we've been active in both acquiring and divesting assets during the period. Additionally, the focus in acquisition materially added to this FUM growth. Developments continue to be a meaningful contributor to our FUM, while our focus on driving total returns as, say, net revaluations also lift during the year, approximately another $1 billion for the past 12 months, in line with previous valuation growth. Importantly, however, a long -- a large proportion of the valuation growth is driven by income rather than cap rate compression.

As indicated in the graph on the right-hand side of the slide, we've seen an annual compound growth rate of 21.5% in FUM since June 2014. As I've previously explained, this FUM growth creates a bow wave momentum to investment management base fees, providing growth and resilience as each year does not see investment management revenue reflect the full year impact until a full year of FUM growth is realized.

Turning to Slide 10. Strong equity flows have seen us active in deploying proceeds into developing and buying new assets. However, we have also been active in curating our portfolios to drive performance. We've taken the opportunity to sell and divest noncore assets where such recycling enhances portfolio returns and in some cases, look to lock in realized performance fees. Active asset management is an integral part of our business.

All our sectors have been busy, but activity has been led by our office and industrial sectors deploying capital after a recent capital raising activity. We continue to see opportunities to transact favorably for our investors given our broad reach in the transaction market. Importantly, our strong tenant relationships continue to provide us with access to off-market transaction opportunities which are mutually beneficial. Repeat customer transactions are a healthy sign of delivering on our customer-centric objectives, many of which reflect our capacity to deal with customers in multiple sectors.

Turning to Slide 11 and our development activity. The group continues to progress various developments across its portfolio, creating investment-grade properties and adding significant value through enhancing both income yield and total returns. Our development completions have added $1.1 billion to FUM in the last 12 months. Our total development pipeline now stands at $6.5 billion, up from $3.5 billion just 3 years ago. We currently have $3 billion of committed projects, predominantly pre-leased to high-quality tenants and significantly derisked through fixed price building contracts. And our industrial pipeline continues to grow and flex our position as the second largest logistics and industrial line in Australia, as is the case with our office portfolio nearing $18 billion. The forward pipeline of committed projects will generate high-quality, long-lease assets for our funds while providing attractive incremental fund growth for CHC and enhancing our credentials to attract capital.

Slide 14 (sic) [Slide 12] and our leasing activity. This slide details our leasing activity across our 4 sectors over the last 12 months. Importantly, it demonstrates our reach within the sectors we operate in. You'll also notice that we often leased to the same tenant in multiple sectors, and our ability to partner with our tenants and meet their entire property needs sets us apart from many of our peers. Importantly, you can also see the value this adds to our assets, driving returns for our investor customers. Our focus on active asset management and partnering with our tenant customers delivers great outcomes for our investors and Charter Hall securityholders.

Just on Slide 13 and our equity flows. It's been another excellent 12 months for equity flows across the business, with 16 of our funds raising equity. Our business continues to benefit from access to multiple sources of capital. Importantly, the period has again been marked by successful equity earnings from each capital source. Within our wholesale funds, we've raised $1.8 billion across both pooled funds in CPOF and CPIF, whilst our partnership funds also continue to find investment opportunities and successfully raise capital to take advantage of these opportunities.

Post balance date, our partnerships have increased with new investments into the $630 million 201 Elizabeth Street acquisition; the $830 million Telstra head office, 242 Exhibition Street, Melbourne; and the $1.9 billion Chifley Tower Complex; and just recently announced on Friday, the Telstra Exchange portfolio at approximately $700 million split between our wholesale partnership business, CLW, and the head stock. Our direct business also continues to enjoy strong support from investors given the exceptional performance of our funds. We currently have 4 direct funds open for investment, and they continue to attract meaningful inflows. The 6% distribution yield become even more compelling versus falling term deposit rates and bond yields.

Finally, despite volatility in listed markets, we have also enjoyed the support of investors in our listed funds with all of them successfully raising equity in -- with well-supported transactions during FY '19 and more recently, just last week, the CLW equity raising, which was significantly supported by CLW existing investors and new investors. Charter Hall continues to enjoy a prominent position as a manager of choice. We have attained this position by our focus on delivering consistent outperformance for our investors and a focus on sustainable and resilient returns.

Now turning to Slide 14 and an update on our [considerable] post balance date activity. In light of the strong transactional start to the year, it seems appropriate to update our FUM and recent transactions. As you can see in the chart, we've grown from $30.4 billion at the end of FY '19 to $34.6 billion today which, as outlined in the bridge, is a combination of landmark transactions, such as Chifley Tower, the head office of Telstra in Melbourne at $830 million, the more -- the recently announced Telstra Exchanges at $700 million and the $630 million acquisition of 201 Elizabeth Street in Sydney CBD, plus a further acquisition in industrial and a further acquisition of an office building leased to the Commonwealth government.

While we're always active in transaction markets, FY '20 has started with some landmark transactions, which I've just outlined. The office sector has been particularly active with several high-profile market transactions. But I will note that we've maintained a long WALE focus with both the Telstra Exchanges and the 12-year lease to Telstra for the 242 Exhibition Street, and the other office towers that have got shorter WALE provide very strong EPU growth for the funds and partnerships that have invested in those assets. Importantly, these demonstrate our ability to partner with capital to access attractive investment opportunities often through off-market channels and our willingness and ability to invest alongside our partners for mutual gain in delivering the investment strategies that we set.

I'll now hand over to Sean McMahon, our CIO.

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Sean Thomas Patrick McMahon, Charter Hall Group - CIO [3]

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Thanks, David, and good morning, everyone. As David has relayed, our property investment portfolio provides a strong alignment of interest with our investor customers while also ensuring that securityholders benefit from our property expertise. Over the period, our investments have grown to $1.8 billion, largely reflecting our investment in the Charter Hall Education Trust, but also growth in underlying asset values. Occupancy is broadly stable. And through active asset management, the portfolio WALE has increased to 7.6 years. Our average weighted rent review remains strong at 3.5%. And the number of properties has increased significantly to 793, again, largely reflecting our investment in the Charter Hall Education Trust. The growth in the property investment portfolio reflects the group's desire to continue to invest alongside our investor customers and also a strong alignment of interest.

Turning to the property investment portfolio movement. During the period, our investment portfolio grew to $1.8 billion driven by new investments and revaluations. Our ability to recycle capital to support new fund initiatives and drive returns for securityholders is an important part of the success of the group. The chart on the right-hand side shows the growth of our total property investment. Whilst the PI yield has fallen in line with cap rates, the significant improvement in the quality and composition of several funds has contributed to this fall in portfolio cap rates and the resulting PI yield.

Now turning to Slide 18 and our earnings resilience. As can be seen in the 3 charts on this page, our property investment earnings are characterized by the high quality of the tenants that provide that income, the diversity of sectors which produce them and the lack of concentration risk or single asset exposure in deriving them. With our single largest single-asset exposure being 1.8% of the group's balance sheet property investment portfolio and our top 10 assets only representing 11.4% of net income generated, the Charter Hall property investment portfolio can be considered a very defensive, well diversified core investment portfolio.

More broadly, across the platform, we enjoy strong tenant customer relationships where we have a genuine interest in our tenant customers and look to partner with them to meet their property needs. These relationships often span asset sectors and multiple properties. 72% of our tenant customers lease more than 1 tenancy from us. This also drives tenant retention with 69% of tenants re-leasing with us during the 12-month period. Naturally, it also feeds back into transactions, with our significant sale and leaseback activity providing off-market opportunities to also grow our funds. These transactions occur as a result of our ongoing focus on our tenant customers. Importantly, they also benefit Charter Hall securityholders by producing earnings resilience across our property investment portfolio.

Now let's move to ESG on Slide 19. Sustainability and community are embedded in everything we do at Charter Hall. Charter Hall already has the largest Green Star-rated portfolio in the country. However, we continue to look for opportunities to improve this. In FY '20, we lifted our office portfolio NABERS rating to 4.77 during the year. We also continue to grow the solar generation capacity across our assets, having added significant additional solar PV during the year, enough now to power the equivalent of over 1,600 homes.

We also remain committed to engaging with the communities in which we operate, donating staff, time and resources in support of initiatives that are a benefit to those in need and that directly benefit the communities in which we operate. Finally, we continue to focus on ensuring we operate with the highest level of governance, recognizing our responsibilities to our investors and the community.

I will now hand over to Russell to provide details on the financial result.

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Russell T. Proutt, Charter Hall Group - CFO [4]

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Thank you, Sean. As summarized on Slide 21, the group delivered a very strong financial performance in fiscal year 2019. The organization's focus on the execution of our strategy has underpinned the substantial gains of profitability in the year. In fiscal 2019, the group reported a 34% increase in EBITDA to $275 million and a 25.5% increase of operating earnings per security. This growth in overall profitability was largely driven by the growth in the property funds management business, which experienced a 54% increase in EBITDA. Exclusive of the effect of the CHOT performance fee in both years, this increase was approximately 40%.

As a result, the group was able to increase its distribution to securityholders by 6% while retaining nearly 30% of operating earnings for reinvestment into the business. And as shown earlier in the presentation, since 2014, the group has delivered an 8.6% compound average growth rate in cash paid distributions or 12.4% if grossed up for the benefit of franking credits.

Now moving to Slide 22 and expanding on the performance of the property funds management segment. In managing the PFM earnings, we are focused on balancing 3 key elements being growth, composition and margins. Along these lines are a few key points I'd like to highlight. The fund management fees grew by nearly 30%, which aligns with the growth of overall FUM growth. The growth in these core recurring fees are the foundation of the group's profitability and our financial resilience. At a 70% increase over FY '18, it was a very strong year for transactions and performance-related fees. This was supported by the $3.2 billion of net equity flows, investment capacity and the group's market-leading transactions team.

Now in respect of operating expenses, part of the increase in the PFM expenses for the year included additional costs related to the acquisition of Folkestone, which was completed in November as well as the increased expenditures required to support the growth of the business. Pleasingly, corporate costs increased only 4.4% for the year. We are extremely focused on balancing between supporting business growth through investment and maintaining cost control in our operations. I would highlight that the PFM EBITDA margin increased to nearly 60% in the period. And when adjusted for the CHOT performance fee, this margin will be approximately 50% or a 350 basis point improvement over fiscal year '18.

Now moving to Slide 23. And as illustrated on the slide, the operating cash flow for the year was $194 million and comfortably covered distributions of $157 million. Any excess will be reinvested into the business, as discussed earlier.

Now turning to Slide 24. The efficient and effective employment of capital in line with the group strategy is the primary focus of the business. And as reflected in the return metric provided, the group has continued its track record of strong returns on capital employed. And as you can see, there was very little change in the composition of the balance sheet from reporting in December.

And now finally for me, I refer you to Slide 25. This slide summarizes the borrowing position across the group in terms of loan duration, borrowing capacity, gearing and cost. And for each of these measures, the group is well positioned with an average debt maturity of 4.3 years in excess of 7 years at the head stock, more than $4 billion of investment capacity in terms of cash and undrawn capacity, look-through gearing of 31% and approximately 5% at the head stock, weighted average cost of debt of 3.58% across the group. With total borrowings at approximately $13 billion at 30 June and more than $6 billion of financing transactions executed during the year, the Charter Hall group is one of the most active Australian property businesses in property financing. We believe this real-time perspective on the financing markets enables us to effectively support the continued growth of the business.

Now I'd like to turn over to David to address FY '20 outlook and earnings guidance.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [5]

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Thank you, Russell. Turning now to Slide 27, our earnings guidance for FY '20. Based on no material change in current market conditions and reflecting FUM growth already achieved in FY '20, guidance is for 18% to 20% growth in post-tax operating earnings per security over FY '19. FY '20 guidance also includes $132 million for the CHOT performance fee expected to be received in April 2020, noting that $50 million of this has already been accrued in the FY '19 earnings. When the impact of the CHOT performance fee that is to be recognized in FY '20 and, having regard to that, recognized in FY '19, our guidance implies post-tax operating earnings per security growth of 11% to 13% over FY '19. FY '20 distribution per security guidance is for 6% growth over FY '19. We've also moved the distribution payout ratio to an expanded range of 60% to 95% of our EPS.

That now ends the prepared remarks, and I'll now invite any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of David Lloyd from Citigroup.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [2]

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Congrats on the solid result. Russell, just a couple -- and David, a couple of questions on the guidance, if I could. If we just look at the delta on the CHOT performance fee, approximately $32 million, and if we adjust for tax and we look at the assets under management uplift already recorded to date on essentially what -- on an average basis, [add another] $5 billion, if we apply just 60 basis points to that AUM and also tax adjust for that, add it to the CHOT performance fee, seems to get you to around $264 million for '20, which is already implying 19% to 20% growth, which is in line with your guidance. But I suppose the glass half empty view would indicate that maybe the rest of the business isn't growing, which doesn't seem to be the case, and the glass half full view would be that maybe guidance could be a little bit conservative. Can you just tell me where I might be going wrong with some of those numbers?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [3]

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Look, I'll start, David, because clearly your mathematics is beyond me. I'm -- a few things I would say. If you look at the acquisitions we've announced post balance date, 242 Exhibition Street, 50% settles in the sort of September to November period and 50% settles in December. So you're only going to get essentially a half year impact in terms of base fees from that. Similarly, on 201 Elizabeth Street, we settle 75%, as per the announcement, in September and then a deferred 25% till July next year. Obviously, the Telstra Exchange announcement last week settles in the next couple of weeks.

So I think there's probably a difference between the impact in FY '20 versus an annualized number that you might have applied. And I won't go into great detail, but it's also dangerous just to apply an average base fee across all of these different funds and partnerships. They have quite variability in the base fee depending on the risk profile, depending on whether it's a wholesale partnership or a pooled fund or any of our other funds. So that would be my only sort of comment on some of your maths. And I don't know if you've got any further comment, Russ?

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Russell T. Proutt, Charter Hall Group - CFO [4]

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I think the delta there will be primarily on the timing of fees here assuming the levels. I don't think there's much difference in the assumptions because we've reported those $4-plus billion of acquisitions since year-end. But I would not say this business is absent growth going forward in the rest of fiscal '20, and I think that 11% to 13% target ex CHOT kind of reflects that. But I think some of the difference from your calculations to our guidance does relate to primarily timing and fee assumptions.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [5]

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Well, I suppose those maths don't include any improvement in property investment income, which I'm sure will be coming anyway. So let's see how the year unfolds. Just maybe one, moving on, just to the CHOT performance fee. I think you've called out $132 million in total. That will be the cash coming back. Can you just -- is that as at -- the $132 million, is that as if the books are rolled off today? Or is that a projection as at April when you -- when the fee will be finalized?

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Russell T. Proutt, Charter Hall Group - CFO [6]

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It's in our guidance, David. So that has our estimate of what the accrual will be in the period and what we'll earn in that period. It's not as, as at the balance sheet date.

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [7]

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Okay. Okay. So what would be the risk factors up or down at the moment? I mean how would you characterize those?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [8]

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Well, I think I'll just...

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David Lloyd, Citigroup Inc, Research Division - Director & Analyst [9]

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[Is it outside risk] to the $132 million?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [10]

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I'll just jump in here. Being an ex-real estate valuer, I can assure you there's 2 impacts on valuations, and it's the value as assessment of market rent at a particular valuation point and cap rates. Now that's a high-quality portfolio, which has got a significant occupancy level. We do have a couple of assets in that portfolio that we are leasing up: one in Brisbane at 175 Eagle Street and one at 150 Lonsdale Street in Melbourne. But the delta on the current estimate is all going to come down to assess market rents and cap rates in effectively the next 9 months.

So short of a significant correction in the office market, we're pretty confident with our estimates. If market rents continue to grow and if cap rates continue to compress on high-quality office assets particularly in light of movements in bond yields, then yes, there may be some upside. But at the end of the day, that's our reasonable assessment of where it will be. And as we've called out, it physically gets paid on the 30th of April next year. And for all the reasons we've articulated in the previous financial year, we've taken a view that we would accrue $50 million of that in FY '19.

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Operator [11]

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Your next question comes from the line of Stuart McLean from Macquarie.

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Stuart McLean, Macquarie Research - Research Analyst [12]

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Just maybe picking up on a question just previously in regards to the leverage of AUM to earnings. Russ, I think you mentioned that the ex CHOT PFM margin was circa 50%. How do we think about this into FY '20? Is there any significant investment that needs to be made in order to sustain an AUM base of getting close to $35 billion?

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Russell T. Proutt, Charter Hall Group - CFO [13]

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Well, look, we're always investing in the platform to make sure it's scalable beyond what's current level, but there's no significant investment to call out that would change the operating model, the operating profile of the business. Margins are obviously directly affected by the transactional activity as well. We had a very strong FY '19, which is a high-margin business. And to repeat, that is obviously a challenge for every new fiscal period. So that was probably the most significant variable. But on the cost side, I would not expect anything material from a movement perspective.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [14]

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Stuart, I think I'd just add that it's somewhat self-evident that we've seen about $4.5 billion of FUM growth in 6 weeks. And we've called out that that's reduced our investment capacity by $1 billion from sort of $4.1 billion to $3 billion. And we define investment capacity as undrawn debt and cash in the existing funds and partnerships. So obviously, in order to fund that amount of FUM growth, in addition to investment capacity, we've also brought in new equity commitments in that last 6-week period, which was definitely the case in all of those transactions we've announced: Chifley, 201 Elizabeth Street. You're well aware of CLW funding half of the Telstra Exchanges. We announced that we've got another wholesale partner that has funded a significant proportion of the Telstra Exchanges.

So the way I think you should be thinking about it is in addition to the investment capacity that we've said still exist post the last $4.5 billion of FUM growth, we still have undrawn equity that's not in our equity flow numbers that is committed and will be undrawn -- and will be drawn over the course of FY '20, particularly in CPOF and CPIF where we've previously called out successful equity raisings where half of the equities are loaded upfront and half is unconditional commitment to be drawn over the next 12 months.

So we feel that we're in a good position to continue to drive our growth. And from a CHC perspective, we intend to continue to be able to drive our co-investment capital growth through recycling of investments in our existing funds. But if you also do the maths on sort of forecast payout ratio and retained earnings, we're going to have significant retained earnings in FY '20, which will help continue to fund that co-investment growth.

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Stuart McLean, Macquarie Research - Research Analyst [15]

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And next question was just on that co-investment. If you were to do a pro forma balance sheet gearing post 242 Exhibition, post Telstra, et cetera, where do you -- where would you sit today?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [16]

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Well, I'll tell you that in February, but I will give you a guide that we've got pretty modest balance sheet gearing. We don't expect there to be material changes in that given what I just talked about in terms of our funding capacity. The look-through gearing will elevate slightly because we've articulated the sort of asset-level gearing that we've put into something like a 21-year WALE Telstra Exchange or a 12-year WALE Telstra headquarters at 242 Exhibition Street. And the other sort of transactions that have been noted are more in line with our average fund gearing. So I don't see material changes in those. And as I've articulated previously, we're very comfortable with our balance sheet sort of gearing range of 0% to sort of 10% or 15%. And we've been articulating for near on 9 or 10 years a group look-through gearing around 30% to 40%, which clearly based on FY '19 is at the bottom end of that target.

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Stuart McLean, Macquarie Research - Research Analyst [17]

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And just one last one, if I might. Just on alternative asset class that you've been expanding to. I was just wondering if storage was something that's on the radar at all, self-storage.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [18]

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Absolutely not. There's other expertise in the sector that is focusing on that. So it's not something that we're progressing.

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Operator [19]

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Your next question comes from the line of Ben Brayshaw from JPMorgan.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [20]

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Just a question for Russell perhaps. Russell, if you could give an update, please, on the potential to realize development inventory in the former FLK business. On our estimates, there is $60-odd million of capital invested in predominantly residential development funds. Just interested in your expectations around timing and a potential sale process involved for those respective vehicles, please.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [21]

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Ben, I think I'll just get Sean to answer that. He's responsible for the development inventory, and he can articulate the fact, as you know, development, it's a little difficult to predict precisely when that will be realized. But go ahead, Sean.

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Sean Thomas Patrick McMahon, Charter Hall Group - CIO [22]

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Okay. Thanks, David. So the FLK residential inventory is substantially presold, as we announced when we first acquired FLK. And presently, it's over 75% presold across the existing inventory. It's pleasing to note that we're making good progress on our plans to be through the bulk of that investment over the next 12 or 18 months. Clearly, there's been a bit of a trough in the residential market in the last couple of years, and that's why we've been very fortunate that all these assets or inventory are at advanced stages so in terms of their physical activity, in terms of their civil works and their presales. So that's the sort of summary of where we think we can get in and out over the next 12 to 18 months.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [23]

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Great. And David, just a question for yourself, please, on the 2 recent major Sydney acquisitions. Firstly, 201 Elizabeth Street for circa $600 million at $16,500 a meter. Could you talk about high-level views, please, on opportunity in that asset, whether it be to reset rents or at NLA extend leases? What do you see as a key opportunity for Charter Hall in that acquisition, please?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [24]

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Well, first of all, Ben, being an ex valuer, I'll give you a comparison. So the block further south we bought at 231 Elizabeth Street in our flagship office fund CPOF, we knew it was going to be empty. We then subsequently preleased it to the New South Wales government, 100%, for 12 years. To give you an idea on a rate per meter, that valuation on completion of the works we're doing for that tenant is up around $23,000 a meter. We were 12-year leased with, what I'll call, attractive rent reviews. When we look at 201 Elizabeth Street, which is more of a major high-rise tower with -- despite the tenants in that building not being able to get any long-term tenure because there are break clauses because the previous owner had plans for hotel residential development, to have a 99% plus occupancy gives us a fantastic opportunity to reset the rents. We see it as a long-term office investment. So all I can say is having succeeded in a repositioning literally a block away, and as you know, the new metro station is diagonally opposite on Park Street, we think that area will experience significant growth over the short to medium term. And therefore, ourselves and our partners, see it as a good repositioning opportunity. I like the question because rarely do I hear in the listed world a focus on rates per meter, and that's what it's all about.

You can look at IRRs. You can look at incentives. You can look at everything, but at the end of the day, real estate comes down to its fundamental value on a rate per meter, whether it's the high land-rich component of the Telstra Exchanges we've just bought or some of the repositioning office assets that we've been pursuing. So we do see it as a good opportunity. Exciting for us was the fact that we're able to continue a strong partnership with DVP, but also introduce another large Canadian pension fund client in Quadreal to that partnership. And therefore, we'll -- we look forward to working with those partners and extracting value. So hopefully, that sort of answers your question on that.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [25]

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Yes. Absolutely. And secondly, on Chifley Tower, the 50% acquisition in joint venture with GIC, David, could you just share your thoughts, please, on to what extent is that site complementary to other CPOF ownership in that area, in particular, Macquarie Street? Is there -- I mean it would appear to have a reasonably large setback and potential for surplus in [a way] to be put on to that site. Is there development potential between that site and other CPOF holdings on Macquarie Street?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [26]

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Look, Ben, first thing I'd say, Chifley site, as long as I've been in this market, has been and continues to be the best site in Australia. I think the Chifley Tower is also, if not the best, one of the best premium-grade towers in the country. So if I look at the site area, 6,500 plus the extra 1,200 of land that we've got on our Macquarie Street leasehold interest, on a combined basis, it's the biggest CBD site in Sydney. So there are a number of iterations of how we can add some value there. For us, we've got a 15-year relationship with GIC. We're continuing that partnership in taking over the asset property and development management for the whole precinct. And for the partners that have come into that in CPOF and DVP, we've got a long history of creating value for those funds and partnerships. So we see it as a very high-quality stabilized asset with value-add, so there'll be a whole range of opportunities we'll explore there.

I think as I've said previously, if you look at the evolution of now our near $18 billion office portfolio, we've had a precinct strategy in a number of major locations. The Wesley Precinct in Melbourne is about a $1.3 billion precinct with 3 different buildings. We're now 100% precommitted on the new 60,000-meter premium-grade building, welcomed fantastic tenant customers like Telstra Super, Cbus, AustralianSuper, Vanguard and the [Commonwealth] government, and we've done the same thing in Brisbane. We've got a precinct play in Bankwest Tower and Raine Square in Perth. So I think you'll see us continue to, I guess, execute on that precinct strategy, and Chifley's clearly the largest and probably one of the highest-quality precinct plays in the country. So I won't go into any greater detail than that for fear of reprisals from my capital partners. But let's just say, we're pretty exciting -- excited about the opportunity. And these things just don't happen in 6 weeks. We've been working on a lot of these things for quite some time. They just happened or got announced in the last 6 weeks.

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Operator [27]

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Your next question comes from the line of Grant McCasker from UBS.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [28]

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Actually, David, you sort of introduced my next question, which I wanted to ask. You said that these couple of deals that have recently dropped have been in discussions for some time. Can you sort of give me an idea of what's the -- bond yields have changed materially over the last 6 months. Is it fair to say that pricing was more agreed in Q1 versus when you were close to the 2% versus sub 1% today? And then can you sort of make a comment on the current bond yield environment? What are you seeing from your wholesale investment partners?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [29]

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Look, Grant, I won't go into the sort of the specifics of when pricing was agreed on any transaction. It's fair to say we have, for some years, been publicly articulating a view that we're in a lower-for-longer environment. The whole IPO of the Long WALE REIT in 2016 was an extrapolation of that belief. It's good to see the bond yield starting to support our thesis. So it's no surprise to us that -- where bond yields have gone to.

And to answer your second part of your question, I think that large wholesale investors have got the same problem that we, as privates have, for if you've got money in term deposits less inflation, you're getting negative returns. And the same thing's occurring in real terms, if you want to invest in cash or bonds, if you're a large sovereign or pension fund, domestic or global. So I think the environment's conducive for more allocation to real assets, particularly property. I don't see any reduction in appetite. And to be honest, the longer bond yields stay at either last year's levels or even current levels, the longer that risk premium, which is an extremely high-risk premium compared to spot bond yields. In my opinion, there will be pressure on discount rate expectations and cap rate expectations. So that's the environment we're in.

But I think, conversely, there's plenty of buffer if there's a backup in bond yields in terms of what's an acceptable risk premium to continue to see equity flows into this sector. And the other comment I'd make is that Australia is seen as one of the genuine core markets in the whole of the Asia Pacific region. It has a lot less volatility than many other Asian markets. So if you're a global investor trying to invest in Asia Pac, Australia is seen as an extremely transparent, high-yielding, and I've said before, one of the few markets that can secure long-term rental escalations across all sectors at higher levels than nearly any other part of the global sort of core institutional markets. So that's why we would expect to continue to see strong demand for good quality real estate in all sectors in this country, but particularly, I think with long lease assets and given the rental escalations you can secure and that risk premium I talked about, the bond yields.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [30]

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Okay. Excellent. Then just one quick one. CPOF and CPIF, are they -- how is performance since inception relative to the hurdle?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [31]

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It's fair to say that we haven't quite hit those hurdles. The -- if you look at the performance of CPOF and CPIF since inception, they're pretty close to those hurdles. There's a -- I think of the GFC that we had to overcome some underperformance, and as you know, those IRR hurdles for performance fees go back to times 0 in 2005 for CPOF and 2006 for CPIF. So as we near each [3-yearly] performance review assessment for each of those funds, we're -- what I'd describe it is we're grinding towards those hurdles. And it's something that, obviously, is a focus of ours and absolutely 100% aligned with our fund investors in trying to continue to maintain both strong relative performance compared to peers in the IPD Index and absolute IRR. So I won't be any more specific than that, but we're not quite there with those funds but not far.

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Operator [32]

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(Operator Instructions) There are no further questions at this time. I would like to hand the call back to Mr. David Harrison for any closing. Please go ahead, sir.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [33]

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Okay. Thank you to the audience, and we look forward to further one-on-one meetings. And in particular, I want to thank the large team at Charter Hall for another exceptional contribution to the group for the benefit of shareholders. So we look forward to catching up with you soon.