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Edited Transcript of CHC.AX earnings conference call or presentation 21-Feb-19 11:00pm GMT

Half Year 2019 Charter Hall Group Results Briefing

North Sydney, New South Wales Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Charter Hall Group earnings conference call or presentation Thursday, February 21, 2019 at 11:00:00pm 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 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

* Grant McCasker

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

* Pete Davidson

Pendal Group Limited - Head of Listed Property

* Rob Freeman

Macquarie Research - Analyst

* Stephen Lam

CLSA Limited, Research Division - Research Analyst

* 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 Half Year Results Briefing. (Operator Instructions) Please note that this conference is being recorded today, Friday, 22nd of February 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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All right. Good morning, and welcome to the Charter Hall Group First Half FY '19 Results Presentation. I'm David Harrison, MD and Group CEO of Charter Hall, and presenting with me today is Sean McMahon, our Chief Investment Officer; and Russell Proutt, our Chief Financial Officer. I will start by summarizing the group's highlights, then discuss our Property Funds Management segment, hand over to Sean to discuss our property investments, and then Russell will provide data on the group financials. I'll then wrap up with our outlook and upgraded earnings guidance.

Just looking at Slide 4, to the period to 31 December, you can see it's been another very active 6 months for the group, and we continue to build on the momentum of previous years. As always, we've been driven by our focus on delivering returns for our investors in our funds and partnerships, and which, together with our funds management business, drives returns to CHC securityholders.

Operating earnings per security post-tax has grown by 13% on the prior corresponding period. Our total platform return or the gain in NTA plus distributions was 12.3% over the past 12 months to 31 December, which is a key focus for the group as a return on equity measure. This was driven by continued solid and above IPD index total returns from all of our -- the funds and partnerships that Charter Hall invests in, which we define as our Property Investment segment, which delivered a 12% total return over the 12 months to 31 December.

Our Property Investment portfolio has grown to $1.8 billion and provides an attractive 6% property investment yield with considerable dry powder to deploy, which Russell will go in, in a little more detail. Our fund growth is very strong over this 6-month period, increasing by $5.2 billion or 22.4% over the last 6 months. Excluding the Folkestone transaction of $1.6 billion, growth was still strong at $3.6 billion for the 6-month period, or roughly 16%. Despite growing fund by $5.2 billion in 6 months, we have also maintained $2.6 billion of investment growth capacity across the group. And just dissecting that $5.2 billion, that's $3 billion of deployment between net acquisitions and development in that 6-month period.

Obviously, central to this growth is our ability to transact. Our leading market share in transactions by the acquisitions and divestments provides invaluable insight into the property markets. We undertook $3.8 billion of gross transactions during the 6-month period, as our investment management transaction, property services and support teams worked collaboratively to buy and sell assets to the benefit of our fund and partnership investors, and of course, Charter Hall securityholders. We continue to do this with a comprehensive set of risk filters. The group continues to maintain modest balance sheet gearing and remains in a net positive cash position. Our focus remains on delivering sustainable growth to our securityholders, replenishing dry powder, strengthening resilience and continue to have a sharp focus on property fundamentals in the sectors we operate.

Slide 5 outlines our strategy. Our strategy of using our property expertise to create value and generate superior returns for our customers remains unchanged and there's evidence of that continuing to be executed well. We accessed $1.2 billion of gross equity for the last 6 months, taking our total of gross equity flows over the last 5 years to $13.5 billion.

We continue to drive investment returns by the ongoing curation of the portfolios we manage. Of the $3.8 billion of gross transactions this half, we divested a further $700 million of assets. Over the last 5 years, we've now realized $9.3 billion of divestments.

Our focus remains on ensuring we manage portfolios to preserve capital and then drive resilient income returns, optimizing the earnings growth from the assets we manage. This has delivered growth for our investors. The funds we manage have grown by $5.2 billion this half, and we control and own 820 properties.

Finally, we continue to focus on growing our largest earnings segment, Property Investments, investing alongside our capital partners. The portfolio grew $115 million and delivered a 12% return for the calendar year.

Slide 6 details our operational highlights. As I said earlier, it's been a pretty busy 6 months for all of our people at Charter Hall. We leased 389,000 square meters of property during this period. Our office portfolio continues to grow through new development and acquisitions, whilst near-term lease expiries present an opportunity to access growth in market rents in major CBD markets.

Our industrial team continue to drive investment returns for our funds through the creation of first-class logistics and industrial properties. They currently have 27 development projects underway in industrial with a completion value of $2.2 billion.

In retail, our focus continues to be on long WALE retail and ensuring our shopping center portfolio is relevant for the consumers and positioned to deliver growth, very much set in that convenience sector.

In social infrastructure, we continue to improve our portfolio through new developments and selective acquisitions and dispositions. Finally, our treasury team continue to support the growth of the business with over $4 billion of new and existing debt facilities financed during the period.

Slide 7 outlines our growth in operating earnings per security and distributions per security. These graphs, which outline growth for the last 5 years, are actually an extension of that trajectory over the last 8 years. And 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 to CHC securityholders. We've delivered sector-leading earnings and distribution growth of 13.3% OEPS and 8.5% DPS growth over the last 5 years. When we include the benefits of franking credits, the DPS growth is 12.8% per annum.

Slide 9. Our Property Funds Management portfolio is well diversified, comprising 820 properties with over 3,000 tenancies and delivering over $1.8 billion of rental income. Our diverse equity sources are well balanced, with 64% wholesale equity, 20% listed equity and 16% unlisted retail equity from our market-leading Charter Hall Direct business. We continue to focus on delivering a sustainable and resilient returns through property sector diversity.

We are focused on long WALE properties, something that is evident when you see that our WALE has actually increased to 8 years over the last 6 months. The weighted-average cap rate across the platform firmed to 5.65%, reflecting the quality of our core portfolio, with long weighted-average lease terms, fixed rental increases across the majority of the portfolio.

Slide 10 just outlines our fund growth. As mentioned earlier, we've been active in both acquiring and divesting assets during the period, and of course, are continuing to cultivate our large development pipeline. The focus on acquisition also materially added $1.6 billion of fund. Developments continue to be a meaningful contributor to our fund, while our focus on driving total returns as, say, net revaluations also lift both in the last 6 months, and obviously, over the last 12 months. As indicated in the graph on the right-hand side of the slide, we've seen a compound annual growth rate of 22.3% in our funds under management since June 2014. As I've previously explained, this creates a bow wave momentum to investment management and other base fees, providing growth in resilience as each year does not see the full impact on an annualized basis of investment management fees driven from this large growth in fund.

It's also worth noting that post balance date, Charter Hall finalized the creation of the Deep Value partnership, which is a wholesale fund or wholesale partnership with 2 institutional investors, with seed assets of $113 million, including the group's 50% of 1 Brisbane, which now means the group's committed originally to 100% and sold down to 50% and now we're sold down to a 10% stake in that property. The Deep Value partnership has investment capacity of over $500 million beyond the $113 million of seed assets and is another future driver of fund growth.

Just looking at Slide 11 and the actual returns achieved from our major funds. This slide highlights that the total property return for our Property Investment portfolio, which is invested in -- the majority of its capital is invested in these funds, as shown on the slide, has delivered, over a 5-year period, an impressive 14.2% IRR, roughly 30% above the IPD index of 11.1% over the same period. The chart highlights that nearly all of our core property investments in our funds have outperformed their sector-specific index over the period. This not only highlights the potential of some of our funds to generate performance fees, but it is a key ingredient in attracting capital to both these existing funds and any new strategies that we implement over time.

Just looking at Slide 12 and transaction activity. Strong equity flows have seen us active in deploying proceeds into developing or buying new assets and as I said earlier, also taking the opportunity to curate the portfolio through noncore divestments.

Clearly, active asset management is an integral part of our business. All of our sectors have been busy, but activity has been led by our office and industrial sectors deploying capital after recent capital-raising activity. We've continued to recycle capital into new developments and expanding existing assets to improve the yield and return from our portfolios. Pleasingly, some of the large acquisitions in the last 2 years have also been de-risked, with major leasing being negotiated directly by our integrated asset management team.

We continue to see opportunities to transact favorably for our investors, given our broad reach into transaction markets. Importantly, our strong tenant relationships continue to provide us with access to off-market transaction opportunities, which are of mutual benefit to both ourselves and our tenant customers. 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, and quite often, off-market.

Slide 19 (sic) [Slide 13] outlines our development activity. As with our fund growth, growth in our development pipeline has been quite considerable. 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. We have a well-qualified and highly experienced in-house development origination and delivery team in each of the sectors that we operate.

Our development completions have added $1.2 billion of fund in the last 12 months and $2.6 billion in the last 3 years. Our total current development pipeline now stands at $5.3 billion, up from $2.6 billion 3 years ago. As you can see on the slide, $1.9 billion of our development pipeline is committed and under construction, with another $3.3 billion of uncommitted projects that we have control of in the form of land banks, and which we expect to be converted to pre-leasing and active projects over the coming periods.

Our industrial pipeline continues to grow and reflects our position as, by far, the second-largest logistics and industrial owner in Australia. We will continue to grow that sector, given the strong appetite from our wholesale investors to invest in this sector and the capacity of our team to do further and further pre-leasing of development and potential acquisitions. The forward pipeline of committed projects will generate high-quality, long-leased assets for our funds.

Just turning to Slide 14. There's a couple of new things that we've introduced in this reporting pack. This is a slide that we feel is important to showcase just how active we are in leasing. This slide details our leasing activity across the 4 sectors over the last 12 months, and it actually dissects it between leasing of the existing assets and pre-leasing of developments. As you can see from the slide, with the value of leasing in office creating about $2 billion, about $800 million in industrial and $700 million in retail and about $60 million in social infrastructure, these are pretty impressive drivers of growth in the business. Most importantly, the bottom row shows you that we are averaging over 9 years as a WALE on the leasing that we're doing in our existing assets and our pre-leasing of development assets.

Lastly, on Slide 15. We once again highlight our equity flows. The business continues to benefit from access to multiple sources of equity across wholesale partnerships, pooled funds, our listed rates, and of course, our direct business.

Within our wholesale funds, we raised and drawn $638 million with successful raisings from our 2 pooled funds, CPOF and CPIF. Both funds have been active deploying capital, and both funds are expected to raise additional equity within the next 12 months. Our partnerships also continue to find investment opportunities and continue to successfully raise capital to take advantage of these opportunities. I mentioned earlier that post balance sheet, we've also created a new wholesale partnership called the Deep Value partnership.

On the direct side of our business, equity flows continue to be strong. After a record $653 million raised in FY '18, pleasingly, the businesses continued with strong inflows of $305 million for the first 6 months. Also, despite volatility in listed markets, we've also been able to create through accretive acquisitions and equity raising in the CLW an improved and more diverse portfolio for our CLW investors.

Charter Hall continues to enjoy a prominent position as a manager of choice. We've attained this position by our focus on delivering consistent outperformance for our investors and a focus on sustainable and resilient returns with very disciplined implementation of risk filters.

I'll now hand over to Sean McMahon, our Chief Investment Officer.

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

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Thanks, David, and good morning, everyone. 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 investments are well diversified across sectors and funds, and importantly, characterized by long WALE, high-occupancy and an average annual rent review, excluding market reviews, of 3.5% per annum, some 1.6% above current inflation levels, that delivers real income growth to our investors. Pleasingly, over the period, our investments have grown to $1.8 billion, largely reflecting our investment in the Charter Hall Education Trusts, but also growth in the underlying asset values.

Occupancy is broadly stable, and through active asset management, the portfolio WALE has increased to 7.5 years. And our weighted average rent review remains strong at 3.5%, and the number of properties has increased significantly to 762, 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 ensure a strong alignment of interests.

Now turning to the Property Investment portfolio movement slide. During the period, the investment portfolio grew to $1.8 billion, primarily driven by new investments and revaluations. As David mentioned, in the period, we were a significant investor in the Charter Hall Education Trust, and elsewhere, we took the opportunity to recycle capital from some of our existing investments while also allocating more capital to office. 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. And 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 the portfolio of cap rates and the resultant PI yield.

Now turning to Slide 19 and our resilience -- earnings resilience. As can be seen in the 3 charts on this page, our Property Investment earnings are characterized by the high quality of 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. And as this chart shows, the largest single-asset exposure is 1.7% of the group's balance sheet income, and our top 10 assets only representing approximately 11% of net income generated. Consequently, the investment portfolio is highly diversified and has strong defensive characteristics.

More broadly, across the platform, we enjoy strong tenant customer relationships, as David highlighted. And 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. And as you can see on the slide, 50% of our tenant customers lease more than 1 property from us. This naturally drives tenant retention, with 78% of tenants re-leasing with us during the 6-month period. 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 tenant customers. Importantly, they also benefit Charter Hall shareholders by producing earnings resilience across our Property Investment portfolio.

Now let's turn to sustainability on Slide 20. 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. We're working with the WELL Building Institute to improve the operation and functioning of our buildings for the benefit of our tenants.

We also continue to grow the solar generation capacity across our assets. During the 6-month period, we added an additional 2,175 kilowatts of solar PV. Our portfolio now generates over 6,111 megawatts per hour of electricity per year, the equivalent of powering 407 homes. In addition to this, we have committed to a further 11,316 kilowatts of solar PV over 14 shopping centers. This will provide approximately 40% of the energy needs of those centers and is the equivalent of removing 1,130 homes from the grid.

Finally, we're also very proud to continue our relationship with the international movement, Pledge 1%, which integrates our business commitment towards investment in our communities through our people, our places and our partnerships.

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

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

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Thank you, Sean, and good morning to everyone joining the call.

Turning to Slide 22. I'll start by highlighting the earnings performance of the group. I am pleased to report that earnings performance for the half was strong, with the business continuing the multiyear trend of profitable growth. Group EBITDA was up 19% to $134 million, which was driven by nearly 30% increase in funds management EBITDA in the half. This translated to operating earnings and OEPS post-tax growth of 13% in the period. And as announced in December, the first half distribution was set at $0.165 per security or a payout ratio of 72%. This represents a 6% increase over last year's first half distribution and includes a $0.035 per security franking credit.

Moving forward to Slide 23 and looking in greater detail at the fund's management earnings performance, there are several areas that are notable and worth highlighting. Investment management revenue of $105 million represented more than 80% of funds management revenue in the half and increased 28% over last year's first half. The continued growth of funds under management, as outlined by Sean and David, has underpinned the growth in fund management fees. And as David explained, it's important to note that the trend in investment management fees tends to lag reported equity flows and fund growth due to intra-period timing of valuations and acquisitions.

The group's equity flows provide investment capacity and enables our property professionals to grow our funds and generate returns through acquisitions and development. As a result, fees generated from both outperformance and transaction activity continue to be strong and an important contributor to our profitability. And while we don't break down the transaction and performance fees separately, we are calling out the specific amounts, including the accounts related to the CHOT performance fee, which for the half year is $20 million of accrued revenue compared to $25 million in the first half of '18. It's also worth noting at the December 31 balance sheet date for this fund CHOT -- the CHOT fund, the accrued performance fee is $105 million. It is worth noting that the group's demonstrated ability to invest capital and generate returns above target levels ultimately attracts further capital and creates a cycle for continued growth of the business.

As you'll see, property services revenue of $21 million was up 13% compared to the first half of last year due to increased contribution from property management and leasing fee income. Development fees were down 3%, but this is reflective of timing impacts on recognition and the nature of the underlying projects. As David outlined, the development pipeline has increased considerably and is a key contributor to our growth.

The increase in fund management operating costs reflects additional resources required to support the expansion of our platform as well as the acquisition of the Folkestone platform for part of the period.

Organizational expense growth of 18% against revenue growth of 25% results in a PFM EBITDA margin of 64% of the half.

Turning to Slide 24. We've provided a bridge between operating earnings and distributions. While distributions exceed operational cash flow modestly, this is not unusual for the business historically. And we would anticipate operating cash flow to fully cover the full year distribution, as has been the case in previous years.

Now moving forward to Slide 25. The balance sheet of the business continues to be sound and allows the group to pursue its growth strategy. NTA in the period remained in line with June's results, reflecting the deployment of some capital into the acquisition of Folkestone that included intangibles in the form of management rights that offset valuation gains in the portfolio for the period. Importantly, the business continues to generate strong returns on capital employed, which remains a fundamental focus for management.

Turning to Slide 26. As you can see, we remain one of the most active participants in the bank and capital markets in the property sector in Australia. There has not been any changes to the capital management strategy for the group, and broadly speaking, the business continues to seek to achieve well-structured, well-laddered and efficiently priced debt facilities, with emphasis on sourcing from diversified sources, including the capital markets, as available.

We manage within leverage tolerances for each of the specific fund mandates with appropriate levels of headroom in relation to covenant levels. We also endeavor to ensure liquidity requirements are met for the business, including to fund both development and acquisition activities outlined.

I'll now hand back to David to speak to our outlook and earnings guidance.

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

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Thanks, Russell. FY '19 is continuing to see strong market dynamics with excess demand for good quality property investments. Tenant demand for office and industrial projects continues to remain strong. We also believe that the property market will continue to accommodate growth, where underlying fundamentals provide effective rental growth. Institutional fund managers with demonstrated track records of delivering innovative funds growth and sustained outperformance for investors, are expected to continue to attract equity inflows. As I said earlier, the momentum that comes with the bow wave effect from such strong fund growth will help deliver, on an annualized basis, very strong revenue growth from base fees for the second half, and obviously, full year '20 and beyond.

Our previous FY '19 guidance was for after-tax OEPS growth of 8% to 10%, following the successful acquisition of Folkestone. In light of the strong performance and level of transactions that's driven $5.2 billion of fund growth in the first half, we are today upgrading our FY '19 guidance to now be forecasting a 14% to 17% growth in post-tax OEPS over FY '18. As previously advised, the distribution payout range has been widened and is expected to be between 70% and 95% of OEPS after tax on a full year basis.

That now concludes the formal part of our presentation, and we'll open up the lines for 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 Rob Freeman from Macquarie.

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Rob Freeman, Macquarie Research - Analyst [2]

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Could we just spend a little bit of time on guidance and just to understand the change? So looks like it's a $7 million to $9 million variance, but you've called out a $20 million sort of pretax CHOT fee.

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

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So what's your question, Rob?

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Rob Freeman, Macquarie Research - Analyst [4]

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The CHOT fee obviously is bigger than the revision. So is there some CHOT fee in the pcp? If so, how much? And why was guidance not revised by more if there is a genuine $20 million delta in the half?

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

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So first of all, Rob, the problem with your thesis is you're assuming that there was no expected CHOT performance fee in our guidance. I'm not going to go into what components from different parts of our business were in our guidance. But the reality is that, as Russell said, our first half this year of $20 million pretax is less than the $25 million that was booked in the prior corresponding period. We've also called out, given that the fund's got a $105 million liability in its balance sheet to pay as a performance fee in CHOT, that we are not only booking $20 million in the first half, we're booking -- we're guiding that we'll be accounting on a pretax basis for $40 million for the full year. So hopefully, that clarifies and answers your question.

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Rob Freeman, Macquarie Research - Analyst [6]

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And so I think in the first half, those performance and transaction fees are up $13 million. So can we just discuss how much of the CHOT fee was in the pcp?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [7]

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I just said the -- in the pcp, there was $25 million booked in the accounts. And we stated that at the half year last year.

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Rob Freeman, Macquarie Research - Analyst [8]

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Okay. And then just on the cash flow statement. You're saying that the full year DV will be covered. Can you just confirm how these performance fees -- is it going to come through the cash flow? So is the whole $40 million from CHOT likely to be cash paid in F '20?

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Russell T. Proutt, Charter Hall Group - CFO [9]

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Yes. So the FY '19 performance fee that we called out, the $40 million is an accrual. It will not be cash paid in this fiscal year. It will be cash paid with the entire performance fee in April '20.

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Rob Freeman, Macquarie Research - Analyst [10]

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Okay. Are there any other big sort of milestone fees? I know you've given us the slide, again, by fund. Where we should think about this accrual methodology potentially being applied?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [11]

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Look, the accounting standards are fairly explicit in what you'd have to do in recognizing revenue. In simple terms, if they are highly probable and very unlikely to be reversed, you have to take a measured approach to what you would recognize as an accrual.

Given the size of the CHOT performance fee, which we've been very public for 2 years now in telling people, "We got paid $13 million a couple of years ago. We got paid $25 million last year," and we've made it very clear that there's a final performance fee due on the 30th of April 2020, and we've now been disclosing the liability that sits in the accounts, we have to look at the performance fees that are becoming due and payable across all of the funds. Clearly, the size of the CHOT performance fee and the fact that it's highly improbable that that current $105 million liability will reverse below $40 million, we are recognizing $40 million this financial year. When we get to December '19, which is halfway through FY '20, we'll have to go through the same process in deciding how much should be recognized in that first half, given 4 months later it's going to be paid.

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Operator [12]

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Your next question comes from the line of Stephen Lam from CLSA.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [13]

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On the net of deployment assumptions, so you mentioned at the last results call that you'd be very disappointed if you didn't do $1.5 billion in acquisitions. You've already done $2.4 billion. So how is the rest of the year looking?

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

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Look, it's fair to say that that was a pretty big 6 months. There's some very large, high-quality acquisitions in that 6 months, like the, yes, Suncorp and Amex building at Shelley Street at Barangaroo was an $800 million transaction across 3 of our funds. So we're certainly not expecting to replicate the first half in the second half. But the very nature of this business: we have continued equity flows; the fact that whilst we call out investment capacity, we don't include in that investment capacity committed but undrawn equity in our wholesale funds and partnerships; so clearly, because of that, you would expect us to have greater investment capacity than what we've just called out which is the combination of cash and undrawn debt in all of the funds.

So we certainly have got capacity to continue the growth. As we've also called out, a large part of our capacity will continue to fund our very large and growing development pipeline of pre-committed office and industrial projects, and we will be selective about new acquisitions. But I can tell you, this business has been for years and continues to be the most active business in the transaction markets across those 3 core sectors. So I'd be very surprised if we didn't continue to see some volume of net acquisitions in the second half. But I wouldn't be expecting you to double the first half.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [15]

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And on the DVP capacity of $500 million, do you think that's going to be deployed in FY '19?

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

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I hope so. No, you know, seriously, I would have expected that that would get deployed over a couple of years. Most of our partnerships, when we set them up with equity commitments, we're pretty judicious, the way we deploy. By the very nature of what we call the fund, Deep Value, they're not going to be coming around every 5 minutes. So we're quite selective about the sort of assets that we're looking for. That fund is targeting a 15% IRR after gearing. So we've got to be able to create some floor space or add some value in one way or another to be able to achieve those sort of returns. But the focus of that portfolio is still income-producing assets rather than a development fund, per se.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [17]

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And early on, on the presentation, you mentioned replenishing dry powder. And in the context of $1.2 billion gross equity raised in the first half, what is the fundraising outlook for the remainder of the year?

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

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Look, as I alluded to, I think our 2 large pooled funds, the office and the industrial fund, have done a fantastic job in deploying the capacity that they've created through recent equity raisings. It's public knowledge that CPOF has acquired a couple of large Sydney assets in the last 12 months, 2 Market Street and 231 Elizabeth Street. We've also just acquired a fantastic corner CBD site in Melbourne called 555 Collins, on the corner of King and Collins, opposite Rialto and 530 Collins. That's potentially an $800 million new project. So I think it's fair to say we will be launching equity raisings for both those funds, given that we've been quite successful in deploying previously raised equity, and in both those instances, we're targeting roughly around $600 million of equity per fund.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [19]

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And last one for me. On the development, $1.9 billion of committed projects, how much of that is already spent?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [20]

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My recollection was that about 1/3 of that $1.9 billion has been spent. The best way to sort of look at it is look at the development component of our fund graph. I can't remember what slide it is, but it will show you what our net acquisitions are and what the development is. That's more or less the 6-monthly run rate, so if you sort of think about that, roughly 1/3 of the development pipeline.

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Operator [21]

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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 [22]

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Just a question, firstly, on the Property Investment income, 3.8%. You made $100 million investment through 2018, plus annual reviews of mid-3s plus gearing would suggest something a bit higher. Is there something worth calling out or I'm missing something there?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [23]

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No, no. It's a good question, Grant. Whilst we stand to make a significant performance fee in CHOT, CHOT also has a couple of assets that have got large vacancies. The [Horizon] -- the old Horizon building in Brisbane, 175 Eagle Street, Horizon left and moved into a new building, which we also own, on the fringe of the city. And that combined with some other vacancies, has sort of created a rental void, obviously, because it's one of our larger investments that has contributed to -- one other factor is that the volume of development in both CPOF and CPIF, even though the costs are capitalized, does create a bit of a drag on the EPU until those developments are completed. So those are the factors that have combined to sort of drag down, if you like, the '19 over '18 EPU on a couple of our bigger funds. Pleasingly, FY '20 has the opposite effect. So as we lease that stuff up and we complete the developments, you start getting a surge back in your EPU growth. So that's the reason for that flatter-than-expected growth in PI.

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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 [24]

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Okay, excellent. And while you mentioned CHOT, just wanted to confirm, is there a finite review event coming up? And sort of what are your plans for that fund over the medium term?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [25]

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It's called a liquidity review. So when we set it up and privatized the old CQO, we said that we would have sort of an ongoing review after 5 years. So we had a review. And that's what it is. It sort of allows the investors to decide what they want to do. There's another one in 8 years -- sorry, 8 years from inception, which is 30 April 2020. And we don't have any expectation, given the high quality of the assets in that portfolio, for there to be any intention from our major investors then to just continue holding the portfolio. But given the nature of these performance fees, we have to set a time frame for us to get rewarded for our performance. And so most of our funds, other than the pooled funds which have 3-yearly rolling performance fees, most of them have somewhere between sort of 5 and 7 years.

So in this case, we got paid a couple of interim fees. As I mentioned, $13 million 2 years ago, $25 million last year. And obviously, we've got the balance of the performance fee payable in the 30th of April 2020, which, at this stage, is in their account to the $105 million as a liability.

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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 [26]

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Perfect. And just one final question. I don't know if you can make comments on sort of valuations and demand for assets, be it 50% versus 100% share value.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [27]

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I've seen no evidence in my 30 years that there's any discount for partial interest on high-quality assets, whether it's office, retail or industrial. About 80% to 85% of all A-grade and premium-grade office assets in this country are held in partial interest. So -- and in fact, in the office market, I would argue quite often that 50% interests are more liquid. There's a deeper buyer pool, and therefore, quite often can achieve a better price than 100% asset. So I hope -- is at the question that you're asking, is the difference in pricing?

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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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Yes, exactly. You've answered the question.

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

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Yes, good. Thanks, Grant.

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Operator [30]

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(Operator Instructions) 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 [31]

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I'm just interested to discuss the growth in property services revenue versus the pcp. It's up 13%. It's a bit below the growth in assets under management. Would you or Russell just be able to talk about the growth in property services revenue? And is there a timing issue there or are there other reasons why that growth has lagged the growth in assets under management?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [32]

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Well, typically, the -- if you sort of think about property services, as it is defined there, you've got property management, development fees, leasing fees. Leasing is a little lumpy. We've got some pretty significant leasing fees coming through in the next 6 to 12 months that you -- the next time we have a call, you'll be asking me why it's grown so much. So that's partly the reason.

Property management is a little more consistent. And development fees, I wouldn't read too much into that negative pcp on development fees. As I said, our development pipeline is growing at such a rate of knots that I'm expecting, on an annualized basis, those development fees to continue to start growing quite considerably. And the reason for that is, effectively, a development fee -- let's say, it's a 3% of total project costs. There's part of it paid upfront to get the planning and procuring the building contract, and then it's spread over the course of the project. So as you have this large increase in development pipeline, you'll have an equally large increase in development management revenue. So I -- that's the best way I can explain it. And I would suggest that those pcp numbers could be the result of 1 or 2 items, but as I said, leasing is probably the most lumpy.

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Operator [33]

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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 [34]

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I just had a question on social infrastructure. So it's $1.2 billion of asset, 4% of the portfolio. How big can this get and how quickly?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [35]

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I'll leave that to Sean.

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Sean Thomas McMahon, Charter Hall Group - CIO [36]

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Yes, thanks, Stuart. Look, we've done a lot of investigations, obviously, entering into this sector, which is sort of expanding our investable universe, as you'd appreciate. But we see the childcare -- or the early learning sector, I should say, as about a $15 billion to $20 billion sector in its own right. There's about 7,500 centers across Australia. So we see opportunity to grow into that space. But also, social infrastructure, from our perspective, has a broader auspice, potentially. And anything relating to social services, which naturally feeds into government-style tenants or long WALE leases across a pretty broad spectrum, gives us an opportunity to grow in that space. But at the moment, our acquisition of Folkestone in the childcare sector is where our immediate focus is in the future.

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Stuart McLean, Macquarie Research - Research Analyst [37]

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Okay. So could you say childcare getting to 6%, 8%, 10% of the portfolio?

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Sean Thomas McMahon, Charter Hall Group - CIO [38]

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I think we'll -- we're growing the portfolio across our major core sectors: office, industrial, retail, quite significantly, as you'd see from our fund growth. But we do see it as -- early learning as a natural extension of what we're doing today, and it will continue to grow sort of in line with the rest of our fund.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [39]

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I think I'd also add, Stuart, it's -- frankly, it's pretty bloody hard to keep pace with our overall group funds. So when you quote to 6%, 8% or 10%, 10% is getting close to $3 billion. It's taken a long time for CQE to get to $1 billion. So if opportunities make sense for CQE, it will grow. What I can tell you is we've got pretty strong wholesale equity interest in the broader social infrastructure sector. So that's not just early learning. As Sean said, there's an appetite, particularly from Aussie super funds to be more broadly invested across alternative sectors, particularly one that provides, effectively, a social good. And providing childcare definitely fits into that category.

We are already pretty big investors in office buildings leased to government across the various different strategies. And as you know, we also bought the National Archives at Chester Hill last year for -- on a 20-year lease to the Commonwealth government. So it's not as if it's a new focus. But as I said, there is a quite strong demand for product if we can create portfolios of assets that are broadly defined as social infrastructure. So I wouldn't just sort of be thinking, "Are we going to triple the size of our childcare portfolio from $1 billion to the $3 billion?" But social infrastructure generally, I think, has got the capacity to, as you suggest, get to 10% of our portfolio. But the reality is it's -- we're not standing still. So the other sectors are growing at the same time.

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Stuart McLean, Macquarie Research - Research Analyst [40]

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And maybe on a few other growth areas. You previously talked about debt funds. You previously talked about growth into infrastructure. Is debt still on the cards? And are there other large platforms that you look to acquire in order to continue this growth?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [41]

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Look, I think I've been on public record of saying the infrastructure pursuit was specifically because an opportunity came up with a large infra manager in Hastings that we did due diligence on and decided not to proceed with. So we're not out there running around looking for more infrastructure managers. And on the debt side, it's fair to say, having done the work, we certainly had capital interested. We think it's very competitive. And I'm not entirely convinced that the pricing in the market is appropriate. And therefore, if we're not getting a reasonable return on our clients' capital, we're not going to co-invest alongside them. So I'd say -- it'd be fair to say that from a back burner, I think the opportunity isn't there. Maybe one day, if things get more dislocated and the pricing is more attractive, we might reengage with our capital partners on that. But it's fair to say, we're pretty busy, as you can see for the last 6 months doing what we're good at. So I think we'll stick with that for the time being.

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Operator [42]

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Your next question comes from the line of Peter Davidson from Pendal Group.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [43]

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Look, Harry, we've had this discussion before. But just in broad terms, can you just sort of walk me through the bow wave effect kind of at a macro level for the funds? I mean, you start with, say, $28 billion of fund. What proportion of that is subject to performance fees, what asset IRR you need, what levered IRR and what kind of hurdle, just roughly?

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [44]

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So first of all, Pete, the -- I'll just explain the bow wave. If you've got $5 billion fund growth in 6 months at 50 bps, it's $25 million a year. Because we're only getting half of that extra $25 million for the second half of '19, that's why you got a bow wave effect. So '19 is going to get roughly $12.5 million of that, and '20 and beyond is going to get $25 million and growing.

The other part of the bow wave, and I'm not much of a sailor but the reality is the other parts of our property services business: leasing, development, management and property management, all benefit, but there's a lag effect. And therefore, there's more -- not like a hockey stick, but there's a strong annualized growth that comes through over the next 12 months as opposed to just the next 6 months. So that's that impact.

The other thing that happens with the sheer growth or scale of our portfolios is that the greater penetration with major tenant customers means we're doing a lot more cross-fertilization between office, retail, industrial, particularly retail and industrial. Huge volume of industrial pre-leasing that is currently committed in our portfolio has been done off-market with existing customers where we've got a good relationship. So there's a whole range of these other things that, I think, meld together into this bow wave effect. And it just takes its time to flow through, and you just don't get the automatic pop in a second half of the year. So hopefully, that explains it.

I think your other question was on IRRs and -- or IRR hurdles for performance fees. It all varies. Across, say, our direct business, they're more or less 10% levered IRR, and we get 20 over 10%. In something like CHOT, we -- it was set at a slightly higher hurdle and it's 20 over 12%. In the pooled funds, CPOF/CPIF, I think in CPIF, it's 10% equity IRR; and CPOFs, an 11% equity IRR. So it all varies. In the most recent partnerships, we -- the level of gearing and the risk profile of the strategy will determine whether you're starting at a 9% or a 10% or 11% or 12% IRR before you get into performance fees. So does that answer your question, Pete?

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Pete Davidson, Pendal Group Limited - Head of Listed Property [45]

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Yes, that's good. That's great.

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Operator [46]

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(Operator Instructions) There are no further questions at this point. I will now hand back to Mr. Harrison for any closing remarks. Thank you, sir.

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David William Harrison, Charter Hall Group - MD, Group CEO & Director [47]

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Thank you. So first of all, thank you to all of our team at Charter Hall. Great effort in producing another set of results pack. And thanks to the audience. And as usual, reach out to Phil or Virly if you want to have a one-on-one meeting with us. See you in 6 months.