Charter Hall Group (ASX:CHC)

David Harrison
MD and Group CEO
Market Cap (AUD): 5.48B
Sector: Real Estate
Last Trade (AUD): 11.945 +0.18 (+1.49%)
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1. About

Charter Hall Group has grown, since its launch in 1991, to become one of Australia’s leading property groups, with a total managed property portfolio of $23.2 B. The Company owns and manages 330 commercial properties around Australia, including office buildings, supermarket anchored retail centres, and a rapidly growing stable of industrial assets, on behalf of its institutional, wholesale and retail investors. Its integrated business model, coupled with its highly skilled and motivated team across investment management, asset management, property management, and project delivery produces sustainable returns for its investors, and positive experiences for its tenants and the community. Charter Hall Group is a stapled security comprising a share in Charter Hall Limited, the operating business, and a unit in Charter Hall Property Trust, which predominantly co-invests in the funds and partnerships the Group manages.

2. Business model

    

The Group operates the following divisions:[1]

 

Division

Revenue ($,000)

% of Revenue

% of Profit (before Int, Tax Depn & Amort)

Profit drivers[2]

Property Investments

$103.8

34.1%

50.1%

PI operating earnings of $103.9m, up 22.2% PI EBITDA growth driven by:

  • Growth in Property Investments Portfolio
  • 3.6% WARR across Property Investments Portfolio
  • Strong market rental reversions in Office

Property Funds Management

$201.0

65.9%

49.9%

PFM EBITDA growth driven by:

  • PFM revenue growth of 12.6% outpacing total PFM expense growth of 10.4%

 

PFM revenue up 12.6% to $201.0m

Property services revenue up 21.1% to $56.7m:

  • Increased development activity across office and industrial underpinning growth in development related fees
  • Successful leasing activity supporting high occupancy

 

PFM operating earnings pre-tax of $98.9m, up 15.4%

3. Strategy

 

Key strategy includes:[3]

 

To access, deploy, manage and co-invest equity to create value and provide superior income and capital returns for its clients and securityholders through:

  • delivering outperformance for both managed fund/partnership investors and CHC securityholders
  • optimising total return on invested capital
  • growing sustainable earnings and maintaining resilience via long WALE portfolios and through strong customer relationships
  • developing a scalable and efficient platform
  • recruiting, retaining and motivating a high performance team

 

Create sustainable securityholder value by:

  • assessing performance and STI outcomes against financial and non-financial key performance indicators (KPI) linked to strategy
  • deferring a portion of STI into equity for executives
  • aligning LTI performance hurdles with securityholders’ expected returns
  • ensuring a significant ‘at-risk’ component of total remuneration

4. Markets

        

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth rate (Annual 13-18)

Retail Property Operators

$23 billion

6.0%

Industrial and Other property Operators

$17 billion

 13.2%

Office Property Operators

$43 billion

11.3%

5. Competition

 

Major competitors include:[5]

 

  • Peet Limited (ASX: PPC)
  • LAND Co., Ltd (TYO: 8918)

6. History

 

1991[6]

Charter Hall launched in Sydney by current executives, David Southon, and Cedric Fuchs, together with Andre Biet (Managing Director from 1991 to 2004 and Executive Director until October 2007)

 

1994   

Between 1991 and 1994 the initial focus was on commercial property advisory work.

 

1995   

First syndicate launched. CHIF1 was the first in a series focusing on high quality single and multi-asset property syndicates.

 

1996   

Australia’s first institutional opportunistic property fund launched with AMP Capital. First of a series of five opportunistic funds largely comprising Australian superannuation funds.

 

2004   

Transfield Holdings acquired 50% of Charter Hall. David Harrison joined the company as Joint Managing Director alongside David Southon

 

2005   

Charter Hall listed on the ASX

 

2006   

Launched the Core Plus Office Fund, the first in a series of long-term, open- ended core investment vehicles

 

2007   

Launched the Core Plus Industrial Fund

 

2009   

The Gandel Group acquired a strategic 12% interest in Charter Hall invests significant capital in the unlisted Core Plus Office Fund

 

2010   

Charter Hall acquired the management rights to Macquarie Group’s real estate funds management platform, increasing its funds under management total to over $10 billion

 

2011   

Charter Hall celebrated its 20 year anniversary

 

2012   

Established the first Bunnings Partnership launching BP1

 

2013   

Charter Hall launched the $400 million Core Logistics Partnership

 

2014   

In partnership with Host Plus Charter Hall acquired 54 hospitality assets leased to ALH for $603m David Clarke was appointed Chairman of the CHC board at the 2014 AGM

 

2015   

Charter Hall raised $225 million in equity, enabling the Group to fund identified equity investments alongside its capital partners and to provided capacity for future co-investments

 

2016   

Charter Hall acquires $197m Campbelltown Mall for new partnership

Charter Hall grows its portfolio with the acquisition of a 50% interest in Coles’ Headquarters in Melbourne for $140.5m

 

2017   

Charter Hall Group announces the successful completion of its fully underwritten $275 million Institutional Placement

Charter Hall ceases due diligence on Hastings business acquisition

 

2018   

Charter Hall Group announces $94 million acquisition of three Brisbane CBD retail/office assets

Charter Hall Group settles the sale of CIP

Charter Hall Group to acquire Folkestone Limited

Charter Hall partnership settles acquisition of No. 1 Brisbane

7. Team

 

Board of Directors[7]

 

David Clarke – Chairman

Anne Brennan – Non-Executive Director

Philip Garling – Non-Executive Director

Karen Moses – Non-Executive Director

David Ross – Non-Executive Director

David Harrison – Managing Director and Group CEO

 

Executive Management

 

David Harrison – Managing Director and Group CEO

Sean McMahon – Chief Investment Officer and Industrial CEO

Russell Prout – Chief Finance  Officer

Richard Stacker – Group Executive – Investor Relations

Adrian Taylor – Office CEO

Greg Chubb – Retail CEO

Natalie Devlin – Group Executive - People, Brand and Community

Aidan Coleman – Chief Technology Officer  

Mark Bryant – Company Secretary[8]


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June)[9]

 

Division

Revenue ($,000)

% Change

Profit (before Int, Tax, Depn & Amort) ($,000)

% Change

Property Investments

$103.8

22.4%

$102.8

22.7%

Property Funds Management

$201.0

12.6%

$102.4

14.8%

Total

$304.8

15.8%

$205.2

18.6%

9. Risk

 

Major risks include:[10]

 

Capital risk

The key capital risk management objective of the Charter Hall Group and Charter Hall Property Trust Group is to optimise returns through the mix of available capital sources whilst complying with statutory and constitutional capital requirements, and complying with the covenant requirements of the finance facility. The capital management approach is regularly reviewed by management and the Board as part of the overall strategy. The capital mix can be altered by issuing new units, electing to have the DRP underwritten, adjusting the amount of distributions paid, activating a stapled security buyback program or selling assets.

 

Financial risk management

Market Risk

Unlisted unit price risk

The Group is exposed to unlisted unit price risk. This arises from investments in unlisted property funds managed by the Group. These funds invest in direct property. Charter Hall manages all the funds that the Group invests in and its executives have a sound understanding of the underlying property values and trends that give rise to price risk. The carrying value of investments in associates at fair value through profit or loss is measured with reference to the funds’ unit prices which are determined in accordance with the funds’ respective constitutions. The key determinant of the unit price is the underlying property values which are approved by the respective fund board or investment committee and the Executive Property Valuation Committee.

 

Cash flow and fair value interest rate risk

The Charter Hall Group has no long-term interest bearing assets. Charter Hall Property Trust has a loan payable to Charter Hall Limited which is an unsecured stapled loan maturing on 30 June 2021 with interest charged on an arm’s length basis. Refer to Note 29(e) for further details. The Charter Hall Group’s and Charter Hall Property Trust Group’s external interest rate risk arises from the $220 million loan facilities and the cross-currency interest rate swaps that convert its USPP interest rate exposure from fixed to variable. At 30 June 2018 no borrowings were drawn on these facilities (2017: $nil). Borrowings drawn at variable rates expose both Groups to cash flow interest rate risk. Borrowings drawn at fixed rates expose both Groups to fair value interest rate risk. The Charter Hall Group and Charter Hall Property Trust Group’s policy is to mitigate interest rate risk by ensuring that interest rates on core borrowings for the anticipated debt term match the use of those funds. Core borrowings are defined as being the level of borrowings that are expected to be held for a period of more than two years.

 

Foreign Exchange risk

The Charter Hall Group’s principal exposure to foreign exchange risk arises from its investments in foreign subsidiaries and exposure to US Private Placement issuances denominated in US dollars. The major asset held by foreign subsidiaries is cash in foreign denominated bank accounts. Cross currency swaps are used to convert US dollar borrowings into Australian dollar exposure.

 

Credit Risk

The Charter Hall Group and Charter Hall Property Trust Group have policies in place to ensure that sales of services are made to customers with appropriate credit histories. 56.8% of the Charter Hall Group’s income is derived from management fees, transaction and other fees from related parties. 40.6% of the Charter Hall Group’s income is derived from equity accounted investments in property funds and distributions from investments in property funds held at fair value through the profit and loss. The balance relates to interest income and gross rental income. 87.2% of the Charter Hall Property Trust Group’s income is derived from equity accounted investments in property funds and distributions from investments in property funds held at fair value through profit and loss. Where appropriate, tenants in the underlying property funds for Charter Hall Group and the Charter Hall Property Trust Group are assessed for creditworthiness, taking into account their financial position, past experience and other factors. Refer to Note 10(c) for more information on credit risk. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The Charter Hall Group and Charter Hall Property Trust Group have policies that limit the amount of credit exposure to any one financial institution.

 

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Charter Hall Group and Charter Hall Property Trust Group aim at maintaining flexibility in funding by keeping committed credit lines available.

References

  1. ^ Annual Report 2018, P. 63
    https://www.listcorp.com/asx/chc/charter-hall-group/news/2018-annual-report-1983626.html
  2. ^ Investor Presentation 2018, P. 21-23
    https://www.listcorp.com/asx/chc/charter-hall-group/news/fy18-results-presentation-1956490.html
  3. ^ Annual Report 2018, P. 33
    https://www.listcorp.com/asx/chc/charter-hall-group/news/2018-annual-report-1983626.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=1894
    http://www.ibisworld.com.au/industry/default.aspx?indid=1895
    http://www.ibisworld.com.au/industry/default.aspx?indid=1893
  5. ^ https://quotes.wsj.com/AU/XASX/CHC
  6. ^ https://www.charterhall.com.au/About-Us/Our-History/
    https://www.listcorp.com/asx/chc/charter-hall-group/news/acquisition-of-197m-campbelltown-mall-for-new-partnership-1413189.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/acquisition-of-50-percentage-interest-in-coles-headquarters-melbourne-1414070.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/completion-of-institutional-placement-1584346.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/charter-hall-ceases-due-diligence-on-hastings-acquisition-1660152.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/chc-acquires-3-brisbane-cbd-assets-for-94-million-1936220.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/charter-hall-group-settles-the-sale-of-cip-1947722.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/charter-hall-group-to-acquire-folkestone-limited-1956383.html
    https://www.listcorp.com/asx/chc/charter-hall-group/news/ch-partnership-settles-acquisition-of-no-1-brisbane-1965072.html
  7. ^ https://www.charterhall.com.au/About-Us/Board-of-Directors/
    https://www.charterhall.com.au/About-Us/Executive-Management/
  8. ^ https://www.listcorp.com/asx/chc/charter-hall-group/news/company-secretary-appointment-resignation-1538759.html
  9. ^ Annual Report 2018, P. 63
    https://www.listcorp.com/asx/chc/charter-hall-group/news/2018-annual-report-1983626.html
  10. ^ Annual Report 2018, P. 80-83
    https://www.listcorp.com/asx/chc/charter-hall-group/news/2018-annual-report-1983626.html