Charter Hall’s ‘custodian’ approach pays off
You could be forgiven for thinking 2020 was a difficult year for property investors. The onset of the pandemic impacting all asset classes in unforeseen ways, no more so than property. As we have seen in other asset classes, there is still little certainty in what lies ahead beyond lockdowns, social distancing and the reopening trade.
Different parts of the economy have clearly been challenged, but despite the backdrop of shuttered retail and empty office blocks, ASX-listed property fund manager Charter Hall (ASX:CHC) has managed to navigate the pandemic exceedingly well.
The group recently delivering their financial year results with two standout announcements. The first was the exceptional growth in capital raisings and inflows, with $5.3 billion in new money coming into the fund’s strategies and the second, $10 billion in gross transactions for the year. Combined with the $4.3 billion in revaluations and the company clearly knows how to navigate a crisis.
The strong results contributed to a better than expected operating profit figure, with management delivering $284.3 million in operating earnings equating to 61 cents per share. Whilst slightly around 15 per cent below 2020’s 69.3 cents per share, it is a remarkable result given the uncertainty and disruption caused by an endless stream of lockdowns and WFH directives.
According to their results presentation the group now has over $52 billion in assets under management with an increasingly diversified asset base. Long known for their commitment to logistics and warehousing, industrial property remains the largest exposure at $15.5 billion with many tenants unaffected by the pandemic due to their important role in the economy.
Their office and retail assets, covering $22.8 and billion and $6.7 billion respectively, were more challenged, however the preference for longer Weighted Average Lease Expiry (or WALE) properties appears to have minimised any major impact on rent collections. According to management, rent collections were also supported by their diversified tenant base with the Federal Government making up 14 per cent of all income, just ahead of Woolworths, Wesfarmer’s and Coles, who may well be the four least impacted employers in Australia.
The result was strong performances across their suite of funds:
- Charter Hall Direct Long WALE Fund (LWF): 17.1% pa (10.4% pa since inception)
- Charter Hall Direct Office Fund (DOF): 16.3% pa (15.3% pa since inception)
- Charter Hall Direct Industrial Fund No.4 (DIF4): 15.7% pa (11.4% pa since inception)
- Charter Hall Direct PFA Fund (PFA): 12.1% pa (10.3% pa since inception)
Having just reached their 30-year anniversary and 16th of being an ASX-listed entity, managing director David Harrison highlights that it has been the more diverse nature of the business that has been key to their performance in FY21. He says “if you have a successful and profitable funds management business, you are generating free cash flow over and above your rents”. The alternative of course, is if you are simply owning property assets and your only source of revenue is rent, than you would likely be seriously challenged in the current environment.
Harrison stresses the groups approach to its relationship with investors and tenants, noting that their “partnership approach generated $5.3 billion of gross equity inflows, with all equity sources recording strong inflows.“ Sale and lease back transactions represented some 40 per cent of capital deployed in FY21, as company boards had a renewed focus on releasing capital from balance sheets, offering strong and consistent rental yields in return.
With interest rates set to remain lower for longer, investors remain attracted to commercial property assets for their consistent income, even more so as equity markets appear overvalued by traditional measures. It is this theme that saw management offer guidance for a further 6% increase in distributions in FY22 assuming conditions don’t deteriorate significantly.
Commenting on the final point to the Australian Financial Review, Harrison says “I don’t think you can lock down economies indefinitely……So we will move towards a reopening when vaccinations are available for those who choose to be vaccinated.”