Charter Hall closes on $70bn of property as investors back real estate funds model

The David Harrison-led funds house is investing through the cycle as big capital will keep chasing property assets even as rates rise.

Charter Hall, led by David Harrison, has reported a near doubling of its annual profit to $911.1m with its property portfolio close to $70bn in value. Picture: Hollie Adams/The Australian

Property funds house Charter Hall has nearly doubled its annual profit to $911.1m and says its real estate empire is close to $70bn in value as it looks to keep up momentum as higher interest rates hit deal-making.

The company beat expectations in a year in which commercial property boomed and despite the current tougher environment for funds groups it says that its model will stand up.

Investors are backing its ability to keep on picking up large portfolios and assets with the aid of its superannuation fund and offshore clients, and drove the company’s shares up 6.5 per cent to $13.36 on Thursday.

Charter Hall chief executive David Harrison said that rising rates would also drive more sale and leaseback deals in fields ranging from telecommunications to government assets, with the firm likely to strike up fresh partnerships.

“All of a sudden the cost of debt is much more expensive than it used to be. We see a lot more opportunities for that,” he said.

The company’s operating earnings of $542.8m reflected operating earnings per security post-tax of 115.6c and it said that in this financial year earnings guidance would be for a conservative “no less than” 90c per security.

Property funds house Charter Hall, led by David Harrison, has reported profit of $911.1m and is close to $70bn in value. Picture: Hollie Adams/The Australian

At the end of June, Charter Hall’s overall funds – including its stake in equities manager Paradice Investment Management – stood at $79.9bn, with property sitting at $65.6bn. But a burst of activity in recent months in which it struck $3.5bn of property deals has lifted the property element to $69.1bn.

The company was hit in the market rout earlier this year but Mr Harrison said it had been a record year of earnings and growth for Charter Hall.

“The business continues to execute on its strategy of partnering with tenants and investors to drive mutually beneficial outcomes. Our strong investor and tenant customer feedback evidences the customer centric approach to partnering we continue to prosecute,” he said.

Charter Hall flagged its intention to remain one of the most active investors in the market with Mr Harrison pointing to the demand for high quality properties. “We continue to be an active buyer and seller of assets, constantly looking to improve portfolios and deliver growth,” he said.

“We are particularly focused on bifurcation in office and industrial markets where we believe modern assets will command much higher occupancies and much lower vacancy rates than older stock.”

The scale of the group’s portfolio is also providing significant advantages, with it able to offer big institutions privatisation and sale and leaseback deals across a variety of industries. The retail funds business is also performing even as bank deposit rates rise.

Mr Harrison also pointed to the strong growth in logistics and triple net lease assets, predominantly with CPI-index rent reviews, which investors were chasing as inflation lifts.

The company is benefiting from its ability to pull off privatisations of REITs and it led deals for its funds to buy pub landlord ALE Property Group and Irongate Group.

“We’re active across all sectors and we’re particularly active in off market-transactions that we generated directly,” Mr Harrison said. “Our ability to execute upon these complex transactions for the benefit of our investors is a key capability of the group and a continuation of the group’s history of being able to complete successful listed M&A activity.”

Mr Harrison said investors were still backing offices despite angst around the future of workspace, with major tenants now prepared to commit for the long term to CBD office projects.

“Our development pipeline has grown to $16bn, with strong growth in pre-leased projects continuing to provide develop to core enhanced returns for our investors,” Mr Harrison said.

Charter Hall remains active despite the market slow down and it completed $8.5bn worth of deals across 90 transactions last year. “We’ve continued to enjoy the support of fund investors with $4.7bn of equity allotted,” Mr Harrison said.

It is going into the year with hefty firepower. “As we start fiscal 2023, our investment capacity stands at $7.9bn leaving us well placed to take advantage of opportunities that may arise,” Mr Harrison said.

Jefferies analyst Sholto Maconochie said Charter Hall delivered a strong result with operating profit above consensus, due to strong property funds growth of 25 per cent, with performance fees coming through and the property portfolio performing.

“[This] was a strong result and Charter Hall have executed well in the first quarter with $3.5bn of net transactions despite a challenging macro environment from rising rates. However, we believe the next six to 12 months may be harder due to elevated bond rates, increased debt costs and lower transactional activity,” he said.

Credit Suisse analyst Peter Zuk said the 2022 result was a beat and the guidance was “well above” the market consensus, with the distribution per security also forecast to grow at 6 per cent.

Mr Zuk said the decline in earnings this year was expected due to elevated performance and transaction fees last year and said that stripping out these, “we think the outlook is generally better than many expected”.