Ladies and gentlemen, thank you for standing by, welcome to the Charter Hall Group 2023 full year results briefing. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time you wish to queue for a question, you will need to press star one one. You will need to press star one one on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded Monday, 21st of August, 2023. 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.
Good morning. Welcome to the Charter Hall Group FY23 results. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our Chief Investment Officer, and Russell Proutt, our Chief Financial Officer. I'd like to commence today with an acknowledgment of country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders, past and present, and recognize their continued care and contribution to country. Turning to the group's results, operating earnings post-tax was AUD 441 million, or AUD 0.933 per security, 3.7% above our guidance. For the 12-month period, that AUD 0.933 per security equates to a return on contributed equity of 23.8%, a metric we believe is important for long-term shareholders, like our management team.
The group's property investment portfolio is AUD 3 billion, which has been stable over the period despite devaluations across the sector. FUM growth continues our long-term trend, up 9.4% for the year to AUD 87.4 billion, driven primarily by property funds under management growth of 9.5% to AUD 71.9 billion, whilst our PIM partnership FUM also grew by 10%. That growth saw us undertake AUD 10.4 billion of gross transactions as we continue to actively curate our portfolios to drive performance via acquisitions, divestments, and developments. The group's balance sheet remains robust, with 2.2% net gearing and significant liquidity. Finally, the group's investment capacity of cash and undrawn debt stands at AUD 7 billion currently and does not include committed but uncalled equity commitments, which further add to this capacity.
Our focus remains on delivering sustainable growth for security holders, replenishing dry powder, strengthening resilience, and retaining a vigilant focus on market dynamics and property fundamentals. On slide 6, our strategy has been very consistent for many years through multiple cycles. We use our expertise and customer relationships to create value and generate superior returns for our investors. AUD 2.8 billion of gross equity was allotted during the year, with our wholesale partnerships being particularly active in that period. Of the AUD 10.4 billion of gross transactions this period, we acquired AUD 7.6 billion and divested a further AUD 2.8 billion 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. We continue to focus on investing alongside our capital partners.
The CHC property investment, or PI portfolio, has delivered a 10.5% annual return for CHC security holders over the last 5 years. Slide 7 highlights our post-tax operating earnings per security and distribution per security growth. We've consistently delivered earnings growth for investors with a 10-year compound annual growth rate of 15.1% of operating earnings per security. We acknowledge the year-on-year growth is variable. However, the annuity revenue growth and earnings have been consistent. Whilst in particular years with strong transaction on performance fee revenue, we retain a larger proportion of earnings, organic reinvestment. Similarly, we've delivered 7.7% annual distribution growth for investors over the last 10 years, with additional franking credits providing tax benefits for our security holders.
Importantly, we've been able to deliver that growth in returns for our investors, whilst also retaining significant investment capacity to fund new growth initiatives and invest alongside our capital partners. A cumulative retained earnings of more than AUD 1 billion since FY13 has been used to support new fund creation and growth in existing strategies by investing alongside our capital partners, providing alignment of interest and delivering future earnings growth for security holders. Slide 8 looks at that growth in more detail and highlights the quality of annuity revenue streams that underpins our OEPS growth. The annuity revenue compound annual growth rate of 16.7% for 10 years highlights the benefits of scale, diversification, and cross-sector relationships that have driven FUM growth and driven outperformance of funds through cycles.
The co-investment model has attracted capital, as we do not use our balance sheet to compete with our partners. Rather, where appropriate, we nurture opportunities that require de-risking to deliver appropriate investments to the funds and partnerships. Turning now to slide 10 on FUM growth. When property FUM growth of AUD 6.2 billion is combined with our investment in the PIM partnership, which has grown its FUM by 10% this year, we ended financial year 2023 with AUD 87.4 billion of group FUM. These slides show the breakout of that AUD 87.4 billion of FUM by equity source and by sector. We continue to remain well-diversified by both equity sources and multi-sector market penetration that amplifies our opportunity set in pre-leasing and sale and leaseback investments. Slide 11.
Fund growth was driven by net acquisitions, that is net of divestments of AUD 4.8 billion. Development, CapEx of AUD 3 billion, offset by devaluations of AUD 1.6 billion during the year, which was driven by cap rate expansion of 40 basis points, which is equivalent to 10% expansion of cap rates. However, market and passing rent growth have partially insulated the impact of cap rate expansion. Our development book continues to be a significant contributor to fund growth. The success of the platform in driving enhanced returns for investors has been driven by all completed projects being profitable, delivering yields on cost and enhanced IRRs above stabilized returns.
Completing AUD 1.7 billion of new prime grade office buildings in Melbourne and Adelaide, 95% of which are pre-committed, has delivered fantastic new accommodation for our office tenant customers, including AFP, Amazon, Allianz Insurance, National Australia Bank, Telstra, plus two other large government repeat customers. Our industrial logistics platform has completed 26 projects, totaling AUD 1.5 billion in value, 100% pre-leased to customers such as Coles, Bunnings, Coca-Cola, Australia Post, Toll and Cleanaway. All brand new state-of-the-art facilities to facilitate growth of their businesses. On slide 12, we break out our property FUM in more detail. This platform comprises over 1,600 properties and delivers more than AUD 3.25 billion of net rental income.
We continue to focus on delivering a sustainable and resilient return through property sector diversity, with a focus on rental growth from well-leased assets, as evidenced by our platform WALE of 8.2 years. The weighted average cap rate across the platform of 4.76%, together with a 3.7% weighted average rent review, provides attractive total returns. As we continue to modernize our portfolios, we reduce maintenance CapEx and obsolescence risk. This is particularly evident in our office power portfolio, which now has a weighted average age of less than nine years. Slide 13, we provide some more detail on major tenant customers across the platform. Our top 20 tenants make up almost 60% of platform rent. These tenant customers are heavily concentrated in non-discretionary industries and sectors.
Government and investment-grade tenant customers have always been our focus, and we are happy that the development book continues to attract high caliber tenants with strong credit credentials. 26% of platform leases are Triple Net, and 21% of the platform net income is CPI-linked, providing strong rental growth and CapEx-efficient portfolios for our investors. Importantly, we continue to partner with our tenants, and this is reflected in the fact that 72% of our tenants have more than one lease with us, while 28% of tenants work with us across multiple sectors. Multi-asset tenant customers make up 65% of our total platform rental income.
The resilience of our major tenant customers and our concentration towards these essential industries underpins the defensive nature of our portfolios and their ongoing performance, whilst also surfacing sale and leaseback investment opportunities, as highlighted with the extension of our Ampol relationship to partner to secure the ZEN Energy portfolio this year, partnering with the Platinum Private Equity firm in acquiring the Irongate industrial portfolio, and the Bega 15-year sale and leaseback acquisition of the Port Melbourne iconic Vegemite facility. Slide 14 outlines some of our recent office leasing successes. Active asset management sits at the heart of the Charter Hall business. This means working with our tenants to provide attractive solutions that meet their property needs are critical.
As the largest office owner in the country with a strong customer-centric approach, as evidenced by our sector-leading Net Promoter Score ratings across all sectors, our leasing capability and relationships drive repeat business. FY23 saw us execute a record 390,000 square meters of leasing across 222 deals or transactions, averaging 2,000 square meters per transaction, well above reported peers. We had a very strong 89% retention rate with our existing office tenant customers, a reflection of our partnership approach with our tenants.
Recent large new customers attracted to the existing portfolio in leases over 5,000 square meters include the recently announced VCAT, 14,000 square meter commitment at 300 La Trobe Street in Melbourne, global firm WPP committing to 13,000 square meters at One Shelley Street in the Sydney CBD, relocating from North Sydney, which I note we don't own any assets in that market, an 8,000 square meter new government lease at 275 George Street, Brisbane. Pre-leasing of developments continues to evidence the flight to quality, with pre-commitments in Brisbane at 360 Queen to QIC and Herbert Smith Freehills, following the BDO and Hopgood's earlier commitments, which brings this to 70% pre-leased well before the 2025 completion.
The recently announced Ericsson commitment at 555 Collins Street and National Australia Bank and Telstra pre-leases in Adelaide are all further evidence of high-quality tenant customers having faith in Charter Hall as their new or repeat ownership partner. We achieved a 6.9 year WALE across all leasing transactions nationally, and our office portfolio occupancy sits at a healthy 97%. And the occupancy is over 98% for our flagship wholesale fund, CPIF. Just turning to industrial and logistics. The leasing success in I&L has been equally impressive to that, that which we've seen in office. Similar to office, it's been an exceptionally busy period, with just under 1 million square meters of leasing achieved across 82 transactions. We also continue to enjoy strong retention rates with our existing customers, as our partnership approach sees tenant customers looking for an ongoing relationship with Charter Hall.
Developments also form a significant portion of our activity as we continue to develop new product to meet both tenant and investor needs. The outcome of our active asset management is that our industrial and logistics portfolio enjoys a high occupancy of 99.1%, with a blend of market reviews, CPI-linked and fixed rental growth across the portfolio. Our relatively large, 200+ hectare land bank of uncommitted sites provides further opportunity to access market rents, as tenants are prepared to secure new modern facilities to accommodate their growth or facility consolidation strategies. On Slide 16, we look at equity flows. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle, albeit, not surprisingly, flows have slowed from previous years given the rising interest rates.
During the period, wholesale partnerships were particularly active with the successful completion of the Irongate Group privatization and several office partnership transactions, combined with a continued focus on sale and leaseback in industrial. We enjoy strong working partnerships with over 100 wholesale capital partners and expect these investor customers will continue to be active in the period ahead, particularly as we craft new strategies that meet their risk profile appetite from core through to opportunistic. Australian real estate continues to screen attractively to global investors, offering attractive rental structures, good governance, relatively low vacancies, and transparent rule of law. Population growth in Australia, and an undersupply in many sectors, provides an attractive relative investment destination for global investors, combined with an attractive currency conversion proposition.
We continue to enjoy the support of capital partners, given our ability to successfully deploy capital into attractive acquisition and development opportunities, investing alongside them to create strong alignment of interests. FY23 saw us active in deploying equity into developments and acquisitions. Our strong tenant relationships continue to provide us with sale and leaseback off-market transactions, which are mutually beneficial to our customers and to our fund investors. We've undertaken multiple sale and leaseback acquisitions with CPI-linked rent reviews in retail and industrial markets, and that continues into this new year. Portfolio curation will continue, combining both divestments and acquisitions, as each portfolio curates via active asset management to optimize returns for investors and maintaining gearing within target ranges. Turning to development activity on Slide 18.
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. It's been a strong period for completions, with AUD 3.1 billion of developments delivered in the last 12 months. Notwithstanding completions, our total development pipeline continues to be robust at just on AUD 14 billion, as we continue to source investment-grade developments for our funds. Our ability to deploy capital in our industrial and logistic pipeline also continues to be a key advantage to the group and drive significant capital inflow. The forward pipeline of committed projects will generate high quality, long lease assets for our funds and partnerships, while providing attractive incremental FUM growth for CHC and enhancing our credentials to further attract capital. I'll now hand over to Sean McMahon, our Chief Investment Officer.
Thanks, David. Good morning, everyone. As David has discussed, our property investment portfolio provides a strong alignment of interests with our investor customers, while also ensuring that security holders benefit from our property expertise. Our property investment portfolio has grown to AUD 3 billion, predominantly as a result of new incremental investment. Occupancy continues to remain high at 97.6%, and the WALE is a very attractive 7.4 years. Our weighted average rent review is 3.6%, reflecting our underlying exposure to CPI-linked leases and fixed annual increases. The portfolio remains well-diversified across sectors and by investment, with an 80% weighting to the core East Coast markets. We continue to allocate incremental group capital to investments that support new fund creation and the ongoing growth of our existing funds.
The growth in the property investment portfolio reflects the group's desire to continue to invest alongside our investor customers and ensure a strong alignment of interests. Turning to the property investment portfolio movement. During the period, we made net investments of AUD 271 million in our property portfolio. Our investment portfolio has delivered an impressive 11.6% 5 year compound annual return for Charter Hall security holders. As David explained earlier, we've retained over AUD 1 billion of earnings since FY13 that have been used to invest alongside our capital partners and support new fund initiatives. This has delivered significant returns for security holders and is an important part of the success of the group. Turning to slide 22 and our earnings resilience. As can be seen on this page, our property investment earnings are characterized by the diversity of income which produce them.
No single asset is more than 4% of the group's property investment portfolio. 18% of the property net income is also from CPI-linked leases, which, blended with our fixed annual increases, produces an attractive 3.6% weighted average rent review. The property investment portfolio can be considered a very defensive, well-diversified core portfolio. Let's now move to ESG on slide 23. Climate resilience, recognizing the role we play in communities, and responsible business are embedded in everything we do at Charter Hall. During the period, we brought forward our commitments to net zero Scope 1 and Scope 2 carbon emissions by 5 years to 2025. We've also established near-term and long-term Scope 3 targets using science-based methodologies, and it is our intention to obtain external verification of the baseline year and emissions inventory in the next 12-24 months.
We now have 63 megawatts of installed solar across the group's platform, an increase of 15.8 megawatts in FY23. We've also undertaken AUD 900 million of sustainable finance transactions, which recognizes the ESG performance of our assets and their attractive environmental credentials. 17 of our funds scored in the top 20% of GRESB, with three funds recognized as global and regional sector leaders. We remain committed to the communities in which we operate and donated over AUD 1.4 million in disaster and hardship support. We also facilitated 210 employment outcomes in partnership with social enterprises as part of our goal of providing 1,200 employment outcomes for vulnerable youth by 2030. 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.
Thank you, Sean, and good morning to everyone on the call. Slide 25 presents a summary of earnings for the 2023 fiscal year. As David highlighted, the group reported statutory earnings of AUD 196 million and operating earnings of AUD 441 million. In the following slides, I will discuss the key drivers impacting each of our 3 reported segments. While our FY23 earnings are lower than our recorded results in FY22, this year's earnings reflect the underlying strength and resilience of our business. Whilst the business did face, along with the rest of the sector, the headwinds of higher costs of capital, valuation pressures, and slower activity levels, the impacts were effectively absorbed by the business. In terms of segment performance, the reduction in property investment segment EBITDA can largely be attributed to higher finance costs and the underlying funds and partnerships.
Whilst we were well hedged across the platform, the increase in costs of our floating rate debt during the year more than offset growth in property income in our investments. Development income was in line with fiscal 2022. It's worth noting, by its nature, this segment can vary from period to period, depending on project activity. In terms of our funds management segment, we reported AUD 423 million of EBITDA, while EBITDA was down from FY22, the result reflects a very strong period of performance. I will expand further on our funds management segment on the following slides. As in prior periods, we've distributed based on an annual target growth rate of 6% and distributed AUD 0.425 per security or a payout ratio of 46%.
This enabled the business to retain approximately AUD 240 million of operating earnings for reinvestment in the business. Turning to slide 26 and looking at our funds management segment in greater detail. At AUD 423 million or 70% of total EBITDA, funds management segment continues to be the largest contributor to our operating earnings. In FY23, base fund management revenues increased 20% year-on-year, reflecting our growth in funds under management during the period. At AUD 165.7 million, transaction and performance fee revenue again contributed significantly to the segment profitability, however, at lower levels than FY22, which was a record year for the business. Property services revenues were up 42%. This increase reflects the growth in the scale of our business and the increase in activity-driven revenues across property management, development, and leasing.
Despite our growth across the platform, operating expenses were restricted to just 3.8% higher than last year. This compares to revenue growth of 25% in the combined base fund management fees and property services revenues. FY23's FM, or funds management EBITDA margin, was 73%, and if we excluded the non-annuity transaction and performance fee revenues, the margin was 62%. Again, further reflecting the resilient profitability of the business. With the continuing uncertain economic climate, we are very focused on managing costs and prioritizing investment throughout the business. Now, moving forward to slide 27, which shows our balance sheet at year-end. As you can see, the group continues to be in a very sound financial position. We continue to maintain an excellent liquidity position and have modest net leverage. This translates to investment capacity at headstock of approximately AUD 700 million.
As we've noted previously, and to us, most importantly, the return on capital metrics continue to be strong and reflects our ability to invest capital effectively. Maintaining strong return metrics is fundamental to ensuring that the business employs both our own and our partners' capital optimally. Ultimately, by focusing on return on capital measures, we believe this will generate long-term earnings growth and value for our investors. Now, on slide 28, we provide an update in relation to the debt funding across the business. With a book of nearly AUD 30 billion across domestic and international bank and capital markets, our ability to monitor and access markets is a critical and distinguishing strength of the business. Our approach to financing our funds and partnerships is specific to the particular investment vehicles, the nature of holdings, and investor profiles.
Leverage across the platform is predominantly maintained at investment-grade credit metric levels. We show our average debt maturity of 3.9 years. It's worth noting that we've dealt with nearly all FY24 maturities as of today and have relatively few in FY25. Across the group, average gearing was approximately 33%, with hedging levels of 59%. The slide also references AUD 6 billion of available platform liquidity as at June 30, which is available to fund further investment and growth. I would add that a further AUD 1 billion of capacity was added in July, with the AUD 1.25 billion Asian Term Loan that was completed by the Charter Hall Prime Industrial Fund, or CPIF. As reflected by this recent financing, the business continues to diversify debt capital sources and will access bank and capital markets as appropriate.
Now I will hand back to David to wrap up and comment on guidance for FY24.
Thanks, Russell. Now turning to our outlook statement and earnings guidance. We will continue to operate the same strategy executed for the last 18 years since our IPO in 2005. A capital-efficient partnership model where the fully integrated platform can identify and exploit opportunities and trends before they become mainstream. We've done this with an early entry and rapid growth in logistics to now being one of the largest logistics platforms in Australia. We've also accessed early the Triple Net CPI rental growth, which has been available from our sale and leaseback opportunities, which has driven over 20% of the platform income now linked to CPI growth. We continue to further grow our economic, resilient, social infrastructure and convenience retail portfolios.
We will also continue the modernization of our office platform, where the sector leading 98% occupancy in our flagship fund, CPIF, has contributed to its leading the MSCI office benchmark returns for the last 10 years. As one of the largest owners of real estate in Australia, we are well aware of submarket liquidity, market pricing, and customer trends. We will continue to curate our portfolios and continue both selective acquisitions and what has now been over eight years of repeated divestments annually, exceeding about AUD 1.5 billion on average for the last five years, as pruning portfolios is a key ingredient of active asset management.
CHC maintains the lowest balance sheet gearing in the AREIT sector at 2.2%, has AUD 600 million of liquidity, whilst the group's platform has AUD 7 billion of liquidity, which will be used to fund both committed development pipeline and provide scope for further growth. Based on no material adverse change in current market conditions, FY24 earnings guidance is for post-tax operating earnings per security of approximately AUD 0.75 per security. FY24 distribution per security guidance is for 6% growth over FY23. That now ends the prepared remarks, and I'll now invite your questions.
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile our Q&A roster. Our first question is gonna come from the line of Sholto Maconochie with Jefferies. Your line is open. Please go ahead.
Hi, David and team. Thanks for the presentation. Just a quick one on the guidance. Normally, you say no less than a number, and now it's approximately. If you just back it on, but it doesn't seem that demanding in terms of the growth in transactions. Can you sort of walk us through what sort of transactions and assumptions you're including in that AUD 0.75, if you can?
Sholto, I think the way I would characterize it is we clearly have a more conservative view on transaction volumes going forward. I wouldn't read too much into, you know, the approximately versus no less than. You know, it was only a few years ago that we sort of moved from approximately to no less than. A bit like I said to you guys when you all asked me why we're not upgrading guidance at the half year. I think we're pretty we're in pretty challenging conditions, so we're just gonna be conservative. I'm not gonna give sort of specific compositional guidance in terms of transactional revenue.
I would say that, you know, with the amount of liquidity we've got at a platform level, we, you know, we'll look to take advantage of opportunities with our partners, as they emerge. It's been well documented in the media, the volume of sale and leaseback transactions we've done in the last few months, we think there'll be an acceleration of those opportunities. I, I sort of going into this financial year, I, I don't see a great deal of difference from previous years. That, that's sort of where we've landed.
All right, thank, thanks for that. Then just on the, on the inflows, obviously, you had the, the wholesale partnerships were good, but the pooled and, and direct was a bit low. What, what's sort of your expectation of inflows? You got a lot of liquidity. What's your sort of expectation on inflows? To that last question, do you think that you'll start to see a bit, bit of a pickup in transactions in the second half of the financial year?
Look, whilst, if I sort of look at the various segments of our inflows, whilst the direct inflows are lower than they have been in previous years, anecdotally, we still think we're commanding a pretty big market share in terms of inflows in that space. I certainly know that we have been able to command a similar market share in, in terms of sort of wholesale partnerships and wholesale pooled funds. You, you don't have to be Einstein to work out that inflows are gonna be lower in a rising interest rate environment than when, you know, people think we've hit peak rates and, and people feel that, you know, the, the environment stabilized a bit more.
I think if you look at the history of this group, you know, we've always been able to secure sort of large portfolios during any particular year. I don't see the next 12 months as being any different, but we've been pretty conservative with our guidance.
Okay, then just finally, the property yield was down to 4.4 versus 5.6 last year, but you didn't disclose a return. I think the return last year was 23% and 10.4 in December. What was the PI return for the year? I couldn't see it in the presenter.
Yeah, I thought, we did disclose that, at a-
I'll come back to it, no worry.
Yeah. I think we did disclose the PI total return for our shareholders, but I'll come back to you.
Well, that's fine. All right, thanks so much for your time. Appreciate it. Thank you.
Thank you. In one moment, while we move to our next question. Our next question is gonna come from the line of Lou Pirenc with Jarden. Your line is open. Please go ahead.
Yes, good morning. Two questions for me. First, on Russell, just the operating cash flow, about AUD 100 million below the operating earnings. I know it can move around quite a bit, but anything there that we should be, should be aware of?
No, no, it's just timing. Some of the collections and receivables. There's, there's no, there's no shortfall, Lou.
David, there's clearly a lot of talk in the market, rightly or wrongly, about redemptions. Can you just talk through?
Sorry, Lou, can you repeat your question? You got cut off.
Oh, sorry. Yeah, just there's a lot of talk in the market around redemptions from, from funds, not specifically for you, but in, in funds management in general. Can you just kind of talk through what you're seeing in terms of who is redeeming, who's asking for money back, who is not, and, and how you see the outlook there?
Well, I'll start with our direct business. There's been media attention about, you know, a particular office fund, the PFA fund. You know, we go through five-year limited liquidity windows for those funds, have been for the last 15 years. You know, we write to our investors after each window. In the case of PFA, we funded 25% of the redemption requests and said that the rest of that will come over the following 12 months. We've also had a liquidity five-year liquidity window for our LWF fund, which we've written to investors and said that they will have 100% of their redemptions funded by Christmas. We don't have any liquidity windows in our wholesale pooled funds. I think CPOF's out to the back end of 2027, 2028.
I, I think as a general rule, if you're in a sort of closed-end, single asset syndicate, obviously, unless the asset gets sold, those people are not getting their liquidity. We run multi-asset, open-ended funds. We've announced sales like Kensington in the PFA fund. I don't think that this is a lot different to, you know, any other previous cycles. Obviously, it's a more challenging environment. You know, if you've got 10% of your investors either lightening up or wanting out of a fund, you also need to be very respectful of the other 90% that, you know, are ongoing investors. We've been very clear that we'll go through an orderly process. We're not gonna do fire sales.
Then if you sort of think about the wholesale sector, not our funds, but there's other wholesale funds that have, you know, had liquidity windows for multiyear periods, and certainly during COVID. Some of them, you know, withheld funding redemptions until asset sales could appear. In the top end of the shopping center market, there's more liquidity, so some of those funds have been able to sell assets and provide funding for the redeeming investors. I think in most of the other wholesale funds I'm aware of, there aren't sort of major liquidity windows, but there are secondaries where people put up their units for sale at a certain price, and if existing investors take them up, great.
If they don't, there's an opportunity for new investors to take them up, if neither of those things occur, the secondary investor doesn't get to sell its assets. I think we just need to recognize that people invest in unlisted property for the long term, and if they want instant liquidity, they'll invest in REITs. You know, if you're investing in REITs, well, you'll take the market pricing at the time, which is generally, particularly in challenging periods, gonna provide discounts to NTA, you know, well below that which you can get in the unlisted world.
Great. Thank you.
Thank you, one moment while we move to our next question. Our next question is going to come from the line of James Druce with CLSA. Your line is open. Please go ahead.
Yeah. Hi, good morning, David and team. Pretty simple question to start with, how many transactions are you... Acquisitions are you starting the year with? What's, what's exchanged but not settled?
Look, we do a lot of transactions. I'm not gonna give you a specific number. What I would say is, in addition to the ones that have been announced, there's probably another AUD 400 million-AUD 500 million of transactions that are exchanged or well advanced across the whole suite of the funds. I mentioned the Kensington sale for PFA. There's a number of industrial assets that we are pruning our various portfolios. I think you'll see it across the sector. The childcare sector continues to be quite liquid. What I would say is the sort of price point of assets up to AUD 50 million, which is where a lot of private investor and syndicate capital exists, that's still quite healthy.
I think Ben Ellis, you know, mentioned during the last 12 months, a couple of shopping center assets we've, we've been able to sell at book or above book. I think that will continue. I, I'm, I'm sort of not really prepared to give compositional indications of what volume of assets we've sold to date, or bought for that matter, 'cause there's been some acquisitions as well.
Sure. Sure. There are a couple of large-ish office transactions in the market that have just printed or are about to print. How do you consider these when you're sort of thinking about guidance this year?
Well, the first thing I'd say is, you know, we're not predicating our guidance on, on particular sort of volumes of divestments. What I find interesting in the office market is a lot of talk about buildings built from 1967 to 1978 being sold at prices in line with June valuations, but everyone seems to pick up on what the discounts were to December 2022. The reality is that we're going through a pretty strong tenant bifurcation in the office market, where people want modern assets, prime quality, and the sort of older assets, particularly, you know, stuff with the sort of ages and vintage that have been sold, got short WALEs, arguably need a lot of CapEx because they're becoming obsolete.
I find it really interesting that the vendors of those assets are not selling their good kit, they're just selling these, 1960s, 1970s built assets. I think that's where you're gonna see things pan out. It's a little different in the industrial market, where even older assets are getting good prices. We've we've just sold a couple of older assets, that, you know, arguably anything approaching my age is pretty bloody old. you know, there's very strong demand for those sort of assets.
If I sort of think about, you know, other transaction markets, you know, there's, in, in the sort of neighborhood, sub-regional shopping center market, there's some assets that have been built for 30 years, but have had significant refurbishments and updating done to them, and they're still very relevant and generating really strong returns, as, as been outlined in the CQR results. It's very different by market, 'cause we're a pretty large player in every, every sector we're investing in. We're pretty, we're pretty close to the trends, and we'll continue to curate our portfolios. I'm a, I'm a strong believer in modernizing asset portfolios.
Right, that's clear. One more, if I may, and this has been asked a few times, I suppose, over the year, but you did mention that you, you focused on return on contributed equity. You pointed out that your investment in your property investments have grown at a 5 year CAGR at 11.6% over the past five years. I couldn't help but wonder, your stock's done a total return of 13%, even with the fall over the last five years. Could you put an argument that you're still better off putting some of that retained earnings back into the stock, especially where it's trading today, and especially given your strong capital position?
You're talking about a buyback in CHC?
I'm trying not to use the word buyback, but yes.
Pretty sure that's my definition of your question. Look, I, I think there are one or two listed property companies in Australia that, like us, have had a pretty strong view that they can have a modest payout ratio and reinvest retained earnings and grow their businesses organically. I think that's the right argument for CHC. I think depending on where pricing dislocation gets in, in other REITs, yeah, I think buybacks will emerge. I think there's a conundrum between sort of keeping your rating agencies happy and buying back your stock. The reality is, there's a lot of REITs out there that have got gearing that, you know, they can sell assets and retire floating rate debt, and it's EPS accretive.
I think that's probably gonna be the first step I see in the sector, and buybacks might be a second step. Certainly when you, you see the sort of earnings yield and discounts to NTA, it, it becomes, more, rational for people to consider that. But as I said, I, I think my own personal view is the REIT sector seems to be one-dimensionally focused on gearing, so I'm not sure, too many buybacks make a difference. I've been tracking this for 35 years, and I haven't seen too many buybacks actually materially change a, a stock's share price. You've really got to balance it between the short-term sugar hit and whether or not it's creating any long-term value.
From a CHC perspective, I think, we've proven over nearly 20 years as a listed entity that we can reinvest our retained earnings and grow our business, and that's probably a better proposition than a short-term sugar hit using that liquidity to buy back our stock.
All right. Thank you.
Thank you. In one moment, while we move to our next question. Our next question is gonna come from the line of Ben Brayshaw with Barrenjoey. Your line is open. Please go ahead.
Good morning. Thanks for the presentation. I was wondering, perhaps a question for yourself, Russell, could you just clarify a couple of things on performance fees, whether they were cash backed in FY23? Also, in relation to CLP, the performance fee test date seems to have shifted into FY24. Could you just clarify, please, what's happened there as well? Thanks.
Yeah, the performance fees were all tested and accrued in FY23. I believe there was some receivable over year-end. I think further to Lou's question earlier about the delta between operating cash flow and operating earnings, there's two differences. There was a higher investment receivables. I can tell you right now, almost 100% of those have been collected since balance sheet date. If you look in the statement of cash flow, there's a little bit higher tax payments out the door, and that relates to a higher FY22 accrued tax, so it's actually largely paid in 23. With respect to CLP-
Ben, you know, what we had with CLP is we had a pretty interesting set of performance dates. We had a year 7 performance date in 2020, FY20. Another one in year 10, which was FY23. Because of the way that sequencing worked, there was going to be sort of irregular periods. What we agreed with our investors in CLP is to have another performance measurement in FY24, and then move to a 3-yearly, regular performance testing regime, which is exactly like CPIF. There'll be another year 11 performance fee in June 2024. Obviously, you know the way the IRR works, you go back from year 11 to, you know, times zero.
Given that we, we had a performance fee collected in FY20 for year 7 and one in FY23 for year 10, subject to where valuations get to, you know, we, we'd expect it to be reasonably modest. Then we can sort of move it to a more regular 3-yearly testing regime like CPIF.
Yeah. Thanks, David. That's clear. Just on development inventory, could you perhaps just touch on, I guess, some of the main assets that you're holding there to back the AUD 130 million in, in carrying value? Just broadly, what, what are the prospects for, I guess, margin realization, you know, as we look forward?
Well, we, you know, we would look at the carrying value of those investments. 60 King William Street in Adelaide is something that got completed post balance date. It's something that was 100% pre-sold to our funds and partners. We'll go through effectively a final payment process in this half for that. That, that's one that is no dollars invested in that 'cause we pre-sold it. There's a couple of other DI projects that don't have dollars invested, and then the other dollars are invested in a range of things from former Folkestone projects, like a RESI project in Gisborne that has done very well. That cash will get realized over that period of time.
There's a couple of other DI investments that we would expect to get realized. Over the next 12-24 months, we're expecting virtually all of that capital invested to be repatriated to us and hopefully profits on top of that. I don't also see that as a segment that's going away. We, you know, we're gonna continue to use our balance sheet, as we have in the past, to sort of invest in those opportunities that there might be opportunities that are not quite harvested, that are appropriate for our funds. As I said, on the core, we don't compete with our funds, but sometimes there's opportunities where we can de-risk, de-risk a project. Sometimes it might be a joint venture investment with some of the funds.
I don't really see us changing our focus on that development investment segment. We've also produced a pretty strong return on invested capital by being able to get in upfront, use our skill and, and capital to de-risk something, and then put it into a position that's appropriate for our sort of funds or partnerships. I really don't expect that to be a, an earning segment that won't continue with a similar run rate to what we've seen over the last few years.
Just finally, gearing in the direct funds at 38%, it's, it's ticked up a bit in the second half. I was wondering, Russell, if you could perhaps just talk through key drivers of the increase there, because if I look at the platform devals of 2.8%, it, it would appear to be, you know, a bit above what those devals would imply.
I, I think you'll find that, again, the devaluations or the valuation changes are not evenly allocated across the various segments. Primarily, movement in the gearing and direct will be related to the reduction in value of some of the holdings.
Yeah, I think also, no surprise, Ben, you know, office assets have had a more pronounced impact. Depending on the age of the buildings, the, you know, the quality of them, there'll be a more pronounced impact in some office funds than others. No surprise, industrial's been pretty resilient. Then, as I mentioned earlier, there's some post balance date asset sales, like the Kensington sale, which will de-gear the PFA fund. And even when we're doing redemptions, we're not gonna be using debt to fund redemptions. The redemptions will be funded out of asset sale proceeds, obviously maintaining a gearing that we're comfortable with.
Thanks, Dave.
Thank you. 1 moment while we move on to our next question. Our next question is going to come from the line of Suraj Nebhani with Citi. Your line is open. Please go ahead.
Oh, hi, guys. Good morning. Just a couple of questions. Can I just check, what is the committed but undrawn capital at 30 June, please, and how that has moved over the last 6 months?
Viraj, for 18 years, we have consistently said that we're not going to identify the committed equity that's unallotted, so I'm not gonna change it this year. All we've said is the AUD 7 billion of liquidity excludes any committed and un-undrawn equity allotted that hasn't yet been allotted.
I guess, fair enough. I guess the other one is on the office side. Obviously, pretty good performance there in the portfolio. Can you clarify, you know, what, what sort of asset value movement are you assuming in guidance? Or, you know, maybe directionally as well, if not quantum.
I've been a valuer for 33 years, Suraj, and I'm not gonna start doing crystal balling on where office, industrial, retail, social infrastructure assets are gonna end up in a year's time. All I would say is, what our valuation performance has proven that if you can have up to 98% occupancy in our flagship office fund, one of the youngest, if not the youngest portfolio in the country at CPOF's under 9 years, you're gonna perform better than some of the older assets that might even be in pretty good locations. The other thing I'd say is, the volume of development that has still got unrecognized profit margins in them, is going to help create NTA uplift in our high quality wholesale funds.
Most of our development is in CPOF and CPIF, but it also extends to our partnerships. When you guys sort of look at differential valuation changes across different office portfolios, I think you need to recognize that, as I've said a number of times, you know, development profits accrue to our funds and our partnership investors. That's where, you know, we're, we're creating some resilience. The other thing I'd say is that, whilst in industrial, you know, short WALE assets are getting pumped up by reversion opportunities in the office world, having, you know, modern assets, longer leases, rent reviews, 3.5% plus fixed annual rental reviews, that's gonna create more resilience for your portfolio than shorter leased assets that are going to come up for downtime and lease incentives.
Increasingly, the older assets are going to require pretty significant lease or CapEx work. That's why we have seen the outperformance of CPOF versus every other fund in the MSCI, and that's why I think we're going to continue to see, you know, more resilience in our office platform than possibly what you're seeing across the rest of the sector.
Makes sense. Thanks a lot, David. One final one. Just want to clarify on CLP. I, I think I missed a part earlier, you know, in, in response to one of the questions. What exactly was it that moved the performance fee into 2024? I guess, is there any other funds where, you know, there is a similar likelihood of movement in the timing of performance fee calculation?
First of all, the 10 years since inception performance fee was tested in FY23 and paid. As I said, with mutual agreement with the CLP investors, because it had an odd, irregular performance fee, 'cause we started with year 7, year 10, and then you go on to another one four years later, then three years later, we agreed that we would retest it again in FY24, and then it would roll into a regular three-year testing pattern. Exactly like CPIF. There will be another test in June 2024. These things work by going back to time zero, so that'll be an 11-year since inception IRR test, and hopefully, if we continue to outperform, it'll generate a performance fee.
Given that we got paid an interim one in year seven in FY 20, a 10-year performance fee in FY 23, I'd expect any, you know, sort of performance fee that might get paid in FY 2024 as being modest.
Thank you. Thanks, David.
Thank you, 1 moment while we move on to our next question. Our next question is gonna come from the line of David Pobucky with Macquarie Group. Your line is open. Please go ahead.
Good morning, David Russell Proutt.
It's nice of you to say good morning, David, but we missed the rest of the question. Can you repeat it?
It's just in terms of equity, growth equity slows down sequentially in 1st half. Could you please provide a bit more color on how capital is viewing commercial real estate currently, and where the and the risks, lie, please?
Look, we've recently released a white paper on Why Australia. What it tells us is that there's significant global capital looking to invest in AsiaPac generally, but particularly in Australia. You know, like, like most people, I think global capital is sort of looking to see whether debt rates sort of peak, stabilize. I think I would characterize it as a lot of capital looking to deploy and just sitting on the sidelines waiting for opportunities. We're seeing a range of demand from investors wanting to co-invest in joint ventures with our large funds, through to continued appetite for partnerships, where they may take a significant majority stake, and Charter Hall Group takes a very small minority.
You know, we've done a number of those partnerships, sort of ranging from sort of 5%-15% stakes. I think there's continued appetite for that. There's no doubt that if, if I compared all the sectors, the sector that's got pretty significant demand is logistics. However, we are starting to see quite a few, both offshore and domestic investors, looking at the differential cap rates in other sectors versus logistics, and starting to think about whether there's some, you know, attractive pricing in other sectors, including good quality office. You know, whilst everyone wants to read the newspapers and, and talk up, you know, the office markets as being dead, you know, our view is that good quality assets are still in demand.
Yes, the demand's not as strong as it used to be. I personally think capital will follow the tenant demand, and we're seeing a very, very strong bifurcation of tenant demand. You only have to look at the level of pre-commitments that we've achieved in all of our office developments for the last few years and continue to achieve with, you know, for example, 70% on a Brisbane new premium grade development that's not gonna be completed till 2025. I think that's where we're going to see capital. There's no doubt there's demand for what, you know, some people call alternatives, ranging from, you know, sort of all things social infrastructure.
We're also starting to see institutional capital turn its attention to convenience retail, both, you know, the sort of shopping centers that we own, and also the CPI-linked Triple Net convenience retail. I think the reality is that as Ben called out on the CQR call, you know, no CapEx leakage, no downtime, you know, compounding impact of uncapped CPI increases, that is being seen as an interesting alternative investment for, for many of our both domestic and global investors. The other thing that we're starting to see is, you know, demand for, you know, whether, you know, some people call it value add, some people call it opportunistic, some people call it special situations.
I just see it as capital that's looking to take advantage of the expertise we've got in our platform to bring capital together and look at some value add pricing. That could be a lease to core opportunity, where there's a good quality asset that, you know, has got a shorter lease, that, you know, capital wants to take advantage of. There, there's various components of developed -to -core that are still providing attractive returns. What institutional capital has realized is that the access to capital for privates, private developers, is very difficult at the moment, both debt and equity. Yeah, I think there's a range of interesting views emerging out there.
You know, clearly, what we do, from myself down, is stay close to our existing and prospective capital partners, so we can take advantage of those opportunities, you know, as they emerge. I don't think that's gonna be any different. I think the back end of this financial year will start seeing quite a large volume of capital being deployed in across all the sectors.
Thank you.
Thank you. In one moment, while we move on to our next question. Our next question comes from the line of Grant McCasker with UBS. Your line is open. Please go ahead.
Thanks. Just a, a quick one. Just on the, the capital position across the funds, are you able to talk through the, the hedge duration? Then just talk about the expectations for interest coverage ratios, just to get a better understanding of the leverage of the funds. When you're looking to finance transactions over the next 12 months, how are you thinking about gearing and hedging relative to the previous structures in place?
Yeah, sure, Grant, I'll, I'll start on that. Like I said before, it's a, it's a pretty varied platform, and it really does depend. Like, for example, our highest geared fund is actually the Telstra exchanges, which is obviously as secure as can be and actually has the highest rating in the group at A-. With that being said, across the group, you have a, probably an average look-through gearing, excluding head stock, of just under 3 times. You've got covenants across the group, anywhere from 1.25 ICR to the typical unsecured structures, would be about 2 x ICRs. We've got headroom really across the group. I think we benefit, obviously, from the fact we're nearly 100% occupied. Really no, no delinquent accounts, all collections.
We're in pretty good state across the, across pretty much all the funds and partnerships. I think we obviously have to be mindful of where ICR levels are when we do new transactions and new financings, but when we're typically around the 30%-40% and probably lower, lower band of that more frequently now, given the cost of capital, it still works because of the kind of assets we're buying. If we were to buy, as David mentioned, maybe something that was, or invest in something that was more opportunistic or needed more activity and didn't have, offer the secure cash flows, we would, we'd finance it accordingly. We really don't have any high-pressure situations that we have to worry about as we sit here today.
If you look at our maturity of our AUD 30 billion book, all of FY23 is taken care of, and nearly all of FY24 is taken care of as well. We're already planning to deal with FY26 and 2027 with respect to maturities. On hedging, I think we indicate nearly 60% at 30 June. You guys have seen the listed and listed vehicles, and you see how we're pretty well set for 2024 and 2025, and we have a mix of cover in 2026 and onwards. We just are looking at that opportunistically, where there's opportunities to, where we think hedging is effective or, or valuable for those.
Obviously, again, the type of investments we have are offering kind of stability of earnings, and we've been biasing toward the upper, upper end of the treasury policies across those funds and partnerships.
I'd probably just add, Grant, you.
Sure.
You, you, you guys seem to be focused on direct. 38% gearing in direct, you've got to remember, they're all secured platforms with 60%, 65% LVR covenants. The same often is the case in our partnerships business, where even with multiple assets, they're a secured platform. CHOT, an example. So, you know, the sub 30% geared pooled funds, you know, are obviously unsecured. But, you know, it's sort of 20%-28% gearing. I, I think we have a business that tailors our target tolerance for gearing, having regard to whether they're secured or unsecured platforms.
Sure. That's, that's very clear. I just wanted to check, so Russell, you said roughly the average is sort of sub 3 times, is that the ICR across the platform with a cost of debt of 4.4%?
Yeah.
What's it look like in 2, 3 years' time, assuming we're in this current interest rate environment?
Oh, we'd still be well north of 2 x, even on a fully adjusted basis.
Yeah.
That's not taking into account the growth in NPI over the next couple of years. It's absolutely something, Grant, we, we all have to watch, and I think everyone in the sector and beyond is watching.
I'd also say, Grant, there's a very big difference between funds with virtually minimal vacancy and locked-in growth, whether it's fixed or whether it's, you know, uncapped CPI. Therefore, when you think about how, you know, ICR buffers are going to go, it'll be very different depending on whether or not you've got locked-in NPI growth.
That's very clear. Thanks, Russell. Thanks, David.
Thank you, 1 moment while we move on to our next question. Our next question is gonna come from the line of Alexander Prineas with Morningstar. Your line is open. Please go ahead.
Thank you. Thanks for the presentation. Just following up on those, those last couple of questions, can you just reiterate? So you've reiterate what your average rental growth or rental uplift was across the portfolio in FY23, and whether you'd expect similar amounts in 2024 or 2025?
I, I'll just give you a broad brush across each sector. As you're aware, in industrial, we're, we're, we're seeing quite a significant leasing spreads and market reversion opportunity. We've got several assets that we've been able to get, you know, even 35%-40% increases in rent. Those portfolios also have a combination of sort of fixed growth. You know, in industrial, I'd be expecting a continuation of growth across the portfolios of circa 4%. In our Triple Net portfolios, I don't see any difference much in, in the sort of growth that we're gonna get going forward. We got a nice CPI print last year. Most of our CPI-linked portfolios are based off either the June or the September print.
Telstra exchanges, for example, were all based off the June print, so we know what the rent review is. Depending on your own view of what the September print is gonna be, we'll continue to provide strong growth there. In the office portfolio, as I said, with very, very little lease expiry or vacancy over the next few years, I don't see why we're not gonna continue to see the sort of 3.5% plus rental growth that we're seeing coming through. In the smaller parts of our portfolio, like social infrastructure, pretty solid growth with a combination of fixed and CPI growth, and once again, triple net leases and no downtime or CapEx. I think Ben outlined pretty well what we're seeing in CQR.
A combination of, probably the highest % of our supermarkets ever being in turnover rent, which I think is a very positive metric, combined with the Triple Net CPI-linked exposure CQR's got. It, it's, it's not uniform, but we're pretty comfortable with the resilience of our NPI growth across the platform.
Thanks for that. Just a quick second question. The, on slide 41, the performance review testing, milestones, the years that are outlined there, is it still the case that the redemption windows line up with the performance review testing?
No, it's never been the case, so.
Okay.
So the redemption-
That is the-
The, the liquidity windows, for example, in FY 28 for CPIF, doesn't line up with the 3-yearly performance testing, and neither for... Typically, the, you know, liquidity windows are 5 or 7 years, so in the case of CPIF, it's 7 years. In the case of CPIF, it's, it's 5-yearly. In the case of the direct funds, they're 5-yearly. I just talked through the fact that we've gone through PFA and, and LWF. Yeah, don't look at the performance fee schedule as some indication of liquidity windows.
Okay, thanks for that. That's it from me.
Great. Thanks for the questions.
Thank you. I'm showing no further questions at this time. I would like to hand the conference back over to Mr. David Harrison for any closing remarks.
Okay. Well, thanks, everyone, for your attention. I'm sure we'll get to see you in the next week or two. As usual, reach out to our fantastic IR team if you've got any need to catch up with us. Thank you.