Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2022 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 will wish to queue for a question, you will need to press Star followed by 1 1 on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Thursday, 25 August 2022. 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, and welcome to the Charter Hall Group FY 2022 results, which is our seventeenth full year results presentation, having listed on the Australian Securities Exchange in June 2005. I'm David Harrison, Managing Director and Group CEO of Charter Hall Group. Presenting with me today is Sean McMahon, our Group Chief Investment Officer, and Russell Proutt, our Group Chief Financial Officer. I would like to commence today's presentation with an acknowledgement of country. Charter Hall is proud to work with our customers and communities to invest in and create places on lands across Australia. We pay our respects to the traditional owners, their elders, past and present, and value their care and custodianship of these lands. Turning now to slide five and the highlights for the year. As you can see, slide five highlights the continuation of growth and resilience in our business.
Operating earnings post-tax was AUD 542 million or AUD 1.156 per share or per security, up 89.5% compared to previous corresponding period. I'd also note that the group EBITDA of AUD 730 million equates to AUD 1.55 per security. Our FY 2022 post-tax earnings return on contributed equity was 31.4%, a leading return within the AREIT sector and the ASX 100, a metric we continue to focus on as an indicator of the value that we have been creating for our security holders. The group's property investment portfolio grew to AUD 2.9 billion as we continued investing alongside our partners and within our funds. Generated from both net valuation growth and reinvestment into our balance sheet portfolio through co-investment with fund partners.
The group delivered a 23.2% property investment return, inclusive of an attractive 5.6% PI yield and continued NTA growth, driven by the outperformance of our fund co-investments. Fund growth continues to be strong, with property funds under management up 25.5% in the period or an additional AUD 13.3 billion. When we include the partnership with the Paradice Investment Management business acquired in December, that takes group funds to 79.9 billion dollars. Further, in the last two months, we've boosted this growth by AUD 3.5 billion in the first two months of FY 2023 in terms of property funds under management. This growth saw us undertake AUD 8.5 billion of gross transactions during FY 2022.
As we continue to actively curate our portfolios to drive performance via net acquisitions and a growing development work in progress or WIP. The group's balance sheet remains resilient, with zero net gearing and a Baa1 credit rating. While the 27.5% NTA growth for the year reflects the quality of our long lease investments, asset and sector selection, particularly industrial and triple net lease portfolios. Finally, the group's investment capacity of cash and undrawn debt stands at AUD 7.9 billion. We note that this does not include committed but uncalled equity commitments, which further increases the capacity. Our focus remains on delivering sustainable growth for security holders, replenishing dry powder, strengthening resilience, and a vigilant focus on property fundamentals. Slide six outlines our strategy, which I'm pleased to say has not changed for many years.
We use our expertise and customer relationships to create value and generate superior returns for our investors. We allotted AUD 4.7 billion of gross equity during the financial year. All of our equity sources contributed to these net inflows. Of the AUD 8.5 billion of gross transactions, we acquired approximately AUD 7 billion and divested a further AUD 1.5 billion of assets. In addition, we invested AUD 2.7 billion in our development pipeline, providing our investor customers access to new investment product and enabling them to deploy capital into unique opportunities not generally available in the open marketplace. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from assets we manage. Finally, we continue to focus on investing alongside our capital partners, deploying an additional AUD 153 million during the year.
The CHC property investment or PI portfolio delivered a 23% return for our CHC security holders, as mentioned earlier. Turning to slide seven, which highlights the consistent growth in earnings and distributions Charter Hall Group has delivered for its security holders. Including our revised earnings guidance today, you can see over a 5-year period, this has averaged 25.4% annual growth in post-tax earnings while we continue to deliver sector-leading annual distribution growth. Turning to slide nine, which depicts the fund growth over the last 12 months and split by sources of equity over the last 5 years. Portfolio curation is an important driver of fund performance. We continue to be an active buyer and seller of assets, constantly looking to improve portfolios and deliver growth.
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. Importantly, this translates into assets that provide ongoing rental and capital growth, and this period was no exception. With net valuations again contributing to fund growth, reflecting the defensive qualities and attractive nature of our assets. Our partnership with Paradice Investment Management also builds upon our core strategy of partnering with wholesale and retail investor customers.
The PIM FUM of AUD 14.3 billion increases group FUM to AUD 79.9 billion as of 30th June, which has expanded to over AUD 83 billion with the FUM I mentioned in the first two months of FY 2023, and it extends our relationship with new institutional retail customers, and so also provides an opportunity for Charter Hall to introduce our existing customers to the Paradice business. As indicated in the graph on the right-hand side of the slide, we've seen a 5-year compound annual growth rate of 27% in property funds under management. The growth has been consistent across all of our equity sources, providing all equity investors access to our growth opportunities and diversity of investment opportunities with both sector-specific and diversified offerings. Turning to slide 10, which summarizes the group funds under management portfolio.
From a group fund perspective, we remain well-diversified across two key elements, property sectors and equity sources. The addition of the partnership with Paradice this year further extends that diversification. As a result, we're able to provide multiple deployment opportunities to our investor partners. This gives the group a significant number of avenues for growth. Turning to slide 11, where we summarize activity in the group property funds management portfolio. We have curated Australia's largest diversified property portfolio, generating more than AUD 2.9 billion of rent annually on behalf of our investors. The scale of our portfolio brings significant advantages, providing opportunities to partner with tenants across sectors and multiple investment opportunities for our investors.
We remain well diversified by equity source and by sector, where we have selected and curated portfolios which have captured the strong growth in logistics and triple net lease assets, predominantly with CPI-indexed rent reviews. Meanwhile, the young age or modern nature and long WALE of our national office and industrial portfolio has helped us drive sector-leading occupancy rates, which ultimately leads through to rental and asset value growth. Our long WALE and convenience retail portfolios have been curated to focus on assets that can deliver genuine earnings growth through exposure, both directly and indirectly to inflation, low occupancy costs, and taking advantage of the benefits of our cross-sector tenant relationships. I think this week's CQR results are a good indication of the strength of our shopping center portfolio and the diversified nature of that convenience retail portfolio.
The group WALE remains strong at 8.6 years. Occupancy across the entire property portfolio is high at 98%, and the weighted average cap rate of 4.37% reflects the quality of our assets. Just turning to slide 12, and a very important slide that demonstrates the depth, but more importantly, the quality of our diversified tenant customers. We see our customers as investors and tenants. We don't distinguish between them in terms of importance, and many of our tenants are also ownership partners or potential vendors in our sale and leaseback program. Our top 20 tenants make up 60% of the platform's net rental income of AUD 2.9 billion, which is clearly growing with the growth in assets since 30th June.
These tenant customers include a high proportion of government tenant customers, but also tenants in industries within essential non-discretionary thematics. We have spent the last decade building our portfolios to focus on these resilient tenants and industry, knowing that the economic cycle will not always be favorable. 23% of platform leases are triple net, and generally, that means net effective rents, so no incentives in those sectors. We have cross-sector relationships that continue to drive platform growth. 21% of the platform net income is from CPI-linked leases, providing our investors strong protection in a high inflationary environment. The resilience of our major tenant customers and our concentration towards essential industries underpins the defensive nature of our portfolios and their ongoing performance. Slide 13, our transactional activity.
Strong equity flows saw us active in deploying equity into developments, acquisitions predominantly off market or portfolios, while sale and leaseback transactions continue to be a feature of our growth. We're active across all sectors, and we're particularly active in off-market transactions that we generated directly, including the privatization of both the ALE Property Group and Irongate Group, which combined created another AUD 3.5 billion of assets under management. 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.
Our repeat sale and leaseback customer transactions are also a healthy sign of delivering on our customer-centric objectives, and is also a good sign that we're delivering with those partners given that we're doing repeat transactions, in terms of sale and leaseback. On slide 14, we've provided a summary, of our development activity, which clearly drives deployment, enhanced yields on cost and IRRs and obviously fund growth. 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. The development book has grown strongly during the period and now stands at AUD 16 billion.
Industrial development continues to grow, with the total industrial pipeline growing from AUD 3 billion to AUD 5.9 billion in the year, with the value of committed projects up from AUD 1.5 billion to AUD 2.8 billion, while restocking in our land banks has also lifted uncommitted projects from AUD 1.5 billion to AUD 3 billion. In terms of development completions and committed developments, we've virtually doubled our metrics from a year ago. Our office pipeline, as I mentioned earlier, has also grown, and we look to procure dynamic office spaces built to meet the evolving needs of our tenants. Our recent council approval for Chifley South, another 50,000 sq m addition to what I still believe is the best CBD site in Australia, is an example of the value add that we're creating for our customers.
Recent transactions, such as a further partnership with our long-term partners GIC on 555 Collins Street, is another further example of how we can use our development skills to attract high-quality capital. The forward pipeline of committed projects will generate high-quality long lease assets for our funds and partnerships while providing attractive incremental fund growth for CHC and enhancing our credentials to attract capital. Slide 15 shows our equity flows for the year. Our strategy of accessing multiple sources of capital continues to deliver growth in all segments. Our pooled funds continue to generate strong investor interest, and I note with interest over AUD 700 billion.
700 million of new equity flows into our flagship office fund, CPOF, which takes total raisings over the last couple of years to close to 1.5 billion, in a market where there is some angst around the future of workspace. I would note that we are seeing very clear evidence of workspace ratios increasing and major tenant customers being prepared to commit for the long term to CBD office projects. Our wholesale partnerships business has been very active, with two highlights being our partnership with Hostplus and CLW on the privatization of ALE Property Group and of course, the more recent completion of the Irongate transaction with our existing customer PGGM, completing those two major privatizations over the last 12 months.
Meanwhile, our direct businesses had an outstanding year with inflows of approximately AUD 110 million per calendar month and totaling about AUD 1.3 billion for the year. In summary, we continue to enjoy the support of Capital Partners, given our ability to successfully deploy capital in attractive acquisition and develop to core opportunities, investing alongside them to cement strong alignment of interest and generate healthy returns for both our investor partners and CHC security holders. I'll now hand over to Sean McMahon, our Chief Investment Officer.
Thanks, David, and good morning, everyone. As David has discussed, our property investment portfolio provides a strong alignment of interest with our investor customers, while also ensuring that security holders benefit from our investment expertise. Our property investment portfolio has increased to AUD 2.9 billion. Occupancy remains strong at 97.3%, and the portfolio WALE remains robust at 8.2 years. Our weighted average rent review at 3.6% is high and benefits from the significant exposure we have to CPI-linked rental increases. Our weighted average cap rate has firmed to 4.55%, reflecting the quality of the assets we have invested in. The portfolio remains well diversified across sectors and by investment, with an over 80% weighting to the core East Coast markets.
We continue to allocate incremental group capital to investments in long life retail, social infrastructure, and industrial and logistics assets. 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. Now turning to the property investment movement. During the period, our investment property portfolio grew to AUD 2.9 billion, with increased valuations and additional new investments. Our ability to recycle capital to support new fund initiatives and drive returns for security holders 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. Pleasingly, our PI yield remains attractive at 5.6%. Turning to slide 19 and the resilience of our PI earnings.
As David spoke to earlier, we have consciously spent the last decade concentrating our tenant exposure to non-discretionary and resilient tenants and industries. As can be seen on this page, the same is true for our property investment earnings. These are characterized by the high quality of the tenants that provide the income, the diversity of sectors which produce them, and the lack of concentration risk or single asset exposure in deriving them. 80% of PI net income comes from leases that grew at fixed annual increases 3.5% a year, delivering annual income growth at a rate above the RBA's inflation target band. The remaining 20% of leases are CPI-linked, ensuring good exposure to additional growth in an elevated inflationary environment. No single asset contributes more than 5% of portfolio investments, and our tenants are heavily weighted towards non-discretionary industries.
More broadly, across the platform, we enjoy strong tenant customer relationships. These relationships often span asset sectors and multiple properties. 71% of our tenant customers lease more than one tenancy from us, and 32% of our tenants are customers across more than one asset class. This also feeds back into transactions with our significant sale and leaseback activity, providing off-market opportunities to also grow our funds. Let's now move to ESG on slide 20. As a business, we remain very focused on ESG as a strategic differentiator. We believe that delivering environmental and social value in partnership with our tenant and investor customers will support long-term sustainable growth and returns. We've now completed AUD two and a half billion in sustainable finance transactions, and this represents approximately 10% of our debt book and is external validation of the attractive environmental performance and rating of our assets.
We continue to make significant progress in our goal of achieving Scope 1 and Scope 2 net zero carbon emissions by 2030 for assets under our operational control. We've now achieved a 54% reduction in emissions against our FY 2017 baseline, driven by 100% supply of renewable electricity to our workplace, office, and industrial and logistics sectors. We are very pleased to announce that we've entered into a 7-year power purchase agreement with global renewable energy giant Engie to supply 100% electricity from renewable sources across the group's property portfolios over 7 years. This PPA provides for the procurement of 151 gigawatts of renewable energy per annum from state-based wind and solar renewable energy projects to 152 Charter Hall sites, roughly equivalent to powering approximately 26,000 homes annually.
As part of the agreement, Charter Hall is a foundation clean energy partner for 3 solar farms currently in development, supporting the build-out of Australia's renewable energy infrastructure. Pleasingly, our achievements have been externally recognized, with Charter Hall ranked 8th in the Financial Times Nikkei Asia-Pacific Climate 200 leader list. On slide 21, we detail some of the commitments we made to the communities in which we operate. Aligned to our Pledge 1% commitment, we invested AUD 1.27 million in social enterprise and community initiatives, up 72% from FY 2021. We've also delivered over 191 employment outcomes for vulnerable young Australians. We know that ESG continues to be a key theme for investors assessing their portfolios, and sustainability is central to how we conduct our business, and always has been.
Our ultimate goal is to be a role model in the Australian property sector by creating environmental and social value alongside sustainable growth and returns. 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. As David highlighted, the group reported statutory earnings of AUD 911 million and operating earnings of just under AUD 543 million, both of which are the highest in Charter Hall's history. Operating earnings were up more than 90%, while group EBITDA was more than double FY 2021, driven largely by the funds management business. Property investment grew 16% with additional net investments made during the year, and development income was comparable to FY 2021. Funds management EBITDA of AUD 552 million represented an increase of 170% over FY 2021. I will expand further on funds management performance on the following slides. We continue to size our distributions based on target annual growth rate of 6%.
For FY 2022, this results in an earnings payout ratio of 35% and retained earnings of more than AUD 350 million. Turning to slide 24, and looking at the funds management business in more detail. This segment continues to drive organizational growth. The base funds management revenue increased more than 35%, reflecting the growth in capital during the year. At more than AUD 370 million, transaction performance revenue were more than 4.5 times higher than FY 2021, reflecting a year of significant transaction activity and performance fee realization as a result of outperformance of the group's funds and partnerships. Property services revenues were up nearly 17% as the scale of the business grows and activity levels increase, including the provision of development management and leasing services to our funds and partnerships.
Several key factors contributed to the growth in operating expenses, including increase in headcount and wage level across the business, which is by far the greatest contributor to the cost increase. Other factors included reduced impact of COVID as business normalized compared to FY 2021, and increased expense relating to long-term incentive program, which are accrued annually despite being measured over a multi-year period. For the year, the funds management EBITDA margin was 79%, and if transaction performance fees were excluded, this margin was 54.4%, demonstrating the continued profitable growth of the business. Turn to slide 25, which illustrates the evolution of the platform and the value of scale in driving profitability. The chart on the left-hand side shows the profitability profile of our funds management business since FY 2017.
The top black line shows the absolute earned EBITDA margin, including all transaction performance fees, showing FY 2022's nearly 80% margin. Now, adjusting for the more variable components of revenue, the second line shows that EBITDA margin achieved has doubled from FY 2017 from about 27% to more than 54% in FY 2022. The chart on the right-hand side shows composition of key revenue drivers relative to operating expenses and the rate of change over the last five years, where all categories of revenue have outpaced expense growth. The combination of scale and investment performance provides the greater potential for transaction performance fees, as reflected in the more than AUD 640 million earned in the last 3 years. Now moving on to slide 26, which shows our balance sheet at 30th June.
As you can see, the group continues to be in a very sound financial position. With nearly AUD 600 million of cash, we are currently at zero net gearing or in a net cash position. The investment portfolio was increased by AUD 500 million and now stands at AUD 2.9 billion. Most importantly, the returns on capital metrics are very strong for the year, reflecting this year's profitability and our continuing ability to employ capital effectively. Maintaining strong return on capital metrics is fundamental to ensuring the business employs capital effectively to generate earnings growth on a per security basis. Now in slide 27, we provide an update in relation to the debt funding across the business. Our financing strategy is tailored to the particular investment vehicles, the nature of holdings, and investor profiles, and are typically done to investment-grade metrics.
At more than AUD 25 billion of total facilities and more than AUD 15 billion executed during the year, we've grown our borrowing capacity in line with our growth and extended our maturity profile. Approximately 90% of our facilities mature after or beyond FY 2025. Across the group, average gearing was approximately 27%. The platform's average cost of funding was 3.1%, with interest for 57% of drawn debt hedged at an average tenor of 2.5 years. The business continues to diversify debt capital sources and will access bank and capital markets across multiple jurisdictions. We've also completed AUD 2.5 billion of green financings across multiple funds. As has been referenced earlier, the group had nearly AUD 8 billion of available equity or investment capacity at 30th June and is well positioned to continue to support further growth.
Now, I will hand back to David to provide an update regarding transaction activity since 30th June and earnings guidance for FY 2023.
Thank you, Russell. Now turning to slide 29, which provides an update of group activity completed so far this financial year in the last 7 weeks. As you can see, we continue to be active deploying across the platform that have completed AUD 3.5 billion of net property acquisitions in the last 2 months. We're pleased to have successfully completed the Irongate privatization and to have continue our office precinct strategy with the 50% acquisition of Southern Cross Towers in Melbourne. Property fund now stands at AUD 69.1 billion and group fund at AUD 83.4 billion. Now turning to slide 30 and our earnings guidance. Based on no material adverse change in market conditions, FY 2023 guidance is for post-tax operating earnings per security of no less than AUD 0.90 per security.
FY 2023 distribution per security guidance is for the continued 6% growth over the previous financial year. That now ends the prepared remarks, and I now invite your questions.
Certainly. As a reminder, to ask a question, please press star one one on your touch tone telephone. Again, for any questions, please press star one one. Our first question will come from Sholto Maconochie of Jefferies. Your line is open. Maconochie.
Hi, everyone. Thanks for your time today and a good result. Just a quick question on the Paradice. It looks like the firm went down about AUD 4 billion between December. Some of that's market related, but what were the outflows in that business over that six-month period?
I think the question, Sholto, you know, like I've said for 17 years, we're not gonna give compositional guidance. Yes, you're right. It's a combination of market pricing and some outflows, but we're not gonna give a compositional indication. As it shows, we're pretty happy with the first six months of performance, which is sort of well ahead of what we expected.
Yeah, it looks that way, AUD 13 million versus AUD 10 million, sort of 10-ish, so it looks good. Just on the transaction, really good run rate to date in the first quarter 2023. A lot of those were struck probably a bit earlier in the year. What are you seeing now if you look at today's coming to September in sort of investor appetite for transactions in the market? What are you sort of seeing on pricing and opportunities in the market to keep that run rate elevated?
Well, I think your question's more around where market activity is at the moment. You know, last few months-
Yeah.
Despite, you know, rising bond yields, there's still been pretty strong volume of transaction activity. It's nowhere near what it was in 2021. There's still, you know, solid transactional activity in most CBDs. I think, you know, it's fair to say the depth of buyer demand and the propensity of people to sort of sit on their hands for the time being has sort of shallowed out the volume of activity. If I sort of go across different sectors, no surprise anything with CPI-linked rent reviews are still being bid pretty strongly. We think the sort of Long WALE retail, convenience retail sector will continue to, you know, attract good buyer demand.
I think, you know, you're seeing a plethora of evidence of institutional capital still being prepared to buy good quality assets. You know, our partnership with bringing GIC into 555 Collins Street is an example of that. When I sort of think about, you know, other markets like industrial, yep, there's no doubt that the volume of transaction in industrial is gonna be lower than it has been for the last couple of years. It's still sitting at record low vacancy rates. You know, I haven't seen vacancy rates in most major markets as low as they are in my career. You know, that's driving good market rental growth.
I think, you know, as we get through FY 2023, I think you'll all be surprised at the volume of, you know, office transactions that get printed in major CBDs.
Yeah. Pricing, is there any firming sort of firming the cap rate sort of widening out a bit? It's not too early to see that given the volumes we've seen.
It's too hard to sort of make a rule of thumb 'cause it's all asset by asset. You know, there's no doubt, and I've said this for years, long-term capital prices, their return expectations on their long-term expectation of bond yields, not the spot bond yield. You know, we weren't seeing capital flow into markets in 2020 and 2021 when 1% bond yields, you know, weren't the predicted, you know, ten-year average bond yield. I think, you know, you're starting to see an inverse yield curve in most bond markets around the world, particularly Europe and the U.S. You know, our view is that they'll be elevated for, you know, this year, next year, and things will start tapering off after that.
I think our, you know, our long-term capital partners are sort of looking through the sort of short term spikes in inflation and bond yields and sort of making decisions, you know, for the longer term. You know, I don't wanna get drawn into, you know, how many basis points I think cap rates, you know, may soften or have softened. I think the reality is it's gonna come down to, like I talked about with industrial, you might see sort of static cap rates or even a bit of softening in industrial, but you're gonna get very strong market rental growth. They tend to offset each other. And I think we're gonna go through a period of what I call the bid-ask spread, where, you know, there's a gap between vendor expectations and buyers.
My experience is it sort of takes 12 months for that to that spread to narrow. You know, we'll watch transactional activity during the course of this financial year and probably sit here in a year's time. As I said, you know, the market might be surprised at the volume of transactions we see.
Yeah, that makes sense. Your development pipeline almost doubled year-over-year. If you look at the first half, second half, you did AUD 101.6 billion in completions. Do you think that'll be elevated going this year? You've called out last result around that sort of AUD 2.5 billion-AUD 3 billion per year now, so a bit more than historically.
Yeah. Well, completions have doubled. If you look at our committed and uncommitted development pipeline, and you look through an average development period in industrial or office, you know, by definition, our completions are gonna keep growing. Office is obviously gonna be pretty lumpy, because we've got some long-term projects like Chifley South that got approved by council this week. We've got some fantastic projects that are in their construction phase that complete during calendar 2023, you know, including, you know, the Amazon anchor, 555 Collins Street in Melbourne, the 60 King William project in Adelaide. We're well out of the ground on the Australia Post headquarters at Richmond in Melbourne, and you know, well out of the ground on our 360 Queen Street project in Brisbane.
What has been most impressive is the volume of pre-commitment demand for industrial, which is why you've seen both pre-leased development WIP grow strongly. As you can also see, we've got a pretty significant uncommitted development pipeline that we've secured, you know, in both industrial and office. Yeah, we don't see that changing. As I called out, there's three major advantages of having, you know, a pretty elite development capability in those sectors. A, we can create brand new product that you can't otherwise buy in the open market. B, it is very attractive for our fund investors to be getting those enhanced yields and IRRs.
You know, from a CHC perspective, you know, it allows us to keep growing our development management revenue and create sort of positive jaws in margins in that part of our business. That's. You know, it's not deliberate, it's not just an accident, and all of a sudden we're growing our development pipeline. It's been a deliberate strategy for the last seven or eight years.
All right. Thanks very much. I appreciate your time. Well done.
No problem. Thanks, Sholto.
Our next question will come from Ben Brayshaw of Barrenjoey. Your line is open, Ben.
Could just expand a little bit more on the growth in the development pipeline over the last 6 months. It's up, you know, circa AUD 3 billion. And just secondly, in terms of how you're seeing opportunities to add to that over the next 12- months in either the office or logistics sector, you know, clearly, I suppose, with rationalization of capital, just interested in your thoughts on how that might play out insofar as freeing up, you know, development sites going forward.
Look, Ben, I don't know what more I can add to what I said to Sholto. The reality is that, if I take it sector by sector, our industrial and logistics pipeline is, you know, being funded by predominantly wholesale funds and partnerships. You know, there's strong appetite from our wholesale capital to keep deploying it. If you look at our tenant customer slide, where 60% of our income comes from the top 20 customers, it's no accident that there's a lot of repeat business across sectors with those customers. A lot of our major retailers are also big users of logistics space. You know, we're pretty customer centric, so we're really looking at securing land that can satisfy the demand of our repeat business customers.
As I said earlier, it's really tight in those sectors. Equally, in our office pipeline, we've not only secured some great pre-lease projects and been able to secure tenant commitments from the likes of Amazon, Aware Super, government on a couple of projects, Telstra on the Adelaide project. My view is there's gonna be a big bifurcation, particularly in office and industrial markets, where the tenant customers want modern space. I think there'll be a big delta between relatively low vacancy rates in modern office buildings in all markets. The older buildings of 30, 40, and some of them are 50 years old, they're really gonna struggle to retain tenants.
I think probably more so than any time in my career, we're gonna see a big bifurcation in vacancy rates in modern buildings versus older buildings. I also have the same view in industrial. I think the demands of industrial customers is changing and changing very quickly. That's why you'll continue to see us, you know, divest older stock. I think we've been averaging sort of AUD 1 billion to AUD 1.5 billion of divestments a year. I don't see that changing as we sort of curate our portfolio. As my executive team get older, our portfolios will get younger. That's basically the strategy.
Yeah. Thanks, David. Just a final question on inflow over the last six months. Wholesale has been in the order of AUD 1.6 billion in direct. Could you just comment on the key drivers of the wholesale inflow? Secondly, direct in the order of AUD 600 million seems to have held up well. Has that come as a surprise, as obviously interest rates have adjusted?
Ben, nothing comes as a surprise for me in Charter Hall. It's all a long-term deliberate strategy. You know, we've got a privileged position that we've developed in the direct market. We have very strong performing funds, as you can see from the deck. We have always been, you know, very focused on not going for the higher yield, higher risk assets that then create higher risk on, you know, value reductions. You know, our portfolio is in the direct business of institutional quality. I think that's holding us in a good position to continue to attract capital from direct self-managed super fund investors and clients of our major, you know, financial advisor, wealth management groups.
On the wholesale side, you know, the wholesale partnership business is continuing to, you know, attract capital. I mentioned the GIC transaction with 555 Collins Street. If you look at Hostplus partnering with us on the ALE take private and then PGGM on the Irongate take private, you know, they're examples of where we're able to use our expertise and market knowledge to secure a product that, you know, is not normally that easy to secure. I don't see that changing. I think the team in the pooled funds in, you know, the CPOF, our leading office fund, I think it's done a 12.8% return for the last 10 years, virtually 20% above the peer set in the MSCI index.
Over the last two years, you know, it's probably generated, you know, close to AUD 1.5 billion of, you know, equity inflows, which is a testament to the quality of that portfolio and our team at a time when there's been a lot of question marks about the future of office. As you know, in the industrial pooled fund, CPIF, you know, we've had a good run of both securing and deploying capital. I don't see any reason why both those funds that are, you know, providing fantastic returns to investors are not gonna continue to attract capital over time.
Thanks for your time, David.
No problem, Ben.
Our next question will come from James Druce of CLSA. Your line is open.
Hi. Good morning, David, Russell, and Sean. David, just my first question, just around where you're gonna put your balance sheet capital near term. Is there anything specific that you're thinking about, or is it more of the sort of co-investment in the broad portfolio?
Look, you know, I think our balance sheet's as strong as we've ever had. We had, you know, nearly AUD 600 million of cash on our balance sheet at 30th June. When we think about how to deploy balance sheet capital, we're pretty proud of the very high return on contributed equity we've been able to deliver for our investors. When we look at how best to shape that, there's no doubt partnering with our wholesale capital on things like the Irongate transaction makes sense. When we look at seeding new funds or partnerships, that's a sensible strategy because we're generally taking a relatively small minority stake and bringing in larger capital partners for those sort of transactions.
I think we also have delivered very high returns on invested capital in our development investment earnings segment, where we've been able to, you know, secure you know, land that for whatever reason was not necessarily attractive to our funds or partnerships at the time. We've been able to secure planning approvals and then pre-lease them and then deliver a stabilized product to our core funds. That's a segment that I think we will continue to invest in. It's provided very high returns for us, and it's essentially a capital light segment as we stabilize and, you know, sell those sort of side opportunities once they're stabilized to our funds and partnerships. But we're patient.
You know, we've got, you know, probably one of the lowest average portfolio gearing levels that the business has had. As I said, you know, we've got a very strong balance sheet. We've plenty of capacity to deploy. We'll be selective. You know, as you can imagine, I can't go into the specifics, but you know, we have a plethora of sort of opportunities to look at and, you know, we'll continue with our co-investment strategy where we're a relatively small stake owner in funds and partnerships. That is how we think we can drive maximum or optimal, you know, EPS growth for the Charter Hall Group.
Okay. Yes, that makes sense. Just maybe on the operating expenses for the next 12 months, do you expect that to be roughly in line with the second half, or do you expect some basic growth coming through there in terms of just looking at the overheads, really?
Yeah. Look, you'd always expect some growth as we continue to grow the business, but you're not gonna see the quantums that we saw year-over-year 'cause like I said, there was a few things that happened during the comparative periods where it was a little bit depressed in the prior year, but also we made sure we invested in the business where we needed to, whether that be in development or finance or operations. We won't see that kinda same investment level going into this year, but I would expect as we grow our business, our overall expenses will increase. As you saw in the margin slide, we're very focused on ensuring that the core operations margins continue to grow in time.
The rate of change should continue to be much behind where you see the revenue growth.
Yeah. I'd just add, you know, we have invested in the platform, both in our people and in non-employee expenses for the last few years. We think we've got ourselves to a point where we can significantly scale up the operation, and create positive jaws. The other thing I'd say is that, you know, we are quite focused, and you've seen it for the last five or six years with the growth in the triple net leased assets in our platform, you know, focusing on low, what I call low FTE intensive funds under management.
You know, there's no doubt it's more profitable for a fund manager to be managing assets that, you know, have triple net leases when we're not doing the normal management intensity that you do in large office and industrial portfolios. You know, as we move forward, both assets within those sectors, office and industrial, as I said, the strategy to create more modern portfolios. If you look at the development book, the average size of assets is growing both in office and industrial, so that creates economies of scale as well.
Yeah, okay. That's clear. Thank you.
One moment. Our next question will come from Lou Pirenc of Jarden. Your line is open. Lou, your line is open.
Thank you. Good morning. Two quick questions. David, in the past, you've said a low interest environment wasn't very conducive for sale and leasebacks. I know you've done sale and leasebacks. Are you seeing signs of a rising interest environment, you know, creating more conversations with owners of real estate that may want to partner with you?
Absolutely, Lou. I've been listening for seven or eight years to CFOs and treasurers of major corporates telling me, "Oh, we don't need to do sale and leaseback. We'll just go and borrow more money." Well, those days are over because the cost of the corporates borrowing money has risen, and therefore, the relative merits of doing sale and leaseback are gonna be stronger in this environment than they ever have been. You know, as you can see from the various acquisitions we've done recently, CQR with Gull, you know, with very strong initial yields and CPI indexation, you know, that's a sign of things to come for us. I think we're going to see more and more corporate sale and leaseback in industrial and logistics sectors.
I think we will probably see a lot more of this happening in, you know, what I call the sort of broad social infrastructure sector. I think you're gonna see it across, you know, telecommunications. Obviously, we did the Telstra Exchange transaction, you know, in 2019, which has been, you know, a fantastic result for our partners in that portfolio 'cause I'll remind everyone, CPI plus 0.5% is looking pretty good at the moment in terms of rent reviews. I think we're gonna see more government sale and leasebacks, there may be some, you know, 51 type-49 type partnerships with both corporates and governments because the, you know, whether you're a federal government, state government, you know, local government, they got the same issue that corporates have got.
All of a sudden, cost of debt is much more expensive than it used to be. We see, you know, significant opportunities ahead for that. Given that we've got a market leading position in sale and leaseback, and frankly some pretty good references from existing customers that continue to do repeat business with us, I think we're well-placed to, you know, access those sort of opportunities.
Thank you. Just on the development income line, I know it's relatively small, but with the doubling of the pipeline, should we expect to see that grow or will most of that come through to partnership income, transaction fees, et cetera?
Look, my view is I don't like anything not growing in Charter Hall, so that's all I'd say.
Thank you.
One moment. Our next question will come from Stuart McLean of Macquarie. Stuart, your line is open.
Thank you very much for your time. First question is just on the outlook for property investment earnings, please. So 5.6% yield as we stand today. I was wondering how that moves going forward 12 months with the rising interest costs that will come through. If you can just provide a bit of color there, that'd be great, please.
Look, I don't need to give you any further feedback than the whole sector's given investors around rising cost of debt. What I would say is that it depends on the portfolios. You know, clearly where we have CPI indexation, strong market reversions coming in in certain sectors, I think our NPI line can keep pace with our, you know, rising cost of debt. The actual cost of debt and how long it's hedged is very different by different funds. You know, we are reasonably comfortable that, you know, we should be able to sort of maintain that. There are pressures on it.
There's no doubt the cost of debt, if it doesn't get offset by a rising NPI line, you know, will cause some short-term pressure or downward pressure on the PI yield. The thing I'd say about the PI yield in CHC is that, you know, it's a relative. The growth in that PI is a relatively small delta in terms of the overall growth of CHC's earnings. But, you know, you don't have to be Einstein to work out over the last five or six years, PI yields have come down as cap rates have come down, and in the current environment, you know, cost of debt is putting pressure on those sort of distribution yields.
I'd also note that, you know, we're quoting PI yield after we have deducted our fees at a fund level. We're getting the same distribution yield from a PI perspective as all of our partners in the various funds and partnerships. It's sort of one of those things that, you know, I'm not gonna give specific guidance on where it might be at a spot rate in 12 months or 24 months, but, you know, clearly it's come down over the last few years. I don't know if you wanna add anything more, Russ.
Yeah. The only other thing I'd add is it's obviously impacted by the mark to market on the valuation of the holdings. The reason it's also come down over time is that the denominator is increasing in value in proportion to the earnings. Those are the factors that have been pushing it down till now, but it is mostly gonna be the interest in the underlying funds that will affect the outcome of the yield going into FY 2023.
It sounds like the key takeaway there if we're thinking about that yield on a go-forward basis is you kind of expect NPI growth broadly to offset any increase in interest costs. Is that the key takeaway as we think about the next 12 months?
Well, the math is pretty simple, mate. To maintain your PI yield, you need your NPI growth to offset any increase in the cost of debt. You know, there's a few other things that change that, whether the funds are lowering their gearing or increasing their gearing. The only other thing I'd add, stuart, is, you know, if the implied blowout in cap rates that the listed market's telling us is gonna happen, happens, well, we've got a tailwind to PI yield in front of us. You know, we're not in the camp that the implied yields that, you know, are trading in the market have got it right anyway.
Okay. Thank you. Second question is just on some of the key performance fees that are coming through. I was wondering for CLW, are you able to provide a vesting date there, whether that's in the near term or if that's towards the end of the financial year, please?
Second quarter of FY 2023.
Great. Thank you. Just on the guidance, as well, do you have to provide any additional color on assumptions around the performance fees or movements in asset valuations as well, please?
I think I'll be consistent with what I've said for about 17 years. We don't give compositional guidance, so, you know, we've made it pretty clear which funds or partnerships have testing dates in FY 2023. You know, the rest of the testing dates are self-evident in the deck.
Just a very final one on these performance fees as well. CPIF, I think you mentioned in your remarks before, David, that that's returned 12.8% over the last 12 years. Is that the life of the fund or does it need to cycle, you know, the GFC as well?
Yeah. I mentioned the 10-year number 'cause that's what the MSCI core index reports. But as with CPOF, which generated a performance fee in FY 2022, it goes back to time zero. The inception of CPOF was June 2006. Yes, you know, the impact of the GFC is gonna lower that IRR that I quoted from inception. You know, at the moment, you know, it's not quite at a hurdle, but with the work that the office team are doing, in particular, the margin creation we're generating for our investors in CPOF from the develop to core projects we've got, and there's quite a few in the pipeline, you know, it may well reach its hurdle over time.
It's not quite there yet.
Great. Thanks very much for your time.
One moment. Our next question comes from Richard Jones of J.P. Morgan. Richard, your line is open.
Thanks. A couple of quick ones, David. Just you touched on the strong direct inflows in FY 2022. Do you have any color on what July inflows were?
Oh, mate, we've never given month by month indication of our flows. I'm not gonna start now. All I would repeat is what I said before. Our team in the direct business are doing a fantastic job. We, you know, yeah, think there'll continue to be demand for property. All I would say is that, you know, FY 2022 was an exceptional year with AUD 1.3 billion of inflows.
Okay. It's no indication of the trend?
I think I've answered the question.
Okay. On the development segment, I assume you've worked largely through the Folkestone inventory. Is that correct? Can you clarify, are you restocking that inventory or will segment earnings predominantly just be management-driven earnings moving forward?
Sorry. Is your question about our total development book across the platform or just our development investment earnings segment?
Yeah, the development investment segment earnings.
Yeah. As I said earlier, we have reduced the actual capital invested in that segment significantly. You know, we will restock. There are opportunities that may not suit our funds and partnerships that suit us in terms of incubation. Yeah, you know, we're in the process of restocking that. I guess, you know, hence my flippant comment before around I don't like things not growing in Charter Hall. That would give you a guide that we don't expect, you know, that segment to not continue to be a focus of ours.
The return on invested capital is about 50% in that business at the moment. Is that just a point in time? Because it's got, you know, AUD 70-odd million of capital, and it's making AUD 35 million of earnings.
Yeah. The way it works is, you know, let's say we secured a site, got planning approval, got it pre-leased, and then once it was stabilized, we sold it to one of our funds or partnerships on a forward-funded basis. That means the capital Charter Hall's deployed is repatriated to Charter Hall. You have a lag effect where the earnings that are generated, you know, as we go through that project, you could argue at a point in time, the return is infinity 'cause we've got our capital back. That's not the way you need to look at that if you're gonna continue to restock and replenish your inventory. As I...
As you just indicated, and I'm not gonna give any indication as to what we would expect as a hurdle, we do generate strong returns on invested capital because we're repatriating our capital much more quickly than, for example, if you did a three-year, you know, residential project where you can't get your capital back until you've sold all the apartments. Well, you got your capital deployed for a bloody long time. Whereas a lot of what we're doing is allowing us to repatriate our capital once we've de-risked it, and then have, you know, funds or partnerships purchase it on a, you know, forward-funded structure.
One final question, David. Can I just clarify, Chifley South and the land you picked up at Collins Place, do they sit on balance sheet or are they in funds?
No, they're all in funds and partnerships. Chifley, we, you know, have a partnership which is a combination of two of our funds and our partner, GIC. The Collins Place freehold is in our flagship AUD 10 billion wholesale fund, CPIF, as per the media release.
Great. Thanks, David.
One moment. Our next question will come from Grant McCasker of UBS. Your line is open.
Good morning. David, just a quick one, maybe this is for Russell, but phenomenal year of performance fees in 2022. Any of those testing dates or the performance fees associated from FY 2022 flow on to FY 2023 earnings?
You mean the other way. You mean testing in FY 2023 accrued in FY 2022 earnings? Is that what you're asking?
No, the other way. Did you have any flow on from FY 2022 into FY 2023 of the performance fees?
No, there's none.
Okay. The vice versa? That's it.
Two no's, mate.
Okay. Good. Goody. Thank you.
One moment. Our next question will come from Louise Sandberg of Bank of America. Your line is open, Louise.
Good morning. Congratulations. Just a quick one from me. Most questions have been answered, but you mentioned that office workspace ratios are increasing and major tenants are committing, but what are they doing in terms of absolute space? Are they increasing or cutting? Especially given your large percentage of government, which we understand is struggling to get people back.
Look, I think there's a myth in the market that because we're currently both government and corporate tenants, you know, are struggling to get their people back into the office five days a week or, you know, in some cases even three days a week, that is a long-term expectation of our tenant customers. What we're seeing with the major pre-commitments we are doing with both corporates and government, is that these customers have an expectation longer term that the, what I call the density or use of their offices will increase. They are definitely taking more space for every person. So, you know, roughly, I think we are seeing a 20%-25% increase in workspace ratios. You know, they got towards as low as 10 square meters per person. I think we're
What I'm seeing is sort of 13 square meters per person. The other thing that's happening, if you'd like to walk through the fit out of Charter Hall in One Martin Place, where we've had to take another floor, is a great example. There is a lot more space being provided as amenity, common area, town hall, you know, F&B space. I think, roughly the two things are offsetting each other. People who may be planning for less bums on seats are increasing the space per person. We are also seeing a complete reversal in activity based working.
I'm not saying there's no one doing it, but no one, nowhere near the volume that we saw pre-pandemic in terms of, you know, if you're not sitting in your desk for an hour, you lose it and someone else can come and get it. I think that's all changing. You know, net-net, we do sort of think it's pretty benign, the change in demand. What I'd also say is that, you know, it's the tightest labor market we've seen in years, lowest unemployment. The war for talent means that people really have to create amenity both within their workplace and in the surrounds. That's why we're so focused on these modern buildings and precinct plays.
I think our customers realize, unless they've got a pretty, you know, modern environment, great retail, well-being, amenity within the complex, it's hard to get people to, you know, wanna be in the work environment as opposed to working from home, you know, 3 days, 4 days, 5 days a week. That's that bifurcation I was talking about. You don't have to listen to me, you know, the fact that there's still capital being prepared to, you know, acquire good quality assets tells you that there's, you know, other people are seeing the same trend. You know, I've just come back from Europe. We're seeing exactly the same trend over there where, you know, the more modern buildings with the great amenity are attracting the tenants and then the older ones are struggling a bit.
That's sort of broadly how I see it panning out. I think owners and people like ourselves as managers need to really invest in their people and have the best people in workplace strategy, people that have been on the other side of the fence advising tenant customers, and you know. Remember that this is an evolving space, and that's what we're seeing in logistics. You know, when I started 35 years ago, you know, I don't think there were tenant reps in the logistics space. Now, you know, the complexity of automation and the facilities requires a really deep understanding of your tenant customer.
I think that's basically going to differentiate people over the next 10 years, that those that are prepared to invest in their people and their platform to understand the customer as well as we can, they'll be the ones that win out in this sort of war for tenants.
I guess I just wanted to touch also on industrial leasing in terms of who your incremental tenants are. Is it your existing customers growing space, or are you seeing more demand from online or fulfillment groups?
I think both. You know, most retailers have an omni-channel strategy. You know, from the big supermarket groups like, you know, Coles and Woolies, and Aldi and Metcash, through IGA, you know, with their IGA network, you know, they're all big customers of ours. You know, what I call the 3PLs have got strong demand, through to the essential sort of manufacturing type tenant customers we've got. I think it's broad and, you know, we are out there courting both existing customers and new customers. I think the demand is pretty broad-based. You know, when you throw the blanket over the industrial market, Sean, what do you think?
There's realistically like 150 tenants that, you know, make up 80% of the industrial market in terms of the large institutional quality.
Yeah, I think that's right, David. I mean, David and I have been doing this for a long time, to quote David, and we've never seen, Louise, these record low vacancy rates of 1% across the industrial segment in Australia. On the flip side, demand has never been higher. Currently there's about 2 million square meters plus of pre-lease inquiry that naturally takes 12-18 months to unlock. We're in a market that's chronically undersupplied, where the demand side's being driven from consumer staples and e-commerce in the main, but it's very broad based, and automation is having a significant impact on new demand as well.
Thank you so much.
One moment. Our next question will come from Alexander Prineas of Morningstar. Your line is open, Alexander.
Good morning, and thank you. Just wondering, is there any pushback on CPI-linked leases at the moment from tenants that are signing new leases? Or perhaps is it sort of reflected in the initial rental rate that is acceptable to the tenant perhaps being lower, given that CPI is a lot higher?
It depends on who the tenant is. If you're a tenant who have pricing power, where they can move their revenue in line with inflation, they are more comfortable with CPI-linked rent reviews. Then, as Sean and I were just talking about, it depends on the sector. If you've got tenants in a really tight market like logistics and they want the space and they don't have a lot of options, well, they're somewhat going to be, whether they're reluctant or not, prepared to have some sort of CPI-linked rent reviews. You know, quite often from our perspective, we'd love to get uncapped CPI or CPI plus 0.5% like we did with the Exchange portfolio.
We're also comfortable with, you know, things like the CPI minimum two, maximum five percent that we've done with Ampol on their portfolio. It's a bit horses for courses. You know, 90% of all leases done in the office market are generally fixed rent reviews. Charter Hall across its, I think we're now AUD 26 billion or AUD 27 billion of office growing quite significantly, have a fixed average rent escalator of 3.5% per annum. I'm pretty happy with 3.5% rent reviews over 10 years. Even when CPI might be above that, I think over the long term, that's not a bad rental review structure. It's different by sector.
You know, as you'd imagine, you know, a retailer is probably more, particularly a convenience retailer, comfortable having sort of CPI-linked rent reviews. And as we've said, and as Ben said on the CQR call, you know, when we think about our convenience shopping center portfolio, we've got strong indirect CPI linkage with turnover rents, as well as, you know, sort of fixed CPI, or CPI index rent reviews in the vast majority of our sort of long WALE convenience retail portfolio. We are shaping, where we can, a growing weighting to CPI. I'd make the comment that if you look at the top 20 or 30 economists, you know, they're all predicting a spike in inflation for, you know, the current period.
I haven't seen an economist with 10-year CPI forecasts above 3% yet, so anywhere in the world, to be honest. I think as a long-term investor, we need to think about what's going to be best for that particular asset. You know, you don't want your rents getting out of control relative to market. We always sort of like to think that, you know, our rental growth is gonna keep the market to passing rent relativities, you know, around parity over the long term.
Thank you. That's all interesting stuff. Just one more on the workspace ratio comments, which were also very interesting. Just, you mentioned you've seen a 20%-25% increase in the workspace ratio. Just clarifying, is that relative to sort of immediately before the pandemic, that increase? Secondly, do you publish data anywhere on kind of workspace ratios, that you're putting into your fit outs?
20%-25%, you know, is going from 10 square meters -12.5 square meters. As I said, you know, we think the market was, you know, pre-COVID around 10 square meters -11 square meters. Certainly new inquiries were planning for that. Now I think it's much closer to, you know, 12 square meters -13 square meters. We don't publish workspace ratios for our tenant customers across the portfolio. It's pretty fluid. It quite often changes, but there is market data out there that other, you know, survey houses do provide. But anecdotally, most large office owners have a pretty good handle on what their average workspace ratios are across their portfolio.
As I said earlier, there's no point trying to look at it during a period where we're still impacted with the transition back from working from home and hybrid back, you know, because you know, as one of the earlier callers asked, you know, I think governments and corporates are still sort of struggling with, they want their people back in the workforce. But you know, different organizations were less militant or more militant about it during the pandemic. Therefore, I think you know, they're dealing with a level of apathy in terms of their staff when you know, we've got record unemployment and you know. I think that'll change as the next few years go on.
You know, I ultimately don't think we can see unemployment stay at the level it's at now. Once unemployment rises, I think there'll be a different attitude. I think if you speak to most CEOs, it's quite ironic that everyone's happy to pack into a 100,000 stadium or go to a music concert or go to every bar and restaurant in every capital city around Australia. There's still a you know, sort of, a reluctance around, "Oh, you know, I can't go back into the office workplace 'cause it's not safe." That whole you know, dichotomy is gonna change over the next few years, I think.
Okay, thank you. That's it from me.
One moment. Our next question will come from Suraj Nebhani of Citi. Your line is open.
Oh, thanks. My questions have been answered. Thank you.
I'm showing no further questions. I would now like to hand the call back to management for closing remarks.
Okay. Once again, like to thank all of the team at Charter Hall for the hard work in generating what on all metrics is, you know, a record financial year for the group. Look forward to meeting up with investors, you know, over coming weeks. Thank you.