Charter Hall Earnings: Prepared for Commercial Property Ructions
We reduce our fair value estimate for property fund manager Charter Hall Group CHC by 2% to AUD 15.90 following fiscal 2023 results. Operating earnings per security of AUD 93.3 cents per security was lower than our AUD 99.9 cps estimate, with the main driver lower than estimated transaction and performance fees. We revise our fiscal 2024 estimate from AUD 103 cps down to AUD 75 cps, in line with new guidance. However, we raise our outer-year estimates, driven by health across the underlying property portfolio. We think it sets Charter Hall up well once current commercial property ructions fade, and reinforces our confidence in their narrow moat.
Charter Hall has for several years favoured long leases and high-quality assets, and sought CPI-linked leases with triple-net clauses where tenants pay property costs. As of June 30, 2023, the average lease in the funds management portfolio was 8.2 years, 25% of leases are triple-net, and 20% have rent linked to inflation, and occupancy was 98%. Over half the funds management portfolio is in industrial, convenience retail, and other long-lease assets doing well in current conditions.
Offices make up one-third of the funds management portfolio, which is where potential concerns might be. But despite headwinds in parts of the office market, the portfolio’s office occupancy is 96%, with an average 5.9-year lease. This leaves the portfolio in good shape and should serve to bolster the group’s reputation and track record versus peers.
Some of our prior longer-term estimates were low compared with what Charter Hall has achieved historically. Most notably, we previously assumed transaction and performance fees at the end of our 10-year discrete forecast period would be roughly 0.15% of estimated funds under management. By comparison, performance and transaction fees totalled 0.23% of FUM in fiscal 2023, despite being a weak year for commercial property markets and transactions. We increase our outer-year estimate to 0.22% of FUM.
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