Mar 06 2019Add to Favorites
Although I almost always invest personally in unlisted syndicated and direct property, this is generally in chunks of $100,000 or more and generally, our minimums for MP Funds Management are closer to $500,000. When monthly or quarterly rental income comes in from these investments, I like to have somewhere to invest it rather than sitting as cash.
Given the monthly rental income from these syndicated unlisted real estate – based investments is usually in smaller amounts and individual rental distributions are not large enough to put back into an unlisted syndicate, I look to the listed real estate markets.
I recently received a distribution from the investment I made in my Self-Managed Superannuation Fund (SMSF) via MP Funds Management into 9 Hunter Street, Sydney, which is a syndicated equity holding of a 15,500 sqm (approx.) office tower on the corner of Hunter and George Street in the CBD.
The 9 Hunter Street holding is a stratum and was acquired for $202 million at the end of 2017, which equated to c$13,000 per sqm. 98% occupied by tenants like Macquarie bank and having the benefit of being located on the doorstep of the new light rail route, which is just finishing construction, and the new Wynyard train station, the property was under-rented at c. $700 per sqm and purchased very well. Commercial office rents have exceeded $1000 per sqm and comparable (freehold) office towers in the vicinity are trading at $21,000 per sqm plus. The rental dividend to investors and that I receive into my SMSF monthly from 9 Hunter Street is sitting around the 5-5.4% per annum mark.
One of the key points that make Australian commercial property assets so attractive is the long lease terms and rental increase structures which are generally not as favorable offshore. In terms of lease structures comparatively speaking, Asia generally has thee year market reviews and whilst North America does have fixed escalations, they are often half the Australian escalation rates. In terms of lease structures comparatively speaking, Asia generally has thee year market reviews and whilst North America does have fixed escalations, they are often half the Australian escalation rates. Charter Hall is one of the listed companies I have had my eye on for a while and I really like for a range of reasons, including their diversified holdings across most of the performing property sectors, their management, and their strong development pipeline. According to CEO David Harrison, Charter Hall has received significant inflows of offshore capital to its unlisted funds for this reason. Charter Hall is also considering a half stake in the $1.8bn Chifley tower, being sold by GIC. Vacancies are at record lows in Sydney and Melbourne, with yield curve further supporting capitalisation rates. I like Charter Hall on the basis of their strong earnings, their consistent year on year growth and furture growth potential, their acquisition of the Folkstone business and their total $28.4b funds under management. According to the ASX 6th March, the annual dividend as at 28/12/18 was 16.5c or 3.63%.
CLSA have recently provided their analysis of Charter Hall, extract below;
CLSA estimate Charter Hall’ s CHC’s underlying growth without the impact of the Chart Hall Office Trust CHOT performance fee and the accretion from the Folkestone (FLK) acquisition. Based on CHC’s original FY19 earnings which indicated that the acquisition of FLK would increase guidance by 3% from 5-7% growth (without FLK) to 8-10% (with FLK), we estimate that based on CHC’s latest FY19 guidance, CHC’s organic underlying growth is 6.0-9.4%.
CHC has a track record of upgrading and beating guidance. CLSA note that since FY12, CHC has a history of providing full-year guidance which it subsequently increases at the 1H results, and then beats when it delivers the full-year results. This suggests a conservative approach in setting guidance, which in CLSA's view has likely been maintained for FY19.
The CLSA price target of A$9.39 is based on a 50/50 blend of CLSA’s DCF (A$9.06) and their FY20E NAV (A$9.72). Our DCF valuation is based on free cash flow to equity, using a 7.52% long-term cost of equity (derived using a risk-free rate of 4.00%, market risk premium of 5.0%, adjusted equity beta of 0.70) and terminal growth rate of 2.5%.
CLSA's forward NAV applies a 17x multiple on the Property Investment income and a blended 17x multiple on the funds management business.
CHC’s strong underlying growth is driven by continued Funds Under Management (FUM) growth to A$28.4bn (A$3.6bn or 16% ex-FLK acquisition), with strong fundraising, fund deployment and Capex to drive further structural FUM growth (CLSA estimate a 3-yr Cagr 13%).
CHC’s 13% growth in 1H19 was strong, but accrual from the Charter Hall Office Trust [CHOT] performance fee liability (A$20m vs A$25m in 1H18), which was not previously explicitly assumed. In CLSA’s view, any concern should have eased as the 6%-7% upgrade in the company’s FY19 guidance to 14%17% implies underlying growth (excluding CHOT) of 9%-13%. CHC’s hard-charging reputation makes it easy to forget it is consistently conservative, having raised its full-year guidance at its 1H results for seven years in a row, and then beating it in six of those years. We increase our target 15%, from A$8.20 to $9.39; O-PF.
Guidance upgraded to 14-17% EPS growth, implying 9-13% growth ex-CHOT
CHC delivered 13.0% YoY operating earnings/EPS growth to A$107.5m/23.1¢ps, including a A$20m CHOT performance fee accrual. But as 1H18 also had a A$25m interim performance fee from CHOT, underlying growth (ie ex-CHOT from both results) was higher at 21.0%. With CHC booking another A$20m CHOT fee accrual in 2H19, FY19 guidance increased from 8%-10% EPS growth to 14%-17%, implying underlying growth of 9.4%-12.7%, or 6.0%-9.4% excluding the FLK acquisition. FY19 guidance in CLSA’s view likely assumes no performance fee from CPIF (FY19 review date) and while this represents a source of earnings upside risk, we believe this is unlikely despite a 5-year return of 11.8%, as the performance fee is based on returns since inception (September 2006) which is likely below the hurdle rate (CLSA estimate it to be 10%-12%).
CHOT fee was likely always part of guidance (after all, it was in FY18 numbers)
CLSA updated their model to incorporate 1H19 results, revised FUM growth assumptions following a surge in net acquisitions achieved (1H19: $2.3bn vs $1.5bn in FY18), strong fund-raising activity (1H19: $1.1bn net equity raised vs FY18: $1.5bn), and upbeat CHC management commentary on capex and investment opportunities.
CLSA note that the inclusion of $40m (pre-tax) accrual of CHOT performance fee in FY19 ($20m in each half) has resulted in a corresponding decrease in our FY20 estimates as it represents a partial pull forward of the expected total CHOT performance fee, which CHC noted is now accrued as a $105m liability on CHOT’s Dec-18 balance sheet.
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MPFM has a key focus on real estate-based investment opportunities specifically along the eastern seaboard of Australia with strong underlying property fundamentals and target investment returns of between 15-40% on a risk-adjusted basis.
In July 2015 we co-invested with another investment Manager, providing funding for a 120- lot residential subdivision in Schofields.
In 2014 we co-invested with former Managing Director and board member Steve Day, in the headstock of real estate investment management business, Propertylink. Investing in and managing major industrial warehouse portfolios, office tower portfolios, and infrastructure projects, other Propertylink co-investors included Goldman Sachs and London’s Duke of Westminster.
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