Narrow-moat Charter Hall Group CHC delivered a fiscal 2024 result in line with our forecasts and management guidance. Operating earnings per security of 75.8 cents fell 19% from a year ago while distributions of 45.1 cents per security rose 6%. For fiscal 2025, management expects another 6% increase in distributions, slightly above our prior forecast of 4%.

Management also guides to OEPS of 79 cents which, if achieved, would be the first time OEPS expands since fiscal 2022. The management forecast is based on stabilization of asset values evidenced by recent transactions and unpinned by a quality portfolio.

Our longer-term assumptions stand, and we increase our fair value estimate by 2% to $16.60 per security to reflect the time value of money. Despite the positive stock price reaction to the result and a reassuring outlook promised by management, securities in Charter Hall remain undervalued relative to our intrinsic assessment.

Funds management weighed on the result, with earnings before interest, taxes, depreciation and amortisation (“EBITDA”) falling 28% in fiscal 2024 to $272 million, largely due to transaction and performance revenue halving, as well as the elimination of co-investments funds management revenue from the segment. We forecast a moderation in total fees collected as a proportion of funds under management over the next decade, due to fee competition. But we assume a slight improvement in margins in the medium term, driven by scale.

Property funds under management declined to $66 billion from $72 billion, mostly due to revaluation movements. We assume Charter Hall’s FUM grows to $100 billion by 2034. We forecast FUM growth from property values bottoming and eventually appreciating, new inflows based on Charter Hall’s record and substantial presence in the sale-and-leaseback market, and uplifts from its $13 billion development pipeline.

Business strategy and outlook

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management clients. This gives Charter Hall diversified property exposure, so rental income produced accounts for about half of the group’s EBITDA. A smaller portion of EBITDA comes from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

Parking money in its own funds ties up capital, so Charter Hall plans lesser co-investments in the future. Funds management contributed nearly 50% of EBITDA in 2024, and we expect this segment to contribute approximately 70% by the end of our 10-year forecast period. This is likely to be underpinned by higher base management fees as Charter Hall expands its asset book, slightly offset by lower performance fees (as a percentage of assets). We anticipate fee pressure and slower property market growth that would likely moderate performance fees.

We expect base fees will continue to grow in line with higher assets under management. But we expect assets to flow in more slowly than the recent pace, which saw AUM double roughly every three years.

Charter Hall has delivered strong performance on its funds due to market conditions and its focus on long-lease assets with strong underlying tenants. This approach benefited from falling interest rates and also saw rental income relatively unscathed through the covid-19 crisis, with nowhere near the damage that rival REITs experienced. With interest rates rising off the zero bound and formerly impregnable rental income under pressure due to structural impacts such as hybrid work and e-commerce, we factor in slower growth and risks. We factor in medium-term growth (albeit slower than history) based on its record and reputation as well as Charter Hall’s proven ability to win offshore funds management clients and entice businesses into sale-and-leaseback deals.

Charter Hall bulls say

  • There remains a long pipeline of sale-and-leaseback opportunities, including new opportunities in sectors such as education and healthcare.
  • Charter Hall’s growing scale means it can offer better service to customers and improve margins.
  • New fund inflows add to Charter Hall’s base fee revenue. Although it is not risk-free, long lock-ins on its funds management vehicles bestow annuitylike characteristics to this revenue.

Charter Hall bears say

  • Charter Hall had almost everything in its favor until 2022, including falling interest rates, strong demand for property investments, and strong rental growth on property. All these tailwinds could be headwinds, given higher interest rates.
  • Rival REITs and others are endeavoring to compete in the property funds management space.
  • Charter Hall has so far limited itself to managing property in Australia, which could constrain its growth options.

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