Selling in Feb 2024 after half year report. Whilst most of below thesis was still in tact, the office market (40% of the business) seems to be under more pressure than I previously expected and their financial strength and FUM has deteriorated. I'm going to bank my quick profit on this one and sit on the sidelines for a while, or deploy that cash into a better opportunity in the coming months.
Valuation based on 76c OEPS expected in FY24 and 7% growth rate for next 10 years with regular PE of 16. (PE of 16 is in bottom decile of its trailing 5 year history.)
Why do I own it?
# Arguably the best and also the largest property manager and developer in the commercial sector in Australia, with $72 billion in property under management.
# Has 10 years of 15% p.a. earnings growth after tax, even after the FY23 write down of office property values which was a significant hit to FY23 earnings.
# Have a nice mix of commercial property sectors across the portfolio with over 1600 properties across office, warehouse, retail and child care. Approx 4500 total tenants of which around 18% are federal government and a significant percentage are defensive businesses like Wesfarmers, Australia Post, Coles and Woolworths.
# While office property in CBD's is under pressure, they have very high quality properties. 96% of their office property is currently leased vs 85% which is the national average in FY23.
# 21% of leases have stepped annual CPI increases while the balance have 3% annual increases. Reasonable pricing power whatever inflation looks like moving forward.
# The tenants seem happy as over 70% lease more than one property with them, plus they have the highest Net Promoter Score of +52 in the industry.
# Staff also seem happy with high engagement scores and over 90% rating Charter Hall as a Great Place to Work.
# Founder led mentality with CEO David Harrison leading the company since 2010 and also holding $11 million in shares. The Board and other executives also have decent skin in the game as they are required to hold at least one years salary in shares.
# Very little debt for a property business at only 15% debt to equity. Effectively they use other large investors to fund development (super funds etc), with Charter Hall putting in up to 20% of the funds for a new property. So the major part of the business is really a property fund manager, rather than an outright property owner like many REITS.
# Have made solid progress on their Net Zero ambition and are on track to be Net Zero by 2025 predominantly through improved development practices and co investing in solar with tenants, combined with some high quality offsets. Should be helpful for future and ongoing investor interest.
# Consistently high ROE / ROCE of over 15%
# Significant MOS at current price of $10.00 in September 2023 at a lower future growth rate and bottom end PE
# They can deliver double digit revenue and earnings growth for 5 + years so the return should exceed my 15% p.a. + target
What to watch
# Further erosion in valuations of properties, especially office properties.
# Commercial property development is complex so big mistake could be costly in any given year.
# Some key man risk around David Harrison - need to dig in more around succession planning for him.
# Need to focus on Operating Earnings Per Share (OEPS) which is a better guide than Regular Earnings Per Share as it factors in depreciation etc and is less volatile based on shorter term property value movements.