Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Charting a course to the future
Charter Hall Group (ASX:CHC) delivered one of the surprises of earnings season last week, once again exhibiting the importance of quality when it comes to investments in property. Quality, as they say, comes down to your definition and in our view it is about the tenant, not necessarily the underling asset. With the property sector in flux and the likes of Scentre Group (ASX:SCG) deciding to lock out one of their tenants from 130 stores around Australia, the ability for your tenant to pay and actually remain viable will be more important than ever; let’s not be shy about it, many businesses will no longer exist after this pandemic.
Charter Hall was able to deliver a 54% increase in operating earnings to $323 million and a 47% increase in its statutory profit to $346 million despite facing real challenges in the Australian economy. Management have been leading an acquisition and capital raising spree in recent years as investors flock to secure property assets as term deposit rates moved under 1%. With a flurry of direct lending, mortgage and other funds entering the market, the board has done well to ensure these assets are easily available for all types of investors, both those with a financial adviser (via managed funds) and those investing directly, by listed real estate investment trusts (REITS).
The result has been incredible growth in assets under management in 2020, up $10.1 billion to $40.5 billion and some $ billion in capacity remaining. This represents a doubling of assets under management in just three years with little signs of slowdown. Whilst this funds management division dominates earnings, at $289m of a total of $426 million, the in-house investment held via the Property Investment division has also being doing well, as the group takes co-investment stakes in each of their funds.
2020 has been a busy year for management as they seek to continue diversifying their portfolio away from traditional retail (currently 18%) and office (48%) buildings into industrial and logistics. A series of announcements were made in 2020 including the sale of their 5% holding in the Waypoint REIT (ASX:WYR) which owns a series of service stations, purchase of a $207 million logistics terminal from ASX-listed Qube Holdings Ltd (ASX:QUB) in Minto and more recently acquiring the $1.4 billion AMPOL portfolio with Singapore’s sovereign wealth fund as a joint partner.
On the takeover, CEO David Harrison said “This off market transaction follows regular dialogue with the Ampol team over the past 2 years and reinforces our confidence in the convenience retail sector” showing that some sectors will remain resilient once circumstances return to some level of normality.
Regarding their funds, management were quoted as saying that “direct flows have averaged $95 million per month during FY20” and they continue to use these funds wisely having “taken advantage of reduced buyer competition”. Such has been the strength of the performance, that the dividend was increased 6% for the financial year on a payout of just 51% of earnings.
In an environment of mass closures, rental waivers, deferrals and suspended dividends, Charter Halls diversification appears to be coming to the fore. Some important figures to consider are that 20% of their funds under management is now through listed REITs meaning they can raise capital directly from the ASX further reducing their marketing costs. Both their internal and managed portfolio have growing allocations to logistics assets (formerly included in the ‘industrial property’basket), 26% and 16% respectively. These are materials holdings and if the pandemic has taught us anything it is that logistics are not a flavour of the month, but a permanent and growing element of the new investment property paradigm.
As alluded to in the introduction, Charter Hall has aligned itself with the highest quality of tenants, Government taking 10%, Telstra 8%, Wesfarmers, 8%, and Woolworths 6%, offering investors a defensive rental income stream. At a time when property and lending related investment opportunities are flying around the market and into inboxes, quality is as important as ever.
