Upside Risk To Charter Hall Earnings

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While stopping short of a fourth guidance upgrade for FY21, Charter Hall has reported strong growth in funds under management and positive revaluations, prompting analysts to again lift earnings forecasts.

-Charter Hall reports strong growth in funds under management 
-Every $1bn of FUM presents circa 0.9% upside to group earnings
-Analysts see upside risk to FY22 earnings

By Mark Woodruff

There are currently very positive domestic and global tailwinds for Charter Hall Group ((CHC)). 

Property asset values have started to rise again, transaction activity has picked up and there is evidence global institutional allocations to real estate are increasing. In addition, domestic superannuation fund flows are set to rise with the Superannuation Guarantee increase, notes broker CLSA.

In late April this year, the group upgraded operating earnings per share (EPS) guidance to at least 57cps. This was the third guidance upgrade for FY21. While this time there was no guidance upgrade, the group expects to close out the year with around $52bn of funds under management (FUM) after recent second half revaluations, which saw asset values marked up 5.9% over the first half.

The group manages and invests in office, retail, and industrial properties. It operates through the Property Investments and Property Funds Management segment. The former comprises a portfolio of property funds, while the latter segment offers investment management services and real estate management services.

Funds under management are expected to increase by 12% over the first half to around $52bn as at June 30, 2021, which is $3bn ahead of what Macquarie was forecasting. 

Citi’s prior FUM estimate was also exceeded by 7%, driven by stronger-than-expected revaluations in the second half. Industrial was up by 10.8% versus December 2020, long weighted average lease expiry (WALE) retail rose by 8.7% and Social Infrastructure increased by 7.4%. Additionally, transaction activity was slightly better than expected, driven by recent acquisitions, while development capex was slightly below expectation.

The broker sees further upside to guidance driven by higher management and transaction fees, following the strong FUM update and recent transactions. FY21 EPS is now expected to be 58.7c, excluding accrued performance, and the analyst continues to see significant upside to FY22/FY23 consensus earnings. Citi's 12 month price target is increased to $17.50 from $17.00.

Citi reiterates a Buy rating and retains the group as a top pick, given a strong operational backdrop, upside to FY21/FY22 consensus earnings and an undemanding valuation at around 20x forecast FY22 earnings. This sits around -30% below the valuation for Goodman Group ((GMG)).

Charter Hall also acquired $2.9bn of assets in the second half, versus Macquarie’s expectation of $1.6bn. While the acquisitions would have largely been factored in to the group’s upgraded earning guidance of at least 57cps in April, the broker sees upside risk and forecasts FY21 earnings of 58.3cps.

Over FY21 the group has delivered 28% asset under management (AUM) growth including $3.7bn of valuations, $1.8bn of capex and $6bn of net acquisitions. Over the next four years, UBS forecasts 8% yearly growth, which the broker concedes continues to look conservative despite the high base.

The broker’s Buy rating is unchanged and the broker lifts its target price to $17.00 from $16.10.

Credit Suisse would not be surprised if the actual FY21 result exceeds management guidance for FY21 of at least 57cps and upgrades its target to $15.35 from $14.40. A Neutral rating is maintained. Meanwhile, Morgan Stanley retains an Overweight rating and lifts its target price to $17.45 from $17.00, reflecting stronger forecasts for funds management income as the AUM is increased.

Performance fee impact on FY22 and FY23 earnings

The increase in FUM bodes positively for upgrades to FY22 earnings, points out Macquarie. 

Every $1bn of FUM presents circa 0.9% upside to group earnings via an increase in annuity-like fees such as funds management and property management fees. These items also attract a higher earnings multiple, explains the broker. Therefore, with FUM around $3bn ahead of the analyst’s original estimate for the start of FY22, this implies an additional 2.8% of earnings.

In addition, the LWHP partnership (Bunnings fund) and the Charter Hall Industrial Fund (CPIF) are due to pay a performance fee in FY22. With positive revaluations for these asset classes likely to further drive further outperformance, there is considered upside risk to FY22 performance fees. 

The significant revaluations also provide confidence to Macquarie regarding performance fees across the broader platform in FY22 and beyond.

For FY22, Macquarie forecasts earnings growth of 38%, including $90m of performance fees. Excluding this item, earnings are still expected to grow by 15%. The key drivers are reinvestment of retained earnings to generate growth in property investments and an increase in forecast FUM to $60bn at June 2022 from $52bn at June, 2021. The broker increases its 12 month target price to $17.42 from $16.12 and maintains an Outperform rating.

Credit Suisse estimates the group’s implied FY22 performance fee accrual as at 31 Dec 2020 was around $78m, though now predicts it will come in meaningfully higher after the announced June 2021 revaluations. While the broker expects continued underlying operating earnings growth in FY23, lower performance fees should lead to a decline in overall earnings relative to FY22. The broker's Neutral rating is unchanged and its target price rises to $15.43 from $14.40.

Meanwhile, Citi is 11% above consensus on significant performance fees in FY22, with upside to FUM driven by a strong backdrop for transactions. Additionally, there’s potential for ongoing asset value upside, particularly for industrial and long WALE properties.

Comparison of revaluation to peers

The half-on-half valuation growth of 5.9% for Charter Hall Group was in-line with other REITs that have reported. Industrial growth was strong at 10.8%, while long WALE retail was also solid with revaluations of 8.7%, explains Macquarie. Notably, office revaluations were 2.9%, which is ahead of Dexus Property ((DXS)), for which office revaluations “increased marginally”.

The broker believes the positive outcome on office revaluations was likely driven by a relatively long WALE versus peers. The group has an office WALE of 6.7 years, which compares to Dexus at 4.1 years.

Growthpoint Properties ((GOZ)), with a WALE of 6.9 years, reported office portfolio revaluations of 5.4% (half-on-half) to June, 2021. While the exposure varies, Macquarie suspects these were also driven by the relatively long WALE.

Summary 

CSLA, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and raised the target price to $18.77 from $17.55.

The database has four Buy and one Hold rating. Ord Minnett has an Accumulate rating, though has not updated since early May. The consensus target is $16.88, signaling 10.1% upside to the last share price.

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