AUSTRALIAN
A
PROPERTY INVESTMENT RESEARCH
Charter Hall Direct Office
Fund: Wholesale A Units
(New Offer)
October 2014
An unlisted fund investing in Australian office properties
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
For Advisors Only
Contents
1.
Overview
3
2.
Fund Overview
5
3.
Property
10
4.
Investment Analytics
13
5.
Management & Corporate Governance
17
6.
Past performance
20
Appendix – Ratings Process
21
IMPORTANT NOTICE
Independent Investment Research Pty Limited, trading as Property Investment Research (PIR) has
not been commissioned to produce this report. This means that PIR has not received a fee for
reviewing and assessing this product. In compiling this report, PIR’s views remain fully independent of
influence or conflicts of interest. Our team of analysts undertake an objective analysis of the offer and
conclusions are presented to senior officers for review.
Disclaimer & Disclosure of Interests
This publication has been prepared by Independent Investment Research Pty Limited (ABN 90 111 53 6700), an
Australian Financial Services Licensee (AFSL no. 293655), trading as Property Investment Research (PIR). PIR has
not been commissioned to prepare this independent research report (the “Report”) and will not receive fees for its
preparation. The company specified in the Report (the “Participant”) has provided PIR with information about its
activities. Whilst the information contained in this publication has been prepared with all reasonable care from
sources that PIR believes are reliable, no responsibility or liability is accepted by PIR for any errors, omissions or
misstatements however caused. Any opinions, forecasts or recommendations reflects the judgement and
assumptions of PIR as at the date of publication and may change without notice. PIR and the Participant, their
officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage
relating to this document to the full extent permitted by law. This publication is not and should not be construed
as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion
contained in the Report is unsolicited general information only. Neither PIR nor the Participant is aware that any
recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our
information, it is not possible to take into consideration the investment objectives, financial situation or particular
needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor
to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their
investment objectives, financial situation or particular needs before acting on such opinions or recommendations.
This publication is not for public circulation or reproduction whether in whole or in part and is not to be disclosed
to any person other than the intended recipient, without obtaining the prior written consent of PIR. This report is
intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country.
PIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold
positions in any securities included in this Report and may buy or sell such securities or engage in other
transactions involving such securities. PIR and the Participant, their directors and associates declare that from
time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities
mentioned in this publication.
PIR, its officers, employees and its related bodies corporate have not and will not receive, whether directly or
indirectly, any commission, fee, benefit or advantage, whether pecuniary or otherwise in connection with making
any statements and/or recommendation (if any), contained in this Report. PIR discloses that from time to time it
or its officers, employees and related bodies corporate may have an interest in the securities, directly or indirectly,
which are the subject of these statements and/or recommendations (if any) and may buy or sell securities in the
companies mentioned in this publication; may effect transactions which may not be consistent with the statements
and/or recommendations (if any) in this publication; may have directorships in the companies mentioned in this
publication; and/or may perform paid services for the companies that are the subject of such statements and/or
recommendations (if any). However, under no circumstances has PIR been influenced, either directly or indirectly,
in making any statements and/or recommendations (if any) contained in this Report.
The information contained in this publication must be read in conjunction with the Legal Notice that can be located
at http://www.pir.com.au/Public/Disclaimer.aspx
For more information regarding our services please refer to our website www.pir.com.au
page 2 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Note: This report is based on the Charter Hall Direct Office Fund PDS, dated 15 October 2014, together with other information
provided by Charter Hall Direct Property Management Limited.
Unlisted Property – Office
Charter Hall Direct Office Fund: Wholesale A Units (New Offer)
Overview
Investment Rating
The Charter Hall Direct Office Fund (DOF or the Fund) is the new name
of the Charter Hall Direct Property Fund, an unlisted vehicle first
established by Macquarie Group in 2006. The Fund’s Responsible
Entity is Charter Hall Direct Property Management Limited (the RE), a
wholly-owned subsidiary of Charter Hall Group (ASX: CHC).
For Advisors Only
The Fund will raise up to $200M in equity through the issue of new
Wholesale A units. The first $87M of Wholesale A units will be issued
to existing investors at $0.975 per unit, with any shortfall to be made
available to new investors. The remaining $113M of Wholesale A units
will be issued to new investors at $1.00 each. Due to the absence of
setup costs, starting NTA is $1.00, which compares favourably to the
$0.85-$0.95 typical of unlisted peers. This report is written for
new Wholesale A investors.
The Fund will have an initial term of five years (Initial Term), which
may be extended for future terms. At the end of each term, investors
may request redemption of any or all of their units. The RE will seek to
obtain the necessary liquidity by selling assets or raising new equity.
Beginning in December 2015, the RE plans to permit up to $15M in
annual redemptions subject to the availability of liquid assets (which
may be limited, given this is a direct property fund). Refer to Page 7
for more details.
The Fund’s current portfolio (Initial Portfolio) comprises eight office
properties with a combined independent valuation of $483M, located
in Sydney, Brisbane, Melbourne, and Perth. The RE has divided this
into two components: core and non-core. The core portfolio ($342M,
or 71% of the total) comprises four CBD office properties (three Bgrade and one A-grade) with average occupancy of 99% and an
average WALE of 4.2 years. The non-core portfolio comprises four
assets with occupancy of 82% and a WALE of 4.1 years. The RE
intends to sell three of the non-core assets over late calendar 2014
and early calendar 2015. It will use the proceeds to fund the
redemption of approximately $90M in units held by existing investors,
as well as the purchase of new assets. PIR has analysed the Fund
based on the initial portfolio only, as we are unable to quantify the
impact of future acquisitions.
Given the initial portfolio’s lease expiry schedule and the upcoming
sale of non-core assets, the Fund will be exposed to short- and
medium-term conditions in the office market. This suggests that the
Fund’s strategy trades off higher leasing risk against the potential
uplift from re-leasing and repositioning assets.
Over the initial term, the RE forecasts an annualised distribution yield
of 7.5%, which assumes that capex will be largely funded by debt.
Current gearing is 45.6%, at the top of the RE’s target range of 35%45%. PIR believes the initial portfolio will have sufficient headroom
against bank loan-to-valuation ratio (LVR) and Interest Cover Ratio
(ICR) covenants.
See the Appendix for a description of our ratings.
The above rating must be viewed in the context of
comparable syndicates and not across all products.
Offer Details
17 November 2014
Offer Opened
Min. Investment
Period
Min. Investment
5 years
$20,000
1
Liquidity
Illiquid
Distributions
Quarterly
$1.00
Initial NTA
Distribution (cents)
2
7.5
1
For new investors. Existing investors can purchase
Wholesale A units under a 1-for-4 entitlement offer.
The entitlement offer will be at a 2.5% discount.
2
The RE forecasts that distributions would be 7.5
cents for the first year on an annualised basis.
Risk/Return Profile
Capital Return
Income Return
Capital Return
Volatility
Income
Volatility
Risk to Capital
Tax Effectiveness
Investor Suitability
PIR has written this report for new Wholesale A investors only.
The Fund’s metrics should be seen in the context of its multi-asset,
multi-tenant portfolio. Investors should be bullish on (1) the shortterm sale prices for suburban office assets; (2) the medium-term
prospects for B-grade and, to some extent, A-grade CBD properties;
and (3) the risks and opportunities associated with re-leasing assets.
While the Fund intends to offer up to $15M in annual redemptions
(subject to the availability of liquid assets), investors should expect to
remain invested through the initial term.
page 3 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Key considerations
Key Qualitative Criteria (initial portfolio)
Highly regarded fund manager with a solid performance track
record and specific expertise in managing property funds. Equal
representation of executive and independent directors lends balance to
decision making. Good track record on corporate governance.
Core portfolio comprises CBD offices. The core portfolio (valued at
$342M, or 71% of the Fund total) comprises four CBD office
properties, of which three are B-grade and one is A-grade. Occupancy
is 99% and WALE is 4.2 years. The RE estimates capex and capital
incentives, aimed at preserving operating metrics, will equate to 19%
of NOI over the initial term. See Page 10 for portfolio details.
For Advisors Only
Non-core portfolio to be sold over 2014-2015. The non-core
portfolio comprises four assets (three suburban, one CBD) with
occupancy of 82% and a WALE of 4.1 years. The RE intends to sell
three assets over late 2014 and early 2015 to fund first, the
redemption of up to ~$90M of units held by existing investors and
second, the purchase of new assets. The RE may sell the fourth asset
(165 Walker St, North Sydney) if it considers this appropriate.
Diversification: The Fund’s assets are located in several Australian
cities – Perth, Brisbane, Melbourne, and Sydney. No single tenant
accounts for more than 10% of core portfolio income. The main lease
expiry is in FY20, when 37% of leases mature. Before then, no more
than 15% of leases mature in any one year.
Management
Track record
Investment process
and philosophy
Corporate Governance
Product
Structure
Fees
Liquidity
Leverage/Capital structure
Portfolio
Property Grade/Asset quality
Property diversification1
Tenancy profile
Tenant lease term
1
Initial portfolio only as PIR is unable to determine
the extent of diversification that will eventually be
achieved.
Investment Profile
Initial NTA is $1.00, which is exceptional for an unlisted property
fund. Initial NTAs are usually in the mid-$0.80 to low-$0.90 range.
The difference is due to the absence of the one-off costs and fees that
would typically be associated with setting up a new fund.
Number of properties
Fee structure: Fees on the initial portfolio are in line with peers – see
Figure 4. The RE will not charge an acquisition fee on initial assets –
acquisition fees will apply to subsequent assets. The RE will charge a
disposal fee (not applicable to initial assets sold before November
2015) on top of sums payable to external agents.
Property sector
Investment term and liquidity: The Fund will have an initial term of
five years (Initial Term), which may be extended for future terms of
five years each. At the end of each term, Wholesale A investors may
request redemption of any or all of their units. The RE will attempt to
obtain the necessary liquidity by selling assets or raising new equity.
Property location
Initial Gearing/ Bank covenant
ICR/ Bank covenant
Office
45.6%/ 60%
3.2x/ 1.5x
A$M
Equity sought
Up to 200
Debt
Total sources of funds
Gearing: The RE forecasts that gearing of 45.6% will remain
relatively constant over the Fund’s initial term, given the use of debt
to fund capex. This offers an adequate cushion against LVR and ICR
covenants – asset valuations would need to drop by over 20% to
breach the LVR covenant and rental income would need to fall by over
40% to breach the ICR covenant. As is typical for syndicates, the
Fund’s debt facility expires before the end of the initial term, during
which time the RE will need to refinance the facility.
IRR1 (pre-tax, %)
Expected return sensitivity: PIR estimates investor returns in the
range of >8% to >11%, based around assumptions on terminal yield
and interest rate movements. Returns will be higher for investors who
buy in at $0.975 per unit. See Investment Analytics for details.
Distribution frequency
page 4 of 21
Perth, Brisbane,
Sydney,
Melbourne
Source and Application of Funds1
Beginning in December 2015, and every six months thereafter, the RE
plans to permit up to $15M in annual redemptions subject to the
availability of liquid assets. The RE has honoured $63M in previous
redemption requests since December 2010; nonetheless, given the
illiquid nature of direct property, investors should expect to remain
fully invested until the end of the initial term.
Market risk. Returns to investors may be lower than PIR’s estimate
if: (a) borrowing costs increase, (b) economic or market conditions
deteriorate, (c) the Fund fails to achieve satisfactory sale prices, or (d)
the Fund re-leases assets on worse-than-expected terms.
8
Na
200
1
The Fund and its portfolio already exist. The
total offer amount is $200M, which will largely be
used to acquire additional assets.
Financial Forecasts
10-year Unleveraged IRR2
(%)
10.8%
8.8%
Performance fee hurdle
(%)
10.0%
Min. Investment period
(year)
5
Tax advantage3
Partial
Quarterly
1
IRR estimate is post-disposal and performance
fees. It assumes investors pay $1.00 per unit.
2
Weighted average unlevered IRR of the initial
portfolio, based on independent valuation reports
3
The PDS envisions that an unspecified percentage
of distributions will be tax-deferred.
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
2.Fund Overview
The Charter Hall Direct Office Fund (DOF) is the new name of the Charter Hall Direct Property Fund, an
unlisted vehicle originally established by Macquarie Group in 2006.
The Fund will have an initial term of five years, which may be extended for future terms of five years
each. At the end of each term, investors will be able to request redemption of any or all of their units.
The RE will seek to obtain the necessary liquidity by selling assets or raising new equity.
The RE seeks to raise up to $200M (the Total Offer Amount) through the issue of new Wholesale A
units. Existing investors will be able to subscribe for the first $87M of Wholesale A units at $0.975 each,
with any shortfall to be offered to new investors. Subsequently, new investors will be able to subscribe
for the remaining $113M of units at $1.00 each. This report is written for new investors paying
$1.00 per Wholesale A unit. We discuss the offer structure on the next page.
For Advisors Only
Potential investors should note that PIR has assessed the Fund based on the initial portfolio only. As
new investments beyond the initial portfolio have yet to be identified, PIR can neither provide a view
nor assess their impact on the fund’s returns and operating metrics. The Fund has defined investment
criteria for the purchase of additional assets, which we reproduce below.
Figure 1: DOF investment criteria
Criterion
Requirement
Property type and location
Australian office
Grade
Prime, A-grade, or B-grade
Tenants
The asset must have a “high-quality anchor tenant”.
Size
The Fund’s interest in the asset must be between $25M and
$150M.
Weighted Average Lease Expiry
(WALE)
Acquiring the asset must not reduce portfolio WALE beneath
three years.
Properties under development
There must be an approved development application, an
agreement for lease, and other risk mitigants deemed
appropriate by the RE.
Source: Charter Hall
Figure 2: DOF fund structure
Wholesale A units
Total Offer am ount: Up to $200M
Charter Hall Direct Office Fund
Initial Portfolio
4 core assets
Future Acquisitions
4 non-core assets
1 Nicholson St,
Melbourne
68 Pitt St, Sydney
RE plans to sell non-core assets to
fund future acquisitions and
redeem existing investors’ units
200 Queen St,
Melbourne
181 St Georges
Terrace, Perth
Source: Charter Hall/ PIR
page 5 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
The Initial Portfolio
The Fund has divided its initial portfolio into two sections: core and non-core. Please refer to the
Property Section of the report for more details.


The core portfolio (valued at $342M, or 71% of the total) comprises four CBD office properties
with average occupancy of 99% and an average WALE of 4.2 years. Three of the four
properties are B-grade and one is A-grade.
The non-core portfolio comprises three suburban assets and one CBD asset. Average
occupancy is 82% and the average WALE is 4.1 years. The RE intends to sell three (all except
165 Walker St, North Sydney) of the non-core assets over late calendar 2014 and early
calendar 2015. It will use the proceeds to fund the redemption of Existing Units and the
purchase of new assets. The RE may also sell 165 Walker St if it considers this appropriate.
The Offer - Wholesale A units
For Advisors Only
The RE seeks to raise up to $200M by issuing two tranches of Wholesale A units:

An $87M Entitlement Offer, which will allow existing investors to subscribe for Wholesale A
units at $0.975 each. This will open on 15 October 2014 and close 14 November 2014. Any
shortfall will be made available to new investors, until the earlier of the shortfall closing date of
31 May 2015 or the Fund raising $87M.

A $113M New Offer, which will allow new investors to subscribe for Wholesale A units initially
at $1.00 each. This will open the business day after the shortfall closing date, and close upon
the earlier of 15 October 2016 or the allotment of the Total Offer Amount.
This report addresses the New Offer. The minimum application amount for the New Offer is $20,000,
which can be increased in $1,000 multiples thereafter.
Acquisition units
Charter Hall Group and its related parties may subscribe for Acquisition Units in the Fund at the
prevailing unit price. These have the same rights as Wholesale A units, except that Acquisition units
may be redeemed using proceeds from the allotment of all units or the sale of assets in the Fund. The
redemption price will be equal to the prevailing unit price for Wholesale A units.
Loan-to-Value Ratio (LVR) and Interest Cover Ratio (ICR)
The initial portfolio will have a gearing of 45.6%, versus target gearing of 35%-45% (calculated on a
total interest-bearing liabilities–to–total assets basis, as per ASIC guidelines). As highlighted in Figure 3
below, the Fund’s property values would need to fall by over 20% before a breach of its loan-to-value
covenant. PIR believes this offers a comfortable cushion against any adverse market movements.
The PDS forecasts an Interest Coverage Ratio (ICR) of 3.2 times for the first year, calculated in
line with ASIC guidelines. The bank covenant requirement is 1.5 times, calculated on a different basis.
Investors must remember that geared investments are riskier than comparable un-geared funds.
Gearing improves investor returns when conditions are favourable – and detracts from returns when
leverage and interest rates rise.
Figure 3: Key debt metrics
Charter Hall Direct Office Fund
Asset value ($M)
483.4
Loan facility limit ($M)
260.0
Amount drawn ($M)
220.9
Implied LVR (%)
45.7%
Loan covenant (%)
60%
Headroom to covenant (%)
23%
Interest rate hedge on debt
54%
All-in interest rate (%)
4.3%
ICR (rent/interest paid)
3.2 times
ICR covenant
1.5 times
Headroom to ICR covenant (%)
46.0%
Source: Charter Hall
page 6 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Interest rate hedging
The RE has advised PIR that its objective is to hedge at least 50% of the Fund’s borrowings against
changes in interest rates. The current facility limit is $260M, of which $221M is drawn and $120M is
hedged.
Liquidity
The Fund will have an initial term of five years (Initial Term), which may be extended for future terms
of five years each. At the end of each term, investors will be able to request redemption of any or all of
their units. The RE will seek to obtain the necessary liquidity by selling assets or raising new equity.
Beginning in December 2015, and every six months thereafter, the RE plans to permit up to $15M in
annual redemptions subject to the availability of liquid assets. The RE has honoured $63M in previous
redemption requests since December 2010; nonetheless, given the illiquid nature of direct property,
investors should expect to remain fully invested until the end of the initial term.
For Advisors Only
Source and Application of Funds (fees)
As the Fund and its portfolio already exist, the PDS does not provide the usual table of sources and
applications. Section 7.3 of the PDS states that offer proceeds will be used to, first, acquire additional
properties for the Fund, and second, meet redemption requests from existing investors.
The RE has advised PIR that, should equity capital become available before the Fund has sourced a new
asset, it will be used to temporarily reduce debt under the Fund’s revolving debt facility.
Costs over the Term of the Fund
The RE and Manager may rebate a portion of their fees to wholesale investors.
The RE will charge the following fees and costs to investors over the initial term of the Fund:
Ongoing Management Costs


Base management fee: 0.5% per annum of the gross asset value (GAV) for investors, and

The ongoing management fees are consistent with industry practice and the Management
Expense Ratio (MER) of 0.7% is also below industry averages.
Fund costs and expenses (accounting, audit, etc.): Estimated at 0.2% per annum of the GAV of
the Fund.
Acquisition Fee
The RE will charge investors 1.5% of the total value of properties acquired (excluding the initial
portfolio).
Asset Disposal Fee
The RE will take an asset disposal fee of up to 1.5% of the gross sale price. Disposal fees will not be
payable on properties from the existing portfolio sold before 30 November 2015.
Note that the disposal fee does not cover payments to external agents. If any fee is payable to external
agents, it will be in addition to the RE’s disposal fee.
Performance Fee
It is normal practice in the industry to charge performance fees should the total returns of the Fund
exceed a benchmark return. According to the PDS, the RE is entitled to 15% of the portion of
outperformance over an IRR of 10% per annum after all fees and costs. This benchmark is consistent
with other property funds in the unlisted property funds sector.
A performance fee, if owing, will also become payable should investors sell more than 85% of the units
on issue.
All-in fee analysis
As a percentage of total Fund cash flow
PIR has analysed the fees that accrue to the RE over the initial term of the Fund as a percentage of all
cash flow generated after deducting interest costs but before management fees payable to the RE. PIR
notes this calculation is based on only the initial portfolio identified in the PDS. Subsequent acquisitions
would affect the analysis shown below. As such, PIR emphasises that this analysis is for illustrative
page 7 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
purposes only.
Based on our estimates, the RE and the manager will take ~5.6% of the total cash flow from the initial
portfolio. This is in line with industry averages. Note that there are no acquisition fees on the initial
portfolio – fees will rise as the Fund purchases subsequent assets.
Figure 4. Fees in Perspective (based on initial portfolio only)
PIR estimates that for every $1.00 of equity invested, the Fund can return:
$1.00
Income and capital gains to investors (b):
$0.56
Total cash to investors (c):
$1.56
Acquisition fee (N/A on initial portfolio, but payable on subsequent acquisitions)
Not estimated
Base management fee (d):
$0.05
Performance fee (e) 1:
$0.01
Disposal fee (f):
$0.03
Total fees (g):
$0.09
Total cash generated by Fund’s initial portfolio (h) 2 = (c) + (g)
$1.65
Fees = % of total cash generated (before fees)
Calculated as g/h
5.6%
For Advisors Only
Principal repayment to investors (a):
1
Performance fee is estimated on the basis that the Fund’s initial portfolio outperforms its benchmark. For more details refer
to the Investment Analytics section of the report.
2
Total cash generated by the Fund’s initial portfolio after all applicable costs..
Source: PIR/ Charter Hall
page 8 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Fund Structure
Charter Hall Direct Property Management Limited (CHDPML)
Manager:
Charter Hall Holdings Pty Limited (CHH)
Investment Term:
Five-year rolling terms. At the end of each term, investors will be able to request the redemption of any
or all of their units.
Issue Size:
The RE seeks to raise up to $200M by issuing two tranches of Wholesale A units: (1) a limited $87M
Entitlement Offer, which will allow existing investors to subscribe at $0.975 each (with any shortfall to be
offered to new investors), and (2) a $113M New Offer, which will allow new investors to subscribe at
$1.00 each.
LVR
The Fund is currently geared at 45.6%, at the top of the target gearing range of 35%-45%.
Cost of Borrowings:
The RE has advised PIR that its objective is to hedge at least 50% of the Fund’s borrowings against
changes in interest rates. The current facility limit is $260M, of which $221M is drawn and $120M is
hedged.
Security:
The bank loan is to be secured by a first mortgage and a fixed and floating charge over the Fund’s
properties and other assets, with no recourse to investors.
For Advisors Only
Responsible Entity (RE)
Fund Profile
Geographic Exposure:
The initial portfolio comprises assets in Sydney, Melbourne, Brisbane, and Perth.
Sector Exposure:
The initial portfolio comprises a mix of CBD and suburban office assets. Six are B-grade and two are Agrade.
Tax
Disclaimer:
Tax consequences depend on individual circumstances. Investors should seek their own taxation advice.
The following comments show PIR’s expectation of tax for ordinary Australian taxpayers, but cannot be
considered tax advice.
Capital gains:
Capital gains tax (CGT) is likely to apply upon the winding up of the Fund as capital is returned to
investors. As the investment term is in excess of 12 months, certain investors will likely be eligible for
the 50% CGT discount upon receipt of sale proceeds as per the current CGT ruling.
Distributions:
Distributions will be treated as income in the year they are earned. Distributions may contain a tax
deferred amount, which decrease the cost base and will give rise to a capital gain should the investment
be sold at a price higher than the cost base. Distributions may not be reinvested.
Legal Structure
Wrapper:
Unlisted Unit Trust
Custodian
The Trust Company (Australia) Limited
Offer Document:
The Product Disclosure Statement, dated 15 October 2014.
Returns
Capital vs. Income:
The final breakdown of the total return is largely unknown; however, it is generally a function of
distributions or dividends received from its underlying investments and any capital gains achieved from
its portfolio of investments. PIR expects income to comprise around 60%-70% of the total return for
Wholesale A investors.
Income Frequency:
Quarterly, in arrears.
Risks
For a more detailed list of the key risks, refer to the Risks section (Section 5) of the PDS.
Fees/Expenses
Base Management Fee:
Investors pay 0.5% p.a. of the GAV of the Fund. GAV should generally resemble the carrying value of
the property. In addition to the management fee, the RE expects the administration expenses required
for the day-to-day operation of the Fund will account for 0.2% of the GAV.
Establishment Fee:
NIL
Acquisition Fee:
Acquisition fee of 1.5% of GAV for investors. This fee is only payable on any new acquisitions undertaken
by the RE or Manager on behalf of the Fund.
Performance Fee:
The RE is entitled to 15% of the portion of outperformance over an IRR of 10%.
A performance fee, if owing, will also become payable should investors sell more than 85% of the units on
issue.
The RE will charge investors a 1.5% asset disposal fee. Disposal fees will not be payable on properties
from the existing portfolio sold before 30 November 2015.
Note that the disposal fee does not cover payments to external agents. If any fee is payable to external
agents, it will be in addition to the RE’s disposal fee.
The RE and the Manager may negotiate different fees with, or rebate a portion of their fees to, wholesale
investors.
Disposal Fee:
Wholesale Investors:
page 9 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
3.Property Portfolio
We table the Fund's initial portfolio below. It comprises eight assets, which the Fund has divided into
two portions: core and non-core.
The core portfolio accounts for 71% of the total portfolio by book value. It comprises four CBD office
properties with 99% occupancy. Three are B-grade and one is A-grade. No one tenant accounts for
more than 10% of core portfolio income, the rolling nature of lease expiries should provide reasonable
predictability of income in any one year, and per the PDS, occupancy has exceeded market averages
for the last four years. We do note that expiries will spike in FY19 and FY20, around the end of the
initial term. The Fund's ability to re-lease this space on attractive terms will affect both income and
the sale prices that could be realised.
For Advisors Only
The non-core portfolio comprises three suburban assets and one CBD asset, with average occupancy
of 82%. The RE intends to sell these assets over late calendar 2014 and early calendar 2015.
Figure 6 compares the Fund’s portfolio to several other multi-tenanted, multi-asset vehicles. We
believe these are better comparables than the typical single-asset syndicate.
Figure 5. Initial portfolio of properties
Indept
Val’n
($M)
% of
p’folio
NLA
(sqm)
Val’n/
sqm ($)
Occup.
(%)
Valuer's
cap rate
(%)
WALE
(yrs)
NABERS
energy
(stars)
7.5%
Valr's
term
yield
(%)
7.8%
77.5
16%
17,328
$4,473
100%
6.6
4.0
125.0
26%
14,336
$8,719
27.0
6%
3,588
$7,525
98%
7.5%
7.8%
3.3
3.0
100%
8.5%
8.8%
4.0
1.5
112.5
23%
19,737
$5,700
99%
7.5%
7.8%
3.6
4.5
342.0
71%
54,989
$6,219
99%
7.6%
7.8%
4.2
3.6
39.5
8%
10,943
$3,610
100%
9.0%
9.5%
5.5
4.5
26.5
6%
5,259
$5,039
75%
8.5%
8.8%
5.5
4.5
45.0
9%
13,140
$3,425
76%
9.3%
9.0%
3.0
2.0
30.4
6%
10,420
$2,917
77%
10.0%
10.0%
3.0
3.0
141.4
29%
39,762
$3,556
82%
9.2%
9.3%
4.1
3.4
483.4
100%
94,751
$5,102
93%
8.1%
8.3%
4.1
3.5
1 Nicholson St,
Melbourne
68 Pitt St, Sydney
181 St Georges
Terrace, Perth
200 Queen St,
Melbourne
Total core
portfolio
2 Wentworth St,
Parramatta
165 Walker St,
North Sydney
300 Adelaide St,
Brisbane
504 Pacific Hwy,
St Leonards
Total non-core
portfolio
Grand total
Source: Charter Hall/m3property/Jones Lang LaSalle/Savills/Knight Frank/NABERS website/PIR
Figure 6: Portfolio comparison
Occupancy
(%)
98%
Cap rate
(%)
8.2%
WALE
(yrs)
5.9
DXS
95%
6.9%
4.9
4.6
3.5
GDI
89%
8.1%
3.3
n/a
n/a
GPT
92%
6.6%
6.3
4.9
3.6
IOF
93%
7.3%
5.0
4.2
3.7
MGR
96%
7.3%
4.7
4.9
3.8
SGP
90%
7.7%
4.5
n/a
n/a
TOF
100%
8.7%
4.2
n/a
n/a
Simple average – office A-REITs
94%
7.6%
4.9
4.7
3.7
AMP Wholesale Australian Pty Fund*
98%
8.4%
3.4
n/a
n/a
CMW
NABERS
energy stars
n/a
NABERS
water stars
n/a
Cromwell CPT12**
100%
7.9%
14.5
4.4
n/a
Simple average - unlisted trusts
99%
8.1%
9.0
4.4
n/a
DOF - core portfolio
99%
7.6%
4.2
3.5
3.6
DOF - entire portfolio
95%
8.1%
4.1
3.5
3.7
* Includes non-office assets. Figures as at March 2014. **Includes one industrial asset. NABERS calculated by PIR on office
assets only. Figures taken from PDS. Source: Companies/PIR/NABERS website
page 10 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Figure 7: Core portfolio lease expiry schedule
37%
15%
12%
For Advisors Only
11%
9%
8%
5%
1%
Vacant
1%
FY15
FY16
FY17
FY18
0%
FY19
FY20
FY21
FY22
1%
FY23
FY24+
Source: Charter Hall
Core assets
1 Nicholson Street, Melbourne
Located on the fringe of the Melbourne CBD, close to the Victorian State Houses of Parliament. It was
constructed in 1958, and more recently has achieved a 4-star NABERS energy rating. The RE expects
$3.3M of capex (~4% of book value) over the first three years, including lift works, recarpeting and
repainting, end of trip facilities, and an upgrade to building systems.
The building is fully occupied. WALE is 6.9 years and the main tenant, Orica (44% of NLA, “BBB” credit
rating from Standard & Poor’s, established in the building since construction), does not expire until
October 2019 – near the end of the Fund’s initial term. Subsequently, Orica has an option to renew its
lease by a further four years.
The valuer estimates that the building’s passing rents are below market rents. After including
unexpired incentives, this produces a passing yield of 5.65% versus an equivalent yield of 7.50%. As
such, the valuer expects a benefit from market reviews (most significantly, a capped Orica review in
2016), plus fixed rent increases.
Overall, PIR expects the building to produce predictable income through the Fund’s initial term. We
believe the key driver of terminal value will be the Fund’s ability to renew the Orica lease in 2019.
The independent valuer forecasts an unlevered 10-year IRR of 8.5% for this asset.
68 Pitt Street, Sydney
68 Pitt St is the largest portfolio asset by value. It is a B-grade Sydney building, which the valuer
considers “well-located within the CBD core”. Since construction in 1965, it has been progressively
refurbished – all but 5 of the 22 office floors have been upgraded in the last few years. The RE has
budgeted $2.1M of capex (~1.7% of book value) for capex in the first year, with most of this to be
spent on lift upgrades.
No one tenant accounts for more than 10% of NLA and, with occupancy of 98%, the building is almost
full. Imminent lease expiries pose some risk to income. According to the independent valuer, leases
accounting for 34.2% of NLA expire over the twelve months to June 2015. The RE advises us that it
has reached heads of agreement covering approximately half this space (16% of NLA). Overall WALE
is 3.4 years.
Given that the RE has historically achieved >90% occupancy from December 2010 onward, PIR
believes it will be able to maintain high occupancy. This will likely come at the cost of incentives,
which are presently high across the Sydney market.
The independent valuer forecasts an unlevered 10-year IRR of 8.6% for this asset.
page 11 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
181 St Georges Terrace, Perth
This is a B-grade building, completed in 2000 and located on an infill site in the central Perth CBD. The
independent valuer describes its site as a “prominent St Georges Terrace location with a high level of
exposure and good vehicular access… [and] notable new developments in close proximity including the
Brookfield Place development.” Budgeted capex is minimal for Year 1. Note that the building’s NABERS
energy rating of 1.5 stars does not reflect a recent upgrade to its chiller. The valuer expects this rating
to increase once sufficient data is in place.
For Advisors Only
Occupancy is 100%, while WALE stands at 3.95 years. The main tenant is DOF Subsea, which
accounts for 66% of NLA, owns subsea vessels, provides services to the oil & gas industry, and has a
~2x interest cover ratio for YTD 2014. DOF Subsea’s lease expires in May 2018. Including other
tenants, more than 80% of NLA will expire during 2018 and 2019. According to the valuer, the
expiring tenants’ leases are significantly over-rented – something factored into the valuation. The RE’s
forecasts have budgeted for lower rents.
The independent valuer forecasts an unlevered 10-year IRR of 9.0% for this asset.
200 Queen St, Melbourne
This is an A-grade Melbourne CBD building, which the independent valuer describes as “convenient…
within close proximity to the CBD’s retail core, legal precinct, and Collins Street financial precinct”. It
was constructed in 1982 and has the highest NABERS ratings of the Fund’s core assets – 4.5 stars for
both energy and water. The RE expects minimal capex ($480,000, largely relating to building services)
in the first year.
Occupancy is 98.7% and WALE is 3.6 years. Lease expiries begin in 2015 (9.1% of NLA), before
spiking in 2017 (22.5% of NLA) and 2019 (46.1% of NLA). As such, this building will be exposed to
conditions in the Melbourne office market over the medium term. The RE believes that the largest
tenant, Barristers Chambers Ltd (a wholly-owned subsidiary of the Victorian Bar, accounting for 34.9%
of NLA) will remain. This is because Barristers Chambers recently took a new lease over one floor that
expires in June 2023, subsequent to the expiry of its main lease in 2019.
The independent valuer forecasts an unlevered 10-year IRR of 8.5% for this asset.
Non-core assets
165 Walker Street, North Sydney
A recently refurbished B-grade office building with a 4.5-star NABERS energy rating. Occupancy is
75%; however, recent re-leasing has secured Sony Australia as an anchor tenant. WALE is 5.5 years.
According to the PDS, the RE is “considering options” for the asset. The valuer “envisages strong
market interest in [this asset] were it put to market, given the location, nature of the improvements,
tenancy profile, and recent growth in rents in North Sydney.”
The independent valuer forecasts an unlevered 10-year IRR of 9.5% for this asset.
300 Adelaide Street, Brisbane
A B-grade Brisbane office building. The independent valuer considers its site “well-serviced by public
transport, however [it is] generally considered a secondary location within the CBD”. Vacancy is high
(26.84%), WALE is 3.0 years, and the NABERS rating is low at 2.0 stars. The RE “is considering the
sale” of this asset.
2 Wentworth Street, Parramatta
An A-grade Sydney suburban building. WALE is 5.5 years. Occupancy is 100%, and the NABERS
energy rating is 4.5 stars. The RE plans to sell this asset as it believes it has maximised the building’s
value. It has appointed two external agents, who began their sales campaign in September 2014. The
RE expects a sale price greater than current book value.
504 Pacific Highway, St Leonards
A Sydney suburban office asset making its way through the residential rezoning process. Upon
completion, the RE will sell the asset.
This asset is a special case. As rezoning is imminent, the offer has been structured to ring-fence any
capital gains and set them aside for the benefit of Existing Investors. If the asset is revalued or sold
before 30 November 2015, Wholesale A investors will only receive current book value ($30.4M, before
the rezoning).
page 12 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
4.Investment Analytics
For Advisors Only
We summarise below the forecasts provided by the RE:

The RE’s asset-level cashflow forecasts are broadly consistent with those made by the
independent valuers.

The RE has assumed the sale of three of the four non-core assets (all except 165 Walker
Street) at the start of FY16. The RE assumes that 165 Walker, plus the four core assets, will
be held to maturity.

The RE forecasts that over the initial term, the four core assets will increase in value at
CAGRs of between 2.7% and 3.7%, broadly in line with fixed rental increases (3.7% per the
PDS). The RE forecasts a higher valuation CAGR (6.2%) for 165 Walker, citing high levels of
demand for this and similar assets.

The RE assumes that all-in interest rates will begin at 4.28%. Subsequently, the RE forecasts
a gradual 100bps increase in the Fund’s base rate over the initial term;

The RE forecasts a distribution yield of 7.5% for new investors who buy units at $1.00 (or
7.69%, for investors who buy discounted units at $0.975). This is based on distributing circa
98% of profits. As such, most capex from Year 2 onward will be funded out of debt.

The RE estimates distributions will contain a tax-deferred component, which it has not
quantified.
Figure 8: Forecast Income and Distribution Statement on an annualised basis
Forecast Income and Distribution Statement
PDS Forecast – 14 November 2014 to 30 June 2015
Annualised $'000
Net Property Income
33,041
Fund Base Management Fees
(2,450)
Fund Expenses
(896)
Finance Costs (net)
(9,580)
Net Profit
20,188
Add back straight-lining of rent
858
Amount Available for Distribution
20,976
Amount available for distribution withheld
(1,209)
Cash distribution
19,767
Forecast cash distribution per new Wholesale A
unit (cents) (annualised)
Annualised distribution yield
Interest cover ratio
7.50
7.50%
3.2x
Source: Charter Hall
Figure 9: Pro-forma balance sheet
Pro-forma Balance Sheet
Pro forma at 14 November 2014
$'000
Assets
Cash and other assets
Investment Property
Total assets
Borrowings
Total liabilities
Net assets
Units on issue ('000)
656
483,425
484,081
(220,877)
(220,521)
263,560
263,560
NTA per unit
$1.00
Gearing
45.7%
Source: Charter Hall
page 13 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
NTA Analysis
The starting NTA is an important consideration. It should be assessed in the context of statutory costs
and fees paid to the fund manager, which dilute investors’ return over the term of a fund.
In this case, NTA is $1.00. As the Fund and its portfolio already exist, there are no setup costs and
hence no dilution. This is exceptional, and one of the Fund’s strengths.
Figure 10: NTA breakdown
Cents per unit
Entitlement
Offer & shortfall
New Offer
97.5
100
Additional consideration1
n/a
n/a
Fund set-up costs
n/a
n/a
Acquisition fee
n/a
n/a
Effect of bonus units issued
n/a
n/a
Discount under entitlement offer
2.5
-
NTA per unit
100
100
Issue price (Wholesale A units)
For Advisors Only
Less:
There are no
setup costs or
acquisition
fees relating
to the initial
portfolio.
Add:
Source: Charter Hall
Comparison to other funds
The table below compares the Fund's financial metrics to a selection of multi-asset property funds.
The metrics of DOF appear to be broadly in line with industry peers.
Figure 11: Fund comparisons
CMW
DXS
GDI
IOF
TOF
AMP
W/Sale
Aus Pty
CPT12
DOF
Share price ($)
$1.00
$1.13
$0.89
$3.37
$2.02
$1.22
$1.00
$1.00
NTA ($)
$0.73
$1.06
$0.93
$3.35
$2.14
n/a
$0.91
$1.00
37.0%
6.6%
-3.8%
0.6%
-5.6%
n/a
9.9%
0.0%
39%
34%
25%
32%
36%
6%
49%
46%
5.9
4.9
3.3
5.0
4.2
3.4
14.5
4.1
12.0
11.5
10.9
12.3
11.9
n/a
13.9
12.9
FY15f earnings yield (%)
8.3%
8.7%
9.2%
8.1%
8.4%
n/a
7.2%
7.7%
FY15f distribution yield
(%)
7.8%
6.0%
8.4%
5.7%
8.4%
8.1%
7.8%
7.5%
Prem/(disc) to NTA (%)
Gearing (%)
WALE (years)
FY15f P/E ratio
For all REITs, distribution yield, earnings yield, and P/E have been calculated using management guidance. DXS earnings
guidance includes trading profits. DXS WALE refers to office portfolio. Look-through gearing used for CMW, DXS, and IOF.
Share prices as at 26-Sep-14.
AMP Wholesale Australian Pty Fund asset data as at Mar-14 and unit price as at 25-Sep-14. “Distribution yield” refers to
FY14 12-month income return. Gearing as at Jun-14.
CPT12 data sourced from PDS.
Source: Companies/PIR
Sensitivity analysis on key assumptions
In this section, we analyse the capital structure of the Fund and its effect on investor returns. The key
areas of analysis are:
1.
The current level of gearing and sensitivity to movement in cap rates;
2.
Effect of a change in interest rates on cash flow and subsequent returns; and
3.
Expected internal rates of returns (IRR)
page 14 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Leverage
The RE has forecast expected gearing levels for the Fund in the chart below. Key assumptions are:

Asset values increase every year as the Fund’s portfolio is revalued on a constant cap rate
basis.

Undrawn debt may be used to fund budgeted capital expenditure.
Using these assumptions, the value of the property would need to decrease by more than 20% in the
first year to breach the LVR covenant of 60%. In subsequent years, the RE forecasts that gearing will
remain largely constant due to the use of debt to fund capex. An important point to note is that the
Fund's gearing will change as it receives subsequent equity inflows or acquires new assets.
Figure 12. Gearing over term of the Fund (base case)
For Advisors Only
60%
55%
50%
45.7%
45.5%
45.0%
44.4%
44.2%
Year 1
Year 2
Year 3
Year 4
Year 5
45%
40%
35%
30%
Source: PIR/ Charter Hall
Interest rate sensitivity
The RE forecasts an initial all-in interest rate of 4.28%. Subsequently, the RE forecasts a gradual
100bps increase in its base rate over the initial term. The current facility limit is $260M, of which
$221M is drawn and $120M is hedged.
Hedging will limit the impact of changes in interest rates on forecast distributions. Future distributions
will be affected by movements in interest rates on the un-hedged amount.
The PDS forecasts an interest cover ratio of 3.2 times for the period to June 2015. PIR believes this
provides sufficient headroom to the covenant of 1.5 times. For the Fund to breach its covenant,
income would need to fall by more than 40%, or interest rates would need to increase more than 3%
from the RE’s base case, which already incorporates an increase in rates (refer Figure 13).
Figure 13. ICR covenant – sensitivity to changes in interest rates
Base case
Base case + 1%
Base case + 2%
Base case + 3%
ICR covenant
3.5
3.0
2.5
2.0
1.5
1.0
Year 1
Year 2
Year 3
Year 4
Year 5
Source: PIR/ Charter Hall
page 15 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Expected Future Performance (IRR Sensitivity)
The three main performance drivers in a property syndicate are:
1. The property income profile (lease structure);
2. The terminal value upon the sale of the property (asset quality + market conditions); and
3. The cost of debt (depending on how highly leveraged).
The Fund is a multi-tenant, multi-asset vehicle, with no one tenant accounting for more than 10% of
the core portfolio’s income. The Fund also has a track record of keeping core portfolio occupancy
above market levels. As such, PIR expects the Fund to re-lease expiries over the initial term. Rising
debt costs will affect the eventual IRR, although not to the same extent.
For Advisors Only
PIR has undertaken IRR sensitivities using both the terminal cap rate and the base rate of borrowings
as variables. Critical assumptions are as follows:
 We assume Wholesale A investors buy their units at $1.00 each. IRRs will be higher for investors
who buy at $0.975 through the entitlement offer or shortfall. The RE estimates the difference will
be circa 80bps-100bps.
 Asset-level cashflows are as per the RE’s forecasts. PIR is satisfied that these are broadly in line
with the independent valuers’ estimates.
 The three non-core asset sales in the next 12 months (2 Wentworth St, 300 Adelaide St, 504
Pacific Hwy) are in line with their independent valuations;
 The five assets held to the end of the initial term (comprising the four core assets plus 165 Walker
Street) are sold at a weighted average terminal yield of 7.78%, which is 12.5bps higher than the
initial cap rate;
 Capital expenditure is forecast to be covered largely out of debt;
 We assume a cost of borrowing based on the forecast provided by the RE (which incorporates an
increase in interest rates over the initial term of the Fund).
 All fees payable are included.
Figure 14 summarises the RE’s expected IRRs based on varying interest rates and terminal yield
assumptions. We have also assessed the effect of varying non-core asset sale prices upon the base
case IRR in Figure 15.
Using the assumptions highlighted above, PIR expects a 5-year IRR of over 8.0% to over
11.0%. By way of comparison, the valuer forecasts unleveraged 10-year IRRs of 8.5% to
9.0% for the core portfolio and 9.2% to 10.2% for the non-core portfolio.
Figure 14. Pre-tax, 5-year IRR (after fees) Sensitivity Analysis – assumes entry price of $1 per unit
Base rate Oct-14 to Oct-19 (simple average)
Terminal Cap rate
2.43%
3.43% (base)
4.43%
5.43%
7.28%
13.0%
12.7%
12.3%
11.9%
7.53%
12.1%
11.7%
11.3%
10.9%
7.78% (base)
11.2%
10.8%
10.4%
10.0%
8.03%
10.3%
9.9%
9.4%
8.9%
8.28%
9.3%
8.9%
8.4%
7.8%
Source: PIR/ Charter Hall
Figure 15. Effect of varying sale prices for the non-core portfolio
Sale price premium/
discount to RE assumptions
-10%
0% (base case)
10%
Fund IRR
10.2%
10.8%
11.4%
Source: PIR/ Charter Hall
page 16 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
5.Management & Corporate Governance
Background of RE and Manager
Charter Hall Group is one of Australia’s leading fully-integrated property groups, with $11.5 billion in
funds under management. The group was established in 1991 and has since created and managed a
suite of funds on behalf of listed, unlisted wholesale, and unlisted retail investors.
Charter Hall Direct Property Management Limited (CHDPML) is the RE of the Fund. In turn, CHDPML
has appointed Charter Hall Holdings Pty Ltd (CHH) as the investment manager. CHH will provide all
services associated with asset and property management, accounting and investor relations.
For Advisors Only
Both entities are wholly-owned subsidiaries of CHC. The RE board has been structured to manage
material conflicts of interest and maintain a high level of corporate governance for the benefit of the
Fund investors. We provide more detail in the section titled Compliance and Governance.
Group Philosophy
CHC aims to grow investor wealth from delivering “smart property outcomes”. Its focus is on
generating above-benchmark returns on equity across its funds management platform. The group is a
co-investor in a number of its listed and unlisted funds and as at June 2014, had around $765M of
co-investments across its $11.5 billion funds platform (including over $12M in DOF). Therefore, we
believe its interests are aligned with those of its clients and investors.
CHC Group financial position
We outline below the financial position of CHC for the 12 months to June 2014. The accounts have
been sourced from the 2014 Annual Report lodged with the Australian Stock Exchange (ASX) and
publicly available information. For more details, please visit the company website.
PIR notes that the Group has generated strong earnings growth since listing in 2005, which remains
above its industry peers. The group has successfully expanded its investor base offshore in recent
years – a range of large offshore pension, sovereign, and institutional funds have become investors
across the suite of funds. As such, PIR believes CHC is a high-profile property fund manager and in a
sound financial position.
Figure 16. CHC 12 months to June 2014
Income
Jun-14
($M)
Income
Balance sheet
Cash
Jun-14
($M)
$50.2
Direct property investment
$1.0
Property investments
$719.8
Property funds investment
$48.7
Other tangible assets
$47.2
Property funds management
$34.6
Intangibles
$87.6
Operating earnings
$81.2
Total assets
Net non-operating items
1.0
Borrowings
$986.1
-
Other liabilities
$69.0
$69.0
Statutory Profit after tax
$82.1
Total Liabilities
EPS (cps)
25.31
Net equity
DPS (cps)
22.30
Look-through gearing (%)
31.0%
NTA per security
$2.38
Payout ratio
88.1%
$917.7
Source: CHC/PIR
page 17 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Board of the Responsible Entity
PIR has reviewed the composition of the RE board and believes that it has the relevant skills and
experience to operate the Fund successfully. Each Executive Director has demonstrable property and
investment management skills, while the non-executive directors have an appropriate blend of direct
property, property funds management and compliance backgrounds.
We view the balance of independent and executive members as a key strength of the RE, when
combined with a clear policy to manage related-party transactions. Directors of the RE and key
management are as follows (summaries based on the PDS):
For Advisors Only
Figure 17. Board of the Responsible Entity and Key Management
Name
Role
Experience
Peeyush
Gupta
Independent Chairman
Co-founder & ex-CEO of Ipac Securities.
Rick Higgins
Independent Director
Non-Executive Director of National Wealth
Management Holdings, BNZ Life, Safety
Return to Work, and SIRCA.
Over 40 years property experience.
Non-Executive Director on the Board of BWP
Management. Senior management roles at
Colliers International and JLL.
Ian Pratt
Independent Director
Over 40 years as an accounting professional.
Director of a number of private companies.
David
Harrison
Executive Director
David
Southon
Executive Director
Cedric Fuchs
Executive Director
27 years of property industry experience.
Joint Managing Director of Charter Hall.
27 years property indusrty experience.
Co-founder of Charter Hall Group.
40 years property industry experience.
Co-founder of Charter Hall Group.
Richard
Stacker
Head of Direct Property
(Alternate Director – for
Executive Directors only)
24 years in real estate funds management.
Steven
Bennett
Fund Manager
13 years experience in funds management,
property, accounting and consultancy.
Head of Charter Hall Group’s direct property
business.
Source: Charter Hall/ PIR
Compliance and Governance
PIR has reviewed the RE’s Compliance Plan and believes the RE’s compliance framework and
procedures are consistent with good corporate governance. The RE has lodged a copy of the Fund’s
Constitution and Compliance Plan with ASIC, as required by the Corporations Act.
page 18 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
For Advisors Only
Figure 18. Fund Management Structure
Source: CHC/PIR
Compliance with ASIC Regulatory Guide 46
ASIC Regulatory Guide 46 ‘Unlisted property schemes: Improving disclosure for retail investors’ and
Regulatory Guide 198 ‘Unlisted disclosing entities: continuous disclosure obligations’ describe ASIC's
preferred benchmarks and principles.
PIR has reviewed the material provided by the RE in reference to the six benchmarks and the eight
disclosure principles recommended by ASIC. We are satisfied with the RE’s efforts to maintain and
adhere to ASIC guidelines.
Governance around Related Party Transactions
The RE maintains and complies with a written policy on related party transactions, including the
assessment and approval process for such transactions and arrangements to manage conflicts of
interest. All transactions in which the RE may have, or may be perceived to have, a conflict of
interest will be conducted in accordance with the RE’s related party transactions policy. Under this
policy, the RE may be required to disclose conflicts of interests to investors. It must ensure that its
disclosure is timely, prominent, specific and meaningful, and contains enough detail to understand
and assess the potential impact on the service provided by the RE.
Where the RE seeks professional services from a related party, fees for such services are subject to
the approval of the Responsible Entity’s independent directors.
Any conflict situations will be monitored and evaluated by the compliance manager for Charter Hall
Group. If the compliance manager considers it necessary, the matter will be referred to the RE’s
Board. The Board can then take steps to ensure that the conflict is managed in an appropriate
manner.
page 19 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
6.Past Performance
Charter Hall Syndicate Performance
Charter Hall has managed a number of syndicates, whose returns we depict below. The aggregate
return for the syndicates as of June 30, 2014 is over 14% p.a. As the chart below suggests, the
returns from syndicates have typically been around 10% to 15% per annum. A few syndicates have
delivered strong returns. None of them have recorded negative returns.
PIR notes that syndicate performance is driven by the unique attributes, risks, and gearing of each
asset. This should be considered when interpreting returns presented in Figure 19 below.
Investors should also remember that past performance is not an indicator of future performance.
For Advisors Only
Figure 19. Charter Hall Syndicate IRRs (p.a.)
30%
26.5%
25%
21.3%
20%
16.2%
14.9%
15%
10.7%
14.7%
12.7%
12.6%
10.1%
10%
7.60%
5%
0%
CHIF1 1997 to CHIF2 1997 to CHIF3 1999 to CHIF4 2000 to CHIF5 2001 to CHIF6 2004 to 1MPT 2002 to 130 Stirling St 144 Stirling St
2008
2013
2013
2013
2013
2013
2013
Trust 2010 to Trust 2012 to
2014
2014
Sydney
Industrial
Melbourne CBD
Retail
Melbourne
Industrial
Syd Office
Sydney /
Melbourne
Office
Syd Office
Syd Office
Perth Office
Perth Office
Aggregate
Charter Hall
*Returns for No 1 Martin Place assume foundation investors purchased units at Trust inception and also took part in the September 2009 rights issue.
Source: Charter Hall/PIR
page 20 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).
Charter Hall Direct Office Fund
Wholesale A Units (New Offer), October 2014
Appendix – Ratings Process
PIR has developed a framework for rating investment product offerings in Australia. Our review process gives
consideration to a broad number of qualitative and quantitative factors. Essentially, the evaluation process includes
the following key factors: product management and underlying portfolio construction; investment management,
product structure, risk management, experience and performance; fees, risks and likely outcomes.
The Ratings
Financial Advisers and investors should note that for all ratings categories, the product may not suit the risk/return
profiles of all investors.
For Advisors Only
AAA: This is the highest rating provided by PIR, indicating this is a best of breed product that has exceeded the
requirements of our review process across a number of key evaluation parameters and scored exceptionally in a number of
categories. The product provides a highly attractive risk/return trade-off. The Fund is likely to effectively manage
endogenous and, to the extent that it can, exogenous risk factors with industry best practice.
AA+: Indicates that PIR believes this is a superior grade product that has exceeded the requirements of our review process
across a number of key evaluation parameters and scored exceptionally in a number of categories.
AA: Indicates that PIR believes this is an above-average grade product that has exceeded the minimum requirements of our
review process across a number of key evaluation parameters. In addition, the product rates highly on one or two attributes
in our key criteria. It has an above-average risk/return trade-off and should be able to consistently generate above-average
risk adjusted returns in line with stated investment objectives. The Fund should be in a position to effectively manage
endogenous and, to the extent that it can, exogenous risk factors. This should result in returns being reflective of the
expected level of up-side and down-side risk.
AA-: Indicates that PIR believes this is an above-average grade product that has exceeded the minimum requirements of
our review process across a number of key evaluation parameters. It has an above-average risk/return trade-off and should
be able to consistently generate above-average risk adjusted returns in line with stated investment objectives.
A+: PIR believes this is a suitable product that has met the aggregate requirements of our review process across a number
of key evaluation criteria. The product provides some unique diversification opportunities, but may not stand apart from its
peers. It has an acceptable risk/return trade-off and should generate risk adjusted returns in line with stated investment
objectives.
A: PIR believes this is a suitable product that has met the aggregate requirements of our review process across a number of
key evaluation criteria but may not stand apart from its peers. There are certain assumptions, the outcome of which is
sometime in the future and, therefore, less predictable. The product has an acceptable risk/return trade-off and is
potentially able to generate risk-adjusted returns in line with stated investment objectives.
A-: PIR believes this is a suitable product that has met the aggregate requirements of our review process across a number
of key evaluation criteria. There are certain assumptions, the outcome of which is sometime in the future and, therefore,
uncertain. However, it has an acceptable risk/return trade-off. The product has an acceptable risk/return trade-off and is
potentially able to generate risk-adjusted returns in-line with stated investment objectives.
B+: PIR believes this is a product that has a number of positive attributes; however, there are a number of risks that make
investing in this product a speculative proposal. While PIR does not rule out investing in this product, investors should be
very aware of, and be comfortable with, the specific risks. The product may provide unique diversification opportunities.
However, concerns over one or more features mean that it may not be suitable for most investors.
B: PIR believes that despite the product’s merits and attributes, it has failed to meet the minimum aggregate requirements
of our review process across a number of key evaluation parameters. While this is a product below the minimum rating to
be considered Investment Grade, this does not mean the product is without merit. Funds in this category are considered to
contain high risks which are not reflected by the projected return. Performance volatility, particularly on the down-side, is
likely.
This report has not been commissioned, and, as such, PIR has not directly received a fee for its publication. Under
no circumstances has PIR been influenced, either directly or indirectly, in making statements and/or
recommendations contained in this report.
page 21 of 21
Copyright © 2014 Independent Investment Research Pty Limited (trading as PIR).