As reported in Lonsec's last Portfolio Partners update ... - Charter Hall

Charter Hall Direct 144 Stirling Street Trust 

May 2012 

Trust Financial Position As at June 2012 

Property Value $54.8m 

Equity Sought $32.0m 

Unit Application Price $1.00 

Net Tangible Assets/unit $0.951 

Debt $24.66m 

Gearing (Loan to Value) 45% 

Portfolio Summary 

No. of Properties 1 

Property Type Office 100% 

Property Location Perth, WA 100% 

Wtd Avg Lease Expiry 7.83 yrs (by income) 

Fund Returns Lonsec Estimates 

Est. Trust IRR pre-tax 11.63% 

IRR After tax (46.5%/15%) 7.75% (10.38%) 

Year end June FY13f FY14f 

Distribution per unit 8.85c 9.15c 

Pre-tax Yield 8.85% 9.15% 

Tax Deferred 44% 41% 

After-tax Yield (46.5%) 6.55% 6.64% 

After-tax Yield (15.0%) 8.11% 8.34% 

Other Fund Details 

APIR Code MAQ0788AU 

Distribution Paid Monthly in arrears 

Minimum Investment $50,000 

Investment Term Five years (June 2017) 

Responsible Entity/ 

Manager 

Charter Hall Direct Property 

M‟ment Ltd / C.Hall Hldgs P/L. 

Manager Fund Holding: Charter Hall Group will underwrite up 

to 49.9%. 

Manager Fees & Expenses 

RE Transaction Fee 2% of gross assets 

Annual Fee & Expenses Up to 0.8% of gross assets 

Performance Fee 15% of excess above 10% pa 

RE Disposal Fee/Costs 1% of gross assets sold + onbilled 

costs 

Advisor Fee: Direct investors may elect to pay to Advisors a 

professional fee for service of up to 3% (incl GST), which will be 

deducted from Application Amounts and result in less units allotted. 

Using This Fund 

This is General Advice only and should be read in 

conjunction with the Disclaimer, Disclosure and 

Warning on the final page. 

Charter Hall Direct 144 Stirling Street Trust (CHD 

144 Stirling St or ‘the Trust’) is an unlisted property 

trust which invests in a single property asset with a 

small cash reserve. 

The Trust aims to provide a sustainable and stable 

income return (initially 8.85% partly tax deferred) with 

the potential for capital growth. 

While the returns of the Trust are expected to be less 

volatile than equities and listed property securities 

investments, investors should be aware that the Trust 

may experience periods of negative returns and that 

there is a risk of incurring capital loss on the Trust. 

As such, Lonsec considers the Trust suitable for 

medium to high-risk profile investors with a five+ year 

investment-time horizon and it will generally sit within 

the growth component of a balanced portfolio. 

Due to the Trust’s significant exposure to an illiquid 

asset (direct property) and that there is no redemption 

facility during the initial five year term of this closedend 

Trust, liquidity risk in the Trust is high. (See 1.4 

Liquidity for further details). 

Lonsec Ratings of Critical Determinants 

Financial 

Gearing 

Properties 

Management 

0.0 2.0 4.0 6.0 8.0 10.0 

WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT 

Lonsec Limited ABN 56 061 751 102 AFSL No. 246842 Participant of ASX Group 1 

This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 

Market 

Exit Strategy 

Conclusion & Ratings Rationale 

Lonsec has initiated coverage of the CHD 144 Stirling 

Street Trust with a ‘Recommended (Upper End)’ 

rating. In comparison to its peers, the Trust rates well 

on the following criteria: 

The Trust offers attractive financial returns, with a 

relatively high pre-tax yield and estimated total 

return over the medium to long term. 

Gearing is moderate with significant headroom to 

bank covenants. 

Perth office property has strong near-term growth 

prospects and the building is under-rented. 

The structuring of the acquisition keeps transaction 

costs low and the benefit is reflected in the high 

initial net asset backing of $0.95. 

The Manager is well resourced with the Trust 

leveraging off the Charter Hall Group‟s resources. 

The Criteria which garnered a lower rating: 

After-tax returns held back by low tax deferred.


The property is on the fringe of the CBD and the car 

parking is leased from the adjacent building (could 

reduce potential purchasers). 

The Trust is not widely diversified, having only a 

single asset with two major tenants. 

Summary – Lonsec Fund Ratings Criteria 

Property Criteria 

The area has good long-term potential, being on the 

northern fringe of Perth‟s CBD and close to rail 

transport with access to the nearby freeway. It is a 

developing area for commercial office, assisted by 

increasing residential density. 

Tenants are of high quality with global engineering 

firm Hatch (64% by income) and WA Government 

(23%) having built-in rental increases of 3.75%-4% 

p.a. The weighted average term to lease expiry at 7.8 

years is slightly above average, with five years still to 

run on the Hatch lease by the end of the initial term of 

the Trust (mid 2017). Net passing rental is 5% below 

market, with good prospects for continued market 

increases given the current tight office supply in Perth. 

The 144 Stirling St building has attractive large floor 

plates, which is a key driver of tenant demand from the 

CBD. It has also achieved 3.5-4.5 (out of 6) NABERS 

ratings for energy and water respectively. Recently, 

the present owner spent $2.7m upgrading the property 

to a high standard. Although there is no significant 

capital expenditure needed in the near-term, the 

Manager has allowed $1.5-$1.6m ($150/m2 for office 

space) covering the first five years - similar to that in 

the valuation report. 

The building benefits from being adjacent to another 

Charter Hall property (which Lonsec reviewed in late 

2009), in particular sharing the car parking located at 

130 Stirling St. In practical terms the Adjoining Owners 

Agreement (99 year lease) ensures adequate parking 

for tenants of each building and protects owner‟s rights 

if the other property is sold or transferred. However, 

the lack of parking on the 144 Stirling St title could be 

viewed negatively by potential purchasers of the 

property. 

Financial & Gearing Criteria 

The near 9% pre-tax distribution yield is at the 

upper end of Lonsec‟s sample of recent unlisted 

property trusts and mid-range for after-tax yield 

given the relatively low tax deferred component. 

The issue of the previous vendor paying out about half 

of existing incentives prior to sale is regarded by the 

Independent Valuer as “not an unusual practice for 

assets of this size”. This brings the current rental up to 

near market levels and makes the property more 

attractive to new investors in the Trust. The Manager 

has stated that it was not motivated to artificially boost 

distributions as income was already comparatively 

high. This will be conclusively proved should the 

outstanding balance of incentives be paid out in 

readiness for the sale of the property at the end of the 

Trust‟s expected life. 

Estimated total returns are underpinned by the 

growth in lease and market rent levels. The Trust 

exceeds Lonsec‟s hurdle rate for this type of property 

trust by a comfortable margin. This is assisted by the 

Manager‟s ability to source the asset from a related 

party, resulting in property transaction cost savings. 

Initial gearing is 45% (47.9%* with planned capital 

expenditure) which is around the mid-point of the 

current Loan to Value Ratio (LVR) range for stabilised 

unlisted property trusts/funds of 38% to 58%. 

Headroom to 60% covenant is significantly higher than 

most other unlisted trusts, with the property able to 

withstand a 21-25% fall in valuation before a breach of 

covenant. While debt is only 50% hedged, the 

Manager‟s current expectation is that market interest 

rates and margins are more likely to reduce in the near 

future. The Manager conservatively allows for interest 

rates to increase through the life of the Trust. 

The overall fees and costs for this Trust (on a present 

value basis) are slightly higher than Lonsec‟s average 

for new unlisted property trusts. The rating for this subcriteria 

is assisted by there being no RE removal fee. 

(Note*: Over five years and assumes no increase in property value). 

Management Criteria 

The Charter Hall Group (CHG) is well capitalised with 

balance sheet gearing of 8% and look-through gearing 

of 33%. Lonsec notes that CHG recorded a good first 

half FY12 operating result (+7% normalised earnings 

per share and +14% distributions per share). The 

outlook is underpinned by the solid recurring income 

from its directly held and co-owned property portfolio. 

The Directors and senior executives of the RE/ 

Manager have a strong background in the property 

and funds management industries. Charter Hall is an 

integrated property group, with most activities 

undertaken in-house, giving the Trust the benefit of 

one of the best resourced teams in the sector. 

Charter Hall has a track record of delivering solid total 

returns over a 20-year period across a variety of retail 

trusts (closed end) and wholesale property funds when 

compared with appropriate benchmarks. The funds 

aimed at „retail‟ investors have delivered income in-line 

with their objectives, however some of the open-end 

funds for which this team has been responsible for 

have underperformed a wholesale benchmark. 

Lonsec Limited ABN 56 061 751 102 AFSL No. 246842 Participant of ASX Group 


2


While this asset has been sourced through a relatedparty, 

Charter Hall has well-defined protocols 

regarding potential conflicts of interest. Separate 

due diligence is conducted (including Independent 

Valuations), with approvals from both the existing 

owner and incoming investor boards - where executive 

directors are not allowed to vote on related party terms 

of the transaction. The Group‟s disclosure to investors 

and innovative improvements to the Trust enhances 

Lonsec‟s rating of the management criteria. 

In order to sell down ownership in the property, new 

investors will be allotted different classes of units for 

specific periods and amounts of the equity raising. The 

units will either pay a cash return or a property return 

and will convert to Ordinary Units should the minimum 

targets specified be met. This is to ensure the smooth 

transfer of the property and/or return of investors‟ 

capital if the First Close minimum of $16m equity is not 

reached. 

If the Second Close amount of $24m is not raised, 

Charter Hall Group (the underwriter) may elect to own 

49.9% of the equity, but its intention is to own less than 

25% and possibly 0% if there is sufficient investor 

demand for units in the Trust. Lonsec‟s rating for this 

category is marginally enhanced by Charter Hall‟s 

preparedness to underwrite the equity raising and to 

potentially take a stake in the Trust. 

Lonsec notes the Drag-Along Rights that the 

underwriter has if it holds 49.9% of the Trust. This 

enables the holder of the Acquisition Units to at any 

time after 30 June 2015 (subject to certain restrictions 

under the Constitution) to request the RE to dispose of 

the property for not less than market valuation. Any 

holder of Acquisition Units has a first right of refusal 

to buy out holders of Ordinary Units (if the RE wishes 

to sell the property in the best interests of investors). 

Market Criteria 

The recent performance of office property remains 

the strongest sector overall and the most popular 

investment category for overseas investors. However, 

the effect of the multi-speed economy is becoming 

more apparent in the different geographic markets. 

Persistent uncertainty in the global economy and 

equity markets has impacted more heavily in Sydney 

where the majority of office tenants are in the financial 

or professional services sectors. Meanwhile demand 

for office space arising from the mining boom is 

especially prevalent in Perth and Brisbane. 

The Perth suburban office market experienced 

improved tenant demand during 2011 which mirrored 

Perth‟s CBD office precincts. With vacancy rates 

declining to 3.3% overall (1.4% A-grade) 1 , effective 

rental growth was strong in the CBD which has 

resulted in modest growth in secondary markets during 

the second half of 2011. (Note 1: Colliers International as at 31 

December 2011). 

Office supply coming on stream in Perth during the 

next 12-18 months is mostly pre-committed. A new 

supply cycle may emerge from 2014 and ease 

vacancy rates. Meanwhile effective rental growth is 

well supported. 

Exit Strategy / Liquidity Criteria 

As a closed-end syndicate with no liquidity during 

the initial term, the Trust does not rate as well as 

those funds with some liquidity mechanisms (albeit 

limited). However, the defined term of the Trust‟s 

Liquidity Review allows investors to vote on whether 

to realise the asset. Even if the Trust continues, the 

Manager is offering a Liquidity Strategy to assist 

minority unit-holders to exit at this point. 

There are provisions for hardship situations similar to 

other Charter Hall funds. 

The property, if offered for sale, should be attractive to 

private investors and small syndicate managers. 

Risk Assessment 

Lonsec rates the key risk factors associated with the 

CHD 144 Stirling St Trust in the table below, which are 

assessed in the overall context of both competing 

unlisted property funds and relative to other asset 

classes. 

Risk Factors Table Low Med High 

Operational Earnings 

Business Low 

Leasing Low 

Capital Gain vs. Income Med 

Diversification Med 

Market Volatility Med 

Financial 

Leverage (gearing) Med 

Refinancing Low 

Interest Cost / Hedging Med 

Currency Low 

Counterparty Low 

Support to Distributions Low 

Management & Others 

Experience Low 

Independence Low 

Related Party Transactions Med 

Liquidity / Exit Strategy High 



3


Capital gain vs income risk is deemed medium given 

that property funds have a higher element of capital 

risk than some other asset classes (eg: cash / bonds). 

Leverage (Gearing) risk is deemed medium in 

comparison to other investment classes (including 

listed property trusts), where there is lower or no 

gearing (some wholesale property funds). 

Refinancing risk is low as Charter Hall has a good 

record of being able to refinance its facilities. Although 

there is an inherent risk that property funds in some 

circumstances may not be able to obtain debt finance. 

Interest Cost / Hedging: The RE is targeting to 

maintain hedging contracts in respect of at least 50% 

of the Trust‟s borrowings. While fully hedging protects 

investors from the majority of adverse rises in interest 

costs, partly hedging gives flexibility to the Manager in 

order to benefit from a fall in interest costs. 

Currency: No part of the portfolio is directly exposed 

to foreign exchange movements. 

Related Party Transactions: The asset is currently 

owned by a related party. However, the Manager has 

clearly defined protocols for related party transactions / 

potential conflicts of interest. 

Liquidity: No liquidity provisions are available during 

the expected five year term of the Trust (except for 

hardship situations). While there is a scheduled 

Liquidity Event in 2017, sale of the asset or other 

liquidity options may not be possible due to market 

circumstances. 

Taking all these factors into consideration, Lonsec 

considers an investment in the Trust to be of low to 

medium risk. 



4


1. Overview 

1.1. The Trust 

CHD 144 Stirling St is an unlisted unit trust, registered 

with ASIC as a managed investment scheme. The 

Trust will have an initial investment term of five years. 

Charter Hall Direct Property Management Limited 

(CHDPML or „the RE/Manager‟) is seeking to raise 

$32m in equity along with bank debt of $24.66m to 

finance a single property at 144 Stirling Street Perth. 

The current owner is a related-party - Charter Hall 

Core Plus Office Fund (CPOF). 

Source & Application of Funds 

This % % 

Raising Prop Equity 

$m 

Equity Raised $32.000 

Borrowings $24.660 

Total Sources $56.660 

Property Cost $54.800 

Stamp Duty $0.000 0.0% 0.0% 

RE Fees $1.096 2.0% 3.4% 

Debt Arranger Fee $0.104 0.2% 0.3% 

Debt Estab Costs $0.156 0.3% 0.5% 

Other Estab. Costs $0.204 0.4% 0.6% 

Cash/Working Capital $0.300 

Total Applications $56.660 

Proportion of Prop/Equity 2.8% 4.9% 

Equity Capital Raising Schedule 

First Close $16m 

Second Close $24m 

Total Offer $32m 

Current Trust: CPOF owns 100% Acquisition Units. 

Until minimum 50.1% ($16m) of new equity is raised, 

Foundation Units are issued that pay a cash return. If 

this minimum is not raised, investor application monies 

are returned (including accrued Distributions) and 

CPOF retains 100% of Acquisition Units. 

First Close: If 50.1% of equity capital raised, syndicate 

investors convert to Ordinary Units that pay a property 

return. Further new investors are then issued Ordinary 

A units also paying a property return. 

Second Close: If 75.1% of equity ($24m) raised, then 

Ordinary A Units convert to Ordinary Units. 

Charter Hall Group will retain up to a maximum of 

24.9% of the Trust, as this is below the new accounting 

threshold for consolidation. However, its intention is to 

sell its 100% holding. 

Ordinary A Units: Allotted prior to the Second Close 

Amount being raised. Upon the Second Close Amount 

being achieved, all Ordinary A Units will automatically 

convert to Ordinary Units. 

Underwriting by Charter Hall Group 

If $24m or above is raised: Charter Hall Group may 

choose to acquire the balance of units available and 

Ordinary A Units issued will convert to Ordinary Units. 

If $16m but less than $24m is raised: Charter Hall 

Group will acquire 49.9% of the Units in the Trust and 

Ordinary A Units issued may be compulsorily 

redeemed (the Manager will return all Application 

Monies to Ordinary A Unit applicants including any 

accrued distribution entitlements). 

Offer Opens: 15 May 2012 

Offer Closes: the earlier of the 30 June 2012 or when 

the Maximum Offer of $32m in equity is raised. 

1.2. Investment Limits / Applications 

Direct Investors: Minimum application is for $50,000 

and thereafter in multiples of $5,000. 

Indirect Investors: As advised by their IDPS operator. 

1.3. Income Distributions 

Trust distributions are expected to be paid monthly (in 

arrears), with the first amount to be paid for the period 

ending 30 June 2012 within 30 days of the end of the 

month. 

1.4. Liquidity 

The Trust has been set up as a closed-end syndicate 

with an initial term of five (5) years (expiry estimated to 

be on or about 30 June 2017) in order to provide 

greater certainty to Unit-holders on an exit strategy. 

The RE/Manager will not be offering investors any 

liquidity mechanism over the Trust’s expected 

investment term (apart from hardship liquidity in 

limited circumstances). 

The RE/Manager will provide Unit-holders with a 

‘liquidity review’ at the end of the five-year 

investment term to vote on whether the Trust should 

continue to hold the Property. 

The Trust will only be rolled forward for an additional 

five-year term if at least 75% of Unit-holders vote in 

favour of the resolution. 

If the asset is retained following this vote, the 

RE/Manager will implement a ‘liquidity strategy’ to 

assist minority Unit-holders to exit their 

investment. If less than 75% of the Unit-holders do not 

support the resolution to extend, then the property 

must be sold and the Trust wound up. 



5


1.5. Overview of Trust Property 

Property State Value Val'n Transaction % Net Income Valuer's Valuer's Net Vacant Tenants 

Date Price Port Income Yield Disc. Cap. Area 

$m $m $m Rate Rate m2 m2 

144 Stirling St, Perth WA 54.8 Apr-12 54.8 100% 4.749 8.67% 10.25% 8.50% 11,042 0 

1.6. Comparison with Other Office Property Funds 



Hatch Assoc; WA Police 

Dept, Wilson Carparking 

Charter Hall Cromwell CorVal Centuria CH Direct 

144 Stirling St Ipswich PT2 8 Aust Ave Prop. Fund 

Mar-12 Dec-11 May-11 May-11 Mar-11 

Property Sector Office Office Office/Ind. Office Office/Other 

No. Properties 1 1 2 1 9 

Total Assets $54.8m $94.2m $54.5m $31.5m $500m 

Asset Locations (Main) WA Qld NSW, ACT NSW NSW, Vic, Qld 

Valuation Date Mar-12 Oct-11 Apr & May 11 Mar-11 Dec-10 

Valuer Cap. Rate (avg) 8.50% 8.50% 7.87% 8.00% 8.53% 

Valuer Disc. Rate (avg) 10.25% 10.00% 9.69% 9.50% 9.45% 

Pre-tax Distrib. Yield (Yr 1) 8.85% 7.75% 8.50%^^ 8.00% ^^ 6.35% 

% Income Support nil 100%*** 3% 17% nil 

Tax Def. (Yr 1) 44% 100% 50% 100% 100% 

After-tax Distrib. Yield (Yr 1) 6.55% 7.75% 6.52% 8.00% 6.35% 

Est. IRR (pre-tax) 11.6% 11.7% 10.7% n/a 11.9% 

Lonsec Hurdle Rate 9.8% 9.7% 10.0% 9.9% 9.9% 

Premium IRR / Hurdle Rate 19% 21% 7% 7% 20% 

Gearing (LVR) 45% 53% 48% 50% 50% 

Debt Cost 6.30% 5.79% 7.18% 7.65% 7.16% 

Initial NTA (Lonsec adj.) $0.95 $0.92 $0.91 $0.90 $0.98** 

Property Initial Yield 8.67% 8.48% 8.82% 8.83% 7.70% 

WALE by income (yrs) 7.8 13.7 12.3 6.1 4.7 

Occupancy 100% 100% 100% 100% 94% 

Major Tenants 

Lonsec Rating 

(Note*: Post capital raising). 

(Note ** $1 equvalent basis). 

Hatch; 

WA Police 

Recomm. 

(Upper End) 

Qld Dept of Public 

Works 

Recomm. 

(Upper End) 

Aust. Red 

Cross; C'wealth 

Dept of E&WR 

Recomm. 

(Upper End) 

(Note ***: Funding Allowance from Builder equivalent to discount on purchase price). 

(Note ^^: Includes income support). 

Fujitsu; SOPA; 

Watpac 

Recomm. 

(Upper End) 

Orica; Barristers 

Chambers; NSW 

Gov't; Wilson 

Parking 

Recomm. 

(Upper End) 

6


2. Financial Analysis 

2.1. Income/Expenses Analysis 

Year end Jun-13 Jun-14 

$m $m 

Property Income 4.920 5.067 

Interest Income 0.013 0.017 

Total Income 4.933 5.084 

Management Fee -0.332 -0.335 

Other Expenses -0.111 -0.112 

Interest Expense -1.573 -1.601 

Total Operating Expenses -2.015 -2.048 

Net Operating Income 2.918 3.036 

(Inc Reserve)/Inc Support -0.086 -0.108 

Net Distribution 2.832 2.928 

Ord Units Issued (m) 32.000 32.000 

Distrib./Unit 8.85c 9.15c 

Yield (Annualised) 8.85% 9.15% 

% Tax Deferred 44% 41% 

The table above details the Manager‟s estimates of 

income and expenses for the Trust over the next two 

years, which Lonsec has verified as being achievable. 

From net operating income, the Manager retains funds 

in reserve for a later period where there may be 

vacancies upon lease expiries resulting in lower 

income. Should this occur, the reserve is available to 

boost distributions or if not, the cash will be available 

to reduce debt or contribute to capital expenditure. 

When the existing owner (CPOF) was negotiating the 

renewal of the lease with the major tenant (Hatch), it 

was agreed that unexpired rental incentives would 

be paid out if surplus cash was available to CPOF. 

Following a recent capital raising, CPOF made a part 

payout of $1.9m, which is the present value of $2.7m 

(half of the total outstanding). This was accretive to 

CPOF‟s earnings (as it will continue to own all/part of 

the property until all the equity is raised in this Trust). 

The Trust will reimburse CPOF the $1.9m by way of a 

higher price paid for the property ($54.8m) which is 

supported by an updated Independent Valuation. 

While this has the impact of increasing income to the 

Trust for the first four years of the Trust (until 1 July 

2016), it brings the net rental received more closely in 

line with market rents for this area of Perth. 

Assumptions underlying income 

The Manager‟s allowances on the property income are 

reasonable and in line with those made in the Valuer‟s 

report. 

For Lonsec‟s comparative purposes over ten years, it 

is assumed that the major tenant (Hatch) will vacate in 

August 2021 (no % retention applied) in-line with that 

of the Valuer. The following amounts have been 

deducted from income upon the major office lease 

expiries. 

Allowances Upon Expiry 

Office 

Avg Vacancy (mnths) 

Prob. Of Renewal 

Effective Vacancy (mnths) 

Incentives (5 yr lease) 

Incentive – effective (mnths) 

Charter 

Hall 



4 

0% 

4 

12% 

7-8 

Valuer 

6 

0% 

6 

5-10% 

3-6 

Total Allowance (mnths) 11-12 9-12 

Agent‟s/Leasing Fees 12% 12% 

However, for the space occupied by the WA Police 

(Ministry of Works lease), Charter Hall assumes a 12 

month option is taken-up and then for the tenant to 

vacate March 2017. A 25% possibility of retaining the 

tenant has been applied to the retail café in FY14. 

Capital Expenditure 

Charter Hall Valuer 

Years 1-5 $1.594m $1.539m 

Years 6-10 n.a. nil 

Per NLA $144/m2 $139/m2 

2.2. Debt Position / Interest Costs 

The property will be funded by a Bank Loan facility of 

$26m secured against the property, provided by an 

Australian bank on the terms detailed in the next table. 

The Manager has arranged hedging (via interest rate 

swaps) of 50% of the Bank Loan for three years until 

December 2014. Half of interest costs are locked in for 

this period at an all-in effective rate of 6.30% pa. 

On the unhedged portion, there is sufficient buffer of 

cash reserves so that FY13-14 distributions would not 

be affected by an increase of 0.75% in interest costs. 

7


Loan Terms 

Facility Limit $26.0m 

Drawn-down $24.66m (Initial) 

Expiry 3 yrs 

(Jan 2015) 

Cost of Debt 6.30% (incl hedging) 

% Debt Hedged 50% 

Hedge Expiry 9 Dec 2014 

LVR 45.0% 

LVR Covenant 60% 

ICR 2.82x 

ICR Covenant 1.65x 

Capital expenditure on the building is expected to be 

around $1.5m during the initial term of the Trust, which 

will be funded from debt. If the value of the property 

does not increase, gearing would edge up to 47.9% 

(LVR). 

Gearing Comparison / Covenant Headroom 

Trust Comparison – Gearing (LVR) 

Fund / Trust Gearing - LVR 

Heathley Diversified 38% 

Charter Hall Direct 43% 

Charter Hall Industrial 45% 

CHD 144 Stirling St 45% 

Charter Hall Retail 46% 

CorVal PT2 47% 

AU Healthcare 47% 

Aspen Parks 47% 

Centuria 8 Aust. Ave 50% 

AU Retail 52% (43%)* 

Cromwell Ipswich 52.5% 

AU Diversified 53% (44%)* 

Arena PF 

Arena PF (Debt/Assets) 

(Note*: After current Rights Issue) 

52%-54% 

(40%-42%) 

The Trust‟s Bank Loan to Value Ratio is sensitive to 

changes in capitalisation rates for properties - as 

determined by market transactions and valuations. The 

table below stress-tests the headroom to covenant, 

should these rates rise. 

Cap’n 

Rate 

LVR Sensitivity – CHD 144 Stirling St 

Portfolio 

Valu’n 

Value 

Chg 

LVR Headroom 

to 

Covenant 

Base (8.5%) $54.8m 0 45.0% 15.0% pts 

+1.0% $49.0m -11% 50.3% 9.7% pts 

+2.8% $41.1m -25% 60.0% 0% pts 

The CHD 144 Stirling St Trust has a very good 

coverage above LVR covenant, with the portfolio able 

to withstand a 21-25% reduction in the value of the 

property before reaching its 60% covenant. (The 

lower buffer is calculated on the expected higher debt 

after borrowing to finance capital expenditure). A rise 

in income or property value will improve the headroom. 

Interest Cover Ratio of 2.82x (FY13) is strong, with 

the property net income having to reduce by 42% 

before the covenant of 1.65x being breached. 

2.3. Fee Structure 

Comparison of Establishment Fees/Costs 

Total Establishment Fees/Cost Comparison 

Value 

$m 

% 

Prop. 



% 

Equity 

RE Fees 1.200 2.2% 3.8% 

Other Estab. Costs 0.360 0.6% 1.1% 

Total RE Fees & Costs 1.560 2.8% 4.9% 

Lonsec Avg (New Funds) n/a 2.7% 5.2% 

The RE/Manager will charge a 2% Transaction Fee of 

the gross asset value for structuring the transaction; 

arranging the Bank Loan; and raising the equity. 

Lonsec‟s average now excludes the Advisor Fee 

component. Excluding this, the establishment fees & 

costs are about average for unlisted property funds. 

On-going Management Fees & Expenses 

The Manager‟s annual management fees and 

expenses compared to industry benchmarks are set 

out in the following tables. 

Comparison of Management Expense Ratios 

% of Gross Assets M/ment 

Fee 

Other 

Exp 

Total 

MER 

CHD 144 Stirling St 0.60% 0.20% 0.80% 

Lonsec Unlisted Avg. 1 0.60% 0.16% 0.76% 

Lonsec Bus+Prop Avg 1.33% 0.25% 1.58% 

Comparison of Indirect Cost Ratios 

% of Equity M/ment 

Fee 

Other 

Exp 

Total 

lCR 


Lonsec Unlisted Avg. 1 1.12% 0.31% 1.45% 

Lonsec Bus+Prop Avg 2.05% 0.54% 2.59% 

(Note1: Excludes trusts that own property and operate a business 

that requires more intensive management and thus higher fees). 

8


Other Fees 

Performance Fee: The RE/Manager is entitled to be 

allocated a 15% share of the excess total return 

(Internal Rate of Return) above 10% pa. 

The performance fee hurdle rate of 10% is similar to 

its peer group. The fee entitlement (15%) above this 

hurdle rate is in line with the incentive structure (midpoint 

15%) adopted by its peer group. This fee will 

only be paid (if applicable) upon sale of the property 

and distribution of net proceeds to investors. 

Selling Fee: A fee of 1% of the gross value of assets 

sold is payable to the RE/Manager with any additional 

selling costs to be deducted from the net proceeds 

(est. agent‟s fees, legal costs etc). 

Lonsec notes that the Manager has no Removal Fee 

(paid if removed as the RE of a Trust by a unit-holder 

vote) in line with the industry moving away from this 

type of „poison pill‟ provision, thereby improving unitholder‟s 

ability to oust poorly performing Managers. 

Total Fees Comparison 

For comparative purposes with our sample of unlisted 

funds, Lonsec has estimated the present value of total 

fees and expenses paid to the RE/Manager by the 

Trust over a ten year period. This considers the 

differences in timing of initial establishment costs, ongoing 

expenses and back-end performance/ disposal 

fees, as well as varying investment terms. In order to 

calculate performance fees, Lonsec has assumed a 

30% increase in the gross asset value over ten years. 

Comparison of PV of Total Fees & Expenses 

% Total 

Assets 

% Net 

Assets 

CHD 144 Stirling St 9.1% 15.2% 

Lonsec New Unlisted Fund Avg 8.4% 14.9% 

The Trust‟s fee structure (adjusted to a present value / 

net assets basis) is slightly higher than the Lonsec 

sector average for new* unlisted property funds, due 

to the marginally higher impact of its performance fee. 

(Note*: Lonsec has separated out new and existing funds as 

the latter usually have lower establishment costs after having 

absorbed a large proportion of the up-front costs within the 

first few years of operation). 

2.4. Distributions / Taxation 

Lonsec has compared the CHD 144 Stirling St Trust 

distribution yield with a sample of unlisted trusts that 

have made offers to the public over the last 12-18 

months. The Trust offers a superior yield on a pretax 

basis, but on an after-tax basis it is more in line 

with the average, given a relatively low tax deferred. 

CHD 144 Stirling St Distributions 

FY13 FY14 

Unit Cost $1.00 $1.00 

Distribution/unit 8.85c 9.15c 

Pre-tax Yield 8.85% 9.15% 

Tax Advantaged 44% 41% 

Yield after 46.5% tax 6.55% 6.64% 

Grossed-up Yield 12.23% 12.41% 

Yield after 15% tax 8.11% 8.34% 

Grossed-up Yield 9.54% 9.81% 

Lonsec Industry Distributions Comparison 

Trust/Sector (Yr 1) Pre-tax 

Yield 



Tax 

Def. 

After tax 

Yield 1 

Lonsec Sample High 8.85% 100% 8.00% 

CHD 144 Stirling St 8.85% 44% 6.55% 

Lonsec Office Avg 7.30% 72% 6.38% 

Lonsec Sample Avg. 7.00% 73% 6.32% 

Lonsec Sample Low 5.69% 22% 3.79% 

(Note1: After tax of 46.5%). 

Comparisons – Other Property Funds 

Fund / Trust Year 1 Distrib. Yield 

(Pre-tax) 

Aspen Parks 8.90% 

CHD 144 Stirling St 8.85% 

Corval PT2 8.20% 

Charter Hall Industrial 8.16% 

Charter Hall Retail 8.00% 

Cromwell ICHT 7.75% 

Centuria 8 Aust. Ave 6.94% 

AU Healthcare 6.90% 

Charter Hall Direct 6.35% 

AU Diversified 6.28% 

AU Retail 5.94% 

Millinium HealthCare Option 5.69% 

(Note: Excludes Fee for Service negotiated with Advisor) 

Fund / Trust Yield After- 

46.5% tax 

Yield After- 

15% tax 

Aspen Parks 8.28% 8.70% 

Charter Hall Retail 8.00% 8.00% 

Cromwell ICHT 7.75% 7.75% 

Centuria 8 Aust. Ave 6.94% 6.94% 

Charter Hall Industrial 6.66% 7.68% 

CHD 144 Stirling St 6.55% 8.11% 

Charter Hall Direct 6.35% 6.35% 

Corval PT2 6.29% 7.58% 

AU Healthcare 5.87% 6.57% 

Millinium HealthCare Option 5.56% 5.65% 

AU Diversified 4.29% 5.63% 

AU Retail 3.79% 5.25% 


9


A relatively low portion of distributions paid to investors 

will be tax advantaged. This is due to the property 

being an existing building with lower capital allowances 

available for structure, plant and equipment and the 

write-off (over time) of establishment costs. 

2.5. Total Returns 

The key financial performance measure that Lonsec 

focuses on is ten year Internal Rate of Return (IRR) of 

the Syndicate and sensitivities. The basic rationale 

behind using the IRR financial analysis is that it 

attempts to find a single number that summarises the 

merits of an investment and depends on only the cash 

flows of the investment. The IRR is compared with 

Lonsec‟s benchmark hurdle rate. 

Lonsec Internal Rate of Return (net after fees) 

Pre-tax 

Net 

(46.5%)* 

Net 

(15%)* 


Lonsec Benchmark Rate 9.75% 5.71% 8.48% 

Lonsec Office Sector Avg 11.15% 8.24% 10.33% 

Lonsec Sample Average 11.47% 8.49% 10.47% 

(Note*: Also net of capital gains tax). 

Total returns (pre-tax) estimated by Lonsec for the 

CHD 144 Stirling St Trust is about average for 

unlisted property trusts and slightly better than 

that for office trusts recently reviewed by Lonsec. 

Due to low tax deferred, estimated after-tax (46.5%) 

total returns are inferior to Lonsec‟s sector averages. 

For a superannuation fund investing in the Trust, the 

after-tax (15%) total returns are only slightly below 

Lonsec‟s sector averages. 

Comparison – Other Property Funds 

Est. Fund / Trust 

IRR 

Pre-tax 

pa 

Net 

(46.5%) 

Net 

(15.0%) 

AU Healthcare 13.1% 10.1% 11.8% 

Millinium Health Care 13.0% 9.8% 12.0% 

Aspen Parks 12.7% 9.8% 11.5% 

Charter Hall Direct 11.9% 9.3% 11.0% 

Cromwell ICHT 11.7% 8.6% 10.6% 

CHD144 Stirling St 11.6% 7.8% 10.3% 

Charter Hall Industrial 11.5% 8.3% 10.5% 

AU Diversified 11.2% 7.5% 9.9% 

AU Retail 11.2% 7.9% 10.2% 

Centuria 8 Aust. Ave 11.2% 9.4% 10.6% 

Charter Hall Retail 11.1% 8.4% 10.2% 

Arena PF 10.7% 8.4% 10.0% 

Corval PT2 10.7% 7.8% 9.7% 


These estimates assume a growth in rental income in 

line with market as assessed by the Valuer (3% for 

Perth office market) and that the capital value of the 

portfolio increases in line with this. Changes in market 

rental growth and capitalisation rates will determine the 

actual capital growth. The terminal capitalisation rate 

rises from 8.5% to 8.75% (as per Valuer). 

As the building was recently refurbished, capital 

expenditure over the next ten years will be relatively 

minor (as per page 7). 

The estimates also incorporate an increase in interest 

costs as follows: 

FY17: No hedging, rate up 0.25% to 6.55%. 

FY18: Rate up 0.25% to 6.80%. 

Should some of these costs not occur, then the 

estimated returns could be greater. However, interest 

costs may rise and other assumptions with regard to 

rental levels and operating costs (both direct property 

costs and those associated with the Trust) may be 

higher than Lonsec has factored in and total returns 

may be less than estimated. In the following table, we 

have detailed total return sensitivities to certain 

variables. 

Sensitivity of Lonsec IRR to Key Assumptions 

Scenario 

Pre-tax 



After Tax 

(@46.5%)* 

Lonsec Base Case 11.6% 7.8% 

+10% Interest Costs 

- 10% Interest Costs 

2.0% pa Rental Growth 

4.0% pa Rental Growth 

11.1% 

12.1% 

10.6% 

12.6% 

(Note*: After tax is also net of capital gains tax). 

7.5% 

8.2% 

6.9% 

8.8% 

10


2.6. Balance Sheet / Net Asset Backing 

As at end Jun-12 

$m 

Cash $0.30 

Property Value $54.80 

Stamp Duty $0.00 

Other Capitalised Expenses $0.26 

Total Assets $55.36 

Current Liabs $0.00 

Interest Bearing Loan $24.66 

Other Non Current Liabs. $0.00 

Total Liabilities $24.66 

Net Assets $30.70 

No. of Units Issued 32.000 

Accounting NTA per unit $0.959 

Less Lonsec Adjustments 

Stamp Duty $0.00 

Capitalised Expenses $0.26 

$30.44 

Lonsec Adj. NTA per unit $0.951 

Lonsec estimates that the NTA of CH 144 Stirling St 

will exceed investors‟ initial $1.00 within approximately 

two years of the Trust‟s commencement date. This 

assumes that the property is revalued, taking into 

account only the increase in the market rental of 

around 3% pa. If capitalisation rates change, the Net 

Asset Value could change by 3.7c for each 0.25% 

point change. 

Thus the break-even period for the Trust is superior to 

that of most new unlisted funds rated by Lonsec, which 

typically have a break-even period of three to four 

years. This is attributable to the lower transaction costs 

available to the Trust. 

Comparison – Initial Net Asset Backing 

Fund / Trust Net Asset Backing 

Millinium HealthCare Option^ $1.02 

AU Healthcare # $0.99 

AU Retail $0.99 

Aspen Parks # $0.98 

Charter Hall Direct $0.98 

Charter Hall Industrial # $0.96 

Charter Hall 144 Stirling St $0.95 

Centuria 8 Aust. Ave $0.94 

Charter Hall Retail $0.92 

Cromwell ICHT $0.92 

Corval PT2 $0.91 

(Note#: NAB based on an equivalent of $1.00). (Note^: Millinium 

property purchased below valuation and no-upfront fees). 



11


3. Management 

An assessment of Management is another key 

performance measure and is largely qualitative, 

focusing on the ownership, operating and reporting 

structure, property investment policy and selection 

criteria. Capable and experienced management is vital 

to the success of the Trust. Previous performance is 

evaluated, but is not necessarily a guide to future 

returns. 

3.1. The Responsible Entity (RE) 

Charter Hall Direct Property Management Limited 

(CHDPML or „the RE‟) will act as the responsible entity 

for the Trust. CHDPML is licensed by the Australian 

Securities and Investment Commission (ASIC) to act 

as the responsible entity for managed investment 

schemes (MIS). 

CHDPML is a wholly-owned subsidiary of the ASXlisted 

Charter Hall Group (Charter Hall or „the 

Group‟). Charter Hall is a specialist property funds 

management group with in-house development and 

property services capabilities. Founded in 1991, the 

Group is listed on the ASX as a stapled security and is 

currently included in the S&P/ASX A-REIT 200 Index. 

Charter Hall currently has „Assets Under Management‟ 

of $10.1b across listed A-REITs and a number of 

wholesale and retail investor unlisted property funds. 

Lonsec has reviewed recent financial results of the 

Group and notes the following: 

Charter Hall Group – Financial Summary 

HY Dec 

„10 

FY June 

„11 

HY Dec 

„11 

Operating Rev $47.2m $109.6m $59.7m 

Op. Cash Flow $23.0m $58.8m $25.3m 

Net Profit after tax $46.8m $52.3m $19.6m 

Adj. NPAT 1 $30.8m $60.4m $33.2m 

Adj EPS 1 10.5c 20.6c 11.2c 

Div. Per Share 8.0c 16.5c 9.1c 

31 Dec „10 30 Jun „11 31 Dec „11 

Funds Under M‟gmt $10.4b $10.7b $10.1b 

Net Debt $54.2m $75.6m $76.7m 

Gearing (ND/TA) 6.8% 8.1% 8.4% 

Gearing (Look-thru) 38.6% 36.6% 33.0% 

NTA per share $2.21 $2.21 $2.19 

(Note 1: Normalised basis excludes non-operating items and pre 

CQO fee and organisational restructure). 

Charter Hall is well positioned to generate recurring 

income from the 19 wholesale, retail unlisted and 

listed property funds. The Group‟s Property 

Investment portfolio comprises $576m of coinvestments 

and contributed 58% of the Group‟s 

earnings (EBITDA) in the first half of FY12. The 

portfolio has performed strongly, with the income 

yield rising to 7% (annualised) from 6.4% in FY11. 

Occupancy rose 2% to 97% and weighted average 

lease expiry is 6.5 years. 

Funds Management activities (28% of earnings) 

also grew with contributions from other vertically 

integrated property businesses such as leasing, 

property management and transactional services. 

While some of these earnings are non-recurring in 

nature, Charter Hall has continued to raise funds in 

its unlisted funds, which will offset the reduction 

from the sale of US assets of the listed CH Office 

REIT (soon to be an unlisted fund). 

Higher risk Development investment and other 

services (14% of earnings) have their own pipeline 

of projects and derive earnings from managing 

these as well as third-party development projects. 

The Group will grow funds under management and 

improve profitability by recycling equity into higher 

return investments; improving earnings in 

underlying investments and cost/debt control. 

Property valuations have stabilised and in some 

instances are compressing, especially for high 

quality assets which are in demand from a range of 

local and international investors. 

Charter Hall Holdings – Investment Manager 

Lonsec notes that the RE has appointed Charter Hall 

Holdings Pty Ltd (CHH or „the Manager‟), a related 

party entity, to act as the Investment Manager for the 

Trust. CHH has been appointed under an „Asset 

Management Agreement‟ (AMA) that specifies the 

asset management services CHH is to provide. 

Importantly for investors, the RE may at any time 

replace CHH. The services to be provided include: 

Managing the property; 

Reporting on Trust performance to investors; 

Providing administrative support; and 

Arranging the disposal of the property. 

All material decisions relating to the Trust must be 

ratified by the Independent Directors of the RE. 



12


3.2. Management Team 

Board of Directors – Charter Hall Direct Property 

Management Limited 

Director Position Joined Group* 

Peeyush Gupta Indep. Chairman 2010 

David Harrison Exec. Director 2004 

David Southon Exec. Director 1991 

Cedric Fuchs Exec. Director 1991 

Richard Higgins Indep. Director 2008 

Ian Pratt Indep. Director 1998 

Richard Stacker Alt. Exec. Dir & CEO 2004 

(Note*: Joined either Charter Hall or Macquarie) 

Lonsec notes that the CHDPML Board is currently 

comprised of three independent directors which 

accounts for 50% of the representatives. The 

Chairman is now an independent. 

Biographies of all the Directors and Senior Executives 

are detailed in the Product Disclosure Statement. 

Executive Team & Other Resources 

The Trust will have access to the experienced Charter 

Hall senior executive team, including a dedicated 

Fund Manager for the Trust (Steven Bennett). 

The Charter Hall Group has a total staff of about 280 

property (development, leasing, and transaction 

services), funds management and finance/back office 

professionals. The Charter Hall funds management 

team currently consists of 15 people, with direct 

support available from 135 „full-time equivalent‟ staff. 

3.3. Investment Style 

Charter Hall is a high conviction real estate manager 

that places emphasis on active management, both in 

its individual asset holdings and portfolio allocations 

(relative to peer-group and market benchmarks). The 

organisation is vertically integrated, where significant 

resources are allocated to all aspects of the property 

funds management process. 

As an investment manager, Charter Hall forms a clear 

view on the property markets it believes to offer the 

highest prospective rental growth over a three-toseven 

year term. The Group uses its own proprietary 

research and market intelligence gained from its 

national presence. A recent addition is Chris Freeman 

(formerly of Savills) as Head of Research for Charter 

Hall. 

The Group also places significant importance on its 

relationships with tenants in order to maximise tenant 

retention. 

On average, the Group favours long-lease duration 

assets and aims to retain high weighted average lease 

expiries relative to its peer-group in both listed and 

unlisted markets. Where short-lease durations are 

considered, they are typically the result of an arbitrage 

opportunity where assets are materially under-rented 

or where there is a re-positioning opportunity. 

The team is performance focused, with all Charter Hall 

funds retaining a significant performance component to 

their respective fee structures, aligning the interests of 

Management with that of investors. 

This does result from time-to-time in the Group taking 

a contrary view to consensus market opinion and 

forecasts, where it believes a mis-pricing event has 

occurred during a property market cycle. 

3.4. Related Party Transactions 

Acquisition Process 

Initial financial analysis is undertaken by Charter Hall 

to see if the property meets all of its acquisition checklist 

criteria. A proposal and Heads of Agreement is put 

before the board of CHDPML for approval to proceed 

to due diligence. 

Management of the Related Party Process 

Lonsec notes that the Group has developed its 

‘Charter Hall Managed Funds Conflict Protocols’ to 

manage conflicts of interests that may arise during 

acquisitions by implementing the following procedures: 

Asset transaction prices must be supported by 

independent valuations; 

All acquisition terms must reflect normal 

commercial terms; and 

All executive directors of the RE will be required 

to abstain from voting on proposed acquisitions/ 

divestments. 

Conflicts of interest will be assessed by the Charter 

Hall Compliance Manager and if necessary, referred 

to the RE‟s board. Under the policy, the RE may be 

required to disclose conflicts of interest to investors. 

With the property currently fully owned by another 

Charter Hall fund, each party has their own 

negotiating team, with separate due diligence 

undertaken, including independent valuations 

obtained. A price was negotiated in November 2011 

in-line with CHDPML‟s independent valuation (which 

also allowed for the $1.9m reimbursement of the 

payout of half of the Hatch rental incentives). 



13


The vendor fund (CPOF) Investment Committee 

approved the transaction unanimously as required and 

this was approved by a separate Investor Committee. 

Furthermore, Charter Hall Group board also oversaw 

the process as it was involved in the underwriting. 

The transaction capitalisation rate of 8.5% compares 

to the 8.0% capitalisation rate when CPOF purchased 

the property in August 2006 for $31.55m. 

Co-investment in Trust by Charter Hall Group 

Charter Hall‟s aim is to have a co-investment in its 

funds of between 0-10%, which aligns the Group with 

the interests of other investors. Given that CHG has 

underwritten 49.9% of the equity issue, there is a 

possibility that it will retain an interest in the CHD 144 

Stirling St Trust. 

3.5. Manager’s Previous Performance 

Non-Wholesale (‘Retail Investor’) Funds 

The table on p15 provides a summary of the 

performance history of Charter Hall funds for mostly 

„non-wholesale‟ or „retail‟ investors. 

Charter Hall has achieved some good 

performances from its CHIF series of funds over 

various periods during the last 10-15 years. 

Some of the funds that came across from 

Macquarie and other more recently established 

open-end funds have underperformed their 

relevant indices. 

Two funds (DIF & 130 Stirling St) have started to 

record strong positive returns and outperformed 

benchmarks. 

All funds have delivered consistent attractive 

income yields in line with their focus towards „retail‟ 

investors. 

Wholesale Funds 

Lonsec also notes that Charter Hall acts as the RE for 

several active wholesale funds spread across the 

opportunistic and core property sectors. While Lonsec 

has not had access to the data for these funds, an 

analysis of their performance has been provided by the 

Manager. 

CH Opportunity Fund Series (1997 to June 2012) 

The series spans five closed-end opportunistic funds: 

Gross realised IRR of all projects is 28% pa (over 

the 15 year history of the series). 

CHOF4 is on track for a 13% pa (gross) total 

return, which ranks it well relative to opportunistic 

real estate funds in Australia for a 2005 inception 

date. 

CHOF5 (2007 inception date) is forecast to 

achieve a single digit total return, relative to a 

peer group which has largely provided or is 

forecast to provide low or negative returns. 

CH Core Plus Funds 

The Charter Hall Core Plus Office and Industrial Funds 

have outperformed their sector specific wholesale 

indices over the three years to 28 February 2012. 

Total Returns 3 yrs (pa) 

(Net of fees) 

Fund 

Peer 

Group 

Avg# 



Out 

(Under) 

Perf. 

CH Core Plus Office +2.0% +0.5% +1.5% 

CH Core Plus Industrial +4.8% -1.7% +6.5% 

Total Returns 3 yrs (pa) 

(Net of fees) 

Fund 

Lonsec 

Sample 

Avg* 

Out 

(Under) 

Perf. 

CH Core Plus Office +2.0% +2.1% -0.1% 

CH Core Plus Industrial +4.8% -1.3% +6.1% 

(Note#: Mercer/IPD Wholesale Property Fund Index does not include 

Charter Hall funds and adjusts for late inclusion of GPT, AMP, ISPT) 

(Note*: Lonsec sample is of major funds including Charter Hall). 

Lonsec‟s sample average calculates the performance 

of the specific funds that are identified in the Mercer/ 

IPD Wholesale Property Fund survey, including the 

Charter Hall funds. 

14


(Source: Iress) 

Charter Hall Group – Total Returns vs Index 

Returns % pa to March 2012 1 yr 3 yrs 5yrs 

p.a. p.a 

Charter Hall Group -3.4% 36.1% -7.8% 

(ASX Code: CHC) 

S&P / ASX 300 A-REIT Accumulation Index 1.6% 14.4% -13.3% 

(XPJAI) 

Out (Under) Performance -5.0% 21.7% 5.5% 

Charter Hall Non-Wholesale Funds Performance 

CHFML & CHDPML Trusts/Funds Period Period Income Capital Total Benchmark Variance Perf. 

Start Ending Return Return Return Index vs 

Charter Hall Investment Funds: 

p.a. p.a. p.a. p.a. p.a. Index 

CHIF1 (Exited) 31-Mar-97 30-Jun-08 15.1% 6.3% 21.3% 12.3% 9.0% Outperf. 

CHIF2 31-Dec-97 31-Mar-12 11.5% 16.3% 27.8% 9.6% 18.2% Outperf. 

CHIF3 31-Mar-99 31-Mar-12 10.7% 1.0% 11.7% 9.6% 2.1% Outperf. 

CHIF4 30-Sep-00 31-Mar-12 7.1% 5.6% 12.8% 9.5% 3.3% Outperf. 



Charter Hall Retail Funds: 

Charter Hall Diversified Property Fund 31-Oct-05 31-Mar-12 6.0% -8.7% -2.7% 7.9% -10.6% Underperf. 

Charter Hall Umbrella Fund (Hybrid) # 30-Nov-07 31-Mar-12 5.4% -8.9% -3.5% -2.4% -1.1% Underperf. 

130 Stirling Street Trust 04-Jan-10 31-Mar-12 9.4% 4.7% 14.1% 9.2% 4.9% Outperf. 

Charter Hall Direct Industrial Fund ^ 01-Jul-10 31-Mar-12 9.0% 1.7% 10.7% 9.2% 1.5% Outperf. 

Charter Hall Direct Industrial (at NTA) ^ 01-Jul-10 31-Mar-12 9.0% -1.2% 7.8% 9.2% -1.4% Underperf. 

Charter Hall Direct Retail Fund ~ 31-Dec-10 31-Mar-12 8.0% 0.0% 8.0% 8.9% -0.9% Underperf. 

(managed by Macquarie until March 2010) 

Charter Hall DPF (Retail Class)@ 01-Jan-06 31-Mar-12 6.4% -6.1% 0.3% 5.6% -5.3% Underperf. 

No.1 Martin Place Trust 01-Jul-02 31-Mar-12 8.5% -0.6% 7.9% 8.5% -0.6% Underperf. 

Macquarie Property Income Fund* (closed) 05-Jun-03 28-Feb-11 9.2% -23.8% -14.6% -0.7% -14.2% Underperf. 

(Note: Benchmark is Mercer/IPD Australian Pooled Property Fund Index, adjusted for fee differences - unless indicated otherwise) 

(Note#: Benchmark adopted has a weighting of 70% to Mercer/IPD Index and 30% to the S&P/ASX 200 A-REIT Accumulation Index.) 

(Note@: Benchmark 93.5% Mercer/IPD adjusted for retail fees; 6.5% S&P/ASX 200 A-REIT Accumulation Index) 

(Note*: Benchmark is the S&P/ASX 200 A-REIT Accumulation Index.) 

(Note^: Reflects 1.0 cpu bonus distribution and 2% bonus units for foundation investors. Lonsec assumes current value is NTA). 

(Note~: Investor funds are being returned as minimum subscription not achieved) 

(Source: Charter Hall & Lonsec) 



15


4. Property 

4.1. 144 Stirling Street, Perth 

Property Details 

Type Office/Retail 

Building Category A-grade 

Location Northern fringe Perth CBD 

Zoning City Centre 

Construction Date 1970 (refurb 2000/2011) 

Ownership Interest 100% 

Purchase Price $54.8m 

Valuation $54.8m (April 2012) 

($4,963/m2) 

Valuer Capitalisation Rate 8.50% 

Valuer Terminal Cap’n Rate 8.75% 

Valuer Discount Rate 10.25% 

Land Area 5,057m2 

Site Coverage 100% 

Lettable Area Office 9,312m2 (3 levels) 

Parking 

(ratio spaces per 100m2) 

Warehouse 1,563m2 

Retail 167m2 

Total 11,042m2 

142 Wilson car spaces 

101 permanent spaces 

(ratio 2.2 / 100m2) 

Occupancy Rate 100% 

Major Tenants Hatch Associates (64% inc) 

WA Police Department (23%) 

Lease Expiry 5 Aug 2021 (Hatch) 

31 Mar 2016 (WA Police) 

WALE 7.8 Yrs (by income) 

Net Passing Rental (Market) $4.749m ($4.935m) 

Lease Rental Growth 3.75%-4.00% 

Market Rental Growth 3.0% (next 10 yrs)# 

Green Ratings 

(design target rating) 

Green Star Rating: 3.5 stars 

NABERS Energy: 3.5 stars 

NABERS Water: 4.5 stars 

(Note #: Valuer assumption next 10 yrs). 

Location / Infrastructure (Excellent) 

The property is located directly north of the central 

Perth CBD, which is on the fringe of the CBD. The 

property is close to a railway station and the Graham 

Farmer freeway exit/entrance. 

Historically, the area was an industrial location but the 

recent trend is the construction of new commercial and 

residential (apartment) buildings. This is driven by the 

higher office rental costs within the CBD as well as 

regulatory support (City of Perth, WA State Gov‟t). 

Thus the area is considered to have good potential for 

future commercial and residential developments 

(although the Trust‟s property is not zoned residential). 

Building Condition / Facilities (Good) 

The building features are: 

Three street frontages. 

Large floor plates (2,400m2), high ceilings and 

unique „up-lighting‟. 

Central atrium with balconies improving 

natural light for levels 1-3 (Hatch) and 

gymnasium (ground floor). 

The WA Police occupy most of the ground 

floor office and warehouse component. The 

latter is being fitted out with demountable 

office space and the loading bay caters for 

vehicle and other storage. 

Café with outdoor area (ground floor). 

Tenants / Leases (Very Good) 

The building is fully occupied with the major tenants on 

the following leases. 

Hatch Assoc WA Police 

Lease Start 6 Aug 2011 1 April 2011 

Lease Term 10 yrs 5 yrs 

Lease Expiry Date 5 Aug 2021 31 Mar 2016 

Options 2 x 5 yrs 1 x 1 yr 

Office Area 

Warehouse Area 

Car Spaces 

Yr1 Rental - Office 

Yr1 Rental – W/house 

Car-park (per bay) 

7349.3 m2 



- 

50 

$412/m2 

- 

$250/pcm 

Rental Review Fixed 3.75% pa 

reviews, with 

market review at 

Aug 2021 & 2026 

(90-110% of 

previous rent) 

Outgoings Net lease with 

tenant paying a 

proportionate 

amount of 

outgoings 

Incentives 

$75.22/m2 (ex 

balconies & gym) 

from July 2016 to 

Aug 2021. 

1962.2 m2 

1563.2 m2 

Nil 

$425/m2 

$150/m2 

- 

Fixed 4% pa 

reviews. Market 

rent review at 

option subject to 

ratchet clause 

(can‟t go down) 

Net lease with 

tenant paying a 

proportionate 

amount of 

outgoings 

9 months rent 

free (ends Dec 

2011) 

16


Hatch Associates Pty Ltd (63.8% of net rental) is a 

100% subsidiary of the Canadian-based privatelyowned 

engineering services company Hatch Limited, 

which has over 10,000 employees operating from 65 

offices around the world. Currently, the firm is 

managing projects with a capital value of US$35b. 

Having been in Australia for around 30 years, Hatch is 

a major beneficiary of the resources developments and 

is participating in the following: 

$US43b Gorgon LNG project 

Ranger uranium oxide mine; and 

GEMCO manganese mine. 

Hatch has the first right of refusal to lease any area of 

office space that may become available within the 

building. It may also surrender Level 1 (2,411m2) at 

the 5 th , 7 th or 10 th anniversary of the lease by giving six 

months notice. 

Minister for Works /WA Police (23.4% of net rental) 

forms part of the WA government. 

Café Latte occupies the ground floor coffee shop 

(167.1m2) on a current yearly rental of $30,000 

(around market). 

Car Parks 

The car parking is housed in the adjoining building 

(130 Stirling St) which has a total of 485 car parks, 

although only 243 of these are available for the benefit 

of the 144 Stirling St Trust on a 99-year lease 

(governed by a Adjoining Owners Agreement). 

Of these, 142 are subject to a 10 year sub-lease 

expiring July 2021 with Wilson Parking Australia 

1992 Pty Ltd. The starting rental is $0.301m plus a 

turnover rent provision (10% of net rental), with fixed 

3.5% reviews annually. The landlord may terminate the 

lease with six month‟s notice (after 1 Jan 2016). The 

tenant can ask for a market rent review if the rent is 

less than $60,000 for three consecutive calendar 

months. 

Currently another 20 bays are subject to a five year 

lease with Downer EDI and 30 bays are vacant/casual 

leasing. 



17


5. Market Analysis 

5.1. Perth Office Markets 

Demand/Supply 

PERTH (as at March 2012) 

Net absorption is at near record highs with 46,968m2 taken up in the 

second half of 2011 and 88,055m2 for 2011 overall. 

Supply for the year was 14,722m 2 , with 85% of that coming in H2 2011. 

Around 160,000m2 of new and refurbished space is currently under 

construction and due to come on stream over the next 18 months. The 

majority is from Raine Square (100% to Bankwest) and City Square 

(100% to BHP, PWC & Barrick Gold) developments. 

A new supply cycle is emerging with192,000m2 proposed (first delivery 

2014) and another 207,000m2 mooted (eg: Perth Waterfront 150,000m2). 

Vacancy The vacancy rate reduced from 5.4% to 3.3% over the second half of 

calendar 2011 due to the strong demand from the resources sector. 

Premium and A-grade vacancy is extremely tight at 0.1% and 1.4% 

respectively, although delays in Raine Square have prevented the 

refurbishment of back-fill space. 

Vacancy rates should remain low with Perth now the tightest major office 

market in Australia. With not a lot of new supply entering the market until 

2014, vacancy rates may not ease substantially until 2013 and 2014. 

Rentals Incentives continued to fall with minimal amounts offered for Premium/ A- 

Grade space (overall 0-10%). Combined with strong demand and lack of 

supply, net effective rental growth was around 20% over 2011. Face 

rents for prime space (A-grade $700m2) will continue to rise over 2012. 

Yields 

In the secondary market, the declining overall vacancy rate led to 

modest growth in rents (to around $500m2) and contraction of incentives. 

Prime yields have remained stable over the past six months (7.50% to 

8.50%), with 2012 yields expected to remain stable. 

Secondary yields (remain stable 8.50% to 9.75%). 

Transactions Sales activity in 2011 exceeded $1b compared to 2010 of $69m with 

renewed institutional and foreign buyer interest. 

Key Property Transactions 

2012 activity may be tempered by European sovereign debt concerns 

and tight credit availability. 

Date Property Price Yield Purchaser Vendor 

Jun „11 108 St. Georges Tce $130m (50%) 8.87% Brookfield PPF Stockland 

July „11 226 Adelaide Tce $103.5m 8.34% SA Motor AC First State 

Sept „11 250 St. Georges Tce $310m (50%) 7.05% Eureka Capital Dexus 

Dec „11 2 The Esplanade $157.7m (50%) 7.32% AMP Stockland 

(Source: Colliers, Jones Lang LaSalle, Lonsec) 



18


6. Lonsec Methodology 

Lonsec Property Research provides quality research 

services to investment managers and financial 

planning groups. Our reports assist financial 

planners in the selection and understanding of 

unlisted property trusts/ syndicates, property 

securities funds and other managed investment 

products. Experienced analysts have conducted an 

extensive and objective review of the Fund and its 

underlying assets. 

The research methodology includes a rating process 

designed to assess the qualitative and quantitative 

factors of the investment. 

The process is consistent for comparable investment 

products, enabling projects to be individually rated, 

comparatively ranked, and to establish a Lonsec 

Research recommendation status for use by financial 

planners. 

The rating determinants are: 

– Financial Analysis 

– Properties 

– Management 

– Market Analysis 

– Exit Strategy 

Lonsec Direct Property Research Rating Definitions 

Projects in this exclusive category possess exceptionally high ratings in 

most of our assessment areas and are considered to be the most 

favoured investment alternative. 

This category includes projects that are rated as having good to excellent 

all-round performance potential in relation to their peers. They are 

suggested better investment alternatives. The ratings distinguish between 

projects at the upper and lower ends of this category 

Projects that fall into this category have satisfied Lonsec‟s rigorous 

analysis criteria and are viewed as acceptable for investment. 

Not Approved The project has failed one or more of Lonsec‟s major investment rating 

determinants. We advise that projects that fall into this grouping are 

detrimental to an investor‟s overall investment portfolio. 

Hold The fund status is either „closed-end‟ or „temporarily closed‟. An 

investment in the fund can be retained. However, the fund will have to 

obtain a new Lonsec rating for any new capital raising or if a roll-over of 

investor capital is proposed or a liquidity offer is made. 

Fund Watch / Under Review This rating indicates that it is not recommended that any new or additional 

investment be made into this fund or product. A significant change has 

occurred with the management of the Fund or the existing rating has 

expired and a detailed assessment of the change is required and / or a 

series of rectifying actions are required from the manager before this 

rating can be changed and/or the previous rating re-instated. A Fund 

Watch / Under Review rating may be a precursor to a ratings change and 

will normally be short term in nature. 

Redeem The Redeem rating indicates the Fund is no longer considered worthy of 

investment for any time period, and redemption (sale of units) should be 

made as soon as possible. An adverse development has taken place that 

is considered detrimental to the interests of investors. 



19


Analyst Disclosure & Certification: 

Analyst remuneration is not linked to the research or rating outcome. Where products are mentioned, the 

Analyst(s) may hold the product(s) referred to in this document, but Lonsec considers such holdings not to be 

sufficiently material to compromise the rating or advice. Analyst holdings may change during the life of this 

document. The Analyst(s) certify that the views expressed in this document accurately reflect their personal, 

professional opinion about the matters and financial product(s) to which this document refers. 

Date Released: 7 May 2012 

Analyst: Kevin Prosser 

Authorised by: Michael Elsworth 

LONSEC STRONGLY RECOMMENDS THIS DOCUMENT BE READ IN CONJUNCTION WITH THE 

RELEVANT PRODUCT DISCLOSURE STATEMENT(S) 

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 

("Lonsec") and should be read before making any investment decision about the product(s). 

Disclosure at the date of publication: Lonsec receives a fee from the Fund Manager(s) for researching the 

product(s) using comprehensive and objective criteria. Lonsec‟s fee is not linked to the rating(s) outcome. Lonsec 

does not hold the product(s) referred to in this document. Lonsec‟s representatives and/or their associates may 

hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). 

Lonsec was a member of the Zurich Financial Services Australia group until 30 June 2011 and where Lonsec 

rated product(s) issued by Zurich usual fee arrangements applied and the association did not affect the research 

process and outcome. 

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or 

advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008(NZ)) or 

limited to “General Advice” (as defined in the Corporations Act (C‟wth)) and based solely on consideration of the 

investment merits of the financial product(s) alone, without taking into account the investment objectives, financial 

situation and particular needs („financial circumstances‟) of any particular person. It is not a “personalised service” 

(as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, 

redeem or sell the relevant product(s). 

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is 

personally appropriate in light of his or her financial circumstances, or should seek independent financial advice 

on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial 

product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for 

each financial product before making any decision about whether to acquire a product. Lonsec‟s research process 

relies upon the participation of the Fund Manager(s). Should the Fund Manager(s) no longer be an active 

participant in the Lonsec research process, Lonsec reserves the right to withdraw the document at any time and 

discontinue future coverage of the product(s). 

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not 

be used or relied upon by any other person. No representation, warranty or undertaking is given or made in 

relation to the accuracy or completeness of the information presented in this document, which is drawn from 

public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of 

completion but subject to change without notice. Lonsec assumes no obligation to update this document following 

publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents 

disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered 

by the reader or any other person as a consequence of relying upon it. 


Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Participant of ASX Group 20

As reported in Lonsec's last Portfolio Partners update ... - Charter Hall

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