Challenger tops expectations

THE Challenger Diversified Property Group will focus on asset sales and boosting office portfolio tenancies after it delivered better than expected interim earnings.

The key assets for divestment include the industrial/business parks at Taylors House, Waterloo, and 187 Todd Road, Port Melbourne.

Challenger's French-based properties are still on the market and the company is looking for appropriate offers. A repositioning of the Jam Factory retail centre in Chapel Street, South Yarra, was boosted by the Topshop Topman store and saw an increase in rent, and there are expectations of improved performance from the centre in the coming year.

Leasing at the Forum in St Leonards was also on track, in an office market the group described as "patchy". The Domain Car Park in Sydney reported flat earnings.

Challenger's fund manager, Trevor Hardie, said that for the half year to December 31 the group reported a profit from operating activities of $22.9 million, with earnings increasing marginally to 10.70¢ a unit.

That was ahead of market expectations with analysts saying it was a "harbinger of good news for the reporting season".

Mr Hardie attributed the gains to rental increases, which on a like for like basis rose 5 per cent. After adjusting for fair value movements, primarily interest rate swaps, statutory net profit increased 10 per cent to $20.8 million. At the group's investor briefing, Mr Hardie reaffirmed the group's full year guidance of 21¢ distribution paid out of a forecast profit of $17.4 million.

"We continue to make progress on our strategic execution and portfolio enhancements and to grow earnings," Mr Hardie said. "Challenger is focused to achieve the position as the preferred mid-cap Australian diversified real estate investment trust."

The head of real estate research at Goldman Sachs, Simon Wheatley, said while the first half surpassed market guidance there was no meaningful advancement on the lease of problem vacancies, or the divestment of non-core French assets. He said these items continued to have the biggest leverage impacts to earnings.

"Net tangible assets increased by 0.4 per cent to $2.74 per unit with a slight increase in valuations despite average cap rates increasing. Average occupancy was marginally up, assisted by the sale of a largely vacant property," Mr Wheatley said.

"The Domain Car Park was down on the previous corresponding period and only break even; overall portfolio net operating income was below our estimate. The lower interest expense was the saviour resulting in the EPS [earnings per share] beat."