HMC Capital Limited (HMC) Earnings Call Transcript & Summary

Good morning, and welcome to everyone on the lines to the presentation of the inaugural set of full year results for the financial year ended 2020 for Home Consortium. Joining me in the room today for the call are our COO, Sid Sharma; and our CFO, Will McMicking. For those of you joining the call this morning in from Victoria, we hope that you are safe and well. The light at the end of the tunnel is approaching, and our thoughts are with you. Moving on to our presentation now. On behalf of our directors and management -- and the management team of HomeCo, we are extremely proud to present our financial year 2020 full year results. When we IPO'd the company in October last year, who would have predicted that Australia and the world would have gone through such an unprecedented time in 2020 due to COVID-19. Our proactive strategy in dealing with our tenants in a respectful way has enabled HomeCo to deliver a very strong set of results today, underpinned by the following key points: one, 99% of all tenant COVID-19 release was documented prior to June 30, 2020. As a result of that and as a result of our proactive negotiations, we were able to basically deliver a cash flow impact as a result of COVID-19 of $5.7 million, which was delivered inside our previous guidance in May 2020 of $6 million to $7 million. Importantly, we've been able to fully offset the COVID-19 cash impact through corporate cost savings during the period, and also a reduction in our final year '20 dividend. Importantly, our balance sheet remains in a strong position, with gearing sitting at around 32% on a pro forma basis at year-end. Our proactive approach in dealing with COVID-19 rent relief has also resulted in us moving back toward normalized cash collection levels in the new financial year. 91% of cash was collected in July 2020, and we are tracking toward a very similar number again in August 2020. Second key highlight that we'd like to bring out from our results today is our portfolio valuations for the 6 months to June 30, 2020, have increased on a gross basis by 5.2%, and 1.7% on a net basis after CapEx and adjustments. Our third key point that we'd like to bring out, we are, today, declaring a $0.075 per share fully franked dividend for the financial year '20 full year. Importantly, this reflects the strength in our balance sheet today and also our confidence in the outlook for the business moving forward. We're also today excited to provide some further details around the next phase of our strategic growth initiatives as we move down the path of our owned, develop and managed model. HomeCo today is announcing further details around our intention to establish an ASX listed Daily Needs REIT by an in-specie distribution to our shareholders. HomeCo will act as manager and responsible entity for the Daily Needs REIT. And importantly, our timetable is on track to basically -- we are planning to achieve establishment of the Daily Needs REIT and an ASX listing in either late 2020 or early 2021, subject to market conditions. Secondly, the development of our unlisted fund to hold our health and wellness assets, HomeCo is progressing well with the aim of seeding the vehicle with $150 million of assets that are currently sitting on our balance sheet. We believe both vehicles have a very clear and exciting investment mandate, and we will provide further details around that this morning during the presentation. Moving to Slide 3 now of our investor presentation. The key financial highlights for 2020 are summarized on Page 3. The numbers tell a compelling story. 97.8% occupancy across our portfolio. That's a 5% increase in occupancy since our IPO in September -- our prospectus was prepared in September last year. Trading occupancy across the portfolio has increased since IPO by nearly 10% to 91.1%. Annual foot traffic for the year ended June 30, 2020, increased by 18%, reflecting the ultraconvenient nature of our assets in the highly strategic locations. As I mentioned earlier, 99% of COVID relief was documented with our tenants through the course of June 30, 2020 -- through June 2020. Importantly, in terms of our financial performance, $17.2 million of FFO has been delivered for the full year -- for the year June 30, 2020, that's a 13% improvement or beat versus our prospectus forecast. In the absence of COVID, that number would have been closer to a 30% outperformance relative to our IPO prospectus. We are obviously declaring a 7.5% fully franked dividend today as well. In terms of our developments and investments, we've delivered our 3 development projects that are -- during the period, that are now open and trading at Hawthorne, Keysborough and Coffs Harbour. And we now have 7 development projects well underway and in train, with 80 square meters of GLA to be delivered through financial year '21. You can see the momentum that is now building in this portfolio that will come through in our earnings in future years to come. We also completed 5 property acquisitions through -- since 30 June, representing $200 million of assets. Importantly, the 3 Woolworths that anchored supermarket assets or neighborhood assets are highly strategic and were acquired off-market, and they give us real momentum now to be establishing of our Daily Needs REIT. Finally, HomeCo today has $1.2 billion of assets under management. That's a 30% increase in our assets under management since our IPO last year, setting us up really well for the next phase of our journey as we move down the path of owned, developed and now managed. Moving to Page 4. We've talked about our own development and managed strategy previously. I've touched on most of the points here. What we'd really like to focus on today in terms of our presentation is articulating our management strategy for the future, the establishment of our Daily Needs REIT, our health and wellness assets moving into an unlisted wholesale fund. And what we'd really like people to take away from the call today is that we remain very focused with a very strong balance sheet now that will accelerate our move into management of our assets. Importantly, development. We haven't forgotten about the developments that we had in place at the time of our IPO. We had 10 development projects in the pipeline. We've delivered 3, 7 are now well in train with those expected to come online through the course of financial year '21. We've undertaken and completed 50,000 square meters of leasing since IPO, and we've continued to develop our pad sites and our childcare initiative, which all give us really strong momentum in future years in terms of our earnings. I'd now like to hand over to Sid Sharma.

Thank you, David, and good morning, everyone. Let's start with Slide 6. HomeCo assets, as most of you know, what we call hyper convenient. Typically, we have large on-grade car parks, minimal internal malls and best of brands. HomeCo customers choose HomeCo as a purpose visit. They can drive, park, shop and return home within an hour should they so wish. As we all live through this global pandemic, working, shopping and living local is more important than ever. As with all businesses, COVID-19 has clearly impacted our results for FY '20, and we have summarized these on Slide 7. At the outset of COVID, we steadfastly took a partnership approach with our tenants and continued to build on relationships for the longer term. We wanted to ensure that: one, our tenants were stronger coming out of COVID than going in with certainty on their obligations to us so they could focus on their core business; two, our shareholders had certainty; and three, our management group could focus on continuing to execute on our strategic and stated objectives of being an owner, developer and manager. It's over 3 months ago now, in early May, we provided guidance to the market of the potential impact that COVID would have on our rent collections. We guided a $6 million to $7 million impact and we have come in just under this at $5.7 million. On this slide, we've provided more color. You will note that the January to March quarter was largely unaffected. So we have called out a quarter 4 bridge without March, so you can clearly track the impact on cash collections. Importantly, our approach has led to 2 key items. Firstly, we have agreements in place with over 99% of our tenants for FY '20. And secondly, our July collections have rebounded to 91% and growing, with August expected to deliver a similar, if not higher, collection rate. Excluding the state of Victoria, over 99% of our tenants are now trading and business is largely returning to normal. Clearly, we continue to watch the unfolding situation in Victoria closely, and our teams remain focused on ensuring customer and tenant safety is paramount. Slide 8 provides data on the increasing diversity of our income sources. In the last quarter, we agreed 5 acquisitions, being 3 centers from Woolworths with late stats on new 10-year leases, an aged care facility in Erina and a leasehold site in Parafield. Our daily needs and health exposure is over 47%, and 87% of our tenants are national tenants. In the appendix, we have provided more detail around foot traffic trends at our centers and comparable growth year-on-year remained strong at 18%. This is a reflection of our assets maturing into the catchments they're residing. And both customers and tenants continue to gravitate towards hyper convenience assets. Slide 9 provides portfolio statistics of our business. Our WALE is steady, and our occupancy has increased to 97.8%; our holdovers are nil, and we have less than 2% of our income expiring in the next 18 months. With the acquisitions we have made, our assets under management have increased 30% since IPO. Our team has leased, developed and opened over 50,000 meters of GLA since IPO. During the COVID quarter, we agreed over 25,000 meters of new leases and leasing inquiry for convenience centers has continued to pick up, especially in the daily needs, essential household goods and health categories. Incentives and rental levels remain in line with our historic averages. Typically, our non-anchor leases are 10 years, with 10% to 20% incentives and fixed escalations of 3% to 4%. Moving to developments. As we highlighted during the IPO, HomeCo has developed now over 390,000 meters of retail and services and daily needs GLA over the last 3 years. Our development momentum continues, and we expect 80,000 meters of new GLA to come online in FY '21. Bathurst is now anchored with a trading Harvey Norman and over 85% leased. Kent is over 85% leased, with the Federal Government of Australia occupying 5,000 square meters for a Services Australia office. Ballarat is now 80% committed with Services Australia, also anchoring this with over a 5,000-meter office. Parafield is 100% committed, excluding the ex-garden center space, with a 35% weighting to the Wesfarmers. Richland is over 85% committed and anchored by a supermarket in Chemist Warehouse. Ellenbrook is over 60% committed, anchored by supermarket in Chemist Warehouse. And Wagga Wagga is over 50% committed and now it is operating. In terms of our pad sites, we are in planning and delivery mode for $6 million of developments. As the year has progressed and inquiry has picked up, we are cognizant of ensuring that any small-scale pad site developments don't compromise our overall land holding and development potential for the highest and best use. As we all know, land is valuable and our portfolio has a skew towards the best growth corridors of Sydney, Melbourne, Brisbane and Perth Metropolitan. Given we are all thinking, working, shopping and living local, we expect more development opportunities will continue to present themselves, and our low site coverage gives us plenty of growth potential. I'll hand over to Will for the financial performance section.

Thanks, Sid. Now turn now to Slide 12 with the earnings summary. The key message to take away from FY '20 earnings is that the group exceeded its prospectus did by a forecast. This was led by property income with a 19% increase in the second half driven by development activity and the 3 new center openings. HomeCo also provided $5.7 million in COVID-related cash flow support to our tenants in FY '20, which comprised $1 million in rent deferrals and $4.7 million in abatements. In terms of the accounting treatment of the abatements, HomeCo follows asset guidelines, which outlined that the abatement is to be expensed through the P&L until the date that the abatement deal is signed, and there is a deemed modification of the lease, after which it is to be capitalized and amortized over the remaining lease term. As a result, of the $4.7 million in FY '20 abatements, $2.4 million was expensed and $2.3 million was capitalized. Despite this impact to FY '20, HomeCo achieved pro forma FY '20 freehold FFO of $17.2 million, which was 13% above the prospectus forecast. Moving now to Slide 13, which details our consolidated balance sheet. Adjusted NTA at June '20, which excludes leasehold properties and intangibles, was $3.20 per security, representing a 2% increase from December '19. We've also presented the pro forma impact from the Woolworths, Parafield and Erina acquisitions and the equity raising announced on July 1. The transaction costs from the acquisitions will be expensed, which, along with the raising resulted in pro forma NTA of $3.8, and this is in line with what we outlined at the time of the raising announcement. If we look at investment properties on Slide 14, HomeCo's asset base post-acquisition sits at $1.2 billion, which is a 30% growth since the September 2019 IPO. In line with our valuation policy, we have 50% of the properties independently valued as at June '20, which resulted in an overall gross increase of 5% or 2% after CapEx. The portfolio cap rate now sits at 6.6%, which is reduced as the portfolio matures as developments complete. Turning to Slide 15, capital management. Following the raising and completion of the acquisitions, pro forma June '20 gearing will set at 32% with $109 million of liquidity. HomeCo also has no debt maturing until October 2022. Our hedge debt sits at around 44% post acquisitions, and this is driving a low-cost of debt of 2.4%. I'll now hand back to David.

Thanks, Will. Moving on to growth strategy and outlook. So on Page 17 of the presentation today, we will provide more details in relation to our intention to create a Daily Needs ASX-listed REIT later this year. Our intention is to establish the Daily Needs REIT through an in-specie distribution to HomeCo shareholders, securityholders. HMC will own a direct stake in the Daily Needs REIT post the in-specie distribution and act as responsible entity of the REIT. Importantly, securityholders will receive a new security in the Daily Needs REIT proportion of their existing current shareholding. The establishment of the REIT will be subject to final Board approval, third-party consents, regulatory and securityholder approvals. Our intention is to be in a position to establish the REIT and list the REIT by late 2020 or early '21, subject to market conditions. It's also our intention to simultaneously look to raise new capital via our PDS to fund strategic acquisitions. Moving to Page 18, the strategic rationale. What does this deliver for securityholders? Ultimately, what we're looking to do is create 2 focused companies with different investment attributes. The Daily Needs REIT, 100% owned portfolio of stabilized, convenience-based daily needs focused assets, targeting consistent growing distributions to securityholders. HomeCo will become an owner, developer and manager of a diversified property -- of diversified property investments, including the Daily Needs REIT and health care. The Daily Needs REIT will start life with the capital structure and balance sheet capacity to take advantage of what we believe to be a rich pipeline of consolidation opportunities in the market today. Over time, HomeCo will progress toward a more capital-light model, with diversified income streams from rent collection, management fees, co-investment income and property development. What we're looking to do is move HomeCo to a model of being able to create value through capital recycling and the introduction of external capital through our health care assets in the future. The Daily Needs REIT investment highlights on Page 19. We've worked hard over recent weeks and months to identify a model portfolio of metropolitan-located, convenience-based assets across our neighborhood assets, our large-format assets and health care to create what we believe to be a model portfolio that will basically deliver diversified and stable income streams and growing income streams into the future. The portfolio has 98% occupancy, and it's designed to basically achieve diversification across sectors, tenants, geographies and deliver resilient and growing underlying cash flows. The portfolio will have an 8-year WALE. It will basically have high-quality resilient cash collections with greater than 80% exposure to national tenants and limited exposure to specialty tenants, which we are currently establishing is around less than 15%. The portfolio achieved through the course of July 2020, 94% cash collection that will start like a sustainable average rents of around $315 a square meter. We also propose that the Daily Needs REIT will start with a 5% distribution yield, the majority of which will be fully tax deferred, taking advantage of the high depreciable cost base of the assets being seeded into the REIT. Growth. The REIT will have growth through contracted escalations, with fixed escalations on the majority of the portfolio, which represent over 3% per annum underlying growth. We believe there are significant consolidation opportunities across this -- across the model portfolio, which we believe will also be able to be achieved at accretive levels. Moving to Page 19, an update on HealthCo. We've talked a little about HealthCo in the past, today, we're providing a further update by our thinking and our planning for the establishment of a wholesale vehicle focused around health and wellness assets primarily. Importantly, what we've done over the last 10 months is we believe we've identified a portfolio of $150 million of seed assets on our balance sheet today that are focused on health and wellness. The assets that are in that category are set at Rouse Hill, Cairns, Ballarat, Roxburgh Park, St Marys, Springfield and Aurrum Erina. Importantly, that $150 million of assets have been developed organically on the balance sheet and will basically represent the foundation assets for the creation of HealthCo, which we will look to basically introduce external capital into through the course of 2021. On Page 21, we've endeavored to provide some additional information on what HomeCo will look like in the future, post the establishment of the Daily Needs REIT and also the creation of the HealthCo vehicle. Importantly, we have not identified specific levels of ownership in the underlying Daily Needs REIT. But suffice to say that HomeCo shareholders will hold a direct share in the vehicle as well as HomeCo itself will hold a direct share, plus new investors will be introduced to provide further capital for growth opportunities that we've identified. HomeCo will then remain with 16 assets on its balance sheet and a portfolio of HealthCo related assets that we will look to introduce external capital into in the future. As we move to Page 22 and the outlook for the future. We believe HomeCo is well placed to withstand any future COVID-19 developments with a strong liquidity position, diversified tenant mix and competitive rent offering that is reflected in our current rent collection levels. In light of recent COVID-19 developments, including the Melbourne Stage 4 restrictions, HomeCo considers it appropriate to provide no financial year '21 earnings guidance. That is the end of our presentation this morning. Thank you for listening, and we'll now move to questions.

[Operator Instructions] Your first question comes from Richard Jones from JPMorgan.

David, thanks for the information on the kind of outlook. Just a few clarifies, just in terms of the Daily Needs REIT, have you thought about what gearing it might have? And how much new capital you might injecting into it, or try to raise, sorry? And I guess, whether that results in-specie being a de-gearing process for the head stock?

So Richard, I suppose the question -- I'll take those 2 questions. So gearing, we're looking for that gearing level a bit broadly in line with the same sort of policy and strategy that we had for HomeCo when we IPO'd in October last year. So around 30% to 40% would be the level of gearing, bearing in mind that the portfolio is a stabilized portfolio, 98% occupancy. And so we believe sort of the mid-30 level would be appropriate. And in terms of the amount of capital, at this stage, what we're looking to do is a proportionate it especially between HomeCo's direct holding and the in-specie that is undertaken to our shareholders. The amount of capital we've raised will be a function of a number of the strategic acquisition opportunities we're looking at, at the moment and the extension amount of that are those acquisitions that are undertaken, but we will look to basically right-sized the gearing, and the gearing will basically end up being about the same level as we currently sit out today across the group.

Okay. And just on the HealthCo. Have you had discussions with investors? And are they wholesale investors or private? Or who's your -- who are the life investors in that vehicle?

At this stage, what we're proposing is that vehicle will be institutional wholesale investors so super fund type investors. What we'd be looking to do is introduce equity into the vehicle to basically unlock the value that sits in those assets today, and we've identified a further pipeline of assets on the balance sheet that we believe we could put more capital into. So what we look to do is bring wholesale capital in initially for a couple of years and then potentially look at the option of listing that vehicle further down the track.

Okay. And then -- and just -- sorry, one more clarifying question just about the kind of medium-term strategy. Can you discuss where you think the kind of asset and earnings mix will sit for HomeCo between, I guess, stabilized assets, co-investments, development and management?

Look, I think we've talked a lot about this morning. And one of the reasons that we're looking to go down this path is more of a capital-light, asset recycling model. As we start life with the new structure, and as we've identified on Page 21, HomeCo will continue to have a very strong balance sheet. It will continue to hold over $500 million of assets on its balance sheet, plus it will have initially a 100% stake in the HealthCo assets as well in the HealthCo proceeds. What that means over time, as we develop the model portfolio within the target ASX-listed REIT, it will give us the ability to free up further capital by moving assets across into the ASX list of REIT as we recalibrate the balance that we've undertaken to date. So the model portfolio has been through quite a detailed quantitative analysis around what we believe to be the model portfolio that we see as being optimal between giving us defensive characteristics, but, at the same time, giving us growth exposure and minimizing the tail risk associated with specialty tenants. So we've come up with what we believe to be a pretty ideal model. And, over time, what we look to do is potentially move some of the remaining far assets that sit on the HomeCo balance sheet across into the REIT keep recalibrating that are at optimal mix. So what it means is HomeCo will have an ongoing source of funding. It will have the ability to release further capital and recycle that into higher growth opportunities into the future. What that mix looks like over time? It's basically one of being much more capital light. And as we said at the very outset when we IPO'd of the company, it's all about long shift term shareholder value creation and being very, very focused on delivering long-term returns, again, the best return on capital for our shareholders.

Okay. And just one final question. Just the shareholder approval, what's the threshold required for that for the in-specie?

50%.

[Operator Instructions]

It looks like...

Your next question comes from Peter Davidson from Pendal.

Just a quick query sort of following up on Richard's one. Could you just distinguish between the 2 sort of collections of centers that you're going to -- 1 year retaining on the seat, the other 1 you're putting down into the daily needs vehicle. How would you distinguish the peer? Is -- are the daily needs more stable, more reliable, less tail risk? What are the other features? How did you determine what you're going to keep on the HomeCo's sheet, and what you propose to put down into daily needs?

Yes. Thanks. We believe, I think, I've got a very unique portfolio of assets that we've developed now, and that's obviously reflected in the quality of rent collection that we've achieved. The assets that we've identified initially for the ASX listed Daily Needs REIT are primarily as set at our supermarket banking. As a result of that, what we've done is, we've backfilled a model portfolio, a model mix. So what we're looking to achieve through that portfolio -- on a portfolio basis is diversification through tenants, geographies and also trying to minimize tail risk. In coming up with that composition, we believe that we've basically identified primarily assets that are supermarket anchored, but also assets that have steady and reliable growth business.

There are no further questions at this time. I will now hand back to Mr. Di Pilla for closing remarks.

Sorry, there's one more question.

Pardon me. Your next question comes from Ian Randall from Goldman Sachs.

Sorry, David. I think Sid mentioned the percentage of tenants outside of Victoria, who opened and trading. Do you have a number for the Melbourne tenants, what percentage of those stores are actually opened?

Sid?

Yes. I'll give you the percentage of the total of the group portfolio, Ian. So 3.5% of tenants across the group are currently not trading and another 12.5% doing Click and Collect.

There are now no further questions at this time. Pardon me, we have a further question. Your next question comes from [ Terry Christelis ] from Argus Advisory.

David, Terry here. Can I just congratulate you on amazing result, but more importantly, probably picking the right people to help you deliver the right result. What [ Sid ] will have done in trying times is absolutely incredible because clearly others in the space haven't even been close in delivering into what you have. And I guess, I just want to acknowledge, I appreciate all the hard work it would have gone into delivering the position you have on behalf of the shareholders. My question is, what are the catalysts, what are the concerns you see in the next 12 months to move into this split of entities? What will be the triggers for you to push the button on that? What are the hurdles and the CPs?

Essentially, Terry, the in-specie distribution is, in terms of the regulatory approvals, I'll just touch on that for a moment. It's obviously a shareholder approval that will need to be undertaken. That's a 50% shareholder vote that's required. There's also some tax work that needs to be undertaken and completed. We'll be, obviously, seeking an APO ruling, which will require probably 3 months in order to complete. That's probably the major sort of time issue that we, obviously, will need to get through. That being said, what I really see is the major factor that we'll, obviously, need to take into account is, obviously, market conditions, understanding a little more around COVID. We're obviously glass-half-full-type people. So we obviously expect that COVID will play out. We're prepared for it. We're ready for it. But if it were to get materially worse, obviously, that may slightly delay our timetable. But that all being said, everything in our control, we're well on track, and we're well advanced in our thinking.

That does conclude our question-and-answer session at this time. I will now hand back to Mr. Di Pilla for closing remarks.

Thank you. I would just like to say thank you, everyone, for joining the call. We appreciate that. Obviously, these are challenging times to everyone out there. So thank you to the shareholder base for your ongoing support and your interest in the company. And as I said at the time of the IPO, we will continue to remain laser-focused on delivering long-term value for our shareholders. Thank you for your time this morning.