HMC Capital Limited (HMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Home Consortium Fiscal Year 2021 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. David Di Pilla, Managing Director and Chief Executive Officer. Please go ahead.

Good morning, and thank you, everyone, for joining the call. Before we commence, Home Consortium would like to acknowledge the Traditional Custodians of country throughout Australia and celebrate their diverse culture and connections to land, sea and community. We pay our respects to their Elders past, present and emerging and extend that respect to all Aboriginal and Torres Strait Islander people today. Joining me on the call this morning are Sid Sharma, our Group Chief Operating Officer; William McMicking, our Group Chief Financial Officer; and Misha Mohl, Group Head of Strategy and Investor Relations. I am extremely pleased to deliver the financial year 2021 results today, a period which marks a key milestone in our transition to become Australia's alternative asset manager of the future. During the 2021 financial year and in the period since 30 June, we have successfully transitioned from a pure asset owner to a more capital-light fund manager with the foundations now in place to deliver on our ambitions to significantly grow fund under management. Turning to Page 4 of this morning's presentation are highlights for the HMC Group. Our FFO for financial year '21 of $0.131 per share was 51% above FFO for financial year '20 and 75% higher on an adjusted basis if we include the HDN in-specie FFO. Our balance sheet is now strong. Following the establishment of HealthCo and the HDN REITs, we now hold a net cash position and have approximately $1 billion of liquidity to scale our fund management platform. We've grown our assets under management in just over 12 months by 144% to $2.5 billion, including our recent $650 million underwritten IPO of HealthCo or HCW, which is due to commence trading on the ASX on the 6th of September. This marks an important milestone in advancing our funds management ambitions. The future outlook for our HDN and HCW REITs is bright, with strong balance sheets and identifiable development opportunities of $130 million and $500 million, respectively. Importantly, none of our ambitions are possible without delivering for our shareholders. Total shareholder returns for HMC shareholders since our IPO in October 2019 have been 109%, which compares to 19.5% for the S&P/ASX 200 and 7.7% for the A-REIT Index over the same period. On Page 5, we provide a graphical representation of the HMC share price since IPO. However, the key message is this outperformance has been achieved through the active management of our portfolio through a period of extreme market volatility and uncertainty caused by COVID-19. The list of milestones achieved since we last reported to you in February 2021 is significant and could only have been achieved through the dedication of our elite team of professionals and the support of our Board. On Page 6 of this morning's presentation, we'd like to highlight our journey since IPO. When we listed HMC in October 2019, we articulated the strategy of becoming an owner, developer and manager of assets. In October 2019, we owned $925 million of assets, had no external assets under management and a balance sheet with 32% gearing and owning modest financial capacity to unlock the development pipeline ahead of us. Today, HMC has $2.2 billion of external assets under management through 2 ASX-listed REITs, an exciting pipeline of growth and acquisition opportunities for the REITs and a strong balance sheet with a net cash position. Moving to Page 7. HMC is now positioned to rapidly scale up its funds management ambitions. Importantly, we now have sufficient capital resources to grow assets under management beyond $10 billion. Our strong capital and liquidity position is underpinned by the following sources of capital. We have net cash on balance sheet of over $100 million post the HealthCo IPO. We retained over $200 million of assets on the HMC balance sheet, which can either be sold down into the REITs or to third-party buyers. Our 27% shareholding in HDN, which has performed well in recent months, and our 20% shareholding in the soon-to-be-listed HCW can both be sold down in the future if higher-returning ROI opportunities arise across the platform, or it can simply be diluted in future capital raises. We recently secured commitments for a $375 million debt facility, which provides additional financial capacity and flexibility. Importantly, we will continue to be prudent in our allocation of capital, and we'll maintain the same robust investment community decision-making process that stood us in good stead to date as a publicly listed company. On Page 8, HMC's evolving and growing platform is now well positioned to scale quickly in a capital-light manner and provide high ROE growth opportunities to our shareholders. The platform we have created through the establishment of our 2 ASX-listed REITs is substantial and underpinned by the following: we have 15,000 shareholders across 3 ASX-listed vehicles, HMC, HDN and soon, HCW. We have committed open-ended or perpetual capital through our REITs. Our REITs provide fee structures which deliver attractive returns to HMC but also provide a competitive management fee structure for the REITs themselves to enable them to substantially grow FFO and assets under management. As we scale up the platform and the balance sheet, we anticipate generating attractive marginal return on equity, which we've illustrated in the top right-hand corner of Slide 8. Based on an illustrative example where we assume co-investment into our REITs of 15% and 35% gearing at the fund, we can drive returns on equity at approximately 18% or better on marginal capital deployed. On Page 9, we'd like to provide an update on our ESG journey. Since becoming a signature to the UN PRI earlier this year, we have focused our efforts on integrating ESG into our investment process and asset management. To help us deliver our broader ESG strategy, we have engaged KPMG Banarra to conduct a Materiality Assessment to identify, understand and prioritize sustainability topics of most importance to our business and to our external stakeholders. The Materiality Assessment survey of our key stakeholders, including investors and tenants, identified 7 key impact themes: climate action, green future, access for all, healthy communities, respect, alignment and accountability. We will prioritize and center our commitment and actions around these key impact themes, such as the establishment of our decarbonization target and meaningful actions to create real social impact. In the meantime, we've commenced working on assessing and planning our pathway to decarbonization through a 2-phased approach. Phase 1 will be to establish a baseline and optimize our existing asset infrastructure, and Phase 2 will be to execute on our renewable energy initiatives. A number of our recent developments and acquisitions are well advanced in their decarbonization journey. Further details of our progress and commitments to a zero-net carbon future will be shared in our sustainability report to be published in November 2021. On Page 11, the funds management section of our presentation. We are committed to the long-term success of our vehicles through strong alignment and well-established investment mandates based on bottom-up model portfolio construction and a focus on capital protection for our investors. We are an active and value-add-focused manager. We recognize that our ability to grow assets under management is ultimately linked to the investment performance of our REITs. We clearly demonstrated this in April this year through the $265 million rights issue undertaken by our HDN REIT, in which HMC fully participated in the capital raising, HMC funded a bonus unit for investors that participate in the rights and HMC sold a portfolio of LFR properties at a 6% discount to independent valuation. This example of strong commitment and alignment between HMC and HDN through our actions has resulted in strong trading performance since and set HDN up with a very bright growth outlook. We are continuing to progress plans to raise unlisted wholesale equity in the health and wellness space and are in active diligence with a number of potential investors. Given the substantial upside in the HealthCo IPO from $500 million earlier this year to the $650 million that was fully underwritten, we will now look to balance our own listed options to ensure we provide complementary unlisted capital that we believe can potentially play a key tactical role in helping to accelerate our ambitions in the health care space. Ultimately, any decision to raise unlisted capital will be based on key terms and fees that can be achieved relative to listed markets. Moving to Page 12. HMC is focused on high-conviction themes where we can invest at scale. Our 2 ASX-listed vehicles are exposed to sectors which are opportunity-rich and underpinned by attractive mega trends. HDN owns a strategic network of last-mile infrastructure, which is benefiting from growing e-commerce penetration. The retail landscape is rapidly evolving towards an omnichannel model and has been accelerated by COVID-19. We are seeing this play out in our portfolio via Click & Collect, Direct-to-Boot, microfulfillment and home delivery. Our assets are located close to customers in the best growth corridors of Sydney, Melbourne, Brisbane and Perth. 88% of our portfolio is in metropolitan locations. Over 7 million people live within 10 kilometers of an HDN asset. 73% of our tenants already have Click & Collect and a further 86% -- and 86% of a home delivery service. Our HealthCo REIT is underpinned by mega trends, driving long-term health care demand, including an aging population, technological advancements and evolving consumer preferences. The opportunity for HealthCo is substantial. We had management consulting firm, L.E.K., undertake a market study as part of the IPO, where they estimated the following size of the investment opportunity. Recurring expenditure across HealthCo's target sectors reached $194 billion in financial year 2019 and is growing at twice the rate of GDP. The installed asset base across the target sectors is $220 billion, and a further $87 billion in new investment is required over the next 20 years. On Page 13. Last week, HDN delivered a strong maiden result, which demonstrated the resilience and growth upside in the vehicle. The key highlights included: financial year '21 FFO of $21.4 million, up 14% versus PDS; an 82% increase in portfolio value since IPO to $1.6 billion; 99% unadjusted cash rent collections since IPO; positive leasing spreads of 4.4% for new leases and 2% for renewals; a development pipeline, which has increased to $130 million, which will underpin strong future FFO and NTA growth; we reaffirmed financial year '22 FFO guidance of $0.083 per unit and provided DPU guidance of $0.08 per unit; and finally, HDN is now well positioned for the upcoming index rebalancing events for both S&P and FTSE EPRA NAREIT. On Page 14. We are excited about the upcoming listing of the HealthCo Health & Wellness REIT on the September 6, 2021. The $650 million IPO is fully underwritten following a very strong response from both institutional and retail investors, which resulted in the IPO being upsized from a target of $500 million earlier this year. As the only ASX-listed diversified health care REIT, we believe HCW is uniquely positioned in an opportunity-rich sector. The vehicle will list with net cash and a $400 million debt facility, providing significant firepower to execute value-enhancing developments and acquisitions. HCW will target 5 key subsectors, including everything from childcare through to aged care and also include private hospitals, primary medical and life sciences. The initial seed portfolio comprises 27 high-quality assets, which are well diversified across subsector, geography and tenant. The portfolio is underpinned by a 9.4-year WALE and embedded rental growth across 100% of the leases, which are predominantly double or triple net. Turning to Page 14 (sic) [ Page 15 ], our strategy and HMC's ambition to become Australia's alternative asset manager of the future. We see a genuine opportunity and a gap in the market for an alternative asset manager that can provide investors with exposure to portfolios of carefully constructed real assets and businesses with structural mega trends. We fundamentally believe alternative assets will and should play a much larger role in asset allocation going forward as investors increasingly seek out greater diversification and noncorrelated inflation-protected returns. The potential new alternative asset classes we will explore include private equity, infrastructure and credit, which we will look to pursue in a measured way over the medium term. By not limiting ourselves to any 1 sector, the scale of the opportunity to raise and deploy capital is significant. We believe we can grow our assets under management to $5 billion by the end of 2022 and $10 billion by the end of 2024. We have a strong management team with significant experience in executing large complex transactions. We would obviously look to further build out our capabilities across the platform as we scale our funds under management. Importantly, real estate will remain a core focus of our strategy and will continue to be a significant growth engine for the HMC Group. Turning to Slide 16, which provides an update on our strategic childcare investment, which is a great example of our ability to identify market opportunities and act on them to create significant shareholder value. In the first half of financial year '20, HMC entered into a strategic partnership with Aurrum Kids to accelerate the rollout of 6 childcare centers on existing HMC sites. The arrangement was established by a $5 million convertible note and gave HMC the ability to convert into a 50% equity interest in Aurrum Kids at year 5 or redeem the note which has a coupon rate of BBSW plus 7% per annum. Importantly, this structure protects HMC from operational downside risk but also provides the ability to participate in any potential upside. I'm pleased to report that this new business is flourishing, with the first 2 centers at Mornington and Ballarat in Victoria tracking well ahead of expectations despite the headwinds of COVID-19. We have expanded the potential pipeline from 6 to 10 centers, which, most importantly, we estimate can be funded without the need for any new capital and within the envelope of the original $5 million convertible note. We believe HMC is well positioned to generate a 4x or greater multiple on its investment should it exercise the convertible note. I'll now hand over to Will McMicking, our Group CFO, who will run through the financial performance section of the presentation.

Thanks, David, and good morning, all. I'll now turn to Slide 18 with the earnings summary. HomeCo recorded funds from operations for FY '21 of $35.8 million or $0.131 per security, which represented a 51% increase versus FY '20 on a per security basis or 75% when adjusting for the HDN in-specie distribution. Direct property earnings increased versus FY '20 from development and acquisition activities in anticipation of the establishment of the HomeCo Daily Needs REIT and the Healthcare & Wellness REIT. Two new key lines in the earnings summary are the share of associate FFO from HDN of $6.1 million and management fee income of $10.9 million. These line items will grow in FY '22 as we see the full year impact of HDN and the new HCW vehicle. A final dividend of $0.06 is also determined to be paid, which represents $0.12 on a full year basis and is 50% franked. Moving now to Slide 19. This is a new slide which outlines funds management revenue for a part year of earnings, following the establishment of HDN in November '20. Total funds management revenue for the period was $10.9 million across funds and property management with 85% of revenue derived from nonacquisition and disposal fees. Our acquisition fees are paid on settlement, so as we look to FY '22, we already have $426 million of announced HDN acquisitions completing in Q1 FY '22 being the HMC LFR portfolio and Victoria Point. Moving now to the balance sheet on Slide 20. The key impact to the June '21 balance sheet versus June '20 is the HDN in-specie distribution in November, of which HomeCo shareholders received 1 HDN unit for every 2 HomeCo securities held. HomeCo's interest in HDN at June '21 is held as an investment in associate at $264 million versus today's market value of approximately $310 million. In addition to the HDN in-specie, the large reduction in freehold investment properties to June is also impacted by the transfer of assets to held for sale for the HCW vehicle and the sale of 7 properties to HDN. The deferred tax asset has historically included a large income tax loss balance, which included pre-2019 IPO losses incurred within Home Consortium Limited. Due to the multiple transactions undertaken within HCL since the 2019 IPO, the likelihood of utilizing pre-IPO losses is now considered low, following completion of the sale of 7 properties to HDN on July 1. The June '21 DTA balance has been adjusted to reflect this, in addition to a reduction in DTA relating to investment properties either sold or held for sale. So what you will see as a result is a noncash deferred tax movement of $88 million in the FY '21 income statement, which is driving the statutory loss for the FY '21 period. Following this outcome, HomeCo is considering making changes to simplify its stapled corporate structure and transition from a staple 2 securities to 1 share, subject to security holder approval. The combined group will then have the benefit of the residual post-IPO tax losses of $10.9 million as at June '21. Turning to Slide 21, capital management. Whilst HomeCo reported June '21 gearing of 26% and cash and undrawn debt of $72 million, these figures will materially change following the 7 -- sale of 7 properties to HDN and the establishment of HCW in September. And HomeCo estimates a pro forma June '21 net cash position of approximately $108 million following these 2 events. In addition, HomeCo completed an upsize and extension of its existing debt facility in July '21 to a $375 million senior secured facility now expiring in November 2023. This new revolver facility will be used to provide asset warehousing capacity for future funds management initiatives. I'll now hand back to you, David.

Thanks, Will. Moving to Page 23 of this morning's presentation, outlook and guidance. HMC started financial year '22 with strong momentum and is pleased to provide the following guidance: pretax FFO of at least $0.185 per share, which is 35% above financial year '21; and financial year '22 distribution per share guidance of $0.12 per share, representing a pretax payout ratio of 65%. As a fund manager, HMC now has greater reinvestment opportunities with the potential to generate returns above our cost of capital. Moving forward, HMC will maintain a flexible approach with regard to future distributions as we continually assess our capital needs and potential growth opportunities. That ends this morning's presentation, and I thank everyone for their interest in joining, and I'll hand it back to the operator.

[Operator Instructions] Your first question comes from Sholto Maconochie of Jefferies.

Just on the FUM target. It seems like it's well in excess of what you're forecasting a few months ago, sort of $5 billion by end of '24. Now that's sort of by end of calendar year '22. Obviously, you got the HealthCo FUM and the HDN. What are the drivers of that growth to get to that strong growth basically double the next 2 years?

Well, Sholto, we've got really good visibility on the growth outlook for both HDN and HCW. Both of them have got good pipelines of opportunities to invest in. But probably more importantly, what we see is real opportunity to scale through potential larger-scale acquisitions and also moving down the path of some of the other opportunities we've discussed this morning and take advantage of unlisted capital sources that are proactively coming to us and wanting us to identify and find the reinvestment opportunities. So I think the point is larger-scale opportunities are probably now on the horizon, given the balance sheet strength that we've now articulated this morning.

When you say larger scale, is that across HDN or HCW or both of the current asset classes?

I think in the near term, that's where our clear growth focus will be. But over time, we believe we can move across other real asset classes. And so we don't...

And isn't that...

Sorry, go ahead.

Sorry. So just when you look at that -- the slide you put in with the new verticals to invest in sort of private equity infra credit, would that be in the '22 target or post that?

I think that will probably post that, you may see some in there, but what we would say is the majority of the growth will be through our core property business through the course of '22. And that's [ for the calendar year ].

Yes. Okay. And then just on the wholesale fund. When are you expecting to raise that equity? And how much are you looking to raise again in the wholesale fund discount? Is it $500 million?

Look, I think what we're saying there is, given how strongly supported HCW was and the fact that I think when we closed the books for the HCW IPO, we closed 3 days early. The number was approached -- in terms of demand, it was approaching close to $2 billion of demand. We upsized the raise into $650 million. We expect it to have a really strong cost of capital. It's got a balance sheet now with cash and undrawn funding lines. So what we're doing is we're trying to balance the way we raise the unlisted money that we're looking to raise in the health care space to really take advantage of the fact that we've now got significant capital resources across the group. We want to keep the growth trajectory of HCW strong. And so we're looking at some very interesting and innovative ways to bring that unlisted capital onboard to sit in a really complementary way, so that both vehicles can scale up quite significantly. So we think what we're saying is we're looking to raise still $500 million of unlisted money, but we want to do it in a complementary way, so that we can accelerate our ambitions and play with a bigger scale across the health care platform in the future.

All right. And then just finally, the -- on the business going forward, the cost base is set for this growth and now you've got the cost base included in the guidance and no material increase in costs needed.

What I would say to you is that it's the one thing that I'd put a huge amount of thought into, and we don't run the costs ahead of the earnings in the business. So essentially, the business as it sits today has got the ability to scale to that '22 target. And then what we'll do is we'll backfill costs as required as we scale. But that target we've given you of $0.185 to '22, it can all be achieved very easily within the current cost structure.

And then -- so just on the fees unlisted, you've got 65 and 55 sort of on the sliding scale when you get to 1.5. On the wholesale, is it broadly in line with typical wholesale over fees that have 45 bps and with a performance fee component? Can you sort of elaborate on your sort of fee you're sort of looking at for the wholesale fund?