HMC Capital Limited (HMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Home Consortium Limited FY '22 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. David Di Pilla, Managing Director and CEO. Please go ahead.

Good morning, and thank you for joining today's call. Before we commence, HMC Capital 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. My name is Dave Di Pilla, and joining me on the call are Will McMicking, Group CFO; and Misha Mohl, Group Head of Strategy and Investor Relations. I am proud of the financial results and progress we have delivered for financial year '22. Our strategy and our ambition to create Australia's leading ASX diversified alternative asset manager is now well underway following a period of transformational growth over the last 12 months. Turning now to Slide 3 of the presentation, an overview of the HMC Group today. Our business continues to evolve at a rapid pace. HMC now manages $5.8 billion of assets across 3 entities, which have been established internally and grown organically. The strategies for these entities are consistent with our high-conviction investment approach, which targets assets that are exposed to structural tailwinds and where we can add value. Our track record since listing in 2019 builds on the value we created from the original Masters acquisition and demonstrates the quality and depth of our people. Importantly, our management team and Board are significant shareholders in the business, which provides strong alignment with shareholders. Our key competitive advantage is our ability to do large complex transactions. We have also built a high-performing in-house operating platform to actively manage our real estate assets and investments. As we look into financial year '23 and beyond, our mission is to connect capital with high-conviction alternative investment opportunities. Moving now to Slide 4, where we have summarized our journey and key achievements since the establishment of the group in 2016. This slide doesn't do justice to the first-class execution and hard work of our people to transform HMC Capital to its current position. In this relatively short period of time, we have executed almost $7 billion of gross transactions, raised over $4 billion of capital, redeveloped 0.5 million square meters of real estate and established 3 high-conviction funds with permanent capital. On Slide 6, our strategic achievements in financial year '22 and our future priorities. Firstly, we've invested to secure a key talent and expand our distribution and investment capability. This investment will support our growth ambitions over the medium term. Secondly, we continue to diversify our sources of capital. This month, we reached first close on HMC Capital Partners, which is our first unlisted product. The fund is already available on 3 investment platforms, and we recently finalized the appointment of a domestic and offshore placement agent to raise institutional capital for this strategy. In addition, we are today announcing 2 new initiatives to raise institutional wholesale capital for a $1 billion last-mile value-add logistics strategy and a health care capital partnering initiative, which we'll launch later this year. And finally, we successfully scaled our platform with a record period of deployment in financial year '22. Importantly, we also demonstrated a disciplined approach to capital allocation in what has been a volatile and evolving market this calendar year. We passed on a number of acquisition opportunities but also opportunistically divested assets in both our REITs and from our HMC balance sheet to build funding capacity and dry powder. Accordingly, our group is now well positioned for growth. As we look forward, we remain well positioned and capitalized to grow our external assets under management well beyond our $10 billion 2024 target. Turning now to Slide 7, where we'd like to discuss our key results highlights for financial year '22. We delivered pretax FFO of $91 million, which compares with $35.8 million in the previous period. We also delivered pretax FFO of $0.31 per share, which is up 126% on financial year '21, and it also exceeded our previously upgraded guidance of $0.29 a share. We've distributed $0.12 per share of fully franked dividend, and our payout ratio of 39% provides the business with capital to reinvest into high ROE opportunities. The successful monetization of the remaining former Masters properties on the HMC balance sheet has further strengthened our financial position, which is currently net cash, and we have over $300 million of potential funding capacity. Our external AUM has grown over the period to $5.8 billion versus $1.4 billion 12 months ago. This record AUM growth during the year is underpinned by approximately $4.6 billion of gross transactions. We generated $64 million of fund management revenue during the year compared with only $11 million in financial year '21, which demonstrates the scalability of our platform and our diversified sources of fee revenue. Our HomeCo Daily Needs REIT is now an ASX 200 entity following the successful acquisition of Aventus. HDN now controls a $4.7 billion portfolio of strategic last-mile infrastructure logistics and has a significant growth pipeline. The listing of our HealthCo Healthcare Wellness REIT in September '21 was the largest real estate IPO since 2014 and demonstrated the significant investor demand for diversified health care REIT in Australia. This month, we achieved financial close with HMC Capital Partners with now approximately $300 million under management. This was a strong result in a difficult capital raising environment. Pleasingly, our first seed asset for the fund is a 14% strategic state in Sigma Healthcare, which is up by 22% since we acquired the physician providing a strong start to fund performance for HMC Capital Partners. On Slide 8, we illustrate our strong track record of growth in AUM, EPS and TSR since listing in October 2019. This slide speaks for itself. Moving now to Slide 9 to discuss our commitment to sustainability and ESG. We are committed to sustainable practices that drive long-term value creation and achieve a positive impact on the community in which we operate. Our inaugural sustainability report last year identified 6 sustainability commitments with the objective of creating healthy communities. I am pleased to report on the following initiatives we delivered over the year, which demonstrate our progress across our asset-owning REITs in particular. We participated in the Global Real Estate Sustainability Benchmark, GRESB for HDN. Our HDN LFR development in Mackay has been designed to achieve a Green Star buildings rating. We believe that first LFR development to achieve such a rating in Australia. We've undertaken building performance ratings of NABERS and Green Star performance for a large number of our assets. We are implementing a smart energy management system to achieve energy efficiency across 21 assets currently, and we'll roll this out across our entire portfolio within the next 2 years. On Slide 10, our decarbonization road map to achieve net 0 emissions for Scope 1 and 2 by 2028 is outlined. This will be achieved through a smart energy management system program and ongoing investment in solar power infrastructure across our underlying REIT portfolios. Further progress on sustainability strategy is detailed in the appendix. Moving now to the fund management section of this morning's presentation. On Slide 12, we provide an overview of our existing fund management platform today. You'll see we've included HMC Capital Partners, which achieved first close this month and will become a significant growth engine for the group in the future. Importantly, the fund expands our platform into new alternative sectors, including private equity and gives us much greater flexibility to deploy capital during times of market volatility and dislocation. Over time, we believe our platform will continue to rapidly evolve as we establish new vehicles and match capital with high-conviction alternative opportunity. Turning to Slide 14 to provide an update on our REITs HDN and HCW. Financial year '22 was a huge year with HDN growing AUM by 249% and highlighted by the acquisition of Aventus, which has been successfully integrated with forecast cost synergies now delivered ahead of expectations. HDN's financial performance during financial year '22 was pleasing. FFO of $0.0885 per unit was up 30% on financial year '21. Operating metrics were also very strong, with greater than 99% occupancy, 99% cash collection and 5.7% positive leasing spreads. HDN's capital management has been proactive and disciplined, as highlighted by the post-balance-date sale of the Sunshine Coast LFR asset for $140 million. This sale reduces HDN's pro forma gearing to 30% and increases hedging to 74%. Importantly, HDN now has $500 million of dry powder for value-enhancing growth opportunities. The shift to omnichannel fulfillment is directly benefiting strategically located daily needs assets, which increasingly act as last-mile logistics hubs. We believe this megatrend will underpin the long-term value of HDN's portfolio and the continued outperformance of this asset class, both in Australia and globally. Our HealthCo REITs also delivered a solid financial result. Financial year '22 FFO of $0.051 per unit exceeded PDS forecast. Our operating metrics were strong with 100% cash rent collection and occupancy increasing to 99% versus 96% at IPO. Since listing HCW has demonstrated discipline in a competitive environment for acquisitions with cap rates tightened to record low levels despite rising bond yields. HCW took advantage of this disconnection by selling its St. Mary's asset for a 71% premium to book value. The sale delivered immediate upside in excess of the forecast development profit and returned HCW to a net cash position with over $400 million of liquidity. We remain highly attracted to the long-term structural tailwinds underpinning future demand for health care services and infrastructure. On Slide 15, we discuss our growth strategy. We remain well positioned to maintain our strong growth trajectory and grow AUM beyond $10 billion. While the exact pathway is not predefined or likely to be linear, we see multiple options to drive strong growth. Firstly, as I highlighted earlier, our 2 listed REITs remain primed for growth with low gearing and significant dry powder. We are today also announcing our intention to establish 2 new unlisted institutional capital partnership opportunities, including a $1 billion value-add last-mile logistics strategy, which complements our HDN investment mandate and capitalizes on attractive acquisition opportunities, which are now coming to market. And secondly, HMC Capital's balance sheet interest in Stages 2 and 3 of the Camden healthcare precinct. We will launch a process later this year to identify a strategic long-term capital partner for the project. We see significant growth rate for HMC Capital Partners Fund 1, which targets undervalued asset-rich companies where we can influence positive change. We are targeting to grow the fund to $1.5 billion of equity over time, which could generate material FUM growth and performance fees for the group. We've recently appointed a domestic and offshore placement agent to raise institutional capital to this strategy. We have also identified corporate M&A activity as another major potential driver of future FUM growth. We will consider strategic M&A opportunities, which provides new or complementary expertise or our attractive opportunities for institutional capital partnerships for the group. I'll now hand over to Will McMicking to discuss our financial results for the year.

Thanks, David. And turning now to Slide 17 with the earnings summary. FFO for FY '22 was $91 million or $0.31 per share on a pretax basis, which materially exceeded the guidance provided at the start of the financial year of $0.185. Key movements during the period included a $53 million increase in funds management revenue, which was driven by [indiscernible] and the Aventus acquisition. This was offset by a reduction in investment income following the sale of remaining investment properties over FY '22, of which sale proceeds are currently being redeployed into new HMC managed funds. $28 million of trading profit was also recognized in FY '22, driven by the sale of Knoxfield and Roxbburgh Park at a combined 38% premium to September '21 book value. Final dividend of $0.06 per share has also been announced today and will be 100% franked, taking total FY '22 dividend to $0.12 per share. Moving now to the balance sheet on Slide 19. The transition to a property-light balance sheet has continued in FY '22 with the composition of assets shifting from direct property to co-investments in HMC managed funds, which totaled $609 million as at June. Other assets include management rights recorded as part of the Aventus transaction and a $14 million equity derivative in Sigma Healthcare acquired as a seed asset for the Capital Partners Fund 1. Overall, net assets increased to $846 million and NTA was $2.31 per share as at June. Turning now to Slide 20 on capital management. As at June, HMC had an undrawn debt facility of $275 million and a cash balance of $58 million, driven by property divestments over FY '22. Further divestments in FY '23 are expected to include the Camden George Hospital Trust, and combined with our current liquidity of approximately $330 million as at June, HMC is well positioned to support its future funds management activities, including the Capital Partners Fund 1. I'll now hand it back to you, David.

Thanks, William. Turning now to our guidance for financial year '23. In financial year '22, we delivered pretax FFO of $0.31 per share, which represented 126% growth on financial year '21 and was 68% above our original guidance of $0.185. This result included material transactional income and trading profits following a record period of deployment. We believe this is repeatable as we continue to scale our existing platform and execute on transformational opportunities. However, the unpredictable nature and timing of these items makes it challenging to provide an FFO forecast for financial year '23 at this time. We are providing a DPS guidance of the financial year '23 of $0.12 per share which is in line with financial year '22. This is consistent with our strategy to reinvest retained earnings into our high ROE growth initiatives. Our outlook for the business is strong, and we are well positioned moving into financial year '23 with strong momentum and a more established and diversified platform. HMC Capital Partners expanded our platform into new sectors, including private equity and gives us greater flexibility to deploy capital in the current environment. Our 2 REITs have strong balance sheet to take advantage of compelling investment opportunities, including their value-enhancing development pipeline. Today we are announcing 2 new unlisted real estate strategies, targeting daily needs and health care sectors. As following an active 12-month period, we are tracking 6 to 12 months ahead of our previously stated AUM growth target of $10 billion by the end of calendar year '24. Thank you for joining the call this morning, and I'll now hand the call back to the operator for Q&A.

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

David and team, congrats on a strong result in FY '22. Just had a couple of questions on the cash flow, was a bit weak, but it seems like it's on operating cash for that a lot of us move into investing cash flow with the distributions received and this way it's accounted for. Would that be correct, the way the business has changed in the last 12 months?

Yes, that's right, Sholto. I mean there's probably 3 things to call out that are traditionally in the operating cash flow. So you've got the dividends from the management funds going through investment cash flows. You have the asset sales going through the investment cash flows. And then, as you recall, as part of that Aventus transaction, we took the acquisition for the 3 key drivers.

Yes, as I thought. And then just on the end value, can just remind us what the end value is -- sorry to say, just 2 and 3 of Camden that you're looking at selling down?

Look, what we've said is you can see the carrying value of Camden states 2 and 3 on our balance sheet. But we believe that, that precinct out there at Camden will be a $500 million precinct for the time it's completed.

And then would you -- would HCW look at some of that? Or is it other third parties would look at that?

The intention at the moment, and we've stated this publicly, is that HCW would actively look to acquire and has an option to acquire the HMC Stage 1. You look at Stages 2 and 3, we're talking very significant dollars there. So we feel a capital partner would make a lot of sense at those stages. I think it's probably the most exciting health care precinct in the country at the moment. And what we do know is there's a lot of interest in institutional capital for that kind of opportunity. So we plan to take advantage of it later in the year once we announce an operating partner for Stages 2 and 3 of the precinct.

Would HCW take a part stake in Stage 2 and 3 or just it won't look at those stages?

Can you just repeat that? It wasn't clear.

Sorry, would HCW take part stake in the Stage 2 and 3 or would go to a third party?

It already has a stake.

I mean HCW. Would it take a bigger stake? Will they sell those remaining...

Potentially, that's on the table, but we're talking a very big precinct out there, as I said, $0.5 billion. That's a big project. And so we'll look to access capital at time. HCW will clearly be part of that discussion, and we'd like it to obviously increase its stake across the precinct, but we'll also look for institutional partners as well. It's an exciting project.

And then just on the new REIT, that's interesting development. What sort of assets is that last mile? Or is it like service stations? Is that warehouses or neighborhood shopping centers? What sort of assets is that targeting in that new fund that you announced today?

Sholto, it will not be targeting service stations. We've clearly stated in the past that's not part of our strategy. What is our strategy, omni-channel last-mile logistics is really what we've become very, very good at. HDN, as I said earlier, has just shy of $5 billion of assets. It has 99% occupancy. It's got 99% cash rent collection within each month. It's got 5.7% positive leasing spreads. That strategy is resonating and working. That is the last-mile infrastructure logistics of the future. As a result of that, we are building off that strategy to identify similar assets that -- but probably not core assets that fit the HDN model but really trying to build a bigger last-mile logistics footprint across the country with institutional capital. So we think it's a strategy it's not the HDN strategy, but it's an extension of what we're doing there, and it's an extension of the strategy that's been proven and works.

And then you impaired $21 million on HCW, is that just because of the fund was launched during the year, so it's just a change in the accounting of that carrying value of that asset?

Yes. I mean it's just down to accounting treatment, Sholto. So you've got to record it at the [indiscernible] after the listing, which was done in the first half, and we've brought that carrying value back to [ NTA of 201 ].

Well, it's all noncash. It's basically an accounting treatment, and it is what it is. We can't really do much about that.

Yes. Understood. And then just finally, the trading profit this year, are you expecting any more trading profits in '23 from the balance sheet?

Look, what we're saying is that there's lots of optionality across this group now. It's a big group, it's much bigger than it was 2 years ago, and there's plenty of optionality now across this platform.

Yes. And then just one more, sorry, if I can push it. The equity yield, what should we assume on the equity yield on the $300 million investment in the Capital Partners Fund?

Well, we've stated that we've got an intention to try and achieve an IRR of 15%. The fundraising documents talk about a 2% to 4% running cash yield after deployment in 2 years. But we are very confident that if you have a look at the first investment we've generated there, we're up 20% in a month or so. 15% is our target to investors. But as this group has built a reputation around, we'd like to underpromise and overdeliver.

Your next question comes from Simon Chan from Morgan Stanley.

Just listening you answer Sholto's question, am I right to say that your -- this $1 billion logistics fund target, you're kind of not targeting, I guess, warehouses as we would know it, but you're targeting more neighborhood malls and somehow repurposing them for last-mile logistics. Is that right?

Yes. So what I'm saying is pretty clear. Industrial assets are a bit down to what we believe we are sustainable levels in Australia, 3%, 4%. What we've built is the last-mile logistics infrastructure of the future. So we are on a journey to educate the market, to educate investors, to educate the investment community around the fact that the reality is that our assets within HDN are being used as a critical part of the last-mile omnichannel delivery across this country today. That's why the demand for our assets is increasing. That's why our occupancy is so high. That's why our cash collection is high. That's why our lease spreads are so high. The reality is we're going to extend that strategy, and we're going to extend it to assets that probably don't fit the core definition of what HDN is looking for today. So we're going to identify assets. We're going to build a portfolio. We're going to repurpose that portfolio, and we're going to expand our last-mile logistics footprint across this country. We've got a strategy that works, and we're going to develop it and we're going to expand it.

So it's kind of like an unlisted version of HDN but with value-add assets.

Exactly.

Okay. Cool. Too easy. And just one more question. Could you -- I understand that you talked about timing of deals makes it hard for you to give a guidance for FY '23. But then on the other hand, you're saying you're tracking 12 months ahead of your target. Isn't there a bit of a mismatch in those 2 assertions?

No. The reality is that you look at our results for '22, there's a lot of one-off items in there. So you'd probably get to a place where you probably look at the recurring income within that result. And then the difference between that recurring income, the $0.031 we delivered this year, there was a lot of one-off items and trading profit. So we're expecting to do a similar or greater number of one-off transactions this year in terms of real asset opportunities. But what I'm saying is that the challenge you have in this environment is if you, for example, announced the deal in calendar '23 but it doesn't close until '24, where does the income go, where does it sit. What we're saying here is this is not a linear discussion. This is saying to you, we are extremely confident we'll get to the $10 billion. We're tracking a year ahead, 6 months to a year ahead of schedule. Where we booked that income, either in '23, either in '24, I can't be precise, but we're very confident on delivering against the $10 billion plan.

Your next question comes from Stuart McLean from Macquarie.

First question on the start on the Camden potential understood funds. Just what's the potential difference between the unlisted health care funds that was proposed circa 12 months ago and what you're looking to do here with Camden kind of coming back to that idea of unlisted health care as a potential fund, please?

When we were looking to do the IPO of HealthCo last year, we did talk about raising listed in parallel with it. Suffice to say that you were all there and you all saw it play out in real time. We set out to raise a $500 million listed health care fund. We've got blown away with $650 of demand. Within 2 days, we had $1.8 billion of demand, so we took extra capital at the time in the listed entity. The reality is there was plenty of unlisted institutional capital. But the reality is that what we're trying to do now is we're trying to say, well, Camden will be a much different proposition once we have an operating part later this year. And what we'll look to do is find a very targeted strategic capital partner for it. We get plenty of inbound inquiring around the asset class. We get plenty of people wanting to own that asset class. And so once we've developed it and got proof of concept, yes, we'll look to introduce a capital funding partner for the asset and the opportunity. It's very different to what we were contemplating last year. This is really a single partner for a very big precinct.

The scope for that unlisted funds continue to grow. Does it have to be limited to just Camden, or if other opportunities out there, portfolios come to market be too large for HCW, you can use that fund? Or would those other opportunities potentially be different funds that you might look to commence?

Look, I think what I would say is that -- this is a pretty important point to make. We've been making this point for a while now. We are trying to build a sophisticated alternative asset management platform here. In saying that, we do not want to be a group that is just playing a one-way bet on falling interest rates and falling cap rates because that time is finished. You got to work much harder. You got to add more value. You have to deliver more when you're talking to institutional capital. So the reality is that pool funds are, yes, obviously, interesting but challenging in terms of the terms. So you've got to really go and add value when you bring in opportunities to market. So what we'll do is we're trying find the right capital partner for Camden. If that capital partner can move into other areas, great. We'll have that discussion. But we won't limit ourselves to any kind of opportunities. This group has lots of opportunities. We're looking at a lot of different transactions across the health care space at the moment. They're all quite significant, and we'll find the right capital partners for the right opportunities. I think we've tried to summarize the point today where we're doing our very best to bring our investor base and the analyst community on the journey with us here as we grow. But at the same time, what I'm saying to you is also that we're trying to steel this smiths down very simply for you today. We are trying to match capital with great investment opportunities in a diverse sense across the alternative space. That's our goal. That's our mission here.

Good. And second question is just maybe a bit of a follow-on from your last comment there. How do we think about the continued growth in inflows in Capital Partners Funds, number one, sitting at $300 million at the moment? When should we expect formal first close and then add additional capital flows into that fund as well, please?

So HMC Capital Partners will get to first close by the end of this month at $300 million. What will then look to do is moved to sort of $500 million by the end of the year. What we're trying to do is match fundraising with opportunities. Obviously, sitting on lots of cash in a fund like that given we call the capital upfront will drag on returns. So we're trying to be tactical in the way we talk about fundraising. But we are looking to build that to $1 billion plus $1.5 billion is sort of our long-term target there for that fund. Performance will be important. Delivering and finding great opportunities will be critical, but we are very confident around that strategy. That adds something very, very strategic and very significant to this group now. We are not any longer having to be a one-way binary bet on interest rates. We are much more sophisticated than we were 12 months ago. And we have now opportunity to take advantage of market volatility through that fund. And I think the performance will start to come through because it is a unique strategy in Australia.

And just a final one for me. Just on the movement in cash over the last 6 months. So the $144 million of cash at Dec '21, sold circa $140 million of assets on balance sheet, which implies kind of $280 million of cash. You finished the year at $60 million. Can you just point out the key cash outflows there that amounted to $230 million over the last 6 months?

Yes. Yes. What you probably have less year is part of the deal. We bought a large shareholding in what is now HDN and obviously paid in part of the management rights. So, we've got to record send it through, but the other movement [indiscernible].

Your next question comes from Grant McCasker from UBS.

Just on the Sigma deal, can you just clarify how much equity does that use up of that sort of $300 million first close and sort of -- yes. Do you expect to be deploying more equity over the next couple of months?

Yes. So the investment we made into the Sigma stake in terms of dollars deployed was $80 million. Obviously, it's up against that deployment number. We can work that out. We've given you an indication of what our entry price is. What we have said with that strategy and that why we believe it's such a scalable strategy is we are getting stand-alone LVR lines on individual investments. And so what we do then get is an LDR ratio on that particular investment money in about 50%. So yes, there's plenty of firepower left in the fund.

Okay. So no further equity from that funds being allocated to Sigma at this point? Is that just debt from here?

Yes. So the way to think about Sigma is Sigma was bought on the HMC balance sheet. HMC will transfer that into the fund, and then the fund will take on stand-alone leverage against that position,secured against the position.