HMC Capital Limited (HMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the HMC Capital Limited FY '23 Half 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. Joining me on the call are Will McMicking, Group CFO; Sid Sharma, Group COO; Misha Mohl, Group Head of Strategy and Investor Relations. 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 and present and extend that respect to all aboriginal and Torres Strait Islander people today. Today, you will hear how we are accelerating the evolution of HMC Capital into a sophisticated and diversified alternative asset manager with multiple growth drivers. We are building a scalable funds management platform, which can take advantage of opportunities, which are now emerging in a more challenging operating and funding environment. Turning now to Slide 3 to provide an overview of the Group today. HMC capital is a high conviction alternative asset manager with $6.2 billion of assets under management across real estate and private equity. Since listing in October '19, HMC has organically established 3 vehicles and growing assets under management plus a 78% compound annual growth rate. Our success has been built on our ability to execute large, complex transactions and generate outsized equity returns from these opportunities. Over the past 12 months, we've significantly invested in our platform via new product development initiatives and distribution capabilities. Over time, we intend to expand and diversify our platform into new scalable sectors such as private credit, renewables and infrastructure. Turning now to Slide 5 to discuss the key results highlights for the first half of financial year '23. HMC Capital delivered operating earnings of 24.9 million or $0.083 per share. We have declared a fully franked dividend of $0.06 per share. Our funds management revenue of 28.4 million for the half represented 54% growth on the first half financial year '22, reflecting the substantial growth in funds under management, about [ $2 billion ]. Our balance sheet remains well positioned to support future growth initiatives with over 200 million of available liquidity facilities and 750 million of investment in our funds platform. And finally, we've progressed our strategy to grow and diversify our capital sources through major product development initiatives. We launched our first private equity fund HMC Capital Partners in August '22, with a $300 million fundraising, which was strongly supported by ultra-high net worth and family offices. We are on track to launch our first unlisted institutional funds in the second half of financial year '23, which is focused on last mile logistics assets. The fundraising for the first $1 billion fund is progressing well with multiple investors now in due diligence. We believe this strategy is extremely scalable, and we target to raise an annual series of $1 billion each year for the medium term as the opportunity of investing and institutional investor appetite for this strategy is strong. And finally, we are progressing plans to establish a 1 billion health care and life sciences unlisted funds with institutional capital partners in financial year '24 with multiple investors expressing interest and in discussions. Slide 7, where we discuss our funds management strategy. HMC today manages 6.2 billion across highly focused funds with scalable portfolio-based strategies, which have been established organically. Our goal is for HMC to evolve into a 20% plus ROE business over time. Importantly, HMC's balance sheet will remain an important source of capital to growth comes under management through strategic asset warehousing and underwriting. Our existing real estate platform is positioned to scale to over 10 billion across multiple strategies with very low incremental costs. The establishment of our private equity platform through HMC Capital Partners during the period represented another important milestone for the Group in establishing our first unlisted fund. We believe the ROE for this strategy over time will be above our 20% target. We see the movement of private equity as a significant growth opportunity and a way for HMC to participate in large-scale transformational opportunities. Significant investment in the infrastructure to establish our first unlisted funds included unlisted registry services, fund administration and auditing, final onboarding and reporting and successful completion of an independent operational due diligence review. This work is now being leveraged for the establishment of our last mile logistics bucket. We are also actively considering potential acquisition and partnering opportunities to further expand our platform into new alternative sectors. Importantly, anything we require will be complementary and scaling within HMC's platform and be marked against our 20% ROE target. Moving now to Slide 8, our growth strategy. This slide illustrates our pipeline of growth opportunities to support our ambitions to grow AUM to over $10 billion by the end of calendar year '24. It also supports my earlier comment regarding our strong preference to invest our time and effort into new funds management initiatives, which is scalable. For example, our HDN vehicle, which has a focused model portfolio investment approach that cost a circa $5 billion portfolio is very scalable as compared to a manager with 60 single asset closed in syndicates totaling 5 billion. Importantly, the growth required to achieve our $10 billion target can be generated from our existing funds and the 2 new complementary unlisted funds. Moving now to Slide 9. Our distribution and fundraising strategy. This slide attempts to illustrate how our fundraising and distribution has evolved over the last 3 years and how we have planned to evolve and expand our capability in the future. Our Daily Needs REIT, which listed in November 2020 with approximately 650 market cap and a largely retail-focused register has successfully evolved it an ASX 200 entity with a more diversified institutional share register. Last year, HDN also went into the FTSE EPRA NAREIT index. Moving forward, HDN is well positioned to attract more global institutional capital and achieve ASX 100 Index inclusion over time. Our Healthcare REIT, which listed in September '21 is the only ASX listed diversified Healthcare REIT. The IPO attracted strong support from both retail and institutional investors. We see strong potential to introduce more domestic and global institutional capital over time to support the REIT's growth pipeline. Our private equity fund, HMC Capital Partners REIT's listed first closed in August 22, with strong support from ultra-high net worth and family office investors. We are now working towards expanding distribution into the broader retail market via a retail [ CDS ]. This will allow us to market the fund's financial planners, self-managed super funds and distribute the product through additional investment platforms. This fund is also well positioned to get its first investment rating over the coming months. In addition, this strategy will also target institutional investors over time as it establishes a track record and build and position in larger scale investments. This will allow the fund to execute strategy on a much larger scale. Now moving to our unlisted product strategy. Our LML Fund series will be HMC's first unlisted funds. The first $1 billion fundraising for this series is well progressed and in prospective strong interest from both domestic and global investments. We've also received inbound interest from private banks and wealth managers. So in the medium term, we also have the option to explore expanding distribution into this retail segment. And finally, we are progressing the development of unlisted healthcare and life sciences fund. Our current focus is on securing a meaningful pipeline of healthcare and life science development opportunities, state of funds alongside our remaining interest in Camden Healthcare precinct, vested interest in this sector remains extremely high. Now moving to Slide 10 to briefly touch on the performance of each of our vehicles and starting with our HomeCo Daily Needs REIT. Since listing HDN just over 2 years ago, we have prudently scaled the model portfolio from $800 million of assets under management to almost $4.8 billion today. HDN owns a strategic real estate land bank with just 37% site coverage in Australia's best metropolitan locations. We're exposed to leading omnichannel retailers and its rent at the bottom of the landlord rental cost curves. HDN earlier this week delivered a strong first half financial year '23 results with 8% FFO growth on the prior corresponding period despite higher interest costs. HDN reported sector-leading operational metrics, including 99% occupancy in rental cash collection, 5.9% leasing -- positive re-leasing spread with incentives of only 5%. And resilient property valuations underpinned by growing income. The REIT upscaled its development pipeline to 600 million and flagged a significant step-up in annual CapEx from 80 million in financial year '23 to 120 million in financial year '24, all while maintaining its 7% ROI target. And finally, HDN's balance share is very well positioned with gearing at 31.5% and interest rate hedging at 7%, providing capacity to pursue accretive acquisitions, which are not included in the guidance outlook provided by HDM. Moving now to our Healthcare REIT on Slide 11. HCW also delivered a strong first half financial year result and upgraded its full year FFO per unit guidance by 4% to $0.071 per unit. The revised guidance for financial year '23 represents 15% growth versus financial year '22. Operational performance remained robust with 99% occupancy and 100% rent collection maintained. HCW has low gearing of 15% and over $200 million of liquidity to fund the REIT's committed development pipeline and acquisitions. HCW recently reached a major milestone with the George Private Hospital development, achieving tenant handover and finishing the development on time and on budget. The George represents the first stage of what will become a $500 million precinct in Australia's fastest-growing LTA. The new strategic partnerships HCW struck with Marta and [indiscernible] potential to create exciting growth pipeline for the REIT. HCW last week also announced the acquisition of a strategic life science assets at Macquarie Park, which is in line with the REIT's strategy to grow its exposure to this subsector. HCW's 500 million plus future development pipeline includes a Camden Precinct and our Ralph real assets. Importantly, the proposed establishment of a new unlisted fund will provide greater funding certainty to these major projects while allowing HCW to manage its closure these opportunities based on funding capacity and investment priorities in the future. Moving now to Slide 12, HMC Capital Partners. The establishment of HMC CP founded our funds management platform in private equity and unlisted funds. Once again, this product was developed in-house and reflects the significant investment in our funds management capability, a lot of thought went into the strategy and design of this product. HMC CP has flexible capital, which leverages our deal making smart and ability to generate outsized returns for investors for complex situation. HMC as the manager has the potential to capture significant performance based income, which aligns well with our high ROE strategy. We are now speaking to institutional investors to execute the strategy with larger companies and situations that will require more meaningful stakes to effect change. I am pleased to report that the fund recently reported a NAV of $1.074, which is tracking well above its performance fee threshold of 7% on an annualized basis. Importantly, the performance was achieved while maintaining a disciplined investment approach with the front holding over 50% weighting for cash. The fund now owns 19.1% of Sigma Healthcare. We are pleased with our strategic holdings and believe the company is well positioned for future growth. The fund is actively building a positioning of second investment, which is a significant real estate focused company, which is trading at a material discount with breakup valuation. Moving now to Slide 13 and an update on our last mile logistics REIT. We see this as another scalable strategy, which can be growing to a series of unlisted fund developments over the medium term. As I mentioned earlier, we see a sufficient pipeline and institutional investor appetite to complete an annual $1 billion series for this strategy. The strategy builds on our track record of successfully repositioned real estate through our leasing and development capability. In December 22, we announced the acquisition of Menai Marketplace as a seed asset for the first LML fund with initial funding support from HDN and Woolworths. I am pleased to report that we've already unlocked a $25 million value uplift since acquisition. Importantly, we believe the LML strategy to be complementary to our existing HDN strategy. The LML Fund will target transitioning retail assets with omnichannel and logistics potential, which are initially suited to HDN's mandate. The Woolworths equity commitment is a testament to the strong alignment between the LML strategy and Woolworths objective to maintain its market-leading omnichannel capability. We are well progressed to achieve our target fund size of $1 billion over the coming months. We have received indicative institutional investor commitments, which are now moving through due diligence and approvals. Moving to Slide 14, where we discuss our progress on sustainability. This slide highlights our HMC Group sustainability framework, which was designed around our objective to create healthy community. I am pleased to report on the following initiatives we delivered over the half that demonstrate the progress we are driving across the entire platform, the environment, our 2 REITs are both on track to achieve net 0 by 2028 with our road map detailed on Slide 15. We are making strong progress on solar PV rollout across the HDN and HCW portfolios. Social, our social impact strategy is supported by the establishment of the HMC Capital Foundation and through Community Co, which support the delivery of our social impact commitments, including our first brand in financial year '23. Governance, we always strive to implement the best practices in everything we do. Over the year, we have released our Modern Slavery policy for HDN, completed our first GRESB and assessment in HDN, achieved a 50% in gender diversity targets across the organization, as well as across our independent Board Director positions ahead of our financial year '25 target. We've implemented KPIs for all management team members across the Group, linked to ESG. We've become a signatory to PRI and the UN Global Compact, and we've commenced our reconciliation action plan, which we'll provide further details on in the coming months. I look forward to keeping you all updated with our ongoing progress. I'll now hand to William McMicking to discuss our financial year results.

Thanks, David. Turning now to Slide 17 with the earnings summary. Operating earnings for the first half was 25 million or $0.083 per share. If we exclude the property trading profits booked in FY '22 and look at the core segments of investment income and fund management, the Group recorded 32% earnings growth over the period. Investment income increased $4.9 million to $20.2 million. It was driven by the investment in the Capital Partners Fund. Funds Management revenue also recorded a $10 million increase to $28.4 million, with growth in recurring management and property management revenues offsetting a reduction in acquisition lease. An interim dividend of $0.06 per share has also been announced and will be 100% franked. Moving to the balance sheet on Slide 19. HMC Capital Partners Fund was consolidated during the period, which has impacted in comparison to June '22. We just focus on the underlying net tangible assets. This has remained relatively flat at $2.30 versus $2.31 June. Feed movements outside the capital partners fund related to HMC selling its interest in the now complete and on Stage 1 hospital development to healthco in December, and HMC continues to maintain an interest in Camden Stages 2 and 3 on the balance sheet. Turning to Slide 20, capital management. As at December, HMC had cash and undrawn debt of $200 million. Debt at December included $7.5 million drawn for the seeding of the LML Funds, which has since been repaid in February. I'll now hand it back to you, David.

Thanks, William. Now turning to the outlook for financial year '23. In financial year '22, HMC Capital delivered operating EPS of $0.31 per share pre-tax, which included $0.104 of transactional income and $0.095 of trading profits from the sale of investment properties. HMC Capital did not provide operating EPS guidance for financial with year '23, given the uncertain nature due to transactional income timing. However, we noted that the financial year '22 pre-tax operating EPS of $0.31 per share was repayable. This statement reflects HMC's track record of executing significant transaction volumes, including large-scale acquisitions with material transaction fees. While the volume of capital deployment activity across HMC's platform has slowed in the first half of financial year '23, we have used this period to focus on strengthening the balance sheet of our listed REITs, holding a high proportion of cash in HMC CP, and executing our first unlisted institutional fundraising for the LML strategy. As a result of the above proactive actions, the HFC Group will have close to $2 billion of dry powder post the LML raising to deploy into accretive investment opportunities. Importantly, we have remained disciplined in our investment approach over the last 12 months as we do not believe the transactional market has reflected the increase in cost of capital. However, we now believe the investment environment is becoming more conducive. HMC is well placed to take advantage of attractive opportunities which are emerging across its growing and more diversified platform. As I hope we've illustrated to you this morning, we remain excited and confident in the outlook for our business and achieving our $10 billion AUM target. Today, HMC reaffirms its financial year '23 DPS guidance of $0.12 per year per share, which is in line with our financial year '22 and supports HMC's high return on equity growth strategy. I'd like to thank everyone for joining the call this morning, and I'll now hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from James Druce from CLSA.

My first question, just around the LML fund. You mentioned the investor in DD here at the moment. Just wondering when that DD period will be up? And would you expect to hit your targets at the end of the first -- at close to June? Or is that more imminent?

Look, those things take time, but we would be expecting to achieve that raising target by at least at the latest 30 June this year.

Okay. That makes sense. And then you've obviously broadened out the sort of distribution for HMC Capital Partners 1. Can you talk to any sort of feel for a run rate of inflows now that you're going down the planning channel?

Well, that's a hard number to give you. But internally, we are sort of looking at once we get on that channel, that will be complementary to the wholesale raising that we've done previously, which will obviously open up. At the moment, we are sitting on over 50% of the funds, investable capital is sitting in cash. So what we do see is any correction will let down that we have in equities over the next few months, so we'll open up investment opportunities. So we'll deploy that cash and then we ramp up raising opportunities around that. But internally, we're budgeting from retail channels, from the retail PDS, somewhere in the order of $5 million to $10 million of inflows per month once we get a bit of a steam up on once we get a track record in that investment strategy. So you could expect -- and as you'll see, we've sort of articulated a bit of a view on that and a bit of a view of where our retail and our wholesale fundraising strategies can take that fund over the course of the next 12 months as we move towards that $10 billion target. So I think we're about to take [indiscernible], well, Slide 8 on the presentation, I think we've got some commentary there.

Okay. And one more, if I may. Can you just talk about the cash flow coming into the second half. The cash flow from operations is sort of $1.5 million for the first half, this is obviously the debut, but you guys got a lot of cash on balance sheet and you're always very active. So just curious to see how you're thinking about the second half cash flow?

Yes. So I mean, if you're asking about the cash flow rate, I mean, the big thing to call out there is about -- so there's about a $25 million gap. $20 million of that is coming through the investing cash flow, so that is dividends from the [indiscernible] capital markets fund. So I mean that's the gap as to deployment, I mean, just for noting that a lot of that cash sitting on the balance sheet EPRA finance fund.

Your next question comes from Sholto Maconochie from Jefferies.

Just one from the cash flow from proceed there. Was that $5.3 million NAV gain in the capital balance 1, was that a non-cash or cash? Those books?

Yes, that's right.

Okay. So that's probably some of the 2, the other $5 million difference, okay. And just on the consolidation of that, like it looks like your own 52%, who owns the other 48% of that fund?

[indiscernible].

Okay. And then just in that fund, I noticed you said you've got a conventional stake in obviously listed REIT, how much is the dollar value or percentage holding in that company, do you hold in that fund?

We can probably work out what we've got in Sigma, we've cut that out in the market. And I told you it's 19.1%. We're sort of guiding you to the fact that seeing about 50% cash, so you could probably back sell that.

I haven't done the calculus, I was going to do that after this call, but for you to state at hand.

You probably work it out, it's probably about 100 million deployed into that strategy at the moment, maybe a bit more.

Okay. Thanks David. And then just on the business going forward. You've obviously got a series of future institutional funds in the last mile logistics. Is that just going to be a club of people in each fund or one investor, how are those future funds work?

We are speaking to investors that are looking at writing pretty significant checks, Hedge fund or be formed around the club of investors. And what we were proposing there is that as we evolve the strategy, execute the strategy, realize the assets, we've got an embedded, obviously take out through HD and over years to come. But the investors that are in diligence now have appetite to continue to roll into other subsequent fundraising. So we think that this is an underappreciated asset class. It's a real opportunity to make outsized returns. And yes, the level of interest is growing around the strategy as we evolve and as we talk to more privates.

And then just on the -- I thought it was the change in wording, but last time was well just the main growth trajectory in growth from beyond 10 billion by '24. Now it's well wishing to grow AUM beyond 10 billion by '24. Is there anything to take a read into that? Or just a change in wording?

I think it's probably just a change in wording.

You are still on track on for that greater than 10 billion number like current to year '24, all right, that's everything from me.

Your next question comes from Stuart McLean from Macquarie.

First question just around funding, these new opportunities you've outlined in detail today with your current capital base. Just how should we expect the funding of co-investment stakes and kind of see stakes in these funds going forward? Is it about recycling out of what you have? Or could you genuinely deploy that $200 million of liquidity and you're happy where the balance sheet would take you do you deploy that $200 million? Can you just provide a bit of commentary around the HMC's funding? That would be great.

I think I understood the question, Stuart. So I hope just breaking up slightly. But I think what we've introduced today is the concept of a 20% ROE target. What we are flagging through that is -- but our real estate platform aligned through our 2 listed REITs that you can see pretty transparently our level of investment in both those REITs. And we are flagging today that we are looking to scale our strategy over time, but with an overarching sort of benchmark or hurdle of 20% ROE. So what that means is, we wouldn't be looking to put more capital into those strategies, but we would be looking to grow those, double those effectively in size and effectively, as a result, not have to increase our cost base in a meaningful way. And as a result, as you evolve and pick that through and model that out, what we're looking at is a very high ROE business on that investment. So that's really the strategy. That's the way to think about it. That's the way we're thinking about our growth and the evolution of the business moving forward.

Then to achieve that ROE of 20%. And just thinking about the growth of the other last mile logistics funds, healthcare funds, et cetera. I'm assuming that it requires capital recycling out of the investments that you've already made, given the comment the $200 million liquidity and you've outlined to build of extra fund opportunity?

So if you look at LML, HMC's balance sheet will not be going into that. Effectively, HDN has committed 50 million to that strategy. The co-investors or the other investors are really pleased with that alignment. And so as a result, HMC won't be putting capital into LML. But I think importantly, if you take a step back from it, what HMC did was, it provided in its balance sheet in order to create LML, it warehouse the costs, it warehouse the initial seed asset on its balance sheet and backstop the acquisition of that, but at the same time, hasn't had to provide ongoing capital into that investment strategy. So the ROE on that alone, for example, it's already sort of running above 20% because there's no equity involved in that investment strategy. What I'm saying is, if you think about and you model out HDN and Healthcare with the capital we've got in there, if we can take those strategies on a combined basis, we'll remain disciplined. We'll remain focused, we'll wait for market windows and opportunities where the cost of capital is right. If we take those 2 strategies alone to over $10 billion, you can then model out what that would look like in terms of fees and so forth. And it's not that far longer bridge or bow to potentially look to see the income that will come off that and the capital will start to traject -- move towards a 20% trajectory. Opportunistically, are we going to sit at those levels of shareholding long term? We probably would be a long-term 10% holder in both of the vehicles longer term, that doesn't necessarily mean selling down. That means just potentially not participating in capital raising and that sort of thing. But strategically, tactically, the way I look at it is if you've got $600 million, then we want to be generating and invested in those 2 strategies, we want to be generating more than $120 million of fees off the back of that. So that's how you get your ROE target. So we're pretty focused on how to get there. We know how to get there. So we're just going to wait for the right windows and time.

I appreciate it. And then second question, just around the performance fees that could come through from Capital Partners fund #1. Will these be accrued in second half '23, if they're to accrue? Or we only look to recognize them in the P&L once they become cash payable?

Look, I think there'll probably be some level of accrual in our results moving forward. But that will be a decision that we'll have to make at each reporting period based on the facts and circumstances at the moment. We're consolidating that fund. We're kind of happy to consolidate the fund at this point in time, because obviously, we like the underlying investments and we like the strategy and stay consolidation, we won't necessarily be just a bright line of 50%. So yes, we'll tactically look at that as we move forward.

And Stuart, one other thing that I'll add is, net performance fees beyond the 2 stabilization period cash paid annually to grow discussion on a positive way.

And just a final question for me, if I may. Just, David, just on your comments around the market become a bit more conducive. Can you just maybe describe what you're seeing in the last few months to make that statement, please?

So I've always used this pretty simple analogy. I always feel as though is the simplest way to describe this is, the listed market is always a forward-looking barometer of what interest rates are doing and what investor expectations are. The real asset market and the transactional market always look back. So what we've seen over the last 12 months and particularly sort of 2022 was there was a lot of static in the market and a lot of inertia in terms of transaction values. Everyone wanted last year's price, so to speak. What we've seen in recent months and what we've seen in some of the transactions that we've announced recently, so you can see through the seed assets we put into LML, the last acquisition that HDN made, the last acquisition that Healthcare made. We're looking at asset acquisitions now opportunistically and you've really got to pick the eyes out in the market. You got to be patient, you're going to be disciplined. But those LML seed assets, we're talking 8% ROI unlevered on those assets. It's pretty attractive that wouldn't have been available 12 months ago. But again, we're just being opportunistic and patient. The asset we picked up with lots of basically [indiscernible] was again very attractively priced. There's other things in our pipeline at the moment that are starting to free up, very attractive, high-quality opportunities, and they are starting to look more attractive in that they are sitting well above our cost of equity to the vehicle. So again, the opportunities are starting to open up the market is starting to become a little more confusing project, little more [indiscernible].

Your next question comes from Andy MacFarlane from Jarden.

Just a couple for me. I think at the last result, David, you talked about the credit pillar and being a bit of a crowded trade. Just interested in your color on what you've seen in the last 6 months and the thinking on that for --?

Can you repeat that? Andy? I didn't quite…

Yes, no worries. And just in terms of the credit pillar for your business. I think in the last call, you talked about it being a bit of a crowded trade. Just wondering what the color is or what you've seen over the last 6 months and sort of how you're thinking about that strategy going forward?

Yes. Look, we've been doing a lot of work on it. Clearly, what we see is capital and liquidity tightening up in the system over the last 12 months, it does appear to be an opportunity for us in that area. We are talking to a number of parties. But what we are not looking to do is get -- create something that's not scalable and something that we're not in control of as a manager. So we're not looking to create a narrow business, just trying to do commercial real estate loans. We're looking at something a little more scalable and a little more diversified in our approach. So we'll be patient there. We'll pick the right opportunity, and we'll look to deploy. But again, we're looking at a number of opportunities.

Clear. Just a second last one for me. Just you called out renewables as well for the HMC of tomorrow. Just wondering what your thinking is there?

So again, it's a space that if you look at even the listed market today, very difficult for investors to get exposures to. So again, if we can come up with the right opportunity, we see opportunity to potentially bring another listed vehicle back in the market over time and find other ways to provide investment opportunities for investors in that space. So again, it's just an opportunity that's opening up. The asset class is pretty hotly contested and the opportunities are hard to find at the right value. So what we think about in terms of these opportunities is if we can find the right platform and the right capabilities, then we'll obviously look to deploy capital. But again, it's just a game of being a bit patient and be very prudent with our capital and again marking everything against our 20% ROE hurdle.

Your next question comes from Richard Jones from JPMorgan.

David, just in terms of second half targets, are you saying you raised 500 million of equity for the LML fund and upscale HMC Capital Partners equity to 500 million. Are they kind of the hurdles that you're setting yourself?

If you have a look at -- are you looking at the waterfall chart on Slide 8?

Not specifically, but I'm just --

If you have look at the waterfall chart on Slide 8, you're broadly sort of on track there and what we're saying is -- we're sort of with the LML strategy, we're looking obviously a $500 million commitment given the gearing level there, given the fees that are calculated off GAAP, think about $1 billion there. But we're saying that we see enough appetite and enough pipeline there to be doing $1 billion series there every year. So that could be $1 billion this calendar year and again in the next calendar year. So that's sort of what we're saying here on Slide 8. And then with capital partners, yes, we are looking to expand the distribution capability of that to both the segments. And so we would expect a level of slow to start there. We're sort of internally thinking about 5 million to 10 million a month, whether that is this financial year or whether it's next financial year, we're still sitting on a fair bit of cash there. So we're in a hurry to do that. We've always going to get the prospectus finalized. That's probably at least another month away. And then we get out on the trail once we think the market environment is right and start pushing that out through some of the retail and financial planning networks.

Okay. And in terms of deployment, so you're saying you could deploy up to $1 billion in last mile in the second half. Is that the -- is that you are saying that obnoxious potential?

Yes.

Okay. So you're well advanced on opportunities then that would suggest?

Yes.

Okay. And then similarly with the capital partners, in terms of deployment, any kind of color on what you think the second half might look like?

Yes. So look, we have -- we like everyone, probably saw that the January equities rally was probably overcooked. We held off deploying our cash through December, January this year. We've sort of been quite prudent. That's why we're sitting on strong cash balances. We're quite enjoying the weakness in markets at the moment. So yes, we're going to be pretty opportunistic with that strategy. I think the reality is we've done a huge amount of work on a number of investment opportunities. We've been cautious in the deployment. We've been very disciplined where opportunities move outside our target, there we just don't deploy, we just sit on the cash. And so we remain prudent, but high conviction in our view around the strategy. So I think if we maintain the discipline, there will be a good new story to tell there in time to go.

Okay. One final question. Just in relation to the capital partners profit that you've booked through the P&L in the first half. Is that just marking to market the NAV move? Is that what you've done there?

Yes. I mean there's a bit of dividend income in there, but the majority is mark-to-market and in accordance with the accounting equities front. So what's booked for December is 3.5%, I touched on in the last report of Jan is double that.

Sorry, we're just cut out a little bit there. You said you booked 3.5% gain and there's been another 3.5% in Jan. Is that what you said?

Yes. Well, I think December, so obviously, we're reporting results today after 31 December. That was 3.5%. The last published NAV was as at January and that was 7.5% -- 7.4%. So what we're talking about is the December number.

[Operator Instructions] Your next question comes from Ben Brayshaw from Barrenjoey.

David, I just had a question on the profit that's been recognized from CP this period, sorry to harp on this. But can I just clarify, will the approach be going forward to take mark-to-market gains through the P&L or as that fund increases its cash distribution, do you then transition to more underlying cash earnings to support the profit recognition. Could you just clarify that, please?

Yes. So whilst the fund has been validated, which we envisage at least for the near term, it will be accounted for in line with double last day, which is -- that will be fair valued through the P&L.

And so if you fall below 50%, does the investment then become accounted for based on the distribution?

That's one of the considerations that as I said, at least for the near-term, it will be for that. The question is, it's not a bright line of 50. The way the audit works is, you need to obviously have a discussion with the auditors around governance arrangements, shareholding, control, you can see with our 2 REITs at '14 in '21, we certainly account those, we don't consolidate those. The auditors are comfortable that we've got independent governance arrangements there and so forth to not have to consolidate. So it will be a journey along the same line for capital cycles. So at some point, that will happen. But at the moment, it's consolidated.

And with the $50 million line provided to CP, what should we expect there in terms of capital release or repayment of that line going forward?

Yes. So that line is in capital partners, between capital partners and a third party. So it's not an intercompany. And yes, we've sort of touched on in the notes. It's obviously a non-recourse line back to HMC Capital. So it's basically by virtue of the fact that it's been consolidated, at the moment it's appearing on our balance sheet, but it's in HMC CP line.

Your next question is a follow-up question from James Druce from CLSA.

Sorry about the main issue of this question. What was the sort of FFO number for the first half '23, if you're just going back to the old way of reporting?

We're $25 million.

Yes.

As we've reported. [indiscernible] equally importantly, we're moving away from being a property company. We're now moving to a funds management company. We never want to focus on operating income moving forward. So it's important in the evolution of the business and the way we obviously presented our numbers. But there's not much difference between the 2 numbers.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.