Home Consortium Developments Limited (HMC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining the call this morning as we present the maiden set of results for Home Consortium as an ASX-listed company. The message I hope that everyone takes away from the results today is that HomeCo is delivering on its prospectus forecasts and investing to establish a base for sustainable long-term growth. Joining me in the room today and available for questions at the end of the presentation will be Chris Saxon, our Deputy Chairman and Lead Independent Director; Sid Sharma, our COO; and Will McMicking, our Finance Director. Now moving to today's presentation. I will start with the key highlights on Page 2. This company has delivered a lot in 120 days since we IPO-ed, and we've endeavored to capture some of that achievement on the first page of the presentation. We've opened 26,000 square meters of gross leasable area since between the IPO date and at the end of the financial year or the calendar year, 31 December. 12,000 square meters of new leases have been written, either through an MoU or a new lease. We've moved our occupancy to 97% across the operating sites. Our foot traffic is traveling very, very well for the final quarter of the year, the calendar year, we were up 21%. For the month of December, we had 2 million visits through HomeCo sites. We expect that trajectory to keep moving as we move the trading occupancy up towards 97% as it's currently contracted. Net tenant mix, very pleasing result there, 40% of all the new leases were written, all the leases that we've written since IPO are the services tenants, 31% to daily needs tenants. Importantly, we're moving that services mix up to 21% of the total portfolio. And we've got some very pleasing exposure now starting to build within the portfolio across the health and wellness space. From a financial point of view, the highlights are also strong and the achievements are strong. For the month of December, we achieved annualized freehold FFO of $22 million. We're on a path to achieve our prospectus forecast on that front. Capital management, what we believe is we're tracking at 33.9% -- with 33.9% gearing and we're working within the target gearing range of 30% to 40%. Net leasehold liability. You'll recall, through the prospectus in the IPO process, that we talked a lot about the leasehold liability. We've had a major achievement there and we've reduced our exposure there by 40%, and we've taken the leasehold liability across the book from $95 million down to $55 million. In terms of the distribution. As at the closing price last night, HomeCo was trading at a 5.4% fully franked annualized dividend, and we will pay a $0.045 fully franked dividend for the interim period. Development and growth. We've talked a lot about this in our prospectus and during the IPO road show. We're delivering on that growth. We've basically completed the acquisition of 3 leasehold sites that we talked about in the prospectus: Hawthorn East, Upper Coomera and Coffs Harbour. We opened 2 daily needs centers in the month of December at Hawthorne East and Keysborough. Construction. We completed investment committee approval in the period to December and have now commenced construction at 3 of our development sites at Richlands in Queensland, Cairns in Queensland and Coffs Harbour in New South Wales, representing 34,000 meters of additional GLA that is now in construction. And importantly, we talked a lot about the land bank, the fact that we had 1.1 million square meters of land and 32% site coverage. Importantly, today, what we can update the market around is that we have 10 of those -- 10 development sites now in development and looking to bring those on and open those through the course of the 2021 year. Moving to Page 3 of the presentation now on Slide 3. What I'd like to do is give you our financial performance in more detail, but also provide some updates and color around the outlook for the business, which is very, very strong. Now financial performance. Our pro forma freehold FFO in the prospectus was $15.175 million that we anticipated for the full year. We are tracking well against that and actually ahead of it. And as a result, today, we're upgrading our guidance for the full year by 10%. The reason we've been able to achieve that is management have worked really hard in the period to December. And we've been able to accelerate the opening of a number of our tenancies across the portfolio and, therefore, brought revenue forward. So very, very pleasing result there. Occupancy. At IPO, we had on our trading sites occupancy of 93.5%. We had trading occupancy of 81.3% in terms of tenants that were open. As at today, we now have achieved occupancy being leases and MoUs in place of 97% across the trading portfolio. We've got trading occupancy, being stores that are open and trading as at 31 December, of 84.4%. That represented 26,000 square meters of new GLA opened in the period from IPO until year-end. Importantly, today, we're going to set out ourselves an internal target of trying to achieve 99% occupancy by the end of this calendar year across the trading portfolio. We're confident in our business, we're confident in our strategy, and we believe that that's the best way to demonstrate that confidence to the market and to ourselves as a management team to try and deliver against that target by year-end. The developments. We talked a lot about the 9 development sites in the portfolio and growing our GLA as a proportion of -- gross lettable area as a proportion of our land bank. Importantly today, as we've talked about, as I mentioned earlier, Cairns, Richland and Coffs Harbour are now in construction. We have 10 development sites underway or 10 pad sites in development. We are targeting as part of our guidance and our outlook looking forward that the 3 development sites in construction at Cairns, Richlands and Coffs Harbour will be open in the financial year '21. We're targeting commencement of 3 other development sites through investment committee. We'd like to have investment committee approval by the end of this year on a further 3. And we'd like to basically aim to achieve opening of the 10 development sites or the 10 pad sites in development in calendar year '21. Importantly, we're delivering on the growth that we talked about in our prospectus and we're achieving against our objectives. Finally, we talked a lot about value-add accretive acquisition opportunities and investment opportunities across this portfolio. Today, we're announcing 3 initiatives in that area, which go to the proposition around investing today to sustainable long-term growth in this organization. We're proposing a childcare investment in a operating business, that will result in accelerating our childcare exposure and our pipeline. Under that initiative, we will roll out a further 6 childcare centers, taking our total exposure to 12. We've made an -- and we've also made an investment in an operating childcare business through a convertible note, which protects our downside but gives us potential upside exposure. As a result of the fact that we've built a very substantial exposure to the health and wellness space, and we'll talk further about that in the presentation, we'll also announce that we're commencing the work to establish a health and wellness REIT. And finally, we talked about our leasehold book, creating an opportunity from the leasehold book. We've now entered into a binding MoU to acquire the Ballarat leasehold site and have some very pleasing developments in regard to leasing there. So we're very pleased to have been able to tick that box as well through the period. So as you can see, it's been a very busy 120 days. We've achieved a lot and -- but hopefully, we're establishing credibility as a public company that does what it says. On Page 4, I won't go and spend too much time on this whole -- I'll let Sid Sharma, our COO, talk further around this. But the pleasing point that we bring out here is -- and one of the key factors that HomeCo talked about during its IPO is our rents are competitive. The cost of doing business for our tenants at our HomeCo sites is competitive. And as a result of that, we've been able to basically put 12,000 square meters of new leases in place and MOUs across the freehold portfolio. Importantly, that's taken -- that proportion of tenants is basically 40% of those tenants are in services space and 31% in the daily need space. We've held our rent levels. We've maintained our WALE. And the proportion of lease -- fixed lease escalations in those new leases, in that new space, were basically contracted through a lease or an MoU. We've maintained the escalations. Importantly, we're setting ourselves a target of 99% occupancy across the trading sites at the end of this year. Finally, just in terms of our introduction, we'd like to go to Page 5. We remind ourselves that this page, quite often, this is the first page of our prospectus. And we remind ourselves and ask ourselves, are we tracking the strategy and are we executing what we said we were going to do? Importantly, the management team remains focused on executing our strategy to be an owner, developer and manager of real estate assets. So we're generating above-average risk-adjusted returns and we're identifying opportunities to do that across the portfolio. We're working really hard to basically deliver an innovative retail and services property strategy across our assets. We're identifying value-accretive opportunities across our brownfield and greenfield sites. And importantly, we're looking to basically today establish a path for partnering and bringing additional capital into the business across the portfolio. I'll now hand it over to Sid Sharma. Thank you.

Thank you, David, and good morning, everyone. Turning to Page 9. As David has already mentioned, the portfolio enjoyed a 21% comparable foot traffic increase in the quarter ending December. We've invested a lot in ensuring that we are in touch with how foot traffic generation at our sites is tracking and we track it every day, as most of you that we met during the IPO know. This graph illustrates the trajectory of the portfolio as we've opened tenancies. But again, the most pleasing part of the result was the comparable increase in the quarter ending December of 21%. That trend has continued in January, which, again, shows the strength of this portfolio development. This increased foot traffic has supported the continued lease momentum we refer to on Page 8. Portfolio occupancy is at 97% across 21 sites, which is an improvement on the 93.5% at the time of the IPO. And again, to reiterate, we're targeting 99%. 71% of the 12,000 meters we've leased since IPO is in the daily needs and services category. The leasing team remains steadfast in its focus to strengthen the defensive, resilient, reliable qualities of our income streams through our underlying assets. Page 9 goes into some details on that. What that's meant is that the WALE has improved and 72% of the portfolio, as outlined on Page 10, has fixed escalations of 3.14% as a weighted average. Lastly, on Page 11, we talk through the development pipeline. We opened HomeCo Keysborough and HomeCo Hawthorn East Stage 1, both on the 27th of November 2019. Both centers are now fully committed. And over the next few months, the final specialty tenants are expected to open for trade. Importantly, since IPO, we've approved and commenced development at Cairns, Richlands and Coffs. These are all expected to open by the end of the calendar year. In addition to this activity, we've identified 10 pad sites that are now in various stages of development, 5 of these now have MoUs in place and all of the forecast returns are in line with what we've suggested in the IPO as in over 12%. I'll hand over to Will for the financial section.

Thanks, Sid. And I'll now turn to Slide 13 with the earnings summary. I'll start by saying that earnings for the 6-month period to December 2019 were influenced by a number of positive key events being the HomeCo ASX listing in October, the refinance of our existing debt facilities at IPO, the acquisition of 3 leasehold properties, 2 new center openings, and the establishment of a $60 million lease mitigation account to fund the ongoing cost of leasehold volume, which is why on this slide, we'll focus on the freehold properties only. As all these activities occurred in the December 2019 quarter, our reported freehold FFO of $0.3 million for the 6-month period doesn't give a true reflection of run rate freehold FFO into the month of December. So what we've done is provide a breakdown of freehold FFO by month. And as you will see in the top chart, freehold FFO has increased to $1.8 million in December 2019 or $22 million on an annualized basis. The key drivers of the increased FFO were a material decline in interest expense post-refinance through a reduction in our gearing and a lower cost of debt and the 2 new center openings being Hawthorn East and Keysborough. On the second chart at the bottom of Page 13, we've also provided a breakdown a freehold FFO in December across the operating and development centers. What we wanted to highlight here is that HomeCo isn't capitalizing operating expenses on the 9 development centers. So if you back these out along with the existing property revenue, which is approximately net $3 million per annum, the 21 operating centers were tracking around $25 million in annualized FFO in December 2019. So when we combine this adjustment with the expected earnings contribution from the remaining vacancies at the 21 operating centers and the opening of the 3 new development centers announced today, we estimate that FFO will cover at least 90% of the FY '20 annualized dividend. So moving now to Slide 14, which details our consolidated balance sheet. Adjusted NTA, which adjusts for leasehold properties and intangibles, is $3.14 per security, which is the same adjusted NTA amount that was outlined in the October 2019 prospectus. Freehold investment properties have increased to $964 million. And if we compare this to prospectus balance, there are 2 key movements. The first is an internal balance sheet transfer of $12 million from assets held for sale. This translates to a sale of excess land at Roxburgh Park, which will no longer be proceeding. And the second key movement is development CapEx of $29 million, of which the majority related to Hawthorn East and Keysborough. And this has been added to investment properties at cost, which is why we are seeing adjusted NTA per security flat between prospectus and December 2019. Regarding the leasehold properties, we've seen some positive development here with the reduction in the net lease liability to $65 million, and we'll cover this in a bit more detail on a subsequent slide. So turning to Slide 15, capital management. As mentioned earlier, HomeCo undertook a refinance of its debt facilities at IPO with a new 3-year $500 million facility entered into. As a result, we're currently benefiting from a very low cost of debt of 2.6% at December, of which 52% is hedged. So at December, we had $165 million of available debt facilities which, combined with cash, gives us a strong $170 million of liquidity to support the continued rollout of our development program. Gearing was 33.9%, which is within our 30% to 40% target band. So moving now to Slide 16, leasehold mitigation. With the $60 million LMA established in IPO, HomeCo has been very active in the 3-month period to December and has successfully negotiated with landlords the surrender and termination of 2 leasehold properties and all of the 4 Bunnings top-up properties. As a result, and as mentioned earlier, the leasehold liability has reduced to $65 million at December, with an LMA cash balance of $37 million. Subsequent to December, the foundation security holders have also entered into a heads of agreement with the landlord of Ballarat to acquire this site on a 3-year deferred settlement basis. As background, Ballarat is a leasehold property in development, which has agreed terms with the major federal government department to anchor this site. What is also proposed with this transaction is that HomeCo will have an option to be nominated as the acquirer of the site, and the terms of any acquisition will set the purchase price at a 7.5% discount to an independent valuation, which will be overseen by the HomeCo independent directors. And prior to any acquisition, the LMA will fund the repurposing and lease payments of this center. So after adjusting for the Ballarat transaction, the pro forma lease liability is estimated to reduce to $54 million with 8 leasehold properties remaining. I'll now hand back to David.

Thanks, Will. Well, as you can see, it's been a very busy 120 days since we listed. I'll just recap some of the growth initiatives that we're looking to unlock across this 1.1 million square meter land bank. There's 10 development sites that we're basically looking to put pads in place of. Across the portfolio, there is demand for each of those sites and there's demand for significantly more sites. The 10 that are currently in place are really tenant-driven that are looking to commence trading at those particular locations, and they have all been inbound inquiries at this point in time. So again, it demonstrates the attractiveness of the locations and the high-level demand for those pad developments. In terms of the leasehold acquisition, Will has taken us through the Ballarat opportunity. We talked a lot about that in prospectus and we talked about the fact that, that could unlock future value opportunities for the company. Importantly, we're doing that and we're working hard against that objective. The childcare investment is really an example of the development capabilities in this organization that we've announced today. The childcare investment is a major initiative for us in terms of increasing our exposure to health and wellness services. Importantly, we have the opportunity basically to make a $5 million investment through a convertible note into an operating business that we've entered into with Aurrum Childcare. What that opportunity means for HomeCo is that HomeCo will be able to generate through its convertible note a fixed coupon of BBSW plus 7%, which will cap our downside but also give HomeCo the exposure or the opportunity that if it converts that convertible note in the future to enjoy some of the benefits of the operating business. Importantly, what does all that mean in terms of returns, in terms of the 6 childcare sites that we're looking to roll out under the initiative? HomeCo will generate as a landlord 7% return of cash yield, where we repurpose the site within an existing Masters box, where we develop a site as a pad, we'll generate a 10% cash yield and gear where the convertible note is converted, and we enjoy the benefit based on the current forecast and the projections for the operating business. That return on an ungeared cash yield basis will go to 13%. So as you can see, we're generating, as we've said, value-accretive opportunities across the portfolio and unlocking the land bank. Finally, the health and wellness REIT. There's been a lot of commentary and a lot of talk around property companies and REITs wanting to get exposure to this space. We set a strategy in place 2 years ago around a pyramid. We said we wanted to gain traction in this space, and we've done it. Today, 21% of our tenant pool is basically across categories comprising childcare and early learning, government services, gyms, medical centers and other allied health services. As we've built that exposure, we believe that we've built something of scale and quality in terms of the quality of the underlying tenant book. And as a result, what we're looking to do is commence the planning to explore the opportunity to bring external capital into that business, whether it be listed or unlisted capital in the future. Importantly, any capital that we release from creating that REIT will be recycled back into value-accretive growth opportunities that we see across the portfolio. So as you can see, plenty of growth as we talked about in unlocking this land bank that we've assembled. On Page 19, we've got more details around the childcare investment. Importantly, it's on strategy would have been -- obviously able to accelerate this opportunity through a partnership with Aurrum Group. As a number of you would appreciate, a number of the shareholders -- 30% of the shareholding in HomeCo is held by Aurrum shareholders. This process and this investment has gone through an exhaustive and comprehensive-related party process, which -- and if there are any questions, Chris Saxon, our leading independent director, is here to answer. But importantly, what this has done is it's really unlocked some very attractive growth opportunities for the organization and opened up a whole lot of future optionality for us. On Page 20, the health and wellness REIT has a working name of HealthCo. As you can see, what we have established over the last 2 years is some very strong partnerships in the pharmacy space with Chemist Warehouse. In the government services space, we've got some strong partnerships there. In the gym and wellness space, we've got a number of gyms across the portfolio and a number of leading brands. In the childcare space, we've basically got 6 existing leases in place with third-party providers and then obviously 6 through the investment vehicle that we've announced today, taking us to 12. Other areas that we could see this entity investing into the future is aged care, NDIS and the hospital sector. We've commenced the planning to introduce capital into this vehicle and structuring work. Importantly, HomeCo will manage the vehicle, and this will become the first step that we take in becoming a manager of external capital. Why do we like this space? The tenant cash flows are of a high-quality, generally backed by underlying government funding. They're defensive and high quality in terms of the underlying credit covenant of the tenants' growth. These sectors are growing. Importantly, the lease terms that we're generally able to achieve in this sector are attractive, generally long WALEs, fixed escalation and generally triple-net leases. Importantly, there is a strong [ demand ] and investors wanting to gain exposure in this space. And therefore, that's why we've commenced the planning process to try to create a stand-alone vehicle or a REIT that basically couples this exposure and with what we believe that the growth opportunities for this entity are exciting. Final page that I'd just like to conclude with. You recall that I started the presentation -- the beginning of the presentation around reminding ourselves regularly around what we said we were going to do in the prospectus. Importantly, today, we are executing on our own developed and managed strategy. Own. We own 33 hold centers, 100% owned by the organization with over $1 billion of assets under management. Develop. We've unlocked the 1.1 million square meter land bank. We're looking to basically increase our site coverage. This organization has actually been able to develop 26 centers across the leasehold and freehold portfolio, representing over 300,000 square meters of GLA. It's been a big undertaking in 2 years, and it demonstrates that we have got genuine development capability in this organization and its value-accretive development. The childcare initiative that we've announced today is another great example of our ability to develop assets and unlock our land bank. And finally, we're commencing the work to position ourselves to become a manager of money as well. Importantly, if we can continue to generate value accretive opportunities, managing money and recycling capital back into value-accretive opportunities make sense. Thank you for your time today and thank you for listening, and now I'll move to the final slide, being our outlook. Page 23. In our prospectus, we talked about $15.175 million of pro forma freehold FFO. We've upgraded our guidance for the year-end by 10%. Occupancy. We had occupancy at IPO under lease, an MoU of 93.5%. We're increasing our -- we're updating the market today and providing a guidance outlook to set a target for ourselves of 99% occupancy across the trading sites by calendar year-end 2020. And developments, the 9 development sites. We've commenced work on construction of 3 of the development sites and we'd like to commence or would like to try and achieve investment committee approval during the course of this year in a further 3 development sites, taking it to 6. So again, importantly, we're unlocking the land bank. And finally, tenant-driven demand has resulted in 10 of the pad sites being in development and we're looking to open those in calendar year 2021. Finally, we said we were going to target value-accretive growth opportunities. The 6 childcare centers that we're looking to develop across the portfolio are a demonstration of that. And the establishment of the REIT is a further opportunity to release capital and reinvest money back into value-accretive opportunities that we see across the portfolio. Thank you for your time. Thank you for listening. And now, we'll throw the lines open for questions.

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

I've got a few questions, if I may. Just in relation to the health care and wellness REIT, are you able to just clarify, all your assets at the moment sit on one title. So I assume that is the case. Are you intending what just to carve out leases out of existing assets into a new entity? Can you kind of work through how that would play out?

So it's a great question, Richard. Thanks for the question. What we're proposing there, and that's the structuring and planning that we're working through. A number of the assets, for example, the childcare centers, the gyms, sit on the ends of the center. So we definitely think we can look to start at those assets. A number of the other properties within the portfolio, the vast majority of the income or the majority of the income comes from health and wellness and the services categories that we've talked about. So we would see those assets potentially going into the health and wellness REIT as a whole. And where we can naturally start at the asset, we will look to start it and basically put it into the vehicle. Where it can't be naturally started, like, for example, the pharmacies where, for example, they trade inside the center, we won't look to do that. But that will be something for the future as part of the rollout of this vehicle. So yes, it is an important consideration and a key factor that we'll look to work through over the coming months.

And then just as a follow-on, I guess, the impact to the tenant mix, I guess, you're kind of highlighting the high exposure to services-based tenants. And this would then significantly dilute that exposure?

What we believe is we will -- we're in a bit of a sweet spot, to be honest with you, Richard. We talked about that pyramid during the IPO, and that was a clear strategy that we adopted. The strategy is working. So importantly, as you look at our mix of tenants, we've got, obviously, daily needs becoming an increasing part of the portfolio. It's a growing category that we really like. Leisure and lifestyle categories, again, a really strong category that's holding up well. Homewares and electrical. It feels like we've bottomed out in terms of the residential market, and we're starting to see some positive signs there across the portfolio. And then services were another area that we look to really focus on to increase foot traffic across the centers. So importantly, we would do this and we'd bring external capital in, but we would only do that on the basis that we've got value-accretive reinvestment opportunities across the portfolio, and we've identified those opportunities. So whilst in the short term we would potentially dilute some of that exposure, HomeCo would look to maintain a very meaningful shareholding in this entity and continue to have the benefit of that shareholding moving forward.

Okay. And then just on the 6 childcare centers that you're targeting. Are they reflected in the occupancy numbers?

One of them is. The other 5 are not. The one that is reflected is Mornington. That's an existing operating site. The other 5 are in sites that -- or sites that are either not developed or they're development sites or alternatively they're development on a pad. So one, occupancy is reflected in the numbers -- in the occupancy numbers we talked about today.

But none in the signed leases or MoUs either?

No. Just one.

Okay. And then do you have a rough number of what that would...

All of the other ones -- invested in one. That one at Mornington in the 21 operating sites that we talked about in the presentation.

Okay. Just a broader question, if I may, David. Just interested, obviously, given your experience, just your thoughts on the [ call coincides? ] And is that something that you guys have looked at?

We won't be looking at that portfolio. We -- what we'd say to you is that they were sites that were assembled for a particular need and use. I don't believe that they would fit our strategy at this point in time.

[Operator Instructions]

All right. I think there's lot going on in the market today. So just one more question or 2 more questions.