HomeCo Daily Needs REIT (HDN) Earnings Call Transcript & Summary

Thank you, and welcome, everyone, to this morning's call. We would like to begin by acknowledging the traditional custodians of the land on which we meet today, the Gadigal and Bidjigal people at the Eora Nation, and pay our respects to their elders past, present and emerging. Turning now to our first half year financial '21 results presentation for the HomeCo Daily Needs REIT, which marks our inaugural results since listing on the ASX in November 2021. Joining me on the call today are Group COO, Sid Sharma; our Group CFO, William McMicking, and HomeCo Daily Needs REIT's Portfolio Manager, Paul Doherty, who joined us recently from the Woolworths Property team. Welcome, Paul.

Thanks, David.

Turning now to Page 2 of today's presentation. As a management team, we are extremely proud of today's results, which we believe set the foundation stones to deliver our investors consistent and growing distributions. We hope today to be able to provide a clearer picture around the building momentum in the business, which provides the platform for ongoing and sustainable FFO and distribution growth. Our operating highlights for the period are strong. High occupancy. We have 98.7% of our portfolio under lease or MoU. Our trading occupancy of 96.7%, pleasingly, has grown by over 3% since we issued our IPO PDS. Our supermarket portfolio experienced 22% MAT growth. Our foot traffic is up 19% on an annualized basis across our centers on a like-for-like period for the final quarter of the 2020 calendar year. While the essential services nature of our tenant mix ensured foot traffic remained resilient through COVID impact in 2020, we are very pleased with the continued growth we saw in the final quarter of 2020. Our financial highlights for the period. We achieved 99% cash rental collection since IPO with this trend continuing through January 21. We are today reaffirming our financial year '21 distribution guidance of $0.042 per unit. Importantly, we now expect this distribution to be fully covered by FFO for the period. Our NTA of $1.34 per unit has grown slightly in the short period since IPO, due primarily to the acquisition of the Bunnings at Seven Hills in Sydney. Our development and investment progress during the period since IPO was significant. 25,000 square meters of major developments are being delivered, Ellenbrook in Perth, Stage 1 opened in December 2020 ahead of schedule. Richlands in Brisbane is on track for opening in March this year. We completed $104 million of investments during the period, which will be immediately accretive to FFO. And today, we're also providing an update around 5 Brownfield development projects, which build on our strategy of unlocking our significant land bank. The projects represent $22 million of new investment and are expected to deliver attractive returns at 10% plus cash yield. As you can see, we have been very busy in the period since IPO and remain very excited around the outlook for our organization. I'll now turn to Sid Sharma, our Group COO.

Thank you, David, and good morning, everyone. Slide 4 outlines our model portfolio strategy, which we have previously articulated. HDN is a portfolio with geographic diversification in the best suburban metropolitan growth corridors, where people live, shop and increasingly now work. Population growth in our catchments is on average 3.7% being approximately 2% ahead of the Australian average. This portfolio also has subsector diversification to neighborhood, large format retail and health categories. We have constructed a portfolio that would stand the test of time through multiple cycles. Lastly, the portfolio is weighted to national tenants with the lowest average rents in the sector, providing a sustainable base to grow organically on. Moving on to Slide 6. This trading update demonstrates the performance of this portfolio and the construct of the model portfolio. It has led to 99% unadjusted rent collections since IPO, which we believe is sector leading. We have also provided some color around our 11 Woolworths and Coles supermarkets in the portfolio, which have comparable MAT growth of 22%, reflecting the young age of our portfolio and our exposure to the best growth corridors of Melbourne, Sydney, Brisbane and Perth. We often get asked about specialty MAT growth in this portfolio. We'd like to point out that only 3% of our tenants report sales and comparable specialty MAT growth is over 8%. LFR tenants generally do not report sales, which is why we provide color on the foot traffic growth, which is on track now to see HDN have over 30 million visitations in the next 12 months. Turning to Slide 7. In the 12 weeks since IPO, we've acquired 2 properties. Bunnings Seven Hills was acquired for $56 million. We subsequently renegotiated a new 10-year lease with Bunnings and an independent valuation now values the property at $60 million. We also acquired Marsden Park Shopping Center in Queensland. This is a neighborhood center, which we acquired for $48 million on a fully let cap rate of 6.75%. We see great upside in this asset, which has a new 15-year Coles lease to 2035 and infill listing opportunity, along with only 14% side coverage 30 kilometers south of Brisbane. I'll hand over to Paul to talk through the portfolio statistics.

Thanks, Sid. Our next slide provides a snapshot of what the portfolio looks like following the 2 acquisitions. The $104 million of acquisitions increased the portfolio to 19 properties with a total value of $978 million. Our weighted average cap rate has remained constant at around 5.9%. Total occupancy has increased to 98.7% and trading occupancy from 93.1% at IPO to 96.7% at the end of December. Pleasingly, income growth continues to be secured by 75% of the portfolio income being subject to contracted income growth. 62% of this is at fixed escalations with a weighted average rent review of 3.4%. Further income security is provided through the lease expiry profile with minimal lease expiries in the next few years. Turning now to Slide 9, I'd like to provide an update on our major developments. Ellenbrook is a supermarket anchor development located 30 kilometers north of the Perth CBD. Stage 1, which comprises a Spudshed and Spotlight opened early in December. The development currently has 91% precommitment and is forecast to deliver a 7% cash yield. Richlands located in the Southwest Brisbane growth corridor is a supermarket anchor development that also includes a Chemist Warehouse, Guardian Childcare center. The development is 94% pre-committed and will open in March this year. It is also forecast to deliver a 7% cash yield. I'll now pass you back to Sid to go through some of the brownfield development opportunities.

Thanks, Paul. As many of you know, the management team at HomeCo over the last 3 years has delivered in excess of 250,000 meters of GLA development focused on retail services and health. Slide 10 provides an update on HDN's 5 future brownfield developments and our continued focus to unlock our significant land bank in our growing catchments. As many of you know, we only develop property once planning approval is given, 50% of the income is pre-committed and we have a fixed price D&C contract. We are well on track to deploy $22 million of capital, generating over 10% cash returns in the short term as outlined on this slide. Moving to Slide 7. We're really proud of the results today and proud of what we call our model portfolio. This portfolio works and has been constructed to provide the best balance of defensive attributes and growth. It's a portfolio of assets with long WALE, in the best growth corridors of Sydney, Melbourne, Brisbane and Perth, underpinned by secure defensive, resilient cash flows from national tenants. This construct translates to road map for HDN, which we provided here on Slide 11. The organic rental growth across 75% of the income streams and continuing unlocking of the land bank provides this vehicle with sustainable organic growth opportunities. Notably, the cap rate of this portfolio is 5.9%. Excluding the Bunnings we have acquired, this portfolio has not been revalued since IPO. The RBA, however, in that period has cut the cash rate by a further 25 bps. And the demand for these assets in metropolitan corridors remains high. I'll now pass over to Will for the financial results.

Yes. Thanks, Sid. And I'll now turn to Slide 13 with the earnings summary. So with the listing on the 23rd of November, this was a short maiden reporting cycle for HDN. FFO for the period was $3.1 million, which is tracking $0.6 million ahead of the PDS budget. And this was primarily driven by the early settlement of the IPO properties and the Marsden Park and Seven Hills acquisitions. The net loss was a result of the IPO-related transaction costs that were expensed and property acquisition costs that were written off through the fair value. Moving now to the balance sheet on Slide 14. So as David said, NTA as at December was $1.34 per unit, which represents an increase versus the PDS of $1.33. As you can see from the chart that the movement in investment properties was primarily driven by the 2 new acquisitions and the development CapEx across Ellenbrook and Richlands. HDN also recorded a $6.7 million fair value gain before stamp duty on acquisitions, with the largest contribution coming from the Bunnings Seven Hills independent valuation. The balance of the portfolio was internally valued as at December, given the recent IPO valuations, and a greater number of independent valuations are due to be undertaken this June. Turning to Slide 15, capital management. Following the raising and acquisitions, gearing sits at 34.5%, which is in the middle of our target 30% to 40% range. Cash and undrawn debt was $154 million as at December, which includes the recent $100 million upsizing of the debt facility during syndication. The debt facility has a 3-year tenor, which expires in November 2023 and is well supported by a syndicate that includes 4 of the major Australian trading banks. Cost of drawn debt is currently 2.2% per annum or 2.6% including underdrawn line fees. I'll now hand back to you, David.

Thanks, Will. On Page 18, we'd like to provide an outlook statement. So for the financial year '21, the full year '21, our FFO guidance is $20.5 million which reflects a 9% upgrade to the PDS issue in November 2021 -- in November '20. Importantly, the PDS distribution per unit of $0.042 per share is reaffirmed. Post upgrade in FFO guidance, our financial year '21 distribution is now expected to be fully FFO covered. We'll now move to Page 19 of the presentation. And based on that upgraded distribution guidance, we provide today a bit of a road map to where we see our future FFO growth for the group. Our existing portfolio will continue to grow from that base FFO upgrade of $20.5 million through the completion of Richlands and Ellenbrook, and the continued lease-up of our operating centers. We also have embedded contractual rental escalations across 75% of our portfolio and a number of our supermarkets now moving into turnover rent. And finally, our significant land bank with $22 million of investment generating greater than 10% ungeared cash yield will deliver further growth. We are excited about the growth outlook and prospects for the organization, and we're very pleased to deliver today's results. Thank you. We'll now open up for questions.

[Operator Instructions] Your first question comes from Arie Dekker from Jarden.

Yes, thanks for a very clear presentation and congratulations on a solid maiden results. Just in terms of acquisitions, obviously, you made a couple out of IPO. Can you just talk to sort of what you're seeing in the transactions market? What the outlook we should expect sort of in calendar year '21 in terms of your intent in that space, and to the extent that is applicable in a sort of conditions that you sort of need to see change first before you sort of consider adding to the portfolio in any major way in terms of the acquisition activity?

So thanks for the question. The way we would -- I might get Sid to comment on the market environment and the outlook. But I think the key overriding consideration that we leave everyone with on that point is every time we consider an acquisition, the first thing we consider is will it create long-term shareholder value, so we will remain disciplined around acquisitions as we have demonstrated with the first 2 acquisitions we've made, both FFO accretive. So discipline around ensuring we don't dilute long-term shareholder value is important to us. The second thing is that we have previously flagged that there are opportunities within the HomeCo portfolio as well on the HomeCo balance sheet to acquire assets there or again bearing in mind that we will look to maintain the quality of the model portfolio that we've achieved. So again, we've got some embedded opportunities there within the group. In terms of the landscape, we're seeing a number of opportunities out there. We're very optimistic around the outlook to make accretive acquisitions. And we've got our tentacles into a lot of different places. We've demonstrated an ability to transact quickly. We've got a strong balance sheet. So we are being presented with a number of opportunities. I think we'll probably answer the next question. Is there any other questions, Arie?

No, no, no. It's great.

Your next question comes from Ian Randall from Goldman Sachs.

Congratulations on the results. Look -- just looking at the development slide on Slide 10, 1 project that's not mentioned is Glenmore Park and perhaps it's a bit more long-dated. But just wondering if it's possible to get a feel for potential timing and scope on that one. And I suppose more broadly, just how we should be thinking about annual developments being on a sustainable basis? I mean, you're talking about $22 million in the current round of projects. Around that number, sort of what we should be thinking about growth from a run rate perspective going forward?