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

Good morning, and thank you for joining us today and for your interest in the HDN result. I'm Paul Doherty, Portfolio Fund Manager for the HomeCo Daily Needs REIT. On the call with me today is our Group Chief Operating Officer, Sid Sharma; Group Chief Financial Officer, Will McMicking; and Group Head of Strategy and Investor Relations, Misha Mohl. In the spirit of reconciliation, I'd like to begin by acknowledging the traditional custodians of country throughout Australia and celebrate their diverse culture and their connection 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 peoples today. It's a pleasure to present such a strong set of numbers in our maiden full year results that exceeded our previous forecasts. Turning to Slide 3 of our presentation. Financial highlights for HDN are: FY '21 FFO of $21.4 million, an increase of 14% over the PDS. FFO per unit of $0.041, an increase of 5% over the PDS. 82% increase in portfolio value since IPO, with the portfolio now valued at $1.6 billion. We have maintained a strong and flexible balance sheet with 35% pro forma gearing, which is at the midpoint of our 30% to 40% target range. 99% unadjusted cash collection since our IPO, which clearly demonstrates the highly defensive and resilient nature of our portfolio. Slide 4 sets out how this strong set of results is built around our model portfolio strategy. Our assets are in growing markets with 88% of the portfolio located in metropolitan areas with exposure to above-average population growth. Population growth in the HDN portfolio is forecast at 1.8%, which is well above the national average of 1.3%. The portfolio is exposed to resilient subsectors with no exposure to department stores and discounters department stores and minimal exposure to discretionary retail and fashion. The portfolio consists of high-quality tenants, with the 3 largest tenants being Woolworths, Wesfarmers and Coles. 80% of gross income is from national retailers. Moving now to Slide 6, which sets out how the model portfolio has been able to deliver growing income streams, notwithstanding uncertain macro backdrop, with the highlights being 99% unadjusted rent collection in the month it is due for every month since IPO. We've also achieved 99% collections in July. Our portfolio has occupancy of 99.3%, an increase from 98.7% in December. And importantly, our trading occupancy has also improved over this period to 97.8%, up from 96.7% at December. This gap will [Technical Difficulty] the strength of our portfolio has resulted in [Technical Difficulty] and positive [Technical Difficulty] on renewals. We have also leased 29,800 square meters in our development across 46 leases. Supermarket sales continue to be strong with comparable MAT of 14%, even cycling against the panic buy of 2020, demonstrating the trend toward convenient local shopping. Comparable foot traffic grew by 15% as our assets benefited from post-COVID lockdown spending. Slide 7 demonstrates how the portfolio has also grown in size since IPO. We will discuss the acquisitions in more detail shortly. However, the portfolio has grown significantly since IPO, with the number of assets increasing from 19 to 28, the fair value increasing 82% to $1.6 billion, embedded rental growth with 81% of tenants subject to contracted annual rental growth. Development is also a key source of growth for HDN, and Slide 8 provides an update on our current developments. HDN's strategically located portfolio and low site coverage of 31.4% provides significant potential to unlock additional income and capital growth. The development pipeline has increased to over $130 million. We had 6 brownfield developments in progress. All 6 of these developments have approvals in place. And 5 of the 6 have commenced, with the remaining development anticipated to commence in September. They are 100% committed to the quality of retailers, are expected to open during FY '22 and forecast to deliver a blended 10% return on invested capital. We have included a few photos of our progress in Slide 9. Moving to Slide 10. We have maintained the portfolio as opportunities to deliver an ongoing development pipeline of at least $20 million per annum. This is demonstrated by the 7 opportunities set out in this slide for which we have commenced planning. These opportunities provide $100 million of potential investment that will deliver approximately 20,000 square meters of additional rentable area and provide an estimated blended return greater than 8%. Timing of these developments is dependent on several factors, including satisfactory planning approvals. We also see the ability to unlock further opportunities in our acquisitions. Turning to Slide 11, which sets out our ability to grow the portfolio by high-quality and accretive acquisitions that meet our model portfolio criteria. We have executed $586 million of acquisitions since IPO, which have substantially improved the scale and diversification of the portfolio. These acquisitions have not been passive, and we have added value in the following areas: the delivery of a tenancy remix at Marsden, Queensland. It has improved the tenant profile, reduced the number of small specialty tenants and, in turn, reducing vacancy. That has driven cap rate compression and the asset value increasing by 10%. This asset also has further development potential as highlighted in the prior slide. Bunnings Seven Hills where we completed a lease extension immediately upon acquisition, driving an increase in value of 7 [indiscernible]. Armstrong Creek, where we have increased occupancy from 82.1% to over 90%. We have strong interest in the remaining tenancies of this asset. We expect this to flow through to further valuation uplift. We recently acquired LFR Portfolio, which is providing development opportunities as well with the current pad site development to commence in Mackay and opportunities identified in South Morang, Upper Coomera, Toowoomba South and Marsden Park, New South Wales. Our most recent acquisition, Town Centre Victoria Point is an irreplaceable marking asset that represents the largest single landholding in the portfolio. We are already investigating opportunities to unlock value, and we'll report our progress in the future. Moving now to Slide 11. We believe the portfolio remains well positioned to deliver attractive total returns, underpinned by both income and capital growth. [Technical Difficulty] the high-quality convenience in LFR assets continues to intensify, which is driving down cap rates as investors seek out the high-quality secure and growing income streams. HDN's portfolio is well positioned with strategically located sites in areas of high population growth, has a long WALE of 7.6 years and is occupied by defensive national retailers, representing 80% of the gross income, delivering 99% cash collection, lower exposure to specialty and discretionary retail tenants. These attractive characteristics provide the base for income growth, driven by contracted annual rent escalations across 81% of the portfolio, a low site coverage of 31%, unlocking brownfield developments, delivering a blended 8% return on capital and a sustainable rental level of $325 per square meter, which is at the lower end of the retailer cost curve. This income growth combined with cap rate compression, driven by the critical retail infrastructure of the portfolio, represents its attractiveness to retailers to take advantage of the omnichannel fulfillment and intensified demand for quality neighbourhood and LFR assets. Will lead to valuation uplift and create headroom for accretive acquisitions. I'll now hand you over to Sid Sharma, who will take you through the next few slides.

Thanks, Paul, and good morning, everyone. Moving to Slide 13. We've often talked about HomeCo investing in megatrends and HDN [Technical Difficulty]. HDN owns a strategic network of last-mile infrastructure that benefits from a continued focus on omnichannel customer fulfillment. 86% of our tenants provide home delivery options. And 73% of tenants have the click-and-collect facility already. Several supermarkets are also trialing micro-fulfillment centers within their stores or underutilized car park infrastructure. Our locations are in high-growth areas, and we already have over 7 million Australians living within a 10-kilometer radius of a HDN asset. Slide 14 expands on this thematic. The retailers are leveraging their store networks increasingly as fulfillment centers to overcome cost side pressures of last-mile delivery challenges. We are a vast country and with a disaggregated population relative to the world. While consumer habits will evolve in line with global trends, the assets that are best positioned to move with the transition of those that have underutilized landholdings, are in easily accessible and convenient access roads and have rentals, which are at the lowest point of the cost curve. These are all characteristics that HDN has and can leverage. As many of you know that have been following the story from day 1, the portfolio has been carefully assembled, having regard to balancing defensive characteristics with embedded organic underlying growth. Just as the portfolio has been assembled carefully, we move to Slide 15, which highlights the carefully assembled team that has been put together to manage the HDN portfolio. We undertook an investor tour earlier this year, and many of our investors provided positive feedback on the depth and capability of the HDN team, capably led by Paul. Paul, as Fund Manager, brings over 20 years of REIT and retailer experience, having recently run capital transactions at Woolworths for over a decade. Abarna Maheswaran joins us in September as HDN Head of Finance. Abarna was most recently Financial Controller of the Global Student Education (sic) [ Global Student Accommodation ] group and before that was Financial Controller at SCA Property Group. Priya Kumar is Company Secretary of HDN and joined us from AMP Capital, where she was Senior Legal Counsel, and had previously held roles at M&G Investments, Allens, Baker & McKenzie and ASIC. We have an in-house asset management capability, led by Marie Nguyen, who has over 15 years experience in retail property. We have an in-house development and delivery category led by Andrew Boustred. This is the development team that has delivered in excess of 400,000 meters of leased space in the last 3 years. We have a dedicated leasing team, which has networks and relationships in all geographies within which we operate. Our internal team is also complemented by an external network of agents, which enhance our reach and pipeline of deals, whether they've been leasing or acquisitions. Our HomeCo corporate team, comprising Clare Chapman, Jourdon Whitfield-Horesh and Matia Jelinic, provides strategic and acquisition support to HDN. The results that Paul, Will and I present to you today is a reflection of the dedication, focus, experience and knowledge that our team has. I'll pass over to Will to run through the financial results.

Thanks, Sid. And I'll now turn to Slide 17 with the earnings summary. So with the ASX listing in late November, this was a shortened 7 months of trading for HDN in FY '21. FFO for the period was $21.4 million or $0.041 per unit. And importantly, FFO per unit was 5% ahead of the PDS forecast. And as we touched on earlier, 99% of rent was cash collected during FY '21, so there was no material impact from COVID-19 on FY '21 earnings. Moving now to the balance sheet on Slide 18. NTA as at June 21 was $1.36 per unit, and the pro forma NTA adjusted for the 7 HomeCo LFR properties, which settled on 1 July, and the Victoria Point acquisition was $1.35 per unit. The key movements since the PDS were 2 investment properties, which included 3 settled property acquisitions to June for $160 million, $50 million of development spend to June and the pro forma June '21 balance sheet reflects the settlement of the 7 LFR properties and the acquisition of Victoria Point. Investment properties pro forma June 21 balance also includes net valuation gains of approximately $64 million, with 25 of the 28 properties supported by independent valuations. It's also worth noting that the June balance reflects the impact of all post-IPO acquisition costs being written off over the period in accordance with our policy, which whilst coming at a cost to NTA, provides strong future income and capital growth for the group. If we take all post-IPO acquisitions up to Victoria Point, this equates to $38 million or $0.05 per unit. Turning to Slide 19, capital management. As flagged in the announcement of the Victoria Point acquisition, HDN was in the process of increasing its debt facilities, which at the time comprised a 3-year $500 million facility. HDN has now completed this process, upsizing to an $800 million facility, comprising of 5-year $550 million term facility and a 3-year $250 million revolver. Pro forma June '21 gearing post -- following the Victoria Point acquisition is 35%. And cash and undrawn debt will be approximately $253 million, providing HDN with a strong capital position. HDN also completed a 2-year interest rate swap post 30 June with approximately 50% of pro forma drawn debt now hedged. Following the hedge, the pro forma cost of drawn debt will be approximately 2.2% or 2.5% including undrawn line fees. I'll now move to Slide 21 with the guidance and outlook. Despite the current COVID-19 backdrop, HDN believes it is well positioned for FY '22 with a strong income profile and available growth levers across the group. These include organic growth by tenancy openings and pad developments, structured rent escalations and resilient tenants where we have a high proportion of national tenants and low SME exposure. HDN is, therefore, pleased to reaffirm FY '22 guidance of $0.083 per unit and provide FY '22 dividend guidance of $0.08 per unit. Our FY '22 guidance assumes that all developments in progress are completed in line with current expectations. Any potential COVID-related rent relief is limited to SME tenants only. And current COVID-19-related lockdowns and government-mandated restrictions do not escalate beyond the present circumstances. So that's the end of the formal presentation. I'll now hand back to the operator for Q&A.

[Operator Instructions] Our first question is from Sholto Maconochie of Jefferies.

Just on the guidance, it's the same as what you put out on your acquisition of Vic Point on the 5th of July, which probably as much COVID impacts in there. Just keen to understand what you've baked into guidance for COVID support and -- in that and what proportion of your tenancies by income qualify under the code of conduct in [indiscernible] Vic.

I'll take that. So currently, 7% of our tenants by income are closed and subject to the SME code of conduct. So we've factored in the present situation on COVID continuing, and we've made an allowance for the COVID impacts on that.

That's right. And what was the cash collection in July? July probably is pretty fine you bill a month? Or is it for July and August? What's the track in August?

July is 99% in the month that it was billed. August is trending -- August so far is trending the same way.

And August is same, okay. And then just on the balance sheet, 35% gearing, you've obviously some valuable come through in this half, the -- [indiscernible] CapEx. What are you thinking in terms of acquisitions? And it's getting quite competitive in this space, so how are you viewing acquisitions in the year because guidance doesn't assume that -- any acquisition.

It's always been a competitive landscape for quality neighborhood, as you know, Sholto. So we're always in touch with the market. We're seeing everything that's moving or not moving. We'll remain disciplined and just focused on the model portfolio and make sure the assets fit that brief. And we'll execute if we think the asset fits the portfolio and it enhances the mix and composition of the portfolio.

And then on the gearing, very focused on keeping that at the low end of the guidance. I mean I think the important thing now is with the expanded asset base, the balance sheet through the structured annual escalations and the returns that we're seeing on this annual target of $20 million in pads, we can basically hold gearing and continue to do that. So it just provides some really strong levers for the business to -- in addition to your structured income growth to have these organic pads. And I think what we showed today is a good pipeline to sort of see us hit those types of numbers into the future.

Yes. And then just on the like-for-like guide of 5%, is that -- what state is that obviously coming from increase in occupancy on the trading occupancy and the spreads? What sort of spreads are you factoring in this year on leasing?

We're -- sorry, Sholto...

I mean I can take that. So I mean -- so what the 5% is it's assets that we've owned for over 12 months within the group. So it excludes new acquisitions other than the [indiscernible] assets. You're right. Most of it's coming through the trading occupancy increase, but we think it's important to just highlight the genuine property growth that's coming in. In terms of spreads, like -- yes. I mean you'll see, I mean, the renewals is pretty low in the near term. So -- I mean we're not -- there's nothing material coming through in rent reversions. But I mean that's probably more a function of the fact that in the near term, you've got very low renewals, which obviously...

What do you think bumped the weighted average again, your fixed bumps on average, what's the total all-in sort of -- well, 3.3%, yes, okay, 3.3% across -- okay.

Your next question comes from Stuart McLean of Macquarie.

My first question is just on the future development pipeline of $100 million. You have to maybe talk through the 2 main ones on that Slide 10 of Vincentia and Marsden maybe where DAs are a little bit more on timing of those, which one goes first when you expect the stabilization to occur and put some detail behind those 2, please?

Yes, Stuart. We've done a lot of work with Vincentia. We're looking to larger DA there in the very short term and work with the local community in getting those approvals. So that one should be coming through potentially around FY '23 is what we'd like to see that one start to come through. Marsden, probably a little bit earlier phase at this point in time. We've got a few concept plans. We're getting some good interest from some potential operators in the space as well and probably just need to advance that one a little bit more. So it might be more of an FY '24 type opportunity there.

The thing with Marsden, Stuart, is it already has an existing DA in place. which the previous owner of the property, QSA, had obtained. That DA is a larger concept than what we are willing to develop on. So it will require amendment, but it's much [indiscernible] on the land. So we're pretty confident that's how we'll come through.

Great. And then maybe just following up on Vincentia then. What's being done to derisk the 6,500 square meters of GLA. And just in terms of those time frames, FY '23, is that income producing in FY '23 or kicking off the project in FY '23?