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

Good morning, ladies and gentlemen. My name is Simon Shakesheff, and I am the Chair of the Board of HMC Funds Management Limited, the responsible entity of HomeCo Daily Needs REIT. I will chair today's general meeting of the unitholders of HomeCo Daily Needs REIT. In the spirit of reconciliation, I would like to begin by acknowledging the traditional custodians of country throughout Australia, and we celebrate their diverse culture and their connections to land, sea and community. We pay our respects to their elders past, present and emerging and extend that respect to all aboriginal and Torres Strait Islander peoples today. I would also like to introduce my fellow directors: Stephanie Lai, who is also Chair of the Audit and Risk Committee; Simon Tuxen; Greg Hayes, who is also a director of Home Consortium; and David Di Pilla, who is also the Managing Director and Chief Executive Officer of Home Consortium. On behalf of the Board of Directors, it is my pleasure to welcome you to this meeting. A significant purpose of the meeting is for HDN unitholders to consider and vote on a resolution relating to the proposed merger of HDN with Aventus Retail Property Fund as part of a merger with Aventus Group. I will shortly outline more detail on that transaction in this address. In addition, HDN unitholders will be asked to vote on other resolutions unrelated to approval of the merger. They relate to amending the investment management agreement, ratifying the institutional placements undertaken in July 2021 and September 2021 and approving the issue of HDN units to Home Consortium as the underwriter of the HDN distribution reinvestment plan. I will outline more detail on those resolutions during the formal business of the meeting following this address. I confirm that this meeting has been convened in accordance with the Corporations Act. And as a quorum of unitholders is present, I now declare the meeting open. With COVID-19 still being an ongoing health concern, this meeting is being held in virtual format only. Unitholders can be present virtually via this live webcast, and you will be able to vote electronically through the online platform provided by our share registry, Link Market Services. To log in, you will need your holder identifier and postcode. The online platform provides an opportunity to all the unitholders to participate in the meeting. Voting on all resolutions will be by way of poll. Unitholders attending the meeting online are able to cast their vote using the electronic voting card received with your online registration. For assistance, please refer to the virtual meeting online guide available in the Investor Centre on our website. Unitholders' questions through the online platform are welcome at the meeting. As set out in the Notice of Meeting, questions were invited to be submitted by 5:00 p.m. Sydney time on 20th of January 2022. I confirm that no questions were received by that time, but you are still able to ask questions at any time during the meeting via the online platform or via the audio line. Order of business. As the formal business of this morning's meeting, unitholders will be asked to vote on the following 5 resolutions: One, to approve the issue of the trust scheme consideration in relation to the HDN-Aventus merger; two, to approve amendments to the investment management agreement to allow for the issue of HDN units to Home Consortium in lieu of cash as payment for fees; three, to ratify the institutional placement of HDN units announced on -- to the ASX on 5th of July 2021, which raised approximately AUD 70 million; four, to ratify the institutional placement of HDN units announced on the ASX on the 13th September 2021, which raised approximately AUD 88.3 million; and fifthly, to approve the issue of HDN units to Home Consortium as a related party underwriter in connection with the distribution reinvestment plan. For each resolution, I will provide the relevant background, put the resolution to the meeting and then invite questions. The vote by poll will then be formally conducted. Once the final votes are cast -- are counted following closure of the meeting, the results will be released to the ASX. The resolutions are independent of one another, meaning the HDN-Aventus merger may be implemented even if the resolutions pertaining to other matters are not approved. The HDN independent directors unanimously recommend that you vote in favor of the resolution to approve the issue of trust scheme consideration in connection with the merger. As HomeCo is a party to the merger, the HDN directors who are also directors of HomeCo have abstained from making a recommendation. Further, the HDN independent directors unanimously recommend that you vote in favor of all the other resolutions. As HomeCo has an interest in the resolutions to approve the amendments to the investment management agreement and the underwriting of the DRP, the HDN directors who are also directors of HomeCo have abstained from making a recommendation in relation to those resolutions. That said, I note that common HDN/HMC directors have joined with the independent directors in making a recommendation in relation to ratification of the placements. Where a proxy vote has been directed to me as Chair of the meeting, I intend to vote in favor of the relevant resolution. Before proceeding to the formal business on each of the resolutions and given the merger is a significant purpose of this meeting, I would now like to provide more detail on that transaction and how it is a compelling opportunity to create value for all our unitholders. On the 18th of October 2021, Home Consortium and HDN announced that they had entered into a binding scheme implementation deed with Aventus to acquire all Aventus securities comprising units in Aventus Retail Property Fund, which I will refer to as Aventus Trust, and shares in Aventus Holdings Limited, which I will refer to as Aventus Company, via schemes of arrangement and subject to certain conditions. If approved by HDN unitholders and Aventus securityholders and subject to the other conditions to the merger being satisfied, HDN will acquire all of the units in Aventus Trust by issuing 2.20 HDN units for every 1 Aventus unit. As part of the transaction, HomeCo will contribute consideration comprising of $0.285 cash or 0.038 HomeCo securities per Aventus share to acquire all of the shares in Aventus Company. The merger will be effected by the unstapling of Aventus units from Aventus shares followed by the acquisition of Aventus Trust by HDN and the acquisition of Aventus Company by HomeCo by way of an interdependent trust scheme and members' scheme. The effect of the acquisition is that HomeCo will acquire the management rights to Aventus, and HMC Funds Management Limited will continue in its role as responsible entity and trustee of the merged HDN Group. Subject to requisite approvals, the merger is expected to be implemented on Monday, 14th of February 2022. The HDN independent directors believe the merger represents a compelling opportunity to create value from 2 highly complementary property portfolios, providing HDN unitholders with an enhanced investment proposition relative to HDN on a stand-alone basis, including: firstly, creating the leading ASX-listed daily needs REIT with a combined portfolio size of approximately $4.4 billion and a market capitalization of $3 billion; secondly, enhanced scale and relevance with the merged HDN Group expected to be eligible for inclusion in the S&P/ASX 200 index; thirdly, compelling financial metrics with FY '22 FFO per HDN unit accretion of 4.0% to HDN's stand-alone FY '22 FFO per HDN unit; fourthly, highly strategic last-mile logistics network spanning 2.5 million square meters of GLA in Australia's leading metropolitan markets and growth corridors; and also, significant growth pipeline with the opportunity to accelerate the value accretive developments by leveraging the merged HDN Group's enhanced scale, tenant relationships and expertise. The implementation of the merger is subject to a number of conditions, which are set out in section 2.1 of the Notice of Meeting. However, I wish to highlight that 2 key conditions are that: Firstly, securityholders of Aventus approve the merger at its shareholder meeting tomorrow, Tuesday, 25th of January 2022; and secondly, HDN unitholders approve the issue of trust scheme consideration this morning. Given that the trust scheme constitutes a reverse takeover using the Listing Rules, the approval of HDN unitholders under Listing Rule 7.1 is required for that reason. The merger presents a number of benefits, as I briefly outlined earlier, as well as potential risks. These are all set out in section 2.3(b) and section 2.4 of the Notice of Meeting, respectively. Appendix 1 to the explanatory memorandum also contains further information concerning the merger and the assets and liabilities, financial performance, financial position and prospects of Aventus and the merged HDN Group. Importantly and on balance, the HDN independent directors believe that the advantages of the merger outweigh the disadvantages and risks associated with the merger and unanimously recommend that you vote in favor of the transaction. In closing, I would like to thank our Board, our investors and all our stakeholders for their ongoing support. I will now commence the formal business of today's meeting. The first item of formal business is resolution 1, which relates to the proposed merger of HomeCo Daily Needs REIT with Aventus Trust. As I have just explained, the merger of HDN and the Aventus Trust is part of a merger with Aventus Group announced by Home Consortium and HDN on 18 October 2021. If resolution 1 is approved by HDN unitholders this morning and subject to the other conditions to the merger being satisfied, HDN will acquire all units in Aventus Trust by issuing 2.20 HDN units to Aventus securityholders for every 1 Aventus unit. I've already elaborated on the background and benefits of the transaction for HDN in my earlier address. However, before voting on the resolution, I will briefly explain why resolution 1 is required before I put that resolution up for a vote. Listing Rule 7.1 limits the number of equity securities that a listed entity may issue without the approval of its securityholders over any 12-month period to 15% of the fully paid ordinary securities it had on issue at the start of that period, subject to certain exemptions. However, a reverse takeover is not one of those exemptions. The Listing Rules define a reverse takeover as being where the number of equity securities to be issued by the acquirer to target securityholders is equal to or greater than the number of fully paid ordinary securities on issue in the entity at the date of the announcement of the scheme. In the case of this merger, there were approximately 790 million HDN units on issue on 18th of October 2021, before the merger -- being the date the merger was announced. Under the scheme implementation deed, the merger is implemented, HDN will issue 2.20 HDN units for each of Aventus unit acquired under the trust scheme, resulting in the issue of approximately 1.25 billion HDN units. Accordingly, the trust scheme constitutes a reverse takeover, and the issue of the scheme -- trust scheme consideration does not fall within any of the exceptions to Listing Rule 7.1. As the trust scheme consideration exceeds the 15% limit in Listing Rule 7.1, it therefore requires the approval of HDN unitholders under the Listing Rule 7.1. If resolution 1 is approved and the other conditions to the merger are satisfied, the merger is expected to be implemented on 14th of February 2022. If this resolution 1 is not approved, the merger will not proceed, and HDN will not acquire Aventus' portfolio of properties. The number of HDN units on issue will not be expanded by the issue of the trust scheme consideration. HDN must reimburse Aventus for all external costs and expenses actually incurred and payable in relation to the merger up to a maximum of $5 million. HDN will continue with the implementation of its business strategy. The investment manager will not receive an acquisition fee under its investment management agreement with HDN, and HDN will incur transaction costs of approximately $2.1 million from pursuing the merger. As I outlined earlier, the HDN independent directors unanimously recommend that you vote in favor of resolution 1. As HomeCo is a party to the merger, the HDN directors who are also directors of HomeCo have abstained from making a recommendation. I will now ask Andrew Selim, our company secretary, to read out any questions put by unitholders in relation to resolution 1.

Thanks, Simon. I confirm that no questions have been put by unitholders either online or via the audio line in relation to resolution 1.

Thank you, Andrew. In that case, I will now put resolution 1 to the meeting for a vote by poll. Resolution 1 is as follows: that, for the purposes of ASX Listing Rule 7.1 and for all other purposes, approval is given for HMC Funds Management to issue the trust scheme consideration to holders of Aventus units under the trust scheme, constituting a reverse takeover of HDN, on the terms and conditions set out in the explanatory memorandum. We have received proxies in relation to this resolution. The following is a summary of the votes for, open and against, which we have received by proxy and which we disclosed to the market earlier today prior to the start of this meeting. Andrew will now read out the current position in relation to proxies.

Thanks, Simon. Proxy voting results for resolution 1 are as follows: for, 99.92%; open, 0.07%; and against, 0.01%.

Thanks, Andrew. Resolution 1 is an ordinary resolution. As set out in the Notice of Meeting, there are voting exclusions that apply to this resolution. I, as Chair, intend to exercise all available proxies in my name in favor of resolution 1. Can I please ask you to cast your vote? You will have until the end of the meeting to complete your voting. I'll now pause to allow you to vote on resolution 1. Thank you. [Voting]

Moving to resolution 2. The second item of formal business relates to the approval of amendments to the investment management agreement. As you know, the investment management agreement delegates to HomeCo Investment Management as investment manager, day-to-day control of the management of HDN and its portfolio assets subject to the supervision of HDN and the terms of the investment management agreement. That agreement commenced on 26th November 2020 for an initial 10-year term. A summary of the investment management agreement is set out in HDN's product disclosure statement released to the ASX on 23rd of November 2020 and in appendix 2 to the explanatory memorandum in the Notice of Meeting. Under those management arrangements, the investment manager is entitled to the following fees: a management fee, which is payable monthly in arrears; an acquisition fee, which is based on the purchase price of any assets acquired by HDN in proportion to the HDN's economic interest in the relevant asset; and a disposal fee, which is based on any assets disposed of by HDN in proportion to HDN's economic interest in the relevant asset. The investment management agreement currently provides that the investment manager may elect to receive the payment of some or all of its management fee in HDN units issued to the investment manager or its nominee. This entitlement does not currently extend to the acquisition fee or the disposal fee. The investment manager and the HDN independent directors have agreed, subject to obtaining unitholder approval sought under this resolution 2, to amend the investment management agreement to permit the payment of some or all of any acquisition fees or disposal fees to be made by way of issues of HDN units to the investment manager or its nominee where requested by the investment manager. These amendments would allow any acquisition or disposal fees to be paid to the investment manager or its nominee in HDN units or cash or a combination of both at the investment manager's election. If the investment manager makes his election, the number of HDN units to be issued to the investment manager or its nominee will be calculated by reference to the VWAP of the HDN units during the period of 5 trading days up to the date on which the relevant asset was acquired, where the calculation relates the acquisition fee, or disposed, where the calculation relates to the disposal fee. HDN considers that the ability to pay acquisition and disposal fees in HDN units, similar to the current regime under which management fees can be paid in HDN units upon the election of the investment manager, will bring about a number of advantages to HDN, including providing another option at the investment manager's election for HDN to meet its payment obligations to the investment manager without putting additional financial pressure on HDN; and a payment option that will further align the interests of the investment manager with those of HDN unitholders for the benefit of HDN unitholders. Resolutions 1 and 2 are not conditional. However, resolution 2 impacts the form of payment HDN can provide to satisfy the acquisition fee that will arise as a result of the merger, which will comprise a one-off payment of $22.3 million to be paid by the merged HDN Group to the Investment Manager. If resolution 2 is passed, firstly, the investment manager will be permitted to request HDN to satisfy the HomeCo acquisition fee in cash or HDN units or a combination of both at the investment manager's election. Secondly, the investment manager intends to elect for Home Consortium Limited to receive the merger acquisition fee in HDN units. The total number of HDN units issued to satisfy the HomeCo acquisition fee will depend on HDN's volume weighted average price in the 5 days leading up to the implementation date of the merger, which is expected to be 14th of February 2022. The HomeCo acquisition fee will need to be paid in cash if resolution 2 is not passed or if the investment manager does not elect to receive the HomeCo acquisition fee by way of HDN units. The HDN independent directors recommend that HDN unitholders vote in favor of resolution 2. As the investment manager and HomeCo have an interest in this resolution, the HDN directors who are also directors of HomeCo have abstained from making a recommendation in relation to this resolution. I will now ask Andrew Selim, our company secretary, to read out any questions put by unitholders in relation to resolution 2.

Thanks, Simon. I confirm that no questions have been put by unitholders either online or via the audio line in relation to resolution 2.

Thanks, Andrew. Now that all questions have been addressed, I put resolution 2 to the meeting for a vote by poll. Resolution 2 is as follows: that approval is given for all purposes for the investment management agreement to be amended to prevent the investment manager to require HMC Funds Management to issue HDN units in lieu of cash to the investment manager or its nominee to satisfy amounts owing in respect of fees as further described in the explanatory memorandum. We have received proxies in relation to this resolution. The following is a summary of the votes for, open and against, which we have received by proxy and which we disclosed market earlier today prior to the start of this meeting. Andrew will now read out the current position in relation to proxies.

Thanks, Simon. Proxy voting results in relation to resolution 2 are as follows: for, 99.88%; open, 0.06%; and against, 0.06%.

Thanks, Andrew. Resolution 2 is an ordinary resolution. As set out in the Notice of Meeting, there are voting exclusions that apply to this resolution. I, as Chair, intend to exercise all available proxies in my name in favor of resolution 2. Can I please ask you to cast your vote? You will have until the end of the meeting to complete your voting. I'll pause now to allow you to vote on resolution 2. Thank you. [Voting]

The third item of formal business relates to the ratification of the prior issue of HDN units under an institutional placement in July 2021. On 5th of July 2021, HDN announced an issue of 48,275,862 HDN units each at an issue price of $1.45 pursuant to a fully underwritten placement to professional, sophisticated and institutional investors. Completion of the placement was announced on 6th of July 2021, and the July placement units were issued on 9 July 2021. None of the subscribers under the July placement were related parties or associates of related parties of HDN. Listing Rule 7.1 provides that subject to certain exemptions, an entity must not issue more equity securities during any 12-month period than that amount which represents 15% of the number of fully paid ordinary securities on issue at the commencement of that 12-month period. Listing Rule 7.4 provides that if the entity in a general meeting ratifies the previous issue of equity securities made pursuant to Listing Rule 7.1, equity securities will be deemed to have been made with unitholder approval for the purposes of Listing Rule 7.1. HDN wishes to retain flexibility to issue additional equity securities in the future without having to obtain specific HDN unitholder approval for such issues under Listing Rule 7.1. To this end, resolution 3 seeks HDN unitholder approval to ratify the issue of the July placement units under and for the purposes of Listing Rule 7.4 and for all other purposes. If resolution 3 is passed, HDN will be allowed to exclude the issue of the July placement units in calculating HDN's 15% placement capacity, effectively refreshing the number of HDN units it can issue or agree to issue without HDN unitholder approval over the 12 months following the July issue date. If resolution 3 is not passed, the July placement units will be included in calculating HDN's 15% placement capacity. This will effectively limit the number of equity securities HDN can issue or agree to issue to approximately 54.8 million HDN units without HDN unitholder approval over the 12 months following the July issue date, unless an exemption applies. All the directors unanimously recommend that HDN unitholders vote in favor of resolution 3. I will now ask Andrew Selim to read out any questions put by unitholders in relation to resolution 3.

Thanks, Simon. I confirm that no questions have been put by unitholders either online or via the audio line in relation to resolution 3.

Thanks, Andrew. In that case, I put resolution 3 to the meeting for a vote by poll. Resolution 3 is as follows: that the issue of 48,275,862 HDN units announced to the ASX on 5 July 2021 on the terms and conditions summarized in the explanatory memorandum is ratified under and for the purposes of Listing Rule 7.4 and for all other purposes. We have received proxies in relation to this resolution. The following is a summary of the votes for, open and against, which we have received by proxy and which we disclosed to the market earlier today prior to the start of this meeting. Andrew will now read our current position in relation to proxies.

Thanks, Simon. Proxy voting results in relation to resolution 3 are as follows: for, 99.91%, open, 0.06%; and against, 0.03%.