Thank you and good morning. Thanks everyone for making time today in a busy reporting season. Joining me on the call is HMC Group CFO, Will McMicking, and Investor Relations Manager, Andrew Dodds. Before we commence today's presentation, we would like to acknowledge the traditional custodians of country throughout Australia. We 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. Let us begin on slide four. Our first half results are pleasing. They demonstrate our ability to continue to grow funds from operations with strong net income growth, offsetting a very substantial step up in interest costs. I'd like to highlight three important points which reinforce why HDN is so well-positioned in the current operating environment.
Firstly, the strong operating metrics reflect our high weighting to the best metropolitan locations, where tenant demand remains robust and fuels our growing development pipeline. Secondly, our property valuations were underpinned by strong rental growth and transactional evidence for well-located daily needs properties. Finally, our balance sheet is strong and flexible to adapt to a rapidly changing macro environment. First half 2023 saw the REIT deliver funds from operation of AUD 0.043 per unit. This represents an 8% increase on the prior corresponding period and is tracking in line with our FY2023 guidance, which we are pleased to maintain today. Net tangible asset per unit of AUD 1.52 was maintained versus June 2022, with strong top-line net income growth offsetting minor cap rate softening recorded across the portfolio. We continue to see strong investor demand for high-quality metro located daily needs assets.
A wider pool of investors is recognizing the compelling growth and defensive qualities this asset class is delivering. This is evidenced by our disposal of Epping at a 2% premium to book value, which we announced today. Coupled with our previously announced disposal of Sunshine at a 6% premium to book, we continue to demonstrate our unique assets remain liquid and highly sought after. Ultimately, this investor interest is underpinned by strong underlying tenant demand for our daily needs assets, which increasingly act as last mile logistics hubs. Comparable net operating income growth is now tracking to 3.8% for the full year, ahead of where we guided the market last half. HDN maintains sector-leading positive leasing spreads of 5.9% with only 5.3% incentives.
This performance is supported by occupancy and cash collections, both in excess of 99%, which is testament to the quality and resilience of our predominantly national tenant base and lower exposure to discretionary retail. Our target FY23 development commencements have increased to over AUD 80 million whilst maintaining our 7% ungeared cash-on-cash target return. We also now anticipate HDN to commence over AUD 120 million of development projects in FY24. The development pipeline has now also increased to over AUD 600 million across 22 projects. We have announced approximately AUD 143 million of accretive acquisitions so far this financial year. This includes the purchase of Southlands Boulevarde in Western Australia and strategic investment in HMC Capital's Last Mile Logistics Fund. Both acquisitions have been fully funded through the capital recycling initiatives I mentioned earlier.
The balance sheet remains in a strong position with gearing of 31.5% at the lower end of our 30%-40% target range. Interest rate risk has been mitigated with approximately 70% of drawn debt now hedged until FY26. This is as a result of interest rate hedges entered into since balance date. We'll speak to this in more detail in the finance section. On slide five, we summarize HDN's investment strategy, which remains unchanged. We continue to target a model portfolio of 50% neighborhood, 30% large format retail, and 20% health and services tenants within those assets. This mix balances the best characteristics of defensive, reliable income streams with sustainable growth. We continue to make good progress in remixing our strategy to the balance asset mix.
Our portfolio is differentiated with over 79% exposure to metro locations and a very high skew to the large growth centers of Sydney, Melbourne, Brisbane to the Gold Coast. We serve over 13 million Australians who live within a 10km radius of a HomeCo center. The last 12 months saw over 80 million visitations to our assets, with comparable center foot traffic growth over 7% year-on-year and significantly higher than pre-COVID levels. This growth should be sustained by the continued increase in net overseas migration. HDN owns over 2.5 million sq m of high quality and strategically located property with just 37% site coverage at present. This gives us substantial opportunity to leverage the rapidly emerging and essential last mile logistics infrastructure trends to unlock additional embedded value and to be able to serve the population growth I've just mentioned. Turning to slide seven.
HDN now owns over AUD 4.71 billion of high-quality, metropolitan-focused real estate . Our weighted average rent review for the half was 3.8%. Twenty-one percent of our income has annual increases linked to inflation. HDN sustainable rents of just over AUD 350 per sq m and customer convenience provide the reliable platform of growth for our tenants and our earnings. We also have a smooth lease expiry profile and less than 1% of our tenants are on holdovers. Moving to slide eight. HDN maintains high occupancy of above 99%. Cash collections in the month of billing continue to exceed 99% each month throughout the first half of 2023.
We continue to grow our property income with over 75 deals completed in the half, delivering positive spreads of 5.9% and maintaining low incentives of just 5.3%. As I stated earlier, footfall remains elevated post-COVID as customers in the fastest growing suburbs of Australia are increasingly living, working, shopping, and dining closer to home. As a result, HDN's retailers continue to perform strongly. Supermarket MAT growth remains a healthy 2.7%, while the 31% of our tenants that report sales have reported exceptionally strong year-on-year growth of over 9.6% at the end of December. Slide nine is a new slide, just calling out how continued operational excellence can lead to rental growth optimization.
We have always made a virtue of cash collection and occupancy as being the best health check for a real estate portfolio. We remain focused on these key metrics to unlock growing leasing spreads. Slide 10, we provide further detail about our top tenants and portfolio weightings, which, as I said, post the Aventus acquisition, we are rebalancing in line with the target portfolio weightings over time. Moving to slide 11, I want to spend a moment to highlight the portfolio's increasing role and value in last mile logistics for our tenants. The enhanced value proposition of omni-channel retailing has led to an increasing number of partners requiring the infrastructure to support their store-based fulfillment strategies. As the omni-channel model helps deliver customer engagement, loyalty, and cost efficiencies, more than 77% of our tenants are operating last mile logistics strategies through these existing stores within our portfolio.
Door flexibility on grade car parking continues to grow the increasing demand we have for spaces within our business. Turning to slide 12 for our sustainability progress. We previously provided a detailed roadmap to net zero. This slide provides more color on the journey so far and the progress we're making, which is gathering momentum, although we believe we can accomplish much more. Slide 13 details the progress and achievements to date in line with our stated strategy. We are pleased to have been named a 2023 regionally top-rated ESG company with Morningstar Sustainalytics, and this year we participated in our first-ever GRESB rating. Importantly, our energy management system rollout is converting our buildings to smart buildings and is progressing very well. We have achieved a 27% reduction in energy consumption to date on the completed sites.
In terms of sequencing, this is a key step to right-sizing consumption first before our broader solar generation rollout commences. The next phase, we'll see the rollout of our EMS and solar installation programs over the balance of HomeCo sites. These next stages are critical to our commitment to achieve net zero within the HDN asset base. Notably, our EMS rollout and solar rollout continue to provide strong economic returns also. Moving on to slide 15. HDN undertook a number of strategic and proactive capital recycling initiatives in the first half of 2023 as we continue to reweigh to the model portfolio.
We disposed of two assets above book value with the capital redeployed into accretive daily needs acquisitions, which offer repositioning and development upside. Southlands Boulevard in Perth is a rare triple supermarket anchor daily needs asset, which was acquired well, and within our structure, we expect to derive a yield of 8%. Similarly, our relatively small, yet strategic AUD 50 million commitment to the HMC Capital's Last Mile Logistics unlisted fund has the potential to create a significant future acquisition pipeline for HDN. On slide 16, we summarize the significant value we have created for our investors through development since the IPO. In just over two short years, HDN has completed over 15 development projects. We've invested over AUD 160 million into accretive development projects, delivering cash-on-cash return to date of over 9%.
Our track record further builds on HMC Capital's successful repositioning of over 500,000 sq m of GLA since acquiring the former Masters portfolio in 2017. Looking forward, our land bank spanning over 2.5 million sq m provides compelling long-term upside by relatively low risk tenant demand-led development projects. Slide 17 highlights our development pipeline, which we are pleased to have upscaled today to over AUD 600 million. It underscores in more detail the substantial embedded growth opportunity in the portfolio, which we firmly believe is another differentiator for HDN. As I said earlier, on the back of continuing strong operational performance and outlook, we are unlocking and upsizing HDN's development pipeline. We anticipate commencing AUD 80 million of development projects in FY 2023, increasing to over AUD 120 million of projects to commence in FY 2024.
On slide 18, we have highlighted some of the FY 23 target development opportunities. These development projects will add more than 28,000 sq m of GLA, and we are on track to achieve a 7% blended cash-on-cash yield. Construction works on Mackay, Glenmore Park, and South Nowra are now well underway. Each of these three projects are now 100% pre-committed. Each of them also have fixed price design and construct contracts with the majority of the design phase now completed. HomeCo Mackay is set to become the dominant large format retail center in the catchment. Glenmore Park will see an essential government-led health and wellness precinct added to our town center. South Nowra will see the introduction of a leisure and lifestyle center that services our Last Mile Logistics network between Sydney and Vincentia.
Slide 19 goes on to show some further detail around each of the major projects I've just mentioned, including some of the key committed tenants. I will now hand over to Will to provide some commentary around the financial results.
Thanks, Sid. Turning now to slide 21 to go through the earnings summary. HDN delivered strong earnings growth with first half FY 2023 FFO of AUD 89.4 million or AUD 0.043 per unit. This equates to growth of 8% versus the prior corresponding period. HDN declared DPU of AUD 0.042 for the half, which also represented an 8% increase versus the PCP. The earnings growth was driven by the full period impact of the Aventus transaction, active portfolio management, and the execution of developments, which offset a rise in interest expense. Turning now to the balance sheet on slide 22. Net valuation gains from investment properties were relatively flat in the half with an AUD 11 million net increase driven by property income gains.
Weighted average cap rate remained at 5.3% as at December, as did NTA at AUD 1.52 per unit. This reflects the ongoing strength of the daily needs asset class and is highlighted by the recent exchange of contracts to sell the Epping property at a 2% premium to December 2022 book value. Moving to slide 23 to talk to capital management. Capital recycling initiatives completed in the half included the sale of the Sunshine Coast property, which puts HDN in a strong capital position. As at December, gearing of 31.5% remains at the lower end of 30%-40% target range, whilst total liquidity sits at AUD 325 million with a weighted average debt tenor of two and a half years.
HDN has also undertaken additional interest rate hedging since December, entering into AUD 475 million forward start interest rate swaps commencing from June 2023 at an average fixed rate of 3.5% per annum. As a result, approximately 70% of December 2022 drawn debt is hedged from June 2023 to June 2026, and the adjusted hedged debt tenor sits at 3.7 years. Turning now to page 25. Today, we're pleased to reaffirm FY23 FFO guidance of AUD 0.086 per unit and distribution per unit guidance of AUD 0.083.
Despite a more subdued outlook for overall consumer spending, HDN's nondiscretionary retail and essential services tenant focus means it remains well-positioned with a property portfolio underpinned by strong fundamentals. In addition, HDN has a healthy balance sheet with funding capacity for its development pipeline and potential accretive acquisitions, which are not included in guidance. I will now hand back to Sid for closing remarks.
Thanks, Will. As you all know, the last 12 months have been transformational for the REIT. We have improved our operating performance, accelerated our development pipeline rollout, integrated over AUD 2.5 billion of assets, and strengthened our balance sheet. We have a committed team and board who we thank and who will continue to deliver for our investors. HDN remains well-positioned to continue to deliver growth beyond FY23 through a combination of increased rental income resulting from embedded escalations and positive re-leasing spreads, additional income from executing our development pipeline and maintaining a strong and flexible balance sheet to take advantage of an evolving macro landscape. I will now hand over to the operator for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your questions. Your first question comes from Annabelle Atkins with JPMorgan. Please go ahead.
Oh, hi, team, and thanks for your time today. Just looking at the ROIC targets on your development over FY 2023 and 2024, you spoke to having fixed price contracts on a number of those products you've commenced. Have you got fixed price contracts on any of the products yet to commence this year and any for the next following years?
FY 2023, are all locked in now.
Yeah.
FY 2024, we're at several stages of planning and tenant commitments, the intention is to have those fixed price D&C contracts moving forward. Ultimately, Annabelle, we are seeing the supply chain ease up at the moment and some positive green shoots appearing over the last few months, we're watching that pretty carefully. It could help improve some of our returns.
Okay. You're seeing more upside on FY 2024 ROIC targets than downside at the moment?
Correct.
Okay, cool. Also noticed the asset held for sale in Hawthorn East, the parcel of land that is contracted to be sold to HMC. Just wondering how that subdivision is going and when you expect to transact that?
Sure. Annabelle, that was an asset, we had held for sale since the original IPO.
Mm-hmm
Where I think we're working through with HMC what our intentions are moving forward, around that asset, we'll disclose more next half.
Okay, cool. Thanks for your time.
Thanks, Annabelle.
Thank you. Your next question comes from Stuart McLean with Macquarie. Please go ahead.
Good morning. Just first one just on 2 half earnings. Just given FFO is going to be flat half on half, is that just top line growth offset by higher interest costs in the second half? There isn't kind of anything else rolling off in the period 1 half to 2 half that's going to impact growth in second half earnings?
Yeah, that's right, Stu.
Great. Thank you. Second one, just on capital recycling. Been pretty active over the last 6 months there. What should we expect going forward? Should we continue to think about divesting LFR assets on relatively low yields and recycling that capital?
Stu, as you've seen over the last six months, we're fairly disciplined with our capital recycling and capital management program and pretty opportunistic on deployment. I expect nothing to change. We'll be disciplined, but opportunistic.
Great. Thank you. Just a third and final one for me. Just on the leasing spreads. Are you able to call out what's happening specifically in LFR, and just expectations going forward, given potential for a softer consumer as well, and just how do you think that impacts leasing metrics in your LFR portfolio, please?
Sure. The spread between daily needs assets and large format retail assets is about the same, Stu, there's nothing to call out in terms of a disparity. The question you're asking is probably around what's happening moving forward. Our view is our retailers have enjoyed three to four years now of sustained sales growth and sustained margin growth, where the sustained sales growth has outpaced rental growth. We don't see any reason for those leasing spread trajectory not to continue.
Great. Thank you. Do you have an occupancy cost for LFR, or do you not get enough sales metrics yet to be able to find that data?
As I said, the 31% of our tenants that do report sales, the year-on-year MAT growth was 9.6%. Occupancy costs are running well below 10% as an average.
Thanks very much for your time.
Thanks, Stu.
Thank you. Your next question comes from Lauren Berry with Morgan Stanley. Please go ahead.
Morning, guys. I was hoping you could give a little bit more color around the decision to dispose of Epping, given it, you know, you talked about it in the past as having some pretty good development opportunities?
Thanks, Lauren. As you may recall, when we talked about Epping and the development opportunity, it was a mixed-use development opportunity that was long dated. The mixed-use included some components of income streams that aren't core to HomeCo Daily Needs REIT. Ultimately, we saw that time horizon a bit longer than we initially anticipated. It was opportunistic to recycle that asset. As we stated, it's currently deriving a passing yield of 4.68%. We think at this point in the cycle, there's better uses of our capital in some of our other development projects and other opportunities we see.
Did you market that one, or were you approached to purchase that one?
It was an unsolicited approach. We get approaches all the time for our assets. As we always make a virtue of it, and we try to call it out, we do have a very heavy metropolitan skew, which, and metropolitan assets of our type are very rare. We do get approached off market and, you know, that was no different.
Cool. Then, can you just give us a bit more detail on your development pipeline? You know, what went into it to increase the size of it, increase the, you know, AUD 80 million starts to AUD 120 million starts. What's going into FY 2024, yeah, if you could?
Sure. It's a combination of more development opportunities that we see across the portfolio that we now have comfort around the sidelines to execute upon. It also includes upscaling certain opportunities where the tenant demand is higher than we initially anticipated. What we'll do next half is provide a bit more detail on the FY 2024 AUD 120 million. We're at various stages of leasing and planning on that, so I prefer not to talk about it yet, but we're very confident that we'll be commencing that AUD 120 million next year.
Do you have a % lease of what you're planning to start within the next 12 months?
Yeah, what we've always said is that there's three gates before we pull the trigger on a development. Firstly, we are at 50% pre-commit. Secondly, we have fixed price D&C contracts. And thirdly, we have all development planning plans and approvals in place. They're the three gates that we will always make sure are crossed before we pull the trigger on the commencement of construction, and nothing's changed.
Great. Thanks, guys.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Edward Day with MA Financial. Please go ahead.
Morning, Sid. Just further on the development pipeline. With the $520 million of active planning across your 22 projects, have you got a feel for the split between LFR and daily needs? If so, do they have different return profiles?
A really good question. The split at the moment is looking like about 60 Daily Needs, 40 LFR. In terms of the return profiles, they're not that dissimilar. We'll always look at a blend every year. They are skewed towards more Daily Needs assets. I'd hasten to add, large format retail, is often talked about one big category. Ultimately, when you actually dig into it, there's a lot of leisure and lifestyle and non-discretionary retail that does form part of large format retail. I think that's an important call-out as well to make.
Thank you. Then just on the incentives, they've ticked up a little bit. I guess, what's the outlook, and what are you assuming for incentives from here?
We see no reason for that not to remain fairly constant. As I said, the retailers within our book have enjoyed three years of sustained sales growth and three years of sustained margin growth. Sales growth and margin growth has outpaced rental growth. We see spreads continuing, we see demand holding. Their performance has been strong. Ultimately, where our assets are, being in metropolitan locations that are gonna be the net beneficiary of net overseas migration, that growth trajectory should continue.
Thanks. Finally, just any tenants in the portfolio that are showing signs of weakness that you have any concerns about?
Not outside the normal course of business, no. None to call out.
Thanks very much.