Thank you for standing by, and welcome to the HomeCo Daily Needs REIT full year 2022, full year results briefing conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press star key followed by one on your telephone keypad. I will now hand the conference over to Sid. Please go ahead.
Good morning, everyone, and thank you for dialing in. Joining me on today's call is Group CFO, Will McMicking. 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, present, and emerging, and extend that respect to all Aboriginal and Torres Strait Islander people today. I'll start today's presentation on slide 3. It has clearly been a transformational year for the HomeCo Daily Needs REIT. The successful merger with Aventus has given us greater scale, a stronger balance sheet, and a platform for growth. There are three key takeouts from today's result. First, the portfolio is performing well. We've maintained high occupancy, high cash collection, strong leasing spreads, and strong comp NOI growth. Importantly, our tenants have also performed well.
Second, we are making strong, solid progress on our AUD 500 million development pipeline. We successfully delivered AUD 37 million of development in FY 2022, and we are on track to activate over AUD 75 million of development in FY 2023. Thirdly, we proactively manage the balance sheet to protect our capital position and flexibility. Today, we announced the sale of our LFR asset on the Sunshine Coast, Queensland, for AUD 140 million. This represents a 6% premium to December 2021 book value. This will see HDN's gearing reduced to 30.6%, which is at the bottom end of our target range, and hedging post this transaction increases to 73.5%. Let's now turn to slide 5 with the key result metrics. FY 2022 saw HDN deliver FFO per unit of AUD 0.0885. This represents a 30% increase on FY 2021 and also exceeds our February guidance.
NTA per unit increased by 12% since June 2021, reflecting strong valuation growth in our portfolio. Pleasingly, we are still seeing strong investor demand for quality daily needs assets notwithstanding these macroeconomic conditions. The sale of our Sunshine Coast LFR asset in the last two weeks demonstrates this. As I mentioned earlier, the portfolio is in great shape, and we are capitalizing on our enhanced scale post the merger to drive rental growth. We achieved comparable net operating income growth of 5.1% and positive leasing spreads of 5.7% with only 3.9% incentives. This reflects the strong underlying tenant demand for our daily needs assets, which increasingly act as last-mile logistics hubs for e-commerce fulfillment and distribution. Our development program secured 26,000 sq meters of leasing in line with HDN's accelerated pipeline rollout. The AUD 37 million of developments delivered in FY 2022 have provided a 10% ungeared cash-on-cash return.
We increased the FY 2023 development target to AUD 75 million with a 7% ungeared cash-on-cash target return. As stated earlier, we have substantial growth opportunity here through the AUD 500 million pipeline of identified projects. Finally, on this slide, I want to note the progress of our ESG strategy. We remain on track to achieve HDN and HMC Capital's target to be net zero in 2028 for Scope 1 and Scope 2 emissions. Turning to slide 6, where we summarize HDN's investment strategy for those that are unfamiliar with it. We target a model portfolio of 50% neighborhood, 30% LFR, and 20% health and services. This mix balances the best characteristics of defensive, reliable income streams with sustainable growth. While at this point our exposure to LFR is higher than target following the Aventus merger, HDN is committed to bringing this back to the model portfolio in the medium term.
Importantly, we have over 79% exposure to metropolitan cities with a high SKUs to the large population growth centers of Sydney, Melbourne, Brisbane, to the Gold Coast. We serve over 13 million Australians who live within a 10 km radius, and we have over 80 million visitations through our assets per annum. We have substantial opportunity to unlock and enhance a lot more real estate. HDN owns over 2.5 million sq meters of high-quality and strategically located land with only a 37% site coverage at present. This gives us a substantial opportunity to leverage the rapidly emerging and essential last-mile infrastructure trends and needs of our tenants. Turning to slide 7. The Aventus merger has been positively transformative for HDN and our expanded unit holder base. Within four months of the merger date, we completed the seamless integration of management platforms, systems, and teams.
This was achieved while maintaining strong operational momentum and making significant progress in unlocking the development pipeline we've spoken about. We would like to thank Darren Holland and the wider management team, along with Bruce Carter and the board of Aventus, for their stewardship, support, and assistance with the successful merger and integration of our respective businesses. Aventus is a remarkable collection of real estate assets that was created with the vision of Brett Blundy and Darren. We are proud to have these assets part of the HomeCo and HMC family. This takes me now to slide 9, where we provide more color on the combined platform and income composition. HDN now owns over AUD 4.65 billion of high-quality real estate with over 1,200 tenants. Average rents are low at AUD 349 per square meter.
73% of our income has a weighted average rent review of 3.6%, and 19% of our income has annual increases linked to CPI. The balance of our income now has four supermarkets that are in percentage rent from the two that we announced previous half. At this point in the cycle, HDN's affordable rents and customer convenience proposition provide a reliable platform for growth for our tenants. Turning to slide 10. We maintained high occupancy above 99%. Cash collection was greater than 99% each month throughout FY 2022. This reflects the portfolio's weighting to high-quality assets and robust tenant governance. We continue to grow HDN's property income with over 200 leasing deals completed over the year. These deals were delivered with positive spreads of 5.7% and low incentives of 3.9%.
As I mentioned earlier, we have forward secured over 26,000 sq meters of development leasing to support the accelerated development pipeline. Despite the continuing impact of COVID-19 over the course of the year, our centres attracted more than 80 million customers. That statistic strongly underscores the portfolio's strategic location and daily needs characteristics. As a result, HDN's retailers continue to perform strongly. Sales grew 3.7% for supermarkets and 1.8% for specialty tenants cycling off already elevated bases. These outcomes highlight the portfolio's premium positioning as critical last-mile infrastructure. Notably, centre foot traffic is materially higher than pre-COVID levels. Customers are increasingly now living, working, shopping, and dining close to home in the fastest-growing suburbs of Australia where HomeCo assets reside.
On slide 11, we provide further detail about our top 10 tenants and portfolio weightings, which, as I said, we are rebalancing in line with the target model portfolio over time. Slide 12 shows there are several ways with which we will rebalance the target model portfolio. One, we are actively remixing our tenants. Two, we are undertaking developments of health, wellness, and supermarket precincts. Number three, we will continue to enhance the portfolio composition via appropriate acquisitions and disposals. The sale of Sunshine Coast for AUD 140 million, representing a 6% premium to December 2021 book valuation, demonstrates our discipline on capital management. Moving to slide 13, I'd like to spend a moment to highlight the portfolio's increasing role and value in last-mile logistics strategies for our tenants. Tenants are increasing their sophistication in finding cost-effective ways to distribute their goods and services to consumers.
With increasing input costs in a high-inflationary environment, being able to utilize existing store networks to fulfill omnichannel orders is critical for tenants. That's where the HDN portfolio is at a critical advantage. We own a very strategic footprint of 2.5 million sq meters of land in the best suburban growth corridors of Australia. Slide 14 discusses in some detail how domestic and international retailers are rapidly adapting their last-mile solutions and omnichannel offers. Slide 15 importantly shows how our retailers and tenants in our portfolio are beginning to utilize their stores for this critical last-mile fulfillment. Whether it's supermarkets or large-format retail tenants, providing frictionless retailing is core for the retail of the future. Increasingly, store footprints, automation, and labor inputs are evolving to meet this challenge.
The HDN portfolio is ideally suited to providing the best real estate for these retailers and tenants to implement their strategies, and we are working closely with them in this regard. Our centers have big on-grade car parks, accessible loading solutions, and are on main roads that service big suburban catchments which are growing fast. More than 77% of our tenants are now supporting their last-mile logistics strategies through their store network in our portfolio. This shows how quickly our tenants are adapting their strategies, and there's more to come. Moving to slide 17. HMC Capital is committed to the creation of healthy communities and driving long-term value creation across all of our investments that we manage. We continue to make great progress implementing our sustainability commitments across the HDN portfolio. We have previously provided our detailed roadmap to net zero.
This slide provides more color on our journey so far and our commitments into the future. Our energy management system to convert our buildings to smart buildings is progressing well. This is a relatively small investment in dollar terms but is already delivering an over 20% reduction in our consumption. It is also yielding a return on investment in excess of 15%, so we're very pleased with the early progress. The next phase will see the rollout of our EMS program across the balance of HomeCo sites, followed by our solar rollout which we are now tendering. These next stages are critical to our commitment to achieve net zero within our asset base in order to play our part in securing a greener future for future generations.
We are pleased to announce today that HomeCo Mackay will be the first large-format retail centre in Australia to target a Green Star rating. Slide 19 cuts through the developments that we are focused on, which include HomeCo Mackay that I've mentioned. Slide 20 provides details of the AUD 37 million of developments which we delivered over FY 2022, and we've provided more details previously. Moving to slide 22. Here, we have highlighted some of our FY 2023 development opportunities. The AUD 75 million of development program has increased by 25% on our plans as of December 2021. These development projects will add 28,000 meters of GLA and target a 7% blended cash-on-cash yield. We've received requisite development approval for Mackay, Glenmore Park, and Nowra, and have made excellent progress on the leasing. HomeCo Mackay is set to become the dominant large-format retail, leisure, and lifestyle centre in the catchment.
This project is tenant-demand-led, as are all of our projects. Glenmore Park will see an essential government-led health and wellness precinct added to our town center. Nowra will see the introduction of a leisure and lifestyle center that services our network between Sydney and the South Coast of New South Wales. This slide merely highlights the breadth of opportunities within the portfolio to remix post the Aventus merger and to positively leverage HomeCo's huge and strategic land bank as we move back to the target model weightings. Slide 23 gives you a closer understanding of future development opportunities which we've categorized into minor and major projects, and over time will provide more color about unlocking these opportunities. I will now hand over to Will to provide some commentary around the financial results.
Thanks, Sid. Turning now to slide 25 to go through the earnings summary.
HDN delivered strong earnings growth with FY 2022 FFO of AUD 105.6 million or AUD 0.0885 per unit, which equates to annual growth of 30%. HDN also declared DPU of AUD 0.0828 for FY 2022, which represents an 18% increase versus FY 2021. The earnings and DPU growth were driven by active portfolio management comprising the execution of developments and acquisitions, including the Aventus transaction which completed in March. Turning now to the balance sheet on slide 26. Acquisitions and valuation gains during the period have resulted in a robust balance sheet with June 2022 total assets of AUD 4.9 billion, net assets of AUD 3.1 billion, and NTA of AUD 1.52 per unit. Underpinning the NTA and its growth are investment properties of AUD 4.7 billion with a weighted average cap rate of 5.3% as of June.
This reflects the ongoing strength of the daily needs asset class and is highlighted by the recent sale of Sunshine Coast at a premium to June 2022 book value. NTA per unit is now 22% higher since first announcing the Aventus transaction back in October 2021. Moving now to slide 27 to talk to capital management. The AUD 140 million sale of Sunshine Coast puts HDN in a strong capital position with post-sale gearing of 30.6% and liquidity of AUD 380 million. HDN has also undertaken additional hedging since December and adjusted for the sale of Sunshine Coast. The group's hedged debt is 73.5%. Weighted average debt tenor and hedged book is 3.1 years and 2.8 years respectively, and a summary of the debt and hedging book is detailed in the appendices. Turning now to slide 29.
We're pleased to provide FY 2023 guidance today and are feeling very positive about the outlook for the business. The property portfolio continues to deliver strong underlying NOI growth and is supported by our deep development pipeline providing attractive reinvestment returns. Our guidance also reflects the proactive capital management steps already taken in FY 2023 with the pending sale of Sunshine Coast, which will reduce gearing to the low end of our target range and improve the hedge book. This disciplined approach by the manager puts HDN in a great position to continue its value-accretive developments and consider other accretive investments as and when they arise. HDN is pleased to provide FY 2023 FFO guidance of AUD 0.086 per unit and DPU guidance of AUD 0.083. I'll now hand back to Sid for closing remarks.
Thanks, Will.
As you can see, the group will remain focused on unlocking highly attractive investment opportunities for our investors while also optimizing tenancy mix and performance across our now substantially expanded portfolio. To recap on my opening comments, there are three key takeaways from today. First, the portfolio is performing really well. Second, we remain focused on unlocking value from our AUD 500 million development pipeline. Thirdly, we have proactively managed the balance sheet and are well positioned to grow into FY 2023. Thank you to everyone for your interest today and ongoing support. I would also like to thank our dedicated management team that really drive our asset performance day in and day out. I will now hand back to the operator for questions.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced.
If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question. The first question will come from Ronny Cheung from Jefferies. Please go ahead.
Hi, everyone. It's Sholto Maconochie overseeing Ronnie's login from Jefferies. Just a question on a good result. Just a couple of questions on the guidance. The Sunshine probably wasn't in consensus given you announced it today. That looks to be about on this year about 1.2% dilutive. That's in the guidance, is it, that you've put out today, that dilution?
Yeah, that's right, Sholto.
Okay. Great. Thanks. Pardon?
Yeah, about AUD 1.5 million in fact when you've reduced the debt.
Yep. Okay. Then just on, I noticed in the guidance you increased the payout ratio by 3% to 97% this year.
I know the business is growing, but what was the rationale behind that?
Yeah. I mean, payout ratio is still within the guidance of 90%-100%. We're conscious of maintaining distribution, and we're feeling confident in holding that.
Okay. Then when you've sold an LFR, are you looking to sell any more, sell some half-stakes in the larger assets like a Castle Hill to get back to your portfolio weighting? Because pro forma weighting LFR's 47% now, so still about 17% off your target. What was your view? I know you'll get there through organic developments, but what's your view on maybe selling down some of the larger assets to reduce that exposure?
Sholto, like we've said, we'll always be proactive in our capital management and disciplined, and we're always opportunistic.
That given, you can see that we can get back to our model portfolio weightings through the organic embedded opportunities within the portfolio. That's the number one focus for the group. We're really happy with our asset base, and we can see growth opportunities in front of us. That's what the team's going to focus on unlocking.
Then just on the debt, I noticed you spent AUD 16 million in derivatives. Was that part of the Aventus merger when you redid that, or was it post that?
Yeah. That was done post the merger, Sholto . What we did as part of the transaction was there was a legacy hedge book that was broken, and we entered into the caps.
I mean, one of the considerations there was at the time of announcing the merger in October, we had guidance for the merged group, so this allowed us to improve the hedge book and hold the prior guidance.
Great. Just as finally on the cap rate, I noticed the cap rate was firm at 575 on Sunshine. It looks like that growth was from income, the 2.4%. The rise in asset value between December and June looks like it all came from income growth of around 3.6%. Is that a fair comment?
Yeah, that's right. Yeah, predominantly income growth there.
All right. Great. That's everything for me. Thanks very much.
Thanks, Sholto.
Our next question will come from Simon Chan from Morgan Stanley. Please go ahead.
Hi. Good morning, guys. Hey, can I just ask Will to clarify his response to Sholto just before-
The AUD 16 million payment, exactly what was it for?
Yeah. It was when we put in as part of the hedging, we entered into caps as we've outlined in the appendices. When you enter into those, there's a premium paid.
Okay. Okay. It's for the cap on the AUD 400 million, isn't it?
Yeah, that's right.
Okay. That's cool. Hey, my next question look, I know the Sunshine Coast sale was a little bit dilutive, but notwithstanding that, earnings guidance is still going backwards. Is it fair to assume it's purely down to the increase in the cost of debt that's resulting in the decline in earnings next year, or is there something else that we should be mindful of?
No, that's it.
I guess the other point we'd like to make here is we've reduced the gearing to 30.6%, so at the bottom of the range, we've got a good development pipeline in the portfolio already, but it sets us up for strong future growth, and that probably adds to the consideration around the distribution holding that at AUD 0.083.
Probably might add to that as well, Will. Ultimately, you can see that our comparable net operating income growth last year and what we forecast moving forward is still very, very, very strong. Leasing spreads are strong. Our houses are almost full. Our occupancy's at 99%. I probably hasten to add, the comparable NOI growth number that we put out on slide 29 at 3.3%, that excludes developments that we've alluded to. So they are not in that basket. They add further growth to the portfolio.
Great.
My final question, just leases you've signed, are you guys sticking to the same structure, or have you tried to work more CPI linkage into new leases signed, etc.? Can you comment on that, please?
Sure. I'll take that one, Simon. So about 12 months ago, we probably saw a bit of the inflationary pressure coming, and we were successful in negotiating a lot more CPI-linked leases at that point in time. We will still work with our tenants. What we really focus on is matching sales growth projections the tenants have with rental growth so that we can match it to have sustainable income growth over the medium term. At this point in the cycle, not many tenants are going to sign a CPI lease with you.
Fair enough. Thanks, guys.
Our next question will come from Richard Jones from J.P. Morgan. Please go ahead.
Thank you.
Hi, Sid. Just in relation to the development, are you able just to talk about the initial yields that you're getting and the time you typically assume for stabilization?
Sure, Richard. The initial cash-on-cash yield are the numbers that we've put out. The FY 2022 numbers of 10%, that's an initial cash-on-cash with earnings that'll flow through in FY 2023. The forward forecast of AUD 75 million of future developments that we're targeting has a return cash-on-cash of 7%. The stabilization period on these kind of assets, given the tenancy book and the low exposure to specialty tenants, is quick. Typically, we stabilize these within 3-6 months, and you don't really have an earnings gap like you would when you develop one of these big shopping centers that have a lot of specialty tenant risk. That takes time to stabilize.
Once the projects are complete, they're income-generating.
Okay. Very clear. Thank you. Can you also just touch on obviously, rising construction costs are an issue for all. Just how sourcing and raw material price increases, how that's impacting on project feasibilities, and potentially, are there income offsets to maintain returns moving forward beyond obviously, strong returns in the projects in FY 2022, but I imagine the cost increases are more a 2023-plus impact?
Sure. I mean, the supply chain impacts, whether it's raw materials or labour, have been flowing through the system for about 18 months. FY 2022, we put out our capital number. We've stuck to that capital number. We haven't gone above budget. FY 2023, on the AUD 75 million that we're targeting, we have seen some of the cost price increases flow through our construction pricing before we've entered into those contracts.
We aim to forward procure as much of the materials and labor and contracts as we can. Importantly, though, Richard, what we've found is we've been able to pass on any cost increases in construction through increases in rental. A couple of case studies has meant that our rental levels have increased by about 10% for new projects, which has more than offset the cost increases, and we've held our target at 7% cash-on-cash return.
Great. Thanks, Sid.
Our next question will come from Andy MacFarlane from Jarden. Please go ahead.
Hi, Will. Sid, thanks. You're fine. Just a quick one on development. Talked about AUD 75 million of annual development CapEx, but obviously, AUD 75 million commenced in FY 2023. Should we be thinking about the run rate as we go forward as being around that AUD 75 million mark?
We're aiming to do better, but at the moment, we're comfortable outlining the AUD 75 million. As you can see, the portfolio's got much more embedded growth in it. The challenge for our team is to do better than the AUD 75 million. The AUD 75 million, which we're commencing in FY 2023, will be cash producing with FY 2024, and we're working very hard to unlock more opportunities that are accretive.
Got it. Just in terms of CPI, I noted in the pack it was sort of our slide 6, 4.5% with a read at FY 2022. What is your expectation within that guidance number for CPI for FY 2023?
I think we've got around that number. I think it's tracking around 4%.
A lot depends on the strike dates for when the leases' annual escalation comes up.
Look, I think it's fair to say it's probably a number that we're going to watch very closely because as the next few months play out, that 4% will probably be a bit better than that.
Got it. Final one for me. I'm hearing that you've got McGraths Hill sort of in the market at the moment, conscious of, obviously, this other sale that was going through. Have you got any expectation around the dollar quantum or any timing of planned asset sales for FY 2023?
We haven't got McGraths or any other asset on the market. As we've always said, we're pretty opportunistic in terms of acquisitions and disposals. That asset sits in APS1, which is a separate syndicate. I think it's probably inappropriate for me to provide too much more color than that given it's only partially held within HDN.
Fair enough. Thanks, guys.
Our next question will come from Grant McCasker from UBS. Please go ahead.
Good morning, Sid. Will, just a question on Sunshine Coast and also how you think about divestments going forward. What drove the process? Why did you choose Sunshine Coast? Is it purely just around the tenant mix, lack of development? Then on the other hand, it's probably in a very favorable location relative to a lot of infrastructure spend and population growth. How do you think about that over the assets you may look to dispose of going forward?
Yeah, sure. Without going into too much detail, I mean, there are some great characteristics of that asset. Ultimately, we know the local community, the local catchment very well, and we also know the looming competition threat in that catchment. For us, it was considered a non-core asset.
We've got a really good price for it at AUD 140 million, which is 6% ahead of our December book values. We didn't see as much development potential in that asset as we see in other assets. Does that make sense? We fortified our balance sheet in the process.
You said it was non-core. What other proportion of the portfolio is considered non-core?
Not something we really want to go into today. We're pretty happy with the portfolio at the moment. It's a very small portion that we would consider non-core. Ultimately, the characteristics we look for, a great asset in great catchments with a lot of land, a lot of development potential, if it fits those characteristics, they are core assets.
Okay. Great. Thank you.
Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. Our next question will come from Stuart McLean from Macquarie. Please go ahead.
Good morning and thanks for your time. First question might be for Will. Just on the increase in hedging from, I think, the pro forma was 56 back a few months ago into the mid-70s, what was the marginal swap rate that attracted those additional swaps, please?
We probably won't give you the exact number, but I think we've been pretty transparent. You're at about 1.4% average for the book that we've detailed in the appendices.
Maybe another way, what was the average swap rate back when it was 56% hedged?
Probably around 1% still.
Okay. Perfect. That's helpful. Thank you. Second question, just on the 3.3% comp NPI growth.
If I just look at the weighted average rent review number that you provided on slide 9, it's 3.8% across 92% of the portfolio. The product of those two is 3.5%. I imagine you get a bit of growth from supermarkets, positive re-leasing spreads. Is there a drag coming through? Is it downtime, or what maybe brings it back down to 3.3%?
Yeah, sure. I'll take that one. There were a couple of one-offs in FY 2022 in the Aventus portfolio that are rolling off. That's the only real mover that's softened that NPI growth number. The other key comment, I think I made it earlier, is it excludes the basket of development assets that we have, which are growing very strongly.
Okay. Great. Thank you. Sitting in your remarks, you mentioned last mile as well across potentially 15 assets.
How do you look to monetize this on a go-forward basis?
More base rent from our tenants.
Can you introduce new contracts immediately, or do you need to wait for the expiry to roll off and how?
It's a combination, Stuart. Typically, when expiries will happen, what's becoming evident is CSAS, it's more critical for tenants to fulfill their last-mile ambitions. From time to time now, and it's increasing at a pace, tenants will come to us and say, "Hey, can we do a click-and-collect facility? Can we do something else to add on?" We'll do that opportunistically as well along the way. Ultimately, it is just enhancing the value that this real estate has. The rents are low, so it'll just keep feeding positive rental spread growth, which is what we're focused on.
It sounds like it might need a little bit of additional capital.
Is that the case? It sounds like you'll monetize it either way, even if it does need additional capital.
It's minimal capital, and yes, you're right. It'll be monetized either way. Ultimately, if you look at the characteristics of our properties, big car parks, loading docks that are immediately adjacent to tenancies, so when they're looking at their last mile, you are literally adding maybe an awning or an additional facility on their tenancy. So it's very minimal CapEx.
Just a final one on the AUD 75 million development pipeline. Just over what period does that complete? Will that all complete in FY 2024, or half of it completes this year and half next year? Just have to give a bit of a guide there, please.
The way I'd be looking at it is the completions will start to occur from about January, and they'll be complete by about September next year. In terms of modeling income, I'd be modeling it predominantly in next financial year, not this financial year.
Great. That's helpful. Thanks very much for your time.
Thanks, Stuart.
There are no further requests at this time. I will now hand back to Sid for closing remarks.
Well, thanks, everyone, for your time today and your questions. We look forward to catching up with you over the next couple of weeks.