Thank you for standing by, and welcome to the HomeCo Daily Needs REIT FY 24 full year results briefing. 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 the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Sid Sharma, HDN CEO and HMC MD Real Estate. Please go ahead.
Good morning, everyone, and thank you for attending today's conference call. Joining me on the call today is HMC Capital CFO, Will McMicking, and HDN Fund Manager, Paul Doherty. Before we commence today's presentation, we want to acknowledge the traditional custodians of countries throughout Australia. We celebrate their diverse culture and connections to land, sea, and community. We pay our respects to Elders, past, present, and emerging, and extend our respect to all Aboriginal and Torres Strait Islander people today. Let's begin on slide 4. As many of you that have been following the HomeCo Daily Needs story know, HomeCo Daily Needs REIT is approaching 4 years since IPO. We are proud of its continued resilient performance and growth. The HomeCo Daily Needs REIT focuses on assets that provide convenient essentials for local communities, along with last-mile solutions for our retailers.
We always set out to say what we're going to do and then deliver what we say. Today is no different. Before I touch on FY 2024, I wanted to recap how HomeCo has dealt with the challenges over the last two years of a rapidly rising interest rate environment and choppy consumer sentiment backdrop. In the two and a half years since our transformative acquisition of the Aventus portfolio, we moved early on our asset recycling program. We have been net sellers, having sold AUD 560 million of predominantly regional large format retail assets at a yield just under 6, and bought AUD 380 million of metropolitan daily needs, supermarket-anchored centers at a blended target yield of 7% and an IRR target north of 10%.
During this active program of rebalancing to our model portfolio, we have maintained occupancy over 99% since IPO. Maintained sector-leading cash collections at 99% since IPO. Delivered consistent sector-leading leasing spreads, which were over 6% for the FY 2024 period. Delivered or commenced over AUD 150 million of developments. Restocked the development pipeline and grown it to over AUD 700 million. Maintained cost discipline on property expenses and capped corporate overheads. We've also maintained a now growing FFO per unit in FY 2025, and we've grown the NTA of the entity, all while preserving a conservative balance sheet at the midpoint of our target gearing range. FY 2024 was again another period of continued operational excellence and discipline for HDN. Key metrics of 99% occupancy and 99% cash collections were maintained for a fourth consecutive year since listing.
We continue to maintain best-in-class leasing spreads, and importantly, our comparable NOI growth continues over 4%. For those analysts that are curious about tenant sales, I remind you that less than 40% of our tenants provide sales, and in a period of cost of goods deflation, it is not a key metric. That given, tenant sales, MAT performance has improved to 1.2% from the 0.4% at last half reporting, with all categories trending upwards off the back of a busy and successful June trading period. Our assets are located in the best growth suburbs of Sydney, Melbourne, Brisbane, and remain in high demand. Our foot traffic growth is testament to the net migration our country is enjoying. Our assets remain in high demand, not only from our tenants, but also the investor market.
Convenience retail continues to outperform globally with our other retail peers. FY 2024, as I've said, was a record period of capital recycling for HDN and critical in our ability to give you all and deliver a strong outlook, commentary, and guidance today. The group settled or exchanged on over AUD 420 million of traditional LFR centers, broadly in line with book values, with proceeds partially reinvested into high-quality daily needs assets with significant longer-term development potential. These transactions also helped accelerate the reweighting to our model portfolio. Our capital position remains strong, and we will continue to actively recycle capital to fund organic growth and increase exposure to more defensive and higher growth daily needs assets. On slide five, we summarize HDN's investment strategy, which remains unchanged since IPO.
We continue to 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. HDN's strong investment fundamentals are underpinned by low rents set at the bottom end of the landlord cost curves and high exposure to national retailers. HDN owns over 2.5 million square meters of high quality and strategically located land, with just 37% site coverage at present, underpinning our AUD 700 million development pipeline. This gives us substantial opportunity to leverage the rapidly emerging and essential last mile infrastructure trends to unlock additional embedded value. Our portfolio is differentiated, with over 83% exposure to metropolitan locations and a high skew 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-kilometer radius of a HDN center and have continued foot traffic growth steadily since IPO. I'll now hand over to Paul to take us through the FY 2024 results in more detail.
Thanks, Sid. Turning now to slide 7. HDN owns AUD 4.8 billion of high-quality real estate, occupied by more than 1,250 tenants, and we again maintained occupancy and cash collections of greater than 99%. This is a metric we are pleased to have consistently reported since IPO in November 2020. It continues to underscore the portfolio's weighting towards high-quality assets and robust tenant covenants, who continue to demonstrate their resilience regardless of the economic climate. HDN's sustainable rents of just AUD 386 per sq m, combined with a high level of convenience and predominantly metropolitan locations, provide a reliable platform for growth for our tenants and for unitholders. 71% of income has a weighted average fixed rent review of 3.6%, and another 20% is CPI-linked, with annual escalations currently at around 4%.
Only 9% projected FY 2025 income remains to be committed. Comparable net income growth was 4% in the period. This was driven by leasing spreads of 6% across 82,000 square meters of leasing deals. Again, we are pleased to have reported sector-leading positive leasing spreads each period since IPO. Importantly, our leasing activity continues to maintain low incentives of just 5.7%. Footfall continues to increase, up 3% for the twelve months to June 2024. Customers are continuing to live, work, shop, and eat closer to home. This is amplified by the fact that HDN centers are all located in the fastest-growing suburbs of Australia. As Sid noted earlier, visitation across our real estate is running at 95 million customers a year. As a result, HDN retailers continued to perform strongly.
Total MAT growth remained positive at 1.2% despite the broader environment. Moving now to slide 8. Here, we provide further detail about our top tenants and demonstrate the tenant quality and diversity that underpins the portfolio and allows us to deliver consistently strong results regardless of the economic environment. 34% of income is derived from our top 10 tenants, and 7 of those 10 retailers are ASX-listed. We wanted to complete our review of portfolio performance with a summary of two key elements that contribute to the strong performance. Firstly, the location of our assets, which we set out on slide 9. This slide highlights that 85% of HDN's portfolio is located in key metropolitan markets, the majority of which is located in the key eastern seaboard capital cities that have the highest population growth.
With 50% of the portfolio located in the Sydney metropolitan area, 19% of the portfolio located in the Melbourne metro area, and 18% of the portfolio located in Greater Brisbane and the Gold Coast. As we'll highlight later, our asset recycling has further strengthened this. The second key element is our model portfolio, which is summarized on slide 10. The model portfolio is aligned with the Australian consumer spending pie. The targeted composition is 50% neighborhood, 30% LFR, and 20% health and services. This delivers a unique defensive exposure with enhanced diversification, with low correlation to traditional property sectors. While the portfolio's performance has been industry-leading, we have continued to make improvements.
Following the merger with Aventus in March 2022, and before the impacts that led to the current economic climate, we commenced a capital recycling program under which we have sold AUD 560 million of assets that were predominantly LFR-focused and located in regional areas. We have successfully redeployed this through the acquisition of AUD 380 million of metropolitan neighborhood assets in the fastest-growing areas of the country. The yield on our acquisitions exceeded the yield on the disposals, and the reweighting has also resulted in improvements in portfolio quality. I would now like to discuss our progress on sustainability, which we have set out on slide 11. Our HMC group-level sustainability commitments are designed around our objective to create healthy communities.... I'm pleased to report on the following initiatives delivered in FY 2024.
On environmental, we have achieved our net zero roadmap FY 2024 targets across our real estate platforms. This includes a 30% net reduction in Scope 1 and Scope 2 carbon emissions in FY 2024 when compared with like-for-like assets in our FY 2022 baseline. We've installed EMS at all remaining feasible sites in FY 2024, and our solar rollout, we now have solar PV active at 30% of feasible sites in FY 2024, with further installation ongoing throughout FY 2025. We're proud of our continued progress with both initiatives across our HDN portfolio. On social, we have maintained our 50% gender diversity target across the whole organization, as well as across independent board director positions at both HMC and HDN level. HMC's Reflect Reconciliation Action Plan has also now been endorsed by Reconciliation Australia, with RAP initiatives underway across the group.
Community Co's national partnership with Eat Up continues, with sandwich-making sessions held this year at several centers. And on governance, HDN was awarded ESG Regional Top Rated Company with Morningstar Sustainalytics. HDN also lodged its second Modern Slavery Statement, and we continue to adopt to responsible investment standards for all our acquisitions. The team is proud of the tangible progress we are making on our sustainability strategy. Moving now to slide 12. This slide shows our net zero energy roadmap on Scope 1 and Scope 2 emissions by FY 2028. You can see progress against our targets over the last number of years, as well as our initiatives up to FY 2028. As discussed in the previous slide, we have achieved our FY 2024 targets and are well underway with our FY 2025 goals, in addition to planning for our future years.
We would now like to go through the growth opportunities in the HDN portfolio, which commence on Slide 14. HDN has 3 levers available to generate growth opportunities. These include: improvement in portfolio quality through asset recycling, organic growth within the portfolio through growth on re-leasing, and ongoing activation of accretive development from the AUD 700 million-plus development pipeline. On Slide 14, we set out our achievements over the last 12 months in capital recycling. We have executed over AUD 420 million in asset sales throughout the period, broadly in line with book values. This underscores the quality of HDN's portfolio and highlights the level of demand for high-quality assets. As Sid noted earlier, proceeds from disposals have been partially recycled into the acquisition of 4 metropolitan Woolworths-anchored daily needs assets. They are located in Sydney and Melbourne's high population growth corridors.
These high-quality acquisitions help to improve the overall composition of the portfolio, provide greater income security over the long term, accelerate reweighting to HDN's model portfolio, and provide additional development opportunities. Slide 15 and 16 set out our organic growth opportunities. HDN has continued to achieve sector-leading leasing spreads at 6%. Our strategic network of sites located in metro growth corridors ensures that our locations have consistent and strong tenant demand due to the growth in population and limited supply of new retail space. This, coupled with an average portfolio rent of AUD 386 per sq m, which is 30% below the Australian total leased space for supermarket and subregional centers, provides the scope for sustainable ongoing income growth.
As a result, we believe we have the ability to continue to deliver leasing spreads between 5%-6% per annum in the short to medium term. On slide 16, where we highlight the importance of our strategically located portfolio to our retailers and their ability to continue to evolve their networks into last-mile logistics hubs. Customers continue to demand shorter time periods between order placement and fulfillment. HDN's predominantly metropolitan portfolio results in 13 million people living within a 10-kilometer radius of our centers. This, combined with the convenient nature of our properties, which are mostly single level with large on-grade car parks, results in retailers requiring enhanced facilities at our centers to be able to offer multiple fulfillment formats from a single location.
HDN has and will continue to work with retailers in delivering these improved facilities and improving returns to our investors. I would now like to highlight the contribution that HDN's development pipeline makes to our growth, which we commence on Slide 17. FY 2024 has been another successful year. HDN completed 4 developments, delivering a 7% return, and all developments are fully leased. The developments include: a government health and wellness facility, childcare center, and expansions of our existing properties to leading ASX-listed and national tenants. On Slide 18, we highlight our development commencements. We currently have approximately AUD 85 million of pre-committed tenant demand-led development projects underway. These include a daily needs, and leisure and lifestyle expansion at Tuggerah and Castle Hill, and a daily needs expansion at Southlands.
All projects are 100% pre-committed to high-quality national tenants and are on track to deliver a 7% return. Our recent acquisitions have also enabled us to increase our development pipeline. On Slide 19, we highlight the development opportunities that our Leppington and Williams Landing acquisitions provide. Leppington is located in the Southwest Sydney Growth Corridor and has forecast average annual population growth of 18%. The property is part of the Leppington Town Centre master plan. We have strong demand from tenants wanting to be in this area to service both the existing and growing population, and we are proposing development of an additional supermarket and leisure and lifestyle precinct to complement the existing daily needs center. Williams Landing is also located in a master plan town center and includes 10,000 sq m of vacant land.
Again, we have demand from high-quality medical, government, and leisure and lifestyle retailers who will complement the existing daily needs centers. We are continuing to progress our plans for these centers, and we look forward to providing further information in the future. Slide 20 highlights our development pipeline. We are pleased to have upscaled the pipeline this year to more than AUD 700 million. It underscores the substantial and better growth opportunity in the portfolio, which we firmly believe is a major differentiator for HDN. This consists of core daily needs retail projects we have in front of us today, which we will deliver over the medium term. The development pipeline is a key strategic pillar for the group. It offers compelling risk-adjusted returns, it is accelerating HDN's tenant remixing towards more defensive daily needs tenants, and it is tenant demand-led.
I'll now hand over to Will to take us through the 24 financial results in more detail.
Thanks, Paul. Turning now to Slide 22 to go through the earnings summary. Property net income grew by 4% to AUD 273 million in FY 2024 and was offset by higher interest expense, with HDN recording FY 2024 FFO of AUD 178.1 million, AUD 0.086 per unit. Turning now to Slide 23 to go through the balance sheet. June 2024 net tangible assets was AUD 1.44 per unit, recording a modest 3% reduction versus June 2023. This was driven by a softening in the portfolio cap rate from 5.5%-5.6% and was partially offset by property income growth. The resilience in HDN's property portfolio allowed the group to continue its asset recycling program, which is funding the development pipeline and an upweighting to neighborhood assets.
Turning now to Slide 24 to talk to capital management. June 2024 gearing of 35.1% continues to be at the midpoint of the target gearing range of 30%-40%. This half, the focus for HDN was on debt tenor, with the group refinancing AUD 1 billion of debt expiries, including new 5- and 6-year tranches, resulting in an increase in weighted average debt expiry to 3.3 years. Hedging remains high at 87% and provides strong interest rate protection into FY 2025, and we will continue to remain opportunistic with our hedging strategy. Summary of the debt and hedge book is also detailed on this slide and in the appendix. I'll now hand back to Sid to provide closing remarks.
Thanks, Will. Turning to page 26. We're really pleased and proud to provide FY 2025 FFO per unit guidance of AUD 0.088 and distribution guidance of AUD 0.085, representing growth of 2.3% and 2.4% respectively. Guidance is underpinned by forecast comp NOI growth of 4% in FY 2025, as strong top-line revenue growth is being driven by high quality and defensive cash flows. Our leasing confidence is underpinned by low supply of quality metropolitan retail property. We're also pleased in this period to have upscaled our development pipeline to over AUD 700 million, and expect to commence approximately AUD 100 million-AUD 120 million of development projects in FY 2025. We'll continue to actively recycle capital to fund organic growth and increase exposure to more defensive and higher growth daily needs assets.
Our management and board remain disciplined and focused as we have always done. We are committed to funding growth out of the existing capital base and maintain conservative gearing in our target range. Thank you, everyone, and I'll now open up 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 question. Your first question comes from Cody Shield with UBS. Please go ahead.
Good morning, Sid, Will, and Paul. Just on the development CapEx commencements in 2024, coming out at AUD 85 million compared to AUD 120 million targeted at the half. Can you just talk to the difference there and, you know, whether it's around timing or, or cancellations?
Thanks, Cody. If you recall, at the half, what I said was that we will always target between AUD 100 million to AUD 120 million a year. However, it'll also be taking into account the balance sheet capacity and other opportunities, in the period. So what we've done is, for the period, we've commenced slightly less developments than we were planning, but we've also bought some quality assets and restocked the development pipeline.
Right. So was that more around opportunities or more around balance sheet, that piece?
Both.
Okay, sure. So not seeing any issues, you know, on the construction front with costs or delivery or so on?
No, things are getting better.
Okay, great. Maybe just on the model portfolio, you know, Sid, in the past, you've noted you get around, you know, 1%-2% of reweighting every year through remixing. We're starting to see retailer margins come off of it, some store closures and so on. Do you think we might, you know, see that 1%-2% pick up in 2025?
I think there's some opportunities for that to occur, yes.
Okay, sure. Maybe one on just the debt refinancing there, Will. Can you speak to, you know, the terms you were able to achieve there, whether there's any change and what we should be expecting for, you know, cost of debt into 2025?
So we increased the tenor, so I mean, that comes at a slight cost, but what we'd say is, you know, the credit margin was unchanged and, you know, we had really strong interest, and that book was over 2 times covered. Some big names came into the book. So, you know, it continues to reflect the high credit quality of HDN.
And then cost of debt into 2025, if you can?
I think, I mean, we previously guided our margin at about 1.5%. So, you know, you can do the math on the hedge book. It's probably just under 4-4.5%.
Okay, perfect. That's all for me. Thanks, guys.
Thanks, Cody.
Your next question comes from Richard Jones with JP Morgan. Please go ahead.
Oh, good day, Sid. Just wondering if you expect any income drag or loss of income from the CapEx you're spending in the existing financial year or the current financial year?
No, Richard, the capital expenditure is all, all incremental. There'll be very little tenant downtime or lost rent through the period.
Okay. And we're assuming that asset sales, all other things being equal, are broadly gonna match the CapEx spend?
Yeah, I think that's a fair assumption, Richard. Look, we're pretty happy with the asset recycling to date. The portfolio is in pretty good shape. We want to keep gearing about where it is. So, in order to fund the development book, we'll selectively recycle an asset here or there.
Okay. Will, just any thoughts on the hedge book? Obviously, you're well covered 2025. The hedges roll off 2026 and I don't think there's any hedging for 2027. So just interested in how you're thinking about tackling that this year.
Yeah, I mean, we've, we're obviously well covered for the next 18 months and, you know, as we've said, we'll be quite in opportunistic. You know, we were having this conversation around increasing the hedging at the half year. We've waited, you know, that's gone in our favor, and, yeah, we'll be opportunistic.
Okay, thanks, guys.
The next question comes from Simon Chan with Morgan Stanley. Please go ahead.
Oh, good day, guys. Hey, I've got a question for Will. Your answer to one of the earlier questions about the debt and the increase of tenor. Your response was, "It came at a slight cost, but credit margin remained unchanged." Can you just elaborate on how it came at a cost, but margin was unchanged?
Yeah, so like for like, our credit margin is unchanged. As you add additional years to your debt tenor, that typically comes at a cost. So rule of thumb is about 10 basis points around. So the credit margin-
Okay, that's much more clear. Hey, Sid, you said capital expenditure that you're kicking off at the moment is incremental, so very little tenant downtime. Perhaps can I just go to slide 20 then, just taking a look at the broader projects you have, like the AUD 700 million there. Is that also the case? Like, can we assume that these projects, as you kick them off over the remainder of this decade, they're all gonna be pad sites or additional land, et cetera, or will there be an element of you know impacting the existing center? I'm just trying to work out, you know, how to think about the actual NNI growth going forward.
Good question, Simon. So that GLA in planning of 110,000 and GLA in plan, in GLA approved of 40,000 is all incremental. It will have very little impact to existing assets. So that's new GLA, new income.
Okay, that's excellent. Just final one. Hey, can you remind us of your stake in LML and whether or not you think there'll be any funding requirements on HDN's part going forward if that vehicle makes further acquisitions?
If you recall, HDN originally committed to a maximum of AUD 50 million of investment into the Last Mile Logistics Fund. AUD 43 million of that has already been invested and is sitting on a net gain of about 20%. The residual AUD 7 million will be invested in the very near term, as LML has unconditionally exchanged on another acquisition and will probably reach full deployment in the near term. Beyond the AUD 50 million, there will be no further commitments at this stage.
Very clear. Thanks for this.
Thanks, Simon.
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 David Pobucki with Macquarie Group. Please go ahead.
Thank you. Good morning. Congratulations on, on the results. Just going back to the, the development pipeline, please, obviously, you've increased it. Could you point to any key contributors to that increase, please?
Thanks, David. Page 19, two of the key contributors is the restocking of the pipeline through the acquisitions we've made at Leppington and Williams Landing. So each of these projects are north of about AUD 50 million each, and then the balance of the increase is driven through incremental opportunities identified on vacant land across the book, and the development team's done a great job trying to find new opportunities where we can build more and lease more. To my earlier comments, there is a supply issue now in metropolitan locations for retail space, so we're looking to capitalize upon that and soak up the tenant demand we have for these assets.
Thank you. That's clear. And just my second question. Thank you for the MAT performance commentary, but I was just curious if you could provide any further color on kind of how you're seeing the consumer environment and tenant demand across supermarkets versus specialty versus, you know, traditional LFR, et cetera.
So in the first half of FY 2024, you saw consumer sentiment reflecting pretty poor consumer spending, and you saw that in the movement in the MAT growth. But in the last half, especially as we ended June quarter, there's a fair bit of cost of goods deflation, which has led to higher volumes, higher foot traffic, and higher sales across all of our categories, including supermarkets, including large format. So it feels like it's dropped and, and retail spending is trending in the right direction, but I'd call out there has been cost of goods deflation, so volumes are up, foot traffic is up, but our retailers are telling us they're holding margin, which is the most important point.
Thank you very much. Good luck over the remainder of the year.
Thanks, David.
There are no further questions at this time. I'll now hand back to Mr. Sharma for closing remarks.
Thank you, everyone, and thank you for your interest in what is a very busy reporting day. We're really proud of what HDN has delivered, and I'd like to extend a very sincere thank you to our shareholders, our board, our management, for what has been an exceptional result in a very tricky couple of years. Look forward to catching up with all of you on the one-on-ones. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.