Thank you for standing by, and welcome to the HMC Capital Limited FY 23 Half 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. David Di Pilla, Managing Director and CEO. Please go ahead.
Good morning, and thank you for joining today's call. Joining me on the call are Will McMicking, Group CFO, Sid Sharma, Group COO, Misha Mohl, Group Head of Strategy and Investor Relations. Before we commence, HMC Capital would like to acknowledge the traditional custodians of country throughout Australia and 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. Today, you will hear how we are accelerating the evolution of HMC Capital into a sophisticated and diversified alternative asset manager with multiple growth drivers. We are building a scalable funds management platform which can take advantage of opportunities which are now emerging in a more challenging operating and funding environment. Heading now to slide three to provide an overview of the group today.
HMC Capital is a high conviction alternative asset manager with AUD 6.2 billion of assets under management across real estate and private equity. Since listing in October 2019, HMC has organically established three vehicles and grown assets under management by a 78% compound annual growth rate. Our success has been built on our ability to execute large complex transactions and generate outsized equity returns from these opportunities. Over the past 12 months, we've significantly invested in our platform via new product development initiatives and distribution capabilities. Over time, we intend to expand and diversify our platform into new scalable sectors such as private credit, renewables and infrastructure. Heading now to slide five to discuss the key results highlights for the first half of financial year 2023. HMC Capital delivered operating earnings of AUD 24.9 million or AUD 0.083 per share.
We have declared a fully franked dividend of AUD 0.06 per share. Our funds management revenue of AUD 28.4 million for the half represented 54% growth on the first half financial year 2022, reflecting the substantial growth in funds under management of AUD 2 billion. Our balance sheet remains well positioned to support future growth initiatives with over AUD 200 million of available liquidity facilities and AUD 750 million of investment in our funds platform. Finally, we've progressed our strategy to grow and diversify our capital sources through major project product development initiatives. We launched our first private equity fund, HMC Capital Partners, in August 2022 with AUD 300 million fundraising, which was strongly supported by ultra-high net worth and family offices.
We are on track to launch our first unlisted institutional fund in the second half of financial year 2023, which will focus on Last Mile Logistics assets. The fundraising for the first AUD 1 billion fund is progressing well with multiple investors now in due diligence. We believe this strategy is extremely scalable and will target to raise an annual series of AUD 1 billion each year for the medium term as the opportunity in this is deep and institutional investor appetite for this strategy is strong. Finally, we are progressing plans to establish a AUD 1 billion healthcare and life sciences unlisted fund with Institutional Capital Partners in financial year 2024, with multiple investors expressing interest and in discussions. Slide seven, where we discuss our funds management strategy. HMC today manages AUD 6.2 billion across highly focused funds with scalable portfolio-based strategies which have been established organically.
Our goal is for HMC to evolve into a 20% plus ROE business over time. Importantly, HMC's balance sheet will remain an important source of capital to grow funds under management through strategic asset warehousing and underwriting. Our existing real estate platform is positioned to scale to over AUD 10 billion across multiple strategies with very low incremental costs. The establishment of our private equity platform through HMC Capital Partners during the period represented another important milestone for the group in establishing our first unlisted fund. We believe the ROE for this strategy over time will be above our 20% target. We see the move into private equity as a significant growth opportunity and a way for HMC to participate in large scale transformational opportunities.
Significant investment in the infrastructure to establish our first unlisted fund included unlisted registry services, fund administration and auditing, client onboarding and reporting, and successful completion of an independent operational due diligence review. This work is now being leveraged for the establishment of our last mile logistics fund. We are also actively considering potential acquisition and partnering opportunities to further expand our platform into new alternative sectors. Importantly, anything we require will be complementary and scalable within HMC's platform and be marked against our 20% ROE target. Moving now to slide eight, our growth strategy. This slide illustrates our pipeline of growth opportunities to support our ambitions to grow AUM to over AUD 10 billion by the end of calendar year 2024. It also supports my earlier comment regarding our strong preference to invest our time and effort into new funds management initiatives which are scalable.
For example, our HDN vehicle, which has a focused model portfolio investment approach across its circa AUD 5 billion portfolio, is very scalable as compared to a manager with 60 single asset closed-end syndicates totaling AUD 5 billion. Importantly, the growth required to achieve our AUD 10 billion target can be generated from our existing funds and the two new complementary unlisted funds. Moving now to Slide nine. Our distribution and fundraising strategy. This slide attempts to illustrate our how our fundraising and distribution has evolved over the last three years, and how we have planned to evolve and expand our capability in the future. Our Daily Needs REIT, which listed in November 2020 with approximately an AUD 650 market cap and a largely retail-focused register, has successfully evolved into an ASX 200 entity with a more diversified institutional share register.
Last year, HDN also went into the FTSE EPRA Nareit Index . Moving forward, HDN is well-positioned to attract more global institutional capital and achieve ASX 100 index inclusion over time. Our healthcare REIT, which listed in September 2021, is the only ASX listed diversified healthcare REIT. The IPO attracted strong support from both retail and institutional investors. We see strong potential to introduce more domestic and global institutional capital over time to support the REIT's growth pipeline. Our private equity fund, HMC Capital Partners, reached first close in August 2022 with strong support from ultra high net worth and family office investors. We are now working towards expanding distribution into the broader retail market via a retail PDS. This will allow us to market the fund to financial planners, self-managed super funds, and distribute the product through additional investment platforms.
This fund is also well-positioned to get its first investment rating over the coming months. In addition, this strategy will also target institutional investors over time as it establishes a track record and builds a position in larger scale investments. This will allow the fund to execute its strategy on a much larger scale. Moving to our unlisted product strategy. Our LML fund series will be HMC's first unlisted fund. The first AUD 1 billion fundraising for the series is well progressed and has attracted strong interest from both domestic and global investors. We've also received inbound interest from private banks and wealth managers. In the medium term, we also have the option to explore expanding distribution into this retail segment. Finally, we are progressing the development of an unlisted healthcare and life sciences fund.
Our current focus is on securing a meaningful pipeline of healthcare and life sciences development opportunities. These are funded alongside our remaining interest in the Camden Healthcare Precinct. Investor interest in this sector remains extremely high. Moving to slide 10, to briefly touch on the performance of each of our vehicles and starting with our HomeCo Daily Needs REIT. Since listing HDN just over two years ago, we have prudently scaled the model portfolio from AUD 800 million of assets under management to almost AUD 4.8 billion today. HDN owns a strategic real estate land bank with just 37% site coverage in Australia's best metropolitan location. It is exposed to leading omni-channel retailers, and its rents sit at the bottom of the landlord rental cost curve.
HDN earlier this week delivered a strong first half financial year 2023 result with 8% FFO growth on the prior corresponding period, despite higher interest costs. HDN reported sector-leading operational metrics, including 99% occupancy and rental cash collection, 5.9% leasing, positive re-leasing spread with incentives of only 5%, and resilient property valuations underpinned by growing income. The REIT upscaled its development pipeline to AUD 600 million and flagged a significant step-up in annual CapEx from AUD 80 million in financial year 2023 to AUD 120 million in financial year 2024, all while maintaining its AUD 0.07 ROI target. Finally, HDN's balance sheet was very well positioned, with gearing at 31.5% and interest rate hedging at 7%, providing capacity to pursue accretive acquisitions which are not included in the guidance outlook provided by HDN.
Moving now to our healthcare REIT on slide 11. HCW also delivered a strong first half financial year result and upgraded its full year FFO per unit guidance by 4% to AUD 0.071 per unit. The revised guidance for financial year 2023 represents 15% growth versus financial year 2022. Operational performance remained robust, with 99% occupancy and 100% rent collection maintained. HCW has low gearing of 15% and over AUD 200 million of liquidity to fund the REIT's committed development pipeline and acquisitions. HCW recently reached a major milestone with The George Centre development, achieving tenant handover and finishing the development on time and on budget. The George represents the first stage of what will become a AUD 500 million precinct in Australia's fastest growing LGA.
The new strategic partnerships HCW has struck with Marta and E. Gross have the potential to create exciting work pipelines for the REIT. HCW last week also announced the acquisition of a strategic life science asset at Macquarie Park, which is in line with the REIT's strategy to grow its exposure to this sub-sector. HCW's $500 million-plus future development pipeline includes the Camden Precinct and our Rouse Hill asset. Importantly, the proposed establishment of a new unlisted fund will provide greater funding certainty for these major projects, while allowing HCW to manage its exposure to these opportunities based on its funding capacity and investment priorities in the future. Moving now to Slide 12, HMC Capital Partners. The establishment of HMCCP expanded our funds management platform into private equity and unlisted funds. Once again, this product was developed in-house and reflects the significant investment in our funds management capability.
A lot of thought went into the strategy and design of this product. HMCCP has flexible capital, which leverages our deal-making smarts and ability to generate outsized returns for investors from complex situations. HMC, as the manager, has the potential to capture significant performance-linked income, which aligns well with our high ROE strategy. We are now speaking to institutional investors to execute the strategy with larger companies and situations that require more meaningful stakes to effect change. I am pleased to report that the fund recently reported a NAV of AUD 1.074, which is tracking well above its performance fee threshold of 7% on an annualized basis. Importantly, the performance was achieved while maintaining a disciplined investment approach with the fund holding over 50% weighting to cash. The fund now owns 19.1% of Sigma Healthcare.
We are pleased with our strategic holding and believe the company is well positioned for future growth. The fund is actively building a position in a second investment, which is a significant real estate-focused company, which is trading at a material discount to its break-up valuation. Moving now to Slide 13 and an update on our Last Mile Logistics REIT. We see this as another scalable strategy which can be grown through a series of unlisted fund developments over time, over the medium term. As I mentioned earlier, we see a sufficient pipeline and institutional investor appetite to complete an annual AUD 1 billion series for this strategy. The strategy builds on our track record of successfully repositioning real estate through our leasing and development capability.
In December 2022, we announced the acquisition of Menai Marketplace as a seed asset for the first LML fund, with initial funding support from HDN and Woolworths. I am pleased to report that we've already unlocked a AUD 25 million value uplift since acquisition. Importantly, we believe the LML strategy will be complementary to our existing HDN strategy. The LML fund will target transitionary retail assets with omni-channel and logistics potential, which aren't initially suited to HDN's mandate. The Woolworths equity commitment is a testament to the strong alignment between the LML strategy and Woolworths' objective to maintain its market-leading omni-channel capability. We are well progressed to achieve our target fund size of AUD 1 billion over the coming months. We have received indicative institutional investor commitments, which are now moving through due diligence and approval. Moving to Slide 14, where we discuss our progress on sustainability.
This slide highlights our HMC Capital sustainability framework, which was designed around our objective to create healthy communities. I am pleased to report on the following initiatives we delivered over the half, which demonstrate the progress we are driving across the entire platform. Environment. Our two REITs are both on track to achieve net zero by 2028, with our roadmap detailed on Slide 15. We are making strong progress on solar PV rollout across the HDN and HCW portfolios. Social. Our social impact strategy is supported by the establishment of the HMC Capital Foundation and through CommunityCo, which will support the delivery of our social impact commitments, including our first grant in financial year 23. Governance. We always strive to implement the best practices in everything we do.
Over the year, we have released our Modern Slavery policy for HDN, completed our first GRESB assessment in HDN, achieved our 50% gender diversity targets across the organization, as well as across our independent board director positions ahead of our financial year 25 targets. We've implemented KPIs for all management team members across the group linked to ESG. We've become a signatory to PRI and the UN Global Compact, and we've commenced our Reconciliation Action Plan, which we'll provide further details in the coming months. I look forward to keeping you all updated with our ongoing progress. I'll now hand to Will McMicking to discuss our financial year results.
Thanks, David. Turning now to Slide 17 with the earnings summary. Operating earnings for the first half was AUD 25 million or AUD 0.083 per share. If we exclude the property trading profits booked in FY22 and look at the core segments of investment income and fund management, the group recorded 32% earnings growth over the period. Investment income increased to AUD 4.9 million to AUD 20.2 million, was driven by the investment in Capital Partners Fund. Funds Management revenue also recorded a AUD 10 million increase to AUD 28.4 million, with growth in recurring management and property management revenues offsetting a reduction in acquisition fees. An interim dividend of AUD 0.06 per share has also been announced. Moving to the balance sheet on Slide 19.
HMC Capital Partners Fund was consolidated during the period, which has impacted the comparison to June 2022. We just focus on the underlying net tangible assets. This has remained relatively flat at AUD 2.30 versus AUD 2.31 in June. Key movements outside of the Capital Partners Fund related to HMC selling its interest in the now complete Camden Stage One hospital development to Healthscope in December. HMC continues to maintain an interest in Camden Stages Two and Three on the balance sheet. Turning to Slide 20, capital management. As at December, HMC had cash and undrawn debt of AUD 200 million. Debt at December included AUD seven and a half million drawn for the seeding of the LML funds, which has since been repaid in February. I'll now hand it back to you, David.
Thanks, William. Turning to the outlook for financial year 2023. In financial year 2022, HMC Capital delivered operating EPS AUD 0.31 per share pre-tax, which included AUD 0.104 of transactional income and AUD 0.095 of trading profits from the sale of investment properties. HMC Capital did not provide operating EPS guidance for financial year 2023, given the uncertain nature of future transactional income timing. However, we noted that the financial year 2022 pre-tax operating EPS of AUD 0.31 per share was repeatable. This statement reflects HMC's track record of executing significant transaction volumes, including large-scale acquisitions with material transaction fees.
While the volume of capital deployment activity across HMC's platform has slowed in the first half of financial year 2023, we have used this period to focus on strengthening the balance sheet of our listed REITs, holding a high proportion of cash in HMCCP, and executing our first unlisted institutional fundraising for the LML strategy. As a result of the above proactive actions, the HMC group will have close to AUD 2 billion of dry powder post the LML raising to deploy into accretive investment opportunities. Importantly, we have remained disciplined in our investment approach over the last 12 months, as we do not believe the transactional market has reflected the increasing cost of capital. However, we now believe the investment environment is becoming more conducive. HMC is well-placed to take advantage of attractive opportunities which are emerging across its growing and more diversified platform.
As I hope we've illustrated to you this morning, we remain excited and confident in the outlook for our business and achieving our AUD 10 billion AUM target. Today, HMC reaffirms its financial year 23 DPS guidance of AUD 0.12 per year, per share, which is in line with our financial year 22 and supports HMC's high return on equity growth strategy. I'd like to thank everyone for joining the call this morning, and now I'll hand back to the operator for Q&A.
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 are on a speakerphone, please pick up the handset and ask your question. Your first question comes from James Druce from CLSA. Please go ahead.
Yeah, good morning, David and team, and thank you for the presentation. My first question, just around the LML fund. You mentioned to investor in DD there at the moment. Just wondering when that DD period will be up, and would you expect to hit your targets at the end of the first or at closer to June, or is that more imminent?
Look, these things take time, but we would be expecting to achieve that raising target by at least, at the latest, 30 June this year.
Yeah, okay. That makes sense. You've obviously broadened out the sort of distribution for HMC Capital Partners Fund I. Can you talk to any sort of feel for run rate of inflows, now that you're going down the planning channel?
Look, that's a hard number to give you, but internally we are sort of looking at once we get on that channel, that will be complementary to the wholesale raising that we've done previously, which will obviously open up. At the moment, we are sitting on over 50% of the funds. Investable capital is sitting in cash. What we do see is any correction or leg down that we have in equities over the next few months will open up investment opportunities. We'll deploy that cash and then we'll ramp up raising opportunities around that. Internally, we're budgeting from retail channels, from the retail PDS, somewhere in the order of AUD 5 million-AUD 10 million of inflows per month.
Once we get a bit of a steam up and once we get track record in that investment strategy. You could expect, and as you'll see, we've sort of articulated a bit of a view on that and a bit of a view on where our retail and wholesale fundraising strategies can take that fund over the course of the next 12 months as we move towards that AUD 10 billion target. I think we've articulated that on this slide. Slide eight of the presentation. I think we've got some commentary there.
Okay, one more if I may. Can you just talk about the cash flow coming into the second half? The cash flow from operations is sort of one and a half mil for the first half. There's obviously the divvy, but you guys got a lot of cash on balance sheet, and you're always very active. Just curious to see how you're thinking about the second half cash flow.
I mean, if you're asking about the cash flow, Rick, I mean, the big thing to call out there is. There's about an AUD 25 million gap. AUD 20 of that is coming through the existing cash flow. That is, dividends from the stakes based over Capital Partners Fund. I mean, that's the main gap. You know, as to deployment, I mean, just worth noting that a lot of that cash sitting on the balance sheet is the Capital Partners Fund.
All right. Thank you.
Your next question comes from Sholto Maconochie, from Jefferies. Please go ahead.
Hi, David and team. Just following up on the cash flow from Brucy there. Was that AUD 5.3 million NAV gain in Capital Partners One, was that a non-cash or cash?
Yeah, that's right.
Okay. that's probably sum of the two, that other AUD 5 million difference. Okay. just on the consolidation of that, like it looks like you own 52%. Who owns the other 48% of that fund?
Investors.
Okay. Okay. Just in that fund, I notice you said you've got a confidential stake in obviously listed REIT. How much is the dollar value or percentage holding in that company that you hold in that fund?
We could probably work out what we've got in Sigma. We've got that out in the market. It tells you it's 19.1%. We've sort of been guiding you to the fact that we're sitting on about 50% cash, you can probably back solve that.
I haven't done the calc, but I was gonna do that after this call. I thought you just had it on hand.
Probably work it out. It's probably about AUD 100 million deployed into that strategy at the moment, maybe a bit more.
Okay, thanks, David. Then just on the biz going forward, you've obviously got a series of future institutional funds in the Last Mile Logistics. Is that just gonna be a club of people in each fund or one investor? How will those future funds work?
We are speaking to investors that are looking at writing pretty significant checks. Each fund will be formed around a club of investors. What we were proposing there is that as we evolve the strategy, execute the strategy, realize the assets, we've got an embedded obviously take out through HDN over years to come. The investors that are in diligence now have appetite to continue to roll into other subsequent fundraisings. We think that, you know, this is an underappreciated asset class. It's a real opportunity to make outsized returns. Yeah, the level of interest is growing around the strategy as we evolve and as we talk to more parties.
Yeah. Just on the I'm not sure it's a change in wording, but the last time it was well-positioned to remain growth trajectory and grow some beyond AUD 10 billion by 2024. Now it's well-positioned to grow AUM beyond AUD 10 billion by 2024. Is there anything to take read into that or just a change in wording?
I think it's probably just a change in wording, I believe.
They're still on track for that greater than AUD 10 billion number.
No doubt.
by calendar year 2024. All right. That's everything for me. Okay.
Thanks so much, David and team.
Cheers.
Your next question comes from Stuart McLean from Macquarie. Please go ahead.
Good morning. Thanks for your time. First question, just around funding, these new opportunities, you've outlined in detail today, with your current capital base. How should we expect the funding of co-investment stakes and seed stakes in these funds going forward? Is it about recycling out of what you have or, could you genuinely deploy that AUD 200 million of liquidity and you're happy where the balance sheet would take you if you did deploy that AUD 200 million? If you just provide a bit of commentary around, yeah, HMC's funding, that'd be great. Thanks.
I think I understood the question, Stuart. It's just breaking up slightly. I think what we've introduced today is the concept of a 20% ROE target. What we are flagging through that is that our real estate platform alone, through our, through our two listed REITs, that you can see pretty transparently, our level of investment in both those REITs. We are flagging today that we are looking to scale our strategy over time, but with an overarching sort of benchmark or hurdle of 20% ROE. What that means is, we wouldn't be looking to put more capital into those strategies, but we would be looking to you know, grow those, double those effectively in size and effectively, as a result, not have to increase our cost base, in a meaningful way.
As a result, as you evolve and think that through and model that out, what we're looking at is, you know, a very high ROE business on that investment. That's really the strategy. That's the way to think about it. That's the way we're thinking about our growth and the evolution of the business moving forward.
To achieve that ROE of 20%, I'm just thinking about the growth of the other last mile logistics funds, healthcare funds, et cetera. I'm assuming that it requires capital recycling out of investments that you've already made, given that there's currently AUD 200 million of liquidity and you've outlined AUD 6 billion of extra fund opportunities.
If you look at LML, HMC's balance sheet will not be going into that. Effectively, HDN has committed AUD 50 million to that strategy. The co-investors or the other investors are really pleased with that alignment. As a result, HMC won't be putting capital into LML. I think importantly, if you take a step back from it, what HMC did was it provided its balance sheet in order to create LML. It warehoused the costs, it warehoused the initial seed asset on its balance sheet and backstopped the acquisition of that, but at the same time hasn't had to provide ongoing capital into that investment strategy. The ROE on that alone, for example, is already sort of running above 20% because there's no equity involved in that investment strategy.
What I'm saying is, if you think about and you model out HDN and HealthCo with the capital we've got in there, if we can take those strategies on a combined basis, you know, we'll remain disciplined, we'll remain focused, we'll wait for market windows and opportunities where the cost of capital is right. If we take those two strategies alone to over AUD 10 billion, you can then model out what that would look like in terms of fees and so forth. You know, it's not that far along a bridge or bow to potentially look to see the income that'll come off that and the capital will start to move towards a 20% trajectory. Opportunistically, are we gonna sit at those levels of shareholding long term?
You know, we probably would be a long-term 10% holder in both of the vehicles longer term. That doesn't necessarily mean selling down. That means just potentially not participating in capital risings and that sort of thing. Strategically, tactically, you know, the way I look at it is, you know, if you've got AUD 600 million, you wanna be generating and invested in those two strategies. You wanna be generating more than AUD 120 million of fees off the back of that. That's how you get your ROE target. We're, we're pretty focused on how to get there. We know how to get there. We're just gonna wait for the right windows and time.
Thanks for the color there. Appreciate it. Then second question, just around the performance fees that could come through from Capital Partners Fund I, will these be accrued in second half 2023, you know, if they're there to accrue or we only look to recognize them in the P&L once they become cash payable?
I think there'll probably be some level of accrual in our results moving forward, but that'll be a decision that, you know, we'll have to make at each reporting period based on the facts and circumstances. At the moment, we're consolidating that fund. We're kind of happy to consolidate the fund at this point in time because obviously we like the underlying investments and we like the strategy. Deconsolidating won't necessarily be just a bright line at 50%. Yeah, we'll tactically look at that as we move forward.
Yeah. Then Stu, one other thing to add is, that performance fee beyond the 2-year stabilization period is paid annually. The accrual discussion kind of falls away.
Great. Thank you. Just a final question from me, if I may. Just David, on your comments around the market becoming a bit more conducive, can you just describe what you've seen in the last few months in order to make that statement, please?
I've always used this pretty simple analogy. I always feel as though the simplest way to describe this is the listed market is always a forward-looking barometer of what interest rates are doing and what investor expectations are. The real asset market and the transactional market always looks back. What we've seen over the last 12 months, and particularly sort of 2022, was there was a lot of static in the market and a lot of inertia in terms of transaction values. Everyone wanted last year's price, so to speak. What we've seen in recent months and what we've seen in some of the transactions that we've announced recently, so you can see through the seed assets we put into LML, the last acquisition that HDN made, the last acquisition that HealthCo made.
We're looking at asset acquisitions now, you know, opportunistically, and you've really got to pick the odds out of the market. You've got to be patient, you've got to be disciplined. You know, those LML seed assets, you know, we're talking 8% ROI unlevered on those assets. That's pretty attractive. That wouldn't have been available 12 months ago. Again, we're just being opportunistic and patient. The asset we picked up with The Life Sites precinct at Macquarie Park was again very attractively priced. There's other things in our pipeline at the moment that are starting to free up, very attractive, high-quality opportunities, and they are starting to look more attractive in that they are sitting well above our cost of equity for the vehicle. Again, the opportunities are starting to open up.
The market is starting to become a little more conducive.
Gotcha.
A little more rational.
Thank you.
Thanks very much for the answers there.
Your next question comes from Andrew MacFarlane from Jarden. Please go ahead.
Hi, guys. Thanks for your time. Look, just a couple from me. I think at the last result, David, you talked about the credit pillar as being a bit of a counter-trade. Just interested in your color on what you've seen in the last six months and the thinking on that going forward.
Can you repeat that, Andy? I just didn't quite.
Yeah, no worries. Just in terms of the credit pillar for your business, I think in the last call, you talked about it being a bit of a crowded trade. Just wondering what the color is or what you've seen over the last six months and sort of how you're thinking about that strategy go forward.
Yeah, look, we've been doing a lot of work on it. Clearly what we see is with capital, and liquidity tightening up in the system over the last 12 months, it does appear to be an opportunity for us in that area. We are talking to a number of parties. What we are not looking to do is create something that's not scalable and something that we're not in control of as a manager. We're not looking to create, you know, a narrow business just trying to do commercial real estate loans. We're looking at something a little more scalable and a little more diversified in our approach. So we'll be patient there. We'll pick the right opportunity and we'll look to deploy. Again, we're looking at a number of opportunities.
Clear. Just a second last one for me. Just, you called out renewables as well, for the HMCF tomorrow. Just wondering what your thinking is there.
Again, it's a space that, if you look at even the listed market today, very difficult for investors to get exposure to. Again, if we can come up with the right opportunity, we see opportunity to potentially bring another listed vehicle back to market over time, and find other ways to provide investment opportunities for investors in that space. Again, it's just an opportunity that's opening up. The asset class is pretty hotly contested and the opportunities are hard to find at the right value. What we think about in terms of these opportunities is if we can find the right platform and the right capability, then we'll obviously look to deploy some capital there.
Again, it's just a game of being a bit patient and a bit very prudent with your capital.
Thanks, David.
Benchmarking everything against our 20% ROE hurdle.
Thanks.
Your next question comes from Richard Jones from JP Morgan. Please go ahead.
Good morning, David. Just in terms of the second half, targets, are you saying you'll raise AUD 500 mil of equity for the LML fund and upscale HMC Capital Partners equity to AUD 500 mil? Are they kind of the hurdles that you're setting yourself?
Are you looking at the waterfall chart on slide eight?
Not specifically, but, just interested.
If you have a look at the waterfall, if you have a look at the waterfall chart on slide A, you're broadly sort of on track there in that what we're saying is with the LML strategy, we're looking obviously an AUD 500 million dollar commitment, given the gearing level there, given the fees that are calculated off gap, think about AUD 1 billion there. We're saying that we see enough appetite and enough pipeline there to be doing an AUD 1 billion-dollar series there every year. That could be AUD 1 billion this calendar year and AUD 1 billion next calendar year. So that's sort of what we're saying there on slide eight. Then with Capital Partners, yeah, we are looking to expand the distribution capability of that to broader segments.
We would expect a level of flow to start there. You know, we're sort of internally thinking about AUD 5 million-AUD 10 million a month. Whether that is this financial year or whether it's next financial year, you know, we're still sitting on a fair bit of cash there, we're in no hurry to do that. We've obviously got to get the prospectus finalized. That's probably less than a month away. We'll get out on the trail once we think the market environment's right, and just start pushing that out through some of the retail and financial planning networks.
Okay. In terms of deployment, you're saying you could deploy up to AUD 1 billion in last mile in the second half? Is that you're saying that much is potential?
Yes.
Okay. You're well advanced on opportunities then that would suggest.
Yes.
Okay. Then, similarly with the capital partners in terms of deployment, any kind of color on what you think the second half might look like?
Yeah. Look, we, like everyone, probably thought that the January equities rally was probably overcooked. We held off deploying our cash through December, January this year. We've sort of been quite prudent. That's why we're sitting on strong cash balances. We're quite enjoying the weakness in markets at the moment. Yeah, we're gonna be pretty opportunistic with that strategy, I think. The reality is we've done a huge amount of work on a number of investment opportunities. We've been cautious in the deployment. We've been very disciplined. Where opportunities move outside our target zone, we just don't deploy them, we just sit on the cash. We remain prudent but high conviction in our view around the strategy.
I think if we maintain the discipline, there'll be a good new story to tell there in times to come.
Okay. One final question. Just in relation to the capital partners profit that you've booked through the P&L in the first half, is that just marking to market the NAV move? Is that what you've done there?
Yeah. I mean, there's a bit of dividend income in there, but the majority is mark to market and in accordance with the accounting with equities fund.
Okay.
What's booked for December is, you know, 3.5%. Kind of touched on at the last report. Jan is, you know, double that, 7.5%.
Sorry, we're just cut out a little bit there. You said you've booked 3.5% gain, and there's been another 3.5 in January. Is that what you said?
Yes. It's Well, I think December, obviously we're reporting results today for 31 December. That was AUD three and a half. The last published NAV was as at January. That was AUD seven and a half, AUD 7.4.
Okay. Thanks.
What we're talking about is the December number.
Yep. Got it.
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 Ben Brayshaw from Barrenjoey. Please go ahead.
Hi, David. I just have a question on the profit that's been recognized from CP this period. Sorry to harp on this, but can I just clarify, will the approach be going forward to take mark-to-market gains through the P&L, or as that fund increases its cash distribution, do you then transition to more underlying cash earnings to support, you know, the profit recognition? Could you just clarify that, please?
Yeah. Whilst the fund is being consolidated, which, you know, we envisage at least for the near term, it'll be accounted for in line with AASB, which is, it'll be fair valued through the P&L.
If you fall below 50%, does the investment then become accounted for based on the distribution?
I mean, that's one of the considerations. Yeah, it's, as I said, at least for the near term, it'll be consolidated. The question of it's not a bright line at 50. The way the audit works is you need to obviously have a discussion with the auditor around governance arrangements, shareholding control. You can see with our two REITs at 14 and 21, we don't consolidate those. The auditors are comfortable that we've got independent governance arrangements there and so forth to not have to consolidate. It'll be a journey along the same line for Capital Partners. At some point that'll happen, but at the moment it's consolidated.
With the AUD 50 million loan provided to CP, what should we expect there in terms of capital release or repayment of that loan going forward?
Yes. So that loan sits in Capital Partners, between Capital Partners and a third party. It's not a intercompany and, yeah. We've sort of touched on in the notes. It's obviously a non-recourse loan back to HMC Capital. It's basically by virtue of the fact that it's being consolidated at the moment, it's appearing on our balance sheet, but it's an HMCCP loan.
Okay. Thanks. Thanks for your time.
Your next question is a follow-up question from James Druce from CLSA. Please go ahead.
Off mute. There we go. Sorry about the minutiae of this question. What was the sort of FFO number for the first half 2023, if we just go back to the old way of reporting?
It was AUD 25 million. Yeah. As we've reported it.
All right. That aligns.
Importantly, we're moving away from being a property company. We're now moving to a funds management company. You know, we wanna focus on operating income moving forward. It's important in the evolution of the business and the way we obviously present our numbers. There's not much difference between the two numbers.
Okay. Thank you.
There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Thank you.