HomeCo Daily Needs Exceeds Targets

19 August 2021

The HomeCo Daily Needs REIT has exceeding their IPO targets in first year despite COVID impacting some retail settings.

Fund Portfolio Manager, Paul Doherty said, “It is pleasing for our maiden financial year-end result to deliver such a strong set of results that exceed our PDS forecasts. Notwithstanding the uncertain operating backdrop caused by COVID-19, HomeCo Daily Needs REIT has made significant progress executing on its strategy through an active approach to asset management, development, and acquisitions since IPO in Nov-20. The quality, scale and diversification of HDN’s portfolio has been substantially improved and the REIT is well positioned to deliver on its objective to provide consistent and growing distributions to unitholders.”

HDN Chair, Simon Shakesheff said, “The retail landscape is rapidly evolving and this has been accelerated by COVID-19. The shift to omnichannel retailing is a global megatrend and retailers are increasingly leveraging their existing store networks as the optimal solution for both in-store and on-line fulfilment. We are seeing this playout across the portfolio via multiple channels including click & collect, micro-fulfilment and home delivery.”

“The resilience of the portfolio since IPO is a testament to the model portfolio strategy to manage downside risk through diversification across geography, subsector and tenant. We have maintained a high quality and defensive exposure across our target sub-sectors, and we have achieved 99% unadjusted cash collection since IPO. The portfolio is well positioned for the current environment with more than 80% national tenants and 88% of assets in metro locations.”

The quality and strength of the underlying portfolio is demonstrated by the solid operating metrics for FY21 despite the ongoing challenges and uncertainty created by COVID-19. These results also reflect the hard work and focus of HDN’s dedicated management team across funds and asset management, leasing and development.

FY21 highlights include:

99.3% occupancy (+0.8% versus PDS) and 97.8% trading occupancy (+4.7% versus PDS)
99% unadjusted cash collections since IPO in Nov-20 to Jun-21
Positive leasing spreads of +4.4% across 20 new leases and +2.0% across 12 renewals
29,800 sqm GLA of development leasing deals executed across 46 leases
14% like-for-like supermarket MAT growth with 2 supermarkets in turnover rent and 3 within 10%
15% annual like-for-like foot traffic growth to June-21
Increased national tenant exposure to 80% from 76% at IPO

Developments provide a meaningful source of growth for HDN and the Groups portfolio and low site coverage of 31.4% provides long-term potential to unlock additional income and capital growth. The development pipeline has increased to over $130m and is expected to deliver attractive ROIC and FFO growth.

HDN currently has $27.5m of brownfield development projects underway across 6 sites which are 100% pre-leased and on track to deliver a 10%+ ROIC on completion in FY22
HDN has identified an additional ~$100m of value accretive brownfield development opportunities across 7 projects which are expected to deliver an 8%+ ROIC on completion. These projects are expected to add a further ~20,000sqm of GLA to the portfolio.

The REIT reconfirms that based on information currently available and barring any unforeseen events or further COVID-19 impacts, FY22 guidance is :

Reaffirming FY22 FFO per unit guidance of 8.3 cents
FY22 distribution per unit of 8.0 cents

The HomeCo Daily Needs REIT is on our Top Picks List.

The REIT commenced trading in November 2020 with a security price of $1.29 against and closed the year at $1.33 against a NAV of $1.36 (-2% discount to NAV). The REIT provided a 4.25c distribution for FY21, equating to a 3.3% yield for the part year, which together with the lift in unit price would provide investors with a total annualised security return of 9.4%.

Key financial and operational highlights for the period are:

Financial highlights:

FY21 FFO of $21.4m up 14% versus PDS FY21 FFO of $18.8m
FY21 FFO/unit of 4.1 cents up 5% versus FY21 PDS FFO of 3.9 cents
82% increase in portfolio value since IPO to $1.6bn1

Operating highlights:

99% unadjusted cash collections since IPO in Nov-20 to Jun-21
99.3% occupancy (+0.8% versus PDS) and 97.8% trading occupancy (+4.7% versus PDS)
Positive leasing spreads of +4.4% for new leases and +2.0% for renewals
Comparable supermarket MAT growth of 14% with 2 supermarkets in turnover rent and 3 within 10%
Development pipeline increased to >$130m and expected to deliver attractive ROIC and FFO growth

Acquisitions:

Since IPO in Nov-20, HDN has contracted $586.0m of acquisitions which have increased the portfolio to 28 properties from 17. These acquisitions demonstrate our ability to source accretive and value enhancing opportunities which are consistent with HDN’s Model Portfolio strategy. The acquisitions include:

Marsden Park Shopping Centre (QLD): $48.0m purchase price at 6.75% acquisition cap rate, revalued to $53.0m at 6.00% cap rate at Jun-21
Bunnings Seven Hills (NSW): $56.0m purchase price at 5.13% acquisition cap rate, revalued to $60.0m at 4.50% cap rate at Jun-21
Armstrong Creek (VIC): $55.6m purchase price at 6.00% acquisition cap rate
HomeCo LFR Portfolio (7 assets): $266.4m purchase price at 6.75% weighted average acquisition cap rate, revalued to $283.7m at 6.15% weighted average cap rate at Jun-21
Town Centre Victoria Point (QLD): $160.0m purchase price at 4.75% acquisition cap rate

Valuations:

Since IPO in Nov-20, the fair value of investment properties has increased from $854.4m to $1,555.5m (+82%) through a combination of acquisitions, development and asset revaluations.

The total portfolio weighted average capitalisation rate is now 5.63% (5.95% as at 31 December 2020) reflecting the continued strong level of investment demand for high quality convenience and LFR assets in the broader market. Recent transactional evidence is supportive of continued uplift in asset valuations.

Portfolio statistics	1H FY21 (31-Dec-20)	FY21 (30-Jun-21)	FY21 (proforma)
Number of properties	19	20	28
Fair value	$978m	$1,112m	$1,556m
Weighted average capitalisation rate	5.95%	5.63%	5.63%
Weighted average lease expiry	8.1 years	8.0 years	7.6 years
Site coverage ratio	32%	33%	31%
Average gross rent/sqm	$330 / sqm	$335 / sqm	$325 / sqm

Capital Management

HDN has maintained a prudent approach to managing its balance sheet. Proforma Jun-21 gearing is 35.0% and includes the acquisition of 7 large format retail properties from HomeCo which settled in Jul-21 and the acquisition of Town Centre Victoria Point which is expected to settle in Aug-21.

HDN completed an upsize and extension of its existing debt facility on 29 July 2021 to a $800.0m senior secured facility (comprising a 5-year $550.0m term and 3-year $250.0m revolver). HDN also completed a 2-year $275m interest rate swap to hedge ~50% of the term debt in August 2021.

NTA per unit increased to $1.36 at Jun-21 from $1.33 at IPO reflecting the benefit of asset revaluations during the period and partially offset by transaction costs. Jun-21 NTA on a proforma basis is $1.35.

Guidance