HomeCo Managing to Develop its Own

24 February 2021

HomeCo continues to deliver investment opportunities for its funds and clients as it acquires and develops its asset base.

The Group is transitioning towards becoming a capital light manager with minimal balance sheet debt and higher return on invested capital with its assets predominantly held off balance sheet via its new listed entities.

HomeCo’s earnings now comprise two key sources:

  • Property investments: comprising direct property (100% owned on balance sheet) and co-investments which comprises HDN.ASX
  • Funds management: management fee income received from HDN and HICT (from Nov-20) and associated expenses.

In issuing its 6 monthly financial report, HomeCo reported FFO of $18.7m for the six months to Dec-20 which increased on the prior period driven by new property income from developments and reduced finance costs (net) following the 2019 listing of HomeCo.

HomeCo’s Managing Director and Chief Executive Officer, Mr David Di Pilla, said “It is pleasing to deliver such a strong set of results that demonstrate the continued execution of our Own, Develop and Manage strategy.

“Since IPO HomeCo has significantly outperformed the S&P/ASX 200 Index by more than 31% and the S&P/ASX 200 A-REIT Index by more than 50%. Importantly we have made significant progress in transitioning to a capital light manager with minimal balance sheet gearing.”

With FUM of approximately $1.7bn, HomeCo are well positioned to grow earnings and additional FUM by leveraging the existing asset base to over $5bn along with further through growth through capital partnerships.

Highlights

  • 38% total securityholder return since IPO in Oct-19,
  • 7.3 cents 1H FY21 FFO per security
  • Interim FY21 dividend of 6.0 cents per security (100% franked) declared
  • 13.6% balance sheet gearing at 31-Dec-20, a 22% decrease versus 35.6% gearing at 30-Jun-20
  • ~$200m liquidity available for deployment to grow funds management business
  • $634m direct property investments
  • 3 major centre developments scheduled for opening in FY22, targeting 7-9% cash yield
  • $40m disposals (asset recycling), with $23m completed and $17m contracted for settlement in 1Q
  • CY21 which are expected to realise an average ungeared IRR of 10%
  • $1.7bn Funds Under Management (FUM) representing a +82% growth since IPO3
  • Successful listing of HomeCo Daily Needs REIT (HDN) in Nov-20 with 16% growth in FUM since IPO
  • HomeCo’s proposed second fund, HealthCo has ~$350m of proposed seed assets4 and is targeting a $500m first close by H1 FY22

Direct Property Investments

As at 31-Dec-20 HomeCo continues to hold 23 properties on its balance sheet with a fair value of $634m and a weighted average capitalisation rate (WACR) of 6.6%.

The portfolio has a weighted average lease expiry (WALE) of 7.7 years and a weighted average rent review (WARR) of 3.06% (across fixed escalation leases representing 78% of the portfolio) providing a base for sustainable long-term growth.

HomeCo continues to utilise its substantial land holding with low site coverage of 31% for developments with significant progress made in 1H FY21.

  • Cairns (QLD) ~11,400 sqm GLA development expected to open 1H FY22 with a forecast cash yield of 9%
  • Ballarat (VIC) ~12,500 sqm GLA development with Federal Government tenancy opened in Aug-20 and remaining site expected to open 1H FY22
  • Wagga Wagga (NSW) ~4,200 sqm GLA open and trading with ~15,500 sqm GLA expected to open in 1H FY22 with a forecast cash yield of 7%

Funds Management

HomeCo established the HomeCo Daily Needs REIT via in-specie distribution and listed on the ASX in Nov-20. Since listing HDN has grown FUM +16% to ~$1bn in real property assets and has outperformed the
S&P/ASX 200 A-REIT index by 4% since listing including a 9% upgrade to FY21 FFO guidance versus PDS. The fund has a strong growth pipeline embedded within the HDN portfolio with significant growth in NTA and income expected.

HomeCo continues to progress the establishment of its Health, Wellness and Government Services Fund (HealthCo) and has embarked on a dual track process underway, unlisted wholesale fund versus listed REIT. HomeCo are targeting a 1H FY22 first close of ~$500m and will seek to appoint advisers in coming weeks. HomeCo propose to own a target 10–15% co-investment in HealthCo and will seed the investment vehicle with ~$350m of proposed assets.

Outlook

Managing Director and Chief Executive Officer, Mr Di Pilla, said “HomeCo is on track to execute its objective to deliver above average risk adjusted returns to securityholders and continues to build a platform for sustainable long-term growth via the Own, Develop and Manage model.”

HomeCo provides FY21 FFO guidance of no less than $35.0m (12.9 cents per security) and full year FY21 dividend guidance of 12.0 cents per security. This guidance reaffirms the 4% upgrade provided on 4 December 2020

HomeCo’s are also considering amending its distribution policy as it transitions to a capital light funds management model with enhanced reinvestment opportunities which can drive attractive returns in
excess of HomeCo’s cost of capital.

This compares to HomeCo’s managed funds which intends to payout a higher proportion of funds from operations consistent with their respective distribution policies and broader strategies to provide stable and growing distributions.

Our Views

HomeCo have a good model of using its balance sheet to gather new assets for establishing wholesale funds and or to seed listed opportunities, whilst retaining key stakes.

HomeCo will need to retain a significant investment in each of its wholesale or listed funds in order to maintain control whilst seeking to build a capital light Funds Management business.

HomeCo are trading at a significant 60% premium to NTA of $2.39. The current distribution yield of 3.14% is also very low and reflects the confidence the market has in the HomeCo model, its underlying portfolio and ability to deliver added value.

HomeCo are on our recommend list.