Company Interview / HomeCo Daily Needs REIT forecasts FY25 growth

Key points:

Company achieves its financial guidance amidst challenging economic conditionsTenant demand remains high in metropolitan growth corridors, prompting a focus on building new retail assetsA sound portfolio strategy encompassing robust leasing spreads and active capital recycling underpins future growth

Sid Sharma, HomeCo Daily Needs REIT (ASX: HDN) CEO & HMC Capital MD, Real Estate. acknowledges the outstanding performance delivered by his team given the challenging macroeconomic environment for consumers and real estate. Sid expresses satisfaction with meeting their guidance and the 2.3% funds from operations growth prediction for the coming year, indicating the robustness of their home Kodaline Street business. He also points out their limited exposure to cyclical and discretionary retail expenditure, which he believes has contributed substantially to their exceptional result.

Sid further reveals that major tenants such as Woolworths (ASX: WOW), Coles (ASX: COL) and Bunnings, who provide daily consumer staples, constitute between 30 to 40% of their income. This he acknowledges gives their assets a resilience as they continue to focus on collecting rent. Amidst the increasing population growth, especially in the metropolitan growth corridors of Sydney, Melbourne, and Brisbane, the demand from tenants is high. Sid indicates the company's eagerness to build new retail assets in these growing metropolitan areas to cater to the increasing tenant demand.

Finally, Sid delves into their portfolio strategy, emphasising the company's strong financial position, high occupancy and potential for growth, courtesy of steady leasing spreads. He references active capital recycling, outlining the selling of assets in weak-growth regional locations and reinvestment in areas with robust population expansion, anchored by major tenants like Woolworths (ASX: WOW) and Coles (ASX: COL). Sid wraps up the discussion by highlighting their strategic investment into last mile retail logistics and the promising returns anticipated.

Full unedited transcript:

0:00

Really proud of what the team has delivered. For the period, it's been an exceptional result. And what's a challenging macroeconomic backdrop for consumers and real estate more generally. So the fact that we've hit our guidance and we're guiding to 2.3% funds from operations growth next year, I think is a great signal for the health and strength of the home. Kodaline street business.

0:22

You talk about the issues, obviously, that households are dealing with at the moment and the consumer in terms of spending. But I see you're saying here that you have limited exposure to cyclical and discretionary retail expenditure. Has that been the difference?

0:40

That's entirely right, Andres. So as the name would suggest, the home Code daily needs to focus on what you need to live as opposed to what you want. So our major tenants are Woolworths and Coles and Bunnings and all of the daily consumer staples that are essential. So as consumer spending is under a little bit of pressure, given the cost of living crisis, people generally tend to gravitate towards what they need, not what they want. And that's where most of our assets are set up for. So you do have that portfolio occupancy of more than 99%. How key are those anchor tenants? You mentioned the biggest retailers Coles, Woolies, Bunnings,

1:19

Sir Andrew are anchor tenants would represent somewhere in the order of 30 to 40% of our income. Now as a real estate owner, um, the ups and downs that a retailer has in any given year, um, don't really impact us. We get a fixed rent and that rental rate escalates every year. So we are a real estate business and we're focused on collecting the rent. So 30 to 40% of our income comes from those key anchors. And then the balance also comes from major Australian listed groups.

1:47

What what's your development pipeline look like? I guess, you know, particularly as far as, uh, what you're seeing from tenant demand.

1:58

Yeah. So, Andrew, Australia, as you know, um, is is experiencing a significant amount of population growth. Now most of our assets are located in the metropolitan growth corridors of Sydney, Melbourne and Brisbane, where population growth far exceeds the national average. So our tenant demand is really a reflection of that population growth story. So our development book, we've improved to 700 million now, and we've taken the last two years as a period to restock that development pipeline. We're really optimistic about building new, convenient retail assets in growing metropolitan corridors because they're ultimately underpinned by increasing tenant demand. What you would have also seen is given construction pricing over the last couple of years has been challenging. There's not a lot of new retail property in stock, so we're going to take advantage of that and soak up a bit more of that tenant demand that is there in the catchments we operate in. So you've said that this result pretty much underscores your model portfolio

2:57

strategy, as well as a period where you've had some active capital recycling. Can you just talk to us more through what you're seeing there?

3:06

Yeah. So the way to think about it is they're operating fundamentals are really, really strong and exactly what a real estate business should be. Our occupancy is 99% our, um, cash collection. In the month we invoice, the rent is 99%. That's a real standout in retail property with our peers. Um, our leasing spreads year on year are growing at 6%. When we have a lease that expires and we do a new lease, but we also have contracted escalations that are averaging close to 4% per annum. So it's got great embedded growth in it. Um, when I talk about asset recycling over the last two years, as interest rates have risen, we've made sure that our balance sheet is in really strong shape to take advantage of the next economic cycle. So what we've done is we've been net sellers, we've sold over 500 mil and we've bought about just shy of 400 million. Now we've sold assets in regional locations where that population growth story isn't as strong. And we've bought assets anchored by Woolworths and Coles in metropolitan locations where population is

4:06

really really strong. What the asset recycling program has done is in a period where everybody has been asking questions about commercial real estate values. We've sold assets, give or take, near our book value for the last two years. So our valuations are really, really robust because investors love your local, convenient retail center and both private investors and also large institutional investors. So our product is in great demand, not only from our tenants but from the investor community. And they're liquid assets and they're tradable assets.

4:37

So I said what is the value of your net assets at the moment? And how does that translate just as far as that net tangible asset per unit.

4:45

Yeah. So as you know, Andrew, like many routes we're trading at a significant discount Toronto. And for all the reasons I've just articulated, our MTA at $1.44 is where our assets are independently valued at. So we have great confidence in our asset book and our asset portfolio. We can control the Controllables, which is continue to deliver great leasing spreads, great development outcomes for our tenant partners continue to collect the rent every month and continue to have high occupancy.

5:13

You also an investor in last mile logistics that unlisted fund. How's that performance.

5:19

Really good Andrew. So we as you know our total asset base is around 5 billion or just shy of. So we're an ASX 200 company. Uh, we made a very small strategic investment of about 50 million into last mile retail logistics fund. Now what we mean by last mile retail logistics is not, um, big industrial sheds. It's that retail centres that play an essential part of the consumer last mile fulfillment solution for retailers. What do I mean by that? Your local retail shopping centre not only acts as an in-store experience, but it's also where your retailers like Woolworths, Coles and Bunnings through home delivery from. And as a consumer, you go and get your direct to boot from. So the last mile retail investment we made is on a new strategy, buying, uh, adaptive reuse assets, i.e. buying old shopping centres that need a bit more love and by converting them into these hybrid retail and fulfillment facilities. That investment was bet 43 million. Initially it will go to 50 million.

6:19

We've already made a 20% gain on that investment. All right. So overall you're saying you do have those resilient cash flows. You're looking for that growth, particularly in that where you've seen population growth in those areas. So overall what what guidance are you giving to the market.

6:36

So we're growing our FFO per unit by 2.3%. Uh, um, now you know, we watched what some of our peers are doing, and I'm really proud that our growth rate comparative to a lot of retail property rates is actually really strong. So, you know, it's been a period where a lot of real estate owners have been impacted by interest expense. We have to we're not immune from that. But what we've done is had great top line revenue growth because we've created great tenant outcomes and been able to get great rental results from our from our assets. That's why we're growing from, uh, to 8.8 cents once from operation next year. So the share prices you can see today, um, it screens pretty well in terms of the yield you'll get on your investment.