HomeCo Daily Needs REIT: Remains defensive with development upside
About the author:
- Author name:
- By Fiona Buchanan
- Job title:
- Co-Head of Research, Senior Analyst
- Date posted:
- 21 February 2023, 8:30 AM
- Sectors Covered:
- Property, AREITS
- HomeCo Daily Needs (ASX:HDN) offers investors exposure to a portfolio of daily needs assets with its large development pipeline to provide both near-term and future growth opportunities.
- FY23 guidance was reiterated; metrics stable across the $4.7bn portfolio; and cap rate expansion was offset by property income growth.
- Looking ahead, the focus also remains on recycling assets and the development pipeline which has been boosted to +$600m from +$500m.
- We retain an Add rating with a revised price target of (login to view).
1H23 FFO $89.4m vs $30.6m in the pcp with the large uplift due to the inclusion of AVN. FFO per security was 4.3c (+8% on pcp). Like for like property growth was 3.8% which helped to offset higher interest costs. 1H DPS 4.2c. NTA flat at $1.52.
Portfolio - valued at ~$4.7bn across +50 assets with exposure to Neighbourhood; Large Format Retail and Health & Services centres. Revaluations were relatively flat with a net $11m increase (WACR unchanged at 5.3%). Top 3 tenants: Bunnings; Coles; and Woolworths.
Metrics remain solid - WALE 4.6 years; occupancy >99%; cash collection >99%; WARR 3.8% (blend of fixed and CPI). Leasing spreads were +5.9% across 75 leasing deals (vs +5.7% at June 2022) with incentives ~5%. Average gross rent $350/sqm.
Divestments/acquisitions – HDN has disposed of two assets – Sunshine Coast and Epping ($210m/5% premium to book value). Part of the proceeds were reinvested into a WA daily needs asset as well as the $50m investment into the unlisted Last Mile Logistics Fund recently launched by HMC Capital. We expect asset sales to remain on the agenda with proceeds to be reinvested into the development pipeline and/or new accretive acquisitions.
Development pipeline upsized – the pipeline is valued at +$600m (was +$500m) across +20 projects. There is ~$80m in active developments (7% return) with +$120m in development commencements now expected in FY24 (we had previously assumed ~$60m in new developments).
Capital management – gearing is ~32% with hedged debt ~70%. HDN entered into $475m of forward start interest rate swap hedges post Dec-22 commencing from Jun-23, at an average fixed rate of 3.5% pa. Current liquidity is ~$325m.
Minor changes to valuation and forecasts
FY23 guidance reaffirmed – comprises FFO of 8.6c and DPS of 8.3c. Guidance assumes an average BBSY of 3.5% (was 2.9%) over FY23; active developments delivering ~7% returns; and 3.8% growth in like for like income (was 3.5%).
Post result, our blended DCF/NAV valuation moves to (login to view). NAV assumes a cap rate of 5.5% (vs BV at 5.3%).
HDN’s portfolio remains well positioned with resilient cashflows and continues to be a beneficiary of accelerating click & collect trends. +80% of tenants are national and 73% of tenants offer click & collect reinforcing the importance of assets being able to support ‘last mile logistics’.
Sites are also in strategic locations with strong population growth (79% metro).
HDN offers investors an attractive yield of +6% underpinned by contracted rental income and has a large development pipeline.
- Near-term catalysts include execution of developments.
- Leasing successes reiterating portfolio resilience.
- Asset re-ratings/asset sales at or above BV.
- Downside risks include execution on the development pipeline.
- General leasing risks.
- Higher-than-expected interest costs.
- Tenant default/non-renewal.
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