HomeCo Daily Needs REIT Earnings: Rental Upside Offset by Debt Costs for Now

HomeCo Daily Needs REIT HDN, or HomeCo’s, fiscal 2023 result met guidance and our expectations. Funds from operations, or FFO, grew 68% to AUD 177 million, reflecting a full year’s contribution from the Aventus Group acquisition. The additional units issued to Aventus shareholders meant FFO per unit fell a modest 3.4% to 8.6 cents per unit. Distributions held steady at 8.3 cents, reflecting an increase in the payout ratio to about 97% of FFO per unit. EBITDA grew 86% to AUD 247 million, in line with our forecast again reflecting a full year of the Aventus assets with margins improving slightly to about 69% from 67% a year ago.

We retain our AUD 1.45 per unit fair value estimate for no-moat HomeCo. The securities are about 20% undervalued, in our view. We’re optimistic about HomeCo’s ability to generate above-peer-group rent increases, and the development pipeline. The portfolio is slowly tilting toward more defensive tenants and aims to have neighbourhood malls grow to become half of the portfolio. Exposure to large format and bulky goods retailers means HomeCo earns an average rent of about AUD 360 per square metre versus more than AUD 1,000 for higher foot traffic neighbourhood malls. We’re encouraged by the 6% uplift in rents for new leases and renewals in fiscal 2023, and we think this speaks to the upside within the portfolio.

Guidance is reassuringly in line with our expectations, with management aiming for FFO of 8.6 cents per unit and distributions of 8.3 cents per unit in fiscal 2024. We expect a headwind from rising debt costs to continue until fiscal 2026, as hedges expire and debt costs peak. Robust rental growth, coupled with the benefit of some debt hedging, is helping to offset the headwind. We expect a modest decline in FFO per unit for the next few years as the higher interest rates manifest, and forecast a recovery to current levels around 2030.