HomeCo Daily Needs REIT records valuation gains of $209m: Promising dividends for income investors

By Market Index
Tue 07 Jun 22, 6:03pm (AEDT)

Key Points

  • Management believes HomeCo’s high quality and strategic asset base is well positioned for the higher inflation and interest rate environment
  • Significant progress accelerating $500m-plus development pipeline
  • Rent collection maintained at over 99% for the period July 2021 to May 2022

While rising interest rates explain why the broader market appears to have turned a colder shoulder on the A-REITs sector at large, investors should remember that when it comes to listed property there is no level playing field.

Everything being equal, there would normally have been enough upside within Homeco Daily Needs REIT (ASX: HDN) market update today to nudge the share price forward.

However, whether it simply fell into the too hard basket or simply got dragged down by the sea of red following the RBA’s announced 50pbs rate hike, news that HomeCo recorded a net valuations gains of $209m and is continuing to unlock it development pipeline fell on deaf ears.

Admittedly within a market awash with value, REITs may not be at the frothy end of the market, but on the strength of its announcement today, HomeCo is one REIT worth keeping on radar.

To the uninitiated, HomeCo is a property company with a focus on neighbourhood retail, health and services, and large format retail.

Well positioned for higher rates

Management believes the HomeCo’s high quality and strategic asset base is well positioned for the higher inflation and interest rate environment, and a quick look at today’s highlights explain why they’re so confident.

  • June 2022 preliminary unaudited net valuation gain of $209m, 4.6% up on December 2021 representing 10cpu of NTA uplift

  • Significant progress accelerating $500m-plus development pipeline with forecast FY23 development commencements increased to $75m (from $60m) at a circa 7% target ROIC

  • Rent collection maintained at over 99% for the period July 2021 to May 2022

  • Leasing spreads of 5%-plus across 103,000sqm GLA since July 2021 underpinning strong rental growth

  • Reaffirming FY22 statutory funds from operations (FFO) per unit guidance of 8.8 cents

  • Distribution of 2.12 cents per unit for the quarter ended 30 June 2022 declared, resulting in a full year FY22 distribution of 8.28 cents per unit

Shift to omni-channel retailing

Management believes the shift to omni-channel retailing is a long-term structural tailwind which is driving the evolution of the REIT’s asset base into critical last mile infrastructure.

Management also attributes strong valuation gains to growing demand for daily needs assets from both private and increasingly, institutional investors.

“Investors remain attracted to high quality daily needs assets offering defensive income streams underpinned by attractive long-term megatrends,” noted CEO Sid Sharma.

“We are making significant progress unlocking and accelerating our value accretive $500m-plus development pipeline with over 30 projects in various stages of planning.”

What’s in store

With FY22 projects on track and on budget, the REIT is now targeting to commence in excess of $75m of developments in FY23 at a circa 7% return on invested capital (ROIC).

The REIT’s Glenmore Park and Mackay projects have received authority approvals for development, have strong customer demand and are in detailed design.

Management believes HomeCo's development pipeline remains the optimal use of incremental capital and provides the greatest opportunity to generate enhanced income and NTA growth.

Three key projects are expected to commence in FY23:

  • HomeCo Glenmore Park development will add 2,400sqm of GLA to existing daily needs town centre and will be anchored by government services, health and wellness tenants.

  • HomeCo Mackay leisure and lifestyle precinct has received planning approval for 17,000sqm of GLA.

  • HomeCo Nowra development has received planning approval for 11,000sqm.

HomeCo Daily Needs REIT share price over 12 months.

The share price was down -1.12% at the close today.

What brokers think

HomeCo’s share price is down -6.34% over 12 months, and shareholders have been on a roller coaster ride year-to-date bouncing from around $1.60 early January to $1.33 at the close today.

Consensus on HomeCo is Moderate Buy.

Based on Morningstar’s fair value of $1.49 the stock appears to be undervalued.

While Goldman Sachs continues to expect strong property valuation across the convenience retail sector, the broker’s preference in this space is HomeCo, with the broker maintain a Buy and target price of $1.70. (04/04/22).

The broker is forecasting dividends per share (DPS) of 8 cents in FY22 and 9 cents in FY23. 

Based on the three brokers that cover HomeCo (as reported in by FN Arena) the stock is trading with 21.8% upside to the target price of $1.62.

Macquarie recently resumed coverage (25/03/22) with an Outperform rating and a $1.63 target.

The broker is impressed by the REIT’s strong portfolio metrics – relative to peers - and a high (78%) exposure to metropolitan markets.

While Ord Minnett sees potential for solid returns through the existing portfolio, the broker was wary of any sell-down stemming from existing Aventus Group (ASX: AVN) unit holders once the merger is finally complete.

The broker retains a Hold rating with the target falling to $1.50 from $1.58.

Today’s share price implies dividend yields of 6% and 6.75%, in FY22 and FY23 respectively.

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