BUY HOLD SELL – Home Consortium (ASX: HMC)
HomeCo (HMC) was born from the failed Master’s entry in 2016. It has managed to establish itself in the top 40 performers of the All-Ords index in the last six months. Since listing, it has been the best performing company in the ASX property index. It currently manages a ~$2 billion property portfolio and is the manager of HomeCoDaily Needs REIT (HDN), which listed in November last year. HMC was added to the ASX 300 index in the March rebalance.
HomceCo has been making headlines recently in its effort to launch a Health and wellness REIT, HealthCo, spending millions buying up assets from the healthcare sector in preparation. HealthCo is set up to be the second biggest float of the year and will cement HMC's third deal worth more than $500m since 2019. The IPO has been slated for September 6 and has been upsized from $600m to $650m, on the back of firm investor interest. HealthCo will also comprise of a ~$1bn unlisted fund as well.
You can see the appeal; a large portfolio of long-leased assets, inflation-protected, and resilient to economic volatility given the essential nature of hospitals. Although you may be asking, why is it going to all that effort? Engaging with underwriters, gauging investor interest, filing a prospectus, compliance. It is a large amount of work. The answer, HMC has moved its foundations from REIT to asset manager, with those details rolled out in April and again at its Macquarie conference presentation in May. HomeCo is transitioning to a capital-light fund manager butterfly with scalability, according to the PowerPoint presentation. The structure is detailed below.
What does that mean for the business? It sounds much nicer and more interesting than its previous title of a defensive and boring REIT. For starters, it will have a gearing level of 0%, which doesn’t sound much like a property manager at all. When interest rates are practically nothing, why wouldn’t you load up? Where will the money for acquisitions, expansion, and big fluorescent signs to blind you whilst you drive home at night, come from? Drum roll, by recycling the assets it already owns into 10-15% co-investment stakes. HMC recently publicised ambitions to grow its fee-generating funds under management to $5bn via asset recycling. Capital structure is not the only thing expected to change, its focus on distributions is poised to adjust as well - more on that below.
HMC reaffirmed its financial year 2021 guidance in mid-July, now expecting funds from operations (FFO) of no less than 12.9 cents per security. FFO is a measure used by companies in the property sector to define the cash flow from their operations. It reflects the performance of typical business operations and excludes money earned from one-offs like asset sales. HomeCo also reaffirmed FY21 dividend guidance of 12c per security.
- ROE of 4.1% is dull. It is expected to rise to 7.3% in future periods. Peers in GMG and VCX sit on 10.7% and 4.3% respectively, which is typical of the sector. The ‘E’, shareholder equity removes debt which is a large component of a REITs capital structure.
- EPS growth is expected to consistently outpace revenue growth in the next few periods.
- A PE of 46.1x is not what a value investor would call cheap. Peers in GMG sit on 36.3x and VCX sit on 13.6c which positions it at the expensive end of the spectrum.
- A gross yield of 3% is below the market average.
- Brokers have a favourable skew. 66% have a BUY or STRONG BUY rating.
- It is trading at a 13.7% premium to the average broker target price and a 35.8% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS HMC?
Despite HMC transitioning into a capital-light asset manager with a gearing level of 0%, it is still likely to behave in a similar way to a REIT. The defensive, inflation-protected, and essential nature of the underlying assets in its portfolio tick the boxes and satisfy the criteria. That said, its distribution policy is expected to shift away from paying out a high proportion of FFO with comments from management revealing a slant to reinvestment to drive returns. Less predictable incomes are the point of difference that may alienate some income-focused investors. The trade-off is that capital growth is expected to sprout from targeted and effective reinvestment. We will have to wait and see.
Brokers have a positive tilt toward HMC although all see it trading above their respective target prices. Morgans essentially copied July’s guidance and plugged that into their model. The broker pointed to the number and timing of new acquisitions and the rollout of new funds as future catalysts for the share price. Credit Suisse believes the transfer of assets for co-investment will be earnings neutral but lifts forecast for FY22 on the back of higher expected fee income. Ord Minnett consider HMC well placed to grow assets under management to $5bn.
HMC has significantly outperformed the ASX 200 index and the ASX 200 A-REIT index since its IPO. The stock is up ~114% since this time last year setting itself up well heading into results on August 25. Market announcements have typically been met with buying interest which is encouraging heading into reporting season. Other observations: The 600c level appears to be a point of resistance. RSI is slightly elevated but is not in overbought territory. Momentum looks to be taking a breather in the short term with the MACD edging closer to the ‘signal line’. When the MACD crosses below the signal line it can be interpreted as a bearish signal.
The big increase in short interest followed HMC's entry into the ASX 300 index, back at a negligible level currently.
Nothing exciting to take away from the top investor moves, of small disappointment is Perpetual and Caledonia selling down some of their significant holdings in March and July respectively.
David Di Pilla is the MD and CEO, he previously worked as an investment banker at UBS so he is familiar with mergers and acquisitions, debt and equity capital market transactions. Not likely to have the wool pulled over his eyes. Chief operating officer, Sid Sharma was an executive at DXS, WOW, WBC and most recently was the COO at SCA property group. Will McMicking is the CFO, another UBS alumni so you could argue there are some brains in the leadership team.
While HomeCo’s decision to move into funds management is not expected to be immediately accretive to earnings, it does appear to be garnering a decent amount of interest. The change in structure is likely to be of less benefit to income focused investors given HMC’s intention to drive growth through reinvestment. Demand for its HealthCo IPO and impressive transaction history present the business in a favourable light with its portfolio of defensive, inflation protected and long-term assets targeted at investors who are more risk averse and want stable/unexciting returns. Of interest will be its ability to drive earnings growth through fee-generating funds under management down the track. Results coming up in August shouldn’t be a surprise, given reaffirmed guidance is less than a month old. The share price trend is strong and fundamentals are OK. Tom recently added HMC to his On The Desk ‘one stock from each sector’ portfolio as his pick for the property sector.