HDN.AXHDN.AXASX
Loading
Operator: Thank you for standing by, and welcome to the HomeCo Daily Needs REIT FY '26 Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Managing Director, Real Estate, and HDN CEO. Please go ahead.
Sid Sharma: Thank you, and good morning, everyone. Thanks for making time to attend today's call on what's a very busy reporting day. Joining me on the call is HDN Fund Manager, Paul Doherty; and for the first time, joining us is the new Real Estate CFO for HMC, Phil Dooley, who has extensive experience in real estate across Scentre Group and Woolworths Properties. So welcome, Phil. Before we commence today's presentation, we want to acknowledge the traditional custodians of country throughout Australia. We celebrate their diverse culture and connections to land, sea, and community. And we pay our respect to elders past, present, and emerging, and we extend that respect to all Aboriginal and Torres Strait Islander people today. We'll begin on Slide 5. So for those that have followed our story for the past half a decade and followed convenience retail for the past couple of decades, I've probably been waiting 15 years to say this, but happily, HomeCo Daily Needs REIT now plays in the hottest subsector in retail property in Australia and globally. Institutional capital across the sector has cottoned on to what high-net-worth and high-quality syndicators have always known. Convenience retail offers strong cash flows and risk-adjusted returns through all economic cycles. HomeCo Daily Needs REIT, we believe, continues to have the highest quality convenience metropolitan portfolio in the sector, evidenced by what we believe to be the continued focus on sustained operational excellence. This half was another period of disciplined and focused execution of our consistent strategy that has remained in place since IPO. In the period, we saw consistent top line revenue growth, driving FFO per unit up 2.5% on the prior corresponding period. Our distributions for the period were $0.043 per unit, up 1.2% on the prior corresponding period, with the payout ratio moderating as we continue our plan to right-size the distribution to AFFO over time. Our NTA continues to grow, supported by strong asset revaluations. Notably, this is the fourth consecutive period HDN has recorded positive net valuation gains. The valuation gains, importantly, have been driven by strong NOI growth, accretive tenant-led developments, and capitalization rates moderately tightening. Our gearing remains at the midpoint of our target gearing range of 30% to 40%, and we are well positioned to execute on our development pipeline. Importantly, it's our operational excellence that continues to power our consistent results. Comparable NOI growth of 4%, leasing spreads of 6.2%, while sustaining high occupancy above 99%, are all market-leading statistics and metrics. Importantly, our focus on cash collection as a health check for a business of this nature continues, and we continue to bill and collect 99% of the cash every month, as we have done every month since IPO. We will continue to focus on growing our earnings, creating exciting new developments for our retailers, and appropriately manage our balance sheet within the means available to us. We're happily reaffirming our FFO guidance for the year of $0.09, and our distribution of $0.086. I will hand over to Paul to discuss our continued focus on strategy and portfolio performance.
Paul Doherty: Thanks, Sid. Turning now to Slide 6. Our investment strategy has remained consistent since IPO and is clearly focused on creating daily needs community hubs. This strategic focus is very clearly aligned with and supports the growth strategies of Australia's leading retailers. Our target model portfolio is 50% neighborhood, 30% large-format retail, and 20% health and services. This mix balances the best characteristics of defensive, reliable income streams with sustainable growth. HDN's strong investment fundamentals are underpinned by competitive rents at the bottom end of the landlord cost curve. And as a result, HDN continues to achieve sector-leading leasing spreads and low incentives. We're pleased to have delivered 6.2 leasing spreads, with momentum continuing into the second half of FY '26. HDN owns 2.3 million square meters of high-quality and strategically located property. Our current site coverage of 36% provides significant inbuilt growth opportunities. Our portfolio is strategically differentiated and advantaged with around 84% exposure to metropolitan locations. Importantly, it has a high skew to the large growth centers of Sydney, Melbourne, and Brisbane to the Gold Coast. We serve around 12.7 million Australians who live within a 10-kilometer radius of a HDN center. That positioning is achieving over 115 million customer visitations across the HomeCo portfolio throughout the year. And it's worth noting that the population in and around our centers is forecast to grow by 21% over the next 10 years. This positions HDN's portfolio to play a critical role in our tenants' omnichannel retailing strategies. On Slide 8, I want to make further comment on the strategic location of the portfolio. Our portfolio has grown to $5.1 billion and, as I've just pointed out, is spread out across key metropolitan growth corridors. With 40% of the portfolio in Sydney metropolitan area, 19% of the portfolio in the Melbourne metropolitan area, and 17% in Greater Brisbane and the Gold Coast. These 3 cities are the fastest growing in Australia, giving our portfolio exposure to the increasing population, as demonstrated by the 10-year population growth projections we've included. Turning now to Slide 9. Here we highlight our diversified tenant base of Australia's leading retailers. Our top 10 tenants make up 34% of gross income, with no single tenant exceeding 10% of our revenue. These are some of the highest quality tenants across Australia and some of the largest retailers providing essential or nondiscretionary retail. Now we also get asked frequently about tenant sales, and as we say every half, retailer sales movements are not always directly correlated with rental spreads or cash collections. That given, HDN's retailers continue to perform strongly. Our total MAT growth is 2.4%, and the nonsupermarket tenants in the portfolio have continued to report strong performance, with this group of retailers reporting MAT growth of 3.7%. And on Slide 10, we provide our portfolio summary. HDN owns high-quality real estate, occupied by approximately 1,350 tenants. The portfolio has consistently maintained outstanding occupancy and cash collections of greater than 99%. The ongoing performance underscores the portfolio's weighting towards high-quality assets and robust tenant covenants, and our tenants continue to demonstrate their resilience through economic cycles. Our sustainable rents of $440 a square meter, combined with the high level of convenience and metropolitan locations, give us a reliable platform for growth for our tenants and our unitholders. 88% of our income increases every year by a weighted average of 3.5%. Comparable NOI growth was 4% in the period, and this was driven by our market-leading leasing spreads of 6.2% across 97 leasing deals. Importantly, our leasing activities continues to maintain low incentives of less than 4%, and we've maintained our WALE of 4.9 years. At December, just 3% of '26 income remains to be committed, and we've reduced that further since December. On Slide 11, we set out the growth in the valuation of HDN's portfolio from June '25. What's important to note on this slide is that our portfolio valuation growth of $212 million gross and $143 million net is underpinned by NOI growth. That's always been the case for HDN since our inception, and puts us on a good footing heading into another year where there's macroeconomic uncertainty. We remain positive on the growth prospects for the portfolio, with valuations being supported by a combination of inbuilt income growth, high-quality assets, and weight of investment demand that's resulted in over $2.3 billion of transactions in the daily needs sector in 2025. Moving to Slide 12. Our focus on operational excellence remains unchanged. Our results remain market-leading, and we're proud of the intensity with which we manage our assets. Our leasing spreads and comp NOI growth is testament to that asset management focus. This operational excellence translates into our FFO per unit CAGR performance over the last 5 years, which is market-leading. Turning now to our sustainability achievements on Slide 13. Across the business, we continue to make solid progress on the ESG initiatives that support both long-term value creation and positive social impact. On the environmental front, the broader HMC real estate platform is reviewing its sustainability strategy to align with the next phase of the group's evolution. We've also achieved 4 Star Green Star ratings at both HomeCo South Nowra and Glenmore Park, a clear recognition of our commitment to healthier and more efficient buildings. And as we acquire new assets, we're progressively rolling out solar where feasible to reduce emissions and operating costs over time. Socially, we've maintained 50% gender diversity across independent Board Director roles at the HDN level, and our Reflect Reconciliation Action Plan continues to advance. We've also strengthened our community partnerships, including continued support for Eat Up Australia and our relationship with Youngster.co. In governance, for the fourth successive year, HDN was recognized as a regional top-rated ESG company, and we've also lodged our annual Modern Slavery Statements and GRESB submissions. Overall, we remain focused on embedding strong ESG practices across the platform as we continue to grow a resilient, responsible portfolio. Moving now to HDN's growth opportunities. HDN owns 2.3 million square meters of high-quality and strategically located property. With a 36% site coverage providing significant inbuilt growth opportunities, we continue to actively develop our assets, and have a $650 million development pipeline where we target a return on invested capital of at least 7%. Our active projects all remain on track, and our historic completions have, in fact, delivered in excess of 8.4%. Given the economic climate, the deployment timing of our development pipeline remains under review to the prevailing risk and return hurdles of the day. On Slide 16, we discuss Warilla Grove that we acquired in August '25. The center is located 15 kilometers south of Wollongong and is underpinned by a high-performing Woolworths and Aldi supermarkets. We've got a great track record of improving performance postacquisitions. Southlands, Marsden Queensland, Lutwyche, Seven Hills, Williams Landing, and Armstrong Creek are all examples where we've bought well, repositioned or redeveloped well, and achieved outsized valuation gains driven by income growth. Warilla's no different. This is forecast to deliver 10% ROIC on incremental development spend. The valuation uplift targeted represents a gain of over 20% economic return on invested capital. And on Slide 17, we outline our progress at Tuggerah. Here we have an 11,200 square meter leisure and lifestyle expansion, which will commence trading in March. The development is occupied by ASX-listed and leading national retailers, including Officeworks, Nick Scali and Anaconda. The development is delivering a greater than 7% return on cost and has delivered $18 million net valuation gain at December. And at the site, we retain a further 10,000 square meters of land, where we've gotten approval for an additional 7,000 square meters of GLA. It's already generated interest from multiple retailers. Our Upper Coomera and Caringbah developments are also on track in terms of delivery and returns. Upper Coomera reached practical completion in the first half and Caringbah is on track for handover to tenants in early March. On Slide 18, we provide an update on some of our other projects. Our Armstrong Creek Town Center expansion is ahead of schedule, with construction well advanced and opening forecast in October '26. The center will have a full-line Woolworths plus a 2,000 square meter online fulfilment center with complementary daily needs retailers. Through our investment in the Unlisted Grocery Fund, we've also commenced the construction of 2 brand-new Coles-anchored neighborhood centers at Richlands and Diggers Rest. Both of these centers are targeted to open in the first half of FY '27. We're very pleased with our recent project completions and the active pipeline. HDN has a proven track record of strong returns on developments, and we'll continue to allocate capital to the highest quality daily needs assets. I'll now hand over to Phil to take us through the financial results for the half in more detail.
Unknown Executive: Thanks, Paul. Turning now to Slide 20 to go through the earnings summary. For the first half, we delivered FFO of $92.4 million, which translates to $0.044 per unit, up from $0.043 for the prior period. Property NOI increased 4.6% to $148.7 million. This was supported by leasing spreads of 6.2%, weighted average rent reviews of 3.5%, combined with active expense management. Development completions also contributed to the uplift in the half. Net interest expense, as expected, reflected the higher interest rate environment. During the half, we increased our hedging to 70%. Revenue growth remains strong and has more than offset any unhedged increase in interest expense, allowing us to maintain distributions of $0.043 per unit. Overall, these results highlight the strength and resilience of the portfolio, and our continued operational excellence, and focus on disciplined financial management. On Slide 21 we present the balance sheet. HDN remains in a strong financial position at 31 December, with net assets of $3.2 billion. Our NTA increased to $1.55 per unit, up from $1.47 at June. This uplift reflects improving valuations, supported by favorable derivative movements. Our weighted average cap rate is now 5.51%. During the half, we continued asset recycling, including the divestment of 3 assets at a small premium to book value. Proceeds are reinvested into higher-quality neighborhood centers and accretive developments. During the period, we completed the acquisition of 3 assets: Warilla, as Paul touched on earlier; Leppington Land, and another small adjoining land parcel at Caringbah. Postperiod, we have now settled on the disposal of North Lakes. Looking ahead, our balance sheet remains well positioned to fund growth through targeted recycling and disciplined investment in our development pipeline. Turning to Slide 22, capital management. Our balance sheet settings remain sound and continue to support the business through the current rate environment. Gearing sits at 35.2%. When adjusted for the postbalance date settlement in North Lakes, this reduced to 34.6%. This keeps us comfortably at the midpoint of our target range and provides ample flexibility to support our development pipeline. Pro forma liquidity increased to $80 million following the disposal of North Lakes. Funding remains sufficient and aligned to our capital deployment plans. During the half, we refinanced the $810 million facility that was due to expire in July '26. We extended the tenure to July '28 and achieved a margin reduction of 42.5 bps. We also added $375 million of new swaps, taking us to 70% hedged, as I covered earlier. The weighted average cost of debt remains steady at 4.8%. Overall, we continue to actively manage our portfolio to ensure resilience, maintain flexibility and support ongoing investment in the portfolio. I will now hand back to Sid to provide guidance and closing remarks.
Sid Sharma: Thanks, Phil. So just rounding out, we can reaffirm our FY '26 guidance of $0.09 and $0.086 per unit. Notwithstanding the economic environment we now face ourselves and the specter of rising interest rates, our portfolio has and will continue to perform well. We'll continue to review our return hurdles on our capital deployment, and we will continue to manage this portfolio within the means of the balance sheet, as we have done now for the better part of 4 years. I will now hand over to the operator for questions.
Operator: [Operator Instructions] First question today comes from Andrew Dodds at Jefferies.
Andrew Dodds: Just picking up on some of the comments around the margin improvements you realized on the $810 million refinancing. I was just hoping you could give some indication as to the group's weighted average margin now across the debt book. And is the expectation that you gain a similar benefit once the $585 million tranche comes up for expiry in FY '28?
Unknown Executive: It's currently around 1.3%. And yes, we're expecting further improvement as the debt rolls off. Yes, absolutely.
Sid Sharma: So Andrew, the last tranche that we just refi'd really speaks to the credit quality of the portfolio and the margin was 1.15%. As per some of my remarks earlier, the sector is now increasingly attractive to not only institutional equity capital, but I think the debt markets have understood the credit quality of the HomeCo portfolio and the skew towards national tenants. So that 1.15% margin, it's a good bellwether for how our portfolio is performing as well. So we think we can improve the weighted margin moving forward, like Phil suggested.
Andrew Dodds: And then just maybe one on retail trading. I mean, I appreciate the focus has always been on profitability and margins over the headline sales figures. But just interested in the, I guess, anecdotes or some of the sales figures you may have received over the past couple of weeks and months, just as that consumer outlook has started to shift and given your exposure to more LFR and housing-related categories would be great.
Sid Sharma: So I think as Paul mentioned, MAT across the portfolio -- and bearing in mind, we've always preferred foot traffic and cash collections as a better metric for their pulse check, given the weighting of retailers that report remain sub-40% of the book in total. But notwithstanding that, the tenants that have reported showed MAT across the group of about 2.4%. If you excluded the supermarkets, our nonsupermarket retailers have MAT growth at the end of December of 3.7% The way to think about retail sales now is it's not just about Christmas, it's about the period all the way from Black Friday extending through to New Year's sales, so even beyond Boxing Day sales. The consumer has been pretty strong, [indiscernible] and electrical, and you can test it with some of the listed retailers that have reported, has performed very well over the course of the last year and continue to do so, anecdotally in January. We don't have the data set yet, but to give you a bit of color. Now post the interest rate rise last week, what anecdotally retailers are informing us is some of their annual growth statistics, which were double-digit post the Black Friday to New Year's period, the growth rate has halved. But that's from double-digit to somewhere around 4% to 5%. So it's still a pretty healthy growth. But the consumer is now going to watch and wait and see how they react between now and Easter, and see what the RBA does. So there will be some moderation, but HDN is positioned for every cycle, and that's why it's got the balance between your groceries plus your home goods.
Andrew Dodds: And then just my final one is just on some of the investments in the unlisted funds. LML now is kind of fully deployed. So I guess just interested to hear the appetite from the capital partners to create a second vintage of this strategy. And again, as a bit of a follow-on, just how competitive is it in this sector right now, just given the number of funds raising capital and deploying into it?
Sid Sharma: So on Page 28, Andrew, we've provided some color around the investments that HDN has made into the HMC unlisted retail funds. So there's 2 key strategies there. One is the last mile retail strategy. And as you rightly point out, vintage 1, which was $1.2 billion, has now been fully deployed. Now that vintage had an investment from HDN of around $42 million out of the $54 million on that page. Now that investment is currently sitting on total gains of about 20% since deployment. Vintage 2 has now been seeded. And I think HMC announced that with a small investment by HDN. Now that fund is sitting on about a 24% gain and actively screening and in diligence to deploy another $200 million in the short to medium term. So Vintage 2 has already been established and created. HDN's contributions to that will be pretty limited moving forward. And as you can see, that LML strategy today is $1.4 billion. HDN's investment is only $54 million. So there's been a lot of success the group has had raising third-party institutional capital for these strategies. The point I would make around the investor appetite, yes, it's increased. Is it competitive? Yes, it's competitive. It's always been competitive, though. Andrew, I think the remark I made earlier was sophisticated high-net-worth investors and sophisticated syndication investors have always been investing deeply into this sector for decades. If you look at the 1,200 convenience retail assets around the country, they're held by approximately 600 different entities, majority of which are high-net-worths and syndicators. What's changing now and obviously, a great discussion point is what we've been saying for the better part of 4 or 5 years is that convenience retail is more relevant to the consumer and is the right subsector in retail for the next decade. And we're delighted to see our thesis play out and waves of institutional capital coming into the sector. HomeCo and HMC never has any problems unearthing high-quality retail assets that are mispriced. So we're not worried about our ability to find that both in HDN and across the group. Paul has given you a wonderful case study on Warilla and a bit of a track record on some of the assets we've developed over the years. The difference between us and everyone else is we can lease well, we can develop well, we can remix well, and we can manage well, and we do it very proactively with a team that has been here now for the better part of 6 years. That's our point of difference, and that's why we can always create outsized returns for our investors. And that's why all of our unlisted funds are sitting on 20-plus percent gain since inception.
Operator: Your next question comes from Adam West at J.P. Morgan.
Adam West: My first question is just about guidance. I'm just wondering, there's been a bit of movement in the cost of debt components. I'm just wondering if you could step through the changes in 1H '26, and I guess why the 42.5 basis point margin reduction didn't lead to an upgrade of guidance.
Unknown Executive: The interest rates went up last week. Obviously, that's effectively covered our exposure on the 30% that's unhedged. We're right smack bang in the middle of guidance at the moment.
Adam West: I guess my next question is just on the re-leasing spreads. So I guess there's been a bit of a pickup in spreads across the space. Could you just provide some color, I guess, on how much spread has been driven by remixing activity versus, I guess, natural underlying rent growth?
Paul Doherty: Yes, happy to talk a bit on that one. Look, of the 97 deals that we did in the 6 months, 33 of those were new leases where we either leased up vacant spaces or replaced existing tenants. On those is where we've typically got, and we continue to get, our highest level of growth. We've got low double-digit leasing spreads on those new leases. And our renewals remain to be strong. We did about 64 renewals in the 6 months, and they delivered a spread of just a tick under 5%. We also saw the incentive levels remain really, I suppose, positive for us. Our incentive levels were around about 10% on the new leases and actually nil, less than 0.5% on the renewals.
Sid Sharma: Which has been consistent now for a number of years. So I think, unlike some other groups, our renewal spreads and leasing spreads aren't driven by buying or rent. It's based on consistent performance of our retailers, which is tracking really well.
Adam West: Could you just provide an indication, I guess, how much of the portfolio would be, I guess, underrented and potential upsides for the FY '27 expiries?
Sid Sharma: We get asked that question every time, and it's a good question. There's no one magic bullet answer. I think if you just do a basic analysis of rent per meter across our portfolio and some of our peers, you can run an argument for between $100 and $200 a meter. But that's not the right answer. That's a crude, easy answer to get to. The way I'd probably answer that question is more on our track record page, on our leasing spreads, which is on Page 27 of your deck. So the group has consistently performed well in terms of its leasing spreads over quite some time. And that's as we balanced around remixing and balanced around renewals, right? So downtime is the biggest drag on comp NOI. So what we always try to do is find the balance between optimizing tenancy mix at the center, having downtime between retailers, but ensuring that we're keeping our rental trajectory and rental growth going up. Now that's a really, really easy thing to say. It's a hard thing to manage, and our asset management and leasing team do an incredible job on managing that.
Operator: Your next question comes from Ben Brayshaw at Barrenjoey.
Benjamin Brayshaw: Sid, just on the refinance of the debt facility, I was wondering if any consideration was given to increasing the liquidity, just in the context of doing development, having a bit more flexibility to pursue your growth opportunities.
Sid Sharma: Look, it's a good question, Ben. And the one thing to take away from this set of results is we've always said that we would do between $80 million to $120 million of developments every year. We've always said that in any given period that deployment would be subject to other compelling opportunities where we can invest capital in. So in this period, we've slowed down a bit of that deployment on the development pipeline, pushed it towards Warilla, which Paul has touched on in a bit of detail. As we think about having the appropriate funding in place, given the current outlook and interest rate environment, we are reviewing a couple of things. One is timing of deployment of our developments. Now we've got a wonderful development book with great inherent tenant demand, but we're just going to think through the timing of our future developments from here on and probably provide a more fulsome update at the full year results. But the way to think about it is we want to live within the balance sheet means. We want to keep our gearing at 35%. And we think we can fund, with the valuation gains that are due to come and will come, we can fund at least half of that development within our existing means pretty comfortably. So call it about $50 million. And then anything beyond $50 million, we'll be looking for some outsized returns and outsized performance on. And funding that is under consideration and review given where interest rates are going at the moment.
Benjamin Brayshaw: Okay. So you're confident you've got enough flexibility to do Armstrong Creek and Richlands?
Sid Sharma: No, they're all done, and they're happening, and we've got enough balance sheet to deliver those. So that's all been absolutely dealt with within the current balance sheet. They're all commitments made.
Benjamin Brayshaw: And just on the cash flow statement, could you comment on the reason for the increase in the net finance costs? Just trying to reconcile that with the net finance costs that have been recognized in operating earnings. Just wondering if there's anything there that's contributing to the uptick versus the pcp and the higher finance costs in the cash flow versus the P&L.
Unknown Executive: Fundamentally, that's driven just by the timing of interest payments. We had a roll-off come off it just after the last period end. That's the main contributor to that.
Benjamin Brayshaw: That's the $16.5 million increase on the pcp, is it?
Unknown Executive: Yes.
Benjamin Brayshaw: Okay. And sorry, just a final question. Just on the payout ratio...
Sid Sharma: So Ben, just to clarify, because I think I can see where your question is heading to. There was no income for capital swaps as part of that finance cost. We didn't, right? Just to be clear. These are all vanilla.
Benjamin Brayshaw: Appreciate it. Noted. Just on the payout ratio, you flagged to move to 90% over a period of time at the June result. Just how you're thinking about that in the context of the higher interest rate environment now, in particular with new CFO coming on board.
Sid Sharma: Sorry, Ben, I just missed that, mate. I just missed the start of that.
Benjamin Brayshaw: Yes, sorry. My question was in relation to the payout ratio...
Sid Sharma: Yes.
Benjamin Brayshaw: 96% for FY '26, but a flagged change to 90% over some -- over a 3-year period, I think you were referencing at the June result. Just interested in the updated thoughts, if you have any on the payout.
Sid Sharma: Yes. Look, we want to get to sizing the distribution to AFFO, and we want to do it as quickly as possible. I think I flagged 2 to 3 years last half. And depending on some of the underlying portfolio performance and growth, we're just going to review it next year. So I'll probably provide an update at the half, but we want to right-size it sooner than later would be the way I would think about it, Ben.
Operator: Your next question comes from Tom Bodor at Jarden.
Tom Bodor: Just one question for me, really, around the development pipeline. If I look at $650 million, around $110 million a year sort of 6-year pipeline, I think you've been pretty clear on how much the run rate can be. But would you be interested in any thoughts around opportunities to accelerate that? Or are you capacity-constrained as a team in terms of what you can deliver per annum?
Sid Sharma: Yes. Good question, Tom, and that's -- and I think the way to think about it is we've lived within our balance sheet means now for a number of years. And so the balance sheet -- and what I mean by that is we're disciplined around deployment and we're disciplined around earnings growth for our investors. So the -- what we think the talent in doing developments in a listed REIT is to continue our FFO earnings growth trajectory while also delivering for our underlying customers' exciting new retail opportunities. So the constraint is really around managing it within the balance sheet, which remains the focus. So given the outlook at the moment, I think the way to think about it is we've got $650 million to spend, but we're probably going to start to pull that back a little bit in terms of deployment in the near term, just to wait and see what happens with the interest rate outlook and just check our settings.
Tom Bodor: It's more about managing risk and pulling back rather than continuing to accelerate, right?
Sid Sharma: That's the way to think about it. And continuing to deliver earnings growth, right? Like, so Page 12 -- if you have a look at Page 12, we've got our FFO unit CAGR for the last 5 years. I think we've done a good job of delivering what we promised our investors, which is consistent and growing earnings and consistent and growing distributions. So everything will be in the context of ensuring that trajectory is maintained.
Tom Bodor: And so just another way to read that higher rates make it harder. Like there's less stuff that's going to be feasible now.
Sid Sharma: Higher rates should usually mean higher rents as well. So rents could offset costs. I wouldn't think of it simply as that. I would think of it as just prudent capital management and capital allocation. It's going to be an interesting period over the next little while, and there might be interesting opportunities thrown up as part of that.
Operator: Your next question comes from Solomon Zhang at UBS.
Solomon Zhang: Just wanted to unpack the potential rent upside from further remixing efforts across the portfolio, specifically for LFR. You're about 40% versus 30% target weight. Just wanted to ask whether your LFR rents sit meaningfully below your portfolio average of $440 per square meter? And if so, by how much?
Sid Sharma: About $100 a meter below the portfolio average. Just to give you some color, new supermarket rents, if you build a brand-new greenfield supermarket, and we're one of the few groups across our platform that can do that, rents are heading north of $500 a meter. LFR rents are around $300 to $400 a meter. So that gives you a bit of color as to where the market is going. But the catchup is coming fast and the LFR retailers aren't like they were 15 years ago. These are some of Australia's leading brand names with strong balance sheets, strong covenants, and an appetite to grow. And more than that, they continue to serve their customers really well and the customers love their products. So we'll do it in a sustained way. We want to be long-term partners for our customers. You won't see us any given year shooting the lights out and being heroes. It's long-term sustained growth, strong partnerships with our tenants, and do what's right by them and do what's right by us.
Solomon Zhang: So I guess we should think about that more as sustained strong spreads rather than just doing a simple mark-to-market.
Sid Sharma: Exactly right.
Solomon Zhang: And then just on your NPI margins, they seem to have lifted about 50 basis points since last year. Could you just talk to the drivers of that and whether they're sustainable and if there's any more upside there?
Sid Sharma: We've been very disciplined in cost management across the portfolio, and we've been well below the inflation rate. So our rental growth has far outpaced our OpEx growth. We're at a good level now. We continue to manage it proactively. That's always a challenge for the team, make sure our income growth at the top line is better than our OpEx growth and then that NPI margin can continue to either stay where it is or moderately improve.
Solomon Zhang: Maybe just a final question, maybe coming back to Doddsie's question earlier. So just on the remainder of the debt book that hasn't been refinanced, when is the earliest opportunity for you to take advantage of those lower margins?
Unknown Executive: There's $300 million that we're about to start looking at in the near future. And then there'll be another tranche in the back half of this calendar year.
Operator: Your next question comes from Simon Chan at Morgan Stanley.
Simon Chan: Sid, so what is your actual payout ratio as a percentage of AFFO in the first half?
Sid Sharma: I'll let Phil answer that. About 1.06.
Simon Chan: Okay. So you don't actually have too far to go to get to 100%.
Sid Sharma: Nope.
Simon Chan: Fair enough. This future development is subject to review of hurdles. I know you kind of touched on it in your answer to earlier questions, but what really instigated this? Is it as simple as the fact that 7% is no longer cut the mustard going forward? Is it driven by capital constraints? Or is it more tenant-led and they don't want to roll out more stores because of the economic environment, they want to wait and see, so you're waiting and seeing? Like, what instigated this?
Sid Sharma: It's none of those things specifically. The way to think about it, Simon, is over the last couple of years, we've recycled assets and we've recycled assets to fund into our development pipeline. And there's roughly been about 100 to 150 bps spread between what we've sold assets for and the yield on cost we've gained out of the development pipeline. If you look at the valuation gains that we've achieved for the half and what we're probably going to achieve next half, given the way the sector is heading and the buoyant demand in the sector, the way I would think about it is this. The valuation gains that will come will typically fund, within the balance sheet, comfortably about $50 million of developments every year. And we still remain within our gearing setting, we remain growing our earnings, and we remain on the footing that we're at. All we're saying is we're just going to -- given the interest rate environment, given the outlook of a couple of interest rate increases possibly coming, possibly not coming, we're just going to reflect on that over the next couple of months. So the way you should model it is not assume for '27 that we will be at our run rate for that particular financial year. Beyond that, I wouldn't think anything more than that. Tenants are performing really well. The demand is overwhelming given there's such a constraint on new retail supply, and we're one of the few groups that are building. And historically, we've achieved 8.4% yield on cost, which has been well above our 7% hurdle. So we'll just assess it project by project. All we're saying is we continue to be prudent. We're not just going to keep going if the environment changes.
Simon Chan: No, that's fair enough. But what about -- can't you just keep selling assets to fund it like you have been and keep doing it at that 150 bps spread?
Sid Sharma: Could be. I could do that. I could not do that. Pretty happy with the portfolio as it is, Simon. And there's a lot of earnings coming through the existing book. So stay tuned. It's all very exciting.
Simon Chan: So the other way to ask my question then, though, is basically, you sold all the stuff you don't want. Would that be a fair comment? You sold all the stuff you don't want. Everything you've got now is core assets or stuff you really like and you're at a point now where you're reassessing.
Sid Sharma: That's a good way to put it, Simon. I wouldn't use those words specifically, but yes, that's good.
Operator: Your next question comes from David Pobucky at Macquarie Group.
David Pobucky: Perhaps just following up on the question around the development pipeline. It looks like Leppington was taken out of the flagged FY '26 commencements and replaced by those 2 Coles-anchored centers in HUG. Anything specific that you can comment on around Leppington, please?
Sid Sharma: Look, it's basically Leppington out for this year, Warilla in. It's basically as simple as that. And in the short term, Warilla is going to provide outsized returns to us, similar to what Lutwyche has done, similar to what Marsden Queensland did, what Seven Hills did, what Southlands has done. So we just think it was a better place for our capital right now. Leppington is such a compelling opportunity still and in the fastest-growing LGA in Australia with tenant demand that's really strong. So yes, Leppington still remains a priority for the group. Warilla just came up and you've got to take these opportunities when they come.
David Pobucky: Just second question around management fees. Looks like they stepped down to $13 million from about $14 million in the pcp and roughly $14 million in the second half of '25. Anything to call out there?
Sid Sharma: Yes. All that is, is the investment into HUG. So Richlands was vended into HUG from HDN as part of HDN's contribution to that fund. So the fee movement really reflects that investment. So there's a skew to the second half on that. Nothing more to read on the RE fees. And I think one of the other questions was around the equity accounted investments. The movement there for the benefit of everyone is McGraths Hill was sold last year. That was in a single asset syndicate that was wound up, delivered over 17.5% return for its investors. So the movement in that is simply the sale of McGraths that's flowing through.
Operator: [Operator Instructions] Your next question comes from Claire McKew at Green Street.
Unknown Analyst: Just a big picture question on capital allocation. Just given HDN's cost of capital is constrained by its trading discount, at what implied cost of equity would management view a buyback as a more accretive risk-adjusted use of capital as opposed to selling assets above book and rotating into higher-risk development opportunities, albeit higher returning?
Sid Sharma: It's a very good question, and it's always under review, but I'm not going to go into those particulars here. So our group has had a track record across its real estate investment trust that buybacks are not off the table. So we will always consider things and it's under consideration.
Unknown Analyst: And then maybe just -- I mean, these topics have been touched on, but you've said given where interest rates are going with respect to your development pipeline, just can you put some numbers to how your hurdles are changing in light of long-term real interest rates edging higher? So are you -- you've spoken about historically the 100 and 150 basis point spread on a risk-adjusted basis. That's pretty thin. So would going forward, you'd be looking for something a little bit higher than that before you can see that ramping back up again? How are you thinking about that?
Sid Sharma: Yes. No, I don't think that spread is thin because remember, these projects are tenant demand led. The income is secured before you start building and the builds are not complicated, right? So we're not building multilevel mega malls hoping and praying that fashion brands from 1995 are going to come and lease a shop from us. So most of our peers, when they do developments, are giving a yield on cost of about 5% to 6%. So 7% relative to the retail property subsector is really, really strong. So all I'm saying is I'm just going to reflect at the moment given the environment is choppy. I'm not saying 7% is the wrong hurdle rate. It's been the right hurdle rate for a very long time. But things are choppy at the moment. It's just a pause moment. And we'll always look to make sure that every investment we make has the appropriate spread to the long-term bond yields and prevailing cap rates.
Operator: Thank you. That does conclude our question-and-answer session for today. I'd like to hand back to Mr. Sharma for closing remarks. Thank you.
Sid Sharma: Look, thank you all for investing the time today and joining us on this call, and it's just so good to see, I think, we've had a record number of participants. So it's good to see convenience retail now being a sector that's got a lot of interest. So I look forward to catching up with you in the next few days. Thank you so much.