HealthCo Healthcare and Wellness REIT (HCW.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the HealthCo Healthcare Wellness REIT FY '25 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Managing Director, Real Estate. Please go ahead.

Good morning, everyone, and thank you for attending today's conference call. 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. We pay our respects to elders past, present and emerging, and we extend that respect to all Aboriginal and Torres Strait Islander people. Let us begin on Slide 5. When we listed HealthCo in 2021, we set out to create Australia's leading diversified health care REIT. It is a unique strategy, especially one in listed markets. As the sector continues to institutionalize, we have clearly encountered challenges in the last few years that are well documented. We recognize and appreciate the unit price impacts to investors. As manager and the largest shareholder of HealthCo, HMC continues to focus on creating long-term value for investors through proactive management of the long-term infrastructure like real estate that HealthCo owns. I understand today that everyone will be eager to have an update on the Healthscope process, and I will turn to that shortly, but let's discuss the FY '25 results. FY '25 was clearly impacted by the receivership of Healthscope at its parent level, which is the largest tenant in the HCW portfolio. Healthscope today represents 53% of HealthCo's earnings on a look-through basis, having regard to the balance sheet assets and those in the Unlisted Healthcare Fund. Funds from operations per unit of $0.066 was impacted by the Unlisted Healthcare Fund pausing distributions, just as HealthCo announced a few months ago. Despite this, we have collected 98% of all rent due and payable having [ receipted ] through the course of the financial year. And all rent owed by Healthscope has been paid in cash. The valuations of the properties declined by 4% on a gross basis, reflecting a 37 bp expansion in cap rates. All Healthscope facilities were independently valued, and 72% of the portfolio was independently valued throughout the half. During the period, we have strengthened the balance sheet and now have 31% pro forma gearing and importantly, $104 million in cash and undrawn debt. HealthCo is well positioned to navigate through this next period. Preserving cash and pausing on distributions will allow HealthCo to ensure long-term value preservation and enhancement in our portfolio. Notably, the like-for-like net income growth from our portfolio was 5.2%, driven by market rent reviews, annual reviews and strong leasing spreads. Turning to the Healthscope portfolio overview on Page 7. HealthCo and the Unlisted Healthcare Fund in total own 11 Healthscope hospitals. These are purpose-built facilities with many of them having been recently refurbished and upgraded. Our facilities treat over 366,000 patient episodes annually, with 86 operating theaters supported by 4,000 nurses and staff. Almost all of our assets are focused on medium and high-acuity critical services. Many of you that have followed our journey over the last year or 2 know that as an Australian-listed company, we are focused and passionate about the important role that these facilities play in the Australian health care landscape. Our focus remains to ensure that all facilities continue to operate and support their local communities. On this page, we have also provided a reminder of the valuation gains since acquisition of this portfolio and the quarterly cash collection since acquisition. We still have high conviction in this asset class, given its long-term value fundamentals. Turning to Page 8. As many of you know, in May this year, 2 nonoperating Healthscope's entities entered into receivership. Our tenant counterparties for clarification are not in receivership and continue to operate and serve their communities. Our legal rights that we have articulated before remain in place, including our cross default and termination rights. We expect the short-term deferral support we have provided will be repaid by the end of September as agreed. Since the appointment of receivers in May, the receivers and advisers have been working through a process of sale. We have had constructive and productive discussions with the receivers and Healthscope management as they work through an orderly sale process. We look forward to working with them constructively moving forward as we have done so in the last few months. In the event that the sale process is concluded, the receivers have a right to seek our consent to assign leases. We are open-minded to such a request. In the event that the receiver-led sale process does not result in one or more proposed assignees and leases that HealthCo and the unlisted fund are willing to consent to, we will look to enter into final lease arrangements with alternative tenants. To that end, we have reached conditional agreements with alternative operators as we stand here today. We understand that investors are eager to see a resolution to this situation as we are. Given, however, the nature of the stakeholders and negotiations with the parties are ongoing, it is imprudent for us to make any further comments beyond what are provided today. Our priorities are clear. number one, continuity of services at all hospitals; number two, ensuring the portfolio is tenanted by well-capitalized operators with strong operational track record; number three, maintaining jobs for nurses and hospital staff; and number four, maintaining long-term value for our unitholders and investors. We do thank our investors for their ongoing support as we work through this situation. I'll now pass over to Christian, who will take you through the results in more detail.

Thank you, Sid, and good morning, everyone. Let's turn to Page 10 for an update on the HCW asset portfolio. I will start with the key metrics for HCW's well-diversified portfolio of private hospitals and other health infrastructure assets. While the Healthscope portfolio has attracted a lot of media coverage, the broader portfolio has continued to perform well. Contracted rent collection was 98%. Like-for-like NOI growth for the year was plus 5.2%, and the portfolio has a long lease expiry of 11.5 years. Let's turn to Page 11 for an overview of our subsectors. Our portfolio includes private hospitals, cancer care centers, aged care facilities, health hubs and a nursing college. Government and national tenants account for over 80% of our income. This include Mater, one of Queensland's largest health care providers; and Genesis Care, Australia's largest cancer care operator. On the next page, we highlight the attractive metro locations of our assets. 96% of our portfolio is located in metro areas in Sydney, Melbourne, Brisbane and Perth. Our assets are located in areas with strong population growth and therefore, benefit from continuing strong demand for health care services. Turning now to an ESG update on Page 13. Our sustainability strategy is built around creating healthy communities. In FY '25, we delivered solar to 70% of feasible sites and reduced Scope 1 and 2 emissions by 32% from our FY '22 baseline. This was driven by our Energy Management System and solar rollout. Moving on to developments, starting on Page 15. We completed developments at Proxima and the Mount in the second half. These projects have delivered great facilities for our tenant partners and accretive returns for our unitholders, with cash yield on cost of up to 7.5%. Now turning to Page 16, where I'll provide an update on our development pipeline. The New South Wales government is moving ahead with its plans to build a $900 million public hospital at Rouse Hill. The planned hospital is adjacent to our existing health hub and provides a strategic opportunity to build a co-located private health care facility. We clearly have some attractive development opportunities lined up. But in terms of prudent capital management, we are focused first on resolving the Healthscope situation and then on securing funding partners for our pipeline. Moving now to the financial results, starting with the earnings summary on Page 18. FY '25 FFO was $0.066 per unit. The result was consistent with previous guidance when adjusted for the suspension of distributions from the Unlisted Healthcare Fund in the second half. The FY '25 distribution was $0.042 per unit. HCW did not declare distributions in the second half in order to maintain balance sheet flexibility. Moving on to the balance sheet on Page 19. NTA as at June was $1.44 per unit with the movement to June driven by portfolio cap rate expansion. All the Healthscope assets were valued independently. HCW's senior debt facility has been extended until November 2026. Turning now to capital management on Page 20. As we have already said, our capital management has remained prudent as we sought to preserve liquidity and maintain strategic flexibility. Adjusted for recently exchanged asset sales, June '25 pro forma cash and undrawn debt is $104 million and June '25 pro forma gearing is 31%. This is at the low end of our target gearing range. Moving on to the outlook for FY '26 on Page 22. In FY '26, our focus remains on resolving the Healthscope situation. Our key goal is to ensure continuity of services at our facilities in order to protect long-term value for HCW's unitholders. We continue to make progress in this regard. We will continue to manage our capital prudently and don't intend to declare distributions until the situation has been resolved. Until such time as that is achieved, it is not appropriate to provide guidance for FY '26. Our conviction in health care real estate remains strong with long-term growth underpinned by powerful mega trends. In closing, we would like to thank our unitholders, the HealthCo Board, the HMC capital team and all of our tenant partners. I will now hand back to the operator for Q&A.

[Operator Instructions] Your first question today comes from Solomon Zhang from JPMorgan.

First question for me is probably for you, Sid. Just on Slide 8, when you're talking about the alternative lease arrangements, I understand that you can't disclose the commercial terms, and it's commercial in confidence and delicate situation. But just hoping you can just touch on some of, I guess, the high level, I guess, where these lease arrangements are sitting? And have you agreed on key terms such rent levels, 10-year incentives?

Yes, Solomon. So the conditional agreements contemplate the key commercial terms. They remain, to your point, commercial in confidence. And given the sensitive nature of the negotiations and this process that's yet to play out, I don't want to go into any further details beyond that.

Right. And could you comment on whether it applies to all the assets or a majority or minority of the assets that you own? [indiscernible]

All of the assets.

Right. Makes sense. So the second question for me is just on the impact of your Unlisted Healthcare Fund distribution freeze on your interest coverage ratio. I understand it directly impacts FFO, but how does it flow through to your headstock ICR?

We feel -- so we're in compliance with all our debt covenants as at June. We will continue to remain compliant with all the debt covenants in FY '26, Solomon.

Yes, it makes sense. But just in terms of the income that they include in the EBITDA of that ICR, does that include the distributions or the distributable earnings of the Unlisted Healthcare Fund?

It is included in the covenant calculation, Solomon. But as I said, we remain confident around our covenants in FY '26.

Yes. So I think Solomon, we're very comfortable that we're positioned now with the excess cash, the excess liquidity, the rent coverage ratio, the support from our banks to ride through the next 12 months very comfortably.

Your next question comes from David Pobucky from Macquarie Group. We'll briefly move on. Your next question comes from Simon Chan from Morgan Stanley.

A few questions. First one, just on your debt roll. You guys, looks like you've rolled debt from May through to November, so 4-month extension 2026. Just wondering two things. One, why do such a short roll? Because I thought most complex when they extend debt, they extend for longer than 4 months. So that's part A of the question. And part B, it seems like you've cut the facility size down to $475 million. Is that just to save money on line fees? Or yes, can you comment on that, please, first?

Simon, it's Christian here. So we extended the facility by 6 months. Our lending syndicates is very supportive of all the stuff that we are doing. The reduction in the facility was part of the extension that we'd entered into.

Did any of the terms change in this whole extension, like margins or other stuff?

All the terms are similar to the previous arrangements. And to note, that's obviously by the extension, it ensures that the debt isn't current in the financial year.

Yes. I guess by the time your December results rolls around, it's going to become current again though, right, because it expires in November 2026?

That's correct. We're continuing to manage our balance sheet, but in a proactive manner, Simon.

Cool. Great. Can you guys just give me an update as to 2 of your assets, please, in particular, Proxima and Eden Park in -- over in Macquarie Park. Proxima, my understanding is there was a rental guarantee, right? How is that -- remind me when it rolls off. And is the asset effectively 100% rented now such that there will be no impact on earnings in F '26? And also just on Eden Park, is a tenant paying rent? Is everything going okay there?

Yes. So Proxima is a health hub on the Gold Coast. It's adjacent to Gold Coast University Hospital in Gold Coast Private Hospital. It's a great facility in a great location. That's anchored by Queensland Health. So the rental guarantee expires or expired at the end of FY '25. Current leasing levels are in excess of 80%, and we'll continue to lease that facility up in the current financial year.

And Simon, we've got commitments over 90%. And we've got a great tenant. That is [ the Delta ]. We're just waiting for them to commence their fit out. So we're really pleased with how that's gone. The rental levels are in excess of what we expected when we set out to do that project. So yes, we're pretty pleased with how it's coming along, and the covenant counterparty there with the government is a strong counterparty risk.

And Macquarie Park, nothing to worry about there?

No. Look, Saluda are a key tenant in Macquarie Park. They're performing really well. The team negotiated a really good market rent review this year with them. And then the other tenant there is Aegros that have just gone through a capital fundraising. They're a life sciences operator. And all arrears and rental were cleared when that capital raising was done. So we're pretty comfortable about where that's heading.

Cool. And the market rent review you just mentioned with Saluda Medical, was that a big one? Was a -- did you get a good positive leasing spread there?

Significant. Yes. So the comp NOI growth that we quoted, Simon, on the first page there, a large part of that was driven by rent reviews and leasing spreads across the book, including that particular deal. I don't want to get into specifics per tenancy, but yes, that was significant, and the team did a great job to negotiate it.

Your next question comes from David Pobucky from Macquarie.