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

Thank you for standing by, and welcome to the HealthCo Healthcare and Wellness REIT FY '24 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Head of Real Estate. Please go ahead.

Hi, 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. And we pay our respect to Elders past, present and emerging, and extend that respect to all Aboriginal and Torres Strait Islander peoples. As many of you know that have followed HealthCo's journey since IPO, FY '24 was a transformative year for the group. Clearly, we are immensely proud of the operational results that HealthCo has delivered while acknowledging the unit price performance has been underwhelming. The operating and earnings performance through FY '24 and continuing growth outlook reflect the critical infrastructure-like characteristics of HealthCo assets. Ultimately, this asset class is supported by megatrends of a growing population, an aging population and requirement for more investment to meet the needs of the broader community. Irrespective of the short-term debate about operator costs and revenue from private health insurance funding, the private hospital sector remains undeniably integral to the provision of health care services for the Australian population. It provides a critical support function to the public system, which itself is consistently operating at above capacity with long waiting lists for care. Our portfolio of high-quality private hospitals and critical health care infrastructure represents irreplaceable real estate, which continues to outperform traditional real estate subsectors. This outperformance underscores our conviction in the asset class, and reinforces our decision to continue deploying capital into HealthCo's value-accretive development pipeline. FY '25 will be another busy year in terms of portfolio enhancement and development pipeline activity, which we will touch on later. With those overview comments and positive outlook, I'll now pass over to Christian, who will provide further detail on the operating highlights for FY '24 and an update on HealthCo's strong financial results for the period.

Thank you, Sid, and good morning, everyone. Let's turn to Page 4 for the highlights for the year. Financially, we delivered 16% earnings growth. FFO of $0.08 per unit and DPU of $0.08 were consistent with guidance. Our balance sheet remains strong with gearing of 32.5%. Operationally, we continue to collect 100% of our rents. In terms of growth, we established the Unlisted Healthcare Fund together with 4 global institutional investors. We have completed around $200 million of asset sales at attractive pricing with proceeds reinvested into our accretive development pipeline and the $50 million unit buyback program. Let's turn to Page 6 for an update on HealthCo, Australia's second largest private hospital operator. While we've seen a lot of debate in news flow about the broader private health care sector, I want to highlight that our private hospital portfolio represents critical health care infrastructure, and that we are well placed as a landlord. Our hospitals provide high acuity services including Intensive Care Units and emergency departments. They are located in metro locations in the 4 largest state capitals in the country and managed 373,000 patient episodes in calendar year '23. They are critical to the delivery of health care services in Australia and cannot be replaced. Importantly, from a landlord perspective, HealthCo is paying all rents in full and on time while HealthCo remains in a strong legal position. Let's now turn to Page 8 for more detail on our asset portfolio. HealthCo's high-quality $1.6 billion portfolio underpins our strong earnings growth. The portfolio provides high income security with 100% rent collection and long lease expiry of over 12 years. Our portfolio also provides inflation protection with 81% of our leases being CPI-linked. So the investment fundamentals are attractive and our portfolio is infrastructure-like in character. Let's turn to Page 9 to explain what I mean by that. Our assets promote critical and high acuity health care services. One example is Knox in Melbourne, one of the largest tertiary hospitals in Victoria with over 330 beds. It offers a full range of complex surgical services, including a 24-hour emergency departments. Importantly, patient volumes have continued to grow holding their completion of a significant brownfield expansion project. On Page 10, we highlight the attractive metro locations of our assets. 93% of our portfolio is located in metro areas in the 4 largest state capitals: Sydney, Melbourne, Brisbane and Perth. Our assets are located in fast-growing areas like The George in Camden, which is the fastest-growing LGA in Australia. Let's move to Page 11 for an update on the Unlisted Healthcare Fund, which we established in the first half of FY '24. The Unlisted Fund's investment strategy is complementary to that of HCW and provides HCW with exposure to higher total return opportunities. And the fact that we partnered with 4 global institutional investors highlights the broader attraction of HealthCo real estate as an asset class. In FY '24, The Fund's completed brownfield developments at Knox and Nepean at funding rates of up to 7.5% cash yield on cost. The Unlisted Fund is seeking to grow further in FY '25 and beyond, and is well placed to act as a funding partner for HealthCo's broader development pipeline. Moving on to Page 12 for an update on HealthCo's asset recycling program. We have sold $195 million of assets since the HealthCo transaction last year. We have continued to redeploy proceeds into our accretive development pipeline while maintaining a strong balance sheet. Turning now to HealthCo sustainability program on Page 13. We have continued to build on the foundation work of HMC Capital's wider sustainability framework in support of our objective to create healthy communities. Throughout FY '24, in line with our Net Zero Energy Roadmap, we achieved a 30% reduction in Scope 1 & 2 carbon emissions. This is largely associated with our smart energy management system rollout and our ongoing investments in solar infrastructure. Beyond those asset-based initiatives, HealthCo is also uniquely placed to deliver social impacts in the community through our investments in health care infrastructure as well as facilitating access to essential health services in the community. We are proud of the achievements we have made to date and are well placed to continue progress on our sustainability strategy as HealthCo. Moving on to developments, starting on Page 15. Developments form an important part of HealthCo's growth strategy. We have a strong track record with $300 million of projects completed since the IPO. These projects have delivered great facilities for our tenant partners, and accretive returns for our unitholders with cash yield on costs of up to 7.5%. Now turning to Page 16, where I'll provide an overview of the development pipeline. We have an exciting development pipeline of over $500 million. This pipeline is comprised of HealthCo portfolio projects in the near term and Camden and Rouse Hill in the medium term. These projects will deliver attractive returns with a target yield on cost of 6% to 7%. Importantly, we will engage with the Unlisted Healthcare Fund to access a funding partner to unlock these opportunities. So as you can see, our portfolio is performing well. Importantly, HealthCo is well placed to continue both strong operating performance and strong earnings trajectory. Moving now to the financial results, starting with the earnings summary on Page 18. HealthCo delivered a strong financial result for FY '24 with 16% earnings growth and a 100% FFO covered distribution. FFO of $0.08 per unit and DPU of $0.08 were both consistent with guidance and represents a strong overall financial results for our unitholders. HealthCo's balance sheet remains strong, as you can see on Page 19. NTA of $1.64 per unit was consistent with our half year results. While HealthCo's valuation movement to June was flat on a net basis. Both these metrics reflect the infrastructure-like characteristics of our portfolio. Now turning to capital management on Page 20. Gearing of 32.5% is at the lower end of our target gearing range while we were 78% hedged as at June. We will remain disciplined in terms of how we deploy capital. Now turning to our guidance for FY '25 on Page 22. We are targeting 5% earnings growth in FY '25. This means that we're expecting FFO of $0.084 per unit and DPU of $0.084. And I'll now hand you back to Sid for concluding remarks.

Thank you, Christian. One of the main in today's presentation once again demonstrates that HealthCo is well positioned to continue to deliver attractive risk-adjusted returns for investors. Our priority in FY '25 is to deliver on the strong FFO per unit guidance that Christian has spoken to. Strategically, we are focused on addressing the unit price discount to NTA, and we will continue with proactive capital management initiatives if the discount persists. I will now hand over to the operator for questions.

[Operator Instructions] Your first question comes from Lauren Berry from Morgan Stanley.

Just wondering on the capital recycling. You flagged in your outlook that you're looking to continue the program. Is there any sense of how many assets or what quantum of assets you might be looking to divest?

Lauren, thanks for the question. So we've gotten through the bulk of the $200 million target that we set ourselves last year. We're not going to place any target that's forward-looking around asset recycling. But suffice to say that if you have a look at Slide 12 of our asset recycling program, we'll be focused on being commercially rational and look to asset recycling, as and when appropriate, to redeploy into our development pipeline.

Any particular asset classes that you might be looking to down weight?

We have always said that we're comfortable with our diverse portfolio composition. And at any given moment in an economic cycle, we may upgrade or down weight particular subsectors. So no, I wouldn't want to give you any color as to which subsectors.

Okay, sure. 6 months ago, you were talking about your development pipeline was around the $800 million mark. At the moment, you flagged $540 million. Could you talk about the difference in size there, please?

Yes. So Lauren, the main driver of that is some of the development pipeline that's already been spent. But I also ask you to have a look closely as to the explanation provided. The previous pipeline with an as-complete value versus this is a capital to be deployed value.

Right. So is the implication there that there is potentially $260 million of profit that could come out of that pipeline?

That's an implication you could draw. Yes, but I'm happy to share with you the bridge of the development pipeline that's already been executed upon. And then we can provide you with some color on our one-on-one as to what that delta is.

Okay, sure. And final one for me. Just your operating cash flow, even if you include the distribution from the Unlisted Fund is quite a bit lower than your FFO that you've reported today. Are you able to talk about the reconciliation?

As you may recall, Lauren, when we did the HealthCo transaction, as part of constructing that deal, we provided Healthscope with 2 years of half rent. That's the primary delta between the FFO and the cash that you would be seeing.

There's about a $30 million difference just at the balance sheet line. Does that really account for the incentive?

So just on that, Lauren, as well. There is -- there's also a deferred distribution from the Unlisted Fund that we have subsequently received, so that's around $4 million. And then there are additional incentives across the portfolio as well. But I think the important point to note per Sid's comment is that we expect cash flow conversion to continue to improve as we go forward with the Healthscope incentives for the HCW balance sheet hospitals running off in FY '25, and we also got the rent incentive at Camden as well running off in FY '25. So overall, we'll see cash flow conversion continuing to improve for HCW.

[Operator Instructions] Your next question comes from David Pobucky from Macquarie Group.

Congratulations on the result. Just the first one, in terms of the buyback, you mentioned that you might consider directing a greater share of asset sale proceeds to increasing your market buyback. Do you mean increasing beyond the $50 million or just accelerating that?

David, it's Christian. So as we've said and Sid said, we're looking at ways in which we can deploy capital in an accretive manner. And as we stand today, we were looking to recommence the buyback at current levels as their unit prices today.

Okay. In terms of the hedge book, it rolls off materially from June '25 to June '26. Any kind of thinking about managing that between now and then, please?

Yes, you're right. You're right about that, David. I mean, in terms of our hedging policy, we're looking to have our debt over 50% hedged. The swaps we have in place are rolling off over the next 3 years. I think if you take a forward-looking view on interest rates, that could well provide a tailwind for earnings going forward. And as a note, if our cost of debt goes down by 25 bps, that will improve earnings by around $0.002 per unit.

That's clear. And just one final one from me. The EBITDAR cash rent coverage for Healthscope of over 3x, does that include the initial concession that you gave them? Or does it exclude it?

That's exclude -- that's on a cash basis, David. That's on a cash basis. But I think -- I believe it's important.

Sorry, go ahead.

No, that's fine.

[Operator Instructions] Your next question comes from Andy MacFarlane from Bell Potter.

Just a couple for me. Just wondering if you can just give us a little more color on the briefing. Kind of what's driving the 5% EPS growth for FY '25?

Yes. Andy, it's Christian. So it's continued contracted rental escalations across the portfolio and also the full year impact from developments that completed in FY '24.

Understood. I guess just one follow-up for me. Just around Healthscope, obviously, appreciate the detail in the pack today, but just wondering what the latest is from recent conversations with them? And what the status is of the debt renegotiation to the extent you can comment?

Andy, we wouldn't want to comment on Healthscope's negotiations with their lenders, but suffice to say that we've had constructive dialogue with them. We support them in terms of their discussions with private health insurers. And they've been honoring all of the terms of their lease agreements with us, and there has been no change to the contractual agreements we set in place when we undertook the transaction.

There are no further questions at this time. I'll now hand back to Mr. Sharma for closing remarks.

Thank you, all. And thank you, all, for the interest and time dialing in today. In closing, we'd like to thank our shareholders as well as the entire HMC Capital team, our HealthCo Board and our tenant partners for their contribution to this result. We remain steadfast and focused on not only executing upon our operating guidance that we've provided but also closing the NTA guide as much as we can through our control. Look forward to catching up with you over the next few days. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.