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 '25 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. Please go ahead.

Good morning, everyone, and thank you all for attending today's conference call on what we believe is a very busy day. 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 respects to elders past, present and emerging and extend that respect to all Aboriginal and Torres Strait Islander peoples today. Let's begin on Slide 5. As many of you that have followed the journey know, we established HealthCo Health and Wellness REIT in 2021. It was established to provide listed investors with exposure to a diversified portfolio underpinned by attractive megatrends, targeting stable growing distributions and long-term capital growth. HealthCo today is the owner of some of the country's largest and most prominent health care real estate assets with a high-quality $1.6 billion portfolio. Our portfolio of private hospitals and critical infrastructure represents irreplaceable real estate. The powerful megatrends driving this sector underscore our conviction in the asset class. From an earnings perspective, we have always delivered what we set out to deliver since IPO. Every FFO per unit guidance has historically been met, and we remain on track to deliver FFO per unit growth at a CAGR of 11% per unit -- sorry, 11% per annum since IPO. Financially for this period, we delivered 5% earnings growth compared to the first half of FY '24. FFO of $0.042 per unit and DPU of $0.04 were consistent with guidance. Our balance sheet remains strong with gearing at 32.4%. Operationally, we have once again achieved 100% cash collection. From a capital management perspective, we have continued initiatives, including the unit buyback program and asset sales, to ensure that we maintain a conservative balance sheet. I'll move on to Slide 6. Now many of you today will be interested in Healthscope, which represents 59% of gross earnings on a look-through basis for HCW. Let's go back and provide some broader context. In 2023, HCW and the unlisted health care fund acquired 11 Healthscope hospitals for $1.2 billion. As at December 2024, these facilities were independently valued at $1.5 billion. The significant valuation uplift reflects income growth, development CapEx and the essential nature of these facilities. Healthscope continues to be compliant with its lease terms, and the hospitals continue to provide critical hospital services to patients in the 4 largest state capitals of Australia. We acknowledge the recent increased market speculation around Healthscope, including the unit price volatility and impact that it has on HCW unitholders. In our view, the market speculation will continue until a sustainable solution, which underpins continuity of hospital services is found. As many of you know that have followed the story since day 1, HCW and UHF provided significant rental support when we acquired these assets. We have made it clear that no additional rental support beyond the existing agreements will be provided to Healthscope. As per our earlier disclosures, if Healthscope were to breach its lease obligations, HCW as the landlord has rights to replace Healthscope as operator of these facilities. HCW and the unlisted health care fund have recently been approached by capable and qualified parties to potentially tenant the 11 hospitals that we own. This includes an approach by a consortium led by HMC Capital's Private Equity division. We understand that HMC is in discussions with a broad group of key stakeholders regarding potential options. HCW will consider meaningful executable proposals that maximize unitholder value and ensure that these hospitals continue to serve the Australian community that relies on them. I will now hand over to Christian for a portfolio overview.

Thank you, Sid, and good morning, everyone. Let's turn to Page 8 for more detail on our asset portfolio. Our high-quality portfolio is diversified across hospitals, primary and specialty care, aged care and government and life sciences. Some of our assets are highlighted on this page, including Knox, one of the largest high-acuity private hospitals in Melbourne; and Erina, one of the largest aged-care facilities in New South Wales. Let's turn to Page 9 for the key portfolio metrics. HCW continued to deliver on all key strategic and operating metrics this half. From an investment perspective, our portfolio continues to provide both income growth and security. Comparable NOI growth was 3.7% for the half year period, with 79% of our leases CPI-linked. We also have a long lease expiry profile with a WALE of 11.6 years. HCW's income security is underpinned by operational excellence, with cash rent collection again at 100%. On Page 10, we highlight the attractive metro locations of our assets. 96% of our portfolio is located in metro areas in the 4 largest state capitals: Sydney, Melbourne, Brisbane and Perth. One call out on this page is our 4 private hospitals in Western Sydney. This is an area which continues to benefit from significant population growth and therefore strong demand for hospital services. Turning now to health care sustainability program on Page 11. We have continued to build on the foundation work of HMC Capital's wide sustainability framework and HCW's assets, which provide Australians with access to essential health services. On the environmental initiatives, we are on track to have solar installed at 65% of our assets where we have operational control. Moving on to developments, starting on Page 13. 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 cost of up to 7.5%. Now turning to Page 14, where I'll provide an update on our development pipeline. The current and future development pipeline stands at over $500 million. In the near term, the brownfield expansion of the Mount Hospital in Perth is on track for completion by June. This development is generating a cash yield on cost of 7.5%. In the medium term, we will seek to engage with the unlisted health care fund to firm up our plans for the next stages of our Camden Precinct in Rouse Hill in FY '26 and beyond. Moving now to the financial results, starting with the earnings summary on Page 16. HealthCo delivered a strong financial result for the half year, with 5% earnings growth and a 100% FFO covered distribution. FFO of $0.042 per unit and DPU of $0.042 were consistent with guidance and represent a strong overall financial result for our unitholders. HealthCo's balance sheet remains strong, as you can see on Page 17. Our asset valuations were stable as at December '24. We recorded a 0.8% gross increase on the June '24 valuations. Strong income growth continued to support asset values despite a modest easing in cap rates. Turning to capital management on Page 18. The asset recycling program continued during the first half with $47 million of asset sales. Gearing of 32.4% continues to be at the lower end of our target range, and our hedging remains high at 85%. We will remain disciplined in terms of how we deploy capital. Our guidance for FY '25 is on Page 20. We are pleased to reaffirm guidance for FY '25, FFO per unit of $0.084 and DPU of $0.084. I will now hand you back to Sid for concluding remarks.

Thank you, Christian. Today's presentation highlights that HealthCo continues to deliver what it sets out to deliver. Clearly, on the immediate horizon, there are a number of options being explored by various parties around Healthscope, which represents 59% of HCW's income. As this process plays out, HCW unitholders can be assured that the HCW management team remains focused on ensuring continuity of service across the Healthscope hospital portfolio and that we will continue to protect the long-term value for HCW unitholders. In closing, we would like to thank the Board and our unitholders for their ongoing support. And I'll now hand back to the operator for questions.

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

Just a couple of questions for me. Just firstly, in regards to HSO, just wondering if you can give a little bit of color just around the critical dates that are ahead and therefore, I guess, what that is in terms of relating to HSO and therefore kind of what it means for HCW as well.

Andy, what we've given you on Slide 6 is all we're prepared to provide at the moment. All we'd -- I'd say to give you a bit more color is the situation will need to come to a head sooner than later.

Okay. Understood. Just in terms of the childcare assets, just after a little bit of color, so you've sold $47 million worth in the period. Just interested in what kind of pricing was achieved versus book and what the timing of those disposals were.

Andy, it's Christian here. Look, we like the sector, but currently, we see better returns in all the target subsectors. But we've sold those assets in the first half at around 5% discount to book value.

And the average yield was just shy of 5.5%.

And the timing of those to settle?

They're all done in the period.

All done.

Yes.

And in Ballarat, you've called out that you have coming up.

Yes. We're considering the sale of Ballarat. We're pretty well advanced on it. All else being equal, it should settle this half.

Just one other question for me, just in terms of development. Just wondering how much is still to be spent at the Mount and then kind of looking forward, what you're expecting in terms of starts and kind of dollar quantum and timing around that.

Yes, not much left to be spent there, Andy. It's about $2 million. And for those that are out in Perth, the Mount sits on a really important parcel of land overlooking the city, and the refurbishment, which has been a long time overdue, means the facility is now a state-of-the-art facility. So it's coming up right to the tail end of the project. And yes, we're very excited about kind of the ongoing outlook of that facility moving forward.

And then beyond the Mount or the rest of the pipeline?

Mate, that's it for now. Obviously, we've still got future developments in the pipeline but nothing committed to. And we're -- given we've got the share buyback on and a couple of other things, we're just managing our development rollout while the situation remains out there.

Your next question comes from Solomon Zhang from JPMorgan.

Two questions from me. I guess the first one is just around the messaging and the turnaround at Healthscope. And it just seems that profitability just hasn't turned around as quickly as hoped. Just hoping for a little bit of color in terms of the drivers of this. Can you allude to whether it's like volumes? Is it wage pressure? And what are the actual pressure points that you are observing at a very high level?

Yes. Thanks, Solomon. What we'd say there is the pressures around private health insurance and wage costs are well documented in the industry. What we'd say around the Healthscope situation specifically is that volumes are up. VMO retention is high. Operational performance is strong. What needs to be rectified at HSO is the capital structure.

Yes. Fair enough. And you previously disclosed an EBITDA-rent coverage ratio of north of 3x. That included the 50% incentive. You haven't included it in this deck. I was just wondering what that is today. And has it improved given the ramp-up of those development completions or sort of stayed flat? Just any color there?

We're still awaiting audited financial statements for the last period from the operator, so I can't comment on the precise numbers. What I'd say is we've still got some rent-frees to roll off between April and September. And if we look at the volumes, if we look at the traffic through these facilities, the underlying operational performance of these facilities continues to be in line with what we would have expected based on the information that we have.

Right. So broadly speaking, the EBITDAR is sort of trending positively, but it's more the interest line?

What I'd -- well, I think that's a good read-through, Solomon. And what I'd say is you can have a look at some other comps in the market that provide a bit more transparent public disclosure around operational performance. So there are some positive trends in the sector. And certainly, from what we have heard, private health insurers have come to the party and the table as well with increased funding.

Your next question comes from David Pobucky from Macquarie Group.

Just the first one around the buyback. You quoted you're 35% of the way through it. Would you mind just talking to the pace of the buyback in the context of where your stock is trading relative to NTA? I mean I'm assuming you want to ensure an appropriate gearing level. I mean -- or do you have an intention to pick up the pace?

David, obviously, in the blackout period, we had to turn the buyback off because that's how the regulations work. What we'd say is we have done as much as we can under the regulations on the buyback, and we'll keep monitoring it now. And if it makes sense from a unit price perspective, we're considering recommencement.

And can you just remind me if it's in the guidance that you quoted or not?

So we've reaffirmed guidance today of $0.084 per unit.

Okay. And just one question on Healthscope if I may. You mentioned Healthscope continues to be compliant with lease terms. So I'm assuming that means they continue to pay their rents on time and in full. Have you spoken to them about their ability to cover their rents once incentives run off?

We have ongoing discussions with all of our tenants, including Healthscope. We expect that the rent will be paid as and when the rent-free runs off. And in the event that the contractual obligations of Healthscope are not met, we will exercise the rights that we have under our leases.

Your next question comes from Callum Bramah from Macquarie.

Just I noticed you obviously got a subtle piece there around guidance that it's based on the continued performance of HCW's portfolio. Can you just clarify that, it's kind of an obvious statement, but why you've made that?

Just for transparency and full disclosure, it's pretty clear. And yes, you're right, it is an obvious statement, but the guidance is predicated on the continued payment of rent. The reason we've called it out specifically, Callum, is we want to complete -- we want to have complete flexibility around this point to make sure that we maximize unitholder returns at the right point and it's not perceived as something that could work against us. Everything we know at the moment means guidance is reaffirmed, and we hope we'll -- we plan on delivering the $0.084 per unit to all our unitholders.

And so is it fair to say your base assumption is that Healthscope keeps operating as is and continues to pay its rent?

12 months ago, 18 months ago, HCW had a major tenant called GenesisCare that over in America went through Chapter 11 bankruptcy, and they did not miss a single day of rent. That is our assumption for Healthscope. We have a contractual lease and a right, and we expect performance of that right, and we will consider alternative proposals in the event that those contractual rights are not met.

And can you just clarify for me, and maybe I got this wrong, but I was under the impression that the rent-free was for 24 months post-March '23, but I think if I heard you correctly just before, some of that rent-free continues through April to September?

Yes. It was 2 years at half rent, but the assets were transacted at different periods between March and September. So the rent-frees are corresponding with the dates the assets were acquired.

Right. And so -- and just to be clear as well, so if Healthscope stops paying or can't pay rent in certain assets, is it all sort of cross-collateralized, if you like? Or how does that work?

In our disclosure provided to the market, I believe, in about April last year, we had some detailed disclosure around our cross-default rights. And yes, those cross-default rights remain in place. So I'd suggest perhaps have a look at that earlier disclosure, which is very thorough.

And are you able to just give me a little bit of an idea, too, in the event that you do need another operator to step in, in the discussions you've had to date, are they happy to take the entire portfolio? Or are they wishing to cherry-pick? And the second one is, just can you explain the process internally at HMC, if there's a consortium looking to do Healthscope, how you break the teams up, if you like, to ensure that there's -- you manage the conflict?

HMC has several divisions in the business. HCW will act in the interest of HCW unitholders. In terms of demand from tenants, we've received inquiries from several groups. And in order to preserve commercial flexibility, I won't comment any further than that. But as Christian pointed out, we've got a high-quality portfolio in the best growth suburbs of Australia with an aging population and a chronic undersupply of beds. So we remain very comfortable in our position and very proud of our assets.

Your next question comes from Liam Schofield from Morgans.

Just a quick question on those 9 assets that were revalued externally. Were any of those Healthscope assets? And did the key assumptions of those valuations change at all?

Yes. So one of those were Healthscope hospitals, but it's also worth noting that all the assets in the unlisted fund were valued as well. So 8 of the 11 were independently valued as at half year.

[Operator Instructions] Your next question comes from Charlie Kingston from K Capital.

Just a few questions, please, and just looking for a bit more color around some things that's already been asked, but just around the sustainability of the rents noting that you've said you won't be providing any more support or assistance to Healthscope or dropping rents. And I think when you bought the assets, you did drop the rents by -- or the rents were dropped by 10% or thereabouts. But just with the discussions, in the worst-case scenario, if VA does occur or you do need to re-tenant some of your -- or all of your hospitals, just looking for some reassurance that the rents are actually fair and at sort of a market rate and affordable for a new operator because -- and I know you have said that Healthscope, their biggest issue is the capital structure and the debt that they have. But with any sale and leaseback, which these assets were, clearly, they set the rents, and they were too high initially. But I suppose just looking for some clarity as to the discussions you're having, how confident you are that in the event you do get a new operator, they will be able to afford the current rents across all of your hospitals. And maybe if you could provide some metrics, I don't know, rent per bed or -- I know rent to EBITDA, you haven't got that detail, but clearly, EBITDA is very volatile, but any sort of metrics that you could provide to support whether or not today's rents are fair in the event that Healthscope is replaced, please.

Thanks, Charlie. You're right in pointing out that when we acquired these facilities, we acquired them from Medical Properties Trust, not on a direct sale and leaseback from Healthscope. And at the time of acquisition, the rental rates in each of these facilities were independently valued by independent valuers, and they were written back somewhere in the order of pretty close to 10% down, along with providing 2 years of half rent as these hospitals recovered from COVID. Each of these facilities are independently valued in the unlisted fund every 6 months and then with -- in accordance with our valuation policy. Every valuer goes through and assesses the market rent of the facilities. Our view is today that the market rents are sustainable, and the issue really relates to the capital structure of Healthscope, which we've previously iterated. In terms of where we go to from here, the only thing I'd say is we want to preserve and maximize unitholder revenue and unitholder value. So we will do what is right to ensure those 2 objectives are met. And we've been approached by several groups. One group happens to be a consortium by HMC. We have received a proposal, which we're considering, and we will act in the best interest of HCW unitholders as we consider that proposal.

Okay. But to be clear, you think the current rents are fair and the operators that you've been talking to, they are happy to pay the current rents. I know things you can't discuss, but that is your base case.

Charlie, that's what we're working towards. Now as you know, every time you re-tenant a facility, negotiations occur, but that's our base case, and we'll do our best in negotiations at the right time. Now important to add, Healthscope today are completely up-to-date with their contractual obligations. So while we will review and consider proposals, if Healthscope continue to meet its contractual obligations, we've got nothing to do.

Okay. And then yes, anyway, it's crystal ball gazing, but I was -- given that -- the current incentives, I suppose, in the event that they are replaced, who knows, depending on who may or may not replace them, there may be further incentives because you are clearly paying out 100% of FFO. So if there are further incentives or restructuring, then just trying to get a sense of how sustainable...

Yes. Charlie, we're not going to get into any specifics here...

No, that's fine.

The thing is, these assets were bought for $1.2 billion. Today, their valuation is $1.5 billion, so we're sitting on a pretty good equity gain. We'll manage this appropriately, and we'll get the best outcome.

And then it has already been asked, but just around the conflict in the event that HMC, their consortium was to own our biggest tenant, circa 60% of our rents, can you -- I mean clearly, if you were in that vehicle, you would want lower rents to maximize profits, but -- and I know they are the biggest shareholder in HCW, and there's clearly a conflict with any sort of externally managed REIT, but it does just seem very awkward if that were to eventuate. And just given the history of HCW floated at $2, raised money to buy these assets at $1.35 and here we are at $1 or a bit lower, I was just hoping for some reassurance from you and the manager that -- how do you -- that's a very big conflict to manage if that proposal was to go ahead because HCW has been a very poor experience to date. And I don't know, could you -- if another vehicle within HMC was to purchase Healthscope, could we somehow, HCW participate in that upside? I'm not sure, but it's a very big and awkward scenario in the event that that does occur. So could you provide some more specifics as to how you'd manage that conflict?

Charlie, we hear you, we understand your concern, and that's why I came out at the outset of this presentation and in my remarks just before opening it up for questions, this management team and Board will protect HCW unitholders' interest. Appropriate governance structures will be established and have been established to address any perceived conflicts. We'll get the best outcome for HCW unitholders in the event of any scenario that plays out. You can be reassured of that.

Okay. And then just lastly, again, on the buyback, just noting, yes, you've been in blackout, but you had -- didn't really sound all that committed to finishing that aggressively, but when you raise money at $1 -- yes.

We can recommence it now. It's under -- We can recommence it. It's under consideration. We're working through every scenario at the moment, and that's all I'll say about that.

But does it -- how do you benchmark that against a development pipeline whereby buying back stock, I would have thought at $1, the current discount to NTA, especially when you raise money at $1.35, I would have thought that's absolutely the best use of capital over any other development or other asset recycling, et cetera? I would have thought you'd be seeking to execute that as aggressively as possible, but I don't know, it's just more of a comment.

Charlie, we hear your comments. Happy to take that up on a one-on-one with you and listen more.

Your next question comes from Simon Chan from Morgan Stanley.

I just got a quick one. You mentioned all along this call that your goal is to make sure you maximize unitholder value, et cetera. Have you thought about just selling your Healthscope assets? Because as you mentioned, you've made good money on it already, right? The valuation has been great. And in unlisted hands, who focus more on IRR rather than short-term earnings, they might actually value these sort of assets more. Have you just thought of just turfing these assets and maximize unitholder value that way?

I'll go back to my earlier comments, Simon. We will consider all executable bona fide proposals that are received. That's all I'll say.

Have you received any bona fide approval to take over ownership of those assets today?

I'm not going to say any more, Simon.

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

Thank you, everyone, for your interest and time today. I know it's a busy reporting day on Valentine's Day. We're -- this management team is working very hard to ensure that we preserve and maximize unitholder value, and we'll continue to do that. Thank you very much.