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 '26 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. Thank you for attending today's conference call. Joining me on the call today is HealthCo Fund Manager, Christian Soberg. 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 respect to elders past and present and extend that respect to all aboriginal and Torres Strait Islander people. I'd like to begin on Slide 6, which outlines our FY '26 results. The key takeaways on this page are that the portfolio is performing as it should, and that HealthCo has a strong balance sheet. Financially, FFO of $0.04 per unit was impacted by the Unlisted Healthcare Fund pausing distributions as a result of the Healthscope situation, which I'll get to shortly. Underlying FFO, which reflects HCW's share of earnings in the Unlisted Healthcare Fund was $0.077 per unit. Operating performance was strong in FY '26 with 100% rent collection, 99% occupancy and NOI growth of more than 4%. HCW has a strong balance sheet with $158 million of cash and undrawn debt as of June. Gearing of 29% is below our target gearing range also. Now moving on to our update on the Healthscope hospital portfolio, which is clearly a subject matter of focus for everyone. Just as a reminder, HCW and the Unlisted Healthcare Fund owned 11 private hospitals in Sydney, Melbourne, Brisbane and Perth, currently occupied and operated by Healthscope. These are high-quality health care infrastructure assets that cater for close to 400,000 patient episodes annually. The portfolio was independently valued at $1.35 billion in June and we estimate that the replacement value is well in excess of $2 billion. We appreciate that all of you will be keen to understand how and when the broader situation will be resolved. The current situation is as follows. All hospitals are operating as normal and 100% of the rent has been paid up to and including this month since the time of acquisition. The transition The Mount in Perth to Bethesda is on track with the new lease starting in October. This is the lease that is guaranteed by the West Australian state government who will also be providing financial and operational support to Bethesda. We have agreed terms with experienced Australian hospital operators for the remaining 10 assets. These lease arrangements provide for tenant diversification and for sustainable long-term relationships with alternative operators. The pro forma NTA impact of the new lease arrangements is expected to be broadly neutral based on independent valuations that take into account the new lease terms. HCW and UHF, together with our alternative operators, have presented a compelling proposal to the receiver that will provide for continuity of service and maintain jobs across all of our assets. Our conviction in the portfolio remains high and we are confident that a path forward can be agreed soon. So that transition to the alternative operators can commence in earnest. Until such time as that is agreed, all of our legal rights, including termination and cross default rates remain in place. I'll now pass to Christian, who will take you through our results in more detail.

Thank you, Sid. Good morning, everyone. And moving now to the portfolio overview on Slide 10. Our portfolio is diversified across 4 key subsectors: hospitals, primary and specialty care, government and life sciences and aged care, with hospitals representing around 65% of income. We continue to manage a high-quality and highly resilient portfolio of 21 assets valued at $1.34 billion with a long WALE of 10.6 years. Operationally, the portfolio continues to perform well. Occupancy is 99%, rent collection is 100% and like-for-like NOI growth was 4.1% for the full year. Around 80% of income is CPI-linked, giving us strong income protection in an inflationary environment. Turning to Slide 11 for more details on our subsectors. Beyond private hospitals, our portfolio also includes cancer care centers, aged care facilities, health hubs and a nursing college. Our tenant base is anchored by high-quality government and national operators who account for over 80% of our income. These include Estia, one of the largest aged care operators in Australia; mater, one of Queensland's largest health care providers and Queensland Health. On Slide 12, we highlight the attractive metro locations of our assets. 97% of our portfolio is located 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. Moving on to our development pipeline, starting on Page 13. We have a strong conviction in the value of a $500 million development pipeline in Sydney. That said, we will only seek to unlock our pipeline once the Healthscope situation has been resolved and only once funding partners have been secured. Moving now to the financial results, starting with the earnings summary on Page 15. HCW's underlying portfolio earnings remained resilient throughout FY '26. FFO of $0.04 per unit reflected the non-declaration of distributions from UHF preserving balance sheet flexibility while progressing the Healthscope situation. On an underlying basis, FFO was $0.077 per unit, which includes HCW's share of UHF FFO. We have included underlying FFO to demonstrate HCW's earning potential on a look-through basis at a time when distributions are temporarily impacted by cash retention in UHF. HCW did not declare a distribution in FY '26 to preserve balance sheet flexibility, while we continue to work through the Healthscope situation. Moving on to the balance sheet on Page 16. We maintained a strong balance sheet throughout the year. NTA was $1.35 per unit as of June with the $0.04 movement from December, primarily reflecting 15 basis points of cap rate expansion. 74% of the portfolio was independently valued including all 11 hospitals operated by Healthscope across HCW and UHF. Turning now to capital management on Page 17. Our capital management remain prudent preserving liquidity and strategic flexibility. HCW completed $77 million of asset sales during the year, and had $158 million of cash and undrawn debt as of June. We have extended our debt maturity out to December 2027. Gearing of 29% is below our target range and we're compliant with all debt covenants. Finally, HCW is 81% hedged. Now turning to the FY '27 outlook on Page 19. The new lease demand private hospital in Perth will commence in just over a month, and we are confident that the path for the remaining Healthcare hospitals in Sydney, Melbourne and Brisbane will be agreed soon. Reflecting this progress, we provided FY '27 DPU guidance of $0.06 per unit, subject to the Healthscope situation being resolved. The distributions are underpinned by underlying FFO of $0.061 per unit and existing cash reserves. Strategically, we're focused on positioning HCW for sustainable earnings and distribution growth in the future and narrowing HCW's trading discount to NTA. In closing, we'd like to thank our unitholders, our Board, our tenant partners and all other stakeholders for their continued support. I will now hand back to the operator for Q&A.

[Operator Instructions] Your first question today comes from Andrew Dodds with Jefferies.

I think you guys have previously spoken to a potential 10% to 15% reduction in asset values resulting from lease incentives to the new operators. But the comment today in the ASX announcement suggests you're not expecting any material change in NTA. So I was just hoping you could kind of explain what the change is here or how this kind of is working?

Yes. So half year, Andrew, what we said was that we expect the valuation impact of the new leases based on constant cap rates to be down between 10% to 15%. That's what we said at half year. As we now look at our valuations as of June, the amount was valued on the basis of the new lease. It has entered into with the Bethesda guaranteed by the WA state government. And while we don't disclose individual UHF valuations, the valuation was broadly consistent with the December value here with cap rate compression, offsetting the impact of the new incentives. Well, the independent valuers also did at the full year was to value all the remaining 10 assets based on the lease agreements that we have agreed with the alternative operators. The overall valuation impact was neutral, Andrew, with cap rate compression offsetting the value of the incentive. And that's the basis upon which we've said that we expect NTA impact on a pro forma basis to be broadly neutral.

Probably adding to that, Andrew, the transaction evidence of late has been really strong that the values can point to. So infrastructure like hospital and life sciences assets have recently traded in the 5% to 5.5% range. And of ticket sizes that are fairly significant material. So that's also given the valuers confidence around fundamental value of infrastructure-like facilities.

All right. Great. And then just on the bridge from FY '26 to '27 underlying FFO. The guidance just implied, I guess, a pretty material step down from $0.077 to $0.061 per share. So I was just hoping to get a better understanding of some of the moving parts within this bridge.

Yes. So the key component of that bridge, Andrew, relates to the low-cost swap in UHF which expired at the end of FY '26. So that expiry of that swap is reflected in the underlying FFO guidance. And if that -- the guidance reflects new hedging arrangements in the Unlisted Healthcare Fund.

All right. Great. And then just finally for me. Just on the DPU, can I just confirm if you expect the distribution to recommence in the first quarter? I think historically, you've paid these quarterly. And I guess, just if the expectation is this is how they will be paid going forward.

So the DPU guidance of $0.06, Andrew, and that's for the full year, FY '27. The timing of the payments will depend on when Healthscope situation has been resolved for the remaining 10 assets.

Your next question comes from Liam Schofield with Morgans.

Just 2 quick questions. Can you just talk about look-through gearing post a resolution, is that the right level of gearing? And then secondly, just on the capacity to grow FFO in future years, some around potential indexation under the revised leases?

Yes. So maybe I'll kick off and then hand over to Christian. Balance sheet gearing, we've stayed at 29% and gearing in the unlisted fund is at 43%. So our gearing levels commensurate to each of those funds and those structures is quite low, which gives us a lot of confidence around our underlying cash to put the guidance out on the distribution. I don't really want to make any forward-looking statements as to where gearing lands subsequent to the resolution of the Healthscope situation, but it's not a moderate change to where we're at today. And as Christian said, if the NTA holds, I think you can back-solve that.

And then in terms of forward-looking outlook, Liam, we see FY '27 as a reset base from which we expect DPU and underlying FFO to grow. And we think that over time, that underlying FFO and FFO in HCW should converge.

Your next question comes from David Pobucky with Macquarie Group.