Vital Healthcare Property Trust (VHP) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting of Vital Healthcare Property Trust. My name is Bernard Crotty, and I'm the Chairman of Vital Healthcare Property Trust. Vital Supervisor has appointed me as Chair of this meeting. As you are aware, this is a hybrid meeting, involving a physical meeting in Auckland, with those like me who are unable to attend due to COVID-19, attending virtually. In my case, I'm coming to you from Toronto, Canada today. As this is our first hybrid meeting, please accept our apologies in advance if we experience any technological issues or if the meeting flow is different from usual. We ask that you hold all questions, whether from the floor or via our online platform until after both addresses and the tabling of the financial statements immediately prior to voting on the proposed resolution. For those of you who are in the room in Auckland, please could I ask that your mobile phones are turned off or to silent mode. The bathrooms are located past the Black panel doors, opposite side of the hallway on the right-hand side. In an emergency, the fire evacuation stairwell is underneath the escalators. Generator staff will guide you out of the room. The emergency meeting point is the downtown car park. This notice of annual meeting has been circulated to all unitholders. It sets the scope of what we are scheduled to discuss today and includes the details of the 1 resolution we are due to consider. I am pleased to confirm that there is a quorum present, and I declare the 2020 Annual Meeting of Unitholders of Vital Healthcare Property Trust open. Voting is now also open. The order for the meeting is as follows. Following general introductions, I will give my address as Chairman. Following my address, I will introduce Aaron Hockly to give his fund managers address. As he is in the meeting in Auckland, Aaron will then table the annual financial statements, following which Aaron will hand over to Graham Stuart, again, because he is in the physical meeting, who will invite questions on any matter regarding the Trust or the presentations other than his reelection. We then move to the formal business being the proposed resolution that Graham Stuart be reelected as an Independent Director of Northwest Healthcare Properties Management Limited, Vital's Manager, which will include and address by Graham and any questions on his proposed reelection. After voting is complete, we have an opportunity for general business, and I will invite you to ask any other relevant questions you may have. We will then conclude the meeting, following which there will be refreshments for those at the meeting in Auckland. Copies of the minutes of last year's annual meeting are available for inspection at the entrance to the room in Auckland. I would like to take the opportunity to introduce the Directors of the Trust Manager. We have in Auckland today, Directors, Andrew Evans; and Graham Stuart. Due to travel restrictions and COVID-19 attending via -- attending virtually are Directors, Dr. Michael Stanford and Paul Dalla Lana. I would also like to welcome the following who are attending in person. Vital's Fund Manager, Aaron Hockly; Justine Wealleans from Trustees Executives Ltd, the Supervisor of the Trust; Thomas Moeke from Deloitte, the auditors of the Trust; and Toby Sharpe from Bell Gully, legal advisers to the Manager. Due to COVID-19 travel restrictions, a number of Northwest's senior executives are also attending virtually on Zoom, including regional CEO, Craig Mitchell, Michael Groth, Vital's Chief Financial Officer; Chris Adams, Executive Director Projects; Richard Roos, Executive Director Portfolio; and Vanessa Flax, Regional General Counsel and Vital's Company Secretary. Following another very successful year for the Trust, it gives me great pleasure to deliver this address as Chairman of the Manager. As shown on the graph in the presentation in front of you, Vital recorded a 12.7% total return for the 12 months ended September 30, 2020, despite COVID impact -- despite COVID-19 impacting around half of this period. Over the same period, Vital outperformed the S&P/NZX All Real Estate Index by 17.1%. This significant outperformance highlights the defensive nature of health care real estate compared to other real estate classes and the resilience of hospital operators, in particular. This resilience led to over 99% of rent being collected over the last 12 months, well above our peers in New Zealand and Australia, with the majority of Vital's tenants having recovered to pre-pandemic operating levels. Despite COVID-19, we were able to raise $157.5 million in October and November, from a significantly over subscribed equity raising. The capital will be used to fund Vital's strategic objectives, which, in turn, will provide future benefits to unitholders. Vital paid $0.0875 per unit in distributions over the 2020 financial year, and we have provided guidance of at least this amount for the current financial year. The Board is focused on a number of governance and other initiatives over the last 12 months. These include the appointment of Graham Stuart as Independent Chairman of the Board with effect from the close of this meeting, of course, subject to his reelection. Mr. Stuart is a former CEO of Sealord Group and a former CFO of Fonterra, both significant global but New Zealand-headquartered businesses. In addition to his role with the Manager, he is Chairman of E Road and a Director of Tower Insurance and Metro Glass. Dr. Michael Stanford was appointed as an Additional Independent Director during this period. Dr. Stanford's executive experience include 23 years running large hospital groups, most recently, St. John of God Healthcare. He was previously on the Board of Australia's second largest hospital operator, Healthscope, and is currently on the Boards of Diabetes Australia and ASX-listed Virtus Health. A revised structure was approved by unitholders at the last annual meeting and resulted in a $2.2 million reduction in base management fees in fiscal '20. In late 2019, we appointed a new Fund Manager, Aaron Hockly; and a new CFO, Michael Groth. Both are seasoned real estate executives with significant experience across New Zealand and Australia. Finally, the Board approved a 5-year portfolio strategy for Vital. This is primarily an internal strategy document designed to support our strategic goals, including earnings growth. However, the publicly released elements provide unitholders with information on targets for earnings growth and investment strategy, including asset types, asset allocations, development exposure, asset locations, and other key qualitative and quantitative factors. It is now my pleasure to introduce Aaron Hockly, Vital's Fund Manager.

Thank you, Bernard [Foreign Language]. It is my pleasure to be presenting to you as Vital's Fund Manager, my first annual meeting in this capacity. It is almost 12 months since I stepped into this role and what a journey it has been, dividing my time between Australia and New Zealand, acquiring 3 aged care facilities in Australia, getting to grips with Vital's significant development pipeline, a special meeting to restructure the Trust, a global pandemic, reconnecting or connecting with many of Vital's unitholders and tenants, unfortunately, too often by means other than face-to-face, developing a new 5-year portfolio strategy for Vital, raising $157.5 million of new equity, starting the process of resetting our debt, announcing new developments and starting a process to redeploy the proceeds from the sale of certain assets in Australia into a premium hospital, which I hope to update the market on shortly. I would like to start by thanking the Board and my Northwest colleagues for their support over the year, including my predecessor, Miles Wentworth, who handed over the Trust in such an excellent position to build on. It is unfortunate that COVID-19 has prevented many of those who have contributed so much to Vital's success from being unable to be here today. I would also like to thank unitholders and other stakeholders for their support for me personally over the last 12 months. I'm always interested to hear why people invest in Vital. So thank you to the 30-something year-old saving for your house deposit, who recently bought our units via shareies. The retiree, who has been a unitholder for the last 20 years, and I see you in the audience as well. Thank you for coming today. And all the other large and small investors who have shared with me what you're seeking from your investment in this fantastic Trust. On any measure, the FY '20 results were outstanding. Our cash profit or AFFO increased by 5.6% per unit. This was the result of both a 3.4% increase in underlying earnings and a 7.2% reduction in expenses. Earnings increased due to rental increases, acquisitions, developments and leasing. In summary, in all real estate level areas, we recorded significant achievements for unitholders. The cost reduction was primarily due to a 28.5% decrease in management costs and also a 13.2% decrease in finance costs. These results have continued into the first quarter of this financial year as we seek to deliver on our newly announced targets for AFFO and distributions of 2% to 3% growth per unit per annum. As at September 30, 2020, the Trust had a $2.2 billion portfolio, comprising 44 investment properties, weighted 70% (sic) [ 77% ] to Australia and 23% to New Zealand. 82% of the portfolio comprises hospitals, including leading private hospitals in Auckland, Brisbane, Hawks Bay, Melbourne, Newcastle, Sydney, Wellington and Whangarei. The balance of the portfolio was split between outpatient facilities in Australia and New Zealand and aged care facilities in Australia. As Bernard mentioned, we have released a 5-year portfolio strategy, which includes asset allocation as a means of guiding the market to where we see the portfolio growing and changing over time. Hospitals will remain the core asset and income provider for Vital and are expected to make up 50% to 70% of the portfolio over the medium term. Whilst we would be very comfortable with a higher percentage of private hospitals, we are also cognizant of the highly competitive landscape for these assets, that hospitals are infrequently sold as well as other matters such as our earnings growth targets. As a result, we are looking to allocate 10% to 20% of the portfolio into each of medical, office buildings and aged care and 5% to 15% of the portfolio into life sciences. However, all of this will be opportunity led. At September 30, 2020, Vital had a weighted average lease expiry, otherwise referred to as WALE or WALT, of 18.5 years. This is the longest WALE of any listed property group in Australia or New Zealand and nearly double the length of the next longest WALE in New Zealand. Whilst WALE isn't everything, it is key for the long-term income security for unitholders. And so it remains both a key focus and a key differentiator with our competitors. We also continue to focus on development opportunities, primarily within the existing portfolio as a means of growing income and value for unitholders as well as improving the portfolio overall. Following recent announcements, our committed development pipeline has grown to $347.1 million, of which -- $250 million of this is left to complete. I will talk more about developments shortly. In March 2020, Vital acquired 3 aged care facilities in Australia for NZD 60.1 million. These assets had a combined WALE of 16.6 years at acquisition, providing a year 1 income of AUD 3.7 million or a 6.5% yield on the purchase price. All assets -- all 3 assets are leased to the not-for-profit operator, Bolton Clarke, one of Australasia's largest and most experienced aged care and retirement living providers with over 200 years experience. Bolton Clarke is the name for the merger between Royal District Nursing Society (sic) [ Royal District Nursing Service ] and Return Services League, who have been providing aged care in Australia since1885 and 1938, respectively. And you can see on the slides and photos of the assets we acquired. Bolton Clarke in Baycrest has 101 beds and is located in Harvey Bay, Queensland. Tantula Rise is a 120-bed facility on Queensland Sunshine Coast. And Darlington is a 90-bed facility on Tweed Coast in Northern New South Wales, just south of the border with Queensland. All 3 of these assets were purpose-built. They comprise single rooms with ensuites. So turning to developments. As noted previously, developments remain a core part of our strategy, to add value for Vital for its unitholders by capitalizing on the Manager's unmatched expertise in this space, our existing relationships and Vital's access to capital. In FY '20, we completed 2 developments requested by Healthe Care, Vital's largest tenant and Australia's third largest private hospital operator. A new 22 surgical-bed day-surgery was constructed next to Lingard Private Hospital Newcastle, the leading private hospital in the Hunter region of New South Wales. The day surgery cost approximately AUD 28 million to construct and with the wider precinct now valued at AUD 190 million. Combined, this is Vital's second largest asset group, and the development was delivered on time and on budget. There are 20 -- over 25 years remaining on this lease. We also undertook an AUD 8.3 million expansion of The Hills Clinic, a mental health inpatient facility, approximately 40 kilometers northwest of Sydney CBD. Following the expansion, which was completed on budget and ahead of schedule, the hospital comprises 85 beds and is valued at AUD 45 million. There are 27 years remaining on this lease. Work continues to rebuild and seismically strengthen Wakefield Hospital, Wellington's preeminent private hospital. The total cost of this project is over $130 million, with Vital's contribution expected to be over $100 million. The first stage of the project is the building of -- is a new building to the rear of the existing hospital, and this is due for completion partly through next year, following which work will commence on upgrading and extending the existing hospital with completion scheduled for mid-2023. On completion, Wakefield will comprise over 74 inpatient beds, 6 operating theaters, a cardiac and angiography suite, an endoscopy suite, consulting rooms and a full range of specialist services. The project has enhanced seismic resilience through its base isolation, well in excess of building code, to ensure this building quite literally stands the test of time. Wakefield is strategically located on the fringe of Wellington CBD and close to Wellington Regional Hospital. It is leased to New Zealand's third largest private hospital operator group, Evolution Health Care, formerly known as Acurity, and Wakefield is leased for 30 years. Royston Hospital, also leased to Evolution, is the leading private hospital in Hawke's Bay. The existing hospital is in the process of being extended and upgraded. Due to significant demand in the region, a new day surgery is being constructed on the adjoining site and is due to be operational by the end of next year. The 2 sites are expected to have a combined value of over $75 million, representing another significant investment in New Zealand's healthcare infrastructure. Finally, the largest project we currently have underway is the East Wing Tower development at Epworth Eastern. Epworth is currently operating at maximum capacity and this 14 level, AUD 126 million development will deliver much needed additional hospital beds, operating theaters, specialist consulting suites and a new emergency department. Epworth has precommitted to approximately 80% of the new building and leasing for the remaining space is well advanced and expected to be 100% occupied at completion. Construction is progressing well, and the structure is up to level 4 and is expected to reach level 7 by Christmas. Refurbishment of some of -- some areas of the existing medical center has already been completed and handed over to Epworth, and the project remains on target to complete by late 2021. Already the largest asset in Vital's portfolio, the expected value of the precinct on completion is approximately AUD 380 million. We undertook a $125 million placement in October 2020, primarily to existing unitholders and also introducing some new investors as part of our strategy to broaden Vital's unit register. The issue price was $2.80, a 6% discount to the previous trading price and a 19.7% premium to NTA, representing both the tightest discount of any property raising this year and the highest premium to NTA. The placement was 3x oversubscribed and was scaled back to preference primarily supportive domestic institutions and retail brokers. Northwest committed to taking up at least its pro rata share and the balance was fully underwritten by Goldman Sachs and Forsyth Barr. To enable retail holders not represented by share broker to participate in the capital raising, we also undertook a follow-on unit purchase plan at the same price as the placement. The initial $25 million was -- we had allocated for the UPP, was nearly 3x oversubscribed, se we elected to increase the size of the UPP to $32.5 million. This enabled over 99% of unitholders who elected to participate to do so at or above their pro rata. 6,813 unitholders participated in the UPP, the vast majority of whom were retail holders. The $157.5 million raised through the placement on the UPP has reduced balance sheet gearing to approximately 33%. Although these proceeds will ultimately be used to fund Vital's development portfolio. And as Bernard mentioned, I'm also tabling the annual report and financial statements for the year ended June 30, 2020. These were circulated to unitholders and are also available on our website. I'll now hand over to Graham Stuart to answer your questions.

Thank you, Aaron, and good morning, and good afternoon, ladies and gentlemen. If there are any questions relating to the Trust or the presentations by Aaron and Bernard, now is the opportunity to raise them. Only unitholders or proxy holders are permitted to speak or ask questions. [Operator Instructions] Questions will be moderated by my fellow Director, Andy Evans, who will read the questions aloud for all to hear. [Operator Instructions] Because there is a delay in receiving online questions, we will call for questions in the room first. We request those wanted to ask the question online to do so quickly as early as possible to ensure that the questions are received and able to be answered. Thank you. We're now open for questions.

John Clearwater, unitholder. With the extraordinary fire disasters that are occurring in Australia and more recently in New Zealand, are you having any difficulty in getting fire insurance? And has there been any recent increase in fire insurance premiums?

Thank you, John. I'll refer that question to Aaron.

Thanks for the question, John. Yes, your question is 100% correct. Insurance premiums are becoming higher and insurance is getting more difficult to obtain. We've got a current program underway to expand our existing insurers because the insurance market is very tight. I don't expect that will impact overall the level of cover we have. Our premiums are going up a little bit, but we are working on that.

[indiscernible], unitholder. Given the current pandemic and the likelihood of future global pandemics, is your construction program taking into account in its building and design the necessity for quarantine and for dealing with pandemics? They will be, I think an inevitable permanent fixture in the world in the future.

Thank you, [indiscernible]. Aaron, I can ask you.

Thanks, Graham. Thanks for the question. Our current projects are significantly advanced, as I was talking about. So there's not really an ability to change the nature of those projects. I did refer to aged care facilities, in particular, and all of those being single room, and that has significant advantages for our aged care operators in terms of warding off not just COVID-like viruses, but also annual flows, et cetera. And that's part of the reason why we're focused on that part of the market. I think it's fair to say that, that future developments will take into account the need or ability for us to respond to pandemics. But the bulk of that is -- will be operator-led as opposed to -- as opposed to us leading that. So we work very closely with our tenants in terms of what they're seeing in the market. We have experience on the Board and also in staff in terms of dealing with government and seeing what's coming down the line that we need to be aware of. But to date, it hasn't changed anything significantly in terms of the way we're planning at the moment. But we are looking into that at a moment.

I'm Oliver Mander. I'm a proxyholder on behalf of New Zealand Shareholders Association. Just, Aaron, if you can just outline for the room, the participation of Northwest in the UPP? And when will the modified substantial security holder notice be issued?

So there won't be an additional substantial unitholder notice. You -- we voluntarily released a substantial unitholder notice following the placement. Northwest Holding has come down following the $32.5 million UPP, but there's no current plans to release that. So they, I think, are sitting at about 25.7%, up from about 25.5% prior to the equity raise.

My name is Craig Tyson. I'm an Investment Manager with ANZ Investments, and we manage money on behalf of 0.75 million New Zealand, Kiwi side of investors. Despite being an investor in Vital for over 20 years and bidding into the capital raise, we did not receive our pro rata allocation. So our holding in the Trust actually fell as a result of the capital raising. Subsequent to the raising, the Manager reported that Northwest, the owner of the Manager, had increased its shareholding in the Trust by 0.4% to 25.9% or around 1.2 million units. So my question is, I'm curious to understand how the Manager was allocated more than its pro rata share of the capital raise, while we were allocated less? And can you answer, as part of that question, could you also reconcile this with the Manager's obligations under the FMCA, or the Financial Markets Conduct Act, to treat unitholders equitably?

Thank you, Craig. I'll answer that question. And as you're aware, Craig, you and I have already spoken about this, so I'll just reiterate some of the points that I made when you first asked these questions. There were 3 key principles on the allocation policy. First was to support broad participation from existing institutional unitholders. We also had a -- second principle was we had an objective of broadening the register. We've had that objective for some time. So the second principle was to allocate to new investors or to existing investors who are significantly underweight. And finally, the units that were left over would be to allocated to unitholders that have been engaged or supportive of Vital's strategic direction. We believe that the allocation was made on a pro rata basis, the basis of which was the $125 million raised in the placement. And all shareholders were allotted a pro rata apportionment of that $125 million, including ANZ. The Northwest's participation in the capital raising was subject to a number of regulatory constraints, but they were not given preferential treatment. The participation was determined according to the same policy as was applied to all other institutions. In fact, the Manager was 7th out of 9 institutions that were allocated above their pro rata. And the Manager received significantly less in proportion to their holding than retail holders did. So in that respect, the Board firmly believes that in this process, Northwest property management company -- healthcare property management company has complied with the requirements of the trustee and the Financial Markets Conduct Act.

Just can you clarify something? I mean unitholders or investors can buy the shares or units every day if they want to be shareholders. So why should they get preferential treatment over existing shareholders when it comes to capital raise? You stated that you wanted to broaden the register. Why should that be at our expense if we are trying to get more shares as an existing shareholder who's been a shareholder for over 20 years?

And we want to -- yes, Craig, we want to broaden the register in the interest of reducing the cost of capital and being able to make sure there's enough depth in the future for capital raising. So it's long been our ambition to be able to pull more institutions, particularly out of Asia, potentially out of Australia onto the register, and that would benefit all shareholders by lowering our cost of capital.

[ Michael Bowden ], shareholder. I don't quite understand this. I mean, given that the UPP was 3x oversubscribed, I see no reason to involve nonunitholders. And this rationale for this broadening the register, it just doesn't make sense to me.

I'm not sure if there's a question in there, Michael. Yes, the idea of broadening the register is to increase liquidity and to bring shareholders on to the register who might have depth to be able to subscribe capital to the company in future capital raises.

You said that the Manager benefited, and you're happy to allocate as a Board to the Manager over their pro rata. And you alluded to the fact that you were giving people who were supportive an over allocation of units. What were the criteria -- which particular criteria do you think the Manager -- what criteria qualified them for an overallocation of 1.2 million units relative to us who actually had an underallocation of about 200,000 units? What aspect of supportive do you think they qualified?

Thank you, Craig. There were a number of areas where the Board saw Northwest as being supportive. The most notable, I think, the most obvious of which was before we entered into this capital raise. And remember, we entered into the capital raise in the context of a North American election, a pandemic, quite a bit of volatility and instability in capital markets. So Northwest put a binding precommitment to support the capital raise and as a 25% shareholder, that was significant value. That meant that for that proportion of the capital raise we didn't need underwriting, and it gave the Board great confidence to go forward. So that's the most compelling of a number of key reasons where they were deemed to be a supportive unitholder.

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