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

Thank you for standing by, and welcome to the Vital Healthcare Property Trust 2021 AGM. I would now like to hand the conference over to Mr. Graham Stuart, Independent Chair. Please go ahead.

[Foreign Language] A warm greeting to all attending today, and special greetings to those of you overseas, we hope before too long, we can welcome you back to New Zealand. Welcome, everyone, to the 2021 Annual Meeting of Vital Healthcare Property Trust. My name is Graham Stuart, I am the Independent Chair of Vital Healthcare Property Trust. Vital Supervisor has appointed me as Chair of this meeting. As you are aware, we are hosting this virtual meeting this year and this is our first fully virtual meeting. Please accept our apologies in advance if we experience any technological issues or if the meeting flow is different from usual. Today's meeting is being held online via the Computershare online meetings platform. This allows unitholders, proxy holders and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting and read the associated company documents. In addition, unitholders and proxies have the ability to ask questions and to submit votes. [Operator Instructions] Should you require any assistance, you can type a query into the Q&A tab, and one of the Computershare team will assist with the chat function and reply to your query. Alternatively, you can call Computershare on 0800-650- 034. That's 0800-650- 034. Please note, while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note your questions may be moderated or if we received multiple questions on the one topic, they may be amalgamated. Finally, due to time constraints, we may run out of time to answer all of your questions. If this happens, we will answer them promptly via e-mail or personal responses on our website. Voting today will be conducted by the way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open the voting for all resolutions. If you are eligible to vote at this meeting, you will be able to cast your vote under the vote tab. Once the voting has opened, the resolution will allow votes to be submitted. To vote, simply select your voting direction from the options shown on the screen. Your vote has been cast when the green tick appears. To change your vote, simply select change your vote. You will have the ability to change your vote up until the time I declare voting closed. The notice of annual meeting has been circulated to all unitholders. It sets the scope for what we are scheduled to discuss today and includes the details of the one resolution that we are due to consider. I am pleased now to confirm that there is a quorum present, and I declare the 2021 Annual Meeting of Unitholders of Vital Healthcare Property Trust open. The resolutions will now be open in the vote tab. Please submit your vote at any time. I will give you a warning before I move to close the voting. The order for today's meeting is as follows: following some general introductions, I will give my address. Following my address, I will introduce Aaron Hockly to give the Fund Manager address. Aaron will then table the annual financial statements, following which Aaron will pass back to me to invite questions on any matter regarding the trust or the presentations other than the reelection of Andrew Evans. Following the questions, we will then move to the formal business being the proposed resolution that Andrew Evans be reelected as an Independent Director of Northwest Healthcare Properties Management Limited, Vital's manager. This will include and address by Andrew and any questions on his proposed reelection. After voting is complete, we will have an opportunity for general business, and I will invite you to ask other relevant questions you may have. We will then conclude the meeting. Copies of the minutes of last year's annual meeting are now available on Vital's website, vhpt.co.nz. I will now introduce you to who we have online today. The full Board of the manager is attending this meeting. Let me introduce Paul Dalla Lana, Andrew Evans, Dr. Michael Stanford and Craig Mitchell, who is attending his first unitholders' meeting in the capacity as a Director of the manager. I would also like to welcome Vital's Fund Manager, Aaron Hockly, along with Justine Wealleans and Evan Kennerley from Trustees Executors Ltd, the supervisor of the Trust; Silvio Bruinsma from Deloitte, the auditors to the trust; Toby Sharpe from Bell Gully, the legal advisers to the manager. We also have several of Northwest senior executive team attending this meeting, including Chris Adams, who is the Executive Director of Projects; Alex Belcastro, who is the Senior Vice President of Medical Precincts; Michael Groth, the Chief Financial Officer; Vanessa Flax, Regional General Counsel and Company Secretary; and Richard Roos, who is their Executive Director of Portfolio. Following another very successful year for the Trust, it gives me great pleasure to deliver this address as the independent chair of the manager. As shown in the graph in the presentation in front of you, Vital has once again outperformed both the NZX50 Index and the NZX All Real Estate indices and recorded a 13.2% total return for the 12 months ending the 30th of September 2021. This significant outperformance highlights the defensive nature of health care real estate compared to other real estate classes and the resilience of our hospital operators at a time when COVID-19 has impacted the wider economy. This resilience led to over 99% of rent being collected over the last 12 months, well above that of our peers in New Zealand and Australia, with the majority of Vital's tenants have been recovered to pre-pandemic operating levels. Despite COVID-19, we were able to raise $157.5 million in October and November this year from a significantly oversubscribed equity raising. This capital will be used to fund Vital's strategic objectives, which in turn will provide future earnings growth for unitholders. Vital paid $0.08875 per unit and distribution over the 2021 financial year, and we have provided guidance of $0.095 for the current financial year. This past year has been a very active one for your Board. Notwithstanding the impacts of COVID-19, interest rates at historical low levels and large amounts of liquidity in our markets have intensified the competition for quality real estate assets. Last year, we announced our new 5-year portfolio strategy. This included ambitious targets for earnings growth per unit and an investment strategy, including asset types, asset allocations, the exposure we have to development properties, asset locations and other key qualitative and quantitative factors. This year, the manager supported by the Northwest teams in Australasia and Canada, has pursued this strategy in a disciplined and focused manner. In October and November last year, we successfully raised $157.5 million by way of institutional placement in the unit purchase plan, both of which were well oversubscribed. Since balance date, we have actually raised a further $142.8 million of equity through an oversubscribed $115 million institutional placement and a $27.8 million unit purchase plan. Late last year, we announced the $95 million acquisition of Grace Hospital in Tauranga as well as 2 divestments in New South Wales and 1 in Tasmania totaling $100 million. In February, we announced the acquisition of a 5,333 square meter development site in Box Hill in Melbourne. This will accommodate an ambitious expansion of the Epworth Eastern Private Hospital over time. In June, we announced an $83 million acquisition of EpworthCamberwell Private Hospital in Melbourne. We also announced the acquisition of 3 further development properties, 1 in Brisbane, 1 on the Gold Coast and 1 in Auckland. These development properties will support the achievement of our 5-year strategic goals. These acquisitions and divestments represent a small part of the activity overtaken this past year. Aaron Hockly will provide greater detail in his report. Your Board has also focused on key governance and other initiatives in the last 12 months. I was appointed as independent Chair at the conclusion of the last unitholder meeting in November last year. Bernard Crotty retired from the Board in June this year and was replaced by Craig Mitchell. Bernard served on the Board of the manager for 9 years, a period in which the Trust has seen very significant growth and investment returns, consistently above those achieved by the NZX50 and the NZX All Retail Estate all Real Estate indices. I take this opportunity to thank Bernard for his service. Craig Mitchell brings a strong background in real estate and development to the Board. He is the regional Chief Executive Officer of Northwest Australia and New Zealand as well as the President of the Northwest Real Estate Investment Trust. His previous roles have been Chief Executive Officer for one of Australia's largest private construction groups and Chief Operating Officer for one of Australia's largest listed property groups. Your Board is coming to the end of a phase of renewal with myself, Dr. Stanford and Craig all being appointed within the last 3 years. We are conscious of the need to balance institutional knowledge and continuity with fresh ideas and new perspectives, and we will continue to ensure that we have the right mix of skills and experience around the Board table to manage the fund and to serve unitholders' interests well. It is my pleasure now to introduce Aaron Hockly, Vital's Fund Manager.

Thank you, Graham. [Foreign Language] and good morning, everyone. I would like to start by thanking the Board and staff and Vital's manager as well as the Vital Northwest team, both in this region and globally. It has been a very challenging year primarily due to the ongoing impacts of COVID-19. As you will be aware, this has continued to have a significant impact on people and their families and their day-to-day living, including on our staff. Most of my colleagues in this region are located in Melbourne, a wonderful city familiar with being the global leader in many things. However, being the most locked down city in the world over the past year has not been a cause of celebration. Our other 2 key regional offices in Auckland and Sydney have also experienced and continue to experience lockdowns and other significant impacts. My experiences at home schooling over the last few months have certainly helped me emphasize with how people's lives have been upended. Despite these challenges, we have continued to achieve significant success both on the financial and operating results I will touch on shortly, but also in setting up the Trust for future success. Much work has been undertaken across all areas from risk to branding to staff development and most importantly, for unitholders, the portfolio itself, including leasing, acquisitions, asset sales, development and sustainability. I would also like to acknowledge our tenants, including hospital operators, aged care operators, and other specialist medical, diagnostic, nursing and therapeutic providers. Lockdowns and other COVID-19 related restrictions have presented significant challenges to health care providers. In spite of these challenges, our operating partners have continued to provide outstanding care for communities across Australia and New Zealand. Private health care operators play a key role in the health care ecosystems in both countries for medical imaging to surgery, securing for people at the start and ends of their lives. These are services which our public systems rely on to function, and this has been highlighted through the pandemic. As a final initial acknowledgment, thank you to the public health providers across Australia and New Zealand, particularly frontline health workers. As challenging as the last few months have been for all of us, we should be very grateful for the people who kept us safe, worked even longer shifts than normal and who continue to put community needs ahead of their own. Since I presented to you 12 months ago, Vital has recorded success across all key areas. In FY '21, we delivered $0.1154 per unit in AFFO or cash earnings, 10.4% above FY '20. We remain on track to achieve guidance of at least $0.118 per unit this financial year, which is over 2% year-on-year growth and within our target of 2% to 3% growth per unit per annum. Growth in AFFO has enabled us to continue to grow distributions to unitholders, which we are guiding at $0.095 per unit, 7% above last financial year. This growth in earnings and distributions per unit is despite raising capital to lower balance sheet gearing to a conservative 34%. Vital's enviable portfolio of high-quality hospitals and other health and aged care facilities continues to support dependable and growing unit total returns. Key features include a market-leading weighted average lease expiry term otherwise known as WALE or WALT, of over 18 years to some of Australasia's leading health care operators. We have continued to enhance the portfolio through the sale of noncore assets and over 60,000 square meters of leasing. The strong performance of our tenants has enabled over 99% of rent to be collected over the last 12 months. Acquisitions and developments are a key source of future earnings growth for unitholders, and we are seeking to continue to prudently grow the portfolio. Over $430 million of acquisitions were completed over the last 12 months, representing 20% of the portfolio value. These acquisitions include large income-producing assets as well as sites that we will develop for health care operators in coming years. At 31 October, Vital's portfolio was valued at $2.7 billion across 42 assets in New Zealand and Australia. The bulk of this value is comprised of private hospitals, but with an important and growing exposure to ambulatory and aged care facilities. We will look to expand across all of these subsectors, potentially adding life sciences should appropriate opportunities become available. This $2.7 billion portfolio valuation is before any changes to market capitalization rates or other revaluations which may be reported at 31 December. Noting that Australia in particular is continuing to see significant cap rate compression for health care properties. Our weighted average cap rate of 4.86% compares favorably against many of our peers in Australia and New Zealand. As noted previously, we have continued to replenish our development pipeline. Committed developments currently total $460.2 million with $276 million of work left to complete. We are targeting having 10% to 15% of the portfolio under development at any time, allowing us to continue to deliver market-leading health care facilities, particularly as models of care evolve and as community expectations around sustainability increase. We have continued to deploy Vital's 5-year portfolio strategy, which at its core seeks to continue to deliver earnings and valuation growth for our unitholders. 18 months ago, we had been targeting increasing the portfolio's value to around $3 billion over 5 years. This seemed ambitious at the time. However, we have made and continue to make substantial progress on delivering this. Importantly, the portfolio strategy does not seek growth for growth's sake, but growth as a means to enhance unit total returns and it includes the sale of assets to improve the overall portfolio. To this end, over $100 million of assets were sold over the last 12 months had a premium to book value. In addition to the $286 million of acquisitions completed over FY '21, we recently acquired Tennyson Centre in Adelaide for AUD 93 million. Tennyson Centre is one of South Australia's leading cancer centers of excellence, and we have already agreed to extend the lease of one of the core tenants by 10 years. We are also in the process of acquiring Hutt Valley Health Hub in Wellington for approximately $46.5 million, with pricing dependent on the amount of development land included. This asset is adjacent to Vital's existing asset Boulcott Hospital and forms part of the Hut Hospital precinct. We will look to master plan these sites, including the development land we own here in conjunction with the hospital operator. Finally, we sold Gold Coast Surgical Center for AUD 13 million, approximately 5% above its book value. This removed several existing and potential vacancies from the portfolio. We are fortunate to have exceptional relationships with hospital operators. In New Zealand, this includes 3 -- the 3 largest private hospital operators. We have recently agreed terms with 2 of these Evolution Healthcare and Southern Cross to undertake $74 million of additional developments at their existing facilities, including Grace Hospital and Tauranga which we acquired in late 2020, Royston Hospital and the neighboring day surgery unit in Hastings and Wakefield and Bowen Hospitals in Wellington. All of these expansions are supported by very favorable business cases and the strength and closeness of our relationship with these operators means that we can adjust our support as required. An example of this is Wakefield Hospital, where we are building not just for immediate use, but with significant expansion capacity in light of the strong and growing demand for Evolution services. Our relationship with Evolution is built on trust and transparency and is one of our key and growing relationships. Playford Health Hub is an example of what Vital is known best for, development and delivery of world-class health care precincts. Acquired in 2 stages, this property was originally a dilapidated shopping center. Its location next to one of South Australia's main public hospitals as well as Northwest's significant development expertise made it an excellent acquisition and development target for us, consistent with our precinct and portfolio strategies. Construction of the first stage of this development, primarily car parking for the public hospital, majority leased to the South Australian government completed this month at a total cost of AUD 24 million. We will commence construction of Stage 2 at AUD 49 million Specialist Medical Center, 60% pre-leased in mid-2022. And earlier today, we announced that we have signed an MOU with Calvary Healthcare, one of Australia's leading health -- leading Catholic hospital and aged care operators to lease and operate a new $93 million private hospital, which will comprise Stage 3 of our development here. Vital's investment in this precinct will be in excess of $130 million with health care operators, notably Calvary, also investing significant capital in the precinct. It goes without saying that sustainability is growing in importance globally. Today's health care and health care property has lagged other sectors in terms of sustainable developments. However, this is rapidly changing. We note the sustainability commitments by governments and hospital operators as well as growing demands from our unitholders and other stakeholders. Vital participated in the Carbon Disclosure Project, or CDP, for the second time this year. We expect to participate in the Global Real Estate Sustainability Benchmark, or GRESB, in 2022. And we are using the learnings and results of these external benchmarks to improve our sustainability performance particularly in relation to the environmental impact of our buildings. The most meaningful contribution we can make is our developments, particularly those where we retain operational control of the building as with the case for Stage 2 of Playford Health Hub. This specialist medical center is targeting a 6-star Green Star rating, will be fully electric and will have a 0 operational energy carbon footprint. It is also important to note that Playford Health Hub, like most of our facilities, will play a key role in the health and well-being of the community's residents. The project is being delivered in conjunction with partners such as SA Health and Calvary, who are positively contributing to community well-being. Finally, to our capital providers, including our unitholders and debt providers, without whom we obviously could not exist and who supported a significant strengthening of our balance sheet over the last 12 months. Our debt funders currently, all banks, increased from 2 to 5 during the year with debt maturities extended. We have also reset our debt facilities to enable our long-term debt capital markets issuance and are aiming to undertake our first such issuance this financial year. We undertook a $115 million placement in October 2021, almost solely to existing unitholders. The issue price was $2.90, slightly above NTA and at a 3.7% discount to the previous trading price, representing one of the tightest discounts of any recent equity raising. The placement was nearly 2x oversubscribed and was scaled back on unitholder -- based on unitholder holdings on the record date. Northwest committed to taking up at least its pro rata and the balance was fully underwritten by Goldman Sachs and Forsyth Barr. To enable retail holders not represented by a share broker to participate in the capital raising, we undertook a follow-on unit purchase plan, or UPP, at a slight discount to the placement. The initial $25 million we had allocated for the UPP was oversubscribed. So we elected to increase this to $27.8 million, reflecting the full amount of the oversubscription. This enabled 100% of unitholders who elected to participate to do so at the full amount of their application. Nearly 5,000 individual unitholders participated in the UPP, the vast majority of whom were retail holders. The $142.8 million raised through the placement and the UPP has reduced balance sheet gearing to approximately 34%, although the proceeds will ultimately be used to fund Vital's development pipeline. Thank you to our institutional and retail investors as well as our debt providers for your ongoing support. The annual report and financial statements for the year ended 30 June 2021 have been circulated to all unitholders and are now formally tabled at this meeting. I will now pass back to our Chair, Graham Stuart.

Thank you, Aaron. If there are any questions relating to the trust or to the presentations, now is your opportunity to raise them. Only unitholders or proxy holders are permitted to ask questions. [Operator Instructions] Questions will be moderated by our Independent Director, Dr. Michael Stanford, and I will read these questions allowed for auto here. Those wanting to ask a question online, please do so as early as possible to ensure that it is received and answered. In consideration for other unitholders, we ask that any questions that relate to your personal situation or unit holding be dealt with outside of this meeting with management via e-mail or phone. Repeated questions or questions that have already been answered may not be put to the meeting. At this stage, no questions have yet been received. I'm looking to Michael Stanford for confirmation, if that's the case. I'll give the meeting another couple of minutes.

[Foreign Language]

Thank you, Michael. Well, we have another opportunity on the general business for questions. So I'll now proceed to the formal business of the meeting.

A question has come through, Chair.

Good. I'm just waiting for Michael to review that question, then I'll read it to the meeting.

Chair will read the question out to you, if I may.

Sure, thank you.

When are you going to change Vital to a limited company so that unitholders have a more democratic system of control for unitholders or shareholders?

Thank you, Michael. I'll answer that question. At this point in time, we don't have any intention of changing Vital to a listed company or a corporate entity. No further business. No further questions. I will now move to the formal business of the meeting, the proposed reelection of Andrew Evans. The vote will be conducted by a poll comprising the proxies lodged in advance of the meeting and the votes lodged through the Computershare platform. I would now invite Andy to address the meeting.

Thank you, Graham. [Foreign Language] Good morning. And may I also offer my welcome to all of the investors that have joined us this morning. I thought I would set out what I believe is the role of an independent director on the Board of NorthWest Healthcare Property Management Limited, the manager of Vital Healthcare Property Trust. I will follow this with my thoughts on the skills, expertise and experience I bring to the company. The way I see it, the Board's role is to effectively represent, govern, promote and protect and enhance the interest of the company and by doing this as an extension, the interest of you, the unit holders. Having regard to its role, the Board directs monitors and supervisors, the manager of the business and the affairs of the company. In particular, at the highest level, the directors ensure there is a clear strategy in place, and the manager is working to the strategy, that the manager is meeting its performance goals and targets, that we, the directors and managers are all aligned on the focus for the business and that the business is appropriately resourced. And in this respect, we'll have to say I have been very impressed with the quality and the depth of the team, including the more recent strategic additions to the Northwest management team. For any of you that have an interest, the Board charter has a good informative document setting out the duties of the Board and this can be found on the Vital website. I take my responsibilities as a director extremely seriously and carry these out to comply with best practice and corporate governance. I am committed to the highest standards of governance, including acting to high standards of ethical and moral behavior. I keep myself informed on corporate governance matters and trends through the Institute of Directors. And one of my main tasks as a committee member of the Auckland Branch of the Institute of Directors is to lead governance workshops on the 4 pillars of corporate governance. My background and expertise is in real estate investment. I believe I am conscientious in all of my involvement and oversight of the activities at Vital and add value through my deep knowledge of the property industry. Vital is different than a traditional real estate investment company, largely due to the importance of the long-term relationships that the landlord creates with the operator. The success of the operator is success for the landlord. This is the value lens that I bring to the Vital business. Like you, I'm also an investor in Vital. And as such, our interests are aligned. I want what is in the very best interest of Vital, and will continue to act to achieve the best outcome for the company and its unitholders. It is my privilege to serve on the board as a representative of you, the unitholders and your continued endorsement is sought. Thank you.

Thank you, Andrew. The details of the proxies received on this reelection are on screen. If I am appointed as a proxy to vote and not directed on how to vote, I will vote in favor of this resolution. Can I please ask you now to cast your vote by clicking for, against or abstain through the Computershare platform. Your vote has been cast when the green tick appears. To change your vote, simply click change your vote. You have the ability to change your vote up until the time I declare voting closed. I'll remind you, we'll be giving 20 seconds on screen before I close voting. Once voting is closed, you will not be able to amend your vote. While votes are being cast, we welcome you to watch a fly-through of the Play Health Hub present. [Voting]

Voting has now closed. The results of these votes will be released to the stock exchange later today. I will now open the meeting for any general business.

There are no further questions, Chair.

Thank you, Michael. There being no further questions, may I wish you all a merry and COVID-free festive season and a healthy and prosperous new year. Thank you all for attending the meeting today.