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

Thank you for standing by, and welcome to the Vital Healthcare Property Trust Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Hockly, Fund Manager. Please go ahead.

[Foreign Language] Welcome to Vital's FY '22 Results Call. My name is Aaron Hockly, Fund Manager, Vital Healthcare Property Trust. With me today is CFO, Michael Groth; as well as Richard Roos, Executive Director of Portfolio; and Chris Adams, Executive Director of Developments. This is the first time in over 2 years we've been together for our results call, and it is great to have my Australian colleagues here in [ Akaroa ] to meet with investors over the next 2 days. We will run through highlights from the year, which included the highest levels of profit, distributions per unit, equity raised and property transactions in Vital's 2-decade history. As always, we will provide an opportunity for questions at the end of the call by phone or by webcast, and additional questions can be made by following a e-mail at any time. Full contact details are available on our website, vhpt.co.nz. At 30 June, Vital owned a $3.3 billion portfolio of health care properties, $2.4 billion in Australia and just over $900 million in New Zealand. Following settlement of our $95 million acquisition in Queenstown in early July, Vital's New Zealand portfolio is now valued at over $1 billion, more than double its value 2 years ago. Vital's WALE at 17.6 years remains the longest of any NZX-listed property group, spread over 47 high-quality incoming producing properties. Consistent with our announced strategy, we have grown Vital's exposure to New South Wales and New Zealand, in particular, and expect to see further growth in these markets as well as Southeast Queensland over coming years. FY '22 has been a big year across developments, finance and the core portfolio. We have provided a time line of key events, including practical completion of several key developments, notably Stage 1 of the redevelopment of Wakefield Hospital and the $97 million expansion of Epworth Eastern in Melbourne. Equity was raised in late 2021 and again in early 2022 to fund acquisitions in Adelaide, Christchurch, Queensland and Auckland. $665 million of debt was extended or refinanced to provide stability for future earnings and support for Vital's significant development pipeline. Strategic land was also acquired in Wellington, Melbourne, Auckland and Sydney for future expansion. Notably, the parcels of land acquired in Sydney will support the doubling of an existing mental health hospital in the city's Northwest and the development of a new health precinct in the Southwest. Angela Bill was appointed as an Independent Director in April to replace long-standing Director, Andrew Evans, who retired on 30, June. We thank Andy for his long service to Vital's unitholders and appreciate his mentoring and guidance to staff, including me over many years. Finally, as part of today's results, we are pleased to announce an agreement to fund-through a new $98 million health care facility in Hobart, Tasmania primarily pre-let to Nexus hospitals. This is our second fund-through development in addition to GenesisCare in Campbelltown, taking the total to $169 million. We have split out fund-throughs from other developments in our results for 3 main reasons: The risk profile is different as Vital is not the developer, but as the name would suggest, just the funder. As a consequence, both Northwest fees and the yields Vital receive are typically lower, reflective of the relative input by Northwest and the risk profile for Vital. $379 million of equity was raised during FY '22. Despite this large equity issuance, we recorded a 15.3% increase in NTA per unit over the year and increased distributions by 8.5% per unit. Equity raise was funded -- has funded $382 million of acquisitions and would also support Vital's development pipeline, which is now in excess of $2.2 billion, covering committed developments, development fund-throughs and potential developments. Michael will shortly talk about our financial strategy going forward, particularly in relation to debt management. We have been telegraphing for some time our increased focus on developments. Land has been acquired by Vital and human resources added by Northwest to focus on opportunities we see in the market, particularly as accretive acquisitions become harder to achieve. FY '22 capital expenditure totaled $100 million, comprising $86 million for developments, $12 million of value-add works at existing properties and $2 million of maintenance and tenant incentive-related works. At 30 June, Vital had 10 developments underway with $215 million of spend remaining. In addition, Vital has $169 million of development fund-through spending committed and a potential development pipeline of $1.8 billion, primarily on the $196 million of strategic land Vital holds on its balance sheet. As part of our FY '21 results, we released Vital's first sustainability report, which included targets for FY '22. I'm delighted to confirm material achievement of all of these targets. Vital again participated in the Global Real Estate Sustainability Benchmark, or GRESB, and the Carbon Disclosure Project or CDP. Results of both of these challenging and independent benchmarking surveys will be released later this year and will allow unitholders and other stakeholders to understand what Vital is doing in relation to ESG and how we compare it to our peers. Northwest has continued to invest in sustainability across the group, including the appointment of 3 dedicated sustainability resources in Australia and New Zealand. Full details of Vital sustainability achievements and future targets are available in our second sustainability report, which has been released today as part of our annual report. We are cognizant that investors typically invest in Vital for the longer term and so are interested in short, medium and longer-term results across a range of measures. Slide 10 shows Vital's key portfolio metrics over the last 1-year, 3-year, and 10-year periods. The metrics chosen are consistent with Vital's statement of investment objectives or SIPO, which sets out what Vital is seeking to achieve. Vital SIPO is available on our website. Notably, we have continued to reduce average building age and increase the diversity of assets and income. These measures are expected to help us deliver on our core purpose of providing stable and growing returns for Vital's unitholders. This is reflected in the growth in NTA, AFFO and distributions per unit whilst maintaining a conservative balance sheet gearing and extending average debt maturity, which I will now hand over to Michael Groth to discuss further.

Thank you, and good morning. As Aaron has introduced, Vital has continued its strong financial performance in line with its objective of targeting through the economic cycle, AFFO and distribution unit growth of 2% to 3% per annum. Key financial highlights include achieving the upgraded AFFO guidance of at least 11.9c per unit, paying distributions of 9.625c per unit, up from 8.875c per unit in 2021 and maintaining a prudent and conservative AFFO payout ratio of 81%. Over the last 24 months, where COVID-19 has thrown up many challenges, the resilience of the health care property sector and its defensive and transparent cash flows has quality that have continued to shine through. Turning to Slide 13. Operating profit before tax and other income was up 10.7% to $56.5 million for the year. Driven predominantly by net property income growth of 12%, which I'll talk about further in a moment, partially offset by general and administration expenses increasing to $37.5 million following Vital's growth in total assets and a higher performance fee, reflecting the circa 16% increase in net tangible assets over 2021. Vital's management expense ratio as a percentage of average total assets decreased by a further 7 basis points to 1.23% per annum. As touched on earlier, AFFO and distribution per unit increased by 3.3% and 8.5% over 2021 to 11.92c and 9.75c annualized, respectively. This continuous increase is seen since 2019 when AFFO and distributions per unit were 9.9c and 8.75c, respectively. Slide 57 provides the reconciliation of operating profit to AFFO. With the only item to note to call out being the reduced maintenance CapEx, reflecting the benefits of improving our average building age and delivering on development projects. On Slide 14, you will see net property income bridge for Vital's 12% growth for the year. Like-for-like growth in constant currency terms was up 2.8% over 2021. This has accelerated to 3.7% in the June quarter, reflecting the higher inflation environment on the circa 80% of leases that are linked to CPI that have recently been reviewed. Slide 54 has further details on this. Overall, the strong growth in net property income reflects the contributions from the recent property acquisitions linked from developments, rent reviews and leasing activity. Looking ahead, the full year contribution from these activities is expected to further underwrite FY '23 growth as is the outlook for a stronger Australian dollar. Net tangible assets per unit have increased 15.3% over 2021 to $3.34 as shown on Slide 15. This has been driven by investment property valuation gains of $244 million. As the portfolio's weighted average cap rate tightened by a further 30 basis points to 4.58%, and the strengthening of the foreign exchange rate on Vital's net investment in Australia. Investments continue to be made in the property portfolio with a further $100 million of capital invested to deliver on development opportunities and value-add. Turning to Slide 16. Capital management, including initiatives to maintain Vital's strong balance sheet has been a focus in 2022. Gearing decreased 5 percentage points to 30%, following over $342 million worth of new equity raised over 2022 and property valuation gains of $244 million. Our strong balance sheet provides the capacity to deliver our committed development and funds through pipelines. Importantly, the initiatives delivered over the last 2 years to 3 years provide Vital with a robust capital position and prudent optionality. These initiatives include extending the weighted average debt duration now at 3.9 years, with no expiries until October '23, diversifying financiers such that we now have 6 partner banks supporting Vital and resetting debt covenants at the time of the 2020 facility restructure such that that material headroom now exists to protect against downside risk associated with any potential cap rate expansion. We are cautious in respect to the current elevated volatility in the interest rate environment and how this may impact Vital over the short term. Our strong balance sheet means that we are well positioned as property cap rates expand. As a guide, a 25 basis point expansion in cap rates would result in the 30 June bank LVR increasing by 1.8% to 33.9%, well below our covenant of 55%. It should also be noted that any valuation impact from increased cap rates will likely be partially offset by gains coming from the strong growth in rental income from Vital CPI linked to leases due to the inherent linkages between interest rates, inflation and cap rates. On the income side, at 30 June, approximately 44% of borrowings are hedged to fixed interest rates. Our focus from 2023 will be on prudently increasing interest rate hedging over the short to medium term and seeking to maintain Vital's weighted average debt maturity profile. The appendices starting at Slide 57, provide further analysis and information on key items of financial performance for the year. On that note, I will now pass you to Richard, who will take you through Vital's portfolio and recent acquisitions.

Thank you, Michael, and good morning, everyone. It's great to be back in the deal and after 2 years of presenting from Australia. Turning to the portfolio and acquisitions update, starting on Page 18. Vital today has $3.3 billion invested in 47 core assets with 135 different tenants. In FY '22, we committed to acquiring $382 million of assets, of which $287 million closed pre-30 June. All of these assets have varying levels of embedded development opportunity, enhance our geographic and tenant diversity and include significant additional investment in New Zealand, including our first South Island investment, a $95 million acquisition of the only private hospital in Queenstown, which we closed on post 30 June. Overall, in FY '22, we produced strong net property income growth of 12.2% and thanks to our annual rent reviews, which are levered to CPI, 2.8% on a like-for-like basis. Turning to Page 19. Over the past 2 years, Vital's acquisitions and divestments have contributed to a reduction in our largest single tenant exposure from over 50% of income to less than 20%. With occupancy of 98.8% or 99.3% if we include vendor rent guarantees on recently acquired assets, Vital has a diverse portfolio and income stream by tenant, location and asset type. The graph on Page 19 listed our key operator partners and the percentage of Vital's total income they represent. Vital's largest operator partner at 19% is Aurora Healthcare. Aurora is one of the largest private providers of mental health and rehab services in Australia with 16 hospitals containing 1,000 mental health beds, 500 rehab medical beds and a range of outpatient and day programs. Healthe Care surgical at 16% of income is one of the leading private hospital operators in Australia, employing over 4,600 people and operating a portfolio of 17 private health care facilities. Founded over 100 years ago, Epworth Healthcare at 15% of income is the state of Victoria's largest not-for-profit private hospital group, renowned for excellence in diagnosis, treatment, care and rehabilitation. In New Zealand, we are fortunate to own hospitals and partnerships with all 3 of the largest private hospital operators, Evolution Healthcare, Southern Cross and MercyAscot, which collectively represents 16% of Vital's income. Our partnership with 2 Australian aged care operators, Hall and Prior and Bolton Clarke across 8 sites, make up 7% of income, while our New Zealand and Australian medical office billing portfolio represents 22%. Starting on Page 20, we highlight several of our recent acquisitions. Meadowbrook in Queensland is an excellent example of the opportunities that can be created with a dedicated team of acquisition specialists. Starting in July of 2019, the Northwest acquisitions team began optioning single-family residential homes in a cul-de-sac adjacent to the Logan Public Hospital, which is undergoing a $540 million expansion to deliver 688 beds by 2023. This rapidly growing area between Brisbane and the Gold Coast with a population of over 340,000 people does not currently have a private hospital. Since the initial acquisition in 2019, we were able to consolidate 16 residential lots. And in March of this year, Vital launched a development application to build over 18,000 square meters of GFA for both public and private health services to support the health care needs of this growing community. On Slide 21, we highlight 3 other recent acquisitions, including 80 Ascot Avenue in Auckland, where in late June, we acquired 3,400 square meters of vacant land adjacent to Vital's Ascot Hospital to ensure Vital has the capacity to meet the expansion requirements of the existing hospital and medical office tenants in the significant medical precinct. In May, Vital acquired and is redeveloping a former aged care facility on the Mornington Peninsula, New Melbourne for other medical uses. And in July, Vital agreed terms with Nexus Hospitals, one of Australia's largest day surgery providers with 16 hospitals to fund-through the development of a new short-stay hospital and ambulatory care facility in Hobart, Tasmania. In circa $100 million fund-through on a 4.5% yield is projected to reach practical completion in late 2024. This expanded relationship with Nexus, which started earlier this financial year, with the acquisition of the Tennyson Center in Adelaide, where Nexus is a key tenant is expected to provide a number of similar opportunities as Nexus, which is majority owned by the investment arm of the Queensland government looks to grow significantly. These acquisitions and related development opportunities will help underpin the growth of Vital's diversified income stream. For additional detail on these and other FY '22 acquisitions, please refer to Slides 41 to 47 of the appendices. Turning on to Slide 22, we spend the next few slides detailing Vital's top 5 assets by value. Collectively these assets are valued at $1.3 billion, representing 40% of Vital's total portfolio by value. They provide a sense of how the portfolio has been developed over the last 2 decades and a guide as to how we expect to continue to build the portfolio over the next 2. The acquisition of strategic sites or assets in large and growing population centers located in close proximity to existing public health facilities, then developing or expanding them in partnership with our best-in-class operators. On Slide 23, we highlight Vital's largest investment. The Epworth Eastern Precinct located in Intercity Melbourne and colocated with the Box Hill Public Hospital and Box Hill TAFE. This investment includes the Epworth Eastern Private Hospital and its newly completed East Wing Tower development operated on a 30-year lease Epworth as well as 2 nearby medical office buildings and a large strategic parcel of land adjacent to the hospital for further development. What began in 1999 as a modest investment in a medical office building and a subsequent hospital development in 2004, has grown into an investment in the precinct recurring value of AUD 482 million. Turning to Slide 24. The Lingard Private Hospital Precinct with a value of AUD 256 million is Vital's second largest precinct investment by value. Located in Newcastle, New South Wales largest city after Sydney, the precinct contains a health care operated -- Healthe Care operated private surgical hospital purchased in 2010 and substantially expanded since with 10 operating theaters, 2 cath labs for cardiac procedures and 140 beds, plus a newly constructed stand-alone day surgery unit with 4 theaters and an adjacent 16-unit [ gentleman's ] complex earmarked for further expansion of the hospital, which is currently in the planning stage. The Ascot Hospital Precinct highlighted on Slide 25, with a value of $209 million is Vital's largest investment in New Zealand. The hospital was developed by Vital in 1997. It currently has 12 theater and 85 beds and is operated by Healthcare Holdings under the Mercy banner. The colocated medical center is 100% occupied by a variety of supportive medical uses. The recently acquired development land will ensure this precinct has the capacity to continue to grow in scale and value for Vital investors and our tenant partners. Turning to the Belmont Private Hospital on Slide 26. Belmont was acquired by Vital in 2010 and is the largest mental health facility in the Vital portfolio and had a 150 beds, one of the largest private mental health hospitals in Australia. Operated by Aurora Healthcare, the hospital is currently undergoing an AUD 22 million expansion to be completed later this year, which will increase the number of beds to 185. Among many treatment programs, Belmont specializes in the treatment of postnatal depression. Across the Vital hospital portfolio, we have over 1,000 mental health beds and are working closely with our operator partners to develop additional beds to meet the mental health needs of the communities we serve. On Slide 27, with a current investment value of $130 million, Vital's fifth most valuable asset is the Wakefield Hospital in Wellington. Acquired by Vital in 2017 and operated by Evolution Healthcare, Wakefield is in the process of being completely rebuilt to meet current seismic standards. Stage 1 was recently completed and Stage 2 with a development cost of $91 million is underway and projected to complete in late 2024, with 8 operating theaters, an additional 42 beds and a day surgery unit. With an initial investment of $23.5 million in 2017 on completion of the Stage 2, the investment value of Wakefield Hospital will exceed $200 million. These top 5 investments, all of which started relatively modestly have grown in time through significant expansion of the hospital and adjoining precinct. And are examples of how Vital's acquisitions have and will continue to provide income growth for its investors into the future. I will now turn over the presentation to Chris Adams to talk to Vital's development strategy and pipeline.

Thank you, Richard, and good morning, all. Slide 29 highlights key attributes of Vital's long-standing development strategy to enhance the earnings and capital upside of the overall portfolio, improved asset quality that meets the demands of modern health care delivery and to meet the needs of our operator partners. Currently committed projects totaled circa $300 million, of which $215 million of the spend remains, as outlined in detail on Slide 14. Importantly, all projects remain on plan after providing for weather and COVID-related delays. The long-term development book continues to be enhanced by the recent acquisition of key sites as noted by Richard and Aaron and now stands at $1.8 billion. Significant resource is dedicated to front-end planning to ensure projects are ready for execution when market demand and conditions for construction enable projects to proceed. We believe the development book is very well positioned, and we take a long-term view regarding execution. Noting we are cautious on the rollout of projects in the current construction market that continue to be impacted by supply chain constraints, labor shortages and increased demand. This has obviously created material escalation in markets and challenges in the execution of projects. In saying this, it should be noted there is a wide divergence in markets across Australia and New Zealand, and these conditions have placed the premium line, depth and quality of consultant and contractor relationships, flexibility regarding procurement options and an increased risk management focus. Contractors are also looking to self-select via key relationships, ability of the counterparties to move efficiently, knowing commitment to projects by project principles and strong counterparty risk. There appears to be early signs of some relief with the current market escalation and the Northwest development team is well resourced to meet the current challenges of the market, including very depth of experience. We also continue to enhance the team when necessary, including the recent appointment of a New Zealand construction manager to focus on activation and delivery in the New Zealand market, given the increasing book of projects and the complexity of delivery in this market. The next slides highlight key development projects underway or recently completed with core partners Epworth Healthcare, Southern Cross and Evolution Healthcare, and we will also highlight certain key future projects. Slide 30, Epworth Eastern, which reached PC in March 2020. As noted by Richard, Epworth Eastern represents a 25-year commitment by Vital with an investment in excess of $400 million. The most recent project being the 14 level East Wing Tower was delivered on plan despite the challenges of COVID with a $97 million spend by Vital, $65 million spend by Epworth, return on cost lease structure with Epworth by our 72% pre-commitment, thus Vital taking a residual 28% tenancy risk with 55% currently leased, which remained on budget. The precinct is well established as one of the key health and education precinct of Melbourne and planning is well underway to enhance the site via hospital expansion and life science uses on adjoining land owned by Vital. Slide 31 outlines the multistage project at Grace Hospital in Tauranga with the hospital operated by a joint venture between Southern Cross and Evolution Healthcare, key Vital relationships. The project is based on the execution of the long-term master plan for the site with a focus on increased theater capacity to meet the significant growth in demand in this catchment and we'll ultimately see over 25% growth in the scale of this hospital. Slide 32 highlights examples of key projects being facilitated on strategic land holdings of the fund. Each of these projects represent core health precinct opportunities and well-established or growing medical precincts. Aligned with the precinct and inventory care strategies are underpinned by strong demographics and market demand and have been subject to extensive data analytics as part of due diligence based on master plans for these sites that reflect our long-term vision. Ormiston is now in construction and planning is well advanced for each of Woolloongabba and the initial stages at Coomera. I will now hand back to Aaron.

Thanks, Chris. As mentioned earlier, sustainability has become an increasing focus for Northwest across all of its platforms, including Vital. Building on the achievements of our FY '22 targets, we have today released expanded targets for FY '23 and beyond, some of which are included in this presentation. Please refer to Vital's sustainability report for comprehensive details. Our program is in place to review Vital's existing portfolio to increase the resilience and energy efficiency of Vital's assets. This will include reviewing opportunities for Green Star certifications where appropriate, noting that the goal is not the certifications in themselves, but improved emissions profiles and greater longevity for Vital's assets. In addition, Northwest, as a responsible employer, inclusive company and good corporate citizen, has released a range of measurable targets, most of which extend to Vital. Some key points are included here, but again, please refer to Vital's sustainability report for full details. Task force on climate-related financial disclosures, or TCFD reporting is expected to grow in importance, particularly in places like New Zealand, where reporting for groups like Vital will shortly be mandatory. We have a plan in place to meet these requirements. Vital's Board and Management has today issued FY '23 distribution guidance of 9.75c per unit, 1.3% above FY '22, noting that FY '22 was 8.5% above FY '21. But another way, FY '23 distributions are expected to be nearly 10% higher than FY '21. Due to significant uncertainty, particularly around debt costs, inflation and exchange rates, we are not currently providing AFFO guidance for FY '23. However, we expect the payout ratio to remain around 80%. Quality, well-located and well-leased health care assets remains a sought-after asset class, demonstrated both through recent transactions and the independent valuation numbers we have released today. We are very pleased to have again delivered growth in earnings and distributions. We anticipate being able to continue to grow both in the future through a mixture of rental growth from existing leases, noting that over 80% of Vital's leases are linked to CPI plus the contributions from new developments as they become income-producing. Earnings growth is expected to be underpinned by Vital's existing quality portfolio, enhanced by developing new assets to meet the demands of health care operators and their patients across Australia and New Zealand. Vital's history spans a range of economic cycles. The defensive nature of the sector with high levels of nondiscretionary and government spending plus ongoing demographic tailwinds are expected to help ensure high levels of demand for health care property and help us to continue to deliver earnings growth despite an uncertain economic outlook. Our developments, notably the 20 years of developments at Ascot and Auckland and Epworth in Melbourne have been undertaken through various economic cycles and highlight why it is important for us to remain ready to take advantage of market opportunities as they arise. We do this always with a view to providing stable and growing returns for our unitholders. [Foreign Language] Happy to take questions.

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Just starting with, I guess, like-for-like rental growth, which stepped up nicely in FY '22 and '21. Can you just sort of -- based on where inflation forecasts are for the year ahead, can you just sort of give a little bit more of a steer of how much better than the FY '22 like-for-like, you would expect and how much of a step-up you'd expect in '23, that based on where those inflation for pass are currently?

Arie, it's Michael here. So my commentary around the Q-on-Q growth that's coming through in the June quarter compared to the June quarter in '21, a pretty good indication of where that's -- what our expectations are around rental growth. So that was 3.7%.

Great. Yes. So yes, that's good. And so then just looking at the dividend guidance and sort of except obviously, there was a decent step-up in FY '21. But against that backdrop of pretty solid growth in NPI likely, can you just sort of talk about the key factors driving that, what looks like quite a conservative step up and guidance even allowing for maintaining sort of a 80% payout? I mean, is the increase in funding costs that you're sort of expecting, particularly as you look to FY '24 a factor in that conservative approach on dividend?

I think big picture, Arie, we're trying to maintain that strategy of growing by 2% to 3% per unit per annum over the medium term. So we have had big step-ups recently. We'd rather continue to keep that distribution profile growing rather than stepping up or having to retract guidance through the year. So there is some conservatism in those numbers. We do have a relatively low payout ratio at 80%. But there are some uncertainties and the key uncertainties for us are really debt costs but also the exchange rates because they will have potentially significant impacts depending on how they move in terms of the underlying income growth.

Sure. And then just on hedging. It looks like your kind of circa the hedging looks, I guess, it was against the committed debt and then particularly overlaying a reasonable committed development pipeline over the next couple of years. Can you just sort of talk to the profile that you presented in the pack, is that at current stage or current? And then have you put any hedging in place since balance data? And what are you sort of thinking about in terms of increasingly hedging against that increasing debt profile?

So, Arie, the current hedging profile was the same as what it was at balance today. It's something that we're actively working through at the moment. We're conscious of where the market is and the growing debt book that's going to come from delivering on the development pipeline. So that's going to be a focus for FY '23.

Okay. Great. Just a couple of quick ones. Obviously, you sort of played what was in front of you on the acquisition front in FY '22. I mean I guess one thing I'm just sort of wondering against your sort of your target sector weightings as whether anything's changed in the last 18 months with regards to the 10% to 20% target for aged care? I mean is there anything structurally in that sector that sort of changed your view on whether you're sort of going to hit in that direction in the medium term?

There hasn't overall. So we set out those targets to provide some sort of guide about the maximum levels of anything for aged care because with such a strong underlying portfolio in hospitals, we didn't want to scare the market by suddenly embarking on a significant acquisition in another subsector. So that was to provide some context. We're still attracted to aged care in both Australia and New Zealand, we are looking at opportunities. We're just cognizant of the relative yields and versus the existing portfolio…

Yes, just on the fund-throughs forecast net returns of sort of 4%, 4.5% initially. In terms of the rental structure for those, are they similar to the rest of the portfolio very closely linked to CPI rental sort of growth. Is there anything to note in terms of caps?

It's Richard Roos here, Executive Director of Portfolio. We've done now, as Arie mentioned, committed to 2 different fund-throughs. They're being done with similar rent growth profile to our other acquisitions, so they typically are linked to CPI, but we'll have some level of cap on them. And in addition to that, we have reasonably regular market reviews where we pick up any differences between CPI and the annual reviews over that period. So very similar to our existing portfolio.

And Arie, probably just worth remembering that the fund-through opportunities are attractive to us, not only for the way that they're delivered, but also because we don't actually wear the full positive stamp duty on those types of acquisitions. That's worth about 25 basis points to the net yield when you look at that.

And then just the last one. The pipeline at sort of $2.1 billion now is clearly very large. You've clearly been active over the last sort of couple of years in building out the portfolio with a lot of development opportunity within that. I just wonder, can you just sort of talk about how wide you've gone now on that pipeline? You've clearly got a lot of long vault assets. Is this now going out sort of 15 years, 20 years? Or is there a substantial amount of investment within the pipeline that you'd sort of see ahead of lease expiry. And just a bit of color on that?

Yes. A lot of the pipeline is around core medical precincts, and those developments tend to be, 1, staged, and 2, larger. We categorize the breakdown of the pipeline largely over a sort of period up to 5 years and then 5 years plus. So it's a long-term view, and we'll develop out in accordance with the needs of all the demand for those assets. I wouldn't say we've gone wide. I mean they're completely consistent with strategy about core growth areas, Southeast Queensland, a bit focused in New South Wales and also New Zealand. So more than multifaceted precinct type development plays in strategic areas. It's not a sort of broad brush. We sort of develop that in a whole range of places across Australia and New Zealand, far, far more targeted than that.

Your next question comes from Nick Mar with Macquarie.

Just on the developments. Could you provide an update on where you've got to? I think you had an MOU on place at Stage 3 not so long ago. Where has that got to?

Yes. Playford's in great shape. So we've commenced construction on project on after the routine season, designing [ struc ] type construction contract. We are at a stage of 57% pre-leased on that project, and we're just coming out of the ground. That's the stage I'm referring to the Stage 2 medical office building when I talk to that. So in the first stage was the car park. That was really an enabling stage to facilitate the major medical office building, which is really focused primarily around cancer services and then the hospital to come at Stage 3. But the project is in great shape, but another sort of 18-plus months of delivery remaining to complete construction on that project at Stage 2.

Perhaps the second part of your question, Nick, that the MOU remains in place with -- to put a private hospital.

So would that have previously been expected to kind of kick off sooner? Is that being delayed at all?

No. That's a project that we're only just going to planning on the Stage 3 project. That's the relocation of the hospital. So there's still planning and still some business case work to go on that project. So that's very much a '23 project mid to late '23 project for us in terms of the hospital component.

And then just on development in general, when you look at sort of interest rates where they are, how do you think about what return hurdles and sort of balance between financial yield and growth, you need to, I guess, commit capital. Obviously, for the fund-throughs 4.5% seems adequate at the moment, given you've pushed the button on the Tasmania opportunity. Could you just talk through that more broadly around the rest of the development pipeline and what you think you need on initial yield to make it work?

Maybe I'll start and maybe Michael or Aaron can add. But I mean, obviously, the development pipeline outside of fund-through stands at a weighted average of -- is it 5.8%? I haven't got the -- 5.8%, yes, on that. So obviously, there's a significant spread to the fund-through projects. We also look at these at an internal rate of return basis rather than just sort of the net income returns. So those -- that internal to return, obviously, capturing the capital growth side of these projects. I think that number is a fair reflection of the portfolio, also turns on the nature of the project, hospitals with single tenants, which have a different delivery and risk profile to some of the others where we're capturing some leasing risk, et cetera. So there is a divergence in that area.

Yes. So Nick, we're focused on hospital or health care real estate is a long-term investment proposition for us. So we've got to be able to and we think for the unitholders as well. So the long life assets, long leases, et cetera. So focusing on what the long-term returns are going to be out of those assets as well as making sure that we get the right rent review structures in place on the leases that underpin them, really drive how we think about the appropriate rate of return for a development opportunity.

So would you be comfortable building stuff at a sort of EPS neutral to dilutive position day 1 given current strength?

So we'd like it to be neutral at least. But if there is good strategic reasons and there is the longer-term return profile that is attractive to underwriting both unitholder returns in terms of both distributions and capital opportunities and partnering with our tenants, supporting them in growing their business opportunities where we can see that that is going to give a better outcome for all parties, then doing developments with AFFO-neutral type territory is something that we're keen to do.

And I'll add to that in a precinct sense, particularly as you see precincts mature, the return profile of those precincts will escalate. So you will get increasing returns via rent reversion and future development out of precincts that mature. So particularly in the growth phase and the mature phase. So that -- if you look through the book and the nature of the development pipeline, again, that reinforces that position. Even if it's neutral at day 1, we would expect stronger growth over time.