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

Thank you for standing by, and welcome to the Vital Healthcare Property Trust FY '24 Full Year Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Hockly, Fund Manager. Please go ahead.

[indiscernible]. Welcome to Vital's FY '24 results call. Over the year, we progressed several strategic initiatives to enhance our resilience, including the sale of noncore assets with the proceeds recycled and the devices developments. This work has enhanced the portfolio and is also expected to enhance unitholder returns in future periods. We also maintained gearing below 40% as planned and recorded $10.9 per unit in AFFO to enable payment of $0.0975 per unit in distributions, consistent with guidance on an 89% payout ratio. As usual, I will provide an update on Vital as a whole and FY '24 highlights but will also provide detail on several of our strategic initiatives. Michael will talk about our financial results and capital management. Of particular note, whilst our borrowing costs have continued to increase, total expenses declined primarily due to lower net management fees. Richard will provide a sector update as well as more detailed information around Vital's high-quality portfolio. Chris will provide details on the five developments completed during the year. The remaining $138 million left to be spent on committed developments and our shovel ready approach for potential developments. I will conclude by summarizing our focus and expectations for the period ahead before opening up for your questions. At 30 June, Vital had a portfolio valued at NZD 3.2 billion, of which $1 billion or 30% is in New Zealand and the other $2.2 billion is in Australia. Over FY '24, Vital's weighted average cap rate expanded by 26 basis points to 5.3% across Vital's 36 income-producing properties. Vital is already market-leading weighted average lease term expanded over the year from 17.8 years to 18.3 years. We have today announced FY '25 distribution guidance of $9.75 per unit and expect this to remain free cash flow covered. Please refer to Slide 55 of the investor presentation for limitations around the sites. We began FY '24 focused on strategy, and I'm pleased to report progress on many initiatives, notably the sale of $251 million of noncore assets which has provided Vital with enough get capacity under existing facilities to complete the committed development pipeline. The Board's strategic review during the year affirmed our focus on health care property due to it being a defensive asset class with tailwinds from aging and growing populations and growing demand for health care. We have continued to refine Vital's portfolio and leasing partly in response to three key sectorial ships. Being a transition to health care precincts, industry consolidation and an increase in procedures being undertaken in [ ambulatory ] care facilities. We also aim to capitalize on growing demand for health care facilities by using Vital's existing unmatched portfolio, strong balance sheet, extensive strategic landholdings and experienced board and management to generate future growth in AFFO and distributions for our unitholders. Using yesterday's closing price of $1.92, Vital is trading on a very attractive gross yield of 7.3% and a 29% discount to NTA. This large discount to NTA is despite selling noncore assets at a 7.5% discount to previous book values, demonstrating the mismatch between Vital's NZX price and the real market for Vital's underlying assets. Turning to FY '24 highlights. We continue to emphasize the income security afforded by Vital's 18.3 year environment. Asset management initiatives have extended the way over the last 1 and 5 years despite the passage of time. We reported a 3.7% increase in like-for-like net property income. As shown on Slide 47 in the appendices, rent reviews completed during the year had a weighted average of 4.9%. Survival's underlying income is expected to continue to grow into future periods. We've now sold $310 million of noncore assets since March 2023, enhancing the resilience of Vital's portfolio, including by increasing the WALE, reducing average building age and increasing exposure to green assets, all of which should enhance future returns. Vital had debt headroom of approximately NZD 158 billion, more than enough to cover the remaining committed development spend of NZD 138 million. However, to keep gearing below 40%, we are targeted at least $100 million of asset sales in FY '25 and currently have $180 million of assets in due diligence for potential sale. This is expected to end our 18-month long sales program. Announcements will be made on further divestments as they occur. We have also been considering this capital partnering for some time under which Vital was looking to add a co-owner for its development pipeline and potentially a limited number of current stabilized assets to provide Vital with another funding tool. An EOI process has not elicited acceptable proposals to date, having regard to the Board's criteria around assets, future development funding and pricing. Particularly given our successful noncore asset sales program. Sector interest remains high, and this initiative will be further progressed in 2025. Although capital partnering remains a strategic priority, it will only be undertaken if terms can be agreed, which benefit Vital. Sustainability remains a key focus and impacts how we approach acquisitions, developments, divestments and capital works. During FY '24, developments targeting 6 Star Green Star were completed in Sydney and Adelaide. 6 Star Green Star is the highest possible rating available and is expected to provide immediate and longer-term income and valuation benefits. In the case of Macarthur, the rating process was undertaken in conjunction with the tenant who occupies 100% of this building. The Playford as a key selling point as we seek to lease the remaining 1/3 of this building. We've been working on improving our ESG stores with a range of ratings providers and have included scoring improvements on Page 43 of our annual reports. This includes being awarded sector leader status from GRESB, a listed health care entities globally as well as being ranked second place for developments in Oceania, and third place in all categories in Oceania. GRESB reviews over 2,000 entities in 75 countries, representing over USD 7 trillion in investments. making us extremely proud of this achievement. I will now hand over to CFO, Michael Groth.

Thank you, Aaron, and good morning. Let me start by emphasizing that our capital management strategy and priorities have not changed. We are prudently managing Vital's balance sheet, financial capacity to preserve funding certainty and optionality for developments and refinancing obligations. Ensuring multiple capital sources of success to support strategic initiatives that have long-term value to unitholders remains a priority, including by proactively recycling capital out of noncore assets and reinvesting in high-quality, resilient opportunities located in the health care precincts. We're expanding the existing health facilities in strong catchments by seeking to diversify funding sources. Including by capital partners to diversify risk and enhance returns. In deferring or canceling development projects and CapEx where forecast returns don't create long-term value for unitholders. It's important to remember that Vital's development pipeline in the source of medium- to long-term value-add opportunity, but activation is primarily a Vital [ selection ]. And finally, by actively managing interest rate risk to support cash flow and earnings certainty and therefore, distributions to unitholders. Turning to our results. Vital has delivered adjusted funds from operations or AFFO of $0.109 per unit per year, down from $0.118 in 2023. Strong rent review outcomes have been offset by the headwinds of an elevated interest in rate environment, a lower exchange rate and increased indirect taxes. Distributions were maintained at $0.0975 per unit, representing an AFFO payout ratio of approximately 89%. And therefore, more than covering -- more than covered by the operating cash flow generated by Vital. Underpinning this result, net property income declined marginally to $144 million with underlying growth offset by the divestment of properties as part of Vital's capital recycling program. Operating costs in aggregate are down 6.8%. Specifically, corporate expenses increased by 24%, driven by the 1 January reinstatement of Victorian foreign owners surcharge tax and increased professional fees associated with upcoming ESG reporting. Management fees were down 26% to $24.7 million. Net interest expense increased 7.5% to $40.6 million despite asset sales and proceeds initially being applied to debt repayment. Reflecting the higher average interest rates, both in terms of base rates and fixed hedge rates when compared to FY '23. Rounding out the result was a market-driven noncash property valuation decline of $165.2 million. Finally, underlying income tax expense, which forms part of AFFO is down [ 13% ] to $12.5 million for the year, incorporating the benefit of some outstanding tax items resolved, partially offset by the 1 July introduction of new in capitalization rules in Australia. We anticipate that nonrecoverable taxes and tax law changes, including foreign owner surcharge taxes will be a pressure point for future years as New Zealand and Australian government to seek additional tax revenue. As an example, the New Zealand building depreciation change would be an adverse impact to FY '25 tax expense was circa $1.8 million. Turning to the components driving reported net property income of $144.5 million, which is broadly consistent with that reported in FY '23. On a constant currency basis, like-for-like rental growth was a strong 4.6%. This top line increase reflects the benefit of circa 82% of leases being linked to CPI, of which 23% are uncapped and 4% have carryforward catch-up provisions. Like-for-like net property income growth was solid 3.7%, impacted by increased Australian land tax that was unable to be equally recovered from tenants. Rounding out the other major contributors to net property income were the contributions from development activity at $5.9 million that were offset by the impact of property investments. Final balance sheet remains well positioned. Leverage has been maintained at prudently given this stage of the economic cycle at under [ 40% ], and is underpinned by strong, transparent and long-dated rental income from tenants whose businesses have built around the delivery of nondiscretionary services. The value of Vital's property portfolio declined 4.2% as both property divestments and a softening in the property portfolio cap rate to 5.31%, more than offset the $260 million of developments in additions to the portfolio. Weighted average cap rates are now 5.59% in New Zealand and 5.18% in Australia. Reflecting the above net tangible asset per unit were $2.69, down from $2.96 30 June last year. Turning to slides focused on Vital's capital management. Our core banking ratios remained strong. There was material headroom versus banking covenants and prudent undrawn facility limits, success to support Vital's development commitments. In terms of capital management, we have made further enhancements. In March '24, the weighted average debt duration was increased and an improvement in the cost of finance secured. There is now no significant debt expiring until Q4 FY '27. Throughout FY '24, over $250 million has been realized from noncore asset recycling initiatives with the proceeds being reinvested into the delivery of Vitals, our quality, committed developments. And as set out on Slide 15, additional interest rate hedging cover has been added, ensuring that there is almost 80% cover for FY '25. The hedging book now has a weighted average duration of 2.2 years. I'll now hand you across to Richard to take you through Vital asset management outcomes for the year.

Thank you, Michael. And again, good morning, everyone. Before providing the final portfolio update, let me start with an update on the private health care sector in Australia and New Zealand. While there have been articles in the media around the short-term headwinds being experienced by private hospitals in Australia, which is generally speaking, an issue of higher cost to deliver health care post-COVID and resistance from private health insurers to fully compensate for the additional costs. There are multiple characteristics that make health care real estate attractive and poised for continued strong growth in both Australia and New Zealand for decades to come. With a growing and aging population, current demographic trends in both Australia and New Zealand are major contributors to forecast growth in health care spending. It's worth noting that health care treatment costs for those over 65 is 5x greater than those 18 and younger. In 2022, health care spending in Australia was $240 billion, an increase of $100 billion from 10 years earlier. 65-year-olds in Australia are a growing portion of the population from 12% in 1992 to 18% in 2022 and projected to be over 20% of the population by 2040. In addition to an aging population, Australia is also growing rapidly, with a population increase of 625,000 people in the 12 months to June 2023. This growing and aging population in both countries is leading to significant pressures on our public health care systems with waiting lists for surgeries at a record high. Currently, 45% of Australians have private hospital insurance and with more than 65% of all elective surgeries being performed in a private hospital, private health care has a critical role in the delivery of health care in Australia. The private hospital landscape in New Zealand is experiencing the same positive tailwinds of a growing and aging population in Australia and has also been in a better position to recover increased costs and as a result, is experiencing healthy profit margins. We anticipate continued significant growth in the New Zealand private hospital market as the public hospital system is under pressure and requires enormous investment in hospital infrastructure estimated to be 3x the current spending to keep up with demand. This is at the same time as government budgets are constrained. These factors are already creating substantial opportunities for private hospitals with the public system doubling the number of publicly funded surgeries performed in private hospitals over the past 10 years from 6% to 12% of total product hospital surgeries. In addition, Kiwi's looking to avoid long public hospital waiting lists are purchasing private hospital insurance with 37% of the population now having health insurance in 2023, up 5% in the past year. We remain very positive on the extensive opportunities for Vital and its operator partners to work together to help meet the health care needs of New Zealand. Turning to the portfolio update on the next slide. In FY '24, we continue to strengthen Vital's portfolio through the sale of noncore assets. With noncore asset sales of $59 million in FY '23, $251 million in FY '24. And with another $180 million in due diligence with respect to purchasers, we have sold or contracted $490 million of noncore assets since March of 2023. The sale of smaller or regional assets with limited growth opportunities has enhanced our focus on core metro and precinct locations, concentrated our relationship with operator partners at their core, most profitable hospitals. Maximized our investment in the highest performing assets with significant opportunities for growth. The completed divestments and other asset management initiatives in FY '24 has helped reduce our building age by 1.9 years and increased our wale by 0.9 years to 18.3 years. One statistic that summarizes the strength of our portfolio is our 99.99% rent collection rate. Over the past 5 years, we have been paid over $600 million of rent with less than $75,000 of that amount [ unflexible ]. Vital has Australasia's highest-quality investable health care portfolio with $3.2 billion invested in a diversified tenant and income base that has over the past number of years, reduced its reliance on any one tenant from almost 50%, 5 years ago to 20% today. It's a portfolio that is diversified across Australia and New Zealand with 80% by value invested in hospitals and 20% in ambulatory care facilities. It has an occupancy of over 98%, and CPI aligned leases that produced a 3.7% like-for-like growth in FY '24. This is a premium quality portfolio. Management has three strategic renewal negotiations, asset sales, development of new and expanded facilities and strong partnerships with operators maintained and increased bundles well from 18.1 years in 2019 to 18.3 years at the end of FY '24. This long well means that very few leases expire in any given year with 1.68% of income expiring annually in the next 10 years. Of the FY '25 lease expiries, 1/3 is an asset in the process of being divested and the balance are in advanced renewal discussions. With the long wale, high tenant retention and very low lease incentives, Vital's portfolio is structured to provide predictable income for many years to come. I will now turn over the presentation to Chris.

Thank you, Richard, and good morning all. Vital continued its long-dated success of development in FY '24, including circa $200 million of completions across five projects. With over $500 million of projects concluded in the last 5-year period. These projects are high quality in nature have been delivered according to the business case and financial expectations in [indiscernible], create the next generation assets with the key focus on green buildings, deliver future earnings growth, work with key operating partners in delivering to the portfolio improvements and growth and continue to deliver to our overall strategy of precinct advantage. The overall development book now stands at $264 million, materially below prior years as the challenges of higher cost of capital, high construction costs and overall more challenging business cases can strain new projects. $138 million of spend remains to include current work in progress, the majority of the spend in the next 12 months. Importantly, Vital also has embedded in its portfolio, a future pipeline of quality projects, focused on existing sites or new precinct opportunities. Once market conditions are met. Looking to key completions in the year. Macarthur Stage 1, $56.4 million integrated cancer center in Campbelltown, Sydney, fully tenanted by Genesis Care for an initial term of 15 years, completed in February. This project is located in one of Sydney's fastest-growing catchments and is the first of a pipeline of projects, which we expect to achieve a 6 Star Green Star as build rating. It also represents the first stage of a multistage precinct at Macarthur over time. The Avive clinic on the Mornington Peninsula, Melbourne leased to Avive for a term of 25 years represents repurposing of an existing aged care facility for mental health use. Significant upgrade and refurbishment of the facility took place, including the extensive use of technology to improve the outcomes in mental health treatment. In addition, retention of the existing structure provided material GHG emission savings of an estimated 60% against the construction of the building from [ new ]. Repurposing of buildings no longer fit for purpose, whilst often challenging in health, will be a key consideration going forward in the broader debate regarding sustainable outcomes for building infrastructure. Please go to Page 2. Representing a 6,400 meter, square meter of medical office building and the second stage in the development of the 3-stage projects co-located with Lyell McEwin Hospital, Adelaide's third largest private hospital. Again, a project on track to achieve a 6 Star Green Star rating with key tenets, including Calgary, Genesis Care and SA radiology. The third stage subject to a number of future milestones, represents a private hospital with Calgary, SA's leading private hospital operator for the relocation of their existing [indiscernible] distance Hospital. Ormiston. This 3,600 square meter expansion of Ormiston Hospital in Auckland, reflects a near doubling of the size of the existing facility as part of a broader precinct development over the [indiscernible] site over the medium to longer term. An example of the response to expected demand for health services in New Zealand outlined more broadly by Richard. Following completion of the current stage of Ormiston in late June this year, a new 20-year lease was signed over new and existing hospital areas by Ormiston Hospital, majority owned by Southern Cross. In Wakefield Hospital Significant progress has been made on the stage project, with Stage 1 in [ newco ] consulting spaces and ancillary areas completed in 2021. And Stage 2 being the key clinical areas of the hospital will conclude later this year with the balance of the works, including demolition of the last part of the current facility and creation of additional ongoing car parks to complete in calendar '25. Importantly, Wakefield has traded successfully through this complete rebuild to establish a state-of-the-art seismically resilient facility for the future. The [ Vital's spend] of $141 million has concluded with rent table across this investment with Evolution Health Care to fund the Dallas works. And finally, turning to the embedded value in Vital portfolio for future development. As noted earlier, we currently hold a conservative position regarding enacting future projects. However, our sector-leading team continues to advance project preparation with a shovel-ready approach to key future projects and market conditions [ permit ]. Importantly, much of the control for this future pipeline rest of Vital whilst acknowledging the development remains a core part of the value-added proposition for unitholders in the meaning of the strategic aims for the portfolio and that of operator partners. I will now hand back to Aaron for concluding remarks.

Thanks, Chris. In addition to the slides we have highlighted on the screen today, the investor presentation to it's buyers, and the Board and executive team, full details on the components of movements in AFFO, NTA and investment property and further detail on the property portfolio and developments. Vital's website has also kept up to date the full financial and property information and included photos and videos of most of Vital's properties. Despite recent heightened market volatility, which is clearly impacted by this unit price, health care property remain a defensive asset class, underpinned by high levels of government support and nondiscretionary spending. We expect the Vital portfolio will continue to demonstrate strong operating metrics and portfolio resilience based on a long history of investments in the assets and our partnerships with market-leading operators. In FY '25, we will continue to enhance the resilience of Vital's portfolio and balance sheet through further noncore asset sales. We have $180 million of assets, which are currently in due diligence for potential sale, and this will conclude our current asset recycling program. We will also continue to look for a capital partner to support activation of Vital's potential development pipeline. Part of the reason why we continue to prepare strategic land of Vital loans to be shovel ready. These developments provide Vital with optionality for future growth should market conditions be supported. FY '25 distribution guidance of $0.0975 per unit has been provided, consistent with FY '24. The work we have undertaken over FY '24 and will continue to undertake will help support future growth in FFO and distributions. And finally, sustainability remains at the core of everything we do. And despite growing competition, we will seek to maintain sector leadership, which should in turn support future earnings and valuation growth for our unitholders. We're now going to take questions, but I've received a couple online, which I'll post to Richard.

First coming from [ ANZ ]. So the first is our request around the rent coverage ratio for our four largest tenants being Aurora with Healthe Care and Evolution and what's the trend?

Sure. Thank you for the question. For confidentiality reasons, I can't disclose the exact figures of specific operators. But what I can say is that a portfolio level in Australia, the rent to EBITDA ratio is now just under 60% and has been trending down for the last number of quarters. So it's stable to improving. And the numbers in New Zealand are back to our preferred rent affordability range of under 50% and again, performing extremely strongly. I think it's important to say that in Australia, there is a review being undertaken by the Australian government to help rebalance the sector post-COVID and work with both private hospital operators and insurers on ensuring that each of the sectors are appropriately profitable. Again, reminding listeners that as per the stats that I gave earlier, 65% of all elective surgeries are done in private hospitals in Australia and it's a critical part of the delivery of health care. The only other point that I'd make is that, again, if you look at procedures, both day and overnight procedures in Australia, and look at trends. Quarter-over-quarter, every quarter now for the last number of years post-COVID. Those are increasing. And in Australia are nearly back to where they were with Pre-COVID. So again, we remain very positive on the sector and at this level of our rent to EBITDA, all of our rents are current and continue to be paid when due.

Thanks, Richard. And second question also for you from [indiscernible]. Can you just talk to the interest level for the asset about to be vacated, which is it with Brighton and would not be more valuable [indiscernible].

Thank you again for the question. With respect to where the divestment is currently at, it is currently in due diligence for residential purposes. We did look at releasing that particular facility. And again, I think it speaks to the divestment of some of the noncore assets that we have sold. Epworth [ Brighton ] is an older facility. It's a relatively small facility by value, and it's not colocated within the amount of precinct. We did look at releasing it, but ultimately, because of its location in one of the prime Melbourne neighborhoods the highest and best use for that asset is residential development, and that is the intended purpose of the prospective purchaser.

Thanks, Richard. Happy to open up for questions from the phone.

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

Yes, a few questions from me. Firstly, just on the divestments, that are NDD at the moment. Is your expectation that the discount to sort of say, in FY '23 reference point will be in the order of 5% to 10% sort of consistent with what you've achieved to date?

Thanks for the questions Arie. I'm sorry, appreciate we -- it's difficult to comment on things that are currently being in due diligence and currently being negotiated. So we'll update the market as soon as we can.

In terms of the yield, I'd say on the current book, what sort of -- on an average basis, what sort of yield are the assets you're looking to divest taking into consideration, obviously, referenced that we just made to Epworth Brighton.

Yes. So there's a blend across those assets. I can symphony around later on with specifics. But we have not kept that at the moment. So it does obviously depend on something like [indiscernible] because that will be debated that somebody will be [indiscernible] after that. I think the more important thing is to note that it will largely be consistent. The assets we sell will largely be neutral to FFO becase use them to repay debt at a very similar level.

Great. Just on the partner program. I mean you referenced the gap between your expectations and those of the global investors set. Can you just provide a bit more color on some of the key factors that have sort of contributed to that gap particularly given sort of my understanding that development options were on the table for those partners. And does the gap give you any reason to be sort of concerned about like some of the cap rates for those stabilized assets in the portfolio and the outlook for those?

Yes. Thank you, Arie, It's Richard. Thank you for the question. I was part of the marketing of what we called the developed core fund. I think what I'd say is there's a couple of factors well outside of Vital itself that have led us some -- and potential capital partners to this point. One is the global allocation of capital. I think there's a number of funds who we're extremely interested in the offering that we are providing and remain interested. But for example, they have to rebalance their existing portfolios from other sectors before they can make the investment in health care. I think we're all aware that it is a bit challenging at the moment to sell office buildings and potentially other assets. And so that will take some time. I think it's more likely that there will be capital available from some of those funds later this year or early next. And I think the other issue is some of the interest rate uncertainty in the world at the moment is causing some of these funds to be exceptionally cautious around the assumptions that they're making in their modeling. And it's our view that as we get more visibility on where interest rates are headed, et cetera, it will make those negotiations and therefore, the success of the funds much more likely.

And maybe for Michael, just a couple of quick ones. Just on hedging. Have you put any meaningful hedging in place post balance date? And then just on the guidance, where you have retained below 90% payout to now is expectation that you could go a touch above 90% in the FY '25 dividend guidance?

Thanks, Arie. So we're actively working at our hedging book at the moment. So we haven't put on material additional hedging post balance date, but it's very much sitting in my inbox at the moment. The second component of your question is just around the 90% payout ratio. Look, it's going to be at or about 90% in the coming 12 months. There's a few variables in there. The interest rate environment, notwithstanding the circa [ 8% ] hedged, what currency does, you'll be able to see that currency markets have been jumping up and down as the interest markets have also moved similarly. So that guidance of around 90% through the cycle is reasonable.

Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

First one, just on your aging receivables. I just noticed there's quite a big tick up there. Can you just talk us through that? And I think you mentioned that everyone is up to date. So I'm assuming it's all being paid.

Correct, Rohan. So for one reason or another, the rent that relates to July and a little bit of June rent was not paid until post balance date. But just to confirm, we're up to date on all of our material tenants from post-balance accuracy on trade [ receivables ].

Perfect. And then just going back to Arie's question on the gap between yourselves and potential capital partners. Can you -- are you still in discussions with the same parties? Like when you kind of got to the end of this process, the -- was it a drop dead or are you kind of call me back when interest rates are down type situation? And are you able to kind of give maybe some color around what sort of [ IRR ] or some sort of return metric that they were kind of looking for?

Yes. Thanks, Rohan. Thanks for the question. Look, it's fair to say that discussions are still continuing with several parties that we dealt with over the period. So we'll continue to work with those. We just think it's more likely that in 2025 as we are progressing, that's what we've given the guidance, but the discussion is underway. It's really difficult to give a precise hurdle rate in terms of what people are looking for, while preserving confidentiality, et cetera. But we just think for the reasons Richard said, they're a bit wider than we think they should be at the moment.

Okay. I was just -- maybe we can discuss afterwards, but I was just trying to get a gauge of how far apart were you seeing swap rates come down quite a bit, where in New Zealand anyway in the last little while. And I was just wondering how much further -- or how much more constructive does that need to get before you're talking again?

Yes. And it's a good point because we're currently only talking about Australian assets. So Australia is obviously at a slightly different point in the cycle. In New Zealand, which is another reason why we think that delaying this is probably in the best interest of unitholders at this point.

That was all for me.

Your next question comes from Nick Mar from Macquarie.

Just on the sort of portfolio allocation. You've obviously expected the majority of your [ aged care ] assets through the noncore divestment program. Can you just talk about what your strategy is there and what you need to see in the Asian market to actually get towards your target waiting that you're looking at for long term?

Yes. Thanks, Nick. I think first about a couple of [indiscernible] we have Richard. But the overall focus was hospitals remain in the core of our investments, that's going to drive the majority of value of the majority of rent and that hasn't changed. We also have an increasing focus on ambulatory care and the 20% exposure we say there has increased materially in terms of numbers, even though the percentage hasn't changed significantly. And also the hospital component actually includes some exposure to ambulatory care. So some of the facilities that are listed in that exposure are actually responding to that schematic around ambulatory care. We sold out of aged care because we had an initial portfolio that had been long targeted for sale. So we're sitting on a noncore asset for some time. We divested that at the end of last year. And then we had an unsolicited proposal from the same party that acquired those assets for the balance of the portfolio. So we've sold out of base year essentially for opportunistic reasons. But pricing was pretty much the book, we still have an interest at aged care, but we need the risk premium for the type of assets to be consistent with the balance of the portfolio.

[indiscernible] a big component of the initial sale. The original acquisition was predicated on renewal of those facilities by way of development, which didn't occur over an extensive period of time. So whilst pricing was what we felt absolutely appropriate today, how consumed to those assets where it was the longevity of those assets based on the fact that they haven't had major renewal in recent time.

Okay. And when you sort of look at the type of aged care that you want, is it materially tighter in terms of cap rate versus what you've been selling? Sort of less accretive to make that shift from some of your other core asset classes?

Yes. I think it's case by case, Nick, so we've got a whole list of criteria that we go through, including purpose, build, nature of the operator, where it is, all those sorts of metrics. I think there probably needs to be some sort of spread between where aged care is and where a leading hospital is. So there's application to that. And also we're trying to target more of a portfolio and degree assets. So that's another screen. So it's a range of measures.

That's great. And then just on some of the financial stuff. The tax number for '25. You obviously flagged a $1.8 million headwind from depreciation changes. What do you think the tax rate will roughly wash in that for the year?

Roughly around that 18% to 20% Nick. It's roughly what our underlying tax rate is [indiscernible].

No, that's good. And then just on incentives and maintenance CapEx. During the year, in terms of capitalizing into sort of $10.6 million, which I know sort of $8.3 million is sports med extension. Can you just talk about the other sort of a couple of million bucks in there and sort of why it's not, I guess, classified as an incentive from an AFFO perspective. And then secondly, you've got $2 million of commitment for conditioning upgrades that sports med. And will that be classified as maintenance in '25?

So the other CapEx has been incurred across the portfolio is those value-add projects that we do consistently to improve quality of the portfolio. So that includes where we're necessarily installing solar on top of roofs, upgrading ESG performance of buildings, et cetera. So that lion's share of that value-added CapEx should be talking about there. The expenditure or the capital commitment in respect to the sports med obligation is around HVAC units. So again, the intention is that, that represents material upgrade, the quality of that building and meet in our view, the value-add component from a CapEx expenditure perspective.

So can you just be clear what kind of incentive or spend would be classified as a sort of cash cost from an AFFO perspective? It seems like there's a sort of cutout for most things that you said.

Yes. So Nick, it's the type of repairs and the routine day-to-day repairs and maintenance expenditure that comes into the portfolio. An example of that is going to be some passive fire remediation works at one of our buildings that we need to undertake. That really just ensure that we're complying with code and nature of all expenditure of that sort of nature.

There are no further phone questions at this time. I'll now hand the conference back to Mr. Hockly.

Thank you. We just one final question online from credit -- investment partners, just asking around as the timing of the delay for capital partnering related to Australian market conditions for hospitals. So I might answer that. I think Richard gave the detail before. I mean there's no doubt that the noise around the sector has made it more challenging, but we don't think that's the key reason. And the second part of that question, which I [ think ] to Richard was, have there been any type of investors transacting or increasing the size of their Australian health care portfolios?

Yes. Thank you for the question. Of the $310 million that we've sold and $180 million that we're currently marketing with the exception of upward pricing those assets are being purchased by smaller competitors of ours. Again, the Vital portfolio is the highest quality investable portfolio in Australasia from our perspective. And when we put what we consider noncore assets onto the market, we get some very strong take-up through the EOI process from, like I said, our smaller competitors who continue to try to grown their book in what is a very limited opportunity set for these types of transactions.

Thank you very much for attending today. As always, happy to take any further follow-up questions via email. And as I've said our website is fully updated with additional information. Thank you.

And that does conclude our conference for today. Thank you for participating. You may now disconnect.