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

Welcome to the 2025 Annual Meeting of Vital Healthcare Property Trust. My name is Graham Stuart. I'm the Independent Chair of the Vital Healthcare Property Trust, appointed by your Supervisor. During today's meeting, I will invite questions in relation to two formal addresses: one on Vital's annual accounts for the 2025 financial year, and the second on the proposed reelection of Angela Bull as an independent director. Angela will speak briefly to her nomination, and then we will open the meeting for general business. If you're a unitholder attending in person and you wish to ask a question, please wait until the relevant time and raise your hand. Please also wait until you've been provided with a microphone just to ensure that those who are attending online can hear your question. If you are a unitholder or a proxy holder and you're attending online, you can submit a written question during the live meeting at any time. Please select the tab, the Q&A on the right-hand side of your screen, type in the question to the field and press send. Your question will be immediately submitted. If like me, you require assistance on these matters, you can type a query into the Q&A tab and Computershare would assist you with the online chat function. Or alternatively, you can call Computershare on 0800-650-054. So that's 0800-650-054. Now while you can submit questions for any time from now on, I won't address them until the relevant time in the meeting. Your questions may be moderated, or if we receive multiple questions on the one topic, they may be amalgamated. In the unlikely event we run out of time to answer any questions, we will answer them in due course via e-mail or by posting responses to our website. Voting today will be conducted by way of a poll and voting will shortly be opened online. Computershare representatives will collect voting forms from those attending in person, and they will collate those results with both voting methods. Results of the poll will be released to the New Zealand Stock Exchange later today. Now the notice of this meeting has been served to all unitholders. It sets out the scope of what we are scheduled to discuss today and it includes the details of the one resolution that we are due to consider. I'm pleased to confirm that there is a quorum present and, therefore, I declare the 2025 Annual Meeting of Unitholders of Vital Healthcare Property Trust open. If you're eligible to vote at this meeting, you're now able to cast your vote under the Vote tab. To vote, simply select your voting direction from the options shown on the screen. Your vote has been cast when a green tick appears. But don't worry, to change your vote, you can simply select Change Your Vote. You can change your vote up until the time that I declare voting is closed, and I will give you an indication shortly before I move to close voting. Now the order for today's meeting is as follows. There are two formal presentations: my address to you as the Independent chair, followed by Chris Adams, who leads Vital's executive team as Fund Manager. I will then table the annual financial statements and invite questions on any matter regarding the trust or the presentations other than at that time, ends the election. We will then move to the formal business being the proposed resolution that Angela Bull reelected, and then I will invite any questions related to her reelection. Now while voting occurs, we're going to play you a short video, giving you an overview of some of the assets in Vital's portfolio, which includes recently completed developments and RDX building in Queensland, which is currently under construction. After voting is complete, we'll have an opportunity for general business and I will invite you to ask any relevant questions that you may have. We will then conclude the meeting. I'll then invite you to stay behind and mingle with the directors and management team. I think there might be a cup of coffee provided or tea. Copies of the minutes to last year's annual meeting are available on Vital's website, vhpt.co.nz. Now the full Board of the management is in attendance today with all of my Board colleagues attending in person, except from Mike Bradley and Zachary Vaughan who are attending virtually from Canada. Zach and Mike are not present in person because they're currently in Toronto preparing market announcements on behalf of the Northwest Real Estate Investment Trust. I'd also like to welcome Northwest's executive team, including Fund Manager, Chris Adams; Regional CFO, Michael Groth; and General Counsel and Company Secretary; Vanessa Flax; Paul Cassidy and Raveen Kaur from the Supervisor of the Trust; Bryce Henderson and Hayden Davison from the auditors of the Trust; and Toby Sharpe, who is a legal adviser to the Manager. Fellow unitholders, I'm pleased to report that operating performance of our fund remains at satisfactory levels despite the challenging economic environment. The operating performance of the fund has been satisfactory with sufficient earnings to maintain the dividend payout of $0.0975 per unit. After 2 years of monetary tightening, interest rates eased significantly with the official cash rate declining from 5.5% to 2.5% currently during the course of the last financial year. The downward trend in property valuations also slowed. Net tangible assets per unit moved from $2.69 at the beginning of the financial year to $2.47 by year-end. Pleasingly, Vital's unit price firmed from $1.80 to nearly $2 at the year-end, and this positive momentum has been continued since the year-end. Your Board and management are committed to enhancing the value of your Vital units. In November 2024, we undertook an in-depth consultation on the dual listing proposal. While such a listing could have increased the earnings and dividends to our unitholders by between 10% and 15% along with delivering other strategic benefits, concerns were raised by our investors about matters such as the demand for units in Vital in the ASX, the smaller size of our fund on the NZX, the liquidity of the units and index inclusion. Mindful of this feedback, the Board ultimately decided not to proceed with the dual listing at this time, but we will continue to evaluate opportunities to strengthen unitholder value, in parallel with and without detracting from our primary focus, which, of course, is on managing the fund's performance. The Board is also mindful that Vital is the only listed property entity in New Zealand that is externally managed. The independent directors have received feedback from unitholders over the years, encouraged us to raise the prospect of internalizing management of Vital, and some of you will recall that this has been a regular topic at recent annual meetings. Consistent with our desire to enhance unitholder value, we have engaged with Northwest over the years. And although we haven't yet been able to reach any substantive agreement on terms, the independent directors continue to consider that there is potential for real benefit to unitholders through internalized management. However, there is no certainty that we will ultimately be able to come through any commercial agreement in this respect. Turning our minds to capital management and development. Our disciplined approach to capital management and development has enabled the trust to navigate through turbulent economic times while preserving balance sheet strength and portfolio quality. In the financial year '25, two major development projects were successfully operationalized: the $16 million expansion of Maitland Private Hospital in New South Wales and Stage 2 of the $141.4 million redevelopment of Wakefield in Wellington. These projects were delivered on time and within budget, enhancing the capacity of the portfolio and the quality of our tenant offerings. The overall development pipeline remained active with 6 completions over the past year representing $277 million of total capital spend. Leasing outcomes continue to underpin the portfolio's performance with over 51,000 square meters leased, extended or renewed during the financial year '25. This represents 22% of the income and 20% of the leasable area of the portfolio. It resulted in occupancy lifting to 98.6% and our weighted average lease expiry, which we call WALE, extending to 18.5 years maintaining high tenant stability. Asset recycling initiatives delivered $49.7 million in gross proceeds from noncore divestments. These included sales of the Hirondelle Private Hospital, Epworth Rehabilitation and residential property in Sydney. These sales were achieved at an average of a 7% discount to book value, and the proceeds have been recycled and reinvested into core developments. On the financing front, vital refinanced $1.1 billion of debt facility in the final quarter securing extended maturities and improving our pricing. The next debt maturity is not until March 2027, providing certainty for funding. Gearing ended the year at 42.1, comfortably within our banking covenant range. Net property income increased by 3.7% on a like-for-like basis. Around 83% now of our rental income is linked to the Consumer Price Index supporting sustainable income growth. Adjusted funds from operation were $70.4 million, generating a payout ratio of 93.6%, which is consistent with prior years. These proactive measures in capital deployment, asset duration and financing have enhanced the property quality that have strengthened our operational resilience and have supported the fund's sustainable dividend profile. Our long-term strategy, we remain a long-term investor steadily focused on high-quality health care properties and attractive locations and with stable tenant relationships. While the past 24 months of more economic shifts that require tactical adjustments, our strategic direction has remained unchanged, investing through market cycles for superior returns. The recently announced GRESB ESG status and our recently released climate-related disclosures reinforce our commitment to sustainability. Now turning our minds to the Board and management. This year, Aaron Hockley resigned after 5.5 years as Fund Manager. The Board expresses gratitude for his professionalism and his contribution to the fund. The Board were fortunate in being able to appoint Chris Adams to replace Aaron as Vital Fund Manager. Chris brings 25 years of sector experience, including significant prior experience with Vital. And he's taken on Aaron's responsibilities, ensuring continuity of operations. In addition, craig Mitchell retired as CEO of Northwest Healthcare Property REIT and as their Director in August with Zachary Vaughan stepping in is Northwest new CEO and Board Director. The Board thanks Craig for his significant contributions and welcomes Zachary to Vital. The outlook for the sector. Vital was well positioned for financial year 2016 and beyond as the health care property market begins to emerge from recent sector headwinds. Interest rates have moderated, operator performance is strong particularly in New Zealand. Property valuations have stabilized. And in Australia, it appears that the Healthscope receivership is drawing to a conclusion. Fortunately, your fund had no exposure to those assets. This overall environment supports tenant demand, income security and, ultimately, embedded value creation for unitholders. In addition to our financial focus, we have continued to enhance our governance in response to stakeholder feedback and to market conditions. The activities that I have highlighted are only a small part of our efforts over the past year. The Board want to thank you for your continued support and your trust as investors in Vital Healthcare Property Trust. The Board and management remain confident that we are working in the right direction to ensure our focused strategy and our resilient portfolio will deliver superior long-term results. It's now my great pleasure to introduce Fund Manager, Chris Adams, to provide his first address to you, and he will provide further detail. Come on up, Chris.

Thank you, Graham, [Foreign Language] and good afternoon. My name is Chris Adams, and I'm the Fund Manager for Vital. I have a long history with the Vital business, having started my career in health care property, as noted by Graham, with Vital in New Zealand in 1995. And I'm very proud to lead the business at this time. Whilst Graham has reflected largely on the FY '25 year, my intention is to focus on the first quarter of FY '26 and beyond. As noted at the full year update, we have a strong focus on driving the operational performance of the business. This focus is apparent in the results, as highlighted on the slide: Improved occupancy at 99%, including committed leases at end September 2025. The upturn in occupancy reflects the take-up of recently completed high-quality space established by the development program. Active lease inquiry continues on the balance of the portfolio and we expect further leasing as we approach the end of the calendar year. The weighted average lease expiry of 19.1 years, the longest of all rates listed on the NZX or ASX, demonstrates the duration of cash flows. Continued improvement in operating metrics also for hospital operators. Strong growth of 5% in net property income for the first quarter of FY '26 versus the corresponding period in FY '25. Over $450 million of asset sales since 2023, in part, to manage leverage to prudent levels, but also a process of portfolio improvement, whereby we have sold assets that were viewed as bottom quartile in terms of asset quality or operational performance and reinvested the proceeds into Vital's high-quality developments. We have recently concluded the sale of Toronto Private Hospital in the Hunter Valley for $38.25 million, as noted by Graham, and a 50% sale of Kawarau Park in Queenstown due to settle later this month. The sale and the interest in Kawarau Park reflects an off-market approach from Mackersy Property, a well-regarded Queenstown-based property group to partner on the asset and play to our respective strengths in commercial and health property to add further value to this precinct asset. Again, noted by Graham, the operational performance focus has been done with a commitment to ESG with recognition for the business by GRESB, which I will come to later. On the next slide, we recognize the near $200 million of development completions in quarter 1, 2026. The Wakefield project is well known to unitholders with the stage rebuild of the entire hospital being in construction for over 5 years. We're extremely proud of the completed facility in conjunction with our long-term partner, Evolution Healthcare. And the quality of the hospital is clearly evident by the way of the strong acceptance by doctors and the broader community in Willington driving strong demand for services. The $25 million expansion on renewal project at Boulcott Hospital in Lower Hutt also now complete, following the complex build and a live environment, strengthening the quality and operating capacity of this hospital, one of fewer New Zealand directly co-located with a major public hospital. And Auckland Endoscopy, a major expansion of this high turnover endoscopy and day surgery facility in conjunction with Evolution and Allevia, two of New Zealand's leading health care providers. The next slide outlines the balance of the current Vital development program. With the $201.3 million of projects nearing completion with only $19.6 million of spend remaining, practical completion of RDX is pending in the New Year. I visited site only last week and note this nearly 15,000 square meter facility is of the highest quality. Whilst the construction component is near complete, the focus is on leasing the asset, which is subject to a 12-month net operating income guarantee for 57% of budgeted net income. We confirm our expectation that this facility will lease up over the period of 18 months post practical completion in line with normal course leasing of life science assets. The multi-stage development expansion of Grace Hospital continues on plan in conjunction with operating partners Evolution Healthcare and Southern Cross for mid 2026 completion. The further expansion works at Wakefield, driven by strong demand for services post opening of Stage 2 in January moves towards completion this year. In terms of financial highlights for the quarter. Strong growth of 5% in net property income over the corresponding period in FY '25. AFFO was [ $0.082 ], representing an 86.4% payout ratio, driven by increased property income but also influenced by timing factors, including the lower tax expense and the timing of maintenance spendings. Distributions of $0.4375 per unit, consistent with guidance and expectations for the full year of $0.0975. Importantly, the fund has no debt expiring until March 2027 and a weighted average debt expiry of 3.6 years following a major refinance in May 2025, as noted by Graham. Balance sheet gearing sits at 42.1%, reducing to 41.5% post the settlement of the Queenstown 50% interest. Net tangible assets now sit at $2.56 as of 30th September, driven by favorable FX movements with the New Zealand dollar depreciating against the Aussie dollar since 30 June and minor upside and valuations from rent reviews. As noted by Graham, we anticipate yields have now stabilized across New Zealand and Australia and future valuations will be driven by the retail growth within the portfolio. We also anticipate that high-quality assets will also benefit in the future from a scarcity factor as limited new supply has entered markets in recent years. In terms of ESG highlights. We acknowledge our recently released second climate-related disclosure with this process being very much about building foundations for the future with ESG as a core part of strategy, including the identification and management of risk. Our commitment to ESG has been recognized GRESB with Global Leader Sector status against our peer group in both standing investments and developments. This commitment to sustainable buildings is evidenced on the next slide whereby Genesis Care Integrated Cancer Centre in Sydney and Playford Health Hub Stage 2 in Adelaide have both received 6-star Green Star certification. RDX on the Gold Coast has a 6-star Green Star design rating with certification to be progressed post completion. And we're targeting our first Green Star project in Auckland with in Auckland Endoscopy well advanced in the design review process. In fact, I think [ Kristy ] tells me today we have that approval. So that's good news. And finally, turning to our outlook and guidance. Confirming our dividend guidance of $0.0975 for the full year against an improving AFFO payout ratio, which provides flexibility to consider options to increase distributions in the future. Continuation of our focus on portfolio optimization with the portfolio showing sector-leading occupancy and lease duration metrics against the backdrop of emerging sector tailwinds, unlocking the embedded value in the portfolio by way of activating shovel-ready developments over time. This has been done with a focus on ESG and a resolute focus on driving unitholder returns and distributing growth over time. I will now hand back to Graham for the next part of the meeting. Thank you.

Thank you, Chris. The annual report and financial statements for the year ended the 30th of June 2025 have been served to all unitholders and are now formally tabled at this meeting. If there are any questions relating to the trust or to my presentation or Chris' presentation, now is your opportunity to raise them. Only unitholders or proxy holders are permitted to ask questions. If there are people from the media here, the directors and management will make ourselves available at the conclusion of the meeting to answer any of your questions. You may ask questions through the Computershare platform if attended virtually. Raise your hand in the room and do wait for that microphone to be given to you. Those wanting to ask a question online, please do so as early as possible to ensure that we can receive and answer that. And in consideration for other unitholders, we ask that questions that relate to your personal situation, all unitholder be dealt with outside of the meeting with management by e-mail or phone. Repeated questions or questions that have already been answered may not be put to the meeting again. I'll throw the floor open with that.

I believe there was an issue about asbestos content of new doors. How has that been resolved in some of the New Zealand hospitals?

Chris, would you like to put up your microphone and address.

And I might have to reach to [ Kristy ] in the back row to give us any further details if I get this wrong. But I mean, those doors were specified at the time when new developments were reviewed as being compliant. Obviously, subsequently, there's been an issue with compliance in relation to those. It's obviously contained asbestos. It's not a risk to anyone, but we're obviously going through a review on the building contracts for replacement of those doors as required. There's no safety concerns to people. As I said, it's entirely contained. But there are matters that we absolutely got to teach into and address them. So Kristy, have I got that entirely right?

Yes.

So the replacement...

Replacement is a [indiscernible].

Robert Weeden, shareholder, I guess unitholder. Question about asset valuations. How close are the building asset valuations just sort of the true value? And this is with reference to recent reducing write-downs.

I mean, certainly, they're mark-to-market each quarter and those of you to be representative of value now, sometimes valuations can be a lagging indicator. And therefore, on the valuations declining, they maybe take a little bit more time to step down that ladder. And equally, when they're rising, they make take a little bit more time to rise up that ladder. I think the answer is we're confident that the movement in yield in marketplaces, particularly if you look at New Zealand as an example, and declining interest rate spread and if you look at the differential bond rates over the long term, you can have some confidence that valuation yields are in the right place. That's also evidenced by market activity that is definitely increasing. So forecasting right now that yields are going to affirm anytime soon, but we have rent growth in the portfolio, and that that's the other side of the valuation equation. And we're confident with 99% occupancy and WALE at 18 years, we're fortunate we've got a very easy cash flow to model and, therefore, we're certain of what the cash flows look like. And there's upside to them and therefore, valuations. Certainly, that's our base assumption, that they'll travel in accordance with that rent growth in the near term.

Michael Bolton, shareholder. How much freedom does the Board have to internalize the management? I understood that Northwest has their level of ownership as such that they can block any attempt to change manager or internalize a manager.

Yes. So I don't want to go too deep into that. But I think my understanding is that a special resolution of shareholders would be required, 75% vote to dismiss the manager or to terminate the management agreement. And so therefore, anyone that holds -- and that for that matter, the Northwest will be able to vote on that resolution. So then that point is correct. Northwest, yes, I think they had that management contract since about 2012. They can sell that at any time to anybody. They're under no obligation to offer it to the fund first. So that's kind of the landscape we're getting in, Michael.

What is the current holding in Vital?

If I'm correct, it's about 28.4%.

So they can block an attempt to internalize management.

Yes, that would be my understanding. That would be a safe assumption, I think.

It seems negligent that the Board has allowed the situation to come about where they've got an ability to do this. We can't basically get rid of them.

Yes, I don't want to go back on history, but I think you've got to look back to the circumstances where that contract changed hands well over a decade ago. And that was not a decision taken by the Board at that time. That was a decision taken by the larger investors in the fund. So that's the reality of what we live with. Those are contractual obligations. They're cast in stone. We'll disclosed through our constitutional documents that you can see online. That's the reality we deal with. We're not able to change that other than through the normal process of commercial negotiation

Yes. But I know it's coming back in history. But the Board should have anticipated and it should be a condition of the contract that the Northwest couldn't get to this 25% or more than 25% ownership level. That should have happened. And that's just -- I don't think it's a very good look for a path forwards anyway.

Yes. I mean, I was a much younger man then and I wasn't involved in the sector. So I can't opine on that. What I can say is your Board are very mindful of the cards that we hold in our hand, and that's the game that we play, too. So yes, with within the commercial reality, the framework we operate in, we're doing everything we can to enhance unitholder value.

[ Cedric ], I'm a unitholder. In relation to the same question, is there any responsibility from the trustees to do what was suggested here, keeping an eye of that the fact they shouldn't have gone up to 28%? What's the attitude of the trustees? Is that within the realm of interest or responsibility?

So it's within the realm, no question. And I'm getting out of my pay grade here, but we have Toby Sharpe. He's going to frame me or just do this if I get things wrong. So I mean, we can't relitigate the past. That is what it is. And in the past is a very distant past nowhere. So I was several kilos lighter and quite a lot younger and I had different color here when this happened. So the primary role of the supervisors are kind of two things. One is to act as a front line of defense for the Financial Markets Authority and ensure that we comply with all the relevant regulations and, most particularly, the Financial Markets Conduct Act. And they are there to hold and manage the custodianship of your funds and the assets that those funds have been invested in. And they're also there to look over our shareholders with relation to their role as an agent of the FMA to make sure that the independent directors monitor and regulate related party transactions. So as independent directors, we spend a lot of our time and we're very mindful of our responsibilities when it comes to related party transactions. And of course, in a externally managed fund, there are a lot of related party transactions. It's basically every time the manager, mostly under the authorities of the trustee, transacts with the fund to take fees and buy properties and things like that. So they have a very real role to play in the legal structure and the operation of the fund. But they're not an active player in the sense that they don't come to the table and conduct commercial negotiations. That's the role of the Board and the independent directors of the company. They are very much looking over our shoulder. And there's quite a number of transactions where we are required to get the authority to do things. And we'd normally certify that we've actually complied with the Financial Markets conduct that in order to do that. So in that respect, we're a little bit different from a corporate entity. We're a managed investment scheme, as you know, under the FMCA, and that's our respective roles. So when it comes to commercial matters, look to the three of us. When it comes to compliance obligations and the custodian trip of your assets, that's largely taken care by Supervisor. So I'm looking at Tobey, he's giving me the thumbs up. So largely got that right. And you would hope that I got that right because I should ought to know what I expected to do, right?

And another question. As far as these green star ratings are concerned, I've been told by several other of the property companies that the criteria for the allocation, shall we say, of stages in Australia and New Zealand is quite different. To what extent can we sort of rely when you're talking about the Australian ones having a green star rating of 5 star, 6 star or whatever it is, that it's compatible with the same New Zealand?

Yes. There are differences. That is correct. And again, Lisa in the back may correct me if I'm wrong here. But they both set high bars for the nature of -- and the appropriate market circumstances, and they are the measure in the Australian New Zealand market to measure the quality of developments and the extent to which you benchmark against these developments in a green star sense. As a business, our commitment is to build assets for tomorrow, and that's what it's about. And it's doing the right things for the environment, but it's also doing the right things by tenants. An example is a health care staff which were in short demand would much rather work in an environment that has association with green star and has appropriate ESG conventionals and these sorts of assets. So slightly different, but the old principles within Australia and New Zealand are the same. And they ultimately, in my view, take us the same place. So again, Lisa, is that a fair assessment? Yes?

All right. Another question, too, if I can. A different matter. You referred to a consultation with stakeholders on different issues. I think one of the major issues that keeps coming up now and again is splitting the Australia and New Zealand portfolios into two separate entities, and that you were consulting with stakeholders on this. I'm a fairly substantial holder in the Vital Health, not in terms of the actual legal definition. But I know, and I think most others here would know that really when it comes pushed down to shove, you can get proxy holders, get them on the side and the rest of us don't matter. I know there's an issue that you, I believe, have been consulting with New Zealand Shareholders Association. I hope that you don't believe that what they say is what all shareholders say because there are many issues that they say that I do not agree with quite strongly. And so I want to make it clear that if you're going to get them on the side, don't think that you've got every shareholder on the side. Just make that as a point, please. And are there any other issues that you really have been consulting with stakeholders on apart from that splitting of the portfolio Yes?

So thank you. Feedback noted and understood. I'd like to give you confidence that we don't actually give any sector amongst our unitholder group a louder voice than any other . Fundamentally, your Board are here to drive the unit value, which is largely determined by the quality of the portfolio and the manager of the fund and the amount that we can pay you in dividends. So what we want to do is get your dividends up so unit price goes up. And to do that, we've got to run a quality portfolio with great tenants, and that's our focus. And so if we see opportunities to enhance that and with the dual listing proposal, we thought we could potentially enhance the funds available from operations, which is what funds the dividend by 10% to 15%. And it's largely done without changing the nature of the assets that you've invested in, then it would be remiss of us not to go out there and very widely canvas our unitholders and take into account a range of views. And yes, I'm just trying to thinking that process where [ Oliver ] was one of the people we consulted with, I think he probably was with the shareholders' association, but we had a widespread consultation. And as independent directors, we're conscious there. And the New Zealand resident ones are retail holders of units. So we're in your shoes in that respect. We're conscious that our obligations are to all unitholders. And there's nothing that we have consulted on with any unitholder that hasn't been made public to all unitholders. So if you go on to our NZX website, run down through the announcements, the matters that we discussed with them, the proposal that we were evaluating at that time and the feedback that we've got, that's all been sort of put up on the website for everyone to see. So I've noted your feedback, and I hope you get some comfort from the fact that we listen to everyone with an equal voice.

Does the trustee have an issue as far as that is concerned besides hoping that consultation of stakeholders?

They're sitting just behind you. I can't answer for -- we're unaware. Yes, our relationship with the trustee is one of a regulator and a commercial entity, the communication between -- and we operate on a no-surprises basis. They kind of know what they're doing. They read our minutes of Board meetings and they see all the essential documents. If they have an issue, they normally raise it with us, always raise it with us very promptly. And we respond very seriously. I can't recall initially that they raised with us in recent times, certainly not in the year under review, that would give rise to any concern by a unitholder.

If they do raise an issue with you, do you actually make that public through the stock exchange that you've had this different?