New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Vital Healthcare Property Trust / Equity Bottom-Up

Vital Healthcare 1H21 — Healthy Result, Healthy Valuation

NEUTRAL
Vital&nbsp;Healthcare&nbsp;Property (VHP) reported a solid 1H21 ahead of our expectations, largely due to better net rental income.&nbsp;VHP's&nbsp;strong top line&nbsp;was largely driven by acquisitions and development income. VHP also tweaked&nbsp;DPS guidance slightly and now expect to pay 4.5cps in 2H21 taking FY21 distributions to 8.88cps. We expect&nbsp;VHP's&nbsp;portfolio to continue to provide investors with a defensive property exposure, with good distribution growth prospects underpinned by developments (we forecast growth of 3% per&nbsp;annum&nbsp;to FY23); however, this is largely in the share price in our view. With VHP trading broadly in line with our NZ$3.15 12-month target, we lower our rating from OUTPERFORM to NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;We lift our FY21–23 AFFO +7%/+7%/+5% reflecting updated FX and lower tax, our DPS forecasts are largely unchanged
Rating:&nbsp;Downgrade to NEUTRAL (from OUTPERFORM)



Portfolio metrics remain supportive


Headline metrics of VHP's portfolio remain very solid, reporting occupancy of 99.1% and a weighted average lease expiry of 19.0 years. Like-for-like net property income grew 1.5% and rent reviews delivered a +2.1% uplift. 98% of leases are subject to structured rent reviews. Revaluation gains saw&nbsp;VHP's&nbsp;NTA lift to NZ$2.55&nbsp;(FY20: NZ$2.38).&nbsp;


Development pipeline to drive growth


Gearing reduced to 32.4% (FY20 38.7%) with&nbsp;VHP having&nbsp;raised capital to fund&nbsp;its c.NZ$360m of committed developments (NZ$225m spend to complete). VHP stated it has a further NZ$560m of potential developments within its current portfolio. Development is likely a more attractive capital allocation option vs. buying assets on market given current demand for property with long lease terms and the medical sub-setor. This activity should provide 1) better NTA (revaluation of current projects will add +9cps once complete), and 2) stronger earnings growth (current projects, acquisitions, and&nbsp;divestments&nbsp;will increase net rental income by ~+20%) and is an integral part of VHP reaching its +2–3% per&nbsp;annum&nbsp;distribution growth targets.


Valuation


We make changes to our risk free rate (from 1.3% to 2.3%) and market risk premium (from 6.0% to 5.5%), consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021. The net impact of this is a +54bp increase in our WACC which, while partly offset by our earnings changes, lowers our DCF by c.6%. This impact is broadly offset by a 4% lift in our NAV driven by higher property values.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Vital Healthcare: 1H21 — Healthy Result, Healthy Valuation