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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Vital Healthcare Property Trust / Equity Bottom-Up

<h2>Vital Healthcare</h2>
FY20 Result Initial Thoughts – FY21 DPU guidance slightly ahead
VHP has reported FY20 AFFO +5.6% to 10.45cps driven by higher rental income, lower management fees paid, and lower interest costs. The result was ahead of our estimate of 9.87cps largely due to strategic transaction costs being excluded from VHPs reported AFFO, adjusting for these the result was 7% below our forecast. Looking forward, VHP guided to FY21 DPU of 8.75cps, slightly ahead of our current estimate of 8.40cps. Medium term VHP target 2-3% AFFO and DPU growth with a conservative pay-out ratio.
Key takeouts:
<ul>
<li>The portfolio remains full at 99.4% occupancy and the long WALT is maintained at 18.1 years. The lease expiry profile remains benign averaging 1.3% pa over the next 10 years. Like-for-like same currency rental growth was +1.6% with CPI increases of +1.5% and fixed of +2.1%. 94% of rental income is subject to structured rent reviews.</li>
<li>VHP’s portfolio saw limited impacts from COVID-19 with rent abatements of &lt;NZ$300k in FY20 and deferrals of &lt;5% of net rent in FY20/21. VHP operated in accordance with the Australian code of conduct in both Australia and NZ.</li>
<li>NTA lifted +3% to NZ$2.38 on the back of a NZ$46m revaluation gain (cap rates firmed 7bp to 5.54%) and positive currency translation that was partially offset by negative net movement in interest rate derivatives, strategic transaction costs, and higher units on issue.</li>
<li>Gearing lifted 3.4ppts to 38.7% with higher bank debt as a result of development expenditure. VHP has undrawn debt capacity of NZ$225m. VHP is looking to extend its debt duration to better match its long WALT; VHPs weighted average debt expiry was just 1.8 years at June-20.</li>
<li>VHP has commenced NZ$279m of development projects with NZ$202m remaining to be spent. Two major projects being Wakefield Hospital (stage 1 NZ$98m with stage 2 expected to cost NZ$61m and commence mid-2021) in Wellington and Epworth (A$126m) in Melbourne are the key projects under way. To part fund these developments VHP has signalled <a href="http://c.nz/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://C.NZ&amp;source=gmail&amp;ust=1597119588115000&amp;usg=AFQjCNHTjRODhExgrL7ELSJo3LcF2pSPPw" rel="noopener">C.NZ</a>$100m of asset sales.</li>
<li>VHP has again highlighted an interest in aged care sector acquisitions with targeted portfolio weight of 10-20% vs. 6% at FY20. VHP also highlighted life sciences/research as another sub-sector to provide portfolio diversification with a targeted portfolio weighting of 5-15% vs. 0% at FY20.</li>
</ul>
Conference call at 10.00am
Pre-registration required:&nbsp;<a href="https://s1.c-conf.com/diamondpass/10008321-invite.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://s1.c-conf.com/diamondpass/10008321-invite.html&amp;source=gmail&amp;ust=1597119588115000&amp;usg=AFQjCNHguWKbsYZEyU-TsQ6VcBZTqJhaAg" rel="noopener">https://s1.c-conf.com/diamondpass/10008321-invite.html</a>
FY20 result summary
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1674585930952294452&amp;th=173d530828474034&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-XOtlFB4L0_Kz12mw7zAlcO1BeT1L4hSjzRnG2_smDJek4E35dGMU8_aGOywXRPlb742SYRavTwOTvNNjzN-5fq5Wq64vPkIOpit8r5stP4AQd51U2jaZ8nAU&amp;disp=emb" width="589" height="65" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Forsyth Barr, Company reports
Rohan Koreman-Smit&nbsp; Senior Analyst, Equities <a href="https://www.forsythbarr.co.nz/" target="_blank" rel="noopener">Forsyth Barr Limited</a>
P: +64 9 368 0085 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Vital Healthcare
FY20 Result Initial Thoughts – FY21 DPU guidance slightly ahead
VHP has reported FY20 AFFO +5.6% to 10.45cps driven by higher rental income, lower management fees paid, and lower interest costs. The result was ahead of our estimate of 9.87cps largely due to strategic transaction costs being excluded from VHPs reported AFFO, adjusting for these the result was 7% below our forecast. Looking forward, VHP guided to FY21 DPU of 8.75cps, slightly ahead of our current estimate of 8.40cps. Medium term VHP target 2-3% AFFO and DPU growth with a conservative pay-out ratio.
Key takeouts:

The portfolio remains full at 99.4% occupancy and the long WALT is maintained at 18.1 years. The lease expiry profile remains benign averaging 1.3% pa over the next 10 years. Like-for-like same currency rental growth was +1.6% with CPI increases of +1.5% and fixed of +2.1%. 94% of rental income is subject to structured rent reviews.
VHP’s portfolio saw limited impacts from COVID-19 with rent abatements of &lt;NZ$300k in FY20 and deferrals of &lt;5% of net rent in FY20/21. VHP operated in accordance with the Australian code of conduct in both Australia and NZ.
NTA lifted +3% to NZ$2.38 on the back of a NZ$46m revaluation gain (cap rates firmed 7bp to 5.54%) and positive currency translation that was partially offset by negative net movement in interest rate derivatives, strategic transaction costs, and higher units on issue.
Gearing lifted 3.4ppts to 38.7% with higher bank debt as a result of development expenditure. VHP has undrawn debt capacity of NZ$225m. VHP is looking to extend its debt duration to better match its long WALT; VHPs weighted average debt expiry was just 1.8 years at June-20.
VHP has commenced NZ$279m of development projects with NZ$202m remaining to be spent. Two major projects being Wakefield Hospital (stage 1 NZ$98m with stage 2 expected to cost NZ$61m and commence mid-2021) in Wellington and Epworth (A$126m) in Melbourne are the key projects under way. To part fund these developments VHP has signalled C.NZ$100m of asset sales.
VHP has again highlighted an interest in aged care sector acquisitions with targeted portfolio weight of 10-20% vs. 6% at FY20. VHP also highlighted life sciences/research as another sub-sector to provide portfolio diversification with a targeted portfolio weighting of 5-15% vs. 0% at FY20.

Conference call at 10.00am
Pre-registration required:&nbsp;https://s1.c-conf.com/diamondpass/10008321-invite.html
FY20 result summary

Source: Forsyth Barr, Company reports
Rohan Koreman-Smit&nbsp; Senior Analyst, Equities Forsyth Barr Limited
P: +64 9 368 0085 | TF: 0800 367 227&nbsp; Level 23, Lumley Centre, 88 Shortland Street, Auckland

Vital Healthcare: FY20 Result Initial Thoughts – FY21 DPU Guidance Slightly Ahead