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).

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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<br>FY20 Result — Operation Goes to Plan</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Vital Healthcare Property (VHP) delivered a solid underlying FY20 result ahead of our expectations, largely due to better than expected COVID-19 abatement outcomes. While no AFFO guidance was given, VHP did provide FY21 dividend guidance of at least 8.75cps, flat on FY20. We believe this reflects management being cautious given the uncertain operating environment. We retain our OUTPERFORM rating underpinned by 1) earnings and dividend growth as developments contribute, and 2) the expectation that VHP's portfolio continues to do its job of providing a very defensive property exposure despite the uncertain economic backdrop. The lift in our FY21–23 earnings forecasts largely reflects reversal of prior COVID-19 abatement assumptions. Our target price increases by +7% to NZ$2.90.</p>
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<h3>COVID&nbsp;collection highlights&nbsp;defensive&nbsp;qualities</h3>
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<p>VHP&nbsp;reported a strong FY20 result&nbsp;with&nbsp;NPAT&nbsp;of NZ$41.7m ahead of our forecast NZ$39.7m, and up strongly on the&nbsp;pcp&nbsp;due to lower corporate costs. Like-for-like rental growth of +1.6% was slower than seen in previous years, however, this was offset by better than expected&nbsp;COVID-19 related rental&nbsp;abatements.&nbsp;VHP&nbsp;provided rental&nbsp;abatements&nbsp;of&nbsp;just NZ$0.3m, or 0.3% of its FY20 rental income, highlighting the&nbsp;defensive&nbsp;attributes of its portfolio. That said,&nbsp;VHP&nbsp;has also deferred rent of NZ$4.5m owing from one of its tenants but it expects this to be largely&nbsp;paid in 1H21.&nbsp;​​​​​​​DPS&nbsp;of 8.75cps was flat on the&nbsp;pcp, representing an FY20&nbsp;AFFO&nbsp;payout ratio of 84% based on&nbsp;VHP's&nbsp;AFFO&nbsp;calculation, or 97% if we adjust for managers fees being paid in units.&nbsp;VHP&nbsp;has guided to dividends of "at least" this amount in FY21.&nbsp;</p>
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<h3>Portfolio metrics remain supportive</h3>
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<p>Headline metrics of&nbsp;VHP's&nbsp;portfolio remain very solid, reporting occupancy of 99.4% and a weighted average lease expiry of 18.1 years. Further revaluation gains saw&nbsp;VHP's&nbsp;NTA&nbsp;lift to NZ$2.38 (1H20: NZ$2.36). While its portfolio remains heavily weighted to hospitals (82%), management has outlined its 5 year target portfolio weightings (Figure 5), which suggests it will try to dilute this exposure in favour of aged care and life science/research facilities.</p>
<p>Gearing lifted to 38.7% (from 35.3% in FY19) due to the acquisition of aged care facilities in NSW, Australia, and development costs. While some Australian developments have been put on hold, they are expected to resume in the near term. VHP has ~NZ$200m of costs required to complete its six committed developments, which will be funded through a mix of bank debt and potential asset sales.</p>
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<h3>Revising forecasts up,&nbsp;DPS&nbsp;slightly ahead of guidance</h3>
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<p>Our earnings forecasts lift by +9%/+8%/+3% in FY21/22/23 due to the increased rental contribution from VHP's recently acquired aged care assets, minor adjustments to our development assumptions, FX movements, and a reversion in our COVID-19 abatement assumptions. We forecast FY21 DPS of 8.90cps or +2% yoy, slightly ahead of guidance.&nbsp;</p>
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<div><strong>Rohan Koreman-Smit CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Ashton Olds</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Vital Healthcare FY20 Result — Operation Goes to Plan

OUTPERFORM
Vital Healthcare Property (VHP) delivered a solid underlying FY20 result ahead of our expectations, largely due to better than expected COVID-19 abatement outcomes. While no AFFO guidance was given, VHP did provide FY21 dividend guidance of at least 8.75cps, flat on FY20. We believe this reflects management being cautious given the uncertain operating environment. We retain our OUTPERFORM rating underpinned by 1) earnings and dividend growth as developments contribute, and 2) the expectation that VHP's portfolio continues to do its job of providing a very defensive property exposure despite the uncertain economic backdrop. The lift in our FY21–23 earnings forecasts largely reflects reversal of prior COVID-19 abatement assumptions. Our target price increases by +7% to NZ$2.90.


COVID&nbsp;collection highlights&nbsp;defensive&nbsp;qualities


VHP&nbsp;reported a strong FY20 result&nbsp;with&nbsp;NPAT&nbsp;of NZ$41.7m ahead of our forecast NZ$39.7m, and up strongly on the&nbsp;pcp&nbsp;due to lower corporate costs. Like-for-like rental growth of +1.6% was slower than seen in previous years, however, this was offset by better than expected&nbsp;COVID-19 related rental&nbsp;abatements.&nbsp;VHP&nbsp;provided rental&nbsp;abatements&nbsp;of&nbsp;just NZ$0.3m, or 0.3% of its FY20 rental income, highlighting the&nbsp;defensive&nbsp;attributes of its portfolio. That said,&nbsp;VHP&nbsp;has also deferred rent of NZ$4.5m owing from one of its tenants but it expects this to be largely&nbsp;paid in 1H21.&nbsp;​​​​​​​DPS&nbsp;of 8.75cps was flat on the&nbsp;pcp, representing an FY20&nbsp;AFFO&nbsp;payout ratio of 84% based on&nbsp;VHP's&nbsp;AFFO&nbsp;calculation, or 97% if we adjust for managers fees being paid in units.&nbsp;VHP&nbsp;has guided to dividends of "at least" this amount in FY21.&nbsp;


Portfolio metrics remain supportive


Headline metrics of&nbsp;VHP's&nbsp;portfolio remain very solid, reporting occupancy of 99.4% and a weighted average lease expiry of 18.1 years. Further revaluation gains saw&nbsp;VHP's&nbsp;NTA&nbsp;lift to NZ$2.38 (1H20: NZ$2.36). While its portfolio remains heavily weighted to hospitals (82%), management has outlined its 5 year target portfolio weightings (Figure 5), which suggests it will try to dilute this exposure in favour of aged care and life science/research facilities.
Gearing lifted to 38.7% (from 35.3% in FY19) due to the acquisition of aged care facilities in NSW, Australia, and development costs. While some Australian developments have been put on hold, they are expected to resume in the near term. VHP has ~NZ$200m of costs required to complete its six committed developments, which will be funded through a mix of bank debt and potential asset sales.


Revising forecasts up,&nbsp;DPS&nbsp;slightly ahead of guidance


Our earnings forecasts lift by +9%/+8%/+3% in FY21/22/23 due to the increased rental contribution from VHP's recently acquired aged care assets, minor adjustments to our development assumptions, FX movements, and a reversion in our COVID-19 abatement assumptions. We forecast FY21 DPS of 8.90cps or +2% yoy, slightly ahead of guidance.&nbsp;



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





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



Vital Healthcare: FY20 Result — Operation Goes to Plan