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

<h2>Vital Healthcare<br>In the Waiting Room</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Vital&nbsp;Healthcare&nbsp;Property Trust (VHP) has announced the acquisition of a private hospital in Melbourne as well as three development sites across Queensland and Auckland. The acquisitions will be funded from debt facilities (increasing gearing +3.2%), are expected to be AFFO&nbsp;accretive, and provide further development options. Also, today's investor day highlighted strong tenant demand exists for commencement of additional expansion projects in NZ at&nbsp;Ormiston&nbsp;and Grace Hospital. VHP still has a further&nbsp;NZ$560m of potential future developments, however, we calculate committed gearing is c.40% and as such any large development commitment would likely require further capital. Whilst VHP has a strong development track record, it currently trades broadly in line with our 12 month target price — capital raise risk will also likely weigh on the share price. Maintain NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21–23 AFFO +0.0%/+0.9%/+0.5% reflecting today's acquisitions and updated interest rate forecasts</li>
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<h3>Acquiring a hospital and development options</h3>
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<p>Epworth&nbsp;Camberwell&nbsp;was purchased on a passing yield of 4.78%, which reduces to 4.28% once an A$8.7m incentive is paid after three years. Upon settlement the property will be subject to a 20 year triple net lease, with annual CPI increases and a market&nbsp;review at year 15. The three other acquisitions include: (1) a ~3000sqm site in Brisbane in the Princess Alexandra Hospital Precinct, (2) a ~20,000sqm site in the proposed&nbsp;Coomera&nbsp;Health Precinct on the Gold Coast, and (3) a ~750sqm site in Auckland, opposite the Auckland City Hospital. The acquisitions cost A$11.4m, A$9.4m and NZ$7.3m excluding costs respectively.</p>
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<h3>Development pipeline remains key earnings driver</h3>
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<p>The acquisitions&nbsp;of development land is on strategy for VHP, which targets ~10–15% of assets under management being development assets.&nbsp;VHP still has a further NZ$200m to spend on committed developments, and has indicated it has a further NZ$560m of potential developments within its current portfolio&nbsp;—&nbsp;we view development as a more attractive use of capital vs. purchasing stabilised assets on market, given current elevated pricing for property within the medical&nbsp;subsector&nbsp;with&nbsp;long lease terms.</p>
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<h3>Balance sheet gearing up</h3>
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<p>The acquisitions will lift FY21E gearing to c.36%, assuming NZ$100m of revaluation gains in 2H21 (60% of the portfolio to be revalued 2H21). We estimate committed gearing is now c.40%, after accounting for the remaining NZ$200m of spend on active developments and the incentive fee on Epworth Camberwell. While the DRP and medium term revaluations will provide some balance sheet headroom, further significant development commitments may require additional capital.</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>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Vital Healthcare In the Waiting Room

NEUTRAL
Vital&nbsp;Healthcare&nbsp;Property Trust (VHP) has announced the acquisition of a private hospital in Melbourne as well as three development sites across Queensland and Auckland. The acquisitions will be funded from debt facilities (increasing gearing +3.2%), are expected to be AFFO&nbsp;accretive, and provide further development options. Also, today's investor day highlighted strong tenant demand exists for commencement of additional expansion projects in NZ at&nbsp;Ormiston&nbsp;and Grace Hospital. VHP still has a further&nbsp;NZ$560m of potential future developments, however, we calculate committed gearing is c.40% and as such any large development commitment would likely require further capital. Whilst VHP has a strong development track record, it currently trades broadly in line with our 12 month target price — capital raise risk will also likely weigh on the share price. Maintain NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY21–23 AFFO +0.0%/+0.9%/+0.5% reflecting today's acquisitions and updated interest rate forecasts



Acquiring a hospital and development options


Epworth&nbsp;Camberwell&nbsp;was purchased on a passing yield of 4.78%, which reduces to 4.28% once an A$8.7m incentive is paid after three years. Upon settlement the property will be subject to a 20 year triple net lease, with annual CPI increases and a market&nbsp;review at year 15. The three other acquisitions include: (1) a ~3000sqm site in Brisbane in the Princess Alexandra Hospital Precinct, (2) a ~20,000sqm site in the proposed&nbsp;Coomera&nbsp;Health Precinct on the Gold Coast, and (3) a ~750sqm site in Auckland, opposite the Auckland City Hospital. The acquisitions cost A$11.4m, A$9.4m and NZ$7.3m excluding costs respectively.


Development pipeline remains key earnings driver


The acquisitions&nbsp;of development land is on strategy for VHP, which targets ~10–15% of assets under management being development assets.&nbsp;VHP still has a further NZ$200m to spend on committed developments, and has indicated it has a further NZ$560m of potential developments within its current portfolio&nbsp;—&nbsp;we view development as a more attractive use of capital vs. purchasing stabilised assets on market, given current elevated pricing for property within the medical&nbsp;subsector&nbsp;with&nbsp;long lease terms.


Balance sheet gearing up


The acquisitions will lift FY21E gearing to c.36%, assuming NZ$100m of revaluation gains in 2H21 (60% of the portfolio to be revalued 2H21). We estimate committed gearing is now c.40%, after accounting for the remaining NZ$200m of spend on active developments and the incentive fee on Epworth Camberwell. While the DRP and medium term revaluations will provide some balance sheet headroom, further significant development commitments may require additional capital.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Vital Healthcare Property Trust

Vital Healthcare: In the Waiting Room