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</h2>
Upgrade to OUTPERFORM
OUTPERFORM
In our sector report Real Estate Reflections dated 26 March 2020, we looked at sector gearing and provided an update on our preferred LPVs. We also provided some thoughts on how investors should be positioned as uncertainty persists, and a reminder of what happened during the global financial crisis (GFC) and how things may be 'different this cycle'. We upgraded our VHP investment rating from NEUTRAL to OUTPERFORM.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">VHP</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.35</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">42.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">44.3&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">47.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">49.3&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">21.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">19.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">18.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$2.76</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">9.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.8&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">10.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">10.5&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">21.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">19.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">18.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Low</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-10.3</td>
<td style="text-align: left; width: 42.6pt;">3.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">5.8</td>
<td style="text-align: left; width: 48pt;">1.6&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">24.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">24.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">22.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">446.3m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">8.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,051m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">3.7</td>
<td style="text-align: left; width: 42.6pt;">3.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">231.5k (NZ$590k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">5.3</td>
<td style="text-align: left; width: 42.6pt;">5.5</td>
<td style="text-align: left; width: 48pt;">5.5</td>
<td style="text-align: left; width: 42.6pt;">5.5</td>
</tr>
</tbody>
</table>
Appealing portfolio less exposed to economic cycle
VHP&nbsp;remains with a very appealing portfolio given its spread of&nbsp;healthcare&nbsp;assets, with many&nbsp; resilient to the traditional economic cycle, long WALT of 17.9 years, 99.5% occupancy. Only an average of 1.6% of the leases expire per&nbsp;annum&nbsp;over the next 10 years.&nbsp;VHP&nbsp;has been successful in adding value via&nbsp;brownfield&nbsp;developments, but this will be more challenging near term.
Vital&nbsp;Healthcare&nbsp;Property — upgraded from NEUTRAL to OUTPERFORM
VHP&nbsp;has strongly&nbsp;defensive&nbsp;portfolio characteristics and is well managed on the ground in NZ and Australia. It is relatively fully geared at ~35% versus a sector average of ~31% but this is offset by the portfolio qualities mentioned above.&nbsp;VHP&nbsp;also has a relatively low dividend pay-out ratio which is helpful. Sentiment towards manager&nbsp;NorthWest&nbsp;remains a risk factor. We have yet to change our forecasts or NZ$2.76 target price.
Better longer-term structure vs. added complexity
As per our&nbsp;VHP&nbsp;note dated 20 March 2020, we recommend&nbsp;that&nbsp;unitholders&nbsp;approve what is proposed regarding the change in corporate structure and ASX listing. The&nbsp;unitholder&nbsp;meeting is on 31 March 2020 and votes have to be received by 29 March 2020. Our view is centred on the belief that what is being created is a better longer-term structure, given it will potentially widen the appeal to Australian and other international investors.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Vital Healthcare
Upgrade to OUTPERFORM
OUTPERFORM
In our sector report Real Estate Reflections dated 26 March 2020, we looked at sector gearing and provided an update on our preferred LPVs. We also provided some thoughts on how investors should be positioned as uncertainty persists, and a reminder of what happened during the global financial crisis (GFC) and how things may be 'different this cycle'. We upgraded our VHP investment rating from NEUTRAL to OUTPERFORM.
         


NZX Code
VHP
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.35
NPAT* (NZ$m)
42.2&nbsp;
44.3&nbsp;
47.8&nbsp;
49.3&nbsp;
EV/EBITDA
21.5&nbsp;
21.3&nbsp;
19.8&nbsp;
18.2&nbsp;


Target price
NZ$2.76
EPS* (NZc)
9.5&nbsp;
9.8&nbsp;
10.4&nbsp;
10.5&nbsp;
EV/EBIT
21.5&nbsp;
21.3&nbsp;
19.8&nbsp;
18.2&nbsp;


Risk rating
Low
EPS growth* (%)
-10.3
3.0&nbsp;
5.8
1.6&nbsp;
PE
24.8&nbsp;
24.0&nbsp;
22.7&nbsp;
22.4&nbsp;


Issued shares
446.3m
DPS (NZc)
8.8&nbsp;
9.0&nbsp;
9.0&nbsp;
9.0&nbsp;
Price/NTA
1.0&nbsp;
1.0&nbsp;
1.0&nbsp;
1.0&nbsp;


Market cap
NZ$1,051m
Imputation (%)
100
100
100
100
Cash div yld (%)
3.7
3.8&nbsp;
3.8&nbsp;
3.8&nbsp;


Avg daily turnover
231.5k (NZ$590k)
*Based on normalised profits


Gross div yld (%)
5.3
5.5
5.5
5.5



Appealing portfolio less exposed to economic cycle
VHP&nbsp;remains with a very appealing portfolio given its spread of&nbsp;healthcare&nbsp;assets, with many&nbsp; resilient to the traditional economic cycle, long WALT of 17.9 years, 99.5% occupancy. Only an average of 1.6% of the leases expire per&nbsp;annum&nbsp;over the next 10 years.&nbsp;VHP&nbsp;has been successful in adding value via&nbsp;brownfield&nbsp;developments, but this will be more challenging near term.
Vital&nbsp;Healthcare&nbsp;Property — upgraded from NEUTRAL to OUTPERFORM
VHP&nbsp;has strongly&nbsp;defensive&nbsp;portfolio characteristics and is well managed on the ground in NZ and Australia. It is relatively fully geared at ~35% versus a sector average of ~31% but this is offset by the portfolio qualities mentioned above.&nbsp;VHP&nbsp;also has a relatively low dividend pay-out ratio which is helpful. Sentiment towards manager&nbsp;NorthWest&nbsp;remains a risk factor. We have yet to change our forecasts or NZ$2.76 target price.
Better longer-term structure vs. added complexity
As per our&nbsp;VHP&nbsp;note dated 20 March 2020, we recommend&nbsp;that&nbsp;unitholders&nbsp;approve what is proposed regarding the change in corporate structure and ASX listing. The&nbsp;unitholder&nbsp;meeting is on 31 March 2020 and votes have to be received by 29 March 2020. Our view is centred on the belief that what is being created is a better longer-term structure, given it will potentially widen the appeal to Australian and other international investors.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022


Vital Healthcare Property Trust

Vital Healthcare: Upgrade to OUTPERFORM