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Vital's manager looking to invest more than $350 million

Friday 9th August 2019

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Vital Healthcare Property Trust’s manager is still looking for investment opportunities and believes the trust has more than $350 million of firepower.

Vital has $257 million of headroom on its existing banking facilities and its manager, Canada-based NorthWest Healthcare Property Real Estate Investment Trust, says it is looking at selling about $100 million of Vital’s properties.

In May, NorthWest bowed to investors' wishes and agreed that Vital wouldn’t participate in a deal to buy Australian health-related properties from Healthscope for A$1.25 billion – Vital’s share would have been A$625 billion.

Miles Wentworth, interim manager of the NorthWest subsidiary managing Vital, says it’s part of the manager’s core business to be looking at opportunities on Vital’s behalf.

“If something similar came up in the future, should we look at it? Absolutely,” Wentworth told BusinessDesk.

“It’s our core business. We should be looking at value-adding opportunities for our investors. Everything we do is looking to add value for our investors.”

The Healthscope properties were purchased at a capitalization rate of 5 percent and, taking into account costs, the rate for Vital would have been even lower, but its cost of capital is closer to 6 percent – as cap rates fall, values rise.

All told, the process of participating in the Healthscope process cost Vital $4.3 million in the year just gone plus $3.6 million the previous year, although those costs were reduced to $4.9 million by interest NorthWest paid on a related loan Vital provided.

“It’s called a cost of doing business,” says Wentworth, who only took on his current role after the decision to pull Vital out of the Healthscope deal. He is well-known to long-term investors, having managed the business when it was called Calan Healthcare Properties Trust for 10 years until 2006.

Vital’s manager is demonstrating that it can add value – in the year ended June, it has committed Vital to $218 million worth of projects with a weighted average return on costs of about 6.1 percent.

These projects include redeveloping Wakefield Hospital in Wellington and expanding the Epworth Eastern Hospital in Melbourne.

NorthWest and Vital have also jointly purchased land in North Adelaide next to a major tertiary hospital. Wentworth says developing that site should play out over the next five to 10 years.

The manager is also looking at opportunities to own properties used in providing aged care.

Wentworth stresses he won’t be looking at Vital investing in retirement villages per se. “We would only ever own just the real estate and just the care-related property,” so sale-and-lease-back deals might be possible.

But he sees a big opportunity in Australia where the major aged-care providers are currently grappling with a royal commission and the market is highly fragmented.  

Wentworth argues that Vital could be much more highly geared than it is currently.

NorthWest repaid an $80.3 million loan from Vital on Aug. 2 and that took gearing under Vital’s banking covenants from 41.3 percent at June 30 down to 35.5 percent.

“We’re in a defensive sector with very unique demand drivers attached to it and high-quality tenants,” he says.

The $1.8 billion portfolio is 99.4 percent occupied with a weighted average lease term of 18.1 years.

Vital’s trust deed, which measures debt differently from the banking covenant, allow maximum gearing of 50 percent.

Vital’s net profit fell 6.6 percent to $93.4 million for the 12 months ended June from $100.1 million the previous year. NorthWest is promising to maintain the coming year’s distribution at a minimum of 8.75 cents per unit, the amount of payout for the year just gone.

Vital units last traded at $2.62 and have gained about 23 percent in the past year.

The price of Vital units jumped from $2.12 on May 9, the day before NorthWest said Vital wouldn’t participate in the Healthscope transaction.


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