Vital's unique defensive qualities support high gearing: manager

Thursday 31st October 2019

Vital Healthcare Property Trust's gearing will rise to about 42 percent as a result of its debt-funded development projects but its manager says that isn't high for a vehicle of its type.

Vital's current gearing, or debt to total assets, fell to 35.3 percent after the manager, which is owned by Canada-based NorthWest Healthcare Properties Real Estate Investment Trust, repaid money it borrowed from Vital last year.

Vital's rising gearing comes as other listed property vehicles have been raising fresh equity to reduce theirs. High share or unit prices lessen the dilutive impact on existing shareholders when new equity is raised.

Goodman Property Trust recently raised $175 million, reducing its gearing below 20 percent. Kiwi Property Group has just raised $180 million from a placement and is seeking another $20 million from retail investors, reducing its gearing to 27.4 percent. It can accept another $10 million in over-subscriptions which will lower gearing further.

Both Kiwi and Goodman aim to keep gearing between 25 and 35 percent.

Miles Wentworth, acting chief executive of Vital's manager, told the annual meeting that the trust's defensive characteristics and the uses to which its debt is being put justify the higher gearing.

“Vital is invested exclusively into a sector with the unique defensive characteristics of an aging and growing population as well as technology generating more and more health solutions,” Wentworth said.

“Our portfolio has a weighted average lease term to expiry of 18.1 years and occupancy of 99.4 percent. These factors all contribute to an extremely high quality portfolio of assets with cashflows that can be reliably forecast over the long term,” he said.

“We therefore see the debt level as being prudent, noting it is a balance between having a lazy balance sheet and an over-geared one.”

Vital's 18.1 years weighted average lease term is the longest by far in the property sector and compares with Goodman's at more than five years and Kiwi's at 5.2 years.

The redevelopments of Vital's Epworth Hospital in Melbourne and Wakefield Hospital in Wellington are being financed by borrowings at 3 percent and have a contracted rental return of 6.1 percent, Wentworth told the meeting.

He outlined some planned longer-dated projects including Ormiston in South Auckland and Elizabeth Vale in Adelaide and said the manager will continue to advance these and associated feasibility studies.

“Active consideration is being given to capital recycling opportunities within the fund,” Wentworth said.

“This means that we are considering the sale of some smaller and lower value properties where value has been maximised. The funds released will be reinvested with a view to further enhancing the quality of the portfolio,” he said.

“We are actively looking at further opportunities in the aged care sector, an industry with a large scale property component and which shows many similar characteristics to our existing portfolio. While we consider there are strong synergies, any investment opportunities will be carefully and thoroughly evaluated against our value-adding assessment framework.”

Chair of the manager, Bernard Crotty, told the meeting it is exploring a foreign exempt listing on the ASX, given that about 75 percent of Vital's properties are in Australia.

“This is being considered in order to access deeper and broader pools of capital, drive our cost of equity lower and provide access to value-adding funding for future growth,” Crotty said.

“If the board decides to pursue this initiative, approval from unitholders will be required with a 75 percent majority required. Any vote would be expected to occur late in the first or second quarter of calendar 2020."

Crotty reaffirmed that Vital's 2020 annual distribution would be at least 8.75 cents per unit and the board will review this when it releases its first-half results in February.

Unitholders today overwhelmingly approved changes in the trust deed with 99.9 percent of those voting supporting the changes, which required 75 percent approval. NorthWest was prevented from voting the near 25 percent of units it owns.

The changes included removing the manager's right to sack independent directors and changing the manager's fee structure, reducing fee percentages as the assets grow, making explicit other fees and basing the manager's incentive fee on net rather than gross assets.

They were changed after last year's annual meeting at which angry investors accused NorthWest of treating Vital as its personal piggy bank.

Under the previous fee structure, NorthWest routinely charged a number of fees not specified in the trust deed including property management fees, rent review fees, acquisition fees, leasing fees, development management fees and project management fees on top of its base fees.

Since NorthWest bought the management contract in 2011 for $11.5 million, it has collected more than $120 million in gross fees.

New Zealand Shareholders' Association chair Tony Mitchell said his organisation thinks the new fee structure is still excessive. But he said the changes are positive and that NZSA would vote its proxies in favour.

“It's been a bit of a challenging ride for everyone to get here,” Mitchell said.

Vital units are trading at $2.655, down 1 percent from yesterday, but up almost 29 percent from a year ago, ahead of the benchmark S&P/NZX 50 Index's 25 percent annual gain.

(BusinessDesk)

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