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Vital Healthcare annual profit falls 6.6% after $4.3m spend on Healthscope

Thursday 8th August 2019

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Vital Healthcare Property Trust’s annual net profit fell 6.6 percent after it spent $4.3 million evaluating a proposed purchase of Healthscope properties that most of its investors didn’t want to happen.

The manager, Canada-based NorthWest Healthcare Properties Real Estate Investment Trust, ultimately bowed to pressure on a deal that didn’t stack up financially and Vital didn’t proceed with the purchase.

Despite this, NorthWest still pocketed a 3.9 percent increase in fees while distributions to Vital’s unitholders rose 2.2 percent to 8.75 cents per unit.

NorthWest has now collected more than $125 million in gross fees from Vital since it bought the management rights in 2011 for $11.5 million.

Vital’s net profit fell to $93.4 million for the 12 months ended June from $100.1 million the previous year. NorthWest’s fees, both base and incentives, rose to $25.9 million from just below $25 million the previous year – NorthWest will be paid the $12.1 million incentive fees in Vital units. Finance costs also rose. 

NorthWest continues to say that Vital “agreed” to pursue the A$1.25 billion Healthscope opportunity jointly with its manager, even though Vital itself, being a trust, has no officers or directors and so isn’t capable of agreeing to anything.

It also talks about “Vital’s board of directors” when they are actually legally directors of Vital’s manager, a subsidiary of NorthWest.

The statement announcing the results says that deciding against Vital participating in the Healthscope transaction was “exceptionally difficult, but taking into account a broad range of considerations – including Vital’s investment objectives, the structure of the transaction, Vital’s prevailing cost of equity and market feedback.”

The transaction was done, as NorthWest says, at a 5 percent capitalisation rate when the weighted average cap rate of Vital’s portfolio at June 30 was 5.61 percent, down 15 basis points from a year earlier – the lower the cap rate, the higher the value.

Vital’s cost of capital is about 6 percent so buying something at a 5 percent cap rate – the actual rate would have been lower after costs – was never going to stack up as a sensible investment.

Vital’s existing portfolio performed well in the latest year with net property income rising 7.7 percent to $97.7 million and the value of the portfolio rose by $103.6 million to $1.8 billion.

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

NorthWest has committed Vital to $218 million worth of projects with a weighted average return on costs of about 6.1 percent.

Vital lent NorthWest $80.3 million last year which was used to pursue the Healthscope transaction. That loan was repaid after balance date, taking gearing under Vital’s banking covenants from 41.3 percent at June 30 down to 35.5 percent.

NorthWest says Vital has about $257 million headroom under its debt facilities.

Interim manager of the management company, Miles Wentworth, says in a statement that the trust started this year in a strong position.

“Vital’s investment thesis is backed by underlying long-term trends and we continue to see strong demographic and technological trends driving demand for healthcare services – particularly those delivered from quality healthcare infrastructure and my market-leading operators, like those of Vital’s portfolio,” Wentworth says.

In the current year, the manager will have “a strong focus on the delivery of our two major projects” at Wakefield Hospital in Wellington and Epworth Eastern in Melbourne.

Vital units are trading unchanged at $2.605 and are up about 19 percent from a year ago, about the same as the benchmark S&P/NZX 50 Index. The price of Vital units jumped from $2.14 in late April after NorthWest said Vital wouldn’t proceed with the Healthscope transaction.


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