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Vital Healthcare lifts 2018 earnings as expansion continues

Thursday 9th August 2018

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Vital Healthcare Property Trust saw adjusted earnings grow in 2018 as it continued to invest and expand throughout New Zealand and Australia.

The listed hospital owner and developer's adjusted funds from operations - the preferred measure of listed property investors - rose 4.5 percent to $49.5 million in the year ended June 30. The figures are adjusted for a one-off $13.8 million benefit in 2017 from a lease termination receipt.

The hospital investor has been expanding and diversifying its portfolio since it raised $160 million in a rights issue in 2016, and spent $194.7 million on acquisitions in the year. It bought four sites adjacent to its existing private hospitals in Australia in the year, for a total of A$9.6 million, so it can expand in future to meet forecast ongoing healthcare demand.

The company has committed to spending $112 million on development over the next four years, with plans to spend A$8.6 million by the end of the year on two hospital projects, and $4 million on building Wellington’s first radiation oncology centre at Bowen Hospital. 

“We start 2019 with Vital’s portfolio and financial position ready to withstand short term headwinds, particularly in Australia for hospital operators, balanced by a relatively positive outlook in New Zealand," said David Carr, chief executive of manager NorthWest Healthcare Properties Management.

"Vital’s investment thesis is backed by underlying long-term trends. We continue to see, and believe, in the strong demographic and technological trends driving demand for healthcare services – especially those delivered from quality healthcare infrastructure and by market leading operators, like those in Vital’s portfolio."

Vital Healthcare's net profit dropped to $100 million, from $217.6 million a year earlier. Net property income rose 1.1 percent in the year to $90.6 million, and the biggest impact on net profit was a lower revaluation gain on investment property, at $85.5 million in 2018 from $168.5 million a year earlier. Its 42 properties - 12 in New Zealand and 30 in Australia - are at a 99.3 percent occupancy rate with a weighted average lease term of 18.2 years.

Expenses also grew, with management fees rising to $11.9 million from $8 million in 2017, and incentive fees of $13.1 million from $12.3 million, which Vital said in a statement was as a result of revaluation gains. The value of Vital's property portfolio rose to $1.73 billion as at June 30, from $1.38 billion a year earlier.

Vital's bank debt has expanded to $668.7 million from $401.9 million a year earlier. It renewed two tranches of debt in June, putting its weighted average debt maturity at 3.1 years, and has $114 million of headroom from $64 million a year earlier.

In early May, Vital's manager NorthWest Healthcare Properties bought a 10.1 percent interest in ASX-listed Healthscope, Australia’s second-largest private hospital operator, acquiring 176.1 million shares through a derivative transaction at A$2.39 per share. At that time, NWH said it and Vital "currently intend to pursue any potential Healthscope real estate acquisition jointly, with scope to introduce other capital partners as appropriate."

Healthscope, which owns 45 hospitals in Australia, was then entertaining two takeover offers - one from Brookfield Asset Management and another from private equity firm BGH and Australian Super - but rejected both later that month and gave an earnings downgrade. Since then, Healthscope has sold its Asian pathology businesses for A$279 million. It is set to give a full earnings update on August 21st.

Vital said today it has incurred $3.6 million in strategic transaction costs towards acquiring that Healthscope interest, which it said was a "generational opportunity to jointly acquire a sizeable, quality portfolio of Australian private hospital real estate assets concentrated in large metropolitan centres."

In a presentation accompanying today's results, Vital said Healthscope's underlying real estate "is (and has always been) of significant strategic interest", and the 10 percent stake gives it influence and flexibility. Vital's next steps are to "monitor situation, develop strategic and tactical plan to execute at appropriate time", it said.

The board will pay a second-quarter distribution of 2.1875 cents per unit on Sept. 20, pushing the annual dividend to 8.5625 cents per unit, ahead of the 8.5 cents guidance. It said the 2019 dividend will total 8.75 cents per.

Vital units dipped 0.5 percent to $2.145, and have declined 2.5 percent this year.


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