VHP Vital Healthcare

[RTM]

https://www.nzherald.co.nz/business/...d=m6perg5kkhp2

For those interested.

"Progress was marked today on the $166 million expansion of Wellington’s largest private hospital.
Sue Channon, chief executive of Evolution Healthcare which operates Wakefield Hospital, said a topping-out ceremony was held when the new building’s structure reached its highest point.
Hawkins is working at the hospital between Rintoul St and Florence St, Newtown.

“Evolution’s $166m investment in redeveloping Wakefield Hospital has reached its highest point,” a company statement said today. "

Etc

[benbob]

Please enlighten me. NTA=$3.17 SP=$2.31 ... Why dont directors sell all the assets and wind up the company and give us all a 40% boost on our share price. Is the NTA possibly false?

[Sideshow Bob]

Please enlighten me. NTA=$3.17 SP=$2.31 ... Why dont directors sell all the assets and wind up the company and give us all a 40% boost on our share price. Is the NTA possibly false?

There is a number of companies on the NZX with NTA above their share price/market cap, especially the REITs. It does indeed beg the question, and in VHP's case their ATH is about $3.30 - so probably hardly ever been over its NTA.

Share price has fallen as interest rates have increased, as buyers are generally buy for divvies/yield - so they want a higher yield (even now gross yield is <5%).

There will be a methodology behind the valuation of assets (which I expect is all tangible, rather than a value of intangible assets) - and the question would be whether these values would be realisable in the market.

Following on from this, another question is the relatively poor return on assets? In terms of the old chestnut of "maximising shareholder value", winding the company up and selling assets above book value could be the way - can't recall it having been done with a larger company.

Of course, directors would be doing themselves out of a job, and also depended what larger shareholders wanted to do.

It is sometimes a bit of a trap sometimes - buying companies at lower than NTA. But typically that value is never truly realized.....at least to shareholders.....

[Rawz]

Its a bit like inception.

The property market is happy to value properties at a certain rental yield.
The share market is happy to value these reits at a certain dividend yield.

[Fortunecookie]

There is a number of companies on the NZX with NTA above their share price/market cap, especially the REITs. It does indeed beg the question, and in VHP's case their ATH is about $3.30 - so probably hardly ever been over its NTA.

Share price has fallen as interest rates have increased, as buyers are generally buy for divvies/yield - so they want a higher yield (even now gross yield is <5%).

There will be a methodology behind the valuation of assets (which I expect is all tangible, rather than a value of intangible assets) - and the question would be whether these values would be realisable in the market.

Following on from this, another question is the relatively poor return on assets? In terms of the old chestnut of "maximising shareholder value", winding the company up and selling assets above book value could be the way - can't recall it having been done with a larger company.

Of course, directors would be doing themselves out of a job, and also depended what larger shareholders wanted to do.

It is sometimes a bit of a trap sometimes - buying companies at lower than NTA. But typically that value is never truly realized.....at least to shareholders.....

I think you hit the nail on the head.

In addition to the regular dividend, how do you realise value over an above that. Yes they can continue to grow earnings but as you say the return on assets aren't great.
Take for example KPG, NTA is great so it is well secured. A few months ago I looked at their BTR project. Unit cost averaged around $750K and that was on land that they already owned.
Apply market rent, how do they intend to extract above average returns.

So there are few companies that are reits or some quasi form of reits.

On a side note, I do believe BTR is the way of the future.
There is tremendous benefit when there is one landlord or has majority ownership as opposed to multiple.
I can see reits taking this approach as relatively speaking, rent repayment from renters are alot safer compared to commercial.

[Snoopy]

Please enlighten me. NTA=$3.17 SP=$2.31 ... Why don't directors sell all the assets and wind up the company and give us all a 40% boost on our share price. Is the NTA possibly false?

Its a bit like inception.

The property market is happy to value properties at a certain rental yield.
The share market is happy to value these reits at a certain dividend yield.

I think this comment by Rawz is on the money. The current historical gross dividend yield for VHP, based on a share price of $2.31, is 4.949%. Now imagine what that dividend yield would drop to if the share price rose to its NTA. Actually no imagination is necessary. The answer is: $2.31/$3.17 x 4.949% = 3.606%.

As I write this, the best big bank interest rates on offer for a 5 year term deposit at ASB is 5.25%. So a higher return and more security than VHP. On that basis you could say that VHP, even at $2.31, is overvalued. And using the same measuring stick, VHP at $3.17 is simply 'pie in the sky'. While the tools used to value VHP at its asset backing are no doubt legitimate, the answer makes no sense for dividend investors.

The only explanation I can offer is that the market values medical company tenants highly and unlikely to go out of business just because the business cycle turns down. Hence the reason VHP shares are priced at a premium on market to other REITs (even if I am only talking about yield). I think for investment purposes the dividend yield record is a much better valuation metric than looking at net asset backing. I would almost go as far as to say, for REITs, net asset backing, which jumps up and down anyway on interest rate fluctuations, should be ignored.

SNOOPY

[Snoopy]

Anyone participating in the capital raise coming up? Not the most exciting company I know, but I have been a unit holder for 15 years and it has certainly weathered the various storms and continued to pay a regular dividend. Leasing to Medical providers seems a good place to be at the moment.

$2.80 - only a 6% discount and that after a large run up in the previous few months.

An ok investment so long as interest rates don't reverse direction and start rising.

A short excerpt from 'Taking Stock' 29th June 2023 by Fraser Hunter

--------------------------

Healthcare Property Sector

The property healthcare sector consists of just one company, Vital Healthcare Property Trust (VHP). VHP specialises in acquiring, developing, and managing high-quality, well-tenanted properties in the healthcare sector across New Zealand and Australia. The portfolio is diverse and consists of 47 properties including hospitals, out-patient facilities, aged care facilities, and research facilities.

Due to its needs-based nature, VHP has a high occupancy rate (98.4%) and longer lease terms (average expiry 17.2 years) than the rest of the sector. VHP has a strong history of delivering investor returns through steady growth in asset values and the ability to increase rents. While VHP's exposure to the healthcare sector positions it for continued earnings and dividend growth, its main risk lies in its valuation, as it trades at a higher P/E than the sector, has a lower rental yield, and relatively high gearing.

--------------------------

The bit in bold got me thinking.

If the value of an asset is the 'discounted value of future cashflows', and if the contracted values of those cashflows stretch out for 17 years (as opposed to 8 for a big box retail property owning company like Investore) does that mean VHP is more valuable for the same annual yield profile? The reason I am asking is that many property rental deals contain 'rights of renewal'. If you operate a large supermarket on a key site, then there is is good chance you will take up your 'right of renewal' despite that right of renewal not having to be signed up to for some years. So despite such cashflows being 'likely', does the fact that these renewal contracts are 'not signed' means these likely future cashflows are rated at zero for property company valuation purposes?

The reason I am asking is that this could (partly?) explain why VHP is a company higher rated (by that I mean the market bids it up to a lower yield) than the likes of IPL. You could argue that both supermarkets and medical centres represent businesses in which consumers spend because of 'need' rather than 'greed'. So I am really puzzled why the yield of IPL as a listed entity is so much better than that of VHP.

SNOOPY

[Snoopy]

Due to its needs-based nature, VHP has a high occupancy rate (98.4%) and longer lease terms (average expiry 17.2 years) than the rest of the sector.

--------------------------

The bit in bold got me thinking.

contain 'rights of renewal'. If you operate a large supermarket on a key site, then there is is good chance you will take up your 'right of renewal' despite that right of renewal not having to be signed up to for some years. So despite such cashflows being 'likely', does the fact that these renewal contracts are 'not signed' means these likely futIf the value of an asset is the 'discounted value of future cashflows', and if the contracted values of those cashflows stretch out for 17 years (as opposed to 8 for a big box retail property owning company like Investore) does that mean VHP is more valuable for the same annual yield profile? The reason I am asking is that many property rental dealsure cashflows are rated at zero for property company valuation purposes?

Vital have let it be known, in advance of their annual result release, that the 'capitalisation rate' for the company is now 5.06% for FY2023. This implies an annual divisor factor of:
1/(1-0.0506)= 1.0532, which equates to a multiplication factor of 0.9495

This means the earnings discount factor, moving out 'n' years in the future is 0.9495^n

Over FY2022, the operating profit, which includes interest expense already removed, in this case (i.e. this is EBT) was $56.5m. Let's assume tax is paid at a rate of 30%. Now let us assume operating profit grows by 2% per year. What is the discounted cashflow valuation of earnings both 8 and 16 years into the future?

Year	Operating EBT	Operating EAT	Discount Factor	PV OEAT	Sum Period to date
2023	$57.6m	$40.3m	1.0	$40.3m
2024	$58.8m	$41.1m	0.9495	$39.0m
2025	$59.9m	$41.9m	0.9015	$37.8m
2026	$61.1m	$42.8m	0.8560	$36.6m
2027	$62.3m	$43.6m	0.7717	$33.6m
2028	$63.6m	$44.5m	0.7327	$32.6m
2029	$64.9m	$45.4m	0.6957	$31.6m
2030	$66.2m	$46.3m	0.6606	$30.6m	$282.1m (after 8 years)
2031	$67.5m	$47.3m	0.6272	$29.7m
2032	$68.8m	$48.2m	0.5955	$28.7m
2033	$70.2m	$49.1m	0.5654	$27.8m
2034	$71.6m	$50.1m	0.5369	$26.9m
2035	$73.1m	$51.2m	0.5098	$26.1m
2036	$74.5m	$52.2m	0.4840	$25.3m
2037	$76.0m	$53.2m	0.4596	$24.4m
2038	$77.5m	$54.3m	0.4363	$23.7m	$494.7m (after 16 years)

This table is telling us that, using real world numbers, it makers quiet a difference whether your rental contracts run for 8 years or 16 years. The 16 year rent contract is worth: $494.7m / $282.1m = 1.75 times more. My gut feeling was that because those extended contract dates were so far out in the future that ratio would be much less. So my gut feeling was wrong, which was a good reason to really check out the numbers!

Does this explain why -in this time or rising capitalisation rates- the shrinkage of asset values at VHP of just 6.4% - was relatively modest?

SNOOPY

[Snoopy]

Does this explain why -in this time or rising capitalisation rates- the shrinkage of asset values at VHP of just 6.4% - was relatively modest?

Just been to a broker seminar presented by Aaron Hockly, who is the equivalent of the CEO if Vital Healthcare Property Trust (VHP), had any employees. (All the staff at VHP are employees of property manager Northwest, including the 19 or so based in Auckland and approximately double that number based in Melbourne). VHP is but one of five property investment arms managed by 'Northwest Healthcare Properties Management Limited', based in Canada. But VHP is the only one of these funds with a public listing, with the other four all majority controlled (70% stake) by the sovereign wealth fund of the Singaporean government. I managed to get a chat with Aaron after the seminar, so he was able to clear up a lot of my questions.

I was concerned that the rise in capitalisation rate that has been pre-announced to 5.06%, would be matched by an equivalent rise in discount rate. That in turn would see the present value of discounted cashflows of the future (that 17 year income stream) discounted to the extent that the value of VHP units might be significantly affected. Aaron was being coy, given the results of the company are to announced to the market on Thursday next week. But he said that the capitalization rate and the discount rate were not necessarily as closely coupled as that, as discount rates also needed to account for the quality of the lease agreements and what that meant for the surety of income going forwards.

Further to that he said that many of the 'cap and collar' CPI lease agreements, which limited CPI linked rent rises to well below the actual CPI rate of 7% that we are seeing, did have 'catch up clauses' where excess CPI rises could be carried through into future years. Failing that there were also 10 year reset clauses, where over that much longer period, rent that had fallen behind inflation could be 'made up', as that part of the rental agreement rolled over.

I asked about 'competition' from the other arms of Northwest in securing future development projects. Australia is pretty much on the doorstep of Singapore after all! Aaron said that VHP had first dibs on all New Zealand projects and aged car opportunities in both Australia and NZ. As far as Australia was concerned, Northwest arranged it so that new opportunities were offered first on a rotational basis to the five different property arms managed by Northwest. While superficially this sounds 'fair' (because you wouldn't want one property owning associated arm of Northwest bidding against another), in fact VHP did have a disadvantage because of the higher capitalisation rate hurdles that applied in Australia and New Zealand, when evaluating new opportunities. A Singaporean arm of Northwest might make a go of a project with a 4% yield on completion, where VHP needs around 6% to make an equivalent project viable.

According to Aaron, most of the acquisition opportunities for VHP have dried up. They have either already been sold to global long term asset owners, or the price that VHP might have to pay has become too high. That means that from now on, Vital will be undertaking new developments, which, initially at least, will involve more construction contract risk that has been typical of VHP in recent years. An investor asked if these new developments had further opportunities for yield improvement by 'building out' more lease-able space on current sites. Aaron's answer was a fairly definitive 'no', although he did add that where VHP had been able to purchase adjacent land to existing developments, that remained a possibility. I asked about public private partnerships in development of the 'health precincts' that VHP now favours. He said VHP had not gone the PPP way, although he did note the new birthing unit being built in Christchurch on the old Police site was the be fully tenanted by 'Health New Zealand'.

The biggest threat to VHP in the near term is rising interest rates, because costs are rising faster than any rent increases can cover. To that end, Vital had put some of their less desirable properties up for sale. Even in these tough times they had been able to sell assets at a 9% discount to book value, verses something like a 27% discount that it was possible to buy VHP shares at on market. Properties put up for sale had doubts about end of contract lease renewals. One instance being where a hospital had acquired land to develop a new facility that looked like it might 'replace' a building where an existing lease had just a few years until expiry.

The long term strategy for VHP management is to keep AFFO (Adjusted funds from operations) growing at a rate of 2-3% per year. That does not sound a lot in the current interest rate climate. But long term Aaron is convinced this policy will provide a satisfactory return for unit holders. Reassuringly, VHP is able to over-rule potential new project purchases that might benefit Northwest (because if the size of the property portfolio under management at VHP increases, then Northwest fees increase, tied to the value of assets being managed) but not VHP (because the yield available on some new rental contracts make them not viable for VHP, the property owner). Aaron said the NZ domiciled directors are there to ensure the NZ unit-holders interests are looked after in this regard.

It is unusual for an NZ based property company to have most of their assets in Australia. This obviously limits the NZ imputation credits that are able to be attached to dividends paid to NZ unit-holders. But Aaron seems adamant that the arrangement works well, because no 'extra' tax is deducted from the Australian income at source if it is brought back to NZ. This sounds a bit odd to me. Even though no extra tax is deducted when the money leaves Australia, that doesn't remove the liability to pay income tax on that money to the NZ government once it hits the bank account of an NZ domiciled entity. In practice I suspect any retained profits in Australia stay in Australia, to fund Australian developments. Aaron also made an off the cuff remark about some of the Australian assets being subject to NZ's FIF tax regime. I was shocked by that because generally Australian assets that produce taxable income in Australia are exempt from FIF. So maybe some of these 'Australian' assets are held my offshore companies in Singapore or Bermuda or something? Whatever, I guess VHP have done all the calculations to make sure the tax paid is optimized for VHP!

SNOOPY

discl: do not hold, but considering it.

[Sideshow Bob]

https://www.nzx.com/announcements/416066

Northwest Healthcare Properties Management Limited (Northwest), as manager of Vital Healthcare Property Trust (Vital), released its results for the 12 months ended 30 June 2023 (FY23) today.

Vital continues to have a market leading portfolio of high-quality, healthcare assets across Australia and New Zealand valued at NZ$3.4 billion with ~99% occupancy and a weighted average lease term (WALE) of 17 years to the leading healthcare operators for each country. Work undertaken during FY23 is expected to further enhance the quality and future earnings of the property portfolio for the benefit of Unit Holders.

FY23 highlights include:

1.Growth in Adjusted Funds From Operations (AFFO), which is a proxy for underlying cash earnings, of 8.1%. This includes the contribution of 5.3% net property income growth on a like-for-like, same property basis (3.6% on a like-for-like, same property, constant currency basis).
2.Commencement of a non-core asset divestment programme with ~NZ$155 million already transacted and a target of a further ~NZ$100m to be divested in FY24.
3.Continuation and replenishment of Vital’s committed development pipeline including commencement of construction of:
a. A$140 million RDX development on the Gold Coast.
b. NZ$43 million expansion of Ormiston Hospital in Auckland.
c. NZ$23 million expansion of Endoscopy Auckland.
d. A$64 million cancer centre at Macarthur Health Precinct,
Sydney (stage 1).
e. A$29 million mental health facility at Mount Eliza, Melbourne.
Note: all figures above other than Endoscopy Auckland include land.
4. Several significant ESG / sustainability achievements including being ranked second globally for healthcare real estate by GRESB.
5. Delivering to the distribution guidance of 9.75 cents per unit
(cpu).

Fund Manager, Aaron Hockly, says that Vital is part way through a process of further upgrading and enhancing its property portfolio, in-line with announcements made over FY23.

“This is primarily through the sale of non-core assets and the reinvestment of sales proceeds into developing new healthcare facilities in key healthcare precincts with strong sustainability characteristics. These enhancements are expected to support future earnings growth for Unit Holders.” says Hockly.

Macarthur Health Precinct in Campbelltown, Sydney is an example of a development where funds are being reinvested. The precinct is anticipated to comprise a three-stage development with stage one, a ~A$64m comprehensive cancer centre (costs includes land), currently underway (July-22 commencement) and due for completion in the second half of FY24. Stage two is expected to comprise a major medical office building and day surgery and due to be committed to in the next 12 – 18 months. Stage three is expected to be an ambulatory care facility to be progressed thereafter.

“Net property income growth in FY23 was a healthy 18.1% reflecting acquisitions, developments and rent reviews delivering a 3.6% increase on a same property, constant currency basis,” continues Hockly.

“Like many businesses, Vital has experienced the impacts of increasing interest costs contributing to rising debt costs in FY23. We have balanced this by prudently raising equity ahead of investing in new developments which contributed to AFFO per unit falling in FY23. We anticipate that our ongoing portfolio enhancements will support AFFO growth per unit in future periods.”

Outlook

Despite recent heightened market volatility, healthcare property remains a defensive asset class, underpinned by a high level of government support and non-discretionary spending. This has been demonstrated by recent sales in the sector notably in Australia.

Vital has A$180m of debt headroom which, in conjunction with asset sales, will fund its development pipeline and has no debt expiring until March 2025.

FY24 distribution guidance of at least 9.75 cpu has been provided.

Online-only Annual Report

As part of Northwest’s and Vital’s sustainability efforts, Trustees Executors Limited, as Vital’s supervisor, has agreed to waive the Trust Deed requirement for Northwest to print and post the FY23 Annual Report and FY24 Half Year Report and instead will post a summary report to those Unit Holders who have elected to receive a hard copy.

As usual, the full Annual Report and Half Year Report will be released to the NZX, made available on Vital’s website and emailed to Unit Holders who have provided an email address to Computershare. In addition, Unit Holders may request a hard copy be posted to them. Northwest will monitor Unit Holder feedback on this initiative over the next 12 months to determine, in consultation with the Supervisor, how to proceed with subsequent reports.

This initiative is expected to save over 250,000 pages of paper and divert 500kg of waste from landfill per annum, equivalent to a reduction in greenhouse gas emissions of 1,532.16kg CO2e.

Refer to the attached documents including Vital's FY23 Annual Report, Investor Presentation and Annual Report Summary for full details of Vital's results.