Q4 2026 Healthco Healthcare and Wellness Reit Earnings Call
Speaker #2: Thank you for standing by, and welcome to the Healthco Healthcare and Wellness REIT FY26 full-year results briefing. All participants are in a listen-only mode.
Speaker #2: There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, please press the star key, followed by the number 1 on your telephone keypad.
Speaker #2: I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Managing Director, Real Estate. Please go ahead.
Speaker #3: Good today's conference call. Joining me on the call today is Healthco Fund Manager Christian Soberg. Before we commence today's presentation, we want to acknowledge the traditional custodians of country throughout Australia.
Speaker #3: We celebrate their diverse culture and connections to land, sea, and community. We pay our respect to Elders, past and present, and extend that respect to all Aboriginal and Torres Strait Islander people.
Speaker #3: I'd like to begin on slide 6, which outlines our FY26 results. The key takeaways on this page are that the portfolio is performing as it should and that Healthco has a strong balance sheet.
Speaker #3: Financially, FFO are 4 cents per unit. This was impacted by the unlisted healthcare fund pausing distributions, as a result of the Healthscope situation, which I'll get to shortly.
Speaker #3: Underlying FFO, which reflects HCW's share of earnings in the unlisted healthcare fund, was 7.7 cents per unit. Operating performance was strong in FY26, with 100% rent collection, 99% occupancy, and NOI growth of more than 4%.
Speaker #3: HCW has a strong balance sheet, with $158 million of cash and undrawn debt as at June. Gearing of 29% is below our target gearing range.
Speaker #3: Also, now moving on to our update on the Healthscope hospital portfolio, which is clearly a subject matter of focus for everyone. Just as a reminder, HCW and the unlisted Healthcare Fund own 11 private hospitals in Sydney, Melbourne, Brisbane, and Perth, currently occupied and operated by Healthscope.
Speaker #3: These are high-quality healthcare infrastructure assets that cater for close to 400,000 patient episodes annually. The portfolio was independently valued at $1.35 billion in June, and we estimate that the replacement value is well in excess of $2 billion.
Speaker #3: We appreciate that all of you will be keen to understand how and when the broader situation will be resolved. The current situation is as follows: all hospitals are operating as normal, and 100% of the rent has been paid up to and including this month since the time of acquisition.
Speaker #3: The transition of The Mount in Perth to Bethesda is on track, with a new lease starting in October. This lease is guaranteed by the Western Australian State Government, who will also be providing financial and operational support to Bethesda.
Speaker #3: We have agreed terms with experienced Australian hospital operators for the remaining 10 assets. These lease arrangements provide for tenant diversification and for sustainable, long-term relationships with alternative operators.
Speaker #3: The pro forma NTA impact of the new lease arrangements is expected to be broadly neutral, based on independent valuations that take into account the new lease terms.
Speaker #3: HCW and UHF, together with our alternative operators, have presented a compelling proposal to the receiver that will provide for continuity of service and maintain jobs across all of our assets.
Speaker #3: Our conviction in the portfolio remains high, and we are confident that a path forward can be agreed upon soon, so that transition to the alternative operators can commence in earnest.
Speaker #3: Until such time as that is agreed, all of our legal rights, including termination and cross-default rights, remain in place. I'll now pass to Christian, who will take you through our results in more detail.
Speaker #4: Thank you, Sid. Good morning, everyone. Moving now to the portfolio overview on slide 10. Our portfolio is diversified across four key subsectors: hospitals, primary and specialty care, government and life sciences, and aged care.
Speaker #4: Hospitals represent around 65% of income. We continue to manage a high-quality and highly resilient portfolio of 21 assets, valued at $1.34 billion, with a long WALE of 10.6 years.
Speaker #4: Operationally, the portfolio continues to perform well. Occupancy is 99%, rent collection is 100%, and like-for-like NOI growth was 4.1% for the full year. Around 80% of income is CPI-linked, giving us strong income protection in an inflationary environment.
Speaker #4: Turning to slide 11 for more details on our subsectors. Beyond private hospitals, our portfolio also includes cancer care centers, aged care facilities, health hubs, and a nursing college.
Speaker #4: Our tenant base is anchored by high-quality government and national operators, who account for over 80% of our income. These include Estia, one of the largest aged care operators in Australia; MATA, one of Queensland's largest healthcare providers; and Queensland Health.
Speaker #4: On slide 12, we highlight the attractive metro locations of our assets. Ninety-seven percent of our portfolio is located in Sydney, Melbourne, Brisbane, and Perth. Our assets are located in areas with strong population growth and therefore benefit from continued strong demand for healthcare services.
Speaker #4: Moving on to our development pipeline, starting on page 13. We have a strong conviction in the value of our $500 million development pipeline in Sydney.
Speaker #4: That said, we will only seek to unlock our pipeline once the Healthscope situation has been resolved, and only once funding partners have been secured.
Speaker #4: Moving now to the financial results, starting with the earnings summary on page 15. HCW’s underlying portfolio earnings remained resilient throughout FY26. FFO of 4 cents per unit reflected a non-declaration of distributions from UHF, preserving balance sheet flexibility while progressing the Healthscope situation.
Speaker #4: On an underlying basis, FFO was 7.7 cents per unit, which includes HCW's share of UHF FFO. We have included underlying FFO to demonstrate HCW's earning potential on a look-through basis at a time when distributions are rarely impacted by cash retention in UHF.
Speaker #4: HCW did not declare a distribution in FY26 to preserve balance sheet flexibility while we continue to work through the Healthscope situation. Moving on to the balance sheet on page 16.
Speaker #4: We maintained a strong balance sheet throughout the year. NTA was $1.35 per unit as of June, with the 4-cent movement from December primarily reflecting 15 basis points of cap rate expansion.
Speaker #4: Seventy-four percent of the portfolio was independently valued, including all 11 hospitals operated by Healthscope across HCW and UHF. Turning now to capital management on page 17.
Speaker #4: Our capital management remained prudent, preserving liquidity and strategic flexibility. HCW completed $77 million of asset sales during the year and had $158 million of cash and undrawn debt as of June.
Speaker #4: We've extended our debt maturity out to December 2027. Gearing of 29% is below our target range, and we're compliant with all debt covenants. Finally, HCW is 81% hedged.
Speaker #4: Now turning to the FY27 outlook on page 19. The new lease at the Marant Private Hospital in Perth will commence in just over a month, and we are confident that the path for the remaining Healthscope hospitals in Sydney, Melbourne, and Brisbane will be agreed soon.
Speaker #4: Reflecting this progress, we've provided FY27 DPU guidance of 6 cents per unit, subject to the Healthscope situation being resolved. The distributions are underpinned by underlying FFO of 6.1 cents per unit and existing cash reserves.
Speaker #4: Strategically, we're focused on positioning HCW for sustainable earnings and distribution growth in the future, and narrowing HCW's trading discount to NTA. In closing, we'd like to thank our unitholders, our board, our tenant partners, and all other stakeholders for their continued support.
Speaker #4: I will now hand back to the operator for Q&A.
Speaker #1: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2.
Speaker #1: If you're on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Andrew Dodds with Jefferies. Please go ahead.
Speaker #5: Oh, good morning, Sid and Christian. Thanks for your time. I think you guys have previously spoken to a potential 10 to 15 percent reduction in asset values resulting from lease incentives to the new operators, but the comment today in the ASX announcement suggests you're not expecting any material change in NTA.
Speaker #5: So I was just hoping you could kind of explain what the change is here, or how this is working.
Speaker #4: Yeah, so in the half year, Andrew, what we said was that we expect the valuation impact of the new leases, based on constant cap rates, to be down between 10% to 15%.
Speaker #4: That's what we said at half year. As we now look at our valuations as of June, the amount valued on the basis of the new lease it has entered into with Bethesda, guaranteed by the WA State Government.
Speaker #4: And while we don't disclose individual UHF valuations, the valuation was consistent with the December value, with cap rate compression offsetting the impact of the new incentives.
Speaker #4: What the independent valuers also did at the full year was to value all the remaining 10 assets based on the lease agreements that we have agreed with the alternative operators.
Speaker #4: The overall valuation impact was neutral, Andrew, with cap rate compression offsetting the value of the incentive. And that's the basis upon which we've said that we expect NTA impact, on a pro forma basis, to be broadly neutral.
Speaker #5: Probably adding to that, Andrew, the transaction evidence of late has been really strong that the valuers can point to. So infrastructure like hospital and life sciences assets have recently traded in the 5 to 5.5 range.
Speaker #5: And of ticket sizes that are fairly significant and material. So it also gives investors confidence around the fundamental value of infrastructure, like facilities.
Speaker #3: Most.
Speaker #5: All right, great. Thank you. And then just on the bridge from FY26 to FY27 underlying FFO, the guidance just implies a, I guess, pretty material step down from 7.7 to 6.1 cents per share.
Speaker #5: So I was just hoping to get a better understanding of some of the moving parts within this bridge.
Speaker #4: Yeah, so the key component of that bridge, Andrew, relates to the low-cost swap in UHF, which expires at the end of FY26. So, that expiry of that swap is reflected in the underlying FFO guidance.
Speaker #4: And if that's the guidance, it reflects new hedging arrangements in the unlisted healthcare fund.
Speaker #5: All right, great. And then just finally for me, just on the divvy, can I just confirm if you expect the distribution to recommence in the first quarter?
Speaker #5: I think, historically, you've paid these quarterly. I guess I'm just wondering if the expectation is that this is how they'll be paid going forward.
Speaker #4: So the DPU guidance of 6 cents—that's for the full year FY27. The timing of the payments will depend on when the healthcare situation has been resolved for the remaining 10 assets.
Speaker #5: All right, thanks, guys. Appreciate it.
Speaker #1: Your next question comes from Liam Schofield with Morgan's. Please go ahead.
Speaker #6: Thanks for the presentation, guys. Just two quick questions. Can you talk about look-through gearing post-resolution? Is that the right level of gearing?
Speaker #6: And then secondly, just on the capacity to grow FFO in future years, some color around potential indexation under the revised leases?
Speaker #5: Yeah, so maybe I'll kick off and then hand over to Christian. Balance sheet gearing, we've stated at 29 percent, and gearing in the unlisted fund is at 43 percent.
Speaker #5: So our gearing levels, commensurate to each of those funds and those structures, is quite low, which gives us a lot of confidence around our underlying cash to put the guidance out on the distribution.
Speaker #5: I don't really want to make any forward-looking statements as to where gearing lands subsequent to the resolution of the Healthscope situation, but it's not a moderate change to where we're at today.
Speaker #5: And as Christian said, if the NTA holds, I think you can back-sell that.
Speaker #4: And then, in terms of the forward-looking outlook, Liam, we see FY27 as a reset base, in which we expect DPU and underlying FFO to grow, and we think that, over time, that underlying FFO and FFO in HEW should converge.
Speaker #6: Perfect. Thanks, guys.
Speaker #1: Your next question comes from David Pobacki with Macquarie Group. Please go ahead.
Speaker #7: Good morning, Sid, Christian, and team. Thanks for taking my questions. Just to follow up on what values are being assumed for the Healthscope portfolio, can you provide any color around the assumptions that they're making regarding face rent and incentives?
Speaker #4: Yeah, hi David. So, they've seen the new lease agreements. One key component that we can comment on in relation to those lease agreements is that face rents will remain unchanged.
Speaker #4: And more broadly, I think the cap rate compression that we refer to reflects improved tenant covenants and reflects sustainable rent structures going forward.
Speaker #7: On the UHF distributions to HCW that have been suspended for some time now, is there any likelihood of a catch-up on those distributions at some point once the Healthscope situation is resolved?
Speaker #5: It's certainly a possibility, David. So, following a resolution, several capital management initiatives, including special distributions, are up for consideration pending outcomes with the underlying assets.
Speaker #7: Yeah, and just the final question from me—just in terms of the broader Healthco experience at a high level—has it changed your approach, or the approach that you want to take, to tenant concentration risk or your exposure to the healthcare subsector?
Speaker #7: I know that you've noted that the alternate lease arrangements will provide increased tenant diversification, though.
Speaker #5: It's an interesting question, David, and there's always learning from every experience. We're certainly, alongside all of our investors, frustrated by the extent to which this situation has dragged on, and we're very focused on getting to an outcome.
Speaker #5: When we acquired the portfolio—perhaps I'll speak on the real estate fundamentals first—then we talked about the infrastructure-like qualities of the portfolio.
Speaker #5: You'll recall that the portfolio was acquired for approximately $1.2 billion. Today's book value, even net of the Healthscope experience, is in excess of that, which proves the resilience of the fundamental real estate.
Speaker #5: However, the fundamental value of the real estate certainly hasn't been reflected in unit price movements. For HCW unitholders, we need to assess exactly how we position the fund moving forward.
Speaker #5: As we said, currently on the table is a proposal with a consortium of diversified tenants before the lenders and the receivers for review and approval.
Speaker #5: It's an executable proposal, which does address some of the diversification concerns you've raised, but it is not a proposal that's been approved as yet.
Speaker #5: So, ultimately, we will make decisions in the best interests of all unit holders in HCW as we work through this situation over the next few weeks.
Speaker #7: Thanks, Sid. Thanks, Christian.
Speaker #1: Your next question comes from Lauren Berry with Morgan Stanley. Please go ahead.
Speaker #8: Hi, good morning guys. I'm just interested in UHF. Are there any concerns that that vehicle could be approaching covenant levels, given that it is quite high gearing?
Speaker #8: You've had the swap roll-off, and the tenants are not potential for higher incentives when the new tenants come on board.
Speaker #5: Thanks, Lauren. Gearing today is at 43 percent in that fund. It's well inside all of its covenants, and it's a fund that's well-equitized by significant global investors and institutional capital.
Speaker #5: We have no concerns around that vehicle being able to work through this situation, and we have great investor support with our institutional investors who are ultimately long-term investors that understand the fundamental nature of these assets.
Speaker #5: So that fund was always designed to have slightly higher gearing than the listed vehicles, as you can imagine, so it's got plenty of headroom.
Speaker #8: Yeah, the current ICR?
Speaker #5: The ICR at the unlisted fund is well within covenants, Lauren.
Speaker #8: Okay, all right. And then, second one for me: the new agreed leases you've got with replacement tenants, is there any agreed capex contribution to those assets as you transfer the lease?
Speaker #5: It's a combination of rent-free and cash incentives across the portfolio. But given where we're at on that journey at the moment, Lauren, I prefer not to go into specifics on that.
Speaker #8: All right. Thanks, guys.
Speaker #5: Thanks.
Speaker #1: Thank you. That concludes the question-and-answer session. I'll now hand back to Mr. Sharma for closing remarks.
Speaker #5: Thank you all for dialing in on what is a very busy day. Again, I want to say thank you to all of our loyal investors.
Speaker #5: Our board and our management team are working through this situation. Like everyone, we're keen on seeing a conclusion to this, and it's in the best interests of the healthcare system in Australia that the Healthscope situation is resolved in a timely manner.
