Thank you for standing by, and welcome to the HealthCo Healthcare & Wellness REIT FY 2024 full year results briefing. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital, Head of Real Estate. Please go ahead.
Good morning, everyone, and thank you for attending today's conference call. Before we commence today's presentation, we want to acknowledge the traditional custodians of country throughout Australia. We celebrate their diverse culture and connections to land, sea, and community, and we pay our respects to elders, past, present, and emerging, and extend that respect to all other Aboriginal and Torres Strait Islander peoples. As many of you know, that have followed HealthCo's journey since IPO, FY 2024 was a transformative year for the group. Clearly, we are immensely proud of the operational results that HealthCo has delivered, while acknowledging the unit price performance has been underwhelming. The operating and earnings performance through FY 2024 and continuing growth outlook reflect the critical infrastructure-like characteristics of HealthCo assets.
Ultimately, this asset class is supported by megatrends of a growing population, an aging population, and requirement for more investment to meet the needs of the broader community. Irrespective of the short-term debate about operator costs and revenue from private health insurance funding, the private hospital sector remains undeniably integral to the provision of healthcare services for the Australian population. It provides a critical support function to the public system, which itself is consistently operating at above capacity with long waiting lists for care. Our portfolio of high-quality private hospitals and critical healthcare infrastructure represents irreplaceable real estate, which continues to outperform traditional real estate subsectors. This outperformance underscores our conviction in the asset class and reinforces our decision to continue deploying capital into HealthCo's value accretive development pipeline.
FY 2025 will be another busy year in terms of portfolio enhancement and development pipeline activity, which we will touch on later. With those overview, comments, and positive outlook, I'll now pass over to Christian, who will provide further detail on the operating highlights for FY 2024, and an update on HealthCo's strong financial results for the period.
Thank you, Sid, and good morning, everyone. Let's turn to page four for the highlights for the year. Financially, we delivered 16% earnings growth, FFO of 8 cents per unit, and DPU of 8 cents were consistent with guidance. Our balance sheet remains strong, with gearing of 32.5%. Operationally, we continued to collect 100% of our rent. In terms of growth, we established the Unlisted Healthcare Fund together with 4 global institutional investors. We have completed around AUD 200 million of asset sales at attractive pricing, with proceeds reinvested into our accretive development pipeline and the AUD 50 million units buyback program. Let's turn to page 6 for an update on Healthscope, Australia's second-largest private hospital operator.
While there's been a lot of debate and news flow about the broader private healthcare sector, I want to highlight that our private hospital portfolio represents critical healthcare infrastructure and that we are well-placed as a landlord. Our hospitals provide high-acuity services, including intensive care units and emergency departments. They are located in metro locations in the four largest state capitals in the country and managed 373,000 patient episodes in calendar year 2023. They are critical to the delivery of healthcare services in Australia and cannot be replaced. Importantly, from a landlord perspective, Healthscope is paying all rent in full and on time, while HealthCo remains in a strong legal position. Let's now turn to page eight for more detail on our asset portfolio. HealthCo's high-quality AUD 1.6 billion portfolio underpins our strong earnings growth.
The portfolio provides high income security with 100% rent collection and long leasing—long lease expiry of over 12 years. Our portfolio also provides inflation protection, with 81% of our leases being CPI linked. So the investment fundamentals are attractive and our portfolio is infrastructure-like in character. Let's turn to page nine to explain what I mean by that. Our assets provide critical and high-acuity healthcare services. One example is Knox in Melbourne, one of the largest tertiary hospitals in Victoria, with over 330 beds. It offers a full range of complex surgical services, including a 24-hour emergency department. Importantly, patient volumes have continued to grow following the completion of our significant brownfield expansion project. On page 10, we highlight the attractive metro locations of our assets.
93% of our portfolio is located in metro areas in the four largest state capitals: Sydney, Melbourne, Brisbane, and Perth. Our assets are located in fast-growing areas, like The George in Camden, which is the fastest growing LGA in Australia. Let's move to page 11 for an update on the unlisted healthcare fund, which we established in the first half of FY 2024. The unlisted fund's investing strategy is complementary to that of HCW, and provides HCW with exposure to higher total return opportunities. The fact that we partnered with four global institutional investors highlights the broader attraction of healthcare real estate as an asset class. In FY 2024, the fund completed brownfield developments at Knox and Nepean at funding rates of up to 7.5% cash yield on cost.
The Unlisted Healthcare Fund is seeking to grow further in FY 2025 and beyond, and is well-placed to act as a funding partner for HealthCo's broader development pipeline. Moving on to page 12 for an update on HealthCo's asset recycling program. We have sold AUD 195 million of assets since the Healthscope transaction last year. We have continued to redeploy proceeds into our accretive development pipeline while maintaining a strong balance sheet. Turning now to HealthCo's sustainability program on page 13. We have continued to build on the foundation work of HMC Capital's wider sustainability framework in support of our objective to create healthy communities. Throughout FY 2024, in line with our Net Zero Energy Roadmap, we achieved a 30% reduction in Scope 1 and 2 carbon emissions. This is largely associated with our smart energy management system rollout and our ongoing investment in solar infrastructure.
Beyond those asset-based initiatives, HealthCo is also uniquely placed to deliver social impact in the community through our investment in healthcare infrastructure, as well as facilitating access to essential health services in the community. We are proud of the achievements we have made to date, and are well-placed to continue progress on our sustainability strategy at HealthCo. Moving on to developments, starting on page 15. Developments form an important part of HealthCo's growth strategy. We have a strong track record with AUD 300 million of projects completed since the IPO. These projects have delivered great facilities for our tenant partners and accretive returns for our unitholders with cash yield on cost of up to 7.5%. Now turning to page 16, where I'll provide an overview of the development pipeline. We have an exciting development pipeline of over AUD 500 million.
This pipeline is comprised of HealthCo portfolio projects in the near term, and Camden and Rouse Hill in the medium term. These projects will deliver attractive returns with a target yield on cost of 6%-7%. Importantly, we will engage with the Unlisted Healthcare Fund to act as a funding partner to unlock these opportunities. So as you can see, our portfolio is performing well. Importantly, HealthCo is well placed to continue both its strong operating performance and strong earnings growth trajectory. Moving now to the financial results, starting with the earnings summary on page 18. HealthCo delivered a strong financial result for FY 2024, with 16% earnings growth and a 100% FFO covered distribution. FFO of AUD 0.08 per unit and DPU of AUD 0.08 were both consistent with guidance, and represents a strong overall financial result for our unitholders.
HealthCo's balance sheet remains strong, as you can see on page 19. NTA of AUD 1.64 per unit was consistent with the half year results, while HealthCo's valuation movement to June was flat on the net basis. Both these metrics reflect the infrastructure-like characteristics of our portfolio. Now, turning to capital management on page 20. Gearing of 32.5% is at the lower end of our target gearing range, while we were 78% hedged as at June. We will remain disciplined in terms of how we deploy capital. So now, turning to our guidance for FY 2025 on page 22. We are targeting 5% earnings growth in FY 2025. This means that we're expecting FFO of AUD 0.084 per unit and DPU of AUD 0.084. I'll now hand you back to Sid for concluding remarks.
Thank you, Christian. We believe today's presentation once again demonstrates that HealthCo is well positioned to continue to deliver attractive risk-adjusted returns for investors. Our priority in FY 2025 is to deliver on the strong FFO per unit guidance that Christian has spoken to. Strategically, we are focused on addressing the unit price discount to NTA, and we will continue with proactive capital management initiatives if the discount persists. I will now hand over to the operator for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're using a speakerphone, please pick up the handset to ask your question. Your first question comes from Lauren Berry, from Morgan Stanley. Please go ahead.
Hi, good morning, guys. Just wondering on the capital recycling you flagged in your outlook that you're looking to continue the program. Is there any sense of how many assets or what quantum of assets you might be looking to divest?
Hi, Lauren. Thanks for the question. So we've gotten through the bulk of the AUD 200 million target that we set ourselves last year. We're not gonna place any target that's forward-looking around asset recycling. But suffice to say that if you have a look at slide 12 of our asset recycling program, we'll be focused on being commercially rational and look to asset recycle and as, as and when appropriate, to redeploy into our development pipeline.
Any particular asset classes that you might be looking to downweight?
We have always said that we're comfortable with our diverse portfolio composition, and at any given moment in an economic cycle, we may upweight or downweight particular subsectors. So no, I wouldn't want to give you any color as to which subsectors.
Okay, sure. Six months ago, you were talking about your development pipeline was around the AUD 800 million mark. At the moment, you've flagged AUD 540 million. Could you talk about the difference in size there, please?
Yeah. So Lauren, the main driver of that is some of the development pipeline that's already been spent. But I'd also ask you to have a look closely as to the explanation provided. The previous pipeline was an as-complete value, whereas this is a capital to-be-deployed value.
Right. So, is the implication there that there is potentially AUD 260 million of profits that could come out of that pipeline?
That's an implication you could draw. Yeah, but I'm happy to share with you the bridge of the development pipeline that's already been executed upon, and then we could provide you with some color on our one-on-one as to what that delta is.
Okay, sure. Thank you. And, final one from me. Just your operating cashflow, even if you include the distribution from the unlisted fund, is quite a bit lower than your FFO that you've reported today. Are you able to talk about the reconciliation?
As you may recall, Lauren, when we did the Healthscope transaction, as part of constructing that deal, we provided Healthscope with two years of half rent. That's the primary delta between the FFO and the cash that you would be seeing.
There's about a AUD 30 million difference just at the balance sheet line. Does that really account for the incentive?
Just on that, Lauren, as well, there is, there's also a deferred distribution from the unlisted fund that we have subsequently received, so that's around AUD 4 million. And then there are additional incentives across the portfolio as well. But I think the important point to note further to Sid's comment is that we expect cashflow conversion to continue to improve as we go forward with the Healthscope incentives for the HCW balance sheet hospitals running off in FY 2025, and we also got the rent incentive with Camden as well, running off in FY 2025. So overall, we'll see cashflow conversion continuing to improve for HCW.
Great. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from David Pobucky from Macquarie Group. Please go ahead.
Morning, Sid, Christian, Andrew. Congratulations on the result. Just the first one, in terms of the buyback, you mentioned that you might consider directing a greater share of asset sale proceeds to increasing the on-market buyback. Do you mean increasing beyond the AUD 50 million or just accelerating it?
Hi, David, it's Christian. So as we've said and Sid said, we're looking at ways in which we can deploy capital in an accretive manner. And as we stand today, we were looking to recommence the buyback at current levels as unit price is today.
Okay. Thank you, Christian. In terms of the hedge book, it rolls off materially from June 2025 to June 2026. Is there any kind of thinking about managing that between now and then, please?
Yeah, you're right. You're right about that, David. I mean, in terms of our hedging policy, we're looking to have our debt over 50% hedged. The swaps we have in place are rolling off over the next three years. I think if you take a forward-looking view on interest rates, that could well provide a tailwind for earnings going forward. And as a note, if our cost of debt goes down by 25 basis points, that will improve earnings by around AUD 0.002 per unit.
Thank you. That's clear. Just one final one from me. The EBITDA cash rent coverage for Healthscope of over three times, does that include the initial concession that you gave them, or does it exclude it?
That's on a cash basis, David. That's on a cash basis. But I think, I think it's important.
Sorry, sorry, go ahead.
No, that's fine.
All right. Thanks, Sid. I appreciate it. Good luck for the rest of the year.
Thanks, David.
Thank you. Once again, if you wish to ask a question, please press star one and wait for your name to be announced. Your next question comes from Andy MacFarlane from Bell Potter. Please go ahead.
Good morning, guys. Look, just a couple from me. Just wondering if you can just give us a little bit more color on the bridge and kind of what's driving the 5% EPS growth for FY 2025.
Yeah, so hi, Andy, it's Christian. So it's continued, contracted, rental escalations across the portfolio and also full impact from developments that completed in FY 2024.
Understood. I guess just one follow-up for me, just around, you know, Healthscope, obviously appreciate the detail in the pack today, but just wondering, you know, what the latest is from recent conversations with them and, you know, what the status is of the debt renegotiation, to the extent you can comment.
Andy, wouldn't want to comment on Healthscope's negotiations with their lenders, but suffice to say that we've had constructive dialogue with them. We support them in terms of their discussions with private health insurers, and they've been honoring all of the terms of their lease agreements with us, and there has been no change to the contractual agreements we set in place when we undertook the transaction.
Thanks, Sid.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Sharma for closing remarks.
Thank you all, and thank you all for the interest and time, dialing in today. In closing, we'd like to thank our shareholders, as well as the entire HMC Capital team, our HealthCo board, and our tenant partners for their contribution to this result. We remain steadfast and focused on not only executing upon our, operating, guidance that we've provided, but also closing the NTA gap, as much as we can through our control. Look forward to catching up with you over the next few days. Thank you.
Thank you. That does conclude our conference for today.