I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Managing Director, Real Estate. Please go ahead.
Good morning, everyone, and thank you all for attending today's conference call on what we believe is a very busy day. Before we commence today's presentation, we want to acknowledge the traditional custodians of country throughout Australia. We celebrate the 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 Aboriginal and Torres Strait Islander peoples today. Let's begin on slide five. As many of you that have followed the journey know, we established HealthCo Healthcare and Wellness REIT in 2021. It was established to provide listed investors with exposure to a diversified portfolio underpinned by attractive megatrends targeting stable, growing distributions and long-term capital growth. HealthCo today is the owner of some of the country's largest and most prominent healthcare real estate assets with a high-quality AUD 1.6 billion portfolio.
Our portfolio of private hospitals and critical infrastructure represents irreplaceable real estate. The powerful megatrends driving this sector underscore our conviction in the asset class. From an earnings perspective, we have always delivered what we set out to deliver since IPO. Every FFO per unit guidance has historically been met, and we remain on track to deliver FFO per unit growth at a CAGR of 11% per unit—sorry, 11% per annum since IPO. Financially, for this period, we delivered 5% earnings growth compared to the first half of FY2024. FFO of AUD 0.042 per unit and DPU of AUD 0.04 were consistent with guidance. Our balance sheet remained strong with gearing at 32.4%. Operationally, we have once again achieved 100% cash collection. From a capital management perspective, we have continued initiatives including the unit buyback program and asset sales to ensure that we maintain a conservative balance sheet.
I'll move on to slide six. Now, many of you today will be interested in Healthscope, which represents 59% of gross earnings on a look-through basis for HCW. Let's go back and provide some broader context. In 2023, HCW and the Unlisted Healthcare Fund acquired 11 Healthscope hospitals for AUD 1.2 billion. As of December 2024, these facilities were independently valued at AUD 1.5 billion. The significant valuation uplift reflects income growth, development CapEx, and the essential nature of these facilities. Healthscope continues to be compliant with its lease terms, and the hospitals continue to provide critical hospital services to patients in the four largest state capitals of Australia. We acknowledge the recent increased market speculation around Healthscope , including the unit price volatility and impacts it has had on HCW unit holders. In our view, the market speculation will continue until a sustainable solution which underpins continuity of hospital services is found.
As many of you know that have followed the story since day one, HCW and UHF provided significant rental support when we acquired these assets. We have made it clear that no additional rental support beyond the existing agreements will be provided to Healthscope . As per our earlier disclosures, if Healthscope were to breach its lease obligations, HCW, as the landlord, has rights to replace Healthscope as operator of these facilities. HCW and the Unlisted Healthcare Fund have recently been approached by capable and qualified parties to potentially tenant the 11 hospitals that we own. This includes an approach by a consortium led by HMC Capital's Private Equity Division. We understand that HMC is in discussions with a broad group of key stakeholders regarding potential options.
HCW will consider meaningful, executable proposals that maximize unit holder value and ensure that these hospitals continue to serve the Australian community that relies on them. I will now hand over to Christian for a portfolio overview.
Thank you, Sid, and good morning, everyone. Let's turn to page eight for more detail on our asset portfolio. Our high-quality portfolio is diversified across hospitals, primary and specialty care, aged care, and government and life sciences. Some of our assets are highlighted on this page, including Knox, one of the largest high-acuity private hospitals in Melbourne, and Erina, one of the largest aged care facilities in New South Wales. Let's turn to page nine for the key portfolio metrics. HCW continued to deliver on all key strategic and operating metrics this half. From an investment perspective, our portfolio continues to provide both income growth and security. Comparable NOI growth was 3.7% for the half-year period, with 79% of our leases CPI-linked. We also have a long lease expiry profile with a WAL of 11.6 years.
HCW's income security is underpinned by operational excellence, with cash rent collection again at 100%. On page 10, we highlight the attractive metro locations of our assets. 96% of our portfolio is located in metro areas in the four largest state capitals: Sydney, Melbourne, Brisbane, and Perth. One callout on this page is our four private hospitals in Western Sydney. This is an area which continues to benefit from significant population growth and therefore strong demand for hospital services. Turning now to the Healthcare Sustainability Program on page 11, we have continued to build on the foundation work of HMC Capital's Wider Sustainability Framework and HCW's assets, which provide Australians with access to essential health services. On environmental initiatives, we are on track to have solar installed at 65% of our assets where we have operational control. Moving on to developments, starting on page 13.
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 unit holders, with cash yield on cost of up to 7.5%. Now turning to page 14, where I'll provide an update on our development pipeline. The current and future development pipeline stands at over AUD 500 million. In the near term, the brownfield expansion of the Mount Hospital in Perth is on track for completion by June. This development is generating a cash yield on cost of 7.5%. In the medium term, we will seek to engage with the Unlisted Healthcare Fund to firm up our plans for the next stages of our Camden precinct and Rouse Hill in FY26 and beyond.
Moving now to the financial results, starting with the earnings summary on page 16. HealthCo delivered a strong financial result for the half-year with 5% earnings growth and a 100% FFO covered distribution. FFO of AUD 0.042 per unit and DPU of AUD 0.042 were consistent with guidance and represent a strong overall financial result for our unit holders. HealthCo's balance sheet remained strong, as you can see on page 17. Our asset valuations were stable as of December 2024. We recorded a 0.8% gross increase on the June 2024 valuations. Strong income growth continued to support asset values despite a modest easing in cap rates. Turning to capital management on page 18, the asset recycling program continued during the first half with AUD 47 million of asset sales. Gearing of 32.4% continues to be at the lower end of our target range, and our hedging remains high at 85%.
We will remain disciplined in terms of how we deploy capital. Our guidance for fiscal year 2025 is on page 20. We are pleased to reaffirm guidance for fiscal year 2025: FFO per unit of AUD 0.084 and DPU of AUD 0.084. I will now hand you back to Sid for concluding remarks.
Thank you, Christian. Today's presentation highlights that HealthCo continues to deliver what it sets out to deliver. Clearly, on the immediate horizon, there are a number of options being explored by various parties around Healthscope , which represents 59% of HCW's income. As this process plays out, HCW unit holders can be assured that the HCW management team remains focused on ensuring continuity of service across the Healthscope hospital portfolio and that we will continue to protect the long-term value for HCW unit holders. In closing, we would like to thank the board and our unit holders for their ongoing support, and I'll now hand back 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 on a speakerphone, please pick up the handset to ask your question. Your first question comes from Andy MacFarlane from Bell Potter. Please go ahead.
Morning, guys. A couple of questions for me. Just firstly, in regards to HSO, just wondering if you can give a little bit of color just around the critical dates that are ahead and therefore, I guess, what that is in terms of relating to HSO and therefore kind of what it means for HCW as well.
Andy, what we've given you on slide six is all we're prepared to provide at the moment. All I'd say to give you a bit more color is the situation will need to come to a head sooner than later.
Okay, understood. Thanks, Sid. Just in terms of the childcare assets, just after a little bit of color, I see you've sold AUD 47 million worth during the period. Just interested in what kind of pricing was achieved versus book and what the timing of those disposals were.
Yeah, morning, Andy. It's Christian here. Look, we like the sector, but currently we've seen better returns in other target subsectors. We've sold those assets in the first half at around 5% discount to book value.
The average yield was just shy of 5.5%.
Thank you. The timing of those to settle?
They're all done in the period.
All done.
Yeah.
Cool. Ballarat, you've called out that you have coming up.
Yes, we're considering the sale of Ballarat. We're pretty well advanced on it. All else being equal, it should settle this half.
Okay. Cool. Thank you, guys. Just one other question for me, just in terms of development. Just wondering how much is still to be spent at the Mount and then kind of looking forwards what you're expecting in terms of starts and kind of dollar quantum and timing around that.
Yeah, there's not much left to be spent there, Andy. It's about AUD 2 million. For those that are out in Perth, the Mount sits on a really important parcel of land overlooking the city. The refurbishment, which has been a long time overdue, means the facility is now a state-of-the-art facility. It's coming up right to the tail end of the project. Yeah, we're very excited about kind of the ongoing outlook of that facility moving forward.
Beyond the Mount for the rest of the pipeline?
Mate, that's it for now. Obviously, we've still got future developments in the pipeline, but nothing committed to. Given we've got the share buyback on and a couple of other things, we're just managing our development rollout while this situation remains out there.
Understood. Thanks, Sid.
Thank you. Your next question comes from Solomon Zhang from JP Morgan. Please go ahead.
Morning, Sid and Christian. Thanks for your time. Two questions from me. I guess the first one is just around the messaging and turnaround of Healthscope . It just seems that profitability just hasn't turned around as quickly as hoped. Just hoping for a little bit of color in terms of the drivers of this. Can you allude to whether it's volumes? Is it wage pressure? What are the actual pressure points that you are observing at a very high level?
Yeah, thanks, Solomon. What we'd say there is the pressures around private health insurance and wage costs are well documented in the industry. What we'd say around the Healthscope situation specifically is that volumes are up, VMO retention is high, operational performance is strong. What needs to be rectified at HSO is the capital structure.
Yeah, fair enough. You previously disclosed an EBITDA rent coverage ratio of north of three times. That included the 50% incentive. You have not included in this deck. I am just wondering what that is today and has it improved given the ramp-up of those development completions or sort of stayed flat just any color?
We're still awaiting audited financial statements for the last period from the operator, so I can't comment on the precise numbers. What I'd say is we've still got some rent freeze to roll off between April and September. If we look at the volumes, if we look at the traffic through these facilities, the underlying operational performance of these facilities continues to be in line with what we would have expected based on the information that we have.
Right. So broadly speaking, the EBITDA is sort of trending positively, but it's more the interest line.
I think that's a good read-through, Solomon. What I'd say is you can have a look at some other comps in the market that provide a bit more transparent public disclosure around operational performance. There are some positive trends in the sector. Certainly, from what we have heard, private health insurers have come to the party and the table as well with increased funding.
Thanks, Sid.
Thanks, Solomon.
Thank you. Your next question comes from David Pobucky from Macquarie Group. Please go ahead.
Good morning, Sid and Christian. Thanks for taking my questions. Just the first one around the buyback. You've quoted you're 35% of the way through it. Would you mind just talking to the pace of the buyback in the context of where your stock is trading relative to NTA? I mean, I'm assuming you want to ensure an appropriate gearing level, or do you have an intention to pick up the pace?
David, obviously, in the blackout period, we had to turn the buyback off because that is how the regulations work. What we would say is we have done as much as we can under the regulations on the buyback, and we will keep monitoring it now. If it makes sense from a unit price perspective, we are considering recommencement.
Thank you. Can you just remind me if it's in the guidance that you quoted or not?
We have reaffirmed guidance today of AUD 0.084 per unit.
Okay. Just one question on HealthCo, if I may. You mentioned HealthCo continues to be compliant with lease terms, so I'm assuming that means they continue to pay their rents on time and in full. Have you spoken to them about their ability to cover their rents once incentives run off?
We have ongoing discussions with all of our tenants, including Healthscope . We expect that the rent will be paid as and when the rent free runs off. In the event that the contractual obligations of Healthscope are not met, we will exercise the rights that we have under our leases.
Okay. Thank you, Sid.
Thank you. Your next question comes from Callum Bramah from Macquarie. Please go ahead.
Morning, guys. Thanks for taking the question. I noticed you obviously got a subtle piece there around guidance that it's based on the continued performance of HCW's portfolio. Can you just clarify that? It's kind of an obvious statement, but why you've made that?
Just for transparency and full disclosure, it's pretty clear. Yeah, you're right. It is an obvious statement, but the guidance is predicated on the continued payment of rent. The reason we've called it out specifically, Callum, is we want to have complete flexibility around this point to make sure that we maximize unit holder returns at the right point, and it's not perceived as something that could work against us. Everything we know at the moment means guidance is reaffirmed, and we hope we plan on delivering the AUD 0.084 per unit to all our unit holders.
Is it fair to say your base assumption is that Healthscope keeps operating as is and continues to pay its rent?
Twelve months ago, eighteen months ago, HCW had a major tenant called Genesis Care that over in America went through Chapter 11 bankruptcy, and they did not miss a single day of rent. That is our assumption for Healthscope . We have a contractual lease and a right, and we expect performance of that right. We will consider alternative proposals in the event that those contractual rights are not met.
Can you just clarify for me? Maybe I got this wrong, but I was under the impression that the rent free was for 24 months post-March 2023. I think if I heard you correctly just before, some of that rent free continues through April to September?
Yeah, it was two years at half rent, but the assets were transacted at different periods between March and September. The rent free is corresponding with the dates the assets were acquired.
Right. Just to be clear as well, if Healthscope stops paying or cannot pay rent in certain assets, is it all sort of cross-collateralized, if you like, or how does that work?
In our disclosure provided to the market, I believe in about April last year, we had some detailed disclosure around our cross-default rights. Yes, those cross-default rights remain in place. I'd suggest perhaps have a look at that early disclosure, which is very thorough.
Are you able to just give me a little bit of an idea too, in the event that you do need another operator to step in? In the discussion you've had today, are they happy to take the entire portfolio, or are they wishing to cherry-pick? The second one is just can you explain the process internally at HMC? If there's a consortium looking to do Healthscope , how you break the teams up, if you like, to ensure that you manage the conflict?
HMC has several divisions in the business. HCW will act in the interests of HCW unit holders in terms of demand from tenants. We have received inquiries from several groups. In order to preserve commercial flexibility, I will not comment any further than that. As Christian pointed out, we have a high-quality portfolio in the best-growth suburbs of Australia with an aging population and a chronic undersupply of beds. We remain very comfortable in our position and very proud of our assets.
Right. Thanks so much.
Thank you. Your next question comes from Liam Schofield from Morgans. Please go ahead.
Morning, guys. Just a quick question on those nine assets that were revalued externally. Were any of those Healthscope assets? Did the key assumptions of those valuations change at all?
Yeah. One of those were Healthscope hospitals. It is also worth noting that all the assets in the unlisted fund were valued as well. Eight of the eleven were independently valued as at half year.
Right. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Charlie Kingston from K Capital. Please go ahead.
Hi, guys. Just a few questions, please. I'm just looking for a bit more color around some things that's already been asked, but just around the sustainability of the rents, noting that you've said you won't be providing any more support or assistance to Healthscope or dropping rents. I think when you bought the assets, you did drop the rents by, or the rents were dropped by 10% or thereabouts. Just with the discussions, in the worst-case scenario, if VA does occur or you do need to re-tenant some of your or all of your hospitals, just looking for some reassurance that the rents are actually fair and at sort of a market rate and affordable for a new operator because, and I know you have said that Healthscope , their biggest issue is the capital structure and the debt that they have.
With any sale and lease back, which these assets were, clearly they set the rents and they were too high initially. I suppose just looking for some clarity as to the discussions you're having, how confident you are that in the event you do get a new operator, they will be able to afford the current rents across all of your hospitals. Maybe if you could provide some metrics, I don't know, rent per bed or I know rent to EBITDA, or you haven't got that detail, but clearly EBITDA is very volatile. Any sort of metrics that you could provide to support whether or not today's rents are fair in the event that Healthscope is replaced, please.
Thanks, Charlie. You're right in pointing out that when we acquired these facilities, we acquired them from Medical Properties Trust, not on a direct sale and lease back from Healthscope . At the time of acquisition, the rental rates in each of these facilities were independently valued by independent valuers, and they were written back somewhere in the order of pretty close to 10% down, along with providing two years of half rent as these hospitals recovered from COVID. Each of these facilities are independently valued in the unlisted fund every six months and then in accordance with our valuation policy. Every valuer goes through and assesses the market rent of the facilities. Our view is today that the market rents are sustainable, and the issue really relates to the capital structure of Healthscope , which we've previously iterated.
In terms of where we go to from here, the only thing I'd say is we want to preserve and maximize unit holder revenue and unit holder value. We will do what is right to ensure those two objectives are met. We have been approached by several groups. One group happens to be a consortium by HMC. We have received a proposal which we're considering, and we will act in the best interest of HCW unit holders as we consider that proposal.
Okay. To be clear, you think the current rents are fair, and the operators that you've been talking to, they are happy to pay the current rents. I know there are things you can't discuss, but that is your base case.
Charlie, that's what we're working towards. Now, as you know, every time you retain a facility, negotiations occur. That's our base case, and we'll do our best in negotiations at the right time. Important to add, Healthscope today are completely up to date with their contractual obligations. While we will review and consider proposals, if Healthscope continue to meet its contractual obligations, we've got nothing to do.
Okay. Thank you. I think that's Christian Soberg, but given that the current incentives, I suppose, in the event that they are replaced, who knows, depending on who may or may not replace them, there may be further incentives because you are clearly paying out 100% of FFO. If there are further incentives or restructuring, then just trying to get a sense of how sustainable that is.
I'll just add some specifics here.
Yep.
The thing is.
No, that's fine.
These assets were bought for AUD 1.2 billion. Today, their valuation is AUD 1.5 billion. We are sitting on a pretty good equity gain. We will manage this appropriately, and we will get the best outcome.
It has already been asked, but just around the conflict in the event that HMC, their consortium, was to own our biggest tenants, circa 60% of our rents, I mean, clearly, if you were in that vehicle, you would want our rents to maximize profits. I know they are the biggest shareholder in HCW, and there is clearly a conflict with any sort of externally managed REIT. It does just seem very awkward if that were to eventuate. Just given the history of HCW floated at AUD 2, raised money to buy these assets at AUD 1.35, and here we are at AUD 1 or a bit lower. I am just hoping for some reassurance from you and the manager that how do you—that is a very big conflict to manage if that proposal was to go ahead because HCW has been a very poor experience to date.
I don't know. If another vehicle within HMC was to purchase Healthscope , could we somehow HCW participate in that upside? I'm not sure, but it's a very big and awkward scenario in the event that that does occur. Could you provide some more specifics as to how you'd manage that conflict? Thank you.
Charlie, we hear you. We understand your concern. That is why I came out at the outset of this presentation and in my remarks just before opening it up for questions. This management team and board will protect HCW unit holders' interests. Appropriate governance structures will be established and have been established to address any perceived conflicts. We will get the best outcome for HCW unit holders in the event of any scenario that plays out. You can be reassured of that.
Okay. Thank you. Lastly, again, on the buyback, just noting, yes, you've been in blackout, but you did not really sound all that committed to finishing that aggressively.
We can recommence it now.
Raise money at $1.
We can recommence it. It's under consideration. We're working through every scenario at the moment, and that's all to say about that.
How do you benchmark that against a development pipeline whereby buying back stock, I would have thought at the current discount to NTA, especially when you raise money at AUD 1.35, I would have thought that's absolutely the best use of capital over any other development or other asset recycling, etc. I would have thought you'd be seeking to execute that as aggressively as possible, but.
Charlie, we hear your comments. Happy to take that up on a one-on-one with you and listen more.
Great. Thank you, Sid.
Thanks, Charlie.
Thank you. Your next question comes from Simon Chan from Morgan Stanley. Please go ahead.
Hey, good day, Sid. Hey, I just got a quick one. You mentioned all along this call that your goal is to make sure you maximize your holder value, etc. Have you thought about just selling your Healthscope assets? Because as you mentioned, you've made good money on it already, right? The valuation has been great. And in unlisted hands who focus more on IRR rather than short-term earnings, they might actually value these sort of assets more. Have you just sort of just turfing these assets and maximize holder values that way?
I'll go back to my earlier comment, Simon. We will consider all executable bona fide proposals that are received. That's all I'll say.
Have you received any bona fide approval to take over ownership of those assets today?
I'm not going to say any more, Simon.
Okay. Fair enough. Thanks, mate.
Thanks, Simon.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Sharma for closing remarks.
Thank you, everyone, for your interest and time today. I know it's a busy reporting day on Valentine's Day. This management team is working very hard to ensure that we preserve and maximize unit holder value, and we'll continue to do that. Thank you very much.