Release Date: August 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- HealthCo Healthcare and Wellness REIT (ASX:HCW, Financial) delivered 16% earnings growth for FY24.
- The company maintained a strong balance sheet with gearing at 32.5%.
- 100% rent collection was achieved, ensuring high income security.
- A $50 million unit buyback program was initiated, reflecting confidence in the company's value.
- Significant progress in sustainability, achieving a 30% reduction in Scope 1 and 2 carbon emissions.
Negative Points
- Unit price performance has been underwhelming despite strong operational results.
- Operating cash flow is lower than reported asset flow, raising concerns about cash flow conversion.
- The development pipeline value has decreased from $800 million to $540 million.
- There is ongoing debate and uncertainty around operating costs and revenue from private health insurance funding.
- The company faces challenges in addressing the unit price discount to NTA.
Q & A Highlights
Q: 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?
A: Hi, Lauren. Thanks for the question. So we've gotten through the bulk of the $200 million target that we set ourselves last year. We're not going to 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, where we focused on being commercially rational and look to asset recycling as and when appropriate to redeploy into our development pipeline. - Sid Sharma, Managing Director, Real Estate
Q: Six months ago you were talking about your development pipeline was around $800 million mark. At the moment, you flagged $540 million. Could you talk about that different insights there, please?
A: Yeah. So Lauren, the main driver of that is some of the development pipeline that's already been spent. But I also ask you to have a look closely as to the explanation provided the previous pipeline wasn't as complete valued, whereas this is a capital to be deployed value. - Sid Sharma, Managing Director, Real Estate
Q: Just your operating cash flow, even if you include, the distribution from the unlisted fund is quite a bit lower than your asset flow that you've reported today. You're able to talk about the reconciliation?
A: As you may recall on, when we did the HealthCo transaction, as part of constructing that deal, we provided HealthCo with two years of half rent. That's the primary delta between the FFO and the cash that you would be saying. - Sid Sharma, Managing Director, Real Estate
A: There is also a deferred distribution from the unlisted funds that we have subsequently received. So that's around $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 cash flow conversion to continue to improve as we go forward with the HealthCo's incentives for the HCW balance sheet hospitals running off in FY25. And we also the right incentive at Camden as well, running off in FY25. So overall, we'll see cash flow conversion continue to improve for HCW. - Christian Soberg, HCW Fund Manager
Q: In terms of the buyback, you mentioned that you might consider directing a greater share of asset sale proceeds to increasingly on-market buybacks. Do you mean increasing beyond the $50 million or just accelerating it?
A: Hi, David. This is Christian. So as we have 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're looking to recommence the buyback at current levels as the unit price is today. - Christian Soberg, HCW Fund Manager
Q: In terms of the hedge book, it rolls off materially from June '25 to June '26. Is there any kind of thinking about managing that, trickling down them please?
A: You are right about that, David, I mean, in terms of our hedging policy, we're looking to have a depth over 50% hedge. 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 bps, that will improve earnings by around $0.02 per unit. - Christian Soberg, HCW Fund Manager
Q: The EBITDAR, cash rent coverage for HealthCo above three times, does that include the initial concessions that you gave them or does it exclude it?
A: Does exclude that from a cash basis, David, that's on a cash basis. But I think it is important. - Christian Soberg, HCW Fund Manager
Q: Just wondering if you can just give us a little more color on bridging kind of what's driving the 5% EPS growth for FY25?
A: Yes. Hi, Andy. It's Christian. So it's continued our contracted rental escalations across the portfolio. And also fully impact from developments that completed in FY24. - Christian Soberg, HCW Fund Manager
Q: HealthCo obviously appreciate the detail in the pack today, but just wondering what the latest is from recent conversations with them and what the status is of that renegotiations to some extent. You can comment.
A: Andy, I wouldn't want to comment on HealthCo'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 have 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. - Sid Sharma, Managing Director, Real Estate
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
