New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Vital Healthcare Property Trust / Equity Bottom-Up

<h2>Vital Healthcare<br>1H22 Result&nbsp;— Keeping Active</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Vital Healthcare (VHP) has delivered a strong interim result driven by acquisitions and solid rental income growth. VHP also upgraded guidance for the full year with DPS now expected to be 9.75cp. Thus far, FY22 has been an active year for VHP, with commencement of further brownfield projects in NZ and acquisition of significant stabilised, and development, assets in Australia. Whilst VHP's defensive asset base, accretive development pipeline, and high portion of inflation indexed rental reviews are attractive, we believe these are largely reflected in its share price and retain our NEUTRAL rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22–24 AFFO +0.9%/+2.3%/+1.9% and DPS +2.6%/2.3%/+1.9%.</li>
<li><strong>Target price</strong>:&nbsp;-10cps to NZ$3.20 with an increase in our NAV offset by a higher cost of capital in our DCF.</li>
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<h3>Healthy portfolio metrics</h3>
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<p>VHP's portfolio metrics remain healthy, with 99% occupancy and WALT of 17.8 years. VHP only has 1.2% of rent expiring over the next 12 months and this averages 1.9% per year over the next 10 years. VHP achieved like-for-like same currency rental growth of +3.7% in 1H22. 94% of VHP's rental income is subject to structured rent reviews with a large portion linked to CPI (c.86%). VHP indicated that due to the lag between reported inflation and rent reviews, current levels of high inflation underpins robust rent reviews over the medium term. Recent acquisitions and the break-up of Healthe.care has reduced VHP’s tenant concentration.</p>
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<h3>Acquisitions have added to the development pipeline</h3>
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<p>VHP has undertaken NZ$328m of acquisitions thus far in FY22, including development sites The Hill's Clinic and Campbelltown Health Hub. In addition to the NZ$304m of development projects under construction, acquisitions have lifted VHP's uncommitted development pipeline by a third to NZ$1b. This includes Playford Health Hub (A$170m total cost), and Box Hill, Melbourne (A$300m+). We view development as an attractive capital allocation vs. buying assets on market and estimate VHP's committed developments will add c.10cps NTA on completion.</p>
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<h3>Gearing creeping back up</h3>
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<p>Gearing decreased to 33.2% at Dec-21&nbsp;(was 35.0% FY21) reflecting&nbsp;VHP's&nbsp;equity raise and 1H22 revaluation gains of NZ$153m. Including the&nbsp;Campbelltown&nbsp;Health Hub stage 1 committed gearing is c.40% on our numbers.&nbsp;While the DPR and &lt;100% of AFFO payout provide NZ$30–40m of capital per&nbsp;annum, any further large scale developments or acquisitions will likely require VHP to source additional capital via asset sales and/or further equity.</p>
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Vital Healthcare 1H22 Result&nbsp;— Keeping Active

NEUTRAL
Vital Healthcare (VHP) has delivered a strong interim result driven by acquisitions and solid rental income growth. VHP also upgraded guidance for the full year with DPS now expected to be 9.75cp. Thus far, FY22 has been an active year for VHP, with commencement of further brownfield projects in NZ and acquisition of significant stabilised, and development, assets in Australia. Whilst VHP's defensive asset base, accretive development pipeline, and high portion of inflation indexed rental reviews are attractive, we believe these are largely reflected in its share price and retain our NEUTRAL rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22–24 AFFO +0.9%/+2.3%/+1.9% and DPS +2.6%/2.3%/+1.9%.
Target price:&nbsp;-10cps to NZ$3.20 with an increase in our NAV offset by a higher cost of capital in our DCF.



Healthy portfolio metrics


VHP's portfolio metrics remain healthy, with 99% occupancy and WALT of 17.8 years. VHP only has 1.2% of rent expiring over the next 12 months and this averages 1.9% per year over the next 10 years. VHP achieved like-for-like same currency rental growth of +3.7% in 1H22. 94% of VHP's rental income is subject to structured rent reviews with a large portion linked to CPI (c.86%). VHP indicated that due to the lag between reported inflation and rent reviews, current levels of high inflation underpins robust rent reviews over the medium term. Recent acquisitions and the break-up of Healthe.care has reduced VHP’s tenant concentration.


Acquisitions have added to the development pipeline


VHP has undertaken NZ$328m of acquisitions thus far in FY22, including development sites The Hill's Clinic and Campbelltown Health Hub. In addition to the NZ$304m of development projects under construction, acquisitions have lifted VHP's uncommitted development pipeline by a third to NZ$1b. This includes Playford Health Hub (A$170m total cost), and Box Hill, Melbourne (A$300m+). We view development as an attractive capital allocation vs. buying assets on market and estimate VHP's committed developments will add c.10cps NTA on completion.


Gearing creeping back up


Gearing decreased to 33.2% at Dec-21&nbsp;(was 35.0% FY21) reflecting&nbsp;VHP's&nbsp;equity raise and 1H22 revaluation gains of NZ$153m. Including the&nbsp;Campbelltown&nbsp;Health Hub stage 1 committed gearing is c.40% on our numbers.&nbsp;While the DPR and &lt;100% of AFFO payout provide NZ$30–40m of capital per&nbsp;annum, any further large scale developments or acquisitions will likely require VHP to source additional capital via asset sales and/or further equity.


Vital Healthcare: 1H22 Result — Keeping Active