The value of Vital's portfolio has risen from $513.9 million in June 2011 to $1.93 billion in December 2019.
The value of Vital's portfolio has risen from $513.9 million in June 2011 to $1.93 billion in December 2019.
COMMENT:
Vital Healthcare Property Trust's investors are likely to be far happier with the manager's plan to sell it $60.1 million of aged care assets than they were about its previous acquisition proposal.
But the manager, a subsidiary of the Toronto-listed NorthWest Healthcare Real Estate Investment Trust, still has todeal with a reservoir of investor distrust engendered by its past behaviour.
NorthWest wants to sell the trust three aged care assets in New South Wales and Queensland before the end of June, all at a capitalisation rate of 6.5 per cent, well above Vital's weighted average cap rate of 5.52 per cent at December 31.
Since a property's cap rate is a measure of its value relative to rental income, and the lower the cap rate, the higher the value, it appears NorthWest is offering Vital a bargain.
The Canadian operator has said the properties have weighted average lease terms (Walt) between 16.5 and 16.8 years - long, but below Vital's existing average of 17.9 years - and the same tenant, not-for-profit multi-national aged care provider Bolton Clark. And it will add to earnings from year one of Vital's ownership.
NorthWest argued that aged care properties are a good type of asset class for Vital to own because of growing demand from an ageing population and the higher yields available from such assets compared with hospitals.
It also noted that aged care facilities account for about a third of Australian healthcare properties by value, with a market value of about A$30 billion.
This latest acquisition offers a stark contrast with the previous proposal.
Investors had been disturbed from the first whiff of information they got in May 2018 about NorthWest's plans to chase assets then owned by Australian takeover target Healthscope.
They feared the Canadian operator would pay too much for them.
Their fears were confirmed in February last year when NorthWest announced it would buy 11 Healthscope hospital properties from the successful bidder, Brookfields, for A$1.258 billion.
That was at a 5 per cent cap rate, meaning it was even lower after NorthWest's fees and other costs, and well below Vital's cost of capital, then about 6 per cent.
The fears about this transaction also crystallised a festering resentment over NorthWest's track record of milking Vital.
It had collected gross fees of well above $100m through to December 2017 since buying Vital's management contract for $11.5m in 2011, and fees were starting to escalate dramatically each year.
The returns to Vital's investors had been much more modest but had been better than from the rest of the property stocks listed on NZX.
The 2017 annual report said the 10-year compound annual return for Vital's unitholders had been 12.5 per cent, outperforming the sector by 6.5 per cent.
The reason NorthWest's fees escalated so sharply was because they were based on gross property values, giving the manager every incentive to have Vital buy more properties.
The value of Vital's portfolio had risen from $513.9m in June 2011 to $1.67b in December 2017 and to $1.93b in December 2019.
After sustained opposition from Vital's unitholders culminated in a rowdy annual meeting just before Christmas 2018, NorthWest decided in May 2019 to leave Vital out of the Healthscope deal – and incidentally, to change its fee structure.
This isn't Vital's first foray into aged care property. In 2016, it bought four properties in a A$41m sale-and-leaseback for 20 years with privately-owned provider Hall & Prior.
While that deal represented an 8 per cent cap rate, interest rates generally have fallen steeply – the Reserve Bank of Australia's cash rate was 2 per cent and is now 0.75 per cent.
NorthWest doesn't mention brownfields development opportunities in comments about the latest acquisition but in 2016 it identified the sector's significant capital requirements and the development potential of the four properties Vital bought as part of their attraction.
The investor revolt spurred by the Healthscope deal was led by three institutional investors, ANZ Investment Funds, Mint Asset Management and ACC, which collectively own about 10 per cent of Vital's units.
Craig Tyson, who manages Australasian property securities at ANZ, said there's a reason NorthWest is offering such a relatively high cap rate – post Australia's royal commission into aged care, a number of operators are struggling and having to sell assets, bringing a lot of properties to market.
But the purchase is consistent with Vital's stated strategy and the cap rate looks reasonable, Tyson said.
As for the changed fee structure, while the base fee was lowered and the incentive fees are now based on net assets, a number of other fees are expressly itemised, having previously been implied, making comparisons difficult.
NorthWest had estimated net distributable income in the year ended June 2019 would have been 4.1 per cent higher if the new fee structure had been in place then, but time will tell whether fees will fall in future.
