Calan listing to unveil force in health market

By Bob Dey

Calan Healthcare Properties will achieve stock exchange listing in a fortnight, after having worked steadily towards that goal in the past five years.

In tandem, its asset growth has been strong and its development plans are expected to make it a major force.

"We've built a $186 million portfolio of properties and we have $20 million under construction to unfold in the next 12 to 18 months," managing director Martin Lyttelton told unit holders after they voted to change the trust deed, which will enable the listing to proceed.

Lyttelton was almost nonchalant in outlining the next step - to increase assets to $500 million.

He was open in answering a question that becomes of concern when investors do not see a rise in returns to them to match asset growth.

"I can understand how that [asset growth] will benefit management. How will it advantage unit holders?" one investor asked.

Lyttelton acknowledged that it was a real issue for management.

"When we do due diligence we are looking at earnings on capital works. We set [yield] thresholds of 10.5 to 11 per cent. Typically these properties are valued at 9.5 to 9.75 per cent. There would be an issue if we made future investments at low yields."

That is a simplified version of investment - a focus being criticised for the weight given to double-digit initial yields in syndicate promotions, with the potential for trouble later if tenants leave, are not replaced quickly and the return necessarily falls.

What Lyttelton is saying on initial yields is that Calan enters a deal with a margin of about 12 per cent between that price and subsequent firmer valuation.

He makes two other points, one of diversification and the other on looking beyond straight yields and prices.

"The figure of $500 million of assets is a strategic focus in achieving diversification across sectors and geographically. If we decline the earnings per unit then we are not making appropriate investments."

Calan has one big new investment in Auckland - the $58 million Ascot Hospital & Clinics on land beside the Ellerslie racecourse, with a 20-year hospital lease and 10-year lease on consulting areas.

It also owns a range of properties spread geographically and through primary, geriatric and continuing care, medical office space and a hospital laundry to be expanded.

Work has just started on the $17 million Ascot Clinics, a medical consulting building beside the new private hospital, and Calan is planning a $30 million day surgery and medical centre for a site beside North Shore Hospital.

This new private facility beside the existing public hospital is expected to be built by mid-2001.

Calan has bought three Melbourne assets - the Brighton private and rehabilitation hospitals and Box Hill medical centre.

The first two are in the suburb which Lyttelton says has the highest private health insurance, about 75 per cent coverage, and the medical centre in the suburb with Melbourne's highest household income.

Lyttelton says the population pools in Melbourne and Sydney make them attractive, but he expects investment in Australia to remain a minor part of the portfolio, up to 25 per cent.

The growth plan is not just to achieve scale, but also to ensure locations are good "and close to where the clinicians live."

The Australian investments were made at yields of 11 per cent with long leases on the hospitals and at 10 per cent on the medical centre, and a range of lease terms from two to 10 years.

Over the whole portfolio, the average of remaining leases is 14 years across 42 tenants.

In the trust's first two years it achieved gross returns of 12.16 and 12.94 per cent, falling to 10.52 per cent in 1997 and 8.49 per cent last year.

Although no distribution forecast has been made, Lyttelton says the slide in return has been halted by closing the trust.

It had remained open for investment until May, with units offered at net asset backing, and this year brought in $30 million of investors' money.

That enlargement of the equity base puts the trust on a sound footing for future growth.

But in the meantime, that had resulted in diminished returns.

"Inflows were running ahead of our ability to use the funds," Lyttelton said.

Since the trust was closed in preparation for the listing it had had five buyers for every seller, and that was without institutional buying. The largest unit holder had about one million units and the average among the 8000 investors was just under 16,000 units.

The compliance listing, simply turning unlisted units into listed and therefore more easily tradeable ones, is scheduled for September 7 and sets up a tantalising prospect.

Calan's general manager, Chris Donahoe, says the trust will lob into the listings around the bottom of the NZSE 40 index.

Property For Industry, also a pure-play property investor, is in that spot now with $125 million market capitalisation.

At the December balance date Property For Industry's asset backing was 78c a share and it has traded occasionally above that, but in the past two months has been discounted down to 69c.

Calan would have a market capitalisation of $139 million on its asset backing of $1.11 a unit.

Although the bottom of the market forms only a tiny proportion of the index, institutional buying for weighting purposes would put a premium on the stock - at least during the weighting period.

As even AMP found with the listing of its blue-ribbon office trust, that weighting period does not last forever and its stock has been lumped into the discounted property stocks basket.

Its asset backing has been chopped back 6.3c from the prospectus forecast, so the current market price of 90c (plus 4.1c dividend) produces a discount against anticipated value and small premium over the revised backing of 92.7c.

While AMP claims the premium spot in the New Zealand property market through possession of the best of the central business district buildings, uncertainty about the whole office market has to carry through to this stock.

Property For Industry believes it has a strong-performing collection of assets in the property sector which is doing best, yet still struggles for investor confidence.

Calan moves into a sector which is new to investors, and has another recent new player in Ryman Healthcare on market capitalisation of $136 million, $1.36 a share and therefore also competing to take that last slot in the NZSE 40.

It had hoped for a listing price in the range of $1.50 to $1.80, but is still trading well above asset backing of 71c a share.