AGM addresses and presentation
The following is the address of the Chairman of Vital Healthcare Management Limited for the Vital Healthcare Property Trust Annual Meeting held at the Guineas 3 Room, Ellerslie event Centre, 80 Ascot Avenue, Greenlane, Auckland at 2.00 pm on Wednesday 31 October 2012.
Chairman’s Address, Vital Healthcare Property Trust Annual Meeting, 31 October 2012
Good afternoon and welcome ladies and gentleman to the 2012 Annual Meeting of Vital Healthcare Property Trust. I’m Graeme Horsley and it is a pleasure to address you today in my first Annual Meeting as Chairman having now been an Independent Director of the Trust’s Manager for five years.
The conduct of this meeting will be governed by the Unit Trusts Act 1960 and the Trust Deed of the Trust. Under the terms of the Trust Deed I have been appointed the Chairman of this meeting.
The Notice of Annual Meeting, including all resolutions to be considered, has been circulated to all unit holders.
Before the business of the meeting can commence it is necessary for there to be a quorum. The requirements for a quorum are that Unit Holders are present in person or by proxy, attorney or authorised representative holding not less than 10% of units in existence. Proxies have been received from 80,876,631 unitholders holding 27.14% of units on issue and therefore represent over 10% of the number of units on issue. On that basis, I am pleased to confirm that there is a quorum present and I declare the 2012 Annual Meeting of unitholders of Vital Healthcare Property Trust open.
We have a lot to get through today, and the order of the meeting will be as follows:
1. First, I will give my address as Chairman of the manager of the Trust.
2. David Carr, the Chief Executive Officer of the Manager, will then give a presentation of the activities of the Trust in the 2012 financial year, along with some perspectives on the forward outlook for the Trust.
3. I will then invite you to ask any questions you may have regarding the Trust or raise any other business that may properly be brought before the meeting.
4. We will then move to the matters that are usually dealt with at an annual meeting for which there are the three Resolutions. The first two relate to the election of two Independent Directors to be appointed to the Board of the Manager. The third Resolution proposed is to amend the Trust Deed as it relates to the election of Independent Directors and to incorporate by reference the NZX Listing Rules that are in effect from time to time. I will expand on each prior to each Resolution being put to unitholders later in the meeting.
5. We will then conclude the meeting, following which there will be refreshments, and I invite all unitholders to enjoy these with us.
The Annual Report including the Financial Statements for the year end 30 June 2012 have been circulated to all unitholders and are now formally tabled at the meeting. Copies of the minutes of last year’s Annual Meeting are available for inspection at the rear of the room.
Before my address, I would like to introduce my fellow Directors. To my left/right is, Claire Higgins and to her left/right is Andrew Evans and next to Andrew is Bernard Crotty. We have an apology today from Paul Dalla Lana who is unable to join us. I will speak shortly to the changes to the Board from last year.
I would also like to introduce members of the Executive Team of Vital Healthcare Management Limited, first is the Chief Executive Officer, David Carr and next to David is the Chief Financial Officer and Company Secretary, Stuart Harrison.
Also present today to my right is:
1. Matthew Band from Trustees Executors Limited, the Trustee of Vital Healthcare Property Trust;
2. Andrew Burgess from Deloitte, the auditors for the Trust. They have supervised the counting of the proxies submitted by unitholders prior to the meeting, and will be reviewing the counting of the votes by Computershare later in the meeting and finally;
3. Andrew Harmos, from Harmos Horton Lusk Limited, the legal advisers to the Manager.
With the formalities over we will now commence the presentations.
As unitholders will recall, proposals to internalise the management rights at last year’s Annual Meeting were effectively scuttled by some institutional investors and other parties blocking the opportunity for unitholders to acquire the management rights. These investors then sold their stake in the Trust, with the ultimate purchaser of those units and the shares in the Manager itself being acquired by NorthWest Value Partners Inc. (who I shall refer to as ‘NorthWest’).
NorthWest, as the new owner of the Manager and as a 19.8% unitholder in the Trust clearly has a significant investment in Vital, which results in a genuine alignment of the Manager’s interests with those of unitholders, something the Trust has been lacking for many years now.
Following on from the change of owner of the Manager and for those of you that were here last year you will have noticed a few changes in Board composition. I have already introduced all the Directors but to quickly recap, following the settlement of the acquisition of the shares in the Manager by NorthWest, Bill Thurston and Peter Brook retired and Paul Dalla Lana and Bernard Crotty joined as Directors of the shareholder of the Manager.
Again I extend a welcome to Mr Crotty, attending his first Vital Annual Meeting as a Director.
Also to ensure continuity of the activities and strategic direction of the Trust, Mr Andrew Evans has remained on the Board and meets the test for an Independent Director in accordance with the NZX listing rules. He has no association with the current shareholders of the Manager.
Last but by no means least I would like to welcome Mrs Claire Higgins. Claire joined the Board in January 2012 and is based in Melbourne, Australia. Claire has extensive experience in financial reporting, accounting, governance, treasury management and stakeholder communications and currently is on a number of Boards in Australia with exposure to the health sector.
As you will have seen in the Notice of Meeting, both Claire and myself are the only nominations for appointment as Independent Directors of the Manager. We have accepted those nominations and we will formally address these resolutions later in the meeting.
The new Board has been working exceptionally well together. At the start of the year the Board reviewed the existing strategy of Vital and ultimately arrived at the view that the prior principles and objectives of the Trust remain the foundation for its future, with no change to the existing strategic philosophy and direction of the Trust.
Having a strategy and executing it effectively are clearly two different things. David and his team’s ability to execute on the strategy remains a core feature in driving the growth and diversification of the business, ultimately leading to enhanced performance and returns to unitholders.
I truly believe we have one of the most capable teams managing this class of asset and I would just like to record the Board’s thanks to David and his team (a number of whom are here today) in living up to the demands and high expectations we place on them.
A key focus within the existing strategic framework is that the Trust:
• Maintains its low-risk, medium return investment characteristics
• Retains its expert focus in healthcare real estate, or social infrastructure as it is better known
• Continues with its relationship focused approach, and
• Pursues appropriate opportunities for growth, diversification and liquidity.
In my opinion, the success of the delivery of the strategy is directly validated by unit price performance.
I note in this regard that the unit price peaked at a 12 month high of $1.285 (“One dollar twenty eight point five”) the week before last, which implied a 12 month total return, including distributions for the year, of around 19%.
If you were at the Annual Meeting in November last year the unit price on that day was $1.13, so as you can see the market continues to support our strategic direction and its application. David in his presentation will provide some longer term analysis and discussion on Vital’s performance.
As I just mentioned, supporting this total return and notwithstanding the protracted period of volatility in global
markets, the 2012 financial year concluded with delivery of a cash distribution of 7.7 cents per unit, in line with the forecast given in the November 2010 Simplified Disclosure Prospectus.
Operationally last year was a continuation of the foundation we have built on in recent years with Vital now established as the largest listed healthcare property trust in Australasia.
I can assure you however that growth in itself has not been the focus. The key benefit that growth brings is diversification, which remains one of the core strategic goals of the Board. The rationale for diversification is to protect and enhance unitholder returns over the long term. David, will again touch on this during his presentation to give you a greater understanding and overview of these diversification benefits.
Over the last few years Vital has increased its weighting to Australian assets, now at approximately 75%. This was a deliberate and active strategy to manage geographic, economic and tenant risk, while at the same time providing access into a significantly larger and more mature healthcare market with a greater pool of opportunities. Further, it now positions Vital as one of just a few specialised and dedicated healthcare property investment funds in the Asia Pacific region with this level of scale, diversification and liquidity.
Following the 2010 Australian portfolio acquisition we continue to display some unique market leading characteristics, including a portfolio weighted average lease term of almost 12 years. No other New Zealand listed property entity comes close to that and we have maintained close to full occupancy, which has a direct beneficial impact on earnings and distributions to unitholders. Again David will expand further on these core portfolio characteristics shortly.
Due to the on-going uncertainty in local and global markets, exposure to healthcare infrastructure assets is increasingly being seen as a differentiated, relatively low risk option for the global investment market.
Some additional highlights for the 2012 financial year were the continuation of the brownfields development programme, with 2 Australian projects now concluded at Belmont Private Hospital in Brisbane and Maitland Private Hospital in Newcastle, both now generating returns of approximately 10% per annum.
Through the course of the 2013 Financial Year we will conclude most of the balance of the remaining developments, which will further enhance the Trust’s future earnings.
We also had the acquisition of Mayo Private Hospital, and we recently commenced a A$6m extension to Mayo to cater for current and future demand for health services in the region. We also acquired Hurstville Private Hospital, Vital’s first acquisition in Sydney.
Post balance date we announced the acquisition of Sportsmed Hospital and Clinics in Adelaide, South Australia. Sportsmed is one of the largest specialist orthopaedic hospitals of its kind in Australia. Along with the medical consulting building the Sportsmed Campus provides an excellent facility that supports all of the activities of the hospital business. In 2010 Sportsmed was rated Australia’s number 1 private hospital from over 140 private hospitals surveyed. The Sportsmed acquisition will settle in December and David will run through a few slides shortly giving you a better perspective of the property and the rationale for the acquisition.
We haven’t just been buying and developing, we have also now sold circa $13 million of non-core or lower value properties and have approximately another $20 million targeted for sale.
All this activity leads me to comment on our current and forecast gearing.
Let me reassure you that the Board has carefully considered and is comfortable with current gearing levels, supported by the current sales programme of non-core or lower value assets. We also have other tools in the toolkit to manage our balance sheet requirements as the need requires.
Moving on, the annual independent revaluation of Vital’s property portfolio resulted in a marginal 1.05% decline, or circa $6 million. This was principally due to two properties, Allamanda and Ascot, with medium term lease expiries that do not occur for 5 & 6 years and where we are currently engaged in proactive lease discussions with both tenants. Excluding these two properties, the overall result would have been a revaluation gain of 0.52%, or approximately $3 million across the balance of the portfolio.
Personally, and being a commercial valuer for 40 plus years, I would expect to see growth in asset values over the medium term, all things being equal of course, and this clearly also assumes David and his team can satisfactorily resolve the two significant lease expiry events I have just mentioned.
In terms of the outlook, we expect the healthcare property sector will continue to deliver relatively stable investment performance as a degree of fragility in equity markets still exists.
As I alluded to in the Annual Report, the activities of Vital’s tenants are underpinned by favourable structural factors such as an ageing demographic and resilient private health insurance levels. Vital continues to occupy an enviable position within this sector, with portfolio fundamentals that are well above sector averages, solid relationships with tenants and growing recognition for its execution capability and credibility.
As I commented at the start, Vital’s growth and diversification strategy has delivered strong results to date and this momentum is projected to continue into the coming 2013 financial year and beyond.
Unitholders can look forward to a defensively positioned core portfolio, a continuation of the targeted divestment of non-core lower value assets and recycling of capital into opportunities that enhance the overall position of the Trust.
The strength of the property portfolio together with a positive healthcare sector outlook has led the Board to provide investors with a net distributable income guidance range for the coming year of 7.7 to 7.9 cents per unit, compared to 7.7 cents per unit in 2012.
Finally, I would like to thank all unitholders for their continued support through 2012 and the Board and management team look forward to providing you with updates on the activities of the Trust through the course of 2013.
Thank you and let me now pass the presentation across to David in his role as CEO of the Manager – David.
[Graeme to pass the meeting to David].
Manager’s Address – Vital Healthcare Property Trust
Annual Meeting – 31st October 2012
Thank you Graeme, welcome and good afternoon everyone.
My name is David Carr and I’m the Chief Executive Officer of Vital Healthcare Management Limited.
I’ll start today by giving you an overview of the Trust’s performance and financial position for the 2012 financial year.
We will then have a look at some of the underlying healthcare trends in Australia and New Zealand and then review the current portfolio position, including some of the diversification characteristics the Chairman mentioned.
We’ll also run through an update of the development projects and acquisitions in Australia, including the acquisition of Sportsmed in Adelaide and I’ll then wrap up with an outlook for the year ahead.
This chart shows the total return performance of Vital over a 10 year period as against the indices shown to 30 September.
The chart really speaks for itself, but focusing on a couple of themes here, first you can see Vital’s relative outperformance even prior to the Global Financial Crisis which hit around August 2007.
Then as you would expect, total returns across the board had a sharp decline for the following few years. Noticeably however around September 2008 Vital commenced its recovery some 6 to 12 months ahead of the other indices.
Certainly by September 2009 Vital was in a clear phase of growth as compared to the other indices which were either flat, or improving at a more moderate rate of growth.
The overarching message here is that the market continues to recognise the relative resilience and defensive characteristics of Vital and supports the on-going strategy of the Trust as the Chairman alluded to in his remarks.
We’ll now have a look at a summary of the key financial results and position of the Trust for the year ending 30 June 2012.
Starting by looking at the top two charts first, on the left you can see net income increased to $48 million and on the right, as a result of the full year contribution from the 2010 Australian portfolio acquisition, gross distributable income was up 27%.
This increase, after allowing for the increased number of units issued as a result of the 2010 capital raising, ensured that we delivered on the guidance for the 2012 financial year of 7.7 cents per unit.
We completed independent market valuations of all properties as at 30 June 2012 which resulted in a small valuation decline of just over 1%, and this was the primary component for the NTA, or Net Tangible Assets now sitting at 98 cents.
We’ll now have a look at the treasury and capital position of the Trust.
Starting on the top left of this slide, a key feature during 2012 was the successful renewal of the Trust’s bank facility, locking it in for an average of 3.8 years, up from 2.2 years.
Additionally as a result of the lower interest rate environment, and approximately 15% of our debt being un-hedged, or floating, we have been able to take advantage of this and had a year-end weighted average cost of debt of 6.87%, down over 1.3% from the prior year. This provides an immediate tangible benefit to earnings.
On the bottom left, you’ll see we also improved the bank facility debt to asset covenant, to now align with the Trust Deed, at 50% and whilst you can see that we have utilised some of the facility over the last 12 months, the current headroom relative to the new covenant is about the same as last year at approximately 8%.
The last chart on the lower right shows that we have sought to utilise the bank facility that we have been paying for, and the Trust’s gearing as at 30 June 2012 was sitting at 42.3%. As at 30 September, as a result of asset sales and the underwritten Distribution Reinvestment Plan, or DRP, gearing has now scaled back to just under 42%.
Over the next few slides I’ll run through some health sector perspectives which in our view continues to support the underlying position and activities of Vital both here and in Australia.
This first slide provides some overall context of what the general supporting foundations are for healthcare real estate.
The statement at the top of the slide that “people don’t tend to change their healthcare spending patterns depending on the economy” rings true to a large extent both here and in Australia which you’ll see shortly on the next slide.
That is not to say the health sector is totally immune, that would be naïve. However, we do know that due to the essential nature of healthcare, it is a relatively resilient and substantive component of the GDP of both the New Zealand and Australian economies.
I’ll touch specifically now on some of the foundations supporting healthcare you can see in the slide.
This chart shows private health insurance trends in Australia and New Zealand and we keep a close eye on these trends as a leading indicator or proxy for monitoring how the Trust’s tenants are performing.
Clearly, as you can see, Australia’s percentage of population with health insurance is now approaching 50%, with New Zealand levels hovering at a touch over 30%, with a small divergent trend evident in each country’s population either taking up or maintaining health insurance.
The key point here, is that as we came through the deepest recession since the 1930’s, there was only a marginal decline in health insurance levels in New Zealand, and in Australia they have actually increased.
This is evidence of the defensive characteristics of healthcare I often refer to, and certainly supports our strategy over recent years to further diversify into Australia.
Irrespective of the divergent trends in each country for private health insurance, one forecast that simply cannot be ignored is that for both countries, the over 65 age group is estimated to double in the next 40 to 50 years as shown here.
In fact as can be seen by the blue line, New Zealand’s rate of growth is forecast to outstrip Australia from about 2030. You may ask why this is relevant?
If you look at this chart from NZ Treasury it clearly shows that the over 65 age groups’ healthcare costs rise exponentially with age relative to the rest of the population.
And remember, based on the previous slide and the ageing population projections, this then results in a compounding effect in the demand for healthcare services over the next 50 years and quite clearly these trends will continue to support our diversification and growth strategy.
The IPD (or Investment Property Databank) real estate Healthcare Index was launched in February this year following demand for the establishment of an independent index by investors, ourselves and other healthcare property landlords.
The Index provides an independent and robust approach to a 5 year time series of direct healthcare property valuation data in the Australian market. You’ll see Vital is one of 5 participants with its Australian assets forming part of the 49 properties in the Index with an approximate value of A$1.0 billion.
Apart from being a valuable financial and performance analysis tool, it has become a very helpful marketing tool in our continued education of the wider market about the emerging healthcare asset class and its numerous defensive qualities and characteristics.
As you’ll see over the following 2 slides, the IPD data separately validates and reflects Vital’s performance ‘through the cycle’, that Healthcare property is a defensive real estate investment in its own right.
In terms of some of the data produced by IPD, this slide shows the annualised healthcare property returns as measured against IPD’s All Property index, which includes industrial, retail and office type properties.
As you can see healthcare returns exhibited a much lesser decline than All Property, which late 2008, at the height of the global financial crisis had negative total returns, whilst healthcare was still generating positive returns of approximately 7% at the bottom of the cycle.
As you can see the ‘catch up’ game has however almost concluded as fundamental market dynamics return to relatively more stable conditions.
This chart demonstrates the less volatile capitalisation rates for healthcare assets when compared to IPD’s All Property index.
When looking at the ’peaks and troughs’ through the period of volatility we have just been through there was a 1.25% spread in capitalisation rates in the All Property index over the last 6 years, compared to a 0.75% spread for healthcare.
In other words, healthcare property values were much less volatile than traditional property assets over the last 6 years.
I’ll now run through a few slides that will give you a greater perspective of the Trust’s portfolio profile, where you will see that we have maintained or strengthened a number of core portfolio metrics through the year and improved our overall diversification.
This slide summarises the current portfolio position to 30 September 2012 and shows the Australasian spread of the Trust’s assets along with the size by value of each asset, with our average property value now sitting at $26 million.
You will also see in this slide that approximately 75% of Vital’s portfolio is in Australia and 83% of the properties owned are hospitals, with the balance being medical facilities and other healthcare buildings.
It’s fair to say that due to the size of its population and economy, Australia obviously offers a greater pool of potential opportunities.
However, I think it’s worth re-stating there is no ‘target percentage’ weighting to Australia.
Vital’s portfolio composition remains a function of sourcing value enhancing and accretive opportunities in either country at any given point in time. Opportunities do exist in the New Zealand market, but as always we’ll be patient and prudent when considering these.
This diversification through assets with different values, in a range of locations and undertaking a variety of healthcare activities assists in protecting Vital from any substantive political, economic, geographic, financial or other healthcare reforms in each respective market.
Starting at the top left of this slide, this portfolio dashboard shows that we continue to maintain close to full occupancy, with the portfolio currently 99.3% leased, having been over 99% now for the last 3 years and well ahead of the New Zealand listed property sector at just under 96%.
Looking forward I wouldn’t expect to see too much change in occupancy levels, as we have a relatively low risk expiry profile over the next few years and I’ll talk more about that shortly.
For the year ending 30 June 2012 we completed 125 rent reviews with an average increase of 3.3% down slightly on 2011, mainly reflecting a lower inflationary environment in Australia and New Zealand over the period, which we expect to continue to see over the course of 2013.
The lower right chart shows the Trust’s WALT, or weighted average lease term as at 30 September, at 11.6 years, over twice the New Zealand listed property sector average of 5.5 years and remember a long dated WALT provides an extended period of income certainty for unitholders.
The lower left chart shows the change in the portfolio composition, and as noted earlier, the weighting to hospitals has lifted to 83% versus 79% last year. This weighting will vary over time depending on portfolio activity and composition.
As you can see we have continued to maintain a low risk lease expiry profile through to 2018, with the largest expiry concentration in the next few years being in 2015, where 23 tenants have lease expiries. The majority of these however are smaller consultants, specialists or surgeons, with a historically high probability of renewal.
The darker column in each year shows the single largest tenant expiry for that year.
The first key lease expiry is in the 2018 financial year, with Healthscope at Allamanda Private Hospital on the Gold Coast and after that is in 2019 with Mercy Ascot at Ascot Hospital here in Auckland, and we continue to have constructive discussions with both tenants, notwithstanding that the leases do not expire for 5 and 6 years respectively.
In terms of the current development programme, as the Chairman mentioned we have now finished two value-add developments at Belmont and Maitland Hospitals and as you can see in the above table we are largely through most of the remaining developments as at 30 September.
Overall, these value-add developments are forecast to produce average yields of approximately 10% per annum, which will certainly help support Vital’s future earnings.
I’ll now run through a quick case study that will look at the Belmont Private Hospital redevelopment and give you a perspective of the rationale and type of works that were undertaken.
Belmont is located in the Brisbane suburb of Carina and is approximately 15 kilometres from the Brisbane CBD.
The project comprised a major redevelopment and modernisation of Belmont, which is a psychiatric hospital and this slide gives you an idea of the works that were undertaken.
In essence the yellow area shows the new building works, which increased the area of Belmont by about one third, and you can also see that we reconfigured some of the existing areas shown in blue.
Key to the project was the increase in total beds from 90 to 120 and at the same time increasing the number of private rooms from 62 to 90. Additional specialist consulting suites and car-parks were also developed.
The investment rationale for the A$12.6 million development had a number of elements, including the performance constraints of the existing facility, the strong business case from the hospital operator, the attractive forecast returns and improved patient environment.
As a result, following completion of the works in July, the hospital has already exceeded forecast occupancy targets, supported by Doctor referrals that now recognise Belmont as a leading psychiatric facility, providing high quality patient care, comfort and security.
Vital is now receiving an attractive return on cost of approximately 10% per annum and pleasingly, post development Belmont had a revaluation gain as at 30 June 2012 of A$1.5 million.
Next I’d like to run through a few slides on our most recent acquisition of Sportsmed in Adelaide, which occurred after 30 June 2012, and will settle in December.
First some background into Sportsmed. Sportsmed is a leading private hospital operator, backed by a group of 13 orthopaedic surgeons and aligned clinical services that take place in a state-of-the art facility where they treat around 130,000 patients each year.
Sportsmed is located approximately 4 kilometres north-east of the Adelaide CBD and now expands Vital’s portfolio footprint to 5 of the 6 Australian states.
On settlement Vital’s portfolio WALT will increase by around 6 months and it will also support our diversification strategy as it reduces our weighting to the Trust’s largest three tenants from 61% to 56%.
As mentioned earlier, the portfolio weighting to hospital properties moves to approximately 83%, but we see hospital investments as a strong and stable market segment for Vital to invest in.
On settlement, Sportsmed will enter into a new 20 year lease, the property is 100% occupied and we will have fixed rent reviews at 3% per annum and periodic reviews to market.
The property is being acquired for A$29.2 million equating to an initial property yield of approximately 8.6% after costs and will be accretive to earnings.
Finally, in terms of outlook, the Trust’s strategy is sound and remains fundamentally unchanged. Vital holds a well-respected position in the Australasian healthcare property sector, and has exhibited a period of proven resilience.
Vital’s portfolio metrics are among the best in the listed property sector on both sides of the Tasman and we remain focused on the continued execution of Vital’s strategy.
The focus for 2013 is the on-going enhancement of our core portfolio, successful conclusion of the current value-add development programme and actively seeking to resolve medium term lease expiry events.
Whilst the Trust’s core portfolio metrics remain defensively positioned, the sector is not without elements of pressure from the likes of political reform and on-going headwinds in local and global markets. However over the longer term we expect that health sector fundamentals will continue to provide sound underlying support to the Trust.
Prudent capital management will continue to play its part, including the on-going divestment of selected non-core assets as we continue to consider future value-add opportunities.
On the back of a relatively stable earnings outlook, and as the Chairman said, we are guiding to a net distributable income range of 7.7 to 7.9 cents per unit for 2013.
Thank you, that concludes my presentation, I’ll now pass you back to the Chairman.