Healthcare Property Fund: Private Hospital Challenges Expected to Be Temporary

Sid Sharma, Managing Director of Real Estate at HMC Capital, has expressed confidence in the stability of private hospitals within the fund manager's portfolio, stating that there is "very limited risk" of these facilities closing. This outlook is supported by the strong demand for critical care services, which bodes well for the sector's long-term prospects.

These comments were made following the announcement that HealthCo Healthcare & Wellness REIT, listed on the ASX, reported a 16% increase in full-year earnings for FY24, aligning with expectations. The trust, part of David Di Pilla's HMC Capital, anticipates a 5% growth in earnings and distributions for the upcoming financial year, driven by inflation-indexed rents and income from newly completed projects, including hospital expansions.

Despite the broader trend of declining commercial property values, HCW reported a 2.3% gross gain across its $1.6 billion portfolio. This was primarily due to rental growth, which offset the impact of rising cap rates.

Mr Sharma emphasized the critical role private hospitals play in Australia's healthcare system, pointing out that while some private hospitals have closed recently, the facilities in HCW's portfolio are different in nature. These are acute care centres located in high-quality metropolitan areas with a high volume of patients, making them essential social infrastructure.

Even as Healthscope, owned by Brookfield, recorded a $919 million write-down earlier this year amid rising costs, it maintained its lease obligations to HCW and the $1.3 billion unlisted healthcare trust, which includes seven Healthscope hospitals.

Sharma believes the ongoing discussions between private hospital operators and insurers regarding revenue and costs are temporary and expects a balanced resolution. He also noted that as a real estate owner, HCW is in a strong legal position, ensuring protection regardless of the outcomes of these debates.

In FY24, HCW achieved funds from operations (FFO) of 8¢ per unit, totaling $45.3 million, in line with forecasts. The trust paid an 8¢ per unit distribution and expects FFO of 8.4¢ per unit for FY25, with similar distribution expectations. HCW's portfolio maintained a 99% occupancy rate and collected 100% of rent invoiced. However, statutory profit declined by 66% to $7.3 million.

Analysts, like Bell Potter's Andy MacFarlane, have noted that HCW's guidance for FY25 places it among the few REITs expected to see earnings growth. Investors responded positively, with the trust’s stock price rising 2.1% to $1.20 on Monday.

Private hospitals contributed 57% of HCW's income in FY24, making up nearly two-thirds of its $1.6 billion portfolio, including pharmacies, aged care facilities, government research laboratories, and childcare centres. The trust's hospital investments include a 50.4% stake in a $1.3 billion unlisted healthcare trust (UHT) that owns seven Healthscope hospitals and recently raised $650 million in equity.

Over FY24, HCW sold $195 million worth of assets, primarily childcare and medical centres, at around a 6% discount to their book value. Senior portfolio manager Christian Soberg described this as an "attractive" outcome, given the sharper declines in other real estate subsectors.

According to analysts at Jarden, combining a solid FY25 outlook, additional asset sales to fund a buyback, lower gearing, and efforts to reduce the stock's large discount suggests that HCW's shares should perform well.

When considering hospital stays, especially for critical care, patients often require specialized accommodation, either within the hospital or nearby. According to studies, the length of hospital stays can significantly impact the need for such hospital accommodations, particularly in cases involving complex or long-term treatments. Private hospitals, like those in HCW's portfolio, play a crucial role in providing these facilities, ensuring that patients and their families have access to the necessary care and support during their stay.