HealthCo reports a surge of over 15% in the values of private hospitals within a nine-month period.

Private hospitals have bucked the trend of declining commercial property values, experiencing a notable increase of over 15% from March to December. This information comes from HealthCo Healthcare & Wellness REIT, the largest listed owner of healthcare property on the ASX.

A portfolio comprising 11 Healthscope-operated properties experienced a substantial net valuation gain of approximately $200 million. HMC Capital, under the management of David Di Pilla, acquired these properties last year for $1.2 billion from a New York-listed property trust.

The Healthscope portfolio received a boost in valuations, coupled with a $100 million capital investment aimed at upgrading and expanding certain assets. As of December 30, the portfolio's valuation reached $1.5 billion.

HCW, identified by its ticker, disclosed these valuation gains while reporting a 29% increase in funds from operations (FFO), a crucial earnings metric for REITs, for the six months ending December—the FFO of $22.6 million, equivalent to 4¢ per share, aligned with guidance. Similarly, the interim distribution of 4¢ per unit, reflecting a 7% year-on-year increase, also met expectations.

The trust reaffirmed its full-year earnings and distribution guidance of 8¢ per unit, marking the first time earnings will cover the fund's payout.

HMC Capital's Chief Operating Officer, Sid Sharma, outlined three key factors contributing to private hospitals' outperformance compared to other mainstream commercial property asset classes. He cited compelling underlying demographics, including an aging population and increased uptake of private health cover, the attractive structure of leases with high-quality tenants, and a scarcity of available high-quality hospitals in the country.

Highlighting the strong demand for healthcare real estate, HMC Capital raised total equity commitments for its unlisted healthcare fund to $650 million in the half-year period. In December, they secured a fourth global institutional investor. The unlisted healthcare fund (UHF) includes seven of the 11 Healthscope hospitals, with HCW owning 49.6% of UHF, valued at $582.3 million.

The remaining four Healthscope hospitals are held on the HCW balance sheet alongside investments in childcare centres and other specialized medical facilities, including seven GenesisCare cancer treatment clinics. Healthscope is HCW's largest tenant, contributing 49% of its rental income, while Healthscope-operated hospitals represent $900 million of its asset base.

With a favourable outlook for the sector, HCW is embarking on a $1 billion-plus development program to expand existing hospital assets and establish new ones, such as The George Private Hospital in Camden, western Sydney.

Projects totalling $200 million are underway, including enhancements to properties like Knox Private Hospital in Melbourne. Additionally, ongoing reviews of $200 million worth of near-term projects and $600 million in longer-term opportunities are underway.

These developments yield attractive returns of up to 7.5%, surpassing HCW's portfolio capitalization rate of 5.16%, which increased by 13 basis points in the past half-year.

While the Healthscope portfolio experienced robust gains, not all of HCW's assets appreciated during the same period, some childcare centres and certain specialist medical facilities incurred minor writedowns due to expanding capitalization rates.

HCW reported a net valuation gain of $38 million (2.5%), with a significant portion attributed to its half share in a $57 million gain at Nepean Private Hospital in Sydney. This contrasts with asset writedowns reported by other REITs like Mirvac and Region Group.

Considering asset sales, part of HCW's ongoing $200 million divestment plan aimed at reducing gearing, values increased by a modest $3 million over the half-year, reaching $1.637 billion.

HCW units experienced a 0.7% decline, falling by 1¢ to $1.34 on Tuesday. Concurrently with its half-year update, HCW announced that Mr. Sharma would oversee HMC Capital's real estate activities, including HCW. Meanwhile, Christian Soberg, formerly HCW's chief financial officer, will be HCW's senior portfolio manager.