Our latest investor update on the 2nd of August saw us joined by Aaron Hockley, the fund manager at the Vital Healthcare Property Trust at the Novotel in Central Christchurch.
Traditionally, property companies concentrate on offices, shops and industrial property but Vital Healthcare’s portfolio differs as they concentrate on Healthcare properties such as Hospitals and Clinics. These facilities are usually rented out by health boards and enjoy long tenancy agreements from very high-quality tenants. Many of the rental agreements are linked to CPI and Vital is a company we like for these reasons. The company also offers a good dividend yield which is another attractive feature.
The listed property market has been a tough place to invest over the last couple of years. The rise in interest rates has been the main headwind for property companies as this is one of the key factors in how commercial property is valued. Interest rates have a direct relationship with capitalisation rates, which is the main variable when it comes to valuing property. All else equal, higher rates equal lower values. The drop in the share prices across the listed property sector has resulted in the entire sector trading at a discount to Net Tangible Assets.
Certain parts of the listed property sector trade at a bigger discount. These are the property companies with higher retail exposure. For example, Precinct Property’s discount is relatively small given that 16% of its portfolio is retail. The bulk of the rest of Precinct Property’s portfolio is office space. Retail and office space have both been impacted by changes accelerated by COVID-19. In the case of retail, this is online shopping, and in the case of office space, this is remote working. Whilst these changes won’t be the death knell for either area of property, it does create headwinds for both sub-sectors and will make increasing rents more difficult in the long run.
One area where we believe there will be less exposure to changing consumer habits is Healthcare Property. Remote heart surgery seems a long way off! Vital Healthcare Property Trust is the owner of $3.5 billion healthcare property portfolio in New Zealand (30%) and Australia (70%), mainly private hospitals. They have a 17.8-year weighted average lease term, with 80% linked to CPI.
The company has been divesting non-core properties and recycling the proceeds into new developments that will improve portfolio quality and future earnings growth. The share price is currently trading at a 24% discount to asset value per share of $2.96 (currently $2.25). We expect the discount to asset backing to reduce as interest rates stabilise (and eventually drift downwards). Healthcare properties benefit from long lease terms relative to other property sectors.
So, very much a company we like at Hamilton Hindin Greene. If you would like to know more please do get in touch.
We are hoping to arrange a further investor update later this year so please keep an eye out for details. We hope to see you at the next session.