Ann: Healthscope Update, page-103

I can see Pine Rivers and The Geelong Clinic listed as properties directly owned by HCW on page 22 of the 1H FY25 Results Presentation. When I look at their webpages, they are operated by Healthscope and they offer mental health/addiction services. So, there's at least two properties heavily involved with mental health.

I agree that there are wide ranges in the value of the properties, so that should be considered. Nonetheless, the primary issue with HCW, as I see it, is gearing. My impression is that the cap rates are really low (UHF 5.03%), when compared to other listed health REITs (e.g., REP) and recent sales of medical properties in Australia (though only somewhat comparable in nature). My guess is that these cap rates were relatively low because a) anticipation of 100% rent from 2025; and b) a nationally regarded medical health operator as tenant. Going forward, a rent reduction of 15% + 100% vacancy on one medical property (even a small one) will have a significant impact on gearing (and covenants, if banks enforce them).

Based on what I could find (though not able to find direct sources), UHF has approximately $100m of contractually obliged spending remaining, which was projected to increase gearing to 50%. The covenant is 55%. UHF can't afford a 15% rent reduction, if the current cap rates were based on the expectation of 100% headline rent. It might not be their choice to accept 15% rent or not, if no operator wants to run a particular place on 100% rent.

The Australian reported yesterday that "based on industry experts" (take that for what its worth) between 5 and 15 of Healthscope's health operations (of which there are I believe 37 in Australia) could fail to find buyers. Naturally, this would seriously worry investors.

The much more positive side of the ledger for HCW is cash flow. They earned 4.2c per unit last financial half, and that was with 50% rent from Healthscope operated properties. Even if HCW did get only 85% of headline rent going forward (and all operations remained open), that would be a significant increase in cash flow, implying that the earnings and distribution yield is more than sustainable (and very significant on the current share price). Nearly anyone can see that, and yet, here we are at 74.5c, likely because of the non-trivial risk of covenant breaches. It's possible banks will waive the gearing covenant so long as interest coverage remains elevated, but it's also possible they won't.