From Bell Potter:HCW and the Unlisted Healthcare Fund...

From Bell Potter:

HCW and the Unlisted Healthcare Fund (UHF)announced the issuance of breach notices to its tenant, Healthscope (HSO), forfailure to pay 100% of rent due for March 2025, with only partial payment ofthe rent received.

In the event that HSO’s breaches are notremedied, HCW and UHF will enforce their legal rights and seek to replace HSOtenancies with alternative hospital operators. HCW has confirmed that it is inactive discussion with potential replacement operators.

HCW has withdrawn FY25 guidance for FFO / shareand DPS of 8.4c pending resolution of the current situation. HCW has cash andundrawn debt headroom of c.$100m, and the vehicle will receive additionalsupport from HMC capital as required, including the deferral of managementfees.

BP view: Not ideal, but not unexpected either. Giventhe ongoing, challenging landscape for all Australian private hospitaloperators, and recent press articles (eg The Australian), HSO had beenforeshadowed to potentially be in breach of debt covenants with a deadline forMarch 2025. This appears to be the ‘gun fired’ in a process that could takemultiple avenues, but ultimately looks to replace or stabilise the underlyingoperator for the assets. HCW announced at its recent 1H25 result that HCW andUHF had been approached by parties including a consortium led by HMC Capital’sPE division, and that it would “consider all proposals”. While clearly thiscould impact FY25 earnings with four months of the year remaining, weunderstand HSO rent to be c.$3m on a monthly basis, which would imply that with$100m liquidity, HCW has cashflow to support itself for >24mths should norent be paid by HSO. Trading at a -42% discount to NTA, one of the widestdiscounts amongst our sector coverage, its clear the market is alreadyascribing downside into the price for an unfavourable outcome regarding HSOtenancies.

We currently have a BUY recommendation and$1.30 PT on the stock.