Generation Healthcare REIT

Transcription

1 AUSTRALIA GHC AU Price (at 06:13, 24 Aug 2015 GMT) Neutral A$1.65 Valuation - Sum of Parts A$ month target A$ month TSR % +1.8 Volatility Index Low GICS sector Real Estate Market cap A$m day avg turnover A$m 0.2 Number shares on issue m Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total DPS growth % Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x GHC AU vs ASX 200 Prop, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2015 (all figures in AUD unless noted) 24 August 2015 Macquarie Securities (Australia) Limited Generation Healthcare REIT On a good path Event GHC reported FY15 underlying operating EPS of 9.6cps, up ~4% on the pcp and in line with our 9.6cps forecast. Impact Delivery of development pipeline highly accretive to earnings... Delivery of the trusts development pipeline remains a source of value creation for GHC. Indeed with an incremental cost of debt of ~4% and developments that are expected to yield >8%, delivery of the Epworth Freemasons Cancer Centre, Casey Stage 2 and the Frankston Private Expansion will deliver significant earnings accretion. Indeed the spread of ~$3.6m, based on current debt costs and post management fees, represents ~17% of FY16 operating earnings and whilst delivery of this development pipeline is expected over FY17-FY19 and so the accretion will be gradual over four years, it underpins a healthy earnings growth profile with our actual forecasts more conservative in light of our economics teams longer term forecasts for a rise in interest rates.... and valuation. NTA rose strongly from $1.08ps at December 2014 to $1.22ps at June 2015 as the issue of units above NTA was supplemented with strong property revaluations in the half (+9cps). Whilst three assets fell in value, the vast majority of the portfolio increased in value. We expect GHC to continue to deliver strong NTA growth as further cap rate compression across the portfolio is supplemented by the revaluation of developments. Indeed if we conservatively assumed the committed development pipeline were re valued to a 7.75% cap rate, it would add ~5.2cps to NTA (+4.3%). And it s fully funded. Based on our estimates, GHC can debt-fund its entire committed pipeline and remain comfortably within its LVR and ICR metrics. Gearing would increase to ~43% on our calculations (before assuming any further positive revaluations), within management s target range of 40-45%. Furthermore, modest revaluations (3.5% pa for two years and revaluation of the development spend to a 7.75% cap rate), would see gearing move back to ~40%. We accordingly believe that further equity will only be required to fund acquisitions, with Aged Care certainly on the radar as is a restructure of GHC s debt investment in Waratah Private Hospital or additional developments. Earnings and target price revision EPS: FY16-1.5%, FY %, FY %. TP up 3% to $1.59. Price catalyst 12-month price target: A$1.59 based on a SOTP methodology. Catalyst: Further aged care acquisitions or restructure of Waratah investment Action and recommendation Neutral. GHC is a well run property trust with strong organic growth prospects, value add development opportunities and acquisition opportunities, although the share price is already trading around our valuation. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 Fig 1 GHC FY15 result in line with expectations The good The not so good The interesting FY15 result in line with expectations. GHC reported a FY15 statutory net profit after tax of $31.3m. Operating income which excludes AIFRS adjustments as well as the performance fee was $17.2m or 9.6cps, up ~4% on the pcp and directly in line with our 9.6cps estimate. FY16 earnings guidance also as expected. Consistent with our 10.0cps forecast going into the result (moderated slightly to 9.9cps), GHC have maintained previously provided FY16 operating EPS guidance of 9.9cps, which is up ~3% on the pcp despite the drag arising from equity raisings to provide capacity to fund future development spend. FY16 DPS guidance is 8.84cps which is similarly up ~3% on FY15. Developments are very earnings accretive in a low interest rate environment. Delivery of the trusts development pipeline remains a source of value creation for GHC. Indeed with an incremental cost of debt of ~4% and developments that are expected to yield >8%, delivery of the Epworth Freemasons Cancer Centre, Casey Stage 2 and the Frankston Private Expansion will deliver significant earnings accretion in addition to revaluation gains on completion. Strong NTA growth. NTA rose strongly from $1.08ps at December 2014 to $1.22ps at June 2015 as the issue of units above NTA was supplemented with strong property revaluations in the half (+9cps). Whilst three assets fell in value, the vast majority of the portfolio increased in value. We expect GHC to continue to deliver strong NTA growth as further cap rate compression across the portfolio is supplemented by the revaluation of developments. The weighted average cap rate of the property portfolio has fallen from 8.24% at December 2014 to 7.82%, although this is partly due to a change in the basket of properties following the RSL care acquisition (7.65% cap rate) which has dragged down the weighted average. Distribution free cash flow covered. Reported net operating cash flow of $16.3m, equating to 9.0cps is below operating income of 9.6cps but ahead of the 8.6cps distribution declared (even after our assumed maintenance capex spend) and in line with our expectation and we continue to expect the FY16 distribution will be covered by operating cash flow and broadly in line with free cash flow Source: Macquarie Research, August 2015 Some asset values fall. Overall the asset revaluations across the portfolio were strong but we do note that three assets were devalued in FY15 being the ARCBS, Pacific Private and The Frankston Specialist Centre, all of which were driven by very asset specific factors. Some operating metrics soften. Occupancy of the portfolio has fallen from 98.6% at December to 97.8%, although this is partly impacted by a change in the composition of the portfolio but primarily due to the completion of the Casey Specialist Centre which is 84% occupied. Tenant retention across the portfolio also fell to 81.5% in FY15 from 87.6% in 1H15 ad 89.1% in FY14. Committed developments fully funded. Based on our estimates, GHC can debt-fund its entire committed pipeline and remain comfortably within its LVR and ICR metrics. Gearing would increase to ~43% on our calculations (before assuming any further positive revaluations), within management s target range of 40-45%. Furthermore, modest revaluations (3.5% pa for two years and revaluation of the development spend to a 7.75% cap rate), would see gearing move back to ~40%. We accordingly believe that further equity will only be required to fund acquisitions, with Aged Care certainly on the radar as is a restructure of GHC s debt investment in Waratah private hospital or additional developments. Lower risk and higher return. MSCI s analysis of property sectors shows that healthcare real estate has delivered the highest return despite having the lowest return volatility over the 8 years to June FY15 result in line with our expectation GHC reported a FY15 statutory net profit after tax of $31.3m. Operating income which excludes AIFRS adjustments as well as the performance fee was $17.2m or 9.6cps, up ~4% on the pcp. The result was in line with our 9.6cps estimate. In summary: Net property income of $24.3m is up 31% on the pcp on the back of like for like property rental growth of 3.3% and the full year contributions of the Spring Hill acquisition and the further investment in Epworth Freemasons Clarendon St; Net finance costs of $4.9m were well down (~23%) on the pcp despite a higher debt balance on the back of debt refinancing undertaken which has resulted in a significantly lower interest rate for GHC. Responsible entity fees increased along with the asset base of the trust. Share price outperformance in the half, means that a $2.0m performance fee has accrued to the manager in the half and will be settled with the issue of units in 1H16 was already in our forecasts. 24 August

3 Fig 2 FY15 operating EPS 9.6cps, up ~4% on the pcp FY14A 1H15A 2H15A FY15A % change on pcp Net property income A$m % Finance costs A$m % RE fees A$m % Other expenses A$m % Net operating income A$m % Rental straight lining A$m Property revaluations A$m MTM of derivatives A$m Performance fee A$m Other A$m Net profit after tax A$m % EFPOWA # m % Net operating income per share Acps % DPS Acps % Source: Company data, Macquarie Research, GHC, August 2015 NTA rose strongly from $1.08ps at December 2014 to $1.22ps at June 2015, as the issue of units above NTA was supplemented with strong property revaluations in the half (+9cps). Whilst three assets fell in value, the vast majority of the portfolio increased in value. We expect GHC to continue to deliver strong NTA growth as further cap rate compression across the portfolio is supplemented by the revaluation of developments. The weighted average cap rate of the property portfolio has fallen from 8.24% at December 2014 to 7.82%, although this is partly due to a change in the basket of properties following the RSL care acquisition (7.65% cap rate) which has dragged down the weighted average. Reported net operating cash flow of $16.3m, equating to 9.0cps is below operating income of 9.6cps but ahead of the 8.6cps distribution declared (even after our assumed maintenance capex spend) and in line with our expectation and we continue to expect the FY16 distribution will be covered by operating cash flow and broadly in line with free cash flow. Fully funded to deliver accretive development pipeline Delivery of the trusts development pipeline remains a source of value creation for GHC. Indeed with an incremental cost of debt of ~4% and developments that are expected to yield >8%, delivery of the Epworth Freemasons Cancer Centre, Casey Stage 2 and the Frankston Private Expansion will deliver significant earnings accretion in addition to revaluation gains on completion. Fig 3 GHC development pipeline Fig 4 Committed developments highly earnings accretive Full year pro forma Incremental NPI 9.6 Incremental interest -5.2 Management fees -0.8 Net change to earnings 3.6 FY16E operating income 21.2 Accretion 16.9% Notes: Assumes a 4.5% cost of debt. Development completions assumed to occur over FY17-FY19 so accretion will be phased Source: GHC, August 2015 Source: Macquarie Research, August August

4 Based on our estimates in the table below, GHC can debt-fund its entire committed pipeline and remain comfortably within its LVR and ICR metrics. Gearing would increase to ~43% on our calculations (before assuming any further positive revaluations), within management s target range of 40-45%. Furthermore, modest revaluations (3.5% pa for two years and revaluation of the development spend to a 7.75% cap rate), would see gearing move back to ~40%. We accordingly believe that further equity will only be required to fund acquisitions, with Aged Care certainly on the radar as is a restructure of GHC s debt investment in Waratah Private Hospital or additional developments. Fig 5 Balance sheet capacity to fund committed pipeline A$m 30-Jun-15 Dev t Spend Pro forma Revals Pro forma Assets Cash Investment properties Equity accounted investments Other assets Total assets Liabilities Debt Other liabilities Total liabilities Equity Gearing 26.6% 43.2% 40.4% NTA per unit A$ps Source: Company data, Macquarie Research, August August

5 Fig 6 FY14 FY15E FY16E FY17E FY18E FY19E FY20E Income NPI A$m Other income Total income A$m Expenses Interest expense A$m (6.4) (4.9) (6.5) (6.9) (7.9) (9.4) (10.7) Trust & other expenses A$m (1.8) (2.3) (3.0) (3.3) (3.7) (3.9) (4.0) Total expenses A$m (8.2) (7.2) (9.5) (10.2) (11.5) (13.3) (14.8) Profit before tax A$m Tax expense A$m OEI A$m Reported net profit after tax A$m /- adjustments to derive statutory profit A$m Reported statutory profit A$m Per share data EPS A cps EPS growth % 3.9% 3.3% 5.9% 9.7% 8.8% 3.2% FFO A cps FFO growth % 3.9% 3.3% 8.6% 9.4% 8.5% 3.1% DPS A cps DPS growth % 7.3% 4.0% 2.5% 5.0% 5.0% 5.0% Cashflow statement Cash flow from operations EBITDA A$m Net interest A$m (7.5) (6.9) (7.4) (9.0) (10.2) (11.0) (10.8) Change in working capital A$m Tax paid A$m Other A$m (0.3) (0.3) (0.3) (0.3) (0.3) Net operating cash flow A$m Cash flow from investing A$m Asset sales A$m Asset purchases A$m (30.5) (51.0) Capex- Maintenance A$m - (0.7) (0.8) (1.0) (1.2) (2.5) (2.6) Capex - development A$m (20.4) (13.5) (32.5) (43.0) (25.0) (5.0) - Other A$m (8.4) (1.1) (10.7) Net investing cash flow A$m (59.2) (66.3) (44.0) (44.0) (26.2) (7.5) (2.6) Cash flow from financing Issue of equity A$m Debt movement A$m (9.5) Distributions paid A$m (5.8) (9.3) (18.7) (19.6) (20.7) (22.1) (23.6) Other A$m (1.9) (1.7) Net financing cash flow A$m (15.5) (16.5) Net cash flow A$m 1.3 (1.6) 0.5 (0.2) Balance sheet Total current assets A$m TOTAL ASSETS A$m Total non current liabilities A$m TOTAL LIABILITIES TOTAL EQUITY A$m Source: Company data, Macquarie Research, August August

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) GHC AU vs ASX 200 Prop, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August month target price methodology GHC AU: A$1.59 based on a DCF methodology Company-specific disclosures: GHC AU: The preparation of research on was funded by ASX in accordance with the ASX Equity Research Scheme. This research was prepared by Macquarie Securities (Australia) Limited and not by ASX. ASX does not provide financial product advice. The views expressed in research pertaining to do not necessarily reflect the views of ASX. No responsibility or liability is accepted by ASX in relation to this report This report was prepared solely by Macquarie Securities Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Macquarie Securities Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of in the past 24 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 29-May-2015 GHC AU Neutral A$ Feb-2015 GHC AU Neutral A$ Jan-2015 GHC AU Neutral A$ Aug-2014 GHC AU Neutral A$ Jun-2014 GHC AU Neutral A$ Feb-2014 GHC AU Neutral A$ Dec-2013 GHC AU Neutral A$1.18 Target price risk disclosures: GHC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 24 August

7 Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 24 August