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Edited Transcript of VHP.NZ earnings conference call or presentation 7-Aug-19 11:30pm GMT

Preliminary 2019 Vital Healthcare Property Trust Earnings Call

Auckland Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Vital Healthcare Property Trust earnings conference call or presentation Wednesday, August 7, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Adams;Executive Director NorthWest, Developments & Acquisitions

* Miles Peter Wentworth

Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited

* Richard Roos

Vital Healthcare Property Trust - MD of the Australian Business - Vital Healthcare Management Limited

* Stuart Harrison

Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited

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Conference Call Participants

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* Angus Simpson

ANZ Investment Services (New Zealand) Limited - Equity Analyst

* Jeremy Andrew Simpson

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Nick Mar

Macquarie Research - Analyst

* Owen Batchelor

Jarden Limited, Research Division - VP of Equity Research

* Shane Solly

Harbour Asset Management Limited - Director & Portfolio Manager

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Vital Healthcare Property Trust 2019 Annual Results. (Operator Instructions) I would now like to hand the conference over to Mr. Miles Wentworth, Interim Manager.

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [2]

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Thank you, Ashley. Good morning, and welcome to the 2019 annual results call. Joining me on the call today are Stuart Harrison, the Chief Financial Officer of Vital Healthcare, who will be talking to you about the 2019 financial results, a recap of Healthscope and the Capital management section of the presentation. Stuart will be followed by Richard Roos, who is an Executive Director responsible for the Vital portfolio and jointly responsible for acquisitions. And Richard will be followed by Chris Adams, who's an Executive Director responsible for Vital's projects and jointly responsible for the acquisitions with Richard.

This is the senior team that is responsible for the management of Vital Healthcare. Collectively, we have been in health care property for 75 years. Despite the personnel changes during FY '19, the management team has a depth of industry experience and significant experience in regard to the Vital portfolio.

We also have in the room with us, Jason Kepecs, who is Vital's Director of Investor Relations.

Our slide pack this year includes an enhanced level of disclosure. We have taken this approach to provide the market and analysts with as much information as possible in order to help you fully understand and value Vital. As such, we will be talking to the key points rather than each and every slide.

I will now spend a few minutes summarizing the highlights from the 2019 financial year and will then hand to the team for their respective sections. I will then come back and round it out with the outlook for the fund before we can take your questions.

There are 3 overarching messages for you today. Firstly, the business as usual -- from the business as usual perspective, Vital's normalized net distributable income performance, that is our operating result, was a solid result at $51 million. This was a 3.8% increase on FY '18's $49.1 million.

Secondly, Vital has had another successful and busy 12-month period. Our focus has been on actively managing the operating performance of the business and progressing projects. As well as the business as usual activity, we undertook a fee and governance review that will be put to unitholders vote at the annual meeting, and invested significant time and resource into accessing the Healthscope opportunity, which the Board ultimately declined to participate in.

Thirdly, healthcare has an undeniably positive growth profile, benefiting from the demands of an aging and growing population as well as technology providing better, more effective health solutions and outcomes. These factors are unique, and unlike any other segment within the property industry, provide a defensible investment proposition that continues to support and underpin our value add, scale and diversification strategy.

Slides 4 through 9 provide an overview of Vital Healthcare. To summarize this section, the trust is the only listed healthcare property specialists in either Australia or New Zealand. Vital has a well-diversified, scaled portfolio of high-quality healthcare property. We have exceptionally strong investment characteristics and have delivered investors strong performance over many years.

Now turning to Slide 11, the highlights for 2019. Firstly, the financial highlights. With the highly structured rent review profile of the fund, we again delivered attractive like-for-like net rental growth on a same currency basis of 2.3%. The normalized net distributable income was $51 million, which is a 3.8% increase on FY '18. Net tangible asset backing was up 2% to $2.31, driven by strong growth in property revaluations. Debt to total assets, excluding the Healthscope related party loan that was repaid earlier this month, was down 220 basis points to 35.3%. With the announcement of a fourth quarter distribution of $0.021875 per unit, the total distribution for FY '19 has increased 2.2% from the prior year to $0.0875 per unit. And total returns to investors, being the change in unit price plus distributions for FY '19, was an attractive 27.5%.

In relation to the portfolio, portfolio values were up 6% or $104 million. This reflected the weight of capital and continued appetite by investors for healthcare property. The team renewed 32 leases during the year with positive spreads to the prior rental. Our portfolio continues to have a long and attractive weighted average lease term of 18.1 years. And we are continuing to see occupancy of over 99%, 99.4% to be specific, which speaks to the quality and desirability of our portfolio.

Acquisitions and projects has seen another active year. We acquired $25 million worth of strategic landholdings across 6 locations in both Australia and New Zealand. This provides attractive future growth opportunities for the fund. $218 million worth of return on cost projects have started, consisting of the Acurity projects at Wakefield and Royston totaling $50 million, the AUD 126 million new tower at Epworth Eastern in Melbourne along with 2 health [e-care] projects at the Hills and Lingard for AUD 34 million. These projects have a development yield of 6.1%, being a circa of 480 basis point premium to the New Zealand 10-year government bond rate, which has been agreed upfront without hospital operating partners.

In terms of other portfolio growth opportunities, we have $61 million of fully funded stage 2 and 3 at Wakefield, with longer-dated opportunities at Elizabeth Vale in Adelaide and Ormiston in health.

I will now hand it over to Stuart, who will walk you through the 2019 financial results.

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [3]

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Thank you, Miles, and good morning, all. Slide 13 sets out some of the core numbers from our 2019 financial performance, and we will walk through the elements of this in greater detail within subsequent slides.

Moving to Slide 14. This details the like for like net property income performance. Here, we're comparing the revenue and expenses from those properties which we owned both at the start of the 2018 financial year and still at the end of the 2019 financial year. Gross property income includes rental income as well as operating expenses recovered from tenants and totaled $95.9 million, a 2.2% increase. The increase reflects changes across a number of the properties with no single property contributing significantly. After allowing for property expenses incurred plus nonrecurring maintenance costs, we arrived at a like-for-like net property income that shows an increase of 2.3% over the prior year. Net property income from acquisitions and developments recognizes the amount of additional net property revenue generated as a result of acquisitions or regionalized developments over the past 24 months. A reminder that the acquisitions were Eden Rehab, the Hills, plus the Acurity assets at Wakefield, Royston and Bowen.

On to Slide 15. As you may appreciate, within any financial year, there are a number of one-off items that arise, and this slide sets out to present a normalized net distributable income position. So what are some of the differences that have occurred year-over-year to get to a normalized position?

First, we have the Ascot fitout. 5 years ago, we received a lump-sum payment of $10 million as part of a 30-year lease renewal and payment of remaining fitout rent that Ascot Hospital would otherwise have had to pay. This payment had been amortized over the subsequent 5 years, and this concluded in March 2019. This has therefore given rise to approximately $573,000 of additional income in the prior year, given the reducing nature.

Next, we have strategic transaction costs, and I'll talk to the Healthscope opportunity shortly. Nonrecurring costs related to corporate governance activities, including independent expert opinions and due diligence costs on opportunities that did not proceed.

Next, we come to tax. Now on IRD, and hopefully I don't get too technical, but in short, during the year, the IRD adopted a position, whereby the distribution that is paid to Vital from its Australian-based trust is no longer eligible for the foreign dividend exemption. This therefore means that this income, approximately AUD 6 million, will now be taxed in New Zealand at 28%, and the calculations being done to determine if any of the tax paid in Australia is capable of being offset as a credit against the New Zealand tax. This has been provisioned in the FY '19 tax expense and, as such, is materially higher than FY '18.

Following these adjustments, this has given rise to a normalized net distributable income of $0.115 per unit, an increase of 3.8% over the comparative position for 2018. With distributions made to unitholders equating to $0.0875, this means we had a conservative, normalized net distributable income payout ratio of 76%.

Moving on to Slide 17 and a recap of the Healthscope transaction. This slide, along with the Note 24 in the financial statements, sets out the nature of the opportunity that Vital looked to participate in with the acquisition of the Healthscope real estate portfolio. At a summary level, the size of the opportunity considered by NorthWest and Vital was an AUD 1.25 billion. Vital considered this on a 50-50 basis, that is a potential AUD 625 million investment. A reminder of some of the facts. The Healthscope real estate opportunity represented an opportunity to acquire a large portfolio of high-quality assets. Vital and NorthWest agreed to jointly pursue the opportunity and invested significant resources to do so. In order to have a material influence on -- as to the outcome, that is securing the real estate, the parties secured an equity position at Healthscope via derivative position. The risks were actively managed by ensuring a cap & collar were added. Given the complexity of contracting the derivatives and leveraging NorthWest's scale and global presence, along with relationships, NorthWest led the project. Funding was required to secure the equity position, and this was provided on an equal, same terms basis between Vital and NorthWest. Ultimately, there was no associated funding cost to Vital investors. Vital contributed a related party loan of AUD 80.3 million to the joint derivative position, with this now being fully repaid on the 2nd of August 2019.

So moving to Slide 18. After significant consideration of the opportunity, it was determined by Vital's Board of Directors not to proceed with Vital's participation in the Healthscope acquisition. This was an exceptionally difficult decision that took into account a broad range of considerations, including Vital's investment objectives, the proposed structure of the transaction, Vital's cost of equity at the time and market feedback. The pursuit of such an opportunity does not come -- does come, sorry, with some net cost impacts, and we've set the elements of these totaling $4.2 million.

I'll now hand you over to Richard Roos, who will talk to the revaluations.

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Richard Roos, Vital Healthcare Property Trust - MD of the Australian Business - Vital Healthcare Management Limited [4]

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Thank you, Stuart. Please now turn to the Revaluation section, starting on Slide 20.

As Miles mentioned in his opening remarks, Vital experienced a portfolio revaluation gain in FY '19 of $103.6 million. In percentage terms, this translates to a year-over-year gain of 6%. The gain roughly aligns with the split of the portfolios by country, with 77% of the increase coming from the Australian properties and 23% from New Zealand. The primary driver of the gain was cap rate compression, with growth in rents providing 90% of the gain and development margin the balance.

As can be seen on Slide 21, overall, the portfolio weighted average cap rate firmed 15 basis points to 5.61%, with metropolitan-located assets, as you might expect, on a tighter weighted average cap rate of 5.5% versus regional assets at 5.74%. Overall, the demand for healthcare assets continues to increase. New industry entrants are looking to acquire assets, and additional capital is being allocated to this sector. This demand, along with lower bond yields, have been the primary drivers of continued cap rate compression in FY '19.

Looking forward, we see continued modest tightening of cap rates in the near term as bond yields continue to decline and the full effect of several recent market transactions, including Healthscope, are taken into account by the valuers.

Looking at the NTA Bridge on Slide 22. You'll note the key driver of the 2.2% growth in net tangible assets year-over-year was revaluations. Unrealized foreign exchange losses and hedges offset around 2/3 of the positive valuation impact.

Turning now to the portfolio. As you can see from Slide 24, the Vital property portfolio is strongly diversified in terms of geographic location, healthcare asset type and tenant relationships. All of the key portfolio metrics are in great shape. We continue to experience near 100% occupancy, with limited near to medium-term expiries and a weighted average lease term of over 18 years.

Slide 26 sets out the forward lease expiry profile. In my view, the expiry profile is very manageable, and we continue to expect the proportion of renewed leases to be very high. While we don't detail any specific lease transactions in the presentation, we thought it would be helpful to provide some detail on several recent lease transactions that demonstrate the strength of our portfolio and our tenant relationships.

As part of the negotiations to commence the AUD 126 million Epworth Eastern expansion, which Chris and his team will be managing, the Epworth Eastern lease term will be reset to 30 years on practical completion of the development. In addition, the 2020 market rent review was pre-agreed, with rent increasing by AUD 576,000 this year and annual structured rent increases of 3% commencing from 2021.

We also recently completed a substantial new 10-year lease with Epworth and their IVF partner at the Acura Medical Building, which is located in the Epworth Eastern medical precinct.

And finally, last month, we finalized a new lease at the Gold Coast Surgical Centre for the day surgery floor, which has been vacant since late 2016, when we negotiated a surrender of the prior lease with Healthscope in return for a payment from them of AUD 4.55 million or roughly 8 years' rent. This new lease takes the occupancy at the building from 63% to 100%.

On Slide 27, which is the last of the portfolio slides, we provide some detail on the outcome of FY '19 rent reviews. The main point here being that rents in FY '19 increased at an annualized rate across the portfolio of 2.2%, largely driven by structured rent reviews.

Thank you. I will now turn over the presentation to Chris.

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Chris Adams;Executive Director NorthWest, Developments & Acquisitions, [5]

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Thank you, Richard. I refer you now to Slide 29 regarding the acquisitions update.

Our focus on looking to the future with acquisitions that are strategic in nature saw several properties added to the portfolio this year. These properties provide near- or longer-term growth opportunities and in the main are blocks of land that enable us to expand existing assets or are well-located sites offering a new footprint.

In Australia, several residential properties were acquired adjoining Maitland Private Hospital in New South Wales and Abbotsford Private Hospital in Perth. In New Zealand, we acquired a land parcel adjoining Royston Hospital in Hastings. The Ormiston acquisition reflects the fund's focus around establishing health precincts. This site provides the opportunity in time to create a health precinct that will allow Vital to expand Ormiston hospitals as the catchment in South Auckland continues to grow and also to add additional health services on the site.

Likewise, on Slide 30, where an opportunity arose at Elizabeth Vale in Adelaide. It presents the opportunity to enhance a major existing health precinct, with this site being adjacent to one of Adelaide's major tertiary hospitals, the Lyell McEwin. The project is being undertaken in joint venture with NorthWest. The longer-term intention is to establish a private hospital. In the interim, we benefit from the existing retail asset, which provides an income stream during the master planning phase and early stages of development. A number of existing tenants on the site are health providers. There is the potential to relocate these tenants to a specialist center that is likely to be part of an early site activation, along with car parking for the broader present. Master planning is well advanced and is being undertaken in conjunction with key health care groups that have expressed an interest in being tenants in the new development.

Turning now to Slide 31, Vital's committed projects. Our strategy with brownfield development is to expand existing hospitals to meet the increased demand in each catchment. Wakefield and Epworth Eastern are 2 examples that demonstrate scale and quality.

On Slides 32 through 35, we have included key facts on these 2 substantial projects. I won't go into the details, but as you can see, these developments are large scale projects being undertaken with market-leading operators. Each project leverages off strongly performing operating businesses. The projects utilize Vital's established return on cost methodology for projects with long-dated lease pre-commitments. Each project is now live, with leading contractors appointed.

As noted on Slide 33, we're pleased to announce an agreed construction contract for Epworth Eastern and commencement on-site with Icon, a business with a strong history in healthcare construction via Cockram, now part of Icon, but also part of Kajima Corporation, an $11-billion Japanese construction business.

Now passing back to Stuart regarding balance sheet and capital management.

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [6]

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Thank you, Chris.

Slide 37. The balance sheet reflects our solid capital position. The increase in investment properties to $1.84 billion is an net effect of acquisitions, development spend, revaluation gains and a negative adjustment for foreign exchange translations. Vitals' bank debt at 30 June was $735 million, giving rise to a debt to total asset ratio of $38.1 million. Subsequent to June, there has been the repayment of the related party loan of AUD 80.3 million, and that's what gives an updated loan-to-value ratio of 35.3%. 9.5 million units were issued during the year, 6.5 million units were issued to the manager for their incentive fee and 2.9 million units were for the dividend reinvestment plan.

Slide 38. With the repayment of the intercompany loan debt, we are now at around 35.3%, which is well below the 50% Trust Deed covenant.

On Slide 39. Over the course of the year, the Trust added a tranche of AUD 150 million to the bank facility for a term of 3 years in order to provide the funding lines for the Epworth Eastern and Wakefield projects. As of June 30, we had debt headroom of $173 million, which has now increased to $257 million.

Moving to Slide 40, which sets out the details on Vital's interest rate hedging profile. The year-end 2019, drawn down debt has a weighted average cost of 4.4%, slightly lower than the prior year at 4.6%. We've seen a drop in our fixed interest rates, pre-line and margin, down to 3.12% as over the course of the year, we added to our long-dated interest rate swaps. The most recent of these was an AUD 30 million at 1.53% for 10 years.

Thank you. I will now hand you back to Miles.

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [7]

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Thank you, Stuart.

Now moving to Slide 42, the outlook for the fund. On the operational side, a key focus during FY '20 would be to manage the effective delivery of our development program, including the Epworth Eastern project and Stage 1 of the redevelopment at Wakefield. We have a number of longer-dated projects, for which we will continue to advance the master planning and associate feasibilities. Consideration is being given to capital recycling opportunities within the fund, with a view to further enhancing the quality of the portfolio. We are looking at further opportunities in the aged care sector, an industry with a large-scale property component, which shows many similar characteristics to our existing portfolio. While we consider that there are strong synergies, any investment opportunities will be carefully and thoroughly evaluated against our value-adding assessment framework.

In relation to governance-related matters, we expect to complete the search and make an appointment of a full-time CEO/Fund Manager by the end of this calendar year.

And lastly, the Board has confirmed an FY '20 distribution per unit of at least $0.0875 per unit.

Thank you. I'd now like to hand it back to Ashley, the operator, and we're happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Nick Mar from Macquarie.

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Nick Mar, Macquarie Research - Analyst [2]

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Just a quick one from me on the dividend or the distribution. What's your thinking? Obviously, there's wording around of it being at least $0.0875. And given your view on the normalized earnings, it's obviously a low payout ratio for FY '19. What are the kind of key factors in there that would see it exceed the $0.0875 mark?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [3]

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Thanks, Nick. Look, at the end of the day, the Board's taking a defensible, conservative position at the early part of the financial year. And yes, we have drawn attention to the at leasts. In other words, it's a floor. And as we progress through the financial year, the Board will consider more fully where we're setting against -- earnings against the distribution. So it will be evaluated as we move through.

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Nick Mar, Macquarie Research - Analyst [4]

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Sure thing. And is there any discussion about having a target payout ratio or a more formalized dividend policy?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [5]

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Look, it's a continuation of what we've always said, and that's really been making sure that it's a sustainable distribution, and we've been consistent in the use of that language. It's about making sure that it's, again, defensible and sustainable.

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Nick Mar, Macquarie Research - Analyst [6]

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Great. And then in terms of the capital recycling opportunities, could you talk more through which assets you view as non-core and what you think you can do with that capital otherwise?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [7]

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Look, I won't be specific in regard to which particular assets, but there are a number of assets within the portfolio that really we can't add any more value to. And as a result, we've got -- as Chris outlined, in regard to the projects, we've got great value add coming through in those projects. A sensible and logical thing to do to -- if we maximize the value on some assets and maybe smaller in size, then resizing that capital into those capital projects is a sensible and logical thing to do with that capital. And it enhances the quality of the portfolio at the same time.

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Operator [8]

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Your next question comes from Jeremy Simpson with Forsyth Barr.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [9]

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Just a quick question around the Elizabeth Vale development. You're talking a healthcare precinct with a medical center and a hospital. Would that be a new operator coming into that area? Or do you think there's a chance you'll get the Lyell McEwin Hospital to expand or you have something a bit different there?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [10]

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Lyell McEwin is part of SA Health, so it's obviously the public provider. There is a small-scale private hospital in the location, a major not-for-profit operates there. So certainly, that will be a factor in the discussions. The discussions are broad-based, but I believe there's opportunities around all of those parties.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [11]

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And you'll be able to stage it, so you'll be able to retain? I mean to get some of the existing payments in the retail seem medical. But you say you've got to stage it so you can retain those guys. Is that the plan?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [12]

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Yes, absolutely. The sites for that 1.78 hectares does provide for staging, absolutely. So there are small components of the retail that will have to go and be modified but, yes, the intention is to retain the holding income and the retailers as long as possible. We also see an element of the retail being continued. There is a strong amenities associated with what we're doing but also associated with the Lyell McEwin and the number of people that are closely located on that site.

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Operator [13]

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Your next question comes from Angus Simpson with ANZ.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [14]

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I just have a quick question around that change in tax with regard to the IRD regime in Australia. Can you just try to give us a bit more detail around what those have changed in the IRD's view there? And then also just, I guess, what is kind of the expected effective tax rate going forward?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [15]

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Yes. So the change is actually in the New Zealand regime as to how the income that we get from Australia is taxed. And so we now have the scenario where that distribution that we get from Australia is taxable in New Zealand. So I think I touched on -- in the current year, we ended up with approximately $6 million worth of operating income that would be taxed at the $0.28. And as we go forward, there will be obviously some tax credits that are coming into play for the tax that we've paid in Australia.

So I think historically, from an effective tax rate type position, we would probably have to be shifting ourselves from -- sort of -- we're targeting a net 15% to 17%. I think we're probably hitting now towards the 17% to 20% type level on the back of this.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [16]

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And then just a last question with regard to the hedging of the asset base. So when I look back to 2014 when there was a similar currency move, there was a -- in the waterfall chart, there was a comment saying FX translation hedging, which was a plus $0.04 which kind of offsets the FX movement. Has there been a change in hedging for that not to be in the waterfall this year, or is that already included in the $0.08 movement?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [17]

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No. I guess, the key that you got this year is, given where exchange rates were relatively stable through the course of the year, and so within the policy, there is the ability as to what percentage we hedge. The Board, looking at the natural currency hedge that we had in play throughout the majority of the year, was comfortable to set what the natural currency hedge and not to actually take out any derivative.

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [18]

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Just maybe -- sorry, Angus. Adding on because -- entering into those hedges, naturally there's a cost attached to that. They have a duration period anyway, so you're marking to market at the end of the duration of those hedges. There's a line of thinking. One, you have your natural hedge to the maximum extent possible. But if FX hedges are over the top, as I said, there's a cost and there's a mark-to-market at the end of it, anyway. So to my way of thinking, they're probably not that value for money.

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Angus Simpson, ANZ Investment Services (New Zealand) Limited - Equity Analyst [19]

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Okay. So is there going to be a change in some values there, the policy or going forward, do we expect the Board to continue with the new one we are doing, with no additional or limited additional hedging?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [20]

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If there's a change in policy, then obviously, that's something that we would have to put in because it's identified within the [cycle]. So the policy, basically, it still remains there in play. But as we say, part of that policy allows for the Board's consideration to actually be able to go down to those sorts of levels. A natural currency hedge that's sort of sitting in that 56%, 60% at the moment, that is where they're comfortable to be at, but that doesn't mean that we aren't continually monitoring where the kiwi dollar, Aussie dollar is.

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Operator [21]

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Your next question comes from Owen Batchelor with Jaden Securities.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [22]

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Just one quick question. I didn't see any rent to EBITDA metrics disclosed. Are you able to provide us with how that's looking at the moment and perhaps how it's moved over the last 12 months.

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Richard Roos, Vital Healthcare Property Trust - MD of the Australian Business - Vital Healthcare Management Limited [23]

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Sure. Thank you for the question. Basically, throughout FY '19, when you look at the entire vital Portfolio and the mix of tenancies, rent EBITDAR was relatively stable the entire year and remained well within the overall band, which we consider normal rent to EBITDAR being 40% to 50% of EBITDAR being rent.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [24]

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So sort of in the middle of that range, are we talking?

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Richard Roos, Vital Healthcare Property Trust - MD of the Australian Business - Vital Healthcare Management Limited [25]

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It fluctuates within the range, depending on whether we've just rentalized a brownfield development and the stage of ramp-up and how material that was. But within the entire year, we were within the band.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [26]

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Sure. Okay. And then just following off from Nick's question around capital recycling, I think you've previously flagged around $100 million in asset sales. Just wondering if that rough number still stands? And also, do you have a formal internal target [gearing range]?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [27]

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So in regard to a dollar amount, probably around that $100 million is sensible and logical. But if we are evaluating that at the moment in terms of individual assets and when it's appropriate to move those forward, in regard to a specific percentage, no, there isn't a specific percentage that we're working to. Again, within the presentation, we've been quite clear and really articulating to the market that we have no peers. We have -- we are a very unique vehicle in the sector that we operate. It's a very defensive sector. And when you look at overlay, that was a very long weighted average leased in the high occupancy and the high-quality tenants that we have, we should have a higher level of debt than other REITs in the market. It's getting a balance between a lazy balance sheet and an over-geared balance sheet, and we're -- the Board's very, very comfortable with the level of gearing where it's at now.

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Operator [28]

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(Operator Instructions) Your next question comes from Shane Solly with Harbour Asset Management.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [29]

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I've got 3 questions, 2 other granular. First one, just on Healthscope costs. Can you just confirm there's no additional cost to be included in the next half year associated with the healthcare -- sorry, Healthscope process?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [30]

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That's correct. The only thing we will obviously have is we'll have some income on the back of the loan, given that was repaid. But that's an income, so no additional costs.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [31]

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Okay. Stuart, while I've got you, then the next one, just picking up on the tax question again. Obviously, the MIT regime is still - is supportive of keeping a New Zealand domicile. If you're effectively being fully taxed on those Australian net earnings, Is that correct still?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [32]

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Sorry, I don't follow your question.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [33]

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Sorry. I said, so if you're getting -- we're effectively being taxed on Aussie income at 28%, the MIT regime still works?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [34]

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Yes, it does.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [35]

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Does it still supports the entity being a New Zealand-based entity and getting that MIT benefit?

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Stuart Harrison, Vital Healthcare Property Trust - CFO & Company Secretary of Vital Healthcare Management Limited [36]

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Yes.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [37]

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Okay. And just a final one, just to get a -- whether there's anything that can be added to the governance board review process. Just an update on how that's traveling?

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [38]

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Yes. Sure, Shane. The Board is currently considering the composition of the Board in regard to the number of independent directors as a percentage of the total board. We will be back communicating with the market in due course as to how and when we move that forward. So it's currently with the board.

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Operator [39]

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That's all we have time for today. I'll now hand back to Miles for any closing remarks.

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Miles Peter Wentworth, Vital Healthcare Property Trust - Interim Manager of Vital Healthcare Management Limited [40]

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Thank you, Ashley. In closing, thank you very much for joining the call today. Look, we have told you about the solid FY '19 performance that's been delivered, the projects that are now under construction and largely fully leased with locked in and cost-based rentals, the brownfield development opportunities that we have secured and our interest in assessing investment opportunities, including further investment in aged care.

As I mentioned in my introduction, healthcare has an undeniably positive growth profile, benefiting from the demands of an aging and growing population as well as technology providing better, more effective health solutions. These factors are unique, and unlike any other segment within the property industry, providing a defensible investment proposition that continues to support and underpin Vital Healthcare's strategy and investment proposition.

Stuart, Jason and myself are available for the rest of the day, so please call if you have any questions. Thank you. That concludes our briefing.