Given the rapid changes we continue to see as Federal and State Governments work together to deal with the health crisis stemming from COVID-19, these questions and answers will be updated frequently and reflect information current at the time of publishing (Thursday, 9 April 2020).
With some health professionals not currently practicing as a result of COVID-19, some tenants may seek rental assistance options that the government is yet to release – how do you see this affecting the Trust?
A small amount of our tenants have requested rental relief. We are assessing each request on a case by case basis having regard to past and future occupancy. Our role is, where possible, to achieve a balanced outcome where investors in the Healthcare Property Trust (Trust) may also receive a return for any assistance. Where possible, we are discussing extensions to the existing lease terms in exchange for lease incentives.
On 7 April 2020 The Federal Government released the National Cabinet Mandatory Code of Conduct for Small to Medium Enterprise (SME) commercial leasing principles. The Code is to apply for the duration of the Job Keeper program and is mandatory in relation to SME tenancies suffering COVID-19 financial distress (as defined by their eligibility for the Job Keeper program).
An SME is defined as a business with a turnover of up to $50 million - this applies at a group level in relation to retail corporate groups (and not an individual brand level). In the announcement, the Government said that the Code should also be applied “in spirit” to all leasing arrangements for affected businesses. The Code is intended to be rolled out at a state-level through legislation and regulations though these are yet to be announced. We continue to work with those tenants that have requested rental relief within the framework set by the National Cabinet Mandatory Code of Conduct.
What happens if private hospitals close as a result of the cancellation of elective surgery?
In late March 2020 it was announced by the Prime Minister that all non-urgent elective surgery in Private Hospitals was to cease on 1 April.
On 30 March 2020, in a letter to private hospital operators, the Minister for Health confirmed the Federal Government would guarantee the economic viability of overnight and day hospitals through agreements with state governments. We understand these agreements are progressing, with some states more advanced than others. We also understand that fixed costs such as rent will also be covered by the agreements between states and individual private hospital operators.
What opportunities do you see arising from this crisis?
The most important role we can play at this time is to continue to build goodwill with tenants by extending lease terms when appropriate.
We continue to assess future acquisition opportunities and are managing the Trust in the best interest of investors.
Will unit price valuations be adjusted for the direct property assets? Some industry funds are suggesting this will be the case.
In accordance with our valuation policy we regularly seek independent valuations of the Trust’s portfolio over a 12-month rolling basis. Generally, one quarter of the portfolio is independently valued each three months. We may seek additional independent valuations when we have cause to believe there may have been a material change in a property value, such as a new or extended lease.
Given our experience from the recent round of property revaluations in February 2020, we expect capital values to hold up well for the Trust’s properties. The feedback from valuers so far is that capitalisation rates for properties with long term leases are stable, which should be supportive of capital values for the Trust’s properties. However, properties with shorter lease terms may see an increase in vacancy and letting up allowances.
We may bring forward valuations for properties where we feel there has been a material change - either positive or negative. Otherwise we will continue our valuations as normal – providing valuations for one quarter of the portfolio per quarter. Our next valuations are due in April and May 2020.
Is there any expected impact to scheduled development works as a result of the pandemic?
The Trust has a development pipeline of over $600 million, which includes several projects in Queensland and Victoria.
We do not expect changes to developments already underway, however we will continue to monitor and assess market conditions prior to commencing other planned development projects as we expect that construction costs may decline while current market conditions persist.
Can you provide an update on debt and also any gains as a result of historically low interest rates?
We are monitoring debt pricing closely. Given the Trust is currently ~76% hedged, the drop in floating rates has marginally improved the Trust’s return. The Trust maintains a strong capital position with a gearing ratio of approximately 22% and liquidity of approximately $150 million available. We continue to assess various capital management initiatives to enhance unitholder returns.
What are the expected income distributions (% pa)?
We expect to maintain income distributions. The March 2020 quarter distribution for Wholesale units is 2.028 cents per unit and was paid on 6 April 2020.
Will the distribution receive any concessional tax treatment?
There is no additional concessional tax treatment for distributions at present.
Will distributions remain quarterly?
Yes, we expect to maintain quarterly distributions.
Are there any potential interruptions or delays to distributions and what is the likelihood of this happening?
We intend to maintain income distributions quarterly.
Will the Trust’s property valuations continue to be on a staggered 12 month rolling basis? And, is it your expectation that the Trust’s capital growth component will remain net positive for the foreseeable future (the next 6-12 months)?
We will continue to operate our valuations program on a staggered basis and may bring forward valuations for those properties where we feel there has been a material change either positive or negative.