The following is the address of the Chairman of Vital Healthcare Management Limited for the Vital Healthcare Property Trust Annual Meeting held at the Main Lounge, South Stand, Eden Park, Auckland at 2.00 p.m. on Tuesday 06 December 2011. Chairman s Address, Vital Healthcare Property Trust Annual Meeting, 6 December 2011 By now all unitholders will be aware of what has taken place over the last few days. Paul Dalla Lana and Bernard Crotty, two executives from NorthWest Value Partners are present today and Paul will make a presentation later in this meeting. Let me now talk about Vital s business results. The 2011 financial year was a significant one for portfolio growth and diversification. The Trust has now matured into a significant participant in the listed property sector and Vital is now Australasia s largest listed property fund focusing purely on healthcare assets. With that comes the very real benefits of diversification which has proved, and in my opinion will continue to prove, to be critical in the delivery of the enhanced future position and performance of the Trust. As I alluded to in my earlier address, the period of activity around the ownership of the management rights in the last 12 months is a direct result of Vital s increased attractiveness as an investment entity post the 2010 Australian transaction. This has periodically diverted the Board and Management s attention from our core focus and function of managing both the assets and related activities of the Trust, however I can assure you it has not led to a lapse in the delivery of Vital s strategy and annual business plan by David Carr and his team over the course of the year. You will see evidence of this in the CEO s presentation. Notwithstanding the protracted period of global economic instability, the 2011 financial year saw another sound period of performance for the Trust, enabling the Board to deliver a cash distribution of 8.1 cents per unit, in line with the forecast given in the Simplified Disclosure Prospectus issued in November 2010. The management team have credibly maintained near full occupancy of the Trust s 126,000 square metres of net lettable area. We recognise that full occupancy has a direct beneficial impact on earnings and distributable income to unitholders. High occupancy levels are also a testament to the enduring relationships the management team has with the Trust s tenants, with approximately 95% of leases by income being renewed or extended over the course of the year. 1
The highlight for the year was the successful conclusion of the Australian portfolio acquisition and rights issue in December 2010. In a few weeks, on 22 December actually, we will arrive at the first anniversary of the acquisition and in addition to meeting net distributable income forecasts in the 2010 Prospectus, the now consolidated portfolio has further strengthened a number of our market leading portfolio metrics. Following the robust and full due diligence we remain very pleased with the Australian investment, and in fact now see it as a platform to further enhance and diversify Vital s market leading position in the Australasian Healthcare real estate sector. As you will see in David s presentation shortly there remains the potential for some relative pressure in certain parts of the healthcare sector that may impact some of the Trust s tenants and their activities. For example, New Zealand private health insurance membership levels have been in steady decline now since December 2008, whilst in Australia the exact opposite has occurred with a sustained period of year on year growth since 2005. Notwithstanding the increase or decrease in health insurance membership rates the ageing population of both countries will still, in our view, continue to underpin the demand characteristics for healthcare services and real estate over the longer term. We also remain mindful of domestic and global headwinds and continue to work closely with tenants that may require support and assistance in seeing through any periods of on-going volatility or uncertainty. You will continue to see no material change to the strategy of the Trust which has a core mandate to invest in the New Zealand and Australian market and remain focused on what I call pure medical, hospital or ancillary healthcare assets. From a governance perspective, we indicated earlier in the year that with approximately 70% of Vital s portfolio now in Australia it was only logical that we should have an Australian representative on the Board of Directors. Specifically, we were looking for someone with a strong finance and healthcare background to complement the existing members of the Board. We are very fortunate to have found someone with that unique combination of skills and a wealth of experience and are now awaiting final approval from NorthWest, the new conditional shareholder of the Manager to appoint that person to the Board of the Manager. We have already started and will continue to focus on the potential corporatisation of the Trust and also the outstanding fee review. This will continue into the early part of 2012. 2
We will also endeavour to engage with NorthWest, the new conditional shareholder of the Manager on the potential internalisation of the management rights to the Trust. This, is of course, is in addition to continuing to drive and deliver on the business as usual elements of the Trust s activities, which includes tenancy and portfolio asset management, the Trust s treasury, capital and financial position and further opportunities to enhance, diversify and cement the Trust s market position. We are confident that our strategy places Vital in a sound position to withstand events like the global financial crisis, and we are always mindful of this when making strategic decisions on behalf of all unitholders. For the financial year ending 30 June 2013, as detailed in the 2011 Annual Report, we expect to commence a transition to an AFFO or free cash flow based distribution payout ratio. In essence, the proposed change allows for deductions from the Trust s net cash flow for recurring maintenance capital expenditure on properties. We will provide more information on this around the time of the 2012 results in August next year. In closing I would like to thank all unitholders for their support through 2011. I assure you that both the Board and management team continue to remain fully focused on optimising the on-going performance of the Trust. For the remainder of the 2012 financial year and into 2013, the Board remains confident that the Trust is well positioned and structured, with a diversified foundation of assets within the healthcare sector, and remains on target to deliver on the Prospectus forecast for 2012 with a net distributable income of 7.7 cents per unit. Thank you. [Ends] [Bill to pass meeting to David] 3
Manager s Address - Vital Healthcare Property Trust Annual Meeting, 6 December 2011 Thank you, welcome and good afternoon everyone. Again, my name is David Carr and I m the Chief Executive Officer of Vital Healthcare Management Limited. I ll start today by giving you an overview of the Trust s performance and financial position for the 2011 financial year. We will then have a look at some of the underlying healthcare trends in Australia and New Zealand and then review the current portfolio position, including an earthquake risk review we have undertaken of the Trust s key New Zealand assets. We ll also run through a couple of the developments projects in Australia and I ll then wrap up with our outlook for the year ahead. This table details the total returns to Vital unitholders over 1, 3, 5 and 7 year periods as against the NZX Gross Property Index and the NZX50 Gross Index to 31 October 2011. As you can see, for the 1 year period we re about 8% behind the Property Index but slightly ahead of the NZX50. This isn t surprising as the Property Index continues its re-rating as we come out of the Global Financial Crisis and as investor confidence improves, along with a lower interest rate outlook over the medium term. Over 3, 5, and 7 year periods Vital has outperformed both indices by a considerable margin, and particularly over the 5 year period where the NZX50 produced total returns of negative 11.9% as compared to the Trust s 35.9%. Over a 7 year investment horizon the Trust had more than twice the returns of the Property Index, with the NZX50 producing a total return of just 18.5%. This chart shows the Trust s unit price (in green) as measured against its Net Tangible Assets (or NTA) (shown as the grey line) since June 2009 and the bottom of the chart shows the trading volumes or liquidity of the units in the Trust. As you can see Vital generally traded above NTA from mid 2009 through to the time we announced the Australian acquisition and rights issue in mid September 2010, as marked by the red cross. This saw an adjustment and temporary decline in unit price below NTA, however since around April this year we have been trading above the current NTA of $1.04. Importantly, you can also see at the bottom of the chart, that trading volumes have increased significantly since the rights issue occurred and this provides for greater liquidity for unitholders when buying and selling units in the Trust. 4
We ll now have a look at a summary of the key financial results and position of the Trust for the year ending 30 June 2011, which are now a little historic but certainly still relevant to the Trust s overall position. The 2010 portfolio acquisition changed the scale and profile of the Trust which is now the largest and most diversified listed healthcare fund in Australasia, focusing primarily on hospital and medical properties. This diversification and our focus on enhancing portfolio returns resulted in net property income growth, leading to the Trust exceeding the 2011 Prospectus forecasts, with an $11.5m net profit before tax and delivering on the Net Distributable Income target of 8.1 cents per unit. We completed independent market valuations of all properties as at 30 June 2011 which resulted in a total property value of $513.9m, with approximately 67% of the Trust s portfolio now located in Australia. Portfolio valuations were relatively stable, with Australia slightly stronger than New Zealand, and as I mentioned on the earlier slide the Trust s NTA is $1.04 cents per unit. Through the course of the year the Trust has maintained a stable capital and treasury management position, with a key feature being that the bank facility is locked in to September 2013. Following the $151m equity capital raising last year, our gearing as at 30 June 2011 was just under 37%, well below the bank facility covenant of 45% and Trust Deed covenant of 50%. In terms of our gearing outlook, based on the current development programme and expected sale of non-core or lower value assets, we forecast gearing will move to approximately 40% over the course of 2012. The Distribution Reinvestment Plan was well supported by unitholders with just over 26% of the cash distribution being reinvested for the final quarter. The Trust s foreign exchange policy review was concluded and implemented, where the policy seeks to minimise the impact of movements in the Australian versus the New Zealand dollar. There are two core elements we are seeking to protect here. The first is Translation hedging, whereby the Trust has Australian Dollar assets which are offset by a level of Australian Dollar debt, which is often referred to as a natural currency hedge. It is for the balance of the unhedged portion where the Trust will enter into foreign exchange contracts to fix the exchange rate exposure. 5
The second element is called Transaction hedging, which looks to lock in, in advance, identified exchange rates that will apply when repatriating profits generated in Australia back to New Zealand for distributions to unitholders. Over the next few slides I ll show you two clearly different private healthcare insurance trends in New Zealand and Australia. We always keep a close eye on health insurance and other trends as a bell weather or leading indicator for monitoring how the Trust s tenants are performing. The first chart shows a very clear picture of declining health insurance coverage in New Zealand over the last 3 years, and for the 12 months to the end of September 2011 insurance membership fell by 24,500 people or 1.8%. The Health Funds Association of New Zealand who produced this chart also noted that private health spending has now dipped to below 20% of total health spending in New Zealand and this is well below the OECD average of 28% and even further behind Australia s 33%. Whilst this decline is partly symptomatic of the state of the economy, the trend suggests that policy makers will need to consider how to best address the ongoing provision of a sustainable, well balanced private and public healthcare system for all New Zealanders. This leads me onto a vastly different picture in Australia which shows a clear increase in membership levels over the 3 year period as shown on the right of the chart, shaded in green. Australia now has 45.6% of its population with hospital treatment insurance, compared to New Zealand s 31%. Membership in Australia has now increased for 6 consecutive years, which demonstrates the popularity of their health insurance schemes, supported by a very attractive 30% rebate for members, which was introduced in 1999. Notwithstanding these disparate trends, remember that for both countries the over 65 age group is estimated to double in the next 20 years, with that age group forecast to use healthcare services at four times the rate of the rest of the population. So, in summary, whilst we see some near term pressure in New Zealand, with 80% of our hospital assets located in Australia, the Australian trends clearly support our diversification and growth strategy into that market. I ll now run through a few slides that will give you a greater perspective of the Trust s portfolio profile, recognising that notwithstanding some of the sector related 6
pressure I just alluded to, we have maintained or strengthened a number of core portfolio metrics through the year. This slide summarises the current portfolio position to October 2011, and shows the Australasian spread of the Trust s assets which now comprises 24 properties, 124 tenants, a total property value of just under $527m and a weighted average portfolio capitalisation rate of 9.3%. This chart details the Trust s geographic split, with the 2010 acquisition resulting in a relatively balanced weighting of assets by location, including Victoria, Queensland and New South Wales. This level of diversification also assists in protecting the Trust from any substantive political (or policy), economic, geographic, financial or other healthcare reforms in each respective market or jurisdiction. This tenant diversification chart shows the current majority weighting into core private hospitals, with both for profit and not for profit hospital operators representing some 75% of the Trust s portfolio. We don t see any concentration risk here, with further diversification through four significant and substantial hospital operators, being Mercy Ascot in Auckland, Epworth Foundation in Melbourne, Healthscope in Queensland and Healthe Care, who occupy eight separate hospitals, primarily along the Australian eastern seaboard. As you can see the balance of the portfolio is leased to medical specialists and surgeons, diagnostic and radiology providers, GP s and DHB s who collectively provide a stable portfolio of tenants, with sound lease covenants for the Trust. We continue to maintain close to full occupancy across the portfolio, which is currently 99.1% leased. This has fundamentally been driven by a continuing high level of lease renewals, with approximately 95% of tenants with expiries renewing their leases over the last 12 months. Looking forward I wouldn t expect to see too much change in occupancy levels, as we have a relatively low risk expiry profile over the near term and I ll talk more about that shortly. This chart shows the rent review profile of the Trust. The profile is a deliberate strategy and key point of difference that positions Vital with a stable and frequently recurring rent review structure. For 2012 we have approximately 94% of rent reviews subject to CPI, fixed or structured review mechanisms, with just under 6% subject to market reviews. 7
Last year we settled 115 reviews, with an average increase of 3.8%. For the 4 months to the end of October 2011 we have now concluded 41 reviews resulting in an increase over passing rent of 4.2%, so we ve made great progress for the year to date. First, just noting the point at the top of the slide, the Trust s WALT, or weighted average lease term is now 11 years, over twice the NZ listed property sector average, and well above the Trust s 8.6 years in June 2010. A long dated WALT provides for an extended period of income certainty for the Trust. As you can see we have continued to maintain a low risk expiry profile through to 2017, with the largest expiry concentration in the next few years being in 2015, where 29 tenants have lease expiries. The majority of these however are smaller consultants, specialists or surgeons, with a historically high probability of renewal. The lighter, lower section of each column shows the single largest tenant expiry in each year, and I am pleased to be able to announce today that we have now secured an early 5 year lease renewal at Epworth Brighton in Melbourne. This now extends the lease expiry date to 2019, it increases the Trust s WALT to approximately 11.2 years, and importantly reduces the 2014 lease expiry profile from around 5% to 2%. The next large lease expiry is in 2018, with Healthscope at Allamanda Hospital on the Gold Coast and after that is in 2019 with Mercy Ascot at Ascot Hospital and we have already had constructive initial discussions with both of these tenants. As a consequence of several catastrophic earthquakes in Christchurch and other global earthquake and weather related events, there has been a clear focus by responsible landlords to review the adequacy of existing buildings, initially to protect life and then, the structure and fabric of the building itself. We have now received initial engineering advice on the likely earthquake resilience of the Trust s core New Zealand assets as shown, with similar reviews for the balance of the portfolio, including the Australian assets to commence shortly, if required. The initial assessment has been undertaken using a risk classification scale which compares a buildings likely structural performance relative to current, or new building standards. This table details the low, moderate and high risk building rating categories, with 4 out of the Trust s 5 core New Zealand buildings rated low risk, with two buildings having A grade ratings of 100%. Buildings which are below the minimum New Building Standard of 34% can be deemed as earthquake prone by New Zealand territorial authorities, who may seek to enforce the minimum standard on building owners, if a change in use is sought as part of any future works. 8
As you ll appreciate, due to Napier s location and earthquake history we have now commissioned a fully detailed, site-based assessment to determine whether any additional works are required, with any costs likely to be direct costs to the Trust. Finally, insurance premiums are clearly on the rise, with our current premiums increasing approximately 50% on the prior year. Whilst we are fortunate in having the buying power of a large portfolio, these increases are still a real cost incurred and recovered from around 95% of the Trust s tenants. Since settlement of the Australian acquisition we have now committed to a further A$38m of value-add development and we have also removed 5 of the 9 existing tenant call options, giving us long term security over these strategic assets. Overall, these value-add developments are forecast to produce average yields of approximately 10% per annum, which will help support the Trust s future earnings. I ll now run through a couple of examples that will give you a perspective of the rationale and type of works that we are undertaking. This slide details some key elements relating to the development at Lingard Hospital which is located approximately 5 kilometres from the Newcastle CDB. The hospital had already undergone a first stage development that initially added 2 new operating theatres, which have proven very successful and now placed additional demand on hospital beds. In addition to this first stage success, there is an unmet catchment demand in the region of approximately 35,000 operations per annum. With this, and other supporting research and information, we have now committed A$22m to build 2 additional theatres, a new 40 bed ward and other patient recovery and diagnostic areas at Lingard. On completion, these works are forecast return approximately 10.5% per annum and cement Lingard as one of the premier hospitals in the Newcastle region. Currently the project is around 40% complete and remains on target to finish in mid 2012. Finally, this recent aerial photograph shows the entire Lingard Hospital bordered in yellow, with the part not shaded showing the area that is currently under development. The second development is at Maitland Hospital, located in the Hunter Valley region, approximately 160 kilometres north of Sydney. The catalyst for the works at Maitland was once again driven by capacity constraints of the existing hospital. As a result of this demand the Maitland development 9
included the provision of an additional 24 beds, a fourth operating theatre and dedicated rehabilitation unit including new hydrotherapy pool and gym. These works, completed in October will now yield a return of approximately 9.5% per annum to the Trust. With 650 hectares of land recently rezoned on the fringes of Maitland to provide for an additional 5000 new homes, this forecast future demand will likely lead to further development at Maitland Hospital, with initial planning discussions having already commenced with the tenant. All the value-add development works we are currently undertaking are tightly managed by our Australian Fund Manager, along with the tenants own dedicated project and development management teams. Just to wrap up, the Trust s Strategy is sound and remains fundamentally unchanged, with a secure capital position, well placed to withstand any continuing market volatility. We are now approaching the first anniversary of the Australian portfolio acquisition and we continue to focus on the delivery of the value-add development programme, with many of these projects concluding through 2012. Whilst the Trust s core portfolio metrics remain relatively defensive, the sector is not without elements of pressure, however over the longer term we expect that the health sector will continue to provide sound underlying support to the Trust. Anecdotally we have seen little evidence to suggest any material change in property capitalisation rates, however should any market instability persist, the Trust, as proven through the last cycle, should remain relatively insulated against this. We have provisionally targeted approximately $30m of non-core, lower-value asset sales this financial year, and are about halfway to meeting that target, with sale proceeds used to repay debt and fund the current development programme. We also continue to consider value-add opportunities that may further enhance the Trust s overall position. Otherwise as the Chairman said, we remain on course to deliver an FY12 net distributable income of 7.7 cents per unit and we ll also look to commence a transition to an AFFO (or free cash flow ) based payout ratio in FY13, which essentially moves to a sustainable distribution reflecting the net cash flows from the operating activities of the Trust. Thank you, that now concludes my presentation. [ENDS] 10