Manager's Overview

The Manager has taken a proactive yet conservative approach to managing the Trust’s portfolio, resulting in the Trust’s strong and sector-leading performance over the past 12 months. 

Financial performance

At a property portfolio level, the Trust performed well, with gross rental income increased 9.7% to $23.8m as a result of increased rental income from rent reviews and improved occupancy levels. 

The Trust’s operating profit however decreased 2.3% to $11.8m, due to the continued leasing up of the recently completed Ascot Central building and an increase in the Trust’s cost of debt. In calculating operating profit, any unrealised items are removed from the Trust’s profit before tax. 

Following a slight market-driven decline in portfolio revaluations of $7.1m, a decline of 2.4% from June 2008, and mark-to-market interest rate swaps revaluation decline of $8.7m, the 2009 net loss after tax is $2.2m. 

These unrealised adjustments do not impact on the operating profit of the Trust or the distributable profit available to unitholders as is evidenced by the Trust achieving its cash distribution target of 8.5 cents per unit to 30 June 2009.  

The Trust did not pay any income tax during the financial year due to being entitled to a tax refund for the 2008 tax year. This resulted in no imputation credits being attached to the Trust’s distribution for the 2009 financial year. In the 2010 financial year, the Trust’s effective income tax rate is expected to normalise to around 11%. 

Financial position

Total assets decreased by $14.8m to $295.3m, down 4.8%. The decrease was mainly due to the receipt of the final instalment of the Waitemata land settlement of $4.3m (land on Auckland’s North Shore that was sold in 2003 with a delayed settlement) and the movement in the mark-to-market interest swaps valuation. 

The debt-to-total-asset ratio, or gearing, moved slightly to 35.7% from 34.9% as at 30 June 2008. Gearing is expected to reduce to approximately 33.6% following settlement of the sale of both the Thames Street and Biomed properties and will sit significantly below the Trust’s bank and Trust Deed covenants of 50%. 

The net tangible asset backing of the Trust declined from $1.30 per unit as at 30 June 2008 to $1.17 per unit as at 30 June 2009 (excluding allowance for deferred tax on revaluation gains) as a result of devaluations of both property assets and interest rate swaps. 

Property revaluations

Relative to the recent near 10% annual decline in values experienced by many other New Zealand listed property entities, this small decline is representative of the Trust’s sound lease structures and generally resilient characteristics of the healthcare sector that the Trust invests in.  

The independent property valuations as at 30 June 2009 were completed by DTZ, Colliers International and CB Richard Ellis and show the aggregate value of the Trust’s investment properties at $286.2m, excluding the unconditional sales of the Thames Street and Biomed properties. The portfolio is split between the New Zealand properties valued at $184.2m and the Australian properties valued at $102.0m. 

In real terms, excluding the effect of currency movements, the portfolio on a ‘like for like’ basis declined 2.4%, or $7.1m. The revaluation result reflects a marginal softening in the weighted portfolio capitalisation rate from 8.4% to 8.8% over the 12 months to 30 June 2009. However, this movement was largely offset by the Consumer Price Index (CPI)-linked rental growth provisions in many of the Trust’s leases, along with the income certainty of the Trust’s weighted average lease term of 9 years and the significantly improved portfolio occupancy levels over the last 12 months. 

Occupancy

Portfolio occupancy levels are now one of the highest in the New Zealand listed property sector at 98.0% compared to 94.3% at 30 June 2008. 

A number of new leases were secured over the 12 months to 30 June 2009, including 10 tenants new to the portfolio which adds greatly to the diversification of the Trust’s cash flows. This improvement in occupancy levels also included facilitating the expansion of a number of the Trust’s existing tenants as part of the ongoing growth in demand for healthcare services being experienced, notwithstanding current economic conditions.  

In total, approximately 3,500 square metres of space was leased which has secured rental income of $1.25m per annum. Furthermore, the weighted average lease term of 7.3 years for these leases adds to the certainty of income for the Trust and is representative of the commitment new tenants to the Trust are prepared to make as part of a long term partnership. 

Rent reviews

A total of 54 rent reviews were completed to 30 June 2009, with approximately 80% subject to review by CPI. The average increase achieved over the passing rent was 4.1%, or 3.6% compounded annually. For the 2010 year approximately 75% of the Trust’s portfolio has CPI-linked rent reviews. 

Lease expiry profile

The Manager has now renegotiated or renewed the majority of the lease expiries for the 12 months to 30 June 2009, which represented 9.3% of the Trust’s total annual rental income. Approximately 98% of tenants by income have re-committed to the Trust, with a weighted average lease term of 6.4 years being secured for the new leases. 

The Trust maintains a 9 year weighted average lease term, the longest term of any listed property entity on the New Zealand Stock Exchange. 

Looking forward, for the next two years to 30 June 2011 only 4.9% of the Trust’s leases are due to expire. However the Manager will continue to proactively engage with the tenants to secure early lease renewals where possible to further enhance and protect the Trust’s contracted rental income position. 

Divestments

Prior to the end of the financial year the Manager announced the unconditional sale of two properties, 116 –118 Thames Street, Melbourne and the Biomed property in Point Chevalier, Auckland. 

Thames Street was the Trust’s only property held purely for development and the sale price of AUD$2.8m was in excess of the 30 June 2008 asset valuation.

The Biomed sale, which settled post balance date, sold for $2.8m, approximately 5% below the June 2008 asset valuation and was one of the Trust’s lowest value investment assets. 

The proceeds of both sales will be used to repay debt, further strengthening the Trust’s balance sheet, with gearing forecast to reduce to 33.6%. 

The sale of other selective lower value or non-core assets will be considered over the medium term as part of the Manager’s ongoing and prudent capital management strategy. 

Incentive fee

An incentive fee of $0.25m is payable to the Manager for the year to 30 June 2009 (2008: $0.88m). The fee is paid by issuing units in the Trust. 

Strategy and outlook

The Manager has worked hard to steer the Trust through the global financial crisis. The disciplined, conservative and prudent asset management approach of 2008 and 2009 will be continued into 2010, ensuring that the overall portfolio position is further strengthened, cementing the medium to long term stability of the Trust. 

The Trust’s strategy of owning and investing in lower risk, specialist medical and healthcare property assets in the New Zealand and Australian markets continues, with potential for further portfolio diversification within the stated sectors and markets. 

Continued pressure on both the public and private healthcare sector and an ageing population will also provide the Trust with a degree of defensiveness into the future. 

The relationships the Trust has with its tenants is valued and recognised as pivotal in the results achieved over recent years. We will continue to build on these and other external relationships to ensure that the Trust is regarded and recognised as the preferred specialist medical and healthcare property partner in its respective markets. 

The Manager will continue to proactively manage the performance and strategic direction of the portfolio to produce the desired results, notwithstanding any ongoing uncertainty in the global financial markets.