Healthcare Property Trust

The Australian Unity Healthcare Property Trust is a little different to many of the other REITs we have profiled over the last few weeks. Structured like a regular REIT, this trust is sectorally focused in healthcare. Currently, it’s closed to new applications, so this is one to keep on your radar as a future opportunity.

The fund predominantly invests directly in property in the healthcare sector (around 75-90% overall in the long term), but may also invest in related assets including managed funds or companies that hold predominantly healthcare property (up to 20%). The fund currently holds over a billion dollars under management. The Wholesale Units are returning 14.67% at one year, 12.07% at three years and 10.30% at five years. Distributions are quarterly.

The key feature of the trust is its portfolio of healthcare properties, mostly private hospitals. The fund has a long WALE of 10.58 years (weighted by income) and the occupancy rate is nearly 98% (measured by area). The fund holds a total of 37 properties directly. The chart below shows the fund property portfolio by book value and lettable area. (Only 22 properties out of the 37 are described in the PDS, these are the ones charted below.)

lettable-area-vs-value

Data: Australian Unity Healthcare Property Trust PDS. Chart: The Constant Investor.

Unlike an office fund such as Charter Hall, where the relationship between lettable area and book value may be complicated by high-value inner city properties with small areas but very high value, the Australian Unity healthcare trust holds property largely outside CBD areas and there is a strong relationship between lettable area and book value. The size of the points represents the number of tenants leasing any given property. While the portfolio has a considerable number of single-tenant assets (private hospitals, for example), the fund also holds a number of properties leased for specialist, consulting and day surgery tenants with multiple leases in the one building.

The next chart shows the value of the properties held by the fund against WALE. Once again, size of the point is representative of the number of tenants leasing the property. The fund has a number of properties with WALEs below or around five years: those properties with multiple tenants such as the specialist consulting rooms and day surgeries.

value-vs-wale

Data: Australian Unity Healthcare Property Trust PDS. Chart: The Constant Investor.

There is a second cluster of properties with WALEs of close to or exceeding fifteen years: these are mainly private hospitals. This gives the fund a good mix of stability in terms of future income, however, some of these specialist properties may be subject to substantive renovation and tenanting costs should the existing tenants choose not to renew at the close of the lease. When it comes to medical facilities, it’s not as simple as a new coat of paint in this season’s must-have office-friendly beige. However, these are expected and forseeable future costs and can be managed.

The trust has two different types of units: Class A and wholesale. The wholesale units have a liquidity event (up to 2.5% of available capital) every quarter, but otherwise function much as regular units in a trust do with limited liquidity. The Class A units have a monthly liquidity facility and consequently the portfolio attached to those units has a higher allocation to cash and a lower return. In this fund you can choose the liquidity profile that suits you best, but there is a price attached to that in the form of a lower return with more liquidity.

As always, withdrawal rights are dependent on the fund’s overall liquidity, so keep that in mind when making your decisions. I spoke to Mark Pratt from Australian Unity about the liquidity and accessibility of investors’ funds: even during the Global Financial Crisis, the fund was still able to meet 100% of all withdrawal requests at that time.

There is a reason why this fund is particularly interesting, it’s a good example of an asset with low correlation to other parts of the market, even within its own sector. The chart below shows the ASX200 index plotted alongside the ASX300 REITs index we have seen before. Unsurprisingly, the two indices have had some pretty similar behavior over the last ten years. The hospital fund’s entry price, shown in the last panel doesn’t exhibit that same behavior, however: it is uncorrelated with the indices.

hospital-vs-asx

Data: ASX 200 Index, ASX 300 REIT Index, Australian Unity. Chart: The Constant Investor.

Now it’s worth pointing out that it’s entry price that is plotted above, not net asset value which would be a better measure of similarities between the index and the fund’s behaviour. However, entry price is a pretty reasonable indicator of net asset value over the long term, even if it is imperfect (we haven’t taken into account changes in the buy spread here).

In Unlisted Gems and in unlisted investments generally, we talk a lot about correlation with the stock market (for our purposes, the ASX200). The chart above is a pretty good example of what an investment that is uncorrelated with the equities market may look like. For example, the correlation between the ASX200 and the ASX300 REIT index is 0.81, this is quite high- the maximum a correlation can be is one.

The correlation between the healthcare fund’s entry price and the ASX 200 index is -0.03. That’s very small- almost nothing. Even the correlation between the relevant sector index (the ASX 300 REITs) and the fund is low at 0.1. If you let me get technical for a minute, these correlations are so close to non-existent that a simple model cannot spot significant differences between them and zero. This is a fund that is uncorrelated with the ASX200. If you’d like to explore more of what numbers like this mean and how correlation works, you can check out my interactive here.

Now, as always at the Constant Investor, we aren’t advocating a one-size-fits-all approach. As we’ve said before, low- or no-correlation investments are not bullet-proof by virtue of being uncorrelated.

The risks that might attach to an investment like this are less likely to be the usual array of “maroeconomic downturn” and “foreign exchange” risk- after all, when you need a pacemaker, you need one no matter what the inflation rate is. We can see this from the charts above. The profitability of the assets under management are more likely to be affected by things like changing government regulation, particularly around medicare and private health funding. Demography will also be another considerable factor: though for the immediate few decades, demography is clearly on the side of healthcare.

The fund is highly recommended by Zenith, Lonsec and SQM. Fees are relatively simple, the buy/sell spread is 3.0%/0.5% for Wholesale units and 2.4%/0.4% for Class A units. Management fee is around 0.68% and day to day expenses are estimated at around 0.3%. Whilst the fund isn’t open for investments at the moment, put it on your watch list for 2017.