Goldman Sachs has initiated coverage on the ASX’s latest real estate trust, Healthco Healthcare and Wellness REIT (ASX: HCW) with a Buy rating.
The midcap REIT’s mixed bag of Australian healthcare and wellness assets includes 27 properties, including small private hospitals, age care facilities, and medical centres.
Goldman’s believes Healthco’s strong balance sheet, stable income streams, plus upside for growth offers up a compelling investment proposition. With these types of facilities built with the long-term in mind, any risks of tenants moving on any time soon is low.
Healthco’s average lease term is around 9 years, and around 85% of the REIT’s income is from leases with fixed rent increases.
Acting as a hedge against inflation, around 15% of the REIT’s income is also wired to the consumer price index (CPI).
The broker also likes the fact that the REIT’s relatively transparent and secure income streams are anchored by strong tenant covenants in sub-sectors that are for the most part government-backed.
Goldman’s believes the opportunities for healthcare related assets are underpinned by emerging key mega trends. These include Australia's ageing population, growing government expenditure, technological improvements, and the increasing consumption of health-related services.
To help put that opportunity set in context, the REIT estimates an additional $87bn of investment into healthcare property is required within the next two decades.
Given the vast investable opportunity set available to Healthco, the broker believes $50m of 100% debt-funded acquisitions could deliver 300bps-plus of earnings accretion (based on FY23 estimates) - while gearing would increase by roughly 6%.
Overexposure to childcare
Some brokers are wary of Healthco’s lingering (21%) exposure to the childhood sector, which is not regarded as not having the same ‘recession proof’ qualities as healthcare.
However, given management’s focus on acquiring more health care related assets going forward, the REIT’s exposure to childcare is likely to progressively diminish.
With a debt facility of $400m, around $45m in cash and no debt, Healthco looks well positioned to continue adding quality health care assets to its growing portfolio.
Goldman’s $2.56 target price implies a potential total return of 22% versus an average of 6% for the broker’s A-REIT coverage universe.
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