This article originally appeared in Australian Financial Review.
Fund manager RAM delivered a small boost to investors in its Essential Services Property Fund, after upgrading the full-year payout following a series of healthcare acquisitions, and as it increased its development pipeline to over $200 million.
Trading under the ticker REP, the fund forecast a full-year distribution of 4¢ per security, up from 3.9¢ guided in its product disclosures statement ahead of its October 20 float.
We are enhancing investor returns: Scott Kelly Oscar Colman
Driving this upgrade were the acquisitions this week of three Perth healthcare properties – two day hospitals acquired for $35.1 million on a yield of 4.5 per cent and a medical centre acquired for $8.9 million on a yield of 5.75 per cent.
These acquisitions, alongside the divestment of a Coles-anchored Gunnedah shopping centre for $20.3 million at a healthy premium to its book value, will reweight the portfolio to an even split between healthcare properties and neighbourhood shopping centres, a key objective of the fund.
Once bedded down, the three Perth acquisitions will grow the value of the portfolio to $761 million spread across 35 assets, trading on a weighted average cap rate of 5.6 per cent.
RAM CEO Scott Kelly told The Australian Financial Review REP had made excellent progress in the short time since listing.
“We are delivering on our promises, and enriching the portfolio with enhanced returns for investors,” he said.
Though he acknowledged it was rare to sell an asset so soon after listing, he said the divestment of the Gunnedah mall followed an attractive, unsolicited offer that allowed RAM to recycle capital into modern healthcare facilities.
On the development front, REP’s pipeline has grown to more than $200 million of value-add projects, of which $135 million are under construction or close to commencing.
RAM head of real estate Will Gray said undertaking projects on sites REP already owned and controlled was an efficient way to deliver organic growth.
“When the timing is right, we’ll engage on [further] medical transactions,” he said.
Between the October 20 listing and December 31, REP delivered funds from operations – the key earnings metric for real estate investment trusts – of $5.5 million and a December quarter distribution of 1.09¢ per unit.
The forecast for the full-year is for FFO of $21.6 million, a small rise on the $21.3 million guided in its PDS, driven by the acquisitions, which will have more of an impact on earnings in the 2023 financial year.
With 85 per cent of the fund’s income “exposed to growth” through either fixed annual increases of 3.4 per cent or indexed to CPI, weighted average annual rent increases of about 2.4 per cent were anticipated, the RAM team said.
This, combined with 94 per cent of its income coming from essential services tenants – the fund’s three biggest tenants are private hospital operator Healthe Care, Woolworths and Coles – a 99 per cent occupancy rate and a 98.5 cash collection rate, provided “favourable tailwinds for the next 24 months”, even in a rising bond market, Mr Gray said.