HealthCo REIT Faces Steeper Losses Amid Strategic Asset Recycling

Financial Performance Overview

HealthCo Healthcare and Wellness REIT (ASX: HCW) has reported a significant deterioration in its financial results for the half-year ended 31 December 2024. The REIT posted a net loss of $15.4 million, a 208% increase compared to the $5.0 million loss recorded in the same period last year. This loss came despite a modest rise in funds from operations (FFO), which edged up to $23.5 million from $22.6 million, suggesting underlying operational resilience amid broader challenges.

Revenue from ordinary activities fell sharply by 30%, from $41.0 million to $28.7 million, reflecting the impact of the REIT’s ongoing asset recycling program and a shrinking property portfolio.

Asset Recycling and Portfolio Changes

The group’s strategic asset recycling initiative has been a defining feature of this reporting period. The portfolio was reduced from 25 properties at mid-year to 20 by December 2024, with five properties sold for a total consideration of $46.5 million. This downsizing aligns with HealthCo’s focus on optimizing its asset base, potentially to improve capital efficiency and focus on higher-quality or higher-yielding assets.

Independent valuations were conducted on 45% of the portfolio by number, representing 21% by value, with a weighted average capitalisation rate increasing slightly to 5.52%. The fair value of investment properties declined to $965 million from $1.017 billion, reflecting both disposals and market valuation pressures.

Capital Management and Debt Profile

HealthCo maintained a disciplined capital management approach, with drawn debt reduced to $440.8 million from $481.3 million and a stable cost of debt at 5.5% per annum. The group’s gearing ratio remained steady at around 32%, with 85.1% of drawn debt hedged, up from 77.9% six months prior, indicating a cautious stance against interest rate volatility.

The REIT also continued its on-market unit buy-back program, purchasing 11.2 million units during the half-year, reflecting management’s commitment to capital efficiency and shareholder value amidst a challenging market environment.

Distributions and Investor Returns

Despite the increased losses and revenue decline, HealthCo declared interim distributions of 2.1 cents per unit for the year ending 30 June 2025, consistent with the prior period. Total distributions for the half-year amounted to $23.3 million, underscoring the REIT’s focus on maintaining stable income streams for unitholders.

Outlook and Strategic Considerations

The directors highlighted no significant changes in the group’s state of affairs beyond the asset recycling program. However, the reliance on major tenants, including Healthscope, introduces some uncertainty given market speculation around tenant stability. The REIT’s ability to manage tenant risks and execute its portfolio strategy will be critical in the coming periods.

HealthCo’s financial statements were reviewed by KPMG, who issued an unqualified review report, affirming the integrity of the reported results and the going concern basis of preparation.