HCW distributions remain suspended while 10 hospital transfers await approval

Going Concern Warning Sits Behind Unmodified Audit Opinion

HealthCo Healthcare and Wellness REIT’s annual report contains a warning that matters more than the headline loss: KPMG identified a material uncertainty that may cast significant doubt on the trust’s ability to continue as a going concern. The audit opinion itself was not modified, but the qualification-style emphasis reflects the unresolved transition of 10 hospitals currently leased to Healthscope.

HCW says Healthscope remained compliant with its lease obligations at 30 June 2026 and at the report date. However, if that position changes before alternative tenant arrangements are completed, the trust says operating cash flow could be affected and the risk of breaching debt covenants could increase. Management’s forecasts support the going-concern basis and assume the assets remain tenanted and tenants continue meeting their obligations.

Healthscope Transition Still Awaits Binding Documentation

The proposed solution covers all 11 Healthscope hospitals owned by HCW and its 49.6% interest in the HMC Wholesale Healthcare Fund. A binding agreement has been reached for Mount Private Hospital in Western Australia, with the new lease expected to commence in October 2026 and Bethesda Healthcare supported by a guarantee and financial and operational backing from the WA State Government.

For the remaining 10 hospitals in Sydney, Melbourne and Brisbane, lenders have provided support for the assignment of existing leases and the transfer of operations to alternative operators. The proposal remains subject to binding documentation, required approvals and other customary conditions. Until those steps are completed, the hospital portfolio remains the central source of uncertainty in the accounts.

Losses, Valuations and Suspended Distributions

HCW recorded a statutory loss of $49.7 million for FY26, narrower than the $89.3 million loss in the prior year. Funds from operations fell to $21.9 million from $36.5 million, or 4.0 cents per unit compared with 6.6 cents. Underlying FFO, which includes HCW’s share of UHF’s FFO, was 7.7 cents per unit, but UHF did not declare distributions while progressing the Healthscope situation.

The portfolio also absorbed a $49.0 million unrealised fair value loss on investment properties. HCW’s directly held investment properties fell to $771.3 million from $889.2 million after six property disposals and valuation reductions, while the weighted average capitalisation rate widened to 6.2% from 5.8%. Net tangible assets declined to $1.35 per unit from $1.44.

No distributions were declared for FY26. The decision preserved balance-sheet flexibility, but left unitholders without income during a year in which the trust also recorded a 4.7% decline in portfolio valuations. The annual report points to FY27 distribution guidance of 6.0 cents per unit, with reinstatement dependent on resolution of the Healthscope arrangements.

Liquidity Improved but Interest Cover Remains Exposed

HCW ended the year with $158.3 million in cash and undrawn debt, gearing of 29.0% and $372.3 million of drawn debt. Its $475 million senior secured facility was extended in August from November 2026 to December 2027, removing the immediate refinancing deadline that contributed to the net current liability position at year-end.

That extension provides time, not a resolution. Only 53.7% of drawn debt was hedged at 30 June, down from 83.9% a year earlier, and the cost of debt rose to 6.0% from 5.6%. HCW also disclosed that a 25-basis-point increase in the portfolio capitalisation rate would reduce investment property value by $30.9 million, illustrating how quickly valuation movements can affect the asset backing of the trust.