This article originally appeared in Australian Financial Review
Real Asset Management (RAM) has reached its target of $500 million of assets under management for the Essential Services REIT it hopes to float next year, after buying three private hospitals – one in Tasmania and two in regional NSW – from the New Zealand-listed Vital Healthcare Property Trust.
The investment firm, backed by high net worth investors and small institutions, paid $100 million on a 5.65 per cent yield for the 70-bed North West Private Hospital in Cooee near Burnie on the north-west coast of Tasmania, the 54-bed Dubbo Private Hospital in central NSW and the 79-bed Mayo Private Hospital in Taree on the NSW mid-north coast.
The deal, brokered by Simon Quinn from JLL, was struck at 14.7 per cent premium to the hospitals’ June 30 aggregate book value of NZ$87.4 million ($82.2 million), highlighting the strong appetite for prime healthcare real estate from institutional investors.
All three hospitals sold on 15-year leases to Australia’s third-largest private hospital operator, Healthe Care, with built-in annual rent increases.
RAM has pencilled in a float of its Essential Services REIT in the second quarter of 2021 on the back of a $250 million to $300 million equity raising.
With the new acquisitions RAM’s essential services property portfolio now spans 13 neighbourhood retail centres worth $374 million and six medical properties, four of which are private hospitals, worth $117 million.
The proposed REIT is expected to deliver a distribution yield of about 5.75 per cent on a near fully leased portfolio with a weighted average lease expiry of almost eight years.
RAM director and head of real estate Will Gray said the investment firm had been actively working on the private hospital transaction for almost 12 months.
“We see it as highly attractive to our investors given the long-term sustainable and resilient income yield on offer in a high-growth real estate sector,” Mr Gray said.
“The provision of private healthcare services, including the assets they occupy, will only increase in demand as the public healthcare sector continues to be burdened by high patient demands and ageing assets.
“Accordingly, we are only now just starting to see the commencement of significant institutional demand to participate in the healthcare or medical property space,” Mr Gray said.
A December report by JLL forecast yields on private hospitals and medical centres to fall to record lows over the next 12 months as institutional investors pivot their portfolios away from office and retail property and towards the sought-after alternative asset class.
Analysis by the real estate agents shows healthcare cap rates have fallen from more than 9 per cent six years ago to well below 6 per cent.
RAM will look to build on the value of its three newly acquired private hospitals, with plans to roll out new mental health clinics at each of them in partnership with Healthe Care.
“We are currently exploring two [more] private hospital acquisitions,” Mr Gray said.