It can be difficult saying goodbye to things you really don’t want to part with. But that’s the situation APN’s analytical team found themselves in recently, saying ‘farewell’ to Generation Healthcare REIT (GHC) which was recently acquired by Canadian healthcare specialist Northwest.
It’s an instructive story, one that shows the value of buying assets at attractive prices and moving them on at the right time, even if the parting is difficult.
Initially known as ING Real Estate Healthcare Fund (IHF), Generation Healthcare listed in May 2006. It was the first and only property trust focused on the Australian healthcare sector. At that time, IHF was priced at $1.00 offering investors an 8.4% distribution yield.
APN’s securities team conducted initial due diligence. We liked what we saw in the management team and the underlying portfolio of assets. The weighted average lease terms were greater than 10 years; tenants like Epworth Hospital were of a high quality; and there seemed plenty of scope for sustainable rental growth.
Back then, our team was still learning about the healthcare market but we were well aware that the growth in health expenditure and services required to sustain Australia’s ageing population was beginning to gain momentum.
Nevertheless, we did not build an initial stake until February 2007 when what was to become GHC had its first post-listing public offer under the IHF moniker. Conservative investors like us like to allow some time for management to start to prove their worth, and to appreciate their grasp of the business.
GHC didn’t disappoint on either score. Since then the stock has become a core non-index holding across APN’s funds, providing high and sustainable income growth with lower-than-market volatility. Really, it’s all we could ever hope for from a commercial property holding.
Since our initial investment at $1.08, the share price has increased a staggering 116% or 14.7% p.a. But best of all for our income-focused investors, GHC has delivered an average distribution yield of 7.5% p.a.
We don’t often talk of total returns because it can draw the investor’s eye from where it should be focused. But with GHC now out of our portfolio it seems safe to do so. Total returns on the fund’s initial investment have been in excess of 22% p.a.
The chart below shows the impact of this return on an initial investment of $10,000 since GHC’s IPO in May 2006 compared with the S&P/ASX 300 AREIT Index and the S&P/ASX 300 Equities Index.