Q3 2022 NorthWest Healthcare Properties REIT Earnings Call
Good morning, ladies and gentlemen, and welcome to the northwest healthcare properties Real estate investment Trust third quarter 2022 results conference call. At this time all lines are in a listen only mode. Following the presentation, we'll conduct a question and answer session. If at any time during the call you require immediate assistance. Please press star zero for the operator.
This call is being recorded today.
November 15th 2022, I'd now like to turn the conference over to Paul <unk>, Chairman and CEO . Please go ahead.
Thank you operator, and good morning, everyone. Appreciate you joining us today.
Joanne I show agenda.
Financial Officer together, we are pleased to share our results for the third quarter of 2022.
First I'd like to point out that during today's call. We may make forward looking statements as defined under Canadian Securities Law.
All such forward looking statements reflect management's expectations regarding our business plans and future results. They are necessarily based on assumptions that are subject to uncertainties and risks, which could cause actual results to differ materially.
We direct all of you to the risk factors outlined in our public filings.
And now to the quarter.
The REIT high quality in defense of $10 6 billion dollar portfolio delivered strong financial results with revenues and net operating income increasing by 21, 2% and 19, 9% respectively year over year, well net asset value grew by two 7%.
$13 or 97 cents per unit over the same period.
However, as a result of nonrecurring items and lower transaction volumes and related management fees.
During the quarter and increased interest expense together with temporary temporarily elevated leverage.
<unk> decreased to 15 cents per unit.
The reach foundational pillars remain stable. These include a high quality defensive portfolio delivering strong built in growth in this quarter to 5% constant currency SPP NOI and supported by 97% occupancy and almost 16 year weighted average lease expired they.
Each portfolio continues to demonstrate market, leading cashless to body with 81 point something percent of income subject to taxation.
During the quarter the REIT.
Reached agreement on on the formation of a new UK JV initiative with an aggregate equity commitment of 500 million pounds to be funded at 85% by U K institutional investor and 15% by the REIT.
In addition, this investor will make a 50 million pound investment and they're each existing portfolio.
This was a key strategic priority for the REIT in 2022.
As highly strategic for the business as it expands the asset management platform and introduces a new institutional investor and further positions to REIT to execute on attractive opportunities as they emerge within the region.
Agreement is expected to be finalized by year end and proceeds from the shifting money kind of investment will be redeployed.
Higher cost floating rate debt, resulting in interest rate savings is approximately.
One cent per unit per quarter.
Considering additional investments in its U K portfolio going forward.
During and post quarter end the REIT completed the following balance sheet initiatives, which include the refinancing of approximately $1 billion of their each 2022 and 'twenty 'twenty three debt maturities to extend term and fixed interest rates.
These include successful public offering of $155 million of unsecured convertible debentures.
$16 per unit conversion price bearing fixed interest at 6.25% that mature on August 31st 2027.
The refinancing of two floating rate facilities with a combined outstanding balance of approximately $475 million, which extended the terms of maturity by approximately two years and I expect it to result in annual interest rate savings of approximately two cents per unit.
Commitments to extend the maturity of its you're a secured loan facility to 2025, which is expected to generate annual interest rate savings of approximately one cents per unit.
The completion of an 18 month extension of which $110 million Australian.
Silly.
And additionally, the REIT extended the term to maturity of its Australia and term debt facilities maturing in November and December of 2022 to April and June 2024, respectively.
Combined with the aforementioned U K initiative as well as the expected reversion of quarterly management. She said historic levels, adding another approximately two cents per unit on a run rate basis, we would expect future earnings to be in line with historic levels completion of these initiatives along with the associated debt repayment is expected to increase long term.
Fixed rate debt exposure to approximately 65%.
While generating strong interest rate savings and extending the average term to maturity of the reach that overall consolidated leverage is expected to decrease approximately 420 basis points to 43, 5%.
Separately the reach U S joint venture initiative continues to progress and despite microeconomic uncertainty right.
We are engaged with the shortlist of qualified partners is working to agree commercial terms in Q1 'twenty 'twenty three.
As a result of the expected U K JV formation post quarter end in place capital commitments increased to $12 $5 billion with appropriate fee bearing capital increasing to $5 $9 billion.
That's the REIT Fund management continues to scale the pro forma the completion of the U S. Shrink that you deployed and committed capital is expected to increase to $6 7 billion and $13 $3 billion respectively.
I would target ownership level of between 20% to 30% across its capital platform.
Anticipates generating an increased level of growth in both <unk> and NAV on a per unit basis is what are all the result of leveraging its capital light model and internally generated capital to fund growth.
Yeah.
In Q3, the REIT continues to execute on its growing asset management business and completed acquisitions totaling $125 million in its various Australasia platforms read also advances global house kept leasing strategy by adding approximately $150 million new development pipeline.
Within the region.
But macroeconomic uncertainty resulted in lower nature of volume.
Acquisitions in the quarter I mean, it's constructive on the long term demand factors that drive value creation in health care real estate.
With a growing investment pipeline there it continues to evaluate new opportunities, Virginia, she bearing capital vehicles on an opportunistic basis, while remaining disciplined in its capital allocation strategies.
Yeah.
For the quarter, our results were temporarily impacted by the REIT flexible interim capital structure, resulting in a F. F. L. P. Internet 15th that however, with the completion of the previously disclosed balance sheets and JV formation initiatives and their version of management fees to historic levels future earnings are expected to revert to.
Levels in line with previous quarters.
Net asset value during the year increased 2.7% to 13, 97, again, driven by fair value gains across the portfolio and the expansion of its global asset management business with.
With respect to liquidity, neither read as well position with over $150 million in the mail uncommitted resources today.
This is expected to increase to more than $300 million on completion of its U S initiatives.
Operationally our results were inline with expectations with accelerating S. P NOI growth of 2.5% largely driven by contractual rent indexation.
And by the high occupancy and long term leases previously noted.
All regards highly defensive.
While the macroeconomic environment is creating uncertainty around inflation and interest rates.
<unk> is well positioned with 81, 7% of its revenue indexed to local inflation.
Over 97% indexation in its international markets.
Saying that until I know what the following in Canada. We were on plan portfolio occupancy remains stable at 88%.
The REIT has recently committed to a new lease on one temporary they can see and its western Canadian portfolio and expects to have that occupancy increase to more than 90% again at historic levels. The property will be fully occupied by January 'twenty 'twenty four we continue to see.
A return to pre COVID-19 level activities at our properties, including increased leasing activity quarter over quarter.
We're making progress on a number of life Sciences, and I'm, the chair of care initiatives, which are gaining momentum and expected to become part of the business in the near future.
In the U S. Our newest region, our portfolio is performing as expected with occupancy at 97% and almost nine year weighted average lease term.
So I have successfully on boarded and integrated assets in respect to management platform.
So progress on new and renewal leasing activities.
In Brazil, we were on plan steady, 100% occupancy and continued strong cash currency as power stimuli of 10, 7%.
Operationally, we know that to reach the major tenant reached Dor continues to deliver exceptionally strong results and is anyone brings those top 10 companies by market capitalization.
Europe continues to pop up well with constant currency S panel I growth of three 7% and.
Occupancy was stable at 97, 2%, we continue to find good investment opportunities in Europe , allowing us not only to increase scale and critical mass in our existing regions, but also consider opportunities in adjacent markets and finally.
And in Australia, New Zealand, and our largest market.
Occupancy remains stable nearly 100% and delivering constant currency S. P. N AOI growth of eight 3% with a weighted average lease term of almost 16 years I.
I am pleased with the progress we've made during the quarter, and particularly post quarter, which advance the strategic objectives produced solid operating results.
Deep strategic relationships best in class regional operating platforms and strong access to both public and private capital. The REIT continues to transition to a more asset light business.
First in class Global healthcare real estate investment manager.
With that I'll now ask the operator to open up for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session did you have a question. Please press the star key followed by the number one on your Touchtone phone, you'll hear a three tone prompt acknowledging your request.
<unk> will be taken in the order. They are received if you're using a speaker phone. Please lift your handset before pressing the keys will take our first question from Cerium Sarnath loss with Cormack Securities. Your line is now open.
No fair enough.
Just looking at <unk> T. In the JV that you guys have formed well can you guide us in the ease of deployment of the proceeds from the JV.
I'm, sorry, I, just got part of that could you repeat your question. Please.
Sure just took all the genes that are being formed right now in the U S. Nevertheless.
And most person he probably miyuki can you comment on the pace of deployment.
Yes.
The JV has a deployment of the new U K JV has a deployment period of three years.
And with some extensions as with a typical industry features so that would be our expected deployment and again leverage focused in there in the 45% to 50% range, which is typical.
We are in the U K.
Behind that again, we do see a number of interesting opportunities. Obviously this has been a long time coming for the business. So we have quite an active opportunity set as we head into <unk>.
Thinking about what to do a new partner opportunities that we're pursuing.
That's great color, Paul onboard them keeping in mind, the Belgian disconnect between the public market and the public market.
Are you seeing any opportunities in the public market place that you'd probably be talking to us.
Okay.
Uh huh.
I think our focus remains on you know fairly yeah traditional asset transactions in the U K for the time being.
So I haven't seen quite as a sharp correction there and in terms of health care.
And so where we're again focused more on.
On the traditional asset side of things and we do see some compelling opportunities in that direction. If I understood. Your question correctly.
Yeah, No. That's that's really helpful. Thanks for that Paul I'll turn it back.
Yeah.
And ladies and gentlemen, as a reminder to ask a question. Please press the star key followed by the number one on your telephone keypad.
We will go to Tal Woolley with National Bank Financial your line is now open.
Hi, good morning, everyone.
Yeah.
Hi, good morning.
Sorry.
I just wanted to and I apologize I missed some of the preamble upfront.
But and your management fee breakdown, you've got one either on line item. This other fees and cost reimbursement that went negative this year.
And I'm just wondering if you can talk a little bit about what exactly created that situation is that okay.
That's up from something else or if you can just give a little bit more color there.
Hi, Sharon would you like to address Saturday or maybe even get into that detail offline. If that's a preferred.
Yeah. Thanks for that question. So I can give you a high level commentary on that I mean first off I'd call out the management fees in general this quarter were lower than where we traditionally expect them on a run rate basis. I think all of that is timing related and nonrecurring in nature I when we think through <unk>.
Transaction activity and transaction driven fees that was clearly lower than expected during the quarter I've just given some of the macroeconomic volatility, but I would note that we have a high degree of visibility into transaction volumes in Q4, and expect activity based fees from transactions to revert to historical levels, I, which were averaging around $4 million a quarter.
For the last the last four quarters or so I in respect to your specific question on cost reimbursements, I and I and the other are the other recoveries. If he may again timing related I. We're engaged in some large transactions in the moment, where we're arrangements contemplate us being.
Reimburse for a lot of the a lot of the cost of the read is incurring in respective management and ongoing management services and respective procuring those transactions I Theres really just been a shift in timing. So I would note that in Q2, we had some fairly material cost reimbursements.
And other recoveries in Q3, some of that reversed out, but we do expect to recover that over the coming quarters as sad as against all those transactions pick up speed.
Okay.
So if we take if we assume like the current.
Our asset base.
And then the UK JV transactions each transaction goes through.
What would you sort of estimate the run rate fees of the platform would be.
Yeah, I don't think we've given it on a proportionate basis, yeah, yeah totally I mean, I don't think we'd give any concrete guidance around I, you know management fees, noting that you know I mean, we do have a steady level of recurring base transaction fees I, you know I would call out that as we go into 'twenty 'twenty, three will likely be providing some more holistic guidance.
As I you know as a lot of these platforms come together I, So maybe I'd defer that discussion to next quarter, but but happy to work off of some of the historic I mean, some of the historic results offline.
Okay.
In the U K I, you know like I know in the past you haven't engaged in you know a huge amount of hedging or anything like that you know as you've gone around the world.
I just wonder when you look at sort of like the macro situation in the U K and the fact that it is like you know a large liquid currency, you can trade and hedge them pretty effectively.
You know like has your approach to sort of on managing the financial risk there shifted a little bit.
With respect to the U K versus some of the other jurisdictions.
Oh I can kick off with the narrow U K part and then perhaps you can talk a bit more broadly around the global financial risks and management are in the U K I you know over the course of the quarter I didn't and so sorry, just post quarter, we completed I E. A two year renewal works.
That should have a new I mean of a of a new facility I in respect of our UK portfolio. So that was quite a quite a big accomplishment to do a whole scale refinancing against that I almost now almost $1 billion portfolio I think that now gives us the ability to to really lock into longer term capital structure arrangements and where.
Alright, we put in place hedges across various I various specific debt instruments that we have whether they be in the U K and the U S post quarter end I and we'll be looking to very actively engage on a more comprehensive hedging program, including considering currency exposure going forward I part of it has been historically are bound.
She has been quite transition area in nature as we brought in I have you know a lot of these capital platforms and as some of those parts are starting to lock in as expected and we were able to take much more longer term capital structure decisions that maybe Paul if you want anything to add to that.
No Sean I think that covers it off and I say it again I think that that's exactly the point, which is you know where where we have some visibility now and oh, the permanent capital structure in place on one in the U K as an example, it allows us to move to a you know about.
Longer duration, and some and some bumps interest rate and currency hedging is appropriate and we're looking at that.
That is an appropriate measure certain throughout the portfolio.
Okay.
And then just you know I appreciate it.
All are around how you see that sort of refinancing.
Savings playing out I guess, it's about a couple of questions. You know like one of the bullets you discussed that extending the maturity of your U S secured loan facility.
75.
Gonna generate interest rate savings and I'm, just I'm wondering how extending our maturity gets you right savings.
Yeah I'd note a couple of things when we entered into the U S a year ago, or so or sorry at the front end of this year and in early Q2, we did put on a short term floating rate facility that I'd say it was just a yeah just higher cost at nature. So I'm looking for it as we're putting on more permanent more permanent.
<unk> facilities, I think gives us the ability to vote, both extended term and reduced rate.
Okay.
And then the same thing too with the the floating rate facilities like Kurt.
Your refinancing those and extending the maturity is it just a question of like.
I guess I was just surprised to hear that like credit and like your credit spreads and stuff like that would be better on a refinancing right now than they were let's say a year ago.
So can you just walk through like how youre getting the savings on the refinancing of the credit facility.
Yeah, and then I had to call out that it's really a function of where we're where our starting point was so noting that coming into I mean coming into this moment of macro volatility you know we had several you.
Four or five corporate level.
Secured and unsecured facilities.
That were just I'd say temporary in nature revolving in nature I to enable flexibility really in advance of our Jv's I and now that we've brought certainty to the U K part of it and continue to make progress on the U S. I in respect of our JV initiatives has allowed us to just bring more certainty in.
Perhaps I consider facilities that arent revolving and just have I have more structure associated with them and not as much flexibility associated with them.
Given that we don't need it so it's given us the ability to bring rate down as well as extended term, which is counterintuitive in the current moment, but but it's really coming off of a very high starting point.
Okay.
And then I guess, just lastly, like within Canada like.
Are you finding other opportunities sort of beyond.
You know the medical office portfolio.
For new projects like ours.
You know the government's reworking.
You know how to handle it you know finding it.
Incremental beds looking at you know transitional care type.
Type beds.
Across the province, I know you have I believe you have about one facility up and running already in that regard is there.
Scope to do more of those going forward.
Yeah, maybe I can take a crack at that tell them. It is a really interesting time in Canada in the moment in lots of discussions going on about.
You know about.
Health care delivery and in new in new formats. Our focus as you know has been in a couple of areas ambulatory and outpatient and and we have.
That facility, that's shortly completing in that space and we are working on a number of others that are that would be similar in nature again that so.
Hum.
And Ontario, driven initiative, but we are starting to see that come through in other provinces, including Alberta, and Quebec and our portfolio.
So certainly that is a notable.
Notable trend in and we do think that you know.
The ambulatory.
Sort of spaces is underrepresented strongly in Canada. Its really just working through you know what type of tenancies in there and it makes for tenants.
That can fulfill those those facilities, we expect to see more of those coming over time. So that's been a reasonably long standing initiative, and we expect to be adding to that.
Still pretty incremental to the portfolio.
Now the other initiatives that we are quite focused on views and that's kept pretty big space. It's one of our core global strategies now and that's a real combination.
Of health care.
Search education and all of the ancillary uses and we are quite active on a number of initiatives. There that we expect to be in ansible in the fourth quarter.
It will be yeah, I would say transformative for the Canadian business in terms of size and certainly fitting the opportunity set that you.
You know that we see in other markets, where you know quite concentrated particularly Australia, where we're at.
We have a really significant opportunity set so those are the two areas that we're really focused on.
Right now there are other government initiatives talking about.
Different types of Oh.
Long term care in particular, and we are keeping an eye closely on that as they look to provide bags and perhaps a little more structure to the nature of the operations in that space, but it hasn't been something that's quite reached our action ability and clearly.
Yeah still continues to be maybe more.
Early stage I would say, so a little bit of a trip to Canada, but we are seeing some changes coming in and the ones that are.
You know very consistent with our core.
Strategies globally.
Okay, that's great. Thanks, gentlemen.
Yeah.
Once again Thats Star one if you have a question next we'll go to Tammy Barrett with RBC capital markets. Your line is now open.
Thanks. Good morning, just in terms of the UK JV can you just remind us or walk us through the you know.
The anticipated capital repatriation that youre expecting.
Okay.
Yeah, Sean do you want to speak to that.
Yeah.
Okay.
He taught me I. Thanks for that question I have in terms of I E. The capital that we expect to generate out of her recent both seed portfolio, a recapitalization as well as I guess the go forward I knew JV initiatives, we did call out and do note that our that our ownership.
Target.
In the you don't win both of those platforms the seed portfolio as well as the new money JV is it I mean, there's around 85%.
So we'd previously guided to a selling down to about a 30% level. We're now selling I mean, I mean, obviously, that's changed and I you know, we'll get into a variety of reasons that drove that change I'm you know in terms of the capital coming back I would note that our that we are doing the transaction at our current IRS a book value. So I'd.
No change there and spent I mean is it expected in terms of our current valuations and we really just haven't seen the transactional evidence to support any changes in valuations there. So a quite nice to to be the mark there and be able to transact at our current Mark I'd, maybe Paul I defer to you a little bit in terms of the overall strategy around the 85 to <unk>.
<unk> allocation versus the previous 70 to 30.
Yeah.
Sure So I.
Thank you.
Again in this.
Progression to sort of a more capital light clearly you know.
We've been considering a range of Oh about comes out I think we were comfortable with our investment partner at this level and certainly provoke requires northwest to put up slightly less equity than some of them Tyler.
Additional joint ventures, but still meaningful alignment and in all of the things that go with that as a principal investor. So you know, we we like that mix I think otherwise the you know the JV itself sort of it's quite similar to the ones. We we've done already and have in place. So broadly speaking has a similar.
Yeah investment periods similar fees.
Fees and related yes, some governance structure. So I think it shows quite similar to the things that we've been doing and again. This is going to allow us to pursue what we see is some interesting opportunities in the U K that are starting to percolate and we've been working hard to get.
Get that in place in order to move to.
To move quickly and efficiently into what we see is a continuing attractive market and so that's our thinking.
A little backdrop, there I'm not sure if there's anything else.
Got it just maybe one last one in terms of the the pro forma proportionate leverage once the U K G. B it's finalized.
And everything is in place where does that take our pro forma leverage on a proportionate basis.
He told me I can come back to you with a specific number offline and and I would call out.
We'd previously guided guided to proportionate leverage you know around that I had fortyish percent, Mark I really pro forma our U K and our U S initiatives I've you know as we just noted in our high in the prior quarter.
You know the capital generated out of this current recapitalization in the U K, you'll generate about 50 million pounds lower than we'd previously anticipated with a bigger sell down but we do think that just given our broader convictions around the asset management business and perhaps that's a capital light model in terms of lower a lower look through ownership.
Over time, we still see that proportionate leverage number into that low forty's is achievable I. It just might require different tool kits within the business, where as you know we're still capital heavy in the majority of our platforms and regions.
Got it just last one on the U S. Our partner discussions.
You can add there.
Narrow down to the final strokes, maybe a bit further than where you were last quarter or a <unk>.
Now I guess put a sort of a timeline on it for Q1, just curious if there's anything you can share there.
Yeah, I think what I would share pardon me is that are you know obviously with market volatility and in in Q3 I'm you know it was a difficult time to be working through.
In discussing our jbs and major transactions, so I think and based on our.
Current state I would say the market is certainly you know finding its its level in and we're we're confident that we can move forward on the timelines as proposed so that's probably the biggest thing to call out. It's just a you know that.
Q3 was a relatively.
All entitled time in not just capital markets, but certainly interest rate and in related markets and so that's passed now and I think we see you know market.
Since backend in and we're having constructive dialogues with a number of parties. So we're confident that we'll be able to move forward here and again this is a.
High quality institutional portfolio that we acquired and was well thought out and in the marketplace and transactions in health care real estate or are returning are actively so we are confident that we'll be able to move forward as Patrick.
Thanks, very much I'll turn it back.
And next we'll go to Fred Blondell with Orange in the Bank Securities. Your line is now open.
Thank you and good morning, just one quick question for me with the closing of the U K JV. This year end and the closing of the U S. JV and I guess in the Q1 next year is it fair to say that at the margin you'll.
You'll be focusing a bit more on the pricing strategy in 2023, and so what was it and what are your views are on the on the pricing strategy at this stage, especially in the in the context of no in the current context of the construction costs. Thank you.
Okay.
Yeah.
So it's theres lots in there I think I mean again the business continues to have a number of active strategies and Caribbean, including sort of the traditional partnering with health care, operator strategy in EM, and our ambulatory and outpatient strategies all of which come through the existing JV. So I wouldn't say that they're deemphasize, but in terms of.
New initiatives.
We are making progress in our in our developed core initiative in Australia, which is a very much a precinct driven.
Certain fund and has a long term development and appropriate development attached to it.
I think you know we've been able to find some spots where we can make them you know good investments today in and make development costs and pricing work in fact, we're seeing prices start to come in now and most of our markets. So.
That's a you know that's actually been a positive sign and that's come through the business over you know the three or $400 million on a development that we have underway today.
A similar amount of things that are in planning and business. So.
I would say that.
Development, although as we come into this sort of.
No market moment, and an economic moment requires you know sort of even more rigorous underwriting and Ken.
Now that we're approaching it with that.
Slightly more cautious on.
Opportunity set the things that sort of support the health care pricing strategy, and then really that combination of major health care users and a major educational and research users. It is still you know quite alive market moment, and so where we can find good.
And appropriate opportunities.
You know with the appropriate.
Appropriate contracts and and you know certainty of leasing et cetera, we're still looking to do stuff but.
But you know again hard to estimate that that's a new a new initiative and developed calling that we have.
Number of existing firm projects.
Projects underway already that are are are moving forward and are on budget and on schedule and Oh man substantially leased I think where we're feeling that there's a you know a consistent level of development business can support because it is it looks to me.
To go to go forward.
Hope that answers the question yes.
Yeah, No absolutely and then it looks like you had a quite an extensive process to find the right JV partner for at least in the U K and I guess in the U S. Due to how should we view this process to find the right JV partners would've precinct strategy take out like what would be your views on that.
Okay.
Yeah, I think where we're in active discussions with a small number of very significant investor said as I've mentioned before and so that's continuing I think we're hopeful that in the fourth quarter will have.
<unk> reached a reached out spend of at least one of.
So it's too and no again, we have a nice pipeline of opportunities and and and.
Uh huh.
Quite a few portfolio in there still.
It was still in an early stage opportunities, but you know abroad brought the interesting opportunity so the core or or constructive that things can happen as we said in the context of people.
That's great. Thank you.
Yeah.
Okay.
Yeah.
One moment.
I show no further questions I'll now turn the call back over to our presenters for any additional or closing remarks.
Thank you operator, and ladies and gentlemen, appreciate you listening in I don't know, if it's health care properties Q.
Q3, 2022 conference calls.
Yeah.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation you may now disconnect.
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