Q1 2023 NorthWest Healthcare Properties Real Estate Investment Trust Earnings Call
Speaker 1: I.
Speaker 2: Good morning ladies and gentlemen and welcome to the Northwest Healthcare Properties Real Estate Investment Trust first quarter 2023 results and conference call. At this time all lines are in a listen only mode. Following the presentation we will conduct a question and answer session.
Speaker 2: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Paul Dalilana, Chairman and CEO . Please go ahead.
Speaker 3: Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm joined by Shailen Chhande, the REIT's chief financial officer. Together, we are pleased to share with you our results for the first quarter of 2023.
Speaker 3: First, I'd like to point out that during today's call we may make forward-looking statements as defined under Canadian Securities Law. While 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 a lot of uncertainty.
Speaker 3: cause actual results to differ materially. We direct you all to the risk factors outlined in our public filings.
Speaker 3: And now to the quarter. Our global portfolio of healthcare real estate continues to differentiate itself from the broader commercial real estate landscape. With 83% of our leases subject to indexation and delivering strong SPNOI growth of 4.4% from an exceptionally stable cash flow profile that is highly diversified and is not only a
Speaker 3: and supported by 97% occupancy in a weighted average lease term of 14 years.
Speaker 3: In the first quarter of 2023, revenue and net operating income both increased by 30 and 25% respectively over prior year. However, as a result of higher interest rates, temporarily elevated leverage and lower transaction volumes within the REIT's capital platforms, FFO per unit declined to 17 cents.
Speaker 3: During the quarter, the REIT implemented a hedging program to fix the interest rate on $900 million of floating rate foreign currency debt. And for the part of the quarter the hedges were in place, the REIT achieved interest savings of approximately $4 million. Beginning in Q2, 2023, the REIT implemented a hedging program to fix the interest rate on $900 million.
Speaker 3: the full quarter impact of hedging will result in an incremental interest savings of approximately 2 cents per unit. And over the course of 2023, the collective impact of hedging activities, the UK and US joint ventures and non-core asset sales previously announced are expected to increase per unit FFO.
Speaker 3: by approximately 20% relative to the current quarter run rate.
Speaker 3: Our previously announced UKJV is progressing well with the REIT securing an investment from an institutional investor to acquire between 70 and 80% of the net equity in the REITs portfolio. The commitment is subject to final documentation and is expected to close on or before June 30, 2023.
Speaker 3: Similarly, the REIT's US joint venture initiative continues to progress and the REIT mewings actively engaged with qualified partners and is working toward commercial terms. Completion continues to be expected in the second half of 2023. The REIT is also pleased to provide an update on its non-core sales program announced last quarter.
Speaker 4: unit.
Speaker 3: Inclusive of the non-core sales program, its US JV and UK JV initiatives, the REIT expects to generate between $550 and $600 million of net proceeds in 2023. These proceeds from the above noted initiatives will be deployed towards reducing variable rate debt repayment on an accretive basis.
Speaker 3: The REIT remains highly disciplined with respect to capital deployment and as a result in Q1 acquisition volumes were muted. That said, the healthcare real estate market continues to adjust to the rapid change in global interest rates over the last 12 months with bid-ask spreads beginning to converge On September weirdest of weeks, the health and wellness ofBC format S aka a very solid
Speaker 3: transaction volumes starting to return to prior levels.
Speaker 3: The REIT remains particularly focused on its health care precincts initiatives and in particular it's developed a core fund which it expects to advance significantly in Q2 and Q3. These are attractive long-term investment opportunities in all of the REIT's markets which will allow it to pursue and grow its business.
Speaker 3: in the highest quality segments. From a balance sheet perspective, at March 31, 2023, the REIT reported debt to gross book value, including convertible debentures, of 57.6% on a proportionate basis.
Speaker 3: Subsequent to quarter end, the REIT issued an $86.3 million convertible debenture, net proceeds of which were used to repay short-term variable rate debt on an accretive basis. With the successful issuance of the convertible debenture, the REIT has increased its exposure to fixed rate debt, including its in-place hedges to 64%.
Speaker 3: its refinance 76% of its 2023 debt maturities and reduced its weighted average interest rate to 4.7%.
Speaker 3: Considering the approximate $340 million of non-core asset sales,
Speaker 3: and the UK and USJVs an associated debt repayment, the REIT anticipates proportionate leverage decreasing by almost 1000 basis points to 47% which is in line with its long term target.
Speaker 3: segmentally, I note the following. In Canada, we were on plan with portfolio occupancy remaining stable at approximately 90% and seeing our variable revenues, particularly through parking, continue to rise to pre-COVID levels. Additionally, our health and wellness centre development has been a major part of the community's long-term plan to ensure that people are safe and safe
Speaker 3: anchored by a Lakeridge Health Hospital, achieved substantial completion in early Q2. We also continue to make progress on a number of life sciences, ambulatory care and healthcare precinct initiatives, which are gaining momentum and expected to become part of the business in the near future.
Speaker 3: In the US, our portfolio is performing as expected with occupancy at 96% and an almost nine-year weighted average lease term. Our team has successfully integrated the assets acquired approximately one year ago and respective management platforms and continues to work closely with our healthcare tenants and progress on new and renewal leasing activities.
Speaker 3: In Brazil, we were on plan with steady 100% occupancy and continued strong constant currency SPNOI of 6.5%. Operationally, we note that the REIT's major tenant in Brazil, Rigidor, continues to deliver exceptionally strong results and is among Brazil's top 10 companies by market capitalization. Europe continues to perform well with occupancy and weighted average lease terms.
Speaker 3: remained steady at nearly 100% and delivered constant currency SPNOI growth of almost 8% with a weighted average lease term of more than 15 years.
Speaker 3: I'm pleased with the progress we've made during the quarter and post quarter, which advanced the REIT's strategic objectives and produced solid operating results. With deep strategic relationships, best in class regional operating platforms, and strong access to capital through existing commitments, the REIT continues to transition to a more asset-laid business.
Speaker 3: a best in class global healthcare real estate investment manager. And with that, I'll now turn it over to the operator to open up for questions. Thanks.
Speaker 2: Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request. If you would like to withdraw your question, please press star followed by two.
Speaker 2: If you are using a speakerphone, please list a handset before pressing any keys. Your first question comes from Mike Marketis with VMO Capital Markets. Please go ahead.
Speaker 5: Hi there, thank you operator. Good morning Paul and Shailin. If I could just start off on the fair value loss that you booked, perhaps you could give us a little bit more colour by region. The reason I ask is just that if we look at the disclosure, it looks like at least in your equity account of JVs, the values were flat in Australia, or relatively flat in Australia and Europe .
Speaker 5: I think you noted that the values were up in Brazil. Should we infer that the bulk of the negative adjustment would then be US, Canada and the UK?
Speaker 6: Yes, that's indeed correct. I'd note that on an aggregate basis our weighted average cap rate expanded by about 10 basis points to 5.5% or so and the majority of that widening and weighted average cap rate was across the Americas and European platforms.
Speaker 6: Yes, that's indeed correct. I'd note that on an aggregate basis our weighted average cap rate expanded by about 10 basis points to 5.5% or so. And the majority of that widening and weighted average cap rate was across the Americas and European platforms. Okay, great. Thank you.
Speaker 5: So you guys got the yeah, you did the converse post quarter Congrats on that to go down some more high cost corporate debt If we just look at the
Speaker 5: variable rate corporate debt, how much is the REIT left with after that transaction? How does the cost on what's left because I think you have different tranches and costs compared to the 9-3? And then the last question for me is just with all the capital repatriation with the UK the asset sales and US
Speaker 6: one as well. So I think your first question, I think the crux of that was with the use of proceeds on the convertible debenture issuance. So the full 86 million where we successfully had the over-lawment exercise was used to repay two different facilities at the corporate level and we did achieve that weighted average interest rate of 9.3% in terms of the repayment.
Speaker 6: So that was as planned. As we talk through our broader initiatives in 2023 between the non-core asset sales, the US JV initiative and most imminently the UK JV initiative, Paul referenced that $550 to $600 million of net proceeds and all of that will be used to repay corporate level financing.
Speaker 6: Some of it may fall within the corporate segment, some may fall in other regional segments, but we do expect to be using the majority of those proceeds to significantly de-lever and it will take down our floating rate debt exposure to less than 30%.
Speaker 5: Thank you. Okay. And then just last question for me before I turn it back. I guess the UKJB is progressing as anticipated. It's only been six weeks since we last talked so no changes there.
Speaker 5: Maybe just with respect to the US, I think the verbiage that you guys talked to or put forth in the press release in the MD&A hadn't changed much as well, but maybe Paul if you could just explain a little bit how that process is going and if there's been any change or puts and takes with respect to the conversation with the parties at the table as it relates to the USGB.
decision which is really providing both stability in, I guess initially in interest rates but then more directly in asset prices. We're seeing enough transactional activity in the US and you know in with our partners and the people that we're talking to.
well in terms of our capital partners, you know, sort of at the margin decision. So, you know, we're confident that, you know, that both price and, you know, willingness to deploy capital, our focus, you know, is certainly to identify opportunities where we can bring some growth capital to the initiative. So that's where we're concentrated on right now versus...
let's say a co-invest possibility and that would be consistent with prior initiatives that we've done in other markets.
Okay, and then I'm sorry, just one last one before I turn it back. I think you guys, one of the assets that you're selling is in the US, maybe just give us some comments in terms of how that property didn't fit with the overall strategy in the US.
Yeah, so the specific property is the Bakersfield Heart Hospital. And I wouldn't say that it didn't fit fundamentally. What happened is that we had a tenant that wanted to acquire it. They were a not for profit and didn't and weren't able to contemplate a co-ownership situation so we... Here.
and we're able to find agreeable terms to sell it to this tenant, which is an outcome that happens sometimes. I think what we've also been able to secure is an opportunity set with them on broader real estate opportunities. So we continue to explore the opportunity to grow with this organization, which is great.
great tenant but ultimately one that you know wants to and needed to own their real estate directly. So a little bit of backdrop to that you know as we mentioned we were happy with pricing and again it wouldn't have been our first decision to exit you know a good relationship with a good long-term partner but in this case it was.
Good morning everyone.
Thank you. Thank you.
Thank you.
Just wondering on the portfolio of the assets held for sale, can you give us some estimate of the NOI attributable and what secured debt is held against it? Tal, I can get more specific on the NOI. It does sit in a couple of different segments. So it's broadly in line with our IFRS cap rate.
broadly spread across the portfolio. So I'd use that five and a half as a blend. In terms of the secured debt associated with those portfolios, I'd look to the liabilities held for sale number on the balance sheet, and I think that represents the direct secured level financing.
Okay, perfect. And I guess like your goal here through all these steps, you know, with the joint venture creation and the
non-core sales, you know, the idea is to, you know, obviously move the, you know, your debt ratios down into the 40s. You know, I'd also say though, like historically you guys have been very, you know, healthy acquirers going forward.
non-core sales. The idea is to obviously move your debt ratios down into the 40s. I'd also say though, historically you guys have been very healthy acquirers going forward. I'm just wondering, it's like
Should we be thinking of like this 40 level?
or your target in the low 40s of kind of like the trough because you should expect at some point, particularly if you're starting up a new JV to begin acquiring more properties again.
Yeah, that's a great question Tal and the answer is no. I think we are looking to be sort of permanently in the mid 40s in terms of leverage. I think the answer to how we grow comes from becoming increasingly more capital-light so we continue to have.
a lot of assets on balance sheet beyond the US and UK assets that are slated to go in. And we see that being able to fund certainly the majority of any incremental capital that goes into it.
to growth in the future. So that's sort of our plan and again, you know, sitting here at sort of just over 50% mark, look through ownership. You know, I think the target is in the mid-20s on that, you know, to guide, you know, and again, that's through all regions and all.
sub-asset classes.
I guess maybe just more generally on the pace, would you say that like...
the dollars of asset growth you're sort of targeting going forward is maybe a little less than where it's been in the past.
Yeah, I think that's certainly for 2023. That's absolutely fair. I think we continue to be, as we said, cautious about the market and maybe what I would say and all that what we haven't seen is things go opportunistic, which might get to a different answer. What we have seen broadly in healthcare real estate is, you know, strong support for existing asset prices and things that are.
you know, again, making those prices work within the construct of today's interest rates and return expectations, you know, hasn't screamed enough to be opportunistic where we would grow beyond that. That said, we have almost $5 billion of 100% debt and equity committed capital.
in the business's capacity plus what we bring in the UK and the US. So certainly we'll be well primed to add over time. It's unlikely that everything matches up perfectly, but we're hopeful that the first direction here will be.
moving in the more asset-like direction. And we see pacing of acquisitions picking up in 2024 fundamentally, as the markets come to that equilibrium moment. So our prediction is sort of the first half of 2024. We start to get visibility, comfort maybe around some of the inflation trends. I think that translates into long-term rates.
ultimately into values and starts to get to a comfortable equilibrium point in asset markets, which is not the case today. But again, underneath all of that, we continue to see demand for healthcare real estate assets at exceptionally strong levels. I'd call out the recent...
you know, MPT transaction on the HealthScope assets in Australia. I think we mentioned that in our last call, but you know, again, that's a very strong look through cap rate on, you know, assets that we have, you know, the other half of in our portfolio. In our view, the better half, just to be clear.
But, you know, nonetheless super strong pricing there. We've seen major transaction happening in Europe at, you know, essentially book value or IFRS book value on significant portfolios. And, of course, you know, the U.S. is probably the most active of all markets where we started to see...
of growth outside of some of the developed core initiatives that I've mentioned. And it would be a 50% ish number to what we've done in prior years.
core initiatives that I've mentioned and it would be you know a 50 percent ish number to what we've done you know in prior years
Okay, and then just lastly, maybe you can give an update on Australian Unity and where you stand with that. If you can just remind us like what's your current position, how are you holding your position and that I believe there's a put call derivative in there and have there sort of been any movements.
in terms of resolving that and
you know, is the position you plan to hang on to for the long term.
Yeah, it's a great question. You're probably about a quarter ahead of us wanting to get fully ahead of it. We do have a pretty active legal process running there just to be direct to the point which has sort of Q2, early Q3 timelines to it. So I think we'll be in a slightly better position to talk there.
We do like the assets there and we are sort of committed to growing in Australia with our partner GIC. So I would just say that we'll leave it there for now, but I think there will be more visibility on things coming over the next couple of quarters.
And that's a situation where, if I recall correctly, when you first got involved, you tried to tender to or you tried to make a tender offer to shareholders. Is it that kind of mechanism?
that you would have to use to try and increase your position there? Or is there a negotiated solution that you can come up with?
I can't speak to that but I'll just say that we're the largest shareholder of Australian Unity with our partner at about 18% of the vehicle. I think all leavers are on the table for bringing it to a...
a positive outcome. Okay. All right, that's great. Thanks very much, gentlemen. Thank you.
As a reminder, should you have any questions, please press the star followed by the one.
Your next question comes from Pammy Beer with RBC Capital Markets.
Please go ahead. Thanks. Good morning. You mentioned potentially using some of your excess liquidity towards unit repurchases. I'm just curious, how do you balance that? Maybe how active do you expect to be? And how do you balance that story with respect to your debt reduction initiatives? Yeah, it's a great question, Pami. So I think for me, I think it's a good question.
and I think it's again a secondary initiative, but if things continue to be dislocated for a period of time and if we are successful in managing all of our initiatives which we expect to be, you know, it will be a real consideration for us. I mean it's not what we want to do but if the market continues to be substantially disconnected from NAV we would have the tools to consider that.
Right, okay. And then just on the USJV, what's your expectation as to where...
You know realize obviously this is still a negotiation process, but where do you see potential transaction? Relative to your I press you know book value at this stage
We are seeing the market within 5-10% of the total.
I have RS book value, Tommy, and I think as I mentioned before there's a lot of data points in the US for what we would do again. That's against the backdrop of a JV with some of the attractive features that we like to have, which is long-term capital commitments.
appropriate fees and structure to it. So again that's some of the things that we're seeing out there and we think that market's reasonably deep. Right and the property that is currently out for sale, I just wanted to confirm, Shaylin, was that in line with the, well there's no write down taken on that.
on a quarterly basis I guess in AFFO. How much of that will be driven by a recovery in the fee income?
I'd say there's really three components that drive that 20% increase in stabilized results and I think two of them to a large degree have a high degree of visibility which is around the hedging program which has now been implemented.
where we only got the partial quarter during Q1 and that'll come on fully in Q2. The second is with a high degree of visibility around the substantial deleveraging coming out of the UK JV, which will happen in Q2. And then really the third component is around a recovery of a transactional level volume.
that we've seen historically. I think Paul had alluded to it but we have $4.6 billion of available capacity across our existing platforms and we're clearly looking to deploy that over the coming years.
So we do expect some stabilization in our activity-based fees. And I'd say it's the smallest component of that 20%. So really a high degree of visibility on those first two and then as bid-ask spreads continue to converge, we'll see that recovery in activity-based fees.
Thanks very much. That's helpful. Thanks, Shailen. All right. I'll turn it back. Our next question comes from Mario Sarek with Scotiabank. Please go ahead.
Thank you and good morning. Just a clarification on the previous question with respect to the USGB fair values but in the five to ten percent with enough IFRS is that as of the Q1 23 IFRS value or relative to the purchase price.
I'm not sure if there's a meaningful difference between the two. Yeah, Barry, I'll chime in on that. No material difference between purchase price and Q1 I press, so it's within that 5-10%. Got it. Okay, and then secondly, more of a broader-based conceptual question.
The asset management business has been growing for several years now. Outside of your conversations with LPs on...
The US JV which my sense is it's a bit more directed or targeted in terms of the discussions but how would you characterize the magnitude of your discussions with global LPs today in terms of future product offerings relative to three to five years ago.
Yeah, let me try and roll that together. Thanks and good morning Meryl.
I think over the last, even through the difficult moments of the last year, which have had a lot of LPs thinking about existing commitments and where they want to focus, the trends that we've seen that are very pronounced are certainly a rise in focus on alternatives and within alternatives a better understanding.
healthcare. We are seeing a lot of capital formation in healthcare. I mean calling out the recent Australia example that we spoke about around the HUSCOB portfolio as a good example which was a combination of retail and wholesale capital coming into a 1.2 billion dollar transaction. So we see vibrant interest in the space.
And I think the flow of that capital has only been muted around, I mean, again, many LPs looking at, you know, what's happening with their existing commitments, maybe a bit of a denominator effect question, but more, you know, just getting to that level of what price and value are and the discussions we're having is that there's...
So, we talked a little bit about the US as maybe one example, but in developed to courts, another really good example and very long term, certainly with an almost permanent characteristic on the back end and really seeing good interest in that.
but we've started to sense that there's an uptick in interest across a number of discussions that we're having. I think our focus obviously around strategies other than developed core, which has a bit of balance sheet stuff, but is more perspective assets. It continues to be the existing portfolios that we have, so it opens up a number of geographies.
Brazil is an example, certainly Canada is an example, and it opens up a number of new segments, MLBs is an example for us, all of which we see as being suitable and of interest to the LPs that we're talking to.
Got it. Okay. And is healthcare generally a product that doesn't...
align well with opportunistic funds or opportunistic returns or do you see yourself in the future kind of expanding the product offering to opportunistic type returns? Yeah, yeah, that's a great question. I think our initial strategies have been more focused around our patient claims.
focused on. I wouldn't say that things couldn't be opportunistic, I'd say that it just hasn't happened. We have not seen that level of distress in pricing or ownership. The hallmarks of healthcare real estate by and large are still long term index cash flow.
you know, albeit with some operator pressures out there around the world. And we've called out, you know, really the cost side of operators. There's a huge pent up demand and operators are starting to come back to COVID, pre-COVID level, you know, levels of activities. So, you know, through our portfolio, which is, you know, global and very diverse, you know, we see, you know, reasonably well performing tenants. And.
and certainly not distress at an operational level that would translate into asset value. So that's what we're seeing and I think there's enough capital looking for opportunities that we just haven't seen. If anything, we've seen the opposite of distress. We've seen very firm pricing across.
the bigger, more fundamental strategic opportunity sets. Always there are some exceptions to that. I'd say of all our markets, the US would be the most diverse and certainly anything on any day could be happening in that market. But our focus there is sort of in a very stable.
call it a mid-market strategy around ambulatory care, which is again performed reasonably well and other than adjusting for the underlying costs of financing has really not had big big dislocation. So it's a bit of around the world happy to take that offline, but
I guess Canada and Brazil being two markets where you still own 100% of the assets and a desire to get down to a 25%.
interest on work through basis portfolio wide. Are there any specific nuances that would make
that becoming a reality in those two countries any more or less challenging relative to what you experienced in the other markets today? No, I don't think so. You know, and again, as we've mentioned, I think maybe there's a...
a between the lines question there, Mario, about how the business works as a REIT. And I think the good news is that we see it comfortably working within the context of.
this asset light, more asset light initiative that we're on. So that's the only thing that we've been mindful of. And I think otherwise, the business is set up to be able to be much more asset light than it is. And it can come at it across any number of regions or strategies. Again, our priorities are the bigger and more core ones for now.
But beyond that, I mean, I think there's lots of interesting healthcare opportunities out there. So, did I get to the heart of it? Yes. No, that works. And then just for Shaylin, I may have missed it, but on the $515 million of debt that's associated with the assets held for sale, what's the average?
that cost on that? You know Mary, I'll need to go back and check that number. I'll come back to you on that.
on that? You know, Mary, I'll need to go back and check that number. I'll come back to you on that. Okay. Thanks, guys.
Thank you. Your next question comes from Robert Novoselic with Solomon Investment Research. Please go ahead. Good morning guys. Thanks for taking the call. I'm just wondering, there was a comment made on the last quarterly call about the AFL-FOjust came through?
comments today were very much consistent with that. It is very much an expectation we guided to that 20% increase in annualized earnings or quarterly earnings. I've really underpinned through a couple of initiatives that I previously mentioned on the call, but around our hedging activities and implementation of our program which happened over the quarter.
the completion of our UK JV in Q2, as well as our US JV and non-core asset sales, as well as a general return to transaction volumes which would drive activity-based fees. So that guidance is very much reaffirmed. That's great, thank you very much. Thank you.
Your next question comes from Jake Stivalletti with CRBC.
question comes from Jake Stivalletti with CRBC. Please go ahead.
Hi guys, good morning. I might have missed it but looking at your FFO rec it looks like there's a 400k adjustment excluded. Is that a one-off or non-operational? I'm just looking for a bit of color on that.
I need to dive into that 400k Jake so maybe we can go offline on that. I just need to, I can't recall which line item that was but we can go offline. Okay thanks and then last question just touching back on the unit buybacks. If that's a route that you do pursue would you give any consideration into
abandoning the drip? Yes, so I think we look at the package of the drip and potential buyback holistically. I think as Paul had mentioned, our initial focus is principally on deleveraging and we view that as the principal focus in the near term.
As we look through the drip, I'd say it's relatively immaterial to the overall business and we know it's a component that many of our investors appreciate so we would look at that carefully but it's relatively immaterial.
Okay, thanks. That's it for me. There are no further questions at this time. Paul Dalilana, please proceed. Well, thank you operator. I think that brings the Q1 call to a conclusion. Appreciate all the questions and interest. Thank you everyone. Have a good day.