Q2 2023 NorthWest Healthcare Properties Real Estate Investment Trust Earnings Call

Speaker 1: Good morning ladies and gentlemen and welcome to the Northwest Healthcare Properties Real Estate Investment Trust 2nd Quarter 2023 results and conference call. At this time all lines are in a listen-only mode.

Speaker 1: Following the presentation, we will conduct a question and answer session for analysts only. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Friday, August 11, 2023. I will now turn the conference over to Craig Mitchell, interim CEO . Please go ahead.

Speaker 2: My name is Craig Mitchell, Interim CEO of Northwest Healthcare Properties, REIT.

Speaker 2: Joining me is Mike Brady, President and Shailen Janday, our Chief Financial Officer.

Speaker 2: Before I get into the quarterly earnings, I want to preface this discussion.

Speaker 2: As you know, this is my first Analyst Corps as Interim CEO and Mike's first since becoming President.

Speaker 2: The REACH trustees announced our appointments earlier this week as part of some key decisions regarding the REACH's future direction.

Speaker 2: The goal is to unlock Northwest value in response to changing market dynamics.

Speaker 2: We also announced that Paul Dallana has stepped away from the Board of Trustees and has resigned as Chief Executive Officer to focus on initiatives at North West Value Partners, the REIT's largest shareholder.

Speaker 2: As the Board acknowledged, we thank Paul for his leadership and invaluable contributions to North West.

Speaker 2: From establishing the REIT to taking it public in 2010 and stewarding operations across four continents, Paul has built the foundations for this business.

Speaker 2: The changes announced on Tuesday are important in our progression as a publicly traded Greek. I joined Northwest in 2018 as CEO of Australia New Zealand and a member of the Global Management Team. I was named President in 2020 with a focus of funds and operations.

Speaker 2: more than 20 years of experience in the rest of the sector.

Speaker 3: Thanks Craig, Mike Brady here and most of you know me. I've been with Northwest since 2006 as executive vice presidents and general counsel. I have extensive experience in real estate investments and finance transactions.

Speaker 3: Global leadership, governance, and legal matters. To that end, I'd like to point out that we make forward-looking statements defined under Canadian securities law during today's call.

Speaker 3: 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 actual results to differ materially. We direct you to all the disclaimers and risk factors outlined in the list.

Speaker 2: earnings this quarter. A global portfolio of healthcare restate continues to differentiate itself from the broader commercial restate landscape.

Speaker 2: With a 3% of our leases, subject to indexation and delivering strong SPNI growth of 5.1% from a stable cash flow profile, that is highly diversified and supported by 96% occupancy and a weighted average remaining leaf term of approximately 14 years.

Speaker 2: Adjusted Fund for Operation AFFO, per unit decreased from 20 cents in Q2 2022.

Speaker 2: to 13 cents in Q2 2023. As a result of lower management fees and an increase in interest expense related to floating rate debt.

Speaker 2: Adjusting for the non-readcurring component of management fees.

Speaker 2: AFFO would increase to 15 cents per unit for the quarter.

Speaker 2: Globally, our businesses are stable and growing. Now, we'll go through each one, Canada. We're on plan with portfolio occupancy, remaining stable at approximately 89%, and seeing our variable revenues, particularly through parking, continues to rise towards pre-COVID levels.

Globally, our businesses are stable and growing. Now, I'll go through each one, Canada. We're on plan with portfolio occupancy, remaining stable at approximately 89%, and seeing our variable revenues, particularly through parking, continues to rise towards pre-COVID levels. In the US,

Our team has successfully integrated the assets quite approximately one year ago, and we continue to work closely with all our tenants. Europe continues to perform well with occupancy and weighted average lift terms stable at 97% and 15 years, respectively.

In Brazil, we're on plan with steady 100% occupancy and continue strong constant currency SPNI growth of 6.4%.

Operation the REIT's major tenant in Brazil, Regidor, continues to deliver strong results and is among Brazil's top 10 companies by market capitalization.

And finally, in Australia and New Zealand, our largest market, occupancy remains steady at nearly 100%.

and delivered constant currency SPN, NOI growth of almost 5%.

with a weighted average lease term of 16 years.

The takeaway is that Northweds resilience in a challenging environment of rising interest rates and inflation is evident.

There is much to build on and I intend to bring an operational focus as interim CEO .

Our strong fundamentals are our evolution as a global asset manager and specialised expertise in healthcare estate underscores our position of strength. And I'd like to turn over to Shalyn to provide the financial results.

Thanks Craig and good morning everyone. I'm pleased to provide a few updates for you this morning. Thanks Craig and good morning. Thanks Craig and good morning.

From a balance sheet perspective, at June 30th, 2023, the reported debt to gross book value, including convertible debentures of 50.8%.

I want to emphasize that strengthening the balance sheet is a high priority for the and we are taking steps to do so.

As of today, August 11, 2023.

The Reeds is refinanced 91% of its 2023 debt maturities and increases the exposure to fixed rate debt to 66%. It has a weighted average interest rate of 5.1%.

Post-corder end, the reason has liquidity by $175 million by finalizing a new 50 million non-revolving credit facility.

and extending the maturity of its 125 million revolving unsecured credit facility by one year to November 2024.

The rep remains constructive on the long-term demand factors that drive value creation and healthcare real estate.

And with 5.8 billion of available fee bearing capital, it is well positioned to execute new investment opportunities while remaining disciplined in its capital allocation strategies.

The rate remains highly disciplined for a capital deployment and as a result in Q2, 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 and transaction volumes increasing.

And with that, I'll pass it back to Craig. Thanks, Shailin.

So the close, Northwest remains committed to delivering value for our unit holders.

The decisions announced earlier this week and the Solid Foundation were built are essential steps in unlocking the significant value of the read.

With deep strategic relationships, excellent regional operating platforms and strong access to capital through existing commitments, the read continues to be a leading global healthcare redist nay investment manager Hakka. I'm

And with that, I'll now ask the operator to open for questions.

Thank you, ladies and gentlemen. We'll now take questions from our analysts.

Should you have a question, please press the star, followed by the one on your touchtone phone. If you'd like to which way of question, please press the star, followed by the two. If you're using a speaker phone, visit the handset before pressing any keys. One moment, please, for your first question.

Your first question comes from Mike Marquitas from BMO Capital Markets. Please go ahead.

Thank you operator. Good morning Northwest team and Craig.

And Mike, it's a pleasure to speak with you

just with respect to the key changes that were announced earlier this week. And Craig, you gave us some pretty good color with respect to the thought process there, but...

I'm not sure if you can answer this, but the changes that were made at the management of the board level was this part of a normal sort of succession planning, or was it response in response to anything in particular? We'll walk around again right here.

Thanks for that question, Mike. Look, as you know, to the confidentiality, I really can't elaborate further than what we announced in August 8th. I'm happy to go through the three major points on the August 8th announcement, but you've caught that.

Okay, no, that's fair, that's fair. And I guess there's no mention, let me mention that you guys are, continue to look at,

You know strategies to surface the value in the UK portfolio, but the press release in your comments didn't mention anything with respect to the US recap. Is it safe to say that that's on hold, depending the strategic review at this point, or is it something that continues to be a priority for the week? I'll just pass on the shadows for that.

Yeah, thanks, Mike. You know, I guess as the board has assembled this strategic review committee, it will look to examine all options available to the reach. Nothing specific to the UK, JV, to announce at this time.

Okay. Now with respect to the non-recurring management fees, thanks for highlighting that in terms of the, you know, adjusting for that, that would be a two-cent impact. Perhaps you could give us a little bit more color as to what that related to. And maybe, I don't know if you're able to give this any guidance in terms of where you see total fees playing out on a full-year basis.

over the course of Q2. Those amounted as you noted to roughly $8 million or so as disclosed in the MDNA. You might recall that last quarter we had an increase in project acquisition and other fees.

And on a year-to-date basis, we look at that number as being stabilized, given the reversal of this quarter. In terms of stabilized asset management fees, I really take you to the base fee that we report and calling out that that's underpin by $5.8 billion.

of committed fee bearing capital. As we know, project and acquisition fees can be lumpy, so it's hard to give guidance there.

Okay, perfect.

Last thing from my end is just the the cash that you disclose in the MDNA. I think it says 60 some odd million bucks, 68 million. How much of that is at the corporate level as opposed to potentially being trapped within a sub?

I call out and maybe refer you to our supplemental, which does break that out by region. Although maybe the more substantive issue there is that the cash that the read has on a global basis is accessible by the read with the exception of the fact that we consolidate vital and that is a separate edit.

independent entity. So there's not really any substantive differences to whether the REITs catch this at the corporate level or in any of our regions.

Okay, and without having a chance to look at the details, is any of that 68 million within $1.68 million, the full amount that's available to you?

I'd need to go back and check the supplemental. We're happy to come back to you over emailing that.

Okay, thanks. I'll turn it back. Thanks, Mike. Your next question comes from Paul Woolley from National Bank Financial. Please go ahead.

Morning, Tom. Yeah, morning. Shailan, I'm wondering, you know, you mentioned that the REITs focused on, you know, getting to a strong balance sheet. What's sort of the metrics near term that, you know, you would put around, you would put on leverage and stuff like that to define like what you would consider strong? Yes, it's how I really say, I mean, as you know, the REITs current debt to growth book value is circa 50% on a consolidated basis and circa 58% on a proportionate basis. That's higher than where we'd like to see it longer term. We've historically guided to...

circa 40% on a consolidated basis. And as we consider our strategic review and as the board engages on that, we'll be announcing to the market our initiatives and target balance sheet metrics. your

Okay, and then I'm just wondering with the active joint ventures, like do you have a sense of what kind of acquisition volume you are looking at? Because I'm just wondering how you're gonna be able to...

you know, keeping up with the JVs and at the same time trying to get the leverage ratios down. It's great here. I think the joint ventures in the current market with the bit are spread quite wide. I don't think you see much transactional volume coming out of the joint ventures from either party. Okay. And then, was there any, you know, I don't exactly know the sequencing of events, obviously heading into the heading into the release today, but like in terms of the, you know, border view, was there any discussion around the distribution rate this quarter? And then as you guys take over,

What is your feeling about where the distribution rate should be? I call out that we did announce the distribution for August today and we continue to review and approve distributions on a monthly basis. We'll continue to update the market as planned.

Craig, do you think the current rate is...

The right number for the company or you know, because obviously it's one of the ways that you could create a little bit more breathing room for yourself on the balance sheet.

Look, I think it's the committee just being formed, and we just go through our due process with the committee.

Okay, and then I appreciate this all came together very quickly, but one of the things that wasn't mentioned in the press release earlier was...

Can you just sort of give an idea for investors about how you're looking at that longer term? Yeah, so I think with best governance practice, the board needs to go through a search. That's why my appointment is interim. I put my hand up to be permanent and we'll see how that goes. That's great. Thanks very much, Dylan. No, thank you. Thank you.

Your next question comes from Robert Neville-Select from Solomon Investment. Please go ahead. Oh, good morning. Thank you.

I'm just wondering sort of a similar question that was already sort of covered about the AFFO pale ratio. I'm just wondering, or maybe it has to wait to the strategic reviews over, but in order to get that back in line, I'm wondering what the thinking is there, whether the AFFO was expected, you expected to increase or you may have to

Yeah, thanks Robert. Good morning. I would call out that as you've noted, it is something that is under consideration as part of the strategic review. And I'd reiterate my earlier response that we did announce the distribution for August today and we continue to review and approve distributions monthly.

Okay, thank you. The next question comes from Dean Rickettson from CIBC. Please go ahead.

Thanks, morning everyone. Shailin, just in the counting question, when you book the Project in Acquisition Fees,

What's the trigger that would have you put those into the P&L? And the reversal of that was, was that the UKJV or just some clarity around kind of what happened there and how you deal with that from an accounting perspective?

Yeah, so we're going to get into the details of IFRS Rev Rec, which I don't want to tell anybody. But I mean, I think it's really a probability test that we apply against the rules on management fees. In respect of the specific fees accrued in Q2.

You're right in the Q2MVNA. We did attribute those to the acquisition project fees to the UK and that is the reversal that came through in our Q3 or sorry, Q2 results. So Q1 is where we did accrued them. So I think that covers the crux of the question, but it was ultimately a probability test.

in Q1 and then in Q2 related to the related to our earlier announcements in respect to the termination of the UKJB.

Got it, that's clear, thanks.

Next question comes from Syram Shrineva from Carmark Securities. Please go ahead.

Thank you, Peter. Good morning, not just team. Craig, just go in with your comment on widening bed asks spreads.

How should we be looking at that from your disposition program perspective? Like, does that kind of cause a bit of a delay and going through the 340 million of this division?

Or is that something which you're comfortable kind of running through the year? No, we're comfortable. We're chosen the assets carefully. We know the markets. And going by region, we're pretty comfortable. You can see we've been pretty successful to date and that's in the results in Q2.

I think it's nearly 50% either settled or under letters of intent to give you a sense.

Yeah, nothing else. And I thought it was the other point. It's in line with Abu Kali.

All right, now that's good to know. Just for me on that, in terms of the buyers who are actually acquiring these assets, can you just do some color on, like, what are the profile of these buyers? Are they more institutional funds or are they more individual operators?

All right, no, that's good to know. Just probably on that, in terms of the buyers who are actually acquiring these assets, can you just do some color on, what are the profile of these buyers? Are they more institutional funds or are they more individual operators? So, look, I'll just pass you every mic for that one.

Yeah, so I mean there are different counter parties depending on the region and you know today we're finding that they tend to be regional local operators well respected operators in those specific regions.

All right, that's good, go to the gentleman, turn it back. Thank you.

And that's good call, gentlemen, tell it back. Thank you. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please post a star followed by the one.

Your next question comes from Mark Marketers from the ML Capital Markets. Please go ahead.

Thanks, I've just got a quick follow up for you guys.

You know, one of the great features about Northwest is that the fun structures that you have of standing have perpetual life terms or very long life terms, I think, in case of one of them in Europe . I'm not sure if you can answer this, but with respect to those asset management agreements, is there anything in there?

that would preclude or be an impediment to a change of control at the mandatory level. Craig here, I'm gonna pass over to Mike, but I think the simple answer is no, they're a pass over to Mike. Yeah, I hope Mike. I mean,

Those agreements are subject to confidentiality restrictions.

I concur with the high level assessment that Craig has made.

I appreciate that. Thanks so much.

There are no further questions at this time. I will turn the call back over to Craig Mitchell, interim CEO , for closing remarks.

Thank you operator and thanks everyone for your time this morning Shailen, Mark and I will be setting up for 101 so looking forward to seeing you in person Early next week. Thanks for your time. Talk to everyone soon. Bye. Bye