Q3 2024 NorthWest Healthcare Properties Real Estate Investment Trust Earnings Call

Good morning and welcome to the Northwest Healthcare 3rd Quarter 2024 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2.

Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Alyssa Barry, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Northwest.

Speaker Change: Q3 2024 conference call. Thank you for joining us today. This call is being recorded and a replay will be available on our website at www.nwhreit.com.

Speaker Change: Today's discussion includes forward looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

Speaker Change: Please see our public filings on CDAR Plus, including our MD&A and annual information form for a discussion of these risk factors.

Speaker Change: Please note all currencies referenced today are in Canadian dollars unless otherwise stated.

Speaker Change: Presenting on today's call, we have Craig Mitchell, our CEO, and Stephanie Karamarkovic, CFO. Mike Brady, our President, and Tracy Whittle, our Chief Operating Officer, are also present and available for the question and answer session. I will now turn it over to Craig for his opening remarks.

Thank you, Alyssa.

Craig Mitchell: Good morning everyone. Q3 was a strong quarter for execution as we continue to reduce leverage, make major strides in lowering G&A expenses and minimize near-term debt expiries.

all while maintaining operational excellence.

Craig Mitchell: Key updates from this past quarter highlight a dedication to achieving sustainable growth and financial strength.

As noted in our Q3-24 results news release of yesterday,

Craig Mitchell: Demand for healthcare real estate remains strong, as evidenced in our portfolio performance.

We reported industry-leading key performance indicators.

Craig Mitchell: Same property, net operating income on a consolidated basis increased by 5% compared to the same period last year.

Craig Mitchell: A portfolio occupancy of 96% is underpinned by a wider average lease expiry of 13.4 years.

with over 86% of leases subject to rent indexation.

Craig Mitchell: The portfolio comprised of more than 1,740 tenants on September 30th.

The REITs cash flow continues to be highly diversified.

Craig Mitchell: And during the quarter, we executed 369,000 square feet of leasing deals.

at a retention rate of 88%.

Craig Mitchell: Also, we made noteworthy progress this quarter on our asset disposition and balance sheet improvement strategies.

Craig Mitchell: We successfully completed the sale of our UK portfolio to Assura.

Craig Mitchell: Generating $885 million in growth proceeds using net cash proceeds to repay debts and concluding our strategic review.

Craig Mitchell: This major transaction results in accretive debt reduction and aligns with our objective to simplify the business and achieve a more favourable leverage level.

Craig Mitchell: We also continue to actively assess our portfolio and identify further opportunities to unlock value through non-co-asset sales.

Craig Mitchell: With the REIT having over 200 million of assets currently listed for sale or under contract.

Reducing our overall debt exposure.

Craig Mitchell: Since Q2 2024, we have repaid, refinanced or extended a total of $1.1 billion in debt, which Stephanie will discuss further in her remarks.

Craig Mitchell: To further strengthen our portfolio long-term income stability, we took steps to extend key leases in Brazil. We recently renewed the $157,000 square feet lease for Sabara Hospital on a 10-year term, addressing our only major 2025 lease maturity.

and subsequently listed the property for sale.

Craig Mitchell: We also completed early lease extensions for two properties leased to Regidor.

Craig Mitchell: These activities have improved the lease maturity profile of our Brazilian portfolio, extending the whale to 18.2 years with fully inflation index leases.

Craig Mitchell: Through active asset management, material and early lease extensions were also achieved in Australasia with key operators on five major hospital assets.

Craig Mitchell: These lease extensions vary between 5 and 10 years and collectively, amongst others, leasing achievements have materially increased the global portfolio whale to 13.4 years.

Craig Mitchell: This compares to 12.9 years in Q2 2024, which included the UK portfolio of over 25 years.

Craig Mitchell: Looking ahead, healthcare real estate continues to stand out as a steady asset class with strong demand.

Craig Mitchell: The essential nature of healthcare facilities, typically supported by government funding and long-term inflation index leases.

Craig Mitchell: Provides investors in this sector with a unique foundation of stability and long-term cash flows.

Craig Mitchell: While the macroeconomic environment remains dynamic and global central banks calibrate monetary policies,

We expect our business to remain robust.

Craig Mitchell: Bolstered by durable demand drivers such as an aging population and a sustained need for health care services

Craig Mitchell: We believe Northwest is well positioned to meet this growing demand. A high quality portfolio which consistently maintains high occupancy rates and strong cash collection underscores the reliability of healthcare real estate, even through economic fluctuations.

I will now hand over to Stephan.

Thanks, Craig.

Stephan: Our portfolio performance remains strong through Q3 2024 considering the disposition of non-core properties in the last 12 months.

Stephan: As a result, our Q3 revenue from investment properties decreased by 12% over the prior year. Lower revenue from dispositions was partially offset by rent escalations and indexation across all of our regions.

Stephan: The REIT delivered consolidated same property net operating income of $70.7 million, which is 5% higher than Q3 2023, driven by the expiry of a free rent period in Canada, inflationary adjustments on rents, rentalized capital spend, and improved recoveries reflecting steady growth in our underlying leases.

Stephan: Q3 2024 FFO per unit was $0.11 excluding the impact of accelerated amortization of deferred financing fees as a result of significant debt repayments during the quarter.

Stephan: This compares to $0.14 per unit in Q3 2023, however, excluding the impact of interest rate caps that expired earlier this year, FFO in Q3 2023 was $0.09 per unit.

Stephan: The increase of $0.02 per unit over the prior year is mainly attributable to improvements in interest expense and G&A expenses.

Stephan: Q3 2024 AFFO per unit remained in line with our expectations at $0.09 per unit and represents a payout ratio of 99%.

Stephan: General and administrative expenses, excluding non-cash compensation and employee termination benefits were lower by $2.1 million compared to Q3 2023.

Stephan: The decrease over the prior year is primarily a result of the REIT's continued efforts to improve operational efficiency by streamlining and simplifying operations and reducing costs.

Stephan: In a strategic effort to further enhance operational efficiency, during the third quarter, the REIT made the decision to reduce its workforce by approximately 16%.

Stephan: The REIT-recognized termination benefit costs totaling $3.8 million for the 3 and 9 months ended September 30, 2024, which have been included in general and administrative expenses.

Stephan: The Workforce Reduction Measure is expected to result in annualized cash savings of approximately $6.5 million, of which $3.7 million will flow through G&A expenses and property operating costs.

Stephan: The REACH G&A cost ratio for Q3 2024 was 6.48%, which is calculated as G&A costs, excluding non-cash comp and employee termination benefits, minus base management fees divided by rental revenues.

Stephan: Looking ahead, we anticipate this ratio to trend between 5 and 6% in 2025, driven by our ongoing efforts to streamline operations and enhance overall efficiency.

Stephan: Interest expense in Q3 2024 was $44.3 million as compared to $58.7 million in Q3 2023.

Stephan: The decrease in interest expense, as compared to the prior year, is attributable to the reduction in total debt and lower weighted average interest rates, as the REIT has focused on repaying high-cost borrowings through its disposition initiative.

Stephan: The proportionate value of the REITs investment properties on September 30, 2024 was $4.3 billion, down from $5.2 billion as of June 30, 2024.

Stephan: The decrease of $900 million is attributable to the disposal of the UK portfolio during the quarter at its IFRS carrying value and fair value adjustments in Brazil and Australasia.

Stephan: The REIT's disposition activity during the quarter and subsequent to the quarter has resulted in the REIT making significant progress on capital management initiatives.

Stephan: Since December 31, 2023, the REIT has reduced proportionate debt from $3.6 billion to $2.7 billion and has reduced proportionate leverage by 160 basis points to 57.3% and consolidated leverage by 270 basis points to 49.2%.

Stephan: The REIT has a stated objective of reducing proportionate leverage below 50% in its pursuit to becoming an institutional quality REIT.

Stephan: With respect to the REIT's near-term debt maturities, the REIT only has approximately $281 million of remaining 2025 maturities.

Stephan: Including $125 million of Series G convertible debentures and $156 million of mortgages and property level borrowings across multiple facilities, which will be refinanced in the normal course.

Stephan: Looking ahead to the remainder of 2024 into 2025, we expect our earnings to reflect the impacts of our asset dispositions.

Stephan: Capital Management Initiatives, and Recent Reductions in G&A Expenses. We remain focused on maximizing operational efficiencies and further strengthening our balance sheet. And with that, I'll now ask the operator to open up the call for questions.

We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question is from Mark Markitis with BMO Capital Markets. Please go ahead.

Speaker Change: Thanks, operator. Good morning. And Craig, I'm not sure if you're in the Eastern time zone, but whatever time zone you're in, good day to you. Thank you. Thank you. Stephanie, you gave a G&A expense ratio, and I was trying to scribble and get it down. Could you kind of walk us through that math again, please, and how you're thinking about it?

Speaker Change: Yeah, for sure. And just for illustrative purposes, it's in the investor deck as an appendix, the full calculation in the quarterly.

Speaker Change: kind of varying ratios over the quarters, I think over the last four quarters, but it is GNA expenses as reported excluding non-cash comp and severance, and then we deduct from that base management fees.

Speaker Change: got it okay and I'll have a look at the deck but is that done on a proportionate or on a consolidated basis

Consolidated basis.

Consolidated. Okay, thank you for that.

Speaker Change: So in our press release, we noted that there was $104 million of liquidity today on existing credit facilities and cash.

Speaker Change: and then we've also continued to mention that we have 200 over 200 million of assets in various stages of disposition of which we expect them to some most of those to close and in the next couple of quarters

Speaker Change: Okay, so is the 104, is that a, again, is that a consolidated, proportionate, does it include vital? I'm just trying to get... No, none of that includes vital, it's essentially the cash and debt facilities we have access to at a corporate level.

Speaker Change: Okay, so it is a corporate metric. Okay. And then, and then of the assets that are held for sale, so what's the, what's the leverage attached to them? I guess I could go to assets held for sale, but just getting a sense of what kind of cash you could get back with that 200 million of assets for sale.

Speaker Change: It's less than 50% leverage. Less than 50 million? Less than 50%. 50% leverage, yeah.

Okay.

Okay, I guess is there...

Speaker Change: In the, I mean, I hate going down this road, but in the event, like, what are the options available to you if you don't generate the liquidity?

on that note.

Yeah, I think... Go ahead, Craig.

Craig Mitchell: I think, Mark, we've got quite a few options. As you said, you've got $100 million worth of headroom today available. You've got $200 million worth of assets available.

Craig Mitchell: So we have, or we have, you know, just refinancing options in the debt markets. So I think we've actually got a lot of, a lot of levers here.

That was actually a great point. I forgot about the...

Speaker Change: Thank you for that. Okay, and then just maybe, Craig, if you could provide us with an update in terms of finding your successor. Has a firm been engaged to conduct that search as the search commenced?

Yeah. Yeah.

Craig Mitchell: So yes, a firm's been appointed and it's a global search firm, major office in Toronto.

Craig Mitchell: That was done a couple months ago so it is well in track.

Craig Mitchell: So, already people reaching out to us, and we're reaching out to them. So that is a process which is well in track, on process.

Okay, great. I appreciate the update. Thanks so much.

That's right.

Speaker Change: The next question is from Sairam Srinivas with Karamark Securities. Please go ahead.

Speaker Change: Thank you, operator. Good morning, guys. Thanks, Aki. Just thinking about dispositions, I know we've talked about the Brazilian portfolio for a bit now in the last couple of quarters. Has there been any progress in terms of your vision there or in terms of, you know, any interest you're kind of seeing there?

I think, sorry, it's Craig here.

Speaker Change: By putting Sabara, so doing the 10 year extension with Sabara, and we put Sabara on the market with CBRE.

Speaker Change: It really gives us a sense of testing that market and what the local depth and breadth is at hospitals in downtown Sao Talo and that will give us a good flavour.

We are always prepared for all the options.

Speaker Change: Thanks, Raghav. That's a really good caller. And maybe you're looking at the $200 billion or so of assets that are currently under, you know, on sale. Are they mainly, would be safe to say they're mainly essentially in North America then?

Speaker Change: About 150 million of it is really Canada, Europe, and North America, right? Most of it sits ...

Speaker Change: in the Northern Hemisphere because, as you appreciate, the Southern Hemisphere in Australasia doesn't provide liquidity. And if I did a comparison between the U.S. and Australia,

Speaker Change: and Canada, probably still even more weighted towards Canada. So Riley Park, which we talked about our last call, is probably the largest asset on the market.

Speaker Change: That makes sense and maybe just shifting gears to the organic growth disclosures on NOI. I know the organic growth is very strong in North America this quarter and that's because there was a tenant introduction last year. If you kind of eliminate that in the two years, how does that normalized growth look like?

Speaker Change: Definitely I don't have that off the top of my head.

Yeah, I think we estimate around 3.5% to 4%.

Speaker Change: That makes sense, Stephanie. All right, guys, thank you so much for this, and I'll do it back.

Speaker Change: Just one thing that I mean what we're now seeing is not only getting good lease indexations but there's 88% rent retention.

Speaker Change: All right, we're getting minimal downtime, and the team is really starting to drive with a focus of getting some leasing spreads over passing rents and renewals to really kick up that growth as well. So we're really getting into focusing on the basics.

Speaker Change: I think it looks really good. Thanks again and congrats on a good quarter.

Speaker Change: Again, if you have a question, please press star then 1. Please stand by as we poll for questions.

Speaker Change: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Craig Mitchell for any closing remarks.

Craig Mitchell: Thank you for your questions today everyone. As we progress our strategic initiatives during 2025, we're confident in our pathway to a successful business turnaround and a smooth leadership transition. As I announced in October, we will be retiring from the REIT.

Craig Mitchell: We have built a strong management team and established a solid foundation with significant potential for future growth.

Craig Mitchell: A structured transition process is underway to ensure continuity, and I believe the time is right for a North American-based CEO to build upon our successes.

Craig Mitchell: We remain focused on becoming an institutional quality healthcare REIT with a sustainable financial profile. We look forward to keeping you updated on our progress and thank you very much for your support today. So have a good day everyone. Thank you.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.