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Good afternoon. My name is Chantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Northeast (sic) [ NorthWest ] Healthcare Properties Real Estate Investment Trust First Quarter Results Conference Call. [Operator Instructions] Paul Dalla Lana, CEO of NorthWest Healthcare Properties Real Estate Investment Trust, you may begin your conference.
Thank you, operator, and good afternoon, everyone. Appreciate you joining us. I'm joined today by Shailen Chande, the REIT's CFO; and Peter Riggin, the REIT's COO. Together, we are pleased to share with you our results for the first quarter of 2018. But first, I'd like to point out that today -- 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 actual results to differ materially. We direct you to all the risk factors outlined in our public filings. The first quarter of 2018 marked another active period for the REIT highlighted by high-quality German and Australian acquisitions, the integration and rebranding of the REIT's Australasian management platforms, and the completion of previously announced Canadian capital recycling initiatives. In addition to a very busy transactional quarter, the REIT continued to deliver strong financial and operational results across an expanded 149 properties, 10-million square foot diversified healthcare real estate portfolio, underpinned by long-term inflation-indexed-leases, that now account for more than 71% of income. Post quarter end, the REIT announced the acquisition of a 10% strategic interest in Healthscope, one of Australia's leading private health care hospital operators, with the intention of leveraging this position to access Healthscope's underlying real estate portfolio of high-quality Australian hospitals.In addition, we're also pleased to announce that material progress was made in advancing [adapting] our planned approximately $2 billion Australian institutional joint venture initiative. And we are targeting finalization late in the second quarter, early in the third quarter of 2018. With more than $2.5 billion in assets and growing in the leading health care real estate platform in Australia and New Zealand, NorthWest Healthcare Properties is well positioned and for the next phase of growth and opportunity in this exciting market.For the quarter, our financial highlights were as follows. Annualized quarterly AFFO of $0.92 per unit on a normalized basis, representing an increase of 6% year-over-year and a payout ratio of approximately 7%. An increase in net asset value per unit of 2.7% quarter-over-quarter to $12.32 per unit, primarily driven by FX gains in the quarter. Approximately 47% LTV, excluding convertible debentures. And source currency weighted normalized cash SPNOI growth of 1.8% as compared to the first quarter of 2017, driven largely by inflation indexation on leases of the REIT's International assets. All of this underpinned by 96% portfolio occupancy and a weighted average lease turnover of approximately 13%. Segmentally, I note the following. Finance and liquidity. The business is well positioned for growth with more than $250 million of liquidity across the entire business to pursue identified initiatives. Additionally, there remain significant opportunity to optimize the REIT's balance sheet by lowering its weighted average interest rate and extending its term to maturity on approximately $350 million of existing finance, which we're focused on. Net asset value. The value of the REIT's portfolio increased by $41 million or 2.7% quarter-over-quarter as a result of both currency appreciation, income growth and portfolio gains. All International regions enjoyed growth with the strongest performance in Brazil and Australia. And we see these trends continuing through the balance of 2018, with continued cap rate compressions and for high-quality health care infrastructure assets. Together with the expected completion of significant development projects in Australia and New Zealand, we'd anticipate continued NAV per unit growth. Currency. The REIT's portfolio weighted basket of currency has appreciated relative to Canadian dollar approximately 2.4% quarter-over-quarter. From regional perspectives, Brazil was on plan with 100% occupancy and strong income SPNOI year-on-year plus 2.7%. Operationally, REIT's major tenant Rede D'Or continues to deliver strong results and growth to opening up the possibility for further partnerships with the REIT. In Canada, we were on plan, performing well with normalized cash SPNOI of 1.2% and portfolio occupancy at 91.4%. The quarter also saw some investment activity in Canada with the conclusion of the capital recycling initiatives and sale previously announced Dundas-Edward Centre for gross proceeds of approximately $167 million. In Germany, we were on plan of performing as expected with cash SPNOI of 2.1% year-over-year and occupancy at 97.2%. Along with positive operating performance, the quarter was an active one regarding investment activities with the acquisition of 2 medical office buildings and 2 post-acute care rehab clinics for a combined value of approximately CAD 111 million. The acquisition of these 2 post-acute care clinics and the 25-year lease terms, represents a milestone as the first health care infrastructure properties acquired in Germany and our first transaction with MEDIAN Kliniken, Germany's leading rehabilitation clinic operator. Additionally, the expansion into rehab clinics moves the REIT more towards its strategy of focusing on assets with long-term inflation-indexed-leases, with minimal capital and leasing cost commitments. Vital Trust reported cash and SPNOI year-over-year of 1.7%, highlighted by occupancy levels over 99% and increased weighted average lease term to maturity of approximately 19 years. And Northwest Australia also performed well with portfolio of occupancy stable at 98.5%. Growth continued with the successful acquisition of the remaining 50% interest in Epworth Freemasons Hospital for AUD 52 million. For the balance of 2018, building on this position and supported by strong health care industry trends, the REIT will continue to optimize its balance sheet by repaying higher cost financing and introducing further tenure and flexibility to its capital structure, drive internal growth through the completion of its 11 committed accretive value-added development projects totaling $223 million, complete its Australian institutional JV bringing significant fee-bearing capital and capacity to its market-leading ANZ business, leverage its strategic Healthscope investment into a significant long-term real state opportunity likely in conjunction with Vital Trust and further institutional partners, continue to scale our German business with the addition of further MOB and rehab hospital assets and selectively recycle capital from lower growth to subscale assets into long-term inflation-indexed assets. In sum, our REIT is focused, differentiated and scaled and better positioned than ever to deliver stable and growing return to its unitholders.With this in mind, we reiterate our run rate guidance to AFFO of approximately $0.95 per unit in 2018 and now its $12.50 per unit and LTV below 50%. I will now ask the operator to open up the call for questions.
[Operator Instructions] Your first question comes from Fred Blondeau with Echelon Wealth Partners.
Three quick questions from me for now. First of all, in terms of capital allocation, it looks like the real took a plunge, and I was wondering, how you feel investing more in euros at this point from a Canadian standpoint versus potentially contemplating opportunities, again, in Brazil?
I think we're always considering currency when we look to allocate capital, Fred. I think, we know that relatively speaking, the euro has outperformed and perhaps the real more recently underperformed. But I think we do tend to take quite a long-term on our investments. And so we think about Germany, we obviously see a number of very accretive long-term opportunities there. And so we are likely to continue to grow and scale that business. But we are constructive on Brazil as well. And certainly within the context of our existing relationships, we do believe that we'll see opportunities there going forward. So I'm not sure that fully answers your question, but I think probably a little bit of both, although, we do consider Europe still workable within the current exchange rate environment, and more importantly within the investment climate that we're in.
Absolutely, that's fair. Is there a point where you will contemplate hedging currencies, like, I mean, getting to a point where the size -- getting to a size where you would have to at least explore the idea?
I think, yes. We've said historically that we always felt that given our currency diversification and some of the relative relationships between those currencies, it allowed us to be fairly comfortable without express hedges between the 2. And we've equally said that when things started to weigh it up in any particular direction, that we would consider that. So clearly as we look at the business right now, we are waiting up very significantly in Australia and New Zealand. And so I think as we think about how that might fit within the business, it's likely that we will consider something there. And so that's probably a quick answer to the question really around that balancing and diversification of our 4 global currencies.
Yes. And, I guess, in terms of the potential partnership, it looks like it took a bit longer than expect -- than first expected, I guess. But also perhaps it is also more substantial than expected. So I was wondering if you could expand on that?
Yes, to the former and I think for 2 reasons. Obviously, as our first initiative, we wanted to get the arrangements right and to work through them fairly methodically. So that's taken perhaps a little bit more time than we initially imagined. But I'm happy to report that we're substantially through that. I think more importantly though, we've identified clearly some new opportunities in region and trying to anticipate that as part of what we're doing that is taking a little bit of time. So we do see both of these issues coming into clarity over the next short while, and highly confident that we'll have all of the formal terms to announce certainly before our next call and very likely by the end of this quarter, formally.
Yes, absolutely. And could the scope of the partnership be extended to other countries at some point?
I think the nature of the investors that we're speaking to are all very global. And so there is a very reasonable possibility that could be done. That was a high criteria for us when we started discussions. Although the initial program is very much Australia focused. We do see that being over time portable if we do what we say we're going to do and people get comfortable with the opportunities set more broadly to find. So I think that's the good thing about the type of people that we're dealing with that they're relationship based and global.
Perfect. And then lastly, I was wondering if you could give us a bit more details on your expected development yields at this juncture? And whether you see any risk that yields could compress in the short to midterm?
Right. Just pulling that together right now. Yes, we've got it historically to approximately 100 basis point positive spread to our cap rates on the majority of our developments. It's probably a combination of 75 to 125. We do see approximately a 7% average yield on that basket of developments and against -- again a cap rate sub-6 on that. So certainly both accretive in terms of value creation and income for the business. Again, reminding everyone that these developments are very derisked and they are 100% flat and either fully cost-plus contracted or in most cases, even we're providing capital to the hospital operators to deliver directly. So we see them over the next 12 to 16 months coming in very, very cleanly and positively to the business.
[Operator Instructions] Your next question comes from Troy MacLean with BMO Capital Markets.
Just on Healthscope, I know it's obviously pretty early days, but what part of their other portfolio you are targeting? Is it the hospitals? Would you be willing to own really anything that they're operating? Or how do you think about that?
Yes. I think we have both an existing relationship with Healthscope, so we're already their landlord at Frankston and in Victoria. So we know the business well and we have been partners with them on other assets in the past. I think, Troy, it's -- there are lots of possibilities for how we might participate in potential portfolio sale. Obviously, we are prepared to consider all or even parts of the portfolio if that's the right thing for the business. And we're working very hard to be sort of a supportive partner and a long-term player here to the variety of groups, I think, that are considering what to do there. The business is a significant one, again, with -- really with almost 30 owned assets today and most of those are very high-quality and would meet our investment criteria. So we see a very significant opportunity, and that's the reason we've taken the position that we did.
Could the Healthscope assets, potentially could that be part of the JV you talked about?
It's not actually. So we're treating it as a sidecar opportunity. So I think, again, just to guide to that, we know clearly it could have been. But in this case, because we see significant opportunities outside of this, we wanted to have capacity in both directions. So for us it's an added opportunity that we haven't talked about clearly. We do expect the potential to consider similar terms and similar structure to what we have agreed on the broader or the initial JV is to get that right, but it's not a requirement. And I think we see a number of possibilities as the situation evolves.
And then just finally, when you look at Germany and Australia and New Zealand, are those markets becoming more competitive for acquisitions? And is it still like local players, are you seeing more international money look for acquisitions in those markets?
Yes, I think it's safe to say that each of the markets we're in has a degree of competition to it. And I think on any given asset, we could see all or some of the above. But in the case of Germany, and in particular, in the medical office building space, it's clearly very much a private market. And it's a market that again as we know here from Canada, requires both an operating platform and capital and the will to sort of go through that process. So that's a small number of players that could do things at scale in that space. But more and more there is decent private capital available. So that's what we intend to see as we look at things at the asset level. There aren't a lot of portfolios as was the case in Canada. So it's really a -- it's a ground up initiative. I think in the rehab space, it's a little more diversified my answer and and we see a broad range of potential competitors there. And so again clearly it tends to be more focused health care investors. And so it's not quite into the general category of capital, but still a broader appeal. But that said I think we find enough opportunities as it's a big space and there's lots to do. Australia, I think, is a bit of both and clearly certainly attracting more capital and more interested health care real estate. We, of course, have by far the largest platform in the region. And I think we have a very specific view as to what we're doing and how to leverage that platform. So when we get to the sharp edge of things, we see our offering as being not just capital, but also the ability to provide management and execution capacity to our partners. And so I think that's where we are the most differentiated. But certainly from private into other larger scale organizations, we see competition. So in general, I think like a lot of alternative asset classes, there is increasing interest in the space. And probably the biggest challenge for people coming in is the lack of relationship or experience. And so clearly with our institutional partners, that's one of the core offerings that we're bringing to the table and that's the reason that we wanted to do that, which is to harness that interest and to really leverage it to allow us to be a very meaningful consolidator.
There are no further questions at this time. I will now turn the call back over to the presenter.
Okay. Well, thank you, operator. Again, I appreciate everyone participating on the call. And we appreciate your interest in NorthWest. Have a good day.
This concludes today's conference call. You may now disconnect.