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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. [Operator Instructions] This call is being recorded on Friday, May 12, 2023.
I would now like to turn the conference over to Paul Lana, Chairman and CEO. Please go ahead.
Thank you, operator, and good morning, everyone. Appreciate you joining us today. I'm joined by Shailen Chande, the REIT's Chief Financial Officer. Together we are pleased to share with you our results for the first quarter of 2023. But 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 necessary based on assumptions that are subject to uncertainties and risks which could cause actual results to differ materially. We direct you all to the risk factors outlined in our public filings.
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 supported by 97% occupancy in a weighted-average lease term of 14 years.
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, AFFO per unit declined to $0.17.
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 full quarter impact of hedging will result in an incremental interest savings of approximately $0.02 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 AFFO by approximately 20% relative to the current quarter run rate.
Our previously announced UK JV 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 REIT’s portfolio. The commitment is subject to final documentation and is expected to close on before June 30, 2023.
Similarly, the REIT's US joint venture initiatives continues to progress and the REIT remain 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, which has been expanded to include approximately $340 million of properties and is progressing well. The first sale is expected to close on May 31 with the balance of sales expected to fall over the course of Q2 and Q3. Net sales proceeds will be used to repay higher cost debt and are expected to be accretive to AFFO per unit.
Inclusive of the non-core sales program, its US JV and UK JV initiatives, the REIT expects to generate between $550 million 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.
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 and transaction volumes starting to return to prior levels. The REIT remains particularly focused on its healthcare 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 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. 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%, its refinance 76% of its 2023 debt maturities and reduced its weighted average interest rate to 4.7%.
Considering the approximate $340 million of non-core asset sales and the UK and US JVs, and 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.
Segmentally, I note the following. In Canada, we were on plan with portfolio occupancy remained stable at approximately 90% and seeing our variable revenues, particularly through parking continue to rise to pre-COVID levels. Additionally, our Jerry Coughlan, Health and Wellness Center Development anchored by [indiscernible] 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.
In the US, our portfolio is performing as expected with occupancy at 96% and an almost 9 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.
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, Rede D'Or, 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 term stable at 97% and 16 years respectively. We continue to find good investment opportunities in Europe, allowing us to not only increase scale and critical mass in our existing markets, but also to consider opportunities in adjacent markets.
And finally, in Australia, our largest market, occupancy 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.
I'm pleased with the progress we have made during the quarter and post quarter, which advanced the REIT 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-light business, 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.
[Operator Instructions]. Your first question comes from Mike Markidis with BMO Capital Markets.
Hi there. Thank you, operator. Good morning, Paul and Shailen. If I could just start off on the fair value loss that you booked, perhaps you could give us a little bit more color by region. The reason I asked 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 and were relatively flat in Australia and Europe. And I think you noted that, the values were up in Brazil. So should we incur that bulk of the negative adjustment would then be US, Canada and the UK?
Yes. Hi, Michael. I can take that. 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. So you guys got to be -- you did the converse post quarter. Congrats on that to pay down some more high-cost corporate gas. If we just look at the variable rate corporate debt. How much is the REIT left with after that transaction? And 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 us is with all the capital repatriation with the UK, the asset sales and US JV expected sort of throughout the course of this year, do you think that you can get your corporate debt down. I mean, excluding the converts your variable rate corporate debt down to zero by the end of this year?
Yes. Yes, Michael, I'll take that 1 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 overallotment 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. 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 million to $600 million of net proceeds and all of that will be used to repay corporate level financing. Some of it may fall within the corporate segment, some may fall in other regional segments, but we do expect to be repay, I mean, using the majority of those proceeds. It's a significantly de-lever and it will take down our floating rate debt exposure to less than 30%.
Got it. Thank you. Okay. And then just last question for me before I turn it back. I guess the UK JV is progressing as anticipated. It's only been 6 weeks, I think since we last talked, so no changes there. Maybe just with respect to the EU I think the verbiage that you guys talked to put forth in the press release and 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 has been any change or puts and takes with respect to the conversation with the parties at the table, as it relates to the US JV?
So maybe two things I'd just call out that we are planning for the US JV in the second half of 2023. So that hasn't changed. I think in terms of the climate for taking the decision, which is really providing both stability in -- I guess, initially in interest rates, but then more directly in asset prices. We are seeing enough transactional activity in the US and with our partners and the people that we are talking to that we believe there will be sort of a comfortable level to transact that, and a willingness for people to start to reinvest and look at long-term opportunities.
Again, healthcare continues to screen reasonably well in terms of our capital partners, sort of at the margin decision. So we are confident that both price and willingness to deploy capital. Our focus is certainly is to identify opportunities where we can bring some growth capital to the initiatives. So that's where we are concentrated on right now versus, let's say, a co-invest possibility and that would be consistent with prior initiatives that we have done in other markets.
Okay. And then, sorry, just one last one before I turn it back. I think you guys -- one of the assets that you are 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.
Yes. So this 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 are able to find agreeable terms to sell it to this tenant, which is and outcome that happens sometimes. I think what we have also been able to secure is an opportunity set with Sam on broader real estate opportunities. And so we continue to explore sort of the opportunity to grow with this organization, which is a great, great tenant. But ultimately one that wants to and needed to own their real estate directly. So a little bit of backdrop to that. As we mentioned, we were happy with pricing, and again it wouldn't have been our first decision to exit a good relationship with a good long-term partner, but in this case, it was one that made sense.
Your next question comes from Tal Woolley with National Bank Financial.
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 I mean, it's broadly in line with our IFRS cap rate. The assets are broadly spread across the portfolio. So I'd use that 5.5% as a blend. In terms of the secured debt, associate with those portfolios. I looked at 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 with the joint venture creation and the non-core sales, the idea is to obviously move this, your debt ratio is down into the forties. You know, I'd also say though, like, historically, you guys have been very, healthy acquirers going forward. And I'm just wondering if, like, should we be thinking of, like, this 40 level or your target in the low 40 that's kind of like the trough because you should expect at some point particularly, just starting up a new JV to begin acquiring more properties again?
Yes. 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 suited to go in, and then we see that being able to fund certainly the majority of any incremental capital that goes into to growth in the future. So that's sort of our plan. And again, sitting here at sort of just over 50% mark, look through ownership. I think the target is in the mid-20s, so I'm on that to guide 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've said, cautious about the market and maybe what I would say in 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 strong support for existing asset prices and things that are again, making those prices work within the construct of today's interest rates and return expectations hasn't screened enough to be opportunistic where we would grow beyond that. That said, we have almost $5 billion of a 100% debt and equity committed capital in the business as capacity plus what we bring in the UK and the US.
So certainly, it will be well primed to add over time. You know, it's unlikely that everything matches up perfectly, but we're hopeful that that the first direction here will be moving in the more asset light direction and we see pacing of acquisitions picking up 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 and then ultimately into values and, 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, MPT transaction on the health scope assets in Australia. I think we mentioned that in our last call, but again, that's a very strong look through cap rate on assets that we have the other half of in our portfolio in our view, the better half, just to be clear. But nonetheless, super strong pricing there. We've seen major transactions happening in Europe at essentially book value or IFRS book value on significant portfolios. And of course, the US is probably the, the most active of all markets where we've started to see that equilibrium come in. So we are getting a sense that maybe starting to turn the corner in things. But again, for us, we're not budgeting a super active 2023 in terms of growth outside of some of the developed core initiatives that I've mentioned. And it would be a 50 percent-ish number to what we've done in prior years as an idea.
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 in that? I believe there's AP call derivative in there, and has there sort of been any movement in terms of resolving that and is this a position you plan to hang onto for the long term?
Yeah, you're -- it is 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 a Q2, early Q3 timelines to it. So I think we'll be in a slightly better position to talk there. But 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'll be more visibility on things coming over the next couple quarters.
And that's a situation where like, if I recall correctly, when you first got involved, like 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 sort of a negotiated solution that you can kind of come up with?
I can't speak to that. But I'll just say that, we're the largest shareholder of Australian unit with our partner at about 18% of the vehicle. And I think all levers are on the table for bringing it to a positive outcome.
[Operator Instructions]. Your next question comes from Pammi Bir with RBC Capital Markets.
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?
Yes. It's a great question, Pammi. So I think first off, we are prioritizing debt reduction, as our primary initiative. So it would be secondary to that. And I think again, it's a practical consideration in the moment of the market disconnect that we are having. So we haven't set specific targets or objectives ahead 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 -- that 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 US JV, what's sort of your expectation as to where I realize obviously this is still a negotiation process. But where do you see potential transaction relative to your IFRS book value at this stage?
Yes. We are seeing the market within 5% to 10% of IFRS book value, Pammi, and I think as I mentioned before, there is 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 and appropriate fees and structure to it. So again, that's some of the things that we are seeing out there and we think that market is reasonably deep.
Right. And the property that is currently out for sale. Just wanted to confirm Shailen, was that in line with the -- well, there is no write down taken on that? Or was there -- just any color?
Yes. It's within that 5% to 10% of IFRS, which is now reflected in our Q1 accounts.
Okay. And then just lastly with the 20 percent increase that you expect to be able to achieve on a quarterly basis, I guess in AFFO, how much of that will be driven by a recovery in the fee income?
Yes. I'd say, there is 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 will come on fully in Q2. The second is with a high degree of visibility around at 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 have seen historically. I think Paula alluded to it, but we have $4.6 billion available capacity across our existing platforms. And then we are 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 will see that recovery in activity based fees.
Your next question comes from Mario Saric with Scotiabank.
Thank you and good morning. Just a clarification on the previous question with respect to the USJV fair values, but the 5% to 10% is enough IFRS, is that as of the Q1 ‘23 IFRS value or relative to the purchase price, and 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 IFRS, so it's within that 5% to 10%.
And then secondly, more of a broad-based conceptual question. Paul, a gas management business has been growing for several years now. Outside of your conversations with LPs on the USJV, which my sense is it's a bit more directed or targeted in terms of the discussions. Like, 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?
Let me try and roll that together. 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 of 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 healthscope portfolio as a good example, which was a combination of retail and wholesale capital coming into a $1.2 billion 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 what's happening with their existing commitments, maybe a bit of a denominator effect question, but more just getting to that level of what price and value are and the discussions we're having is that there's starting to be more visibility on that and more comfort around committing.
So, the breadth of our discussions are as wide as they've ever been. I think we continue to look for a fairly specific partner in our big core strategies. So, we've talked a little bit about the US as maybe one example, but in developed to accords another really good example and very long term certainly with a almost permanent characteristic on the back end and really seeing good interest in that across both Australia and the Americas in terms of capital. So, I think, the answer is it's -- these are more positive dialogues. It was fairly muted in the second half of 2022. The year started a little bit quieter, 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, uh, other than developed core, which has a bit of balance sheet stuff, but is more prospective assets, it continues to be at the existing portfolios that we have. So it opens up a number of, of geographies Brazil as an example. Certainly, Canada is an example. And it opens up a number of new segments MLBs as an example for us, and all of which we see as being suitable and of interest to the LPs that we're talking to.
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 as opposed to core plus?
Yeah, that's a great question. I think our initial strategies have been more focused around our core long-term investing activities and we've been quite consistent about that. But I think as the business grows and evolves, we will be able to tuck in some added strategies and certainly value add or development are the ones that we are 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. That the hallmarks of healthcare real estate, by and large are still long-term index cash flow and albeit with some operator pressure out there around the world and we have called out really the cost side of operators, there is a huge pent-up demand and operators are starting to come back to COVID, pre-COVID levels of activities. So through our portfolio, which is global and very diverse, we see reasonably well-performing tenants and certainly we are not distress at an operational level that would translate into asset value.
So that's what we are seeing and I think there is enough capital looking for opportunities that we just haven't seen. If anything, we have seen the opposite of distress, we have 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 dislocation.
So it's a bit of around the world, happy to take that offline. But again, if it were to get to distress, I think we would consider looking at it. We just haven't seen it in any of our markets at any scale anyways.
Okay. Maybe two more quick ones online, if I may. You mentioned or you highlighted I guess Canada and Brazil being two markets where you are still own 100% of the assets and a desire to get down to a 25% interest on a 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 to-date?
No. I don't think so. And again, as we have mentioned, I think maybe there is a between -- behind 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 initiatives that we are on. So that's the only thing that we have 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 is lots of interesting healthcare opportunities out there. So I did not get to the heart of it.
No, that works. And then just for Shailen, I may have missed it, but on the $515 million of that debt associated with the assets held-for-sale, what's the average debt cost on that?
Mario, I'll need to go back and check that number. I'll come back on that.
Okay. Sounds good.
Your next question comes from Robert [indiscernible] with Sullivan Investment Research.
Good morning, guys. Thanks for taking the call. I'm just wondering there was a comment made on the last quarterly call about the AFFO per unit for 2023 was expected to come in the low $0.80 range. And I'm just wondering, I mean, obviously there is a lot of uncertainty there. But is that still an expectation?
Yes. Hi, Robert. I can take that. Good morning. So I'd say, our comments today were very much consistent with that. I mean, it is very much an expectation. We guided to that 20% increase in annualized earnings or quarterly earnings. I mean, we 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.
Your next question comes from Jake [Stibiletti] with CRBC.
I might have missed it, but looking at your FFO rack, it looks like there is 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. 400 K, Jake, so maybe we can go offline on that. I just need can't recall where, which specific line item that was, but we can go offline.
And then, last question, just touching back on unit buybacks, if that's a route that you do pursue would you give any consideration into abandoning the drip?
Yeah, so I think, we look at the package of like yes, the drip and potential buyback holistically. I think as Paul had mentioned, our initial focus is prince beyond de-leveraging, and we view that as the principle 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.
There are no further questions at this time. Paul Dalla Lana, 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.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And ask you to please disconnect your lines.