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Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties REIT Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 9, 2018. I would now like to turn the conference over to Paul Dalla Lana, CEO. Please go ahead.
Thank you, operator, and good morning, everyone. Appreciate you joining us here today. I'm joined by Shailen Chande, the REIT CFO; and Peter Riggin, the REIT COO. And together, we are pleased to share with you our results for the second quarter of 2018. 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 due to 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 of the risk factors outlined in our public filings. Before getting into the details of the results, I thought I would provide some perspective on our business in this moment. NorthWest began 2018 in the best position in its history, building expressly upon the strategy we've put in place in 2015. In a nutshell, we are focused exclusively in health care real estate, bringing our real estate acumen and knowledge in relationships to the world's largest and fastest growing industry, health care.We're differentiated, with a high quality infrastructure on our portfolio with more than 71% of our income based on long-term leases that are fully indexed to inflation. And that we were scaled as a world leader with $5 billion in assets in leading platforms in each of our markets. And now to our results. Quarterly financial and operational highlights include annualized quarterly AFFO of $0.90 per unit on a normalized basis and a payout ratio of 89%. A decrease in net asset value of 4% quarter-over-quarter to $11.50, primarily driven by FX in the quarter. Approximately 50% LTV, excluding convertible debentures and source currency adjusted SPNOI growth of 5% as compared to the second quarter of 2017, driven largely by inflation indexation on leases at the REIT's international assets. All of this underpinned by a 96% portfolio occupancy and a weighted average lease term of approximately 13 years across an expanded 152 properties, 10.6 million square foot portfolio. The second quarter of 2018 marked another exceptionally active period for the REIT highlighted by the completion of 3 key strategic initiatives. Firstly, the REIT expanded its European footprint with the acquisition of 2 high-quality medical office buildings in the Netherlands, an attractive market with defensive health care characteristics and a significant consolidation opportunity. Combined with its entry into the German post-acute care rehabilitation market in the first quarter of 2018 through a partnership with MEDIAN Kliniken, the REIT is effectively leveraging its operating experience and management platform in the region to scale its European business. In Australia, the REIT, together with Vital Trust, acquired a 10% strategic interest in Healthscope Ltd., Australia's second largest private hospital operator, with a longer-term objective of jointly participating in the ownership of Healthscope's underlying real estate portfolio. The REIT, in conjunction with Vital, its existing JV partners and other institutional investors, have secured debt and equity commitments for a potential $2 billion-plus portfolio real estate transaction. At post quarter end, the REIT entered into a AUD 2 billion debt and equity JV with a large sovereign wealth fund. The focus of the fund is to acquire and develop core Australian health care real estate. The JV will have an indefinite life and be 70% owned by the institutional investor and 30% owned and managed by the REIT. As part of the transaction, the REIT has agreed to sell a seed portfolio with a completed value of AUD 412 million, which is expected to close in the third quarter. And finally, subsequent to quarter end, the REIT entered into an agreement to acquire Hospital Morumbi from Rede D’Or for BRL 258 million, approximately CAD 88 million, at a 7.5% capitalization rate. The acquisition is the seventh with Brazil's leading private hospital operator and will be funded from net proceeds from the sale of initial assets into the institutional joint venture. With significant growth opportunities in both Australia and Europe, the REIT will continue to leverage its differentiated health care real estate platform and anticipates attracting additional fee-bearing institutional capital to support a target $4 billion growth pipeline. Taken together, these initiatives provide the REIT with significant runaway and resources to continue to scale up business in both the year and long term. In addition to increasing our scale, we have significantly improved our capital markets profile, which will enable us to leverage new opportunities and also further improve and grow the business over time, so eventually, end up with the following: finance and liquidity, the REIT enters the third quarter of 2018 with a significant opportunity to continue to optimize its balance sheet, carrying more than approximately $500 million of historic corporate and property level financing with a weighted average interest rate of 7.7%, which presents a natural opportunity to generate meaningful interest rate savings through refinancing at lower rates. With consolidated leverage at 50.2% and 56.1%, excluding and including convertible debentures, respectively, the REIT will continue to be focused on accretive deleveraging through capital recycling and leveraging its global platforms and transactions similar to its recent institutional joint venture to reach its target of an LTV below 50%. And net asset value. Having seen sequential gains over the past 12 months, driven by significant portfolio revaluation gains, the REIT has eliminated approximately $135 million of historic goodwill related to both its Vital properties and former Generation portfolio. This was probably offset by significant value creation in the REIT's ANZ asset manager, given the recent institutional joint venture and partially offset by approximate 4% decrease in currency, leaving now that $11.50 per unit for the quarter. Looking forward, we see significant path to approximately $12 net asset value through both currency normalization as well as completion of an existing $280 million at share pipeline of accretive expansion opportunities. In terms of currency, the REIT's portfolio basket of currencies depreciated relative to the Canadian dollar, about 5% quarter-over-quarter. Regionally, Brazil was on plan with 100% occupancy and continued strong and predictable income with constant currency adjusted SPNOI year-over-year of 7.6% improved. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver strong results and continues to grow an improving economy there, which will open up further opportunities for the REIT. In Canada, the REIT was on plan and performing well with constant currency adjusted SPNOI of 5% year-over-year and portfolio occupancy up to 92.1%. Post quarter-end, the REIT entered into a significant lease at its Glenmore Professional Center in Calgary, taking occupancy to more than 90%. In Germany, the REIT was on plan and performing as expected at constant currency adjusted year-over-year SPNOI growth of 6.5% and occupancy at 95.7%. Along with positive operating performance, the quarter was again an active win regarding investment activities, with the acquisition of 3 medical office buildings for a combined value of approximately CAD 165 million. As mentioned earlier, the acquisition of 2 high quality medical office buildings in the Netherlands, the REIT's first properties outside of Germany, which opened up a new opportunity to scale our platform there further. Vital Trust reported strong yearly results. It's -- with its year-end for 2018, with constant currency adjusted SPNOI up 3.1% year-over-year. Its occupancy level at more than 99% and a net asset value, where NTA as described there, increase of 10% in source currency. NorthWest Australia also performed well and on plan. For the balance of '18, building on these strong results, ongoing portfolio improvement continued the support of trends in the health care industry, the REIT will continue to focus on completion of its 11 committed development projects, $280 million at share, which are all 100% let and expected to deliver in the coming 18 months, primarily in Australia and New Zealand, where subsequent to the quarter-end, we also welcomed a significant addition to our ANZ leadership team with Craig Mitchell joining as CEO. I'm pleased that the NorthWest global team has been able to advance a number of key long-term strategic initiatives during and post quarter. Our bigger and better portfolio is supported by an even better lease structure internationally with long-term inflation index assets. And as a result, the REIT is better positioned to deliver stable and growing returns to its unit holders. With this in mind, the REIT reiterates its run rate guidance to AFFO of $0.90 per unit in 2018, a target now of $12 per unit as developments complete over the coming 12 to 18 months and an LTV forecast of below 50%. I'll now ask the operator to open up the call for questions.
[Operator Instructions] And your first question is from Stephane Boire from Echelon Wealth Partners.
I just had a few questions for you. First, I wanted to have a bit more clarity on the onetime items relating to the ANZ manager and the G&A. Are there any nonrecurring items that we should consider for Q2? I think it was $4.6 million or something.
I'll just turn that call to Shailen Chande, if I could.
Hi, Stephane. So in respect to some of the nonrecurring items across the portfolio of both finance and more broadly, we do detail in the MD&A in our normalized AFFO calculation, so the related adjustments. In ANZ specifically there has been a lot of transactional activity as we noted through both some of the ongoing developments as well as acquisitions in the Vital Trust platform, which do generate activity-based fees. Although those tend to be lumpy on a quarter-over-quarter basis, given recent activity, which has been relatively stable quarter-over-quarter, is to some degree considered the recurring nonrecurring in terms of the ability to generate activity-based fee. Hopefully, that provides us some context and happy to perhaps dive in more detail offline or after you have had a chance go through that normalized AFFO detail.
Okay, yes, please, I'd appreciate it. We'll talk after the call then. And also, I wanted to -- I was wondering if you might have an update on your strategy in regards to your 10% interest in Healthscope. And how should we view it in light of your recent JV partnership?
All right. So I think we've been reported in the press pretty significantly in Australia, so I'd recommend that as a good starting point around our focus there. But I think it's quite simple. We've taken the interest in conjunction with Vital Trust to ensure that we have a seat at the table of what we see as one of the most significant real estate opportunities in that region. That M&A processes is playing out as we speak, although it's moving a little bit slowly in the moment, but still likely to lead to what we see as a corporate transaction, which is likely to be involving a sub real estate transaction, and it's our focus is on the real estate. So clearly, this interest in the head stock here gives us a seat at that table. I think as I mentioned, we've secured both debt and equity commitments to fund potentially a $2 billion-plus portfolio real estate bid on -- related to Healthscope and that is separate from our institutional joint venture in terms of its commitment and potentially its structure will likely have similar attributes to it. So we see ourselves well positioned to be an active and engaged participant in any process that develops there over the next little while. And certainly we're very focused on this as it represents one of the most strategic investment opportunities that we see in the industry. I would call back perhaps from history, 4 years ago, when Healthscope did its initial public offering. It ran at, call it, a triple track sales process, trade sale, an IPO and potentially a property sale. And Vital and NorthWest at that time were the leading bidders on the property portfolio. So we've focused on this for quite a while, and certainly, we see this as a generational type of opportunity in the Australian hospitals market. So that's the context for our focus. And certainly, we're structured and ready to go when and if that opportunity materializes.
Okay. And finally, it looks like you're momentarily reallocating capital from Australia to Brazil, but definitely it makes sense at this juncture. Although this -- does this mean that you don't see immediate opportunity through the JV at this time? And relating to that question, how do you feel in regards to the currency hedging in light of the real's volatility?
Right. I think, again, we've got to be careful to not define the investment windows too narrowly. I think that comment is really around the next 30 days when both of those transactions are likely to close. But clearly, we remain quite very constructive on Australia over time, and we do expect to have capacity and the ability to grow that, both the JV and potentially the Healthscope portfolio transaction in due course. I think, again that there's an exceptional moment for currency volatility. And I'm not sure that it's necessarily the real that's so entirely volatile, but really the Canadian dollar is relatively strong. We're closely watching it. And as you know, we've set, without being too prescriptive, a limit in terms of our portfolio around exposure to the real in that 20% to 25% range of our business. Clearly with growth in Australia and with the trajectory of both the JV and potentially other transactions, we think that's going to be at the low end of the range over time. And so we're comfortable with any of the volatility, as you said, that might come out of it. Just re-emphasizing that the Brazil real estate assets have very visible and growing cash flow over time. And we do believe that as this moment of world currency volatility or change normalizes, that, I think, Brazil will find a natural place in that. So again, lots of subcurrents, but within our portfolio, again, we see the underlying cash flow and the underlying value of opportunities in Brazil in the right measure in our business offering still attractive risk-adjusted returns. And then we'll focus again very much on the mid to long term there in terms of really the highest quality assets and the best location that you can have in the industry so. With all of that, yes, we're comfortable.
Your next question comes from Sairam Srinivas from BMO.
So my first question, are there other developments, probably other markets in Europe that you would look to enter in addition to Netherlands?
Again as we look to scale our European business that the nice thing is there are other adjacent markets that have attractive characteristics to Germany and the Netherlands, but for the moment, I think we do see a lot of runway in those 2 markets. I'd again just emphasize that in the case of Germany with our post-acute care rehab investments, we have a very attractive vertical there. We do see, in the near term, 3 or 4 meaningful transactions that offer, again, this long-term indexed inflation, credit quality tenancy that we like in other parts of our international portfolio, that sort of offsets some of the intensity of the MOB business that we have in Germany. So we see a nice vertical emerging in Germany around that post-acute care rehab space that we've started to invest in. And I think in terms of the Netherlands, one of the subtle market points, although it's a smaller market by population and obviously, by health care opportunity compared to Germany. It is a more concentrated market, and it does have the advantage of having the ability more broadly to invest in the acute care space, a hospital space that we like. And so that market has restructured to allow for that investment. We do see a lot of opportunity to partner with the leading hospital operators in that market. And again, having a market moment, where capital is likely to be sought and required in the industry, in the acute care space, which we like. So again, the potential to have very long-term significant assets like we have in Australia and Brazil, for example, in addition to an MOB space that is typified by the types of investments that we just made. So I think taken together, we see those 2 markets in the near term of offering us a lot of runway. And that certainly when we look at the types of returns that we can generate with 6% to 7% cap rates and 2-ish percent interest rates on long-term financing. Those are very attractive criteria for us. So again, we're quite concentrated on making sure that we get scale in both of these new markets before we go any further afield. But the nice thing about Europe is that everything is close. And certainly in terms of potential for future capital partners like our JV in Australia, we have a high degree of interest right now. So we're certainly focused on putting ourselves in the position to be within a small select group of European markets, again a leading player.
That was really helpful. Probably shifting focus a bit towards Brazil. I think I've seen a new outpatient care building development that you mentioned in the report. I was wondering if you could give me some color on the timing of the development in terms of when do you see this getting completed? And when do you see NorthWest acquiring it?
That's right. So the one thing we know about Rede D'Or is they tend to move pretty quickly. So the good news is that as part of the HMB transaction that, again, I didn't expressly speak to in the conference call script, but nonetheless, happens concurrently with our Morumbi investment. We've had an administrative building complete already, so we'll be closing on that concurrently with the Morumbi transaction. That's about a $5 million investment or so. And then the outpatient clinic is under construction as we speak, probably about a 12-month completion there. So -- and that's approximately $25 million. Both of those go to expanding the HMB Campus, which is one of the suburban São Paulo, if you could say it correct, largest assets that we have. And again, speaks to a very good asset, continuing to grow and evolve and having these brownfield type of expansions that are -- we think quite unique to the industry. These are being done at, again, roughly 50 to 75 basis points wider than today's in place cap rates. So at an attractive spread, again, with Rede D'Or doing all of the work. So really, we're a funding partner to this development and it flattens on completion and when everything's done. So we also like that type of investment. The new Morumbi hospital has a similar size. Again, approximately all-in $30 million expansion in planning. That timing hasn't been set yet as Rede D'Or is looking broadly in the area do a very, very significant expansion. It is one of the best hospitals in São Paulo and within Rede D'Or's portfolio. And so as an initial investment, we're super excited to have, again, what we consider an absolute trophy asset with that future expansion potential and perhaps even a larger regional opportunity, which is being defined by Rede D'Or as they continue to weigh their business. So these are the types of things that we look for. And again, this would be the highest quality asset that you could acquire in this space in Brazil or anywhere for that matter. This is a major regional hospital in one of the best neighborhoods of one of the biggest cities in the world. So we are always constructive when it comes to things like that.
That was really helpful. And probably my last question is out in the Pacific Ocean and that's with regards to Healthscope. I think you spoke about it and the color was really helpful on the first question. But I was just wondering if you had any comments on the recent development they post the evaluation of -- after the board evaluated the asset et cetera? Has there been any development after that in terms of our interest in the real estate portfolio?
I think -- sorry, if I understand the connection, 2 comments that I would make. As an existing landlord to Healthscope in the Frankston asset that we have as well as an ongoing participant in the market, we're in constant dialogues with them about providing one-off tailored solutions to their portfolio. So we have 2 or 3 dialogues going on with them about optimizing or improving or expanding, and that's probably the strength of our Australia platform, relative to others is that we have that ability to find and source and provide a true real estate platform to these hospital types. So there's 2 or 3 things at an asset level that aren't part of the corporate moment that Healthscope is involved in that we're working on. And we're optimistic that 1 or 2 of those, over time, could yield a nice individual opportunity. And that's our business with all operators in Australia, and I think we're uniquely positioned there to be able to execute on that. In terms of the corporate moment, I think a couple observations. I think, clearly, the slow burn in terms of responding to the current bidder group that's there and then potentially other suitors. And I think that's really around a large real estate moment they have, which is the opening of the Northern Beaches Hospital, which is their major asset. And this is a major $800 million, $900 million public/private hospital just north of downtown Sydney, which is really set to open in the fall, or our fall later this year. And so clearly, an impactful event for Healthscope. I'm not sure that, that opening is going to provide huge visibility in terms of operations and value. That's something that's going to take some time, but that's the next major portfolio event as it relates to the Healthscope company. And we see that coming later this year so -- I think that the moment there is it continues to be active and I just highlight that the bid by the BGH Group, which really sets this process off, is in support of Healthscope's largest shareholder wanting change. And I think that's the AustralianSuper, which is the largest investor in Australia and clearly an impactful one. And I don't think the characteristics behind what led them to make their initial move and the conviction that they have to, to ultimately changing the direction Healthscope has changed. So I think while there's a little bit of time between here and when something might happen, I see those elements are still place. Our response to that is, again, to be ready to move. As I said, we underwrote the portfolio and obtained debt and equity commitments to put ourselves in a position to move quickly. And we expect that sometime after the results release, which comes later this month, and the opening of that hospital, the next round of corporate activity, I think, is likely to heat up. And I guess we'll be at the table, which is our objective.
[Operator Instructions] At this time, there are no further questions. You may proceed.
Okay. Thank you, operator. I thought just want to make one more point that maybe I didn't clearly make as much as our investor update has and I think important just to draw this connection directly, which is with the announcement of our JV and certainly some of our other third-party capital initiatives, including the Healthscope one that we just spoke about, we now see pretty clear visibility to potentially a $4.5 billion to $5 billion of fee-bearing capital in our business. And really, the capacity to grow this business correctly in the near term from our $5 billion today to potentially up to $10 billion in the near future. I think for us, those are very profound steps and we've taken a long time to get to this point. We took our time in terms of picking our JV partner, which what I think, of course, is a 2-way process, but really has some unique elements in that this is evergreen capital. This is capital that has the ability to be expanded, both within region and in other regions and certainly positions our business with more capacity than it's ever had. And certainly, we think capacity that allows us to pursue the fulsomeness of the health care real estate opportunity in all of our markets. So we're very enthused by that. Clearly, the impact on the business can be significant. Today, the asset management part of our business is generating about $30 million to $35 million on a run-rate basis in income for the business, we see that with some of the deployment of these future commitments potentially growing up to $50 million. And a lot of this could happen in the near term, given some of the transactional activity that we're pursuing. So it is quite a dramatic step for our business, one that we're very excited by. And to have the confidence and support of major global institutions during this I think speaks well to both our plan and our ability to execute. So we're in a very positive moment for the business and really looking to take these steps at pace. Thank you. I appreciate your time and enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.