NorthWest Healthcare Properties REIT
TSX:NWH.UN
Earnings Call Analysis
Q4-2023 Analysis
NorthWest Healthcare Properties REIT
The company has reaffirmed its commitment to delivering value for unitholders, emphasizing that recent strategic decisions are geared toward unlocking the significant intrinsic value of the REIT. With a clear vision for 2024 and into 2025, the aim is to become an institutional quality REIT with a strong, sustainable financial profile capable of weathering economic uncertainties, which includes simplifying the geographic footprint to enhance efficiencies.
The company reported robust tenant performance with an impressive rent collection rate of 99% for both the year and quarter, highlighting high retention in the Canadian portfolio at 83%. The company's leasing spreads are in good shape, exhibiting a positive trajectory. Moreover, the strategic focus on asset retention seems to be paying off with no significant negative impacts anticipated on leasing spreads.
The management is actively focusing on the significant debt maturities anticipated in the first half of 2025, with assertive steps already taken to refinance a substantial amount of non-mortgage debt. These refinancing actions are especially pertinent given that the average cost of corporate debt is approaching 8%. The clarity of refinancing asset-backed facilities reflects a strategic approach to managing high-cost debt and leveraging the company's strong foundational ability.
The company's tax strategy does not present major limitations to the tax-deferred status, thus maintaining an efficient tax position. The payout ratio of the dividend currently stands at 100% of the funds from operations (FFO) when adjusted for interest rate caps. Management plans to address the high-cost debt, expecting this to initiate earnings per share growth and subsequently lower the payout ratio below 100%, aligning with the goal of achieving a range between 80% to 100%.
In line with its strategy to simplify its geographic footprint, the company is actively pursuing dispositions, having successfully transacted nearly $500 million in asset sales last year. The disposition strategy is intended not just to reduce leverage and manage high-cost debt but also to bolster operational efficiencies across all markets. Additionally, the company managed to dispose of 70% of the portfolio by the first two months of the current year, with an expectation to progress further in the first half of this calendar year.
The company has made prudent financial adjustments concerning interest rate caps, which, if bought upfront, would have been reflected in the adjusted funds from operations (AFFO). With all caps having expired by February, they have been replaced with forward-starting swaps set to initiate once the caps expire — a move that signals proactive interest rate management and a commitment to solidifying the REIT's financial foundation.
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Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties Real Estate Investment Trust Fourth Quarter 2023 Results and Conference Call. [Operator Instructions]. This call is being recorded on Friday, March 15, 2024. I would now like to turn the conference over to Alyssa Barry, Investor Relations from Northwest. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to NorthWest Fourth Quarter end 2023 Annual Financial Results Conference Call. Thank you for joining us today. This call is being recorded, and a replay will be available on our website in due course. 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. Please see our public filings on SEDAR+, including our MD&A and annual information form for a discussion of these risk factors. Presenting on today's call are Craig Mitchell, our CEO; Mike Brady, President and General Counsel; and Karen Martin, Interim CFO. I will now turn the call over to Craig for his opening remarks.
Thanks, Alyssa. Good morning, everyone. Glad to be on the call. NorthWest has undergone significant changes over the last 7 months. We certainly believe in the resiliency and outlook of our healthcare real estate sector with the institutional quality portfolio and a newly appointed management team who have been proactive in strengthening our business. In August 2023, we identified opportunity for value creation and implemented a plan, firstly, to refinance several near-term 2023 and 2024 debt maturities. Secondly, to sell select assets, including noncore investment properties and investment in the securities of Australian Unity to use those proceeds to reduce certain high-cost debt. Thirdly, to reduce and review our monthly cash distribution to ensure that it is sustainable. And finally, further strengthening our governance and our management. We successfully completed all the initiatives in 2023. All in all, the latter half of 2023 was about strengthening our business and our balance sheet. As demonstrated in our financial results, we have an exceptional health care real estate portfolio that's performing well in a sector that is positioned for resilience and growth. It's important to highlight for the challenges that we have faced with the company over the past year stem from rising interest rates, which resulted in a strain on our balance sheet. To strengthen our financial position, we divested assets, saved over $450 million, including noncore investment properties and investment in Australian Unity with the proceeds used to pay down debt. Furthermore, we amended, extended and repaid total debt facilities which valued at over $1.4 billion with 2023 and 2024 maturities. These initiatives underscore our commitment to fortify our financial position for sustainable growth.
The REIT's strong operating performance is demonstrated in same-property NOI for Q4 2023, which has increased by over 4% on a comparable prior year period. The property portfolio performed well with 83% of the property portfolio rents indexed to inflation and an 87% lease renewal rates, supported by long WALE of 13.3 years. Strong operating results came from all regions in the quarter with same property NOI growth coming from the Americas at 2.5% in the positive, Europe positive 3.2% and Australasia, a positive 6.5%.
My priority as CEO has been to enhance our investor engagement efforts. This means strengthening our relationships with existing investments and building new relationships. We have still a lot of work to do here, but I assure you that building trust and confidence in NorthWest is at the forefront of our agenda. We are all committed to better transparency and reporting clarity as it relates to our overall business and strategic plans. In summary, we believe our solid operating performance, combined with strong overall sector fundamentals, positions the REIT for sustainable growth. I'd now like to introduce our President, Mike Brady, to provide an update of our strategic initiatives during the quarter. Over to you, Mike.
Thanks, Craig, and good morning, everyone. I'll start by providing an overview of our noncore asset sales. In 2023, we successfully divested properties totaling $360 million with $162 million transacted in Q4 alone. In 2024 year-to-date, we have sold 5 additional properties at fair value of $41 million. Net proceeds were used to repay property level debt, corporate credit facilities and for general Trust purposes. Additionally, during 2023, we sold or redeemed approximately 63% of our investments in unlisted securities, generating $134 million and continue 2024 to date with further redeemed unlisted securities worth $15 million. Again, net proceeds from these transactions were allocated towards repayment of asset-specific corporate variable rate debt as well as for general trust purposes. In 2023, for the third year in a row, the REITs and Vital Healthcare Property, which we manage participated in the GRESB process the global ESG benchmark for assessing real estate and infrastructure investments. In the global listed sector for both healthcare standing investments in healthcare development categories Vital and NorthWest placed first and second, respectively. In the global sector healthcare development, which includes listed and unlisted companies, Vital and NorthWest came in first and third place globally. The REIT maintained its 4-star ESG rating for the development benchmark for the second consecutive year, solidifying our position within the top 20% of global real estate entities in this category. This is a significant achievement for the REIT and for Vital. In terms of governance, 2 new trustees were appointed to the Board in January; Bobby Julian and Graham Garner. We welcome Bobby and Graham and appreciate their contributions to the Board. Concurrently, we announced the retirement of Robert Baron from the Board of Trustees. On behalf of everyone at NorthWest, we thank him once again for his years of service with the REIT. I'll now turn it over to Karen to share our financial highlights.
Thanks, Mike. Hello, everyone. I'll begin with the operating highlights for the quarter. For the 3 months and year ended December 31, 2023, the REIT delivered another strong operating results and the key highlights to follow: Revenue from investment properties increased 4.1% in Q4 of 2023 and 12.3% for the year. primarily due to lease indexation and the full year impact of our 2022 acquisitions. Rental indexation contributed year-over-year to same property NOI increase of 4% in Q4 2023 and 3.7% for the full year. Strong operating performance was underpinned by long-term lease maturity profile with a weighted average lease expiry of 13.3 years, portfolio occupancy rate of 97% and rent collection rate of 99%. In 2023, the REIT was impacted by Central Banks globally increasing interest rates. This has resulted in higher interest rate expense, representing an effective weighted average interest rate of 6.2% as at December 31, 2023, compared to 5.35% as in December 31, 2022. Combined with adjustments in investment property fair values, the REIT had a net loss for the 3 months and year ending December 31 of $189 million and $481 million, respectively. This is compared to a net loss in Q4 of 2022 of $136 million and net income of $126 million for the full year 2022. Adjusted funds from operations, AFFO, for Q4 2023 was $0.13 per unit, this compares to $0.17 per unit in 2022, resulting in AFFO payout ratios in Q4 of 67% in 2023 and 117% in Q4 of 2022. It is worth noting that the $0.13 per unit includes premiums on interest rate caps that expired during the first quarter of 2024 and this contributed $0.04 per unit to AFFO during the fourth quarter of 2023. On November 27, 2023, holders for NorthWest $125 million Series G convertible unsecured subordinated debentures approved to extend the maturity date of the debentures from December 2023 to March 2025. As of December 31, 2023, the REIT had mortgages and loans payable of $3.6 billion, down from $3.8 billion at the prior year-end. In the first 3 months of fiscal 2024, the REIT has extended approximately 28% of its non-mortgage debt maturing in 2024 and 2025. This includes the extension of $125 million of its revolving corporate debt from '24 to '25 and $172 million of its debt from 2025 to 2027. And earlier this week, Vital Trust extended the weighted average term to maturity to approximately 4 years on $430 million in term debt, of which $177 million were maturing in 2025. The extensions are approximately at the same weighted average interest margin as current financing. Looking ahead, we're encouraged by the significant progress made to date and the overall performance of our real estate portfolio. I will now pass it back to Craig for his closing remarks. Craig?
Thank you, Karen. While the strategic review is underway and until such time as we have updates to share on that front, management has recognized key action items that can be taken in the near term and remains committed to building a more robust, sustainable and profitable business. Looking ahead, to 2024 and into 2025, our focus will be, firstly, maximize value for our unitholders. Secondly, continue to do surface embedded value from within our portfolio. Thirdly, to continue to strengthen our executive team while at the same time managing G&A, then continue to improve our investment engagement. Fifthly, become an institutional quality REIT with a sustainable financial profile and a balance sheet capable of withstanding interest rate changes and other uncertainties no matter what the economy throws at us. And finally, continue to simplify our geographic footprint to improve efficiencies in all our markets so we can leverage our expertise and do all the things we are really good at. NorthWest remains committed to delivering value for all our unitholders and the decision to announce this quarter and the solid foundational ability are essential steps to unlock the significant value of the REIT and to maximize value for all our unitholders. We believe NorthWest offers unparalleled access to a diversified healthcare portfolio of high-quality and difficult to replicate assets. We believe there is a significant value embedded in the REIT and we will continue to crystallize value where we believe it makes sense. We're excited about the future of NorthWest and we thank you for your support. And with that, I'd now like the operator to open up and call for questions. Thank you.
[Operator Instructions] Your first question comes from the line of Sairam Srinivas from Cormark Securities.
And team NorthWest congratulations. I think it was a good quarter and you guys have already accomplished a lot since we last spoke. My first question is around the dispositions. Just looking at the dispositions done in the America so far, can you give us some color in terms of the geographic contribution of each of these dispositions between like Brazil, America and Canada?
All right. So I might just hand over to Mike to answer that question.
Yes. So the breakout is 4 in the Americas and 10 in Australasia.
No, my question was more in terms of between the Americas, like were they more in Brazil versus the U.S. versus Canada?
Within the U.S. and Canada.
All right. And can you speak about generally the kind of investors that are buying these properties? Are they more investor-centric or are they user-centric users who are buying these assets?
They are institutional investors for the most part and in 1 instance as a local developer.
Your next question comes from the line of Pammi Bir from RBC Capital Markets.
Can you maybe just talk about in terms of the disposition outlook for the course over the next few months or over the course of this year, how do you see that cadence sort of trending? And then any further updates with respect to whether that may include more U.S. asset sales, more Canada or Brazil? Or anything you could share on that front?
Look, well, thanks for that question. I'll go first and then hand over to Mike. I think the first thing we are very focused on dispositions of noncore assets. That's probably the first key point. And secondly, we're doing that as we speak. And we're taking a position and a very conservative position that we're only making announcements where we have dispositions, which all conditions are waived and are affirmed. We're looking at dispositions in the Americas, we're looking in America, we're looking in Europe, and we're looking in Brazil. So in all markets, we're looking at active opportunities. Mike, is there anything else to add to that?
No, I think that covers it well.
Okay. And then maybe just on the Australian Unity units. Do you expect to have exited the balance of the holdings in the first half of this year or this quarter at all? Or just any updates on that front?
Yes. So as we've disposed of 63% of the portfolio as at December. In the first 2 months, we disposed of another 7%. So we're now 70% disposed. We've got about $16 million left. We would expect that to be in the first half of this calendar year.
Okay. And then just on the -- I want to come back to the premiums, the $11 million is, I guess, the premiums on those industries you adjusted for [indiscernible] this quarter. Can you just explain the rationale there for that adjustment? And then just any color you can share in terms of what the implications are for Q1? Because I think, as you mentioned, they expired. So I just want to get a sense of what that looks like.
Yes, sure, maybe I might just hand over to Karen to answer that question.
Sure. We actually mentioned it on the Q3 call as well. When you look at the premiums, we are paying the premiums over time. If we had bought the caps and paid for it upfront, they would have been adjusted in the AFFO. So continuing that when we're paying over time it was adjusted into the AFFO. All of the caps have expired as of February. They were running about $0.04 per quarter. And we replaced those with forward-starting swaps, which will kick in when the caps expire.
Okay.
Just to round that out. So if you look at our results, stripping out those caps, we're sitting at $0.09 per quarter, which is consistent with Q3. [indiscernible] Q3 $0.09 as well. It's probably the key underlying number to be focused on.
Yes. Yes. So that $0.04 that adjustment disappears in Q1 effectively.
That's exactly right.
Okay. And then just last 1 for me. The lease in Brazil with that hospital, the Sabará hospital, I think it's coming due. Just any thoughts on what that may look like? Or any -- are you expecting it to get renewed? Or...
Yes. Look, I might take that. I was actually in Sao Paulo in late January and that Sabará is a 16 story hospital, children's hospital actually, it's a very full, very, very active hospital, good rent EBITDA margins. That expires -- the lease expires in October. We are in active negotiations as we speak. So I would expect there will be a renewal there, yes.
[Operator Instructions] Your next question comes from the line of Himanshu Gupta from Scotiabank.
So just looking at the debt maturities, I'm looking at this year first and then we'll get to the next year. So in 2024, when is the next large debt maturity now?
Actually, we pushed that off now into 2025. So for the balance of 2024, it's just the normal course mortgage renewals, which we expect to refinance as we go.
Okay. So that $125 million is pushed to March, I think, next year. So it's not much to renew this year from a debt perspective.
That's correct.
Okay. Now talk about next year, which is obviously a very big year. If I look at Americas, then Europe almost $500 million plus, do we have a sense? Is it coming in the first half of the year or the second half of the next year?
The bulk of the maturities in 2025 are in the first half of the year. And to the ones you specifically mentioned, those facilities are asset backed, and we do expect to be able to refinance them.
Okay. Okay.
And adding to this, it's Craig here. So this is a big, big focus of us, what I see in the first 2 months of this year, we find [ 28% ] of the non-mortgage debt. So you're right. Our big focus is not so much 2024 expired, it's really the first half of 2025.
Got it. Okay. And Craig, for example, if I look at the Americas, the expiring rate of debt is like 8.19%, call it, 8% plus. Do you think the renewal rate is likely to be higher than this or very similar to this rate?
Can you talk to the margins embedded.
That's right, yes. So like do you see like further headwind when you renew this debt next year based on what you're seeing right now?
So what we see right now, if I look at mortgage debt from a margin perspective, I don't see any material expansion of mortgage debt. Yes, we need to bring that leverage down a little bit. But if you look at Vital as an example, it's maybe $500 million worth of refinancings we just did in the last 2 months, and they were at existing margins. So the margins will be consistent. We have a lot of high-cost debt in 2025. You can see the weighted average is nearly 8%. That will be our furthest forward payment of that high-cost corporate debt.
All right. Okay. And if we are not successful in selling the Brazil or the U.S. portfolio. So do you see that the Americas and the Europe getting renewed at kind of similar margins as you mentioned?
That's exactly right.
Okay. Okay. Fantastic. Okay. And maybe just turning to the same-property NOI growth, I think, pretty strong this year almost touching 4% there. So my question is that, especially in your U.S. portfolio, are there any tenants on the watch list? Or how are your tenants performing in your U.S. portfolio especially?
Yes. our tenants are performing well. If you look at our rent collection, we're at 99% for the year and the quarter. So good rent collection, we're running about 4.2% of the portfolio expiring in calendar 2024. And we talked about Sabará lease is a big part of that. But again, we are seeing increased profitability across the business at different speeds. So I'd say in the U.K. is performing very well. Australia is coming off of a low base and we're getting good collections out of our U.S. portfolio. Particularly focusing our U.S. portfolio is more medical office buildings rather than hospitals. And again, good collections in Brazil as well.
Awesome. Okay. And maybe just 1 last one. I think in January, the some -- those Class B units were converted into the trust units. Any color on that?
Maybe Mike, maybe just talk about the simplification of that for us, but I'll hand over to you Mike.
Okay. Those Class B units were owned by 1 investor, and they exercise their rights pursuant to the declaration of trust, very simple transaction exchange Class Bs for regular trust units. And it does simplify things for us because that now extinguishes all outstanding Class B units.
Your next question comes from the line of Matt Kornack from National Bank Financial.
Just in terms of the organic growth outlook for 2024, I mean, is it safe to say you don't have much in the way of lease maturities and it sounds like in the Americas, it's likely to see a renewal in Brazil. So occupancy should be somewhat stable. Can you give a sense as to I mean the spreads on new leasing seem to be in the 1% or so range. But where CPI your expectation is? Should we see similar type growth from what we saw this year?
Yes. Yes. So Matt, Craig here, you're right. Not a lot of lease expired profile, we saw very high retention in the Canadian portfolio at 83%, the leasing spreads in marketing or passing effectively if you're not going to see any possible or negative reversion on the leasing spreads. So I think we'll see indexation. Indexation obviously is tapering down from '23 to '24 as economy slows, but you're still going to get that positive growth so I still expect it to be north of 3%.
And it's not a huge driver because of the nature of your leasing profile. But is your view that market rents may if indexation comes down, potentially outstrip the growth and you'd get more on turnover leasing? Or should we expect that the portfolio is kind of track in line with inflation from a growth standpoint?
I think we need to just make the assumption it tracks in line with inflation, Matt.
Okay. And then just on capital allocation, some of the decisions around what to sell. Are there any major kind of tax considerations that would limit you in terms of what would be a logical portfolio or properties to sell? And I mean how much of that figures into what you can ultimately do at this point?
No, there's no major limit to tax and effecting our tax deferred. Of course, we do manage that carefully, and we do take that in consideration, but I don't see that as a limit in any way.
[Operator Instructions] There are no further questions at this time. We have 1 question from David Ellis from Research Capital.
I may have missed this at the beginning, but what's your payout ratio on your dividend now?
If you strip out the interest rate caps, David, it's about 100% so $0.09 a quarter, if you strip out that $0.04 interest rate gap we talked about, it runs at 100% of FFO.
And how do you see that in the future, going into the future?
Look, I see us coming off on a low base. We need to repay high-cost debt that would drive an earnings per share growth, and that will reduce our payout ratio to be below 100% is how I see it.
And do you have a policy on where you want it to go or where you think it should go?
Look, Yes, it really should be sitting in that 80% to 100% range, where the policy should be. So we're at the high into that range. But then on the flip side, we're also coming on a very low base which is why we set at that $0.36 annualized late last year, and we brought it down to that level.
And again, I may have missed that. You're still looking for any further asset sales?
Yes, we are. We are still looking for further asset sales and transacted nearly $500 million in the last year. We're still looking to do that to reduce leverage, bring down that high-cost debt of interest rates and also simplify geographic footprint.
There are no further questions at this time. I will now turn the call over to Craig Mitchell. Please continue.
Well, thank you, everyone. I really appreciate everyone's time this morning. You would have noted that we've got a new investor update deck. I appreciate everyone if there's any additional comments you want to make to that. We're very focused on increasing our transparency of our business and our financial numbers. And I appreciate everyone's time today, and thank you very much. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.