NorthWest Healthcare Properties REIT

TSX:NWH.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties Real Estate Investment Trust First Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 15, 2024. I would now like to turn the conference over to Alyssa Barry, Investor Relations for NorthWest. Please go ahead.

[Alyssa Barry, executive]

Thank you, operator. Good morning, everyone, and welcome to the NorthWest Q1 2024 Conference Call. Thank you for joining us today. This call is being recorded, and a replay will be available on our website at www.nwhreit.com.

Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management 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 financial statements and AIF for a discussion of these risk factors.

Presenting on today's call are Craig Mitchell, our CEO; Mike Brady, our President; and Stephanie Karamarkovic, CFO. Tracey Whittall, our Chief Operating Officer, is also present and available for the question-and-answer session.

I will now turn it over to Craig for his opening remarks.

[Craig Mitchell, executive]

Thank you, Alyssa. So good morning, everyone. I'm pleased to share that our Q1 results are consistent with Q4 2023 and are in line with management's expectations.

We reported revenue of $134 million, net operating income of $95 million and maintained a strong occupancy rate of 96.5%. Our performance this quarter reflects strong leasing activities and robust same-property NOI, which is up 6% from Q1 last year. In first quarter alone, we successfully compared $200 million in property dispositions and the sale of a portion of our investment in unlisted securities, and we've used these proceeds to reduce debt and strengthen our balance sheet.

In the last 12 months, we've divested 27 properties and a portion of our AUHPT units for a total proceeds of nearly $700 million. As we look ahead into the year, we've continued to pursue the sale of additional assets globally, and we'll provide further updates on this as available.

Efficiency and cost savings remain at the core of our operational focus. We're challenging how we're doing business to drive efficiency across our entire organization. On top of this, we're working hard to improve our capital management, achieving more favorable leverage levels and streaming our financial position.

Concurrent with the strategic review process underway, we've also enhanced our governance and management team. During the quarter, Tracey Whittall joined as our Chief Operating Officer and Stephanie Karamarkovic as our Chief Financial Officer. Both have impressive -- have been very impressive in a short period of time and strengthen our leadership bench in a very meaningful way. We are pleased to have both on board.

I'd now like to introduce our President, Mike Brady, to provide an update on our strategic initiatives during the quarter. Over to you, Mike.

[Michael Brady, executive]

Thanks, Craig, and good morning, everyone. In terms of our strategic asset dispositions during Q1 '24, we successfully diverted 12 noncore properties generating total proceeds of $165.2 million. Following the quarter, we further divested an additional property valued at $20.5 million. Proceeds from these sales have gone towards repaying property level debt and corporate credit facilities, aligning with our broader objectives to streamline the organization and strengthen our financial position. Since mid-2023, we have reduced our proportionate debt by $383 million, reducing it to $3.5 billion.

Additionally, during this first quarter, we redeemed an additional $15.3 million from our investment in unlisted securities, bringing our total proceeds from these sales to $150 million. We've now sold approximately 71% of this investment. This has enabled us to fully repay the term debt secured by these unlisted securities in Australasia.

The strategic financial management reflects our commitment to maintaining a robust and adept financial framework and continuing Northwest's progress towards becoming an institutional quality REIT. I'll now turn it over to our Chief Financial Officer, Stephanie Karamarkovic, to share our financial highlights for the quarter.

[Stephanie Karamarkovic, executive]

Hi, everyone. Thank you for the warm welcome over the last month. I really appreciate it. I've been Northwest's Chief Financial Officer for about 30 days, and there's nothing like diving in during a reporting period. This is a bit of a homecoming for me, as I previously worked at NorthWest for 8 years. I'm very pleased to be back, and I look forward to getting to know many of you.

Turning over to our financials in more detail. Our Q1 revenue from investment properties slightly decreased by 1.3% as compared to Q1 2023, due to strategic asset sales, but was partially offset by rental increases across all of our markets. Our NOI of $95 million was essentially flat as compared to the first quarter of last year, however, was 2.7% lower than [ Q1 ] 2023 as a result of the asset dispositions.

Same-property NOI of $88.9 million was 6% higher than in Q1 2024 -- was 6.1% higher than in Q1 2024, driven primarily by contractual rent increases and indexation. Our portfolio occupancy of 96.5% is underpinned by a weighted average lease expiry of 13.2 years and 84% of leases subject to rent indexation. With our portfolio comprising of more than 1,800 tenants, the REIT's cash flow is highly diversified. It's also worth noting that our global rent collection is 98%.

Q1 AFFO per unit was $0.11. After adjusting for interest rate caps that expired during the period, AFFO per unit remained consistent with the past 2 quarters at $0.09 per unit. Reported G&A for the quarter was $15.5 million, which is $2.5 million higher than the first quarter of 2023 and $3.2 million higher than Q4. Included in G&A is noncash compensation expense during Q1 2024 of $2.5 million as compared to $2.3 million in Q1 2023 and a $0.7 million noncash compensation recovery in Q4.

Excluding these impacts of noncash compensation, G&A in the first quarter was $13 million, which is $2.3 million higher than Q1 '23, but flat as compared to Q4. Debt to GBV remained stable at 47.7% with a decrease in debt related to asset sales being offset by investment property fair value losses and FX depreciation.

We've also taken significant steps in capital management, having refinanced amended mortgages to achieve more favorable terms contributing to a more resilient financial structure. The REIT continues to be impacted by higher central bank interest rates globally. Interest expense for the quarter was $55.4 million, which is $3.7 million higher than in Q1 '23, but is $1.7 million lower than in Q4.

This decrease in interest expense as compared to Q4 is due to debt repayments of high-cost debt as a result of proceeds from asset sales, partially offset by the full quarter impact of the extension of the REIT's Series G convertible debentures. The REIT's effective interest rate is 6.1% as compared to 5.15% at March 31, 2023, and 6.37% at December 31, 2023.

As at March 31, 2024, on a proportionate basis, the REIT had mortgages and loans payable of $3.5 billion, down from $3.6 billion in the prior period and $3.7 million in Q4. During the first 3 months of 2024, the REIT extended approximately $300 million of its nonmortgage debt maturing in 2024. This includes the extension of $125 million of its revolving credit facility from November '24 to March '25 and the extension of $172 million Australasian secured loan for an additional 2 years to March 2027.

Looking ahead, we're encouraged by the significant progress made to date and the overall performance of our real estate portfolio. And with that, I'll now ask the operator to open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Sairam Srinivas with Cormark.

[Sairam Srinivas, analyst]

Just looking at the transaction market right now and just tying that with the fair value loss that you saw this quarter on assets. Can you talk about a bit about the transaction outlook? And is this something we should be reading from the fair value loss in terms of market appetite for the assets?

[Craig Mitchell, executive]

Yes. So maybe I'll go back in history just to provide a bit of color. The market [indiscernible] as you'd appreciate, but we're being very successful with our dispositions. The $700 million that were sold in the last 12 months were sold at an adjusted cap rate of sub-7%.

In the last quarter, the $200 million of sales in 3 AUHPT units at the real estate level are sold in a cap rate of just under 7.5%. So we are seeing transactions move. It varies by market. It's [ trepid ], but we are transacting in 27 properties. It feels like we're at the top of the interest rate cycle, which should give everyone a little bit of confidence about how to provide discount rates.

[Sairam Srinivas, analyst]

That's good color, Craig. And maybe just -- maybe I missed this in the disclosure. But are there more dispositions out in the pipeline for you guys that you guys are working on right now?

[Craig Mitchell, executive]

I think we've been very clear. I mean, we're trying to restore our unit price as close to NAV as possible and increase our earnings. We have some high-cost debt. We've got nearly $400 million plus of nearly double-digit interest rates. So we're like to be able to reduce that.

We're looking to strengthen our balance sheet, as we've done in the last 12 months. So we're always looking at ways of improving the robustness of this business, whether that be dispositions of units, real estate individual day transactions or efficiencies in the G&A line. So all 3 things, all 3 parts serving for us.

[Sairam Srinivas, analyst]

All right. And maybe just kind of rewinding almost 1 year ago now. I guess the entire process of dispositions are also kind of taking part because of leverage and the urgency to kind of pay down debt. But having now actually refinanced extended term beyond '24, most of them, does that change your maybe outlook on dispositions? Maybe does it give you more of a breather in terms of the timelines you can execute disposition?

[Craig Mitchell, executive]

No. I think, as I said, we're very focused on increasing our earnings. We're now probably at the third quarter at 9%. So we're very pleased with that. We feel like we've got a good baseline need to grow that number. Part of growing that is either obviously were 3 ways: good like-for-like growth. You saw that come through our portfolio, reducing G&A. There's a big focus on that and efficiency. And the third one is repaying high-cost debt or dispositions. So there's always an urgency in all transactions and particularly in this market, yes, it's important to us.

[Sairam Srinivas, analyst]

And probably my last question is you've spoken about [indiscernible] market looking to kind of lighten up on and obviously, Brazil is one of them. Like is that still a candidate you guys are looking to offload? And would you see that the current fair value, where it is today, balance sheet kind of represents where the assets should be sold at? Or what you'd be looking for them from a seller standpoint?

[Craig Mitchell, executive]

Yes. So the [indiscernible] we saw in the first quarter we just announced, and they held our books at fair value less than Q4. I think we're at the cycle now where cap rates have started to stabilize. You might see a little bit of softening in cap rate, but nothing material. So I think you're at a point in the cycle where capital value are staying stabilized.

[Sairam Srinivas, analyst]

All right. So what I'm basically reading is that the fair value reduction or the revision that you saw was mainly a function more of interest rates being a [indiscernible] cap rates is actually the NOI number on the assets that they can generate. Would that be fair to say?

[Craig Mitchell, executive]

That's fair to say. NOI is strong with good indexation. That rent collection of 98%, it's 4 years in a row of 98%. So the cash flows are strong, really. The valuation assumptions, these are the discount rate or on the terminal cap rate or the no cap rates. What's driving it, not the underlying cash flows.

[Operator]

Your next question comes from Frank Liu with BMO Capital Markets.

[Frank Liu, analyst]

Congrats on your appointment, Stephanie and Tracey. It's good to see the new disclosures within the supplemental schedules. With the new segments laid out, could you just briefly comment on the organic growth you're expecting over, let's say, 1 year and 2 years across like North America, Brazil, Europe and Australasia?

[Craig Mitchell, executive]

Yes. I'll talk -- Frank, it's Craig, at a high level. On a proportionate basis, we saw 5.4% like-for-like growth on a consolidated basis of 6%. I think that is elevated. I think if you look forward where we are in the inflationary environment globally, I think you can assume, particularly in the next 12 months, [indiscernible] 4% like-for-like growth on a blended basis.

Pretty hard to give you -- but that's a reasonable assumption. Of course, most markets by 4% a year, that's a little bit harder to do because 4% is index to inflation. You're still in that 3% to 4%, if you want look at absolute 2 years, if we think the interest rate globally are going to come down. But so think about 4% the next 12 months, 3% or 4% the year after. Appreciate your comments on the disclosure. I think you really tried to listen hard to the investment community late last year. And we're also open to comments to try and get the best disclosure and make our business as easy to value as possible.

[Frank Liu, analyst]

Of course, yes, it's always good to see some improvements that may help with the modeling perspective and better understanding your business. Just on the color on the last POI, I guess, so there is no outlier. Like I mean, we plan -- I mean, 4% next 12 months, 3%, 4% in 2 years. Is there any outliers you want to go? Maybe I can switch my question to this way?

[Craig Mitchell, executive]

No. We've got a reason. If you look at on our management presentation, we've got our expiry profile. It's very, very benign. So I don't expect any major outliers, whether it be downtime, termination income or the like. So don't expect any outliers.

[Frank Liu, analyst]

Got it. Perfect. Just want to briefly follow up on a news that came out in March related to Healthscope. I guess they were planning to ask landlords for relief for some of the assets, for some of their unperforming hospitals. I'm just curious if you have had any conversation with the management at Healthscope? And should we expect any impact to NorthWest?

[Craig Mitchell, executive]

Sure. Okay. No, that's a good question. Just maybe just the broader range, maybe a bit of background for everyone. Healthscope, they're a critical provider of health care services in Australia. They're the second largest private hospital operator in Australia behind Ramsay. They're working with the government at the moment trying to increase their revenue rates they're getting from the insurers. At the moment, they're facing negative jaws. In effect, what I mean by that is their cost base, whether it be PP&E, nursing, it's going up at a higher rate than they get from revenue from insurers. So that negative jaws, they're kind of working with the industry and government to close that down.

The owners of Healthscope is the Brookfield Partners. Yes, they have come with a proposal to the banks and landlords to restructure their debt and their corporate structure. Very clearly, we and the banks have rejected any initial proposal. We will always consider to support. They may return for any lease enhancements. I think it's important to note that we've got very strong leases. We have cost of faults in all their leases. But it's also very important to know as well that Healthscope has met all their lease obligations and they have 0 amount of rent outstanding. And again, just give it the quantum of the proportional rent, they're 3.5% of our rent roll on a proportionate basis. So I think it's, bringing it all together, the conversations will continue, and I think this will sort of play out over time.

[Operator]

There are no further questions at this time. I will now turn the call over to Alyssa for closing remarks.

[Alyssa Barry, executive]

Thank you very much. On behalf of the NorthWest team, thank you for participating in today's call, and we're looking forward to speaking with you again in August for our Q2 results. Should you have any questions, please feel free to reach out to us directly. Have a wonderful rest of your week.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.