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 Second Quarter 2020 Results and Conference Call. [Operator Instructions] This call is being recorded on August 24, 2020. I would now like to turn the conference over to Paul Dalla Lana. Please go ahead.

[Paul Dalla Lana, Chairman & CEO]

Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm joined by Bernard Crotty, the REIT's President; Shailen Chande, the REIT's Chief Financial Officer; and Peter Riggin, the REIT's Chief Operating Officer. Together, we are pleased to share with you our results for the second quarter of 2020. 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 necessarily based on assumptions that are subject to uncertainties and risks, which could cause actual results to differ materially. We direct all of you to the risk factors outlined in our public facts. The defensive nature of the REIT's health care real estate portfolio that is 97.3% occupied with more than 80% of revenues, provided directly or indirectly by public health care funding, has resulted in the REIT's operating results and portfolio valuations not being significantly impacted by COVID-19. During Q2 2020, 97.6% of the REIT's revenues on a proportionate ownership basis were either collected or subject to formal deferral arrangements, and results for July 2020 are broadly consistent with these figures. The REIT's deferral arrangement span 379 tenants, representing approximately 4% of annual gross rent, with the majority of the arrangements in the REIT's Canadian and Australasian portfolios. During the quarter, the REIT did not recognize any significant provisions for uncollected rent and expects outstanding rent to be fully collectible. The impact of COVID-19 continues to affect countries unevenly, with some countries progressing through phased reopenings, while others struggle to control the wave of the pandemic. Nonetheless, signs of a return to normalcy are beginning to emerge, as evidenced by the restart of elective surgeries in most of the REIT's global markets. That said, significant backlogs have built up over the course of the pandemic, with one estimate pegging the global backlog of surgeries at more than 28 million cases. In the U.K. alone, waiting lists have grown by more than 4 million people to 8 million, and in Australia, approximately 0.5 million people were added to waiting lists. As a result, we believe that pent-up demand exists and will spur a strong recovery for the health care industry and, by extension, health care real estate. Specifically, as it relates to our hospital operators, we believe they are well positioned to participate in increasing volumes to alleviate this backlog. Similarly, many of our tenancies in our medical office buildings are expected to see increased volumes in the months ahead, given the nature of the essential services with relatively inelastic demand that many of them provide. Before touching on transactional items, I wanted to announce the appointment of Craig Mitchell, currently the REITs Chief Executive Officer of Australasia, to the role of President. He will replace Bernard Crotty, who is retiring from the REIT after 15 years of leadership, most recently through its Vital Healthcare Trust subsidiary, where he will continue as a Northwest representative on its Board. In addition to support accelerating growth in Europe, the REIT has hired Tim Blackwell as Executive Vice President, Funds Management; and Marco Mosselman as VP and Country Head, Netherlands; both new positions within the REIT's management team. Additionally, the REIT is also announcing the appointment of Ms. Stephani Kingsmill to its Board of Trustees, effective September 8. Ms. Kingsmill is an experienced executive who has served in a wide range of roles in the insurance, asset management and real estate businesses of Manulife Financial Corporation. Amongst her roles at Manulife, she was Executive Vice President, Human Resources for the company's global workforce, additional experience that is valuable to Northwest at this time of ongoing international expansion. Ms. Kingsmill was named 1 of the 100 most influential women in Canada by the Women's Executive Network. She holds a Bachelor of Commerce degree from Queen's University and has her ICD designation from the Institute of Corporate Directors. She will replace Dr. David Naylor, who will resign concurrently from the Board to focus on a number of urgent public health initiatives related to COVID-19 pandemic after almost 7 years of service to Northwest and its predecessor entities. On behalf of Northwest, we welcome Ms. Kingsmill to our Board and wish Dr. Naylor and Mr. Crotty success in their new endeavors, noting their many contributions to the growth and success of the REIT over the past years. During and post quarter end, the REIT also made notable progress on its long-term strategic priorities, including the acquisition of a strategic U.K. hospital portfolio. On August 21, 2020, the REIT completed a $452 million acquisition of a portfolio of 4 hospitals located in Greater London, England. The properties are 100% leased on long-term inflation index basis to Aspen Healthcare, a leading English hospital operator. The London portfolio was acquired at a 6.2% going-in capitalization rate and funded with $223 million term loan and a $125 million expansion of the REIT's revolving credit facility, in addition to existing resources. The addition of the London portfolio is strategically important as it increases the scale of the REIT's U.K. portfolio to more than $620 million and positions it for further growth in partnership with the region's leading health care operators. It also diversifies the REIT's U.K. operator mix and brings its focus into major U.K. health care markets. And lastly, it provides the REIT with an attractive portfolio with which to seed future U.K. joint venture, which is a priority for the business. During the quarter, we also advanced our European joint venture. And in conjunction with the previously announced $3.1 billion, EUR 2 billion, European JV initiative, the REIT entered into a binding agreement, subject to regulatory clearances, with GIC, Singapore's sovereign wealth fund, to pursue pan-European health care real estate opportunities together. We are pleased to be expanding our partnership with GIC into Europe. The joint venture will benefit from a high-quality initial portfolio and leverages Northwest's significant regional presence with a goal to building the leading pan-European health care real estate platform. We also completed strategic asset sales previously identified, and year-to-date, the REIT's has completed 3 of its 4 key initiatives, generating more than $130 million in net proceeds while adding $273 million of fee-bearing capital. During the quarter, the REIT advanced the remaining disposition transaction, namely the sale of 70% of its $470 million German and Dutch triple net portfolio, which will be used to seed the European JV. The Seed Portfolio has been expanded by $196 million to include an additional 5 assets in the Netherlands and is expected to close in Q3 2020, subject to customary closing conditions. And lastly, deleveraging. With the acquisition of the London portfolio expected to temporarily increase the REIT's leverage, the REIT remains committed to deleveraging strategy and achieving investment-grade credit metrics through its target proportionate leverage of 45% and net debt-to-EBITDA ratio of 8x over the next 12 months. For the quarter, our results were in line with our expectations, noting the above deleveraging, including annualized quarterly funds from operations of $0.92 per unit on a normalized basis, implying a payout ratio of 87%. Earnings accretion from recent investment and financing activity was as expected, although foreign exchange movements saw the Canadian dollar appreciate by approximately 3.7% over the last quarter relative to the REIT's average foreign currency exposure, which continues to impact earnings. In fact, over the last 12 months, we estimate the relative strength of the Canadian dollar has reduced annualized AFFO by approximately $0.05 per unit. In the context of a lower-for-longer Canadian interest rate environment, we expect these trends may begin to ease and then wind in 2020, providing a tailwind to the REIT's future earnings. Net asset value decreased by approximately 1.2% to $12.37 per unit, driven again primarily by a higher Canadian dollar relative to the REIT's foreign currency exposure, with property values largely stable. In terms of liquidity, the REIT is well positioned with $84 million of cash and available credit, post the closing of the U.K. acquisition and pro forma the completion of the European Seed Portfolio sale, which is expected to close in the third quarter. This is expected to increase to more than $350 million as the REIT seeds its current U.K. portfolio into a future U.K. JV. The REIT has also completed repayments or renewals in respect of all 2020 maturing debt obligations on favorable terms and is now taking proactive steps to refinance normal course 2021 maturing facilities. Operationally, our results, which are derived from an expanded 183-property, $6.6 billion health care infrastructure portfolio, tenanted with leading operators, primarily on long-term inflation index leases, were on plan. Inherent strengths of the portfolio are reflected in the REIT's Q2 2020 year-over-year source currency, cash-recurring SPNOI growth of 2.9%, largely driven by contractual rent indexation and underpinned by a 97% occupancy rate and a weighted average lease term of more than 14 years. In all regards, a highly defensive portfolio. Segmentally, I'll note the following: our 8 hospital properties in Brazil, 7 of which are tenanted by industry-leading Rede D'Or, have continued to operate, but with adjustments for COVID-related activity as the major cities in Brazil deal with a challenging COVID environment. The REIT is also focused on gaining traction with additional high-quality operators in Brazil and sees a very constructive market in that regard. The Canadian MOB portfolio was impacted by COVID-19 to varying degrees as some services, such as nonemergency dental and physiotherapy, were temporarily suspended because of government and/or industry-mandated shutdowns or by physician distancing guidelines. But the majority of tenants either continued to offer services in their premises or provided government-funded virtual care, either from their premises or remotely. Approximately 11% of the tenants were granted rent deferrals, which were typically for the equivalent of 2 months of gross rent and have an average repayment period of 8 months. In exchange for the deferral, approximately 50% of tenants agreed to lease extensions. In aggregate, the REIT granted rent abatements that totaled less than 1% of the region's gross rent. And the majority of these cases, tenants agreed to extend their leases by an average of approximately 32 months in exchange for any abatement. Leasing activity in Canada has remained robust, with 89% and 54% of the region's annual budgeted renewal and new leasing activity, respectively, completed. This level of activity resulted in a 91% effective renewal rate for the quarter. Occupancy for the region was on plan at 92.3%. In Europe, our hospital tenants and large clinic operators have performed well. In Germany, the government provided financial incentives for the conversion of some facilities or a portion of facilities for COVID-related demand that took effect at a number of our properties. The postponement of elective surgeries and the curtailing of certain rehabilitation services resulted in select clinics in Germany and the Netherlands experiencing reduced patient demand, resulting in short-term rent deferrals being granted, but generally with short-term repayment plans. No such deferrals were granted to our U.K. hospital operators, where most private hospitals, including ours, had their capacity requisitioned and paid for by the National Health Service, or NHS, so they could provide bed supply to help the NHS manage health care needs during the pandemic. That arrangement has been extended until at least October 31, with the government recently announcing an additional GBP 10 billion investment towards reimbursing private operators to provide care in the years ahead in order to relieve pressure on long waiting lists that have swelled during the pandemic. In Australia and New Zealand, to varying degrees, governments also secured access to many private hospital beds, again, providing underlying financial support to most of our operators while their revenues were curtailed with the postponement of certain care, especially elective surgeries. In some cases, that support was insufficient, so we have entered into short-term rent deferral arrangements. However, even in these cases, a majority of rent was still collected each month. Across the REIT's global markets, all of our properties have remained open and operational during the pandemic. Because the effects of the pandemic are uncertain, there can be no assurance that there will not be any further disruptions to our tenants in the future. However, based on the resiliency today, we are confident that the portfolio is well positioned to continue to perform, even in these challenging times. I'm pleased with the progress made during the quarter, which advanced a number of the REIT's key long-term strategic objectives and also produced solid operating results, despite the disruption and conflicting priorities caused by the COVID-19 pandemic. With deep relationships, best-in-class regional operating platforms and strong access to public and attractively private -- attractively priced private capital, the REIT is well positioned to continue executing on its strategy. We have almost $5 billion in capital available in our JVs to pursue new opportunities as they arise and expect to find both generational and opportunistic possibilities over the balance of 2020. I'll now ask the operator to open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Tal Woolley at National Bank.

[Tal Woolley, Research Analyst]

Just wanted to ask on the fee line this quarter. So like from your disclosures, you've billed about $11 million in the first half, and you sort of continue to guide into that $35 million run rate. So should we be expecting that fee income to significantly increase in the back half of the year?

[Paul Dalla Lana, Chairman & CEO]

Tal, it's Paul here. Yes, I think that's right. The major difference in the -- a little bit the first but more the second quarter to prior years was slightly less transactional activity. And obviously, with the completion of our European JV and the related Seed Portfolio as well as plans for our U.K. JV, likely expect to -- through the balance of the year, we do see meaningful activity levels coming. So I think a lot of that already booked and planned as well as some pretty near-term items that we expect to add to the mix. So very much, yes. Shailen, I don't know if you'd add anything to that in terms of more precision?

[Shailen Chande, Chief Financial Officer]

Yes. Paul, I think that's fair. The other comment I'd just add there is you would note that on a year-to-date basis, the proportion of base fee income has actually increased quite materially and really coming out on the back of significant deployment of capital in the latter end of 2019 and early 2020. As we look forward through the remainder of the year, we expect that activity-based income to start to -- help to start to restore to 2020 -- 2019 levels.

[Tal Woolley, Research Analyst]

Okay. And then on Page 30 of your investor update presentation, you sort of outlined how you come to -- you sort of do a -- you provide a chart, breaking down how you see the valuation of the manager changing from about $275 million in Q2 2019 to pro forma all of the future transactions on the come to about $725 million. Can you just walk through how you arrive at the $725 million? What's sort of the valuation approach that you're using to get there?

[Shailen Chande, Chief Financial Officer]

Paul, happy to jump into that if you'd like.

[Paul Dalla Lana, Chairman & CEO]

Please.

[Shailen Chande, Chief Financial Officer]

Great. Okay. Yes, Tal, thanks for calling this out. And clearly, the growth of the asset -- our global asset manager has been a very significant component of the business over the last 12 to 18 months. If we look back about a year ago at Q2 2019, the business had about $3.5 billion of committed AUM into JV initiatives, and that was underlying the $275 million valuation pinned on about $35 million of stabilized fees. As we look through our Q2 2020 valuation, which I'd highlight is $525 million, that's really a function of very substantial increase in AUM year-over-year from that $3.5 billion to about $8.4 billion of committed facilities today in respect to both our Australian core hospital JV, our investment in the Vital platform as well as the European JV of $3.1 billion. So the real growth in the -- year-over-year in the -- I mean in that valuation has been driven by underlying increases in AUM and an increase in stabilized fees from about $35 million to $60 million. As I look through the valuation metrics that we think about that underpin that $525 million valuation and the $8.4 billion AUM, it's really looking at our stabilized fees, applying, I'd say, a market-based EBITDA margin against those fees, which we'd estimate to be between 60% and 70%, and then a valuation multiple that we believe is conservative in the context of perpetual JV relationships in the range of 13 to 15x on the multiples side. So that gets you to the current valuation of $525 million. The further growth to $725 million that you called out is really layering in, I'd say, the current initiatives that we've spoken to, both around expanding our existing and potential new Australian JV relationships and then also growing -- leveraging our current portfolio in the U.K. into a broader U.K. health care fund. So we do see path over the near term of growing our AUM from $8.5 billion to about $12 billion and, thereby, increasing related fees and EBITDA to drive that further $200 million of growth.

[Tal Woolley, Research Analyst]

Okay. Great. That's helpful. And then just on your collections, too, just to make sure I'm comparing these right to some of the other names I cover. So you quoted a 97%-ish collection rate that was taking deferrals into account. So if I think of like as a percent of billed rent, it looks like it might be around 93%. Does that square with your math?

[Paul Dalla Lana, Chairman & CEO]

Shailen or Peter, did you want to speak to that?

[Shailen Chande, Chief Financial Officer]

Yes. Tal, I can take that at a high level. Yes, it does. In terms of our overall quarter cash collections, if you want to think about it that way, we came in -- I mean just over 90%, and then with about 3% or 4% attributable to deferral arrangements on a consolidated basis, which, as we know and per Paul's introductory remarks, relate primarily to the Canadian and Australasian portfolios where we've engaged with 379 tenants or so, representing 4% of gross rent in formal deferral arrangements.

[Tal Woolley, Research Analyst]

Okay. And then I guess, you've talked about wanting to take advantage of generational or opportunistic deals that could materialize through this period. Safe to say that we should be expecting the majority of your acquisitions going forward to really come via the joint venture -- or should be fed through the joint ventures in that you're probably not going to be taking 100% of assets under your own balance sheet that much going through this period. Is that the goal here?

[Paul Dalla Lana, Chairman & CEO]

Correct. Yes, that's very much the plan.

[Tal Woolley, Research Analyst]

And has there been any thought to -- like Canada is sort of the only place where you're not running JVs like this. Has there been any thoughts to like maybe employing the same strategy you've employed around the world with the Canadian assets?

[Paul Dalla Lana, Chairman & CEO]

Yes. Tal, a lot of thought. I think as you'll have noted, I think we have prioritized Europe, I think, very much coming into the year. And so certainly, now the Europe and U.K. is our near-term focus. But I think as we look down the line, we see this model being suitable in all geographies. And so certainly, as we start to think about the Americas, which is the only geography now without any JV arrangement, it will be very much a key focus for us in 2021.

[Operator]

The next question comes from Chris Couprie from CIBC.

[Chris Couprie, Research Analyst]

Just following up on Tal's question regarding the kind of the generational opportunities. I'm assuming you're talking about Europe, is that right? And then just in terms of if we try to think about how competitive that process might be, given the success you and others have had in this kind of area, are there any more people looking at this space?

[Paul Dalla Lana, Chairman & CEO]

So a couple of things. I think we see opportunities in really generational ones coming around the world. I would just say that our focus, to the earlier comments, will be to leverage our existing JVs, which are both in Australia, New Zealand and now broadly across Europe. So I think we see good opportunities in all of those markets and certainly generational ones with our existing operating tenants and partners starting in each of those markets. So just call that out to -- for a level of precision. I think to build on themes, Chris, that we've mentioned earlier, I continue to see health care as coming relatively well positioned through this difficult moment. So our view is that if we look more broadly into real estate asset classes that there are a number of them that have significant challenges and certainly mid- to longer-term implications in front of them. And so when we talk to our investment partners, thinking about new health care real estate opportunities, it screens really well. And we've seen that with GIC most recently, but there are a number of active discussions that we're having with other partners that build on those themes. So I would think that if that's representative, yes, there are meaningful institutional partners and other types of capital investors starting to more seriously consider the asset class. I think that's not necessarily an entirely new theme, but one that's accelerating. But I think what many of those investors or even, in some cases, competitors lack are scale or the operating platforms that we have to be able to -- or relationships that we have to be able to deploy capital in the many ways that we do it. So while I think there's going to be more capital formation into health care real estate, I think we're still pretty well positioned to be able to offer the services and scale and the relationships to be able to execute well in each of our markets. So that would be a quick answer to it. But for sure, we are seeing the themes of health care real estate screening very positively across the market. And the good news is we're in big markets where there's lots to do, and we don't have to do everything to have meaningful opportunities. I'd call out, for example, Australia, where in our core JV, we've invested $2.5 billion over the last 18 months with our partner there, and we see a very similar trajectory looking forward, as an example, and we've got committed capital to do that. So those would be the general themes. And then now with Europe coming on and certainly with a pan-European mandate in front of us, we see many, many opportunities in each of our core markets, and we'll start to look at a number of adjacent markets as well. The U.K., as an example, we've just added to the mix in 2020. And already, we have a sizable portfolio there and a sizable set of relationships that I think offer the ability to build on. So those are themes that we're focused on as we look down the line. But yes, the big trend, for sure, is that I think as an alternative asset class maybe perhaps becoming mainstream, we're starting to see health care screen pretty positively across the investment universe out there, and so lots of people thinking about it.

[Chris Couprie, Research Analyst]

Okay. And then just two quick ones. Number one, the upsizing of the European Seed Portfolio, can you just maybe talk to kind of how that timing came about? And then just second, just from a maintenance perspective, the sequential change in the Canadian NOI, is that basically all parking revenue?

[Paul Dalla Lana, Chairman & CEO]

Okay. So two quick themes. To the European JV, yes, so very much building on my earlier comments, our mandate broadened over the course of our discussions. And as we worked through the market-related -- the market-specific education and onboarding process, we agreed to add our Netherlands portfolio to the mix, which is quite complementary to the original German portfolio that we had identified. So that happened quite naturally, and I think really just builds on those bigger themes that I said that investors are looking for bigger and broader strategies, or at least the ones that we're talking to. So it lined up nicely with what we were hoping to achieve. So I think that's specific to how that Seed Portfolio grew. Timing is -- I mean we are in closing right now. So I think in reality, it's really just customary conditions, and we expect it to close broadly in Q3, nothing exotic about that. So that's pretty much locked in at this point. Moving back to Canada, yes, the vast majority of the Q2 sort of revenue miss, if you will, was around that variable income stream, in particular the parking in a small number of our tenants that are service-oriented, like cafés and other things. So I think not a surprise when for a period of time, there wasn't as much activity happening in our buildings. That level of activity has already started to pick up significantly as things have started to reopen, and so we're seeing a very quick return to traditional levels. And certainly no permanent dislocations in our Canadian portfolio or others, in either Germany or Australia where we have multi-tenant properties. They are fully back up and running at historical levels of activity. So we have a pretty quick and sharp recovery.

[Operator]

The next question comes from Sairam Srinivas from BMO.

[Sairam Srinivas, Associate]

I mean, first of all, congratulations, guys. This was a tough quarter, and you guys obviously accomplished a lot of things on a strategic initiative, so congrats on that. My first question was primarily on the London hospital portfolio. Does this portfolio have any brownfield opportunity in terms of development?

[Paul Dalla Lana, Chairman & CEO]

Yes. I think developments in London and expansion in London is always tricky. So certainly, there are a number of planned capital expansions that we're aware of. And I think we're just starting to get our EQ up around the operator and their plans and priorities going forward. But certainly, we could see, and we've historically guided that sort of 5% to 10% of our portfolios typically are in some form of brownfield expansion, and I would expect that those metrics, again, subject to London planning, if you will, would be quite consistent. And as we are starting to see the emergence from some of the pandemic restrictions and, in particular, how the NHS is encouraging public capacity and all of the existing private capacity -- or public demand, I should say, and the backlog to be channeled through a number of our operators, we think that, that will add to that theme. So I think starting off, certainly, 5% to 10% expectation, which is consistent across our portfolio, is probably a good starting point, but we'll be working to refine that. And if anything, it might end up on the bigger side, given that NHS moment and some of the backlogs and the plans to work through the private system as we see it. So those would be a couple of themes there.

[Sairam Srinivas, Associate]

Got it, Paul. That was really great. And I'm looking at the cap rate. I know -- like you guys disclosed it's about 6.2% on this, and then broader portfolio, I guess, is at about 6.5%. And I know you mentioned in the presentation that the market is around 5%. So when you do end up transferring this portfolio to the JV, would that be at market rate, or would that be at the rates you acquired?

[Paul Dalla Lana, Chairman & CEO]

Yes, very much at market. And yes, we do see some nice value-creation opportunities into the portfolio. I think it's one of the reasons that we took the chance to invest at this moment in this specific portfolio. And those are certainly near-term focuses for us as we see, again, all of these themes play out and, certainly, high interest, in particular, in London hospitals and the demand and opportunity trends there.

[Sairam Srinivas, Associate]

That's awesome, Paul. And I think, finally, probably drilling back to COVID-19 and the impact it's had on the MOB side, do you think it's going to probably have an increase in terms of, like, cleaning expenses or any pandemic-related expenses that we should be providing for in the future?

[Paul Dalla Lana, Chairman & CEO]

Yes, we do, of course. And I think we've been able to manage sort of between slightly lower activity levels, at least in the quarter, and perhaps coming through the operating expense line to date with the plan that those will increase as we look through the balance of the year and into next year in order to accommodate for traffic flows. I'd call out, though, that the vast majority of our leases and 99.9% of our revenue is on a net basis. And so even with slightly rising costs, most of them will be passed through to tenants as part of that. So obviously, delivering leasing efficiently and for value is the area of focus for Northwest as we think about that. And we have a strong history, I think, in being able to deliver relative value throughout our operating business, which, as you know, is a very significant part of the Northwest platform with in-house property and leasing and asset management, amongst other things. So yes, we're quite focused on that and making sure that our tenants are able to operate at the highest levels of throughput safely, I guess, as we exit sort of the COVID moment.

[Operator]

The next question is a follow-up from Tal Woolley at National Bank.

[Tal Woolley, Research Analyst]

I just had a couple of quick questions about credit markets, too. I don't know, Shailen, perhaps you can speak to this. Any big changes in your various markets in terms of, like, credit availability from before the pandemic to after?

[Shailen Chande, Chief Financial Officer]

Tal, yes, I'd give you just a general comment to that, which would be no. I'd highlight that we were able to refinance all of our 2020 debt maturities as planned, I would say, in our initial budgets in a pre-COVID environment. While we did, at the early onset of the pandemic, see credit spreads widen out a little bit, we found the availability to be -- the markets to be quite liquid. And if anything, spreads, specifically post quarter end, we've seen tighten up to kind of where they were prepandemic. And then, obviously, in the broader backdrop in the macro environment with overall reducing base rates in, you might say, every region globally, we've, if anything, seen a slight tightening of overall borrowing costs.

[Tal Woolley, Research Analyst]

Okay. And I think it was late last year, you were sort of starting to talk about targeting the ability to issue unsecured debentures. Can you talk at all about sort of where you stand on that process? And what are the numbers you kind of think you need to hit on the balance sheet side for the rating you want to get?

[Shailen Chande, Chief Financial Officer]

Yes. Thanks, Tal. And I'd highlight that our strategy very much remains intact around achieving investment-grade metrics. We view entry level into BBB low ratings around that sub-50% loan-to-value. But perhaps more importantly, given the importance of management fee streams in our business at about 8x proportion net debt to EBITDA, we'd highlight that as we progress throughout the year on our various initiatives, including the completion of the sale of the European Seed Portfolio as well as the launch of the U.K. JV and seeding of that portfolio, we very much see our metrics tracking to those 2 targets. In terms of where the discussions sit today, we're very much at the early stages of those discussions, looking for our numbers to track a bit more tightly to those specific targets and then commence a more formal discussion.

[Operator]

There are no further questions. You may proceed.

[Paul Dalla Lana, Chairman & CEO]

All right. Thank you, operator. I think that's all from Northwest for this Q2 2020 conference call. So I wish everyone a good day. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Enjoy the rest of your day.