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's Second Quarter 2023 Results and Conference Call. [Operator Instructions] This call is being recorded on Friday, August 11, 2023. I will now turn the conference over to Craig Mitchell, Interim CEO. Please go ahead.

[Craig Mitchell, executive]

Thank you, operator, and good morning, everyone. Thank you for joining us. My name is Craig Mitchell, Interim CEO of NorthWest Healthcare Properties REIT. Joining me is Mike Brady, President; and Shailen Chande, our Chief Financial Officer.

Before I get into the quarterly earnings, I want to preface this discussion. As you know, this is my first analyst call as interim CEO and Mike's first since becoming President. The REIT's trustees announced our appointment earlier this week as part of some key decisions regarding the REIT's future direction. The goal is to unlock NorthWest's value in response to changing market dynamics. We also announced that Paul Dalla Lana has stepped away from the Board of Trustees and has resigned as Chief Executive Officer to focus on initiatives at NorthWest Value Partners, the REIT's largest shareholder.

As the Board acknowledged, we thank Paul for his leadership and invaluable contributions to NorthWest. From establishing the REIT to taking it public in 2010, instituting operations across 4 continents, Paul has built the foundations for this business. The changes announced on Tuesday are important in our progression as a publicly traded REIT. I joined NorthWest in 2018 as CEO for Australia and New Zealand and a member of the Global Management Team. I was named President in 2020 with a focus on funds and operations, have more than 20 years of experience in the real estate sector.

[Michael Brady, executive]

Thanks, Craig. Mike Brady here and most of you know me. I've been with NorthWest since 2006 as Executive Vice President and General Counsel. I have extensive experience in real estate investments and finance, transactions, global leadership, governance and legal matters.

To that end, I'd like to point out that we make forward-looking statements defined under Canadian Securities Law during today's call. 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 you to all the disclaimers and risk factors outlined in our public filings.

[Craig Mitchell, executive]

Thanks, Mike. With that, I want to touch on a few highlights from our earnings this quarter. Our global portfolio of Healthcare Real Estate continues to differentiate itself from the broader commercial real estate landscape, with 83% of our leases subject to indexation and delivering strong SPNOI growth of 5.1% from a stable cash flow profile that is highly diversified and supported by 96% occupancy and a weighted average remaining lease term of approximately 14 years.

Adjusted funds from operations, AFFO, per unit decreased from $0.20 in Q2 2022 to $0.13 in Q2 2023 as a result of lower management fees and an increase in interest expense related to floating rate debt. Adjusting for the nonrecurring component of management fees, AFFO would increase to $0.15 per unit for the quarter. Globally, our businesses are stable and growing. I'm going to go through each one.

Canada. We're on plan with portfolio occupancy remaining stable at approximately 89% and seeing our variable revenues, particularly through parking, continues [indiscernible] towards pre-COVID levels. In the U.S., our team has successfully integrated the assets acquired approximately 1 year ago and we'll continue to work closely with all our tenants. Europe continues to perform well with occupancy and weighted average lease term stable at 97% and 15 years, respectively.

In Brazil, we're on plan with steady 100% occupancy and continued strong constant currency SPNOI growth of 6.4%. Operationally, the REIT's major tenant in Brazil, Rede D'Or, continues to deliver strong results and is among Brazil's top 10 companies and market capitalization. And finally in Australia and New Zealand, our largest market, occupancy remains steady at nearly 100% and delivered constant currency SPNOI growth of almost 5% with a weighted average lease term of 16 years.

The takeaway is that NorthWest's resilience in a challenging environment of rising interest rates and inflation is evident. There is much to build on and I intend to bring an operational focus as interim CEO. Our strong fundamentals, our evolution as a global asset manager and specialized expertise in healthcare real estate underscores our position of strength. And now I'd like to turn it over to Shailen to provide the financial results.

[Shailen Chande, executive]

Thanks, Craig, and good morning, everyone. I'm pleased to provide a few updates for you this morning. From a balance sheet perspective, at June 30, 2023, the REIT reported debt to gross book value, including convertible debentures of 50.8%. I want to emphasize that strengthening the balance sheet is a high priority for the REIT and we are taking steps to do so. As of today, August 11, 2023, the REIT has refinanced 91% of its 2023 debt maturities and increased its exposure to fixed rate debt to 66%. It has a weighted average interest rate of 5.1%.

Post quarter end, the REIT enhanced liquidity by $175 million by finalizing a new $50 million nonrevolving credit facility and extending the maturity of its $125 million revolving unsecured credit facility by 1 year to November 2024. The REIT remains constructive on the long-term demand factors that drive value creation in Healthcare Real Estate, and with $5.8 billion of available fee-bearing capital, it is well positioned to execute new investment opportunities while remaining disciplined in its capital allocation strategies.

The REIT remains highly disciplined for capital deployment, and as a result, in Q2, acquisition volumes were muted. That said, the health care real estate market continues to adjust to the rapid change in global interest rates over the last 12 months with bid-ask spreads beginning to converge and transaction volumes increasing. And with that, I'll pass it back to Craig.

[Craig Mitchell, executive]

Thanks, Shailen. So to close, NorthWest remains committed to delivering value for our unitholders. The decisions announced earlier this week and the solid foundation we have built are essential steps in unlocking the significant value of the REIT. With deep strategic relationships, excellent regional operating platforms and strong access to capital through existing commitments, the REIT continues to be a leading global healthcare real estate investment manager. And with that, I will now ask the operator to open for questions.

[Operator]

[Operator Instructions]

Your first question comes from Mike Markidis from BMO Capital Markets.

[Michael Markidis, analyst]

Craig and Mike, it's a pleasure to speak with you for the first time on the call. Just with respect to the key changes that were announced earlier this week, and Craig, you gave us some pretty good color with respect to the thought process there. But I'm not sure if you can answer this, but the changes that were made at the management and the Board level, was this part of a normal sort of succession planning? Or was it a response -- in response to anything in particular?

[Craig Mitchell, executive]

Thanks for that question, Mike. Look, as you know, due to confidentiality, I really can't elaborate further than what we announced in August 8. I'm happy to go through the 3 major points on the August 8 announcement but you've got that.

[Michael Markidis, analyst]

Okay. No, that's fair, that's fair. And I guess there's no mention -- you mentioned that you guys are -- continue to look at strategies to surface the value in the U.K. portfolio, but the press release and your comments didn't mention anything with respect to the U.S. recap. Is it safe to say that, that's on hold pending the strategic review at this point or is it something that continues to be a priority for the REIT?

[Craig Mitchell, executive]

I'll just pass on to Shailen for that.

[Shailen Chande, executive]

Yes. Thanks, Mike. I guess as the Board has assembled this strategic review committee, it will look to examine all options available to the REIT. Nothing specific to the U.K. JV to announce at this time.

[Michael Markidis, analyst]

Okay. Now with respect to the nonrecurring management fees, thanks for highlighting that in terms of the -- adjusting for that, that would be a $0.02 impact. Perhaps you could give us a little bit more color as to what's that related to. And maybe I don't know if you're able to give us any guidance in terms of where you see total fees playing out on a full year basis, Shailen.

[Shailen Chande, executive]

Yes. Thanks, Mike. I'd call out that in respect of the management fee reversals over the course of Q2, those amounted, as you noted, to roughly $8 million or so as disclosed in the MD&A. You might recall that last quarter, we had an increase in project acquisition and other fees. And on a year-to-date basis, we look at that number as being stabilized, given the reversal this quarter.

In terms of stabilized asset management fees, I'd really take you to the base fee that we report and calling out that, that's underpinned by $5.8 billion of committed fee-bearing capital. As we know, project and acquisition fees can be lumpy, so it's hard to give guidance there.

[Michael Markidis, analyst]

Okay, perfect. Last thing from my end is just the cash that you disclosed in the MD&A. I think it's $60-some-odd million, $68 million. How much of that is at the corporate level as opposed to potentially being trapped within a [ sub ]?

[Shailen Chande, executive]

Yes. I'd call out and maybe refer you to our supplemental, which does break that out by region, although maybe I mean, the more substantive issue there is that the cash that the REIT has on a global basis is accessible by the REIT with the exception of the fact that we consolidate Vital and that is a separate independent entity. So there's not really any substantive difference as to whether the REIT's cash sits at the corporate level or in any of our regions.

[Michael Markidis, analyst]

Okay. And without having a chance to look at the details, is any of that $68 million within Vital or is $68 million the full amount that's available to you?

[Shailen Chande, executive]

I need to go back and check the supplemental. We're happy to come back to you over e-mail on that.

[Operator]

Your next question comes from Tal Woolley from National Bank Financial.

[Tal Woolley, analyst]

Shailen, I'm wondering, you mentioned that the REIT's focused on getting to a strong balance sheet. What's sort of the metrics near term that you would put around -- you would put on leverage and stuff like that to define, like what you would consider strong?

[Shailen Chande, executive]

Yes. So Tal, I'd really say, I mean, as you know, the REIT's current debt to gross book value is circa 50% on a consolidated basis and circa 58% on a proportionate basis. That's higher than where we'd like to see it longer term. We've historically guided to circa [ 45% ] on a consolidated basis. And as we consider our strategic review and as the Board engages on that, we'll be announcing to the market our initiatives and target balance sheet metrics.

[Tal Woolley, analyst]

Okay. And then I'm just wondering with the active joint ventures, like do you have a sense of what kind of acquisition volume you're looking at? Because I'm just wondering how you're going to be able to finance keeping up with the JVs and, at the same time, trying to get the leverage ratios down.

[Craig Mitchell, executive]

It's Craig here. I think the joint ventures in the current market with a bid-ask spread quite wide, I don't think you see much transactional volume coming out of the joint ventures from other party.

[Tal Woolley, analyst]

Okay. And then was there any -- I don't know exactly know the sequencing of events, obviously heading into the release today. But like in terms of the border view, was there any discussion around the distribution rate this quarter? And then as you guys take over, what is your feeling about where the distribution rate should be?

[Shailen Chande, executive]

Tal, so I'd call out that we did announce the distribution for August today. And we continue to review and improve distributions on a monthly basis. We'll continue to update the markets as planned.

[Tal Woolley, analyst]

And Craig, would you -- do you think the current rate is the right number for the company? Or would -- because obviously, it's one of the ways that you could create a little bit more breathing room for yourself on the balance sheet.

[Craig Mitchell, executive]

Look, I think it's -- the committee is just being formed and we just go through our due process with the committee.

[Tal Woolley, analyst]

Okay. And I appreciate this all came together very quickly. But one of the things that wasn't mentioned in the press release earlier was this is an interim appointment. Is the Board's intention to run a process or like can you just sort of give an idea for investors about how you're looking at that longer term?

[Craig Mitchell, executive]

Yes. I think with best governance practice, the Board needs to go through a search. That's why my appointment is interim. I put my hand up to be permanent and we'll see how that goes.

[Operator]

Your next question comes from Robert Novoselac from Solomon Investments.

[Robert Novoselac, analyst]

I'm just wondering sort of a similar question that was already sort of covered about the AFFO payout ratio. I'm just wondering or maybe it has to wait until the strategic review's over. But in order to get that back in line, I'm wondering what the thinking is there, whether the AFFO was expected, do you expect it to increase? Or you may have to reduce the distribution or a little bit of both? I'm just kind of wondering how you're going to bring that payout ratio back into line.

[Shailen Chande, executive]

Yes. Thanks, Robert. I would call out that as you've noted, it is something that is under consideration as part of the strategic review. And I'd reiterate my earlier response that we did announce the distribution for August today and we continue to review and improve distributions monthly.

[Operator]

Your next question comes from Dean Wilkinson from CIBC.

[Dean Wilkinson, analyst]

Shailen, just an accounting question. When you book the project and acquisition fees, what's the trigger that would have you put those into the P&L? And the reversal of that, was that the U.K. JV? Or just some clarity around kind of what happened there and how you deal with that from an accounting perspective.

[Shailen Chande, executive]

Yes. So we're going to get into the details of IFRS rev rec, which I don't wish on anybody. But I mean, I think it's really a probability test that we apply against accruals on management fees. In respect of the specific fees accrued in Q2, you're right. In the Q2 MD&A, we did attribute those to the acquisition of project fees to the U.K., and that is the reversal that came through in our Q3 -- or sorry, Q2 results. So Q1 is where we did accrue them. So I think that covers the crux of the question, but it was ultimately a probability test in Q1 and then in Q2 related to our earlier announcements in respect to the termination of the U.K. JV.

[Operator]

Your next question comes from Sairam Srinivas from Cormark Securities.

[Sairam Srinivas, analyst]

Craig, just going back to your comment on widening bid-ask spreads, how should we be looking at that from your disposition program perspective? Like does that kind of cause a bit of a delay in going through the [ $340 million ] of dispositions? Or is that something which you're comfortable kind of running through the year?

[Craig Mitchell, executive]

No, we're comfortable. We've chosen the assets carefully. We know the markets, and going by region, we're pretty comfortable. You can see we've been pretty successful to date and that's in the results in Q2. I think it's nearly 50% either settled or under letters of intent to give you a sense. And I think the other point is in line with our book value.

[Sairam Srinivas, analyst]

All right. No, that's good to know. Just probably on that, in terms of the buyers who are actually acquiring these assets, can you just give some color on what is the profile of these buyers? Are they more institutional funds or are they more individual operators?

[Craig Mitchell, executive]

Look, I'll just pass you over to Mike for that one.

[Michael Brady, executive]

Yes. So I mean, there are different counterparties depending on the region. And to date, we're finding that they tend to be regional, local operators, well-respected operators in those specific regions.

[Operator]

[Operator Instructions] The next question comes from Mike Markidis from BMO Capital Markets.

[Michael Markidis, analyst]

Just a quick follow-up for me, guys. One of the great features about NorthWest is that the fund structures that you have outstanding have perpetual life terms or very long life terms, I think, in the case of one of them in Europe. I'm not sure if you can answer this, but with respect to those asset management agreements, is there anything in there that would preclude or be an impediment to a change of control at the manager level?

[Craig Mitchell, executive]

Craig here. I'm going to pass over to Mike, but I think the simple answer is no, but I'll pass it over to Mike.

[Michael Brady, executive]

Yes. Mike, I mean, those agreements are subject to confidentiality restrictions, but I concur with the high-level assessment that Craig has made.

[Operator]

There are no further questions at this time. I will turn the call back over to Craig Mitchell, Interim CEO, for closing remarks.

[Craig Mitchell, executive]

Thank you, operator, and thanks, everyone, for your time this morning. Shailen, Mike and I will say [indiscernible] one-on-ones and looking forward to seeing you in person early next week. Thanks for your time. Talk to everyone soon. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.