Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties Real Estate Investment Trust Q4 2023 results and conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. 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's Q4 and 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 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 seven months. We firmly believe in the resiliency and outlook of the healthcare real estate sector. With an institutional quality portfolio and a newly appointed management team, we've been proactive in strengthening our business. In August 2023, we identified opportunities for value creation and implemented a plan. Firstly, to refinance several near-term 2023 and 2024 debt maturities. Secondly, to sell select assets, including non-core 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 distributions to ensure that it is sustainable. And finally, further strengthening our governance and our management. We successfully completed all these 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 healthcare real estate portfolio that is performing well in a sector that is positioned for resilience and growth. It is important to highlight that the challenges that we have faced as a 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 valued over CAD 450 million, including non-core investment properties and investment in Australian Unity, with the proceeds used to pay down debt. Furthermore, we amended, extended, and repaid total debt facilities valued at over CAD 1.4 billion with 2023 and 2024 maturities. These initiatives underscore our commitment to fortifying our financial position for sustainable growth.
The 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 rate supported by a 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 a positive 2.5%, Europe a 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 investors 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. Now I'd 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 non-core 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 five additional properties at a 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 investment in unlisted securities, generating $134 million, and continued 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 REIT 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 and 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 four-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, two new trustees were appointed to the board in January, Bobby Julien and Graham Garner.
We welcome Bobby and Graham and appreciate their contributions to the board. Concurrently, we announced the retirement of Robert Barron 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 three months and year ended December 31st, 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 rates 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 31st, 2023, compared to 5.35% as in December 31st, 2022. Combined with adjustments to investment property fair values, the REIT had a net loss for the three months and year-ending December 31st of CAD 189 million and CAD 481 million, respectively. This is compared to a net loss in Q4 of 2022 of CAD 136 million and net income of CAD 126 million for the full year 2022. Adjusted funds from operations, AFFO, for Q4 2023 was CAD 0.13 per unit. This compares to CAD 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 CAD 0.13 per unit includes premiums on interest rate caps that expired during the Q1 of 2024, and this contributed CAD 0.04 per unit to AFFO during the Q4 of 2023. On November 27th, 2023, holders of NorthWest CAD 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 31st, 2023, the REIT had mortgages and loans payable of CAD 3.6 billion, down from CAD 3.8 billion at the prior year-end. In the first three 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 CAD 125 million of its revolving corporate debt from 2024 to 2025 and CAD 172 million of its debt from 2025 to 2027.
Earlier this week, Vital Trust extended the weighted average term to maturity to approximately 4 years on CAD 430 million in term debt, of which CAD 177 million were maturing in 2025. The extensions are approximately at the same weighted average interest margin as current financing. Looking ahead, we 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 unit holders. Secondly, continue to surface embedded value from within our portfolio. Thirdly, to continue to strengthen our executive team while at the same time managing our G&A. Then, continue to improve our investor 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.
Finally, continue to simplify our geographic footprint and 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 unit holders, and the decisions announced this quarter and the solid foundation we're building are essential steps to unlock the significant value of the REIT and to maximize value for all our unit holders. 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.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press Star followed by the number 1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press Star 2. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Your first question comes from the line of Sairam Srinivas from Cormark Securities. Your line is now open.
Thank you, operator. Good morning, everybody. Team NorthWest, congratulations. I think it is 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 America so far, can you give us some color in terms of the geographic contribution of each of these dispositions between Brazil, America, and Canada?
Oh, sure. And I just hand over the mic to answer that question?
Yes. Hi. So the breakout is 4 in the Americas and 10 in Australasia.
No, Mike, my question was more in terms of between the Americas. Were they more in Brazil versus the US versus Canada?
Within the U.S. and Canada.
All right. 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 one instance, a local developer.
All right. I'll turn it back. Thanks so much.
Your next question comes from the line of Pammi Bir from RBC Capital Markets. Your line is now open.
Thanks. Good morning. Can you maybe just talk about, in terms of the disposition outlook for the course of 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. But I think the first thing is we are very focused on dispositions of non-core 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 firm. 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 update on that front there?
Yeah. So as we've disposed of 63% of the portfolio as of December, in the first two months, we disposed of another 7%. So we're now 70% disposed. We've got about CAD 60 million left. We would expect that to be the first half of this calendar year.
Okay. And then just on the, I want to come back to the premiums, the CAD 11 million and, I guess, the premiums on those interest rates that you adjusted for and had to hold 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.
Yeah, 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 CAD 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 CAD 0.09 per quarter, which is consistent with Q3. We ripped out caps in Q3. It's CAD 0.09 as well. It's probably the key underlying number to be focused on.
Yeah. Yeah. So that CAD 0.04, that adjustment disappears in Q1 effectively.
That's exactly right.
Yeah. Okay. And then just last one 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 expecting it to get renewed or any concerns?
Yeah. So look, I might take that. I was actually in São Paulo in late January. That Sabará is a 16-story children's hospital, actually. It's a very full, very, very active hospital, good rent-to, EBITDA margins. The lease expires in October. We are in active negotiations as we speak. So I would expect there will be a renewal there. Yes.
Thanks very much. I'll turn it back.
Ladies and gentlemen, as a reminder, should you have any questions, please press Star 1 on your telephone keypad. Your next question comes from the line of Himanshu Gupta from Scotiabank. Your line is now open.
Thank you and good morning. 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've 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 CAD 125 million is now 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, you talk about next year, which is obviously a very big year. If I look at Americas and 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. To the ones you specifically mentioned, those facilities are asset-backed, and we do expect to be able to refinance them.
Okay. Okay.
So, Himanshu, this is Craig here. So this is a big, big focus of us. You can always see in the first two months of this year, we're financing 28% of the non-mortgage debt. So you're right. Our big focus is not so much 2024 expires; it's really the first half of 2025.
Got it. Okay. Craig, for example, if I look at the Americas, the expiring rate of debt is like 8.19, call it 8%+. Do you think the renewal rate is likely to be higher than this or very similar to this?
Karen, do you want to talk to the margins embedded?
That's right. Yeah. So do you see further headwind when you renew this debt next year based on what you're seeing right now?
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. If you look at Vital Trust as an example, it's nearly CAD 500 million worth of refinances we just did in the last two 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 focus for repayment of that high-cost corporate debt.
Got it. Okay. If we are not successful in selling the Brazil or the U.S. portfolio, so do you see that the Americas and Europe getting renewed at kind of similar margins, as you mentioned?
That's exactly right.
That's correct. Okay. Okay. Fantastic. Okay. So thanks for that. And maybe just turning to the same property and NOI growth, I think pretty strong this year, almost touching 4% there. So my question is that, especially in your US portfolio, are there any tenants on the watchlist, or how are your tenants performing in your US portfolio specifically?
Yeah. 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've only got 4.2% of the portfolio expiring in calendar 2024. And we talked about Sabará lease is a big part of that. But we are seeing increased profitability across the business at different speeds. I'd say the U.K. is performing very well. Australia is coming off a low base, and we're getting good collections out of our U.S. portfolio. Particularly focused in our U.S. portfolio is more medical office buildings rather than hospitals. And again, good collections in Brazil as well.
Awesome. Okay. Maybe just one last one. I think in January, those Class B Units were converted into the trust units. Any color on that?
Mike, maybe just talk about the simplification of that for us. But hand it to you , Mike?
Okay. Those Class B Units were owned by one investor, and they exercised their rights pursuant to the declaration of trust. Very simple transaction, exchange Class Bs for regular trust units. It does simplify things for us because that now extinguishes all outstanding Class B Units.
Okay. Fair enough. Okay. Thank you, guys. I'll turn it back. Thank you for the call.
Thank you.
Thank you. Your next question comes from the line of Matt Kornack from National Bank Financial. Your line is now open.
Hi, [inaudible]. 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, at least 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 to what we saw this year?
Yeah. Yeah. So Matt, Craig here, you're right. Not a lot of lease expire profile. We saw very high retention in our Canadian portfolio at 83%. The leasing spreads market equals passing effectively. So you're not going to see any positive or negative reversion on the leasing spreads. So I think we'll see indexation. Indexation, obviously, is tapering down from 2023 to 2024 as the economy slows, but you're still going to get that positive growth. So I still expect it to be north of 3%.
It's not a huge driver because of the nature of your leasing profile. Is your view that market rents, if indexation comes down, potentially outstrip the growth, and you'd get more on turnover leasing? Or should we expect that the portfolio is going to 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. Then just on capital allocation and 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 limiter to tax in affecting our tax-deferred. Of course, we do manage that carefully, and we do take that into consideration, but I don't see that as a limiter in any way.
Okay. Great. Thanks, guys.
Again, as a reminder, if you have a question, please press Star 1. There are no further questions at this time. Oh, we have one question from David Ellis from Research Capital. Your line is now open.
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%, right? So CAD 0.09 a quarter. If you strip out that CAD 0.04 interest rate cap we talked about, it runs at 100% of AFFO.
How do you see that going into the future?
Look, I see it's coming off a low base. We need to repay high-cost debt. That will drive earnings per share growth, and that will reduce our payout ratio to be below 100%, is how I see it.
Do you have a policy on where you want it to go or where you think it should go?
Look, yeah. It really should be sitting in that 80%-100% range where the policy should be. So we're at the higher end of the range. But then on the flip side, we're also coming from a very low base, which is why we set it at that CAD 0.36 annualized late last year. And we brought it down to that level.
Again, I may have missed that. You're still looking for any further asset sales?
Yes. Yes, we are. We are still looking for further asset sales. We transacted nearly CAD 500 million in the last year. We're still looking to do that to reduce leverage and bring down that high-cost debt of interest rates and also simplify geographic footprint.
Thank you very much.
Thank you.
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. 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. 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.