Earnings Call: Q4 2020

Mar 12, 2021

Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties REIT 4th Quarter 2020 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, March 12, 2021. I would now like to turn the conference over to Paul D'Aulana. Please go ahead. Thank you, operator, and good morning, everyone. Appreciate you joining us today. I'm joined today by Shailen Chande, The REIT's Chief Financial Officer and Peter Ragan, The REIT's Together, we are pleased to share with you our results for the Q4 of 2020. But first, I'd like to point out 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 direct all of you to the risk factors outlined in our public filings. For 2020, the defensive nature of the REIT's Healthcare real estate portfolio that is 97.1% occupied with more than 80% of its revenues Provided directly or indirectly by public healthcare funding has despite the impact of COVID resulted in strong operating results for the full year, including 5% AFFO per unit growth and 3.4% SP same property NOI growth 3% net asset value per unit growth, all on a constant currency basis. Rent collections remained strong throughout the year With 98.2 percent of the REIT's revenues on a proportionate ownership basis either collected or subject to formal deferral arrangements in Q4, which is an improvement of 67 basis points over quarter over quarter. As a result of the strong rent Collection and the underlying defensiveness of the REIT's tenant space, the REIT did not recognize any material provisions for uncollected rent and expects all deferred rent will be repaid in full. The approval and rollout of multiple COVID-nineteen vaccines is improving sentiment across the REIT's global markets. Regionally, the U. K. Is among the global leaders in Across Australia and New Zealand are lagging in terms of vaccination, but have been highly successful in terms of their containment strategies around COVID-nineteen. With those economies and our tenants and operations substantially returned to pre pandemic levels. General gas Trends coupled with backlogs built up during the global lockdowns are expected to drive elevated demand for healthcare services, which is perhaps most clearly demonstrated by the $160,000,000 fair value gain recorded by the REIT in the quarter. In our view, this increase is being driven by the relative outperformance vis a vis typical commercial asset classes and a growing acknowledgment Before continuing to discuss the results of the quarter, I thought it would be useful to provide some history And perspective on our business environment. Today, NorthWest is in the best position in its history, building expressly upon the strategy we've put in in 2015, in large part resulting from executing on key 2020 strategic initiatives, including expanding our global asset management REIT today has increased committed key bearing capital assets and capital from $5,000,000,000 to more than $8,800,000,000 today, Including the recently completed $3,100,000,000 European joint venture and a significant fair value gains. Importantly, Deployed Seaburn capital increased by 46 percent to $4,800,000,000 in 2020, providing the REIT with an additional $4,000,000,000 of available capacity Despite the impact of COVID-nineteen, The REIT executed on all of its 2020 strategic priorities, including finalizing The announced European JV with GIC and the sale of the related sea portfolio for $473,000,000 Completion of strategic Asset sales totaling $830,000,000 into REIT's fee bearing capital platforms and generating more than $280,000,000 of liquidity to Pursue further acquisition and deleveraging opportunities scaling the REIT's European platform with $732,000,000 of Including entering the U. K. Through 2 portfolio transactions totaling $620,000,000 including revaluation gains, Asset Center Management, the individual increased by 115 percent to $1,700,000,000 Driven primarily by to 48% at the end of 2020. Post quarter end, the REIT issued 17,000,000 units at $12.65 per unit, Raising gross equity of $215,000,000 which was used to repay corporate debt and further reducing leverage to 44.3 Leverage is expected to decline to sub 40% as the REIT executes on deleveraging activities, including The completion of an additional $5,000,000 to $25,000,000 private placement to Northwest Valley Partners as contemplated in the last And the conversion of the REIT Series V and Series S convertible debentures maturing in July December, respectively, which would reduce leverage by almost An additional 300 basis points. Both series of converts have strike prices in line with the REIT's current unit price and the formation of the U. K. Joint venture and sale At the REIT's existing assets into the JV, which will generate approximately $260,000,000 in net proceeds and reduce leverage by approximately an additional 300 basis points. For the quarter, our results were in line with our expectations, noting the above deleveraging, including annualized quarterly Adjusted funds from operations of $0.92 per unit on a normalized basis, implying a payout ratio of 87%. Earnings Net asset value also increased by 1% year over year to $13.27 per unit, driven by an increase in the value of the REIT's asset management platform and strong property revaluation gains was partially offset by a gain by a higher Canadian dollar relative to the REIT's foreign currency exposure. Over the past 12 months, we estimate the relative strength of the Canadian dollar has reduced annualized AFFO by approximately $0.03 per unit And net asset value by $0.32 per unit. In the context of a lower for longer Canadian interest rate environment, we expect these trends will begin to unwind in 20 Thank you, everyone, providing a further tailwind to the REIT's earnings. In terms of liquidity, the REIT is well positioned with $285,000,000 in Absent those previously announced initiatives we're focused on. This is expected to increase now to more than 3 $65,000,000 as the REIT cedes its current U. K. JV in 2021. Operationally, Our results reflected those expected from an expanded 188 property, dollars 7,800,000,000 defensive healthcare and infrastructure portfolio, Having mostly long term inflation index leases with leading healthcare operators. This strategy is reflected in the REIT's 2020 constant currency cash recurring SD NOI growth of 3.4%, largely driven by contractual rent indexation and underpinned by a 97% occupancy rate and a weighted average lease term of almost 15 years. In all regards, Segmentally, I note the following. In Brazil, we were on plan with steady 100% And continued strong constant currency cash SPNOI growth of 4.6%. Operationally, the REIT's major tenant, Rigidore, continues to deliver exceptionally strong results and in December 2020 completed an initial public offering raising more than BRL11.5 billion, $8,400,000,000 of which will be used to build and grow its business. The IPO valued the hospital chain at approximately $25,000,000,000 Pricing it among Brazil's top 10 companies by market capitalization. In Canada, we were also on plan, continuing solid performance With constant cash as recurring SPNOI growth of 2%, portfolio occupancy remaining stable at 92%. During the year, the REIT completed And I'll turn it over to you. In Europe, we are also on plan, performing as expected with constant currency SPNOI growth of 1.2% and occupancy increasing to 97.6%. As mentioned earlier, we increasing to 97.6%. As mentioned earlier, we continue to find good investment opportunities in Europe, allowing us not only to build scale and critical mass Included in that is with Vital, our business reported similar results with SB NOI growth of 4.3% occupancy at 99 percent to a weighted average lease term of more than 19 years. In Q4, Vital completed a $139,000,000 equity raise, 56,000,000 units of which the REIT acquired approximately 15,500,000 units and increased its ownership position to just over 26%. Also in Australia, as previously disclosed, the REIT together with a capital partner has entered into option agreements to acquire a strategic interest of approximately With a well of 16 years and 98 percent occupancy, agreements are subject to customary foreign investment approvals. Looking ahead, Aveda has identified a number of strategic priorities for 2021, included the deleveraging and the achievement of its investment grade metrics, Completion of its previous Xenafts UK JV, advancement of key strategic transactions including the SunTrustra of Uniti, building out And finally, we are considering new markets, including the U. S, but very close to finalizing its I am pleased with the progress made during the quarter, which advanced a number of the REIT's Key long term strategic objectives and also pretty solid operating results despite the COVID environment. With deep relationships, Best in class regional operating platforms and strong access to public and increasingly effectively priced private capital, The REIT is well positioned to continue executing on its strategy. I'll now ask the operator to open up the call for questions. Thank First question comes from Fred Blondeau at IA Capital. Please go ahead. Thanks and Good morning. Just a quick question from me in regards to Regador. It looks like they might grow quite a bit over the next 12, 24 months. Your focus this year is on the U. K. JV, but could you be tempted to focus a bit more on JVING, Brazil earlier or that will still be a 2022 focus? Yes, it's a good question. I think it is a focus of ours. I think, let's Just say late 'twenty one, early 'twenty two, we could see those initiatives coming together. And I think the environment there is very constructive for that right now, Both in terms of following the region to world, but also in terms of seeing other healthcare operator consolidation and And counterparty development for Northwest. So we remain constructive in Brazil and I think that would be It's just slightly behind these other initiatives that we could do. And how should we Reviewing your growth in Brazil in parallel to what Rigidor is trying to do here, at least for the next 12 to 24 months? Yes. Well, I think, I mean, again, the comments I would say is that Rejador is an exceptional business. They're really one of the best Healthcare operators that we've seen globally, frankly, and so and they have quite a unique business opportunity and that the market And Brazil continues to be highly fragmented and obviously has attractive fundamentals. So I think that strategy, we're We're a supporter of that strategy of continued consolidation and growth, and we see that happening not only with 3 jewelry, but also with Other potential counterparties, I think the challenge for us with Rigidor, of course, is that they've just raised a lot of capital And they're for as many of the sale leaseback type transactions that we've done with them historically is probably A little bit diminished, but their appetite is very strong to continue growing. We are seeing similar organizational opportunities. So I feel like we'll be able to find a fair number of high quality situations in Brazil. That's great. Thank you very much. Next question comes from David Rothschild, a shareholder. Please go ahead. Yes. Thanks for taking my question. I'm looking at your earnings announcement here. For the 3rd or the December quarter, what was the AFFO per share versus last I don't see it in here. I see the gross, but not the per share finger. Shaylin, would you like to respond to that? Yes. Can you give me 2 minutes? I'll just pull out the specific per quarter figure. Given it was an annual results, we disclosed per share our per share numbers were focused on our annual results And year over year that was at $0.85 per unit in 2020 versus $0.84 per unit In 2019, representing a 1% per unit increase in AFFO per unit in Canadian dollars, we'd also called out that we excluding the impact of foreign exchange that equated to roughly a 5% increase Yes, I guess I would like to compare quarter over quarter. I saw the yearly figure, but I didn't see how you did in last quarter versus a year ago. Yes. I'll take it in a couple minutes to pull out that number, so perhaps you can go offline. Thank you. Thank you. There are no further questions at this time. You may proceed. I do apologize. We just have a question that popped in from Tal Woolley at National Bank. Please go ahead. Hey, good morning, everybody. Just on the Australian Unity Investment, I apologize if you addressed this earlier in your comments, Is that private REIT like under officially under a strategic review right now or Because you sort of mentioned in your presentation that potentially a generational opportunity for you. And I'm just wondering how What the timeline kind of is on that investment and how we should think about it evolving? Yes, there's lots in that, Tal. So I think as always, it's a little bit difficult I'd like to talk about these sorts of situations, but as has been in the press, we can confirm that we've made Whether that concentrates a strategic review or not, I'm not sure. But clearly, it's that's The nature of our current engagement and we'll maybe just leave commentary beyond that to the press at this point, but I think we're certainly very focused on our next steps Okay. And just Shailen, in the same property NOI dialogue in the MD and A, I'm just looking at The sort of like the currency adjusted for non currency adjusted and you sort of you have a statement there saying that basically same property NOI For the quarter decreased by 19.3 percent in euros, but increased by 26.8% In Canadian dollars, and that does not jive to me with like the like that's a huge swing With respect to the currency not having moved anywhere close to that amount, like is there I'm just wondering if there's something else in there that I'm missing. Yes. When we disclose our constant currency same property NOI, there's a nuance there that it references a recurring Constant currency, same property NOI numbers, so that also adjusts for any non recurring items over the course of the quarter. So that Swing, you're right, doesn't represent only foreign exchange movement. It also includes the elimination of non recurring items. And I would call out that in Q4 annually within our European portfolio and specific to our German medical office building portfolio, So the Q4 traditionally has been a little bit volatile. I'm happy to go a little bit more detail with you on that specific catch up, but we do show We do have a breakout on a global basis what those nonrecurring adjustments are when we bridge from reported SP NOI to Cash recurring SP NOI. Okay. And then just going through your supplementary schedules too. So if I'm doing my math right, Proportionate debt to EBITDA based on your ownership value of various entities, that's running around 10.5 times trailing EBITDA, does that number jive with sort of your calculation? Prior to our equity offering, correct. And I would also take you to our and I think the specific number is just 10.06 net debt to EBITDA proportionately as of Okay. And then I know like this because there's been a bunch of transactions that you guys been working on over But there was some sort of chatter, I think sort of late 'nineteen, early 2020 about possibly looking to You used the Canadian unsecured market and trying to open up that channel of funding. Where does the company sort of sit on that right now? Yeah, I would say on the heels of our recent equity financing coupled with our planned UK JV And the natural conversion of our convertible debentures, our pro form a leverage profile will very much put us into, I'd say investment grade metrics where we'd see our pro form a net debt come into sub 8 times and then we do have a more formal bridge A reconciliation to that target. So we see our investment grade metrics as being a catalyst to both support What we believe is a reasonable equity valuation for our units as we achieve those metrics. And then as it As pertains to accessing unsecured capital, I think it really brings an additional tool into the toolkit to pursue some of the REIT's growth initiatives. Level finance within our JV structures where we have the benefit of the covenant of our capital partners. So it's really there's intention in the discussion as to whether we consider using Canadian unsecured finance versus extremely efficient Capital partner covenant asset level finance, but I think the real target right now is to get our metrics and our credit metrics into those investment grade parameters and then really start to bring that tool into the toolkit and to And that but that feels like something you could get to probably in 2021 if everything kind of hits right? I think that's very much our target. And as we look through our UK JV profile that Paul had mentioned in terms of completion in 2021, That's the real catalyst to put us squarely into those metrics. Okay. And then Paul, maybe you can just give a little bit more backstory on Why now considering the U. S. I'd like to consider the U. S. And sort of how you've been thinking about that market over the last several years and why you're now is the time to maybe Consider pushing in there. Yes, I think, Sure, Tom, that's a good question. I think just starting with the obvious that we know the business has matured in scale and capabilities To be able to look seriously at the U. S, it's the largest healthcare market, like Finjan Healthcare real estate market in the world. So it's certainly an obvious one. So I think those are the 2 big things. But I think we also see just in the moment, particularly sort of the COVID emerging moment, just some screening a little bit more opportunistically for us to participate. And so those three things taken together, I think kind of get us to a place where we can look at it. We've consistently looked at the U. S. Market since we started the business for reference points and just understanding the functioning The healthcare industry, as I said, is a very dynamic market. So I think we've been trying to understand it for a long time. And now based on that, we started to develop our strategy and focus on a number of segments in the market that we think are attractive given our cost So I think there's a lot of things coming together, but we see it very clearly as a super logical market to be in and one where As you've followed Northwest, we'd like to have a position that's at least in its sub segment, a Scalable and meaningful position where we can have impact in the market, and I think we've been quite focused on finding areas where we believe that to be the case despite The size of the market and the breadth of established competitors, if you will, we've been able to identify narrowly some very specific and attractive Places to focus on. So that's what we've gotten to and I think it's a big step. So we'll be evaluating it very carefully over the next little while, but The market dynamics have screened more positive than ever for us over the last little bit. So that's the message And is there like you sort of talk about the care versus cure assets like what are the types of assets that you'd Probably be considering looking at. Yes. Well, sorry, just to clarify. It's very different. So I'm just trying to get a flavor if the type of asset you're looking for is changing a little bit because it's the U. S? No. We have some very core Our business, I mean, starting with focusing in the CURE side of the space. So where we look at exclusively in CURE. And then I think as you've heard from a balance of our strategies both in Europe and in Australia where the markets are a little more vibrant. We have a strong Precinct or campus, academic medical centers sort of focus, if you want to think of it that way. So there's some pretty logical directional Opportunities there, of course, we have our historical MOB business where we have the management expertise and Technology to deliver sort of multi tenant solutions. And so all of those things start to come together as we look at the U. S. Or any market for that matter. So I think just to be clear, we are very much focused in reaching the focus in the Pure side of the space and our existing strategies in every market To inform the things that we'd like and where we're likely to focus in the U. S. And is it fair for us to think that sort of like the As you've broken into new markets previously, like it'll probably look similar in terms of the way where you make some principal investments on your own and then find You know a capital partner to help accelerate that growth later on. And are you guys getting to the point now where you have enough of a rep maybe where You don't maybe have to go through that principal phase, like you might be able to set up a JV at the outset of entering a new market? Yes. It's a great question. I think we are at that stage, Tali, I think that the trick in all these things is that when you have a dynamic market where there are active Transaction doesn't perfectly line up to start. So I'm not sure I can definitively give you that answer today, but I would say that it's higher in our minds To start, if possible and certainly what we see in the U. S. Is meaningful enough And definable enough, I guess, that it would it could achieve that outcome that you mentioned. But I think we always, again, we have a long view, of course, of just Practicing what we preach, I guess, and doing things. And I would say that between those two is where we'll end up likely. So we'll see. But I think where we are in the business in terms of positioning ourselves with capital partners and discussions Those capital partners, I mean, I'm sure it has come up quite clearly in our 2020 results and clearly in our focus, we Certainly, healthcare real estate is in a moment where it's getting lost focus and we think that We're certainly a partner of choice for many institutional investors. And so all that taken together gives us a lot of confidence, not just As we think about U. S. Market entry, but in all the things we might do, it's a very good moment for our business and Quite focused on leveraging our corporate resources and IP and relationships to maximize that. So that's At the moment. So I think a lot of things lining up, we may perfectly line up in the transaction. It's always hard to say yes to that, but I hope so. Okay. At this time, we have no further questions. You may proceed. Okay. Thank you, operator. And everyone on the call, appreciate your time. And we'll sign off now from the management team from Northwest this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.