Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties Real Estate Investment Trust third quarter 2020 results and conference call. At this time, all lines are in 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 zero for the operator. This call is being recorded on November 13th 2020. I would now like to turn the conference over to Paul Dalla Lana. Please go ahead.
Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm also joined by 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 third quarter of 2020. 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 filings.
The defensive nature of the REIT's healthcare real estate portfolio that is 97.2% occupied with more than 80% of the revenues provided directly or indirectly by public healthcare funding has, despite the impact of COVID, resulted in strong operating results on a year-over-year basis, including 5% AFFO per unit growth, 4.7% constant currency SPNOI growth, and 3.6% NAV per unit growth. Cash collections continue to improve with 97.6% of the REIT's revenue on a proportionate ownership basis, either collected or subject to formal deferral arrangements in Q3, which improved further in October to 98.1%. As a result of the strong cash collections and underlying defensiveness of the REIT's tenancy base, the REIT did not recognize any material provisions for uncollected rent as it continues to expect that all deferred rent will be fully repaid.
The impact of COVID-19 continues to affect countries unevenly, with some countries progressing through phased reopenings, while others struggle to control the pandemic. During Q3, several of our key markets in Europe, the U.K., and Australia began to reopen, and the REIT saw an increase in activity in elective surgeries resuming in those locations. Even as some of these markets continue efforts to contain the pandemic, demographic trends, coupled with backlogs built up during the initial global lockdown, are expected to drive elevated demand for healthcare services, supporting healthcare real estate over the medium and long term. This trend is also playing out in the investment market, with capital formation in healthcare real estate hitting all-time highs pre-pandemic and investment volume accelerating, which is translating into higher asset values.
Strategically, the REIT has now executed on all of its 2020 priorities put in place at the beginning of the year. These achievements included completion of the previously announced CAD 3.1 billion European JV with GIC and related sale of eight German rehabilitation hospitals, three Dutch clinics, and two Dutch MOBs for CAD 473 million. Completion of the strategic asset sales totaling CAD 788 million into fee-bearing capital platforms, which generated more than CAD 280 million of liquidity to pursue strategic opportunities and deleveraging activities.
Significantly, these dispositions are expected to generate incremental stabilized fee income and are accretive to the REIT's AFFO per unit. The European expansion, with CAD 719 million of year-to-date acquisitions, including entry into the U.K. market through the acquisition of two hospital portfolios for CAD 620 million. U.K. asset management initiatives, which have the potential to create upwards of CAD 85 million of value as cap rates compress and as a result of tenant diversification and lease optimization initiatives.
During the quarter, the REIT's largest tenant, Aspen Healthcare, outperformed expectations as a result of NHS support related to COVID-19. Balance sheet stability, with approximately 500 basis points reduction in leverage to 55.5% and a 0.7x turn reduction in net debt- to- EBITDA to 9.5 x on a proportionate basis. Post completion of its planned U.K. JV and asset management initiatives and CAD 200 million of committed developments in 2021, the REIT expects to achieve proportionate leverage below 50% and approximately 8x net debt- to- EBITDA.
For the quarter, our results were in line with our expectations, noting the amount of deleveraging, including annualized quarterly adjusted funds from operations of CAD 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. While overall foreign exchange movement was minimal, it continues to impact earnings over the past 12 months, reducing annualized AFFO by approximately CAD 0.03 per unit and NAV by approximately CAD 0.70. In the context of a lower for longer Canadian interest rate environment, we expect that these trends may begin to ease and unwind in 2020, providing a tailwind to the REIT's future earnings.
In terms of liquidity, the REIT is well positioned with approximately CAD 200 million of liquidity, which is expected to increase to more than CAD 460 million as the REIT cedes its currently planned U.K. portfolio into a JV in early 2021. The REIT has also completed repayments or renewals in respect of all 2020 maturing debt obligations on favorable terms and has taken proactive steps to refinance normal course 2021 maturing facilities. Approximately 43% of 2021 maturities have been refinanced, repaid, or under active negotiation.
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 and there can be no assurance there will not be any further disruptions to our tenants in the future. However, based on their resiliency to date, 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 key long-term strategic objectives, including European expansion and the growth of our global management platform.
Also, as we produce 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 priced private capital, the REIT is well positioned to continue executing on its strategy. We have almost CAD 4 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 and into 2021. I'll now ask the operator to open up the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speaker phone, please lift the handset before pressing any keys. Your first question comes from Fred Blondeau, iA Securities. Fred, please go ahead.
Thanks, and good morning. Maybe first question for Shailen or Paul. Just on your 50% target debt ratio, what would be your timeline here?
Shailen, would you like to respond?
Yeah. Good morning, Fred.
Good morning.
As we think through our achievement of the 50% target proportionate leverage, really the critical driver in achieving that is around completion of our planned U.K. JV. Paul had mentioned in his introductory remarks, when we were actively focused on that U.K. JV in the moment with a view to be able to sell down our interest in our directly owned, 100% owned portfolio in the U.K. into that JV, over the course of 2021 in the front half. Really that's the critical driver, and we see that as continuing to be achievable.
Okay. That's great. Should we expect you guys to get there mid- next year, or?
Correct. Pending completion of our U.K. JV, that's the driver.
Right.
We're forecasting that for H1 2021.
Yeah. Perfect. Thanks. Paul, could you comment on the situation in Canada in regards to parking income? What are you seeing so far in Q4, and what would be your base scenario here for next year?
Well, thanks. Actually, I'm going to take advantage of Peter's attendance on the call, who knows that a little bit better. What I will say, just to lead into that, is that we're seeing a relatively quick return to activity levels across all our regions, including Canada. Again, a bit underpinned by those comments in the opening remarks that deferring some of the health requirements of our populations is very difficult to do for an extended period of time. We have seen a relatively sharp return, and I'll let Peter continue with that if you can, Pete?
Yeah. Thanks, Paul. Good morning, Fred.
Good morning.
I think Paul summarized it in that from the low in the spring of the shutdowns and the slowdown in the economy, we've seen a steady increase of parking. Year to date, we've been at about 70% of plan, and that's very close to last year's results. Every month we see that increasing, and we expect that to continue as the year ends. Going into 2021, we expect to get back to certainly stay above those levels now and get back to full as soon as we see additional waves of the pandemic flatten in certain markets.
Mm-hmm. No, that's fair. Maybe Shailen or Paul, could you remind us how we should look at your exposure to Brazil? It continues to be a significant driver on your Canadian dollar, despite inflationary adjustment. What are your views here?
Well, a couple comments. I think just with the growth of the business in many other parts of the world, and particularly Europe and Australia over the last little bit, the proportion of Brazil in our overall business has declined. I think probably call that out, and certainly as we look down the line, we do see meaningful and continued growth using our JVs and other things to help that along. I think that trend is likely to continue. That'd be point one. I mean, point two, Brazil is a pretty specific situation. In source currency and in the base portfolio, it continues to perform very well. We have eight acute care hospitals in the major markets, most of them with one of the best operators anywhere in Rede D'Or.
We're quite comfortable with the underlying performance, and it's very conservatively structured. The thing works for us and really the drag has only been around FX, which has really continued for the last 18 months as Brazil has been both in a significant recession and certainly, more recently, going through some difficult COVID moments. I think we're comfortable with Brazil. That all said, I think we are comfortable with Brazil in the mix, and certainly we like the assets and again, we expect that some of those currency trends will reverse in time, and we've set up the business to be able to manage through moments like this without overtly impacting it.
Underlying that, we're seeing in the source market, certainly continued growth in the income streams there, continued valuation increases as the tenant continues to perform, and it's one of the top businesses in the country. In balance, we're okay with that. Certainly, we're going to get to some parts of the machine contributing and some not. I think, we've sized Brazil to be within an appropriate level of tolerance within that.
That's great. I was just surprised how ineffective, or I guess not ineffective, but how low the impact was from the inflationary adjustment compared to the results in Canadian dollar. It's all good. Thank you.
You're welcome.
Thank you. Your next question comes from Chris Couprie, CIBC. Chris, please go ahead.
Morning, gents. Just wondering if you can give us an update at all with respect to Aspen Healthcare and the administration process, and does that essentially need to kind of conclude to further advance the U.K. JV?
I think, thanks, Chris. That's a good question. Again, probably one that has some subtlety in answering in the moment, but it's an active process and certainly, NMC and their administrators are in the midst of taking decisions around Aspen. We think that they're likely to come over the balance of the year, so in Q4 here. Certainly, we're playing an appropriate role as the largest landlord to Aspen today.
We think that we are able to derive some meaningful value improvements and relationship improvements in our business. We are playing a role in that process, an appropriate role. I think we are looking to leverage the results of that in our ultimate U.K. JV, which is sort of positioned and getting ready to go. I think there's a lot in that, but I'll just say that the process is advancing and we're making progress in it. I think we do see a relatively clear path in the near term through this very big and complicated overall administration to bring certainty to the Aspen situation.
Okay, that makes sense.
Yeah.
Just with respect, obviously the U.K. JV is next in focus for you guys, but with respect to the available capacity in the remaining active JVs, any color at all in terms of what the active pipeline might look like for deploying capital in those JVs?
Yeah. As I mentioned, we have approximately CAD 4 billion in capacity in our two Australian and European JVs. Of course, we also have capacity within Vital. I think collectively, we have very meaningful capacity. I would say to some of the general comments we made, that we see it as a very constructive moment, both for generational and opportunistic things in our business.
I would expect us to be quite active in areas that certainly where we have capacity and capital and the resources to act on that. We see a robust pipeline. We see some very good opportunities, and certainly we have partners that are looking to do things. That's probably it. No specific guidance there, but I think we've historically had pretty active investment cycles circling in around CAD 1.5 billion-CAD 2 billion a year of overall activity. I would expect that we'll at least meet that, if not exceed that this year and into the future for a little bit.
Any kind of nascent conversations on JVs in other regions?
Absolutely. We'll stick to sort of getting the U.K. one done in the near term-
Yep
...certainly we are looking to bring that type of resource and toolkit to the Americas market for sure. That would be our next focus, I think, in 2021.
Thanks a lot. I'll turn it back.
Thank you. Your next question comes from Mario Saric, Scotiabank. Mario, please go ahead.
Hi, good morning.
Good morning.
Just maybe sticking to the previous question. We saw your institutional partner, GIC, team up with Ventas in the U.S. on a JV announcement. With respect to Brazil, in terms of potential kind of JV activity and then possibly reducing your investment capital in that region, how much of an implication does Rede D'Or's potential IPO have in that process, if at all?
Yeah, it's a great question. I think it has both a benefit and maybe a challenge for us. I'd say the benefit is that it shines a light on one of the highest quality businesses, certainly in Latin America and maybe in the world of healthcare operators. We see that as driving portfolio value and certainly making it more attractive for potential partners and broadening that potential. I think what it does do, though, is bring a lot of capital to the business. It certainly, although they have meaningful growth aspirations and most of that planned IPO capital, as I understand it, is intended for growth as opposed to liquidity for the owners.
I think it makes it more challenging with an already high-quality operator. I think, you know, some tandem things. Definitely, we have a good relationship with Rede D'Or. We are certainly working on incremental expansions within our existing portfolio and a number of tuck-in things. As a business, again, they see themselves still in the relatively early innings of the consolidation of the Brazilian healthcare space. We do sense that there's more to do there. I would also call out that it also helps with a number of their competitors in establishing other existing counterparties for us and sort of institutionalizing the provider environment in Brazil, which is another positive.
All in all, we see it as a positive, but it probably will take, again, noting the size of the IPO and the amount of capital they're going to raise. It probably takes any pressure that they might have felt, if that's the right word, off of near-term things and gets them very focused in the mid- to longer term, which I think we've been a good partner for them. We see incremental opportunities there, but nothing transformational, I think, as a result of both those comments.
Great. Thanks, Paul. Then maybe just a broader question. In terms of capital deployment when I hear words like generational opportunities with existing very high-quality assets that are potentially highly sought after, which would imply a valuation could be nothing is for sale with those types of assets, typically speaking. In the past, acquisitions have been maybe a bit of pressure on per-share growth given the delta between acquisition cap rate and applied cap rate. Now that the unit price has improved, how should we think about AFFO per unit accretion from transaction activity in terms of Northwest co-invest, including the fee streams that are attached or associated with those co-invests going forward? Should we look at that as being a meaningful driver of AFFO per unit growth going forward?
I think, Shailen, maybe I'll let you add into this, but I'll just maybe introduce the subject. From our standpoint, I think, again, the advantage of our JVs and our particular structure is that within the context of the current market, we certainly see the ability on both a principal real estate basis and in conjunction with the asset management fees driven by the business of generating sort of + 15% IRRs on our capital, which we see as very attractive across generational-type pricing, if you want to say it that way. I think with the structure that we have and the partner that we have, we're able to sort of compete at the pretty sharp end of the stick and competitively and generate acceptable returns. We see that as acceptable.
Certainly, we are looking to round that out with a number of tuck-in and balanced other acquisitions. I think all in all, I would say that we do see a very constructive way to deploy capital. Having the capacity that we have in our JVs does give us the tools to get there. That'd be a balanced answer. Maybe, Shailen, you'd like to bring some precision or decouple that a little bit?
Yeah, Paul, I think you encompassed the thematic there. Mario and others, I might take you to page 18 of our investor presentation, which I think does a really good job of just summarizing the Northwest business model, where as we look through the defensive nature of the portfolio and underlying AFFO growth on a levered basis, we see that generating about a 6% return just from SPNOI growth. Layering in our asset management initiatives and really leveraging our third-party capital commitments.
We see that adding about 350 basis points to that return. Coming in at just around 10% on a levered basis. You layer in development accretion and just the ongoing cash flow coming out of the assets on a levered basis, you're coming into that mid-teen target IRR or AFFO per unit growth. I think as we look through the catalyst for change around AFFO per unit growth, we very much see that higher ROE coming out of that asset management business, and we do see that as a major driver.
Got it. Understood. Okay. The incremental accretion from potential transactions would be included in the 3.6% bucket in the asset management on this chart.
I missed your number there precisely, but I think we're close. Yeah.
Okay. No, that's really helpful. Two more really quick ones on my end. With the kind of rise of COVID infection rates in the U.K., can you comment on any changes in NHS policy with respect to funding capacity?
Yeah. We can. A couple things. As we understand it, the contract that was initially written to expire in December is being recut to go now to the end of March. That's broadly been agreed in Parliament, and it's being implemented more or less as we speak. The second thing that I would say is that the government, and I think just subject to their finalization of their process, has committed a further GBP 10 billion to healthcare in 2021 and beyond, which, when we look at the overall commitment, probably is a 40% increase or so across what's been already committed, to help break down some of the waiting list issues and get the industry back to an even keel, at least in a British context. I think two very strong government commitments there.
We are seeing the results come through our portfolio and the operators in our portfolio, both BMI and Aspen are ahead of plan for the year, pre-COVID-19 plans. Are looking at how they're able to get back to even increased capacities because their businesses are, although a little bit different, still have a very significant private component to their business in addition to the NHS component. Where the NHS has taken a lot of capacity, it's starting to release some of that capacity, and the private system is starting to come back in to fill and deal with this backlog, which is growing, again, to 10 million patients is the number that you hear in the U.K., which is an astonishing number.
I think in general, it's a relatively constructive environment despite the pandemic, and I think the feeling is that the operators are positioning themselves for pretty increased volumes. There are challenges, of course, in terms of accessing resources and certainly some COVID-related costs. We are seeing sort of the demand side of the equation starting to ramp up pretty substantially in the businesses that we have visibility into, and feeling pretty good that that's going to be a multi-year phenomenon because those waiting lists are going to take a long time to clear, ultimately, even beyond that, once the NHS sort of looks at what it's able to fund and not fund, and given some of the public finance issues that come out of this. I think in general, that would be a summary level answer to the U.K.
Got it. Okay. No, thank you for that. My last question just relates to deferrals. Your bad debt expense provisions have been relatively low, given your confidence in ultimately collecting the deferred rents. It's been several months now that I'd say that some of the rents have been deferred. How have actual rent collections on those deferrals come in relative to expectations? I just wanted to clarify that the cash rent collection figures that you disclosed, those are reflected for the revenue for that month as opposed to collection of previously deferred rent.
Yeah, Mario, I can chime in there and I can both say that the collections have been very much in line with our expectations and as disclosed, and that, yes, the cash rent collections are referred to that specific month.
Okay. Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one on your touch-tone phone. Your next question comes from Sairam, BMO Capital Markets. Sairam, please go ahead.
Good morning, everyone. Guys, congratulations on a great quarter. Paul, the question for you here is on, especially on the European JV side, are you looking specifically for, let's say, hospitals versus MOB? Is there a specific asset mix you're looking there, or is it more like any healthcare assets that are out there?
Yeah. Again, I would come back into our presentation again, just as a reminder to say that we're virtually exclusively focused in the cure side of the healthcare business, and I think we've delineated that in our IR presentation pretty well. Really from hospital, post-acute care or outpatient MOB and then life sciences. Life sciences is a recent addition that we have been focused on that in Europe, across all of our markets there. We see that as another vertical that we'll be bringing into the business progressively, noting that we already have assets that are in that direction in all of our markets, actually.
The strategy doesn't include where we're not focused, again, just to be clear, is in the care side of it, in skilled nursing or aged care, assisted living or retirement. When people in Europe talk about healthcare, it often starts from the care direction as opposed to the cure direction, so we're quite specifically focused. We do have broad-based strategies on that include hospital and outpatient and MOBs existent in all of our markets, with the exception of the U.K., which is just, for the moment, hospital and life sciences-based. I would say that we tend to have a pretty broad-based view to it, and we like all of these segments within the European market. Each of our geographies probably has one, two, or even three of these elements at play.
Again, within those obviously we're focused on operator relationships and we're focused on, again, certainly the more major markets within the markets that we're in, like London, like Berlin, and like Amsterdam and Rotterdam, where we have the bulk of our existing assets, if I had to characterize it. That would be where we're focused, and our capital partner is set up to follow us in all of those geographies in some segments. I think we have bandwidth in each direction. Does that answer your question?
Definitely. Thanks, Paul. Thanks for the color. I'll turn it back.
Thank you. There are no further questions at this time. Please proceed.
Okay. Well, thank you, operator, and thank you all for listening in to Northwest Healthcare Properties REIT's third quarter 2020 earnings call. We appreciate your interest and wish everyone a good day. Thanks.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please-