Earnings Call: Q2 2019

Aug 9, 2019

Morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties Real Estate Investment Trust Second Quarter 2019 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, August 9, 2019. I would now like to turn the conference over to Paul Dalla Lana, CEO of Northwest Healthcare Properties REIT. Please go ahead, sir. Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm joined by Shailen Chande, The REIT's Chief Financial Officer. Together, we are pleased to share with you our results for the Q2 of 2019. 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 you to all of the risk factors outlined in our public filings. For the quarter, our results were in line with our expectations and include annualized quarterly AFFO of $0.92 per unit on a normalized basis, up 2% quarter over quarter with our payout ratio declining to 87% and a 1% quarter over quarter increase in net asset value per unit to $11.76 primarily driven by fair value gains in Brazil and Australasia, but partially offset by adverse FX movements. 45.5 percent consolidated LTV, excluding convertible debentures, year over year source currency adjusted SPNOI growth of 1.8% and 3.2% adjusted SPNOI growth year to date, primarily driven by contractual rent indexation and all of this underpinned by a 97% -plus occupied portfolio with a weighted average lease term of more than 14 years across 169 properties and 13,800,000 square feet. In addition to our focus on operations, EEREIT progressed several key strategic initiatives. In Australia, the completion of the Healthscope acquisition together with our JV partner wrapped up an intense year long process that was a significant milestone for the REIT at its first $1,000,000,000 acquisition. It also served as a catalyst for a $1,600,000,000 upsize of the existing JV, which provides significant additional capacity to continue our consolidation of Australian healthcare real estate and build upon NorthWest's leading market position. In Europe, we continue our growth strategy of key new relationships in both the medical office and hospital sectors, driving increased deal flow, which our team is converting into accretive acquisitions, including $63,000,000 closed in Q2 and subsequent to quarter end. While in Canada, the REIT has been successful in partnering with Lakeridge Health, Durham Ontario's regional acute healthcare provider to develop a new ambulatory care center together. The start of what we believe will be a growing opportunity set to work with Canadian health authorities to provide long term real estate solutions. The REIT continues to build scale in the Canadian capital markets and post quarter end successfully executed its largest equity offering to date. Proceeds from the financing have been deployed to replay existing debt, reducing leverage by over 2 50 basis points on an earnings accretive basis. The REIT remains committed to reducing leverage to below 50% over the medium term and has targeted a suite of higher cost debt for repayment in 2019 with similar accretive features, likely using resources from its targeted non core and Australian JV asset sales, which are also progressing well. Regionally, Brazil was on plan with occupancy steady at 100 percent and continued strong and predictable income. Year over year, constant currency adjusted SPNOI growth increased 4%. Operationally, the REIT's major tenant, Rigidor continues to deliver strong results and expand its business, thereby opening up the possibility of further partnerships with the REIT. Market interest rates in Brazil, driven by a stabilizing economy and progress on domestic fiscal reforms, have recently trended significantly lower, reaching historically low levels. NorthWest capitalized on this trend with our recent $190,000,000 financing at an all in rate of 3.88 percent plus inflation, while existing Brazil debt at 7.5% interest rate was repaid, generating more than $7,000,000 of interest savings annually. Gree is gaining traction with other high quality operators in Brazil and is actively working on transactions to diversify its investments in the region. In Canada, we are also on plan continuing solid performance with positive year over year currency adjusted SPNOI growth of 6.6% and portfolio occupancy remaining healthy at 92.7%. During the REIT quarter, the REIT completed 87,000 square feet of renewal leasing at an average renewal rent of 7.9% above the expiring rent. The REIT also entered into the 60,000 square foot $19,000,000 development project with Lakeridge that I previously mentioned. And in Europe, we were on plan performing as inspected with positive year over year on a constant currency SPNOI of 3.4% and occupancy increasing to 97.2%. As mentioned earlier, we continue to find good investment opportunities in Europe, allowing us to not only build scale and critical mass in Germany, but now also build upon our initial two acquisitions in the Netherlands. In Australia, occupancy increased 130 basis points quarter over quarter to almost 99% and delivered strong year over year constant currency SPNOI growth of 2.2%, all with a weighted average lease term of more than 16 years. As previously mentioned, during the quarter, the REIT completed its acquisition of 11 core hospitals from Healthscope together with its JV partner, which further strengthens REIT's leading position in the region and leveraging that strong capital relationship. And in Vital, for fiscal year 2019 results were delivered yesterday evening, the business reported strong and on plan results with positive year over year source currency SPNOIF of 2.3% and stable occupancy over 99% with a weighted average lease term of more than 18 years. For the balance of 2019 and building on these strong results, ongoing portfolio improvements and continued support of trends in the healthcare industry, the REIT will continue to drive internal growth through the completion of 9 committed low risk value added developments and expansion projects, again primarily in Australia and New Zealand, totaling approximately $414,000,000 on a consolidated basis, dollars 173,000,000 at our share. As well, the REIT expects a further $500,000,000 of new investment activity in 2019, split broadly equally between Europe, and Australia, New Zealand and Brazil. Furthermore, we are planning a combination of non core asset sales, again targeting $350,000,000 to 400,000,000 in Canada and JV asset sales in Australia, all of which is progressing well. And finally, on the yields of our recent 1.6 $1,000,000,000 increase to the Australian JV, the REIT continues to target a further $1,500,000,000 to $2,000,000,000 commitment in Brazil, Europe and Canada. I'm pleased that we've been able to advance a number of these key long term strategic initiatives during the Q1. Our bigger and better portfolio is supported by long term inflation index assets. And as a result, the REIT is even better positioned to load stable and growing returns to existing unitholders. Unitholders. Furthermore, we continue to be the real estate partner of choice to the healthcare industry, which provides exceptional global opportunities to grow accretively and enhance unitholder value. I'll now ask the operator to open up the call for questions. Thank Your first question is from Troy MacLean from BMO Capital Markets. Troy, please go ahead. Good morning. Just on the JV, is that intended to buy like kind of stabilized properties or could you envision doing development inside the JV? Yes. So Troy, the JV is on the same terms as the initial JV and if that's what you're referring to, our Australia JV. And yes, it does have the capacity to do both brownfield, which is a characteristic of existing portfolio. As you recall, we have an expansion there already underway at Epworth Freemasons in Melbourne, about $100,000,000 expansion, which is tracking to plan, as well as Greenfield. Although, again, Greenfield has its own subtleties and times associated with it. So we would likely see pretty significant brownfield focus for the JV. I'd highlight that as part of the Healthscope acquisition, there's a gain, at least identified today, between $102,000,000 $200,000,000 of brownfield expansion projects in the 11 assets that we acquired. And we do expect Brookfield as they work through sort of their onboarding of the business to look to grow and we expect to find more projects there. So I would say that, that brownfield opportunity is likely to be again somewhere between 10% 20% of the overall business. It's probably been that in our own existing business as well. And just as a reminder, those returns tend to be approximately 100 basis points wider than the cap rates that the underlying assets would have. So it's a nice low risk way to generate both cash flow and value accretion. And then how quickly do you think you can invest the JV proceeds? I mean, you were able to do it fairly quickly with Healthscope, and I know that doesn't come along very often. But just do you see this as kind of a series of smaller investments that's going to take like maybe 2 years? Or do you think you can deploy that relatively to deploy $1,600,000,000 I think we are looking in the 12 to 24 month range realistically, barring any sort of chunkier prospects of which there are some. We are active in the JV right now on about $250,000,000 of acquisitions, which we expect to get finalized in the Q3. So we're making pretty good progress there. And that capacity, I think, was really anticipated for a while now given that we see a pretty robust pipe. So I'd say 12 to 24 months is realistic and we're pretty well on our way there. And then just on the Lakeridge development, you mentioned that there could be room to do more of these projects. Is that with Lakeridge? Or do you there's more kind of regional health authorities that want to have build new assets partnering with private capital? Yes, I'd say both. I mean, Lakeridge is one regional health authority and we know that they have a couple other projects, but a couple of trends at work here. I mean, firstly, ambulatory care, which I think in the hospital world is a large and established trend and sort of really looking to get all of the absolutely non acute care procedures out of major hospitals. And so we see that as a big trend everywhere in the world. And certainly, that Ontario and other provincial health sort of health ministries are looking to evolve those efficiencies. So we see broad based sort of opportunity there. And I think sort of the ability to partner with public health authorities to develop as well as to provide capital sort of sets us apart and we're quite focused on that. What does that mean in terms of a big opportunity set, hard to gauge? I think we'd be pretty happy if we could do 5 to 10 of these in Ontario. That would be a nice start. But I think that would be, again, the characteristics that we like about these relationships is that they're long term index cash flow. They're more infrastructure like than what we see in our traditional medical office portfolio. And we're just starting to form relationships further up the food chain in terms of healthcare infrastructure. So that's kind of a trend. Again, in addition to Ontario, we have Quebec has already been quite active in this direction. We have a number of assets like this in our Quebec portfolio already, and we see Alberta starting queue up pretty significantly in terms of again looking for private capital solutions into facilities like this. So that would be some context. And then for the Lakeridge, was that like an RFP process? Or did they come to you because they knew you would be the logical partner? Yes. No, it was a robust RFP process. It was Infrastructure Ontario influenced, I'd say, which probably a little more than it needed. But I think it gave us a chance to distinguish ourselves in a very formal way. And so it was competitive. And certainly, I think we demonstrated our ability to work with the health authority in a bunch of key areas. And so it wasn't just capital that carried the data there. All right. Thank you. I'll turn it back. Thank you. There are no further questions at this time. Please proceed. Okay. Well, thank you, operator. I think that's it for us and appreciate everyone's attendance. Thank you again. Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.