Good morning, ladies and gentlemen, and welcome to NorthWest Healthcare Properties Real Estate Investment Trust first 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 10th, 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. Appreciate you joining us today. I'm joined by Shailen Chande, the REIT's Chief Financial Officer, Bernard Crotty, the REIT's President, and Peter Riggin, the REIT's Chief Operating Officer. Together, we are pleased to share with you our results for the first quarter 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 the actual results to differ materially. We direct you to all of the risk factors outlined in our public filings.
With that behind us, our results for the first quarter were in line with our expectations and include annualized quarterly AFFO of NZD 0.90 per unit on a normalized basis and a payout ratio of 89%. A net asset value of NZD 11.65 a unit, down slightly from last quarter as a result of FX movements and dilution from our recent equity offering, but partially offset by fair value gains in the REIT's portfolio. 46.3% consolidated LTV, excluding convertible debentures, and year-over-year source currency-adjusted SPNOI growth of 2.5%, primarily driven by inflation indexation. All of this underpinned by a 97%+ occupied portfolio with a weighted average lease term of 13 years across an expanded 158 property, 11.9 million sq ft portfolio.
In addition to our focus on operations, during the quarter, we executed on the REIT's top strategic priority, entering into a transaction to acquire 11 high-quality Australian hospitals from Healthscope for CAD 1.2 billion, and can confirm our institutional partner's commitment to participate in this transaction. As a result, the REIT's partner will acquire 70% interest in the portfolio, with NorthWest retaining a 30% interest and providing management services. To finance the transaction, the REIT and its partner arranged new property-level debt facility for approximately CAD 769 million, with an initial interest rate of 3.0%. About 130 basis points ahead of what we had previously forecast. At the REIT's share, this requires equity of approximately NZD 130 million, which the REIT has already invested through its existing investment in Healthscope and in-place deposits for this transaction.
As a result, we expect the transaction to be highly accretive, with an incremental year 1 AFFO of NZD 0.11 per unit and initially recurring AFFO of NZD 0.09 per unit. The transaction is expected to close in early June 2019. In Europe, we continue our growth strategy by closing on the acquisition of a number of medical office buildings and rehabilitation hospitals, bringing our total assets in that region to approximately NZD 700 million, a 75% increase over the last 12 months. During the quarter, the REIT was also active in the capital markets, closing a NZD 144 million equity financing with significant institutional participation, and we were also added to the S&P/TSX Capped REIT Index as part of the March rebalance. From a regional perspective, firstly, Brazil was on plan for the quarter, with 100% occupancy and continued strong and predictable income.
Year-over-year constant currency adjusted NPF SPNOI growth increased 4.1%. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver strong results and expand its business, thereby opening up the possibility of further partnerships with the REIT. Importantly, the REIT is also gaining traction with other high-quality operators in Brazil and is actively working on accretive transactions to diversify its tenant space in the region, again, in proportion to the overall business. Finally, the REIT has entered into local refinancing arrangements, which are expected to close in Q2 on approximately NZD 187 million of our existing debt. That will see us lower our interest costs there by NZD 2.5 million, or NZD 0.02 per unit per annum. In Canada, we were also on plan, continuing strong performance with positive year-over-year currency-adjusted SPNOI growth of 3.8%, and with the portfolio occupancy remaining healthy at 92.8%.
The quarter also saw positive renewal rent increases with a 4% spread on expiring rents, as well as the continuation of construction of a new campus medical office building in St. Albert, just outside Edmonton, with pre-leasing now approaching 70%. In Europe, we were on plan as well, performing as expected with positive year-over-year constant currency SPNOI of 0.03% and occupancy increasing 50 basis points to 96.9%. As mentioned earlier, we continue to find good investment opportunities in Europe, allowing us to not only continue to build scale and critical mass in Germany, but also now to build upon our initial two acquisitions in the Netherlands. Further, last year's acquisition of four rehabilitation hospitals from MEDIAN Kliniken in sale and leaseback transactions, has opened the door to growth in the hospital segment of the healthcare real estate.
Not unlike other parts of our international portfolio, which are characterized by single-tenant, management-light properties secured with 20-plus year leases indexed to inflation by best-in-class operators, including MEDIAN, Germany's largest rehabilitation operator, and more recently, AMEOS, another of the region's leading hospital operators. Occupancy increased 80 basis points quarter-over-quarter to 97.6% in the Northwest Australia portfolio, which also had strong year-over-year constant currency SPNOI growth of 4.4%, all with a weighted average lease term of more than 13 years. As previously mentioned, during the quarter, the REIT entered into a definitive agreement to acquire 11 highly strategic properties from Healthscope, which will further strengthen the REIT's leading position in the region while also leveraging its existing capital relationships.
At Vital, for its Q3 2019 results delivered yesterday evening, the business also reported strong on-plan results with positive year-over-year source currency adjusted SPNOI of 0.3% and stable occupancy of over 99% and a weighted average lease term of 18-plus years. Vital confirmed a 2.9% increase to its distribution over the prior year period. During the quarter, the REIT's fee review was finalized, and Vital announced the management changes, with David Carr, the CEO of Vital, stepping down and being replaced on an interim basis by Miles Wentworth, the previous CEO of the business and an existing member of Northwest Australian team. Finally, Vital also confirmed it will not participate in the Healthscope opportunity. In total, the news was well-received, with Vital shares up 7.5% overnight.
Corporately, the REIT continues to focus on balance sheet optimization initiatives and plans to refinance approximately NZD 230 million of existing corporate debt with a weighted average interest rate of approximately 7.5% at rates 150 to 200 basis points lower, generating a further NZD 3.54 million, approximately NZD 0.03 per unit of annual interest rate savings. For the balance of 2019, and building on these strong results, ongoing portfolio improvements and continued supportive trends in the healthcare industry, the REIT will continue to drive internal growth through the completion of nine committed low-risk, value-added developments and expansion projects, again, primarily in Australia and New Zealand, totaling approximately NZD 370 million on a fully consolidated basis and NZD 148 million at the REIT's share. In addition to the Healthscope property acquisition, Northwest expects a further NZD 750 million to NZD 1 billion of net investment activity in 2019, split broadly equally between its existing regions.
We are planning a combination of non-core and joint venture asset sales in Canada and Australia, totaling approximately NZD 500 million to NZD 600 million. In further support of these growth initiatives, Northwest will increase its JV capital in Australia a further NZD 1.5 billion to NZD 3.5 billion, as well as targeting an additional NZD 1 billion to NZD 2 billion commitment similar to the ones in Australia for deployment in Europe and Brazil. I'm pleased that we've been able to advance on a number of these key long-term strategic initiatives during and post-quarter. Our bigger or better portfolio is supported by long-term inflation index leases. As a result, the REIT is even better positioned to deliver stable and growing returns to existing unitholders. We continue to be a real estate partner of choice to the healthcare industry, which provides exceptional global opportunities to grow creatively and enhance unitholder value.
I'll now ask the operator to open the call for questions.
Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touchtone phone. If you're using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question is from Chris Couprie from CIBC. Chris, please go ahead.
Good morning. Just with respect to the Healthscope transaction, can you just remind us in terms of what the timing for the close would be?
Yeah, I can, Chris. Hi, and good morning. It is, again, subject to a May 22nd vote, and will close in early June. We're estimating around the 8th of June right now in region. Those are the critical dates ahead of us. Again, from what we can see, it looks like a relatively straight shot as much as M&A can ever be. Things are fully tracked from our side and the transaction looks substantially in place.
Great. Just in terms of the disclosure you had around the accretion under the finalized structure. That NZD 0.11 of accretion in year one, and NZD 0.09 thereafter, how does that compare to the Which of those is comparable to the kind of 4 to 7 that you'd indicated before?
I'll turn that call to Shailen Chande, if that's okay, Chris Couprie.
Sure.
Good morning, Chris Couprie. In respect of the accretion of NZD 0.11 in year one and initial recurring of NZD 0.09. The increase from our previous range of NZD 0.04-NZD 0.07 was really driven by three factors. One, the level of Northwest Healthcare Properties REIT ownership, which came in at 30% relative to the range of 25%-30%. Two, the fact that the interest rate on the financing came in about 130 basis points lower than initially forecast. Three, the fact that there was slightly higher debt on the portfolio than initially forecast in that NZD 0.04-NZD 0.07 range. LTV on the portfolio is coming in just under 60% where it was previously forecasted at 50%-55%.
Switching gears a little bit, with respect to the Vital fee review, and just maybe the asset management business in general, excluding the impact of Healthscope, how should we be thinking about that now going forward?
Again, the fee review, as you recall, the terms of the fee review were broadly concluded on April 1st this year. They will be put to Vital unitholders at the AGM, which is again, likely to be in the early fourth quarter of this year. We expect that given the benefits to the Vital unitholders of those fees, that will be approved. I think in practical terms, I think we'll see on a go-forward basis in terms of the business, a slight shift in our fee construct there from base to activity-based fees, given that the new arrangements have a slightly more prescriptive activity-based fee, which is in line with the New Zealand market precedents. That would be the structural change as we think about the business going forward. There continues to be a very constructive environment in Australia and New Zealand for our businesses.
We think both public and private institutional capital has a role in us pursuing that business fulsomely. Again, those would be my comments.
Okay, thanks. I'll get back in line.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question is from Troy MacLean from BMO Capital Markets. Troy, please go ahead.
Good morning. Just on the institutional JV, you mentioned potentially upsizing it and moving it into different markets. Is that with the same partner, or is there a new partner that could emerge?
I think, Troy MacLean, two answers to that question. In Australia, our focus is on upsizing with the same partner, and that's quite advanced. In terms of the other regions, I think we're having more broad-based discussions that include our existing partner, but may include others. Those are still in the early to mid stages, but moving well. I think we are likely to see additional capital partners come into the business. Certainly, diversification of those relationships would be important to us. We've clearly been able to demonstrate with our existing partners, having deployed NZD 2 billion in the last six months for them on plan and certainly with perhaps even higher quality opportunities than originally imagined that we can deliver. I think that puts us in good stead as we look down the line.
On the deleveraging plan with the approximately NZD 500 million of asset sales in Australia and Canada. For the Canadian, how much of that would be in Canada, and what markets are you looking to sell? I'm just curious, what do you think the portfolio looks like in Canada post the sales?
Yeah. We haven't quite been that prescriptive, Troy MacLean. Our approach to Canada, I think, has been consistent for a little while, where we've been looking to incrementally tune the business. We see, again, an increasing focus to major markets and larger assets within the Canadian portfolio. That's where we've found that we're able to deliver the best returns and find the greatest value. I think that continues to be our focus. The range in Canada, broadly speaking, is NZD 100 million-NZD 200 million. The range outside of Canada is around NZD 400 million. Those are the components.
Just my final questions on the financing on the Healthscope transaction. You mentioned an initial interest rate of 3%. How long is that rate in place for?
That's a five-year commitment. Again, the benefits of our JV structure there coming through, and that's even from our own math, roughly 130 basis points inside what we would see comparable financing in that marketplace going at. Clearly a very attractive and creative structure.
Okay, perfect. That's it for me. Thank you.
Thank you. Your next question is from Mario Saric from Scotiabank. Mario, please go ahead.
Mario .
Mario, your line is open. Sorry, Mario, your line is open.
Hi, sorry about that. Two questions, one on the Healthscope financing and then one on the NZD 1 billion-NZD 2 billion potential third-party capital infusion outside of Australia. Just on the financing, I believe you mentioned the term on the debt was five years. Was that the anticipated term for the debt coming in, and is there anything else that would have impacted that 130 basis point lower than expected rate? I think you mentioned the benefits of the JV partnership there. Presumably, that would have been perhaps contemplated. I'm just trying to understand if anything else has shifted in the market that made the pricing more attractive.
Yeah. Let me try and respond to that. I think, yeah, we were conservative in our initial estimates, Mario, in terms of what that could be and whether that would include what the ownership would ultimately end up being. As we moved to our institutional JV, we had reasonable belief that the rates could come in. I think this was at the high end of the range of that tightening, if you will. We have done recent transactions there with our partners, so we have pretty good visibility, and I think that's just part of the messaging that we were considering a combination of Vital and/or our JV and a combination of capital structures that might go with it as we were forecasting numbers earlier in the piece.
As we've gone there, I would say that relative to our existing commitments with our JV partner, again, they were broadly in line, but maybe 20 to 30 basis points tighter than where we were probably reflecting the quality of the portfolio, the cleanliness of the leases, and the scale of the opportunity. All of which were viewed quite favorably in the marketplace. Not entirely surprising, but clearly we were dealing with a range of possibilities around the original guidance, and that's firmed up now. We can be more precise.
Okay. Then as you turn focus on accumulating fee-bearing third-party capital outside of Australia, how would you compare the potential investment mandates in the fee structures anticipated relative to your existing JV fee structure in Australia?
Right. That's good. I think in Europe, quite comfortably. Again, reminding this is an evergreen structure with a combination of market fees and a promote as well, again, built around core long-term assets. In Brazil, I think we're still working through that and whether or not that we're likely to add a term to that structure, and that hasn't been resolved yet, again, around some of our higher quality, longest term assets. I think that's probably the debate, and we're working through that now, so to speak.
Got it. Okay. Given the early success that you've demonstrated in Australia with the model, have you seen any incremental competitors trying to come in and emulate what you're trying to do?
I think the environment for the space I would characterize in a couple ways. Australia in particular is a very robust and competitive market. I think the Healthscope transaction is illustrative of that, both at the M&A level as well as the broad interest at the portfolio level. It influences our views to take the steps that we took, including the derivative stake and everything, because we knew this would broadly appeal. I think that market condition continues to exist, and there certainly is institutional capital formation in the space there and more broadly in other locales, I think.
That said, in terms of the scale and features of the JV arrangements that we've been able to put in place, I think we're in a pretty evolved category, and I would just say, as demonstrated in this transaction, it gives us the ability to certainly move quickly and to execute accretively on very big transactions. We're focused on that particular combination of things, given what we see as the increasing interest in the space and understanding as well. I think we're in good position to augment our business, of course. Others are trying to do the same, and it's a competitive world, but it's a big world, and there's room for lots of participants. My sense is that there'll be more to do than we're able to do and that we're going to be as selective as ever.
Okay. Thank you.
Thank you. There are no further questions at this time. Please proceed.
Okay, well, thank you, operator. We appreciate the opportunity to address our Q1 2019 results and would wish everyone a good day. Thank you.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.