Good morning, ladies and gentlemen, welcome to the NorthWest Healthcare Properties Real Estate Investment Trust Q4 2018 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 Friday, March 8, 2019. I would now like to turn the conference over to Paul Dalla Lana, CEO of NorthWest Healthcare Properties. Please go ahead.
Thank you, operator. Good morning, everyone. Appreciate you joining us today. I am 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 Q4 of 2018. First, I would 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. Our results for the quarter were in line with our expectations and include annualized quarterly AFFO of CAD 0.88 per unit on a normalized basis and a payout ratio of 90%.
An 11% quarter-over-quarter increase in net asset value per unit to CAD 12.30, primarily driven by favorable FX movements and fair value gains in the REIT's portfolio. 47.8% consolidated LTV excluding convertible debentures, and full year 2018 source currency adjusted SPNOI growth of 4.3% compared to 2017, primarily driven by inflation indexation on leases at the REIT's international assets. All of this underpinned by a 96%+ occupied portfolio and a weighted average lease term of 13 years across an expanded 156 property, 11.2 million sq ft portfolio. In addition to our focus on operations in the quarter, we ended 2018 and started 2019 working on a number of significant strategic initiatives.
In Australia, we have advanced the Healthscope transaction such that we now have definitive agreements to acquire 11 freehold hospital property assets from Healthscope and an AUD 1.2 billion sale and leaseback transaction, conditional on the Healthscope Brookfield transaction, which is progressing well with a targeted closing in Q2 2019. The high-quality portfolio will be 100% occupied by Healthscope on an absolute quadruple net lease basis, with the tenant responsible for all property operating costs, including maintenance capital expenditures. The leases have a weighted average expiry of 20 years and are subject to six annual rent increases of 2.5% per annum, providing strong organic growth, along with an additional potential growth coming from an AUD 500 million-plus development pipeline of expansion projects at an approximately 100 basis point spread over the stabilized cap rates on the properties.
Through leveraging its capital relationships, the REIT intends to structure the portfolio acquisition such that it will manage the 11 properties and ultimately maintain an approximately 25%-30% ownership interest in the portfolio, resulting in an approximately CAD 125 million-CAD 150 million equity requirement, which has already been funded through its existing investment in Healthscope, which will be rolled into the transaction and previously funded deposits. 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 Europe to approximately CAD 700 million, more than doubling over the last 12 months. We were also active in the capital markets, closing in the quarter a CAD 125 million convertible debenture, and post-quarter, a CAD 144 million equity financing, both with significant institutional participation.
In addition to this, capital markets activity were also active on a number of financings and refinancing, much in support of the pending Healthscope transaction. From a regional perspective, firstly, Brazil was on plan for the quarter and the year as a whole, with 100% occupancy and continued strong and predictable income. 2018 constant currency adjusted SPNOI was 6.4%. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver outstanding and strong results and expand its business, thereby opening up the possibility for further partnerships with NorthWest, as evidenced by the recent acquisition of Hospital São Luiz Morumbi in São Paulo for BRL 272 million. The acquisition was our seventh with Brazil's leading private hospital operator. In Canada, we were also on plan, continuing strong performance with positive currency-adjusted SPNOI growth of 1.5% in 2018 and portfolio occupancy up 150 basis points quarter-over-quarter to 93.2%.
The quarter also saw positive renewal rent increases with a 5.7% spread on expiring rents, as well as the start of construction of a new campus Medical Office Building in St. Albert, just outside Edmonton, with 63% pre-leasing. In Europe, we were on plan and performing as expected with positive 2018 constant currency SPNOI of just under 1%. Occupancy increasing 80 basis points to over 96.4%. As mentioned earlier, we continue to find good investment opportunities in Europe, allowing us not only to build scale and critical mass in Germany, but also now to build upon our initial two acquisitions in the Netherlands.
Further, in 2018, the acquisition of four rehabilitation hospitals for Median Kliniken in sale leaseback transactions also opened the door to growth in the hospital segment of healthcare real estate, not unlike other parts of our international portfolio, which are characterized by single-tenant management properties secured with 20-plus year leases indexed to inflation by best-in-class operators. In this case, Median, which is Germany's largest rehabilitation operator with over 120 facilities. In NorthWest Australia portfolio occupancy was stable at 97%, with a weighted average lease term of more than 13 years. First quarter-end, the REIT entered into a definitive agreement to acquire the 11 properties previously mentioned from Healthscope, and will look to further strengthen the REIT's position in the region, while also leveraging existing capital relationships.
At Vital, per its half-year 2019 results delivered on March 1st of 2019, the business reported strong and on-time results, with positive 2018 constant currency adjusted SPNOI up 6%, and stable occupancy of over 99%, and a weighted average lease term of 18.5 years. Also saw a 1% increase in net tangible asset value to NZD 2.24 per unit, while making progress on a NZD 200 million portfolio of ongoing accretive developments. For the balance of 2019, 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 350 million in total, NZD 160 million proportionate share.
In addition to the Healthscope property acquisition, Northwest expects a further NZD 750 million of net investment activity in 2019, split broadly equally between Europe and Australia and New Zealand. Furthermore, we are planning a combination of non-core asset sales, again, approximately CAD 350 million-NZD 400 million, primarily targeted in Canada, as well as NZD 400 million in JV asset sales, in Australia. Lastly, Northwest will increase its JV capital in Australia a further NZD 1.5 billion-NZD 3.5 billion, as well as targeting a further NZD 1.5 billion-NZD 2 billion commitment, similar to the JV commitments in Australia, in Europe. I'm pleased that we've been able to advance a number of these key long-term strategic initiatives during and post-quarter. Our bigger and better portfolio is supported by long-term inflation-indexed assets. As a result, the REIT is even better positioned to deliver stable and growing returns to its 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 you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Stephan Boire of Echelon Wealth Partners. Please go ahead.
Thank you. Good morning. I was just wondering, what kind of same property NOI growth do you expect this year before the effect of currencies?
That's a good question, Stephan. I think, again, we've been targeting in the 3%-4% range pretty consistently in the business. It was 4.3% this past 12 months. I think those are two good data points for you.
Okay. All right, thank you. All right. In terms of your acquisition pipeline, I'm sorry if I missed it, but what do you expect for the REIT alone this year?
We didn't break down those numbers exactly in that format, in aggregate, we have a CAD 1.25 billion transaction underway as you know.
We expect net a further CAD 750 million. I think that will be split, though, between roughly, if I had to say it, roughly 50% to the REIT and 50% into Australia, which is likely to use a combination of our existing capital relationships there, the JV and Vital.
Okay, perfect. All right, great. That gives a lot of color. Thank you. That's it for me.
Our next question comes from Chris Couprie of CIBC. Please go ahead.
Good morning, guys. In your outlook section, you have a point here, increasing investor liquidity by raising new capital and broadening the investor base. Can you explain what you mean by that?
Taking it face value, Chris, I think we are looking highly likely to be now included in the TSX Composite Index, which is probably some good news that is just happening as we speak now. That comes across the next week formally, but it looks like that. I think just with the increase of our market cap and broader investor appeal in the business and better understanding, we're starting to see both new participants. That was evidenced in our recent equity offering in terms of institutional support. I think just, again, certainly more liquidity and other things. I think it's that sweet spot of size as well as understanding and some of the more differentiated parts of the business starting to distinguish itself.
That said, if I can take a chance to riff on it a little bit, I wouldn't say that we're super happy where we are if we compare ourselves to other peers that are in the healthcare space that are trading at a meaningful premium to NAV right now. We continue to be a little bit light. Certainly light on this quarter, coming in at CAD 12.30 a unit. We see a lot of room to improve through investor participation and understanding and hopefully, align those two up a little bit better.
With the Healthscope transaction, obviously, and Vital and so on, your reputation in the Australasian region must be, or profile must be increasing. Is there any thoughts around doing anything in that region, whether it be through a listing or marketing or anything on that line of thought?
Certainly we've already been actively marketing. You'll recall that we've recently added a new regional CEO there, Craig Mitchell, who has a strong and distinguished Australian real estate capital markets background. Of course, we have a good and established platform in New Zealand. I think we're pretty actively marketing at all times now the business. As this transaction works through, it'll give us an even more natural opportunity. We highlight that of the REITs post-transaction, the CAD 6 billion in assets or so, CAD 4 billion of those will be in Australia and New Zealand. It's a meaningful part of the business and certainly a natural opportunity, as you note. Haven't fully progressed the dual listing thought although it's intriguing to us and certainly, any opportunity for us to do things that are complementary to the business is, I think, on for consideration.
I think the main point I would say, though, that we're sort of 90 days out from roughly the closing of that transaction. Having spent a year in the business sort of positioning it for the opportunity and now having the opportunity work its way through its system, we feel like we're in a great place now to both put that into the business and let it do its thing, which is accretive both in terms of earnings and more expansion opportunities, all of the things that we do in the business, as well as open up some of the doors that you've talked about. Certainly in the second half of the year, I think we'll be focused on taking as many natural advantages as we can.
Sure. Just lastly on Healthscope, that range of 25%-30%, what's going to dictate the ultimate percentage? Is it your desire versus the partners? Let's just say at the midpoint of the range, can you just remind us where you think, let's say, consolidated leverage is going to be once the transaction closed?
Yeah. Okay, a few questions in there. That range is defined by the two existing relationships that we have in the marketplace. Again, as you'll know, we have a 25% interest in Vital, and our JV is a 70/30 JV equity, with our institutional partners. Those are the goalposts of existing relationships. We've been running our maths splitting that 50/50 illustratively. Those discussions are going to get resolved in the next short while. It'll be somewhere between the two, more than likely. I think that's the background to that range. I think the maths on each of those goalposts are well known and well described through existing relationships. I'll just maybe let Shailen guide to post-transaction LTV, if that's okay.
Yeah. Thanks, Paul. Good morning, Chris. In respect of post-transaction consolidated LTV, we don't anticipate any material change. I'd note that our equity investment in the transaction is already factored into our balance sheet and that we have circa AUD 150 million deployed into our investment in Healthscope currently, as well as previously funded deposits. That'll ultimately roll into the property transaction. No material financing or changes in leverage expected as a result of the transaction.
Okay, thanks guys. Turn it back.
Your next question comes from Mario Saric of Scotiabank. Please go ahead.
Hi, good morning.
Morning.
Paul, I just wanted to run by some of the figures that you highlighted on the call in terms of potential commitments. As we sit here today, I guess pro forma Healthscope, you've disclosed in your investor presentation third-party fee-bearing assets of NZD 3.5 billion, let's say, rounding up.
Can you walk us through how that CAD 3.5 billion is anticipated to change based on some of the comments that you made on the call?
Right. Yeah. I would think broadly, Mario, it will ultimately double. Again, just for everyone's benefit, that CAD 3.5, the reference that you speak to is the combination of the JV and Vital Capital, the interests in both of those entities that we don't own, just to talk to it directly. Our target is to roughly double that over the next balance of the year to be direct. We're in very advanced stage discussions and more of the discussions on more than half of that, and we see a market and a world that's increasingly coming into the direction of some of the original premise of the JV that we've spoken a lot about on these calls.
Certainly, an increasing interest by large institutional partners in the asset class, and just a very constructive moment in the majority of our geographies around healthcare and healthcare real estate by extension. We find ourselves in a pretty good position in terms of being able to lever that. You'll recall that the initial JV that we've done and that we have in place has some pretty specific components to it. It's evergreen, and it has a number of structural features that we consider to be important. We're very focused on replicating that type of capital in an expanded format in Australia and New Zealand, as well as Europe, as I mentioned.
Okay. Sorry, Paul, did you say within the next year or so?
I think 2019 is our target.
2019. Okay. You just mentioned that it would include kind of additional penetration in Australia then perhaps exporting the model into other regions?
Right.
Got it. Okay. That's helpful. Just a couple of other kind of small questions. Just on the IFRS NAV, the disclosed CAD 12.30 compares to a normalized of CAD 12 per unit. What's the difference between CAD 12.30 and CAD 12?
Two main adjustments. I'd let Shailen and Eric have to get beyond the two to dive into the real detail, but post the equity offering, there was a little bit of near dilution there as is the want in those things, number one. Number two, the currency momentum to today has given back a tiny bit from the year-end. Those two adjustments are the larger. Did I get that right, Shailen?
Yeah. Thanks, Paul. Yeah, I might say those two adjustments are partially offset by an increase in the valuation of our investment in Healthscope. Per our IFRS December 31st statements, we marked that investment as at a December 31st Healthscope unit price. Post December 31st, that has increased materially as the Brookfield bid got formalized. There is about a NZD 20 million increase in the value of that investment in Healthscope post-quarter end, which
Got it.
Partially offset the impact of FX and the dilution from the equity financing.
Understood. Okay. Just on the fair value gain of NZD 58 million, you noted in the disclosure that some of it was related to recognition of excess land value in Europe. I was wondering how much of the NZD 58 million would be comprised of that and what the trigger was to recognize the value.
It's a relatively small amount, I'd say inside of NZD 10 million of the NZD 58 million, related to some excess land value in Germany, primarily. The trigger was really an ongoing review of our plans in respect of that land. As we've continued to explore a potential development opportunity on that land, it became very clear to us that that land was worth more than we'd initially carried it at.
Got it. Okay. As more of a broader question, in terms of excess land value potential in Canada, internally, have you looked at what that kind of value differential could be between the cost of the land for your portfolio today versus what the fair value of that land might be, and in some instances, perhaps a change of use being the driver of the fair value increase?
We haven't in perhaps the same detail as others. There's a couple of specific situations that we've previously spoken to. Obviously, we have a transaction underway at 30 Merchant Street with an institutional partner there. I think last quarter we spoke a little bit about Sheppard in Toronto. Again, some ongoing both development and expansion and ultimately land value recognition. I think those are sort of the broader, the two main ones in the business. Obviously, we have other land in the portfolio, and I'd highlight both in Canada, where, for example, we're building in St. Albert, but we have a number of land parcels that are strategic, and that we're always looking to expand on.
In Australia, where we're very active and have both at NorthWest Australia, you'll have seen a number of transactions this quarter that we've spoken to, smaller ones, but that are strategically located sites next to regional hospitals that are in the early stages of future planning. I think for us, our main focus on property is pretty geared towards those types of things anyway. I think we can always look more in the GTA. There's an incredible moment here and there is probably things for us to consider, again, the couple of things that we've targeted on are advancing and making progress, nothing more specific beyond that.
Okay. The projected or the forecast sale of CAD 350 million-CAD 400 million of assets in Canada this year, would it be fair to assume that the disposition cap rate on those assets would be fairly comparable to your IFRS cap rate for the region as a whole?
Yeah, I think that's a reasonable assumption. That target is 2019.
Okay. My last question, and I may have missed this with the Vital results, but any update in terms of timing on the management contract discussions there in terms of a resolution?
Yeah, those discussions are ongoing. The target is March 31st, in conjunction with potential Healthscope portfolio participation. That's been announced to that market again at the AGM and again as part of the half year results on March 1st. That date stands.
Okay.
Again, I would just highlight. Yeah. That's it. Yeah.
Your next question comes from Troy MacLean of BMO. Please go ahead.
Good morning. Just a question on the CAD 0.88 of normalized AFFO. What level of asset sales does that take into account? Is it only the completed transaction so far, or does that include the potential sale of the Canadian portfolio or of the Canadian assets that you want to sell?
Yeah. No, it's only the completed or committed transactions that we have. It includes Healthscope, obviously, but it does not include any prospective acquisitions or dispositions or new JV capital.
Just with the development pipeline bigger post the Healthscope transaction and the JV, would it be fair to say that acquisition volume could come down over the next couple of years outside of the JV? Or how do you look at what buckets you have over the next couple of years and where you want to invest?
Yeah. Sorry, you're taking me out beyond already guidance here, but I would reiterate, Troy, that the big themes of the business, which are incredibly constructive. I think we are in a very real moment for healthcare consolidation and by extension, the need for healthcare-related capital. Our business increasingly is positioned very well in all its geographies with leading platforms and leading relationships. I'd highlight that in 2018, we did transactions with all of our major partners. So if we looked at our top five tenants, we did transactions with all of them. We've probably announced or will shortly announce transactions in 2019 again with all of them. That's just the existing group. Every time I seem to say that things like Healthscope are an exception, again, this business has been targeting that portfolio since the 2014 IPO, frankly. There are more things like this.
All of those environmental observations, I think apply. Our sense here is that the addition of JV Capital is going to be an important tool in our toolkit to allow us to do the chunkier or more concentrated things. That's the reason we put on the initial JV in Australia because we saw things like Healthscope coming sooner than later. There are other large portfolios in that marketplace that we have some visibility on that could be coming in the next little while. We certainly see similar activity in Europe. Again, our main partner in Brazil just announced another BRL 8 billion internal expansion program coming off of roughly the same sized one over the last five years. All of our partners that we know well are continuing to grow and improve their businesses. That offers us opportunities going forward.
We would say that those themes apply to the business, making sure that we have the tools in the toolkit in the right order and the right way to keep pace with our partners is I think the focus. That for us leads us to a combination of both improving the existing structure of the Canadian business, making sure that it can grow and do things as well as adding even more JV capital and other types of things that we can use to pursue all of these opportunities to their fullest extent.
In Europe, you basically more than doubled the size of the portfolio in 2018. How much more could you grow without meaningfully adding to G&A? Are you happy with the size of the business or is that something you still want to get bigger?
We'd have a few really specific answers to that, so I try and work through them. The general theme, Troy, is I think we expect to have a similar level of growth in 2019 as we did in 2018, barring any significant one-off sort of transactions, a number of which are queuing in that marketplace. We certainly have high visibility on CAD 350 million worth of, we'll call them incremental tuck-in acquisitions, and that's a range of MOBs in our core markets in Germany. We've identified new markets in the Netherlands, as you know, and into the rehab hospital space. You'll have seen that we did another transaction with a group in addition to Median, AMEOS Group, another large consolidator there. We certainly see that culmination of activity delivering CAD 359 of opportunity over the next 12 months with pretty high visibility.
Again, I think the platform, certainly other than regional management tools for the medical office building part of the business, is pretty well-sized. That's a 30-plus person platform now with full corporate functionality, right from the investment suite down to the operating suite. We are, I would say, hitting stride in terms of the size of the platform and its relationships, and I think it's sort of been five years to get to this point for us. The path has been quite similar to the one we went through in Canada, and just much bigger markets with more to do. I think we're very feeling good about the existing business there. Around that, I would say that Europe is in a moment of hospital consolidation. We've seen a number of large transactions happening.
We are aware of a number of large portfolios queuing, whether they're 2019 or 2020. Certainly, a very meaningful set of opportunities coming down the road that we see potentially being of high interest. We're certainly working very hard to position ourselves, as we did in Australia, to have the tools in the toolkit to be able to pursue those in the right way and at scale. I think two answers to that question.
Would any of the assets in Europe potentially make its way into the JV you have? Or do you have to do something separate to have a JV in Europe?
It's a great question, Troy. I don't think we're quite as far advanced on that yet. It's not unimaginable. I think, the themes that we lived in Australia are the ones that we know best, obviously. That seeding a relationship with tangible things makes it a little bit easier for people to have visibility and certainty that it's not a theoretical exercise, if you will. Not that we ever approach it that way, but clearly from the capital side, that's one of the considerations. That's what we did in Australia, of course, so that playbook worked well and continues to work well. I'd say it's possible. It's not a requirement, and really, we want to make sure that we have clarity of investment focus, and our focus is, again, certainly within the business in Europe, broadly on the cure side of the healthcare real estate space.
We want to be able to do all those things. We like that complementary fit of long-term hospital assets and certainly the medical office building space. Finding a partner that has similar views and wants to do all those things in a multi-market format with the combination of things that we bring to the table is sort of where we're thinking. Again, it's not an absolute requirement, but it's a possibility, and I think we're working through that.
Thank you. I'll turn it back.
Your next question comes from Tal Woolley of National Bank. Please go ahead.
Hi. Good morning.
Morning, Tal.
I just wanted to start on the balance sheet. I think you've got a small convert and some credit lines to roll prior to the end of the year. When you think about going forward and given what your plans are, do you have a sort of set idea of what sources of that capital you want to use between secured credit or bank debt and converts post the Healthscope closure?
Thanks, Tal. I'll let Shailen speak to that if that's okay.
Yeah.
Hi, Tal. Good morning. In respect of our 2018 or 2019 maturities, I'm very much anticipating to refinance in normal course. A lot of them are rolling shorter-term facilities. In terms of our broader strategy on the balance sheet, I continue to emphasize that we have really a balance sheet that's quite flexible and poised for both deleveraging as well as significantly accretive refinancing. We have about CAD 250 million of corporate and property level financing with a weighted average interest rate of just about 7%. In the context of today's market, that could be refinanced at significantly lower rates to the tune of about 200 basis points. That would probably take us to a bit more of an unsecured strategy relative to what we have today.
As we look to grow in various regions, we also note that we look to leverage those respective capital structures, and we note the accretion that comes through from our in-country financing, specifically in Germany as well as in Australia when we have the benefit of our JV partner.
Okay. My last question is just on, as your investment priorities seem to be very much outside Canada, mostly from what you discussed earlier. Is there some sort of threshold of having assets outside Canada where tax planning becomes a little bit more complicated? I guess I'm just wondering because you'll have so much outside of the country. Is there a size at which maintaining the REIT structure or just your tax planning gets way more complicated?
Yeah, Tal, I'm happy to take that on. There's a lot embedded in that question. I guess at the highest level, in terms of minimum Canadian content, if you may, for REIT or SIFT status, that's not necessarily a driver, and we don't see that as being a constraint. We are a SIFT in all of our regions. That hasn't posed an issue historically, and we don't see any constraints around that.
Okay, perfect. Thank you very much.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. There are no further questions at this time. Please proceed.
Okay. Thank you, operator. Thank you again to everyone participating on the call. We do appreciate your interest in NorthWest. Goodbye, and have a good day. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.