Earnings Call: Q2 2018

Aug 9, 2018

Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties REIT Second Quarter 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 Thursday, August 9, 2018. I would now like to turn the conference over to Paul Dalla Lana, CEO. Please go ahead. Thank you, operator, and good morning, everyone. Appreciate you joining us here today. I'm joined by Shailen Chandig, the REIT's CFO and Peter Riggin, the REIT's COO. And together, we are pleased to share with you our results for the Q2 of 2018. 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. Before getting into the details of our results, I thought I would provide some perspective on our business in this moment. Northwest began 2018 in the best position in its history, building expressly upon the strategy it put in place in 2015. In a nutshell, we are focused exclusively in healthcare real estate, bringing our real estate acumen knowledge and relationships to the world's largest and fastest growing industry, health care. We're differentiated with a high quality infrastructure portfolio with more than 71% of our income based on long term leases that are fully indexed to inflation. And lastly, we are scaled as a world leader with $5,000,000,000 in assets and leading platforms in each of our markets. And now to our results. Quarterly financial and operational highlights include annualized quarterly AFFO of $0.98 per unit on a normalized basis and a payout ratio of 89%, a decrease in net asset value of 4% quarter over quarter to $11.50 primarily driven by FX in the quarter, approximately 50% LTV, excluding convertible dementures and sourced currency adjusted SPNOI growth of 5% as compared to the Q2 of 2017, driven largely by inflation indexation on leases of the REIT's international assets. All of this underpinned by 96 percent portfolio occupancy and a weighted average lease term of approximately 13 years across an expanded 152 property, 10,600,000 square foot portfolio. The Q2 of 2018 marked another exceptionally active period for the REIT, highlighted by the completion of 3 key strategic initiatives. Firstly, the REIT expanded its European footprint with the acquisition of 2 high quality medical office buildings in the Netherlands, an attractive market with defensive health care characteristics and a significant consolidation opportunity. Combined with its entry into the German post acute care rehabilitation market in the Q1 of 2018 through a partnership with MedianKliniken, The REIT is effectively leveraging its operating experience and management platform in the region to scale its European business. In Australia, the REIT, together with Vital Trust, acquired a 10% strategic interest in Healthscope Limited, Australia's 2nd largest private hospital operator, with a longer term objective of jointly participating in the ownership of Healthscope's underlying real estate portfolio. The REIT, in conjunction with Vital, its existing JV partners and other institutional investors, has secured debt and equity commitments for a potential $2,000,000,000 plus portfolio real estate transaction. At post quarter end, the REIT entered into a AUD 2,000,000,000 dollars debt and equity JV with a large sovereign wealth fund. The focus of the fund is to acquire and develop core Australian healthcare real estate. The JV will have an indefinite life and be 70% owned by the institutional investor and 30% owned and managed by the REIT. As part of the transaction, the REIT has agreed to sell a seed portfolio with a completed value of AUD 412,000,000 which is expected to close in the Q3. And finally, subsequent to quarter end, the REIT entered into an agreement to acquire Hospital Morumbi from Rijador And for Brazil, Bria is CAD 258,000,000 approximately CAD88 1,000,000 at a 7.5% capitalization rate. The acquisition is the 7th with Brazil's leading private hospital operator and will be funded from net proceeds from the sale of initial assets into the institutional joint venture. With significant growth opportunities in both Australia and Europe, the REIT will continue to leverage its differentiated healthcare real estate platform and anticipates attracting additional fee bearing institutional capital to support a target $4,000,000,000 growth pipeline. Taken together, these initiatives provide The REIT with significant runway and resources to continue to scale its business in both the near and long term. In addition to increasing our scale, we have significantly improved our capital markets profile, which will enable us to leverage new opportunities and also further improve and grow the business over time. Statementally, I note the following: Finance and liquidity. The REIT entered the Q3 of 2018 with a significant opportunity to continue to optimize its balance sheet, carrying more than approximately $500,000,000 of historic corporate and property level financing with a weighted average interest rate of 7.7%, which presents a natural opportunity to generate meaningful interest rate savings through refinancing at lower rates. With consolidated leverage at 50.2% and 56.1%, excluding and including convertible debentures, respectively, the REIT will continue to be focused on accretive deleveraging through capital recycling and leveraging its global platforms and transactions similar to its recent institutional joint venture to reach its target of an LTV below 50%. Net net asset value. Having seen sequential gains over the past 12 months driven by significant portfolio revaluation gains, the REIT has eliminated approximately $135,000,000 of historic goodwill related to both its VITAL properties and former generation portfolios. This was broadly offset by significant value creation in the REITs and handset manager given the recent institutional joint venture and partially offset by an approximate 4% decrease in currency, leaving NAV at $11.50 per unit for the quarter. Looking forward, we see significant path to approximately $12 net asset value through both currency normalization as well as completion of an existing $280,000,000 ad share pipeline of accretive expansion opportunities. In terms of currency, the REIT's portfolio basket of currencies depreciated relative to the Canadian dollar, about 5% quarter over quarter. Regionally, Brazil was on plan with 100 percent occupancy and continued strong and predictable income with constant currency adjusted SPNOI year over year of 7.6% improved. Operationally, the REIT's major tenant, Rejador, continues to deliver strong results and continues to grow in an improving economy there, which will open up further opportunities for the REIT. In Canada, the REIT was on plan and performing well with constant currency adjusted SDNOI of 5% year over year and portfolio occupancy up to 92.1%. Post quarter end, the REIT entered into a significant lease out of Glenmore Professional Center in Calgary, taking occupancy to more than 90%. In Germany, it was on plan and performing as expected with constant currency adjusted year over year 0.5% and occupancy at 95.7%. Along with positive operating performance, the quarter was again an active one regarding investment activities with the acquisition of 3 medical office buildings for a combined value of approximately CAD165,000,000 As mentioned earlier, the acquisition of 2 high quality medical office buildings in the Netherlands, the REIT's first properties outside of Germany, which opened up a new opportunity to scale our platform there further. Vital Trust reported strong yearly results. It's it was its year end for 2018 with constant currency adjusted SPNOI up 3.1% year over year. Its occupancy level at more than 99% and our net asset value or NTA, as it's described there, increase of 10% in source currency. North West Australia also performed well and on plan. For the balance of 'eighteen, building on these strong results, ongoing portfolio improvements and continued supportive trends in the health care industry, the REIT will continue to focus on completion of its eleven committed development projects, dollars 280,000,000 at share, which are all 100% let and expected to deliver in the coming 18 months, primarily in Australia and New Zealand, where subsequent to the quarter end, we also welcomed a significant addition to our ANZ leadership team with Craig Mitchell joining as CEO. I'm pleased that the Northwest Global team has been able to advance a number of key long term strategic initiatives during the post quarter. Our bigger and better portfolio is supported by an even better lease structure internationally with long term inflation index assets. And as a result, the REIT is better positioned to deliver stable and growing returns to its shareholders. A target now of $12 per unit as developments complete over the coming 12 to 18 months and an LTV forecast of below 50%. I'll now ask the operator to open up the call for questions. Thank you. And your first question is from Stephane Boire from Echelon Wealth Partners. Please go ahead, Stephane. Thank you. Good morning. Hi. I just had a few questions for you. First, I wanted to have a bit more clarity on the one time items relating to the ANZ manager and the G and A. Are there any non recurring items that we should consider for Q2? I think it was $4,600,000 or something. I'll just turn that call to Shailen Chande, if I could. Hi, Stefan. So in respect of some of the non recurring items across the portfolio, both in ANZ and more broadly, we do detail in the MD and A in our normalized AFFO calculation, some of the related adjustments. In ANZ specifically, there has been a lot of transactional activity as we noted through both some of the ongoing developments as well as acquisitions in the Vital Trust platform, which do generate activity based fees. Although those tend to be lumpy on a quarter over quarter basis given recent activity, which has been relatively stable quarter over quarter. It's to some degree considered the recurring non recurring in terms of the ability to generate activity based fees. Hopefully, that provides some context and happy to perhaps dive in more detail offline or after you've had a chance to go through that normalized AFFO detail. Okay. Yes, please. I'd appreciate it. We'll talk after the call then. And also I wanted to I was wondering if you might have an update on your strategy in regards to your 10% interest in Health Scope? And how should we view it in light of your recent JV partnership? Right. So I think we've been reported in the press pretty significantly in Australia. So I recommend that as a good starting point around our focus there. But I think it's quite simple. We've taken the interest in conjunction with Vital Trust to ensure that we have a seat at the table of what we see as one of the most significant real estate opportunities in that region. That M and A process is playing out as we speak, although is moving a little bit slowly in the moment, but still likely to lead to what we see as a corporate transaction, which is likely to be involving a sub real estate transaction, and it's our focus is on the real estate. So clearly, this interest in the headstock here gives us a seat at that table. I think as I mentioned, we've secured both debt and equity commitments to fund potentially a $2,000,000,000 plus portfolio real estate bid on related to Healthscope and that is separate from our institutional joint venture in terms of its commitment and potentially its structure, although we'll likely have similar attributes to it. So we see ourselves well positioned to be an active and engaged participant in any process that develops there over the next little while. And certainly, we're very focused on this as it represents one of the most strategic investment opportunities that we see in the industry. I would call back perhaps some history. 4 years ago, when Healthscope submitted its initial public offering, It ran at, we call it, a triple track sales process, trade sale, an IPO and potentially a property sale. And Vital and Northwest at that time were the leading bidders on the property portfolio. So we've focused on this for quite a while. And certainly, we see this as a generational type of opportunity in the Australian hospitals market. So that's the context for our focus and certainly we're structured and ready to go when and if that opportunity materializes. Okay. That's really good. Thank you. And finally, it looks like you're momentarily reallocating capital from Australia to Brazil. That definitely makes sense at this juncture. Although does this mean that you don't see immediate opportunities for the JV at this time? And relating to that question, how do you feel in regards to the currency hedging in light of the real volatility? Right. I think, again, we've got to be careful to not define the investment windows too narrowly. I think that comment is really around the next 30 days when both of those transactions are likely to close. But clearly, we remain quite constructive on Australia over time, and we do expect to have capacity and the ability to grow that type both the JV and potentially the Healthscope portfolio transaction in due course. I think, again, this is a bit of an exceptional moment for currency volatility, and I'm not sure that it's necessarily the real that's so entirely volatile, but really the Canadian dollar is relatively strong. We're closely watching it. And as you know, we've set without being too prescriptive a limit in terms of our portfolio around exposure to the real and that 20% to 25% range of our business, clearly with growth in Australia and with the trajectory of both the JV and potentially other transactions, we think that's going to be at the low end of the range over time. And so we're comfortable with any of the volatility, as you said, that might come out of it, just reemphasizing that the Brazil real estate assets have very visible and growing cash flow over time. And we do believe that as this moment of world currency volatility or change normalizes that, then I think Brazil will find a natural place in that. So again, lots of subcurrents, but within our portfolio, again, we see the underlying cash flow and the underlying value opportunities in Brazil in the right measure in our business offering still attractive risk adjusted returns. And we're focused to gain very much on the mid to long term there in terms of really the highest quality assets and the best locations that you can have in the industry. So with all of that, yes, we're comfortable. Okay. Okay, that's good. All right. Thank you. That's it for me. Thank you. Your next question comes from saraham Srinivas from BMO. Please go ahead. Thank you, operator. Good morning, everyone. For my first question, are there other developments probably other markets in Europe that you would look to enter in addition to Netherlands? Again, as we look to scale our European business, the nice thing is there are other adjacent markets that have attractive characteristics to Germany and the Netherlands. But for the moment, I think we do see a lot of runway in those two markets. And again, just emphasize that in the case of Germany with our post acute care rehab investments, we have a very attractive vertical there. We do see in the near term 3 or 4 meaningful transactions that offer again this long term index deflation, credit quality tenancy that we like in other parts of our international portfolio and sort of offset some of the intensity of the MOB business that we have in Germany. So we see a nice vertical emerging in Germany around that post acute care rehab space that we've started to invest in. And I think in terms of the Netherlands, one of the subtle market points, although it's a smaller market by population and obviously by health care opportunity compared to Germany, It is a more concentrated market, and it does have the advantage of having the ability more broadly to invest in the acute care space, not the hospital space that we like. And so that market has restructured to allow for that investment. We do see a lot of opportunity to partner with the leading hospital operators in that market. And again, having a market moment where capital is likely to be sought and required in the industry in the acute care space, which we like. So again, the potential to have very long term significant assets like we have in Australia and Brazil, for example, in addition to an MOB space that is typified by the types of investments that we just made. So I think taken together, we see those 2 markets in the near term of offering a lot of runway. And certainly, when we look at the types of returns that we can generate with 6% to 7% cap rates and 2 ish percent interest rates on long term financing. Those are very attractive criteria for us. So again, we're quite concentrated on making sure that we get scale in both of these new markets before we go any further afield. But the nice thing about Europe is that everything is close. And certainly, in terms of potential for future capital partners, like our JV in Australia, we have a high degree of interest right now. So we're certainly focused on putting ourselves in the position to be within a small select group of European markets, again, a leading player. Thanks for that color. That was really helpful. Probably shifting focus a bit towards Brazil. I like I've seen the new outpatient care building development that you mentioned in the report. I was wondering if you could give me some color on the timing of this development in terms of when do you see this getting completed and when do you see the Northwest acquiring it? That's right. So the one thing we know about Rigidor is they tend to move pretty quickly. So the good news is that as part of the HMB transaction that again I didn't expressly speak to in the conference call script, but nonetheless happens concurrently with our Marumbia investment. We've had an administrative building complete already. So we'll be closing on that concurrently with the Marumbi transaction. That's about a $5,000,000 investment or so. And then outpatient clinic is under construction as we speak, probably about a 12 month completion there. So and that's approximately $25,000,000 Both of those go to expanding the HMB campus, which is one of the suburban Sao Paulo, if you could say it correct, largest assets that we have. And again, speaks to a very good asset continuing to grow and evolve and having these brownfield type of expansion set that are, we think, quite unique to the industry. These are being done at, again, roughly 50 to 75 basis points wider than today's in place cap rates. So at an attractive spread, again, with 3 gigaher doing all of the work. So really, we're a funding partner to this development and it finds on completion and when everything is done. So we also like that type of investment. The new Murumby Hospital has a similar size, again, approximately all in $30,000,000 expansion in planning. That timing hasn't been set yet as Richdor is looking broadly in the area to do a very, very significant expansion. It is one of the best hospitals in Sao Paulo and with the Interiors portfolio. And so as an initial investment, we're super excited to have again what we consider an absolute trophy asset with that future expansion potential and perhaps even a larger regional opportunity, which is being defined by Regidor as they continue to weigh their business. So these are the types of things that we look for. And again, this would be the highest quality asset that you could acquire in the space in Brazil or anywhere for that matter. This is a major regional hospital and one of the best neighborhoods of one of the big cities in the world. So we are always constructive when it comes to things like that. Thanks, Paul. That was really helpful. And probably my last question is out in the Pacific Ocean and that's with regards to HealthCo. I know you spoke about it and the color was really helpful in the first question. But I was just wondering if you had any comments on the recent development like post evaluation of like after the Board evaluated the assets etcetera. Has there been any development after that in terms of our interest in the real estate portfolio? I think sorry, if I understand the connection. And two comments that I would make. As an existing landlord to Healthscope in the Frankston asset that we have, as well as an ongoing participant in the market, we're in constant dialogues with them about providing one off tailored solutions to their portfolio. So we have 2 or 3 dialogues going on with them about optimizing or improving or expanding. And that's probably the strength of our Australia platform relative to others is that we have that ability to find and source and provide a true real estate platform to these hospital players. So there's 2 or 3 things at an asset level that aren't part of the corporate moment that Healthscope is involved in, that we're working on. And we're optimistic to be able to to be able to execute on that. In terms of the corporate moment, I think a couple of observations. I mean, clearly, the slow burn in terms of responding to the current bidder group that's there and potentially other suitors. And I think that's really around the large real estate moment that they have, which is the opening of the Northern Beaches Hospital, which is their major asset. This is a major $800,000,000 $900,000,000 public private hospital just north of downtown Sydney, which is really set to open in the fall, our fall, but sort of later this year. And so clearly an impactful event for Healthscope. I'm not sure that, that opening is going to provide huge visibility in terms of operations and value. That's something that's going to take some time. But that's the next major portfolio event as it relates to the Healthscope company. And we see that coming this later this year. So I think the moment there is it continues to be active. And I'd just highlight that the bid by the BGH Group, which really set this process off, is in support of Healthscope's largest shareholder wanting change. And I think that's the Australian Super, which is the largest investor in Australia and clearly an impactful one. And I don't think the characteristics behind what led them to make their initial move and the conviction that they have to ultimately changing the direction of Healthscope have changed. So I think while there's a little bit of time between here and when something might happen, I see those elements as still being in place. And so our response to that is, again, to be ready to move. As I said, we underwrote the portfolio and obtained debt and equity commitments to put ourselves in a position to move quickly. And we expect that sometime after their results release, which comes later this month, and the opening of that hospital, the next round of corporate activity, I think, is likely to heat up. And I guess, we be at the table, which is our objective. Thanks, Paul. That was really helpful. And yes, that will be all for me. Thank you. At this time, there are no further questions. You may proceed. Okay. Thank you, operator. I might just make one more point that maybe it didn't clearly make as much as our investor update has. And I think it's important just to draw this connection directly, which is with the announcement of our JV and certainly some of our other third party capital initiatives and including the Healthscope 1 that we just spoke about, We now see pretty clear visibility to potentially $4,500,000,000 to $5,000,000,000 of fee bearing capital in our business and really the capacity to grow this business correctly in the near term from $5,000,000,000 today to potentially up to $10,000,000,000 in the pretty near future. I think for us, those are very profound steps, and we've taken a long time to get to this point. We took our time in terms of picking our JV partner, which I think, of course, is a two way process, but really has some unique elements in that this is evergreen capital. This is capital that has the ability to be expanded both within region and in other regions and certainly positions our business with more capacity than it's ever had. And certainly, we think capacity that allows us to pursue the fulsiveness of the healthcare real estate opportunity in all of our markets. So we're very enthused by that. Clearly, the impact on the business can be significant. Today, the asset management part of our business is generating about $30,000,000 to $35,000,000 on a run rate basis in income for the business. We see that with some of the deployment of these future commitments potentially growing to $50,000,000 And a lot of this could happen in the near term given some of the transactional activity that we're pursuing. So it is quite a dramatic step for our business, one that we're very excited by and to have the confidence and support of major global institutions doing this. I think James speaks well to both our plan and our ability to execute. So we're in a very positive moment for the business and really looking to take these steps at pace now. Well, thank you. I appreciate your time and enjoy the rest of your day. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please