Good afternoon. My name is Chantelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Northwest Healthcare Properties Real Estate Investment Trust First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Paul Dalla Lana, CEO of Northwest Healthcare Properties Real Estate Investment Trust, you may begin your conference.
Thank you, operator. Good afternoon, everyone. Appreciate you joining us. I'm joined today by Shailen Chande, the REIT's CFO, and Peter Riggin, the REIT's COO. Together, we are pleased to share with you our results for the first quarter 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 the risk factors outlined in our public filings. The first quarter of 2018 marked another active period for the REIT, highlighted by high-quality German and Australian acquisitions, the integration and rebranding of the REIT's Australia-Asia management platforms, and the completion of previously announced Canadian capital recycling initiatives.
In addition to a very busy transactional quarter, the REIT continued to deliver strong financial and operational results across an expanded 149 property, 10 million square foot diversified healthcare real estate portfolio, underpinned by long-term inflation index leases that now account for more than 71% of income. Post quarter-end, the REIT announced the acquisition of a 10% strategic interest in Healthscope, one of Australia's leading private healthcare hospital operators. With the intention of leveraging this position to access Healthscope's underlying real estate portfolio of high-quality Australian hospitals. In addition, we are also pleased to announce that material progress was made in advancing our planned approximately AUD 2 billion Australian institutional joint venture initiative. We are targeting finalization late in the second quarter or early in the third quarter of 2018.
With more than CAD 2.5 billion in assets and growing in the leading healthcare real estate platform in Australia and New Zealand, Northwest Healthcare Properties is well-positioned for the next phase of growth and opportunity in this exciting market. For the quarter, our financial highlights were as follows: annualized quarterly FFO of CAD 0.92 per unit on a normalized basis, representing an increase of 6% year-over-year, and a payout ratio of approximately 87%. An increase in net asset value per unit of 2.7% quarter-over-quarter to CAD 12.32 per unit, primarily driven by FX gains in the quarter. Approximately 47% LTV, excluding convertible debentures, source currency-weighted normalized cash SPNOI growth of 1.8% as compared to the first quarter of 2017, driven largely by inflation indexation on leases the REIT's international assets. All of this underpinned by 96% portfolio occupancy and a weighted average lease term of approximately 13%.
Segmentally, I note the following. Finance and liquidity. The business is well positioned for growth with more than CAD 250 million of liquidity across the entire business to pursue identified initiatives. Additionally, there remains significant opportunity to optimize the REIT's balance sheet by lowering its weighted average interest rate and extending its term to maturity on approximately CAD 350 million of existing finance, which we are focused on. Net asset value. The value of the REIT's portfolio increased by CAD 41 million, or 2.7%, quarter-over-quarter as a result of both currency appreciation, income growth, and portfolio gains. All international regions enjoyed growth, with the strongest performance in Brazil and Australia. We see these trends continuing through the balance of 2018, with continued cap rate compression for high-quality healthcare infrastructure assets. Together with the expected completion of significant development projects in Australia and New Zealand, we anticipate continued NAV per unit growth.
Currency. The REIT's portfolio-weighted basket of currencies appreciated relative to Canadian dollar approximately 2.4% quarter-over-quarter. From regional perspectives, Brazil was on plan, with 100% occupancy and strong income SPNOI year-over-year, +2.7%. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver strong results and growth, opening up the possibility for further partnerships with the REIT. In Canada, we were on plan, performing well, with normalized cash SPNOI up 1.2% and portfolio occupancy at 91.4%. The quarter also saw some investment activity in Canada with the conclusion of the capital recycling initiatives and sale of previously announced Sun Life Financial Edwards Centre across proceeds of approximately CAD 167 million. In Germany, we were on plan and performing as expected with cash SPNOI up 2.1% year-over-year and occupancy at 97.2%.
Along with positive operating performance, the quarter was an active one regarding investment activities with the acquisition of two medical office buildings and two post-acute care rehab clinics for a combined value of approximately CAD 111 million. The acquisition of these two post-acute care clinics and their 25-year lease terms represents a milestone as the first healthcare infrastructure properties acquired in Germany and our first transaction with MEDIAN Kliniken. Germany's leading rehabilitation clinic operator. Additionally, the expansion into rehab clinics moves the REIT more towards its strategy of focusing on assets with long-term inflation index leases, with minimal capital and leasing cost commitments. Vital Trust reported cash and SPNOI year-over-year +1.7%, highlighted by occupancy levels over 99% and increased weighted average lease term to maturity of approximately 19 years. In Northwest Australia, also performed well, with portfolio occupancy stable at 98.5%.
Growth continued with the successful acquisition of the remaining 50% interest in Epworth Freemasons Hospital for AUD 52 million. For the balance of 2018, building on this position and supported by strong healthcare industry trends, the REIT will continue to optimize its balance sheet by repaying higher cost financing and introducing further tenure and flexibility to its capital structure. Drive internal growth through the completion of its 11 committed accretive value-added development projects totaling CAD 223 million. Complete its Australian institutional JV, bringing significant fee-bearing capital and capacity to its market-leading ANZ business. Leverage its strategic Healthscope investment into a significant long-term real estate opportunity, likely in conjunction with Vital Trust and further institutional partners. Continue to scale our German business with the addition of further MOB and rehab hospital assets. Selectively recycle capital from lower growth or subscale assets into long-term inflation-indexed assets.
In sum, our REIT is focused, differentiated, and scaled, and better positioned than ever to deliver stable and growing returns to its unitholders. With this in mind, we reiterate our run rate guidance to AFFO of approximately CAD 0.95 per unit in 2018, a NAV of CAD 12.50 per unit and LTV below 50%. I'll now ask the operator to open up the call for questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Frederic Blondeau with Echelon Wealth Partners. Your line is open.
Thank you.
Go ahead.
Good afternoon. Three quick questions from me for now. First, in terms of capital allocation, it looks like the Real took a plunge, and I was wondering how you feel investing more in euros at this point from a Canadian standpoint versus potentially contemplating opportunities again in Brazil.
I think we're always considering currency when we look to allocate capital, Fred. We know that, relatively speaking, the euro has outperformed and perhaps the Real more recently underperformed. I think we do tend to take quite a long-term on our investments. When we think about Germany, we obviously see a number of very accretive long-term opportunities there. We are likely to continue to grow and scale that business. We are constructive on Brazil as well, and certainly within the context of our existing relationships, we do believe that we'll see opportunities there going forward. I'm not sure that fully answers your question, but I think probably a little bit of both, although we do consider Europe still workable within the current exchange rate environment and more importantly, within the investment climate that we're in.
Absolutely. That's fair. Is there a point where you would contemplate hedging currencies? Are you getting to a point where you're getting to a size where you would have to at least explore the idea?
I think yes. We've said historically that we always felt that given our currency diversification and some of the relative relationships between those currencies, it allowed us to be fairly comfortable without express hedges between the two. We've equally said that when things started to weight up in any particular direction, that we would consider that. Clearly, as we look at the business right now, we are weighting up very significantly in Australia and New Zealand. I think as we think about how that might fit within the business, it's likely that we would consider some things there. That's probably a quick answer to the question, but really around that balance and diversification of our four global currencies.
Yeah. In terms of the potential partnership, it looks like it took a bit longer than first expected, I guess. Also perhaps it is also more substantial than expected. I was wondering if you could expand on that.
Yes to the former. I think for two reasons. Obviously, as our first initiative, we wanted to get the arrangements right and to work through them fairly methodically. That's taken perhaps a little bit more time than we initially imagined, but I'm happy to report that we're substantially through that. More importantly, though, we've identified clearly some new opportunities in region and in trying to anticipate that as part of what we're doing, it is taking a little bit of time. We do see both of these issues coming into clarity over the next short while, and I'm highly confident that we'll have all of the formal terms to announce, certainly before our next call and very likely by the end of this quarter.
Yep. Yeah, absolutely. Could the scope of the partnership be extended to other countries at some point?
I think the nature of the investors that we're speaking to are all very global, so there's a very reasonable possibility that could be done. That was a high criteria for us when we started discussions. Although the initial program is very much Australia focused.
Yep
We do see that being, over time, portable, if we do what we say we're going to do and people get comfortable with the opportunity set more broadly defined. I think that's the good thing about the type of people that we're dealing with, that they're relationship based and global.
Perfect. Lastly, I was wondering if you could give us a bit more details on your expected development yields at this juncture, and whether you see any risk that yields could compress in the short to midterm.
Right. Just pulling that together right now. Yeah. We've got it historically to approximately 100 basis point, positive spread to our cap rates on the majority of our developments. It's probably a combination of 75 to 125. We do see approximately a 7% average yield on that basket of developments.
Yep.
Against, again, a cap rate sub 6 on that. Certainly both accretive in terms of value creation and income for the business. Again, reminding everyone that these developments are very de-risked and that they're 100% let and either fully cost plus contracted or in most cases even, we're providing capital to the hospital operators to do the work directly. We see them over the next 12-15 months coming in very cleanly and positively to the business.
Perfect. Thank you very much. I'll leave it there.
Thanks.
If you would like to ask a question, press star one on your telephone keypad. Your next question comes from Troy MacLean with BMO Capital Markets. Your line is open.
Good afternoon.
Troy, Hi.
Just on Healthscope. I know it's obviously pretty early days, what part of their portfolio are you targeting? Is it the hospitals? Would you be willing to own really anything that they're operating, how do you think about that?
Yeah, I think we have both an existing relationship with Healthscope, we're already their landlord at Frankston in Victoria. We know the business well and have been partners with them on other assets in the past. I think, Troy, there are lots of possibilities for how we might participate in a potential portfolio sale. Obviously, we're prepared to consider all or even parts of the portfolio if that's the right thing for the business. We're working very hard to be sort of a supportive partner and a long-term player to the variety of groups, I think, that are considering what to do there. The business is a significant one. Again, really with almost 30 owned assets today, most of those are very high quality and would meet our investment criteria.
We see a very significant opportunity, that's the reason we've taken the position that we did.
Could the Healthscope assets, potentially, could that be part of the JV you talked about?
It's not, actually. We're treating it as a sidecar opportunity. I think, again, just to guide to that, we know clearly it could have been, in this case, because we see significant opportunities outside of this, we wanted to have capacity in both directions. For us, it's an added opportunity that we haven't talked about. Clearly, we do expect the potential to consider similar terms and similar structure to what we've agreed on the broader or in the initial JV, if we can get that right. It's not a requirement, and I think we see a number of possibilities as the situation evolves.
Just finally, when you look at Germany and Australia, New Zealand, are those markets becoming more competitive for acquisitions? Is it still local players, or are you seeing more international money look for acquisitions in those markets?
I think it's safe to say that each of the markets we're in has a degree of competition to it. I think on any given asset, we could see all or some of the above. In the case of Germany, and in particular in the medical office building space, it's clearly very much a private market, and it's a market that, again, as we know here from Canada, requires both an operating platform and capital and the will to sort of go through that process. That's a small number of players that could do things at scale in that space. More and more, there is decent private capital available, that's what we tend to see as we look at things at the asset level. There aren't a lot of portfolios, as was the case in Canada.
It's a ground-up initiative I think in the rehab space, it's a little more diversified, my answer, and we see a broad range of potential competitors there. Again, clearly tends to be more focused healthcare investors. It's not quite into the general category of capital, but still broader appeal. That said, I think we find enough opportunities. It's a big space, and there's lots to do. Australia, I think is a bit of both and clearly certainly attracting more capital and more interest in healthcare real estate. We, of course, have by far the largest platform in the region, and I think we have a very specific view as to what we're doing and how to leverage that platform.
When we get to the sharp edge of things, we see our offering as being not just capital, but also the ability to provide management and execution capacity to our partners. I think that's where we're the most differentiated, but certainly, from private into other larger scale organizations, we see competition. In general, I think like a lot of alternative asset classes. There's increasing interest in the space, and probably the biggest challenge for people coming in is lack of relationship or experience. Clearly, with our institutional partners, that's one of the core offerings that we're bringing to the table, and that's a reason that we wanted to do that, which is to harness that interest and to really leverage it to allow us to be a very meaningful consolidator.
Thanks for the color. I really appreciate it, and I'll turn it back. Thank you.
There are no further questions at this time. I will now turn the call back over to the presenter.
Okay. Well, thank you, operator. Again, appreciate everyone participating on the call, and we appreciate your interest in Northwest. Have a good day.
This concludes today's conference call. You may now disconnect.