Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties Real Estate Investment Trust Q3 2022 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during the call you require immediate assistance, please press star zero for the operator. This call is being recorded today, November fifteenth, 2022. I'll now turn the conference over to Paul Dalla Lana, Chairman and CEO. Please go ahead.
Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm joined by Shailen Chande, the REIT's Chief Financial Officer. Together, we are pleased to share our results for the Q3 of 2022. 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 all of you to the risk factors outlined in our public filings. Now to the quarter.
The REIT's high-quality and defensive CAD 10.6 billion portfolio delivered strong financial results, with revenues and net operating income increasing by 21.2% and 19.9% respectively year-over-year, while net asset value grew by 2.7% to CAD 13.97 per unit over the same period. However, as a result of non-recurring items and lower transaction volumes and related management fees during the quarter and increased interest expense together with temporarily elevated leverage, AFFO decreased to CAD 0.15 per unit. The REIT's foundational pillars remain stable. These include a high-quality defensive portfolio delivering strong built-in growth, in this quarter 2.5% constant currency SPNOI, and supported by 97% occupancy on an almost 15-year weighted average lease expiry. The REIT's portfolio continues to demonstrate market-leading cash flow stability with 81.7% of income subject to rent indexation.
During the quarter, the REIT reached agreement on the formation of a new U.K. JV initiative with an aggregate equity commitment of GBP 500 million to be funded 85% by a U.K. institutional investor and 15% by the REIT. In addition, this investor will make a GBP 50 million investment in the REIT's existing portfolio. This was a key strategic priority for the REIT in 2022, and it's highly strategic for the business as it expands the asset management platform and introduces a new institutional investor, and further positions the REIT to execute on attractive opportunities as they emerge within the region. Agreements are expected to be finalized by year-end, and proceeds from the GBP 50 million investment will be redeployed to repay a higher-cost floating rate debt, resulting in interest rate savings of approximately CAD 0.01 per unit per quarter.
The REIT is considering additional investments in its U.K. portfolio going forward. During the post-quarter, the REIT completed the following balance sheet initiatives, which included refinancing of approximately CAD 1 billion of the REIT's 2022 and 2023 debt maturities to extend term and fix interest rates. These include a successful public offering of CAD 155 million of unsecured convertible debentures with a CAD 16 per unit conversion price bearing fixed rate interest at 6.25% and maturing on August 31, 2027. The refinancing of two floating-rate facilities with a combined outstanding balance of approximately CAD 475 million, which extended the terms of maturity by approximately two years and are expected to result in annual interest rate savings of approximately CAD 0.02 per unit.
Commitments to extend the maturity of its U.S. secured loan facility to 2025, which is expected to generate annual interest rate savings of approximately CAD 0.01 per unit. The completion of an 18-month extension of its AUD 110 million Australian facility. The REIT extended the terms and maturity of its Australian term debt facilities maturing in November and December 2022 to April and June 2024 respectively. Combined with the aforementioned U.K. initiative as well as the expected reversion of quarterly management fees to historic levels, adding another approximately CAD 0.02 per unit on a run rate basis, the REIT expects future earnings to be in line with historic levels.
Completion of these initiatives, along with the associated debt repayment, is expected to increase long-term fixed-rate debt exposure to approximately 65% while generating strong interest rate savings and extending the average term to maturity of the REIT's debt. Overall, consolidated leverage is expected to decrease approximately 420 basis points to 43.5%. Separately, the REIT's U.S. joint venture initiative continues to progress. Despite macroeconomic uncertainty, the REIT remains actively engaged with a short list of qualified partners and is working to agree commercial terms in Q1 2023. As a result of the expected U.K. JV formation post quarter end, in-place capital commitments increased to $12.5 billion with deployed fee-bearing capital increasing to $5.9 billion.
As the REIT's fund management continues to scale and pro forma the completion of the U.S. joint venture, deployed and committed capital is expected to increase to $6.7 billion and $13.3 billion respectively. At a target ownership level of between 20%-30% across its capital platforms, the REIT anticipates generating an increased level of growth in both AFFO and NAV on a per unit basis as a result of leveraging its capital-light model and internally generated capital to fund growth. In Q3, the REIT continued to execute on its growing asset management business and completed acquisitions totaling AUD 125 million in its various Australasian platforms. REIT also advanced its global healthcare precinct strategy by adding an approximately AUD 150 million-dollar new development to its pipeline within the region.
While macroeconomic uncertainty results in lower net volume of acquisitions in the quarter, the REIT remains constructive on the long-term demand factors that drive value creation in healthcare real estate. With a growing investment pipeline, the REIT continues to evaluate new opportunities within its fee-bearing capital vehicles on an opportunistic basis, while remaining disciplined in its capital allocation strategies. For the quarter, our results were temporarily impacted by the REIT's flexible interim capital structure, resulting in AFFO per unit of CAD 0.15. However, with the completion of the previously disclosed balance sheet and JV formation initiatives and the reversion of management fees to historic levels, future earnings are expected to revert to levels in line with previous quarters.
The net asset value during the year increased 2.7% to CAD 13.97, again, driven by fair value gains across the portfolio and the expansion of its global asset management business. With respect to liquidity, the REIT is well positioned with over CAD 150 million of available uncommitted resources today. This is expected to increase to more than CAD 300 million on completion of its U.S. initiatives. Operationally, our results were in line with expectations, with accelerating SPNOI growth of 2.5%, largely driven by contractual rent indexation and underpinned by the high occupancy and long-term leases previously noted, in all regards, highly defensive.
While the macroeconomic environment is creating uncertainty around inflation and interest rates, the REIT remains well positioned, with 81.7% of its revenue indexed to local inflation, which includes over 97% indexation in its international markets. Segmentally, I note the following. In Canada, we were on plan, portfolio occupancy remaining stable at 88%. The REIT has recently committed to a new lease on one temporary vacancy in its Western Canadian portfolio and expects to have that occupancy increase to more than 90%, again, at historic levels. The property will be fully occupied by January 2024. We continue to see a return to pre-COVID level activities at our properties, including increased leasing activity quarter-over-quarter.
Additionally, we are making progress on a number of life sciences and ambulatory care initiatives, which are gaining momentum and expected to become part of the business in the near future. In the U.S., our newest region, our portfolio is performing as expected with occupancy at 97% and almost nine year weighted average lease term. NFS has successfully onboarded and integrated assets in respective management platforms and continues to progress on new renewal leasing activities. In Brazil, we were on plan, steady 100% occupancy and continued strong cash currency SPNOI of 10.7%. Operationally, we note that the REIT's major tenant, Rede D'Or, continues to deliver exceptionally strong results and is among Brazil's top 10 companies by market capitalization. Europe continues to perform well, with constant currency SPNOI growth of 3.7% and occupancy stable at 97.2%.
We continue to find good investment opportunities in Europe, allowing us not only to increase scale and critical mass in our existing regions, but also consider opportunities in adjacent markets. Finally, in Australia and New Zealand, our largest market, occupancy remains stable at nearly 100% and delivering constant currency SPNOI growth of 8.3% with a weighted average lease term of almost 16 years. I am pleased with the progress we made during the quarter and particularly post-quarter, which advanced the REIT's strategic objectives and produced solid operating results. With deep strategic relationships, best-in-class regional operating platforms, and strong access to both public and private capital, the REIT continues to transition to a more asset-light business and a best-in-class global healthcare real estate investment manager. With that, I will now ask the operator to open up 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 key followed by the number one on your touchtone phone. You'll hear a three-tone prompt acknowledging your request. Questions will be taken in the order they are received. If you're using a speakerphone, please lift your handset before pressing any keys. We'll take our first question from Sairam Srinivas with Cormark Securities. Your line is now open.
Yeah. Paul, just looking at 2023 and the JVs that you guys have formed, can you guide us on the pace of deployment of the proceeds in the JV?
I'm sorry, I just got part of that. Could you repeat your question, please?
Sure. Just looking at the JVs that are being formed right now in the U.S. as well as the U.K., and more specifically probably the U.K., can you comment on the pace of deployment?
Yes. The JV has a deployment, the new U.K. JV has a deployment period of three years, and with some extensions, as with typical industry features. That would be our expected deployment, and again, leverage focused in there in the 45%-50% range, which is typical in the U.K. Behind that, again, we do see a number of interesting opportunities. Obviously, this has been a long time coming for the business, so we have quite an active opportunity set as we head into thinking about what to do with our new partner and opportunities that we're pursuing.
That's great color, Paul. Coming on that, keeping in mind the broad disconnect between the public market and the private market, are you seeing any opportunities there on the public market side that you'd probably be attracted towards?
I think our focus remains on, you know, fairly you know traditional asset-level transactions in the U.K. for the time being. We haven't seen quite as sharp a correction there in terms of healthcare. We're you know again focused more on the traditional asset side of things, and we do see some compelling opportunities in that direction, if I understood your question correctly.
Yes. No, that's really helpful. Thanks for that, Paul. I'll turn it back.
Ladies and gentlemen, as a reminder, to ask a question, please press the star key followed by the number one on your telephone keypad. Okay, next we'll go to Tal Woolley with National Bank Financial. Your line is now open.
Hi, good morning, everyone.
Hi, Good morning, Tal.
Sorry. I apologize, I missed some of the preamble up front. In your management fee breakdown, you've got one line item, this other fees and costs reimbursement that went negative this year. I'm just wondering if you can talk a little bit about what exactly created that situation. Was that a catch-up from something else, or if you can just give a little bit more color there.
Hi, Shailen, would you like to address that or maybe even get into that detail offline if that's preferred?
Thanks for that question, Tal. I can give you a high-level commentary on that. I mean, first off, I'd call out that management fees in general this quarter were lower than where we'd traditionally expect them on a run rate basis. I think all that's timing related and non-recurring in nature. When we think through transaction activity and transaction-driven fees, that was clearly lower than expected during the quarter, just given some of the macroeconomic volatility. But I would note that we have a high degree of visibility into transaction volumes in Q4 and expect activity-based fees from transactions to revert to historic levels, which we're averaging around CAD 4 million a quarter for the last four quarters or so.
In respect to your specific question on cost reimbursements, and the other recoveries, if you may. Again, timing related. We're engaged in some large transactions at the moment where arrangements contemplate us being reimbursed for a lot of the costs that the REIT is incurring in respect of management and ongoing management services in respect of procuring those transactions. There's really just been a shift in timing. You'd note that in Q2, we had some fairly material cost reimbursements, and other recoveries. In Q3 some of that reversed out. But we do expect to recover that over the coming quarters as, again, some of those transactions pick up speed.
If we assume, like, the current asset base and then the U.K. JV transaction, fee transaction goes through, what would you sort of estimate the run rate fees of the platform would be?
Yeah, I don't think we've given any.
On a proportionate basis.
Yeah. Yeah, Tal. I mean, I don't think we've given any concrete guidance around, you know, management fees, noting that, you know, I mean, we do have a steady level of recurring based transaction fees. You know, I would call out that as we go into 2023, we're likely providing some more holistic guidance as, you know, as a lot of these platforms come together. So maybe I defer that discussion to next quarter, but happy to work off of some of the historic results offline.
Okay. In the U.K., I, you know, like I know in the past you haven't engaged in, you know, a huge amount of hedging or anything like that, you know, as you've gone around the world. I just wonder when you look at sort of like the macro situation in the U.K. and the fact that it is like, you know, a large liquid currency you can trade and hedge in pretty effectively. Has your approach just sort of on, you know, managing the financial risk there shifted a little bit, with respect to the U.K. versus some of the other jurisdictions?
Paul, I can kick off with the narrow U.K. part, and then perhaps you can talk a bit more broadly around the global financial risks and management. In the U.K., over the course of the quarter, so sorry, just post-quarter, we completed a two year renewal or extension of a new facility in respect of our U.K. portfolio. That was quite a big accomplishment to do a full-scale refinancing against that, now almost a billion-dollar portfolio. I think that now gives us the ability to really lock into longer-term capital structure arrangements.
We've put in place hedges across various specific debt instruments that we have, whether they be in the U.K. and the U.S. post quarter end. We'll be looking to very actively engage on a more comprehensive hedging program, including considering currency exposure going forward. Part of it has been, historically, our balance sheet has been quite transitory in nature as we brought in, you know, a lot of these capital platforms. As some of those parts are starting to lock in as expected, we're able to take much more longer-term capital structure decisions. Maybe, Paul, if you want anything to add to that.
No, Shailen, I think that covers it off nicely. Again, I think that's exactly the point, which is, you know, where we have some visibility now and the permanent capital structure in place on the U.K. as an example, it allows us to move to, you know, both longer duration and some both interest rate and currency hedging as appropriate. We're looking at that as a, you know, as an appropriate measure sort of throughout the portfolio.
Okay. Just, you know, I appreciate the color around how you see the sort of refinancing savings playing out. I guess I just have a couple of questions. You know, like one of the bullets, you know, you discussed that extending the maturity of your U.S. secured loan facility to 2025, that's going to generate interest rate savings. I'm just wondering how extending the maturity gets you rate savings.
Yeah, I'd note a couple things. When we entered into the U.S. a year ago or so, or sorry, at the front end of this year in early Q2, we did put on a short-term floating rate facility that I'd say was just higher cost in nature. Looking forward as we're putting on more permanent facilities, it gives us the ability to both extend term and reduce rate.
Okay. Then the same thing too with the floating rate facilities. Like, are you refinancing those and extending the maturity? Is it just a question of like, I guess, like, I'm just surprised to hear that, like, credit, like, your credit spreads and stuff like that would be better on a refinancing right now than they were, like, say, a year ago. Can you just walk through, like, how you're getting the savings on the refinancing the credit facility?
Yeah. I'd call out that it's really a function of where our starting point was. Noting that coming into this moment of macro volatility, you know, we had several, you know, four or five corporate level secured and unsecured facilities that were just, I'd say, temporary in nature, revolving in nature to enable flexibility really in advance of our JVs. Now that we've brought certainty to, you know, the U.K. part of it and continue to make progress on the U.S. in respect to our JV initiatives, it's allowed us to just bring more certainty and perhaps, you know, consider facilities that aren't revolving and just have more structure associated with them and not as much flexibility associated with them given that we don't need it.
It's given us both the ability to bring rate down as well as extend term, which is counterintuitive in the current moment, but it's really coming off of a very high starting point.
Okay. I guess just lastly, like within Canada, are you finding other opportunities sort of beyond, you know, the medical office portfolio, for new projects? Like as, you know, the government's reworking, you know, how to handle finding incremental beds, looking at, you know, transitional care type beds across the province. I know you have, I believe you've got one facility up and running already in that regard. Is there scope to be more of those going forward?
Yeah, maybe I can take a crack at that, Tal. It is a really interesting time in Canada at the moment, and lots of discussions going on about you know about healthcare delivery in new formats. Our focus as you know has been in a couple of areas, ambulatory and outpatient. We have you know a facility that's you know shortly completing in that space, and we are working on a number of others that would be similar in nature. Again, that's a you know an Ontario-driven initiative, but we are starting to see that come through in other provinces, including Alberta and Quebec in our portfolio. So certainly that is a notable trend.
We do think that, you know, the ambulatory, you know, sort of space is underrepresented strongly in Canada, and sort of just working through, you know, what type of tenancies and the mix of tenants that can fulfill those facilities. We expect to see, you know, more of those coming over time. That's been a reasonably longstanding initiative, and we expect to be adding to that, still pretty incremental to the portfolio. The other initiative that we are quite focused on is in the healthcare precinct space. It's one of our core global strategies, you know, and that's a real combination of healthcare research, education, and all of the ancillary uses.
We are quite active on a number of initiatives there that we expect to be announce able in the Q4, that will be, you know, I would say transformative for the Canadian business in terms of size and certainly fitting the opportunity set that, you know, that we see, in other, you know, markets that we're, you know, quite concentrated in, particularly Australia, where we have a, you know, a really significant opportunity set. So, you know, those are the two areas that we're really focused on. You're right, though, there are other, you know, government initiatives talking about different types of, you know, long-term care in particular.
you know, we are keeping an eye closely on that as they look to provide beds and perhaps a little more structure to the nature of the operations in that space. It hasn't been something that's quite reached actionability and clearly you know still continues to be, you know, maybe more early stage, I would say. A little bit of a trip through Canada, but we are seeing some changes coming and ones that are you know very consistent with our core strategies globally.
Okay. That's great. Thanks, Paul Dalla Lana.
Once again, it's star one if you have a question. Next, we'll go to Pammi Bir with RBC Capital Markets. Your line is now open.
Thanks. Good morning. Just in terms of the U.K., JV, can you just remind us or walk us through the, you know, the anticipated capital repatriation that you're expecting?
Yeah, Shailen, do you want to speak to that?
Hey, Pammi. Thanks for that question. In terms of the capital that we expect to generate out of our recent both seed portfolio recapitalization as well as I guess the go forward new JV initiatives, we did call out and do note that that our ownership target in the you know in both of those platforms, the seed portfolio as well as the new money JV is, I mean, is around 85%. So we'd previously guided to selling down to about a 30% level. We're now selling. I mean, obviously that's changed, and you know we'll get into a variety of reasons that drove that change.
You know, in terms of the capital coming back, I would note that that we are doing the transaction at our current IFRS book value. So, no change there I mean, as expected in terms of our current valuations, and we really just haven't seen the transactional evidence to support any changes in valuations there. So, quite nice to be the mark there and be able to transact at our current mark. Maybe, Paul, I'd defer to you a little bit in terms of the overall strategy around the 85%-15% allocation versus the previous 70%-30%.
Sure. I think, you know, again, in this progression to sort of more capital-light, clearly, you know, we've been considering a range of outcomes. I think we were comfortable with our investment partner at this level, and certainly from what you know requires Northwest to put up slightly less equity than some of its other institutional joint ventures, but still, you know, meaningful alignment and all the things that go with that as a principal investor. You know, we like that mix. I think otherwise the you know the JV itself sort of is quite similar to the ones we've done already and have in place.
Broadly speaking, has you know similar you know investment periods, similar you know fees and related you know sort of governance structure. I think it feels quite similar to the things that we've been doing. Again, is gonna allow us to, I think, pursue what we see as some you know interesting opportunities in the U.K . That are starting to percolate. We've been working hard to get that in place in order to move you know quickly and efficiently into what we see as a continuing attractive market. That's maybe a little backdrop there. I'm not sure if there's anything else.
Got it. Just maybe one last one. In terms of the pro forma proportionate leverage, once the U.K. JV is finalized, and everything's in place, where does that take pro forma leverage on a proportionate basis?
Hey, Pammi, I can come back to you with a specific number offline. I would call out that we'd previously guided to proportionate leverage, you know, around that 40-ish% mark, really pro forma our U.K. and our U.S. initiatives. I've, you know, as we just noted in our in the prior question, you know, the capital generated out of this current recapitalization in the U.K., it'll generate about GBP 50 million, lower than we'd previously anticipated with a bigger sell down. We do think that just given our broader convictions around the asset management business and perhaps that capital-light model in terms of lower look-through ownerships, over time, we still see that proportionate leverage number into that low 40s% as achievable.
It just might require different toolkits within the business where, as you know, we're still capital heavy in the majority of our platforms and regions.
Got it. Just the last one on the U.S. partner discussions. Anything you can add there? You know, have you narrowed down to the final shortlist maybe a bit further than where you were last quarter? Or, you know, you've now, I guess, put sort of a timeline on it for Q1? Just curious if there's anything you can share there.
Yeah. I think what I would share, Pammi, is that, you know, obviously with market volatility in Q3, you know, it was a difficult time to be working through, you know, pricing and discussing, you know, JVs and major transactions. I think, you know, based on our current state, I'd say the market is certainly, you know, finding its level, and we're, you know, confident that we can move forward on the timelines as proposed. I think probably the biggest thing to call out is just, you know, that Q3 was a relatively, you know, volatile time in, you know, not just capital markets, but certainly, you know, interest rate and related markets and so that's passed now.
I think we see, you know, market participants back in and we're having constructive dialogues with a number of parties. We're confident that we'll be able to move forward here. Again, this is a high quality institutional portfolio that we acquired and was well sought out in the marketplace and transactions in healthcare real estate are returning actively. We're confident that we'll be able to move forward as planned.
Thanks very much. I'll turn it back.
Okay. Next, we'll go to Frederic Blondeau with Laurentian Bank Securities. Your line is now open.
Thank you, good morning. Just one quick question for me. With the closing of the U.K. JV this year and the closing of the U.S. JV, and I guess in Q1 next year, is it fair to say that at the margin you'll be focusing a bit more on the precinct strategy in 2023? What are your views on the precinct strategy at this stage, especially in the context of you know, in the current context of the construction costs? Thank you.
Yeah. So there's lots in there. I think, I mean, again, the business continues to have a number of active strategies, Fred, including, you know, sort of the traditional partnering with healthcare operators strategy and our ambulatory and outpatient strategies, all of which come through the existing JVs. I wouldn't say that they're de-emphasized. In terms of new initiatives, we are making progress in our develop-to-core initiative in Australia, which is very much a precinct-driven sort of fund and has long-term developments and appropriate development attached to it. I think, you know, we've been able to find some spots where, you know, we can make good investments today and make development costs and pricing work.
In fact, you know, we're seeing prices start to come in now in most of our markets. That's actually been a positive sign that's come through the business over, you know, the CAD 300-CAD 400 million development that we have underway today and the similar amount of things that are in planning in the business. I would say that, you know, development, although as we come into this sort of, you know, market moment and economic moment, requires, you know, sort of, you know, even more rigorous underwriting and, you know, that we're approaching it with a, you know, slightly more cautious opportunity set.
The things that sort of support the healthcare precinct strategy and really that combination of major healthcare users and major educational and research users is still, you know, quite a live market moment. Where we can, you know, find good and appropriate opportunities with appropriate contracts and certainty of leasing, etcetera, we're still looking to do stuff. You know, again, hard to estimate that it's a new initiative in develop-to-core and that we have, you know, a number of existing projects underway already that are moving forward and are on budget and on schedule and substantially leased.
I think we're feeling that there's a, you know, a consistent level of development the business can support as it looks, you know, to go forward. Hope that answers the question.
Yeah. No, absolutely. It looks like you had quite an extensive process to find the right JV partner for at least in the U.K. and I guess in the U.S. too. How should we view, you know, this process to find the right JV partners for the precinct strategy? Like how, like what would be your views on that?
Yeah, I think we're in active discussions with a small number of very significant investors, as I've mentioned before, and so that's continuing. I think we're hopeful that in the Q4 we'll have reached an announcement on at least one of those two. You know, again, we have a nice pipeline of opportunities and we've got quite a few portfolio and there's still land and early stage opportunities, but broadly interesting opportunities. I think we're constructive that things can happen, as we've said in the context of Q4.
That's great. Thank you.
Okay. One moment. Okay. I show no further questions. I'll now turn the call back over to our presenters for any additional or closing remarks.
Thank you, operator, and ladies and gentlemen. Appreciate you listening in on Northwest Healthcare Property Trust's Q3 2022 conference call. Thank you.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect.