CA - NorthWest Healthcare Properties Real Estate Investment Trust (NWHUF) Q3 2023 Earnings Call Transcript
2023-11-08 14:28:08 ET
NorthWest Healthcare Properties Real Estate Investment Trust (NWHUF)
Q3 2023 Earnings Conference Call
November 08, 2023 10:00 AM ET
Company Participants
Craig Mitchell - Chief Executive Officer
Mike Brady - President & General Counsel
Karen Martin - Interim Chief Financial Officer
Conference Call Participants
Fred Blondeau - Laurentian Bank
Himanshu Gupta - Scotiabank
Pammi Bir - RBC
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties Real Estate Investment Trust Third Quarter 2023 Results and Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, November 8, 2023.
I would now like to turn the conference over to Craig Mitchell. Please go ahead.
Craig Mitchell
Thank you. Good morning, everyone, and welcome to NorthWest's Third Quarter 2023 Conference Call and Webcast. Thank you for joining us today. This call is being recorded and a replay will be available on our website at nwhreit.com.
Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings, including our MD&A and annual information form for a discussion of these risk factors.
On the call with me today is Mike Brady, our President and General Counsel; and Karen Martin, our recently appointed interim CFO. I joined NorthWest in 2018 as CEO of Australia and New Zealand. I have more than 20 years of experience in the real estate sector leading organizations as a CFO and CEO. I've been the REIT's Interim CEO since August 8, and I was appointed CEO on a permanent basis on October 23.
In the past 90 days the management team has been extremely busy. Looking back at the quarter, our Q3 game plan focused on four key management initiatives. Firstly, refinancing near-term debt maturities; second, sale of the Australian Unity units; third, selling noncore assets; and fourth, improving governance and management.
Looking at near-term debt maturities. Since August 2023, we have pursued a strategy to strengthen the balance sheet. We made a difficult but necessary decision to reduce the monthly distribution by 55% in September and this has improved the REIT's liquidity and will bring down AFFO payout ratio.
To date, we've been successful in refinancing and extending corporate debt obligations. Management extended the maturity dates of multiple debt facilities and anticipates by the end of November to have extended and repaid all 2023 debt maturities.
We secured a new term loan of $140 million with an April 2025 maturity. We refinanced our largest debt maturity in 2024, which comprises of $235 million joint venture debt facilities, extending the maturity date to December 2025 and December 2026. And finally, as outlined in our press release from October 16, we launched the process of amending and extending the $125 million Series G convertible to March 2025.
Now, turning to the sale of units in Australian Unity. So NorthWest continues to sell and redeem the balance of its holdings in the Australian Unity Healthcare Property Trust, with net proceeds being allocated towards debt repayment, including the REIT's $94.5 million secured loan which is now fully repaid in October.
To date, the REIT has completed $110 million in sales and redemptions of its units. As previously announced, NorthWest anticipates completion of the sale or redemption of the balance of its holdings by the first half of 2024. Net proceeds will be used to repay other debt and for general trust purposes.
The third initiative is noncore asset sales. At the outset of 2023, the REIT announced that it proactively identified approximately $300 million of noncore assets for sale. To date, we've completed sales or have under contract for sale $180 million of our noncore properties. Proceeds from these sales net of transaction costs will be used to repay debt and for general trust purposes.
In the fourth initiative, governance and management on October 23, 2023 we announced the appointment of Karen Martin as our interim Chief Financial Officer. We're extremely pleased to have Karen joining the REIT's team, and I look forward to working with Karen moving forward. One of the initiatives we're working on is to improve our communication with our unitholders, which includes both getting out to meet our unitholders and the way we message our financial reporting. Karen, will be a large part of these initiatives.
So in summary, our plan to strengthen the balance sheet has provided more time and financial flexibility for the REIT, while it works on additional strategic initiatives to improve unitholder's value. While the strategic review is underway, management has recognized key actions that can be taken in the near term and remains committed to building a more robust sustainable and profitable business. This will be achieved through efforts to streamline operations, reduce debt and increase profitability. NorthWest aims to build on its position as a health care real estate leader, focused on delivering value and sustainable growth to its unitholders.
I'd now like to introduce our President, Mike Brady. As many of you know, Mike has been with the REIT since 2006, and before being named President in 2023. Mike leads our major strategic global transactions, overseas, legal compliance and governance. Over to you, Mike.
Mike Brady
Thanks, Craig and good morning, everyone. Today, I will be commenting on some of the strategic initiatives that were undertaken during the quarter. On August 8, the REIT announced a comprehensive strategic review, aimed at unlocking significant value for all unitholders. The REIT formed a Strategic Review Committee, comprised of members of the Board to assess the optimal path forward for the REIT. There is no certainty regarding the results of the committee's strategic review, or that any particular transaction will be agreed upon or consummated. The REIT does not intend to comment further on the strategic review, until it determines that additional disclosure is appropriate or required.
Respecting our 2023, ESG Global rankings as outlined in our press release in 2023, NorthWest and Vital Trust, which is managed by NorthWest participated in the GRESB Real Estate Assessment for the third year running. As you may know, GRESB is the global ESG benchmark for assessing real estate and infrastructure investments.
NorthWest is the manager and 28% owner of Vital Healthcare Property Trust, a New Zealand listed fund that invests in health care properties in New Zealand and Australia. I am happy to report that NorthWest and Vital achieved sector leader status in three categories: the global listed sector leader for both health care standing investments, and health care developments, with Vital coming in first and NorthWest coming in second place.
And in the global sector leader in health care development, Vital and NorthWest came in first and third place, respectively. And NorthWest maintained its 4-star ESG rating for the development benchmark for the second consecutive year, solidifying our position within the top 20% of global real estate entities in this category. This is a tremendous result for the REIT and for Vital, demonstrating NorthWest's commitment to ESG best practices. Not only is this the right and responsible thing to do, it represents a key component of NorthWest volume and its associated cost of capital.
I'd now, like to turn things over to Karen. We are very pleased to have Karen, joining the NorthWest executive team. And Karen has over 30 years of senior executive experience, with both public and private organizations in financial services and specialty finance.
Karen Martin
Thanks, Mike. I'm very excited to be joining NorthWest. Hi, everyone. I'm Karen Martin, Interim CFO and I'll be providing commentary about the financial results for Q3 2023. For three and nine months ended September 30, revenue increased by 5.1% and 15.3%, respectively. Net income for three and nine months ended September 30, decreased by $116.4 million and $553 million, respectively primarily as a result of fair value losses on investment properties from changes in valuation parameters.
Operationally, the REIT's high quality and defensive health care real estate portfolio delivered strong results including 3.7% same-property net operating income growth on a year-over-year basis. The REIT portfolio occupancy of 96% is consistent with last quarter and is supported by a weighted average lease expiry of 13.2 years and 82.9% of leases are subject to inflation indexation.
With portfolio comprising more than 2,000 tenants, the REIT's cash flow is highly diversified across its 229 properties. Other highlights for the quarter, Q3 2023 net loss attributable to unitholders was $81.3 million as a result of fair value loss on investment properties. The Q3 AFFO of $0.13 per unit is down from $0.15 per unit on a year-over-year basis.
Total assets under management decreased by 5.3% on a year-over-year basis to $10 billion due to combination of noncore asset sales and changes in the fair market property valuation. Net asset value per unit decreased by 4.7% to $11.96 in Q3 compared to as at the June 30th value. The decrease is predominantly due to the cap rate expansion to 5.75%.
The capital deployed in fee-bearing vehicles of $5.7 billion is a decrease of 1.7 [ph] year-over-year as a result of fluctuation in foreign exchange rates. Consolidated debt to gross book value including convertible debentures is 51.6%, an increase of 80 basis points on a quarter-over-quarter basis.
To date, management has been successful in refinancing and extending corporate debt obligations and on completion of the extension of the convertible debentures, the REIT will have extended or repaid all of its corporate debt facilities maturing before November 2024.
As previously communicated to the market, the REIT has also continued to undertake non-core asset sales. These sales will enable the REIT to strengthen its balance sheet, improve its operations while the Board undertakes its strategic review.
I will pass the call back to Craig. Craig?
Craig Mitchell
Thank you, Karen. While the strategic review is underway, management has recognized key actions that can be taken in the near-term and remains committed to building a more robust, sustainable and profitable business. We're taking necessary steps to strengthen our balance sheet, improve our management team, align our business and prepare for the future as NorthWest aims to build on its position as a healthcare real estate leader, focused on delivering value and sustainable growth to all unitholders. Looking ahead to late 2024 and into 2025, we are developing and executing on debt strategies today to manage our debt maturity profile.
Moving forward, we are optimistic about the opportunities to increase and improve our business in many of our healthcare markets. NorthWest remains committed to delivering value for our unitholders. The decision announced this quarter and our solid foundation, we are building are essential steps to unlock the significant value of the REIT. With our deep strategic relationships and excellent regional operating platforms, the REIT continues to be a leader in global healthcare real estate.
And with that, I will now ask the operator to open for questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Fred Blondeau from Laurentian Bank. Please go ahead.
Fred Blondeau
Thank you and good morning. Just three quick questions for me. First, I thought you have $218 million in assets held for sale at Q3. I was wondering if you could give us a bit more color on the nature of those assets. And I guess where I'm going with the discussion is, I didn't see any update on the US and the Brazil portfolio initiatives. I was wondering if there was any of this in the assets held for sale at Q3? Thank you.
Craig Mitchell
So Fred I'll answer the second question first. There's, no updates on the Brazil or the US in the asset held of sale. And regarding your first question, we've also got assets held for sale in the Vital Trust, because it's on a consolidated basis, in addition to the Canadian portfolio being the Atlantic portfolio.
Fred Blondeau
Okay. No that's helpful. Thank you. And then maybe while I got your attention on the subject, what was the thought process on those initiatives for Brazil and the US, because like I guess, where are you heading with this?
Craig Mitchell
Well, really, it's just -- we're just exploring what the opportunities are to look at our maturity profiles in late 2024 and 2025 looking at our leverage. As you know it ticked up 80 basis points to 51.9% and really looking at the simplification of the business. That's kind of how we're thinking about it.
Fred Blondeau
Okay, but no update specifically on …
Craig Mitchell
No.
Fred Blondeau
…these two portfolios?
Craig Mitchell
No. No.
Fred Blondeau
Okay. That's a bit unclear, but it's okay. We can take it offline. And then, I was wondering if you could explain the $4.2 million year-on-year increase in the G&A that's quite substantial was there any onetime items in there? What's a good -- I guess, what's a good run rate?
Karen Martin
Yeah. Maybe we'll take it offline. And we'll show you where we have additional disclosure in the MD&A and the financial statements.
Craig Mitchell
Yes.
Fred Blondeau
But on the increase itself like where does it come from?
Craig Mitchell
It mainly comes from a donation that we provide in Australia to [Indiscernible].
Fred Blondeau
A donation?
Craig Mitchell
Yes.
Fred Blondeau
Did you say a donation of $4 million is that what you said?’
Craig Mitchell
No, no.
Fred Blondeau
No. Okay. Okay.
Craig Mitchell
We'll take that offline, but it's not $4 million.
Fred Blondeau
Again, we will take it offline, but what's the -- like what's the main items of that increase?
Craig Mitchell
Yeah. Let me come back to you on that, because I haven't got that on hand.
Fred Blondeau
Okay. Okay. And last one for me. I saw you put a great emphasis on GRESB. I guess it relates mostly to Australia. I was wondering if you could give us a bit more color on the rest of the portfolio on that front.
Craig Mitchell
No, that's Australia, that's Europe and Canada that's a global...
Mike Brady
That's a global ranking.
Craig Mitchell
Irs global ranking, Fred.
Fred Blondeau
Okay. Okay. In the press release I saw it was mostly focusing on Australia, but you're saying is that applies on the portfolio as a whole. Is that what you're saying?
Mike Brady
Exactly. Right Yeah Fred.
Craig Mitchell
Yes, Fred yes.
Fred Blondeau
Okay. Thank you so much. That's it for me. Thank you.
Operator
Thank you. The next question comes from Himanshu Gupta from Scotiabank. Please go ahead.
Himanshu Gupta
Thank you and good morning.
Craig Mitchell
Good morning.
Himanshu Gupta
So first off the investments in Australia Unity Fund, I think you sold almost $100 million in Q3. So how much is now left to be sold?
Craig Mitchell
We've just sold just over half, so about half left.
Himanshu Gupta
Half left. And I think Craig you mentioned in your prepared remarks in the second half -- or sorry in the first half of the next year,...
Craig Mitchell
Yeah.
Himanshu Gupta
… or should we expect something in Q4 as well?
Craig Mitchell
That's exactly right. There's a normal course of redemption process that Australian Unity Property Trust does in November. So there will be a redemption process in November. So there will be some -- there will be some proceeds in Q4.
Himanshu Gupta
Okay. And just to clarify there is no debt associated with those investments as of now?
Craig Mitchell
As of now correct. We had $94.5 million worth of debt against that asset. And we've now received $110 million. So you're right. It all goes to General Trust.
Okay. Got it. And then on the asset dispositions, I think earlier you mentioned you have something classified as assets held for sale. Do you have a sense of timing? I mean, should we again expect something like early next year? Or is it something more imminent?
Craig Mitchell
No, we should expect by the end of the year -- an update by the end of the year, particularly the ones that are firm.
Himanshu Gupta
Okay. And so how far along are you in the process? I mean, are they like waiting to be closed or you're still in negotiations for closing that $150 million plus?
Craig Mitchell
No. The $180 million we announced, they are firm, they're either closed or firm.
Mike Brady
So binding agreements of purchase and sale with all conditions waived.
Himanshu Gupta
Okay. Okay.
Craig Mitchell
So we have other assets under negotiation. We just haven't mentioned that amount, because they're still under negotiation.
Himanshu Gupta
Got it. Okay. And then obviously, you have done I would say a good job in the last few months in terms of addressing the near-term debt refinancing. I mean, as we stand today, do you have a handle of where FFO or AFFO is likely to shoot up next year? Or more in terms of what is your target payout ratio next year in the light of the new distribution?
Craig Mitchell
Yes. So at this stage, we're not providing guidance. But what I can say, if you look at our earnings of $0.14 FFO per unit, you're stripping out the interest caps as we've discussed and we did last quarter, you're getting to sort of a $0.10 which is very consistent to last quarter. So it gives you -- that will give you a sense of a run rate.
Himanshu Gupta
Got it. And that takes into account all the debt refi what you have addressed there including the convertible debenture as well?
Craig Mitchell
To date, yes. And the convertible debenture of course, so that interest expense will come in Q1 next year.
Himanshu Gupta
Clear. That's correct. Okay.
Craig Mitchell
Yes.
Himanshu Gupta
Okay. Fantastic. And maybe one last question is on the sale value loss or the fair value adjustments you've done in Q3, which geography most of them are pertaining to?
Craig Mitchell
Yes. So we did cap rate softening of 12 basis points. And reasonably, we took a -- if I say most of it is in Americas be it Canada and US.
Himanshu Gupta
Okay. So when you're saying most of them Americas, would that mean that most of them is in the US or Canada or a spread over?
Craig Mitchell
It's spread over between both.
Himanshu Gupta
Okay. Fantastic. Okay. So I think that’s about it and I’ll turn it back. Thank you.
Craig Mitchell
Thank you.
Operator
Thank you. [Operator Instructions] Next question comes from Pammi Bir from RBC. Please go ahead.
Pammi Bir
Thanks. Good morning. Just given the sort of the cadence of the noncore asset sales and the sales of the Australian Unity units, where do you see leverage and floating rate debt exposure by the end of this year or early 2024?
Craig Mitchell
It's a tough, super tough question, right? I think, if I think about leverage first, I don't think there's a material change in leverage, right, because really you are creating liquidity and not materially changing leverage. But I think from a -- and I'll come back to you because we haven't done it, but it will definitely improve the fixed rate portion of our debt. Because you can see we've told you, we've sold $110 million roughly half that's another $110 million to go on the Australian Unity. And you've still got another $100 or so million from what we disclosed up to $300 million. So it gives you a sense of liquidity up to $200 million in the next sort of six to nine months.
Pammi Bir
Okay. Just on the dispositions that you have done to date, where is pricing coming in relative to the book value?
Craig Mitchell
Yes. On that $180 million which is what we have closed and firm, we have just over 10% discount. So it's 11% discount to the Q3 -- sorry Q2 valuation.
Pammi Bir
Got it. And then just last one for me. On the Series G converts, has the support level increased at all from the 24% I think that you disclosed last month?
Craig Mitchell
Yes. Let me just pass you to Mike and answer that question.
Mike Brady
So, we have received verbal indications of additional support along with the contracted support. So yes, we're feeling very optimistic about that process.
Pammi Bir
Thanks, very much. I’ll turn it back.
Mike Brady
Thanks, Pammi.
Operator
Thank you. As we have no further questions, I will turn the call back over for closing comments.
Craig Mitchell
Thank you everyone. Really appreciate it and I'm sure I'll be speaking to a few of you in the next few days. Have a great day. Goodbye.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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NorthWest Healthcare Properties Real Estate Investment Trust (NWHUF) Q3 2023 Earnings Call Transcript