Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties REIT Fourth Quarter 2020 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, March 12, 2021. I would now like to turn the conference over to Paul Dalla Lana. Please go ahead.

Thank you, operator, and good morning, everyone. Appreciate you joining us today. I'm joined today by Shailen Chande, the REIT's Chief Financial Officer; and Peter Riggin, the REIT's Chief Operating Officer. Together, we are pleased to share with you our results for the fourth quarter of 2020. But 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. For 2020, the defensive nature of the REIT's health care real estate portfolio that is 97.1% occupied with more than 80% of its revenues provided directly or indirectly by public health care funding has, despite the impact of COVID, has also been strong operating results for the full year, including 5% AFFO per unit growth, a 3.4% same-property NOI growth and 3% net asset value per unit growth, all on a constant currency basis. Rent collections remained strong throughout the year with 98.2% of the REIT's revenues on a proportionate ownership basis, either collected or subject to formal deferral arrangements in Q4, which is an improvement of 67 basis points over -- quarter-over-quarter. As a result of the strong rent collection and the underlying defensiveness of the REIT's tenant space, the REIT did not recognize any material provisions from collected rent and expects all deferred rent will be repaid in full. The approval and rollout of multiple COVID-19 vaccines is improving sentiment across the REIT's global markets. Regionally, the U.K. is among the global leaders in terms of its vaccination rollout campaign, while Canada, Germany and the Netherlands are in the process of accelerating their own national vaccination plans. Of course, Australia and New Zealand are lagging in terms of vaccination but have been highly successful in terms of their containment strategies around COVID-19 with those economies and our tenants and operations substantially returned to pre-pandemic levels. [ Turning to ] trends, coupled with backlogs built up during the global lockdowns, are expected to drive elevated demand for health care services, supporting health care real estate over the medium and longer term. As we alluded to last quarter, demand for health care real estate is intensified, which is perhaps most clearly demonstrated by the $160 million fair value gain recorded by the REIT in the quarter. In our view, this increase is being driven by the relative outperformance vis-à-vis typical commercial asset classes and a growing acknowledgment from the investment community as to the stability and infrastructure-like characteristics available in long-leased health care real estate. Despite this material fair value gain recorded this quarter, our assets still traded at a significant spread to other core real estate products. And as a result, we believe that this trend is only beginning as health care real estate migrates from a niche asset class into the mainstream. Before continuing to discuss the results of the quarter, I thought it would be useful to provide some history and perspective on our business in a moment. Today, NorthWest is in the best position in its history, building expressly upon the strategy we have put in place in 2015, in large part, resulting from executing on key 2020 strategic initiatives, including expanding in global asset management platform. The REIT today has increased committed fee-bearing capital assets and capital from $5 billion to more than $8.8 billion today, including the recently completed $3.1 billion European joint venture and a significant fair value gains. Importantly, deployed fee-bearing capital increased by 46% to $4.8 billion in 2020, providing the REIT with an additional $4 billion of available capacity to pursue continued growth across Australia, Asia and Europe and generated accretive promoted returns. Despite the impact of COVID-19, the REIT executed on all of its 2020 strategic priorities, including finalizing the previously announced European JV with GIC and the sale of the related seed portfolio for $473 million; completion of strategic asset sales totaling $830 million into the REIT's fee-bearing capital platforms and generating more than $280 million of liquidity to pursue further acquisition and deleveraging opportunities; scaling the REIT's European platform of $732 million of acquisitions, including entering the U.K. through 2 portfolio transactions totaling $620 million. Including revaluation gains, assets under management in the region increased by 115% to $1.7 billion. Driven primarily by dispositions of wholly owned assets into managed capital platforms, the REIT's consolidated leverage decreased by 160 basis points to 48% at the end of 2020. Post quarter end, the REIT issued 17 million units at $12.65 per unit, raising gross equity of $250 million, which was used to repay corporate debt and further reducing leverage to 44.3%. Leverage is expected to decline to sub-40% as the REIT executes on deleveraging activities, including the completion of an additional $5 million to $25 million private placement to NorthWest Value Partners, as contemplated in the last offering; and the conversion of the REIT Series E and Series F convertible debentures maturing in July and December, respectively, which would reduce leverage by almost an additional 300 basis points. Both series of converts have strike prices in line with the REIT's current unit price. And the formation of the U.K. joint venture and sale of the REIT's existing assets into the JV, which will generate approximately $260 million in net proceeds and reduced leverage by approximately an additional 300 basis points. For the quarter, our results were in line with our expectations, noting the above deleveraging, including annualized quarterly adjusted funds from operations of $0.92 per unit on a normalized basis, implying a payout ratio of 87%. Earnings accretion from recent investment and financing activity was as expected, although foreign exchange movements are the Canadian dollar appreciate by approximately 0.8% over the last year relative to the REIT's average foreign currency exposure, which continues to slow earnings growth. Net asset value also increased by 1% year-over-year to $13.27 per unit driven by an increase in the value of the REIT's asset management platform and strong property revaluation gains. It was partially offset again by a higher Canadian dollar relative to the REIT's foreign currency exposure. Over the past 12 months, we estimate the relative strength of the Canadian dollar has reduced annualized AFFO by approximately $0.03 per unit and net asset value by $0.32 per unit. In the context of a lower-for-longer Canadian interest rate environment, we expect these trends will begin to unwind in 2021, providing a further tailwind to the REIT's earnings. In terms of liquidity, the REIT is well positioned with $285 million in current liquidity, absent those previously announced initiatives we're focused on. This is expected to increase now to more than $365 million as the REIT seeds its current U.K. JV in 2021. Operationally, our results reflected those expected from an expanded 188-property $7.8 billion defensive health care and infrastructure portfolio, having mostly long-term inflation index leases with leading health care operators. This strategy is reflected in the REIT's 2020 constant currency cash recurring SPNOI growth of 3.4%, largely driven by contractual rent indexation and underpinned by a 97% occupancy rate and a weighted average lease term of almost 15 years. In all regards, a highly defensive portfolio. Segmentally, I note the following: In Brazil, we were on plan with steady 100% occupancy and continued strong constant currency cash SPNOI growth of 4.6%. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver exceptionally strong results and in December 2020 completed an initial public offering, raising more than BRL 11.5 billion, BRL 8.4 billion of which will be used to build and grow its business. The IPO valued the hospital chain at approximately $25 billion, placing it among Brazil's top 10 companies by market capitalization. In Canada, we were also on plan, continuing solid performance with constant cash recurring SPNOI growth of 2%, portfolio occupancy remaining stable at 92%. During the year, the REIT completed 250,000 square feet of renewal leasing at rates relatively in line with expiring rents. We continue to focus on our ambulatory care initiatives, building on commitments to build a new center for Lakeridge Health that were announced in the second quarter of 2019 and with additional projects under consideration in Ontario and Alberta. In Europe, we were also on plan, performing as expected, with constant currency SPNOI growth of 1.2% and occupancy increasing to 97.6%. As mentioned earlier, we continue to find good investment opportunities in Europe, allowing us not only to build scale and critical mass in Germany, the Netherlands and now the U.K. but also to pursue opportunities in adjacent markets. And finally, in Australia, our largest market, occupancy remained steady over the year at 99% and delivered constant currency SPNOI growth of 2.3% with a weighted average lease term of 17 years. Included in that is with Vital. Our business reported similar results with SPNOI growth of 4.3%, and again, occupancy at 99% with a weighted average lease term of more than 19 years. In Q4, Vital completed a $139 million equity raise, issuing 56 million units, of which the REIT acquired approximately 15.5 million units and increased its ownership position to just over 26%. Also in Australia, as previously disclosed, the REIT, together with a capital partner, has entered into option agreements to acquire a strategic interest of approximately 16% of the units in Australian Unity Healthcare Property Trust, a $2.4 billion unlisted health care property trust comprising 62 high-quality hospital, medical centers and other health care assets leased to leading Australian health care operators with a WALE of 16 years and 98% occupancy. Agreements are subject to customary foreign investment approvals. Looking ahead, the REIT has identified a number of strategic priorities for 2021 included a deleveraging and the achievement of its investment-grade metrics; completion of its previously announced U.K. JV; advancement of key strategic transactions, including the Australian REIT, building out its Canadian ambulatory outpatient strategy into other regions, including Europe, and Australia and New Zealand; and new fund initiatives, including the Australian health precinct development strategy, which is being led by Alex Belcastro, the recent Head of Development for Ramsay Health, who has joined NorthWest. And finally, we are considering new markets, including the U.S., and close to finalizing its U.S. market strategy and further announcements coming in 2021. I am pleased with the progress made during the quarter which advanced a number of the REIT's key long-term strategic objectives and also produced solid operating results despite the COVID environment. With deep relationships, best-in-class regional operating platforms and strong access to public and increasingly attractively private capital, the REIT is well positioned to continue executing on its strategy. I'll now ask the operator to open up the call for questions.

[Operator Instructions] First question comes from Fred Blondeau at IA Capital.

Just a quick question for me in regards to Rede D'Or. Looks like they might grow quite a bit over the next 12, 24 months. Your focus this year is on the U.K. JV, but could you be tempted to focus a bit more on JV-ing Brazil earlier? Or that would still be a 2022 focus?

Yes. It's a good question. I think it is a focus of ours. I think let's just say late '21, early '22, we could see those initiatives coming together. And I think the environment there is very constructive for that right now, both in terms of following Rede D'Or, but also in terms of seeing other health care operator consolidation and counterparty development for NorthWest. So we remain constructive in Brazil, and I think that would be just slightly behind these other initiatives that we would do.

And how should we be viewing your growth in Brazil in parallel to what Rede D'Or is trying to do here, at least for the next 12, 24 months?

Yes. Well, I think -- I mean, again, the comments I would say is that Rede D'Or is an exceptional business, really one of the best health care operators that we've seen globally, frankly. And so -- and they have quite a unique business opportunity in that the market in Brazil continues to be highly fragmented and obviously has attractive fundamentals. So I think that strategy, we're a supporter of that strategy of continued consolidation and growth, and we see that happening not only with Rede D'Or but also with other potential counterparties. I think the challenge for us with Rede D'Or, of course, is that they [indiscernible] a lot of capital and their need for -- as many of the sale leaseback type transactions that we've done with them historically is probably a little bit diminished, but our appetite is very strong to continue growing. But we are seeing similar organization opportunities, so I feel like we'll be able to find a fair number of high-quality situations in Brazil.

[Operator Instructions] Next question comes from [ David Rothschild ], a shareholder.

I'm looking at your earnings announcement here. For the third -- or the December quarter, what was the AFFO per share versus last year? I don't see it in here. I see the gross but not the per-share figure.

Shailen, would you like to respond to that?

Yes. Can you give me 2 minutes? I'll just put out the specific per-quarter figure. Given it was an annual result we disclosed per share, our per-share numbers were focused on our annual results. And year-over-year, that was at $0.85 per unit in 2020 versus $0.84 per unit in 2019, representing a 1% per unit increase in AFFO per unit in Canadian dollars. We'd also called out that we -- excluding the impact of foreign exchange, that equated to roughly a 5% increase year-over-year in AFFO per unit. I will -- feel free to shoot me an e-mail, and I'm happy to get into a specific quarterly number with you.

Yes. I guess I would like to compare quarter-over-quarter. I saw the yearly figure, but I didn't see how you did in last quarter versus a year ago.

Yes. I'll take a couple of minutes to pull out that number, so perhaps you can go off-line.

Thank you. There are no further questions at this time. I do apologize. We just have a question that popped in from Tal Woolley at National Bank.

Just on the Australian Unity investment, and I apologize if you addressed this earlier in your comments. But is that private REIT like under -- officially under a strategic review right now? Or -- because you sort of mentioned in your presentation that potentially a generational opportunity for you. I'm just wondering how -- what the time line kind of is on that investment and how we should think about it evolving?

Yes. There's lots in that, Tal. So I think, as always, it's a little bit difficult to talk about these sorts of situations. But as has been in the press, we can confirm that we've made an unbinding offer to the trust. And they're in the process, I think, of considering what to do next. Whether that constitutes a strategic review or not, I'm not sure. But clearly, it's -- that's the nature of our current engagement, and we'll maybe just leave commentary beyond that to the press at this point. But I think we're certainly very focused on our next steps, and I'll leave it there.

Okay. And just Shailen, in the same-property NOI dialogue in the MD&A, I'm just looking at the sort of like the currency adjusted versus non-currency adjusted. And you sort of -- you have a statement there saying that basically same-property NOI for the quarter decreased by 19.3% in euros but increased by 26.8% in Canadian dollars. And that's a -- that does not jive to me with like the -- that's a huge swing with respect to like the currency not having moved anywhere close to that amount. Like is there -- I'm just wondering if there's something else in there that I'm missing.

Yes. When we disclosed our constant currency same-property NOI, there's a nuance there that it references a recurring constant currency same-property NOI numbers. So that also adjusts for any nonrecurring items over the course of the quarter. So that swing, you're right, doesn't -- it doesn't represent only foreign exchange movement. It also includes the elimination of nonrecurring items. And I would call out that in Q4 annually within our European portfolio and specific to our German medical office building portfolio, we tend to go through a variety of accrual adjustments in respect of our tenant recovery. So the Q4 traditionally has been a little bit volatile. I'm happy to go a little bit more detail with you on that specific catch-up, but we do show -- we do have a breakout on a global basis what those nonrecurring adjustments are when we bridge from reported SPNOI to cash recurring SPNOI.

Okay. And then just going to your supplementary schedules, too. So if I'm doing my math right, proportionate debt to EBITDA, based on your ownership all the various entities, that's running around 10.5x trailing EBITDA. Does that number jive with sort of your calculations?

Prior to our equity offering, correct. And I would also take you to our -- and I think the specific number is just 10.06 net debt to EBITDA proportionately as of Q4.

Okay. And then I know like -- because there's been a bunch of transactions that you guys have been working on over the last 2 years, but there was some sort of chatter, I think, sort of late '19, early 2020 about possibly looking to use the Canadian unsecured market and trying to open up that channel of funding. Where does the company sort of sit on that right now?

Yes. I would say on the heels of our recent equity financing, coupled with our planned U.K. JV and the natural conversion of our convertible debentures, our pro forma leverage profile will very much put us into, I'd say, investment-grade metrics, where we'd see our pro forma net debt come into sub-8x, and we do have a more formal bridge or reconciliation to that target. So we see our investment-grade metrics as being a catalyst to both support what we believe is a reasonable equity valuation for our units as we achieve those metrics. And then as it pertains to accessing unsecured capital, I think it really brings an additional tool into the toolkit to pursue some of the REIT's growth initiatives. We do call out that a lot of our capital structure is focused on very efficient asset-level finance within our JV structures where we have the benefit of the covenant of our capital partners. So it's really -- there's a tension in the discussion as to whether we consider using Canadian unsecured finance versus extremely efficient capital partner covenants asset of finance. But I think the real target right now is to get our metrics and our credit metrics into those investment-grade parameters and then really start to bring that tool into the toolkit and to explore where we can best take advantage of it.

And -- but that feels like something you could get to probably in 2021, if everything kind of hits right?

I think that's very much our target. And as we look through our U.K. JV profile that Paul mentioned in terms of completion in 2021, that's the real catalyst to put us squarely into those metrics.

Okay. And then, Paul, maybe you can just give a little bit more back story on why now considering the U.S. -- like to consider the U.S. and sort of how you've been thinking about that market over the last several years and why you're -- now is the time to maybe consider pushing in there?

Yes. I think -- sure, Tal. It's a good question. I think just starting with the obvious that we know the business has matured and scale and capabilities to be able to look seriously at the U.S. It's the largest health care market and by extension health care real estate market in the world. So it's certainly an obvious one. So I think those are the 2 big things. But I think we also see, just in the moment, particularly sort of the COVID emerging moment, just some, let's say, screening a little bit more opportunistically for us to participate in. And so those 3 things taken together, I think, kind of get us to a place where we can look at it. Obviously, we've consistently looked at the U.S. market since we started the business for reference points and just understanding the functioning of the health care industry. As I said, it's a very dynamic market. So I think we've been trying to understand it for a long time. And now based on that, we started to develop our strategy and focus on a number of segments in the market that we think are attractive given our cost of capital and given our management expertise. So I think there's a lot of things coming together, but we see it very clearly as a super logical market to be in and one where, as you followed NorthWest, we'd like to have a position that's at least in its subsegment, a scalable and meaningful position where we can have impact in the market. And I think we've been quite focused on finding areas where we believe that to be the case despite the size of the market and the breadth of established competitors, if you will. We've been able to identify narrowly some really specific and attractive places to focus on. So that's where we've gotten to. And I think it's a big step, so we'll be evaluating it very carefully over the next little while, but the market dynamics have screened more positive than ever for us over the last little bit. So that's the message today.

And is there like -- you sort of talk about the care versus care assets. Like what are the types of assets that you'd probably be considering looking at?

Yes. Well, sorry, just to be clear...

I'm just trying to get a flavor if the type of asset you're looking for changes a little bit because of the U.S.

No, no. We have some very core beliefs in our business. I mean starting with focusing on the care side of the space, so where we looked exclusively in care. And then I think as you've heard from the balance of our strategies, both in Europe and in Australia, where the markets are a little more vibrant, we have a strong precinct or campus, academic medical center sort of focus, if you want to think of it that way. So there's some pretty logical directional opportunities there. Of course, we have our historical MOB business where we have the management expertise and technology to deliver sort of multi-tenant solutions. And so all of those things start to come together as we look at the U.S. or any market for that matter. So I think that, just to be clear, we are very much focused and we can focus on the pure side of the space. And our existing strategies in every market sort of inform the things that we like and where we're likely to focus in the U.S.

\And is it fair for us to think that sort of like the -- as you've broken into new markets previously, like it'll probably look similar in terms of the way where you make some principal investments on your own and then find a capital partner to help accelerate that growth later on? And are you guys getting to the point now where you have enough of a rep maybe where you don't maybe have to go through that principal phase, like you might be able to set up a JV at the outset of entering a new market?

Yes, yes. It's a great question. I think we are at that stage, Tal. I think that the trick in all these things is that when you have a dynamic market where there are active transactions, does it perfectly line up to start. So I'm not sure I can definitively give you that answer today, but I would say that it's in our minds to start, if possible. And certainly, what we see in the U.S. is meaningful enough and definable enough, I guess, that it would -- we could achieve that outcome that you mentioned. But I think we always, again, have a long view, of course, of us just practicing what we preach, I guess, and doing things. And I would say that between those two is where we'll end up likely. So it's -- we'll see. But I think where we are in the business in terms of positioning ourselves with capital partners and discussions in those capital partners, I mean, I'm sure it has come up quite clearly in our 2020 results. And clearly, in our focus, we're as advanced as we've ever been in this broader range people as we've ever seen. And I think to the asset class and certainly health care real estate is in a moment where it's getting a lot of focus. And we think that we're certainly a partner of choice for many institutional investors. And so all that taken together gives us a lot of confidence not just as we think about the U.S. market entry, but in all the things we might do, it's a very good moment for our business, and we're quite focused on leveraging our corporate resources and IP and relationships to maximize that. So that's kind of the moment. So I think a lot of things are lining up, and they perfectly line up in the transaction. It's always hard to say as to that, but I hope so.

At this time, we. Have no further questions. You may proceed.

Okay. Thank you, operator, and everyone on the call. Appreciate your time, and we'll sign off now. And from the management team of NorthWest Healthcare Properties REIT, have a nice day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.