TORONTO, November 14, 2022 /CNW/ – Northwest Healthcare Properties Real Estate Investment Trust (the “REIT”) (TSX: NWH.UN), today announced its results for the three and nine months ended September 30, 2022 and the formation of a new joint venture targeting UK healthcare real estate.

Northwest has entered into agreements with a UK institutional investor (the “UK Investor”) in respect of a new joint venture targeting healthcare real estate in the UK (the “UK JV”) with an aggregate equity commitment of $765 million (£500 million) to be funded 85% by the UK Investor and 15% by the REIT as well as a $75 million (£50 million) investment in the REIT’s existing seed portfolio. The agreements are expected to be finalized by year-end.

Operationally, Northwest’s inflation indexed $10.6 billion, 233 property portfolio performed well in the third quarter with a stable net asset value increasing by 2.7% to $13.97 per unit, occupancy at 97% and a market leading 14.0 year WALE delivering 2.5% year over year (“YOY”) same property NOI growth on a constant currency basis.

During the quarter, revenue and NOI grew 21.2% and 19.9%, respectively on a YOY basis. However, as a result of several non-recurring items and lower transactional volumes, management fees decreased during the quarter while increasing interest expense coupled with the REIT’s temporarily elevated leverage level resulted in AFFO per unit decreasing to $0.151. With high visibility into near-term transactional activity which is expected to result in quarterly management fee income reverting to historic levels and adding ~$0.02/unit on a run-rate basis, the REIT expects earnings to be in-line with previous quarters when combined with the $0.04/unit annualized impact of balance sheet initiatives completed post quarter, including:

1 These are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. Further, the REIT’s definitions of FFO and AFFO differ from those used by other similar real estate investment trusts, as well from the definitions recommended by REALpac. See “Non-IFRS Financial Measures”, Exhibit 1 and Exhibit 2.

• Refinancing two floating rate facilities with a combined outstanding balance of approximately $475 million which extended the term to maturity by approximately 2 years and are expected to result in annual interest rate savings of approximately $0.02/un;
• Proceeds from the UK portfolio recapitalization will be used to repay higher cost floating rate debt. The transaction is expected to close in December and upon completion are expected to generate annualized interest savings of approximately $0.01/un.
• Commitments to extend the maturity of its US secured loan facility to 2025, which is expected to generate annual interest rate savings of approximately $0.01/un.

 

Proforma the completion of the UK refinancing and recapitalization, associated debt repayment, and the US refinancing, exposure to long-term fixed rate debt is expected to increase to 65% of outstanding debt while also generating the aforementioned interest savings and extending the REIT’s weighted average term to maturity.

Commenting on Northwest’s results and progress on key strategic initiatives Paul Dalla Lana, Chairman and CEO said:

“With the recent market volatility, we are pleased to announce the formation of a new UK JV with a £500 million equity commitment and the recapitalization of our existing UK platform in line with our

current IFRS valuation. This was the REIT’s top priority in 2022 and it is highly strategic for the business as it expands the asset management franchise, introduces a new institutional partner, and positions the REIT to execute on attractive opportunities that we expect to emerge in the UK in the near-term.”

Mr. Dalla Lana went on to say:

“While Q3 financial results were impacted by an interim flexible capital structure, the REIT has taken concrete actions to reduce its interest expense by refinancing more than $1.0 billion of higher cost debt at lower rates post quarter-end.”

Capital Formation:

The REIT entered into agreements with the UK Investor to recapitalize the REIT’s existing UK portfolio (the “Seed Portfolio”) with a $75 million (£50 million) investment and the formation of a joint venture to pursue investment opportunities in the UK with a $765 million (£500 million) equity commitment (the “UK JV”). The capital commitment will be split 85% to the UK Investor and 15% to Northwest. The UK JV has a target to grow, independent of the Seed Portfolio, to approximately $1.5 billion (£1.0 billion). Northwest will manage the UK JV and will charge market-based fees.

Separately, the REIT’s US joint venture initiative continues to progress despite macroeconomic uncertainty and the REIT remains actively engaged with a short list of qualified partners and is working to agree commercial terms in Q1 2023.

Funds Management:

In-place capital commitments increased by $1.5 billion to $12.5 billion as a result of the new UK JV, agreed post quarter end and deployed fee bearing capital increased to $5.9 billion (+1.7% QOQ). The REIT’s funds management business continues to scale and proforma the completion of the US joint venture, deployed and committed capital would 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.

Growth:

In Q3, the REIT completed acquisitions totaling approximately $125 million all within either Vital or its Australian JV and continues to advance its global precinct strategy and post quarter end added an additional ~$150 million development project to its pipeline in one of its Australian capital platforms.

While macro-economic uncertainty resulted in lower near-term volume 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 investment opportunities within its fee bearing capital vehicles on an opportunistic basis while remaining disciplined in its capital allocation strategies.

Defensive Real Estate Portfolio:

The REIT’s high-quality and defensive portfolio delivered strong operational results including 2.5% same property NOI growth which is up 10 bp YOY. The REIT continues to have market leading cash flow stability with portfolio occupancy at 97%, a weighted average lease expiry of 14.0 years and 81.7% of the consolidated portfolio subject to rent indexation.

Balance Sheet Initiatives:

A significant focus in Q3 and post-quarter end was the refinancing of $1.0B of the REITs 2022 and 2023 debt maturities to extend term and fix rates:

• On August 25, 2022 the REIT completed a public offering of $155 million of unsecured convertible debentures with a $16.00 per unit conversion price, bearing fixed rate interest at 6.25% and maturing August 31, 2027.
• On October 28, 2022 the REIT completed an 18 month extension of its $110.9 million (A$125 million).
• On October 28, 2022 the REIT closed a new three year, $406.8 million (£266 million) term loan facility secured by its UK portfolio. Proceeds of the transaction were used to repay existing UK debt with a November, 2022 maturity date.
• On November 1, 2022 the REIT closed a new one-year, $125 million unsecured revolving credit facility. A portion of the of the proceeds will be used to repay the REIT’s existing $79 million unsecured facility with a January 1, 2023 maturity date.
• On November 2, 2022, the REIT extended the term to maturity of its Australian term debt facilities maturing in November and December 2022 to April and June 2024, respectively.
• The REIT has also received commitments to extend the maturity of its US secured loan facility to 2025.

 

Proforma completion of the post quarter end financing activities, the UK recapitalization and associated debt repayment, and the US JV the REIT’s consolidated leverage is expected to decrease to 43.5%.

2022 Third Quarter Financial and Operational Highlights:

For the three and nine months ended September 30, 2022, the REIT delivered strong operational performance with an increasingly conservative balance sheet across an expanded 233 property, 18.6 million square foot defensive acute healthcare real estate portfolio underpinned by long-term inflation indexed leases. Key highlights are as follows:

• Q3 2022 revenue of $115.8M up 21.2% YOY;
• Q3 2022 AFFO of $0.15 per unit (see Exhibit 2);
• Same Property NOI growth of 2.5% in Q3 2022 as compared to Q3 2021, driven primarily by annual rent indexation (see Exhibit 3);
• Strong portfolio occupancy of 97% consistent with last quarter with the international portfolio holding stable at 98.4%;
• Weighted average lease expiry of 14.0 years is underpinned by the international portfolio’s Hospital and Health Care Facility Assets’ weighted average lease expiry of 18.6 years;
• Total assets under management (“AUM”) increased 24.9% year over year to $10.6 billion;
• Total capital deployed in fee bearing vehicles is $5.9 billion up 16.0% year over year. Undeployed capital in existing fee bearing vehicles totals $4.3 billion;

 

 

• Net asset value (“NAV”) per unit increased by 2.7% year over year to $13.97 driven primarily by fair value gains resulting from the execution of the REIT’s UK asset management initiatives (see Exhibit 4);
• Debt to Gross Book Value – Including Convertible Debentures of 47.7% has decreased 390 bps, year over year, and is expected to decrease by a further 416 bp through the seeding of the new US JV.

 

Selected Financial Information: (unaudited) ($000’s, except unit and per unit amounts)	Three months ended September 30, 2022	Three months ended September 30, 2021
Number of properties	233	192
Gross leasable area (sf)	18,582,638	16,153,200
Occupancy	97 %	97 %
Weighted Average Lease Expiry (Years)	14.0	14.1
Net Operating Income	$89,547	$74,694
Net Income (Loss) attributable to unitholders	$6,611	$161,380
Funds from Operations (“FFO”) (1)	$37,176	$47,645
Adjusted Funds from Operations (“AFFO”) (1)	$36,960	$47,264
Debt to Gross Book Value – Declaration of Trust (1)	44.4 %	40.6 %
Debt to Gross Book Value – Including Convertible Debentures (1)	47.7 %	43.8 %
(1) FFO and AFFO are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. The REIT’s definitions of FFO and AFFO differ from those used by other similar real estate investment trusts, as well from the definitions recommended by REALpac. See “Non-IFRS Financial Measures”, Exhibit 1 and Exhibit 2 and “Performance Measurement” in the REIT’s MD&A.