CIBC commentNORTHWEST HEALTHCARE PROPERTIES REIT
A Reduction In Leverage On The Horizon
Our Conclusion
NWH released Q4/22 results, with a headline miss on both FFO and AFFO, resulting from continued temporary higher floating rate leverage and muted transactional activity (fees) from the REIT’s third-party fee-bearing business. A positive arising from the quarter was the announcement of the secured commitment for the U.K. JV and the expected recapitalization of the U.S. portfolio, both of which are expected to reduce leverage significantly in the coming quarters. Looking beyond the noise, NWH produced solid property-level results, increasing SP-NOI 2.9% Y/Y, demonstrating the defensiveness of the asset class. Given recent macroeconomic events and the associated negative sentiment regarding commercial real estate (whether warranted or not), we are lowering our NAV to $12.50 (on an unchanged cap rate) and reducing our price target to $12.00, based on a modest discount to NAV.
We maintain our Outperformer rating.
Key Points Q4/22 Results:
FFOPU of $0.15 fell short of our $0.18 estimate and $0.19 consensus. AFFOPU came in at $0.17 compared to our $0.18 estimate and similar consensus. The drivers behind the miss were higher interest rates (floating rate debt), temporarily higher leverage, and lower transaction volume within the REIT’s fee-bearing capital platform. As a result of imminent JV initiatives, the planned disposition of non-core assets and the addition of hedging agreements, the REIT expects AFFOPU to increase by ~10% on an annualized basis in 2023 (a figure in line with our estimate). Adjusted SP-NOI increased 2.9% Y/Y (primarily driven by rent indexation), while occupancy remained stable at 97%.
Asset Management: NWH ended the quarter with $6.1B of fee-bearing capital (up ~5% Q/Q) and $11.5B of total commitments. During the quarter, the REIT secured a commitment with a U.K. institutional investor for a larger investment in the REIT’s U.K. portfolio (70%-80% of the net equity value), which is expected to close in Q2/23. The REIT expects the aforementioned U.S. JV initiative to close in the latter half of 2023.
Balance Sheet Initiatives: Consolidated leverage for the quarter increased to 48.5% (56.1% on a proportionate basis). Upon completion of the above-noted balance sheet initiatives, we expect proportionate leverage to fall to ~45% by Q4/23. Interest coverage was ~1.9x, down from 3.5x Y/Y and down 99 bps Y/Y to 2.38x on higher floating rate debt expenses. Subsequent to year-end, the REIT entered into hedging agreements to fix interest rates on $892MM of floating rate, foreign currency debt facilities, immediately resulting in an increase to annual AFFOPU of $0.05 (and reducing its weighted average interest rate to 4.7%), a move that should ameliorate the coverage ratios significantly.