CIBC commentsThere is a common generalization on the gridiron that there are two types of quarterbacks: those who scramble to the sidelines and those who lower their shoulder and run up the middle. While we’re not insinuating that we’re staring down a 250 lb linebacker and about to get sacked, in this case we are choosing to move to the sidelines and wait for the field to clear a bit. Given the recent C-suite turnover (a process just beginning) and the U.K. joint venture falling through, we no longer believe that we have sufficient visibility into the very near-term outlook for the REIT. While we view the recently announced strategic review as a step in the right direction, there are perhaps too many unpredictable outcomes on which we cannot, with certainty, provide commentary. To be clear we don’t believe there are underlying issues with the real estate (or the REIT for that matter), we simply prefer to take a knee for the time being as the plan evolves. As such, as of August 11, we downgrade NWH from Outperformer to Neutral. We reduce our NAV estimate to $11.00 (previously $12.50) on a 5.75% cap rate (previously 5.50%). Accordingly, we lower our price target to $9.00 (previously $11.00), maintaining a modest discount to NAV.
Key Points
Q2/23 Results: FFOPU of $0.13 fell short of our $0.19 estimate and $0.17 consensus, representing a decrease of ~32% Y/Y (however, when adjusting for certain non-recurring changes the result would have been $0.15). AFFOPU came in at $0.13 compared to our $0.18 estimate and $0.17 consensus, representing a decrease of ~35% Y/Y. The drivers behind the miss continue to be higher interest rates (floating rate debt), temporarily higher leverage, and lower transaction volume within the REIT’s fee-bearing capital platform. Occupancy remained stable at 96%.
Senior Management Changes: On August 8, 2023, NWH announced a series of management changes, with the most prominent being Pal Dalla Lana stepping away from the board of Trustees and resigning from the position of CEO. Craig Mitchell, formerly President, has been appointed the interim CEO. Mr. Mitchell joined NorthWest in 2018 as CEO for Australia and New Zealand.
Distribution Sustainability: The REIT’s payout ratio (154% for Q2/23) remains at the higher end of our coverage universe. The cancellation of the U.K. joint venture and the lack of clear updates regarding the U.S. portfolio recapitalization leave the REIT in a heightened state of leverage (with considerable variable rate debt exposure), leading us to question the ultimate sustainability of the distribution. Given the aforementioned strategic review, it seems probable that a distribution cut could be included in future plans (and at the very least is a lever that management is considering).