TSX:NWH.DB.G - Post by User
Post by
incomedreamer11on Nov 15, 2023 8:32am
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Post# 35736338
Scotia comments
Scotia comments
Rate Cut(s) Should Jump-Start the Price Action Here
OUR TAKE: Mixed. We maintain our SP rating but highlight that risk/reward profile has improved. In our last note titled “Laying Out Cards on the Table”, we mentioned that floor price could be in the $4.50-range. With no new bad news in Q3, we maintain that NWH should see fundamental support around mid-$4 level. At the same time, we think NWH could be one of the top beneficiaries within our coverage universe in case of potential interest rate cuts next year: (1) NWH has 34% variable-rate debt (second-highest within our coverage) – Exhibit 3. (2) NWH has higher leverage at 59% (Debt to GBV) – Exhibit 7, and (3) NWH has 42% of total debt maturing in 2025 at expiring interest rate of 7.4% – Exhibit 9. As mentioned in our recent initiation report (link), we continue to believe that operating portfolio is performing well while balance sheet is the main problem. We expect y/y % decline in FFOPU to bottom-out in Q2/24 and we should see a sharp positive recovery in Q2/25. Interest rate cuts and earnings recovery should be key catalysts for the stock – maintain $6.50 target.
KEY POINTS
Model update post Q3 – Last round of negative revisions (hopefully): Our 2024 FFOPU estimate is revised down by 12%, and now implies -33% y/y growth. We have assumed no dispositions, no JV formations, no expansion in AUM and have fully penalized them on higher interest rates including 10% Converts, and burn-off of low interest rate swaps. Our 2024 FFOPU estimate of $0.40 is 14% below consensus. We expect Street expectations will come closer to us in the near-term. Our NAVPU is also reduced to $7.25 (-$1.25) as we used higher cap rate of 6.7% (+11bp) and also further lower our NOI expectations – Exhibit 6 for details.
Progress made on Balance sheet – Still lot of work to be done: Leverage remains elevated throughout 2024 as we model no dispositions (other than the ones already announced) – Exhibit 5. 18% of total debt maturity in 2024 and 42% in 2025 – Exhibit 9. We think 2024 is more manageable now and expected rate cuts in 2024 and 2025 should ease-off some interest rate burden in 2025 especially. We expect 16% y/y FFOPU growth in 2025 mainly from interest rate savings.
Valuation and Scenario analysis – Post Q3 model update, NWH is now trading at 11.8x 2024 AFFO multiple, 39% discount to our revised NAV, and 7.8% implied cap rate. NWH valuation looks reasonable in the context of higher leverage and higher payout ratio – Exhibit 2. NWH distribution yield is 8.2% and our revised 2024 AFFO payout ratio is 96% and should normalize to 82% in 2025. See our previous note (link) for scenario analysis – we don’t want to duplicate the same work in this report. Exhibit 1 for key events and timelines.