TSX:NWH.DB.G - Post by User
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incomedreamer11on May 22, 2024 10:36am
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Scotia comments after conference
Scotia comments after conference
Re-Setting the Floor: Five Is the New Four
OUR TAKE: Slightly Positive. Since Oct ’23 (i.e., since distribution cut announcement), NWH unit price has been trading in the range of $4.00 to $5.00. NWH has made good progress on both asset sales and tackling debt re-financings (details below). Post Q1 results (details on page 7) which came in ahead of Scotia, our 2024 FFOPU estimate is slightly revised higher by 8.6% and 2025 by 1.3%. Our NAVPU of $6.75 (or $8.00 excluding Deferred Tax Liability) is unchanged - Exhibit 5.
Five is the new floor: At 7.50% implied cap rate (i.e., over 100bp above IFRS cap rate of 6.42%), our NAVPU would reduce to $5.00. NWH divested 12 non-core properties in Q1 ($165.2M) at a cap rate of sub-7% or closer to NAV valuation, and a total of 27 properties in the last 12 months (~$700M) at a cap rate of just below 7.5%. NWH portfolio quality is much superior to assets disposed, and we think $5 could be the new floor price.
What if Brazil portfolio is disposed? If Brazil with IFRS value of $793M is disposed at ~5% discount, leverage will reduce to ~53% (from 59%) and debt maturities in 2025 will reduce to ~30% of total debt (from ~42%). We think a sizable portfolio disposition is required to take unit price closer to $6.50.
KEY POINTS
More progress made both on asset dispositions and debt renewals: Total dispositions of $201M so far in 2024, we continue to think that an increased pace of dispositions is the key catalyst for the stock. In 2023, NWH divested $495M of non-core assets ($360M) and securities ($135M). More progress was done on financing as $172M variable rate Australasian secured term loan was refinanced and extended by 2 years. Post quarter, NWH fixed the interest rate on $40M at 7.36% p.a. for a term of 2 years through interest rate swaps. Only $125M of debt is due in 2024 (3.5% of total debt). These are regular mortgages which are expected to be renewed during the year. Apart from these mortgages, there is no major debt maturity in 2024.
Work needs to be done to cover 2025 maturities: $1.48B of debt is coming due in 2025 (42% of total debt - Exhibit 9) at an expiring interest rate of 7.34%. $568M of debt due in the Americas in early 2025 – we think NWH is considering sale of US and or Brazil portfolio to tackle this large debt maturity and de-lever balance sheet. While strategic review is still ongoing (started on Aug 8, 2023), we have little visibility with respect to US/Brazil/UK portfolio dispositions. We think market is not pricing in large-scale dispositions and as such see them as the key catalysts for the stock.Model update post Q1: Our 2024 FFOPU estimate increased by 8.6%, and now implies -30% y/y growth – Exhibit 8. We continue to assume no dispositions, no JV formations until Q3/25, and no expansion in AUM. Our 2024 FFOPU estimate of $0.427 is 1.7% below consensus (Exhibit 7). Our NAVPU is unchanged at $6.75 – Exhibit 5 for details.
Valuation – NWH trades at 12.7x 2024 AFFO multiple, ~23% discount to our NAV, and 7.6% implied cap rate. NWH valuation looks reasonable in the context of higher leverage and higher payout ratio – Exhibit 2. NWH distribution yield is 6.9% and our revised 2024 AFFO payout ratio is 88% and should normalize to 84% in 2025.
Conference call takeaways: (1) Transaction market remains choppy, but with level of disposition activity, NWH believes the interest rate cycle is at its peak. NWH has divested 12 non-core properties in Q1 ($165.2M) at a cap rate of sub-7%, and a total of 27 properties in the last 12 months (~$700M) at a cap rate of just below 7.5%. NWH also further redeemed its investments in unlisted securities, bringing the total proceeds to $150M and effectively disposing 71% of the investment. Proceeds from redemption and disposition of properties have been used to reduce debt.
(2) Cash flows are robust and diversified, with SP NOI up ~6% y/y supported by 84% of properties indexed to inflation and contractual rent increases. Portfolio occupancy is at 96.5% underpinned by WALT of 13.2, one of the longest in our coverage. NWH has also achieved 98% rent collection for four years in a row. Fair value reduction on portfolio properties in Q1 is a function of higher-for-longer interest rate environment. Given that rates decelerate and inflation cools down, NWH expects SP NOI growth of 4% in the next year, and 3-4% the year after.
(3) Balance sheet: Leverage remains elevated at 59.3% compared to last year at 57.6% and 59.2% last quarter. Post Q1, NWH fixed its rates for its Australasian Secured term financing of $40M at 7.36% p.a. for two years term. We note that NWH variable debt (31.5% of debt vs. 30.6% in Q4/23) of $192.1M in mortgages and $1.6B in term debt are hedged with fixed rates of 2.37% and 5.66% p.a., respectively. As at March 31, NWH’s net weighted average interest rate is 6.1% (vs. 6.27% in Q4/23).
(4) Brookfield restructuring HealthScope: In 2019, Brookfield Business Partners completed its acquisition of Healthscope and sold 22 of its portfolio properties, which NWH bought part of and is currently leasing back to the entity. As per news sources, the leases have a weighted average life of 20 years and annual rent increases of ~2.5%. This March, Brookfield called in specialists to restructure HealthScope’s $1B loan, backed by cash flow from its 38 hospitals. As per Brookfield’s filings, HealthScope is able to meet its quarterly covenants in March, but absent any modification to the loan agreement, have minimal headroom with a possibility of breach in the near future. This restructuring comes amid the Australian private hospital sector’s negotiations with the government and private insurers for more funding, as the sector’s margins saw deterioration due to increasing costs. HealthScope came with an initial proposal to restructure their lease agreement, to which NWH rejected. Management highlighted in the call that as of date, HealthScope (~3.5% of rent roll) does not have any outstanding lease obligations due. NWH is open to supporting HealthScope in exchange for lease enhancements.