CIBC comments after conferenceOur Conclusion
NWH reported a slight Q2/24 miss, falling two cents short of consensus. SPNOI grew ~4% driven by inflation adjusted rent, “rentalised capital” spend and improved recoveries. The REIT continues to make significant headway in its non-core asset disposition program; announcing the conclusion of its strategic review and the long-awaited sale of the U.K. portfolio.
Although disposed of at a loss, we view the sale of the portfolio as another step in the right direction as the REIT looks to continue reducing higher rate leverage, and to put it plainly, simplify its story. However, given the above-average gearing profile combined with uncertainty regarding the amount and pace of future dispositions, there are perhaps a shade too many (albeit diminishing) unpredictable outcomes on which we cannot, with a high degree of accuracy, estimate the final outcome of. We choose to remain on the sidelines for now, until there is evidence of a more direct and transparent path to a reduction in leverage and a sustainable payout ratio (something we believe will occur concurrently with a simplification of the REIT’s operations).
We are decreasing our NAV estimate to $7.75, and accordingly maintain a discount to NAV with a price target of $5.50. NWH remains Neutral rated.
Key Point
Q2/24 Results:
FFOPU of $0.09 decreased ~31% Y/Y (+~12% excluding prior year interest caps) and compared to consensus of $0.11. AFFOPU of $0.09 also fell short of the consensus estimate of $0.11; the headline payout ratio was ~105%, aided by a ~12% participation rate in the REIT’s DRIP. Operating revenues and NOI were in line with our expectations as SP-NOI increased ~4% (led by Australasia at +6.6%). Occupancy increased 50 bps Y/Y and sits at 96.5%. During the quarter, the REIT recorded a FV loss on investment properties of ~$172MM, ~$105MM of which was written down on the U.K. portfolio to reflect the market price at which it was sold.
Asset Management:
NWH ended the quarter with $6.0B of fee-bearing capital on $11.3B of total commitments in co-investment vehicles. A continued lack of transactional volume continues to hinder any material capital deployment, a dynamic we expect to continue through 2024. Balance Sheet: D/GBV for the quarter (including convertible debentures) increased 170 bps Y/Y to 52.5%; interest coverage was 1.68x.
Distribution Sustainability:
Almost one year after the 50% distribution cut, the current headline numbers suggest an AFFO payout ratio of ~105%. While the REIT continues to allocate non-core assets for disposition, we do note the higher leverage may have some questioning if the initial distribution cut in 2023 may prove to be on the conservative side. To be clear, we are not suggesting a further cut is near-term likely, as the sale of the U.K. portfolio should serve to lower the payout ratio to a more sustainable range
Sale Of The U.K. Portfolio:
Subsequent to quarter end and marking the conclusion of the formal strategic review process, the REIT’s U.K. portfolio was sold to Assura PLC, a publicly listed REIT on the London Stock Exchange. Total consideration was $885MM, comprised of $708MM in cash with the remaining $177MM in shares of Assura (representing ~8% of the public float). The sale price of the U.K. portfolio represents a capitalization rate of 5.9%. Debt totalling ~$690MM, with a weighted average interest rate of 7.9%, will be repaid with the net proceeds from the transaction. The sale results in a fair value loss of $105MM, that the REIT chose to recognize during the quarter (and in turn lowering the IFRS NAV to $9.53 from $10.86 at year end). While a sale occurring below the fair market value of the portfolio is less than ideal, we would note that the current share price for Assura of £0.42 represents a ~20% discount to the consensus EPRA NAVPS. If Assura shares were to converge to NAV parity, we could see ~30% of the $105MM FV loss recouped. Additionally, the sale is expected to.
result in accretive debt reduction and balance sheet improvement, providing optionality for addressing future debt repayments.
Debt And The Rate Environment: As the interest rate environment continues to stabilize, we are being presented with a more normalized view of what to expect in terms of debt rolls. NWH’s current effective weighted-average interest rate is 6.04%. As of Q2/24, NWH had ~$56MM of debt maturing through 2024 at a weighted-average interest rate (WAIR) of ~3.5%. While the 2024 debt roll will provide an immediate headwind (absent a material, and quicker, lowering of interest rates), NWH has a much more substantial portion of debt maturing through 2025 (pre dispositions). Approximately $1.4B matures in 2025 at a weightedaverage interest rate of ~7%. While on the surface, and if the market does play out as most economists expect, then it would look as if NWH could benefit from a decrease in rates by 2025, perhaps lessening the impact (and, indeed, risk) of the aforementioned debt roll given the elevated rate at which the debt is maturing. However, when breaking down the debt maturities geographically, ~12% of total debt maturing is located in Brazil (at a 10.3% WAIR) where the current Brazilian 10-year government bond currently sits at ~11.4%. Absent a larger pull-back in bond yields through 2025, the debt maturity should serve as a small headwind. Furthermore, a portion of the aforementioned debt maturities relates to 10% convertible debentures with a conversion price of $7.25. Given the recent pull-back in the unit price, we would be remiss not to suggest that any refinancing could occur at a similar interest rate or perhaps even higher.
Valuation: NWH units are up ~8% YTD (vs. the XRE down ~2%) and are trading at a ~38% discount to consensus NAV (vs. the historical discount of ~3%—call it parity). The REIT trades at a forward consensus P/FFO multiple of ~10x, compared to the pre-pandemic average of 11.2x. We believe that in light of the recently concluded strategic review, and elevated leverage, the units are likely to continue to trade at a discount to their historical measures for the time being.