TSX:NWH.DB.G - Post by User
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incomedreamer11on Aug 15, 2024 10:51am
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Scotia comments after conference
Scotia comments after conference
Yesterday's Sell-Off Provides a Better Entry Point
OUR TAKE: Mixed. NWH unit price was down ~5% yesterday as market focus was on Q2 miss (details on page 7), while UK portfolio sale was completely overlooked. We think UK portfolio sale has materially improved the risk profile, and as such we expect valuation discount to narrow. NWH is now trading at 30% discount to NAV (Exhibit 4) and 8.1% implied cap rate (Exhibit 9). Our 12-month target is $6.50, which is largely based on our NAVPU of $6.75 (unchanged) and implies 9.7x 2025E AFFO multiple.
NWH distribution yield is 7.6% and implies AFFO payout ratio (Exhibit 2) of 90% in 2024 and 74% in 2025. So, we think distribution is fully covered. Leverage (Exhibit 5) reduction at 55% vs 61% in Q2 and 59% last year. Leverage is elevated but has come down on $1.6B of asset dispositions in the last one year. 2025 debt maturities (Exhibit 8) have reduced to 27% (as % of total debt) vs 42% previously. We maintain our SP rating as we see FFOPU y/y growth (Exhibit 7) beginning from Q1/25 and still y/y declines in Q3/24 and Q4/24. We see $5 as the new floor, and the stock could move towards $6 as 2025 earnings growth is visible.
KEY POINTS
Debt refinancing risk has significantly reduced (Exhibit 8): At the start of the year, 60% of total debt was due which included 42% expiring in 2025. Pro forma UK sale, only 28% of total debt is due which includes 25% expiring in 2025. 2025 debt now includes $125M Convertible Debentures expiring in Mar 2025 and $282M expiring in North America, which largely includes property-level debt in U.S. portfolio. We think there is minimal refinancing risk. Debt repaid with proceeds from UK portfolio: Brazil debt of $140M @11.3% expiring in 2025 has been repaid; Corporate debt of $95M @9.42% expiring in 2025 and European debt of $460M @6.2%. In total, $690M of debt will be repaid with weighted average interest rate of 7.9%.
Good valuation mark on U.K. portfolio in context of current trading price: NWH has sold UK portfolio for $885M at 5.9% cap rate. Sale price implied $105M of FV loss which equated to 10.6% of IFRS value. This should be seen in the context of IFRS valuation relative to current unit price. Revised IFRS NAVPU is $9.53 (-$0.83 q/q mainly due to UK sale). Current price implies 48% discount to IFRS NAV. NWH received over 10 offers which included interest from local and international parties. See link to our previous note for details on UK transaction.
Still looking for inflection point on earnings growth (Exhibits 6 & 7) – FFOPU declined 40% y/y in Q2/24, which was the steepest decline in the last couple of years. We note that burning off of interest rate caps was the main reason for q/q decline in FFOPU in Q2. We still expect FFOPU to decline double-digits y/y in Q3 and Q4, and y/y growth to turn positive from Q1/25 and onwards. We think, valuation may look attractive, but market is waiting to see the inflection point on earnings. This also may have been the reason the stock did not respond to UK portfolio sale.
Model update post Q2: Post Q2 miss, our 2024 FFOPU estimate decreased by 7.5%, and now implies -30% y/y growth – Exhibit 6. We expect FFOPU growth to accelerate in 2025 as proceeds from UK portfolio dispositions were used to paydown debt - Exhibit 7. We assume no dispositions, no JV formations, and no expansion in AUM. Our NAVPU is unchanged at $6.75 – Exhibit 4 for details.
Valuation: NWH trades at 11.9x 2024E AFFO multiple, ~30% discount to our NAV, and 8.1% implied cap rate. NWH valuation looks reasonable in the context of higher leverage and higher payout ratio – Exhibit 1. NWH distribution yield is 7.6% and our revised 2024E AFFO payout ratio is 90% and should normalize to 74% in 2025.
Conference call takeaways:
(1) NWH has completed their year-long strategic review period which resulted in the divestment 46 properties and investments in unlisted securities, generating CAD $1.6B for the firm. NWH closed the sale of their UK portfolio to Assura for CAD $885M at a 5.9% cap rate, including $708M in cash and $177M in stock consideration. Due to the firm’s UK REIT structure, NWH was able to repatriate the cash from this sale without any tax withholding. NWH’s ownership of Assura represents less than 10% of their equity value, so the investment will be grouped in with other investments and marked-to-market every quarter. Distribution income will be recorded as earned and subject to 15% withholding tax representing the preferred rate given the Canadian, UK partnership. The cash proceeds from the disposition of these assets were used to reduce leverage.
(2) Cash flows continue to be highly diversified and stable with a high rent collection rate of nearly 99%. SPNOI y/y growth for Q2/24 was 3.5% (4.2% on a portfolio consolidated basis) vs. 6% in Q1/24. For the second half of the year, NWH expects around 3%-4% SP NOI growth as inflation starts to ease. In Q2/24, NWH negotiated or completed ~810k sf of new and renewed leasing with a retention rate greater than 80%.
(3) NWH remains committed to pursing potential opportunities to continue to sell portfolio of assets as they are experiencing increasing demand in the sale market. These opportunities will allow the firm to deleverage high cost debt they wish to repay. They are also under-hedged on their balance sheet, so they see opportunity to implement interest rate swaps as the market gains momentum. NWH is looking at JV partnerships to grow their asset management business since they want to expand their asset light department of their business. Management predicts the firm’s asset management business will continue to grow as the market continues to recover.
(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, which NWH rejected. Based on our discussion with NWH, Brookfield does not have the ability to reduce rents. Management highlighted in the call that as of date, HealthScope (~4.8% of rent roll) does not have any outstanding lease obligations due. NWH is open to supporting HealthScope in exchange for lease enhancements.