Post by
incomedreamer11 on Sep 26, 2023 10:51am
CIBC comments
Our Conclusion
Friday evening NWH announced an update regarding initiatives to strengthen its financial position and its ongoing strategic review process. The announced distribution cut of 55% will rightfully receive the lion’s share of attention, although the maturity of the REIT’s interest rate caps in Q1/24 will ultimately be the biggest factor impacting our 2024 estimates, resulting in a 30% reduction thereto.
While the distribution cut was largely expected, we are of the belief that there may be additional changes to come over the next several quarters as a result of the review process. Indeed, it appears as if this is just the beginning as the REIT has indicated both the U.S. and Brazil portfolios may be available for sale in their entirety (or more likely parts thereof). While we believe reducing leverage remains the highest priority for the REIT, and positive steps are being taken in that direction, there is still not enough clarity as to what direction the REIT will go following the culmination of the review process. As such, we continue to remain on the sidelines, reducing our forward NAV estimate to $9.00 and utilizing a 6.25% cap rate (previously 5.75%). Accordingly, we are lowering our price target to $6.00 (previously $9.00), applying a ~30% discount to our NAV estimate in order to account for elevated leverage and a lack of transparency into the near-term direction of the REIT.
Key Points
Monthly Distribution Reduction: While not unexpected (we have been highlighting the increasing probability over the last two quarters), the most prominent news coming out of the aforementioned press release is the immediate reduction in the REIT’s monthly distribution to unitholders from ~$0.067 to $0.03 per unit (or from $0.80 per unit to $0.36 per unit on an annualized basis). 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), which had led us to question not if, but when, the distribution would be reduced. We estimate a post-reduction 2024 AFFO payout ratio of ~87%, falling within the range specified by management.
AUHPT Sales: Subsequent to the announced settlement agreement between NWH and Australian Unity Funds Management Limited, NWH has received gross proceeds from AUHPT unit sales and redemptions of ~$82MM. NWH expects to complete the sale or redemption of the remaining units for gross proceeds of ~$115MM in Q4/23 and Q1/24. All proceeds will be used to repay debt and for general trust purposes. While not substantially material, we do note the sale results in accretion on an FFOPU basis, as the AUHPT investment currently has a yield sub-4%, compared to variable rate debt exceeding 9%.
The Strategic Review Process Begins to Unfold
Revision To Earnings Guidance: Management has undertaken an analysis of the REIT’s operating results, specifically the maturity of the in-place interest rate caps in Q1/24. The REIT expected the absence of the interest rate caps to decrease AFFOPU by $0.16-$0.20 on an annualized basis. While management doesn’t provide annual guidance per se, we believe the reduced “guidance” was generally on consensus 2024 estimates.
Capital Recycling: As previously announced on August 8, 2023, NWH has undertaken a broad-based strategic review to unlock value. The REIT has formed a Strategic Review Committee of the board to assess the best course of action for the REIT’s next phase of development and growth. The committee has retained two major Canadian banks and an international bank, as co-advisors, to help assess and explore strategic alternatives available to the REIT. Following consultation with its financial and legal advisors, the REIT is determined to explore, among other strategic initiatives, transactions involving the potential sale of all or part of the REIT’s U.S. and/or Brazil property portfolios. While we cannot summarily dismiss an outright sale of the segments, we believe it is unlikely given the lack of transactional activity and current volatility of interest rates. Given heightened interest rates and continued price discovery (or perhaps lack thereof), we believe the sale process will likely culminate primarily through individual asset dispositions in an effort to improve overall balance sheet health. In Exhibit 1 below is a comparison of NOI contribution by geographic segment (as of Q2/23) and the GLA breakdown of the Americas segment. As of Q2/23 the Americas accounted for ~50% of the REIT’s NOI. Assuming a sale in the entirety of the U.S. and Brazil portfolios would result in a disposal of ~46% of the Americas segment, implying (using simple math, which of course it never is) a reduction in NOI of ~23%. Sales of assets YTD have generated gross sale proceeds of ~$74MM, with an additional ~$50MM expected in Q4/23. Additional assets that are currently under conditional agreement or are being marketed for sale amount to ~$100MM.
Comment by
TimeBuilder on Sep 26, 2023 12:59pm
THANK YOU for that Duly Noted: Regards, TimeBuilder