Mitchell and other Northwest executives spoke to analysts on Aug. 14 on the heels of the REIT’s release of its Q2 2024 financial results.
The REIT announced last week that it sold its U.K. portfolio to Assura, a healthcare REIT publicly traded on the London Stock Exchange, for $885 million, representing a cap rate of 5.9 per cent. Eighty per cent of the transaction ($708 million) was in cash and 20 per cent ($177 million) was in Assura shares, or about eight per cent of Assura’s public float.
Debt of $690 million, with a weighted average interest rate of 7.99 per cent, will be repaid with net proceeds from the transaction.
The sale of the U.K. portfolio came on the heels of a now-concluded, year-long strategic review which has resulted in total sales of $1.6 billion, Mitchell said.
As a result of the property sale, Northwest has reduced its consolidated debt-to-gross-book value, including convertible debentures, to 47.1 per cent. The trust has “made substantial inroads into our 2025 debt maturity,” Mitchell said.
Overall debt reduced by $1.2B due to asset sales
Along with the sale of other properties, Northwest reduced its outstanding debt by $1.2 billion to $3 billion during the strategic review process, Northwest president Mike Brady said.
Brady said “the U.K. portfolio was a very strong portfolio. In an ideal world we wouldn’t have sold it, but it was a good portfolio, at a good price and we’ve had a lot of inbound interest which led us to run a formal process.”
Last September, minority investor TMR Capital PTC Limited expressed an interest in acquiring Northwest’s U.K. properties with partners. Earlier last summer, Northwest had announced the collapse of a proposed joint venture for its U.K. hospitals portfolio.
The REIT now has 200 properties in Canada, U.S., Brazil, Germany, Netherlands, Australia and New Zealand, with $9.3 billion in assets under management. Of that, $3.3 billion is owned directly by the REIT and $6 billion is owned jointly with third-party investors.
Mitchell said there was “some interest earlier on” for the REIT’s Brazil portfolio, but “we didn’t like the pricing or the interest to be honest, so the bid-ask spread was quite wide. We will continue to have dialogues with various parties and if there’s a move of the mind, we’ll look at something. At the moment, there’s nothing in the cards.”
He added “everything’s on the table,” for potential future sales. “We still have some high-cost debt on our balance sheet that we want to get rid of and if we can do that in an accretive manner, we will.”
Northwest’s diversifed cash flows
With a portfolio of more than 1,800 tenants, Northwest’s cash flows are highly diversified, Mitchell said. The rent collection rate is nearly 99 per cent, the retention rate is over 80 per cent and the REIT executed 810,000 square feet of leasing deals during the first half of the year.
“Healthcare stands out among all real estate classes as a particularly strong and stable sector offering superior risk-adjusted returns, especially in the context of an aging population,” Mitchell said, “which continues to drive stable and growing demand for healthcare facilities.”
The essential nature of healthcare, combined with long-term leases and government funding, further enhances the sector’s stability, he said.
“Our high-quality healthcare real estate portfolio continues to be resilient and has a demonstrated track record of producing strong cash flows, collections, long-term inflation index leases and long-term high occupancy levels (about 97 per cent) through economic cycles,” he added. “We believe our REIT is strategically positioned in the right asset class to meet the growing demand for quality healthcare facilities.”
Mitchell added that Northwest is committed to further streamlining operations and reducing costs to increase efficiency.
Northwest now prefers to reinvest back in Canada and the U.S, while international growth “will be more asset light,” in joint ventures.
Easing of interest rates a benefit
He noted the Bank of Canada’s recent rate cut to 4.5 per cent signals the start of an easing cycle which could lower borrowing costs and boost real estate investments.
According to The Motley Fool stock investing site, Northwest stock is trading 65 per cent from all-time highs. In the last 10 years, the REIT’s stock has fallen by almost 50 per cent.
“The REIT is significantly undervalued considering our high-quality portfolio and proven management track record over the past year,” Mitchell said, discussing Northwest stock. “Our focus now is on increasing the visibility and awareness of Northwest, ensuring that the market fully recognizes the value and potential of our REIT.”