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Edited Transcript of NWH.UN.TO earnings conference call or presentation 3-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 NorthWest Healthcare Properties REIT Earnings Call

Toronto Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of NorthWest Healthcare Properties REIT earnings conference call or presentation Friday, March 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Dalla Lana

NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO

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Conference Call Participants

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* Mario Saric

Scotiabank - Analyst

* Neil Downey

RBC Capital Markets - Analyst

* Troy MacLean

BMO Capital Markets - Analyst

* Matt Kornack

National Bank Financial - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the NorthWest Healthcare Properties Real Estate Investment Trust Q4 2016 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Paul Dalla Lana, CEO of NorthWest Healthcare Properties Real Estate Investment Trust, you may begin your conference.

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [2]

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Thank you, operator, and good morning everyone. Thank you for joining us today. I'm joined today by Bernard Crotty, the REIT's President, Peter Riggin, the REIT's Chief Operating Officer, and Shailen Chande, the REIT's Chief Financial Officer. Together, we are pleased to share with you our results for the fourth quarter and year of 2016. But first, I'd like to point out that, during today's call, we may make forward-looking statements as defined under Canadian securities law. While such forward-looking statements reflect management's expectations regarding our business, plans, and future results, they are necessarily based on assumptions that are subject to uncertainties and risks which could cause actual results to differ materially. We direct you to all of the risk factors outlined in our public filings.

For 2016, at the highest level, Q4 caps an active year where the REIT continued to build on the promise of its transformational combination with NorthWest International completed in May of 2015. Performance was solidly on plan with positive financial and operating results, in line with management guidance, as well as the completion of CAD350 million of new strategic growth initiatives and more than CAD500 million in capital markets activities, highlighting the REIT's successful capital allocation efforts for the year and raising its market capitalization to more than CAD1 billion while substantially improving its financial profile.

Quarterly and annual highlights were FFO and AFFO of CAD0.99 per unit and CAD0.92 per unit, respectively, for the annualized quarter on a normalized basis, representing a payout ratio of 87%; net asset value of CAD12.10 per unit, a 10.6% increase over Q3 2016; 39.5% LTV, excluding convertible debentures; all of this underpinned by 96% portfolio occupancy and a more than 11-year weighted average lease term. Importantly, this strong financial and operating performance came from a larger, higher-quality 142-property 9.5 million square foot diversified healthcare real estate portfolio.

Of particular note, the REIT now earns more than two-thirds of its net income internationally and more than half from healthcare infrastructure assets, namely hospitals, all of which benefit from inflation index rents and, in the case of our hospitals, typically more than 20-year contracts with low or no capital requirements on the part of the REIT. This core portfolio provides a solid foundation from which the REIT can and will grow its earnings and value going forward.

Segmentally, I note the following. Operating-wise, we had strong same property NOI growth of 7.2% for the year on a constant currency basis with occupancy and weighted average lease terms showing 130 basis point and 15.6% increases respectively as well. Currency in the quarter was plus 2.7% positive. I would also note that that's increased a further 3.3% year-to-date in 2017.

In terms of finance and liquidity in the quarter and subsequent to the quarter end, the REIT completed a number of significant financing and investment initiatives, including CAD167 million of new corporate financing through two successful offerings comprising approximately CAD86 million of equity and CAD81 million of new convertible unsecured debentures, completion of the balance of its previously announced hospital Santa Helena acquisition for CAD129 million, a CAD30 million investment in two German medical office buildings, and a CAD15 million follow-on investment in Generation Healthcare REIT. That leaves the REIT with significant liquidity of more than CAD80 million, providing continued balance sheet flexibility and acquisition capacity into 2017.

In terms of net asset value, the value of the REIT's portfolio grew by CAD72 million in the quarter and CAD210 million in 2016 as a result of both income growth and improved valuations in its property portfolio, accounting for 68% of that number and currency appreciation accounting for the remainder. All international regions enjoyed strong growth with the strongest performance coming in both Brazil and Australia. We see these trends continuing in 2017 with continued cap rate compression for high-quality healthcare infrastructure and the forecast completion of significant development projects in our Australasian portfolio at both Vital and Generation REIT.

In terms of regional perspectives, Brazil was on plan with 100% occupancy, strong income and now growth. Completion of the Santa Helena acquisition priestly mention and the repayment of our Brazil term loans of BRL160 million in Q4. Canada also on plan and performing well with year-over-year same property NOI slightly positive and a portfolio occupancy of 91.6%, down slightly from Q3 but up 90 basis points year-over-year.

In addition, we note strong and on-plan Western Canada results with full-year 2016 new and renewal leasing for the region at 118% and 105% versus plan respectively. In addition, leasing spreads on renewal leasing in Western Canada in the quarter were positive 2.6%, tracking the 2.7% experience for the portfolio as a whole, further evidence of the defensive characteristics of healthcare real estate. We continue active discussions with Bantrel regarding their upcoming lease expiry this summer while also marketing the property for lease, which is producing a good level of interest from prospective tenants.

In Germany, we are on plan and performing as expected with year-over-year same property NOI up 1.2% and occupancy holding steady at 95.4%. In addition to solid operating performance in 2016, it was an active year regarding external growth in Germany with one acquisition completed in the quarter and two furthers contracted and completed in 2017.

Vital Trust reported strong 2017 half-year results all our Q4 2016 with NOI plus CAD12.6 million Q-over-Q, excluding one-time Allamanda lease termination income and now plus approximately 5%. Operations continue to perform well with the CAD1 million New Zealand portfolio almost 99% occupied and with a weighted average lease term of 18 years. Additionally, it completed approximately CAD20 million of its Australian development activity and made significant progress on the remaining CAD63 million of expansion projects expected to be completed in 2017. The quarter and year-to-date period also saw significant investment activity with the acquisition of the Akara medical office building, Abbotsford and Ormiston hospitals totaling almost AUD50 million.

Generation REIT also reported strong 2017 half-year results. Operations were on plan with its AUD530 million portfolio seeing approximately 7% value accretion driven by significant cap rate compression in its major market hospital assets. Progress continues on its AUD90 million development projects at Casey and Frankston hospitals, now more than 65% complete with Frankston expected to come online and complete in Q1 2017. With this in mind and the positive foundation that I previously mentioned, the REIT provides guidance for 2017 with AFFO of approximately CAD0.95 per unit, NAV of approximately CAD12.50 per unit and LTV in the 40% to 50% range pre- and post-convertible debentures, all driven by our recent acquisition financing efforts as well as the continued growth of a stable and diverse portfolio.

I'll now ask the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mario Saric, Scotiabank.

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Mario Saric, Scotiabank - Analyst [2]

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Just maybe a couple of quick questions. On the same property NOI growth on Slide 6 of your investor update, you have a chart showing the historical same property NOI growth and it's been really good. I think you mentioned 7.2% this quarter. Can you give us a sense of when we can kind of expect that strong same property NOI growth to maybe translate into stronger FFO per unit growth and what the catalyst may be for that (technical difficulty)?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [3]

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I'm not sure how to fully respond to that question, but I might say that I think we do feel that FFO has seen reasonable and significant growth over the past 12 months. So, my initial reaction would be that it is translating. But maybe I might take a more detailed analysis off-line and have Shailen and I try and put some further thoughts to that.

In general, I would say that we have a pretty direct drive relationship with FFO and with NOI growth to FFO and AFFO, particularly through our international assets, which, as I mentioned, are either very long-term hospitals or all indexed with fairly defined cost center. So that would be my initial reaction.

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Mario Saric, Scotiabank - Analyst [4]

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No, I was just -- the growth has been really good and I think, in Q4, the year-over-year FFO (inaudible) growth was in the 5% range. But generally, on a lever basis, you would think that may be a bit higher than the same property NOI growth, which is (technical difficulty) what could drive that relationship change maybe a little bit going forward.

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [5]

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Do you know what? Part of the answer would be of course, with development just coming online progressively in 2016 and also in 2017, that might be part of the answer. But let us take that off-line and try and get a more thoughtful response.

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Mario Saric, Scotiabank - Analyst [6]

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Okay. And then just maybe secondly, in terms of potential healthcare consolidation, I think one of your stated objectives for 2017 was to advance discussions with institutional partners to kind of leverage the consolidation of global healthcare real estate. Can you provide a bit of color in terms of the potential magnitude and structure of that initiative?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [7]

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Yes. I think, again, starting at the top with the large-scale trans -- I think the asset class has and is becoming better understood and we are seeing significant institutional investment, particularly in the US into the asset class. In our specific case, we are in active discussions with a number of large global investors, and so I would expect that that investment at a minimum would take the form of a private sidecar type structure to allow us to pursue select investments in parallel with that institutional capital partner and may include more than that on specific regional joint ventures if we end up going that way. We are targeting roughly CAD1 billion as a starting point for institutional capital and it's a major priority in 2017.

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Mario Saric, Scotiabank - Analyst [8]

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Okay. And do you think that the healthcare market is understood enough now where you can create private funds going forward, and kind of (multiple speakers)

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [9]

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We sure do. And we have seen evidence of similar examples in Australia of course and in America, as I referenced. So I think we are very comfortable that, again, the scale of the investment opportunity and the interest in the part of broader global institutional capital is there and just converting that into the right structure for NorthWest and the right relationship for NorthWest and a potential partner is really the subtlety that we are focused on.

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Mario Saric, Scotiabank - Analyst [10]

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And would that structure potentially open up NorthWest to new territories and geographies in terms of stuff?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [11]

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At this point, no. We've consistently indicated that we have a lot of runway in our existing markets and with our existing partners, so I think our focus remains in our current geographies. For the time being, there are significant opportunities of scale each of our investment platforms where we are. So despite the fact there are other compelling healthcare real estate markets, of course, we've talked about the US and the UK and generally as good comparables, our focus remains in geographies that we are in for the time being.

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Mario Saric, Scotiabank - Analyst [12]

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Got it. And under these structures, would NorthWest Healthcare generally be considered the GP?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [13]

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Yes.

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Mario Saric, Scotiabank - Analyst [14]

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Sorry, my last question maybe is on Bantrel. You mentioned you're marketing the space. Are you marketing the entire space or (technical difficulty)?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [15]

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I think the discussions with Bantrel continue in terms of their interest in some or all of the space. That business (technical difficulty) for them is quite dynamic. So, again, I think it's a likely part of the space and those are active discussions which I think are premature to get into more detail.

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Mario Saric, Scotiabank - Analyst [16]

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Okay, that's great. Thank you.

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Operator [17]

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(Operator Instructions). Neil Downey, RBC Capital Markets.

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Neil Downey, RBC Capital Markets - Analyst [18]

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Thank you. Good morning everyone. Maybe to follow up on the discussion that Mario initiated in terms of targeting institutional capital, the notion of CAD1 billion of third-party capital, should I also think about the REIT making an equity contribution to some sort of new funds so this would be a CAD1 billion of capital plus some additional capital from the REIT?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [19]

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I think that's a possibility, Neil. We are in I think still early to mid level timing-wise discussions here, so it could involve additional capital on the part of the REIT or it could evolve assets on the part of the REIT or a combination of both. And I think, again, we are, as we are in dialogue right now, I think it's a bit premature to go beyond that.

But our general feeling again is to look to the future for NorthWest. I would highlight Australia as a pretty good example of the business. We have very significant activity and opportunity happening in that region in both of our businesses there, and we see very significant opportunity going forward, so very much a moment where we are quite constructive, and I think we could see additional investment in both fund and in our current structure.

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Neil Downey, RBC Capital Markets - Analyst [20]

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Okay. And perhaps a question that's a bit micro-detailed in nature, but the sizable lease termination receipt that was booked in the fourth quarter, I guess it was CAD13 million on a consolidated basis, the REIT share would be roughly a 25% piece of that. And I know this is a NorthWest call, but can you give us a bit more detail on that in terms of what that all means (multiple speakers) the tenants that are involved, but is there any subsequent income disruption and what does it -- how does that relate to the occupancy statistics that we see as at December 31, etc.?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [21]

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Good questions. Very much a one-time but planned event, and coming about 18 months after the announcement of this transaction. So the Allamanda lease termination relates to Healthscope leaving a large regional hospital in the Gold Coast of Australia to a new campus, a public-private campus developed we'll call it in the suburbs of that city, that area. And so 18 months ago, Vital knew that that was happening. In the intervening period, it's leased 100% of the hospital to Ramsay, the largest private hospital operator in Australia, and so there would be no occupancy disruption at all. There is a small turnover period between the two, and in effect this lease termination payment relates to roughly the one-year notice period that Healthscope needed to provide to that. So a fair degree of continuity.

The business and plan through Vital has been well-articulated to that market, and there will be no earnings disruption as a result of the balance of portfolio activities that has gone on in Vital and the subsequent re-leasing of the space to Ramsay Healthcare. So pretty rare, and we'll call it generational type event in a 25-year hospital but highlighting again that large regional hospitals, even when certain operators seek new assets, still have a high degree of appeal for existing operators. And in this case, we've got an even stronger covenant and the release sort of back-to-back, if you will, with the previous operator. So that's been a subject of a lot of dialogue at Vital in the New Zealand reported market, and so there's good reporting on that if you want further context.

But again, in terms of the main questions, it won't affect portfolio occupancy or revenue at Vital, given the balance of activities going on and the subsequent releasing to Ramsay.

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Neil Downey, RBC Capital Markets - Analyst [22]

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Okay. Super. Thank you very much.

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Operator [23]

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Troy MacLean, BMO Capital Markets.

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Troy MacLean, BMO Capital Markets - Analyst [24]

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Good morning. In the MD&A and your outlook, you mentioned the potential for more dispositions. Is that only in Canada, or would you look at dispositions outside of Canada?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [25]

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I think, just be very specific, I think we see a very small opportunity in Canada to just tweak the portfolio. We are down to sort of asset-by-asset thinking. So I wouldn't say there's a program in place at all in Canada anymore. We concluded that sort of non-core portfolio activity earlier in the year, and -- or 2016 I should say. So select things here and there will always pop up and there may be one.

In terms of the broader portfolio, I'd say it's a bit the same right now. We feel like we have a really good core portfolio, but occasionally there are assets that don't fit the long-term profile. For example, Generation REIT has just sold its Bendigo asset. It closed early in January, a small regional asset, more MOB in nature compared to some of the broader or larger major market hospitals where their business is focused. So I think really we will constantly be looking to prune and improve the portfolio, but these will be small steps and the more overwhelming theme would be growth through acquisition and we see a very instructive market there. As I previously mentioned, there's growth through expansion in the combination of both the brownfield program and greenfield development programs underway at both Generation and Vital, and probably some select development in Canada. We see some new opportunities here to add selectively as we've just completed the Barry MOB this quarter or in fourth quarter and now look to add one or two smaller CAD25 million-ish multitenant MOBs anchored by main healthcare tenancies in our core market areas. We are very active in a couple of projects look -- in supporting a couple of projects in the GTA for example.

And then as we've mentioned in our MD&A, we are looking very closely at the opportunity to harvest urban density in our portfolio. So in specific, we are quite targeted on Dundas-Edward Centre. We know that there's upwards of 0.5 million square feet of residential density in a very large plus-50,000 square-foot site in downtown Toronto. So we are certainly looking at those types of areas.

So I would say the portfolio in the moment is very much defined by internal and external growth as opposed to asset sales. And if sales happen, they would be smaller things that happen in the normal course, if you will.

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Troy MacLean, BMO Capital Markets - Analyst [26]

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As you grow the portfolio, do you have a minimum level of Canada's contribution to the NOI mix of the portfolio, or if Canada really end up being below let's say 25% of the NOI of the Company?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [27]

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I think the directional targets we've given we've sort of achieved now, Troy, so at the end of the day, we had messaged that the international business would be more than 50% of the business, and I think we are through that now. I think, beyond that, really we look at the business as how can we grow in any way possible. So we are Canadian of course. We are here. We have an excellent team and lots to do, so we will always be Canadian and we will always have things to do here. We don't have an artificial number in mind, but what we do know is that the global trend in healthcare is very significant and that really is what underpins our business here. We have the largest industry in the world, one of the fastest growing industries in the world, and certainly, in other places in the world, a very dynamic moment in terms of consolidation and the need for real estate capital. So those later trends are not as evident yet in Canada as we know our health policies and our health systems are approaching things a bit differently.

So, for the moment, we see broader opportunities outside of Canada, but the good news here is that we walk up and down the street every day thinking about what we can do, and we have a lot of people and expertise here. So I always think Canada will be a significant part of the portfolio, but I do think, for the time being, that we are seeing some very structural or I should say secular opportunities outside of Canada that are ripe.

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Troy MacLean, BMO Capital Markets - Analyst [28]

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Thank you. I'll turn it back.

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Operator [29]

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(Operator Instructions). Matt Kornack, National Bank Financial.

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Matt Kornack, National Bank Financial - Analyst [30]

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Good morning guys. I just wanted to turn to your capital stack and your leverage levels. At this point, at least from a geographic standpoint, are you fairly settled with regards to some of the exposure from a debt perspective. I know, in Brazil, you've made some moves and deleveraged. But do you see anything further on that front? And also, looking at your convertible debentures, they are not huge amounts but you do have some maturities of higher interest rate convertible debentures. Would you foresee doing anything before term on those?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [31]

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So, very good questions and sensitive ones. I think, in terms of asset level finance, the business has probably, other than normal course mortgage maturities, done most of the heavy lifting and we probably see all of our term finance and asset level structure broadly in place. I would say that there continues to be a meaningful opportunity corporately for the REIT and we are looking at all possibilities to improve that, including lower cost convertible debenture financing, if that's the way to say it, or repaying it with other forms of finance. I think we continue to see, as the REIT is maturing, an opportunity, whether it's 2017 or 2018, of potentially accessing the unsecured market and achieving a ratings and moving in that direction, which would open up some more tools in that capital stack.

But all of our focus right now is to become more efficient at a corporate level. I think we've done the heavy lifting at the regional level, if you will. So there continues to be some opportunities in the near term, next 12 months for sure, to make some improvements and just provide the business with more flexibility and lower cost of capital and additional sources of capital as it matures. And so I think that's our general focus.

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Matt Kornack, National Bank Financial - Analyst [32]

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And just going back to the unsecured debt side, have you had preliminary discussions with the rating agencies as to how close or how possible it is to get an investment grade credit rating?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [33]

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We are just commencing those now, so I'd say it's early days, and we see ourselves on the cusp of it right now. So, as I said, in a very accelerated timeline, it could be 2017. I think more likely we would see 2018 as being the timeline for execution as we sort of build that unencumbered stack up and work through the sizing and growth to meet those sort of, again, entry point metrics for unsecured.

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Matt Kornack, National Bank Financial - Analyst [34]

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Sure, that makes sense. And just quickly with regards to acquisitions in 2017 and developments, it says CAD300 million of which CAD80 million is done, but CAD220 million is under contract. Are those exclusively acquisitions, or how much of that is development versus acquisitions?

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [35]

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Let me get that split for you. I may need to come back to you on that, but no --

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Matt Kornack, National Bank Financial - Analyst [36]

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Sure, no problem.

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [37]

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There is a significant amount of committed 100% leased and 100% financed development underway at both Generation and Vital. So I'll give you the exact math maybe post-call if that's okay. But that's a combination of both acquisition and committed development, again highlight (technical difficulty) those committed developments in the case of Generation and Vital are 100% leased, 100% financed and really in sort of execution mode if you will. But we do see a meaningful pipe happening, both in Australia and in other geographies that we've got. So I think that's a nice way to start the year, and I think we've had a very active fourth quarter and, frankly, an active 2016 and I think we see a similar level of activities in 2017 would be my sort of directional guidance.

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Matt Kornack, National Bank Financial - Analyst [38]

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Okay, sorry, those would be fully consolidated numbers, though. It's there, Vital -- well, maybe not generations. Okay. That works as well, and that's it for me. Thanks.

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Operator [39]

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There are no further questions at this time. I return the call to our presenter.

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Paul Dalla Lana, NorthWest Healthcare Properties Real Estate Investment Trust - Chairman, CEO [40]

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Thank you, everybody. I appreciate your time today, and enjoy the balance of your day. Thank you.

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Operator [41]

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This concludes today's conference call. You may now disconnect.