Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript

Thanks, operator. Good morning, everybody, and thank you for joining us on our conference call for third quarter results. Steven Hong here. With me are Zach Vaughan, our CEO, Stephanie Karamarkovic, our CFO, Mike Brady, President, Tracey Whittall, COO, and Dave Casimiro, EVP. We released the earnings announcement last night, and an updated investor relations presentation has been posted to our website, which listeners can refer to as the call goes along. After our comments, we will be happy to take questions from analysts. Today's discussion contains forward-looking statements. As usual, we want to warn you that those statements rest on management's assumptions and beliefs. Such forward-looking statements carry uncertainties and other factors that might make actual results differ materially from them. Please refer to our public filings on SEDAR+, including our MD&A and annual information form, for a discussion of these risk factors. On this call, we will also reference certain Non-GAAP financial measures. A reconciliation to the most directly comparable IFRS measure appears in our MD&A and earnings release. Unless otherwise noted, every amount discussed today is in Canadian dollars. With that, I will now turn things over to our CEO, Zach Vaughan.

Thanks, Steven, and good morning, everyone — I appreciate you joining us today. Starting with the quarter, we're pleased with how the portfolio performed. Same property NOI rose 3.5%, excluding an increase in costs related to facilities outsourcing. Occupancy across the portfolio ended the quarter at 97%. AFFO came in at CAD 0.10 per unit, and we finished the quarter with liquidity above CAD 350 million. Our debt currently sits at 50% of book value and 8.5 x EBITDA, which is comfortably within our target ranges. In addition to the financial results Stephanie will cover shortly, we advanced several key initiatives spanning our balance sheet, property portfolio, cost structure, and capital allocation strategy. Beginning with the balance sheet and capital structure: during August, we established a fresh CAD 500 million unsecured credit facility, replacing the secured one we had before. Following the quarter's close, we also completed a CAD 300 million unsecured debenture offering carrying a 4.86% coupon, and a portion of those proceeds went toward redeeming our outstanding 6.25% Series H convertible debentures. This execution leaves me quite pleased. The credit spread we achieved came in over 100 basis points tighter than our inaugural bond offering from last year, and we brought a meaningful set of new institutional investors onto our debt register — a clear reflection of our progress and our stronger credit profile. All told, these deals broaden our funding sources, push out when our debt comes due, and bolster our financial flexibility. Turning to the property portfolio: a major milestone this quarter was settling the Healthscope matter in Australia. As previously announced, Healthscope's creditors gave the green light to the sale of its remaining hospital operations, and Calvary Health Care is set to become our new tenant at all 12 of our properties. This deal has several main pieces: rental incentives across the lease's first 48 months, a longer lease term that lifts the portfolio WALE to roughly 18 years, better yearly rent indexation, and a mechanism for reviewing rent down the road that's linked to how profitable each property is. The setup gives us certainty over the long haul and brings in a first-rate operator whose integrated healthcare business spans retirement living, home care, and residential aged care — all of which will further bolster how our hospitals perform and how profitable they are. Fundamentals across the Australian hospital sector, more broadly, keep getting better too. At present, the hospital benefit ratio—meaning the share of private insurance premiums returned to hospital operators—is roughly 86%, and that remains under the 90% average seen before the pandemic. As the ratio keeps normalizing higher, operator margins will strengthen, and through our upcoming rent review that will let us share in the upside. Turning to our cost structure: the work we are doing to streamline the business keeps reaching the bottom line. Stephanie will cover the details, but we are still on track to hit our targeted annualized G&A run rate by year-end. With a leaner operating platform in place, we’re now able to scale and back new investments while adding very little overhead, which produces meaningful operating leverage and supports longer-term earnings growth for unitholders as we reposition the portfolio. That leads me to capital allocation, where we keep redeploying capital into attractive investments throughout North America. In the quarter, we closed roughly CAD 170 million of acquisitions across three properties located in Brooklyn, N.Y., Burlington, Ontario, and Edmonton, Alberta. As we previously guided, we remain on track to finish about CAD 250 million of acquisitions by year-end. Our acquisition pipeline keeps building in both Canada and the U.S., and we are well-positioned to put capital to work at compelling returns. Lately, turbulence in the bond market is creating chances, since certain owners now face pressure either to refinance at elevated rates or to sell. Increasingly, we observe sellers prioritizing certainty of execution over making decisions purely on price. With our ready access to debt capital and proceeds from asset recycling, plus a favorable deal environment, we are well positioned to seize these opportunities as we reposition the portfolio. Before I finish, I want to touch on Brazil. Following the unexpected election outcome, Brazilian equity and currency markets experienced a notable decline, and our unit price was affected as well; even so, keeping focus on the fundamentals matters. All of our properties in Brazil are fully leased, with 100% occupancy, through agreements that are long-term, triple-net, and tied to inflation without any cap. Rede D'Or, our main tenant, continues to post solid operating results, both at the level of the individual properties and across the company as a whole. Rent cover — referred to by many U.S. peers as four-wall coverage — is an essential measure of the quality and durability of triple-net leased real estate, since it compares the EBITDA produced inside a given property or group of properties with the rent being paid. The larger that figure, the stronger a tenant's capacity to satisfy its current lease commitments and to handle rent hikes down the road; as a point of comparison, Realty Income, the biggest U.S. A net lease REIT that owns more than 15,000 properties, carries an A rating, and has a market capitalization larger than the whole Canadian REIT index usually reports four-wall coverage of about 2.5x to 3x. In our Brazilian portfolio, four-wall coverage comes in at roughly 7x. Because unit-level profitability is that strong, and because nothing in the recent election changes the structural demand for private healthcare in Brazil, we have strong confidence in how durable our properties are and in our tenant's credit quality. The credit markets share that view. Since the election, bond spreads on Rede D'Or's debt have stayed put and are actually 20 basis points tighter year-over-year. Stephanie will cover how currency swings are affecting us in the near term, but the core operating fundamentals and profitability of our Brazilian assets are still exceptionally strong. To sum up, I'd like to leave you with four main points. First, our portfolio is doing well, and resolving Healthscope has cleared away a lot of uncertainty. Second, very successful financings have given us greater financial flexibility, while our simplification efforts continue to drive G&A down. Third, throughout North America we continue to find attractive acquisitions, supported by a pipeline that is expanding and a pricing environment that is turning more favorable. Fourth, even with the recent volatility in the Brazilian market, the effect on our business at the fundamental level is minimal, and strong results keep coming from our portfolio, supported by exceptional rent coverage. With that, I will hand the call over to Stephanie.

Thanks, Zach, and good morning, everyone. This quarter we've made solid headway on our strategic initiatives, backed by steady operating performance. I'll walk through our third quarter results, the cost reductions, and NAV movements, and then I'll give an update on our balance sheet, liquidity, and recent financing activities before we open it up to Q&A. Let me begin with operating results for the third quarter. Our portfolio kept delivering stable operating performance, helped along by contractual rent growth and the strong fundamentals of our healthcare real estate assets. Same property NOI, on a proportionate basis, rose 3.5% year-over-year, excluding the impact of the transition to outsourced facilities operations in Canada. That growth came from contractual rent increases, rentalized capital expenditures, better cost recovery, and higher parking income. When those transition costs are included, same property NOI was up 2.6% year-over-year, reaching $51.8 million. Now on to earnings. Reported FFO came in at $0.10 per unit, or $0.11 when you exclude accelerated amortization of deferred financing costs. On that adjusted basis, FFO matched the prior period. AFFO was $0.10 per unit, versus $0.11 in both the second quarter and the same period a year ago. That modest decline from Q2 mainly reflects the timing of capital redeployment. By quarter end we had fully redeployed the European sale proceeds into North American acquisitions, but since these investments closed during the quarter, they didn't fully offset the earnings from the disposition. On top of that, the related G&A savings are still being realized and will benefit future quarters. Year-over-year, AFFO reflects a reduction of roughly $1.6 million from the deconsolidation of Vital Trust, and that was partly offset by North American acquisitions, lower financing costs, favorable foreign exchange, and G&A savings. Our AFFO payout ratio was 89%, compared with 85% last year. Turning to our cost structure. Proportionate G&A, excluding unit-based compensation and employee termination-related costs, fell to $8.9 million; that compares with $11.6 million in Q3 last year and $10 million in Q2, which works out to reductions of approximately 24% year-over-year and 12% quarter-over-quarter; these results reflect the restructuring and efficiencies achieved over the past year; we remain on track to hit our targeted annualized G&A run rate of approximately $35 million by the end of 2026. Now to NAV and recent valuation adjustments. Our NAV per unit was $7.43, compared with $7.66 at the end of Q2. Three principal items explain the decline. First, fair value adjustments from the revised Calvary lease terms, which amounted to a $7.5 million reduction at our share of the Australian hospital properties and a $19 million reduction in our management platform valuation, together lowering NAV by approximately $27 million. Second, mark-to-market adjustments in our Vital Trust investment, and lastly, the reclassification of certain tax liabilities tied to the Vital Trust internalization from deferred to current. Operating earnings and favorable foreign exchange movements partially offset these impacts. As Zach noted, the Brazilian real has been volatile following the recent election. Earlier this year, the stronger real gave us a favorable foreign exchange benefit when reported FFO, AFFO and NAV were translated into Canadian dollars, but the currency has since eased and now trades at roughly the same level seen at the start of 2026; as part of our usual quarterly valuation work, we'll keep watching how things develop in Brazil. On the balance sheet and leverage side, debt to gross book value stood at 49.9% on a proportionate basis, versus about 52% at the close of 2025. Debt to annualized adjusted EBITDA came in at 8.5 x, which sits inside our target range of eight to nine times. As our Non-GAAP disclosures explain, this metric annualizes quarterly adjusted EBITDA and accounts for acquisition and disposition activity in the quarter. With the amount of capital recycling we've done, we see it as a more representative picture of leverage based on the portfolio we held at quarter end. On liquidity and debt maturities, we finished the quarter with roughly $357 million of available liquidity on a proportionate basis, made up of $297 million of undrawn borrowing capacity plus $60 million of cash. As Zach mentioned, we also closed several important financings during and after the quarter. In August, we put in place our new $500 million unsecured credit facility, which replaced our secured facility and pushed the maturity out to August 2031. Notably, the move to an unsecured facility was backed by our expanding pool of unencumbered assets, which came to about $2.1 billion at quarter end, up from $1.2 billion at the close of 2025. In October, we finished a $300 million Series C senior unsecured debenture offering carrying a coupon of 4.865% and maturing in October 2029. We then applied part of those proceeds to redeem all of the outstanding 6.25% Series H convertible debentures, which removed our August 2027 maturity and brought financing costs down, and that will help our results beginning in the fourth quarter; in Australia, we refinanced roughly AUD 715 million of joint venture debt, equal to about CAD 210 million at our share, moving the maturity from December 2026 to December 2028. Taken together, these financing transactions addressed meaningful near-term maturities, broadened our funding sources and enhanced our financial flexibility. Our economic weighted average interest rate was 5.33%, versus 4.71% at the end of 2025; the rise reflects last quarter's repayment of lower-cost European mortgages, higher floating rates in Australia and shifts in our overall debt mix. With about 72% of proportionate debt at fixed rates, including hedges, and a better maturity profile, we don't expect material refinancing headwinds over the coming 12 to 24 months. Lastly, on capital deployment, we put about $170 million into North American acquisitions during the quarter, funded through capital recycling and available liquidity. We've also gotten the TSX's approval to renew our normal course issuer bid, or NCIB, which lets us buy back roughly 22 million trust units along with 8.5 million principal amount of our Series I convertible debentures during the coming 12 months. We'll weigh any buybacks against our other capital allocation priorities, taking into account market conditions, relative value, and the liquidity available to us. To wrap up, this quarter showed how resilient our portfolio is and the genuine progress we've made on our priorities; we've bolstered the balance sheet, redeployed capital into North America, and come closer to our G&A target. Our earnings continue to show the transitional effect of dispositions and redeployment, yet we think these initiatives set us up well for the next phase of our strategy. With that, I'll hand it back to the operator so we can open the line for Q&A.

Thank you and good morning.

Morning

I've got a few questions about Brazil. To start with the currency exposure—we did see some volatility there. Is there any way to hedge that currency exposure? I mean, have you folks explored that?

We've certainly explored it, Himanshu. The trouble is that hedging the Brazilian real through any sort of derivative is quite punitive. So what we try to do instead is simply carry local debt to the extent that it makes sense from an interest rate standpoint; but yes, in an economic way, we aren't able to hedge the currency otherwise.

Understood. All right, Zach, given that a new government is now in office, are there any announced policy shifts regarding healthcare, or anything that might affect your tenant either positively or negatively?

Yes. They haven't announced anything that would affect our tenant, which is mostly private healthcare. I mean, the system is both public and private. Actually, when you consider everything from wider credit spreads to some of the recent noise now emerging from what will be the incoming administration, it seems fairly positive; they're discussing spending caps, spending controls, and changes to tax policy; so that applies to the broader market and economy. But as for our tenant, we keep seeing very strong results. Their insurance division by itself brought in almost 75,000 members during the last quarter. So they appear to be firing on all cylinders and simply continuing to improve. Nothing out there would affect that. We believe the effect on our units was mainly just pure exposure to Brazil, which is probably unjustified considering the actual cash flows we're generating there.

Understood. Since your rental indexation in Brazil is tied to inflation, has anything shifted in inflation expectations since the government changed?

Yes. I'd say there's been a bit of an expectation that it could come in somewhat higher. As you'll remember, Himanshu Gupta, rates were heading lower at that point. That seems to have come to a stop once broader global economic troubles came to the surface. At this point, where people previously expected cuts, they now expect rates to stay level for a while, so no reduction anytime soon. A number of the projections show inflation a touch higher, around the high 4s, correct?

Yeah.

So

Understood. Only the final question regarding Brazil. What does that imply for your intention to leave the country, to exit the exposure? Does it delay our exit further? Is there anything you're hearing about investment activity that might slow things down, or likely remain as is, or anything along those lines?

Look, I believe the way we've consistently viewed Brazil is based on a few of the characteristics I mentioned. These are simply remarkable assets with a remarkable tenant, and they're just so remarkably profitable, and they're genuine triple net leases with substantial term remaining. Our thinking was, when it came to capital recycling, this was one that never fit within our roughly 12-month plan; it sat more toward the later end for us to try and work out. I don't believe it alters our view, since we hadn't expected to do anything with Brazil in the near term, unlike Europe, New Zealand, and so on. I'd say our plans remain unchanged.

Understood. Many thanks, and I’ll hand it back over.

Thank you.

Thank you. Morning. One additional item regarding Brazil. Could we add further debt to that portfolio, so to speak, perhaps to increase the hedge somewhat?

Yes, well, right now interest rates sit in that 13%, 14% range in Brazil, so local debt is likely not an option for us. Yes, I'd say the brief answer is no.

Alright. Zach, you mentioned the pipeline is growing, and I suppose that's mostly down to volatility in global rates. Does that cut both ways for you, affecting what you're able to sell too?

Yes, and I think the interesting part is where we're seeing it. It would matter if we were selling in North America in order to buy in North America, essentially; but I do feel that because things are more leveraged, especially in the U.S. markets and in the way the debt markets function, and since many assets there are held — it's simply a huge universe of assets held by limited life vehicles. We're likely seeing that impact sooner than, say, in Europe, New Zealand, Australia, and so on. It clearly is something of a double-edged sword, but considering where we're trying to put capital, yields are definitely reacting faster in those markets than in others. I suppose the answer is that I'm probably more bullish because I think yields are widening. You'll likely see that on some of our acquisitions in the quarters ahead. But most importantly, property levered buyers are having a harder and harder time in this market, whereas nine months ago, a year ago, there was plenty of competition from them.

All right, that's useful. So now that Healthscope is resolved, how are you thinking about the timing for getting out of that investment?

Yes, I'd say at this point it is. Now, I'd describe it as settled in the sense that we have a binding agreement.

Yeah.

At some point—whether that lands at the close of this year or during the next one—they will move into the position of beginning to run these hospitals. I genuinely believe we'll require a stretch of time simply to observe how those operate, and our expectation is that it will go well. Still, when it comes to anyone wanting to examine it and say, "Okay, I'd like to see a little more of how this is playing out with the new tenant," I get that. Exiting Australia has never seriously been something we've considered for the very near term. What we're focused on near term is really Europe and New Zealand. In the relatively near term, that's where our attention will be. My view is simply that Australia—the new tenant needs a bit of time to season.

All right. So that would be roughly late 2027, stretching into 2028, before you'd really take a look at that? Is that a reasonable way to frame it?

Yes. That's right.

All right, thanks. I’ll hand it back.

Thanks, Rabira. Morning, everyone.

Morning. Zach, Stephanie, I’ve just got one question for you about Brazil, and that’s all I’ll ask. Essentially, if we keep in mind the pace of $0.10, $0.11 of FFO quarter to quarter, does that alter the Q4 impact in terms of what you observed with the real and the translation risk?

Right, so as we've mentioned, roughly a 5% depreciation in the real works out to about $0.01. So that could have an effect. I mean, it really didn't shift until the middle of the quarter, so we probably won't see a full quarter's impact from it. There might be some movement within the quarter depending on where rates land on average across the quarter.

And only to make sure, that comes to $0.01 when annualized, right?

Yes.

Okay, all right, that's great. So let's shift gears, probably over to Europe. Zach, I realize you may have already touched on this, but you've mentioned European dispositions in Q4 as something where you could probably sell more and probably leave Europe. Is that still something you're considering, or is it more of a mid, like Q1, Q2 activity next year?

Yeah, I think so. Sorry, we really have two investments remaining in Europe. We hold a portfolio of triple net lease clinics in Germany, and we have an asset outside of Rotterdam. Regarding the clinic assets, those are likely nearer to liquidation value, though our general assumption has been that everything will wrap up around Q2. From my own career experience doing considerable work in Europe, things simply move slowly there—each deal takes more time—so that's my expectation. After that we'll be largely out of Europe, and I'd figure the next asset comes roughly six to nine months later.

That's excellent, Zach. And if we perhaps focus only on the Vital Trust units over in Australia, clearly those units have declined somewhat. Does that alter how you see the timing of the dispositions there?

No, I don't believe it does. Small fluctuations in the unit price aren't all that significant for us when it comes to net proceeds, provided we can redeploy that money at higher rates. The way we look at those is that they're relatively simple to exit, so they'd likely be our first source of capital if we have things to deploy it into; we'll be opportunistic when we need capital for redeployment, since that is a simpler source of liquidity. I think-

So I guess-

they'll probably sell. Yeah.

My apologies. I suppose it's probably reasonable to assume that this depends more on opportunities for acquisition and deployment, in terms of when you could exit those and reinvest?

That's my view, unless something opportunistic comes along that

Yeah, so the way we see it, I suppose, is that this thing gets marked to market each quarter, and whenever we need it, it's a source of liquidity that's ready to go. But we'd probably… that's one where, unlike getting out of Europe or doing something in Brazil or Australia, those are harder to match fund. In that sense, this one's a bit easier.

That's great. And Stephanie, just to remind me, are there still any dog loans that these units secure?