Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript & Summary

Good morning, and thank you for joining the Vital Infrastructure Property Trust Q1 2026 earnings conference call. Right now, every line has been switched to listen-only mode. After the presentation, there will be a question-and-answer session. Should you need immediate help at any point during this call, just press star zero to reach the operator. Today's call, May 14 2026, is being recorded. I'll now hand the conference over to Steven Hong, Vice President of Investor Relations.

Thanks, operator. Morning, everyone, and thank you for joining us for the conference call on our first quarter results. Steven Hong here. With me are Zach Vaughan, Chief Executive Officer; Stephanie Karamarkovic, Chief Financial Officer; Mike Brady, President; and Tracey Whittall, Chief Operating Officer. We released our earnings announcement yesterday afternoon. An updated investor presentation is now posted on our website, and listeners can refer back to it during this call. After our comments, we'll be happy to take questions from analysts. Today's discussion includes forward-looking statements. As always, we caution that those statements rest on management assumptions and beliefs. Such forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from those statements. Please see our public filings on SEDAR+, including our MD&A and annual information form, for a discussion of these risk factors. On this call, we'll also reference certain non-GAAP financial measures. A reconciliation to the most directly comparable IFRS measure is provided in our MD&A and earnings release. Unless otherwise noted, all amounts discussed today are in Canadian dollars. With that, I'll now turn things over to our Chief Executive Officer, Zach Vaughan.

Thanks, Steven. Morning, everyone? Appreciate you being with us today for our Q1 results. Beyond the strong operating results we're going to cover in our remarks, we've kept moving forward on simplifying the business, bringing costs down — Stephanie will share more specifics on that — and recycling capital so it can be redeployed back here. Last quarter, we announced an agreement to sell a portfolio of 32 properties in Europe. I'm happy to report that the Netherlands portion of this portfolio closed at the end of April, and the remaining assets in Germany are expected to close in Q2. Our share of net proceeds from the entire transaction will be about $145 million, which is going to be redeployed to reduce leverage and support future growth. As a reminder, in late August of this year, we'll also be through our lockup period related to our public shareholdings in New Zealand. These capital recycling opportunities, together with our current liquidity of over $400 million, create significant optionality for new investments going forward. During the quarter, we also reactivated our growth activities in Canada. We closed on the transitional care facility that's long-term leased to The Ottawa Hospital, and we advanced progress on our new development with Royal Victoria Regional Hospital or RVH in Barrie, where we received zoning approval in April.

After RVH wraps up in 2029, that property will produce roughly $9 million in yearly NOI, which works out to nearly $0.04 a unit. That income is entirely under contract, it runs for the long term, and government credit stands behind it. With hospitals and health systems throughout Canada moving more and more toward outpatient care, we hold a unique position as the partner of choice, and talks keep moving forward with a range of Canadian health systems in Ontario, Alberta, and Manitoba. Beyond that, we have an active pipeline of follow-on acquisitions of standing assets at differing stages of negotiation right across Canada. South of the border, we're reviewing several opportunities that involve large, long-term leased critical healthcare assets, and we're pushing discussions ahead with potential strategic operating partners. Now to Q1 results: same property NOI rose 3% compared with a year earlier. That's a strong outcome, particularly given it reflected elevated property expenses stemming from our choice to outsource facility management work within our Canadian portfolio. Without that effect, same property NOI growth would have come in at 4%. On leasing activity for the quarter, we finished roughly 324,000 sq ft. We closed the quarter with portfolio occupancy above 96% and a weighted average lease term exceeding 12 years — the longest among REITs.

Looking at our balance sheet, we've achieved real progress. At quarter-end, proportionate leverage was roughly 52.5%. Once every bit of the proceeds from the European sale comes in, we anticipate that figure dropping under 50%, and at that point debt to EBITDA should land somewhere around the mid 8x range. As I said earlier, we have substantial liquidity available — over $400 million — and that's before factoring in any extra proceeds from recycling activities down the road. Before I pass things to Stephanie, here's a brief Healthscope update. We're still engaged with the receiver and the creditors, working toward a resolution that locks in the transaction we previously disclosed with the new operator. That deal would let every one of our hospitals move over to a top-tier not-for-profit operator. We'd take a nominal initial financial hit, but we'd also gain the chance to share in the longer-term profitability of those hospitals, which, judging by what we're seeing across all our Australian assets, simply keep getting better. Back in April, a collective proposal came in from a number of operators — our potential new partner among them — to acquire Healthscope's remaining hospitals. Those are the hospitals that no buyer or home was found for during the sales process.

Should the lenders give their approval, this deal would offer a fix for every Healthscope hospital, and that's an essential result for everyone with a stake in the matter. From what we've observed to this point, the receiver and the lenders are engaging actively with this proposal, which we find encouraging and which, in our view, brings us nearer to a resolution. Let me recap just a handful of points. First, we posted a solid quarter, with same property NOI growth landing at the top end of our target range, even after factoring in certain increases in property expense. Second, our existing liquidity and the proceeds we expect from recycling give us substantial financial flexibility. Third, we are actively chasing growth, both via our hospital health and health system partnerships and via follow-on acquisitions in Canada and the U.S. Fourth, we think we are getting considerably closer to a resolution on Healthscope. We're pleased with the quarter, and the outlook ahead remains quite positive. Our top priority is to keep showing the strength of our portfolio by delivering results consistently, as we have been doing, and to keep telling our story and drawing new capital to Vital. With that, I'll hand it over to Stephanie.

Thanks, Zach, and good morning, everyone. During today's call, I'll take you through the first quarter financial and operating results for Vital Infrastructure. We'll go over our balance sheet, including debt maturities and liquidity, and then we'll move on to the question-and-answer period. Before I start, a quick reminder about our reporting baseline for 2026. After the internalization of the Vital Trust management structure at the end of 2025, Vital Trust is no longer consolidated within the REIT's results. Our ownership interest is now accounted for as an equity accounted investment. Because of that, certain year-over-year comparisons are affected, particularly NOI, FFO, AFFO, and other proportionate measures. Starting in 2026, Vital Trust no longer contributes to proportionate NOI, and our investment shows up in FFO and AFFO through distributions received rather than our proportionate share of underlying operating results. This treatment modestly reduced AFFO this quarter compared to the prior year, but it aligns our reporting with the cash distributions we receive and gives a simpler, more transparent presentation consistent with how we assess this investment. Turning to results: we delivered a solid start to the year with steady cash flow performance consistent with our long-term strategy. Same property NOI on a proportionate basis grew by 3% year-over-year to $57.4 million for the quarter, driven by contractual rent escalations, rentalized capital expenditures, higher parking income, and improved cost recoveries.

In North America, SPNOI kept feeling the pressure from elevated property operating costs versus a year earlier, largely because of the outsourced facilities management transition that took effect in November of last year. If you set aside that transition effect, total SPNOI rose 4% for the quarter versus the same stretch a year ago. FFO came in at $0.11 for the quarter, against $0.10 in Q1 of 2025 and $0.12 in Q4. AFFO per unit was $0.10, in line with Q1 of 2025 and below the $0.12 posted in Q4. As we noted earlier, one comparability item worth flagging is how we treat our Vital Trust investment. Starting in January, after Vital Trust was deconsolidated, the REIT's AFFO now captures cash distributions instead of our proportionate share of Vital Trust AFFO. That lowered AFFO by $1.7 million, or $0.007 per unit, versus Q1, and by $1.4 million, or $0.005 per unit, versus Q4 of 2025. Q4 2025 also carried a one-time current tax income tax recovery of $1.3 million, or $0.006 per unit, that did not repeat in Q1. On top of that, internalizing management of Vital Infrastructure Property Trust had a modest net effect on FFO and AFFO relative to the prior quarter, since management fee income fell $3.7 million but was mostly offset by $1.4 million of G&A savings and a $1.7 million drop in interest expense from repaying debt with internalization proceeds.

Also worth noting, our AFFO payout ratio is still inside the range we target, coming in at 87% for this quarter, which is better than the 92% recorded in the equivalent period a year ago. Turning to G&A, proportionate G&A costs this quarter — leaving out unit-based comp and severance — came to $10.6 million, versus $11.6 million in Q4 and $11.7 million in Q1 of 2025. G&A is moving along the path we anticipated, since we are realizing savings from efforts to simplify our platform, such as the Vital Trust internalization and the divestiture of the European portfolio. Because a meaningful share of our European platform moves over to TPG in Q2, we anticipate additional cuts to regional G&A. By the close of 2026, we anticipate run rate G&A, excluding unit-based compensation and severance, of roughly $35 million each year, which works out to an approximate $12 million, or 25%, reduction relative to 2025. NAV per unit stood at $7.55 on March 31st, the same as December. NAV took a hit from $35 million in fair value losses during the quarter, mostly tied to transaction price adjustments on the European assets held for sale, along with $26 million of mark-to-market losses on Vital Trust units down to their trading price at quarter end. Partly offsetting those impacts were $42 million of unrealized foreign exchange gains on net equity.

Now, on the balance sheet: the REIT's proportionate leverage stood at 52.7% at the close of the quarter. Debt to adjusted EBITDA came in at 8.6x, compared with 8.7x on a comparable basis as of December 31st. The weighted average interest rate was 4.76%, with more than 86% of our debt either fixed rate or hedged, and the weighted average term to maturity was 2.3 years. Regarding near-term maturities, at our proportionate share as of March 31st, we had roughly $380 million of remaining 2026 maturities. Since quarter end, though, we've repaid $65 million of Canadian mortgages and $16 million of European mortgages, bringing near-term maturities down to approximately $300 million as of today. Among the remaining 2026 maturities are $206 million of term loans in our Australian joint venture, maturing late in Q4 2026. We're in active discussions with the lending syndicate and expect to renew this facility early in Q3. As of today, available liquidity exceeds $400 million, which gives us meaningful flexibility to execute on our priorities. To close, our first quarter results show the durability of our portfolio, our disciplined approach to capital allocation, and the progress we're making to strengthen the balance sheet. With resilient healthcare infrastructure demand supporting our assets and a proactive approach to capital management, Vital Infrastructure is well-positioned to pursue opportunities and deliver sustained results in the quarters ahead.

Having said that, I'll hand things back to the operator so we can begin the question-and-answer portion.

To ask a question now, just press star one on your phone's keypad. Once more, that's star one if you'd like to pose a question. The first question we have is from Sairam Srinivas at ATB Cormark Capital Markets — please go ahead.