Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript

Good morning, everyone, and welcome to the Second Quarter 2026 Earnings Conference Call for Vital Infrastructure Property Trust. <<operator_script>> Today is May (sic) August 13, 2026, and this call is being recorded. At this point, I'd like to hand the conference over to Steven Hong, Vice President of Investor Relations. Steven, please go ahead. Please hold for a moment. We've encountered a technical problem. We'll begin in 1 minute. Thank you. At this time, I'd like to turn the conference over to Steven Hong, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining our conference call on second quarter results. Steven Hong here. With me are Zach Vaughan, CEO; Stephanie Karamarkovic, CFO; Mike Brady, President; and Tracy Whittall, COO; as well as Dave Casimiro, EVP. We released our earnings announcement yesterday evening, and an updated Investor Relations presentation has been posted on our website, which listeners can refer to during the call. After our comments, we will be glad to take questions from analysts. Today's discussion includes forward-looking statements. As always, we want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see our public filings on SEDAR+, including our MD&A and annual information form for a discussion of these risk factors. During 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 will now hand it over to our CEO, Zach Vaughan.

Thanks, Steven, and thanks to all of you for being with us on today's call. This marks my fourth earnings call since becoming CEO of Vital, a role I took on a bit more than a year ago. Since I came on board, the senior management team and I — backed by our Board — have been carrying out a strategic plan aimed at transforming the business, built around 4 key priorities: one, simplifying our footprint; two, strengthening our balance sheet; three, reducing our cost structure; and four, disciplined capital allocation. This transformation is still at an early stage, yet we are seeing solid progress on every one of these priorities, as our results this quarter and our recent activities show. Beginning with footprint simplification: in the quarter, we completed the closing on the remaining European properties that formed part of the bigger transaction with TPG Real Estate. That transaction accounted for most of the equity we had invested in Europe and produced $145 million in net proceeds. As of June 30, our European property operating business and its employees have also moved over to TPG. What remains in Europe for us is just 2 investments, and both are efficient to oversee; we plan to exit them in due course.

The big move we made exiting Europe, together with bringing Vital Trust in New Zealand in-house, really shows how dedicated we are to making the business simpler and building a more concentrated operating platform. Now let me turn to the balance sheet. When Q2 closed, our LTV on a proportionate basis came in at 47%, roughly 900 basis points lower than twelve months earlier. What's important is that our debt-to-EBITDA ratio on a comparable basis improved substantially, reaching 7.7x, compared with 9.4x a year ago — that's nearly a 2 turn reduction. On top of that, we finished Q2 with $443 million of liquidity, which gives us considerable room to go after accretive growth. Let me shift to costs. G&A in the second quarter declined by $2.2 million versus the prior year, and we expect additional cuts next quarter as our European sale takes effect. Thanks to these actions and other steps the team has taken to make operations leaner, we remain on track to bring G&A down by more than 30% by year-end. Critically, with our streamlined footprint, we're able to recycle capital with little to no added overhead, which boosts operating leverage across our platform and lets a larger share of property earnings reach unitholders. Finally, on capital allocation: I made a commitment on my first earnings call that disciplined capital allocation would be our laser focus.

Over the last 12 months, we've brought in roughly $300 million in net proceeds and recycled those back into North America, doing so through a mix of cutting debt and making accretive investments. What matters is that over the past several quarters we've shown we can put that capital to work in opportunities that are accretive for our unitholders, and we've now closed or committed to the transactions that follow. Early in the year, we made a commitment to develop a new ambulatory facility for RVH in Barrie, and once it's finished in 2029, it will contribute additional NOI of $9 million, or $0.04 a unit. Back in March, we picked up a transitional bed facility in Ottawa that's on a long-term lease to the Ottawa Hospital. That marked our first new acquisition in Canada in nearly a decade. Then, after quarter end, we closed or committed to additional acquisitions totaling approximately $153 million. In July, we acquired a 142,000-square-foot integrated community health center in Brooklyn, New York, which is a significant step toward reestablishing our presence in the U.S. market. The property is a modern, purpose-built, transit-connected outpatient community health hub situated in one of North America's largest and most dynamic cities. Dedicated health care space in New York City is in very short supply, and barriers to entry there are very high.

This property combines a wide array of health care services — primary care, specialty care, imaging and diagnostics. AdvantageCare Physicians, which ranks among New York's biggest multi-specialty physician organizations, leases the entire facility — 100%. Roughly 11 years remain on that lease, and it carries contractual annual rent escalations, which gives Vital durable, predictable and growing cash flows. As part of our quarterly results, we also announced that we signed a definitive agreement to acquire a Canadian outpatient property located in Burlington, Ontario. A diverse mix of health care providers leases 99% of that property, which offers long-term operational and densification upside. Acquired at a going-in cap rate of over 7%, these acquisitions — approximately $153 million in total — are expected to be immediately accretive to earnings. These transactions show our ability to identify accretive, high-quality health care real estate investments across North America. Our pipeline keeps growing in both Canada and the United States, which gives us confidence that our strategy to refocus and grow the portfolio in North America is highly executable. So across all 4 of our strategic priorities we are making tangible progress, and we are confident that momentum will continue over the coming quarters.

Now let's look at how our real estate portfolio actually performed underneath, and it stayed solid through the quarter. If you set aside a one-time increase in costs tied to outsourcing facilities management in Canada, same-property NOI for the whole portfolio rose 3.2%. Occupancy stood at 96.1% when the quarter closed, and our WALE came in above 13 years — among the longest for Canadian REITs. What these figures keep showing is the defensive character, the quality, and the long-duration income our portfolio holds. Beyond helping deliver essential health care services, a great many of our properties sit in dense urban markets with substantial long-term embedded value. One illustration of that: in July, the City of Toronto approved our rezoning application for Fairview Health Center. With that approval, we can develop 980,000 square feet of buildable area, anchored by 100,000 square feet of medical space. The rest of the project may be market rate residential, with no affordable housing component required. Our team is delighted to have gotten this across the line. It hands us considerable optionality and, as time goes on, the chance to generate meaningful incremental value for unitholders. One last quick point on Healthscope before I finish.

It's already been publicly reported that a consortium made up of 4 operators is now in active diligence with the receiver aimed at acquiring the operating business and all remaining assets of Healthscope. That consortium has our backing, along with the support of the other major landlord. As we've said before, we have a committed transaction with Calvary — a large, high-quality Australian not-for-profit operator of hospitals and senior housing — to step into a new lease covering all 12 of our properties, subject to approval from the lender and the receiver. We expect to have more information before our Q3 earnings release, and we'll keep everyone updated as this process moves along. On an encouraging note, performance at our Australian hospitals continues to improve. And from a liquidity perspective, we keep seeing institutional capital coming back to the market. Last week, an institutional investor agreed to buy a hospital in suburban Melbourne. That property was acquired for AUD 291 million, which equates to a low 5% cap rate. We see this as an encouraging data point for asset values and market liquidity, and we expect further transaction activity as hospital operating performance continues to get better and the Healthscope situation moves toward resolution. In addition, as Stephanie will highlight, after quarter end we successfully refinanced all of the debt secured by our Healthscope assets on attractive terms, which demonstrates the availability of funding for high-quality Australian health care infrastructure.

To wrap up, here are a few key points. First, across every one of our strategic priorities we're seeing genuine progress, and the gains in the metrics we reported this quarter make that clear. Second, the portfolio keeps delivering the way it should, producing cash flows that are stable and rising, supported by essential health care assets that carry substantial upside over the long term. And third, we stayed disciplined in how we allocate capital, showing that we can spot accretive chances to recycle capital and expand the business. We're happy with the strategic headway we're making as well as how the business performed fundamentally during the quarter. Vital is turning into a simpler, stronger and more focused company, with a better balance sheet, a more efficient cost structure and a growing pipeline of appealing investment opportunities. With that, I'll pass it to Stephanie to discuss the financial results.

Thanks, Zach, and good morning, everyone. On today's call, I'll first walk through Vital Infrastructure's second quarter financial and operating results and then cover our balance sheet, including debt maturities, liquidity before we move into Q&A. Before I begin, just a quick reminder on our operating -- reporting baseline for 2026. Following the internalization of Vital Trust management structure at the end of 2025, Vital Trust is no longer consolidated within the REIT's results and is now accounted for as an equity accounted investment. As a result, certain year-over-year comparisons, particularly NOI, FFO, AFFO and other proportionate measures are affected. Beginning in 2026, Vital Trust no longer contributes to proportionate NOI, while FFO and AFFO now reflect cash distributions received rather than a proportionate share of its underlying operating results. Although this affects comparability with prior periods, it aligns with our reporting with the cash flows we receive from our investment and provides a simpler, more transparent presentation. Turning to our second quarter results. We delivered another quarter of steady operating performance consistent with our long-term strategy. Same-property NOI on a proportionate basis grew by 2.3% year-over-year to $51 million for the quarter, driven by contractual rent escalations, rentalized capital expenditures, higher parking income and improved cost recoveries.

Looking at North America in particular, same-property NOI rose 1% during the quarter. Contractual rent escalations and greater parking income were mostly offset by increased property operating costs tied to our shift to outsourced facilities operations, which took effect in November of last year. If you set aside that transition, North American same-property net operating income grew 3.3%, and our total same-property net operating income would have been up 3.2% year-over-year. FFO per unit, excluding accelerated amortization of financing costs, came in at $0.11 for the quarter, consistent with the first quarter of this year. AFFO per unit rose to $0.11 from $0.10 in the first quarter, though it's worth noting that both FFO and AFFO leave out roughly $0.5 million of accelerated amortization of financing costs connected to early repayment of certain European mortgages using proceeds from the European portfolio sale. On a proportionate basis, management fee income fell by about $3.6 million, mainly reflecting the deconsolidation of Vital Trust and reduced fees from the European joint venture after the portfolio sale. That decline was more than offset by an approximately $5 million decrease in finance costs versus the second quarter of last year, again reflecting the deconsolidation of Vital along with lower borrowing costs following our refinancing activity and lower amortization of deferred financing fees.

Broadly speaking, those items gave a slight boost to FFO and AFFO this quarter. Notably, our AFFO payout ratio is still inside the range we target, at 85% for the quarter, better than 88% during the same period a year ago. Moving on to G&A. Our ongoing emphasis on operational excellence and simplifying the business is producing a structurally reduced cost base. G&A attributable to AFFO, which leaves out unit-based compensation and employee termination benefits, fell to $10 million for the quarter, down from $12.2 million in last year's second quarter. Those savings come from carrying out a number of strategic initiatives across the past 18 months, among them the internalization of Vital Trust, the European portfolio sale, the resulting closure of 4 regional offices, the outsourcing of our Canadian facilities management platform and broader corporate cost optimization. Consequently, our global headcount is down roughly 40% year-over-year, while we retain the capabilities required to support our North American growth strategy. With most of our European platform now moved over to TPG and further simplification initiatives in progress, we anticipate capturing additional efficiencies through the remainder of the year. And because of that, we are still on track to reach a run rate annual G&A expense, excluding unit-based compensation and severance, of approximately $35 million by the end of 2026.

Management anticipates that these measures will boost operating leverage, reinforce the quality of earnings, and lift long-term value for unitholders. As of June 30, 2026, NAV per unit stood at $7.66, compared with $7.55 on March 31. That gain came mainly from beneficial foreign exchange fluctuations and mark-to-market gains on our Vital Trust units, partly offset by transaction costs tied to the European portfolio sale. Now on to the balance sheet. Proportionate leverage showed substantial improvement, reaching 46.8%, versus 52.7% at the close of the first quarter and 56% a year earlier. The quarter-over-quarter decline largely stems from the timing of the European portfolio sale, since the net proceeds had not yet been deployed by quarter end. As those proceeds are redeployed into our North American acquisition pipeline — including the Brooklyn acquisition closed after the quarter end and our Canadian committed acquisition — we anticipate leverage will rise modestly from the June 30 levels. Had these subsequent acquisitions been reflected, pro forma proportionate leverage would have been roughly 48.8%. At quarter end, our debt to adjusted EBITDA ratio was 7.1x, or about 7.7x on a comparable basis once the EBITDA contribution from the disposed European properties is excluded. Pro forma for the impact of our subsequent acquisitions and repayment, that ratio would have been roughly 8x, which in our view better captures our ongoing operating profile.

Regarding debt coming due soon, at quarter end we had roughly $230 million of 2026 maturities left. In Canada, $18.8 million of mortgage maturities should be repaid or moved onto our revolving credit facility, and about $7 million of that has already been repaid since the quarter closed. For Australia, I'm happy to say our joint venture completed a successful refinancing of AUD 715 million, or CAD 210 million at our share of term debt, after quarter end, pushing the maturity out from December 2026 to December 2028 and taking care of what had been our biggest single 2026 maturity. As of today, total available liquidity exceeds $250 million, including the Q2 activities disclosed subsequently, which gives us considerable flexibility to pursue our priorities. Our weighted average interest rate came in at 5.25% versus 4.76% a year earlier, reflecting a shift in our debt mix after repaying lower-cost European mortgages and using our revolving credit facility to fund acquisitions. Our weighted average term to maturity stood at 2.2 years, and that has improved since then thanks to the successful refinancing of our Australian joint venture after quarter end. Moving to capital recycling: as Zach noted, we completed the sale of our European portfolio during the quarter.

This deal brought in roughly $145 million in net proceeds for the REIT, after accounting for transaction costs and taxes. A meaningful share of that money has already been put to work buying the Eastern New York Health Hub in Brooklyn, and what's left is earmarked for our Canadian acquisition pipeline. As we said before, the plan had been to apply the cash from the European portfolio sale toward retiring our 6.25% Series H convertible debentures. But with the appealing acquisition opportunities that have come up over recent months, we chose instead to direct that capital into accretive North American investments that we expect will deliver greater long-term value for unitholders. Since the Series H debentures turn callable without penalty on September 1, subject to the required 30-day notice, we plan to revisit this shortly and weigh the most efficient way to handle the maturities — whether through further asset recycling, refinancing at more favorable market rates, or a combination of both. Importantly, our expanding pool of unencumbered assets keeps strengthening our financial flexibility, putting us in position to tap a wider range of financing alternatives over time while further diversifying where our capital comes from. In the meantime, we'll keep opportunistically repurchasing our convertible debentures under our normal course issuer bid, where we believe doing so is an attractive use of capital.

In the quarter, we bought back about $1.5 million in convertible debentures, which takes our year-to-date repurchases up to $2.9 million, and we kept the flexibility to put capital first into accretive investment opportunities. All of this together has made the business simpler, made the balance sheet stronger, and shifted our capital in a meaningful way toward North America, all while keeping the stable cash flow traits of our portfolio intact. To wrap up, the results for our second quarter show how durable our portfolio is and how disciplined we are about allocating capital. With resilient demand for health care infrastructure backing our assets and a proactive stance on managing capital, Vital Infrastructure is in a good position to go after opportunities and deliver sustained results in the quarters to come. With that, I'll hand it back to the operator so we can open the line for Q&A.

<<operator_script>> Our initial question is from Jonathan Kelcher of TD Cowen.

Starting with the pipeline and acquisitions, Zach, you mentioned it’s been fairly active. How does that compare between the U.S. and Canada?

Right now, it probably — I'd say — well, again, it shifts from one day to the next. In terms of acquisitions, I'd characterize the mix as roughly 2/3 U.S. at present. That really mirrors — I mean, look, if doing everything in Canada were possible, we might well go that route. Obviously, the difficulty is that much of the health care infrastructure and assets are essentially owned by the single payer. As a result, the U.S. tends to be the place where we come across more acquisition opportunities. When it comes to development opportunities — where we'd pursue strategic transactions such as the one we did with RVH — those are all located here in Canada.

All right. So there's no U.S. development. Are there certain states you might be aiming to add, or on the flip side, ones you'd prefer to avoid?

Yeah. It's interesting, Jonathan — my career began in office, then I moved into apartments and hospitality, and you tend to concentrate on particular key markets. In this instance, I'd say we lean toward the East Coast and down into the Southeast when it comes to markets, though this isn't a strategy built state by state. It's really more about specific assets and areas, and what the underlying users are actually doing in the building. But I'd add one thing: it's all skewed. Everything we're chasing at the moment tilts heavily toward outpatient rather than inpatient.

Alright. And finally from my side, regarding dispositions—how ought we to view those for the rest of the year?

When it comes to properties, or...

Well, I suppose it’s both — the properties and that Vital New Zealand...

Yeah, and Mike — Mike’s right here — so he can kind of bring you up to speed on the timing.

Yes, Jonathan — with regard to our stake in the New Zealand entity, no restrictions apply to us anymore. That said, there's nothing we can announce today.

My view is that we'll take advantage of it when the moment is right, though having that on hand as a means of liquidity is clearly something we'll look into.

All right, and what about the property side?

Regarding property, I'd say the remaining German clinics are likely the dispositions currently being actively evaluated. As for timing, if that were to happen, it would probably be a Q4 event.

All right, then, let me try to pull it all together here. If I look at the situation this way — suppose you had applied the entire amount of cash returned from the European sales toward the acquisition you announced. And in the event that you were to announce additional ones, should we reasonably regard the New Zealand shares as a source of funding?

Yes. New Zealand and Europe, I'd say, definitely serve as funding sources for us.

The following question is from Sairam Srinivas of ATB Cormark Capital Markets.

Zach and Stephanie, nice work on the quarter. Turning to dry powder down the road — I realize you said most of the cash from the European acquisition has likely been put to work, but how are you viewing leverage going forward? And how should we think about leverage over the next 12 months?

I'll take that question. Yes. So I'd say our leverage goal over the medium to long term sits at roughly 50%, or 8x debt to EBITDA. That figure will move up and down somewhat as we recycle capital and redeploy it, but 50% is really what we aim for, since that's the level we're comfortable with over the long term given the underlying credit and the quality of our portfolio. So yes, that's what I would target.

And if we consider just the volume of acquisitions coming up, could you say something about how that figure might shape up? Is another $100 million in acquisitions on the way?

Yeah, I believe we kind of provided soft guidance suggesting roughly $250 million for the year as something of a target. So I'd say that's likely a fairly solid range to land in. So definitely, assuming another $50 million in acquisitions ahead of year-end is a safe bet.

Thanks. And Zach, how do you see Fairview Health Center? What's the long-term plan for that development?

Fairview is among the stronger performers in our portfolio, and it functions as a pretty important health hub. Over the longer term, I think there is going to be demand for bigger community health operators in that broader area, and we are in discussions with a few of them. So once we settle what we are doing on the health side, we will work out how to plan the remainder, which will most likely be residential. That means either selling the surplus land net of the medical piece, or perhaps partnering with a party who would take responsibility for the residential portion. But it is still early days.

The following question is from Himanshu Gupta with Scotiabank.

Zach, I believe during your prepared comments you mentioned a deal — Melbourne Hospital, at a cap rate in the low 5s, if I caught that correctly. How does that stack up against — how do your cap rates, or your pricing, stack up against deals you've observed over the past 1 year or the past 2 years? I'm just hoping to get a feel for how competitive or attractive the market is right now.