Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript

Welcome to Vital Infrastructure Property Trust Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded today, May (sic) [ August ] 13, 2026. I would now like to turn the conference over to Steven Hong, Vice President of Investor Relations. Please go ahead. One moment please. There has been a technical issue. We will start in 1 minute. Thank you. [Technical Difficulty] I would now 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 participating in our second quarter results conference call. This is Steven Hong speaking. Joining me are Zach Vaughan, CEO; Stephanie Karamarkovic, CFO; Mike Brady, President; and Tracy Whittall, COO; and Dave Casimiro, EVP. Our earnings announcement was released yesterday evening, and we posted an updated Investor Relations presentation on our website, which listeners can refer to during the call. Following comments, we will be glad to ask and 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 thank you, everyone, for joining us today on the call. This is my fourth earnings call as CEO of Vital, having joined a little over a year ago. Since joining, the senior management team and I, with the support of our Board, have been executing on a strategic plan to transform our business centered on 4 key priorities: one, simplifying our footprint; two, strengthening our balance sheet; three, reducing our cost structure; and four, disciplined capital allocation. We are still in the early stages of this transformation, but we are making strong progress across each of these priorities as demonstrated by our results this quarter and our recent activities. Starting with the simplification of our footprint. During the quarter, we closed on the remainder of the properties in Europe that were part of our larger transaction with TPG Real Estate. The transaction represented the majority of our invested equity in Europe, generating $145 million of net proceeds. As of June 30, our European property operating business and employees have also been transferred to TPG. In Europe, we are left with just 2 remaining investments, both of which are efficient to oversee and which we intend to exit in due course. Our substantial exit from Europe, along with the internalization of Vital Trust in New Zealand, clearly demonstrates our commitment to simplifying our business and creating a more focused operating platform. Moving to our balance sheet. At the end of Q2, our LTV on a proportionate basis stands at 47%, down about 900 basis points from a year ago. Importantly, our debt-to-EBITDA ratio improved meaningfully to 7.7x on a comparable basis, down from 9.4x a year ago, close to a 2 turn reduction. In addition, we ended Q2 with liquidity of $443 million, giving us significant flexibility to pursue accretive growth. Switching to our cost structure. During the second quarter, G&A fell by $2.2 million year-over-year with further reductions expected next quarter as the impact of our European sale flows through. As a result of these and other efforts undertaken by the team to streamline operations, we are on track to reduce our G&A by over 30% by year-end. Importantly, with our simplified footprint, we can recycle capital with little to no incremental overhead, increasing our platform operating leverage and allowing a greater proportion of property earnings to flow through to unitholders. Lastly, turning to capital allocation. I committed on my first earnings call that we would be laser-focused on disciplined capital allocation. In the past 12 months, we have realized approximately $300 million of net proceeds that have been recycled back to North America through a combination of debt reduction and accretive investment. Importantly, during the last several quarters, we have demonstrated that we are able to reinvest that capital in opportunities that are accretive for our unitholders, having completed and committed to the following transactions. At the start of the year, we entered into a commitment to build a new ambulatory facility for RVH in Barrie, which, when completed in 2029, will add additional NOI of $9 million or $0.04 a unit. In March, we acquired a transitional bed facility in Ottawa on a long-term lease to the Ottawa Hospital. This was our first new acquisition in Canada in almost a decade. And after quarter end, we completed or committed to approximately $153 million of additional acquisitions. In July, we acquired 142,000-square-foot integrated community health center in Brooklyn, New York, marking an important step in reestablishing our presence in the U.S. market. This property is a modern purpose-built transit-connected outpatient community health hub located in one of the largest and most dynamic cities in North America. New York City has a very limited supply of dedicated health care space and very high barriers to entry. The property brings together a broad range of health care services, including primary care, specialty care, imaging and diagnostics. The facility is 100% leased to AdvantageCare Physicians, one of New York's largest multi-specialty physician organizations. The lease has approximately 11 years remaining and includes contractual annual rent escalations, providing durable, predictable and growing cash flows for Vital. We also announced as part of our quarterly results that we signed a definitive agreement to acquire a Canadian outpatient property in Burlington, Ontario. The property is 99% leased to a diverse mix of health care providers with long-term operational and densification upside of the property. Together, these acquisitions totaling approximately $153 million are being acquired at a going-in cap rate of over 7% and are expected to be immediately accretive to earnings. These transactions demonstrate our ability to identify accretive high-quality health care real estate investments across North America. Our pipeline continues to grow in both Canada and the United States, giving us confidence that our strategy to refocus and grow the portfolio in North America is highly executable. So we are making tangible progress across all 4 of our strategic priorities, and we are confident that momentum will continue over the coming quarters. Turning now to the underlying performance of our real estate portfolio, which remained strong during the quarter. Excluding a onetime step-up in expenses related to outsourcing facilities management in Canada, NOI across our portfolio on a same-property basis grew by 3.2%. We ended the quarter with occupancy of 96.1% and a WALE of over 13 years, one of the longest of the Canadian REITs. These metrics continue to reflect the defensive nature, quality and long-duration income within our portfolio. In addition to supporting the delivery of critical health care services, many of our assets are located in dense urban markets where there's meaningful long-term embedded value. As a demonstration of this, in July, we received City of Toronto approval for our rezoning application at Fairview Health Center. This approval allows us to develop 980,000 square feet of buildable area, led by 100,000 square feet of medical space. The balance of the project can be market rate residential without the need for any affordable housing component. We're very pleased that our team was able to achieve this result. It provides us with significant optionality and over time, the potential to create meaningful incremental value for unitholders. Before I wrap up, a quick comment on Healthscope. As has been publicly reported, a consortium comprising 4 operators is in active diligence with the receiver to acquire all of Healthscope's remaining assets and operating business. This consortium has both our support and that of the other major landlord. As we have previously indicated, we have a committed transaction in place with Calvary, a large, high-quality, not-for-profit Australian hospital and senior housing operator, to step into a new lease on all 12 of our properties, subject to lender and receiver approval. We anticipate further information before our Q3 earnings release, and we'll keep everyone informed as the process continues. Encouragingly, performance in our Australian hospitals keeps improving. And from a liquidity standpoint, we continue to see institutional capital return to the market. Last week, an institutional investor agreed to acquire a hospital in suburban Melbourne. The property was acquired for AUD 291 million, equating to a low 5% cap rate. We view this as an encouraging data point for asset values and market liquidity, and we anticipate further transaction activity as hospital operating performance keeps getting better and the Healthscope situation moves towards resolution. In addition, as Stephanie will highlight, after quarter end, we successfully refinanced all the debt secured by our Healthscope assets on attractive terms, demonstrating the availability of funding for high-quality Australian health care infrastructure. So to summarize, here are a few takeaways. First, we're making real progress across each of our strategic priorities and the improvement in our reported metrics this quarter demonstrates that. Second, our portfolio continues to perform as it should, generating stable and growing cash flows underpinned by critical health care assets with significant long-term upside. And third, we remained disciplined in our approach to capital allocation and are demonstrating our ability to identify accretive opportunities to recycle capital and grow the business. We are pleased with both the strategic progress we are making and the underlying performance of the business during this quarter. Vital is becoming a simpler, a stronger and a more focused company with an improved balance sheet, a more efficient cost structure and a growing pipeline of attractive investment opportunities. And with that, I'll hand it over to Stephanie to talk about 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. In North America specifically, same-property NOI increased by 1% for the quarter as contractual rent escalations and higher parking income were largely offset by higher property operating costs associated with our transition to outsourced facilities operations effective in November of last year. Excluding the impact of that transition, North American same-property net operating income increased by 3.3% and our overall same-property net operating income would have increased by 3.2% year-over-year. FFO per unit, excluding accelerated amortization of financing costs, was $0.11 for the quarter, in line with the first quarter of this year. While AFFO per unit increased to $0.11 from $0.10 in the first quarter, it's worth noting that both FFO and AFFO exclude approximately $0.5 million of accelerated amortization of financing costs related to the early repayment of certain European mortgages using proceeds from the European portfolio sale. On a proportionate basis, management fee income declined by approximately $3.6 million, primarily reflecting the deconsolidation of Vital Trust and lower fees from the European joint venture following the portfolio sale. This was more than offset by an approximately $5 million reduction in finance costs compared with the second quarter of last year, reflecting again the deconsolidation of Vital and lower borrowing costs following our refinancing activity and lower amortization of deferred financing fees. Overall, these items had a modest favorable impact on FFO and AFFO for the quarter. Importantly, our AFFO payout ratio remains within our targeted range at 85% this quarter, an improvement from 88% in the same period last year. Turning to G&A. Our continued focus on operational excellence and business simplification is translating into a structurally lower cost base. G&A attributable to AFFO, which excludes unit-based compensation and employee termination benefits, declined to $10 million for the quarter from $12.2 million in the second quarter of last year. These savings reflect the execution of several strategic initiatives over the past 18 months, including 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 overall corporate cost optimization. As a result, our global headcount has declined by approximately 40% year-over-year while preserving the capabilities needed to support our North American growth strategy. With the majority of our European platform now transitioned to TPG and additional simplification initiatives underway, we expect to capture further efficiencies over the balance of the year. And as a result, we remain on track to achieve a run rate annual G&A expense, excluding unit-based compensation and severance of approximately $35 million by the end of 2026. These actions are expected to enhance operating leverage, strengthen earnings quality and improve the long-term unitholder value. NAV per unit was $7.66 as at June 30, 2026, up from $7.55 at March 31. The increase was driven primarily by favorable foreign exchange movements and mark-to-market gains on our Vital Trust units, partially offset by transaction costs associated with the European portfolio sale. Turning to the balance sheet. Our proportionate leverage improved materially to 46.8%, down from 52.7% at the end of the first quarter and 56% this time last year. The decrease from the prior quarter primarily reflects the timing of the European portfolio sale with the net proceeds not yet deployed by quarter end. As we redeploy these proceeds into our North American acquisition pipeline, including the Brooklyn acquisition completed subsequent to the quarter end and our Canadian committed acquisition, we expect leverage to increase modestly from June 30 levels. On a pro forma basis, reflecting these subsequent acquisitions, proportionate leverage would have been approximately 48.8%. Our debt to adjusted EBITDA ratio was 7.1x at quarter end or approximately 7.7x on a comparable basis, excluding the EBITDA contribution from the disposed European properties. On a pro forma basis, reflecting the impact of our subsequent acquisitions and repayment, our ratio would have been approximately 8x, which we believe better reflects our ongoing operating profile. On near-term debt maturities, we had approximately $230 million of remaining 2026 maturities at the end of the quarter. In Canada, $18.8 million of mortgage maturities are expected to be repaid or transitioned to our revolving credit facility, of which about $7 million has already been repaid subsequent to quarter end. On the Australian side, I'm pleased to report that our joint venture successfully refinanced AUD 715 million or CAD 210 million at our share of term debt subsequent to quarter end, extending the maturity from December 2026 to December 2028 and resolving what was our single largest 2026 maturity. As of today, total available liquidity is over $250 million, including the subsequently disclosed Q2 activities, providing significant flexibility to execute on our priorities. Our weighted average interest rate was 5.25% compared with 4.76% a year ago, reflecting a change in our debt mix following the repayment of lower-cost European mortgages and the use of our revolving credit facility to fund acquisitions. Our weighted average term to maturity was 2.2 years, which has since improved following the successful refinancing of our Australian joint venture subsequent to quarter end. Turning to capital recycling. As Zach mentioned, we successfully completed the sale of our European portfolio in the quarter. This transaction generated approximately $145 million of net proceeds attributable to the REIT after transaction costs and taxes. We have already redeployed a significant portion of those proceeds into the acquisition of the Eastern New York Health Hub in Brooklyn with the remaining proceeds committed to our Canadian acquisition pipeline. As we have previously communicated, our expectation was to use proceeds from the European portfolio sale to repay our 6.25% Series H convertible debentures. Given the attractive acquisition opportunities available in recent months, we instead prioritize redeploying that capital into accretive North American investments that we believe will generate greater long-term value for unitholders. With the Series H debentures becoming callable without penalty on September 1, subject to the required 30-day notice, we intend to revisit this in the near term and evaluate the most efficient approach to addressing the maturities, whether through additional asset recycling, refinancing at more favorable market rates or a combination of both. Importantly, our growing pool of unencumbered assets continues to enhance our financial flexibility, positioning us to access a broader range of financing alternatives over time while further diversifying our sources of capital. In the meantime, we will continue to be opportunistically repurchasing our convertible debentures used under our normal course issuer bid, where we believe doing so represents an attractive use of capital. During the quarter, we repurchased approximately $1.5 million of convertible debentures, bringing the year-to-date repurchases to $2.9 million, while maintaining the flexibility to prioritize capital deployment into accretive investment opportunities. Taken together, these initiatives have simplified the business, strengthened the balance sheet and meaningfully repositioned our capital towards North America while preserving the stable cash flow characteristics of our portfolio. In closing, our second quarter results demonstrate the durability of our portfolio and our disciplined approach to capital allocation. With resilient health care 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. And with that, I will turn it back to the operator to open up the line for Q&A.

[Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD Cowen.

First question, just on your pipeline, the acquisition pipeline, Zach, you talked about it being pretty active. How does that stack up U.S. versus Canada?

At the moment, it's probably -- I would -- I mean, again, it fluctuates day-to-day. I would say it's probably skewed about 2/3 to the U.S. at the moment in terms of acquisitions. It's really a reflection of -- I mean, look, if we could do everything in Canada, we may well do that. I think the challenge is, obviously, a lot of the health care assets and infrastructure is sort of single payer owned. So the U.S. tends to be where we find more acquisition opportunities. Our development opportunities in terms of where we would do strategic transactions like we did with RVH, those are all here in Canada.

Okay. So no U.S. development. Are there any states that you would -- that you're maybe looking to add to or conversely stay away from?

Yes. It's interesting, Jonathan, like coming from a background of starting my career in office, moving to apartments and hospitality, you tend to focus on certain kind of key markets. I think in this case, we're probably biased towards the East Coast down to the Southeast in terms of markets, but it's not a specific state-by-state strategy. It's more asset and area specific and what the underlying users is doing in the building really. But I would also note, it's all skewed. Everything we're pursuing right now is really skewed towards outpatient versus inpatient.

Okay. And then lastly for me, just on dispositions. How should we think about that for the balance of the year?

In terms of properties or...

Well, both, I guess, properties and the Vital New Zealand...

Yes. I mean, Mike, I can -- Mike is here, so he can give you the kind of update on timing.

Yes. Jonathan, we're no longer subject to any restrictions with respect to our holdings in the New Zealand entity. Having said that, we don't have anything to announce today.

I think we'll be opportunistic about it, but certainly now being -- having that available as a source of liquidity, obviously, is something we'll explore.

Okay. And on the property side?

On the property side, I think probably dispositions that are kind of actively under evaluation would be the balance of our German clinics potentially. And timing, that would probably be a -- to the extent that happened, I think it would likely be a Q4 event.

Okay. So just sort of put everything together, if I were to think about it, if you've kind of used all the cash that you've got back from the European sales to your announced acquisition. And if you were to announce more, we should probably think about the New Zealand shares as a funding source?

Yes. I think New Zealand, Europe are certainly a source of funding for us.

Your next question comes from the line of Sairam Srinivas from ATB Cormark Capital Markets.

Zach, Stephanie, congratulations on the quarter. Just thinking about dry powder looking ahead, I know you mentioned all the cash from the European acquisition is probably deployed, but how would you think about leverage looking forward? And where should we think about leverage in the next 12 months?

I can take that one. Yes. So I think our kind of mid- to long-term target of leverage is around that 50% or 8x debt to EBITDA. That will kind of vary up and down as we recycle capital and then redeploy, but we're really targeting that 50%, which is what we feel comfortable on a long-term basis given the underlying credit and quality of our portfolio. So yes, I think that would be what I would target.

And maybe just looking at the quantum of acquisitions ahead, at this point, can you comment on what that number would look like? Would it be another $100 million of acquisitions to come?

Yes. I think we sort of gave, I think, soft guidance that we think sort of $250 million for the year was kind of a target. So I think that's probably a pretty good range to be. So certainly, another $50 million of acquisitions before the end of the year is a safe assumption.

Perfect. And Zach, what's your view on Fairview Health Center? And what's the long-term plan here for that development?

Fairview. So look, Fairview is one of our better performing assets. It is kind of a critical health hub. I think longer term, we are -- there is a need for larger community health operators in that general area. And so we are talking to some of them. So I think once we sort of resolve what we're doing on the health side, we'll figure out how to plan for the rest of it, which is likely to be residential. So either we would sell the excess land net of the medical or possibly partner with someone to -- who would sort of take charge of the residential. But it's still early days.

Your next question comes from the line of Himanshu Gupta from Scotiabank.

Zach, in your prepared remarks, I think you pointed to a transaction activity. Melbourne Hospital at low 5 cap rate, if I heard it right. How does that compare to -- how does your cap rate or pricing compare to transactions you have seen in the last 1 year or the last 2 years? Just trying to get a sense of how competitive or desirable the market is.

Yes. This is in Australia. We -- look, we continue to see assets trade. I mean, out of Vital Trust, they have been trading assets. Again, it's very asset specific depending on the operator and the profitability of the asset. But I would say seeing that kind of pricing on the large asset with term is very encouraging. There's some element of some potential redevelopment there, but not enough to really make that pricing materially different. So look, I think what we're seeing is capital starting to come back in bigger ways and in bigger deals to Australian health care. In other words, if you talk to people down there, there -- the idea of Healthscope, which 12, 18 months ago was on everyone's mind and a big discussion, people are looking through it.

Got it. And then on the subject of Healthscope, I mean, once that situation is sorted out, I mean, will that be a source of disposition as well? I know you outlined the Vital units and remaining Europe assets. But would this 12 asset Healthscope would also be a disposition candidate?

Look, so I think once this is resolved, certainly, the liquidity of all those assets changes dramatically. And part of our strategy with that partnership was to continue to recycle capital. And so we'll be actively reengaging with that. So yes, you could look at it as a source of liquidity. But I think until we're through Healthscope, it's too early to give real guidance on specific assets.

Fair enough. And then -- sorry, one more follow-up on Healthscope. I think you mentioned that you support the -- I mean, the proposal or agreement so far with the operators. Based on -- if this agreement goes through, do we know like will there be a rent concessions being given or any rent reduction, NOI reduction we should expect if this gets done with Calvary?

Yes. Himanshu, so at this time, we're not able to comment. Again, given the terms of the transaction and the offer are still subject to approval, we're not able to provide any further details. But as soon as we are, we'll be able to provide some update on what our lease terms with Calvary look like.

Okay. Fair enough. Fair enough. Maybe the last question is on the G&A. And obviously, a big part of your focus and making a lot of progress there as well. So should we see like a step down in Q3 G&A from Q2 now that Europe is folded and that gets you to realization of the $35 million annualized savings?