An activist fund manager has launched a campaign to acquire 14 hospitals in Britain from debt-heavy Northwest Healthcare Properties Real Estate Investment Trust NWH-UN-T, the latest in a series of hedge fund crusades against underperforming REITs.
Early Monday, hedge fund TMR Capital PTC Ltd. published a letter urging the board of Northwest to sell its British unit as part of a move to pay down $3.9-billion in debt, a third of which is at floating interest rates. Toronto-based Northwest owns $10-billion of assets, with 231 medical buildings and hospitals in eight countries.
TMR made its overture after Northwest cut its distributions to investors by more than 50 per cent late Friday, and announced it was in talks to sell properties in Brazil and the United States,
When trading resumed on Monday, the price of Northwest units fell by 8.7 per cent to a historic low. Year-to-date, the REIT’s units are down by more than 40 per cent.
TMR, which is based in the British Virgin Islands and led by Canadians, went public with its campaign after being privately rebuffed by Northwest in recent months. The hedge fund holds a stake in the REIT and declined to disclose its size.
On Monday, Northwest vice-president of investor relations Andrew Grieg said in an e-mail the REIT has received several unsolicited offers from potential buyers of parts of its business since starting a strategic review in August. He said all offers are being considered by the REIT’s advisers and a special board committee, and Northwest has no plans to comment until the review is complete.
Northwest owns 25 hospitals and medical offices in the U.S and eight properties in Brazil. Mr. Grieg said these are “large, high-quality portfolios in large, dynamic markets that are not our core markets.”
In June, the REIT cancelled plans to sell a 70-per-cent stake in its British hospital portfolio to an unnamed institutional investor, a transaction that would have brought in $276-million. In a recent presentation, Northwest targeted cutting debt from $3.9-billion to $2.5-billion, and locking in more than 70 per cent of debt at fixed rates.
The sharp increase in interest rates this year left a number of REITs struggling to maintain distributions while paying down debt. REITs typically put mortgages on their properties equivalent to 50 per cent of their value.
Northwest is the latest of several REITs to cut its payout, after rate hikes left the company borrowing money to pay distributions. The majority of Northwest’s unitholders are income-seeking individual investors.
Activist funds have pushed for asset sales and new boards at perceived underperformers, including H&R Real Estate Investment Trust and shopping mall owner First Capital Real Estate Investment Trust, with varying degrees of success.
In a letter to Northwest, released on Monday, TMR partner Derek Vago said the fund manager made a non-binding offer for the British hospitals in August, and has been unable to engage in follow-on negotiations.
“We do not think it is in the best interests of the REIT to delay discussions and launch another formal process, particularly in light of the prior process that did not result in a successful sale of the U.K. portfolio,” said Mr. Vago, a graduate of McGill University.
“The REIT’s unit price is declining further than in June and this in large part, in our opinion, is due to the aborted U.K. transaction as well as perceived lack of direction.”
TMR said selling the British hospitals would allow Northwest to pay down debt and free up cash for “sustainable distributions.”
Earlier this year, TMR successfully pushed for the break up of British food services conglomerate Restaurant Group PLC, which owns the Wagamama chain. TMR offered to buy the company’s British pubs.
In September, Restaurant Group’s chair resigned and the company sold a money-losing division with 75 locations to a rival chain, Big Table Group Ltd. Restaurant Group’s share price has increased by 62 per cent this year.
Andrew Willis