Morningstar DBRS Assigns Issuer Rating of BBB (low) to Northwest Healthcare Properties Real Estate Investment Trust and Provisional Rating of (P) BBB (low) to Its Senior Unsecured Debentures

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BBB (low) with a Stable trend to Northwest Healthcare Properties Real Estate Investment Trust (the REIT or the Issuer). Morningstar DBRS also assigned a provisional credit rating of (P) BBB (low) with a Stable trend to the REIT's Senior Unsecured Debentures. As of February 5, 2025, the REIT had no Senior Unsecured Debentures outstanding; if the REIT were to issue Senior Unsecured Debentures in the future, Morningstar DBRS expects the issuance to be on terms and conditions consistent with market practice and satisfactory to Morningstar DBRS, including guarantees consistent with the REIT's secured revolving credit facility. The credit ratings are based on the credit risk profile of the proportionately consolidated entity, including the REIT and its subsidiaries.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and trends consider the recent progress the REIT's management has made in regard to the REIT's major strategic initiatives, including strengthening the balance sheet and institutionalizing and simplifying its business. A recent example includes the REIT's recent successful disposition of its UK portfolio ($885 million), with net cash proceeds used to repay debts with a weighted-average interest rate of 7.9%. Morningstar DBRS expects that balance sheet strength will be a continued focus for the REIT and that the continuing transition of senior management, including the retirement and replacement of current Chief Executive Officer Craig Mitchell, will be managed effectively.

CREDIT RATING DRIVERS
Morningstar DBRS would consider a positive credit rating action should the REIT's total debt-to-EBITDA improve below 8.6 times (x) and EBITDA interest coverage improve above 2.33x on a sustained basis, all else equal. Morningstar DBRS would consider a negative credit rating action should the REIT's total debt-to-EBITDA increase above 9.8x and EBITDA interest coverage remain below 1.83x on a sustained basis, all else equal, or if the REIT were to reverse course on transitioning toward an unsecured debt stack and instead rely more on secured credit facilities for funding.

FINANCIAL OUTLOOK
Morningstar DBRS expects the REIT's total debt-to-EBITDA to stabilize in the high 9.0x range in the near to medium term from 8.7x as of the last 12 months ended September 30, 2024 (LTM), which reflects debt repayment from the recent UK portfolio sale while the reduced EBITDA is annualized over time. Morningstar DBRS expects the REIT's EBITDA interest coverage to improve to the 1.80x range in the near to medium term from 1.44x LTM, as the REIT prioritizes repaying higher-cost debt. Morningstar DBRS' expectations are supported by the REIT's continued prudent financial management, with selective disposition of noncore assets, modest growth capital expenditures (i.e., developments and/or acquisitions), and steady same-property net operating income growth.

CREDIT RATING RATIONALE
The credit ratings are supported by (1) the REIT's superior geographic and property diversification with a granular portfolio of assets in several attractive (i.e., gateway) international markets; (2) a long-dated lease maturity profile with a small amount of space maturing each year, especially over the next 10 years; and (3) a portfolio of necessity-based institutional-quality assets focused on the healthcare sector with a track record of cash flow stability. The credit ratings are further supported by the REIT's market position as a global leader in healthcare real estate, as demonstrated by its proven track record of executing transactions, including a partnership with a leading global investor, and managing $8.5 billion in global healthcare real estate. The credit ratings are constrained by (1) a relatively weak financial risk assessment profile, including both leverage and coverage; (2) elevated counterparty risk with a relatively high proportion of non-investment-grade or nonrated tenants; (3) a relatively small portfolio as measured by proportionate EBITDA on an LTM basis of $316 million; and (4) asset type concentration with a portfolio focused entirely on healthcare real estate.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of the Issuer, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of the Issuer, the BRA carries greater weight than the FRA.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

A provisional credit rating is not a final credit rating with respect to the above-mentioned security and may change or be different than the final credit rating assigned or may be discontinued. The assignment of a final credit rating on the above-mentioned security is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit rating.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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