Vital Healthcare Property Trust (VHP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Vital Healthcare Property Trust FY 2023 Annual Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Hockly, Fund Manager. Please go ahead.

[Foreign Language] Welcome to Vital's FY '23 Results Call -- my name is Aaron Hockly, Vital's Fund Manager. As usual, presenting with me today are Michael Groth, who will provide an overview of Vital's growth in net property income and conservative balance sheet gearing. Richard Roos, who will provide an update on Vital's $3.4 billion property portfolio, valuation changes and our noncore divestment program. And Chris Adams, who will provide an update on Vital's $545 million committed development pipeline, including 2 new developments committed to since our last market update, one in Wellington and one in New South Wales. Listeners may be aware of the Board and executive changes announced at Northwest Canada level over the last few days. These changes have 3 levels: firstly, the separation of the tier and Global CEO roles and appointment of an independent chair in line with best practice corporate governance. Secondly, Northwest is undertaking a strategic review of the REIT. There is no certainty that any changes will result from this review and the REIT does not intend to comment further at this time. And finally, Paul Dalla Lana has stepped down from his roles on the Northwest Board as Global Chief Executive Officer; and is NorthWest's representative on Vital's Board. Vital Director and former Northwest President, Craig Mitchell has been appointed Interim Global CEO, while a search is undertaken and long-term Executive Vice President and General Counsel, Mike Brady, has been appointed Global President of Northwest and replaces Paul on Vital's Board. Otherwise, Northwest leadership team remains in place to provide stability and continuity of leadership. For Vital, the only impact is the change of one of Northwest's appointed directors. We remain focused on running Vital and the changes do not have any impact on Vital other than this change of Director. The Northwest strategic review was yet to occur, and none of us on this call are involved in that process. As such, we aren't able to respond to any related questions. Vital comprises 45 income-producing properties, geographically diversified across all Mainland, Australian states and New Zealand, plus over $200 million of currently nonincome-producing strategic land. Our 17.8 year WALE remains market-leading and provides our unitholders with a significant level of income security and times like these of economic uncertainty. Growth in net property income over the year highlights the resilience of health care assets and health care operators as does the relatively modest softening in valuations. Healthcare Property is a defensive asset class with core returns largely uncorrelated with business cycles. While like all property investors, we have been impacted by rising interest rates, our unitholders have benefited from the relative stability that health care property provides – there are a number of ways you can consider Vital's net property income growth over FY '23. On an absolute basis, Vital recorded 18.1% growth, reflecting the impact of acquisitions, developments, divestments and rent reviews. As some of these impacts are one-off, the like-for-like same-property income provides another useful metric, and at 5.3%, this was also strong. After removing the impact of foreign exchange benefits, which arise due to the New Zealand dollar depreciated against the Australian, this like-for-like figure reduces to a still healthy 3.6%. I -- our core portfolio metrics remain strong. In addition to a nearly 18-year WALE, the portfolio was 99% occupied with over 99% rent collected for the year. As mentioned, the resilience of health care property led to a modest softening of market capitalization rates over the year, reducing by 47 basis points on average to 5.05%. The resilience of Vital's portfolio enabled us to meet our distribution guidance of 9.75 cents per unit for FY '23, representing an 87% payout ratio on adjusted funds from operations or AFFO of 11.18 cents per unit. During FY '23, we commenced a number of portfolio-enhancing activities -- notably expediting the sale of noncore assets to repay debt and ultimately, to fund new developments. To date, $155 million of assets have been sold or are due to settle shortly, and we are targeting divesting an additional $100 million over this financial year. The assets have been divested at less than a 9% discount to book value, significantly less than the discounted book Vital is currently trading at. Richard will provide an update on the sales process shortly. The asset sales, coupled with our development program will enhance Vital's portfolio and ensure a greater proportion of assets are in core health care presents with strong green credentials. Chris will provide more detail on our specific developments and why we see them as being so critical for Vital's future. These enhancements will also support our overarching objective of growing AFFO by 2% to 3% per unit over the medium term. Michael will talk more as to why we had a small fall in AFFO per unit in FY '23 and our efforts to ensure we achieve this targeted growth over the medium term. Michael will also provide more detail in relation to Vital's debt position. Importantly, Vital has no debt expiring until March 2025. AUD 180 million of debt headroom available to fund the development pipeline in conjunction with asset sales and conservative gearing at 36% after recent valuation declines, but before around $150 million of asset sales proceeds expected to be received over this financial year. We also continue to deliver on a number of ESG initiatives, which are comprehensively detailed in the annual report we released earlier today. Our ESG achievements include upgrading a number of existing facilities as well as monitoring and reducing greenhouse gas emissions. Our ESG focus has moved from being primarily data collection orientated to implementation, including solar power installations, electrification and other upgrades of Vital's properties. We have continued to support the communities in which we operate, including bio-donations in New Zealand to the Red Cross, Gut Foundation, Keystone Trust and 2 leading children's hospitals. We have also become more conscious of the First Nations peoples of the land on which our assets are located. This has included Northwest as Manager of Vital, developing its first reconciliation action plan in Australia and the Maori strategy in [indiscernible]. In governance, we have again voluntarily disclosed how we have complied with the NZX Corporate Governance Code despite the code not technically applying to Vital as a funded she. We have also continued to work with stakeholders like the New Zealand Shareholders' Association to ensure we are available for questions from unitholders large and small. To this end, we have undertaken over 40 dedicated Investor Relations events in over 15 different cities and towns. Our ESG initiatives have led to a range of external recognitions, including from GRESB, we were ranked second for listed health care real estate globally, CDP, which moved us from awareness to a management ranking and of the Australasian Reporting Awards, where we're a finalist for communication. I will now hand over to CFO, Michael Groth.

Thank you, Aaron, and good morning. I will now run through Vital's results and financial highlights for FY '23. As you will have expected, the monetary response from our reserve banks to the higher inflationary environment has impacted Vita's results. As some context to this, Australian and New Zealand base interest rates have increased by over 2% and almost 2.5%, respectively, versus 30 June last year. Whilst there is no change to our approach, this environment emphasizes how important it is to actively manage Vital's capital structure and balance sheet to ensure that long-term unitholder value is created and maintained through the cycle. In this respect, we have delivered a number of initiatives to ensure Vital's balance sheet remains robust and flexible, including increased debt facility limits that provide prudent and flexible funding headroom for our development commitments and working capital requirements, extending Vital's debt maturity profile, such that our next debt maturity will not be until late FY '25. Further diversification of financiers with 2 new banks joining our club debt arrangements. Increased interest rate protection to over 70%, with the process to extend the duration of the hedging book underway and delivered $155 million of capital recycling initiatives that Aaron identified earlier, enhancing the strength, quality and resilience of Vital's balance sheet now and in the property portfolio over time. Now turning to Slide 8. Net property income is up 18.1% underpinned by developments, contributions from last year's property acquisitions and like-for-like rental growth of 5.3% or 3.6% on a constant currency basis. It is important to note that the full impact of the current high inflationary environment will be captured in FY '24. This is because of a second half bias in the timing of rent reviews. This is highlighted on Slide 38 in the appendices, which shows 4.8% annualized like-for-like rental review outcomes versus 30 June last year and reflects an acceleration from the 3.4% we reported at 31 December. The interest rate environment that I touched on earlier has impacted both Vital's net interest expense and property revaluation outcomes. Interest expense, net of interest income and interest capitalized on Vital's active development projects and land holdings under development has increased by 30%, notwithstanding the significant increase in the level of interest rate hedging protection put in place during the year. Property valuations have also been impacted, declining by $29 million. as Vital's weighted average cap rate softened 47 basis points to 5.05%. Embedded within this number is approximately $120 million of value created from rent reviews and leasing activity that Richard will touch on briefly later. AFFO per unit reduced 6.2% to 11.8 cents impacted by both the additional units on issue from the 2022 equity raised, the higher interest rate environment and a higher effective tax rate for the group. Vital has declared a final quarter distribution of 2.4375 cents per unit, bringing the full year distribution to 9.75 cents, up 1.3% on the prior year, and its distribution ratio remains prudent at 87%. The drivers of net property income that I touched on earlier are presented further in detail on Slide 9. Of note is the 3.6% per annum like-for-like property income growth on a constant currency basis, up from 2.8% reported in FY '22. Richard talks further about Vital's rent review profile and outcomes in a moment. Turning to Slide 10. Against the more challenging economic backdrop, Vital continues to prioritize prudent capital management, thereby ensuring that the foundations of the business remains strong. Gearing has increased from 30% to 36%, reflecting the settlement of the FY '22 contracted acquisitions, proceeds of $100 million from divestments that have been settled, development CapEx incurred and the property valuation decline discussed earlier. It's this property valuation decline, net of the associated deferred tax impact that has resulted in a net tangible asset per unit of $2.96, down from $3.34 12 months ago. On Slide 11, we highlight Vital's funding structure and some of the key metrics at 30 June. Substantial headroom versus banking covenants access with a loan-to-value ratio of 36.5% versus a covenant of 55%. In addition, Vital's interest cover ratio remains healthy at almost 3.1x versus a covenant of 2x. As indicated earlier, Vital has built up a strong group of relationship banks with 2 new banks joining this group as part of the refinancing and term extension exercise completed in March. Undrawn facility limits totaled AUD 118 million, which in combination with asset sales, provides the certainty required on development funding. Finally, Vital's weighted average debt duration has been held steady at 3.8 years, with no debt facility due to expire before March 2025. Richard will now take you through Vital's asset management outcomes for the year.

Thank you, Michael, and good morning, everyone. Turning to the portfolio update, starting on Page 13. With annual rent increases that are highly aligned to CPI, the Vital portfolio generated income growth in FY '23 of 5.3% on a like-for-like basis and 3.6% on a constant currency basis. Annual rent reviews that are aligned to CPI helped offset higher interest rates and reduced the impact of higher capitalization rates. Our current divestment program of non-core assets, which is discussed in more detail later in the presentation, strengthens our portfolio by increasing our weighted average lease expiry or WALE, reduces near-term lease expiries and lowers overall CapEx obligations. It also allows us to ensure that our -- that the assets in our portfolio meet our commitment to improve the sustainability of our assets and our carbon emission targets. The divestments are also consistent with our strategy to focus on larger assets in core health care precincts leased on a long-term basis to leading health care operators. Turning to Page 14. Vital has a portfolio and income stream, which is highly diversified by location, tenant and health care use. We have consistently maintained a portfolio that is roughly 2/3 invested in the Australian market with 1/3 invested in New Zealand. Since 2013, Vital has reduced its reliance on its single largest tenant from 40% of income to 18% of income today. Our tenants include the 3 largest New Zealand operators and 6 of the top 10 in Australia. These top-tier operator relationships are critical in that they provide vital investors with diversity of income, strong covenants that provide security for that income and significant growth opportunities through the acquisition of additional assets, expansion of existing assets and new greenfield developments. Over the last 10 years, Vital has increased its WALE from 11.9 years to over 18.1 years post the current contracted divestments. Our strategy of providing strong in-house development capability to support the growth aspirations of our operator partners, coupled with locational focus on medical precincts, has resulted in our tenants making longer-term commitments to our hospitals and ambulatory care centers. With a long WALE and occupancy of 99%, the Vital portfolio is made up of high-quality health care assets in both Australia and New Zealand, ones that our health care partners are committed to operating from for decades to come. Turning to Page 15. In FY '23, the value of the Vital portfolio increased modestly to $3.4 billion. acquisitions of $163 million and a development spend of $192 million were offset by a net revaluation loss of $209 million, settled divestments of $62 million and a Forex loss of $43 million. Property revaluations included gains of circa $147 million related to rent increases, lease extensions and development margins, which partially offset the 47 basis points of capitalization rate softening since 30 June 2022. From $570 million 10 years ago to $3.4 billion at the end of FY '23, the increased scale of the business has allowed significant investment in the ANZ team. which is made up of over 55 health care specialists located in Auckland, Melbourne and Sydney with expertise in health care development, hospital operations, strategy, asset management and treasury. In addition to the growth of the portfolio over the past 10 years, Vital unitholders have also seen the net tangible value of vital assets increased from $0.98 to $2.96 per unit at the end of June 2023 with AFFO for the same period growing from $0.08 to over $0.11 per unit. Turning to Page 16. As indicated earlier in the presentation, divesting of noncore assets has been a significant focus for the business over the past number of months. It resulted in $100 million of asset sales in FY '23 at an 8.4% discount to book value with a further $55 million contracted unconditionally at a 7.1% discount. A further $100 million of noncore asset sales are targeted for FY '24 with several of those already being marketed. The result of these sales will be a stronger portfolio with a longer WALE, stronger tenant retention, lower CapEx and better ESG credentials. I will now turn the presentation over to Chris.

Thank you, Richard, and good morning all. The long-standing development strategy for Vital remains a key focus to create the next generation of assets with a focus on green buildings and the sustainability of our overall portfolio, deliver future earnings growth, work with key operating partners and delivering to their portfolio improvement and growth agendas and deliver to our strategy of precinct advantage. Importantly, execution of the development book remains on plan across the projects under construction. And whilst we remain cautious of overall market conditions, projects continue to be considered where they clearly meet our portfolio goals. This includes recent Board approval of brownfield developments at Bulwark Private Hospital in Wellington and Main Private Hospital in New South Wales. Slide 19 details a number of development milestones in FY '23, with the fund now having circa $545 million of projects, including fund-through projects under construction. Key project commencements included Ormiston Hospital in South Auckland, Playford Health Hub in Adelaide, continuation of staged development of Southeastern Private Hospital in Melbourne and RDX on the Gold Coast. Completions at Epworth Eastern in Melbourne, the fund's largest asset, major expansion and new projects of middle health facilities at Belmont, Brisbane and Abbotsford-Perth, along with expansion and refurbishment of Royston Hospital in Hawkes Bay. These projects were all completed on plan despite key challenges during the construction, such as the impact of COVID and natural disasters. Our disciplined approach to projects was reflected in the termination of the proposal to fund through the Tasman Medical Center in Hova as a result of adverse conditions in the construction market, whereby this project could not be delivered on plan in terms of cost or program. Across the balance of the $2 billion of potential projects over the long term, our strategy is to ensure we are shovel ready to capitalize on market opportunities as they arise. Project returns also need to be recalibrated on future projects as higher cost of capital impact project returns. Slides 20 and 21 highlight progress at key projects. These projects have key attributes of precinct advantage by Northwest as part of the precinct strategy for Vital, including collaboration with core existing health services or teaching institutions. Our design with high levels of sustainability credentials have in place or are looking to put in place governance structures to drive the overall success of the precincts in which they are located. Construction of these projects is also progressing well. RDX has reached the bottom of the 3-level basement well ahead of program. The structures at McArthur Health precinct in Sydney and Ormiston are now complete with facade installation and fit-out advancing, and the structure at Playford 2 is well advanced. These projects are representative of overall progress across the development book being in line with expectations, noting high levels of oversight and risk management from our highly experienced development team. I will now hand back to Aaron to outline the future focus for Vital.

Thanks, Chris. We have provided FY '24 distribution guidance today of at least $0.0975 per unit. This minimum being consistent with FY '23, noting that the Board may review guidance over the year once some earnings and expenses become clearer. Distributions are expected to remain at a conservative payout ratio of around 90%. We are seeking to enhance Vital's existing portfolio, primarily through the sale of noncore assets and ultimately use the funds for Vital's development pipeline. Vital has a significant committed and potential development pipeline. And as Chris mentioned, all of Vital's existing developments remain on track. We will also consider a variety of ways of funding new developments provided the developments and the funding add value for Vital's unitholders. Sustainability remains core to what we do in every part of our business. A key initiative this financial year will be our first TCFD report due by October 2024 and significant work has already been undertaken. Recent sales of health care assets, both Vital's and other parties has further demonstrated the attractiveness of health care assets. In SIPS, we have taken in FY '23 will continue to support earnings growth in future periods. We're now happy to take questions.

[Operator Instructions] Your first phone question comes from Nicholas Hill with Craig Investment Partners.

Just in terms of asset sales, how do you describe the level of inquiry for health care assets by at the moment? Has it sort of like falling off in the past 3 quarters or the past quarter of the year? Or are like other players like really starting to try and deploy capital?

Nicholas, it's Richard Roos here. Now we've been very encouraged by the level of inquiry with respect to the divested assets. And I'd say that, that inquiry has remained consistent, notwithstanding some of the challenges in the broader commercial market.

Would you say that, that sort of level of surprise is sort of like maybe you think perhaps we could get a few more assets out the door than the $100 million or $150 million previously indicated?

Look, I think we're constantly reassessing the number of assets and the overall value of assets that we're divesting depending on other opportunities that arise in the market.

Okay. And just looking at some of the additional committed developments, I noticed that the forecast net returns are a bit higher at around 5.9% to 6%. Why are these slightly higher than the project started previously? Are you able to get sort of sharper construction costs now that we are further into the downturn?

No. I think construction cost escalation continues in the market. So I'm not sure there's improved construction costs. It's a reflection of the cost of capital and the need to reflect that into the returns we derive from projects. So the sort of the higher cost of capital, high construction costs, that means we've got to be particular about what projects we're doing because, obviously, that also impacts business cases, but it's a need to drive higher returns from capital to forward.

Your next question comes from Arie Dekker with Jarden.

Just on divestments in terms of those that you're targeting for 24. Are you pretty comfortable you can continue to get within 5% to 10% in this case of FY '23 book values on that $100 million [indiscernible]?

Yes. Thanks, Arie. Again, I think we have every expectation that the discounts that would apply are going to be no more than what we currently have achieved in the market. And again, demand continues to be very robust for what we consider noncore assets, which I think reflects exceptionally favorably on our portfolio overall.

Yes. And then just turning to aged care. I mean you've got -- it's a small part of the portfolio. You've got 8 aged care assets are all individually pretty small in scale, including a couple of small ones in Western Australia. Some of those have seen a bit of a lift in cap rates, a reasonable list in cap rates in '23. Like with the business moving away from acquisitions to the development pipeline, what's sort of the intention of aged care assets because it does look a little bit like sort of a no man's land picking up also on your comments around wanting to invest in sort of scale assets as well.

Yes. Thanks, Ari. Just probably 2 parts to your question. The first part is some -- if you look at some of the aged care assets we are now, they're probably not assets we go out and acquire. So that's definitely ones that we might look to divest over the next 12 months. In terms of aged care overall, as a sector, we do have it in the mandate. It's been sitting there for some time, targeting around that 15% level is sort of the maximum. We're just a bit more cautious on the sector overall and want to make sure that we're partnering with the right operator that provides sufficient scale that's probably not for profit, so that they get the tax advantages. And so we're not rushing out in terms of aged care, but reviewing opportunities as and when they come up.

Okay. So you would have rolled out acquisitions in [indiscernible] and next year or 2?

We certainly wouldn't rule it out, particularly if yields that we can achieve on aged care reflect the relative risk position. So -- if you think about core hospitals, they should have a significantly lower market capitalization rate than aged care to reflect the relative risk. And so if that aligns with our cost of capital and our yield ore and look at acquiring.

Just on rental growth expectations for '24, I mean there is a decent lag sort of impact of inflation sort of flowing through in that. Could you just give a little bit of guidance on what you're sort of looking at for FY '24 like-for-like? I mean is 4.5% too high, but you would expect to be in the 4s.

Yes. I think based on the fact that as Michael indicated that the majority of our annual reviews are in the back half of the financial year, we expect very strong reviews to flow through the -- to flow through FY '24. And with 81% of the portfolio, either uncapped CPI or capped in some way, we're very confident that we're going to continue to benefit from what is still relatively high CPI numbers.

And then so taking that into account sort of specifically, is 4.5% sort of what you're targeting seem for '24?

Ari, the 4.8% that we talked about as the REIT review position that exists at 30 June versus 30 June [indiscernible] the in prior year. It's a pretty good guide to how we're thinking next year.

Good. And then just on the lease expiries, you've sort of -- it looks like you've pretty much done 2/3 of the 24 lease expiries through signed extensions or its of agreement. Are you committing to any upgrade expenditure on those renewals? If so, what sort of level? And also, what sort of level of rents have you negotiated on those renewables versus previous?

Yes. I'll answer that question generally. In general terms, renewal leasing for health care assets are very stable. So we achieved very low incentive programs. And we're able to hold rents at or very close to what they're currently at. So we're very comfortable with both the level of incentives being low and the high probability of renewals at existing rates.

And then just -- because I think it is sort of close to 4% of the book. Any meaningful upgrade expenditure committed as part of those FY '24 expiries?

No.

Your next question comes from Nick Mar with Macquarie.

Just following on from the development yields. Obviously, they're linked to sort of cost of capital and sort of on rates or other sort of benchmarks. Can you just talk through how that sort of ties into, I guess, rent per meter and hence affordability for dine. It doesn't seem like the profitability will be correlated things like bond yields. So how does it make sure that it's actually still viable for them when delevers go up?

Yes, Chris here. Really, the square meter rates are not really a major consideration for us that may be cross jet. But really, we're looking at the business case as a going concern perspective and looking at a rent to EBITDA metric which we're looking in the range of 40 to 50-odd percent is an indicative range and Brent. We're also looking at the strategic overlay of the business, et cetera, where it's going, what the development does to the asset more broadly and renewal, et cetera, and the future of the asset. But really, we're very conscious that these developments have to align with the overall performance of the asset and improvement of the assets. This is about enhancement of the assets. We're at a very minimum, maintaining the positioning of an asset in the market.

And Nick, just to add a little bit of color to that as well. I suppose the tenants are incentivized to continue to grow their business and starting to see some momentum in the private health insurance rates that they're achieving on procedures that are higher than previously. And quite often, you find that they're going to contribute money, their own money into these developments to stand alongside effectively the investment vital is making a brownfield expansion. So there are a number of factors that all play into that to deliver that the increased returns on -- rental returns on development at the moment.

And then just on the future development pipeline, there's a comment in there about exploring the sole funding options and coding joint venture. Could you just talk through how that would be beneficial for vital in the context of being externally managed vehicle that's simply being some with lower vital. So what's the sort of reasoning behind it and how can be official?

Yes. So the basic thought process goes like this, that currently, we don't really have access to Australian capital. So the deals of superannuation funding, et cetera, that's sitting in Australia. So one of the ways that we might access that is through the PA funding some developments. And the benefit to Vital could be few fold and nothing has been committed to or discussed yet. But we get first-mover advantage in some places. So we get to kick off developments that may not otherwise be able to commit. We don't have to put everything on Vital's balance sheet. We still get access to premium quality new builds. And the final element is really we've built up a substantial amount of strategic land sitting on balance sheet. So we don't want that sitting there indefinitely capitalizing costs, et cetera. So being able to activate those have some long-term strategic benefits as well.

Okay. And then lastly, it Michael, could you just talk through sort of the performance, they didn't seem to go down despite the devaluation and sort of NTA had of you. Can you just talk through the calculation behind that.

Yes, sure, Nick. So the way that the incentive fee works for a year in which a decrease in the net tangible asset position arises. Is it that set to zero as opposed to decreasing the previous net tangible asset increases. What it does mean though that in subsequent years that that decrease needs to be made in good while you're not seeing a significant change in the level of incentive fee for this year, subsequent years, incentive fee will be much less because the $209 million of devaluations that have been reported, need to be made put.

Follow up to one [indiscernible]

[indiscernible]

Sorry, I'm just saying isn't the calculation sort of 3-year rolling still. So you just count a deal rather than a negative for the situation.

That is correct. Yes.

Your next question comes from Rohan Koreman-Smit with Forsyth Barr.

Just a couple of quick questions for me. First one, I was under the impression that the cap on the rent reviews was 4%, and it was on the majority of the leases, but it looks like you did a 4.9% on your CPI reviews. Can you just help me with that one?

Yes. So the detail we get before was really a guide. We did say that there's some complications in applying that guy. And it does depend on which specific reps come up and how much at that point in time.

Yes. So the overall number, and we can get into some of the math maybe off-line, but 81% of our portfolio is linked to CPI of only which 60% has a cap. And that cap is weighted at 3.5%. So the balance is uncapped and in some cases, actually have multipliers on CPI. So the higher CPI is the greater the Vital unitholders benefit.

And then just kind of looping back to the other development funding opportunities. If you look at your 2 spend on all your developments, you've got $337 million to go. You've got $80 million of headroom and you've got $155 million of asset sales either in progress or targeted to be sold. That kind of square away this 2 spins -- leaves very little, I guess, funding in total. Are we to assume that these alternate development funding options are kind of relatively well advanced and you'll [indiscernible] prison some things pretty shortly, if you are to kind of commit to more developments.

So no, what you can take away is that it's really for future developments in advance of what's currently committed. So if we look to bring on stream some of that $200 million of strategic land underway, I think the bigger takeaway is that we don't necessarily have to raise equity or expand debt. That's really the core position we're trying to get out to the market.

Perfect. And then just on the flip side of it, your gearing targets. I mean on my numbers, you're committed to be kind of at the high 30s, maybe being on 40. -- that's typically being kind of the top end of your range. Can you kind of talk to views on gearing going forward? And if the kind of historical kind of numbers are still what you're thinking about?

Yes.so it's Michael here. So you'll understand pretty much okay in terms of how you're looking at it. That's something that we're pretty comfortable with as a group. I'd say traditional 30% to 45% mark. We keep a close launch on where valuation outcomes might move in the broader market. But we're also pretty comforted by the strong metal growth coming through in the portfolio and the impact that, that does on alleviating or adding to the valuation outcome. So I think I mentioned earlier that that added over $100 million, $120 million of the valuation outcomes this year. So that's a nice tail we start to see about gearing and where that ends up over time.

And then final one, just on the tax position. It kind of came in a bit stronger than what I was forecasting. Are you able to just talk through kind of your expectations for the tax rate going forward and kind of mechanisms behind that?

Sure. So this -- let's break it down into the components. So on a medium-term basis, we expect our tax rate to be around that 20%, low 20% mark on operating income. There's probably 3 key drivers that has contributed to current-year result. So firstly, the acquisitions that we've made in New Zealand over the last 12, 18 months, have traditionally been financed by equity as opposed to debt. So the equity that we've raised in the local market has been spent on those types of acquisitions, actual hedge reasons and all those sorts of things. So the first reason. Second reason is that interest rate swaps, happened to have been domiciled in New Zealand. They're in the money at the moment. And the forcing taxi clean come in New Zealand. We're working our way through the requirements to adjust that and to restructure those so that, that isn't the case. -- that the hedge Australian dollar-denominated debt. So it's a legacy issue more than anything else that we're fixing. And thirdly, it's around the structural nature of how Vitaliano's assets in Australia. You'll remember in the proposal that we put up some time ago was seeking to address that and the tax implications of that. So that's a structural theme that exists in this vehicle that we can't solve at this point in time.

Your next question comes from Craig Tyson with ANZ Investments.

And yes, look, apologies, I might have missed this at the start of the call, which I missed a few distractions here this morning,

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Ladies and gentlemen, we have temporarily lost connection with the lead the conference will resume shortly. Your first question comes from Shane Solly with Harbour Asset Management. What interest costs being assumed in guidance. Ladies and gentlemen, we have still lost connection with the speaker line. Please continue to hold, and the conference will resume shortly. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.