Vital Infrastructure Property Trust (VITLUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties Real Estate Investment Trust Fourth Quarter 2021 Results Conference Call. [Operator Instructions] Also note that the call is being recorded on March 15, 2022. And I would like to turn the conference over to Paul Dalla Lana, CEO. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I appreciate you joining us today. I'm joined by Shailen Chande, the REIT's Chief Financial Officer. Together, we are pleased to share our results for the fourth quarter of 2021. But first, I'd like to point out that during today's call, we may make forward-looking statements as defined in the Canadian securities laws. While such forward-looking statements reflect management's expectations regarding our business plans and future results, they are necessarily based on assumptions that are subject to uncertainties and risks, which could cause actual results to differ materially. We direct all of you to the risk factors outlined in our public filings. The REIT's high quality and defensive $9.2 billion portfolio delivered record financial results, highlighted by 2.2% and 9% AFFO and net asset value per unit year-over-year growth, respectively. While also reducing proportionate leverage by 840 basis points. Underpinning these results was a 16.3% increase in fee-bearing capital, resulting in a 60% increase in proportionate asset management fees and 3.6% constant currency same-property NOI growth. While the social and economic disruption caused by COVID-19 fades from memory, demographic trends and the backlog built during global lockdowns are expected to drive elevated demand for health care services and health care real estate over the medium and long term. Demand for health care real estate has continued to intensify, as demonstrated by the $594 million of investment property revaluation gains in our portfolio in 2021, as the REIT's weighted average capitalization rate compressed by 43 basis points to 5.2%. The increase is being driven by capital flows into the sector as a result of the relative outperformance vis-a-vis typical commercial asset classes, and an acknowledgment of the stability and infrastructure-like characteristics offered by long weighted average lease term, care-focused health care real estate. Despite the fair value gain recorded in the year, health care real estate continues to trade at a discount to core commercial asset classes, which we believe will support continued cap rate compression as health care real estate continues its migration into the mainstream. The REIT also notes, the increased geopolitical risks driven by the Russia-Ukraine conflict. And despite the organization's exposure to European markets, the impact at this point has been limited with credit and equity markets open and accessible and no evidence of disruption in acquisition markets. Nonetheless, the REIT is moving to derisk its operations by accelerating 2022 debt maturities and is already either refinanced or is in advanced discussions to refinance approximately 70% of its 2022 maturities. Moreover, the changing macroeconomic environment, including rising inflation and interest rates has highlighted the importance of annual rent indexation. Factoring in fixed contractual increases and inflation-linked caps and collars, the REIT would expect rent growth above inflation at global CPI of 2%. In this context of the current inflationary environment with CPI hovering around 5%, the REIT's contractual rents would be expected to increase by almost 70% of this increased inflation. In the event of a wider conflict, the REIT has mitigants in place to ensure execution of key 2022 strategic priorities that will minimize the impact on its global operations. The instability caused by this conflict across multiple facets of the global economy further highlights the stability of cure-based health care real estate as a haven for investors due to strong returns driven by high occupancy and long credit supportive uses. Before discussing the results of the year, I thought I would provide some perspective on our business in this moment. Today, NorthWest is in the best position in its history, with Vital Trust trading near all-time highs and asset management platform just reaching its stride and the strongest balance sheet that it's ever had. Post-quarter end, the REIT made substantial progress on key initiatives, including full completion of our U.K. value creation initiatives, generating approximately $200 million of incremental value and entering into agreements to refinance the portfolio with a new GBP 265 million facility, all of which positions the REIT to execute on its plan, the U.K. JV in the second quarter of this year. A new $2.2 billion Australian JV expansion that builds upon our successful Australian core hospital JV with GIC and increases the total commitment in that fund to more than $5.6 billion. And after a year of extensive diligence, the REIT has agreed to acquire a $765 million portfolio of cure-focused health care assets located in the United States. This high-quality portfolio opens 27 assets located in 10 states with a mix of hospitals, ambulatory and outpatient clinics and medical office buildings akin to our current portfolio. The portfolio also has low management intensity with a long way out and is an ideal starting point for our future growth in the U.S. And building on our previously announced precinct development focus, the REIT has launched a health care precinct development fund to focus on a growing pipeline that includes opportunities at the intersection of health care, research and education. An example of this type of development is the recent acquisition in Q4 of the Epworth Geelong & ELIM project. In particular, these types of development offer significant long-term growth in multi phases with leading partners, in this case, Epworth and a potential project of almost 1.2 million square feet, which will create a world-class innovation, education and health care precinct in suburban Melbourne. Additional to this, we see opportunities across Australia and Canada in the total precinct pipeline -- development pipeline approaching $2 billion. Also in 2021, we saw significant deleveraging driven by $580 million of equity issuance, which includes both Series E and F convertible debenture conversions and $447 million of equity, new equity consolidated leverage decreasing by 610 basis points to 41.9%, in line with investment grade metrics. Upon completion of the U.S. acquisition, we will temporarily increase this leverage, noting that all formation of both the U.K. JVs and U.S. co-investment funds with existing portfolio seeding those platforms, leverage will decrease again by a further 600 basis points to approximately 36%. Pro forma proportionate leverage is expected to decrease by almost 400 basis points from Q4 2021 and a starting point of 48.5%. For the year, our results were in line with our expectations, noting the above deleveraging, including annualized quarterly adjusted funds from operations of $0.95 per unit on a constant currency and leverage-neutral basis, implying a payout ratio of 84%. Earnings accretion from recent investment and financing activities was as expected, although foreign exchange movements saw the Canadian dollar appreciate by approximately 4.6% over the last year relative to the REIT's average foreign currency exposure, which continues to slow earnings growth. Net asset value also increased by 17% year-over-year to $15.47 per unit, a gain on a constant currency basis, driven by an increased value in the REIT's asset management platform and strong property valuation gains on a constant currency basis. Over the past 12 months, we estimate the increased strength of the Canadian dollar has reduced annualized AFFO by approximately $0.04 per unit and net asset value by $1. In terms of liquidity, the REIT is well positioned with $100 million of existing liquidity. This is expected to exceed $300 million as the REIT cedes its current U.K. portfolio and future U.S. portfolio into new funds this year. Operationally, our results reflected those expected from an expanded 197 property, $9.2 billion defensive health care infrastructure portfolio, mostly having long-term inflation index leases with leading health care operators. The strategy is reflected in the REIT's 2020 constant currency cash -- sorry, 2021 constant currency cash recurring SPNOI growth of 3.6%, again, largely delivered by a 97% occupied, substantially rent index portfolio with a weighted average lease term of almost 15 years. In all regards, a highly defensive portfolio. Segmentally, I note the following. In Brazil, we're on plan with steady 100% occupancy and continued strong constant currency cash SPNOI growth of 4.8%. Operationally, we note that the REIT's major tenant Rede D'Or continues to deliver exceptionally strong results and is among Brazil's top 10 companies by market capitalization. In Canada, we were also on plan, continuing solid performance with constant cash recurring SPNOI growth of 1.2% and portfolio occupancy remaining stable at 91%. During the year, the REIT completed 257,000 square feet of renewal leasing at rates relatively in line with expiring rents. We continue to focus on regional sustainability initiatives and our ambulatory care and life sciences precinct development initiatives are gaining momentum and expected to be highly accretive. In Europe, we are on plan and performing as expected with constant currency SPNOI growth of 1.1% and a stable 97.4% occupancy. We continue to find good investment opportunities in Europe, allowing us not only to build scale and critical mass in our existing regions, but also to pursue new opportunities in adjacent markets. And in Australia, our largest market, occupancy remained steady over the year at 99% and delivered constant currency SPNOI growth of 2.8% with a weighted average lease term of almost 17 years. At Vital, the business reported similar results with SPNOI growth of 5.5%, driven by record inflation again in the year and occupancy stable at 98% with a weighted average lease term of more than 18 years. Vital's weighted average cap rate also compressed by 66 basis points, driving significant fair value gains and resulting in an incentive fee exceeding $17 million for the REIT's asset manager, a 222% increase from the prior period. I am pleased with the progress made during the year, which advanced the REIT's long-term strategic objectives and produced solid operating results. With deep relationships, best-in-class regional operating platforms and strong access to both public and private capital, the REIT is just beginning to hit its stride in terms of unlocking the full potential of its asset management business, and becoming a global leader in health care real estate. I'll now ask the operator to open up the call for questions.

[Operator Instructions] And your first question will be from Joanne Chen at BMO Capital Markets.

Congrats on the solid end for the year. Also, just also on your entry in the U.S., I guess just on that front first, what's the pipeline looking like for further opportunities in the U.S. I guess, kind of over the near-term?

Yes. That's a fantastic question. I think in the near term, we're very focused on bringing capital partner into the existing investment. So that's probably our highest priority. But clearly, the U.S. is the largest health care and health care real estate market in the world. So there's a very significant opportunity set happening, and we've been working hard over the last year to identify that. So certainly, we have a decent pipeline of opportunities, but nothing imminently planned in terms of major transactions.

Got it. Would it be in the markets that you're already in? Or are you looking at additional ones as well?

Yes. I think I would always refer back to sort of our core strategy. So this is -- the thing we like about this portfolio, obviously, it's highly diversified, both by market and operator and in fact, asset type. So it kind of makes a pretty wide imprint across possibilities. But I think we see that as a good starting point and certainly broadly in that cure health care space, which we remain focused, but I'd call out sort of our sort of global priorities of health care precincts or campuses or academic medical centers in U.S. terminology as well as ambulatory and outpatient as being key themes for us. And we're calling that the MOB space in the U.S. has a heavy degree of ambulatory and outpatient sort of characteristics to it. So I think as we think about MOBs and up into ambulatory, we look a little bit more to geographic concentration opportunities over time. And certainly, we had some key markets. And when we get into health care precincts and academic medical center is such a pretty well-known map of the top 20 of those places in the U.S. and those would all be on our list to be looking at over time.

Got it. Okay. And I guess just on the organic growth front, it was encouraging to see the big bounce back in Australia. But could you maybe provide some color on the European portfolio? What were some of the factors that perhaps drove that a little bit lower relative to other markets?

Yes. I think maybe -- well, I might defer to Shailen because I think there's some nuance in the numbers through our U.K. business and the final stabilization of things there. And then we could speak more regionally about CPI and the structure of our leases in different places.

Great. Thanks, Paul. So over the course of 2021, you would have seen about 1% or 1.1% of year-over-year SPNOI growth. That's probably muted by the tune of about 120 basis points or so by some of the value creation activities we undertook in the U.K. where we ended up regearing some of the leases and specifically in respect of the Aspen portfolio that we acquired as we restructured and replaced some of those tenancies with higher quality tenancies. And ultimately embarks on our $200 million of value creation. We ended up regearing some of the leases, which impacted SPNOI growth. So excluding that kind of, call it, nonrecurring asset level value creation initiative, you would have seen about 2% -- 2.3% of year-over-year SPNOI growth in Europe, including the U.K., which is in line with our longer-term expectations. And maybe I'll defer to Paul on some of the more broader macro in Europe where we see significant growth in the pipe.

Yes. So I think the majority of our -- we really have 2 types of asset classes in Europe that's long-term acute and outpatient type facilities with long-term leases and full indexation that ranges from sort of 70% in CPI to RPI in the U.K., which is probably somewhere between 75 and 100 basis points above U.K. CPI. So a bit of a mix in that pot of long-term index leases, and then we have our MOB portfolio, which is broadly centered and concentrated around Berlin, which is a market that's enjoying pretty strong rental growth, just given some of its own characteristics. So I think that 2.3 to -- up to 3 range, given that combination of activities is sort of a continuing European target and really the results this quarter had that onetime adjustment that Shailen spoke of.

Got it. No, that's really helpful. And I guess, maybe switching gears more so back to Canada. You've seen a lot of headwinds where there's a very strong demand for life science -- with life sciences in Canada and the short supply. Would you have any interest to further invest in this area kind of in 2022? And I guess within Canada, would there be any particular markets that you would be focused on?

Yes. I mean, as you know, one of our most core strategies is the precinct strategy. So we had intersection of health care and research and education. So for sure, we're focused on the good places that those things happen right now, and we have assets in those precincts like our 149 College asset here in Toronto in the MaRS Discovery District and others. So we're very focused on looking to appropriately to grow and evolve that. You're right that probably the dollar demand for life sciences is very strong. I'm not sure that the tenant demand is so strong. So we're quite focused on making sure our projects are sustainable and have the long-term characteristics set that we like and need. But we did enter the life sciences market here with our acquisition in Quebec in 2021 and spending a good amount of time thinking about it. And I expect it will have a number of things to do in 2022 in our current pipe here in Canada. And we like the space, of course. In Australia, where we're very active. We have a significant pipeline there. Part of the reason for our leaning in to focus on a new precinct-oriented development fund or JV as it were. And we think there's a huge opportunity set there in front of us. We already are heavily invested in health care precincts in Australia with our existing Vital and GIC JVs and we'll look to redouble that sort of investment over the next little while. We think we have a fantastic opportunity set there. So I think that will continue to be a theme for us as we sort of fully leg out this precinct strategy in these markets and with the possibility of looking in Europe, although noting that the concentrations of health care precincts are slightly different in Europe and have a slightly different construct than the ones that we're focused on for the moment in the Americas and in Australasia.

Got it. Okay. That's helpful. Just maybe one last one for me. Would there be any updates that you can provide on Australian Unity Healthcare Property Trust or none at this time?

No, I think we now own just under 18% of Australian Unity, and so in our partnership with GIC. And clearly, we're considering actively all of our next steps there.

Next question will be from Sairam Srinivas at Cormark.

Congratulations on both the quarter as well as the initiatives [ fourth ] quarter. Just heading into Australia, I just had a question on the Australian JV expansion. Have you already identified the assets for that investment? And if you can just comment on the time line there?

Yes. The answer is we do have a significant pipe in Australia for the core JV. And so that was the rationale behind it. And I would just point to the current JV, which we see AUD 3.7 billion and invested between just under 4 years. So certainly, we expect to meet or exceed that pacing in the current moment there. So yes, quite an active pipeline and really good visibility into deployment there. But again, we have already lived through $3.7 billion over the last 4 years of GIC successfully. And so that's a pretty good track record, I think.

Definitely. Just probably moving back to the U.S., congratulations on that acquisition. In terms of -- when you guys set up in Australia, you ended up establishing an entire platform there. Can you talk about the importance of having the local platform as well as your plans for the U.S. in that context?

Yes, that's a great question. So I think 2 answers. I think we have a long history as a firm in going into new markets and building strong local platforms. And so I would expect that over time, we'll see that in our U.S. expansion initiatives. And so we expect some announcements coming up around people and platform and related things there. That said, we have a very strong operational business here based in Toronto with all of our regional offices that offer a lot of corporate and relative support. So I think we're quite comfortable to get started. And again, calling out that this portfolio and particularly is not overly management intensive. Again, it's got relatively long-term leases and a relatively small number of tenants. So from the operational ownership perspective, it's manageable even within the context of our current business. And I think where we're focusing on the team is at the asset management and more growth-oriented levels so that we can leg out that part of our exercise. So a comfortable starting point today and long history here in owning and operating these types of buildings in similar markets, so capable to leverage that. And then from there, obviously, we'll look to have a more dedicated U.S. teams to grow the business in time.

That makes a lot of sense, Paul. And probably my final question is regarding the Global Healthcare Precinct Fund. Can you give us some color on your thought process there and the kind of investments you're looking onto that fund related to kind of the other geographic specific investment plans you already have?

Yes. I think that the thought process is really that there's more development and longer term than what we have. And we already have a perpetual life one. So to make it longer term than forever, it seems interesting. But it's really that nexus of development and then converting into long-term ownership that we're focused on. And so -- and we see large multistage developments happening over time as sort of the key type of initiatives. So it's nuanced from the standpoint that it's more development than IPP and we'll have an even longer sort of investment time line to it.

Next question will be from Jake Stivaletti at CIBC.

Congrats on the quarter. I just have a few quick questions. In regards to the Australian JV, what is the expected timing of full capital deployment? And is there any possible fund expansion with new partners?

Yes. So the Australian JV is exclusively with GIC. I think we were sort of building up to that, but the actual parameters are the same as our existing JV, which is roughly 4 years and then a couple of extensions after that in paper, I think we expect to outperform that as we did in the original JV. So hard to talk about pacing beyond that, but certainly, more than likely, all of it within 4 years, which has been the history. A big focus of our business is adding and growing to our set of investor relations. And so I would expect that when we get into the precinct fund, for example, that we're likely to have additional investors or 1 or 2 initial investors in there given that the characteristics of that fund are by particular and then it's big and it's long term, and it has development. So it's a particular audience there, but we've spent a lot of time landscaping that market. So I think for 2022, more broadly, even outside of Australia, our focus continues to be on broadening out our capital partner relationships with a number of these initiatives, and we expect that we'll have good success both in the near term through the U.K. in the U.S. and in some of the other new initiatives that we're working on. So it is a priority for the business. And that said, what I would call out is that we're very proud to be a big and long-term partner of GIC's, one of the biggest real estate investors in the world. And certainly, we've been able to work with them both in Australia and Europe in very meaningful ways. So we've never discount the opportunity to grow with an excellent long-term partner like GIC.

And on the topic of the precinct fund, are there any specific regions you want to build on or perhaps something you want to expand into?

As I said, I think we're quite focused on our existing markets. I mean -- so when we think about Australia, I mean, again, it's a market not dissimilar from Canada in terms of the way the country is built up and the number of large cities. And so there's quite an established list of, let's say, 50 health care precincts in that market. And so we'll be focused certainly in the top half of those very extensively. And so we have quite an evolved view of what that looks like today. And so that's quite clear in our minds, I guess. Maybe when we think about Canada, I'm not sure if in the markets that we're looking at, it'd be probably a little bit more tailored and we would look to bring partners in on specific opportunities as opposed to a broader continuum of opportunities right now, given size and given some of their unique characteristics. So -- and of course, we're focused here in the major markets in Canada in that constellation of health care research and education. So there's a very defined opportunity set that we're focused on in any event in the Canadian market. So I'd start there. I guess over time, as we grow and evolve in the U.S., there'll be many opportunities there, but that's, I think, further out for 2022 at this point.

Great. And speaking about the U.S., how do you intend to finance the equity portion of the acquisition?

Yes, I can speak to that, Jake. Thank you. Yes, so the -- I mean, as noted, we're -- we have a 55% LTV asset-level finance facility against the portfolio and the equity portion of the REIT's contribution to finance the portfolio in the initial term will be funded on balance sheet with existing liquidity and new corporate facilities. And as Paul has alluded to, longer term and by the end of 2022, we expect to have the U.S. co-investment partner on the portfolio to be able to recycle that equity and meet our target leverage objectives.

Great. And for target leverage, what's the stabilized target range?

Yes. So we've been guiding to 45% to 50% proportionate loan-to-value. I'd call out that we're in that range right now. We'll take slightly above that range with the U.S. acquisition. And then post completion of the U.K. JV and bringing on the U.S. co-investment partner will be at the low end of that range.

Next question will be from Tal Woolley at National Bank.

Can -- Paul, can you just talk a bit about where the U.S. portfolio transaction came from, how you sourced it?

Yes, I can. So it was an institutional vendor and a marketed process in the U.S. So that, I think, sort of was the front door. I think over the course of the year, a good bit of 2021. We've been working through the asset level things with our team and some core relationships there in the U.S. that we may speak to in the near term. So we've had quite a full team of U.S. coverage for about a better part of 2021. And I guess as with all things, our journey there has been really getting our mind around the for-profit segment of health care, which is, again, a little bit more entrepreneurial than we've seen in other markets that we're in today. So that's been quite a journey, and we've gotten quite comfortable with how that works and what the nuances are in comparison to the businesses that we already run today. So I think that's been the excess, have lots of between advisers and related support people we have lots of good advice in getting through this. And I think we've found a high degree of comfort in being able to underwrite the business and get our arms around the opportunities. So that's been our focus through it, and it was as you probably become aware, it's a very liquid and competitive market. So clearly, our ability to work through that efficiently and deliver certainty to the institutional vendors here was a differentiating factor as we got this deal over the line. So it's been a big initiative, but comfortably in place today.

And in terms of like the partnership model for the U.S., are you looking to utilize like some of your existing relationships given that you guys have had a good working history and some success? Or are you looking to bring in someone new just because this market is kind of different?

I wouldn't rule anything out at this point, Tal. I think we're still formulating that. But I think this portfolio offers perhaps a discrete investment opportunity versus maybe a broader or bigger strategy as a starting point. And so we're open to that, whereas some of the other things we've done in our business is really cut across the market, and we were looking for broader sort of commitments and more programmatic type investments. So that's one of the nice things about this investment as it stands on its own. It's a good investment, and that's a little bit why we're straddling the line perhaps between co-invest and JV to use own -- our model. So I think the good news is there's lots of potentially interested partners and so the portfolios I think, highly attractive to a broad range of institutional investors. So we expect to move through this quite quickly, and given now that we're clearing cover on this and have the ability to talk directly. So I think this one could open up the possibility for some different participants. But again, as I said, I wouldn't rule out and our business model is built heavily on existing partners and growing existing relationships. So this point, it's a little open, so I can't be more specific, but I think there are a number of possibilities here just given the construct and the liquidity in the market and the demand for these types of assets and investments, and we see a very attractive sort of risk return profile in that sort of core plus type range, which is, again, slightly different than some of our other strategies, which are very core and very long term.

Okay. And you mentioned in your remarks and in the presentation that the acquisition cap rates are about 100 basis points higher in the U.S. than they are in some of the other jurisdictions where you operate. In your work here, can you sort of talk to us just a bit about why you think those acquisition cap rates are a little bit higher? And if like how closable do you think is that gap in the U.S. versus the other jurisdictions over time? Or should we be looking for that at all?

Yes, I would say there are some nuances in the U.S. So certainly, at the MOB part of the portfolio, very, very liquid defined market. We have plus $10 billion transactions in the market today. As an example of the type of volume that happens here, I think quite a well-understood market and probably pretty proximate to the other things that we see around the world, with cap rates now for the best quality stuff, certainly in the mid- to low 4s as an example, it's not in this portfolio exactly, but that's probably comparable across a lot of markets that we see in the MOB space. I think where maybe some of the nuances is in the ambulatory and outpatient space where we're seeing slightly wider cap rates to that, probably 100 basis points above that in general, maybe 150 if you get into some acute care and depending on the covenants and related things associated with it. And that's probably where the U.S. market is more evolved both in terms of the size and scale of those asset classes as well as sort of the precision that the markets are bringing to their thinking there. And so we would see that probably as the biggest difference to other markets that we're in, where large acute care space is very well bid and might be at the most pointy end of things. I think in the U.S., there's a continuum of cap rates across the nature of the hospital and the nature of the covenants. And so that market is quite evolved. And that's where we've spent our time making sure that we understood that combination of things in order to get comfortable with pricing. And that's how we think about it, broadly speaking, sort of broadly MOBs around 5 in this portfolio and outpatient and ambulatory stuff in the low 6s that it kind of gets into the blend that we've talked about, and that's where we've ended up.

Okay. And then just on the U.K. joint venture, you've sort of been trying to signal getting this one across the line for the past year. Is there any particular like hitch or something in a deal that's making it difficult right now? Or is this -- this is just the process? I'm just trying to get a feel for what it's like to close one of these things.

Yes. So I mean the real-time driver for us has been around the value creation initiative through onboarding Aspen and splitting the property in OpCo, which we did in the fourth quarter of last year. So I guess as we were leaning into the U.K. JV and some of the early messages, probably hadn't anticipated that. And that exercise, obviously, we've decided to do our balance sheet at 100% and take the benefit of that. So that's been the real timing delay. I think bringing it from there till now, it's a pretty traditional process. You're right. It takes a little bit longer to find a long-term programmatic partner. So we're in the short strokes of ironing out all of those things now, and we take the appropriate amount of time to get that as in [ T's ] dotted I would just say. And that's -- recalling that the goal here is the GBP 1.5 billion long-term evergreen JV. So there's a lot to do to get that in the same way that it took us a good amount of time to get our first Australian core JV set up and established. So I wouldn't say there's anything particularly complicated about that other than we chose to sort of pause and come back with the value creation done and start with a clean starting point. So that's really what's happened for us, and that's by design. And so we're quite comfortable with where we are in the process, and now bringing to conclusion in the next short while. Obviously, in between now and then, we've got permanent financing in place. So that's another big step along the way in that financing [ bringing ] supports broadly speaking, the JV as it goes forward and gives us a good tool. So that's another significant milestone that's come post year-end and just as we lean in to finalize the picture.

Okay. And then just a couple of questions for Shailen here. Unsecured market, still a goal for this year or we'll see what happens?

Yes. I think we've talked about getting our leverage metrics to those -- I mean, into that range for unsecured. And I'd say, I mean, even including this current U.S. transaction that's going to temporarily increase leverage, our debt metrics are very much tracking when we look through to the U.K. and -- I mean the U.K. JV and our U.S. co-investment partners. So our metrics are tracking. I think it's really, as I mentioned before, around -- I mean the question now is really word is unsecured fit within our portfolio, recognizing the broader REIT strategies evolving to become a little bit more capital light. And really, I'd say the real potential for unsecured is at our JV levels are at our portfolio levels. So we look at a portfolio like Vital that scaled quite substantially that has opportunities in that market. We look at the U.K. as -- I mean in the context of its JV strategy, which could also have a debt capital market solution. So I think it's really -- I mean it's a little bit nuanced right now in terms of where unsecured fits within the market, but our leverage objectives remain unchanged to ensure that we have that option should we choose to. We also note that market, in general, has priced out a little bit wider over the recent weeks given some of the geopolitical instability and the relative price, if you may, may not be as attractive at a global level.

Got it. And then just lastly, Shailen, getting to the tail end of my forecast on the income statement, cash taxes and discontinued ops, just wondering -- give us -- I know this is difficult at the start of the year and the changes in the portfolio, but there a decent placeholder number we could use for cash taxes. And I just don't know what the -- what we can expect to run down on the discontinued ops piece to be.

Yes. So I'll start with discontinued ops first. And really, over the last 12 months, our discontinued operations have really comprised of, I mean, the in and the out related to the Aspen Healthcare Group, when we made that acquisition and then sold it completely down within 2 quarters. So I don't -- I mean, there's no real rundown on that. That transaction is fully complete. So you won't see anything flow through there in 2022. In terms of cash taxes, it is a little bit nuanced. I would say if you look at 2021 holistically, and straight line that 2021 number across 2022 for your forecast, that's probably fair. I know there's a bit of quarter-to-quarterly volatility, but it's really driven by the timing of accruals and the timing of some of the more nuanced -- I mean, nuanced tax treatment in regions. But I'd say if you straight-line that over the course of the year, you're fine. But we can go off-line and talk about that in a little bit more detail if you'd like.

Next question will be from Mario Saric at Scotiabank.

Maybe just sticking to the U.S. portfolio expansion, what's kind of -- I think it was noted about what 90% of the income is indexed. What's been the kind of rent growth in the portfolio over the past couple of years in terms of underwriting? What type of rent growth are you looking for going forward?

Yes. Thanks. Mario, it's Paul. I'll take that. By and large, the -- this portfolio has fixed rent steps at around 2.5% built in. So the vast majority of those are contractual. So it's not precisely indexed to CPI, but more contractual. And I think that's a characteristic that we see more commonly in the U.S. than perhaps some of our existing markets. but certainly prevalence in this portfolio. So it's quite sort of built in, I guess, is the short answer.

Got it. Perfect. Okay. And then within the portfolio, is there any value attributable to kind of development or redevelopment upside? Or is the valuation essentially stabilized valuation?

Yes. So again, this portfolio has a small number of development projects. I'm going to go from memory here, but I'll say 3 and about somewhere around to USD 25 million to USD 30 million of built-in expansion. They're sort of expected to happen in the relatively near term, and they are also quite contracted and come in. We might just go off-line there around those final numbers or Shailen, if you have those?

No, I don't have those off hand, but we will follow up. I think Mario, one point I'd add is that 5.5% cap rate that we quote is on in place.

Right. Okay. And then what would the average debt cost to be on the property level debt?

Yes, say 2%, 2.75% to 2.90%, somewhere in there, all in.

And the term for that?

Yes. So we've taken -- I mean, similar to what we did in the U.K. where we entered into a market, we are seeking a co-investment partner or a long-term JV partner in the case of the U.K. We've kept the debt structure relatively flexible for the time being. So we put on a 1-year facility pricing inside of 3%, so at about 2.9% floating. Swapping that out would bring us in to about 3.5%, if we put on a full 1-year swap there. But the intention would be to bring in our co-investment partner and then seek ultimately, their long-term leverage targets and put in the more long-term finance at that point. I'd call out the liquidity around the MOB market as well as some of the -- I mean [indiscernible] some of the ambulatory care assets is highly liquid. And then when we look at the acute care hospitals that we're financing in the portfolio as well, we see lots of liquidity.

Yes. And so the target, Mario, sort of on a 5-year facility would be in the low 3s right now.

Correct.

[ 3% to 3.25% ], which is what we'd expect to do when we finalized the equity part of the transaction.

Right. Perfect. Okay. That's what I was looking for. So call it a 250-ish kind of spread to acquisition cap rate?

Exactly. And -- very low, below the line, right? So it's virtually all in place and very limited cost below the line.

Okay. Paul, your comment on kind of bringing a JV partner in it, it sounded like the partner that you're thinking of bringing any specific to the transaction as opposed to kind of a springboard partner for a much bigger kind of U.S. JV fund, if I can call it that. Is that a fair assessment?

I might just bring some nuance to that, so I don't want to overread into this, Mario. We're having wide-ranging discussions, but we're in clearly some specific ones. What I would say is that I think the ideal partner for us is always somebody that we can do more with over time. I think what might be different about this is this might be a discrete opportunity set as opposed to a large programmatic one. So that's maybe the nuance that I would bring to that, whether or not that's -- and we would always hope that the partner has the willingness and capacity to do other bigger things over time. So that's maybe the precision I bring to that comment.

Got it. And just also, what would make this transaction kind of discrete in your terms?

Yes. I think it's scale, it's diversification. And again, it's big enough to stand on its own. I think that would be the way we would think about it. And I think we've had a lot of feedback in that direction. Of course, the ability to grow over time and our more sort of overarching strategies, supplies. And so we clearly would like to see something that could link to that, but it may not be as direct as a large programmatic JV to get started. It also is a getting started transaction for us, so we're aware of that. And I think we approach it with that flexibility, maybe [ sort of makes sense ].

Okay. And then I guess in terms of deciding upon this portfolio given the market liquidity which you highlighted presumably, there is other opportunities kind of as the starter portfolio. Like what was it in particular, if you have to point to one thing more that in particular, that really attracted this portfolio over others in terms of deciding that this was the first one to go in?

Yes. So we like the diversification of the portfolio and really that being across that continuum of care sort of subsegments. So we like that a lot. We're investors in all of these categories. We like the fact that it was relatively management intensive. So even the MOBs tend to have large single tenants and are not particularly multi-tenant driven MOBs there are a couple, but as a starting point, again, acknowledging from the earlier comments around platform and intensity, which we know very well. We like those attributes. And so -- and we felt that, that mix of returns, obviously, combined was attractive. And so I think it was those 3 things that led us in this direction. We looked at many billions of dollars of transactions in the U.S. over the course of the year and had a lot of chance to think about things. And of course, it also gave us the scale to get started and focus, which is helpful versus single asset sort of things.

Perfect. Okay. That makes sense. And then I guess my last question or area of focus part. I just want to clarify your comments on inflation, which, as you pointed out, has been very topical recently globally. You mentioned in terms of like what expectations. I just want to clarify that you kind of highlighted CPI at 5%, historically at 2%, and you think that rents could increase [ about ] 70% of the excess. So are you saying that like the expected rent growth in '22 should be something closer to 4%, am I understanding that correctly?

That's what we're saying exactly. Sorry, I was -- I kind of cut to it as elegantly as I would have Mario, but I think listen, we have more than 70%, probably close to 75% of the portfolio with either direct relationships to indexation or fixed increases. So we have a high correlation to increasing inflation is broadly speaking, in our plan, we're certainly seeing potentially up to another 100 basis points above where we've been as a global environment. And once we get above that level, then some of the caps and collars that we have in place come in, so that doesn't track as clearly it probably goes to 70% of that. So we'll get between 3.5% and 4%, pretty much a 100%. And above that, it's, let's say, 70% on the index part of our business. So that helps the precision. It's a pretty direct relationship, obviously, and it's pretty close to full CPI, but we do have caps and collars in place in various places.

Perfect. And you probably mentioned this in prior calls, however, in terms of timing, like, let's say, the CPI is 4% in Q4 '21. Generally, is there a time lag between when you start to see that in your leases across your geographies? Or is it fairly instantaneous?

Yes, Mario, I think we see that inflation indexation typically kicking in annually. So I mean, intra-quarter, right? But over the course of 2021 or 2021, you see the reset in 2022 and so forth.

[Operator Instructions] And your next question is a follow-up from Jake Stivaletti.

Sorry, just one quick follow-up. It's on behalf of Scott Fromson. He's listening to the webcast, but hasn't been able to dial-in. Would you be able to provide a breakdown of the private versus public funding within the U.S. acquisition?

Jake, we can follow up with you on that number specifically. I just don't have it in front of me.

And at this time, we -- I'm sorry, we do have a next question coming from Pammi Bir.

Just really one question for me. It sounds like you're keeping your options open [ to increase ] the U.S. co-investment partners. But I'm just curious, are you down the path in terms of possibly having one in place? And then just given the -- I guess, the work that we saw with respect to the U.K. joint venture that obviously took more time. But I guess really the question and the second part of that question is, is there a good degree of confidence that you will have a partner in for 2022?

So yes, 100% for both. So -- and the U.K. is ahead of the U.S. just in terms of our execution. So we're very confident. And I think maybe just stepping back and maybe just highlighting again that the business has taken a very significant direction over the last 5 years in terms of asset management or funds management, depending on for -- or in America or Australia and having that discussion. And so I think we have established ourselves as a fantastic partner and certainly a very capable investor on behalf of large-scaled institutions around the world. And we're looking to build on that, and we have some great discussions and progress on these 2 initiatives and some of the other things that we've been talking about. So underpinning all of that, again, it's important to know that we're starting to see this business really, really tracking growth. So this is a new territory for us, and we do know that from investors in both Europe and Asia and Americas, that there's a strong appetite for health care real estate. That's probably a secular shift as all of us have been following the alternative scene. So I think where NorthWest is still finding its way is that we've been looking for a very significant larger long-term partners. And I think as the business evolves, we're seeing opportunities for more discrete investments like the U.S. one that I've just mentioned. And that's probably where things start to move a little bit quicker and where we can be more nimble in our thinking. But nonetheless, we continue to see the opportunity to bring in a suite of very high-quality partners to help us in our broadly speaking core strategies, and that's our focus. The combination of all of that though, I think, is getting pretty interesting. And we start to see runway gain over the near term to more than double our committed capital in these strategies. Those are big words to say. I think we have the credibility to connect the dots there. And so that's a big step change for the business, and obviously, it has significant earnings and value components to it. And I think that's probably as we see an area of the business accelerating more than anything, something that we call out. And again, it's not insignificant today. We saw a 60% increase in our asset management revenue this past year. And again, we could see similar types of growth in the near term as we continue to leg out these strategies that we announced. So I think it's a big, important part of our business, and it does drive the business increasingly in 2022.

That's good color. Just maybe as an add-on to that, the partner that you're speaking to, it sounds like it's pretty broad, would that include possible U.S. partners?

Absolutely. Absolutely. Yes. I mean, we've, again, consciously started to cast the net a little bit wider and a little bit more geographically focused. And again, this U.S. portfolio, as an example offers lots of opportunity for that. Of course, some of the other things that we're thinking about in other markets also appeal to large U.S. investors. And we would just broadly say that most of the institutions that we've been able to survey are, again, as they are underweight alternatives, they are very much underweight health care. And we think that, that combination of long-term index cash flow with a little bit of growth. is a very attractive proposition. So we're seeing a lot of positive reception from investors around the globe in terms of the asset class and in this health care industry. So a very constructive moment for what we're doing and where we're going. Certainly, there's some heightened interest in areas of health care, such as life sciences, but we think that really, when we get back and [ peel that onion ] back the interest in the stuff that we're doing at the core of health care precincts and the core of our ambulatory and outpatient strategies, and these are really broad-based strategies. And so they are appealing to quite a range of investors.

And at this time, we have no further questions. Mr. Dalla Lana, please proceed.

Okay. Well, thank you very much. I appreciate all of you joining us for our Q4 '21 conference call. And I wish you a good day. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.