Good morning, ladies and gentlemen, and welcome to the Northwest Healthcare Properties Real Estate Investment Trust fourth quarter 2021 results conference call. At this time, note that all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on March 15, 2022. 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. First, I'd like to point out that during today's call, we may make forward-looking statements as defined under Canadian securities law. While such forward-looking statements reflect management's expectations regarding our business plans and future results, they aren't 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 CAD 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 a backlog built during global lockdowns are expected to drive elevated demand for healthcare services and healthcare real estate over the medium and long term.
Demand for healthcare real estate has continued to intensify, as demonstrated by the CAD 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-à-vis typical commercial asset classes and an acknowledgement of the stability and infrastructure-like characteristics offered by long weighted average lease term cure-focused healthcare real estate. Despite the fair value gain recorded in the year, healthcare real estate continues to trade at a discount to core commercial asset classes, which we believe will support continued cap rate compression as healthcare real estate continues its migration into the mainstream. The REIT also notes the increased geopolitical risk driven by the Russia-Ukraine conflict.
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 de-risk its operations by accelerating 2022 debt maturities and has 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 the 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 core-based healthcare real estate as a haven for investors due to strong returns driven by high occupancy and long credit-supported leases. 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, an 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 GBP 200 million of incremental value and entering into agreements to refinance a portfolio with a new GBP 265 million facility, all of which positions the REIT to execute on its planned U.K. JV in the second quarter of this year, a new CAD 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 CAD 5.6 billion. After a year of extensive diligence, the REIT has agreed to acquire a CAD 765 million portfolio of core-focused healthcare assets located in the United States.
This high-quality portfolio includes 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 WALE and is an ideal starting point for our future growth in the U.S. Building on our previously announced precinct development focus, the REIT has launched a healthcare precinct development fund to focus on a growing pipeline that includes opportunities at the intersection of healthcare, research, and education.
An example of this type of development is the recent acquisition in Q4 of the Epworth [long ELIM] project. In particular, these types of development offer significant long-term growth in multi-phases with leading partners, in this case, Epworth, you know, and a potential project of almost 1.2 million sq ft, which will create a world-class innovation, education, and healthcare precinct in suburban Melbourne. Additional to this, we see opportunities across Australia and Canada in the total precinct pipeline, development pipeline, approaching CAD 2 billion. Also in 2021, we saw significant deleveraging, driven by CAD 580 million of equity issuance, which includes both Series E and F convertible debenture conversions and CAD 447 million of 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 on formation of both the U.K. JVs and U.S. co-investment funds with existing portfolios 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, 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 CAD 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 CAD 15.47 per unit, again 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 CAD 0.04 per unit and net asset value by CAD 1. In terms of liquidity, the REIT is well positioned with CAD 100 million of existing liquidity.
This is expected to exceed CAD 300 million as the REIT seeds 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, CAD 9.2 billion defensive healthcare infrastructure portfolio, mostly having long-term inflation-indexed leases with leading healthcare operators. The strategy is reflected in the REIT's 2021 constant currency cash recurring SPNOI growth of 3.6%, again, largely delivered by a 97% occupied substantially rent-indexed 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 sq ft 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. 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 CAD 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 assets, 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 healthcare real estate. I'll now ask the operator to open up the call for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three tone prompt acknowledging your request. If you would like to withdraw from the question queue, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. Your first question will be from Joanne Chen at BMO Capital Markets. Please go ahead.
Hey, good morning. Congrats on a solid end to 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?
Yeah, that's a fantastic question. I think in the near term, we're very focused on bringing a capital partner into the existing investment. That's probably our, you know, highest priority. You know, clearly the U.S. is the largest healthcare and healthcare real estate market in the world. There's a very significant opportunity set happening. We've been working hard over the last year to identify that. Certainly we have, you know, a decent pipeline of opportunities, but nothing imminently planned in terms of of major transactions.
Got it. Would it be in the markets that you're already in or looking at additional ones as well?
Yeah. I think I would always refer back to sort of our core strategy. This is a you know, the thing we like about this portfolio, obviously it's highly diversified both by market and operator and in fact, you know, asset type. 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 acute healthcare space, which we remain focused. I'd call out sort of our, you know, sort of global priorities of healthcare precincts or campuses or academic medical centers in U.S. terminology, as well as ambulatory and outpatient, as being key themes for us. Recalling that the MOB space in the U.S. has a heavy degree of ambulatory and outpatient sort of characteristics to it.
You know, I think, as we think about MOBs and up into ambulatory, we look a little bit more to geographic concentration opportunities over time.
Okay.
Clearly we've got some key markets. When we get into healthcare precincts and academic medical centers, there's a pretty well-known map of the top 20 of those places in the U.S. and those would all be, you know, on our list to be looking at over time.
Got it. Okay. I guess just on the organic growth front, it was encouraging to see, you know, the big bounce back in Australia. Could you maybe provide some color on the European portfolio?
Okay.
What are some of the factors that perhaps drove that a little bit lower relative to other markets?
I think, you know, 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. Then we could speak, you know, more regionally about CPI and the structure of our leases in different places.
Great. Thanks, Paul. Over the course of 2021, you would've 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 embarked on our CAD 200 million of value creation, we ended up regearing some of the leases which impacted SPNOI growth.
So excluding that kind of, call it, non-recurring, asset level, value creation initiative, you would've 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. Maybe I'll defer to Paul on some of the, you know, more broader macro in Europe where we see significant growth in the pipeline.
Oh, great.
I think we, you know, the majority of our. We really have two types of asset classes in Europe. That's long-term, you know, acute and outpatient type facilities with, you know, with long-term leases and full indexation that ranges from sort of 70% of CPI to RPI in the U.K., which is probably, you know, somewhere between 75 basis points and 100 basis points above U.K. CPI. A bit of a mix in that pot of long-term, you know, index leases. 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, you know, some of its own characteristics.
I think that, you know, that 2.3% to, you know, up to 3% range, you know, given that combination of activities is sort of a continuing European target. Really the results this quarter had that one-time adjustment that Shailen spoke of.
Got it. No, that's really helpful. I guess maybe switching gears more so back to Canada. I know you've seen a lot of headlines where there's a very strong demand for life science with life sciences in Canada and the short supply. Would you have any interest, you know, to further invest in this area kind of in 2022? I guess within Canada, would there be any particular markets that you would be focused on?
Yeah. I mean, as you know, one of our most core strategies is the precinct strategy. That intersection of healthcare and research and education. For sure we're focused on the good places that those things happen right now. We have assets, you know, in those precincts like our 149 College asset here in Toronto, you know, in the MaRS Discovery District and others. We're very focused on looking, you know, to appropriately grow and evolve at a rate that probably the dollar demand for life sciences, you know, is very strong. I'm not sure that the tenant demand is so strong, so we're quite focused on making sure our projects, you know, are sustainable and have the long-term characteristics that, you know, we like and need. We did enter the life sciences market here with an acquisition in Quebec in 2021.
We're spending a good amount of time thinking about it, and I expect it will have, you know, a number of things to do in 2022, you know, in our current pipe here in Canada. You know, we like the space of course. You know, 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, you know, a precinct-oriented development fund or JV as it were. We think there's a, you know, a huge opportunity set there in front of us. We already are heavily invested in healthcare precincts in Australia with our existing, you know, Vital and GIC JVs.
We'll look to, you know, redouble that sort of investment over the next little while. We think we have a fantastic opportunity set there. I think, you know, that will continue to be a theme for us as we, you know, sort of fully leg out this precinct strategy, you know, in these markets and with the possibility of looking in Europe, although noting that the concentrations of healthcare precincts are slightly different in Europe and have a slightly different construct than the ones that we're, you know, focused on for the moment in the Americas and in Australia.
Got it. Okay. No, that's helpful. Just maybe one last one from me. Would there be any updates that you can provide on Australian Unity Healthcare Property Trust, or none at this time?
No, I think, you know, we are now on just under 18% of Australian Unity.
In our partnership with GIC, and clearly we're considering actively all of our next steps there.
Okay. Got it. That's helpful. Okay, thank you so much. I will turn it back.
Thank you. Next question will be from Sairam Srinivas at Cormark. Please go ahead.
Thanks for the comments, Paul, and congratulations on both the quarter as well as the initiatives post-quarter. Just heading to Australia, I just had a question on the Australian JV expansion. Have you already identified the assets for that investment? If you can just comment on the timeline there.
Yeah. The answer is we do have a significant pipeline in Australia, for the core JV. That was the rationale behind it. I would just point to, you know, the current JV, which was sitting at AUD 3.7 billion and invested between just under four years. Certainly we expect to meet or exceed that pacing in the current moment there. Yeah, quite an active pipeline and, you know, really good visibility into, you know, into deployment there. You know, again, you know, we have already lived through, you know, AUD 3.7 billion over the last four years with GIC, successfully and, so, you know, that's a pretty good track record, I think.
No, definitely. Thanks for that color, Paul. Just probably, you know, going back to the U.S., congratulations on that acquisition. In terms of, you know, 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?
Yeah, that's a great question. I think two answers. I think we have a long history as a firm in going into new markets and you know building you know strong local platforms. I would expect that over time, you know, we'll see that in our U.S. expansion initiatives. You know, 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 you know all of our regional offices that offer a lot of corporate and relevant support. I think we're quite comfortable to get started. Again, calling out that this portfolio in particular is not you know overly management intensive.
Again, it's got relatively long-term leases and a relatively small number of tenants. From the operational ownership perspective, you know, it's manageable even within the context of our current business. I think where we're focusing on the team is at the asset management and more growth-oriented levels so that we can, you know, leg out that part of our exercise. A comfortable starting point today and long history here in owning and operating these types of buildings in similar markets. You know, capable to leverage that. You know, from there, obviously we'll look to have, you know, the more dedicated, you know, U.S. teams to grow the business in time.
That makes a lot of sense, Paul. Probably my final question is regarding the Global Healthcare Precinct Fund. Can you give some color on your thought process there and, you know, the kind of investments you're looking into that fund, related to kind of, you know, the other geographic specific investment funds you already have?
Yeah, I think the thought process is really that it's more development and longer term than what we have. We already have a perpetual life one. To make it longer term than forever seems interesting, but it's really that nexus of development and then converting into long-term ownership that we're focused on. We see, you know, large multi-stage, you know, developments happening over time as sort of the key type of initiative. It's nuanced from the standpoint that it's more development than IPP and we'll have an even longer, you know, sort of investment timeline to it.
That's amazing. Thanks, Paul. Thanks, Shailen, and congrats again, guys. I'll turn it back.
Thank you.
Thank you. Next question will be from Jake St ivaletti at CIBC. Please go ahead.
Hi, gentlemen. 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?
Yeah. 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 four years and then a couple 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, you know, more than likely all of it within four years, which has been the history. The big focus of our business is adding and growing, you know, to our set of investor relations.
I would expect that, you know, when we get into the precinct fund, for example, that we're likely to have additional investors or one or two initial investors in there, given that, you know, the characteristics of that fund are quite particular, and that it's big, and it's long term, and it has, you know, it has development. It's a particular audience there, but we've spent a lot of time landscaping that market. I think for 2022, more broadly, even outside of Australia, you know, our focus continues to be on broadening out our capital partner relationships with a number of these initiatives. We expect that we'll have, you know, good success both in the near term through the U.K. and the U.S. and in some of the other new initiatives that we're working on. It is a priority for the business.
That said, what I would call out is that we're, you know, very proud to be a big and long-term partner of GIC, one of the biggest real estate investors in the world. Certainly, we've been able to work with them both in Australia and Europe in very meaningful ways. We'd never discount the opportunity to grow with an excellent, you know, long-term partner like GIC.
Thanks. On the topic of the precinct fund, are there any specific regions you wanna build on or perhaps any you wanna expand into?
As I said, I think, you know, we're quite focused on our existing markets. I mean, when we think about Australia, I mean, again, you know, it's a market not dissimilar from Canada in terms of, you know, the way the country is built up and the number of large cities. There's quite an established list of, you know, let's say 50 healthcare precincts in that market. We'll be focused, you know, certainly in the top, you know, the top half of those very extensively. We have quite an evolved view of what that looks like today. That's quite clear in our minds, I guess.
You know, maybe when we think about Canada, I'm not sure if you know, in the markets that we're looking at, it'd be you know, it'd be probably a little bit more tailored, and we would look to bring partners in on specific opportunities as opposed to you know, a broader continuum of opportunities right now, given size and given some of their unique characteristics. Of course, we're focused here in the major markets in Canada, you know, in that constellation of healthcare research and education. You know, there's a very defined opportunity set that we're focused on in any event, in the Canadian market. I'd start there.
I guess over time, you know, as we grow and evolve in the U.S., there'll be many opportunities there, but that's I think further out from 2022 at this point.
Great. Speaking about the U.S., how do you intend to finance the equity portion of the acquisition?
Yeah, I can speak to that, Jake. Thank you. I mean, as noted, we have a 55% LTV asset level finance facility against the portfolio. 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. As Paul had alluded to, longer term and you know, by the end of 2022, we expect to have a U.S. co-investment partner on the portfolio to be able to recycle that equity and meet our target leverage objectives.
Great. Thanks. For target leverage, what's the stabilized target range?
Yeah. We've been guiding to 45%-50% proportionate loan-to-value. I'd call out that we're in that range right now. We'll tick 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, we'll be at the low end of that range.
Okay, great. Thanks. Congrats again on the quarter, and I'll turn it back.
Next question will be from Tal Woolley at National Bank. Please go ahead.
Hi, Paul. Hi, Shailen. How are you doing?
Great, thanks.
Paul, can you just talk a bit about where the U.S. portfolio transaction came from, how you sourced it?
Yeah, I can. It was an institutional vendor and, you know, a marketed process in the U.S. That, you know, I think, you know, sort of was the front door. I think over the course of, you know, the year, a good bit of 2021, we've been working through, you know, 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.
We've had quite a full team on, you know, U.S. coverage for you know, the better part of 2021. I guess, you know, as with all things, you know, our journey there has been really getting our mind around, you know, the for-profit segment of healthcare, which is, you know, again, a little bit more entrepreneurial than we've seen in other markets that we're in today. That's been, you know, quite a journey, and we've gotten quite comfortable with how that works and, you know, what the nuances are in comparison to, you know, the businesses that we own and run today. I think, you know, that's been the excess. I just had lots of, you know, between advisors and related support people, you know, lots of good advice in getting through this.
I think we've found, you know, a high degree of comfort in being able to underwrite the business and, you know, get our arms around the opportunity. That's been our focus through it, and it was, you know, as you've probably become aware, you know, it's a very liquid and competitive market. You know, clearly, you know, our ability to work through that efficiently and deliver certainty, you know, to the institutional vendors here was a differentiating factor as we got this deal over the line.
It's, you know, it's been a big initiative, but, you know, comfortably, you know, in place today.
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 know, you guys have had a good working history and some success? Or are you looking to bring in, someone new just 'cause this market is kinda different?
I wouldn't rule anything out at this point, Tal. I think we're still, you know, formulating that. I think this portfolio offers perhaps, you know, a discrete investment opportunity versus maybe, you know, a broader, bigger strategy as a starting point. We're open to that, whereas, you know, some of the other things we've done in our business is really, you know, cut across the market and we were looking for, you know, broader sort of commitments and more programmatic type investment. You know, that's one of the nice things about this investment is 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 our model.
I think the good news is there's lots of potentially interested partners and so the portfolio's, you know, I think, highly attractive to a broad range of institutional investors. You know, we expect to move through this quite quickly, you know, given now that we're clearing cover on this and have the ability to talk directly. I think this one, you know, could open up the possibility for some different participants. But again, as I said, I wouldn't rule out and, you know, our business model is built, you know, heavily on existing partners and growing existing relationships. At this point it's a little open.
Sorry, 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. We see a very attractive sort of risk-return profile in that sort of core plus type range, which is, you know, 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 that presentation that, you know, the acquisition cap rates are, you know, 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? If, you know, 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?
Yeah, I would say there are some nuances in the U.S. Certainly, you know, at the MOB part of the portfolio, you know, very liquid defined market. You know, we have, you know, +CAD 10 billion transactions in the market today, you know, as an example, you know, of the type of volume that happens here. I think quite a well-understood market and probably pretty proximate to, you know, the other things that we see around the world. You know, with cap rates now for the best quality stuff, you know, certainly in the mid to low 4s% as an example. It's not in this portfolio exactly, but you know, that's probably comparable across a lot of markets that we see in the MOB space.
I think where maybe some of the nuance 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 even 150 basis points if you get into, you know, some of the acute care and depending on the covenants and related things associated with it. 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, you know, sort of the precision that the markets are bringing to their thinking there.
You know, we would see that probably as the biggest difference to other markets that we're in where, you know, large acute care space is, you know, 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 covenant, and so that market is quite evolved. That's where we've spent our time making sure that we understood, you know, that combination of things in order to get comfortable with pricing. That's how we think about it, broadly speaking.
You know, sort of, you know, broadly, you know, MOB is around 5% in this portfolio and outpatient and ambulatory stuff in the low 6s%, and it kinda gets into the blend that we've talked about, and that's where we've ended up.
Okay. Just on the U.K. joint venture, you know, you've sort of been trying to signal getting this one across the line for, you know, for the past year. Is there any particular, like, hitch or something in the deal that's making this difficult right now? Is this it, this is just the process? I'm just trying to get a feel for, you know, what it's like to close one of these things.
Yeah. I mean, the real-time driver for us has been around the value creation initiative through, you know, onboarding Aspen and you know, splitting the property in OpCo you know, which we did, you know, in the fourth quarter of last year. I guess, as we were leaning into the U.K. JV and some of the early messages, you know, probably hadn't anticipated that, and that exercise obviously we've decided to do on our balance sheet at 100% and take the benefit of that. That's been the real timing delay. I think bringing it from there till now, it's a pretty traditional process. You're right. You know, it takes a little bit longer to find, you know, a long-term programmatic partner.
We're in the short strokes of ironing out all of those things now. We take the appropriate amount of time to get the i's and t's dotted, I would just say. That's recalling that the goal here is a GBP 1.5 billion long-term Evergreen JV. 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.
I wouldn't say there's anything, you know, anything particularly complicated about that other than, you know, we chose to sort of pause and come back with the value creation done and start with a clean starting point. That's really what's happened for us and that's by design. We're quite comfortable with where we are in the process and now bringing it to conclusion in the next short while. Obviously, in between now and then, we've put permanent financing in place, so that's another big step along the way. That financing again supports, broadly speaking, the JV, you know, as it goes forward and gives us, you know, a good tool.
That's another significant milestone that's come, you know, post year-end and just as we lean into finalizing things here.
Okay. Just a couple questions for Shailen here. Unsecured market still a goal for this year, or we'll see what happens?
Yeah, I think we've talked about, you know, getting our leverage metrics into those, I mean, into that range for unsecured. You know, I'd say, I mean, even including this current U.S. transaction, that's gonna 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. Our metrics are tracking. I think it's really, as I mentioned before, around, I mean, the question now is really where does unsecured fit within our portfolio, recognizing the broader REIT strategy is evolving to become a little bit more capital light. Really, I'd say the real potential for unsecured is at our JV levels or at our portfolio levels.
We look at a portfolio like Vital that's 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. 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 know that that market in general has priced out a little bit wider over recent weeks, given some of the geopolitical instability and the relative price, if you will, may not be as attractive at a global level.
Got it. Just lastly, Shailen, getting to the tail end of my forecast on the income statement, cash taxes and discontinued ops. Just wondering, you know, given I know this is difficult at the start of the year and the changes in the portfolio, but is there a decent placeholder number we could use for cash taxes? I just don't know what we can expect the rundown on the discontinued ops piece to be.
Yeah. 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. I mean, there's no real rundown on that. That transaction's fully complete. 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 looked at 2021 holistically, and straight lined that 2021 number across 2022 for your forecast, that's probably fair.
You know, I know there is a bit of 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 offline and talk about that in a little bit more detail if you'd like.
Nope, that's perfect. Thanks, guys.
Next question will be from Mario Saric at Scotiabank. Please go ahead.
Hi, good morning. Maybe just sticking to the U.S. portfolio expansion, what's kind of. I think it was noted that about 90% of the income is indexed. What's been the kind of rent growth in the portfolio over the past couple of years? And in terms of underwriting, what type of rent growth are you looking for going forward?
Yeah. Thanks, Mario. It's Paul. I'll take that. By and large, this portfolio has fixed rent steps at around 2.5% built in. The vast majority of those are contractual. It's not precisely indexed to CPI, but more contractual. I think that's a characteristic that we see more commonly in the U.S. than perhaps some of our existing markets, but certainly prevalent in this portfolio. It's quite sort of built in, I guess, is the short answer.
Got it. Perfect. Okay. Within the portfolio, is there any value attributable to kind of development or redevelopment upside? Or is the valuation essentially kind of a stabilized valuation?
Yeah. Again, this portfolio has a small number of development projects. I'm gonna go from memory here, but I'll say three and about somewhere around CAD 25 million-CAD 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. They might just go offline there around those final numbers. Or, Shailen, if you have those.
No, I don't have those offhand, but we will follow up. I think, Mario, one point I'd add is the 5.5% cap rate that we quote is on in place.
Right. Okay. What would the average debt cost be on the property level debt?
Yeah. Say 2%, 2.75%-2.90%, somewhere in there, all in.
Do you need the term for that?
Yeah. I mean, similar to what we did in the U.K., where we entered into a market, and we are seeking a co-investment partner or long-term JV partner in the case of the U.K. We've kept the debt structure relatively flexible for the time being. We put on a one-year facility, pricing inside of 3%, so at about 2.9% floating. Swapping that out would bring us into about 3.5%, if we put on a full one-year swap there. The intention would be to bring in our co-investment partner and then seek ultimately their long-term leverage targets and put in more long-term finance at that point.
I'd call out the liquidity around the MOB market, as well as some of the ambulatory care assets is highly liquid. When we look at the acute care hospitals that we're financing in the portfolio as well, we see lots of liquidity.
The target, Mario, sort of on a five-year facility would be in the low threes right now.
Correct.
3%-3.25%, which is what we'd expect to do when we finalize the equity part of the transaction.
Right. Perfect. Okay. That's what I was looking for. Call it a 250-ish kind of spread to acquisition cap rate?
Right.
Okay.
Very low below the line, right? It's virtually all in place and very limited, you know, very limited cost below the line.
Okay. Paul, your comment on kind of bringing a JV partner in it sounded like the partner that you're thinking of bringing in would be specific to this transaction as opposed to kind of a springboard partner for a much bigger, I mean, U.S. JV fund, if I can call it that. Is that a fair assumption?
I might just bring some nuance to that, so I don't wanna overread into this, Mario. We're having wide-ranging discussions, but we're in, you know, 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, you know, opportunity set as opposed to a large programmatic one. So that's maybe the nuance that I would bring to that. We would always hope that the partner has the willingness and capacity to do other, you know, bigger things over time. So that's maybe the precision I'd bring to that comment.
Got it. Just out of curiosity, like, what would make this transaction kind of discreet in your terms?
I think it's scale, it's diversification, and, you know, 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, you know, the ability to grow over time in our more, you know, sort of overarching strategies, you know, applies. We clearly would like to see, you know, 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. I think we approach it, you know, with that flexibility maybe is the right way to say it.
Got it. Okay. I guess in terms of deciding upon this portfolio, given the market liquidity, you highlighted presumably there was other opportunities, kind of as a starter portfolio. Like, what was it in particular, if you had to point to one thing, what was it in particular that really attracted you to this portfolio over others, in terms of deciding that this was the first one to go with?
We liked the diversification of the portfolio and really that being across that continuum of pure sort of sub-segments. We like that a lot. We're investors in all of these categories. We like the fact that it was relatively management unintensive. Even the MOBs tend to have large single tenants and are not particularly multi-tenant driven MOBs. There are a couple, but you know, as a starting point, again, acknowledging some of the earlier comments around platform and intensity, which we know very well, we like those attributes. We felt that mix of returns obviously combined was attractive. I think it was those three things that led us in this direction.
You know, we looked at, you know, many billions of dollars transactions in the U.S. over the course of the year and had a lot of chance to think about things. Of course, you know, it also gave us the scale to get started and focus, you know, which is helpful versus a single asset sort of things.
Perfect. Okay, that makes sense. I guess my last question or area of focus part is just to clarify your comments on inflation, which as you pointed out, has been very topical recently globally. You mentioned in terms of rent growth expectations, I just want to clarify that you kind of highlighted CPI at 5% historically, and 2%, and you think that rents could increase at 70% of the excess. Are you saying that like the expected rent growth in 2022 should be something closer to 4%? Am I understanding that correctly?
I think that's what we're saying exactly. Sorry. I couldn't cut to it as elegantly as I would have, Mario. I think, you know, listen, we have more than 70%, probably close to 75% of the portfolio with, you know, either direct relationships to indexation or, you know, fixed increases, you know. We have a high correlation to increasing inflation because 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. Once we get above that level, then some of the caps and collars that we have in place come in. That doesn't track as cleanly. It probably goes to 70% of that. You know, we'll get between 3.5% and 4%, it's pretty much 100%.
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.
Again, you've probably mentioned this in prior calls, however, in terms of timing, like let's say the CPI is 4% in Q4 of 2021. Generally, is there a time lag between when you start to see that in your leases across your geographies, or is it fairly instantaneous?
Yeah, Mario, I think we, you know, we see that inflation indexation typically kicking in annually. You know, I mean intra-quarter, right? You know, over the course of 2021 you'd see the reset in 2022 and so forth.
Okay. That is it for me. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. Your next question is a follow-up from Jake Stivaletti. Please go ahead.
Hi, guys. Sorry, just one quick follow-up. It's on behalf of Scott Thompson. He's listening to the webcast but isn't able to dial in. Would you be able to provide a breakdown of the private versus public funding within the U.S. acquisition?
Hey, hi, Jake. We can follow up with you on that number specifically. I just don't have it in front of me.
Okay, thank you. I'll turn it back now.
Thank you. At this time we do have a next question coming from Pammi Bir. Please go ahead.
Thanks. Just really one question for me. It sounds like you're keeping your options open with the U.S. co-investment partner. I'm just curious, you know, are you down the path in terms of possibly having one in place? Just, you know, given the, I guess, you know, the work that was involved with the U.K. joint venture, you know, that obviously took more time. I guess really the question then, the second part of that question is there a good degree of confidence that you will have a partner in line for 2022?
Yes, 100% to both. The U.K. is ahead of the U.S. just in terms of execution. Yeah, we are very confident. I think maybe just stepping back and maybe just highlighting again that, you know, the business has taken, you know, a very significant direction over the last five years in terms of asset management or funds management, depending on if we're in America or Australia and having that discussion. You know, I think we have established ourselves as a, you know, a fantastic partner and, you know, certainly a very capable investor, you know, on behalf of large, you know, scaled institutions around the world.
We're looking to build on that and we have some great discussions and progress on these two initiatives and some of the other things that we've been talking about. You know, underpinning all of that, you know, again, it's important to know that we're starting to see this business, you know, really track and grow. This isn't new territory for us. We do know that, you know, from, you know, investors in both Europe and Asia and Americas, you know, that there's strong appetite for healthcare real estate. That's probably a secular shift as all of us have been following the alternative scene. I think where Northwest is still finding its way is that we've been looking for very significant, you know, larger long-term partners.
I think as the business evolves, we're seeing opportunities for more discreet investments like the U.S. one that I've just mentioned. That's probably where, you know, things start to move a little bit quicker and where we can be more nimble in our thinking. But nonetheless, you know, we continue to see the opportunity to bring in, you know, a suite of very high quality partners to help us in our, you know, broadly speaking, core strategies. That's, you know, that's our focus. The combination of all of that though, I think is getting pretty interesting. You know, we start to see runway, you know, 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. You know, that's a big step change for the business and obviously it has significant earnings and, you know, value components to it. I think, you know, that's probably as we see an area of the business accelerating more than anything, something that, you know, we call out. Again, it's not insignificant. Today, we saw a 60% increase in our, you know, asset management revenue this past year. Again, we could see similar types of growth, you know, in the near term as we continue to leg out, you know, these strategies as we announce.
You know, I think it's a big important part of our business and it does, you know, it does drive the business increasingly in 2022.
Right. No, that's a good color. Just maybe, as an add-on to that, the partners that you're speaking to, you know, it sounds like it's pretty broad, but would that include possible U.S. partners?
Absolutely. Yeah, I mean, we've again consciously started to cast the net a little bit wider and a little bit, you know, more geographically focused. 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. We would just broadly say that most of the institutions that we've been able to survey are, you know, again, as they are underweight alternatives, they're very much underweight healthcare. We think that, you know, that combination of long-term indexed cash flow with, you know, a little bit of growth is a very attractive proposition.
We're seeing a lot of positive reception, you know, from investors around the globe in terms of the asset class and the healthcare industry. A very constructive moment for what we're doing and where we're going. Certainly there's you know, some heightened interest in areas of healthcare, you know, such as life sciences. We think that, you know, really, when we get back and peel that onion back, the interest in the stuff that we're doing at the core of healthcare precincts and the core of our inventory and outpatient strategies and MOBs are really broad-based strategies. They're appealing to quite a range of investors.
Thanks very much. Paul, I will turn it back. Thanks.
Thank you. At this time, we have no further questions. Mr. Dalla Lana, please proceed.
Okay. Well, thank you very much. Appreciate all of you joining us for our Q4 2021 conference call, and wish you a good day. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, than k you for attending, and have a.