Good morning, ladies and gentlemen, welcome to the NorthWest Healthcare Properties Real Estate Investment Trust fourth quarter 2022 results and conference call. At this time, all lines are now listening 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. This call is being recorded on Friday, March 31st, 2023. I will now turn the conference over to Paul Dalla Lana, Chairman and CEO. Please go ahead.
Thank you, operator, good morning, everyone. 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 2022. 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 are necessarily based on assumptions that are subject to uncertainties and risks, which could cause actual results to differ materially. We direct you to all of the risk factors outlined in our public filings. Now to the year and the quarter. Operationally, the REIT's high quality and defensive portfolio delivered strong results, including 2.9% same property net operating income on a year-over-year basis in Q4 2022.
The REIT's portfolio occupancy of 97% is underpinned by a weighted average lease rate of 14 years, with 83% of leases subject to rental indexation. With a portfolio comprising more than 2,100 tenants, the REIT is highly diversified, and its tenants are performing well, with including its top 10 hospital operators having an average EBITDA coverage of 2.3x . In 2022, revenue and net operating income both increased by approximately 20%. As a result of higher interest rates, temporarily elevated leverage, and lower transaction volumes within the REIT's capital platforms, AFFO per unit declined to CAD 0.73, a 16.1% reduction compared with 2021.
Subsequent to year-end, the REIT entered into hedging arrangements to fix approximately CAD 892 million of floating-rate foreign currency debt facilities, which will immediately stabilize results and increase annualized AFFO by CAD 0.05 per unit. Additionally, the REIT has actioned several accretive initiatives to improve per unit results, including CAD 220 million of non-core asset sales and a focused completion of its U.S. joint venture initiative, which when combined with the U.K. JV, are expected to generate between CAD 425 million and CAD 500 million of net proceeds in 2023 and add a further CAD 0.03-CAD 0.05 per unit to AFFO. Considering the in-place hedges and incremental initiatives underway, the REIT anticipates AFFO per unit increasing by approximately 10% on an annualized basis over the course of 2023.
Finally, as transactions volumes normalize and the REIT deploys its approximately CAD 4.5 billion of undeployed capital commitments at a pace comparable with historic levels, it expects a further CAD 0.03-CAD 0.05 per unit in incremental earnings, with overall annualized results returning to the mid-CAD 0.80 per unit level. From a balance sheet perspective, at December 31st, 2022, the REIT reported debt to gross book value, including convertible debentures, of 56.1% on a proportionate basis. Considering the approximately CAD 220 million of non-core asset sales, and in addition to its commitment to closing the U.K. JV in Q2 2023 and the US JV later in 2023 and associated debt repayment, the REIT anticipates leverage decreasing by almost 1,200 basis points to 44.5%, which is its long-term target.
The REIT has aggressively addressed its upcoming debt maturities and has refinanced CAD 1.7 billion of expiring debt since the beginning of Q4, with the goal of extending term and increasing exposure to fixed rates. As a result, the REIT has now refinanced 67% of its 2023 debt maturities, extending its weighted average term to maturity to 3.1 years, and its increased portion of fixed debt, including hedges, to 63%. Importantly, the REIT has done all of this and at the same time reduced its weighted average cost of borrowing to 4.7%. The REIT would like to provide an update on its U.K. JV initiatives.
Since last quarter, the REIT has secured a commitment with an institutional investor for a larger investment in the REIT's U.K. portfolio that will now amount to between 70% and 80% of net equity in the U.K. platform and accelerate the REIT's deleveraging strategy while providing capital for future growth. The commitment is subject to diligence, final documentation, and typical closing conditions and is expected to complete in Q2 2023. The U.S. joint venture initiative continues to progress, with the REIT working towards commercial terms with qualified partners, and despite a difficult macroeconomic background, closing in the second half of 2023 remains the focus. Additionally, the REIT has identified CAD 220 million of directly held non-core assets in the Americas, Europe, and Australasia. Sales processes are underway for select assets, and marketing for the balance will begin in Q2 2023.
Collectively, these transactions are anticipated to generate net proceeds of between CAD 425 million and CAD 500 million, which will be redeployed to repay higher cost and variable rate debt. From an investment perspective, the second half of 2022 was impacted by the rapid rise in interest rates and widening bid-ask spreads on assets between buyers and sellers. As a result, transaction activity was muted. As we look towards the second half of 2023, we see pricing expectations beginning to converge and expect transaction volumes to begin normalizing. Nonetheless, Northwest had a successful 2022 from an acquisitions perspective, with CAD 1.1 billion in completed acquisitions, highlighted it by its entry into the United States market. The REIT remains constructive on long-term demand factors that drive value creation in healthcare real estate globally.
With more than CAD 4.5 billion of available committed capital, it is well positioned to execute on new investment opportunities while remaining disciplined in its capital allocation strategies across eight global markets. Segmentally, I note the following. In Canada, we were on plan with portfolio occupancy remaining stable at approximately 90% and seeing parking revenues return to pre-COVID levels quarter-over-quarter. We continue to make progress on a number of life sciences and ambulatory care initiatives, which are gaining momentum and expected to become part of the business in the near future. In the U.S., our newest region, our portfolio is performing as expected with occupancy at 97% and an almost 10-year weighted average lease term. NorthWest has successfully onboarded and integrated the assets and respective management platforms, and continues to progress on our new leasing activities.
In Brazil, we were on plan with steady 100% occupancy and continued strong constant currency SPNOI of 9.2%. Operationally, we note that the REIT's major tenant in Brazil, Rede D'Or, continues to deliver exceptionally strong results and is among Brazil's top 10 companies by market capitalization. Europe continues to perform well, with occupancy and WALE stable at 97% and 16 years respectively. We continue to find good investment opportunities in Europe, allowing us to not only increase scale and critical mass in our existing markets, but also to consider opportunities in adjacent markets. Finally, in Australasia, our largest market, occupancy remains steady at nearly 100%, delivering constant currency SPNOI growth of 6.7% with a weighted average lease term of almost 16 years.
Corporately, I'd like to highlight that the REIT published its second annual sustainability report, also outlining key accomplishments and specific organizational goals for the future. I am pleased with the progress we've made during the quarter and post-quarter, which advanced the REIT's strategic objectives and produced solid operating results. With deep strategic relationships, best-in-class regional operating platforms, and a strong access to capital across the platform, the REIT continues to transition to a more asset-light business, a best-in-class global healthcare real estate investment manager. With that, I'll now ask the operator to open up for questions.
Thank you. Ladies and gentlemen, we will now take questions from our analysts. Should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Mike Markidis from BMO. Please go ahead.
Hi, good morning. Thank you for taking my question. Just on the U.K. portfolio, congrats on securing the additional equity commitment. Could you maybe comment on sort of what the give and takes were in that transaction? Specifically, I'm just curious as to where the valuation would come out relative to where it was marked as of Q4.
I'll address sort of in two parts, or maybe, even three. To the first, I think, you know, part of the decision that we made over the course of the last 90 days was to increase the size of the JV. There were a number of structural considerations to make it work efficiently, both for our partner and ourselves. We spent the extra time, you know, figuring those things out, and it allowed us to increase the size of the investment to, you know, a more conventional level there.
I think we're not in a position to talk yet about valuation, but, we'll be once all the, all the, I's and T's are dotted, which are expected, you know, certainly in the next, 30 days or so. That's, that's a quick update.
Okay. Appreciate that. Thank you. Just on the plan to move ahead with the U.S. JV, totally seems that you're confident in that transaction, both in the press release commentary and on the call commentary. Just trying to reconcile that with the declassification of the U.S. portfolio from held for sale back just into normal income-producing properties. Is that just an accounting technicality? Just trying to reconcile that change.
I'll pass that to Shailen. Thanks, Mike.
Hi, Mike. Thanks for that question. You are correct in that we've historically included both our U.S. portfolio and U.K. portfolio in assets held for sale. It is indeed an accounting technicality. We would have reclassified the assets and immediately classified the U.S. assets into assets held for sale in Q2 2022. There is a technicality within IFRS that requires the assets to be sold or anticipated to be sold within one year of the initial classification. Given that we expect the U.S. in the latter half of 2022, accounting statements force us to put it into back into IPP, if you may.
Got it. Even though you anticipate to sell it within a year of today or Q4, the accountants don't care it didn't happen or is not planned to happen within a year of initial classification?
Correct. It's not a rolling test. There's some technicality there. It's, you know, from the initial time of classification.
I love accounting. Okay. Moving on, last one from me before I turn it back. Just on, you know, again, appreciate the color on the impact of the all the transactions that you have planned and the potential impact of 10% on AFFO per unit. Just to clarify, should we read that to mean that, you know, you'll get there for your full year 2023 number? Or is that a run rate will get to +10% versus where we were in 2022 at some point in the year?
Hi, Mike, I'll respond to that. It's a full year number. The run rate will be a little bit higher. There's really that doesn't include exactly, you know, future transactions which would be additive to that number and clearly dependent on things happening. It's really meant to be a specific number where we're talking about the immediate impact of the completed hedging initiatives which are in place today, and the JV and non-core sale initiatives, which are, you know, the U.K. is signed up, and the U.S. and the CAD 220 million to come. Just to bring some precision to, you know, to that, to that 10% as it were.
Okay. just to elaborate on that, I think you guys did CAD 72 in 2022, so approximately 10%. If we just use 10% implies CAD 79 for this year, with some room for additional based on redeployment of capital and normalization transaction volume.
Yeah, I think it's a little bit above that, but I might suggest maybe that we can take that offline and get into the precision of it, or you can with Shailen.
That'd be great. Thanks so much, and I'll turn it back.
Your next question comes from Sairam Srinivas from Cormark Securities. Please go ahead.
Thank you, Operator. Good morning, Paul. Good morning, Shailen.
Morning.
Trying to wrap my head around this U.K. JV update as such. Are you able to comment on the increase in size of the commitment at this point?
I'm not sure I totally follow, but, just to be clear, you know, the transaction that we announced in December, I guess late November with our last earnings call, you know, contemplated a 15% investment in our portfolio. The incremental news, I guess, just to say it directly, is that that 15% has now become between 70%-80%, which is more traditional to our current JVs and our preferred, you know, long-term, you know, asset-light structure of 20%-30%, you know, look-through ownership. It's super consistent with that. The reason, as I mentioned again, we had always been desirous of this level of JV sell down, if you will.
What prohibited us at the time in the fourth quarter or, sorry, last year, I guess, was some technical issues around structure that, you know, that limited what we could do and announce at the time. We've been able to work through those in the interim and come to a more, you know, preferred long-term level of ownership and structure. That's sort of the journey we've been on.
All right. Thanks a lot for that, Paul. My, probably the last question is on capital recycling. At this point, are you guys comfortable in saying, you know, which markets or, you know, are the specific markets you're targeting to exit?
Yes. Yes, we are. That CAD 220 million is comprised of assets in most of our markets. It's reasonably evenly weighted. Again, these are all, you know, assets that we believe are performing assets that can sell and be, you know, within striking distance of our, you know, our current book values. You know, it's again, we're looking closely at our portfolio and, you know, looking for where we wanna deploy capital and focus our energies.
You know, that's been a healthy exercise and probably when it's, you know, that 5%-7% of our portfolio, I would think that that's, you know, over time gonna be a pretty steady state exercise for us as we look to just refine and improve the things we're working on. There's nothing in there that's particularly, you know, difficult or non-performing. We see it's quite a broad-based mix of assets across multiple markets which are all, you know, open and, and capable of receiving them. It's, it's a bit of a segue maybe into the demand for healthcare real estate, and I guess we are seeing some exceptional demand across both Europe, Australasia and of course, the U.S. where, you know, we have very fluid markets.
You know, just to echo that, you know, healthcare real estate as maybe one of the larger of the alternatives continues to be, you know, strongly in demand and highly defensive. So we expect, you know, again, given that this is a broad-based process with many assets selling, you know, sort of success and there aren't any sharp edges to any one of the transactions or anything involved in it. We're experiencing high demand. A number of these are under contract as we speak and with the balance sort of in process. So, you know, I expect that there'll be a continuum of announcements as we sort of chip away at it through the next couple of quarters.
That's great, color, Paul. Thank you. I'll turn it back.
Your next question comes from Pammi Bir from RBC Capital Markets. Please go ahead.
Thanks. Good morning. Just with respect to the CAD 425 million-CAD 500 million, I guess, of the net expected proceeds on, on the initiatives, how does that break down between the non-core assets, and the U.K. and U.S. JVs?
Hi, Pammi. Good morning. I guess, the specific breakdown will be disclosed as we execute on the transactions. As Paul had noted, previously, the largest component, you know, of that, I mean, of those bucket of transactions would be the U.K.. We'll be in a position to better comment on that, over the coming quarter as that transaction is finalized.
Okay. I think if I recall, the U.K. JV, the total sort of aggregate, expected sort of equity repatriation if you were to get to that sort of 70%-80%, which it seems like you have now. I think, am I right in recalling CAD 350 million as sort of the rough figure?
Yeah. I think we'll probably need to go offline on that. I think obviously this disclosure's, you know, been over a period of time. FX rates have changed. The % sell down has changed. I think we'll need to get into a bit of that detail. I'd call out that over the next quarter, specific numbers will come out of net proceeds from that transaction.
Okay. All right, maybe just on the U.S. portfolio, can you talk about maybe where does that process sit at this point? You know, I, you know, I think you mentioned that you're still engaged with qualified partners. Is it pricing? Is it, you know, lining up financing or kind of all of the above that's maybe, you know, stalled or hampered, maybe the further progress on that?
Yeah. I think a few questions in there. You know, again, we are still looking at pricing within the context of, you know, our IFRS book value. That's something that we believe is achievable, certainly within striking distance of that. I think maybe I've previously spoken just about sort of capital formation moments, and so I think, you know, what I would say is the U.S. was sort of the quickest and sharpest to sort of turn off and really happen, broadly speaking, you know, in the middle of last year. It has started to return and that's, you know, really around stabilized, you know, long-term asset values and some financing.
Obviously, we've been able successfully to put financing in place on the portfolio and term it out and bring certainty to that. That's helped our discussions. I think that combination of, you know, pricing visibility, you know, just a little bit more confidence in, you know, future asset values and obviously us having put in place, you know, term financing, which has now happened, you know, just in this last 90 days, have sort of unlocked the logjam, if you will, to get that, you know, process moving. It's followed a little bit internally, you know, behind our U.K. JV, just in terms of resources and pushing to get things done.
You know, we're confident that, you know, there's a strong market for, you know, as you recall, a widely diversified, you know, ambulatory, you know, sort of portfolio in the U.S., and we're experiencing good discussions in that regard. We expect things to start to move now reasonably efficiently.
Thanks, Paul. That's helpful. Maybe just switching gears with respect to MPW's, you know, the sale of the Healthscope portfolio. I'm just curious, you know, your thoughts on that transaction and where pricing came in?
Well, we were surprised to see how strong the pricing was, to say it mildly. I think, you know, when we look through it and, you know, have a very close analysis of all the pluses and minuses, it's probably a sub 5 cap rate. We also view our own assets to be, you know, relatively stronger in the moment. It certainly supports, you know, the valuations we have today in place. I guess, just calling out even in the moment, where, you know, we have, you know, more difficult, you know, investment climate, you know, that demand for, you know, the types of assets that we have is exceptionally strong. This would be another good example of that.
You know, we were part of that process, just to be fair, and we were very disciplined about what we wanted to do. Kudos to MPW for getting that off and, obviously, you know, we are the, you know, we own the other half of that portfolio, so we understand it very well. You know, we like the assets that we have.
Got it. Just last one for me. Just given where, you know, where the balance sheet is and, you know, with respect to the U.S. portfolio, the initiative that's sort of still in progress, just, you know, how are you feeling about putting more capital to work at this point? Or is it really just predicated on getting the U.S. JV, you know, buttoned down first?
Yeah. So number, you know, one-three , four- 10 priorities are around completing our, you know, sort of balance sheet initiatives. You know, and that's clearly focused. We know why, you know, why we've had a couple of soft quarters, again, around carrying assets, you know, on our balance sheet and having maximum flexibility to do that. You know, we're quite focused to transition from that moment to, you know, what we see as a more stable long-term moment, which is around the corner here. I think a lot of this work will be done, you know, in the context of, you know, by the end of our second quarter. You know, when we report on that, which would have significant progress on almost everything on that list by that time.
We're feeling good about that. you know, there are a small number of very strategic things that we need to consider in the interim, but our focus is very much around, you know, getting back to that steady state and then positioning the business for, you know, all of the things that we've been talking about over time.
Thanks very much. I'll turn it back.
Your next question comes from Tal Woolley from NBF. Please go ahead.
Hi. Good morning.
Morning.
Just again, on the dispositions, can you give us an estimate of just how much NOI and how much secured debt is attached to those assets?
I don't have that handy, Tal. If I could, you know, we'll get it to Shailen. I think it may even be in our IR deck that comes out a little later on. Again, you know, roughly it's in line with the portfolio, I would say, around debt levels and nothing... You know, it's an average mix of assets. You know, I'll come back on NOI when we speak. Again, it's a representative sample of assets across multiple markets in the REIT, so.
Yeah. Tal, just building on that, if you used our weighted average cap rate, about that 5.4% level, I think that's fair. you know, our weighted average leverage level is fair as well.
Okay. Thank you. Just in terms of borrowing right now, I guess, like, you guys have lots of options given the markets, you know, that you're in about. Can you just maybe talk a little bit about where you're seeing rates in each of the markets, and what's your most effective way to borrow right now?
Yeah. Tal, there's a lot in that. I guess it's a very regional specific question as we get into it. Happy to take the more specifics offline. I would call out as we think through, you know, the REIT's global capital stack, you know, and really what's come through over the last couple of quarters, it's really been the corporate part of the capital stack that we've been exceptionally focused on. And I'd call out that a lot of that was short-term, high-cost floating rate debt, which is coming off the balance sheet, either has or is about to, as we conclude on our JV initiatives. At a regional level, we're still seeing liquidity to be able to finance our assets.
You know, credit spreads, although we've seen them widen, you know, in the broader markets, we haven't seen that come through at the asset level yet. But happy to go through, more specifics on that offline.
Yeah. Maybe what I'd just call out is that, you know, in the context of both, Q3 and Q4 and, you know, the year to date this year, we've obviously had, you know, very successful long-term refis of both the U.K., you know, the U.S. portfolio. You know, the balance of our beyond corporate, the balance of our, you know, 2023 initiatives are really asset level financing in regions. You know, we're, you know, we'll be done in the normal course. You know, I would think that, you know, that, you know, we're not seeing a shortage of, availability of finance. Obviously, the terms of it have changed over the last, you know, 12 months.
You know, that's one good thing about healthcare that we've seen is that there seems to be, you know, relatively strong support. You know, we at an underlying portfolio level, have a strong portfolio that can support, you know, appropriate financing. I don't think we're seeing any hedges in terms of completing, you know, 2023 and beyond. We'll all be working into 2024 stuff. You know, we're starting to see some stability in terms of, you know, what has been maybe the market moment around, you know, the points of inflection on, you know, what would be short and longer term financing, you know, in the two-three year kind of window where everyone's been, you know, trying to understand where is inflation going, where are longer term rates going.
We're just starting to see a little bit more stability there where, you know, it helps us to take decisions for even longer term things.
Okay. I guess just more broadly, you know, this is a fairly sizable acquisition for a year for you, over CAD 1 billion, you know, a big chunk of that obviously being the U.S. You're gonna be doing some, you know, selling here of properties heading into the early part of 2023. What do you think the investment plan looks like in terms of acquisitions and development spending for 2023?
No, that's an excellent question. I think, you know, the first answer is, as we've said, you know, an extreme focus on sort of completing the, you know, initiatives that we've just talked about ahead of doing, you know, anything new or significantly new. I think, you know, maybe just to guiding to, you know, sort of general levels of activity. You know, we have, you know, CAD 4.5 billion at 100% numbers, including debt of committed capital. You know, that's gonna grow with those JVs. You know, I think, you know, that would be our capacity. Traditionally we've sort of looked at that and said, "Let's roll that out over the terms of those commitments." You know, three-four years are typically those windows.
You know, ultimately, when we see markets kind of return and when the business is positioned to be able to move forward. I would think that that's a pretty steady state, you know, level of activity, somewhere between CAD 1 billion-CAD 1.5 billion a year. You know, if markets open up again or firm up, I guess, and we're able to complete, you know, the activity that we just talked about around balance sheet activity, you know, the second half of the year could be presumably half of that as an average, and that would be maybe a, you know, subject to reasonable estimate.
Is there any particular geographies that you're still like, you know, that I think will present particularly interesting opportunities in the short term, or is that more just of a general comment?
Yeah, I think it's a little bit a little bit general, but of course, at any given time, certain things shine brighter or less brighter. I think the emphasis for us in doing things over the next little while will be maybe it would probably have a strategic overtone to it, and that would be coming back to our sort of key strategies that either be very relationship driven with one of our operators looking for specific things to do. It could be very driven by sort of healthcare precincts. You've heard me talk a little bit about some of the things we're seeing here in Canada and Australia. We've talked about that before on these calls.
Those would be things that would probably get to the top of the list for us that, you know, have a strategic and sort of long-lasting overtone. To development, I think, you know, we have been positioning, you know, pretty meaningfully for development in the business. We have, you know, circa CAD 500 million of projects underway. They're all tracking according to plan, and most of those projects, as you'll recall, are 100% let with, you know, the vast majority of execution risk on the tenant, so sort of cost plus, if you will. We expect all of those projects to wind out over time and complete and move into IPP in a normal fashion. A lot of those, of course, are at Vital, so, you know, we see the proportional impact of that.
We also have a number on balance sheet ourselves. The, you know, the new development world, I think, is a little bit muted right now as we look at both the corporate priorities of the business, but also just, you know, the construction moment continues to be challenging, where we're seeing, you know, still some inflation pressures in pricing coming through construction. We're obviously seeing a moment with our operators where efficiency is becoming particularly important. We're seeing, you know, clearly, a very disciplined approach to cost of capital and risk-adjusted cost of capital as we look at expansion.
I would say within the development world, as I said, almost everything that we'll look at for the balance there will be expansions with our existing operators, you know, in that strategic relationship sort of bucket.
Okay. I guess, just a couple more housekeeping questions. Just, broadly speaking, Shailen, like what's a decent number for us to think about for cash taxes?
Yeah, I think we've had a couple discussions on this historically, if I recall. Obviously it's been I mean, you do have some quarterly volatility around cash taxes, you know, when we, you know, noting that we are a global and we have a complex global transfer pricing structure. You know, cash taxes, 15% of management fee income is generally where it's been coming through, knowing that the management fee income is really the only real part of our business that does attract cash taxes. On an annualized stabilized basis, 15% is a fair number.
Okay. Just lastly, on the fees, you know, obviously, it was a bit of a down year on a proportionate basis for the fees. I'm expecting then, you know, you'd maybe expect to see some of that recover this year. I'm just wondering if there's a good way to sort of think about, you know, within that fee bucket, how much of it is sort of like a recurring fee in nature, and how much of it is episodic?
Yeah. Sorry, there's a lot in that, Tal, it's a really good question. I'll just encourage Shailen to sort of bring some precision offline here. I think, you know, from our standpoint, if we're looking, you know, looking ahead and stabilize, you know, the business, broadly speaking, is probably growing into a stabilized fee level that's pretty consistent with what we reported this year as fees in total.
Yeah.
I think the activity-based things will go on above that, right? So, you know, we have, as we mentioned, you know, a significant amount of undeployed capital. So if we overlay that and grow the business, that would be a good starting point. I'll let Shailen, you know, maybe offline bring some precision to that. You know, again, it was, you know, it was a year where, you know, where we were lower on activities, a little bit lower on incentive fees. So we see those things restoring over time, you know, practically in a slightly larger base because we'll be growing, you know, assets under administration. Obviously, you know, both the US and UK bring significant transaction fees as well.
These are big, you know, initiatives that will generate meaningful fees in 2023.
Okay, that's great. Thanks, Shailen.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Mario Saric from Scotiabank. Please go ahead.
Hey, good morning, guys.
Hello.
I did wanna come back to the U.K. portfolio for a second. The disclosed fair value of it was up about CAD 50 million quarter-over-quarter to CAD 957 million. It looks like you don't break down the U.K. versus Europe in terms of the IFRS cap rate, but that European IFRS cap rate was up 40 basis points quarter-over-quarter to 5%. The CAD 50 million increase in the UK portfolio, is that simply a function of FX or were there other adjustments made this quarter versus Q3?
Yeah. Thanks, Mario. Yeah. The sterling has appreciated relative to the CAD, so that CAD 50 million is attributable to FX.
Got it. Okay. can you share what the U.K. cap rate is as part of the broader Europe IFRS cap rate of 5%?
Yeah, Mario, I think over the course of the quarter, as we conclude on the transaction, we can speak to the U.K. cap rate more specifically. I know that we had our acquisition cap rates disclosed over recent quarters. I'd use that as the base.
Okay. Tying that into the commentary on the expected net proceeds for 2023, I just want to kind of flush that out a little bit more. Like on page 23 of your MD&A, you highlight the fair value of the U.K. portfolio, the fair value of the U.S. portfolio, and the associated debt for both of those portfolios. If I look at the equity, just simply fair value minus debt, that would translate into CAD 530 million in the U.K. and CAD 330 million in the U.S. Can you remind me of whether there's any other leverage that we should factor into those two portfolios when we're thinking about the net equity from the two of them?
Yeah. No, there most definitely is. I'd call out, I mean, there's a lot of puts and takes there. I'd also call out that as we think through, you know, our net proceeds from the transactions, we include adjustments for working capital and other related items. We can perhaps get into that, I mean, offline. When we think about our aggregate proceeds, you know, from the three pools of disposition activities, on that non-core asset sales, the U.K. and the U.S., I think we've given you the broad guidance at that CAD 425 million-CAD 500 million of net proceeds.
Okay. Shailen, just in terms of the floating rates at exposure went from 60% to, I think, 37% or so, where do you see that ending up by year-end after having completed all of the expected capital recycling?
Yeah. I'll turn that, I'll invert your numbers a little bit. We talk about the percentage of fixed rate exposure. I mean, post the hedging that we have completed, our fixed rate exposure has gone up to about 67%, so floating 30+. We expect that to continue to increase. I'd call out that the primary area for increase and then where we have more floating rate debt than we'd desire in the long term is in Australia, within our, within our JV platforms. We will continue to work through with our partners around bringing in more fixed rate debt there. We do have a target at 70%+ on fixed rate debt. I think we are getting close to that.
Obviously in the context of the current market, we continue to evaluate that target and look towards increasing it.
Okay. Just my last question. I think, Paul, you remarked that after everything is said and done, in terms of the recycling and the debt repayment and whatnot, you do expect to return to a, kind of a stabilized AFFO per unit in the mid-80s versus the CAD 0.79 or so, which would represent the 10% increase year-over-year that you talked about. Like, at that mid-80 AFFO per unit, the payout ratio is about 95%. You know, the dividend yield today or the distribution yield today is north of nine. It's one of the higher ones in the universe. What's a reasonable kind of payout ratio target for you longer term?
Are you comfortable with kind of the distribution policy and kind of the puts and takes into it as your business model evolves into a 20%-30% co-investment model?
Yeah. It's a big journey that I know we've talked about. I just say sort of probably first off, Mario, I think that the 10% number should be taking us up into the low 80s to begin with. You know, the goal here quite quickly with the execution of all the things that we've said around balance sheet should be, you know, to have obviously the distribution covered and be down the road. In terms of, you know, what would be a normal year and adding to that, yeah, I think that gets us into the mid, a little bit above mid-80s, and that's a starting point for that journey as we go, you know, to substantially more asset light.
Again, I think we've had some discussions around this. If I recall my own discussions, that journey, in coming from, you know, again, just over 50%, maybe 50%-55% look-through ownership into the, you know, 20%-30%, you know, those numbers are driving us into, you know, into a dollar more or less of AFFO. Leverage, as we've said, always in that 40%-45% range, which we think we can get quite close to here just with the, you know, the balance sheet initiatives that we've talked about in 2023.
You know, going from that middle 80s number up to CAD 1 is the journey from, you know, look through ownership, you know, where we are, less the 2 JVs that we've talked about, you know, down through the rest of the platform. That's the initiative that we're on. You know, again, that more capital light initiative, which I think is good. We have significant assets continuing on balance sheet beyond the U.K. and the U.S. Over time, we'll be looking at, you know, the ways to bring those into a more capital light format. Again, don't wanna underestimate the intensity of getting through, you know, the U.S. and U.K. initiatives, which have clearly, you know, sort of been, you know, year-long projects for us now.
You know, we're confident of doing that now that markets have restored. Obviously, we have an agreement in the U.K., that's in full execution. The U.S. a little bit behind, we do expect post that there's more to come, and we'll be approaching it in a logical and disciplined way. Again, back to, you know, continuing to see strong demand, you know, for the underlying assets and their characteristics and finding the right types of capital for them is important for us. I'll just remind that all of our capital commitments have traditionally been exceptionally long term. You know, they've had growth capacity built in.
They've had, you know, healthy fees and, you know, incentives and, you know, characteristics are things that we have been sticking to as we've gone through this process as opposed to, you know, shorter term, you know, maybe more expedient solutions that didn't meet those kind of long-term things. Again, these are, you know, very core long-term assets for us. We're looking for core long-term partners and a real ability to grow, you know, in key markets. Obviously the U.S. has, you know, a lot of possibilities. The U.K. is a very particular market that we like and has, you know, some really good, you know, tuck-in opportunities. Just some context to where it's going, but I think that would be consistent with where we've been.
You know, again, other than the delay here over the last, you know, six and now, you know, three-six months more to get execution done, you know, we're still on that same plan.
Got it. Part of the genesis of the question is when you think about getting to that 20%-30% co-investment or look through, as you put it, that would entail reducing your ownership interest in some of your higher yielding markets like Brazil and Canada. I appreciate the color in terms of kind of the longer term target AFFO per unit. I don't expect you to answer the question, but maybe I'll ask it anyways, 'cause given how much is going on in the business today, like that CAD 1 of AFFO per unit that you're referring to, is that four-five years out? two-three years out? Like how should we think about the timing of that metric?
Yeah, I think certainly much closer to the latter than the former. I think, listen, the business has a sense of urgency to move forward now. Clearly, you know, this has been a cathartic moment for us in terms of taking decisions and moving, you know, maybe more in parallel than in sequence. So I'd leave you with those takeaways. You know, the destination is known and now, you know, we want to move efficiently to get there and, you know, clearly, using internal capital, you know, at attractive, you know, acceptable valuations is the key. I guess what we won't be doing is using, you know, public capital in this pricing level.
You know, it's very safe to say that we see quite a disconnect here, and we're immediately focused on closing that as quickly as we can.
Just one last clarification. Again, the dollar that you're referring to, that assumes a 20%-30% essentially co-investment or look through in each of your regions. Is that fair?
Correct. Yeah.
Okay. Great. Thanks for the call, Paul. Appreciate it.
Paul, there are no further questions at this time. Please proceed with your closing remarks.
I'll be brief and thank everyone and we'll look forward to speaking again. Appreciate that. Have a good day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining. You may now disconnect your lines. Thank you.