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Good day. My name is Steve, and I'll be your conference operator today. At this time, I would like to welcome everyone to NorthWest Healthcare Properties Real Estate Investment Trust's Q4 2017 Earnings Conference Call. [Operator Instructions] Paul Dalla Lana, Chief Executive Officer, please go ahead.
Okay. Thank you, operator, and good morning, everyone, and thank you for joining us here today. I'm joined by Bernard Crotty, the REIT's President; Peter Riggin, the REIT's Chief Operating Officer; and Shailen Chande, the REIT's Chief Financial Officer. Together, we are pleased to share with you our results for the fourth quarter and year-end 2017. But first, I'd like to point out that today's -- 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 and 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. Before getting into the full details of our results for the year, I thought I would provide some perspective on our business in this moment in time. NorthWest ends 2017 and begins 2018 in the best position in its history, building expressly on the strategy put in place in 2015. In a nutshell, we are focused, concentrated exclusively in health care real estate, the world's largest and fastest growing industry, with expert knowledge and deep relationships. We are also differentiated, with a high quality infrastructure-light portfolio having long-term indexed-to-inflation leases that provide low-risk steady growth. And lastly, we are scaled as a world leader, with $5 billion in assets and market-leading platforms in each of our markets. In the moment of time, I'm not sure all of these attributes are fully recognized or reflected in our unit price today, and we have more work to do on communicating these themes and their endearing value. At the highest level, 2017 was another transformative year for the REIT, with our asset base growing by over 40%, the completion of $330 million in equity financing spread over 2 successful offerings, the inclusion in the Solactive REIT Index at an additional index post year-end, completion of $872 million in acquisitions, $103 million in developments and $200 million in dispositions, all while delivering improved operational metrics and per unit AFFO and NAV growth. Among a -- many achievements for the year, the acquisition of Generation REIT stands out as significant for the REIT, which, together with the integration and rebranding of our 2 Australasian management platforms as NorthWest Healthcare Properties Management, has solidified our leadership position in the region and positions the REIT to capitalize on future growth opportunity. For the fourth quarter of 2017, we are pleased to deliver another exceptional quarter highlighted by active investment activity, with over $500 million among acquisitions, development and capital recycling and the completion of $500 million in new financing. Of note, the quarter reflected onetime expense items related to its Generation acquisition, totaling approximately $0.02 per unit as well as some drag related to capital raised early in the period and the aforementioned investments and divestments being completed later or post-quarter, representing an approximately further $0.02 per unit that will not be realized until this year. Additionally, post quarter-end, the REIT announced the integration of its regional management platforms, with more than $2.5 billion in assets and the leading healthcare real estate platform in the region, NorthWest is well positioned for the next phase of growth and opportunity in the exciting Australasian market. Quarterly and annual highlights were as follows. Annualized fourth quarter AFFO of $0.93 per unit on a normalized basis, again, reflecting significant activity through the quarter and representing a 6% year-over-year increase and payout ratio of 86%. Net asset value per unit increased by 2.9% year-over-year to $12, primarily driven by portfolio valuation gains and offset slightly by Canadian dollar appreciation through the quarter. And on a normalized basis, net asset value was $12.23 per unit. LTV of 47%, excluding convertible debentures and Canadian and source currency-weighted normalized cash SPNOI growth of 1.2% and 4.4%, respectively, in Q4 and as compared to the same quarter in 2016, again driven largely by inflation indexation on leases at the REIT's international assets. All of this underpinned by 96% portfolio occupancy and a weighted average lease term of approximately 13 years. Importantly, this strong financial and operational performance has come from an even larger, higher quality 10.1 million square foot, 149 property globally diversified platform. Of particular note, the REIT now earns more than 2/3 of its net operating income internationally and more than half from health care infrastructure assets, namely hospitals, all of which benefit from inflation indexed rents, and in the case of our hospitals, typically more than 20-year lease contracts with minimal or no capital requirements on the part of the REIT. Before the REIT completed its largest public equity offering, which included the welcoming of several new institutional partners, the proceeds of our offering were used to repay 2 series of convertible debentures, totaling $40 million, with a weighted average interest rate of 7%, and the REIT pay additional acquisition financing related to Generation REIT. In addition, the REIT has completed financing initiatives, totaling more than $500 million, including a new 5-year $475 million syndicated term loan facility, which we'll use to repair higher cost debt and fund future development and acquisitions; as well as a new 10-year Brazilian long-term financing, with 69 basis points lower interest rate than the previous one. Collectively, these initiatives position the REIT for further growth underpinned by a simpler and optimized balance sheet. In terms of NAV, the value of the REIT's portfolio has increased 2.9% year-over-year and was unchanged from Q3 2017. Looking ahead, we expect continued cap rate compression to continue for high quality health care infrastructure assets across our international portfolio. And with significant developments completing over the next 12 months, we see meaningful NAV growth on the horizon. Regionally, Brazil was on plan, with 100% occupancy and strong income growth, more than 6% year-over-year as far as currency. Operationally, the REIT's major tenant, Rede D'Or, continues to deliver strong results, opening up the possibility of further partnerships with NorthWest. During the quarter, Fitch upgraded Rede D'Or to a local AAA rating. In Canada, we were on plan and performing well with more than 113% of annual renewals activity already completed and 82% of the annual new leasing activity achieved, with normalized cash SPNOI up 4.9% and portfolio occupancy holding firm at 91.2% Of note, the REIT now leased 70% of Bantrel place , with the further 20% under negotiation. The quarter also saw some investment activity in Canada, with continued capital recycling initiatives including the sale of one of the 2 assets listed for sale last quarter, with the second one being sold post quarter and earning the REIT approximately $200 million. The REIT was also active in pre-releasing a potential MOB development in response to market demand in Western Canada. Germany was on plan and performing as expected, with cash and SPNOI year-over-year up 6.8% and occupancy up 97.1%. Along with positive operating performance, the quarter was an active one regarding investment activities with the acquisition of 3 medical office buildings and 2 post-acute care clinics for combined value of approximately $126 million. The acquisition of these 2 post-acute care clinics represent a milestone as the first health care infrastructure property acquired in Germany and the first transaction with MEDIAN Kliniken, the leading rehabilitation clinic operator in Germany. Additionally, the expansion into rehab clinics move towards the REIT's international strategy with long-term inflation indexed leases with minimal capital and leasing cost requirements. Vital Trust reported cash and SPNOI growth year-over-year up 3.2% and highlighted occupance levels at 99.3%, its eighth year in a row at this level, and increased lease term to 18.6 from 17.7 years. The quarter also saw significant investment activity again, with the acquisition of the Eden Rehabilitation Hospital and 3 assets from the Acurity Health Group, totaling $132 million. NorthWest Australia also performed well, with portfolio occupancy stable at 98.5%. Progress continues on its development in expansion pipeline, with expansion of Epworth Freemasons Hospital beginning. As a reminder, this is an $84 million dollar value-added development that follows the successful completion of Frankston Private Hospital and Casey Private Hospital, which were completed in Q2 and Q3, respectively, both with significant value creation. Additionally, the REIT committed to acquire the remaining 50% interest in Epworth Freemasons for $52 million, which is expected to close later this quarter. Looking ahead and building on the scale of the platform and the track record of consistent operational results, the REIT is focused on continuing to execute its international growth strategy to build regional scale, enhance portfolio quality and build upon its market-leading positions in key geographies while delivering growth on an absolute and per unit basis. The REIT has advanced significantly its discussions with new institutional capital partners and expects to have announcements early in Q2 with regards to progressing these initiatives formally and is continuing to position itself as a leader in the ongoing consolidation of health care real state globally. With this in mind, the REIT reiterates its run rate guidance of AFFO of approximately $0.95 per unit in 2018, growing to more than $1 per unit in 2019. Now $12.50 per unit in 2018, again growing to more than $13 in 2019, largely around in place and committed developments that will be completing over the ensuing 12 months. I'll now ask the operator to open up the call for questions. Thank you.
[Operator Instructions] And your first question comes from Fred Blondeau with Echelon Wealth Partners.
Two quick questions for me. First in regards to your 40% target leverage, I was wondering if you could give us a bit more color on the action plan there and what we should expect for the end of 2018.
Yes. Thanks, Fred. So in general, we do remain committed to reducing and lowering our leverage, and I think that the 2018 target, again, is likely to come more with the completion of our ongoing development pipeline. And so probably, it's going to move out about 6 months, but roughly the same target.
Okay. That's fair. And just on Germany, it looks like you recently were able to grow quite a bit there. What should we expect for 2018?
Yes. So again, in the near-term visibility there, we have the completion of the 2 of the 5 remaining acquisitions that we've mentioned to the market. Both of which, again, will complete in the next couple weeks, in Q1. We continue to see good pipeline both in the MOB consolidation and in the emerging relationship in the post-acute care world, so I would expect that Germany continues to be a focal point for us. It's, again, just hitting our initial scale objectives, and we see a big and significant market with a high degree of fragmentation and characteristics that we like in terms of attractive investment returns and clearly a stable and predictable health care market. So Germany continues to be a focal point for us.
[Operator Instructions] And your next question comes from Troy MacLean with BMO Capital Markets.
Just following up on the question about post-acute care. Like, do you envision that part of the portfolio being, like, half the German portfolio in the next couple of years? Is it like that big a relationship, potential?
Yes, so [ I know ] a couple of things hiding in there. We do see it certainly being comparable in size to the MOB opportunity there, so it's a meaningful opportunity. It is a particular area to the German health care space, so clearly -- and an important one that represents somewhere between 6% and 10% of the overall German health care industry. So quite a sizeable industry and, as a result, quite a sizeable opportunity. Again, always hard to predict these things in terms of their pacing, but we've been spending a lot of time looking into the hospital space in Germany and have ended up in the rehab hospital space as a starting point. So certainly, our expectation is to be able to add these types of assets meaningfully over time. And again, all of that would lead me to think that it has a, likely meaningful part of our German portfolio.
You mentioned in your comments potential for new capital partners. In what markets would that most likely happen?
Yes, so I think just to be consistent with past discussions on the point, we are extremely advanced in the Australasian market on our initial discussions and our initial partnership. And I would expect that to be coming first, and that's a big focal point for us. We do see more broadly, I think, high institutional interest in health care real estate in the space. And so clearly, as we're in good global markets for that, there are other opportunities, but our focus for 2018 is certainly to add to our Australasian region in terms of the initial relationship.
And then just on the asset sales, you've sold a fair bit in Canada. It looks like very attractive pricing. Do you expect this to be more active on sales in Canada? Or you've kind of -- you've sold what you want to sell and now it's more on the point of capital side?
That's a great question, Troy, and I think we are looking throughout the portfolio, I would say, for capital recycling opportunities. I mean, the business at $5 billion is mature. And I think with its pipeline, with, say, obvious sort of tensions around equity and debt financing and in every REIT business and with mature assets, some of which have different profiles we do expect to identify. And again, that's $100 million to $200 million a year of opportunities to reposition our capital, and I think that could come in all directions over time. So not a particular focus on Canada at this moment, but certainly a focus on looking for opportunities within the business to reposition capital for higher growth or better quality or all of the above assets. And I think we do have a pipeline of -- small pipeline circling around that, that we see to execute on 2018. So I might say $100 million to $200 million, and I think it's sort of broadly across all of our regions at this point.
And then just my last question, given the integration, do you expect any further onetime costs in 2018? Or was everything kind of mostly put in the 2017 Q4?
Yes, very much the latter. We completed the acquisition, obviously, in July of 2017. We took the time, given the nature of our team and our structures in the region to get that right. And again, really, put everything through as a 2017 event. So I think we see pretty clear sailing ahead in terms of the integration and the team. Of course, we are running a big platform there and a big growing one so there's always going to be tweaks and changes to that, but nothing structural as we see in the moment.
Your next question comes from the line of Mario Saric from Scotiabank.
I just want to circle back to the fundraising initiatives, and it sounds like we'll get color on that within about a month or so. But in terms of the discussions, are they predominantly focused on transaction-based relationships? Or is the kind of longer-term plan to create funds-like structure with institution part [ contract ]?
Yes. So I think, I mean, just so that I fully understand your question, I think the latter, Mario, but just to -- and just to be specific, our objective has been potentially to seed an initial relationship with a small number of assets to make it tangible and real and then to have very significant, in the order of $1 billion, of third-party capital capacity to grow in a targeted focus in that region. So -- and we're substantially advanced on that initiative, so I would say that much more focused towards providing pipe and growth capacity, as we see. Again, the majority of these health care real estate trends that reverberate throughout our markets are quite positive and that we had seen these growing, and asset-heavy operators likely to look for capital solutions and were capable of taking them. And so we see very significant opportunity to grow the business over time. And really, this is to position ourselves both in the public context and with additional diversified capital to pursue that scale in our leadership position. So very much around about having pipeline capacity and the ability to preserve meaningful target. To set it in context, that size of a fund in the Australasian market would be the biggest real estate fund. Period. And certainly, globally, would be the biggest healthcare real estate fund. So these are meaningful numbers. It's taken us a little longer than we wanted as a result of that about, but we're quite close. And again, we think it's entirely consistent with our business plan in that region to have a very capital and to have capital that can allow us to do big things very quickly, all of which we see that it's highly likely in the next little while.
Great. Okay. That makes sense. I mean, just more of a high-level question, development becoming a bigger part of the story in your target market. When you're looking at the new product coming online, so the new hospitals that are being built, from a technological perspective, from a structural perspective, what are some of the big differences you're noting in design and so forth in relation to the product?
Yes, that's a great question. And I wish, in fact, Chris Adams, our Regional Director and sort of expert developer, was online to answer that. I think we could probably come back to you with a much more specific answer. But I think the private hospital industry, as we've come to know it, has been quite successful and probably evolving its assets and its structure over time. And again, we see these things as constantly changing. And so even though a brand-new hospital certainly probably is not unlike what we see in our markets here, newer and nicer and has some structural flexibility to do things, we still see an equal number of opportunities in our business. And a focus of our operators, many of whom are doing both new greenfield projects as well as what the industry calls brownfield projects. And so might just come back to say that one of the hallmarks of the space and the thing we like about it is that in addition to those very select greenfield opportunities, a few of which we have underway in our business right now, we almost have a constant pipe of brownfield opportunities because operators are adapting and evolving existing facilities, and that's really where they've come from. So it's not a mutually exclusive thing. I think we see good operators doing both. And as a result, what we rarely see is hospitals becoming obsolete, [we're getting] much more higher utility. They sometimes change or use. They go from acute care to specialist care, or they got expanded or evolved. But that's sort of been our constant. So it's both of those sort of work streams that we have in the business, and I would say that the greenfield opportunities are more rare, right? And that flows our truly once every X years, 10 years or whatever it is. They take a long time to plan. Clearly, the ramp-up and the stage-up of these things requires just a little more planning, whereas adding to our expanding and existing facility is a much more easy and perhaps cost-effective way to grow things. Also, many of the hospitals we have are inner core and just don't offer greenfield opportunities. You're really dealing with urban centers and the need to be highly entrepreneurial and expansionary in terms of what you have. So might say there are 2 trends. Certainly, the great thing about our business, and one of the reasons we particularly like Generation is that they had strong greenfield experience. Obviously, we've completed Frankston and Casey and now the Grey Street expansion, Clarendon as well as Vital's ongoing experience with brownfield and incremental expansion. And so that toolkit, we sort of bring multiple answers to, and I think that's likely to be a characteristic of the business. I'd highlight again just around developments, and you pick up the point that at a 100% basis, the business has about $400 million underway, call it, [indiscernible] at our share. But then all of that development would be 100% pre-let. Over half of it would be on the, let's say, landing brownfield model that Vital has traditionally employed. And where we're into the greenfield projects, in particular Grey Street, again, 100% leased with 100% third-party cost recovery basis-type contract. So very, very low risk developments, and I think that's a differentiator to us. We see the ability to both improve the portfolio and grow earnings and value in this quite low-risk format. You're right, though, that in the moment over the next 18 months, we do have a good bit of it coming online, and it's going to have a meaningful impact for the overall business. I mean, at 100% level, somewhere between $15 million to $20 million of AFFO or NOI coming into the business. I guess, NOI more correctly just as we put capital structure to that. But important to say that, that's in the pipe, 100% committed, 100% contracted, working through. And I think we have an equal track record of having done that, more or less, over the last couple of years. So I think that's a part of the business that people need to understand and be able to look through, and we've put a lot of information together around the -- around our presentation this year-end but also when we did the Generation acquisition around the completion of that pipe and some of those things. And so we feel very comfortable that those earnings are highly visible and executable on and really a part of our business. And I think it's one of the things that we've seen as with a AUD 2.5 billion portfolio, for example, we are likely to have $250 million, which is 10% of the business in some form of brownfield or expansionary activity virtually all time. So it's just sort of been the history over the last 6 or 7 years. And based on our current pipe and based on current dialogues with the business, we see that type of opportunity over the near -- over the visible horizon. So it is a pretty specific characteristic to health care real estate. It's one that we really like, being able to provide those bite-sized expansions on a very low risk basis, improving our own portfolio quality, extending out leases, doing all the things that come with it. And so again, just draw everyone to that moment that we see this as a comfortable part of the business and one that its differentiated and provides us with a lot of [nice] attributes.
Much appreciated. And then, like, just coming back to the brownfield opportunity. I may have missed this in the disclosure. But when you look at the portfolio in totality, what percentage of the urban locations that haven't been expanded or would you say have expansion potential over the long term?
Yes, let me try to be and as specific as I can. So in terms of greenfields right now or bigger brownfields, discreet ones, we put the Grey Street expansion and Clarendon, which is around $86 million. And the Wakefield expansion are sort of more towards the right-side of that ledger, closer to green. Wakefield is a new development, and Grey Street's big enough in its own right and structural enough that it's close to that. The balance of that $400 million pipe is a combination of expansions that are really brownfields. And so that's within our existing business, and those will be between $5 million ones up to $25 million, and they chug through the system in their own tempo. Sometimes adding a work, sometimes adding carparks, sometimes during future proofing works for bigger expansions down the road. So that's what's going on in the business. So I'd say just under $200 million in the bigger and more greenfield-type projects. And the balance is a combination of smaller ongoing brownfields. Within our portfolio, as we look at it, again, I'd say every operator is constantly considering a brownfield opportunity in our business. And I expect that, that $200-ish million number, as I said, was likely to be pretty constant for the next 5 years in our businesses, as we just think. And that could be 10 business cases. That could be 100, again just projects in consideration up and down our portfolio by the operators themselves, and they're just in a constant state that way. In terms of bigger things that we think about, I would say of our bigger regional acute care hospitals, we have probably some future stages. Like again, at least half of that portfolio we're aware of future-stage expansion, even stuff like Casey, which, again, just opened in Q3 in suburban Melbourne. It's got stage 4 and 5 of its expansion plans underway, and it literally just had its grand opening last week. The hospital came in [ as entity ] for us in Q3. So we've already got a brand-new hospital with at least 1 and possibly 2 future expansions in planning stages there, and we see that in the majority of our major urban assets. One, for highlighting, I think we know is Epworth Eastern, which is another big asset with Vital loans, and it's a new mix of planning on a very significant expansion. So clearly, high visibility on good expansion. So never can think of development fully as steady state. But in the moment, with our current operators and with our current pipe, again, pretty comfortable that, that existing level of activity is likely to maintain for the visible future. And again, I do think that's a hallmark of the industry, and so that's an area where we have the most visibility. But certainly Rede D'Or in Brazil has a very similar focus of growing and expanding its business. We have ongoing opportunities there. And I'm sure as we get a little more runway into the rehab space in Germany, we're going to start to see similar characteristics there. But for the moment, that's early days. So we like that type of approach, and we think that it just gives us a nice ongoing chance to invest capital in our own business and improve it accretively. So that's a little -- hope that answers your questions, sorry.
No, it does.
And your next question comes from Matt Kornack with National Bank Financial.
First question, the Canadian dollar has been under some pressure of late against a lot of different currencies. Wondering how you think of that in the context of funding growth with equity from Canada or if there are other sources of capital to fund growth in your respective international markets. And then second question, if you could provide a bit of an outlook from the same property NOI growth, a standpoint for each of the segments just because this year has been fairly volatile, in Canada with Bantrel but also at Vital with some onetime nonrecurring stuff. I'm just interested in your outlook for those 2 markets in particular.
Yes, that's great. Well, I'd just start with the [C dollar a moment]. Obviously, the good news is that once again, more than 2/3s of our earnings coming and value coming offshore, and we're benefiting by some tailwinds in '18, although that's not exactly our design. We have a broadly diversified currency approach, as we've spoken to. It is likely to be a tailwind for us in '18. It does point to the question that you raised. And so clearly, partly that asset recycling initiative that I alluded to and in country or specific private resources in terms of some of our institutional partnerships are looking to be primary sources of capital. Obviously, that would be the simple answer. But clearly, we do see opportunities going forward, and we think about accretion in the context of whatever the cost of our capital is, including [C dollars] and our unit price, so we're always monitoring that. And as a result, sometimes things fall off the list, or they get different priorities. And I think that's the nice part of our business right now with a $5 billion business and significant regional capital allocation tools in front of us. We have a number of answers to that. So again, that's a bit simplistic. But I would say that we're looking, obviously, to harvest internally as much capital and certainly to use our regional resources, which are in place. And I think we mentioned that the quarter financings has significant liquidity, both the corporate and regional liquidity. And again, we see capacity through Vital and other private initiatives and institutional initiatives that we've gone to have very significant dollars. And maybe just highlighting Vital as an example, it probably has between $250 million and $300 million of capacity in its current financing arrangements. We have, again, somewhere around $100 million in our NorthWest Australia business. So we do have meaningful capacity in the system. That's sort of part of the message around Q4, where we did put some facilities and some equity in place to allow us to hopefully do some things in the near term, not all of which were done in the quarter clearly, so that might just stay there. In terms of regional growth perspectives, I'll let Peter work to Canada. And going forward, I think we would distinguish with Bantrel in our thoughts around Canada. You can come to that. But Brazil, Brazil is in a very interesting moment oddly enough, I think quite a positive one for the region. But it is translating into slightly lower growth. As you recall, we've had 5% -- 6% inflation over there and sometimes even higher. Brazil normally is on track around 3%. We are forecasting a little bit higher of that going forward as the economy is coming out of recession now and showing growth there to 3% to 4% in Brazil. We have, obviously, a very, simple structure there, so fully net leases, so it translates pretty directly.
On that front, you guys did a financing in the quarter, which was at -- I mean, compared to a few years back very attractive rates. Do you think Brazil is heading towards a more normalized real estate market, whereby inflation is normal and interest rates are similar to here? Or do you think this is just a short-term blip in that country's development?
Again, as you've heard me speak, I think we're constructive on Brazil. I do think, obviously, it's a windier road than other markets we're in but one that -- with our structure and approach to the market, we feel both secure and well positioned. I do think that the moment there -- and it's a very big market, clearly still going through some of its, call it, maturation, both economic and otherwise. So I think there are just myriad of opportunities there, and we happen to have a fantastic partner and one that has actually even outperformed us. So I think Rede D'Or's financing will do come in on a 10-year basis, under 5% recently. So even 100 and some basis points inside, what we did broadly, we have a similar instrument, which I think speaks to both their continuing improvement and the market's improvement. So I think we're optimistic that what will happen in Brazil is there's going to be other opportunities beyond Rede D'Or for us, which is a big step. And that, that hospital professionalization and consolidation opportunity will continue apace, and I think -- so constructive and see it as a good moment of temper at all with the 2018 federal election. So that's going to have its own dramas, but again, we're looking outside of politics for the answers, and our industry is performing very well. So we're feeling good in Brazil. Bernie, do you want to speak to [ANZ] around growth or just the general opportunity again?
Yes. So I think in [ANZ], certainly -- responding to your question, the macro level growth remains solid, and the economy is performing well. Obviously in that part of the world, there are different macro influences, including investment flows in the region. But from a macro level, performing well and look to continuing that to happen. And I think at the micro level and just in terms of our sector, again, all trends remain positive in terms of the themes of the -- that you've heard us speak about before, whether it's demographic tailwinds and overall demand for health care and regulatory stability in terms of providing for the public private system that creates much of our opportunity. So I think we see the region, generally, is continuing the very favorable trends that we've benefited from over the last number of years.
Right. And maybe just coming to SPNOI or built-in growth, we certainly see in that 2.5% to 3.5% range as being the likely target. I'd highlight that a good number of our leases have floors in the 3% to 3.5% range. So again, pretty good visibility on at least NOI of plus 3% there broadly across the board. Eurozone, and in Germany in particular, again, still slightly muted to that but starting to grow. Obviously, that's been maybe the surprise of 2017, particularly in terms of Germany and some of its relative outperformance. Although, we're still euro-denominated and, clearly, more modest. I think that one in a bit percent is probably ticking up to high 1s, maybe even 2% as we think about that business in the moment and looking down the line, so that would seem to be pretty consistent. And then coming to Canada, Peter.
Yes. Matt, some of the noise from the Bantrel renewal that was effective last August comes out of the system per quarter over previous quarter, prior year quarter comes out of the system from the first half of the year. Overlooking and modestly positive around 1%, and that's really underpinned by good strong performance by the traditional MOB, with the headwind that we continue to face in the Alberta market, where we're doing better than the general office market, for sure, materially better, but still somewhat getting impacted by that.
Fair enough. Just one last question with regards to valuation. Presumably, Canada cap rates are going to be pretty stable. Germany, I think, there's support. I don't know the Australian market and New Zealand market as well from a cap rates standpoint. So if you could speak to what the trends are there, that would be interesting. And then Paul, it sounds like Brazil, its interest rates are coming down, cap rates, I think, this quarter for your portfolio. You took them down a bit. So it sounds like maybe there's room to go lower on cap rates in Brazil. But I guess, maybe just the Australian market and confirmation on Brazil if that's possible.
That's good. Well, again, I'll actually let Bernie speak to Australia and New Zealand there.
Yes. So at the December 31 quarter broadly across the region, the cap rate came in at approximately 5.75%. That reflects, I believe, about 13 basis points from the September 30 quarter, and that's consistent with trends that we've seen for the previous number of years. That is, we've been on a pretty strong cycle of cap rate compression in the region. Obviously, those are pretty lofty in terms of some valuations, but we don't really see any change in the direction. The attractiveness of the sector remains very, very high. And in fact, we see new entrants popping around from time to time. So that's where we're sitting currently and optimistic as we go forward.
That's right. So again, just picking up on that, our portfolio in Australia and New Zealand, heavily major market-focused. So you think of Brisbane, Gold Coast, Melbourne, Sydney and Auckland. It's the big drivers. Those continue to be, broadly speaking, regional gateway markets. And in particular, Melbourne and Sydney, experiencing quite similar trends to what we know here in Toronto. So for sure, that would be the market backdrop and, as Bernie said, increasing interest. So probably -- although, we have enjoyed very significant cap rate compression over the last little while, a few years in the ANZ. That's waning a little bit, but still continuing positively. Where valuation is likely to be driven again is through this development pipe completion. And so all those of developments are coming on at 100 and 250 basis points wider than what current coverage would be. So likely to see that, that's going to be a big value driver. And in Brazil, I think you're right. It's obviously a pretty dynamic market moment right there. And so we are seeing [improving] cap rates. We benefited by that over the last couple of years. If we were to talk to our tenants, they would say that -- they'd like to see even sharper numbers, just to put it mildly. But the fact is that I think it's a reasonable business moment there, and we do see some opportunity for a little bit. But I think probably if we look at '18 and '19 and try to think about that guidance that we were talking to. I said 1/3 would be cap rate-driven, and 2/3s is going to be income-driven if I had to sort of forecast over the next 18 months, which is probably reversing what it's been over the last year just to put a ballpark.
And there are no further questions at this time. I'd now turn the call back over to Paul Dalla Lana.
Okay. Well, thank you again to everyone participating on the call. We appreciate your interest in NorthWest, and have a good day.
This concludes today's conference call. You may now disconnect.