NorthWest Healthcare Properties REIT

TSX:NWH.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the NorthWest Healthcare Properties Real Estate Investment Trust Second Quarter 2021 Results Conference Call. [Operator Instructions] This call is being recorded today, Friday, August 13, 2021. And I would like to now turn the conference over to Paul Dalla Lana, CEO of NorthWest Healthcare Properties REIT. Please go ahead, sir.

[Paul Dalla Lana, Chairman & CEO]

Thank you, Operator, and good morning, everyone. I appreciate you joining us today. We're joined today with by Shailen Chande, the REIT's Chief Financial Officer; and Peter Riggin, the REIT's Chief Administrative Officer. Together, we are pleased to share with you our results for the second 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 are necessarily based on assumptions that are subject to uncertainties and risks, which could cause actual results to differ materially. We direct all of you to the risk factors outlined in our public filings.Operationally, the REIT is performing defensively and performing well as expected, with a portfolio that is 97% occupied by a diversified tenant roster of hospital, health care service and life science research tenants, the majority of which are directly or indirectly funded publicly by their respective governments.In Q2, the REIT advanced a number of its strategic priorities, including its value-creation initiatives in the U.K. to position the portfolio for a planned joint venture, advancing its ambulatory care and hospital precinct development strategies and achieving credit metrics consistent with an investment-grade issuer.The acquisition of Aspen Healthcare for approximately $38 million was a major step for the REIT in the quarter. Aspen is a hospital operator of 4 of the REIT's U.K. investment properties. As a result of the transaction, the REIT acquired 2 new high-quality assets in Claremont Private Hospital and the Edinburgh clinic, as well as control of the operations of 8 hospitals located throughout the U.K.The REIT has concurrently entered into agreements to sell these hospital operations to leading U.K. hospital operators, which are expected to close later this year. As a result of the Aspen acquisition, and the on sale process, the REIT has expanded its U.K. platform and further diversified its tenant base with a much stronger credit profile. In combination with our opportunistic market entering into the U.K. in early 2020, the REIT expects to generate substantial value for unit holders, which are currently estimated at more than $200 million above its cost base.As the REIT executes on the final stages of its U.K. value creation initiatives, its focus is now shifting to executing on its previously announced $1.7 billion U.K. JV initiative, which it expects to be completed later this year or early 2022. In Q2, and subsequent to quarter end, the REIT completed $321 million of accretive normal course acquisitions and $7 million of dispositions, significantly expanding its assets under management to $8.3 billion, an improvement of over 21% year-over-year.The REIT continues to progress earnings and NAV accretive development projects with a pipeline of $320 million currently under construction, and additional $27 million of approved projects with expected completion dates between Q4'21 and Q4'23. Moreover, in this moment of an intense focus on the health care industry, the REIT has been leveraging its relationships with its health care operators and capital partners to participate in what NorthWest views as a key secular trend of decanting services out of hospitals.To that end, NorthWest is focused on this ambulatory care and hospital precinct development strategies and has successfully built out a longer-term development pipeline of over $1 billion. With regards to Australian Unity, based on frustrating transactions completed by Australian Unity in Dexus in June, an ongoing litigation around these matters to have them unwound, the REIT withdrew its previously announced proposal to acquire all of the Australian Unity Healthcare Property Trust at a price of AUD 2.70 per wholesale unit.Separately, the REIT acquired an additional interest through its premium cash offer of AUD 2.70 per unit, which now takes the REIT's holdings up to 17.3%, making it the largest unitholder in the Australian unit. The REIT is actively considering next steps with regards to its investments in this entity.Another key priority of advance during the quarter was the continued debt optimization with the goal of achieving investment-grade credit metrics. In the quarter, the REIT completed $201 million equity raise and post quarter closed a further $25 million private placement to NorthWest Value Partners on the same terms. Net precepts of the issuance were deployed toward the previous announced acquisition of Dutch Medical Office Buildings and the repayment of higher cost debt. In May, $61 million of the $75 million Series E convertible debentures were converted into equity with the balance redeemed with existing liquidity.As a result of all of these initiatives, the REIT's proportional leverage declined 110 basis points, quarter-over-quarter to 49.6%. The REIT's balance sheet continues to present organic deleveraging opportunities through the expected conversion of $80.5 million of in the Money Series F debentures maturing on December 31st, 2021, which had a conversion price of $12.80 per unit. Pro forma completion of private placement, full conversion of Series F debentures to equity, completion of the U.K. portfolio repositioning and seating of the planned U.K. JV.The REIT's pro forma consolidated and proportional leverage would further decline by approximately 860 basis points and 920 basis points, respectively. ESG initiatives also remain a key strategic priority with the REIT being committed to issuing its first ESG report in 2021. The REIT believes that ESG issues have played an important role in defining its past, and will continue to do so in the future. Our global cross-functional team led by the REIT's Chief Administrative Officer is advancing this important aspect of its business, including completing its inaugural submission to GRESB, a leading real estate benchmarking provider.For the quarter, all results are in line with expectations with annualized quarterly adjusted funds from operations of $0.92 per unit on a normalized basis, implying a payout ratio of 87%. Earnings accretion from recent investment activity and financing activity was as expected, although the accretion of the Canadian dollar over the past year relative to the REIT's average foreign currency exposure was a slight drag on earnings. On a constant currency basis, AFFO per unit was up approximately 9% year-over-year, which is particularly notable in the context of the REIT's deleveraging activity.In the context of a lower Canadian interest rate environment, we expect FX headwinds may begin to ease and then align over the balance of 2021, providing us further tailwind to the REIT's future earnings. Additionally, net asset value was up 6.3% to $13 -- $14 per unit this year, driven primarily by strong revaluation gains in Australia and a rebounding Brazilian Real. With significant demand for long leased inflation indexed assets, and increasing interest in health care real estate, in particular, we see near-term potential for a continued cap rate compression across our markets, leading to meaningful valuation increases in the near-term.Combined with our U.K. value creation initiatives, expansion of the global asset management platform and a growing development pipeline, we see the potential for a further $2 per unit in NAV increased in the short to medium term. Before turning to operational results from the quarter, I wanted to briefly speak of some of the trends we are seeing across each of our global markets.Investment activity is at all-time highs with institutional investors [ talking ] to rectify limited or underweight positions in health care real estate. More than that, we continue to see significant capital formation around health care real estate and premium valuations being ascribed to these platforms across Australia, Europe and the U.S. Collectively, these macro themes are driving pricing in our sector, which we are beginning to see high-quality assets in core markets trading into a low 4% range.All that to say while we have already booked substantial fair value gains in Australia and New Zealand, we continue to see significant scope for further cap rate compression across our portfolio. Combined with several value-add initiatives focused on portfolio repositioning and development strategies, we expect to continue to deliver meaningful NAV growth in the near-term.Operationally, our results, which are derived from a 190 property, $8.3 billion health care infrastructure-led portfolio, tenanted by leading operators on long-term inflation index leases was on plan. The inherent strength of this portfolio is reflected in the REIT's operating results with year-over-year constant currency cash recurring SPNOI growth of 2.9%, again largely driven by contractual rent indexation and underpinned by 97% occupancy and a weighted average lease term of more than 14 years.For the 3 months ended June 30, 2021, the REIT collected just under 99% of its rent, which is 20 basis points up from the last quarter. In all regards, a highly defensive portfolio. Segmentally, I note the following: In Brazil, we are on plan with steady 100% occupancy and a continued strong year-over-year source currency SPNOI growth of 4%. Operationally, the REIT's major tenant Rede D'Or continues to deliver exceptionally strong results and expand its business, thereby creating potential opportunities for future partnerships with the REIT.The REIT is also focused on getting traction with additional high-quality operators in Brazil and sees a very constructive market currently. Canada performed satisfactorily during the quarter with stable portfolio occupancy of 92%, and adjusted year-over-year source currency SPNOI decline of approximately 1%, mainly driven by higher payroll related costs.Leasing activity during the quarter was -- also involved 15,000 square feet of new leasing, a 68,000 square feet of renewal leasing completed. Spread on renewal rents during the quarter was up 6.5% with rent collection remaining strong above 98%. On the investment front, the REIT acquired its first Life Science asset in Canada for $15 million at a weighted average capitalization rate of 6.1% during the quarter. The property is located in close proximity to Montreal's Technoparc and is 100% occupied on an 11 year weighted average remaining lease term. The REIT completed the sale of one non-core MOB for an aggregate sale price of $7 million during the quarter.In Europe, we were on plan and performing as expected with year-over-year source currency SPNOI growth of 1.8% and occupancy at 96%. In Europe, the REIT continues to execute on its growth agenda by developing strategic relationships in both the medical office and hospital segments, which continues to translate into accelerated deal flow.In addition to the U.K. value-creation initiatives previously mentioned, the REIT completed the acquisition of its previously announced portfolio of 4 on-campus Dutch Medical Office Buildings for $175 million at a weighted average capitalization rate of 5.1%. And last, in Australia, the occupancy remained stable above 99%, with constant year-over-year source currency SPNOI growth of 3.2% and a weighted average lease term of more than 16 years. At Vital, the business reported similar results with year-over-year SPNOI growth of 6% and occupancy, again at 99% with a weighted average lease term of more than 19 years.As the manager of Vital Trust the REIT completed the acquisition of a large rehabilitation and mental health hospital located in Camberwell, Australia for $68 million at approximately 5% capitalization rate and began new greenfield development in Princess Alexandria Hospital Precinct in Brisbane, Australia.I'm pleased with the progress made during the quarter, which advanced a number of the REIT's key long-term strategic initiatives as well as producing solid operating results despite the COVID-19 environment. With deep relationships, best-in-class regional operating platforms and a strong access to public and increasingly attractive footprints of private capital, the REIT is better positioned than ever, continuing to execute on its strategy.I will now ask the operator to open up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from [ Frank Tsu ], BMO Capital Markets.

[Unknown Analyst]

So my first question comes like, I saw you guys complete the acquisition of the life science assets in Canada. And as we can tell, after COVID, it's a kind of awakening call to the life science sector and the [indiscernible] are committed $2.2 billion in funding the life science through COVID. I wonder on this plan, do you guys expect to be part of the game maybe just improve your presence in the life science in Canada, either through buy or build?

[Paul Dalla Lana, Chairman & CEO]

We absolutely do, and we're active in the life sciences space in all of our markets in varying degrees, but it builds very much on one of our core investment themes, which is our precinct investment theme. And so, we have active projects queuing in and under review in all of those markets. Some of it buy, some of it build. And we expect to have further announcements on this. It's a meaningful opportunity, but it's not limited expressly to life sciences. We do see this precinct opportunity offering a whole range of opportunities for us to grow and build on.And I might call out Australia, some recent examples, which have come out, you may have seen that we reported Vital's results, I guess, 24 hours ago. And we would have called out there 3 or 4 specific projects that have upwards of $1 billion of potential development in precinct, including life sciences, hospital and outpatient opportunities. And we see a real continuing opportunity to build on our key strategies in Australia and New Zealand as an example, but certainly, increasingly in Europe and in Canada, pursuing these initiatives.And so we're quite active in the business. Overall, I might call out, maybe that the business in advancing these initiatives is looking to position the overall investment to between 10% and 15% of the business into value-add or development activities. And I think we see increasing visibility on that pipeline. We've been working hard in all our markets on these initiatives. And so we're starting to make some real progress there.Most of this is in conjunction with our existing capital platform. So it gives us a very attractive way to both invest there and earn fees and related revenue, bringing these projects to completion. So quite excited about that initiative, and really, it's been a long-standing objective for us to grow and build on.

[Unknown Analyst]

And also in this quarter, we're kind of turning to the fair value side of your IPP. I saw you recorded a very sizable fair value gain in this quarter. So I wonder, it's actually in the Vital Trust, I mean. So I wonder what has been changing in that market that drives the fair value gain recorded in Q2? Maybe this is a question to Shailen.

[Shailen Chande, Chief Financial Officer]

Happy to speak to some of our cap rate trends more generally, and Paul can speak to some of the transactional investment moment. More generally, our IFRS cap rate came down about 20 basis points quarter-over-quarter, 5.6% to 5.4%. And you're correct, quarter-over-quarter, the primary change came out of Vital, which was about $200 million or so over the quarter on a consolidated basis. And year-over-year, Vital presented about a 50 basis point compression in its overall weighted average cap rate.So it is a trend that we are seeing in the market more broadly. I'd call out that as we know under IFRS cap rates, it tends to be a bit of a trailing indicator. So perhaps not as up-to-date with what we're seeing in the current investment markets. And for some of Paul's introductory comments, we do see continued scope for marks to our IFRS cap rate, primarily coming out of Europe as well as continued compression in Australia.Paul, I'm not sure if you'd want to add any color around the investment market to perhaps substantiate that.

[Paul Dalla Lana, Chairman & CEO]

Yes. So I think -- I mean, again, maybe putting that in context, we've guided previously to seeing 50 basis points in our total portfolio over the balance of the year. I think we're through 20 in this quarter, and we see the balance coming certainly over the next couple of quarters. A good chunk of that, as Shailen coming through continued cap rate compression in Australia and New Zealand and Europe and as well the U.K. JV initiatives, which I mentioned.So a lot of that is quite visible and coming quickly. And so we're quite confident in that overall outcome in the near-term. I would say, though, that the trends that we're seeing in our space for the highest quality assets, infrastructure like assets that we substantially own already are really starting to converge on the themes we're seeing in the industrial space as an example. And so while we've been guiding into the low 4s for some of our best quality assets, I really think that, that's going to start to have a 3 in front of it quite quickly.And so the trend is very pronounced, and obviously, something that benefits our existing portfolio significantly. So we've been relatively conservative to date on these numbers despite their size and noting that these are big movements on a big portfolio, but we see a lot more to come, obviously equally focused on making sure how we position the business both to acquire and increasingly to develop assets so we can do things accretively. And so we have all of our funds and JVs set up that give us leverage and a very low-cost of capital to pursue opportunities in this type of environment.So we think we're well positioned there. Reminding everybody that we have approximately $5 billion of debt and equity capacity in our existing JVs, to pursue these strategies, plus Vital, which is an evergreen constant capital vehicle. And we really are starting to see some of the value-add and development initiatives that we're pursuing coming in, in mid-5s to mid-6s types of returns. So quite positively accretive to what's available in the sale leaseback market, which is incredibly competitive.Of course, our overall strategy has been to be a broad real estate partner of choice and deliver a bunch of services more than the straight capital. So we see the business positioning itself to really be able to lag out that strategy on the ground in all of our regions.And so really capable of delivering value-added services to our tenants, and that puts us in a really positive situation. Recently, for example, in [indiscernible], we've had a very strong partnering relationship with one of our bigger tenants in the portfolio, Epworth. We've completed the acquisition of Camberwell, which is one of their outpatient clinics in Melbourne. But we've also just come to terms on a strategic partnering relationship with them that will see us acquire interest in 2 of their biggest hospitals, as well as commit over the next ten years to upwards of $1 billion of development with them and expanding these big hospital campuses.And so, we're able to position the business with the best partners as a smart strategic partner and that has the opportunity to join with them on these assets on a 50-50 basis and grow the portfolio together over time. We've had a 25-year relationship with Epworth through dating Northwest involvement in the business in Australia. But it speaks well to sort of the strategies that we have that allow us to build on these partnering aspects and really grow the business, both through acquisition and organic development over time.And so we're really starting to see that pipeline and those opportunities build nicely with similar initiatives underway in our hospital portfolio in the U.K. and in our outpatient rehab clinics in Germany. And I'd call out the MOB acquisition that we did this past quarter in the Netherlands as a great example of buying a set of purpose-built buildings from the hospital operator. And we're now in the middle of the campus of Albert Schweitzer in the Netherlands, one of the top operators, and it gives us a real opportunity to help them grow and evolve their campus over time.And it's the first transaction of this type in the Netherlands. So it also gives us some technology to allow us to talk to the other hospital operators in the Netherlands and offer them similar on-campus real estate solutions. So we really see this part of the business evolving nicely, and I'm quite excited about the potential for it over time.

[Unknown Analyst]

And in addition to that, so I want to circulate back to AUHPT a bit. So on your MD&A, I saw like you guys have the -- you guys announced that the premium cash offer, and also you mentioned the put and call arrangement to acquire 10 million units at AUD 2.70 per wholesale unit. And following that, you guys had anticipated to close the purchase of units by the third quarter of fiscal 2021. So my take is, so is this the premium cash definitely that closed in Q3. And also, do you also expect to exercise your pull and call arrangements in Q3 as well?

[Paul Dalla Lana, Chairman & CEO]

Could be Q3 or Q4. We have flexibility there. But yes, we do expect to exercise them. And we have an effective interest of 17.3%, again making us the largest investor in the business. That consortium includes a JV partner. So we have a strong capital relationship there to achieve that. And again, we're very much looking down the road from there.

[Operator]

Your next question comes from Fred Blondeau of IA Capital.

[Frederic Blondeau, Research Analyst]

I was just looking at your same-property NOI. And I was wondering if you could give us a bit more granularity on -- it looks like you're doing extremely well with Vital. I think you gave us a good color this morning, but could you expand a little bit more on what's going on in Australia? What will be the drivers there?And it looks, you're seeing a little bit more pressure at least last quarter in Europe, so a bit more color on the drivers in these areas would be much appreciated.

[Paul Dalla Lana, Chairman & CEO]

Shailen, maybe I can take a stab at that in Australia. Again, our portfolio in Australia and New Zealand is 100% indexed and 99% occupancy. So the math on SPNOI has pretty direct drive. Now we do have a number of our leases that have fixed floors of 3 year, 3% or 3.5%. So sometimes, the growth rates there are above inflation, it's inflation plus, I would say, through the portfolio. But by and large, the bulk of the portfolio is indexed to local CPI.So that's a bit Australia and New Zealand, and again, at 99% occupied, it translates pretty directly in both directions. So we like that part of the business. Europe has that combination of both MOB and long-term leases. So all of the long-term leases in our rehab and our hospitals, of course, are indexed and it's a bit different in each market, where Germany is CPI indexed, U.K. hospitals have typically a call or a [ floor ] between 2.5% or 2% and 4.5%. So we get a minimum of 2% or 2.5% and up to 4.5%, depending on the lease arrangement there. And in the MOB portfolio, it's probably on average, about 3/4 of CPI that we would get through our leases in the MOB portfolio. So I think taken in combination, you get a bit of a driver there that's pretty close to being inflation-based.Of course, inflation in Europe is lower than in our other markets, including Australia. So we've been seeing that growth in the 1% to 1.5% range translating. We also have, again, in the MOB business, a business that more closely approximates Canada. So there certainly is leasing and some elements of operational performance coming through that business. So it's a bit of stew, but ultimately, increasingly getting closer to CPI based, but not quite as far as Australia, New Zealand or Brazil for that matter.

[Frederic Blondeau, Research Analyst]

And so what would be your views for second half this year and next year, looking at New Zealand and Australia and Europe as well?

[Paul Dalla Lana, Chairman & CEO]

Yes. I'm a bit reluctant, Fred, to make a call on inflation to be direct to the question, I guess. I think the great news about our business, though, is that we have pretty direct drive pass-through into our leases, as we've just talked about, so more than 75% of the business has direct inflation adjustments or better. So I think we're well productive in the rising environment for some inflation. We've been guiding -- maybe Shailen, I'll let you talk to what we're forecasting for the balance of the year. But I think we've been pretty consistent in that 2.5% to 3% SPNOI range across the business.And again, anything different than that would come out of a higher inflation environment, which we are hearing a lot about, but it hasn't yet translated and maybe some of the immediate shock of all this reopening is abating and things are restoring themselves to a little bit normal level.But I'd let Shailen carry it from there.

[Shailen Chande, Chief Financial Officer]

In respect of SPNOI on a global consolidated basis, on a constant currency over the quarter year-over-year, we posted 2.9% or roughly 3% constant currency SPNOI. That's been a fairly consistent run rate for the business. So looking into that 3% SPNOI and certain 6% or just under on a levered basis is how we see that tracking through the numbers, and that's been our historical track record in a fair market going forward.

[Operator]

Your next question comes from Tal Woolley of National Bank.

[Tal Woolley, Research Analyst]

I wanted to start just with Australian Unity. Are you a happy passive shareholder now in Australian Unity?

[Paul Dalla Lana, Chairman & CEO]

Absolutely not. And I think, again, we haven't changed our stripes overnight Tal. So we do things for a reason, and we take a long view to it. What I will say, though, is that clearly, as the largest investor in the trust there, we have a very strategic and very valuable stake, and we except to use it to maximum advantage as we look forward.I can't talk more than that. But I think you know as to have a long-term objective in mind, and we categorically do here with our partner who has an equally long-term view. So nothing about the [ Windy ] road of Australia and M&A is unexpected here, and this will be a multiphase initiative for us.

[Tal Woolley, Research Analyst]

Okay. One of the things I sort of wondered about, having watched the moves over time that you guys have made to increase your exposure there is that, that feels to be a bit of a leverage arbitrage between what's sort of tolerable here in Canada and maybe what is sort of natural practice in Australia. Like, will they -- like, that feels like it's part of the potential upside for a new buyer, like is the -- like why haven't -- do you expect to see them start taking up their leverage as a result, like seeing more of these maybe bigger funds that are kind of relatively more unlevered, taking up their leverage as a result?

[Paul Dalla Lana, Chairman & CEO]

There's lots in that. So again, I think other than maybe, other than tactical things related to the specific situation, which I won't speak to, what I can say about Australia and New Zealand in general, and you see it in our Vital business as well, is that it is a lower leverage environment than Canada traditionally has been, although I'll let Shailen talk a lot about the direction we're driving it.A lot of that comes out of the recent experience in the GSC there in 2008, where that was very impactful in the listed environment and [indiscernible] environment for Trust. So we see lower leverage in that part of the world in general. Obviously, we have different approaches to it. So in the context of our public sub Vital, we have sub-30 kind of leverage focus right now, and that's consistent with the market, and probably consistent with the tight end of the market, maybe in Canada and the U.S. as an example, but certainly expected in the Australia, New Zealand context in the listing environment.Of course, our JV with our large institutional partner is very different, and has a very different leverage fluency, one of our great advantages is being able to use that. It gives us an effective cost of capital and things that we may do. So I think there's different answers to that question and a bit horses for courses. But if you had to generalize across Australia and New Zealand, I would expect it, just given the typical listed and larger unlisted vehicles would be in the 20s in terms of leverage would be pretty steady state there, which would be, I think very much at the low end of the North American market, by [ example ].

[Tal Woolley, Research Analyst]

I also wanted to talk about the Canadian portfolio. Sort of a different question. Do you know within your tenant base for the medical office portfolio, like roughly how much of your exposure is to GPs versus specialists and other types of tenants?

[Paul Dalla Lana, Chairman & CEO]

I might benefit by having Peter's comment on that, not to put you on the spot, Pete, but we do have that at hand, if not, we can -- we do, we just would have to pull it out.

[Peter Riggin, Chief Administrative Officer]

Yes. We don't have that at hand. We can definitely pull that out for you. Maybe if I can just -- what's behind the question, maybe we can just...

[Tal Woolley, Research Analyst]

Yes. Sure. I can certainly go on to the follow-up. I think one of the things I'm sort of increasingly hearing from retail landlords in this country is a desire to get more medical uses into malls, they see themselves as having a lot of things that feature for consumers, a) a lot of other shopping alternatives that drives a lot of traffic, it's free parking. And you just had like just this morning like Loblaws announced another 6 GP clinics that they're going to be opening up in shoppers. I mean, it's early days, but I'm just saying like this appears to be a focus for another asset class just to maybe kind of drive your tenants in a different direction. And so I was trying to get an idea of like what you were thinking about that? And how much, I would say probably the GPs are the easiest to kind of shift into that environment. If you're a specialist or different things, it might be a little bit more -- a little bit more challenging to make that move?

[Paul Dalla Lana, Chairman & CEO]

Yes, you're right. There are all different types of medical buildings, both here in Canada and in Europe, some are GP focused, some are specialists focused, some specifically related to nearby hospital infrastructure. So there's no one brush that cuts it. In terms of the competition, be it from retail centers or from the likes of shoppers, and what have you, we've been dealing with that for the better part of the start of the portfolio. So that's nothing new to us. We continue to believe that it's more than just a space that is synergy within the building, it's services offered. It's just how they're treated as a tenant. So that -- obviously, we're always continuing to watch competition in micro markets, but it's nothing that's throwing us off course. As I said, we've dealt with it for well over a decade.

[Tal Woolley, Research Analyst]

Okay. And then for Paul, you've obviously spent like a lot of the last several years, building out the international portfolio. Can you just -- if we talk about the -- maybe not the life sciences piece, which are just kind of starting here in Canada, but just that core medical office business, are there any sort of interesting opportunities that are coming about? Because like you have been kind of trimming the portfolio around the edges, or should we just continue to sort of see it as like the stable kind of cash flow based on what you're building kind of the rest of the business?

[Paul Dalla Lana, Chairman & CEO]

Again, maybe I'm not sure I fully understand, but maybe I'll try and pick up on a couple of thoughts on my mind or around portfolio management. So I think the business, Tal, as you mentioned, has matured and got much more sophisticated over the last -- since 2010, when we listed it in 2004 since we started it. So I think we have an increasingly sophisticated capital allocation, thinking about what's good and what we like and what we're good at doing. So I think we're in a continuous moment of optimizing and evolving our portfolio.I think the big trends, I mean, again, if I try and come back to Canada, which we all know best, we know that we still continue to have a very stylized health care market in Canada compared to the rest of the world. That obviously has informed our thinking about where to go and why we didn't just get on the planes because we wanted to fly, we went there because we thought we could get better quality and better returns. And I think that's been proven out over time.But I am quite constructive on Canada. Again, it's being dragged perhaps a little bit unwillingly to the alternative of health care [ innovation ] and change. And so we are starting to see the bigger trends come through the business. It's still going to be slow compared to more dynamic markets like Australia, where we have a private sector that's very reactive and responsive.But nonetheless, the big trends are still happening. So the big trend I mean, oddly to talk about ambulatory and outpatient in Canada, it's a funny big trend, because it's been existent for 25 years, and yet we have almost none of it. So we're seeing very significant changing thinking and posture in the provincial health leaders around moving aggressive during COVID, it has been absolute accelerant to trend. We're active, as you know, in acreage and other outpatient ambulatory development opportunities. Those start to have the features that we like in terms of gaining larger creditworthy tenants in the government itself for the hospital operators as well as long-term leases, much more higher acuity procedures happening in these facilities compared to MOBs.So that trend is starting to become pronounced. And all of the provincial governments are in big dialogues around how they evolve their facility's use and just given that they're not necessarily directly on-campus and physically attached to the existing hospital, it really offers NorthWest, a much bigger opportunity set. So that's quite a pronounced trend that we see happening. So that trend also will help what could happen in medical office buildings, of course, so we have a lot of space that can be repositioned to deliver clinical outpatient services, whether it's dialysis or whether it's even day surgery or other types of uses in the hospital, which are becoming less core as a hospital, will shift from all this COVID capacity to really much higher acuity things that are happening in hospitals.So we see that happening. We also see in our MOBs, and as Peter mentioned, through the 15 years we've been doing this, there's been quite an evolution to how practices think. So clearly, we've been at the forefront of thinking about group practice and ways to accommodate both GPs and specialists in more flexible, nicer settings.And so that trend is happening. I mean, and that's a continuing trend, but gives us some opportunities to deliver high-quality things to people. So those are some of the things we see a lot of. And then obviously, when we get into the broader precincts, and we get into that combination of research and health care and education, we see the constellation of those 3 things as being really the drivers of these big precincts and these big opportunities. And we're super focused on that, obviously, when it comes to development, we're quite cautious, and we're looking for all the good things that you would have.Our industry offers us the great opportunity to do a lot of pre-leasing, if not 100% in many cases. But we will find ourselves into arrangements with on-campus or increasing that will have some opportunities. So those are our sort of highest conviction themes, that precinct theme, the outpatient ambulatory theme, and then, of course, MOBs around that play a really important role. But they're facilitating role to broader delivery of health care.

[Shailen Chande, Chief Financial Officer]

So if I were to paraphrase, it would be like there are -- there's good stuff ahead here in Canada, so it's just going to go at the speed of government, not at the -- it's not going to [indiscernible] it's not going to go at the speed of [indiscernible].

[Paul Dalla Lana, Chairman & CEO]

Yes, that's fair. You don't whereas you have to contrast that, I mean, some of the most asset-heavy health care operators in our other markets, private, let's say, to start, are becoming very much crossing over that non-core bridge as it comes to their real estate and really opening up big portfolio opportunities as well as, okay, all the -- how do we expand and evolve it.Because at the same time, what's going on in health care is that the operators are making huge investments in other areas like IT, like in people, there's just a real transformation happening in health care. So there's only so many dollars, and real estate is something that they can control and have great arrangements, long term arrangements through leases, they don't need to have all their capital in real estate, and they need a lot of capital to grow and evolve their businesses, which are experiencing huge demand. So that's kind of the theme.And yes, as we know, governments approach those big themes a little bit differently. And -- but I think Canada is changing, I'm an optimist and a believer in what we do here. But there's been a lot of good articles recently just in the paper around these issues of really needing to evolve the system, and it's not going to be exclusively, let's say, it will be down exactly as it's been down historically, which I'm confident to say today. It's taken a long time to get there, but -- and a big push in terms of COVID, but we're very much in that moment.

[Tal Woolley, Research Analyst]

And do you have a lot of like ex -- or sorry, look, I don't know what the site coverage is like for your Canadian portfolio, do you have like opportunities to sort of increase the density on some of your medical office sites, maybe for some other reasons beyond medical?

[Paul Dalla Lana, Chairman & CEO]

We've been looking in our portfolio for a while now for expansion opportunities, probably 2 big themes that would follow REIT land in general, I think ones are in urban densification, so we've been focused on a series of value unlocking initiatives around excess density in our most core properties.And we have stuff all around the city of Toronto as an example, that has the next 50 story thing on it. And so we're working through that. It's not health care. And then obviously, the things that are close to -- the things that we like, and the portfolio has been very positioned to see properties near our proximity into hospitals or significant research nodes, we're very focused on looking at opportunities to expand and grow our businesses there.And I'd just maybe call out, for example, we own 149 college, which is across UFT and right in, the last Discovery district. And so we're looking at a very significant opportunity there to grow and expand that building. And that itself could be a $500 million project very easily in conjunction with some of the biggest partners in the industry.So there's a bit of a range, but the answer is categorically across the portfolio in all jurisdictions, we're looking for logical ways to expand. And my comments in the introduction, were really meant to say that the business which has historically had sort of $300 million of active developments going on is probably going to treble out over the near-term in terms of going forward. And we see a very attractive opportunity set, getting that right, managing execution on those things is going to be an increasing part of our business. But we've consciously set up to do that, because we have good land, but because also our partners are looking for new and expanded opportunities. So there's a lot in that, but I'd say, yes, yes and yes.

[Operator]

Our next question comes from Mario Saric of Scotiabank.

[Mario Saric, Analyst]

Paul, I just wanted to delve into a bit more detail on your $2 potential [ entity ] upside in the near term. How would you break that down between cap rate compression, the value-add with the U.K. venture? And then potentially development upside? And I ask this, because I don't know how much of the $200 million of U.K. venture value creation above cost is currently in your IFRS today.

[Paul Dalla Lana, Chairman & CEO]

Yes. I'll probably let Shailen bring some precision, but I'd like to get checked online here, Mario. So let's see if I get this right, but I'd say 50% U.K. value creation and 25% each to the other 2 components. Am I close on that, Shailen?

[Shailen Chande, Chief Financial Officer]

Yes, I think that's fair, and maybe the clarifying comment I'd give, Mario, is that, specifically in respect of the U.K. and how much of that is already in our IFRS value, given that the majority of our U.K. portfolio has been acquired over the last 12 months, it's -- I mean, it's essentially being held at cost. So we haven't taken any material marks to our U.K. portfolio and the value creation is the comment with respect to our IFRS remarks.

[Mario Saric, Analyst]

Perfect. Okay. Operationally, Australia has had some more recent challenges with the Delta variant. Can you highlight any changes in rent collection or request for rent deferral and things on those lines within your portfolio in the past couple of months?

[Paul Dalla Lana, Chairman & CEO]

Yes. I'll take that one, Mario. We had -- even I'm remembering that in Australia, when they had 500 cases in total, so that regime is in a very different approach to COVID than we are. But what hasn't happened, I think, other than in the very early days of the first wave is there's been any capacity constraints or restrictions on active procedures as the industry would call it.And so, we're seeing all of our partners operating at substantially full capacity and no limitations on what they're capable to doing. Of course, the demand side of that came back instantaneously, as we know, healthcare is pretty inelastic when it comes to demand. So yes, right now across the world, but including Australia and New Zealand, zero impact from this moment. And not expected, frankly, I think unless things get dramatically different.

[Mario Saric, Analyst]

Perfect. Okay. And then it seems like there's never a dull moment with you, and so far as there's a lot of opportunities globally with the expansion of your asset management franchise over time, you mentioned Australian Unity and that perhaps being kind of a multi process step that could take a bit of time. When we sit back, how do we think about the sequencing of Australia in kind of deploying that excess capital that you have with your institutional partner, the U.K. venture, the -- your potential entry into the U.S. and then any potential structural changes in Brazil and in Canada down the road. Is there enough organizational depth to be able to do all that simultaneously? Or should we think about it one step out of a time? And if so, how should we think about the sequencing of that over the next 2 years?

[Paul Dalla Lana, Chairman & CEO]

You must have been around the Board table yesterday because that is the question. I think you're absolutely right, we -- our issue, for sure is not opportunity, it's getting the sequencing right and phasing it. But I think we do have some very core, strongly held beliefs, and I've mentioned them again very much around these long-term cash flows and mentioned them around precinct and the ability now to add value-add and development. And so as an example, the reason we like Australian Unity as a business is that it emulates many of those core things that we do and we like, and it has complementary geographies and relationships that fit within our strongly held belief.So it's highly aligned, and we think about it in the very long term, calculated way. But more importantly, I mean, I think of all of those initiatives, I think the business is probably capable of doing 2 or 3 of those things at any given time, the business is much broader, and it has increasingly got very strong regional capabilities. So we spent a lot of time and energy building our platforms.So of course, we need to get those staging right, and timing right through the capital markets. And clearly, some of the capital we use, we like to redeploy. So we're not doing everything on top of each other in that regard. But again, I think we're more capable than ever of doing multiple things. And I think I would just say that we're very mindful of making sure that we get things right and in the right order. I call out, as we know, we've been talking a lot about the U.K. JV over the last 12 months, obviously, we came to a very strong conclusion that getting the value enhancement pieces of that portfolio right was the right thing for the business and we paused the JV to facilitate that.We've now -- we're on the 5 yard line or maybe the one yard line of that initiatives. And so [indiscernible] we'll move quite quickly as an example, on -- asset. We've been talking about it for a bit, but we've made a ton of progress in executing on what we have wanted to do. And I will say in this one and in any event, it's ended up better than where we thought probably double than what we thought we were going to be able to achieve in terms of value enhancement.And so -- and with that comes new relationships and new opportunities as well, which will be on the horizon. So I think for a business, as an example, that entered the U.K. opportunistically, that's going to make somewhere between a 40% and 50% IRR its initial investments internally, all for the REIT, see a new JV and establishing a multi set of relationships with the top operators in the U.K. And in a number of different opportunities, we're super happy with that outcome. And it would have been great to be done 90 days ago, but we've taken the long view to get the underlying fundamentals right and to deliver on things.So as an example, we've been able to do that at the same time as our -- all of our U.S. exploratory work. And again, we're not quite to the point of taking an investment decision there, but we're working hard at it. And we do expect news later this year, all the while moving the business in Australia, in New Zealand into a very active set of both growth and call them strategic initiatives.So I think we're capable of doing things, and the business we'll always have to say, way what, in what order it does things. And again, I think over time, we've gotten better at doing that.

[Mario Saric, Analyst]

Understood. And then when we think about your equity needs to accomplish these initiatives, presumably acquiring with your consortium partner, 100% interest in AUHPT was perhaps the base case, I'm not sure if that's the base case going forward after the multistage process or not. But when we look at Australia, the seating of the capital or the seating of the assets in the U.K. and then potential initiatives in North America, given where your balance sheet is today, are you comfortable that you have all the necessary -- or you will have all the necessary required equity to kind of execute on those initiatives going forward?

[Paul Dalla Lana, Chairman & CEO]

Yes. I mean, going forward that's -- I mean, of course, I think over time, this is a growth business, and we probably see in the medium term, doubling the size of the business quite comfortably. So of course, in that context, we will need equity, both JV and otherwise. But in the near-term, I think with the U.K. JV coming quite quickly, I do think we see a very adequate amount of equity for the things that we have underway, again, noting that most of the bigger things are coming through our capital arrangements, so either in Europe or in Australia, where we're putting up part dollars and behind, in some cases, very attractive leverage.So from that perspective, I think in the near-term, we feel pretty good about where we are, the other side of that equation, of course, is leverage. And so we are quite committed to be in a decreasing leverage environment. We've done good steps this year around that. As Shailen noted, we're certainly looking at somewhere between 750 basis points and 1,000 basis points of additional deleveraging coming in a few different ways. So I think all of that is the tension of the business. But I do feel that it's quickly capitalized in the near-term. And certainly, we went early here [indiscernible] couple of times to make sure that was case with visibility on a number of big things. But beyond that, of course, there'll be more to do, and we'll have to get the sequencing of that right, too.

[Mario Saric, Analyst]

Understood. Okay. And your comment on development or value-add initiatives representing 10% to 15% of the balance sheet over time. Is that on a consolidated basis? Or would that represent your proportion of interest or NorthWest proportion of interest in those initiatives to proportion of the balance sheet?

[Paul Dalla Lana, Chairman & CEO]

Yes. I'll let Shailen get -- correct me. But I think both actually, Mario and I think Vital is already heading in that direction. You'll see from the recent releases there that we've got a very attractive advanced pipeline there, Galaxy and our JV in Australia is not far behind with some very big initiatives and obviously funded for the long-term to get that sort of thing done.And so I think across the rest of the organization, we have some catching up to do. But there are a number of meaningful initiatives underway. So it's not going to start at 15%. But I think what we said and probably 18 months ago, just leaning into 2020 when we looked at the business and said, we have a lot of strategic land, we have a lot of partners that want more than just straight sale-leaseback capital. They're looking for new and different and real estate help. We need to position the business in this direction.And so, that's something we've been working at now for 18 months. And I think now it's just getting meaningful enough to talk about specifically. So I feel like we're partway along the path, and it's going to take another 12 or 24 months for it to start to be more pronounced in some of these other geographies.But to maintain $1 billion of value-add and/or development constantly in the business as a near-term objective is a meaningful thing to talk about. And I think we've seeing -- we see ourselves able to do that. And we see the business, again, well capitalized through its capital commitments to accommodate that type of activity. And then we're super focused on making sure that we can do it for, not just an initial suite of projects, but over time. And I think that's one of the nice things about our industry, where particularly in the precinct strategy or ambulatory strategy, they tend to come in multiples or phases.And so once you get started, so we have reasonably high visibility on the phase 1, 2, 3, 4, 5 situations at many of our sites, and that gives us a nice staged opportunity over time to pursue projects, and these are big campuses with lots of different types of uses. So some of them are bite-sized, some of them are bigger and have the usual pre-leasing or varied set of arrangements that you need to make it work.So it's going to be a little bit of everything, in all directions. And -- but coming back to these core strategies and beliefs, which are -- we've always been a major market player, we've always been a larger asset player in conjunction with precincts, in conjunction with other infrastructure. So those are our big themes. And of course, we are always a partnering player. So where we have a partner like Epworth as an example, where they have a very varied set of needs. We're looking to provide all those needs over time, and we're able to do that.So those are some themes that are in the business, and I just think maybe what's changing is just the pace of those things coming. Because the health care industry, I think is changing very quickly. We're seeing in the U.S., as an example, multiple major hospital operators looking to exit their on-campus MOB real estate, again coming to the conclusion that only real estate assets is not core for them, really nice opportunities that marry up with themes that we like in other parts of the world. As an example, to things that we're seeing, and we're seeing that around the world.

[Mario Saric, Analyst]

Maybe one more quick one from me in recognition of the time. The good with development is longer term, not for unit growth, longer-term AFFO per unit growth, better quality portfolio. The bad in the near term is there's no income that's dilutive. So how do you -- as development becomes a bigger part of the story, how do you balance those 2? And do you have kind of a medium to long-term AFFO per unit growth target that you want to achieve?

[Paul Dalla Lana, Chairman & CEO]

Very carefully, I think, is the right answer. But given that a good percentage of the development will come through our JV or permanent capital arrangements, we're able to a -- we're putting up in those situations, 30% or 25% of the equity against leverage that may be a gain and will average out, but certainly, 50% to 60% in the types of projects that we do that are substantially led and substantially fixed contract or very limited cost risk on those projects.So the actual equity dollars to Northwest are relatively small, and we have very attractive development fee arrangements with all of our arrangements. So I think we're able to offset any small capital drag if we can think of it that way on earnings with very attractive fees and earnings around development management, leasing and ultimately, asset management.So we think it's a pretty acceptable mix. So I would say that we probably still see it on the accretive side of the ledger, but I might let Shailen speak to that just to get his lens on that. But it's -- we're talking about $0.05 to $0.10 on all these projects, not $1, we're talking about meaningful fees against that particularly well projects under development.

[Mario Saric, Analyst]

Got it. Okay. And then just maybe the second part of that question, Shailen talked about it structurally, 3% same-store NOI growth. You have a very prolific global asset management business that layers on incremental fee. Like if your 3-year to 5-year business plan goes according to plan, what type of targeted AFFO per unit growth do you think the Company in its standpoint can achieve?

[Paul Dalla Lana, Chairman & CEO]

Great questions. Do you want to start with that, Shailen, or would you like me to try?

[Shailen Chande, Chief Financial Officer]

Yes, Paul. Happy to put out thoughts. Mario, I think we do have a great slide on our investor presentation, actually, Slide 13. I would refer people to, but it's what I like to call our business model slide. At that 3% unlevered SPNOI growth leverage, you're looking at about 6% there. We believe our asset management business and the nature of our fee structures brings about 350 basis point premium growth to that. And then through some of the development, which is becoming increasingly important in our business and forecasting around that 100 basis point spread between stabilized and development yields, we think that brings an extra of 30 basis points to 50 basis points. So all of that would bring us to a core 10% to 12% stabilized AFFO return, in growth rate, leveraging over currency neutral.

[Operator]

[Operator Instructions] There are no further questions. I will turn the conference back over to Paul Dalla Lana. Please go ahead, sir.

[Paul Dalla Lana, Chairman & CEO]

Thank you, operator, and thank you, everyone. That brings to conclusion Northwest Healthcare Properties' Q2 '21 call. We thank you for your involvement and attendance today. Have a good day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.