Assura Limited (AGR) Earnings Call Transcript & Summary

Good morning. I'd like to start by saying how much we appreciate you taking the time to dial in this morning, and I do hope that you and your families are all well. For this morning's presentation, I will introduce the highlights of the year before Jayne covers the financial performance. I will then return with the operational update before introducing our new social impact strategy. But I want first to give you some sense of how we have reconfigured our ways of working to continue operating as effectively as possible and to ensure the health and well-being of our team. We closed the office before the lockdown commenced, and everyone has been working from home since. For many, this has been a challenging time, and we have been supporting our team, both physically and mentally, where we can. We have all played our part in the creation of a plethora of new workspaces and the creative use of domestic nooks and crannies and carefully selected backdrops. Every day, I am amazed at how the team are responding to these challenges and sustaining as near as possible, business as usual. Their efforts have enabled us to play our part in supporting the NHS through this period. These efforts have been many and varied. Throughout our medical centers, we offered all of our vacant space free of charge to NHS occupiers, modifying the space where required, and we continue to offer essential repairs and maintenance, installing new intercoms for controlling access to buildings. Almost 1/4 of the team signed up as NHS volunteers, and our Head of Legal took the lead in coordinating her advisers to offer free advice to NHS tenants. We were very conscious that as we emerge from this crisis, providing high-quality, new space for primary care would be even more important. And so we focused on supporting our construction partners to continue working but only where it was safe to do so. Six of our sites did close, but we are now looking to reopen them with modified working practices. To support our partners as they implemented these changes, we moved to fortnightly payments to help their cash flow. Inevitably, there will be some delays to completion time lines, though the disruption has been thankfully modest. These prompt actions, the flexibility of the team and their efforts to sustain our operations have enabled us to achieve a strong set of results, putting us in a very fortunate position at this time. Our ability to create outstanding spaces for health services is built on the reliability and resilience of our cash flows. These are underpinned by long-term government-funded income and our financial strength. We have maintained our normal patterns of rent collection over recent months, which has enabled us to continue our dividends and to support a further uplift, as Jayne will cover later. The security and longevity of our cash flows also underpinned our asset values at the year-end with a 1% increase in our EPRA NAV. These values reflected the unique portfolio of 576 properties, which has been assembled over the past 17 years. We carefully review every asset for opportunities to enhance its lifetime cash flows and impact on the community. The asset enhancement activity completed by the team included 296 rent reviews, 32 lease regears and 15 new tenancies for our vacant space as well as resilient cash flows and robust asset values. We have also secured new opportunities for growth, completing GBP 134 million of property additions in the year. Our market-leading development team was further strengthened in May last year when we acquired GPI. Their experienced team and strong pipeline were a welcome addition, helping us deliver 4 schemes in the year and a further 15 on-site at the year-end. We are well positioned to sustain this growth as we enter the new financial year with an immediate pipeline of GBP 77 million of developments, GBP 67 million of acquisitions and GBP 17 million of asset enhancement projects. To fund these plans, we completed last month, a 10% equity placing for GBP 185 million, which moves our LTV to 38%. Our purpose, values and culture align us with the NHS, and our commitment to sustainability and social impact underpins everything we do. The importance of this has only been magnified during these challenging times, but it has been core to the way we do business for 17 years. The importance of this is something I will come back to later. Our market has highly attractive sector characteristics. Firstly, our market is built on its long leases and low default risk from NHS funding. Secondly, this market is experiencing strong demand growth after years of underinvestment. And the third key characteristic is the strong risk-adjusted returns that our sector delivers. Taken together, these provide the foundation for predictable and low volatility returns. Assura's portfolio of 576 medical centers is now valued at GBP 2.1 billion, evaluation built on the resilience of the underlying income with 85% NHS funded and contracted rent roll of GBP 1.43 billion. As well as building a portfolio, we have also developed a unique brand and reputation nurtured through long-term, trusted relationships with the NHS and its GPs. These relationships are key to securing our growth opportunities. I would now like to hand over to Jayne to cover our financial performance in the year. Jayne?

Thank you, Jonathan. Good morning, everybody. And to echo what Jonathan has said, thank you for joining us today. As you would expect, the current pandemic has affected our business. However, it has been limited to the extent that we have had the good fortune still to receive over 98% of our rental income so far with only 0.1% requiring a payment holiday. In addition, a small proportion of our other tenants have taken a rent deferral. And so with this in mind, let me take you through our performance for the last 12 months and then look forward to our current activity and our pipeline. The last year has seen us continue our growth, but with a more balanced emphasis between our acquisition, development pipeline and our asset enhancement initiatives. We acquired and successfully integrated the GPI business, accessed the debt capital markets and continued to experience open market rental growth. The acquisition of GPI has resulted in further improvement in our development pipeline. The result is that a number of new schemes are now on site. We secured property additions in the year of GBP 134 million, giving us net rental income growth of 9% to GBP 103.7 million. Our EPRA earnings increased by GBP 3.7 million to GBP 67.5 million, and our EPRA earnings per share for the year has increased by 4% to 2.8p per share. We passed this on to our shareholders through a growth of 4% in the dividend payments year-on-year. Our portfolio value grew to just over GBP 2.1 billion, and our net initial yield has reduced by 6 basis points to 4.68%. In July, we raised GBP 107 million through a private placement with GBP 60 million of the proceeds being deferred and drawn in October. Our loan-to-value at the 31st of March had risen to 38%. However, the subsequent successful equity placing meant that early April, this had fallen to 30% on a pro forma basis. Our next quarterly dividend payment is due to be paid in July. We are pleased to announce a dividend increase of 1.9%. This is in line with our objective to provide a progressive dividend for our shareholders. This brings the quarterly dividend payment to 0.71p per share. Now moving on to other financial metrics. We have delivered growth in our annualized rent roll of 6% to GBP 108.9 million. Our continued focus on asset enhancement has meant that our weighted average unexpired lease length has increased during the second half to 11.7 years. This underpins the security and longevity of our cash flows, as 85% of our rental income is derived from the NHS and its GPs. Our rental growth is 1.79% with open market rent reviews continuing to nudge a little higher at 1.2%. Our net rental income increased by GBP 8.5 million in the year. The acquisition of GPI, continued expansion of our development team and dedicated asset enhancement support has seen our admin costs increase by GBP 1.1 million, reflecting the fact that we expense rather than capitalize these costs. Despite the increasing costs, our EPRA cost ratio has remained steady at 12.6% and continues to be one of the lowest in the sector. If we had chosen to capitalize our development team costs, this ratio would be closer to 11%. Our EPRA net asset value per share increased by 0.6p from 53.3p to 53.9p per share. Our earnings growth of 2.8p was passed on to shareholders in dividends. Capital growth through valuation uplifts and profitability on development schemes added 0.6p per share. Our investment property portfolio increased by GBP 160 million in the year and is a mixture of property additions, some disposals and modest portfolio valuation growth, which improved our net initial yield by 6 basis points. We disposed of 19 assets in the year for GBP 20 million. We also have assets held for sale at the year-end, consisting of a small portfolio of 17 assets for GBP 20 million. This transaction has recently completed. Over the last 5 years, our gross rental income has seen a 16% compound annual growth rate from GBP 50.1 million in 2015 to GBP 103.7 million this year. The charts demonstrate our focus on growing the business alongside our earnings and delivering dividend growth to our supportive shareholders. One of our key objectives is to continue to maintain and grow our contracted rental income alongside our weighted average unexpired lease term. We have added GBP 170 million to our contracted rental income in the year, and this now stands at over GBP 1.4 billion. We manage these long-term cash flows through our acquisitions, developments and asset enhancements. The hard work and dedication of all our property team has enabled us to extend, renew or regear a number of leases and is making a strong contribution to maintaining the lease term. The asset enhancement work adds value to the portfolio and to the long-term income of our business, enabling us to increase our WAULT in the second half to 11.7 years. Our gross debt was GBP 847 million, and our weighted average interest rate has fallen from 3.24% to 3.03%. Our credit rating was reaffirmed, and we secured further long-term debt at a blended rate of 2.3% for 10- and 15-year notes. At the year-end, we had GBP 220 million of headroom on our revolving credit facility with a loan-to-value of 38%. However, following the equity placing at the beginning of April, we have our full GBP 300 million facility available and a loan-to-value of 30% with headroom of GBP 360 million until we reach our 40% loan-to-value. Our debt maturity is now 6.8 years. However, since the year-end, we have amended and extended our revolving credit facility until November 2024 with the continued support of our partner banks. We have a strong pipeline of opportunities to take us through the next 12 months and beyond. Our development pipeline is now an impressive GBP 357 million with 67 schemes across the country. The focus on our asset enhancement has seen 32 regears this year compared to 6 in the prior year. We have 38 in our pipeline alongside 22 capital projects. Our focus is to deliver high-quality buildings, extensions and upgrades, incorporating the latest innovation and sustainability. The acquisition pipeline of GBP 67 million is expected to complete within the first 3 to 6 months. And as mentioned, we have already disposed of a small portfolio of assets this month for GBP 20 million. This chart highlights the impact of our activity pipelines on our long-term rent roll. It represents everything we have in our sites at this point in time and shows that our rent roll will increase to just under GBP 135 million upon completion. The strength of our development pipeline, both our immediate and extended pipeline, will add around GBP 17 million to our rent roll over a number of years. Our acquisition pipeline will add GBP 4 million in the near term, and approximately GBP 5 million will come from our asset enhancement work and rental growth. I present these numbers this year in a very different environment to previously. However, this is a good set of results for the year, demonstrating our ability to deliver our development pipeline, invest in high-quality assets, improve our portfolio and manage our costs, whilst increasing our return to shareholders. I'll now hand you back to Jonathan.

Thank you, Jayne. I would now like to explore our growth areas in a little more detail, starting with development. Following the integration of the team from GPI, we have continued to build our development pipeline, which now stands at more than GBP 350 million. We are on-site at 15 projects with a gross development spend of GBP 81 million. We have an immediate pipeline of GBP 77 million and an extended pipeline of a further GBP 199 million. Looking forward, funding for the NHS and the demands placed on primary care are likely only to increase. This presents an opportunity for us to further our ambition in developing the next generation of medical centers. We've completed 28 acquisitions in the year for a total consideration of GBP 119 million. Our investment team continues to leverage the relationships we have with existing tenants to identify new opportunities. They also continue to refine their use of our bespoke database and to enhance and improve it. We constantly review our portfolio and identify sites with lower growth potential, which we market for disposal. We disposed of 19 properties for GBP 20.1 million during the year and a further GBP 20 million this month. Both portfolios were sold to new entrants in the sector, and so this is both good capital discipline and is supportive of greater market liquidity. Asset enhancement is a core part of our growth strategy, and we have been allocating more resources in this area. We completed 32 lease regears during the year and have a further 38 with terms agreed and due for completion in the next 6 months. On capital enhancements, we have created a dedicated team and recruited 2 new surveyors to focus solely on this area. The team have now built a pipeline of 22 projects for GBP 17 million and are reviewing further opportunities. The picture shown here is Pont Newydd, one of the team's successful projects this year. This building serves 10,000 patients, and to support its further growth, we invested GBP 400,000 to reconfigure the existing space to fit out some vacant space and as a result, secured a new 20-year lease. Rent reviews have also been a key focus, and we have achieved 1.8% growth during the year. 70% of our reviews are linked to open market rents, where growth was 1.2%, as the increased activity in developments creates evidence that supports rental growth. Over recent months, many property sectors and values have been impacted by the disruption to rent collection and tenant liability. The fundamentals of our sector remain constant and have enabled us to record a modest valuation gain with an annual movement of 6 basis points in our net initial yield to 4.68%. Our market remains active with transactions completing throughout the past 3 months. We continue to see opportunities, and we'll retain our selective approach to adding further to our portfolio. I would now like to move away from our results for a moment to talk to you in more detail about the importance of social impact and the recent formalization of our commitment to it. 8 years ago in Warrington, I met the late Graham Roberts as he tried to persuade me to join him at Assura. He outlined the fantastic business model, the highly attractive market, the opportunities for growth and the caliber of the team. But there was one thing that stood out, both for Graham and for myself. It was the positive social impact Assura could have through its work, how the right buildings could provide an enlightening workplace, bringing more services together and providing better care for patients. In short, Assura could make a difference. Since then, I've been privileged to witness at firsthand, the dedication, ingenuity and passion of our team as their actions make this difference day in, day out. These actions could be a prompt response to a query from a tenant, organizing a new extension, delivering best-in-class design through our architects or building the U.K.'s first 0 carbon medical center. Each action may be small, but cumulatively, they make a real difference. These elements have been deeply ingrained in the way we do business. For the past 2 years, I have been considering how we could bring these elements together to formally embed them in our business to magnify their impact and to make us an even better partner to the NHS. This has led us to our ambitious 6x6 plan, which will make Assura the U.K.'s leading property business for social impact. As a starting point in this plan, we have already put into operation the Assura Community Fund, which will support charities and voluntary organizations working across the U.K. to support healthier communities. We have listed here some of the activities we have already supported, such as a community bakery for young adults with learning difficulties and a community gardening scheme. We are aware that we have a bold and ambitious goal. And to make it a reality, our plans must be clear, our targets must be measurable, and we must rigorously track our delivery at every stage. With our 6x6 plan, we intend to reach 6 million people in 6 years, and we have given ourselves 6 pledges to achieve this by 2026. I had intended to give you much more detail about our plans. However, with the limitations of our remote presentation, the opportunity is not ideal. And therefore, we'll look forward to talking to you in more detail about these plans in the future. In summary, Assura has delivered a strong set of results that have highlighted the resilience of our cash flows and asset values, while continuing to deliver solid growth. We're a leader in our sector. We have very strong relationships with GPs, understand their needs and have a team with great experience that can navigate the complex medical and primary care real estate requirements. We ended the year with a strong pipeline of future opportunities, and thanks to the completion of the recent equity raise, we further reinforced our financial strength and our capacity to deliver these plans. As the scale and nature of these evolving requirements become clearer, we are ideally placed to support the needs of the NHS and to deliver on our ambitious plans for social impact. Despite the current level of uncertainty, I will continue to look to the future with confidence. Now that concludes this morning's presentation. Thank you very much for listening, and we'll now move to questions.

So in terms of questions, I'll just read out the question in the first instance, and then I'll respond so everyone is aware of each one. The first question we've received is from Mike Foster from Hardman and it is, are you seeing any geographical bias in new developments planned across the markets? Mike, good question. So in terms of activity, it's fair to say that we're seeing this as quite broadly based. There are always certain hotspots and certain cold spots, in particular, London tends not to have that higher level of activity. We have got a couple of sites we're working on there, but it tends to be a little bit less. But other than that, it's fairly broadly based. If you have a look at the detail in the presentation pack, we've got a slide, Slide 49 or 4.6, which is its heading, that covers in some detail the -- where our current pipeline is. And you can see there that it is a -- it's very broadly based with a good spread of opportunities across England. You probably will notice that the map stops at England. It doesn't go up to Scotland. That's because Scotland has adopted a more PFI-type structure, which is not something that we get involved with. So hopefully, that covers that one. [ Kenneth Mitchell ] from Barclays. Now that you have raised equity, can you give us an update on your plans for deploying that capital? In an ideal world, how would you split between development acquisitions and standing acquisitions? So on that one, I'll just pass to Jayne just to provide you a little bit more detail. Jayne?