Assura Limited (AGR) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for taking the time to join us today. For this morning's presentation, I will introduce the highlights of the period before Jayne covers the financial performance. I will then return with an operational update and the policy backdrop. When we last spoke, I was encouraging you to stay safe and well as we were at the beginning of an unprecedented national lockdown with great uncertainties as to how the pandemic will develop. And here we are again. With, on the one hand, a great deal that has changed. And on the other, much that has remained constant. So looking at what has remained constant. This includes the resilience and stability of our business, underpinned by our commitment to social impact. Our secure long-term cash flows, continued rent collection, progress on our growth plans with pipelines, both delivered and replenished and further gains in our net asset value. So what has changed? And this change has been dramatic. The occupiers of our buildings RGPs have had to respond to completely different ways of working. They've had to embrace a rapid acceleration in their use of technology alongside an ever-increasing workload, as overburdened hospitals have inevitably pushed more responsibility onto primary care. The central role of primary care will play and the national vaccination program will only increase these pressures. I have spoken to you many times about the 2 trends of adopting new technologies and the shift of more services out of hospitals. But what we have seen in the last few months is a dramatic shift. Assura has always been proud of its ability to innovate and respond to changing requirements. And in the past months, I have been extremely impressed by just how closely and assiduously, the team have worked with our customers to make sure we stay ahead of their needs. We have achieved a strong set of results, with growth in earnings, net asset value and our pipeline. But we are well aware that in contrast to businesses in other sectors, we remain very fortunate. Our strong results reflect the successful delivery of the plan we outlined during our equity raise in April. There have been some minor delays in construction, but we have exceeded all of our capital deployment targets and have built strong pipelines for the second half of the year. Our property additions of GBP 118 million were achieved at a yield on cost of 4.6% compared to the 1.5% coupon on our recently issued social bond and with an average lease length of 19.9 years. In developments, we have 15 schemes at a cost of GBP 77 million that have already started construction and a further short-term pipeline of GBP 65 million. In acquisitions, we completed GBP 80 million of deals in the first half and have a further GBP 90 million we expect to complete before the year-end. Asset enhancements have also progressed with one scheme completed and 3 underway, with a near-term pipeline of 19 projects at a cost of GBP 14 million. This first half activity would be pleasing in any period. It is particularly so against the current backdrop. We have extended our services to respond to the changing needs of the NHS during this period. We continue to work with our customers to offer essential repairs and maintenance, to modify the space where required, to ensure their health and safety requirements are fully met. We are also working with patient groups to understand their concerns about visiting health centers during this time and to identify what we can do to reassure them and help them feel safe. Most of our customers have continued to use their buildings throughout and made rental payments in the ordinary course. For the minority who have faced difficulties, we have put in place payment plans. We have continued to support our contractor partners as they undertake their essential work within modified working practices and have made minor changes to our buildings where required in the short term. We've also been looking at long-term design requirements for our buildings by engaging with the NHS on their consultation on future design for primary care as well as working with a group of our GPs to determine what a surgery might need to look like in the future. Building on this consultative and supportive approach, I spoke to you last time about our ambition to be the U.K.'s leading property business for social impact and how our purpose, values and culture align us with the NHS. The Assura Community Fund was launched in May and with our initial GBP 2.5 million donation, we have begun supporting charities and voluntary organizations working on health improving projects across the U.K. Over the summer, we made a GBP 100,000 grant through a new program, [ Cheshire Mines matter. ] This project has a particular significance to Assura, as it will help protect the mental health and well-being of disadvantaged people in communities close to our head office. In contrast, just last week, we set in motion more than GBP 0.5 million in smaller grants to 115 projects right across the country, which will impact more than 50,000 people experiencing some of the harshest impacts of COVID-19, those with disabilities, carriers and those experiencing isolation and loneliness. This is an essential part of our plan to reach 6 million people in 6 years. It sits alongside our commitment to sustainability with our ambition to be building only 0 carbon buildings by 2026. We are making progress across a range of initiatives and are currently developing plans to assess the sustainability and develop an improvement plan for each of our 576 buildings. Now I'd like to pass over to Jayne to take you through the results. Jayne?

Thank you, Jonathan. Good morning, everybody. It's good to have the opportunity to talk to you today. During the past 6 months, our business, like most, has had to adapt to new ways of working. This has been a challenge our team have tackled head on. It is credit to their strength and resilience that we have been able to run the business so effectively in this very different environment. We have continued with business as usual, managing the needs of our customers, growing our portfolio and raising new capital. At the start of April, we raised GBP 185 million from our shareholders and already the deployment of this capital is ahead of our expectations. In line with our social impact strategy, we launched our first ever social bond. This proved to be a huge success with a heavily oversubscribed transaction, pricing at an all-in interest rate of 1.5%. This is particularly encouraging, reflecting as it does the value of our commitment to our social impact goals. We have been affected by the COVID-19 pandemic. But as Jonathan has mentioned, the impact has been limited, and we are well aware of this. The majority of our rents have been collected in line with normal patterns. However, we have had just around 1.5% of tenants requiring deferred payment terms, and less than GBP 100,000 has been granted in payment holidays. Now let me take you through the detail of our financial performance for the first half. It has been a busy 6 months for the business, the purchase of GBP 80 million of acquisitions in the period is GBP 13 million ahead of our equity placing expectations. The development team has successfully completed 6 of our schemes and moved a further 6 on site. And the portfolio team continue to have success with lease regears and the letting of vacant space. We secured total property additions in the period of GBP 118 million. This gave as net rental income growth of 8% to GBP 54.4 million. Our adjusted EPRA earnings increased by 9% to GBP 35.8 million. And our adjusted EPRA earnings per share have remained flat at 1.4p. This incorporates the additional shares raised through the placing in April. Dividend growth is flat at 1.4p per share for the period. Our dividend increase this year moved to the year-end, will increase the dividend by 1.9%. We've grown our dividend by 18% over the last 3 years, and our dividend policy remains unchanged. Our portfolio value is now almost GBP 2.3 billion, and we have seen some valuation growth of approximately GBP 10 million since March. Our net initial yield remains at 4.68%. Our loan-to-value is now 33% compared to the 38% last year, reflecting the capital raise. Looking at the graph at the top left, we have delivered growth in our annualized rent roll of 4% to GBP 113.3 million. And below, you can see that the strong half activity has led to our adjusted EPRA earnings growing by 9%. GBP 3.8 million attributable to additional rental income has been offset by a GBP 900,000 increase in finance and administration costs. The increase in our rent roll flowed through to our net rental income growth of 8%. This includes rental growth of 1.7% with open market rent reviews showing growth from 1.1% to 1.2% within the last year. Our EPRA net tangible assets per share increased by 2.3p, from 53.9p to 56.2p per share. Our earnings growth of 1.4p was passed on to shareholders in dividend. Capital growth through valuation uplifts and profitability on development schemes added 0.5p per share and our equity raise 1.8p per share. Our investment property portfolio increased by GBP 120 million in the period. This reflects our acquisitions, development spend, disposals and portfolio value gain. Our business is about long-term income growth. And one of our key objectives is to continue to improve our contracted rental income alongside our weighted average expired lease term. Our contracted rental income is almost GBP 1.5 billion, with 62% of our rent roll still contracted in 2030. We continue to manage these long-term cash flows through our acquisitions, development and asset enhancements. The strong first half activity has seen our weighted average unexpired lease term increase from 11.7 to 11.9 years. This underpins the security and longevity of our cash flows is 84% of our rental income is derived from the NHS and its GPS. Reviewing our WAULT over time, you can see that this has declined by just over 1 year in a 3.5-year period. Achieving this kind of success requires continuous focus and dedication, and our team has certainly shown this over the past 6 months. In early April, as a result of strong support from our shareholders, we raised GBP 185 million. This was to fund our increasing pipeline of acquisitions, developments and capital projects. We are deploying this capital ahead of the expectations set at the time and our current pipeline of GBP 90 million worth of acquisitions and our development spend within the next 6 months ensures we continue to deploy the proceeds in line with our plans. As mentioned, in September, we raised our first social bond of GBP 300 million at an interest rate of 1.5%. I'll talk further about this shortly. Outside our half year period, we have repaid our GBP 110 million bond. You may remember that this was at an interest rate of 4.75%. We expect the final early repayment fee and costs to be just over GBP 6 million. However, the interest cost saved, coupled with savings on our nonutilization fees relating to our revolving credit facility have meant that the impact is limited. Locking in an attractive rate of only 1.5% and aligning some of our financing with our social impact strategy was the right thing to do. At the half year, our net debt was GBP 742 million and our weighted average interest rate has fallen from 3.03% at the year-end to 2.68%. With the bond repaid, we now have 100% of our assets unencumbered. This is a journey we started on some 5 years ago, and we are delighted that our goal of having a fully unsecured funding structure has now been realized. Our loan-to-value is now 33%. And as a guide, we have around GBP 275 million worth of headroom before we are back to 40%. We had over GBP 300 million of cash at the half year, but this is reduced since the bond was repaid, along with further acquisitions since the period end. We have reduced our revolving credit facility from GBP 300 million to GBP 225 million, reflecting our ability to access long-term debt markets, meaning we no longer require a facility of this size. And our debt maturity has been extended out to 7.7 years. As I've mentioned, in September, we approached the public bond market to raise our first social bond. So what does this mean? We have to create a social finance framework to help determine how the proceeds would be spent. Using the U.N. sustainable development goals, the proceeds from our bond will be spent on projects, which lead to good health and well-being across the nation. Bondholders value the efforts we are making in this space and this was evident in high demand from the transaction. This allowed us to price the bond at a very attractive rate of 1.5% for 10 years, reflecting the support from lenders but also enabling a low cost of debt and showing that being socially responsible is a value to our whole business and stakeholders. We are passionate about the impact our business has within this -- in society, and this further establishes our commitment to improving our social impact. Following the integration of the team from GPI, we have continued to build our development pipeline, which now stands at an impressive GBP 349 million. We are on site with 15 projects with a gross development spend of GBP 77 million. We have an immediate pipeline of GBP 65 million and an extended pipeline of a further GBP 207 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 have completed 20 acquisitions in the period for a total consideration of GBP 80 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 off 26 properties for GBP 23 million during the period, reflecting our approach to capital discipline. As you can see, we have a strong overall pipeline to take us through the next 12 months and beyond. We have already spoken about our development pipeline of GBP 349 million. Our acquisition is very encouraging with GBP 90 million worth of acquisitions due to complete within the next 6 months. We have completed 13 lease regears in the period with a further 42 to come. There are 19 capital projects to complete for GBP 14 million. These are our contribution to the present need for improved high-quality spaces, incorporating innovative and sustainable solutions within our existing buildings. You've seen this chart before, but I show it to highlight the impact of all of the various strands of activity we have within the business at best time. Once completed, our total rent roll will increase to over GBP 138 million. Our strong development program, both our immediate and extended pipeline, will add around GBP 16 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. In the year where the challenge for businesses are extensive, it is vital that we support the NHS and GPs in order that they can continue to deliver much needed high-quality healthcare at this difficult time. This is a good set of results. In this first half, we have received fantastic support from our shareholders and our lenders, enabling us to continue to improve and expand the portfolio and to move forward with our ambitious social impact agenda. And our aim is to continue on this course. I'll now hand you over to Jonathan. Thank you. Jonathan?

Thank you, Jayne. I'd now like to explore core parts of our growth strategy, asset enhancement in a little more detail. It is an area where we have been allocating more resources. We completed 13 lease regears during the period and have a further 42 with terms agreed and due for completion in the next 6 months. On capital enhancements, our dedicated team have completed one project, are on site with 3 and brought a pipeline of 19 further projects for GBP 14 million. They continue to review further opportunities. These projects deliver improved patient experience, great sustainability, longer lease lengths and increasing capital values. More than GBP 10 million has been achieved in direct valuation uplift from these opportunities delivered in the first 6 months. The picture shown here are our Eastfield Medical Centre in Scarborough and Threeways Surgery in Stoke Poges, where in both buildings, we have reconfigured the existing area to generate additional clinical space. We also improved the environmental performance of the buildings through using more energy-efficient lighting. The leases on both properties have been extended. Rent reviews have also been a key focus, and we have achieved 1.7% growth during the period. 70% of our reviews are based on open market rents, where growth is linked to our activity in developments, which creates evidence that supports rental growth. As I have already mentioned, we have experienced some delays in development activity as a result of the disruption from COVID-19. And so it is entirely understandable that there has been some slowing in the rate that rent reviews are being settled. Notwithstanding these issues, we achieved an improved rate of growth of 1.2% for the 6 months. Over recent months, many property sectors and values have been impacted by the disruption to rent collection and tenant viability. The fundamentals of our sector remain constant and have enabled us to record a modest valuation gain, with our net initial yield remaining steady at 4.68%. We continue to see opportunities and will retain our selective approach to adding further to our portfolio. I spoke at the start of today's presentation of the remarkable adaptability of our GPs who have had to embrace entirely new ways of working, starting with switching to holding many appointments by telephone or video call. At one point, Matt Hancock was prompted to question will the face-to-face consultations would eventually be needed at all, an intervention written up by the press as [ Dr. Zoom. ] In fact, the position was more nuanced than this. Both the Royal College or General Practitioners and the British Medical Association have stressed that remote consulting won't be suitable or preferable for everyone and pointed out the importance of face-to-face consultations in, for example, capturing the first impressions of the patient on arrival, the reading of changing body language, the possibility of missing unspoken concerns. So face-to-face consultations will continue to play an important role, alongside the greater use of telephone or video triage. Remote consultations have increased the efficiency of some aspects of primary care. And undoubtedly, have led to a permanent shift in the way we interact with our physicians. The requirement for quality modern space to enable this future mixed approach to consultations will only increase. The modifications we are seeing and as a result of COVID-19, include wider corridors, larger waiting rooms, more flexible consulting rooms, separate entry and exit points and segregated secure zones for treating effective patients. All these changes, we can comfortably integrate in our future schemes and indeed in most of our current buildings. These requirements will accelerate the need to replace the older out-of-date premises, when combined with the necessity to accommodate services relocated from hospitals, significant investments in primary care premises is going to be essential. I would like now to look further at the acceleration of the need for more care to be provided in the community and the effect of this on both the patient and the system. The key to delivering this will be greater understanding, communication and cooperation between hospitals and primary care. So it is encouraging that the NHS is talking about developing this through integrated care systems. These systems include groups of health and social care providers, councils and charities, working together to look at the overall care requirements for a population. Assura aims to provide critical support to the NHS business initiative by bringing the right solutions to the right locations. This will not always be the simple provision of a further GP surgery, it could be the more efficient use or reconfiguration of existing space, an extension to a building, a new health and wellness hub with cancel facilities or a community diagnostic center. The scope for reimagining healthcare facilities and how they meet a wider range of needs is and will remain extensive. But the need beyond COVID, is now not just pressing, but essential to address the ballooning backlog of care. In recognition of this opportunity, we appointed earlier this year ahead of strategic partnerships to lead on our efforts in this area. This broader approach to working across the local health system had already begun to be developed. In Durham in 2018, we delivered a diagnostics and treatment center on an industrial park on the outskirts of the city. This provides essential day case capacity for the local trust as well as a dialysis center that is opened 24/7 for patients. We are currently in planning for a new clinical facility alongside a nursing training center for a trust, again, in the Northeast. The moving of nursing training into centers within the community could be a valuable innovation, given that the shortage of trained nurses is currently causing much concern. Against average, we have just handed over a new facility to Ramsay Health Care, who will deliver day case pain management, urology, general surgery and eye care, thus providing additional capacity within the local healthcare system. The wide variety of possible solutions and the number of parties involved in developing these new initiatives, brings considerable complexities and challenges, but it also plays to Assura's specific strengths, our ability to innovate, our development capability and our deep relationships across primary care. So in summary, I hope I have shown you some of the movement of a great deal of change, but within Assura, much that has remained stable, a resilient and predictable business, a strong pipeline of activity and a commitment to social impacts that is growing. All this continues to mark us out as the right partner for the NHS and underpins our commercial success in continuing to grow earnings and net asset value and to deliver ahead of our plans in April. And so set against the backdrop of daily changes and needs and requirements in new ways of working, in new partnerships being established across the entire health system, Assura with its deep knowledge of primary care, development and innovation expertise and a dedicated team is truly well placed to work alongside the NHS in meeting its future development needs. I hope that when we next meet, it will be face to face. But however it is, we look forward in confidence to delivering strong, resilient results with excellent prospects for growth. Now that concludes this morning's presentation, and I would like to see if we have received any questions.

So questions have been submitted online, and I will read out the question and the name of the person asking the question before we move to a response, if that's all right. You can continue to submit questions as we're going along, and we will take them in turn. So the first question is from Stephen Bramley-Jackson from HSBC. Are there many lease events over the next 6 to 12 months that will continue to lift net rental income growth? And if so, at a similar rate or potentially higher? So in terms of leases that are coming up for expiry over the next 6 to 12 months, it is an ordinary pattern. I wouldn't look for anything outsized and in terms of the shaping of our growth, if you have a look at Slide 9 and our annualized rent roll growth in the 6 months, you can see that the vast majority of the growth came from acquisitions and from development completions with a modest contribution from rent reviews and asset management. And I think if you think about the mix of growth in that sort of shape, as you look forward, that will give you a very good idea as to the likely constituent parts of that. And the majority of it will continue to come from acquisitions and development completions. Notwithstanding that, we do have a number of asset enhancement activities in the pipeline. So we continue to make a good contribution from that area. But the overall mix is likely to remain quite similar. So second question is from Alex [indiscernible]. What are your criteria for deciding to sell a property, and who typically are buyers of your properties? So the criteria for disposal is when we're looking at assets where we believe there might be subdued prospects for long-term growth or where we might have some concerns over the likelihood of a lease renewal at the end of the lease, we might well look to see whether there's a player in the market that's willing to pay full value for those types of assets. There's still good quality assets with long lease length. The average, the portfolio we sold last year still had close to 10 years on the lease length. So they are assets where we have a different perspective on the long-term risk criteria. And if we can identify someone paying full price for that, then we'll happily move that property on. And in fact, that's a process that we have ongoing all time, and we might well make a few further disposals later on this year. In terms of the buyers, with the last 2 portfolios that we've sold, have both been sold to new entrants into the market. So relatively small private equity-backed property funds that we're looking for exposure to our sector. It's likely that there are further new entrants coming into the market because it is the underlying characteristics of asset to our relatively attractive versus other sectors. So it might well be that any further disposals might also be to new entrants. Next question is from Poonam Lodhia from Numis. Despite your low-cost of debt, the GBP 321 million of cash on the balance sheet could be considered inefficient from an income statement perspective. Please, can you comment on how you're thinking about balancing funding capacity with capital structure efficiency, given the shift in the debt structure towards largely fixed-term instruments. So I'll let Jayne take that question, Jayne?

Thanks, Jonathan. Yes, you're right. That is obviously a considerable amounts of cash, but largely, that's due to the timing of the raising of our social bond. Since the half year, we have actually repaid some of our other debt that was due to be refinanced shortly. We've also reduced our RCF from the GBP 300 million that we've been carrying for a few years down to GBP 225 million. So we're trying to create some balance here being long-term and short-term funding. And looking at our pipeline, you can see the remainder of the cash will be spent in pretty short order.

Thank you, Jayne. Next question is Kanad Mitra from Barclays. You have completed GBP 80 million of acquisitions in H1, and there is GBP 90 million more for the next 6 months. That makes it approximately GBP 170 million for the year, which is quite strong. Can you give us a sense of the size of the market still available for acquisition? What's the medium-term plan going to be in terms of mix of acquisitions and developments for growth? So in terms of the size of the market, we own 576 assets out of approximately 9,000 medical centers across the U.K. So clearly, we have a relatively small market share. The market remains extremely fragmented. The vast majority of -- or the majority rather of medical centers are still owned by the clinicians themselves. And so there remains a very significant investment opportunity for many years to come. So plenty of us -- of opportunity for us to continue making acquisitions. In terms of the mix, we've highlighted over the last couple of years, we very deliberately been looking to grow our development pipeline. That's because of the attractive characteristics that brings a slight uptick in the yield as well as securing a brand-new long leased asset in the location. And this year, the development pipeline is -- will be growing up to about GBP 70 million, GBP 80 million of capital deployed, and that's a level we would like to continue to grow but relatively modestly. So acquisitions are likely to remain the largest player, but developments will take an increasingly important part going forward. The next question is from Andrew Gill from Jefferies. Given Assura is in a unique place with respect to social impact for the portfolio, is there anything stopping all future debt being raised as social bonds or debt facilities if these can attract lower interest rates than nonsocial debt? So I'll ask Jayne to respond on that point.

Yes. So in short, no, there's nothing to stop us raising all future debts as social bonds or debt facilities. In practice from a debt facilities point of view, if we look at the banking, it could be a little bit more tricky. I think one of the areas we really like to explore moving forward is around the sustainable element. We've just raised social bond. It's very much linked to the health and well-being aspect of our program. And what I'd really like to do is to incorporate some of the work that we're doing in terms of -- we have got 576 buildings. We're bringing those up and using some of the sustainable targets. So you're absolutely right. There is nothing to stop us from doing that going forward. And it's certainly something we'll be aiming to do.