Assura Limited (AGR) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us today for our second Virtual Capital Markets Webinar. Hopefully, we can organize a physical property tour in early 2022. Today, you're going to hear from several members of our property team covering 2 main topics: firstly, how our sustainability and social impact strategy, SixBySix, is being embedded within the operations of our property teams; and secondly, how we are developing our offering, particularly in respect of working with operators of primary care at scale. Jonathan and myself will then host a Q&A session, including today's presenters. If you remember, at the year-end, Jonathan talked about how Assura was responding to the market themes we were seeing, particularly as the NHS looks to push more services out of hospitals and into a primary care setting. Our presentation today covers 2 of those strategic themes: how the work we are doing improves our offering for our customers moving forward and how this is creating opportunities for further growth. First, I'd like to introduce Simon Oborn, our Head of Property.

Thank you, Jayne. Good afternoon. I'm Simon Oborn, and I'm Head of Property, having been with Assura for just over 2 years. Assura is committed to making a positive difference. And our aim is to be considered the #1 listed property company for long-term social impact. Our SixBySix strategy, which seeks to maximize our contribution to society whilst minimizing our impact on the environment, was introduced last year. And since then, we've been working to ensure that as this evolves, it is embedded across our business and underpins what we do in each area of our operations. Whilst we have a significant amount of work still to do, we've made a great deal of progress, and amongst the successes so far have been the creation of the now firmly established Assura Community Fund, the sourcing of renewable electricity for those buildings where we are responsible for energy procurement, the commencement of trials to develop a truly net zero carbon building and considerable work towards our EPC band B objectives. We know we don't have all the answers, and there's a huge amount of work to do, but we believe we have a clear plan, which continues to evolve and which is embedded across our operations. As a leading property and construction business, we recognize the impact that the sector can have on the environment, and we are keen to play a leading role in setting a positive example. We believe it's essential that we do all that we can, and at the core of our activities are efforts to reduce the carbon footprints of our buildings. Not only will the enhanced energy efficiency reduce energy usage, it will also help future-proof our buildings for the longer term and provide additional long-term benefits to our customers who occupy them. As I mentioned earlier, sustainability considerations, which are a key element of our SixBySix strategy, are embedded across our operations and particularly within our property team. Within the property team itself, we have 3 core disciplines, these being investment, portfolio management and development. Our investment team is focused on identifying buildings which will enhance our portfolio and provide a long-term secure rental stream. Whilst the core investment considerations have historically focused on financial metrics and the importance of a building to the local health economy, the team now considers the energy efficiency of any future acquisition. And as part of the business case, we'll identify the requirements to meet our EPC objectives. Our portfolio management team manages the existing state and is therefore at the core of our band B objectives, where we anticipate investing around GBP 30 million over the next 5 years. For each of our buildings, we have an individual property strategy. And in addition to setting out planned asset enhancement and rent review activities, this plan includes details of the opportunities to improve energy efficiency. Furthermore, we try to ensure that any enhancement proposals include activities that will make a positive difference, even if the building has achieved a band B rating already. Whilst our development team is focused on creating new medical centers that will better serve communities and help to reduce health inequalities, it is also at the forefront of our activity to create leading-edge designs, which minimize the environmental impact of construction activities. We are at the early stage of what we know will be a long process, but it is one that we are committed to going forward and where Ashley will shortly provide greater detail. An illustration of how we are putting our approach into practice is a scheme recently finalized at our Newbyres Medical Centre. Located near Edinburgh, Newbyres is a late 1980s purpose-built facility occupied by the Newbyres Medical Group, who are a forward-thinking GP practice who have become increasingly constrained by the size of the premises. Not only has the patient list size being restricted, but limitations have been placed on the provision of additional services. For example, due to a lack of space, the well-being service can no longer be delivered from the property. Due to its age, the property's energy performance is also poor, with an EPC rating of band D. With the original lease of the premises nearing expiry, we've agreed that a new 20-year term will be taken, with Assura building an extension and undertaking improvements to the existing premises. These works will comprise the creation of 4 new clinical rooms and a multipurpose meeting room, refurbishment of 5 existing consulting rooms, the remodeling of the existing waiting area as well as new flooring to clinical circulation areas, and in addition, replacement of all existing lighting with new LEDs, the provision of a new energy-efficient boiler and roof-mounted solar PV panels. During this significant construction process, we will actively minimize the impact to the practice so that they can continue to deliver their care services without disruption. This proposal will create numerous benefits. The extension will give the practice the option of reopening their patient list, and this will consequently improve access to essential primary care for the local population. The local well-being service can be hosted within the building. This is an essential community service with a high referral rate. The pharmacy service will be able to return to the property, and more space will be available for physiotherapy. And the practice will have a greater ability to adhere to any social distancing guidelines. From an Assura perspective, the extended lease term and the expanded building will secure additional rental revenue and value uplift whilst future-proofing the building. In summary, this project, which is typical of many others we are working on, will ensure the building will be fit for purpose for the long term. It will be a larger, more accessible, energy-efficient and sustainable property, which will be better suited to the provision of a variety of care services in the community. I will now hand over to Ashley to talk about our approach to net zero carbon development.

Thank you, Simon, and hello, everyone. I'm Ashley Seymour, and I'm a Senior Development Manager here at Assura. Just by way of background, I'm a chartered surveyor, and I've been working in the medical sector for about 20 years. I was previously at Matrix Medical, and I came across to Assura following the acquisition of the Matrix portfolio. So over the course of this time, I've been involved in the delivery of over 50 medical centers, ranging from small rural surgeries right through to large multi-occupied health hubs. Over the next few slides, I'm going to take you through the process that we've embarked upon for our net zero carbon pilot project. So to start off with, I'll explain what we mean by net zero carbon. I'll tell you about the pilot project we've chosen, how we measure up currently, what we've learned from the process so far and what the next steps are. So what do we mean by net zero carbon? Well, there are several definitions out there, but we chose to adopt the definition used by the UK Green Building Council, which we felt was the leading organization and one which we are a committed member of now. The UKGBC splits the definitions into 2 elements. Firstly, embodied carbon, relating to the amount of carbon associated with the construction. And secondly, operational carbon, meaning the amount of carbon associated with the ongoing use of the building, principally your ongoing energy bills. And the UKGBC sets out quite helpfully a framework and methodology which we look to follow. So first of all, we look to establish a baseline. Essentially, this is a typical Assura medical center. And by modeling this, we can set our benchmark and compare against it. We then take measures to reduce embodied carbon within the scheme. This means looking at every element of the building from the structure right through to the interior fit-out. In other words, which products and processes have the least embodied carbon. Then we move on to operational carbon. In other words, can we design and construct the building to minimize its energy use? An example might be thicker walls or higher insulation. Then after we've done that, we look to introduce renewables, a typical example being solar panels. And finally, we must offset any remaining carbon in order to achieve net zero. And typically, this is a payment. So in summary, it's very much a fabric-first approach. And only when we've done our best in that regard do we then look at introducing renewables and then offsetting. So in order to continue, we needed to choose a pilot project. Really, this could have been any one of many schemes on our books, but we wanted to choose a project at the right stage, something in our extended pipeline that wasn't too far advanced so that we could steer the design and spec but still deliverable within a couple of years. So we chose Polegate in Sussex. Polegate is a strategically important scheme for the local NHS, which involves the colocation of 2 GP practices who serve almost 20,000 patients. Earlier this year, we secured outline business case approval from the CCG, the governing NHS body. And we've fairly recently selected a greenfield site, which is part of a wider proposal to deliver much-needed housing in the area. So this is an instance where we are working in collaboration with a land promoter to our mutual benefit. They can offer us a site, and we can help them with their planning application by introducing a community use. The site itself is about 1.5 acres. So plenty of space for a 2,000 square meter building with around 100 car spaces. It's on a main arterial routes, so great for patient access, and an outline planning application has been submitted. And just to give you an insight from a GP perspective, we'll now hear from Dr. Brown, who is one of the lead partners.

My name is Dr. Russell Brown. I'm the senior partner at Manor Park Medical Centre. We've been working with Assura for the last few years to try and develop a new building. So why do we need a new building? The current structures are very old and tired. They're not suitable for the provision of modern health care. It's very difficult for us to satisfactorily achieve infection prevention and control measures in a way which is compatible with modern health care. It's extremely challenging. There are quite a lot of procedures that we can't do here because of the infection prevention and control and because of space. Our consulting rooms are significantly smaller than current regulations and guidance would suggest is safe. This isn't good for our patients who prefer to have services here in their practice. At the moment, we're having to refer them to other places, and this is not good for our patients. So why do we need a new building? What are we going to get from a new building? Well, it's not just a surgery but a resource for the community, with services provided closer to patients' home with up-to-date facilities, which is future-proofed where we can provide more comprehensive services. It will be much more professionally satisfying, making recruitment and retention of staff easier, making it much more likely that we can continue to provide high-quality services in the future. And why have we been working with Assura? We've been working with Assura because much as I'm a generalist, they are the specialists. They help us navigate the local structures and procedures with local government and planning regulations, which is something I've had no experience of doing. Then they have the experience of both building and managing facilities, which means that I can get on with what I'm good at, which is providing high-quality local health services in buildings which are fit for the future. This is a really promising project for us and for our patients and would help future-proof services for the local area for a good couple of decades to come.

So what are we looking to get out of our pilot net zero carbon project? Well, firstly, we want to reduce our embodied and operational carbon as much as we reasonably can on the development. We then want to learn and discover both the good and the bad, and then we want to apply these learnings to our other extended pipeline schemes. And as part of this pilot, we will develop a net zero carbon design guide, which embodies all of this and which we can share with our supply chain. So one of the first steps we took was to find out what a typical Polegate-sized medical center produces in terms of CO2 emissions. And that's about 3,000 tons over its assumed 60-year life span. Just to put that into context, it's about the equivalent of powering 1,000 homes for a year or the amount absorbed by 3,000 trees over their 100-year life span. But what we also wanted to find out was the split of the various elements. In other words, which areas can we focus on that have the greatest impacts and which are in our control? And we found that the split between embodied carbon and operational carbon is not far off half and half. This is the bar chart on the left. And if we look at it by building components, the bar chart to the right, it tells a similar story in that the energy use represents about half the emissions, and raw materials essentially make up the other half. And within that, the structure is the largest component. So this gave us a good idea of what the big-ticket items were and what our design team should focus on. We'll now hear from our architects, who will give you a flavor.

Hi, I'm Steve West, West Hart Partnership. This is my co-director, Jim Hart. We've worked with Assura for a number of years, delivering some of your new medical facilities and also looking after your existing buildings, too. I think today, we're just going to talk a little bit about Polegate and our quest to achieve a net zero carbon building for you. Jim, over to you.

Yes. Thanks, Steve. So we really needed to see where we actually were in terms of our more recent buildings, how they benchmark against net zero carbon. So to start that process, we engaged with some specialists in the industry. They were Hoare Lea, ESC and Perrigo. And they are structural engineers, mechanical electrical consultants and the environmental specialists, but specialized not only in net zero carbon buildings but also in the design of primary care centers. So we, first of all, had a review of what we currently have. So looking at one of our existing buildings that we've recently completed to see how that benchmarked against net zero carbon. And it was clearly evident that whilst we were doing very well, well, we are doing very well, we could do much better, and there are plenty of things that we can do to achieve net zero carbon. So Steve, do you want to talk about the main building blocks within the structural element?

Okay. Thanks, Jim. We looked at 5 structural solutions. We looked at their embodied energy to get them to deliver to site and to use them during construction. So the 5 elements we looked at were steel, concrete, timber, recycled steel and something called structural insulated panel system, which we refer to as SIPS, as you know. So each of these elements was tried and tested using an industry-recognized bit of software, which essentially tracks and monitors each of those structural solutions against extraction, fabrication, transport and installation. So in essence, it looks at how much carbon we need and we use to get them on to sites to build them, to use and maintain them and then looking at their end of life. One of the things we did do as architects is we looked at adapting the building design to better suit the structural solutions selected. So things like timber, for instance, we made the building very modular, very rectangular that suits timber. With steel frame, for instance, it doesn't have to be as regular, but it's still very buildable. And things like that end-of-life process, where steel obviously naturally presents a more flexible end-of-life solution than timber. So we've looked at all those elements. And one of the key events of the design is actually looking at its orientation. So that means not putting closing on the sun-facing elevation.

Correct. Because buildings now are becoming so well insulated, part of this process is to make buildings more airtight. So there's less leakage, less leakage of air, less leakage of heat. And it's what that does, of course, it makes the buildings very easy to heat up. In fact, very easy to heat up, but the challenge actually comes in trying to cool the buildings down and trying to get the buildings to a temperate level so that we can operate from.

So what systems on Polegate did we actually use around, for instance, windows?

Well, first of all, we've got the orientation right in as much as we avoided large elements of glazing on the safe side. But around the glazing, we actually -- we've designed in deep reveals. So we've actually set the windows back into the frame so that naturally the windows are shaded, reducing heat gain.

I think where that leads us to is kind of some of the details, things like very deep window reveals to encourage solar shading naturally. So windows are heavily set into the structure, which creates shadowing, introduction of Brise soleil, which is a sunshade effectively; purge ventilation, which enables nighttime, secure nighttime ventilation, which cools the building down during the night so it's cooler in the day. So there's lots of different things that we're looking at that perhaps are considered more detailed and smaller elements, which will add to the overall benefit.

And actually, it's really interesting, Steve, because that actually doesn't cost any money. It doesn't cost any money.

Absolutely.

And of course, we can reduce the carbon that we use just through design, not -- so whilst, of course, we need to get the structure right and we need to get the fabric right and so on. But a lot of the decisions we make around design and how we position the building, where we position the rooms within the building, trying to get that through flow as best we can to use innovative ventilation systems as in natural ventilation where we can use it. It's all stuff that actually doesn't cost, it just takes a bit of thought. And I think that putting all that together can really put us along the way of getting to net zero carbon building without cost [ in the year ].

Yes. And just to kind of finish, the work that we've done on Polegate with the wider team hopefully will set the tone moving forward to deliver the best buildings we can for sure.

So one of the first things we discovered as part of this process was actually that there is not one single official benchmark for both embodied and operational carbon. Various organizations produced their own versions, and none of them is perfect. And just to illustrate the variety, we've shown the various benchmarks from RIBA, LETI and the GLA. And you can see from the chart that there's quite a large difference in them. Now we're still taking advice on this, but our intention is to use LETI, the light blue bars, which has the most stringent and ambitious of targets. On the right-hand side, in purple, you can see how our projects measure up. The first purple column represents our Cinderford scheme. You might recall this as the first certified dementia-friendly medical center. Cinderford was completed in 2020, so really recent. The second column is our latest spec for Polegate, assuming a steel frame. And the third column is an aspirational level, something that we think is possible in theory at this point, and we're assuming it's in the frame here. So as you can see from the chart, our Cinderford projects already beats some of the benchmarks, but we think we can achieve a meaningful improvement on this. By choosing sustainably sourced materials, we think we can achieve a 15% reduction in embodied carbon to get to our Polegate pilot baseline level. And we see further scope for improvements on this in time. Now the rate of improvement will essentially depend on what products and materials are available, but the ambition is there and the trend is clear. Then we move on to operational carbon. And again, our baseline Cinderford model, performed really well, comfortably exceeding building reg standards. But we found that we could improve this further by incorporating some of the things that our architects mentioned like building orientation, smaller windows with deep reveals, nighttime purging and so on. It's also worth saying that this performance assumes a nonrenewable energy source. Moving to a more sustainable energy source would significantly improve the figures. So again, there's considerable scope for improvement over time. So where have we got to? And what have we learned so far? Well, first of all, it's clear that there's no silver bullet for net zero carbon without making an offset payment. It's a very difficult challenge for the whole construction industry that will take a long time to become fully adopted and standard. But we do see it getting easier incrementally over time as we see improvements in the raw materials and the products that we can use and also in our supply chain. So for now, no matter what we do, we will still have to offset carbon to a certain degree in order to achieve net zero. But our approach is to minimize this offset requirement as much as we can and to lead on this rather than to follow. The other aspect is balancing what net zero carbon is leading us towards in terms of a design solution with the actual needs of our customers as well as other design principles. Just to give you an example, the pilot is pushing us to have smaller windows and higher air tightness, but this actually conflicts with the desire to maximize daylighting and natural ventilation, which are encouraged in the NHS design guidance and the sustainability accreditation, BREEAM. So there are conflicts to resolve, and there will be compromises. In addition to this, there are other challenges. Looking at the timber frame, for example, gives us other things to consider. Can we find a good local specialist contractor? How do our insurers feel about increased use of a combustible material? Is timber appropriate for some of our larger buildings, which have larger open areas and therefore, need longer structural spans? Will a timber frame compromise our ability to adapt the building in the future? So we'll have to consider many of these things, but there will be solutions and ways we can mitigate. For example, we've now engaged with our insurers so that we can bring them on this journey too and ensure they are happy and on board. So to finish off, I'd like to let you know our immediate next steps. Firstly, we want to finalize our net zero carbon design guide and share this with our professional team. This is a bespoke document that will cover important broad principles, but also go into granular detail tailored to medical centers. We then like to apply this to all of our extended pipeline projects where we can. But this won't be a rigid set of rules, and it will allow for flexibility and innovation. So for example, it may turn out that Polegate itself might not have a timber frame for the reasons outlined previously, but we will look to incorporate a range of other measures. There are certain other solutions that we'd like to explore too such as cross-laminated timber or CLT. We're not aware of any medical centers constructed in this way before as well as recycled concrete, recycled steel and modular construction. So we are trying to be as radical as we can in our thinking. It will be a continual learning process. We will keep developing and refining it. There will be a feedback loop so that we can iterate and improve. The intention is that our aspirational targets will become the new baselines for future schemes. And lastly, we will be exploring carbon offsetting that is certifiable and compliant with UKGBC standards. And just as a final comment before I hand over to Jayne, we want to be at the forefront of developments on the net zero carbon front. We want to think radically and to be seen as leaders in this field in the eyes of the NHS. Thank you.

Thank you, Ashley and Simon. It's great to see the team embracing the net zero carbon development challenge. There are clearly a number of challenges to work through, and we look forward to updating you on our progress over the coming years. Moving on to the second part of our presentation. I'd like to introduce James Dunmore, our Head of Business Development, to talk about the primary care market and how it is evolving, a topic that is brought up at most investor meetings.

Thanks, Jayne. I'm James Dunmore, Head of Business Development. I've been at Assura for 2 years and have previously worked with NHS trusts, investors and private health care operators to design and deliver health and social care services. It's an exciting time for Assura as we build on our success story to leverage new opportunities. And looking forward, there are 3 themes that frame our approach: customer insight, a growth in target markets and working in partnership. In this session, we will cover some of the main themes in the market, how change is being implemented by the NHS are creating opportunities for us and how we are responding and evolving our offer. This session will be supported with 2 video presentations. Here, we set out some of the themes in the primary health care market, insight that we are using to inform our value proposition to customers, differentiate ourselves and improve the attractiveness of our offer. The poor average quality of stock and lack of estate investment is a risk for existing GP property owners in terms of being unable to make buildings fit for purpose, unsuitable to support a channel shift to digital first, attracting and retaining staff and inability to use the estate to deliver more services. The ownership model is a barrier to transformation, the last man standing concept where one GP partner bears all liabilities and obligations, including those for a lease, an issue that we are creating solutions for through our partnerships with primary care at scale organizations. Advancing technology is also a good example of how we will need to adapt as our customers change their operating model. In primary care, that has been evidenced by the debate on how to use technology to make primary care more responsive for users, manage increased demand and ever-more complex care. NHS reform, we will come to in the next slide. The exact impact of these drivers for change on our existing and our future estate is sometimes unclear. But through being close to our customers, listening and understanding their challenges and working in partnership, we are best positioning ourselves to create competitive advantage in the face of disruption and change in the market. The NHS long-term plan defines the shape of NHS reform and has a triple aim of improving population health, quality of care and cost control. Whilst the agenda is broad for our customers across different health care services, I'd highlight the following. Firstly, there is a short-term response to dealing with backlog activity. A good example of this is the recent budget announcement that the NHS will receive an additional GBP 5.9 billion, much of which is focused on diagnostics and creation of capacity to deal with backlog activity. Secondly, there is reinforcement of the importance of collaboration and partnerships between organizations to deliver improved health outcomes, accountability and value for money. Two examples include the creation of integrated care systems, bringing together organizations to redesign care and improve population health and of course, the maturing of primary care networks with primary care working at scale to provide a wider range of services, improve integration and better manage resources. Just as we have seen the creation of pathology and image generation networks, organizational changes now include setting up NHS trust provider collaboratives to deliver better health outcomes and value for money. So why are these changes relevant to our customers and our business? GP practices, primary care at scale organizations and independent providers are all working in partnerships with these new governance structures, integrated care systems and collaboratives to map out new service pathways and locations where services will be delivered. This represents opportunities for our customers to deliver additional services if there is capacity in the estate to deliver. For example, one aspect of our partnership offer to primary care at scale is about our providing capacity and estate solutions to facilitate this change. We have invested over GBP 150 million in Leeds and West Yorkshire, and we are looking to invest further in this health economy. Jim Barwick, Chief Executive of the Leeds Confederation, speaks here about some of the challenges faced by primary care.