Assura Limited (AGR) Earnings Call Transcript & Summary

Good morning. It's good to see you all again. So we'll go through the usual running order today. So I'll kick off with the overview for the period. Then I'll pass over to Jayne to take you through the financial update. And then I'll come back to give you the outlook for the business. We will, of course, also leave plenty of time for questions at the end. I'm pleased to be reporting on a strong set of results. We have continued to deliver value from our portfolio, generating over GBP 1.5 million of rental growth from 155 completed rent reviews. We have regeared 4 leases, completed 5 asset enhancements with a further 7 on-site and 15 in our pipeline. These initiatives taken together underpin the 5% growth in dividend from July and reflect our determination to drive value from our wide and varied portfolio of 612 health care assets, which has been created over the past 20 years and provides us with a diversified exposure to a U.K. health care market with excellent growth prospects. These underpin our positive outlook and highlight the scope for organic growth, more on this later. This value creation is set against the challenging backdrop of higher interest rates and inflation, but has seen a modest 2% fall in like-for-like value in our portfolio and a shift in our initial yield of 16 basis points. These valuation falls are less than those in other sectors and reflect the enduring quality of our underlying cash flows. Our development activity has slowed due to the current GAAP in rent expectations between us and the NHS. We have begun no new projects, but we have continued good progress on our 4 live schemes. We have also seen progress in Ireland, where we have completed an acquisition in Wicklow and are on site with 2 developments and a further 3 in our pipeline. In NHS projects, we are nearing completion in Cramlington of the Northumbria Health and Care Academy and have started construction on our second Ambulance Hub in Bury St Edmunds. I want now to give you my view on the current attitude in Britain towards health care. I see a fundamental shift. The most significant since the NHS was founded in 1947. We are witnessing a system that many say is close to crisis and is leading us steadily towards private health care as an essential part of the solution. This is bringing demand for private services, and it is a trend we see accelerating. Reflecting this trend, we have completed a new scheme for Ramsay in Kettering, and our on-site with a new specialist cancer care center in Guildford. The final point to make from our first half relates to our financial strength. The primary metric in real estate is still loan to value. However, as a business built on actual cash flows and not on theoretical values, our interest cover is a much more important metric. Our LTV stands at 44% and will nudge higher as we complete our on-site projects. At the same time, our interest cover will continue to improve from the already robust levels of 4.8x. This reflects the impact of the best debt book in the listed real estate sector. Jayne will expand on this competitive advantage in more detail later. Today represents a milestone for the business as we celebrate our 20th year I am privileged to be in my position as your fourth CEO. Over the past 20 years, we have built over 100 best-in-class medical centers. And remarkably, today, over 6 million patients now access their care from one of our buildings. Over time, we have gradually resolutely moved from the old templates of cold clinical rooms to open light field spaces. Our designing for everyone principles that support neurodiversity and our Net Zero Carbon design guide puts us at the forefront of the delivery of sustainable medical properties. We have built a business that consciously looks to deliver for all our stakeholders. Our emphasis on social impact is continuously growing. And for our shareholders, since 2015, we have delivered annual growth in both earnings and dividends per share of 6.5%. A key stakeholder, of course, is our team, who, over the past 20 years, have shown remarkable adaptability in responding to the ever-changing needs of the NHS while remaining true to our values and our purpose. I'm truly grateful to all of the Assura team members, both past and present. They are what makes us a great business. The performance of the business in the first half is particularly pleasing set against the challenges we have faced. This time last year, we talked about how the market was changing as we watched interest rates and inflation make a fundamental impact. Almost overnight, the flow of new acquisitions was halted as returns no longer met the cost of capital. At the same time, inflation forced a leap in the level of rent required for new developments. And so our prospective pipeline slowed dramatically. To meet these challenges, we have embraced a radically different approach within our business. The market had changed, and it was imperative we did too. In the past year, we have made organic growth, our top priority by driving rental growth and accelerating our asset enhancement and sustainability plans. This change has not been easy. We have been forced to delay projects that we have been pursuing for many years. There has been a realignment of our team. We have streamlined in some areas whilst recruiting and strengthening in others. And the team has adapted to new roles and new ways of working. In light of this new reality, we took further steps. We examined our operating efficiency and undertook a complete review of our processes and systems. The implementation of this review is now underway. We have also relocated our offices into a new workspace that supports more flexible working and a generation of new ideas. These changes have led to the emergence of a fresh energy and impetus. New ideas have been generated as to how we respond to emerging opportunities. These include the need for more capacity in the private sector to address our ballooning waiting lists, made post-COVID surge in demand for mental health services, the need from all community diagnostic centers and the growth in private GPs. I will come back to these opportunities later. So in the midst of all these changes, 1 area remains stable, and that is our commitment to social impact and sustainability. On sustainability, our plans for improving over 50 of our buildings before the year-end are underway. And by then, we expect to have more than 65% of our buildings rated as an EPC of B or better. Our net zero design guide continues to be adopted in all of our future development plans. In addition, we have now moved into our new office and with the planning application in process, we look forward to delivering our exciting vision of a net zero carbon workplace for Assura. We'll then be able to say we are truly walking the walk. We continue to support social impact directly through the Assura Community Fund. To date, we have donated more than GBP 1.9 million to projects supporting health and wellness in communities served by our buildings. This year, we have extended that partnership through our work with the National Association for Voluntary and Community Action, NAVCA, who work to help integrate local enterprises with the NHS. We are working with them in 5 regions, supporting locally-identified needs. The locations in which we deliver our core primary care activities are also of major importance. And it is here that health in the qualities are repressing and growing challenge. Research suggests that these have increased by more than 20% since COVID. Almost half of our buildings are in areas which are in the bottom 1/3 of current rankings for health inequalities. Clearly, a contribution from our investing in building new facilities is vital in beginning to address this problem. A primary aim for the NHS has always been for care to be available to all regardless of their ability to pay. These statistics illustrate how far we are falling short of this ambition. As well as a moral argument, there is also a clear economic case for closing the gap in health care inequalities. A recent study for the Times Health Commission estimated that GBP 7.7 billion of economic output is lost through the impact of these inequalities, a further argument for the urgent need for investment in primary care. Our community fund donations are really significant for a business of our size, and they can have a remarkable impact on the communities they reach. However, we also pay attention to the imagination we bring to our core activities and the difference the use of that imagination can bring. There's no better way to illustrate this than our recently completed scheme in Kelsall. In many ways, this is a typical [indiscernible] GP surgery located in the heart of this village in Cheshire. It's about average size, about 1,000 square meters and provide 7 consulting rooms and 2 treatment rooms. It was designed to be BREEAM excellent and is fully electric powered by air-source heat pumps. However, what's different here is the approach to addressing the health needs of this local community. So often, we see that we look at care through the prism of sickness. This center shifts that perspective and looks through the prism of wellness by adopting a model of primary care that is integrated with social prescribing. This is achieved through the delivery of a community wellness center that is integrated in the GP surgery. This center was funded through local charitable fundraising as well as Assura's social impact funds and is staffed through the ongoing support of volunteers. I was fortunate enough to be at the opening of the center earlier in the year, and the doctors and patients alike were enthusiastic advocates of the benefits of this approach. It is a forward-looking and imaginative attitude and I'm one I believe could be the blueprint for future care delivery. Now I'd like to pass over to Jayne to take you through the financial update. Jayne?

Thank you, Jonathan. Good morning, everybody. It's good to be here presenting our half year results. Against the backdrop, we all know is still undoubtedly challenging, we have managed to drive our rental growth, improve the terms on our revolving credit facility, which included moving it to a sustainability linked loan whilst continuing with our on-site development program and expansion in Ireland. In the first half, we met our expectations with our development for r Ramsay at Kettering and our GP surgery in Wolverhampton reaching completion. An acquisition in Ireland further boosted growth and rent reviews came in at a 7.8% on a like-for-like basis. One of the major strengths of Assura is our financing with our long-term fixed rate debt book with no significant refinancing within the next 5 years and a 2.3% average fixed interest rate. With this in mind, let me take you through our performance for the last 6 months in more detail. With the development completions, acquisition and rental growth, we have managed to increase our net rental income by 1% to GBP 70.8 million. We have reduced our EPRA cost ratio to 12%, and our debt costs have not increased under our fixed at 2.3%. EPRA earnings grew from GBP 49 million to GBP 50.8 million, an increase of 4%, and EPRA earnings per share grew by 3% to 1.71p. We have a fully covered dividend which we were able to increase in July by 5% to 3.28p per share. We have continued to see some yield expansion within the portfolio. Given the macro environment of high inflation and higher interest rates, this is unsurprising and equates to a 16 basis points movement or 2% on a like-for-like basis. Our net initial yield is now 5.03% with a portfolio valuation of GBP 2.7 billion for 612 assets. This movement is lower than many others in the real estate sector and is a reflection of our strong cash flows and government-backed income. Our EPRA NTA has reduced to 51.4 per share. The yield shift equates to a reduction of 2.3p per share, the payment of dividends, a reduction of 1.6, which is offset by our EPRA profit of 1.7p. As we announced alongside our trading update in October, we have refinanced and increased our revolving credit facility. We are delighted with the outcome of this transaction and our partners bank's continuing in their support for our business as we increased the facility from GBP 125 million to GBP 200 million, and this gives us additional flexibility in the future. We reduced our margins and now start at 135 basis points, and this sits alongside a reduction in other financing costs. We also have the ability to draw in either sterling or euros, which is significant for our developing Irish business. We're also pleased to have included sustainability-linked KPIs to the facility. These align with our overall business and remuneration targets of getting the portfolio to an EPC of B and using our net zero carbon pathway to reduce our overall energy consumption within the portfolio and on new targets -- projects. If we meet these targets, our margin will reduce, and it is our intention to donate this albeit small reduction to the Assura Community Fund. The facility is set for a 3-year term with the ability to extend to 5 years. When incorporating the RCF, GBP 800 million of our debt and facilities now have a social and sustainability link, and we can safely ensure that any future financing will align with these goals. In addition, this facility further strengthens our balance sheet, along with our best-in-class debt book. We have cash and available facilities of GBP 259 million, which covers all of our commitments and enables us to deliver our current plans. So let's take a look at the balance sheet. The financial metrics highlighted on the left-hand bar charts show the favorable position we are in. The interest cover at 4.8x against the covenant of 1.75x means we have significant headroom. And given the maturity of our debt, this will not reduce any time soon. Below that, you can see the net debt-to-EBITDA. This is a metric that the rating agency uses when assessing our financial position. At a figure of around 9x, this is within the Fitch guidelines. On the 30th of September, our net debt stood at GBP 1.2 billion. And as I've mentioned, this is all fixed with no hedging required at an average rate of 2.3% with a 6.5-year weighted average maturity and 80% of our drawn debt is maturing beyond 2028. Despite the significant increase in interest rates, which is affecting business in general. It is important that we highlight the significant differential within Assura. The chart shows the debt that is maturing. And in the next 5 years, that number is very low with only 1/5 of our debt requiring refinancing. Given we have already grown our rent roll by GBP 3.5 million in the first half of this year, you can see that we can continue to grow the business organically and generate the returns to cover any future interest rate increases. Our EPRA net disposal value is 60p per share, and the mark-to-market on our debt is a net gain of GBP 256 million, reflecting the rate and long maturity of our debt. Our loan to value has increased to just under 44% largely as a result of the yield expansion within the portfolio. And although this has risen, it still remains within our guidance of 40% to 50%. It is our aim to reduce this over time and we have a number of options at our disposal which would help us achieve this. This could include actions such as asset sales, joint ventures or further equity capital. Our rent roll grew by GBP 3.5 million in the first half, GBP 1.9 million due to our additions, GBP 0.1 million from asset enhancements and the remainder from rental growth. We had GBP 1.5 million of rental growth from the 155 reviews at an average rate of 4.2%. This is a mix of both open market reviews at a net 1.5% and index-linked and other reviews at 5.8%. We had a like-for-like uplift of 7.8% on the GBP 19.4 million of rent review. We have a backlog of open market reviews, mainly due to complex issues within the NHS. However, we expect to catch these over the coming months and all background will be paid accordingly [indiscernible] times before. We highlight the position we anticipate we will reach once all of our known activity is completed. All activity is fully funded with our cash and we are focusing upon driving value from the portfolio at this time. We expect our on-site developments to add GBP 4.8 million to our rent roll with 2/3 of these having index-linked reviews. Our rent reviews will add around GBP 7 million and our on-site asset enhancements including extensions in vacant space will add GBP 1 million. And this will increase our rent roll to almost GBP 160 million in the coming years. So in conclusion, in this, our 20th year, I would like to join Jonathan in acknowledging and thanking employees past and present for their continued hard work and adaptability. In this first half, we have maintained a strong performance. We are seeing our rents increase due to rent reviews, development completions and asset enhancements, and we expect this to continue into the future. We have demonstrated our financial strength with the improved terms on our revolving credit facility, and our debt book is credited as being one of the best in the listed real estate space. With the current challenging market backdrop, the support of our investors and lenders is highly appreciated, and we are pleased to say we have achieved over 10 years of consistent dividend growth. Looking ahead, we anticipate as a minimum that we will continue with our steady progress through organic growth. However, we remain ambitious and motivated as we see the growing need for new health care facilities across both the NHS and private sector, and we are consciously preparing for any market opportunities which may arise. And with that, I will end the presentation. And I will hand you back to Jonathan.

Thank you, Jayne. As I said earlier, Assura is 20 years' old. And looking back over our contribution over that time, we have delivered more than 100 new medical centers for the NHS. However, the level of investment has just not been able to keep up with the need to replace outdated buildings and the increasing demand of our health care system, looking to deliver more and more services in ever-growing communities. The workforce has come under increasing pressure as patient-to-clinician ratios move towards unsustainable and even in some cases dangerous levels with predictions for waiting lists to hit 8 million in the coming months. Undoubtedly, the impact of COVID-19 has contributed to the current challenges, but there exists a more profound and enduring issue at the core. The reality is, during the period of austerity, we prioritize revenue funding for the NHS, but this was at the cost of capital investment. A decade of insufficient investment has culminated in a range of substantial issues, including capacity limitations, a backlog of maintenance tasks and a missed opportunity to embrace innovative technologies work methodologies. These challenges have steadily accumulated, intensifying the difficulties faced today. The pressures in the system are also blocking the very solutions to some of the problems. Our current pipeline of primary care developments is almost entirely on hold as the approval process for new projects has ground to a halt. The increasing construction and financing costs are coming up against constrained NHS budgets. Regrettably, this means inevitable delays to the investment in more advanced medical centers that the country so badly needs. Given these delays and the uncertainty around when they could be resolved, we are increasingly seeing near-term opportunities in other areas, mainly private hospitals, projects with NHS Trusts, mental health and projects in Ireland. These are all still meeting the key health care challenge of providing additional services and capacity in the community. But increasingly, there is developing scope for these to be provided by both the private and the public sector. The private sector opportunities allow for a more commercial and urgent decision-making process and benefit from long leases supported by indexation. Returning to the growth in waiting list I mentioned, one of its consequences is the accelerating demand for private health care services, which in turn, results in demand for new private facilities. Our development and sustainability expertise means we are ideally placed to meet this demand. Our existing portfolio of 14 assets is currently valued at GBP 144 million, and we have 1 scheme on site with several opportunities in the pipeline. We're also continuing to make good progress in projects executed directly with NHS Trusts, where approval processes are more streamlined and they are free to adopt a long-term approach to planning. With these clients, we have 12 assets valued at GBP 127 million and have 3 schemes on site and 1 in the pipeline. The field of mental health has experienced a significant surge in the need for its services with referrals for these services increasing by 22% in the past year compared to pre-pandemic levels. lockdowns resulting in social isolation, economic instability and the looming unknown threats of the virus have individually and collectively contributed to heightened levels of stress, anxiety and depression among many. As a result, there has been increased demand, placing greater pressure on an already overburdened system that has impacted both GPs and mental health professionals alike. The consequence of this surge is only slowly becoming apparent with the heightened requirements for mental health facilities. Another example of how insufficient investment is failing to meet this growing demand. This is a market we're well established in. Though to date, we have 9 buildings worth GBP 56 million. Although, currently, there's nothing in the pipeline, it is our intention to focus on growing our presence in this market. In Ireland, they are prioritizing investment in primary care. As a result, we are continuing to see both investment and development opportunities. We currently have 3 assets valued at EUR 31 million with 2 schemes on site and 3 more in our pipeline. These markets sit alongside the significant potential for investment in the U.K. Taken together, they present a compelling case for the future prospects of our business. Now I'd like to take you through some examples of our current projects to give you a little more insight into them. This private hospital in Kettering was opened earlier this year for Ramsay Health Care. The facility provides ear, nose and throat procedures, diagnostic and orthopedics. The hospital boast 2 fully equipped theaters, an advanced endoscopy unit, outpatient consulting rooms and a comprehensive radiology department. This opens up a wide range of diagnostic and treatment options for patients. The opportunity dates back to our acquisition of a primary care center in Middlesbrough in 2014. This included a floor, which was led to Ramsay for surgical day case procedures. They began to reach full capacity, and we were asked to work with them on developing a stand-alone facility nearby. This new project in Kettering is the fifth such new-build hospital we have delivered for them. Ramsay's business model is largely based on performing surgeries on behalf of the NHS, which is an example where each new hospital is effectively additional capacity for the NHS. Their business has seen strong growth over recent years and is now also gaining from a growing self-pay element. The growth in their capacity once again shows the increasing demand for private health care as well as the benefits from high barriers to entry. From an investment perspective, the private hospital market also benefit from strong covenants underpinned by this increase in demand and typically long leases with indexation. Taken together, these represent an attractive investment proposition. I hope you agree, this is an impressive looking facility, and we are looking forward to hosting our Capital Markets Day here in February next year. I very hope -- very much hope many of you will be able to join us for a tour of the facility and the opportunity to hear about the opportunities we see in the wider health care market. You may recall that last year, we completed our first ambulance hub in the West Midlands. Following the success of this project, we won a competitive tender process for our hub in Bury St Edmunds. When completed, this asset will greatly improve the efficiency of the ambulance service by bringing vehicle maintenance, training facilities and the staff into 1 location. We were delighted that one of the reasons we won the bid was our sustainability credentials and our commitment to delivering a net zero carbon in operation building. This has been achieved through a fabric first strategy. This strategy begins with a thorough assessment of the environmental performance of all intended construction materials and the incorporation of smart technologies. In addition to this, the facility has been equipped with over 1,000 square meters of solar panels. Consequently, the entirety of the expected energy demand is met by renewable energy generated on site. This is a further example of us securing deals with NHS Trusts, which benefit from long leases and indexation and deliver essential community health care facilities. Ireland is a market we have entered recently, but only after establishing that Assura would have a unique and distinctive offer within its market. We have, and it is based on our extensive development and sustainability experience. The 2 schemes illustrated here show how we bring skills, which add value to transactions. In Wicklow, we recently acquired a primary care health center. This provides a broad range of services that largely replaces the hospital outpatient requirements in the county. The building is 87% let to the HSC with indexed rent reviews. The team is also being considered for an extension and would see it double in size as an exemplar for the HSE's new strategy of enhanced community care centers. At one of our other buildings in Castlebar, this new strategy is already underway. We are more than doubling the size of the existing building, which will see an increasing range of services delivered whilst greatly reducing the pressure on hospital services. This illustrates the HSE's policy of prioritizing investments in primary care, supporting a more decentralized model and contrast with the U.K.'s approach of prioritizing large hospital enterprises. Both of these projects are clear demonstrations of our ability to acquire assets and then to apply our development and sustainability expertise to enhance the asset's importance, improve its sustainability and to increase our returns with incremental development margin. So in summary, we have had a strong first half, albeit in an ever shifting environment. We have made organic growth our top priority, driving rental growth and accelerating asset enhancement and sustainability plans. This, together with our best-in-class debt book underpins our confidence, which is demonstrated by our 5% increase in the dividend from July. Given the growing pressures on the NHS, we have continued to develop the skills and expertise to meet the needs and build the buildings, which are going to be required when NHS budgets allow. In addition, the opportunities and potential for this business beyond the NHS remains significant, though, of course, we cannot pursue them all with our current available capital. However, it is better to be in a position of having to defer opportunities than to have limited opportunities to consider. This business is not the same business it was 10 years ago, and the NHS is indeed greatly altered Therefore, we are absolutely committed to being at the forefront in identifying and determining the emerging areas where future opportunities lie. We are planning and preparing to ensure that we will be ready to capitalize on the essential and inevitable investment in health care infrastructure when the time is right. Now that completes this morning presentation. And we would like to take any questions you might have. So we have 2 audiences today. We have the webcast and obviously, in the room. So we'd like to start with questions in the room. If you could put your hand up, a microphone will be provided. It's also helpful for the people on the webcast, if you wouldn't mind, just introducing yourself before you ask the question. Thank you.

Sam King from Stifel.

Just 1 question, please, on the expansion strategy. And specifically looking at the private sector in Ireland, I think the messaging this morning is really clear in terms of the increased focus that you have. Just wondering if you can talk a bit more about the competitive advantage that you have there versus peers? And then also, what's giving you confidence from a returns perspective as well?

Yes. So in terms of, I think, referenced in the presentation, are you sort of unique position in Ireland is all built on our development expertise. So the fact that we have a track record of delivering those projects in the U.K., that brings with it that, that design experience, that knowledge of improving facilities and with crucially that sustainability credentials as well. It was really noticeable when we went to Ireland, the HSE were really excited about us bringing some of that sustainability expertise into their market because it's frankly not there at the moment. So that's definitely the position in Ireland. In terms of private hospitals, it's a bit more basic. It's, as I explained with that Ramsay Health care example, it's about knowing a customer. So we had a long relationship with them. We knew exactly what their needs were, and they were very happy to work with us as their partner and that's built up the relationship over time. So customer focus and again, expertise on being able to design, deliver and manage assets for our customers is crucial.

Andrew Saunders from Shore Capital. If we just look at your private care facilities, can you give us an idea of the sort of enhancement you get with rents and returns over your more standard developments with the NHS.

Yes. So clearly, it is a slightly different covenant. So you're looking at a private sector covenant rather than a government covenant. So inevitably, you would expect the yields to be slightly higher as a result. So you get a higher starting point on your yield. But you do benefit from very long leases, typically 25, sometimes 30 years, and they always come with indexation without -- which is obviously clearly a formulaic growth profile. So that is very attractive. So the overall returns are very attractive. And even though it is a private covenant, you are talking about the same fundamental underlying requirement. So yes, it's a little bit 1 step removed from that direct government guarantee, but you still have that underpin of health care demand. So you do get higher returns. I'm not really in a position to disclose precise ranges because that's sort of commercially sensitive. But there are higher returns, but you'd still benefit from that very strong underlying demand.

Max Nimmo with Numis. Just 2 quick questions, if I can. Firstly, on the point, you're not starting any projects at this point and you're kind of losing that growth lever as it were. You put up on screen that you had kind of hit 6.5% earnings and dividend growth CAGR over the last time period. And I'm just wondering, do you think the rental growth that you should be seeing coming through will be enough to offset that growth lever that you're losing? Or should we expect that actually will be lower than that 6.5% kind of on an ongoing forward basis. And the second question was around the 9x net debt EBITDA. You said that was within Fitch's guidelines. Can you give us a bit more detail as what that range is for them. And I appreciate that you don't have any kind of near-term financing coming up. But with LTV at 44%, where does that sit within the guidelines? And what would be the impact if you did get a ratings downgrade on that?

Great. So shall I take the first question, Jayne, are you happy with the second, is that okay? So yes, so in terms of -- I think you used the phrase growth levers. So clearly, if you look back over the last 8 years, one of the very significant growth levers we've had was the incredibly low cost of capital. So an ability to acquire assets, funding off our debt book at the moment, which is 2.3% and the ability to buy assets in the 5s, mathematically, that provides a very, very strong and positive growth lever for the business. That lever is no longer there, but there are other levers that we are able to take advantage of. So I highlighted a real focus on organic growth. Rental growth is improving, we're at 4.2% with potential for more. We are -- we've got a lot of opportunity to drive asset enhancement opportunities, improve the sustainability of our building. So again, we've got significant growth opportunities there. And then the other area is these new markets, which are -- I've got a slightly higher return as we talked about in the previous question and the potential and scope in those markets is very significant. So yes, we've lost 1 specific growth lever, but we still have a number of other levers to pull. So we're very confident on our ability to continue to grow the business. Will it be at 6.5%? Well, I mean I would suggest you just have a look at the consensus numbers for the entire real estate industry, and I very much doubt that you don't find a company that doesn't have a slightly lower growth outlook today than it had 18 months ago, but I would put us in the position we're in an incredibly strong position to take advantage of those opportunities. And maybe, Jayne, if you could cover the debt question.

Yes. So if we just talk about the rating first, and then I can bring in some of the other aspects. So I talked about the 9x net debt to EBITDA, Fitch don't give a formal range, but they just kind of say 8 to 10x is fine. There's a big focus on interest cover. They issued a report only a couple of weeks ago, and we're one of the strongest in the whole of the real estate sector because of our interest cover. And because of the fact that it's actually going to go on for a number of years, it's not just today, we don't have any refinancing or major refinancing until 2028 is the first bond refinance. So there's a big focus on the ICR, a big focus on the 9x net debt-to-EBITDA. On the LTV, we're just under 44%. What they would expect is if we were there on a sustained basis, now they never give an exact -- but we would estimate that would be a couple of years, then there is a possibility of a downgrade. Now we're A- at the moment. We're not in the market, obviously, for any debt. If we were to move to BBB+, we'd be disappointed, but it wouldn't be a disaster, we'd still be a very strong investment grade business and still being able to command investors if we were to go out for a bond. So we're quite confident that we will still remain investment grade in the long -- in the short, medium and long term. But also just going back to the LTV, I referenced in my presentation that it is our aim to bring it down over time. And we're looking at all kinds of aspects, whether we do some disposals or JVs or equally if the markets are stable. And obviously, Jonathan has talked about all the opportunities we have and equity capital in due course.

It's James Carswell from Peer. Jonathan, in the past, you talked a bit about on the development side, the conversations you're having with the NHS about needing those materially higher rents. Can you just give a bit of an update on how this conversation is going? Are there any projects where you could potentially see them signing off on those significantly higher rents in the short term?

Yes. So I mean I think I highlighted in the presentation that we haven't had any new starts in the period. So I think that sort of answers the question to a certain extent. We are still in negotiations. Those are challenging discussions because we are talking about material jumps in the rent. We're talking about 20%, 30% movement as a minimum. Those are not easy conversations, as I'm sure you can understand, while the NHS is budget constrained. Having said that, there are a number where those sites are really critical for local delivery of health care, and those conversations have an urgency behind them. I can't -- if we had something done, then we would have already announced it. So they're not closed, and they're not finalized, but there is signs of isolated instances where I think we may be able to get the higher rents. And then, of course, once you start that process, you create a precedent, then obviously the expectation is that then we'll start to see an acceleration. But I wouldn't want to give you the impression that it's going to be an easy or quick process. It's probably going to be quite extended. But ultimately, we will secure the rents, I'm confident.

Okay. Perfect. And then just a second question and just a slight follow-on for some of the other questions about the non-kind of NHS covenants. I think the percentage that's backed by the NHS or the HSE has been reducing, albeit very gradually over the last couple of years. It's now about 80%. I'm just wondering if you've got a kind of a point to which you don't want that number to go below and where you might see that number end up over the coming years?

Yes. So we don't have any specific targets. It's very much we appraise each opportunity on its merits. As you say, with 80% of your income, effectively government backed, that's a very strong starting point. And then in addition to that, you've probably got another 6%, which is pharmacy funded, which again is government backed, so you're on 85% plus. So I think we've got plenty of scope to allow that to drift down without affecting the underlying strength of the business. And as I highlighted, ultimately, Ramsay, for example, is effectively meeting NHS demand. So the underlying demand for all of these things is the health care requirements, and that's what we're keen to address. So we're very confident with the situation if it does drift down a little bit. We don't have a specific target. It's one we'll continue to monitor and appraise.

[indiscernible] from Barclays. I'll be asking the question on behalf of my colleague, Kanad Mitra, who is struggling on a webcast currently. So his question is, with the remaining CapEx and some more yield expansion will lead to LTV above 40%? Equity has been a part of the equity story in the past. Is this a viable alternative even though the shares are trading below NAV at the moment.

Do you want to take the LTV point?