Assura Limited (AGR) Earnings Call Transcript & Summary

[Operator Instructions]

We will now take our first question from Edoardo of Green Street.

A question from me on the CapEx element of this portfolio. So I understand that the leases are all FRI and the walls are pretty long. But do you have an idea of the potential CapEx backlog on this portfolio? And how are you thinking about financing it and potential returns on that CapEx going forward?

Thanks, Edoardo. So in terms of CapEx on the portfolio, we have terms in the leases, which require the occupiers to commit to a certain level of spend on each of the buildings. So we actually have site-by-site CapEx requirements and obligations from the occupiers, which they have to fund themselves that is very comprehensive in detail, and it is not just maintenance, it's actually about improving the building. So for example, it does include refurbishing bedrooms, supplying new equipment. And it also is a full obligation on the occupiers to meet all of the environmental spend required to improve the EPCs. So actually, these are very landlord-friendly leases. And so there was no CapEx required. Now obviously, we could approach the occupiers, and we could volunteer to help fund that if we wanted to, for a right level of return. But that's -- that we obviously haven't had those conversations and there's no requirement to do so.

Understood. And then maybe I have a second question on the [indiscernible] portfolio. Do you have an idea of sort of the long-term returns from an IR perspective and how this sort of would compare with primary care type asset. I expect stronger medium-term growth on the back of different lease terms. But in the longer term, how are you thinking about the merits of sort of a return perspective?

Yes. So I mean, obviously, the starting point for these assets is higher than in primary care. So the initial yield on cost is just under 6%, and you've got that guaranteed indexation with the cap and collar between 1% and 4% and you've got very long leases. So that is an excellent starting point. So if you model that on an ungeared basis, you'd be looking at high single digit and depending on your financing assumption, clearly, on a geared basis, you well into the low double-digit numbers. That is ahead of where we'd be modeling our primary care primarily because you've got a higher starting point, you've got longer-term leases and you've got the guarantee of that indexation. So yes, you should expect there to be a higher overall return on these assets than you would see in primary care.

Understood. And then perhaps finally, on the disposal program, which you hinted out. So what type of assets are you sort of expecting to sell? And also in terms of the pace of the disposal program for maybe the rest of the year and sort of the next 24 months?

Sure. So yes, on the disposal program, I think we -- I wouldn't really describe it as a hint. This is a clear statement of intent from us. We've been very deliberately front foot about this and been very clear. So we've set ourselves an 18- to 24-month time line, and we're committing to get the LTV below 45% and the net debt to EBITDA below 9 through these disposals. So it's a very firm commitment on our side. And in terms of our outlook for that, I guess, the good news is we have a number of options, and we are pursuing all of those. So clearly, we announced earlier in the year the joint venture with USS. We've transferred -- we announced GBP 107 million going into that vehicle to start with. Clearly, we can put further assets into that vehicle. And in fact, we've started those conversations already. So we're not at contractual stage yet, but we've started those discussions. We also are looking to dispose of some of our primary care assets into the open market. So we have a portfolio that we are currently marketing. That's about a GBP 25 million portfolio. And we're at close to the final stages of agreeing a deal on that at the moment. So that -- those 2 things would happen relatively quickly. So we would want to do those certainly within 12 months. And then on the longer-term time frame, clearly, we have total flexibility. So we could do a third tranche into the JV. We could actually create a JV vehicle for these assets. So we could create a private hospital JV and attract capital that way. Interestingly, this deal was actually leaked into the press. And so it was public knowledge a while ago. And just out of interest, I had an unsolicited approach from an institution saying they would be very interested in participating in such a vehicle. So we clearly have those options, too. And then lastly, we have the option of making further disposals of our primary care assets, and that's likely to be calendar year '25, but that is also something that we'd be interested in doing. So the good news is we've got plenty of options. We're very confident in our ability to deliver the numbers to hit those targets that I've mentioned, and we'll be looking to do that in the time line that we said.

We will now take our next question from John Cahill of Stifel.

Well done on this deal today. Just got a question about the operators. So Nuffield, Circle, Spire pretty familiar names to us. But could you perhaps just give a bit of color on the financial status of them as operators? And what I'm getting at is that presumably their staffing costs are rising fairly quickly. Are they able to pass that on in terms of the pricing to patients such that the rent roll stays pretty far down the list of things they need to worry about and then affordability centers.

Yes. Thanks, John, for your comment and for the question. So yes, so in terms of financial performance, obviously, you have -- we've disclosed in the presentation that the overall rent cover on the portfolio is 2.3. So sort of industry standard is 2. So clearly, that is ahead of where we would expect to be. And also pleased to say that they're all improving and growing rent covers. And that reflects the fact that across the portfolio, what we're seeing is the occupiers do have pricing power. So because of the increase in demand and the sort of surge in activity that we've seen across the board that all of the operators have actually been able to increase their margins in the last 12 to 18 months. And that is a trend that we expect to see continuing certainly for the next 2 to 3 years on what we can see coming down the pipe. So actually, the rent cover we expect to improve from the 2.3 going forward, it's something we'll monitor on a very regular basis, and we will disclose it in full going forward as well. The other thing just to highlight is we actually have asset-by-asset performance data, so we can monitor how every asset is performing, and we've got -- we've built our own projected models of how we think the assets will perform, and we are confident that, that will lead to increasing rent cover. And so there's -- we have no concerns about their ability to meet the rent liability.

We have no further questions in the queue currently. Handing it back to Jonathan for webcast questions.

Great. So we've got a number of questions that have been submitted online, and we'll take these in order. And I'll just read out the question and then we'll tackle it between Jayne and myself. So first question is from [ Angelo ] at [indiscernible]. Northwest Q1 presentation shows a 19.6 years weighted average lease expiry on this portfolio. Do the leases include breaks or were the assets regeared between Q1 and today? A very detailed and perceptive question. The answer is they've been regeared. So the Northwest undertook a regearing exercise before they brought the portfolio to market. So that's why the leases are now in 26 years. Another question from Angelo. How does the 5.9% net initial yield compared to the average net initial yield of your portfolio? So our overall portfolio has a net initial yield of 5.17%. We haven't ever separately split out the hospital side, but it's -- that's consistent. It's close to what our overall position is. So these are -- the lease on -- sorry, the net initial yield on these is slightly wider than our current portfolio. I think that reflects 2 things. I think it reflects the fact that we feel that we've bought well. Northwest are a motivated seller because they're looking to address some of their corporate level liquidity issues. And also, our portfolio is largely brand-new and purpose-built. And so because it's brand new, it's got a slightly tighter yield. Okay. Next question is another one from Angelo is the 48% and EPRA LTV company defined or EPRA and what is the issue price of the shares. So I'll pass over to Jayne to answer that and also to perhaps give you an update on the debt position and the position with the rating agency. Jayne?

Yes. So the 48% is the company-defined LTV, but there wouldn't really be much difference between that and the LTV at the moment. In terms of the credit rating, I'm very pleased to say, as I said in my script that we've been engaging with Fitch around this. And in the last hour, they published an update where they have affirmed our A- rating, which is great. They have put us on negative outlook, but that's purely due to potential execution risk on the disposals. But as Jonathan said, within the 18- to 24-month time frame, we are confident that we will get that net debt to EBITDA down to under 9x. So we think that's a really good result and shows the strength of the business and the strength of the assets that we have purchased. In terms of the issuance price of the shares, that is based on the 30-day VWAP basis.

Okay. Great. Thanks, Jayne. So another question from Angelo. Northwest disposal was part of a strategic review to exit the U.K. market. What gives you certainty that they will remain shareholders given that they will own 8% of the float. So you're absolutely right that there was a -- Northwest undertook a strategic review, and this is part of that process. Though this was not -- these assets were not chosen for sale because it was a market they wish to exit. In fact, quite the opposite, Northwest actually wanted to retain these assets and were actively trying to pursue a joint venture with other parties. Those conversations didn't proceed as planned. And so they were effectively forced into making a sale rather than it being a strategic decision. They have other assets in their portfolio, which are less attractive and less liquid. And so hence, they've sold the best assets they have as a way of achieving that liquidity. So actually, they are committed to the U.K. market. And actually, if you look in our announcement, there's a very positive statement from them in there about their belief in these assets and their commitment to the market. Okay. So the next question is from Kempen. There's quite a few. So I'll take them one by one, if that's all right. So you draw GBP 80 million from the RCF next to the term loan and the available cash. Why wouldn't or couldn't you raise more cash through the term loan instead of tapping into the RCF?

Can I take that?