Assura Limited (AGR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Assura Plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand over to CEO, Jonathan Murphy. Good afternoon to you, sir.

Good afternoon, and thank you, everybody, for joining us for our half year presentation. So in terms of the running order today, you're going to start with me, Jonathan Murphy, CEO. I will give you an overview of the business and the key progress. Before I'll pass over to Jayne Cottam, our CFO, to take you through the key numbers for the first half. And then I'll return for a final overview in terms of key opportunities in our market and our outlook for the business before we move to Q&A. So in terms of the key highlights from the first 6 months of the year, we've had a significant period of strategic change during the year with 2 significant transactions completed. The first one was the GBP 500 million acquisition of private hospitals that we acquired from Northwest in August. This represented a significant expansion of our exposure to the private hospital market, which we see as a really attractive market with long-term growth potential that is very well suited to Assura's expertise in health care and also our wider expertise in managing developments based on our sustainability skills. The second key element is in relation to our funding sources. So during the year, we secured a GBP 250 million joint venture with the pension fund USS. This is a dedicated fund for investing in NHS assets and will enable us to continue to support the NHS in the delivery of its infrastructure requirements while also providing an ability for us to recycle capital. We'll come on and explain how this works in more detail later. The third key thing to highlight is the significant shift, obviously, in the political backdrop where we've seen the election of a labor government with a substantial majority, with a mandate for change, including investing in the NHS. What we found since the labor party took over is this commitment in our position has translated into a firm commitment from them to increase the budget for the NHS by GBP 22 billion and also a strong commitment to the delivery of more health care in the community. We will come on and explain this in a lot more detail later. And all of this has translated into a really strong period of performance with an 8% growth in our overall income level, a 4% growth in our profits and a 4% growth in our dividend. And our dividend yield is currently yielding in excess of 8.5% for investors. In terms of that strategic progress, as I mentioned, the move into private hospitals reflects our ability and willingness to diversify within health care. As you can see here on the slide, our rent roll in the last 5 years has almost doubled, up to GBP 179 million. The largest growth over that time period has been in the private hospital market, which now represents 25% of our overall rental income. This reflects the strong and attractive investment characteristics that we see in this sector with its strong prospects for growth, its solid occupiers and its index-linked terms in terms of rental uplifts. If we look on the right-hand side of the chart, the basis of our rent reviews has also changed materially over the last 5 years. So we have moved towards a greater exposure to index and fixed uplifts. This is now close to 50%. What this means is that we can now guarantee rental growth on more than half of the portfolio, and the other half of the portfolio is subject to open market reviews. The reason for diversifying within health care is to accelerate our growth. We see opportunities to take advantage of growth areas outside of our primary care market to enable to deliver greater returns for our investors. This means we can take advantage of the different timing that you might see in terms of growth opportunities. So for example, at the current time, the opportunity to invest in GP surgeries is relatively modest because of the available funding from the NHS, whereas we are seeing significant growth potential within the private hospital market. This does not in any way reflect the fact that we do not see significant growth in the long term for the GP market. It is purely a matter of timing. So what this enables us to do is to support growth across 2 different areas that might deliver at different times in the cycle, so therefore, providing more stable and less cyclical returns to our investors. This also reflects and will support our long-term growth potential and enable us to continue to support growing earnings and dividends for our investors. Now I'll pass over to Jayne to take you through some of the key commercials from the first half. Jayne?

Thank you, Jonathan, and welcome, everybody. It's good to speak to you this afternoon. So I'm just going to go through our earnings and some of the activity that we've had throughout this first 6 months. As Jonathan has already mentioned, we have seen net rental income growth of 8%, EPRA earnings growth of 4% and our dividend increase of 4%. But underpinning all of this has been the growth in our rent roll. So GBP 179.1 million is what our rent roll now is. And that is made up of a number of items, GBP 29.4 million has come from the hospital portfolio, GBP 1.7 million has come from our rental growth, GBP 1.9 million has come from the completion of our asset enhancement and development program. But we've had a reduction of GBP 3.4 million for those assets that we've put into the USS joint venture. But all in all, we think this has been a fantastic 6 months for the business, delivering on our strategy and continuing to grow our earnings as well as managing our costs, and you can see that our EPRA cost ratio was maintained at 12%. Our EPRA NTA remained largely flat, increased just by 0.2% to GBP 0.494 per share, and I'll go into a bit more detail on that now. So you can see here our net initial yield. Largely, the GP portfolio has remained flat at 5.2% net initial yield. However, within 6 weeks of acquisition of the portfolio, we saw a GBP 25 million net uplift on the hospitals that we acquired in the summer. Now this is because we bought well on these assets. And so we were expecting to see a valuation uplift at the end of September, and that obviously has gone through. But as you can see on the chart on the right there, this has helped to keep our EPRA NTA flat. So we came in the year at GBP 0.493 per share. As part of the transaction for the hospitals, we issued GBP 100 million worth of shares to Northwest, and they reduced our NTA by GBP 0.007. However, the revaluation has increased our NTA by GBP 0.008. So any dilution from the share issue has been negated by the valuation gain. And the EPRA earnings and the dividend paid in the period matched each other. And therefore, we're at GBP 0.494 now at an NTA level. When we announced our acquisition in August, our LTV at a pro forma level was around 48%. As of the 30th of September, this was 49%. However, as I sit here today, we are already under 48%. We have a target that we announced within 18 to 24 months to get the LTV to 45% or below, and we are definitely on our way to making progress towards that. So we have completed since the 30th of September GBP 25 million disposal of a portfolio of GP assets. We also transferred 2 assets into the joint venture for GBP 27 million. They were part of the original tranche that had a slight delay for a few legal points. Then, in our pipeline to dispose within the next 3 to 6 months, we have GBP 110 million worth of assets under active discussion. A large chunk of those already have commercial terms agreed and there are a mix of asset disposals and transfers into the joint venture. Post this GBP 110 million, we'll be at 46%. In the new year, we expect to launch a further portfolio of GBP 90 million of assets that we have identified. And once those are disposed of, that is when our LTV will be at 45%, and this is ahead of our schedule of 18 to 24 months. This is just looking at the portfolio acquisition of the 14 private hospitals. We acquired them for GBP 500 million at a yield on cost of 5.9%. They are geographically spread around the country, but the majority, 64%, are within London and the Southeast. The assets are 100% fully tenant repairing and insuring, so there is limited cost to us as landlord. And the weighted average unexpired lease term on these assets is 26 years. We have a very strong rent cover at 2.3x, and all occupiers are Tier 1 and are trading extremely well, and Jonathan will come on to that shortly. The rent reviews are 100% index linked, and therefore, this is contributing to our rent reviews now being 49% index linked or fixed uplifts and 51% being open market reviews. I'll just spend a moment talking about our funding and our debt structure. In order to acquire the hospitals, we needed to be innovative and fleet of foot to acquire them at the price we did. So the transaction was funded with a GBP 266 million term loan, which stands with 110 basis points margin, and was provided by Barclays. That is a very competitive rate. It is fully hedged with a 2-year swap at just under 5.2%. We had GBP 100 million worth of shares issued to Northwest. We drew down on our RCF, which we do expect to repay with the disposal proceeds over the coming months. And we have some cash on hand, which we also use. We have no refinancings in the short term. We just have GBP 70 million in October next year. As you can see from the chart, we do have limited refinancings before 2029. And the earlier refinancings are all at a slightly higher rate of around 3%. Our average interest rate has gone up from 2.3% to 3%, but that obviously reflects the RCF that's drawn at 6.7% and the GBP 266 million term loan. Just looking at the RCF, we were GBP 85 million drawn at the end of September. This will be reduced or has been reduced by the existing disposals and will continue to be reduced by the further disposals. Therefore, we will be undrawn on the RCF in the short to medium term. When discussing our loan-to-value, following the transaction, we spoke with Fitch, and they were very supportive of the business, and they have reaffirmed our A- rating. They gave a negative outlook from stable, but that was purely on the execution risk of the disposals. And as you can see, we are well underway with those. Therefore, we believe, when we next speak to Fitch next summer, we should return to our stable outlook. I just want to recap for a moment on our GBP 250 million joint venture with USS. We did announce this at year-end as it happened a few days before our results announcement in May. This is a joint venture fund, which we have agreed an 80-20 split, with USS owning 80% of the company. It can be for up to GBP 250 million, and we expect to complete this within 3 years. However, there is a good chance we will do this much earlier. The fund can grow to GBP 400 million. However, the obligation on Assura is up to 20% of the GBP 250 million. We will retain that 20%, and we'll also be receiving fees based on gross asset value for our role as property and asset manager. The joint venture is a fantastic diversification of our funding sources. We've been able to access institutional private capital and we recycle that capital out of loan yielding stabilized assets. And we continued with management control, but we were then able to recycle that into the private hospitals under a yield on cost of 5.9%. So we see that as a very, very good business. There are specific terms around the joint venture. The assets have to be let to the NHS or GP tenants directly. They also have to have average lot sizes above GBP 5 million. But the key point is that the leases need to have index linked or fixed uplifts on the rents. We expect to see the joint venture to grow and that will be either through existing assets from our current portfolio. We can introduce new assets, or indeed, we could look at development opportunities as we move forward. Just coming on to our developments and asset enhancement completions. So we've completed 3 developments in the period. We completed at Southampton a GP medical center, we completed a large building up at Cramlington, and we completed our ambulance hub at Bury St Edmunds. We are on site with 5 developments. Three of those are in Ireland. One is a GP medical center in Winchester and the other is a children's therapy center in Fareham. GBP 2.6 million will be added to the rent roll from these developments as they completed 82% of the rents are index linked. One asset there on the bottom right, Greyswood asset enhancement, is a perfect example of how we can work with the GPs and the NHS to not necessarily build a new facility but to refurbish and extend an existing facility. We have spent GBP 1.2 million on that asset, extending it and refurbishing it. And in return, we've got a 7.5% return on capital employed. Also, we got new rents for the new space but also a 10% uplift on the existing space. And what that does is that provides evidence for all other assets within that area to provide additional rental growth. We have a number of these assets in our pipeline, and we expect to do more of this as we move forward to enhance the assets but also to provide that very important evidence for rental growth. And looking at rental growth, we saw an average uplift of 3% in the period. We reviewed GBP 20.4 million of our rents with 129 reviews, an uplift in overall rent of GBP 1.7 million or 8.2% of the rent reviewed. You can see there in the table at the bottom right that we have changed the split, as I mentioned, from 51% to OMR and 49% RPI, fixed uplifts and other. But the benefit of the hospital portfolio, which is 25% of our rent roll now, is that they are annual RPI uplift rents. And therefore, from the 1st of January, we will expect to receive improved and increased cash flows from the hospital portfolio. The chart on the left there is just showing how our rents have provided additional rent roll over the past few years. And whilst we don't give forecast, this is a general direction of travel. We've put in there what we expect to see as a minimum for the second half of the year. And as you can see, it is much higher than what we've had in the past. So overall, we're very positive about rental growth. It's great that we've got a split between open markets and fixed uplifts. And therefore, we're very positive about how that will look going forward. And as last slide for me is just looking at our cumulative earnings and dividend growth. We aim to have a growing and fully covered and progressive dividend. And you can see that, that is what we've provided to investors over the last 10 years with a compound annual growth rate of earnings of 6.2% and a dividend per share of 7.3%. As Jonathan mentioned, we have a dividend yield north of 8.5% at the moment. And obviously, we've had 4% dividend growth in the last 12 months. And on the whole, we will pass on just under earnings growth in the form of dividend growth. It's what we've done in the past. And we do expect that we will continue with a progressive dividend, albeit in a probably slightly lower rate over the next couple of years. Back to you, Jonathan.

Great. Thank you, Jayne. So what I'd like to do now is just have a look at some of the growth trends and the drivers behind our sector. The first one is demographics, which is the single biggest driver of health care demand. And as you can see here on the chart, the proportion of the population over 70 is forecast to increase by 37% between now and 2040. And in fact, the number over 80 is predicted to increase even more by over 60%. Part of this increasing demand is leading to an increase in our waiting list across our hospital portfolios. And as you can see here, the NHS waiting lists have more than doubled over the last 5 years and now standing at 7.6 million. So to put that in context, that is more than 1 in 7 of the population in England. The growth in waiting lists is a key part of the growing use of private hospitals, but actually, the underlying growth in demand is even more significant. And if you look at this last chart, you can see that there is a 21% forecast increase in the demand for beds in the NHS by 2030. And to give you an idea of scale, that level of increase would require 64 new hospitals which, frankly, is a level that we have never been able to build and is unlikely to be met going forward. So this will probably lead to an ever-growing pressure on our community health care. So in this era of growing demand, what we want to focus on is we've spoken already about our hospital acquisition, but actually, our GP market is an incredibly important part of our growth story as well. And private hospitals is very much an opportunity for us as well as the GP market. So I'd like to spend a little bit of time just taking you through some of the benefits we see and some of the growth drivers that we see in our GP market. The first one, and probably the most significant one, is the political backdrop. So what we've seen since the labor government has been elected is a clear commitment for them in terms of investing in the NHS. In fact, Wes Streeting has stated that he has 3 key priorities for the NHS, and all of these are supportive of investment in primary care. So his first one is he wants to see more care in the community. Well, that is going to require a larger proportion of budget to be allocated to primary care. His second one is he wants to see a shift from analog to digital. Well, the place to deliver that is the place where we have the most interactions with our patients, and that is in primary care. And then the last one is a shift in emphasis from treating sickness to a focus on prevention. And any outreach to the population is going to require the primary care workforce to deliver it, again, placing even greater pressure on the primary care sector. And the key benefit of this move of care into the community is the efficiency for the NHS. So actually, the NHS' own data shows that it is up to 10x cheaper to be treated in primary care than to be treated in a hospital, so clearly a strong incentive for the system to ensure as many of us as possible are treated outside of the hospital environment. It's very notable that in the budget on 30th of October, they were very clear about prioritizing the NHS as the #1 area for future investment. So Rachel Reeves announced a GBP 22 billion increase in general funding for the NHS and a GBP 3.1 billion increase in funding for capital projects and a specific GBP 100 million funding to GP surgeries. All of this represents a significant commitment from the labor government to funding and trying to improve the NHS. Just to understand that in a little bit more detail, it's worth just exploring where we're coming from. So NHS data shows that around 40% of current GP surgeries, and there are about 9,000 across the U.K., so about 40% of those are deemed by the NHS to be not fit-for-purpose and in need of replacement. So in order to meet that, new larger buildings, modern buildings would need to be built. And based on the NHS' own numbers, this would require 1,000 newbuild properties. Clearly, that's a very significant opportunity for Assura to take advantage of. And just to give you an idea, so let's say that we built 15 surgeries a year for 10 years, 15 is a number we have comfortably been building over the last 5 years, so it's a reasonable basis, that would require an investment of about GBP 1 billion. That would enable 3 million patients to be used to have access to services in a brand-new building. And they would cost the NHS a gross amount in rent of about GBP 60 million a year, so a relatively modest investment that could see a significant improvement in the overall estate and the potential to deliver improved health care into the community. The key benefit for Assura from this would be, in order to facilitate this investment, we would require a 30% increase in rents to bring us up to current market levels. And clearly, that would have a read across benefit for the whole of our estate. So I'd like now to just spend a few minutes explaining what we see as some of the benefits of the private health care market, which we've already referenced that we have seen a significant investment this year with the GBP 500 million acquisition. And fundamentally, private health care provides long-term, secure, and indexed cash flows, which enables us to continue to deliver a growing dividend to our investors. So let's look at the growth in the market, first of all. So if you take the last 20 years, there has been a 6% growth in the market to GBP 6.8 billion. So this is a very strong level of growth over the last 20 years. But probably the more important thing is that we're very optimistic about the potential for this growth to continue into the future. You can also see here on the slide, there are 3 distinct areas of demand. There's self-pay, where the patient pays out of their own resources, there's the private medical insurance market and then there's the services delivered on behalf of the NHS. You can see here that all 3 have grown significantly and all 3 represent a meaningful contributor to demand. So that gives us 3 growth areas to continue to support investing in private hospitals. And probably worth mentioning Wes Streeting's view here in the box on the right-hand side, where he's very explicitly said that he has no unideological objection to the delivery of services from the private sector. So long as it's free for the patient at the point of delivery, who provides that services is not of any significance. So let's have a look at how private hospitals work in practice. First of all, private hospitals focus on the delivery of routine procedures. So they're not broad-based acute hospitals, they're delivering a small number of routine procedures that they deliver at scale in specialized facilities that are typically close to their target customers. The average size of a hospital in the U.K. is between GBP 15 million and GBP 30 million of revenue and they operate in a very efficient way, generating more than 20% margins, and that enables us to have a very strong rent cover on our portfolio, which currently stands at 2.3x. This efficiency comes from being very focused on a limited number of procedures in each location. And because of this, they're able to offer very attractive lease structures to us as landlord with 20 years on average in terms of lease length, index-linked reviews and on an FRI basis, so i.e., all of the costs of the building rest with the occupier and not with us, Assura, as landlord. So let's just look at some of the assets we've acquired in the year as by way of example. The majority of the portfolio that we acquired had a bias to London. So 64% of the rental income was in London assets. But we also acquired a number of regional portfolios and regional assets that are equally as attractive. And if I just explain that by taking some of these examples. So Parkside Hospital in Wimbledon, first. So this is our largest single asset in our portfolio. It is a very substantial site in a central location in Wimbledon. It gets 95% of its business from private pay and from insured customers, which reflects the very strong economic demographic of that local area. In contrast, the other 2 assets on the slide, the one in Lincoln and the one in Sheffield, they have a different range of procedures, and they've got a higher proportion of NHS business. This reflects the fact that they have adapted to local health requirements and means that they are able to be leaders in their own fields in their own markets. So I've spoken about 2 key growth markets, private hospitals and GMS GPs, but we are interested in all 4 of our growth markets, though our approach differs slightly in each one, though all is based on our depth of health care knowledge, our development capabilities and our sustainability skills. So in the U.K. GP market, which is GBP 2.2 billion of our assets, we're focusing on rental growth and asset enhancement. In NHS Trusts, we're working with USS to unlock future opportunities that we can deliver through that joint venture. In the private market, we now have established relationships with all of the key players and we've positioned ourselves as a specialist partner, building on our knowledge that comes from our years of dealing in health care. And lastly, in Ireland, the Irish NHS, the HSE, continues to promote investments in primary care, and we're looking to support them in opportunities that we see coming forward. I'd like to just take a moment to describe a little bit more about how Assura operates on our approach to business. So we pride ourselves on doing things differently. We have a very clear purpose. We build for health. And this means that we take into account the impacts of our actions on all of our stakeholders. And this is broken down into 3 different areas: healthy environment, healthy communities and healthy business. So in terms of healthy environment, we've delivered 98 improvement projects in the last 3 years, reducing energy consumption in those buildings by 3.6 million kilowatt hours. In terms of healthy communities, we look to support this through our actions and also through our Assura Community Fund. In the last 4 years, this fund has donated over GBP 2 million to charities and has generated over GBP 8 million of social value. And lastly, healthy business, where we focus on generating attractive returns for our investors through innovation, expertise and customer service. And as testament to our approach, we're delighted to say that we are the first FTSE 250 business to achieve B Corp accreditation, something that was voted for by our shareholders in July and represents a real testament to our overall approach in this market. So in summary, we've had a very busy 6 months. We've had a new JV, issued debt and equity to support our acquisition, and we're on track with our disposal targets. The political backdrop is as positive as it has ever been. We've been busy buying private hospitals where we see attractive growth opportunities. And as a diversified health care REIT, we've been able to take advantage of a broad range of opportunities, though always focused on supporting health and well-being through innovative, sustainable buildings, whether for the NHS or for the private sector. And lastly, we've been able to grow our earnings and therefore, support a growing dividend with a 4% growth in our dividend and a dividend yield that currently stands north of 8.5%. So a very strong basis from which to base our plans for future growth. And given the broad range of opportunities we see, we remain very optimistic about the potential for future growth. So that then concludes our presentation. And now we'd like to take you through some questions that we've received. Please do carry on submitting questions. The poll is open, and we're very happy to take any questions that you might have.

[Operator Instructions] But just while the company take a few moments to review the questions that have been submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And Jonathan, if I could just hand over to you to read out the questions and give response, that would be great. And then I'll pick up from you both at the end.

Great. Thank you. Yes, so I'll read out each question, then I'll pass the number of them along to you, Jayne, I'm sure, as we go through, if that's all right. So the first question is, what are the benefits in the Johannesburg Stock Exchange listing? So yes, a really good question. Simply, it's about liquidity for shareholders. So we've had a number of South African investors in our shares over the last few years. And we found that we have a very attractive investment proposition for the South African investor. However, they have rules in their local market that restricts them from being able to invest in overseas stocks and shares beyond a certain percentage. So the benefit simply is, by listing there, we remove those restrictions. It opens us up to more potential investors and brings additional liquidity into the shares, which obviously benefits all investors. And the ongoing costs are very modest. It's a relatively low cost regulatory charge, a few tens of thousands a year that we need to pay, and we're hoping we can unlock some significant liquidity gains. So next question is, can Assura meet the debt reduction targets within 18 to 24 months given rising borrowing costs? Jayne, are you okay to take that one?

Absolutely, no problem at all. In short, the answer is yes, we absolutely can meet our debt reduction targets. If you actually look at our overall debt, with the exception of RCF which obviously is at a floating rate, all of our debt is fixed and is long term in nature. Indeed, we still have over GBP 600 million of our debt post-2030 at 1.7%. We only have GBP 70 million refinancing within the next 12 months. And we talked about the disposals that we have and the fact that we're actually in commercial negotiations for a large chunk of the GBP 110 million health pipeline. So we're very confident that we can meet the targets that we set in advance of the timetable that we set.