Primary Health Properties Plc (PHP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Primary Health Properties plc investor presentation for the interim results for the 6 months ended 30th of June 2021. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and will publish responses where appropriate to do so. These will be available on your Investor Meet Company dashboard, and you'll be notified once they're ready for your review. I'd also like to remind you this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Harry Hyman, CEO; Richard Howell, CFO; and Chris Santer, CIO of Primary Health Properties. Thank you. Good afternoon.

Hello, everyone, and thank you very much for that introduction, Paul. This is our first time on Investor Meet Company. So we're delighted to be meeting all of you virtually. We welcome the day when perhaps we can see some of you physically. And I thought just before moving into the detail of our presentation for the results, I would give a very brief overview of the genesis of Primary Health Properties and why I think it provides such a resilient source of income in the shape of its dividend. So more than 25 years ago, I discovered that general practitioners in this country, the U.K., have their rents reimbursed to them by the National Health Service and although -- that although the GPs were the tenants of medical centers, in fact, the payer of the rent was, in fact, the NHS. And with the NHS being an agency of the British government, that there was what I would call a disconnect between the covenant on the lease and the actual payer of the rents. And that arbitrage, as it were, the margin, between what you can buy the lease for and what you might be able to buy a government gilt for struck me as an interesting margin to bundle up and pay out to shareholders in the shape of a good, reliable and growing dividend. And so back in '96, we joined the A market, progressed to the main market in '98, became a REIT in 2007, and I'm very pleased to say that over the 25 years, we have a successful track record of growing our dividend in every single year, as we'll come back and describe a bit later in the presentation. The company has moved forward a pace, and I'm just going to give you a brief overview of it. We are, in fact, the leading investor in flexible modern primary accommodation, not only in the U.K., but also now in Ireland, where 8% of our portfolio is based. We're in the top half of the FTSE 250, the GBP 2.1 billion market capitalization and over 500 properties valued at just over -- just under GBP 2.7 billion. The key point which I was referring to earlier, that is 90% of our total rent roll derives from government bodies such as the NHS or the Irish equivalent, the HSE, and given that our rent roll is GBP 136 million, we have 100% occupancy or thereabouts and an average lease length remaining of some 12 years. This represents an extremely solid and stable source of income, which we can support a modest level of gearing on that, typically ranges between 40% and 50%. I'm delighted to say that so far this year, we've paid out 2 installments of our interim payments on our dividend, totaling 3.1p. We've already declared and we'll be paying a third installment in the third week of August, and brokers estimate that we'll be paying a total dividend for the year of 6.2p, which is about a 3.9% yield at the current share price. Given that the contribution to that comes 90% from government sources, we think that is an extremely attractive source of very high-quality income. Other important points that happened during the first half of the year is that we moved from being externally managed to being internally managed, so we're a completely conventional property company. We had some good results, which Chris will talk about later on, from our rent reviews and asset management projects. And as the title of the presentation said, we have laid strong foundations for growth into the second half and on into '22. We have a very prudent level of debt finance at just under 41%, and increasingly, we are telling the story of our extremely strong ESG credentials. In fact, it's very difficult to think of a better example of social impact than investing in new medical centers. Our pipeline moving into the second half of the year is some GBP 195 million spread across the U.K. and Ireland. In fact, EUR 126 million of the pipeline is in the republic. Since internalization, we've also been able to carry out direct development, and I'm pleased to say that from the GBP 10 million that we had in our balance sheet at internalization, we've now moved forward to GBP 21 million, representing 4 projects. We've also taken delivery of a number of projects, which I'll leave Chris to talk about later on. I've mentioned the LTV, and of course, we have plenty of headroom with capacity of over GBP 300 million, which should keep us going for the next 2 to 3 years. Of course, one of the consequences of the pandemic is that a number of parts of the property sector have experienced extreme difficulty on cash flow and cash collection, and I'm very pleased to say that we have a strong track record that shows the resilience of our cash flow, and we've collected over 99% of the due rents in the U.K. and Ireland for both 2020 and for the year-to-date. Of course, there has been some cash flow difficulty with some of the more marginal units like gyms and cafes, and of course, as a responsible landlord, we've stepped up to the plate and given those smaller tenants time to pay. Again, Chris will cover off the additional revenue coming from asset management and from rental growth. And I suppose the other point to touch on at this stage is that we are aware of the changes that the digital world is bringing, disruptive world is bringing. But so far, we see no impact on the total capacity of primary care square footage, and indeed, we think in the medium term, the move of taking services out of expensive and inflexible hospitals and putting those services into the primary care arena is going to lead to a bigger demand for space across the portfolio, which, of course, we're in a great position to satisfy and service. And indeed, the move to integrated care systems and the new government Health and Social Care Bill is indeed emphasizing this unified approach to care, and this should result in many, many more services, more diagnostics being located in the primary care arena, which will offset the reduced amount of square footage that may be needed through a lower amount of patient footfall from the initial stages of triage. But it's our view, having consulted with a lot of medical experts, that after the initial triage, a lot of time is still going to be needed for patients to visit the medical center. And of course, we must remember that not everyone has a smartphone, and if you have aspects of dementia or of a number of complex condition, then it's even more likely that you will be visiting the health center yourself. I'm going to leave the more detailed aspects of this slide on the internalization, which Richard will pick up on the annual savings of about GBP 4 million that came or that are coming from it on an ongoing annual basis. And what it actually means is that we have a more simplified and streamlined approach, and it removes some of the differences between us and our competitors and also widens the universe of shareholders, given that some were not able to invest in an externally managed business. Again, covered the principles of the pipeline, and we can come back to that a bit later in the presentation, but we have plenty to work on. And of course, it's not only new investments. We are committing a large amount of capital on an ongoing basis to keeping our properties fit for purpose and modernized, and Chris will pick that up in the section of the presentation of our asset management. Now here are some of the forward funders that we're working on, just to give you illustrations of the type of properties that were involved. We have Eastbourne. We have a new GBP 8.5 million building, which is reaching practical completion either today or tomorrow, topically. It's got a number of services that are designed to accommodate or deal with the population of Eastbourne, which has got a high level of elderly people. A lot of people go there to retire. And equally, Enniscorthy and Arklow, 2 pretty large, new medical centers in Ireland, and we'll come back and talk about some of the differences between the Irish system and the British system, but the key one, the key fact there is that the HSE, or Irish NHS, probably accounts for 85% of the rent of our Irish portfolio. Great new buildings coming up, and they will be finished in the first part of 2022. The developments that I talked about at the beginning, here are 4 of the ones that represent our development pipeline. Because of confidentiality, we don't give you the precise locations, but the one on the left is going to be located in Lincolnshire. The one second left is on the coast in West Sussex, and we have 2 within the urban setting of London, and we have a wider pipeline of GBP 125 million across 17 other projects that are in our sort of stage 2 stage of work in progress. So having said that, I'm going to hand over to Richard, who's our Chief Financial Officer, who will take you through some of the key financial highlights for the year so far. Over to you, Richard.

Thanks, Harry, and good afternoon to everybody. Just before I start, just to touch on PHP's dividend policy. We'd like to pay out a dividend in 4 quarterly installments each year, typically in February, July, May and, lastly, November each year. But the key for us is that dividend is fully covered by our adjusted earnings, which is basically our rental income less all of our underlying costs such as interest and admin expenses. So last year, we saw a big improvement in our profitability over the 6 months, an increase of just under GBP 5 million. That was driven by 2 key factors. One was the additional income from rentals, mainly rent reviews and asset management projects, which Chris will touch on a bit later. Those were just from acquisitions we made in 2020, a number of developments that Harry already talked about that came online completed in previous years. So that's at around GBP 3 million out of that GBP 5 million. We also internalized the business, as Harry mentioned, and that's delivering around GBP 4 million per annum of cost savings. So that -- in the first 6 months of this year, GBP 2 million of that came through, and that was the difference in terms of the increase in the profit in the first 6 months of this year. So that led to an adjusted earnings per share, 3.1p. That was all paid out to shareholders, 2 quarterly installments of 1.5p each, and that represents a 5% increase of the dividend paid in 2020. The investment property portfolio is valued at just under GBP 2.7 billion, and we saw some strong revaluation gains in the period, just under GBP 67 million. That was driven by 2 key factors. One is the rental growth that's coming through our portfolio, the key driver for ongoing revaluation surplus, but also we saw very strong yield compression in our sector. It was very attracted by the strong fundamentals that this sector is very secure long income streams. There's a lot of demand from investors to this sort of income product as opposed to other property assets such as retail or offices. So we have an adjusted net asset value of just over 115p. That was up 2.5p in the 6 months to June driven by 2 things: our revaluation surplus or 25p per share; and then also internalized business, which are at a cost of GBP 37 million, and that knocked off around 2.5p. As Harry has already mentioned, we have a relatively modest loan-to-value ratio at 41%, and we target our ratio between 40% and 50%, so at the bottom range of that target. We do perhaps like to leverage slightly higher than most other real estate companies that really reflects a very strong income stream from our portfolio. Growth on rent reviews, looking at the property management of the portfolio. Chris will talk about it a bit later, 1.5%. We have a very long average lease length, just under 12 years, and we have pretty much full occupancy at 99.7%. Our EPRA cost ratio, as this is really a measure of our sort of cost efficiency across the portfolio, is now down at 9%, and this is, by far away, the lowest in the whole of the listed U.K. REIT sector, and the next property company on the list was a company called Assura, similar company to us, and their ratio is at -- up at 13%. Average cost of debt, 3.4%, but we have a very low marginal cost of debt at around 1.7%. So every time we borrow more money, it only cost 1.7% when we buy new assets. Just looking at the debt portfolio of the group in a bit more detail. We'd like to borrow on a secured basis. We think that's the cheapest and most efficient route to sourcing finance at -- using the leverage ratios we operate at. But we have a broad and diverse range of lending partners. We have Aviva. We have GBP 0.5 billion of debt, probably our biggest lender, but also have a number of revolving credit facilities with high street banks. They provide a lot of flexibility to us. Every time we have spare cash, we'd like to pay down those facilities. And when we want to buy a property, we have instant access to funds. We also have a range of other bonds and long-dated private placement loan notes, which provides us some very long secured sources of finance. We also have -- because we have some euro-denominated assets, we have some euro-denominated debt to hedge out the foreign exchange risk on those assets. If you look at the debt maturity profile at the bottom, you can see we've got quite a broad spread of maturities. So we don't have any huge waterfall or risk of any refinancing in any particular year. If you look at the 2021 and 2022, we've already agreed terms to renew these facilities, and those are being documented at the moment. We're working very hard with a number of our lending partners to look at our cost to finance and try and reduce this even further. As Harry has already mentioned, we have over GBP 335 million of undrawn cash, loan facilities, which provide a lot of headroom to deal with our future pipeline of acquisitions and future projects. So at this stage, I'm going to hand over to Chris, who's going to take you through the property portfolio.

Great. Thank you, Richard, and very nice to meet you all and be able to speak to you. So just here on Slide 13, 12 maybe even, we just give an overview of the portfolio. And I think one of the key points to note here is that this portfolio is largely built properties that are already rented, standing investments. We've got 514 buildings across the country. It's a very granular portfolio. We're across the U.K. We're not in Northern Ireland. We are in Southern Ireland or Ireland, where we have 19 properties. These are largely buildings that have been built already in the last 5 to 10 years. It's a very new and modern portfolio. It's part of a program with the Irish government, and we're really very pleased with that portfolio as well in Ireland. The entire portfolio valuation, GBP 2.65 billion, a contracted rent roll of GBP 136.1 million. That's probably across something like over 1,000 different tenancies. And we have a net initial yield from that portfolio of 4.7%. A couple of other key points just to note here. The average lot size or the average value of our buildings, GBP 5.2 million. We think that's right in a good place. We have about 50 buildings, which are valued over GBP 10 million, and we have very few buildings valued under GBP 1 million. And the reason why we think that's important is that the buildings under GBP 1 million tends not to be your purpose-built buildings. They tend to be your older, converted buildings. And so we're pleased that we only have a very small number of those in the portfolio and that the portfolio really is modern, purpose-built premises. We got high occupancy rates, 99.7%. And as mentioned before, 90% of the income comes either directly or indirectly from the U.K. or Irish governments via their health services, the NHS or the HSE. I think perhaps one thing I'll draw your attention to on this slide is the wagon wheel in the bottom right-hand side, which gives you an idea of the spread of our lease lengths in the portfolio. So we have probably just over 1/4 of the portfolio has more than 15 years left on the lease, on the top left-hand side or the northwest of the wagon wheel and less than 5% of the portfolio has less than 3 years left on the lease. So we have a weighted average unexpired lease term of 11.8 years of rent from the lease contracts, and that's the spread from 0 to over 25 years. So that's something that we actively manage. We have a team of asset managers and asset management team who are there and actively engaging with the occupiers of our properties to make sure that the buildings remain fully occupied and that they're fit for purpose, both from a clinical standard and from an environmental standard, and our tenants stay with us. It's very important that our tenants and our occupiers stay with us and want to stay with us and renew their leases. So we do generally engage with our occupiers at least 5 years before their leases end for a number of reasons. We think it's good practice. There are also a number of stakeholders that are party to the decision of our tenants to renew. The NHS is the payer, as mentioned earlier, so they are part of that process. So that's something that we have a team of 8 to 10 people focused on, and we have grown the rental income across the portfolio through doing this and rent reviews by GBP 1.3 million in the first half of the year. So that's a 1% increase across the entire rent roll of GBP 136.5 million, and they were from rent reviews and asset management. Rental growth was positive from rent reviews. So on this slide here, we just give an overview of the history of the increases in our rents from rent reviews over the last 15 years. Before I talk about that, we should note that about 70% of the portfolio has a rent review basis every 3 years to open-market rent. Actually, it's every 3 or 5 years, mainly 3 years, but some to 5 years, but the point is 70% have a link to an open-market rent. And the remainder of the portfolio, 25%, is linked to an index, an inflation index, CPI, RPI or Irish CPI, and the remaining 6% have predetermined uplifts already specified in the lease. And so this is a key way in which we grow the revenue and the income of the company, and you can see here on this chart that over 15 years, we've continued to deliver positive rental growth year-after-year. It's not as high now as it used to be, but we continue to see positive growth. We saw 1.5% increase in the first half of the year, which we're pleased with, and that's a mixture of those different drivers. And we -- I hope to see that continue in the second half of the year and beyond. So that accounted for about GBP 1 million of increase in the first half of the year from something like 231 rent reviews. As you can imagine, with over 1,000 tenancies, we have a lot of rent reviews. We also are working constantly with our occupiers, as I said, to make sure that the buildings are up to a good standard from an operational and from the environmental point of view, too, and we've given some examples here of just 4 of our projects that we have on site at the moment. So far, in the first half of the year, we've completed 17 similar projects, not all exactly the same as this, but are sort of similar vein. And really, I guess, the way in which we could characterize these are existing buildings. They are either during their lease or approaching their lease end, and we are in negotiations with the occupiers to often expand and extend the building. So this example here in Leamington Spa, we're extending the building by 20%, 30%. This enables the occupiers to provide more services. The drivers behind that often being that they were operating perhaps at full capacity already. They need to spread out a bit more. They need more accommodation but also some of the drivers we've talked about in terms of population growth, particularly in something like Leamington Spa, there's been a lot of new housing development coming through and new services being provided as well as the health care system, like any system, continues to innovate and provide new services. We start to see some services that could have been provided in the hospital now provided in a medical center, and this continues to drive the need and the demand for more space. And at the same time as doing this, we also refurbished the buildings in terms of the heating, the insulation, the energy efficiency and so on and so forth to mitigate their impact on the environment, reduce energy consumption, and this is measured through EPCs, I suspect we're all familiar with, and we target generally all our buildings to be upgraded to an EPC of B during this process. And finally, I think I'll just point out here that we have a number of policies and targets towards the environment. The NHS itself, our key occupier, has stated that it wishes to be a net zero carbon health care system by 2045, and we support them in that goal. That goal is important to us, too. So we've set some targets around refurbishing our buildings, around the specification of the new buildings that we build and in terms of how we operate the existing buildings to reduce emissions. We've set ourselves a target to reduce our emissions by 25% by 2030, and that's just an example of our impact and how we seek to mitigate our impact on the environment. And as Harry mentioned at the beginning of the conversation, we're also always looking at our social impact. I mean aside from the fact that we are providing modern, purpose-built medical centers for the dispensing of 21st century health care, which we think has a very good and strong social purpose, we have also established recently a community impact fund and allocated some money to that to also give further in terms of supporting the communities in which we are invested and investing. So I will pause there for a moment, and I think that gives us a bit of a whistle stop to all of the portfolio and hand back to Harry to talk about the dividend and wrap up.

Thanks, Chris. And of course, a copy of this presentation is on the PHP website for later, phpgroup.co.uk. Anyway, this is a chart that we're extremely proud of and shows our 25-year track record of paying an increased dividend in each year. I referenced at the beginning that at a GBP 160 share price, it's just fractionally above that today, the yield is 3.9%. We've mentioned that we pay out our dividend in quarterly installments, February, May, August and November. The August one is still to come. The shares are ex dividend. So the next one after that will be in November, and I'm not allowed to tell you what that dividend is going to be for obvious reasons, but our brokers are estimating very, highly skilled financial analysts that 4x1.55 is 6.2%, and I'll leave you to predict the likelihood of that being the case. And as Richard was telling you earlier, dividend cover is pretty much at 100%, notwithstanding the fact that we raised GBP 140 million worth of new equity last September. So a good track record. We consider ourselves -- in America, they have a phrase called dividend aristocrats, and that's what we think we are. And it's vitally important, and we have a number of shareholders that are income funds and high net worth wealth managers and things like that. It's a difficult slide to read, I appreciate, on the screen, but let me just say some concluding remarks. Of course, we take our hats off and salute the excellent work that the NHS has done in the U.K. and the HSE has done in Ireland in the fight against the pandemic. And I think it has shone a spotlight on the need for resilient and robust health care systems, and that is not likely to go away. The demographic drivers for this business: an aging population; a growing population; a population with an ever-higher instance of chronic disease, like type 2 diabetes, which is very much in the news, connected with diet; coronary heart disease; and now the added pressures of COVID, long COVID, the vaccination program, the booster program, all mean that there's an ever-increasing weight on the health care systems. And one of the best ways of the runners of those systems to cope with this increased demand is to put more of it into the primary care arena, better value for the taxpayer, more convenient for the patient. But you can't do that out of clapped-out, semi-detached and terraced houses. It has to be modern purpose-built stock. So we've risen to the challenge. We've built up a portfolio of GBP 2.7 billion with a really strong cash flow, 90% backed by the British and Irish government, a long WAULT, a relatively modest level of leverage. We see a lot of merit in the Irish market, bigger lot size, longer leases, slightly different lease structure but less competitive, frankly, than in the U.K. at the moment where there are a number of pressures. And we're very keen not to be seen to be overpaying, and we want to make sure we get value for money for our stakeholders. The internalization has been very good for the business. As I mentioned at the outset, it's widened the network or universe of potential investors, and we have a very additive business model for every single unit that we buy enhances the bottom line. We have a strong track record. We're highly committed to the business. We've got a great team of 55 people, 56 people involved in running it. We have a REIT structure, which is a very, very strong structure from a tax standpoint and is a very effective way of private individuals, either through a SIPP or an ISA, of owning property with very little tax drag. So those are our -- or my concluding remarks. I'm going to hand back to Paul, who's going to take you through some logistics, and then we'll come back and answer your questions. Thank you very much for your attention so far.

Fantastic, Harry. Thank you very much, Harry, Richard and Chris. Thank you indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q&A tab situated on the right-hand corner of your screen. But just while the team take a few moments to review those investor questions submitted already, I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via our investor dashboard from the Investor Meet Company platform. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order the company better understand your views and expectations.

I guess, Harry, I'll probably just address these to you, but we've had a number of questions that have come in from investors during the presentation today. If I may just hand back to you just to click on that Q&A tab and start up the talk and just read out the question where appropriate to do so and give your response, that would be great.

Yes. Fine. Thank you very much. Some really interesting questions. So thank you, [ Simon ], for your question about how competitive is the investment landscape for acquisitions/developments and are we seeing this being more competitive due to the robust rentals. Well, I think the short answer is that in the U.K., it is very, very competitive. And as I said in my remarks, we're very keen not to overpay. But having the Irish dimension is quite useful. And in the slide deck, we have an interesting -- too far. Slide 21 shows you, on a sort of pretty academic basis, the difference. So in the U.K., if we were able to buy stock at 4.7%, we take off the 10-year LIBOR swap rate and our average debt margin. You get down to a bottom line contribution of 2.4%, 240 basis points. But -- and actually, we can't buy stuff at 4.7%. That's the valuation yield. If we're buying new stock, it would be much closer to 3.75% or 4%. Compare and contrast that with Ireland, where we can buy stock at around about 5%, that's kind of like where we're at on our pipeline deals. If you take into account the fact that the euro LIBOR rate, a Euribor rate rather, is actually negative, and putting on the margin, which is actually about the same, you get down to a much higher contribution. So we really are focusing on our Irish portfolio because we think it's a fantastic opportunity, and our target is to grow that to around 15% of the portfolio, so around about GBP 500 million, between GBP 400 million and GBP 500 million. So next -- so that hopefully deals with Simon's question. We go on to [ Andy's ] question, which is, "With 90% government-backed rent, what leverage do you have on rent term and any increases you can get through?" And I'm going to ask Chris to deal with that and describe the district valuer process and the appeals process. Please, Chris, over to you.

Certainly. So we have -- so about 70% of our portfolio is linked to open-market rent reviews. And in that process, the occupier is represented by the district valuer. So the district valuer is an advisory body. It's a subsidiary of the government, of HMRC, and it is -- it will advise the occupiers, the medical tenants, the doctors and the practitioners on the rents and the fair rents they should be paying. And actually, this is quite comforting to us because these rents are opined on by the district valuer, and we can't really be accused of having set prices, which, in any way, are unfair, these prices, which the district valuer would opine on as being a fair market rent. But actually, at times, sometimes we feel the valuers and the district valuers may see themselves as protectors of the public purse as well, and they don't always give us what we think is a fair market rent, and then we have the ability to appeal. There is an appeals process with the NHS, and we have the ability to go through that, and in fact, we regularly do. And we recently did it on a rent review in South London and Clapham, and we achieved the uplift that we were looking for there and also recently in a property up in the East Midlands, where, again, we had a successful outcome, and the appeals process found largely in our favor. So that's something that is a core part of the work we do here. We have a rent review team, which specializes in this, a team dedicated to doing this, and through that, we feel they gather the expertise, the experience and the knowledge to be able to put forward our case as strong as possible for shareholders' benefit.

Great. Great. Thank you, Chris. The next question, "Are tenants responsible -- this is from [ Vivek ]. Thank you very much, Vivek. "Are tenants responsible for the cost of maintenance or fit-out or refurbishment over the term of their tenancy? What is the typical cost as a percentage of the building value with respect to renovations and such as the tenant leaves and are such works more cosmetic in nature or more wholesale changes to the design and format of the building?" Well, there a lot of questions there, Vivek. I'm going to attempt to answer them. So around 60% of our portfolio is FRI, fully repairing and insuring triple-net, where the tenant is responsible for maintenance. 40%, and the entire Irish portfolio is included in that, is what I would call FRI. Actually, it might be 45%, sorry. I might be out of date on my statistics. And there we are responsible for the exterior maintenance of the building, but the tenant remains responsible for the interior. And that typically costs or the budget is about 4% to 5%, of which we're currently spending 2% to 3%. So we're fine on that, and obviously, as a professional landlord, we want to make sure the buildings are maintained, and planned maintenance is adhered to, and in fact, that's mandatory under the Irish leases. What does it cost in terms of a refurb? Well, it depends what the nature of the refurb is, and it can go from what we might describe as a light tot-up of interior renovation to building some additional rooms. Typically, it's 1 or 2 years' rent, and it could enable us to get an extra 20 years lease extension, and you don't need to calculate to work out that, that's a pretty good deal, Vivek. So I think that deals with that question. Thank you very much for [ Nick ] for saying it's a great business. We agree with you. "What limits or issues, if any, do you face in growing the portfolio? And are ESG demands having any impact on returns?" Well, this is a very interesting question. I think the constraining factor is the pace at which the NHS and the HSE work, the fact it's very fragmented, very localized. So it is difficult, and I'm fond of saying you need patience, P-A-T-I-E-N-C-E, as well as patients with a T-S in order to operate in primary care. And on an ESG, I'm going to ask Chris to answer that because it's very topical. So Chris, why don't you deal with the second part of Nick's excellent question?

Yes, indeed. So at the moment, I mean I think one thing I would say about our buildings as well is that they are relatively straightforward. So they're relatively simple buildings. There are 2, 3 stories. They're in a number of situations, not actually air conditioned, which is actually one of the most expensive parts and energy-intensive parts of buildings, and that is because the NHS doesn't actually reimburse doctors for their air conditioning. So they're naturally ventilated. And so we have about -- 82% of our portfolio has an EPC rating of C or better. So we think that actually from the point of view of getting that portfolio up to an EPC of B, which is where the government is currently consulting on by 2030, these are affordable costs, which can be spread over time. That's something that's very doable. In most situations, it again comes back to the negotiation with the DV about the rent, and I think we're at the beginning of that journey of negotiating with a district valuer that the full impact of additional costs are being reflected in the rents we are being awarded. But like I say, we need to keep the scale of those costs in context anyway. It's not the child that we're owning here. These are pretty straightforward buildings.

Thanks, Chris. I'm going to come to you in a moment, Richard. [ Douglas ] has asked how concerned are we about the rising inflation prospects. And I suppose we should point out that 25% of the rent roll is actually linked to inflation. Maybe Chris -- maybe, Richard, you'd like to deal with this in terms of the hedging position of the company and any future of rising interest rates.

Yes. I suppose a number of different aspects to rising inflation. Inflation has a big impact on rental growth with rent reviews being probably driven more -- one factor that drives it is build cost inflation. So as inflation, especially construction cost starts to rise. Hopefully, that will result in higher rent review increases across the portfolio. The flip side of that is when we come to build new development properties, that might be slightly more expensive. So we do have to negotiate quite hard with the district valuer to get slightly higher rents to get those properties built. But on the debt side, with the rising inflation, interest rates might start to rise, but 100% of our debt portfolio is currently fixed or hedged out. So we have very little exposure on that side -- on the downside risk to the group. But if interest rates tick up a lot, there's a healthy arbitrage at the moment between yield on our portfolio of government gilts, over 300 basis points, that may have some negative impact on the portfolio valuation. But we don't see that coming through with such huge demand for our assets at the moment. In fact, we would see the values perhaps going up slightly in the future.

Thanks, Richard. Next one is from [ Chris ]. Well, thank you very much, Chris, for being a shareholder for over 10 years, and you, like myself, must be very happy. So thanks for having faith with us, and hopefully, you'll continue for quite some time. Good question here about the short positions that have been in place for a period of about -- for some time of 2.5% of the issued share capital, and can we comment on it. Yes, we can. These are taken out by some convertible shareholders. We have a convertible in issue and convertible shareholders split into 2: those that are long-only funds where they don't take a short and those that are, as it were, convertible hedge funds, where in technical terms, they hedge the equity exposure by taking out a short. It's a bit of a nuisance, and some people think it's a negative sign, but it's entirely technical and we've had that checked out by our brokers. So I think the short answer is that we're not concerned about it, and other people shouldn't be either. So that brings us to the end of the questions, and I'm going to hand back to Paul.

That's absolutely fantastic. And Harry, Richard, Chris, thank you so much. You've been very generous of your time for answering all of those and have picked up pretty much everything, I think, in fact, yes. If there are any further questions that do come through, of course, the company will have the ability to review those. And perhaps before we redirect investors to give you some feedback, Harry, perhaps just a final few words, please.

Yes. Well, I think we've demonstrated that we have a really robust and resilient model. If you want something that is really socially good, having better-equipped wellness centers, as perhaps they'll be called in the future, is absolutely vital. We recently did a freedom of information request, and astonishingly, in Southern London boroughs, more than 50% of the primary care stock is still converted houses. I would just want to tell you a little story about a trip around the Glasgow Medical Center. I went to see it after we bought it and asked the practice manager, a lovely lady, what the best thing was about the property, and she said, "Well, I won't attempt to do the Scottish accent and go into trouble. She said, the thing is that we have fewer accidents in the medical center, fewer injuries to our patients. Injuries, surely they come here to get better. In the old property, there wasn't enough space for stuff, so we kept it all in the corridor." And she wasn't joking. She said a number of trip injuries has gone down quite considerably in our building, which just shows you that we need to have more properties like the one at Bray on the slide in front of you and fewer like the terraced houses or we had one over a chip shop that moved into a new medical center in Swansea. But on an investment standpoint, our shares have robust and resilient income characteristics. We have a fantastically strong cash flow. We have a great pipeline. There's an enormous amount of capital that's required to modernize the sector, EUR 1 billion needed in Ireland, GBP 3 billion needed in Britain. And this was commented upon in a topical way by the Royal College of General Practitioners this morning, who, in their 5-stage process that they wanted to ensure the viability of primary care moving forward, pointed to the need for GBP 1 billion of investment in primary care. We actually think it's GBP 3 billion, but no one can argue that it's a very large number. And we strongly look forward to playing our part and continuing supporting wonderful work the NHS and the HSE are doing and delivering healthy returns to our shareholders. So thank you very much.

Harry, that's absolutely fantastic. Thank you for updating. Even Richard and Chris as well, thank you indeed for updating investors. Could I please ask investors not to close the session. You should be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and it's greatly valued by the company. On behalf of the management team of Primary Health Properties plc, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you very much, and good evening.

Thanks a lot. Bye-bye.

Thanks.