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

Thank you very much, and good morning to everyone physically in the room. What a great pleasure to see so many of you in the flash, so to speak. Let's hope we can carry on with this, and we don't have any returns or lockdowns and other such instance. It's been a very tough period for everyone, but I really can't say how -- say enough, how delighted I am to see you here in the room. And for those joining us online, welcome to you, too. My name is Harry Hyman. I'm just going to outline what we're going to do in today's presentation. So I will kick off by giving an overview of what we consider to be strong results that we came out with this morning, reflecting last year's activity. We're then going to play you a video of one of our newest properties at Eastbourne. And I believe that this will be available to people on line too. I'm then going to hand over to Richard, my Chief Financial Officer, who will delve down into the numbers in more detail. Then we're going to hear from Chris Santer, our Chief Investment Officer, is going to talk about the property side. Richard is going to deal our newly announced zero carbon framework that came out this morning with our results, too, and I'll come back at the end to talk about our pipeline and the outlook for the future. And then we'll open up to questions both here and online. So let me kick off by telling you that we believe we've delivered a very, very strong performance for '21. The total property return was at 9.5% and compared -- this is Slide 3 in the presentation -- was at 9.5% compared to 7.4%, which was also a strong return in 2020. And our total accounting return was just a shade under 9% for that year. We believe we've shown an enormously disciplined approach to investment in what has been a difficult time to acquire assets because the whole world has been looking to buy long income strips, and we wanted to make sure that we buy our fair share of them, but not overpay. And in particular, our activities in Ireland have formed an important component of our acquisition strategy, both historically and also as we look forward to the future in '22 and beyond. I'll come back to talk about our pipeline at the end of the presentation, which is also strong. Let's also please remember that the thematics for the sector that we operate in are incredibly strong. We have, both in Britain and in Ireland, a growing population. Population has an ever higher incidence of chronic disease, like type 2 diabetes, like obesity, like drug and alcohol abuse and many other conditions, where the proper place for treating those is in a hub medical center rather than plugging up the secondary care system. And my goodness, how the pandemic showed that sending people for outpatient consultations or diagnostics in hospitals was a big error. Last week's white paper, is putting a lot of emphasis on the integration of social care, with health care and the role of place, which is a funny phrase, but the role of place is clearly very important in primary care. Not only is it easier for the patients, it's easier for the professionals, reduces the carbon footprint of operations for the NHS, which we'll come back to you later in the presentation and is a cost-effective way for health care systems, both here and in Ireland to deal with not only the backlog, but the increasing strong demand for health care services that we see countries. We also have shown during the pandemic that digital, whilst it is disruptive, does not remove the need for physical space at all. And we'll come back and talk more about that. We have a strong focus on income growth. We're incredibly proud of our 26 track record growing dividends. Last year, we paid in total a 6.2p dividend, fully covered by earnings. And this year, we're on track to pay 6.5p and the first quarterly installment has been announced and will be paid on the 25th of February. So that's in 10 days' time or so. The internalization that we carried out was an inevitable step in the development of the business. We're now an internally managed business, and that delivered around GBP 4 million worth of annual cost savings, which clearly has benefited and shown us a further reduced EPRA cost ratio. Richard will talk in more detail about the refinancings that we've carried out, which have also led to a significant reduction in costs for this year and years beyond. So that's extremely good. And on the operational side, we delivered a GBP 2.4 million growth in like-for-like rentals, both from rental growth, which we believe will continue to grow, but also from asset management opportunities. And we're planning on spending GBP 63 million worth of money on our existing estate over the next 3 days. You can't have opened a newspaper in recent days and not seen coverage of inflation. We think that inflation is very positive for us in the medium term, and it's not too bad in the short term. First of all, all of our hedge -- all of our debt is hedged out. So we have no exposure to higher interest rates and 25% of our total rent roll is formally linked to inflation, and most of the balance, we believe, I believe, is, in fact, linked to inflation too through things like the replacement cost of the buildings. We also have a good development pipeline, which we'll come back to in a moment. So if we move on to our dividend track record, I've talked about that, but it's an impressive chart. We're very proud of it. And we intend, as a management team to keep on delivering that growth. Here is our track record of relative performance. I'm not going to read out every single statistic on it. We believe we've outperformed our nearest competitor strongly. And the total property returns show that. Clearly, in comparison to the other parts of the property sector, we never got smashed to pieces as other parts of the property space did during the pandemic. And what we have with PHP is a really, really solid consistent performer investing in socially worthwhile health care infrastructure in both Britain and Ireland. And I can think of nothing better to be investing in -- other than the health care infrastructure of our country as it comes back from pandemic, and we begin to see eating into the backlog of procedures and appointments. I was told earlier today that physical consultations are higher than they were pre-pandemic. So please bear that in mind. We're now going to roll the cameras and show you our great new building at Eastbourne. [Presentation]

That's hopefully a great example of the type of assets we're trying to develop across the portfolio. And Chris has got some more examples of those when he goes through the property review. So turning to the financial highlights. As Harry said, a very strong year for PHP. Net rental income up just over GBP 5.5 million or 4.2%. That was driven predominantly by acquisitions, GBP 3 million and rental growth from rent reviews and asset management projects, adding a further GBP 2 million to net rental income. Following the internalization of Nexus, we also generated an extra GBP 400,000 of service charge management fee income, which is also included in that increase and part of the GBP 4 million of cost savings that we generated. Adjusted earnings up just over GBP 10 million, so GBP 83.2 million, just under 14% increase. So that reflects the acquisitions and rental growth we just touched on, but also a reduction in administrative costs, GBP 2.7 million. and I come back and talk about that and how that fits in with the GBP 4 million of cost savings in a minute, but also the refinancings we carried out last year and in the previous year, saved a further GBP 2 million on the interest cost line. So adjusted earnings per share, 6.2p, which fully covers the dividend. As Harry has already mentioned, we had a very strong total property return, 9.5%, and that was driven predominantly by a very strong revaluation surplus, just over GBP 110 million. Most of that came from yield compression, 17 basis points, which accounts for about 75% of that total surplus, but the additional income from rent reviews and asset management projects accounted for the remainder 25%. The investment portfolio increased by GBP 220 million, now just under GBP 2.8 billion and we saw the strong revaluation surplus, resulted in a 4.1% increase in values over the period. Adjusted net asset value, 116.7p, obviously, a strong revaluation surplus as the main driver of that, just over 8p. The cost of the Nexus internalization and the refinancings in the year reduced that slightly. So cost of Nexus 2.4p and the refi just under 2p. LTV, just under 43%. So that really reflects additional net debt we sort of increased over the year, GBP 144 million. That was slightly offset by the increase in the size of property portfolio of GBP 220 million, and half of that came from the revaluation uplift. Like-for-like rental growth, Chris will go through it in a bit more detail, 1.8%, so GBP 2.4 million of additional income. So despite another year passing, that has only decreased by half a year. Occupancy increased ever so slightly to pretty much full occupancy following a number of lettings we completed in the year. EPRA cost ratio, now the lowest in a whole of the U.K. [indiscernible] and a reduction in cost of GBP 7 million including costs that is including to 2.4p. The refinancing just under GBP 25 million, was under 2p. Those were offset by the very strong revaluation surplus in the year. So an IFRS profit, GBP 142 million, up 26% on the previous year and IFRS earnings per share, 2.5p, again just up under 20% in the period. Looking at the movements in the balance sheet. Obviously, our adjusted earnings were paid out in full as a dividend. The revaluation surplus added 8.3p to net asset value. And as already mentioned, the internalization of Nexus, the right refinancing, reduced bank debt to 116.7p, so very strong returns in the period. Total accounting return just under 9% and a total property return of 9.5%. Just turning to look at the debt portfolio in a bit more detail. So we now have GBP 155 billion -- sorry, GBP 1.55 billion of loan facilities. 90% that is secured, 10% unsecured, which represents a convertible bond. We do like to operate within a target range of 40% to 50% loan to value. We're at the bottom end of that range at the moment, just under 43%. We have undrawn facilities after capital commitments in excess of GBP 320 million. So we've got lots of firepower to deliver the pipeline, which Harry will go through in a bit more detail later in the presentation. Average cost of debt, 2.9% as we draw down on our cheaper revolving credit facilities that will fall further to around 2.7%, assuming all loan facilities were fully drawn. Following a number of refinancings and I'll touch on those on the next slide. The average debt maturities extended back out to 8.2 years from 6.5 years in previous years. And we do have a number of legacy MedicX loans, which we will look at over the course of '22 to possibly look at refinancing those in the future. So looking at the refinancings which we completed in 2021 and a new loan facility, which we're announcing today for the first time, so we refinanced GBP 200 million of Aviva, legacy loans, which go back some time. They've had a blended sort of fixed rate of 5%. So we put in place a new 15-year fixed rate term loan at 2.52%. That also has some sustainability KPIs. So that headline rate will benefit by a further 5 basis point reduction, assuming we hit certain environmental hurdles. Today, we're announcing for the first time a new EUR 75 million 12-year fixed rate of 1.64% private placement, and we do have options to increase that to EUR 150 million over the next 3 years and that will continue to finance our expansion into Ireland. We also refinanced 2 revolving credit facilities, both with NatWest and Santander, also helping to reduce our average cost of debt. If you've got one of the sort of key debt metrics that continue to improve, average cost of debt down, interest cover ratio up, loan-to-value ratio at the bottom end of our target range and our debt maturity extended further. We do have GBP 286 million of legacy MedicX facilities with a blended fixed rate at 4.2%. The mark-to-market on those at the moment is just under GBP 57 million. Majority of that is with a large Aviva loan, just under GBP 260 million, which has a mark-to-market of GBP 44 million, but we will look at some options around that debt over the course of the current year. So at that stage, I'm going to hand you over to Chris, who's going to take you through the property portfolio.

Great. Thank you, Richard, and good morning, everybody. So our property portfolio continues to grow, too. We now have 521 buildings, which has continued to grow over the last couple of years with a total investment value of 2.8 billion reflecting a 4.64% net initial yield. There's a number of other metrics we've set down here, but a couple I'd highlight to you is that our average lot size continues to grow. That's continued to grow over time as we've continued to invest in these larger hub medical buildings. Our occupancy remains extremely high, close to 100% and as you would expect, our government-backed income across the U.K. and Ireland equates to something like 90% of our revenues. So there's a good story of well-secured income to a strong credit covenant over the medium term. And what we've also seen is an increase in the percentage of our capital values, which are valued at over GBP 10 million. These, again, are proxy for the larger medical centers and the hub centers. We're investing in the U.K. and Ireland. And I think perhaps these larger hub buildings have also benefited from some of the yield compression and attraction from other investors in the sector. So we continue to focus on that. And our income expiry profile, you can see here in the table on the right-hand side, we have a number of leases which are over 15 to 20 years, equating to still around 50% of our portfolio. We also have some shorter leases, but they're a smaller part of our portfolio. The leases under 15 years -- under 5 years, I'm sorry, adding up to less than 15% of our revenue. And we have a dedicated team of asset managers who are working specifically on those buildings and almost 70% of those projects we already have terms agreed or planned asset and management initiatives with. But I want to come back and talk about Ireland for a moment -- I'm sorry, I need to get my slides to catch up with me, I'm reading out all the numbers in the slides aren't up there. But just to talk about Ireland for a moment, we now have 20 buildings in Ireland, including 2 on-site, 2 forward funders on site, which again are these significant hub medical centers led to the HSE and the local pharmacies and occupiers. And really, I think we do have one of the strongest portfolios, if not the strongest portfolio of primary care assets in Ireland. The Irish government has always set out to deliver some 200 centers. We think probably 100 with some creative accounting have been created and PHP owns 20 of those assets. So we think there's plenty to go after there. We have an immediate pipeline of GBP 107 million, EUR 127 million of opportunities in Ireland, mainly forward funders, but also some standing investment opportunities. And it is our target to continue to grow that portfolio to close to EUR 500 million over the next 2 to 3 years or 15% of our gross asset value. And we really do see that as one of our key differentiators, our exposure to Ireland, where we can still acquire those slightly higher yields than the U.K. and borrow at those slightly lower cost of borrowings, which we think is very accretive. I also want to touch upon our development activity and the -- how accretive our development activity is as well. You can see that since the internalization, we have now started to progress our direct development pipeline in the U.K. We have 2 schemes which we -- projects, which we expect to be on site very shortly, imminently in the next month or so. And we have a longer-term pipeline of 21 projects with a gross development value of over GBP 160 million, 5 of which are significantly advanced. And really, this is the same trends and tailwinds that we're talking about in the sector. All of these buildings replace existing surgeries, which have become obsolete as we saw in the video with Eastbourne. They were converted residential premises where it's difficult to provide a wide variety of services that are required. And I think these new buildings will help both with the delivery of more services with staff retention, with staff recruitment, particularly aide health professionals, and I think they will also provide a very good -- increasingly strong environmental standards and help support the NHS in its goal to become a net zero health care system. We've got 2 examples here in the U.K. and 2 in Ireland as well, Enniscorthy and Arklow, but I particularly want to touch upon the development there at Spilsby, which would be our first net zero development. And this is something that we haven't been able to do before, but now we're designing these buildings to use less energy and less embodied carbon than we've been previously able to do. We think that in Spilsby, for example, we've been able to reduce the energy there and the energy intensity by some 30% by using technologies such as air source heat pumps, LED lighting throughout, solar panels and importantly, the insulation of the building envelope as well, which is very important. And then we will -- we have made an allowance in our appraisals, which will deliver in terms of offsetting the remaining carbon from that. So this is an example of what we expect to be able to do in our direct development pipeline, specifically going forward. So we've talked about Ireland. We've talked about development both direct development and forward funders. During the year, we were also able to invest nearly GBP 90 million into existing standing assets, both in the U.K. and Ireland. We took a very disciplined approach to the investment through the year and are really focused on acquiring only buildings where we see sustainable longer-term cash flows from these properties that they are crucial to the local health care infrastructure and that we continue to see have a longevity in front of them. Some examples there in Berry in Greater Manchester, Lincolnshire, [indiscernible] in Ireland and [indiscernible] in Dublin. And we have an advanced pipeline of another GBP 105 million of similar acquisitions across the U.K. and standing investments in Ireland as well. So that touches upon the investment, but we also have other levers to grow the revenues of the company, particularly rental growth. We have some 1,200 rent review points across our portfolio. 70% of them are to open market value, which we think will also be impacted by the current inflationary pressures in due course. They take a while to come through, but we do think the costs that we're seeing in the system at the moment, particularly around build costs will flow through into open-market settlements in due course. In 2021, we delivered 1.7% growth as a mixture of those open market reviews, which accounted for 69% of the portfolio on average and indexation on 25% of the portfolio. I suspect there will be some questions on that later, so I'll leave that one hanging out there, and we can come back to that one. And I'll also just touch upon our asset management initiatives. So as I say, we have a dedicated team of professionals focusing on asset management. We have limited lease expiry risk there, but we completed 39 projects over 2021, investing GBP 15 million and generating additional rent and extending those leases back out to 20 years. Well, another key point I'd like to make here is that across our projects that we undertook, for example, the project here in Lamington Spar and also particularly in Holt, in Norfolk, we added significant extensions to these buildings. And actually, if we add up all the extensions that we completed in 2021, it's over 2,300 square meters, which is the equivalent of 2 new medical centers. So we continue to see demand and ongoing demand for space in our centers going forward. And we have, as Harry alluded to earlier, plenty more of that in the pipeline. There's over 100 projects that the team are working on at the moment in varying degrees of advancement, which should see some GBP 60 million to GBP 65 million of CapEx invested over the next 2 to 3 years in terms of delivering additional rental income, securing additional lease term and making -- continuing to make these assets attractive homes for our occupiers to provide health care services from. And we want them to be attractive homes in a responsible manner. And I will pass back over to Richard Howell to take you through our next zero carbon framework.

Thanks, Chris. All right. Today, we're very proud to announce along with our results, a net zero carbon framework, which really is -- PHP is going to work with NHS to get the whole portfolio down to net zero. This includes tenants activities on the real estate side by 2040. So the NHS is an ambitious target of being the first net zero health care system by 2045. So we need to work with them as our biggest tenant to get there. So we're setting our commitment or road map to try and be net zero for all of PHP's operational development and asset management activities by 2030. With the same time frame and the following 10 years, we're going to keep working with our tenants to see how we can get their activities down to net zero and how they can operate our buildings in the most energy-efficient way. So by 2023, end of next year, all of our operations, that's our head office and properties is about 8% of the total portfolio, where we acquired the electricity. We will offset any remaining residual carbon. We are already on the road to transitioning all those supplies to renewables. So that will be in place by the end of this current year. By 2025, all of our developments will be net zero carbon. We've already sort of pretty much making a commitment that all of our direct developments will be net zero straightaway, but we need to work with our forward-funded developers to get those down to net zero over the next couple of years. And then all of our asset management activities, all the extensions and refurbishments we're doing, we'll get those down to net zero by 2030. By 2035, we want to reduce the carbon footprint of the total portfolio by 80%. Obviously, we need to carry out a lot of asset management projects that Chris has alluded to, to put in new technologies to enable that to happen. And then by 2040 to help all our tenants get to net zero across the portfolio. I want to go through all of the detail of this slide, but just to put out a few key highlights. Obviously, PHP is a very strong steward of underinvested key social infrastructure. As Harry has already said, 40% of stock in the U.K. is considered to be unfit for purpose. So we have the capital, we have the sort of means and the skill set to help improve primary health care infrastructure in the U.K. Around 9% of the total U.K. population, 6 million people is registered, as one of our buildings, so obviously have a very strong social impact on the health and well-being of the U.K. population. The cost of all of these improvements to get there. So to be, we're economically viable, which is a minimum commitment we're going to have to do to get EPCs up to be. We think it's between GBP 15 million and GBP 20 million, but to work through the whole portfolio, including properties where it's considered to be not economically viable, i.e., a 7-year payback, we think that's going to cost between GBP 35 million and GBP 40 million. But obviously, all of those works will be carried out as part of a larger asset management project where we'll be looking to regear and extend the properties and obviously, try and get additional rental income and improve the portfolio for years to come. So at that stage, I'm going to hand back to Harry, who's going to take you through the pipeline and key -- and the outlook.

Thank you. Thanks, Richard. Well, one of the consequences of having the disciplined approach is that we've been putting a lot of effort into forward funders on our own direct development pipeline as a better way of securing stock for the future and not entering into a head-for-head smash out with every other long income purchaser in the market during '21. As a result of that, we're now going into '22, as you can see, with a very strong pipeline, GBP 107 million within the U.K., GBP 107 million in Ireland, EUR 127 million and direct developments at GBP 163 million, which is a number of schemes of which Kraft & Spils will be the first to -- and within the next chunk, we've got a couple of in London, one in the Northwest and one in the Southwest. That's right, isn't it? Yes. Got me geography mixed up. And as we increasingly see a great importance on asset management projects, so to spend GBP 67 million on a large number of projects is quite some going, and we have nearly 10 people involved in the asset management activities, a significant commitment. It takes a long time, as you might imagine, to interact with the NHS and the HSE, even longer with the HSE, but that's by the buy. And I'm sure that this will pay increasing dividends for us in the future. I'm very happy to deal with questions on that in a moment. Right. So our outlook, just to recap before we open the floor and in due course, the lines to questions. We've got a 26-year consecutive annual dividend growth track record. Portfolio has grown to GBP 2.8 billion. And the thematics, the demographic drivers in our sector are really, really strong, as is the social impacts of what we are doing. The leveling up agenda, which we've heard a lot about, is really needed to improve the social infrastructure in large ways of the country and health care can form a really important role in that. There are very significant differences in life expectancy between, for example, Glasgow and Chelsea, really quite shocking and that needs to be addressed for the benefit of the nation. We don't see an enormous threat from digital and a lot of the pictures that we have are where health centers are being used to deliver digital consultations because of reasons for patient confidentiality and the fact that the doctors don't spend all day doing digital triage course, it's a part of their workload. We're going to continue with our disciplined approach to shareholder returns and capital deployment and really focus on our efforts to improve rental growth. We have a number of strings to our bow there. Clearly, inflation is driving up replacement cost as is the ESG agenda, which adds to the cost of the buildings. And this is not yet reflected adequately in the level of reimbursement that we're getting from the district value up. And we're going to do all of this within our new net zero carbon framework in a socially responsible way. So for shareholders and stakeholders, PHP remains an excellent way to earn this year something like today's share price or yesterday's share price, a 4.9% dividend yield with 90% of the underlying cash flows coming from the British and Irish governments. So we're delighted to have continued our strong performance. The future is set very fair for us. And now, of course, please feel free to ask questions in the room.

Who is going to be brave and go first, a long time since we've had one of these, and please don't feel shy. Here comes James Carswell. I think if you just hang on for the microphone. If you'd like to say who you are for the benefit of people on the call.

Sure. It's James Carswell from Peel Hunt. Maybe just a couple of questions on the rent reviews, and I guess, particularly with regards to inflation. And I guess the first one, I mean, you touched on Harry, in terms of the high levels of inflation eventually feeding through in the open market rent reviews. Given that, I mean, are you seeing -- and I imagine most investors, the market is competitive. Are they is most of that money chasing the index-linked leases and therefore, are you seeing better value in the open market rent reviews, given your views as how that feeds through? And then I guess, secondly, on new GP surgeries as they come through the system, are you seeing a trend for them to move either towards open market or index linked or is it still a mixture of the 2? And then just thirdly, on the index-linked ones, are there caps and places on your existing index-linked leases?

So let me do them in reverse order. Great questions as always, James. So some -- the smaller index-linked leases tend to be uncapped, typically on pharmacy. The larger ones tend to be capped and collared. Maybe 2 to 4 is an appropriate proxy for those. There will be some that are different. The second question you asked, we are seeing greater emphasis on index-linked assets. Everyone would have seen LXI REIT and its capital raises and the growth of its portfolio. So however, where we combine them with an asset management opportunity with a shorter lease and then extend it into a longer one, that's very much more our game plan because we believe that our excellent management team can add that value. So buying something with an 8-year remaining lease length or 10-year remaining lease length and taking the view that we will be able to extend the lease over time will put off a lot of the much longer income buyers, who want something with a 20- or 25 -- or 30- or 35-year lease outstanding. Could you just remind me what the first question was?

[indiscernible]

Right. Yes. Well, the NHS is a funny organization. It tends to follow what's given it the lowest result historically. So at the moment, they seem to be going on OMV, but maybe that -- and there's no 1 answer. Would you agree with that, Chris?

Yes. It just seems to be a mixture. We have a handful of opportunities which have indexed. Others are open-market value just depends on some of the local dynamics.

Of course, everything in Ireland is Irish CPI linked. And one of the points -- one of the bullet points that we haven't mentioned so far is that at the present time, yields in Ireland have not moved in at all, which is quite strange given the prices being paid for other similar long income asset classes like housing and nursing homes in and of course, they're all different sectors. But you might expect that at some stage in '22, not a prediction, it's just a comment that, that might change. And there may be some embedded reversionary value in the Irish rents depending on when they started and how long and how fast Irish inflation carries on at the current clip. Next one, please. John?

John Cahill from Stifel. Two questions, please. Just on the index-linked leases that you have, do you generally have any caps and collars in place? And if so, can you give a bit of guidance as to where they might be? And then secondly, on the legacy MedicX debt facilities you mentioned, refinancing. Would you consider paying to break the maturity earlier to be in recon earnings accretive?

Well, one for Chris on more detail on caps and collars.

Caps and collars are generally 2% to 4%. So I think that's probably the some are 1% to 3%, some are 1% to 5%, but 2% to 4% is about the rule of thumb. I think we have to remember -- I mean, this year, we have a certain amount of rent that will be subject to indexed reviews. These reviews accrue over 3 years. So it's a 3 yearly cycle. So whilst we will see a strong increase, but this year's, you've got the last 2 years of 2% inflation. So we see a sort of average number increase at the end of last year or beginning of this year, we're seeing on average 3.9% growth per annum in those linkers over that 3-year cycle, if that makes sense. So we haven't really touched it. I'd be very disappointed if we're not doing 2% per annum rental growth this year at least because we've got the inflation coming through. We've got slightly less inflationary reviews this year than last year just because of the way the dates fall. But obviously, inflation is higher. So that will flow through. I do think that aside from the 25% that we're focusing on for index linkers, you've got another which is linked to over market rent reviews, which will, I think, in the next 2 to 3 years because it takes a while for these reviews to come through the system, push through into the awards the DB needs to give because you just can't build some of these buildings right now for the rents that have been awarded in the past. So it's going to push through. And most of the reviews we did in '21 were from in 2018, '19 and '20. We haven't started the '22 review cycle yet, the 2022 review cycle yet. That will come through in a couple of years' time in earnest, but I would be disappointed if we're not doing more than 2% per annum growth at least this year.

Richard, do you want to pick up?

Yes. So I think a simple answer to your question is yes, we will look at catching some of that debt early to obviously reduce the average cost of debt and improve the underlying earnings in the future or there'll be a hit to NAV. So if we do the whole lot, GBP 57 million about 4p per share. I'm not saying we are going to do that a lot, by the way. I think equity shareholders will be adequately rewarded through the share price by paying a higher dividend in future years.

We've adopted a gradual approach, though, as you will have noticed historically. And when you say canceled, it's more likely to get recouponed perhaps with the same lender who knows? We'll have to see how things move forward. Right. Any more in the room? If not, we might open up the lines to see if there are any questions, please. I've got one more in the room first. Yes, please.

Just wanted to go over the net zero carbon approach in a bit more detail. Just in terms of the first couple of stages, so 2023, '25 and '30, realistically how big of a task is that? From memory, I don't think there's much kind of emissions from your own operations and head office and stuff. The bigger part would obviously be the tenant activity. So kind of the level of ambition there and kind of cost expected?

Well, the portfolio where we control the supply of electricity and gas is 8% of the total. So as you say, a relatively small number, but we want to get those to net zero by 2023. So again, it's a relatively small commitment to start off with, but obviously a very small time frame. 2025, all developments to be net zero. And then the large asset management program to be net zero by 2030. I think it's a huge piece of work just measuring the carbon piece across the portfolio. So we started that journey in terms of collecting tenants usage, and we probably have more information on that this time next year on actual cost of the tenants electricity and energy consumption. But obviously, there's a huge piece of work to do working with the tenants to get them down to net zero by 2040.

And I think we should also remember these are relatively straightforward buildings. It's on the whole 2 story, simple buildings, not on the whole air conditioned. It's -- I'm not trying to decarbonize the chart here or something. It's not high-technology building management systems or new air conditioning systems. It is relatively simple measures such as LED lighting, PVs. And we talked a bit about the SOC pumps, for example, we put in Spilsby they do make a considerable difference.

Most of the cost of these projects will wrapped up as part of a large asset management project to regear the property back to 20-plus years typically.

We'll go into that afterwards in more detail. Now let's see if we have any questions from our listeners.

[Operator Instructions] We have a question from Edoardo Gili of Green Street.

A quick question on the -- on your pipeline of roughly GBP 440 million. So you're currently running at 43% LTV and roughly over 8x EBITDA. How is the financing of that pipeline planned out?

You want to deal with that?

Well, we have over GBP 320 million of undrawn loan facilities at the moment. If we spent all of that today, the look through LTV would rise around. Obviously, once a lot of these developments come online and have been developed, we'll be able to use those to raise new finance in the future, which will finance the balance, but we still were within our sort of 50% -- 15% cap.

How far up? So you're ready to go up 50% on your LTV to finance your pipeline. Is that right?

Correct. Yes.

And of course, the pipeline will take more than 12 months to deliver. So it's not an issue for the next 24, 36 months, probably. Anything else online?

On the replacement cost inflation and as well on your yield compression, which has been quite significant over the year, do you have more color on the different regions where you've seen more inflation and where you've seen more real compression?

Well, I've made the point that we haven't seen yield compression in Ireland, which is some may say unusual, but maybe a lack of evidence and a developing market. So that might come in '22, we'll have to wait and see. And other than that, one of the strange things about the primary care market is unlike many other property markets because it's driven by covenant, there isn't a lot of variation regionally. Of course, there is in the level of rents, et cetera, et cetera. But in terms of the way things progress, it tends to be a national picture. A few years ago, ironically -- sort of quite unusually Scotland was the best place for rental growth by a little bit. Chris, would you like to add some more color to that?

Sure. I mean in terms of yields, the yields tend to be driven more by lease length than necessarily where we are in the U.K. It seems to be a more key driver. Yes, there are regional variations across the U.K., but it's within a pretty narrow band. It's not like sort of City of London offices versus regional offices. So in the past, we have seen some good rental growth in London and the Southeast, just simply because land values are higher in London and the Southeast, so that pushes up the cost. It pushes up the rent that needs to be awarded. But at the moment, we're seeing some very attractive awards in the Northeast, actually, really because the rents in the Northeast are off a pretty low base. So we haven't seen much rental growth there for a few years. So we're actually seeing some pretty decent open market review awards up in the Northeast. So hopefully that helps give some color.

Yes. That's very helpful. Another one on the asset management initiatives, which are quite sizable, I think 67 million in the U.K. Based on the presentation, I think on page -- roughly on Page 20, I'm seeing yield on cost of high 2s to low 3s on your asset management initiatives over the last, I think, in the last 6 months. So are those yields on costs, a good indication of what it could be for your current asset management pipeline?

We have 3 measures that we use, return on capital, net present value and additional rental income. We try very hard to get additional rental income, but that's the hardest to get because the NHS is constantly under revenue account pressure, dealing with backlog, dealing with patients, et cetera, et cetera. And though it pains me to say it quite often, it's worth doing the asset management project, even if you get a relatively low rental return on the additional space or the improved space. We try the best we can, but that is the hardest metric to get. Our targets used to be 5%, but we've reduced those in light of market conditions. So it's a complex amalgam of the 3, but getting an extra 15 years on a lease is quite often a very profitable thing to do and return on capital terms and MPV terms. You don't really need to calculate it to work it out. If you get more revenue, that's obviously fantastic as well. And I hope that we'll be able to improve our scoring on that as we move forward into the brave new world with a lot more emphasis on expanding medical centers as part of the new white paper, et cetera. Okay...

Let's go back to the rental...

So I think we're getting a wind-up sign here. So just to be fair, is there someone else on the line who wants to ask a question. Otherwise, we will call it quits and have a chat for those in the room. Anyone else?

There are no further questions on the phone at this time.

Edoardo, sorry to cut you short. If you want to follow up, give Richard, Chris or I a telephone call afterwards, we'll be very happy to speak to you on a one-to-one basis. Good questions. Thanks, everyone, for coming. That's our story. I don't know if you're being offered tea or coffee.

We have a number of questions from people online if you've got time to answer them.

Yes, of course. Sorry.

Firstly, we've got a couple of questions from Andrew Gill from Jefferies. What is the impact on the yield on cost to improve the development to net zero? And is there any compensation from higher rent?

Well, I've already mentioned that we are going to redouble our efforts to get the district valuers office to recognize the lower carbon buildings require higher rents. That is work in progress. And how would you answer that, Chris? The first part of the question.

I think honestly, the yield -- the impact on the yield on cost was pretty marginal. These just seem to us to be relatively straightforward technologies to adopt in terms of LED lightings, PVs, I could hazard a guess. I mean we don't break it out specifically, but these are the extra costs, Spilsby probably been 10 basis, I don't know, GBP 100,000 or some something like Spilsby, which...

I think the 3% yield on cost for an asset management project probably reflects the additional being spent to improve the environmental credentials down to net zero.

But I do think as well, we didn't get any extra rents for something like Spilsby from the DB from the original award because this is something that I think the NHS guidance and guidelines need to catch up on. And as Harry said, it's something that we'll be making the case for going forward because I think if we do want to go that next stage beyond what is otherwise a very well-designed traditional building to something that is, for example, using timber frames or structurally insulated panels, there needs to be a different rent reward from the DV.

And a follow-up question. What is the yield on cost premium over equivalent acquisitions for current on-site direct developments? Will this increase for newly sourced direct developments?

I think the broad answer to that is 50 basis points.

I think we're seeing sort of a profit on cost of doing these direct developments around 10% to 15%, 2 we've just announced, which also reflect the commitment to get them down to net zero is 11% profit on cost.

Okay. We have our next question from Tom Musson from Liberum. How does the average unexpired lease term on inflation-linked leases compared to the group average?

Great question. I'd say it's marginally longer.

And then on Slide 27 in the presentation, you mentioned 74 nil increases on open market rent reviews. How does that compare with prior years? And why do you think you weren't able to progress rents there?

Well, that is a very tricky question to answer, and there's a slide in the appendices, which I'm not going to go through now to the presentation, which shows the sort of vintages of reviews that we're dealing with. And it's a complex answer depending on where we are in that area as to when we take the zeros. There are zeros, and it's a question of tactics as to when we accept them because like at Clapham, if you remember the very famous MedicX case at Clapham clam. There were a lot of zeros nearby, but we wanted to wait for our award at Clapham which came in, I think, from memory at GBP 355 a meter or something like that from a much lower figure. And then we were able not to take zero on the ones that we were holding over. So you have to look at the tactics, but that's all set out in a bit more detail in the appendix.

I think the other point to add is that these aren't necessarily over rented properties. There is just no evidence of an uplift because you have to remember, a number of these rent reviews are upwards and downwards, but they have a landlord only trigger. So it's effectively upwards only, but we need to remember that on the number of these properties, there was just no evidence to implement the rent review. So it's not that they're over-rented per se, just not under rented either.

I think we have time for one more question from Stuart Bell, IDCM. What time frame do you consider reasonable to increase your scale in Ireland, current ownership of circa EUR 200 million versus target of EUR 500 million.

Okay. Well, we'd like to do it as quickly as possible, but life doesn't work like that in the health sector. So I think a realistic objective is to do that over 2 to 3 years.

Fantastic. I think that's all the time we've got time for questions. If you feel questions haven't been answered by responses in the Q&A, then please do feel free to contact you Canon and I'll be happy to provide additional detail. If I hand back to Harry for any additional or closing remarks.

Thank you very much. Well, it's been a great pleasure to see so many of you to have such interesting questions and particularly from our online questioners. Richard, Chris and I will be here for a little bit if you want to stick around and have a chat. Otherwise, thanks very much. We look forward to delivering our next set of results to you in July, stroke August. Thanks a lot.