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

So, good morning, everyone, and welcome to the annual results presentation for Primary Health Properties. I'm joined today by my CFO, Richard Howell; and David Bateman, my CIO. My name is Harry Hyman. I'm the CEO and Founder of the business. We're pleased to come out with our results after what has been a fairly tumultuous period in U.K. debt markets. But the good news is that the underlying operational cash flow of the business is very robust and strong, as you might expect, with 89% of our entire portfolio is rent roll of GBP 145 million being paid for by the British or Irish governments. Like many other people in the property world, we're taking a little pause in the U.K. to see which way things are going. And so I suspect that '23 will be a relatively quiet year in terms of new acquisitions in Britain. But please do remember that we have the Irish market as well where the accretive nature of acquisitions still makes sense. In the light of that, we're very pleased to be commencing our 27th year of consecutive dividend growth. The first quarterly dividend is actually being paid tomorrow. And that would be on an annualized basis, 6.7p per share. In terms of last year's figures, our dividend cover came in at 102%, which is very good. And our property return, which I will talk about in a little bit more detail in a second or 2, was depressed by the revaluation deficit that we experienced, largely driven by those rises in gilt rates that we saw in the fourth quarter of '22. The positive news is that we are experiencing a marked uptick in open market value rental growth, and that bodes extremely well for the prospect of enhanced income in '23. We have very limited exposure to the development market, having only one deal with an end value of about GBP 7 million on site at Croft in West Sussex. We've also done extremely good work on the debt side, and 94% of our debt is hedged out for the next 7 or so years. And Richard, when we get to the financial side, we'll speak in more detail about that. Given this pause that we are experiencing in new acquisitions, our development pipeline is relatively muted. We have some GBP 53 million worth of acquisitions that we're looking at in Ireland, some GBP 14 million -- 1-4 million only in the U.K. and GBP 18 million of asset management opportunities, which, again, David will speak to more about when we get to that stage of the presentation. We took advantage, as you might expect us to do, we have a very, very strong market in the U.K. and we disposed of 13 of our smaller assets, well above the December '21 book valuation, and that looks like a pretty smart move now in the light of where the markets have gone to. From a macro standpoint, the thematics of our business have almost never been stronger. We live in a country with an aging population, a growing population and an ever sicker population. And the trend worldwide is to move a lot more care out of expensive and inflexible and during the pandemic disease-ridden hospitals into the primary care arena. And primary care is not just GPs, it's a whole raft of ancillary services, including community diagnostics, including physiotherapy, mental health, all sorts of services that can be delivered adjacent to the GP offices, but which needs modern purpose-built accommodation to deliver it from. And this is not something that's unique to Great Britain or Ireland, it's something that's happening in most western health care economies. Interestingly, face-to-face consultations are back up to 70% of COVID levels. If you can get an appointment with a GP, which shows how busy they are. And what people forget as well is that a digital -- a digital consultation also needs to be done in secure premises, in the sense of confidential premises. And many of those are carried out from the doctor's consultation room. So the notion that medical centers are thing of past is wrong. And indeed, the demand for primary care has never been greater. We recently visited a senior health official in Ireland, who confirmed that their Slaintecare program is a real must for Ireland. And when we talk to senior officials in the NHS, they also confirmed that primary care is one of their key areas of reducing, as we know, the incredible amount of throughput that is currently within hospitals. We have a firm grip on costs. We do actually have the lowest EPRA cost ratio within the sector, it doesn't mean it can't go lower. We are experiencing the stronger rental growth that I mentioned at the beginning. And we've already carried out nearly all of the refinancings that we need to do over the next 2 to 3 years. So we're in a really good, robust shape to survive, the slightly choppy waters that we've seen. And PHP sales on is a beacon of stability, delivering this growth in income for shareholders. And it's interesting to note that the yield on our shares today or yesterday was around about 6.2%, representing a very attractive investment opportunity there, I say. We go -- the next slide shows that growth in the dividends, which we're very proud of. I think we're a dividend aristocrat as the phrase goes, and this is certainly uppermost in our minds. And this rental growth and asset management that we will tell you more about is really coming through, and we'll deliver this growth in the underlying income. In terms of relative performance, we're happy. I'm sure we'll drill down into this during questions and during our presentation. But our December valuation is pretty much bang in line with our principal competitors. But, of course, because of that negative mark-to-market at December, the total property return for '22 was down at 2.8%. But if you look at our track record, you can see that it's a pretty good one in terms of relative performance. And of course, unlike large other parts of the property market, I hardly need to tell people in the room, this because of our 100% occupancy, because of the long duration of our leases and because of the high-quality nature of our income, we've outperformed many other sectors who reacted quite negatively to the ructions from the third and fourth quarter. It's also true to say that the market generally didn't compress as much, so the ability of it to fall back a bit has been rather muted compared to other sectors. So we think that's all well and good and strong. I'm going to hand over to Richard, who's going to take us further forward through the numbers in a bit more detail.

Good morning, everybody. So as the key thing to note about our earnings for 2022 is that we, as Harry has already mentioned, saw some good strong organic rental growth and our ongoing control on costs and interest costs has held us in good stead. So let's drill down into some of the numbers in a bit more detail. Looking at the key financial highlights. Net rental income was up just under GBP 5 million to GBP 141.5 million. Now around GBP 3 million of that increase came from rental growth, but the impact of acquisitions and developments, net of the disposals that we did last year accounted for the balance. Admin costs were down just under GBP 1 million, which also helped with that adjusted earnings and interest cost savings, although net debt was up slightly, GBP 62 million of year. Interest costs only went up by GBP 200,000, which accounted for a large part of that increase, GBP 5.5 million increase to just under GBP 89 million, a 6.6% increase. Leading to an adjusted earnings per share, 6.6p, which fully covered the dividend paid 6.5p per share. So that lift dividend cover at 102%. As you already know, dividends were up in the year to 6.5p, just under a 5% increase. Like-for-like rental growth, GBP 3.3 million, which was a record year for us, 2.4%, and Dave will go into that in a bit more detail further on in the presentation. Overall, revaluation deficit, net of a small profit on the sales we saw in the year, was just under GBP 62 million. Most of that deficit was driven by an 18 basis points widening of the net initial yield, which accounted for around GBP 134 million deficit. But encouragingly, rental growth, we saw a surplus of GBP 70 million, which is key for the future growth of the portfolio's valuation. So the investment property portfolio didn't really change in terms of size. It's actually GBP 2.8 billion, exactly same as last year. But overall, there's a revaluation deficit of 2.4% after accounting for capital expenditure in the year. So adjusted net tangible assets, down 4.1p, most of that was due to the revaluation deficit 4.6p per share, and that stood at 112.6p at December, down 3.5%. Loan-to-value ratio, we'll come and talk about it a bit more in a second, in the middle of our target range at just over 45%, an increase of 220 basis points over year, reflecting acquisitions in the year, plus the fall in values. WAULT continues to be very strong, 11 years. So that decreased by just over half year despite a full year passing by. And as Harry has already mentioned, full occupancy and EPRA cost ratio, the lowest in the sector, just below 10%. Our average cost of debt increased, slightly reflected an increase in interest rates at 3.2%, and I'll come and talk about that a bit later. Just looking at the income statement in a bit more detail. As I already mentioned, net rental income was driven predominantly by the additional income from rental growth, GBP 3 million, and the impact of acquisitions, development and disposals. Administrative expenses. So we saw a reduction in performance-related pay, which resulted in a savings of around GBP 2 million, but that was offset by additional staff costs and office accommodation costs of just over GBP 1.1 million. Overall, a saving of just under GBP 1 million in the year. Net finance costs down to -- sorry, up GBP 200,000 that was driven basically by additional debt, which costs -- added GBP 1.8 million to the interest cost line, but savings of GBP 1.6 million from the various refinancings we carried out in previous years helped to reduce that. So adjusted earnings per share, GBP 88.7 million, up GBP 5.5 million, an increase of 6.6p. We already touched on the revaluation deficit of GBP 61.5 million resulted in adjusted profit, excluding exceptional adjustments of GBP 27.2 million, down 86% on the previous year, obviously reflecting the revaluation deficit we saw in the period. The increase in interest rates, we saw in the second quarter of the year resulted in a very large gain on the fair value of our derivatives and our convertible bond just under GBP 27 million. And we have an old legacy accounting adjustment relating to the MedicX acquisition back in 2019 of just under GBP 3 million. So profit as reported under IFRS, GBP 56.9 million on an earnings per share basis 4.2p. Looking at the balance sheet in a bit more detail, in particular, I'll come and talk about the revaluation deficit. Adjusted earnings were pretty much paid out as a dividend, so no real change or impact on the net asset value. But the revaluation deficit was equivalent to 4.6p per share. As we mentioned, 18 basis points of yield expansion equivalent to 10p per share or GBP 134 million, offset by the rental growth, GBP 70 million or GBP 5.2 per share and a GBP 3 million profit on the sales of 0.2p. Other adjustments, these relate primarily to FX adjustments on our Irish portfolio. So that resulted in end net tangible asset of 112.6p. When we look forward, every 10 basis points change in net initial yields should result in a revaluation movement of just under GBP 60 million or 4.3p per share, and that impacts the loan-to-value ratio by 90 basis points for future reference. Net initial yield, 4.82%, and that's pretty much bang in line with the numbers Assura reported in January. And we saw some strong like-for-like rental growth from a value at 2.2%, up 30 bps on the same time last year. Just turning to the liability side of the balance sheet. Total debt facilities just over GBP 1.6 billion, 9% of that is unsecured in the form of the convertible bond, 91% secured. Net debt drawn GBP 1.26 billion. And after capital commitments and the acquisition of Axis, which happened in January, we have GBP 326 million of undrawn firepower in our back pocket to deal with future pipeline and any contingencies. 94% of debt is fixed or capped out for a long average period of just over 7 years. And as I've already mentioned, LTV, 45.1% in the middle of our target range. If we strip out the convertible bond, I appreciate it's out of the money at the moment, but that would go down to just below 40% on a look-through basis. Looking forward, if SONIA rates continue to increase, every further 50 basis points increase in rates will only impact the average cost of debt by 4 basis points. In terms of cover for loan-to-value covenants, the portfolio would have to fall by GBP 1.2 billion or just over 40% for us to hit the various covenants across our various facilities. Now the second half of last year, we were very busy refinancing of our shorter-dated revolving credit facilities, and we've dealt with all the refinancings in 2023 and 2024. We do have a fair -- few of maturities in '25, but the majority of that GBP 350 million relates to those revolvers, which were refinanced and that's can only be extended by the first and second anniversaries of those facilities, GBP 350 million or around half of that maturity profile in 2025. So we'll be looking at those maturities, may won't be in the convertible bond, GBP 150 million that matures in July 25. But we do have enough firepower in our existing loan facilities to repay that, if required. Just looking at the various refinancings we did last year. As we've already reported at the start of 2022, we've raised EUR 75 million at a sort of record low rate, 1.64%, fixed for 12 years. This rate seems sort of unbelievable today, but that money is there in our back pocket and there to finance our future expansion in Ireland, and we still have around EUR 30 million of that cash left to invest into Ireland. We've also refinanced all of our revolvers, Santander GBP 50 million, Lloyds that was increased from GBP 50 million to GBP 100 million, Barclays, HSBC and RBS all GBP 100 million each. So overall GBP 560 million of debt facilities renewed for a further 3 years, and we didn't see an increase in credit margins as part of that process. So all of our key sort of debt metrics, cost of debt, interest cover ratio, those will all sort of continue to improve and loan-to-value ratio in the middle of our target range and debt maturity, and loan maturity of just over 7 years. Just turning to our approach on ESG. Most of this you have seen from last year. But just to reiterate our sort of ESG ambition, which is to transition all of our operational, development and asset management activities to net-zero by 2030. I'm pleased to report all of our operational activities are already net-zero, and we've achieved this by buying some offsets in 2022, but also having a good look at where our carbon emissions are coming from. We've already started development of our first net-zero carbon development in Croft in West Sussex and David's got a slide on that, which we'll talk about. And we're restarting our first couple of pilot projects in terms of asset management schemes to get them down to net-zero, and we'll be reporting on that later in 2023. And then, obviously, I suppose the last thing to note really is that we are strong stewards of underinvested key social infrastructure assets. We've got a very active asset management pipeline and part of that project is really to improve the ESG credentials of all of our portfolio. And perhaps the last thing to note is that we estimate the cost of getting all of our EPCs up to B is going to be around GBP 35 million to GBP 40 million across the whole portfolio. But obviously, that will happen through the asset management program, and will be spread over a number of years. So with that point I'm going to hand over to David. He's going to talk us through the property portfolio.

Thank you, Richard. Good morning, everyone. I think I'll probably just start with the headline here. And I think it's important to note that we will be maintaining our disciplined approach to investment. And as you can see, some of you will recognize this slide, the pipeline of investments has been reduced principally while we take a bit of a pause in the U.K., while we wait to see how things settle down. But please do note that both in Ireland and with our U.K. development program, we'll be continuing to selectively look at projects, whereby they will be accretive to earnings. And that's the key watch word there, I think, for this slide. Moving on and in view of that key point there, accretion to earnings, we think that the Irish opportunity remains a fertile ground for us. And you can see the 2 slides on the right side of the page, albeit they demonstrate that returns have been squeezed, they also demonstrate that Irish acquisitions remain accretive to earnings. And fundamentally, that is key. Yields in Ireland remain higher, Euribor rates there remain lower and in all that makes for an attractive opportunity in our opinion. Changing -- moving on. And in view of that, attractive asset class in Ireland and the ability to generate accretions to earnings, you will all be aware that we have made the acquisition of Axis, the management company, which will not only deliver additional income into the business, approximately GBP 1 million per annum, but also, it will provide our ability to service that growing portfolio on the ground, providing efficiencies. And also, it's important to note that we have a 5-year development pipeline agreement with a different part of the Axis business that we didn't buy. We haven't taken on development risk, but we have secured key development pipeline, which we're already working on. Touching on development, but development in the U.K. We are continuing to generate -- procure a high-quality development pipeline, which I think gives us very good optionality for the future. That said, like with all developments at the moment, we are working to reassess, rework, reengineer the rental tone in order to make sure that the schemes are accretive to earnings or viable. And with that in mind, I'm fairly certain that, that will also generate continued rental growth across the rest of the portfolio or firming rental tone. This is a slide that with different assets. So I'm always very proud to be able to show off. It really goes to the hub of what I think is very positive about PHP or one of the many positive attributes of PHP. I think last year, we used a scheme in Spilsby. And I think the year before that, perhaps in Eastbourne. And I think every year, we'll show a slide similar to this, but with a different asset. Fundamentally, you've got 3, what look like cottages, demonstrating not purpose-built, not fit-for-purpose, small facilities, which can't provide a myriad of additional services that are being brought out of secondary care and into primary care and also represent the consolidation opportunity that I think PHP continue to benefit for looking forward. So here is a scheme that we're actually on site with on the South Coast in West Sussex in a place called Croft. It's a scheme with an assumed capital value of about GBP 7 million. It should be completed this year. And it brings 3 practices into one. It generates far more services being provided for in the community. It allows us to build our first net-zero carbon scheme here in the U.K. with BREEAM Excellent accreditation and EPC of A. So I think this really does go to the core of what we are doing for the primary care estate here in the U.K. Moving on, investment activity. Obviously, Harry has touched on the fact that it really was a year of 2 very distinct halves. We did make some acquisitions during the course of 2022 in a disciplined manner. They are all great assets. They're all fundamentally positive in terms of the attributes that they bring to the portfolio. We made those during the first half of last year. And in total, that represented GBP 53 million worth of new acquisitions. And of course, we also took the opportunity in that strong market to sell of a number of assets, which reflected a GBP 2.9 million premium or 13% premium to the December 2021 book value. I think here on this slide. I think the key takeaway, which I think is probably pretty clear. Most of you will have seen this slide before in prior presentations, that we have a very balanced portfolio with an attractive average lot size of about GBP 5.5 million. The WAULT is strong with 11 years, and I think we've got very little expiry risk and I'll touch on that a bit further when you get -- when we get to the asset management slide. But fundamentally, we've got a portfolio which is essentially 100% less. Essentially, we collect 100% of the rental checks quarterly and 90% of the income is government backed. Moving on, rent reviews, something that we keep coming back to because fundamentally, it is so important in this period of inflation, but it's nice to be able to report that we have generated record additional rental increase of about GBP 3 million during the course of last year. And it's also worth noting that approximately 30% of our rent reviews are either index linked or fixed. I think the reality is that the rents in our sector are strongly linked to the build costs. And with those build costs escalating, in line with inflation, I have no doubt that we will be generating more rental growth and affirming rental tone going forward. And please note that with the structure of the rent reviews that take place in primary care, the rent reviews that we've been settling are some 2 or 3 years old. And therefore, as we move forward, the rent reviews we'll be settling will be much more current and therefore, in my view, likely to be more advantageous for rental growth. Moving on and coming back to the asset management point I touched on. For me, again, the key takeaway here is that all these asset management projects, if you read the text in the terms of the description, are fueled by a requirement for more space. And I think that's incredibly positive to see that the occupational -- sorry, the operational lead occupational demand isn't just looking to stay in our buildings, but it's looking to stay and expand. Also, these refurbishments give us a great opportunity to improve on the environmental credentials of our buildings, often allowing us to upgrade the EPCs to higher levels. And with that, I'll pass back to Harry to round things off.

Thanks very much. Looking forward to taking your questions in a moment. But as per usual, the macro backdrop on the demand side is very strong for PHP. As we continue to emphasize, we have a growing population, an aging population, one with an ever higher instance of chronic disease. If you just take mental health, for example, there's a massive demand for this in the community. We estimate -- I estimate some 15% of our total floor play is actually used for community health -- for mental health in the community. We are still faced with an aging population of medical centers, which need renewing. Clearly, the NHS is under enormous pressure, and it doesn't have a lot of its own capital to invest here. So this is a good way of government giving revenue support to enable that capital investment to come from the private sector. The digital threat that people were worried about during COVID has been seen off, and not so much seen off, but is now an integral part of how health care is delivered, but hasn't led to a reduction in the demand for space. Key point from our presentation is that rental growth is on the up. If people want new medical centers built, they will just simply have to pay more rent in order to do that, and that has very positive repercussions for rental reviews on the existing estate. And that also goes for asset management opportunities. We've upped our target levels of rental income that we require from capital expenditure on asset management opportunities to reflect the higher cost environment. And although we all don't like higher inflation, this has a kind of implied benefit for PHP in an odd way in that the higher construction cost go. That is a good way to improve the replacement cost of the buildings, which will lead to higher rental growth in the future. We have very, very strong underlying cash flows. There's nothing wrong with the underlying business. We have got through many periods of turbulence in our history, and I'm sure that we will come through this little pause in the U.K. with flying colors, because I normally compare health secretaries a bit to the King Canute of the world. You may be like King Canute and sit on the beach, commanding the waves to go back. But in fact, the tide is coming in. And this is something that people need to bear into account about health care. It outlives governments, it outlives, Tory governments, Labour government. It is something that is happening, and it happens across Western society. So that is extremely good news for us. We've put a lot of time and effort into developing our position in Ireland, where we have over GBP 200 million worth of assets on the ground. And buying Axis, although it was a relatively small acquisition, is incredibly important because it gives us 20-plus people based in Ireland who are there to represent us, not only managing our existing properties, but routing out new opportunities for us. And this development pipeline agreement for 5 years is very, very strong. So the outlook for '23 is very steady. I've already spoken about our dividend aspirations for the current year and how that gilt-edged income is going to come through for our shareholders. So the share price performance has been disappointing, but understandable. And we're looking forward to rebuilding on this base and moving forward into '23. So that completes our presentation, and I'm now going to throw it open to people in the room to ask questions.

John Cahill, from Stifel. Just wanted to ask about the development pipeline. Obviously, you've paused there for absolutely valid reasons. But is there an argument that you could -- you may be really should continue developing even if the sort of numbers on any individual scheme don't look quite as attractive as they did on the basis you present that evidence for rental growth, which will feed through the time on it fashion? And the second question for Richard, please. On Slide 13, you mentioned about bringing the portfolio to EPC B and the cost of GBP 15 million to GBP 20 million were economically viable. The GBP 35 million to GBP 40 million number, do you mean by that, that you will sell -- preferably sell those assets on…

No, no, that's across the whole portfolio. I think under the regulations are coming, you only have to improve that to at least to B by 2030, where its -- they -- for us that's economically viable. But obviously, across our portfolio, we're going to have to address it. So it's -- the higher number is probably the real number we need to address. But the important thing to note is it will be done as part of an asset measurement project. It's not just…

That's clear.

I'll let David handle the detail of your first question. But in essence, yes, there is an argument for doing that. And I suppose, ultimately, if we can carry out a development with no development profit, that will probably still be worthwhile in terms of delivering assets. But we have a golden opportunity to be going back to the NHS and asking for higher rents because this is extremely important, not only across the development but also for the tone of rental growth in other older assets. So David, maybe you give some specific examples of that.

Sure. So I think the focus for us is clearly not to develop buildings at a loss, and that isn't what we're setting out to do quite clearly. And with that in mind, yes, we've got a pipeline, and we're looking to reengineer the rents in that pipeline. As Harry says, it's a golden opportunity to go back to, let's call it the NHS. But the reality is that the transition, which you may or may not know about, I'll keep it brief, from primary care networks to ICB, it is further opportunity to really set out that if they want schemes to be procured, they have to be procured on a viable basis. So that's the approach that we'll be taking.

And we don't really want to develop them for 0 profit because we like to have, if nothing else, a 10% to 15% margin to deal with the unforeseen, which normally happens with alarming regularity on development. So you need a bit of a buffer to justify the additional risk. And we've been to make representations at a very high level, as I indicated earlier, both in Ireland and in the U.K. to explain to people whose day-to-day job is health care, not economics or development finance that it just doesn't work without increases in rental. And people don't go, yes, that's fine. But they sort of say, we understand and we -- let's see what we can do because these people need the modern primary care to be put in, in both Ireland and the U.K.

And I think there's 2 further things to add, which is that although rents may be going up, it's cheaper, fundamentally to see people in a primary care environment. So if rents are going up, there's still a cost saving for the government. And we've taken the approach on rent at a blanket level. So as Harry says, it will take time for our point of view to be seen, I suspect. However, I think in view of the fact that they will want primary care, we will all need primary care facilities to be built, just like the one I've highlighted in the slides to you in Spilsby, I think the message will come across and when primary care development starts to slow down, which I think actually already has. And that message really comes through, then I think that some action will be taken.

Matthew Saperia from Peel Hunt. A very quick follow-up firstly to John's question on rental growth. Historically, how long from effectively securing a new rent on a development, would it be to see that number start feeding through into the reviews that you would then be reporting in terms of your like-for-like rental growth? And my second question, thinking about the opportunity for growth in Ireland, I think you talked about growing the portfolio to 15% in Ireland. The acquisition of Axis and the pipeline of opportunity that that's given you, how significant is that in an Irish context? Is it a small element of the future supply? Or is it a more meaningful number than that?

Well, I think we view the documentation of a formal right of first refusal, which is the pipeline agreement, in our favor for 5 years is incredibly important. Not that we wouldn't have had a very good chance of acquiring those assets in any event, but I think this document makes it much firmer. So I think that's very, very valid. People in the audience may know that KKR is on the verge of completing. They've announced, they've completed it, but I think it's still to complete an acquisition of our nearest rival, which is called Valley Healthcare, which is managed by an operation called Glencar. That's all in the public domain. And that is a good indication that this is a valid market, and we think they paid -- or I think they paid well above what our valuation is of our Irish assets. So that kind of bodes well for a stable outlook for Irish share valuations. And our deal with Axis is very important in that connection, because I think people ultimately want to deal with local people. And however much we love Ireland, we're not Irish, and they would prefer to deal with an Irish operation on the ground. And so we're very pleased to have cemented our long-term relationship with James Buckley and his team Axis for the future of PHP. And on the other point, which David can wax lyrical about in a moment, it's almost immediate because you can use that as a valid comparator, how quickly it comes through. It's not a direct linear relationship because the district value will say, well, that's for a new building. And the one you're dealing with a review of is not a brand-new building, but we can use it as an indication to discount away from in order to get a higher rent comparative.

Yes. And I think that's -- I think in terms of Ireland, I think James and Axis, or James Buckley of Axis is a well-known developer in that space. Over the years since we've been in Ireland since the end of 2016, we have acquired all Axis' schemes. That was 5 of our portfolio of 20. There are other developers in Ireland. We know them, too. They have -- some have -- there are different qualities of developers, I suppose it's fair to say. We think James and Axis are excellent. And certainly, it gives us an attractive right of first refusal. In rents, as Harry says, we can use the evidence immediately. Remember that the rent review cycle in primary care is 3 yearly. So not only can we use it immediately, but it will be affecting historic rent reviews or sort of future rent reviews that will come through, and we'll drip that new evidence into those reviews.

Rob Murphy, Edison. I just wanted to come back on the rental growth, specifically open markets. I'm just trying to -- when you say an increased tone, can you give us some more color around that? And then also when you're looking at the valuers, what they're using as comparisons and what you're seeing in those markets that would give you some confidence on the growth going forward?

Sure. Well, I think the average rent across our portfolio is something like GBP 190, GBP 200 a meter and new developments are being done at GBP 230, GBP 250, GBP 270, depending on location. So that's a firm a tone for sure. And sorry, what was the second?

Well, just thing about the comparative, because the valuers are going to look at what kind of properties you're using?

Yes. Well, interestingly and unusually at the moment, valuers seem to be taking sentiment into account more than simply transactional evidence because there is little transactional evidence in many property markets -- in property sectors at the moment. But so their sentiment has been affected by the negativity of higher gilt rates. Maybe that will change later in '23 when we get over the negativity and start to come out of that and turn more positive. I don't see that happening in the very short term, but that's what the valuation profession is doing. And historically, changes have been slower to come through. And this year at this time, they've been pretty quick. So I think other commentators would have said that about the property sector. You can see some people nodding. And but it's -- we rely on the external valuers to come up with their reason view. We have 3, 1 in Ireland and 2 in the U.K. and they're kind of think the same. So that's quite encouraging.

In addition to Harry's points, the valuers apply 2.2% ERV growth, which is sort of in line with the sort of improving trend in -- especially open market rental growth. So last year, we actually achieved 1.5%, which is improvement in the 1.1% in 2021. And the value is obviously -- as we've mentioned, those reviews related to 2018, 2020, but the valuers are still looking forward and saying we're still seeing rental growth around 2.2% on the rents today.

Well, that's still a long way below inflation that, right?

That's an annualized increase, yes.

Yes.

But obviously, back in 2020 and on the rate of inflation was much lower. The current inflation we're seeing now is going to take a bit of time to come through. And obviously, we need to see the evidence come through from the settlements on the new developments and existing revenues for that to really sort of drive momentum.

This is Edoardo Gili from Green Street. My only question is in terms of the valuation yields that would make you feel comfortable in acquiring stabilized properties currently. What would you say that yield is in the current market environment?

Well, that's the $64 million question. If I knew the answer to that, I'd give you it. I think we're still waiting to see because there's so much uncertainty. Gilt rates came down. 10-year gilt rate went below 3%, but it's now gone up a little bit more. We'll have to wait, I guess, until Jeremy Hunt has come out with this budget. And we see which way the British economy is moving. I think that's the honest answer. When we see a bit more stability, then we can come back into the water and start again. But meantime, we have a lot to do in Ireland and a lot to do on the asset management side, where we have -- I think I can confidently say we will spend the most that we spent for a long time on improving our current assets, and that's an extremely strong return on capital. And as David was saying, on all of those asset management opportunities, not only they're renewing leases and having refurbishments, they're taking more space. And you can see that trend across our whole portfolio, more things being done in primary care. And quite fun to saying it's rather ridiculous that there are many medical centers when you cannot even have a blood test. And maybe in 20 years' time, we'll be saying it's a bit strange that you can't have an X-ray or a scan in every single medical center, because miniaturization, broadband technology makes all of these things much more feasible to do than in some enormously large complex hospital. And COVID, the reason we've got such a backlog is that people were told not to go to a hospital. And if you can go to hospital and it's the only place you could have your scan, doesn't bode well. So the community diagnostic program is fabulous. The Irish are a bit ahead of us here and having much more hospital star services being delivered out of these large medical centers. And maybe we're seeing a return to what used to be called a cottage hospital, which went out of vogue in the sort of late 70s, early 80s and 90s. We'll have to wait and see. But we want large hub core medical centers like Eastbourne, which we showed you as an example of last year, it's a GBP 10 million building. The average lot size across our Irish portfolio is closer to EUR 20 million, something like that. And that's the way of the future.

And perhaps another question for me on the Valley Healthcare deal. If you have to compare it to your current in-place Irish portfolio in terms of quality, what would you say in terms of comparison of the quality of the 2 portfolios?

Well, there is really one answer I can say, but I truly believe it, ours is better.

Theirs is not bad. Let's be fair. Theirs is not bad. I mean, you can see pictures of it all on their website, even though they've included one of our buildings on their website. The last time I looked, which is a great compliment. All right. Are there any more in the room because we might have some online questions or webcast questions?

[Operator Instructions].

Doesn't mean you can't ask a question in the room, just want to give an opportunity to our online listeners and viewers. This is a hybrid meeting, not a hybrid consultation.

And we have a question from the phone line from Kanad Mitra from Barclays.

So I have 3. As of today, what would make you commit to a new development or acquisition. The second one is, in the recent past, you have stated that you are pushing back on discussions with the NHS for new investments. What is the difference between NHS and your expectations in percentage or basis points if you want to quantify? And thirdly, I noticed that in your report, it's quoted that you expect prime assets, which have experienced greater use compression in the last couple of years to show adjustment more towards gilt trade movements. I just wanted to check what you mean by the statement. We have always considered your assets to be prime primary care centers. Are you saying that you expect they will eventually experience movement similar to gilt?

Okay. Well, on question one, I think we would need to see a healthy margin between the healthy return on development margin. And at the moment, development margins are being squeezed. So that would require rents to probably go up by 10%, 15% depending on the specification of the building. Question 3, I think what we meant to say was that sort of we didn't buy too much that was ultra-prime and by ultra-prime I mean like brand new with a 25 or 30-year index-linked lease, but those have been the assets that have had the biggest yield decompression compared to slightly older assets. There's nothing wrong with any of the buildings in our portfolio, Kanad. I can assure you of that. But it's where people paid really top dollar in early '22, mid-'22 and there were certain people really pouring money into the market. Unfortunately or deliberately, we didn't buy too many of those. And I'm sorry, I couldn't quite hear question 2. Would you mind telling us -- ask second questions…

Last point, we're also referencing the wider property market -- so for example, if you took distribution, which saw a huge amount of your compression in '21, that sort of reversed in '22, which is really...

Please repeat your question.

Yes. On question 2, I'm just asking about the difference between expectations between NHS and your side when you are having discussions. You said some of the deals are kind of falling through or that you're trying to push back?

Do you mean the difference in rents that we're looking to achieve and those that they…

Yes, yes.

Well, Harry is actually on that. He was sort of saying perhaps 15% to 20%. It does depend on the specification of the scheme. And of course, with ongoing requirements for enhanced specification to meet new environmental regulations and aspirations, it's obviously getting harder. So that disparity doesn't look easy to bridge, and that's why we're quoting across the board higher rents.

There's a very interesting document on our website, which is the research that I mentioned by CBRE, which sets out all of the reasons for higher rental growth, supply chain issues, ESG agenda, the fact that rental growth is like behind for some time, higher interest rates, and it demonstrates that for people to do a development, there needs to be a proper margin to allow developers, of which we're one, a small one, to earn a commensurate return for taking the risk because development is, by its nature, a risky activity. People kind of lost track of that maybe over the last 5 years. But if you start -- I mean, our development risks are very easy compared to other ones. We're not building The Shard here or Canary Wharf. We're starting with a pre-let and we're not generally spending money on land without the pre-let in place at a satisfactory rate. But if the pre-lets at too lower rents and the costs go up, then we won't be doing the deal. And we'll be going back to the NHS or the Irish HSE and saying, look, folks, we'd love to do this still, but you have to give us more top line income to make it work. And they kind of understand that. So it will come. Otherwise, there will be no new developments in Britain or Ireland.

As there are no further questions in the phone queue. I'd like to pass it back to the room.

Okay. Unless there's no other questions in the room, I think we are out of time.

Will we be allowed to go into your foyer and have a coffee? Okay. Well, I look forward to seeing you all there. Thanks very much for attending. It's the end of the broadcast. Thank you.