Assura reaps the benefits of scale

UK Reit and primary care property investor Assura Group today announced a 22.3% jump in its rent roll to £91m as it reaped the benefits of increased scale.

The company, which raised over £400m from its equity placing last July and share issue in December, added 120 properties to its book during the year ended 31 March 2018, taking it to 518 properties and boosting the value of its burgeoning portfolio by 28.8% to £1.7bn.

However, CEO Jonathan Murphy indicated that more acquisition activity is on the cards as the company looks to further strengthen its position in what remains a highly fragmented market. Almost half of the properties added during the year came via four transactions which the company had been tracking for a number of years. According to Murphy, this ‘neatly reflects’ Assura’s long-term approach to business of ensuring it is in ‘pole-position’ when opportunities materialise.

Despite its size, Assura’s portfolio represents just 6% of the UK primary care property market, which is estimated to include around 9,000 medical centres. And the company is now in a strong financial position to capitalise on emerging opportunities.

Following the December equity raise, the company repaid its remaining £211m long-term loans with Aviva Commercial Finance, reducing its net debt to £460.4m (2017: £499.6m) with average weighted maturity of six years. Crucially, the equity raises have reduced Assura’s loan to value (LTV) from 37% to 26%. Given it has previously stated that an LTV level between 40% and 50% would be ‘comfortable’, this leaves significant headroom for future borrowing and investment.

The company said it continued to source ‘attractive opportunities’, with £152m of acquisitions and developments currently in solicitors’ hands.

Murphy said there had also been ‘encouraging’ increases in new development activity despite the continued slow progress in transforming government policy on primary care infrastructure into concrete investment in the ground. Assura completed six new schemes during the year for a gross development cost of £31.3m, which added £1.6m to the annual rent roll and generated a 5.2% yield on cost.

‘The number of potential opportunities has increased markedly,’ said Murphy. ‘We are currently on site at a further five schemes with a gross development cost of £23.6m. The pipeline where we expect to be on site within the next 12 months remains strong, comprising a further ten schemes with a gross development cost of £47m.’

Increased development activity could prove a real boost for Assura. Not only is it able to develop new premises at higher yields than can be achieved through buying existing premises but new developments provide evidence of construction cost inflation, which in turn drives rental growth.

Rent reviews continued to result in limited rental growth, generating a weighted average annual rent increase of 1.7% during the year against 1.57% in 2016. However, Murphy said that while significant inflation in costs was not yet being fully reflected in passing rents, the portfolio was well placed to capture rental growth once new development activity picked up.

In addition, the company said its focus on ‘enhancing asset management opportunities,’ such as lease extensions and redevelopments within the existing estate, meant it could optimise efficiency and grow increased rental income into underlying profit and dividends.

During the year, an 18% rise in net rental income to £80.2m together with a reduction in EPRA cost ratio from 14% to 13%, pushed EPRA earnings up by 24% to £50m. EPRA earnings per share increased by 4.2% to 2.4 pence and EPRA net asset value per share rose by 6.3% to 52.4 pence. Dividends per share rose 9.1% to 2.45 pence.

Early repayment charges of £56.4m associated with the payment of the Aviva loan pushed pre-tax profit down from £95.2 to £71.8m. However, outgoing chair Simon Laffin said the company’s increased scale and stronger financial position had assisted in obtaining improved debt terms, with the overall cost of borrowing reduced by 94 basis points to 3.12%.

‘Our ability to ‘develop, invest and manage’ gives us a crucial advantage when securing new development opportunities and other asset management initiatives. Moreover, our model is highly scalable meaning that, as we grow, the benefits of scale accrue to shareholders through a growing dividend stream,’ he said.