1 2 The last 6 months have been intensive for the whole team. - - PDF document

Introductions It is a pleasure to take you through my first reporting period at Assura. The 6 month results speak for themselves. The stability of our valuations, our secure and growing income stream, and our progressive dividend policy are a compelling combination and have together led to a 3.6% increase in NAV, off a 3.4% property return. This is despite the tough economic environment and falling property values elsewhere and demonstrates the robust characteristicsof the primary care sector together with the quality of this business.

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The last 6 months have been intensive for the whole team. Clearly I wanted some short period of introspection to make sure we were all heading in the right direction and indeed the same direction. The list here gives you some insight into the range of activities. That investment of time though means we are now well set up to pursue our business objectives effectively. Just to comment on a few:

• We are just focused on primary care because we are good at it.
• We are committed to development where returns are good.
• We have rectified the obvious financial control gap with a strengthened team to be led from January by

Jonathan Murphy.

• We have validated the REIT model for our business and are ready to go from the first of April.
• We have improved our disclosures and set about a broader communication effort with investors and

have so far met with an encouraging response.

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Now to the results. You will see that we achieved at the property level a six month return of 3.4%. Unfortunately the IPD Healthcare index is currently only published annually. We were though well ahead

• f the IPD monthly index, where valuation falls for a range of commercial property offset income to only

deliver 0.9% return for the same six month period. Our underlying profits increased by 46% in the period. I will come back to the drivers shortly. We had a revaluation gain of £2.2m and so our adjusted EPS was 1.5 pence per share. After dividends paid, NAV is up 3.6% to 37.6 pence per share, a return of 4.2% on opening net assets.

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That 4.2 % total return per share can be reduced to its component parts as you can see on the right with 1.1 pence per share coming from income and 0.4 pence from capital. The income is very predictable due to low risk profile of the portfolio with 15 and a half years under contract, a high level of expected renewal and government backing for the vast majority, 89% in fact. The capital growth is less predictable as it depends on investment markets and rental growth. Compared to other investments though, includinggilts, this sector has recorded less volatilityover the recent crisis. You should note though that the premium our leases command over the equivalent gilt is now 370 basis points.

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We reported a year ago £3.9m of underlying profit for the six months to September 2011. This has risen by some 46% to £5.7m as you can see and the drivers for that growth are shown in green. Rent reviews added £0.4m. Capital investment added £0.4m because our marginal cost of funds is below the yield on developed or acquired investments. The other major item is reduced finance costs as a result

• f closing out the swap a year ago, so reducing interest costs.

In red are some influences in the other direction. We received fewer back rents by £0.1m, a reflection of slowing growth in rents. There were also some small changes in LIFT profitabilityand overheads. We are in the process of building our platform back to the right level of resource after a period of understandable contraction. The second half will see a rise in overheads reflecting this. The business though is extremely scalable and I would expect to maintain our position as the most cost efficient of the listed companies in our sector on a like for like basis.

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We completed 82 rent reviews in the six months. The weighted average annualised uplift on rent reviews settled in the period was 2.35%, adding £0.5m to the annual rent roll. The graph on the right shows the split by quarter. This is quite a high volume of activity. The 82 settlements compares with 99 for the whole of the previous year, which is a credit to the team. The 2.35% annual rental growth compares with the mid 3% annualised growth rate reported in the previous two years. All these figures reflect reviews settled so can relate to old review dates. I will come back to more current information later. We regularly receive settlement by GPs of backdated rental uplifts when reviews are settled late. Those backdated receipts amounted to £500,000 in the period, a fall of £100,000 on the prior year. If the time taken to settle reviews shortens, or if the pace of rental growth is lower than in the past, then back rents reduce. Capital investment has increased the rent roll by £0.8m on an annualised basis, of which £0.6m from

• developments. This takes out rent roll to £36.2m.

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Despite paying a dividend of £1.5m, we have grown the NAV by £6.7m or 3.6% to 37.6 pence. I have identified here the component parts of that total return, split between income, expressed as underlying profit, and capital being the revaluationmovements and disposal gains.

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Our core investment portfolio now comprises 161 primary care centres valued at £517m. The increase is due to developments, acquisitions and a small positive uplift since March of point 1 %. The makeup of lease types remains broadly the same as at March, as you would expect, with 80% open market and a good 20% comprisingRPI or contracted uplifts. Our core rent roll is now £33.5m. By September our initial yields had moved out ever so slightly to 5.92%, offset by income from rent

• reviews. The equivalent yield remained stable too at around 6.1%.

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Our non-core portfolio went up in value by £1m to £27m. Non-core comprises a number of different assets which are mainly legacy. Some give us a good return and it would be suboptimal to sell these in these market conditions. We have three retail malls that fit this description. Others are easier to sell such as low value former GP premises which are suitable for residential conversion. Others are tougher to sell such as non-income earning land or buildings with short leases such as our former head office. The income earning assets are valued at £16.8m, with associated head lease liabilities totalling £2.1m. These have an average initialyield of 13.03%. We added to non-core by completing a small retail development, built opportunistically on land adjoining a previous medical centre development. The valuation performance for non-core was flat with a letting of some vacant space to NHS Solent creating a useful uplift to offset valuation declines elsewhere. On the disposal front we have made inroads into the list of empty former GP surgeries, raising over a £1.0m.

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The balance sheet is transparent. Our book value of property is now £563m, up from £549m. You will find a table setting out the component parts in the appendices. LIFT remains a solid investment, yielding a cash return of £0.6m in the period and recorded £0.3m of equity accounted profits. Cash and deferred consideration is slightly lower than at March due to timing differences in rent

• collection. Since the end of September we received further payments for deferred consideration and now
• nly the repayment of two £3m loan notes remains outstanding from the pharmacy division sale.

Debt increased as part of our investment funding. Other figures are very much like they were at March. Our loan to value ratio has reduced from 64% to 63.5%. EPRA NAV is £198.9m or 37.6 pence per share, 1.3 pence up on March.

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The movement in cash is shown in the chart. Our cash flow is now one of the strongest and longest in the property sector. Our core portfolio involves nearly 90% government reimbursement. 15.5 years average remain on the leases. As we regear or add to the core portfolio, we typically contract for over 20 years without break. We have regearing opportunities regularly as GP practices change shape. These helped us mitigate the passing of time and so our weighted average lease length reduced from 15.8 to only 15.5 years. Our debt maturity remains long at 11.8 years on average.

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I said in June that we were looking to convert to REIT status. I can confirm we are on track to achieve this. A lot of technical work has been completed primarily looking at subsidiary company financing and tax

• considerations. We are in the process of agreeing with HMRC a pool of capital allowance claims. Once

agreed these are available to allow the payment of dividends post REIT conversion without withholding tax and with the usual tax credit. When that pool is used up, then withholding tax would apply for those investors not entitled to receive Property Income Distributions on a gross basis. The targeted conversion date is our financialyear end. I set out on the slide some of the key and compelling reasons for conversion. I don’t propose to cover these now although by all means come back to this in the Q and A.

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I want to talk about how we add value. As a team we are focused on executing well on our strategy and objectives as a stand-alone property company. We have in place a rigorous review of asset performance and IRR projections on both an individual property and portfolio basis. Each property now has an asset plan which is being implemented by the asset managers. This discipline allows us to identify those assets which we expect will underperform over the forthcoming years and informs the team on which assets may be suitable for subsequent disposal, or may require other action. Aligned to the asset plans all staff have renewed personal goals to align their objectives to match the Company's objectives. Two main areas of focus for us are our development programme and the disposal of non-core assets. I would like to spend some time on both of these.

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Firstly, developments. In the half year to date from our 4 completed developments, we have generated a surplus of one and a half million pounds, being a profit on cost of nearly 12% and currently have 6 developments on site, stretching from Milford Haven in west Wales up to Chapel House on the outskirts of Newcastle Upon Tyne and have a further 5 projects which we expect to start on site within the next 6 months. Since the half year end we have completed Milford Haven and started on site on Silsden and Willington. Going forward we have a promising pipeline of approximately 40 projects at varying stages many of which we hope to turn into live projects over the next couple of years. These have been generated from our existing stock of smaller investments, 10 of which are third party development procurements with the remainder split equally between GP referral and smaller developers unable to deliver. Over the summer we have been encouraged by the number of newly advertised development schemes being tendered and now feel the slowdown in developments has probably bottomed out.

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Back in June I was asked about how we secured development opportunities. I have set out the key routes here on this slide. You can see it is through a variety of means, either self-generated and those where the initiator is the NHS or GPs. By way of example our scheme at Y Felinheli came from a small developer seeking our funding, Maidstone was a direct approach from GPs, as was Wallasey and Bebington. Gelligaer and Milford Haven were from one of our partner developers. As can be seen by these examples we are not prescriptive. On the delivery side, we are again flexible but have 4 main ways in which we deliver developments. As we go down the list, the risk taken on reduces. In direct delivery we appoint the full team including the contractor and therefore assume the full risk, albeit mitigated as I will come onto on the next slide. With forward commitment we simply exchange contracts with the developer who in turn carries all the risk through the development and construction period and we buy the end product. Our flexibleapproach helps us secure more opportunities. With the change from PCTs to Clinical Commissioning Groups we experienced a slowing of new

• developments. We now think these have bottomed out and with the new Clinical Commissioning Board

swinging into action, we think there is scope for an increase in the total pipeline of schemes for our

• industry. Of course it is not only the health industry but also the national and local economies which

would benefit from renewed medical infrastructureinvestment in scale. Despite the restructuring within the NHS, we believe the manner of sourcing and delivering of developments will not change in any meaningful way. The system works already.

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As mentioned previously, risk in our sector is somewhat different to the general commercial market. Our risk management is straightforward: All legal agreements are agreed ahead of reaching financial sign off, and once we have received all necessary NHS and District Valuer approvals and financial awards. The premises are invariably 100% pre- let with negligible speculative space. Finally, we ensure that the build contract is placed under a fixed or maximum price basis and any required bank funding is in place. We do not contract to buy the land without an agreement for lease. These, as you will recall, usually have a 21 year lease length, with no rent free and are within the government reimbursement regime. As such, our risk is mitigated, the build contract periods range from 9 to 15 months and we have the experience to manage the technical details and cost control aspects for these specialist medicalcentres.

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We have made good progress in the first 6 months in realising non-income producing and non-core properties. I am pleased with the team’s progress in achieving these disposals despite a difficult commercialmarket. One significant component is a site in Scarborough, sold conditionally to Tesco. This is now reaching a conclusion with a detailed planning permission and Section 106 agreed without objections. The next stage is a road closure order which we will apply for next week and subject to no objections hope to complete the disposal, realising £7m during the summer of 2013. With our non-income earning buildings, we have sold 8 out of 12 since March. The majority of these are ex-surgeries where the GP practice has moved into our new developments. They are generally low value, usually only a few hundred thousand pounds which are ripe for conversion back to residential. We have made one opportunistic disposal from the core portfolio in the first half year. It was an ex- growth investment and as you can see, it was sold at a good profit over book value. We have recycled some disposal proceeds and acquired a newly built medical centre in Nottingham from the GPs. This was off a good NIY of 6.12%. Some of our non-core is non-income earning or has short leases, such as our former head office, and these will clearly be slower to realise in this market than low value residential sites or assets with a longer income stream. Clearly the capital recycling activity is never finished but we have made good progress and are very much on the case.

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Now some commentaryon market issues starting with rents. Rents continued to grow from rent review settlements as I said earlier. I do though want to be crystal clear that rental growth is currently running at a lower rate than historically. The underlying trajectory of rents is masked by the delayed settlement of reviews dating back to earlier years. What this table does for you is split out the growth rates by year. You see these in the rows at the

• bottom. So our 2.29% per annum growth rate in the core portfolio included 2.86% annual growth for 19

reviews that were for review dates in 2011 and 1.8% for review dates in 2012. These figures however include RPI and fixed uplift rents and the centre column excludes these. From that you will see our open market reviews are running at 0.73% for the current year. This is slightly ahead of the figure I gave at June. On the right you can see the remaining outstanding reviews to be settled from prior years. My expectation near term is for only modest growth, still better than many property sectors, with a return to above inflationary increases as demand for new developments returns to its historical levels. The delay in new developments is primarily due to

• rganisational change in the NHS as the new Commissioning Board takes over responsibility for GP

premises from the PCTs, which are being abolished in 4 months’ time.

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Yields remain stable as you can see from our graph here. The Blue line represents our core portfolio’s net initial yield. Green is IPD all property and the mauve colour is the 16 year gilt coinciding with our average remaining lease length. Our core portfolio initialyield you can see has been pretty stable and is now 5.92%. Interestingly, you can see starkly the re-pricing of the 2028 gilt to 2.25%, a 70 basis point yield shift over 6 months, giving us the massive 370 basis point premium I mentioned earlier. I expect further yield stability which is a natural characteristicof an asset class under construction. The financial markets remain strained as you know. In that context our strong income is appealing both for its longevity and its inflationaryprotection characteristics.

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Just a brief update on healthcare reform. The subject is vast so I can only skim the surface here. In the appendices you will find the slides I presented in June listing the policy statements over many years, all targeting the holy grail of moving patient services away from the hospitals and into the community. It is not a party politicalpoint and all governments have seen the light. The latest is the Health and Social Care Act 2012 which brought about the end of Primary Care Trusts and creates from next April Clinical Commissioning Groups under a new Clinical Commissioning Board. Reversing the trend of decades, GPs are thus required to participate in managing the healthcare budget. At the macro level this should facilitate better and more efficient care over time. At the micro level, GPs will be harder placed to blame the centre for denying a treatment, when they are involved in the decision. GPs also face a major new regulatory pressures on service delivery via the Care Quality Commission, which will include fitness of premises. Whilst these reforms are ongoing, there are major trends that are increasingly influencing GP practices. Patients are living longer and the elderly are the biggest consumers. Patients are more demanding than ever before and each generation will bring more pressure to bear. Our current elder citizens’ patience and appreciation of a GP’s time and expertise will be replaced by impatience and an unforgiving sense of

• entitlement. On top of that medical science itself increases the range of possible treatments. All this

means GPs must gear up to work more efficiently. And the shape of practices is changing with fewer equity partners and the younger GPs are less inclined to take on mortgages to buy into the practices. Older GPs can sell their premises but are not permitted by the NHS to sell their goodwill. Realising capital will become an increasing objective for those who own their premises over the next ten years. So what does this all mean for Assura? Firstly, I expect it will not take the Clinical Commissioning Groups long to prioritise the development of new primary care centres as an essential pre-requisite for reducing

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healthcare costs and improving healthcare outcomes elsewhere. The CQC pressure and the pressure to deliver more services will force the debate on premises. GPs currently own 60% of all medical centres and as many look at upgrading their premises, they will find a minor upgrade will not work and the pressure will come to consolidate with other practices and this will drive the market to larger scale properties. GPs are unlikely to have the risk appetite to build and own these themselves. Sale and leasebacks as well as new development opportunities will arise. There are many vocal supporters of the process amongst GPs and with each new building we deliver, we find we are adding to the ranks of the advocates.

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And to wrap up, what is next on our agenda? Firstly to continue doing the day job well: remaining disciplined in our decision making, building not just excellent ‘fit for purpose’ buildings but also our reputation within the health service as a major contributor to reducing the healthcare budget. If we get all that right we will continue to deliver excellent risk adjusted returns for our shareholders. Secondly to build on our excellent reputation with GPs and the NHS to maximise both the size of the development pipeline but also our share of it. Finally to build Assura’s attractiveness to investors, through conversion to REIT status.

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