Assura PLC

LSE:AGR

Earnings Call Transcript 2023-Q2

[Jonathan Murphy, executive]

Good morning, everyone. Welcome to Assura's interim results presentation. I'd just like to say, what an absolute pleasure it is to be back presenting face-to-face after almost 3 years. So very nice to see you all in person.

So today, we'll be sharing with you a strong set of results from a business that continues to be well positioned in a resilient market that retains significant growth potential, both for now and into the medium term. We need to set these results against the backdrop of recent market turbulence. And as with every other business, we are reevaluating our growth plans in light of our increasing cost of capital.

Having said that, this is a great business. We have the leading development team in the sector. We are pushing into new growth markets, and we continue to progress towards net zero. The short-term challenges faced by all real estate businesses at the moment are very real but they are felt less acutely in our sector. And we feel, as a business, well positioned to take them on.

In the first half, we have seen progress across all key metrics with 15% growth in our rental income, 5% increase in our portfolio value and a 13% growth in our earnings per share. A strong set of metrics in any market conditions. Before addressing some of the short-term challenges I referenced earlier, I think it's relevant to look at what Assura has achieved over the past 10 years through its strategic growth plans.

Firstly, we have a leadership position in our sector where years of underinvestment, pressure on our hospitals, growing demographic challenges and the threats of climate change all continue to drive the need for modern facilities. The current clinical and budgetary pressures on the NHS are only increasing demands. And the NHS cannot meet these requirements through their own very constrained capital investment plans. We will be crucial in delivering this required investment. At the moment, we are seeing a level of inquiries for new buildings that is at an all-time high.

Secondly, we have a portfolio of 603 assets across the U.K., which has been carefully assembled over our 19 years of operation. These are best-in-class health care facilities, providing essential services to their communities and have an average lease length of 11.5 years. The associated relationships we have with our customers are an excellent foundation for driving and constantly revising asset management. This typically provides higher returns and requires only limited levels of capital investment.

Thirdly, we have an exceptionally well-constructed debt book with an average interest rate of 2.3% and a weighted maturity of over 7 years. We also have no near-term refinancings and a strong liquidity position.

And finally, we firmly believe that the future for real estate investment will be based on the eventual delivery of net zero carbon buildings. The technology is not there yet to deliver this without offsetting, but it is our intention to be a leader in developing these new capabilities.

These considerable strengths, whilst they cannot remove the short-term challenges, give us the capability to overcome much that we are facing.

Now let's look at some of these challenges in more detail, starting with the volatility in capital markets and the increase in interest rates. Clearly, Assura's cost of capital has increased, but we have no short-term capital needs. Our liquidity position is a strong one, and all of our debt is on a fixed rate with no refinancing until 2025.

Reflecting our increased cost of capital and the current level of volatility, we will select wisely future property additions, and we will place even greater emphasis on optimizing the value from each and every one of our 603 assets across the U.K. And to this end, we have already repositioned some of our team to strengthen our capabilities and we will accelerate our plans wherever possible. These plans will also involve maximizing rental growth. We will be selectively building new developments in order to continue generating new and higher rental evidence.

In the first 6 months, the 13% of the portfolio with uncapped RPI helped us to achieve an overall 4.5% rental growth. This is a great result and compares very favorably to the traditional long income lease with an RPI cap of 4%.

A further challenge for the sector is the expectation for widening yields and falling valuations. Our values in the first half were broadly flat. We also disposed of a portfolio at a small premium to book value. In addition, health care values have shown themselves to be consistently less volatile than the wider property sector.

In terms of our covenants, we would need to see yields move out by more than 220 basis points before we were under any pressure. By way of context, during the GFC, our valuation yields moved by 100 basis points.

The final challenge we face is quite simply the cost of living crisis and the recession we are now in leading to distress for consumers and real estate tenants. Health care is a very resilient asset class with demand not being cyclical or linked to the wider economy. The current portfolio has 81% of its rent secured by the NHS and so the risk of rent defaults is very low. So we are well positioned, both as a sector and as a business to face short-term challenges, and we can continue to support the NHS in delivering their essential infrastructure whatever the economic conditions.

Now more than ever, our purpose and values will need to remain constant. It would be very easy to scale back on our commitment to sustainability and social impact. However, this could jeopardize our future commercial success as evidenced by our ESG-linked financing, which has raised GBP 600 million in the past 2 years at an average interest rate below 1.6%. We have now launched our net zero design guide and are on site with our first such scheme in Fareham, which I'll come back to later.

As part of our ambition to be net zero by 2040, we continue to invest in sustainability improvements across our portfolio. At the 30th of September, we had 47% of our portfolio as an EPC of B or better and we had 23 improvement projects either planned or underway in the first half. A key priority for us is ensuring that our suppliers, they share our commitment to social impact and sustainability. We are currently running a tender process for our key property consultants that will fully incorporate these criteria. We then intend to roll this out across the rest of our supplier base.

Over the past few weeks, the successful Rugby League World Cup tournament has shown a spotlight on our support for them as their official community health partner. We have funded 20 projects at Rugby League communities supporting mental and physical health activities with 4,000 direct beneficiaries. The tournament has been the most inclusive ever with the men's, women's, wheelchair and physical disability rugby league competitions all receiving equal billing and running simultaneously. Social impact lied at the heart of their strategy and this fully aligns with our own. We are proud to have played our part in bringing all formats of the sport into a brighter spotlight. Of course, spotlight would have been even brighter if the men had made it into the final, but not every England team has its own Johnny Wilkinson.

We also continue to support social impact directly through the Assura Community Fund. To date, we have donated more than GBP 1.3 million to projects supporting health and wellness in community served by our buildings. And we retain our ambition for 6 million people to be impacted by 2026, our SixBySix.

Now I'll pass to Jayne to give you the financial and strategic update. Jayne?

[Jayne Cottam, executive]

Thanks, Jonathan. Good morning, everybody. I can't quite believe it's been 3 years since we've been stood here, and it's really great to see you all. As we've all seen, a lot has changed in the last 6 months, more than we could ever have anticipated. But for us, at Assura, this has brought to the fore the strength of our business and its resilience to navigate uncertain times.

The past 6 months have clearly been busy. We have had GBP 141 million worth of additions through our investment and development programs. We've continued with our asset enhancements and we have disposed of a GBP 73 million portfolio. In addition, our rent reviews have been at an average of 4.5%. The foundation of all of this is based in our long-term, low-cost, fixed-rate debt alongside the continued support of our shareholders. Our cash and available facilities ensure that we have clear headroom to continue to grow and enhance the portfolio.

And so with this in mind, let me take you through a review of the past 6 months.

Securing the property additions has given us net rental income growth of 15% to GBP 70 million. Our EPRA earnings increased from GBP 40.9 million to GBP 49 million, an increase of 20%. Our EPRA earnings per share increased by 13% to 1.7p for the 6 months. And we increased the dividend by 5%, bringing it to 1.52p per share. The value of our portfolio is now GBP 2.9 billion, which is a 5% increase. Our yields are largely flat with some very slight yield expansion of 4 basis points, bringing our net initial yield to 4.52% and a small valuation loss in the period of GBP 19 million. Our EPRA net tangible asset per share declined by 1% to 60.2p, and it reflects the above-yield expansion. And our loan-to-value is now 38%.

As you can see, our portfolio has grown significantly over the last 5 to 6 years. The vast majority of this growth has largely been externally driven. This strategy has continued throughout the first half with GBP 141 million worth of additions, a split of GBP 113 million of acquisitions and GBP 28 million of development completions. The chart on the right shows that we have grown our rent roll from GBP 135.7 million to GBP 139.3 million in the period. GBP 5.5 million from our investment activity, GBP 1.2 million from completed developments and GBP 1.5 million from our rent reviews.

This has been offset by our successful disposal program. We disposed of a GBP 73 million portfolio of 61 assets during September. These were sold at a small premium to book value and reduced our rent roll by GBP 4.6 million. These selective disposals reflect our commitment to capital discipline and careful management of the portfolio, and this will certainly be a priority moving forward.

Now I'd like to look at the rent reviews. We had a good start to the year for our rent reviews, with 35% of our rents RPI-linked or with fixed uplifts, we have seen an annualized increase of 5.6% as the indexation starts to come through, and an average of 4.5% overall. Our open market reviews have reached 1.5%, which is an increase since the year-end. However, the sample size is small. We settled 190 rents in the period with an uplift of GBP 1.5 million on our rent roll and an absolute uplift on rents reviewed of 7.7%.

We are positive about the outlook for rental growth as the new developments set the tone across the country. And whilst this takes time to come through, we do expect to see some steady growth overall.

We've shown this slide before, and it incorporates our known pipelines and showing where, on a pro forma basis, our rent roll could end up once all activity has completed. As you can see, given the market backdrop, there has been something of a change here, but it also shows how important our internal growth is to our rent roll as we move forward.

Looking at the chart, and given the activity within the business at this point, we expect our on-site developments to add GBP 6 million to our rent roll. Our rent reviews will add GBP 6.5 million and our on-site asset enhancements, including extensions in vacant space will add about GBP 1 million to take our rent roll to over GBP 150 million in the coming years.

The table below highlights those index-linked rent reviews, which will be settled in the future. A number of our reviews are on a 3 or 5 yearly basis. But based on current indexation, we know that this is built into the uplift. GBP 3.5 million of rental growth on GBP 28.5 million of rent is an uplift of 12%. Therefore, we expect to see some healthy rental growth as we move forward.

On the 30th of September, our net debt stood at GBP 1.1 billion. We have an incredibly strong debt book with our average maturity at 7.5 years, and our weighted-average interest rate has remained steady at 2.3%. We have GBP 159 million of cash and GBP 125 million revolving credit facility available to us, giving us the headroom I mentioned earlier, to deliver on our current plans. And Jonathan will come on to explain that in more detail.

Our loan-to-value is now at 38%. Our guidance on loan-to-value has not changed. We are able to go up to 50%, but prefer to stay in and around the 40% range. Based on where we are at the moment, the headroom before we get to 45% is GBP 364 million. Appreciating that loan-to-value can rise through yield expansion, we need to see yield shift in the region of 100 basis points before we get to 45%.

If we look in a little more detail at our debt maturity, this slide demonstrates that we will have no refinancing requirements for a number of years with only small amounts due before 2029, which is a position we're clearly very happy with. But if you look on the right-hand side, you can also see that our longest debt maturity is fixed at the cheapest rate with all debt due post 2030 at an average rate of 1.7%. And this includes the two bonds we raised over the last 2 years, which due to the strength of our credit with our A- rating, we were able to raise at 1.5% and 1.625%, respectively.

This, coupled with our cash and facilities gives us the security to know that in the short to medium term, we will see minimal impact of the rising cost of debt on our business with the plans we currently have in place.

Whilst the outlook for our sector has fundamentally changed, we have not been impacted to the same extent as of this and we appreciate the luxury of our debt position. However, with the days of cheap debt behind us, we will be prepared to adapt to a new environment.

So in conclusion, we've had a solid and successful first half with continued growth. We have again demonstrated a consistent track record of growing our portfolio whilst maintaining our capital discipline. And the quality of our debt book and facilities available provide a stable footing for the future.

Looking ahead, we will need judicious management of our portfolio to drive internal growth opportunities alongside our development program. And this focus will enable us to provide continued growth for the business.

And with that, I'll now hand you back to Jonathan.

[Jonathan Murphy, executive]

Thank you, Jayne. Before looking ahead, I want to take you through some of the key achievements from a busy and productive first half. We have completed GBP 141 million of property additions at an average yield of 5% and an average WAULT of 12 years. Remaining fully committed to our sustainability goals, we have 23 projects planned or underway in the first half. We have 47% of our portfolio with an EPC rating of B or better. In the second half, our focus is on completing our first net zero carbon audits and on trialing solar panels and air source heat pumps. Asset Enhancement remains a key priority, and we have five extensions we completed in the first half with a further six on site. In terms of lease regears, we completed seven in the period, covering GBP 1 million of our rent roll, adding an average of 11 years on to the lease length.

A key achievement in the period was the disposal of GBP 73 million of properties with a further GBP 3 million immediately after the period end. This sale was to a new entrant in the market and was completed at a small premium to our June 2022 book value. This is an excellent result from the team, highlighting the resilience, desirability and attraction of our assets.

We also continued our progress in all of our strategic areas. We completed the NHS ambulance hub in the West Midlands and secured an opportunity on a further hub development. We are on site with our GBP 25 million scheme at Cramlington for the NHS and we have also secured planning permission to almost double the size of our first acquisition in Ireland. And whilst progressing cautiously, we have agreed commercial terms on several further new build opportunities.

Given the current economic backdrop, as we move into the second half, we are looking cautiously at the projects we are funding. The good news is we are well capitalized with GBP 284 million of cash and undrawn facilities. In addition, we have the flexibility of a further GBP 75 million accordion from our partner banks. In the immediate allocation of this capital, we are prioritizing our asset enhancements, which give us our best returns and our sustainability spend, which is a core priority for us. We have on-site developments, which will all be completed. New developments will also continue to be selectively progressed as the NHS need for new facilities remains acute. These new projects will be crucial in setting the new higher levels of rent that heavy construction cost inflation is driving.

This immediate pipeline now stands at GBP 83 million, which is down from March as we have deferred starting on some of our schemes. Those are now in our extended pipeline. The extended pipeline continues to grow. And given the current level of inquiries, there is no sign of this reducing anytime soon.

New acquisitions will only be considered at the right price, which it is difficult to predict with the current level of volatility. As a result, such acquisitions are not expected to be significant for the moment.

Reflecting these priorities, you can see we have GBP 190 million of available capital uncommitted at the half year, which gives us the flexibility to both pursue acquisitions opportunistically and support selectively our development pipeline.

Now let's look at those developments we have underway in more detail. These provide investors with some certainty of income growth. They support the NHS in its need for essential new capacity, and they provide evidence to drive future rental growth. As our investment activity slows down, the relative importance of our development pipeline grows.

Over the past 5 years, we have been building the leading development team in the sector. And in these developments, you can see the value in this strategy. We have also been broadening into new areas through working with NHS Trusts directly and through delivering community diagnostic and treatment centers with the private sector.

The success of this strategy can be seen here with traditional GP-led schemes such as Wallsend, Cardiff and King''s Lynn. This is supplemented by our private sector partners with our latest facility for Ramsay and the Genesis Cancer Care Center at the Royal Surrey County Hospital in Guildford. Working with NHS Trust, we have the West Midlands Ambulance hub, a physiotherapy unit in Bournville, the Health & Care Academy in Cramlington and a Children's Therapy Center in Fareham. This is a considerable list, and it highlights the progress we have made. As the teams build out these projects, our reputation and our capability will only be further enhanced.

This scheme in Fareham will be Assura's first net zero center. This is important, and I'll come back to why later. It will deliver consolidated capacity for the local NHS Trust in a well-located and imaginatively designed facility, providing a broad range of children's services to the communities of Hampshire. We have made full use of our net zero design guide to improve the building's energy performance and achieved an impressive 46% reduction in the operational carbon used on site. This has then been supplemented by extensive use of on-site renewable energy generation through 80 solar panels, resulting in a residual offsetting liability of only 12 tons of carbon a year. This will be a landmark green building for the NHS, and we hope can become a blueprint for the future, and highlights that for net zero, refurbishing existing buildings is the way to go.

At Assura, as you can see from my description of Fareham, we're pushing hard on net zero. However, I am acutely aware I can report on only one such project to you at this time. The rate of progress both for us and the NHS is painfully slow. And given the current economic challenges, the risk of not meeting these targets is very real. Our immediate aim is to accelerate our own plans in this area. However, we urgently need the NHS to move from talking about net zero to actually doing something about it and funding these essential interventions.

A further priority for our capital is asset enhancements. These schemes require limited capital. They provide high returns and they maximize the value of our existing assets. We now have a dedicated team of seven surveyors working exclusively on identifying and delivering on those opportunities, and this reflects the importance of this expanding strategy. The focus for the team is going to be on unlocking the undoubted potential we have within our 603 properties across the U.K. and in accelerating the rate of progress. Given the slowdown in future investment activity, this only confirms the importance of this approach.

Two of these are illustrated here with the recently completed scheme in Castleford, where we built an extension to provide six further clinical rooms. The practice serves 11,000 patients, and the extension was essential to support them in meeting the increasing demand for services from a growing local population. In West Byfleet in Surrey, we are underway with a project to refurb the existing space and to fit out currently vacant space. In both cases, we achieved increased rents, we extended the lease and we improved the sustainability of the buildings, just highlighting the benefits of this focus on this area.

Currently, we have six schemes on site with a spend of GBP 8.9 million and a pipeline of a further 18 schemes for a spend of GBP 10.5 million. We intend to expand this pipeline further following our additional focus on this area.

So in summary, we have had a very strong first half as we were able to continue investing well, building on our development pipeline, progressing in our new markets and pushing further on net zero. We entered the second half well capitalized, thanks to our strong debt book and with an excellent set of short-term opportunities. We're also prepared to place an increasing emphasis on enhancing our existing portfolio. However, market conditions are likely to lead to softening values and a slowdown in our investments. Notwithstanding this slowdown, the need for investment in NHS infrastructure from which no one can escape is greater than ever.

Given these challenges, we will be even more focused on selectively progressing new developments, underpinned by a relentless focus on driving organic growth through rent reviews, asset enhancements and rigorous cost control. Against this backdrop, we have every confidence in the prospects for the business and in our ability to face the oncoming challenges.

Now that completes this morning's presentation. So I would like to take any questions you have. Now we have a mic available in the room. So if you just raise your hand, the mic will come forward. And for the benefit of the people on the webcast, if you could just introduce yourself, that would be very helpful. Thank you.

[Paul May, analyst]

It's Paul from Barclays. Just three questions from me. Do you want to do them one at a time or altogether?

[Jonathan Murphy, executive]

We -- do them all and then we'll take them.

[Paul May, analyst]

You mentioned sort of seeing, obviously, pulling back from acquisitions and spend there. What is it you need to see in the market to make you more comfortable? Is it simply higher property yields, distressed sellers coming to the market when they come to remortgage or lower cost of debt for yourselves in terms of how you see that progressing?

On the disposals that you mentioned, just working through the numbers, it looks like it was sold at the yield of about 6.3%. Does that sound about right? And was it motivated just because it was a high yield? Or there was a -- in terms of the buyer, how you saw that sort of progressing?

And then can you describe the co-investment sort of JVs that you're potentially working on looking at moving forward, given the change in the cost of capital? And is this something that you expect to do more of in the future?

[Jonathan Murphy, executive]

Great. Okay. So I'll take those in order, if that's okay, Paul? So in terms of acquisitions, what do we need to see? So what I referenced in the presentation was the volatility in the market. So when you've got that level of uncertainty, it's very challenging to establish what fair value is in the market. And so I think we just need to see more time for the markets to settle down to see some evidence in the market, so we can have a higher degree of confidence that we're entering at the right point. So it will be a case of making sure that we've got an entry point that meets our current higher cost of capital but also we think then reflects a more stable value going forward.

Of course, there might be individual circumstances. So you might find a site that's got fantastic rental growth, where the entry point makes sense or there might be, another scenario would be the primary care at scale partners that we're working with, and that's a long-term strategic place we want to continue to be active in that area. So with those sorts of things. But I think as I think, hopefully, I've made quite clear, we're not expecting that to be a significant number going forward in the second half, and we'll continue to monitor that closely.

In terms of disposals, yes, the yield was slightly higher, as you said. That reflected the portfolio. So that was the June. It was done at a small premium to the June 2022 book value. So they were in the books at that level. That reflected the fact that they were slightly older assets. They were smaller assets. They had shorter leases. And so as a result, there was a -- they were valued at a slightly lower level. They reflected assets that we were quite happy to see move on. They were good assets, but we had some concerns about their ability to generate another lease cycle. So it was the right time to move them on. So -- and from the buyer's perspective, I think they wanted to entry into a market. And we were -- that's what we made available to them. So they were willing to take that on.

And then your last question was about co-investment. So you've very eagle eyes, obviously, working through the detail of the presentation. So there are two co-investments that we've done in the period. One is a JV within NHS Trust, where we've effectively were 50-50 owners of a building that they occupy. And that's -- that met their capital requirements. And obviously, from our perspective, it gives us access to a quality asset. We've got a very motivated partner because they're both occupier and co-investors. That's quite a sweet solution for us, and also it helps them because we provided capital for them that then enable them to deploy that capital elsewhere.

And then the other co-investment that we've done in the period was with one of those primary care at scale providers that I mentioned. And again, that's a simple joint ownership and it's a model where we'll co-own assets going forward. So we've got an alignment of interest, and it will be something that we look to do. So those are relatively small.

Could they become more significant? Yes, they could. But at the moment, those are relatively minor investments at this time.

[Denese Newton, analyst]

Denese Newton from Stifel. You're obviously still seeing record high demand and inquiries at all-time highs. At the same time, I think you've referenced previously about significant cost inflation, and you have so now being able to pass that on. Are you still able to pass that on to the same extent? Or has there been any change?

[Jonathan Murphy, executive]

Yes. So it's a very similar picture. So we are seeing construction cost inflation, you're absolutely right. So that is leading to the requirement for higher rents on new schemes. So that inevitably slows the decision-making process down by the NHS because clearly, with a higher price tag, they take longer to consider and make sure it gets -- it does still meet their requirements for value for money. So we are ultimately still seeing our ability to pass that on, but it is taking longer. And in any cases where there's a reluctance to accept, and we are seeing some regions where they are not willing to accept the higher end, we don't progress.

Ultimately, the NHS will need that facility. So we're very confident that in the end, they will come around to being willing to pay the higher rent. But for now, there might be a slight pause in some of the schemes.

[Unknown Analyst]

[indiscernible]. You mentioned, Jonathan, that there's likely to be pricing that's going to come down. What are you seeing in the market at the moment? And you've obviously paused on some of the deals that you were looking at earlier. What are the indications from all of that? Because I've noted that the value has only moved the equivalent yields down by 2 basis points.

[Jonathan Murphy, executive]

Yes. So in terms of values, yes, they've moved out the yield ever so slightly. I think that reflects in the period that we were looking at to the end of September. There was very limited transactional evidence. We'd obviously just done our deal at above book value. So that was supportive. I think they were mindful of the overall quality of the book and the long-term income surety. So I think they're adopting a cautious approach.

I mean in the presentation, I referenced softening valuations. And I think I'm just highlighting that given everything else that's happening in the sector, you have to conclude that it's likely our sector will be impacted even though we haven't seen it to date. To the extent of that, it's not really -- I'm not going to get my crystal ball out. But what we -- I think from our sector, you definitely have seen in the past a lower level of volatility. But equally, I'm not deluding myself that we're immune to the market moves. But so far, it's been relatively muted and very modest.

[Unknown Analyst]

Okay. Great. And maybe just a follow-on from that for Jayne. You mentioned that -- you're obviously in a good financial position. You've got very long-term fixed debt, which is great. Your policy range has not changed though. Obviously, the cost of debt has increased. And I don't know what your RCF, your facility is but given that the environment that Jonathan just described and what you're likely to see, what would make you want to change that range?

[Jayne Cottam, executive]

Well, at the moment, it would have to be a Board decision. And there's nothing out there to suggest we would change that. And we've always had a conservative LTV and we don't intend to change that. And even with some yield expansion, as I referenced in the presentation, we won't be near the top of that range.

In terms of the RCF, yes, you're right. It's on a floating rate. So I think at the moment, it would be somewhere around 4.5% if we were to borrow on that, but it's only GBP 125 million. And everything that we have committed, we can actually cover with the cash that we have. And as we said, we're just keeping everything kind of -- we're just taking a cautious approach and we will see as things kind of settle down where that takes us. But there are no plans to change that. And I can't see at this stage what would drive anything, but it would be a Board decision.

[Jonathan Murphy, executive]

I also think, just to add to that, I think the market is getting a little bit more sophisticated and is now looking more at sort of cash flow metrics. And as Jayne showed, we've got excellent EBITDA cover and interest cover. So -- and obviously, given that we're drawing on cash at the moment, those ratios will actually improve short term. So I think we are moving away from a complete fixation on LTV as the only metric. And I think probably they look at the basket now. So I think that's quite important.

[Edoardo Gili, analyst]

This is Edoardo from Green Street. Just first question on the GBP 88 million committed pipeline. In terms of timing of delivery, you typically mentioned 12 months for the on-site development pipeline. Are you seeing a change perhaps going forward regarding the current macroeconomic backdrop?

[Jonathan Murphy, executive]

Yes. So in terms of that pipeline, what we've identified, we do anticipate that, that will be within 12 months. But as I referenced, we -- that was a larger number at March. And some of those schemes, we've taken a more cautious view and so we've moved them out into our extended pipeline. So we are seeing delays, and we are taking longer to make decisions on progressing because we have to be certain about the fixed price contracts and certain about the contractor, and we have to be sure we've got the higher rent. So we are pushing some of those out, but they're not in that number, but we've already moved them out into the extended pipeline. So that GBP 88 million, I would expect us to start within the next 12 months.

[Edoardo Gili, analyst]

And in terms of the valuation moves that you're perhaps seeing in the market, do you see a discrepancy between Ireland and the U.K.? And is that changing perhaps your target size of your Irish exposure going forward?

[Jonathan Murphy, executive]

Yes. I mean Ireland isn't that dissimilar to the U.K. in terms of the volume of activity. So we haven't seen that many transactions recently. It's quite a small market. So we hear lots of market chatter about pricing, but we haven't seen the actual transactional evidence. So we've not really -- we've certainly not seen any yields moving out in Ireland yet. But the cost of debt has gone up in Ireland, not to the same extent as us here. So you would assume that over time, that would feed through. But so far, we haven't seen those moves.

The relative attractiveness of the markets, we made the decision to move into Ireland. They're adopting -- their health system is adopting a very strategic approach to creating these community centers, and it's a really important project for them, it provides good levels of return, and we are still very keen to play our part. But we are perhaps moving more cautiously than 6 months ago in terms of our movement into Ireland, but it remains an important growth area for us.

[Unknown Executive]

We've got one question off the web, and I'll just do that and then if there's any more in the room. [indiscernible] at BlackRock. You give an example of a net zero development, but it sounds like the NHS are dragging their feet and not able to contribute to these developments. What is your ideal split in terms of cost sharing for any CapEx to improve energy efficiency? And also, what will be the total cost of achieving your net zero ambition for the whole portfolio?

[Jonathan Murphy, executive]

Okay. So I mean, that's the number of the problem with net zero with the NHS at the moment. So as it currently stands, there is a challenge to getting the NHS to sign up on higher rents because of net zero improvements on a building. So any explicit money that you spend to prove the sustainability, they are reluctant to pay a higher rent for it.

Now, in the longer term, that investment is going to lead to a much lower operating cost for that building. It's going to lead to a more sustainable building and long term, will feed through into higher values, I'm very confident. But for the short term, there's a technical challenge with the NHS that we're trying to address, which means they're not willing to pay the higher rents. So today, we are funding that additional cost ourselves. But over the next few years, we are confident we'll be able to get some movement from the NHS to cover that. And frankly, if that doesn't happen, then clearly, we'll have to step away from that ambition. But that's their ambition, too. So ultimately, they have to come around to that. And that's why I referenced my frustration, this reluctance for them to sort of put their money where their mouth is as it were.

[Unknown Executive]

Sorry -- apologies, just one additional one for, I think, it's for Jayne. On undrawn RCF, the cost of those historically was sort of 50 bps, I think, in terms of undrawn commitment fees. Has that changed as part of the change in the rate environment? Or do you anticipate when that gets renegotiated in a couple of years that there would be an increase in the cost of undrawn facilities?

[Jayne Cottam, executive]

So to start with, nothing has changed because we've obviously got a signed agreement. So no, those commitment fees don't change. I honestly can't answer you, Paul, because I'm not in that banking market at the moment in terms of cost of RCF and margins and et cetera. So I honestly couldn't give you a decent answer on that because I don't know. We're not speaking to our banks at the moment about extending or renewing the RCF. And until such time I do -- I just don't know where the market is on that at the moment.

[Ana Taborga, analyst]

Ana Escalante from Morgan Stanley. I just wanted to ask you about the asset enhancement activities. If you can provide a little bit more detail on how that works, a bit in line with what you've said before on the open market rent will be used with the NHS. So I would like to know if -- when you commit on one of these type of projects, whether you have some views on the rents you're going to achieve with the NHS? Or have you any kind of pre-agreements with them in terms of, okay, we're going to invest this and we expect to get at least this increase in rents and whether we at the beginning of the project or later or in the middle or at the end?

[Jonathan Murphy, executive]

So the -- in terms of timing, everything is agreed upfront. So the way it works is all the commercial negotiations are done and the approvals are done with the NHS before we commenced on site and any rental levels are agreed in advance.

In terms of how those are set, it's quite a nuanced picture. So effectively, there are two very distinct ways at work. So if you're building like Castleford, I said we built six new rooms, because you're building brand new, that counts as new build, and you can start afresh with the rental tone on that level. But if you're refurbishing existing, that's set at a different level. So you got -- so you effectively have two different rents that would agree. The slightly higher rent for the brand new build that you've put on and you have a separate negotiation on the refurbished stock on the existing building, if that makes sense.

But the good news is, it sounds that the extension sets the tone that is then discounted to provide the level for the refurbished element, if that makes sense. So you do move both up, but you don't get straightaway to the very top rental level. So I hope that makes sense.

[James Carswell, analyst]

It's James Carswell from Peel Hunt. You talked quite a bit about your potentially requiring a slightly higher rents on new developments to kind of kickstart them. It's quite a hard question, I appreciate. But can you give us a rough idea of the magnitude of that additional rent you need? Is it 5%? Is it 15%? I mean, can you give us a rough feel for how big that number is? And I know it varies asset by asset and clearly, risk-free rates are moving, et cetera, but is -- to stay?

[Jonathan Murphy, executive]

Yes. So it's very hard to give you a precise answer because every single region is different. But I think if I can you just one example for example. So at the moment, we're doing a scheme in Winchester, and we've seen a GBP 40 to GBP 50 increase in the rent off a base of about GBP 220. So what's that about -- it's about a 25% increase in rents. So that's just one example. So what you mustn't do is take that 25% and feed it into the whole model because it's one building, and it's one area but you did ask me for a specific, so I gave you a specific, but don't take that as a read across.

[Matthew Norris, analyst]

Matt Norris from Gravis. Follow-on question on the asset enhancement initiatives. What's the yield on cost there and what's happening to the yield on cost? What sort of returns do you make on these investments, please?

[Jonathan Murphy, executive]

Yes. So I mean it hasn't changed. So typically, what we'd say is that we're able to -- on our developments, we're able to achieve up to 100 basis points pickup in the yield and for asset enhancements, it's up to 200 basis points. So that's the sort of level that we're at. Now clearly, every scheme is different. It depends on the nature of the scheme, but it's at the higher end of the returns.

[Unknown Executive]

[indiscernible] question.

[Unknown Analyst]

Sorry, just one final question for me. On Slide 50, you talk about the rents and how they feed through relative to construction cost inflation. So I think it sort of follows on obviously, you're agreeing it when you're getting a new development. But in terms of district valuers and them being able to feed through construction cost inflation, on Slide 50, you're showing a bit of a range with two examples. What in practice happens generally? How much of the construction cost inflation over time you expect to be able to capture?

[Jonathan Murphy, executive]

So obviously, every scheme is different, same thing, and every region has a slightly different approach. But if you look back over the last sort of 5 or 6 years, we've probably been able to capture only about 1/3 of the construction cost inflation over that time. And that's because over that time, you've seen yields progressively coming in. And because it's cost times the yield, that's obviously softened that plus negotiation and everything else. So we've not been able to capture the majority of it historically.

But as we look forward, if we were looking forward into a stable yield environment or maybe even a yields moving out, then you would have confidence that you were able to capture a greater proportion of it going forward. So I think -- if we -- our forward view is a lot more optimistic than our backward-looking view.

[Unknown Analyst]

Is it a greater proportion? Or does it actually work in reverse as well?

[Jonathan Murphy, executive]

Well, could there be an accelerator as we look forward. I mean, I think at the moment, you have to be -- that clearly would be -- that would be the ideal scenario. Let's just go with a greater proportion for now.

Great. Brilliant, Well, thank you very much for a very extensive and full set of questions, and thank you very much for joining today's presentation. Great. Thank you.

[Jayne Cottam, executive]

Thank you.