Assura clears legacy debt problems to kickstart REIT conversion campiagn

Assura Group, the listed specialist healthcare property investor, has kicked off its REIT conversion campaign today which is expected to be completed by this autumn, in a strategy designed to open up its listed stock to a wider universe of potential investors.

The timing of the conversion is intended to benefit from the Royal Assent of the Finance Act 2012, which comes into effect from July, which will scrap the 2% conversion – based on property valuation at time of conversion.

This will save Assura £11m, based on the main market listed property company’s current £549.2m property valuation, at today’s preliminary results for the year ended 31 March.

Graham Roberts, chief executive at Assura, said: “Conversion to REIT status is neutral to the major institutions that already invest in us, but will attract interest of those specialist REIT funds that invest only in real estate companies.

“Our conversion will make us particularly attractive to another group of investors.”

Currently, some of Assura’s largest institutional shareholders include Invesco, F&C and Artemis.

By converting to a REIT, Assura will be required, like all REITs, to distribute a minimum of 90% of taxable rental profits in quarterly dividends to underlying investors, with recipients’ proceeds taxed by Treasury.

The rationale of this tax requirement when the REIT regime was launched five and a half years ago, was to ensure property companies made property-based investment decisions, rather than investment decisions based on potential tax liabilities.

In addition, the REIT regime removed the previous ‘double taxation’ effect for listed property companies, in which companies were taxed on their profits and investors were taxed on their dividends. Furthermore, it also ensures that underlying investors receive almost full rental distributions from the REITs, akin to direct property investment.

Simon Laffin, chairman at Assura said in a statement this morning: “Our financial strength is underpinned by our core portfolio of 322 leases on 158 investment properties, with a weighted average unexpired lease length of 15.8 years, of which 90% is backed by the NHS covenant. This degree of income and debt security is exceptional in the property sector.

“Our largely government–backed rental stream and our long term secured financing now enable us to start paying a quarterly and progressive dividend.”

Assura has dealt with a number of legacy issues to deal in the last 18 months to prepare for REIT conversion, including a number financing and interest rate swap liabilities – all of which are now complete.

The most painful cost was the requirement to crystallise a £69m swap breakage cost on the interest rate swap hedging the interest risk of £120m National Australia Bank senior loan, which has confirmed its permanent exit in UK property lending.

In Laffin’s own words this morning, the “interest rate swap that had become excessive compared to the liability that it was intended to hedge”.

In order to achieve this, Assura launched a rights issue in November 2011, raising £33.5m, net of expenses. After which a £110m 10-year corporate bond was issued in the same month, at a fixed interest rate of 4.75%, maturing in December 2021.

The successful bond issuance has reduced Assura’s average cost of debt to 5.26%.

Assura total debt stands at £375.6m, including a series of long-dated Aviva Investors loans worth £213.1m, a £52.4m Santander investment and development facility, which matures in November 2016, and a £4m RBS loan which matures next years secured against a non-core asset which will be replaced with cash reserves, if required.

Assura’s £549.2m property portfolio comprises £505.7m of core assets – comprised of 158 medical centres, with an ERV of £34.0m and a weighted average unexpired lease length outstanding 15.8 years. The core portfolio reflects an initial yield of 5.89%.

In its preliminary results this morning, Assura said: “Our task with the core portfolio is to continue to generate good returns. We will do this by a disciplined approach to sourcing new investments and in evaluating developments. Where existing core investments are expected to underperform we will also apply discipline in evaluating hold or sale decisions.”

The non-core property portfolio is worth £26.3m, comprising £14.9m in investment property, £2.3m in vacant properties and £9.1m of land sites, at an ERV of £2.3m, and a weighted average unexpired lease length of 8.1 years.

“Our approach to non-core assets is that they need to deliver a better return over the medium term than our core holdings. Those that do not meet this criteria are considered available for sale although the timing of their sale will depend on market conditions and asset specific considerations.”

About CoStar News

Finance Editor, CoStar News
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