Impact Healthcare REIT PLC
LSE:IHR
Earnings Call Analysis
Summary
Q2-2023
The company has actively managed its portfolio, acquiring six homes at the start of the year for GBP 57 million, contributing to a value increase. Robust rent reviews of 4% at 90 properties contributed GBP 1.1 million to contracted rent, aiding a total return of 6.17% for the five-month period. The debt position was strengthened with a new GBP 50 million facility with NatWest, extending the HSBC facility to 2026, among other refinancings. The current hedge position is being reviewed due to the expired interest rate cap, with the weighted average cost of debt at just over 5%. NAV per share increased by 3.2% to 113.64p, and a dividend of 3.39p per share was declared, fully covered by adjusted earnings. The company remains confident in its market, citing the fragmented nature of UK healthcare real estate and a demographic trend towards an aging population as a backdrop for future growth and expansion.
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Good morning, everyone. This is Andrew Cowley. I'm the Managing Partner of Impact Healthcare. I'm joined this morning by David Yaldron, our Finance Director.That said, thank you to all of you for making time available and we are going to step you through our financial results for the first half of this year.Before we get into the detail, what I would like to do -- I know many of you listening in are very familiar with us, but some of you are not. So I will just, like, step back a minute and try and explain briefly who and what we are.So we -- our main market is REIT. We do one thing, we invest in U.K. social health care assets, primarily care homes for the elderly. So far, since inception 6 years ago, we have deployed just over GBP 600 million. We've acquired 140 homes with 7,700 beds, so just putting that in perspective. The average size of our buildings, they have 55 bedrooms on average.We will walk you through why we think the market we are investing in is an attractive place to invest, both from a social point of view, creating social value by providing long-term capital, but also from a financial and economic point of view, is an interesting place to invest.And it enables us to deliver on a key financial aspects of our strategy, which are to pay a progressive dividend, to ensure those dividends are covered, maintain a robust conservative balance sheet and to think about the long-term.So I've got a snapshot here on this side of what our financial performance was like in the first half year. I don't want to steal David's thunder. He's going to step you through this in detail. But just coming back to most strategic priorities.Progressive dividend, so the dividend target this year is 6.77p, that's up just under 4% on the 6.54p we paid last year. We declared the second interim dividend of year this morning, so we're halfway to delivering on that target. The dividends we paid in first half year are well covered by our earnings, 122% by our EPRA earnings per share, 109% by our adjusted earnings per share.Our balance sheet, our LTVs were just under 29% at mid-year. Thinking about long-term, one of our focuses on the balance sheet next -- in the first half was to improve maturities and our debt. And also we improved the average on expired lease terms on our leases from 20 to 21 years. So thinking always about the long-term.And these results put together enable us to deliver the first half year of 6.2% total NAV return, that's for 6 months, not annualized. So, against what was a pretty challenging backdrop, inflation coming down much less quickly than some people expected, interest rates going up, we are really happy with how the first half of the year has gone for the business.So I'll hand over to David now who can step you through the results in a bit more detail.
Thank you, Andrew. If we can turn to Slide 7. So overall, we have seen positive growth in underlying earnings despite the economic headwinds. Cash income from rent and interest income from loan portfolio investments grew by 23%, and that is after taking account the bad debt write off for the portfolio of 7 homes that were re-tenanted during the period. We did have rent deposits that reduced the overall amount that we had to write off in that period.Underlying administrative costs grew at a slower rate of 15.7% to just under GBP 3.7 million, reflecting an EPRA cost ratio of 16% down 0.2% on the 6 months to June 2022 of 16.2%. The EPRA cost ratio excludes the income generated from our investments by way of a loan. Including this, our adjusted cost ratio is 14%, down from 14.8% in June 2022.Drawn debt increased from GBP 138 million at the 30th June, 2022 to GBP 191 million at the 30th June, 2023. SONIA has been rising over the past 12 months, and is now over 3x higher than at the end of June 2022. This is in part being managed by our fixed and hedged debt facility and interest costs have, therefore, only risen by just over 2x despite the increased level of debt drawn. Overall, adjusted earnings grew 11% to GBP 15.3 million.There were 2 tranches of equity raise, the first in July 2022 and more recently in this year in January 2023, raising in total GBP 33 million from the issue of just under 29 million shares. This reduced the growth per share to 0.8%, up from 3.66p per share to 3.69p per share.We have declared dividends of 3.385p per share, up 3.5% percent on the dividends declared for the first half of last year and these continues to be well-covered by adjusted earnings with dividend cover of 109%. If you can turn to the next slide please.The operational performance discussed in the previous slide has been supported in the period by a growth in the value of our portfolio, which I will discuss in more detail below. This grew less than for the same period last year, reflecting the changing economic environment over the comparable periods.Total comprehensive income grew by 1.1% to GBP 27.6 million, which with the 2 equity raises discussed above, delivered earnings per share of 6.6p per share, down from 7.26p per share in the first half of 2022. Total accounting return for the first half of the year was 6.17%, delivered from a fully cash covered dividend and the underlying growth in NAV. If we can turn to the next slide, please.This slide helps illustrate the elements of the underlying performance with growth in NAV, up 3.2% from 110.17p to 113.64p per share. This also illustrates the elements of both EPRA and adjusted earnings that has supported the dividend cover of 122% and 109%, respectively.I'll talk through the elements of these now. The key components, firstly, net revenue, which is made up of 2 parts. First, the cash rent of 4.69p per share. The second is rent smoothing revenue of 0.79p per share.For those not familiar with this accounting treatment, we have a minimum uplifts of either 1% or 2% in all but 2 of our leases. We are required to straight line these minimum increases over the life of the lease. As a result, we are recognizing more revenue than we receive in cash for the first half of the lease term, which is approximately 10 years to 15 years and we recognize less revenue than we receive in cash in the second half of the lease term.The opposing entry is recognized through a reduction in investment value, and so it has no impact on profit before tax or net assets, but does have an influence on the individual line items.As you can see in our adjusted earnings, we only recognize the cash element of revenue, but we are required to recognize the full accounting revenue for our EPRA earnings calculation.In addition, we have received 0.88p per share of interest income on investments structured as investment loans. The portfolio of 6 homes that we invested in at the start of the year was structured in this way, alongside a portfolio of 12 homes invested at the end of 2021. The option to convert both portfolios to direct investments were exercised at the end of the period and new leases entered into for between 30 and 35 years.Operating costs represent 0.89p per share for the period and have been discussed in the previous slide.Net finance costs include cash interest costs paid, the amortization of debt arrangement costs and the movement in value of our interest rate caps. These combined reflected cost of 1.07p per share. The movement in the interest rate cap value is excluded from EPRA earning and is there for a cost of 1.32p per share.For adjusted earnings, we have excluded the amortization of debt arrangement costs as this is a non-cash item in the period. However, we have included the cash received on the interest rate caps.In the period, we had 2 caps of 1% and 3%, and therefore both were in the money and made payments. These combined adjustments are reflected in the net cash cost from financing of 0.99p per share.Dividends paid reflect the payment of quarter 4, 2022 and quarter 1, 2023. The clarity of the dividend cover at the bottom of this slide is calculated on the dividends paid and declared in the first half of the year.The property investments value of 3.05p per share will be discussed in more detail on the next slide. The rent smoothing value movements offset the rent smoothing revenue as explained earlier.And finally, we issued 9.6 million shares as part of the acquisition in January. These were issued at the NAV at the time, which was the September position of 116.6p per share. Following valuation adjustment at the year end, which reduced the NAV per share to 110.17p, this has been accretive underlying shareholder value on a per share basis. If we can turn to the next slide please.Our investment portfolio grew 12.2% in the period from GBP 568.8 million at the 31st December, 2022 to GBP 638.2 million at 30th June, 2023. This includes GBP 57 million from the acquisition of 6 homes at the start of the year, including GBP 1 million of purchase costs, or 1.8% of the purchase price.A further GBP 0.9 million of the investment value increase is from capital projects. We have a number of projects in progress, which we will mention later in this presentation, and we expect this spend to increase in the second half of the year.We sold one home at carrying value as part of our portfolio management strategy and the remainder GBP 12.6 million or 3.3% of value uplift came from valuation movements. This was primarily driven by rent reviews at 90 properties.These rent reviews were at their caps of 4% and contributed GBP 1.1 million to contracted rent and supported value uplifts of GBP 14.1 million. This was partially offset by some value write downs primarily on the re-tenanted portfolio.Overall, the value movement contributed 3.05p per share and the EPRA topped-up yield has remained stable at 6.95% against 6.98% at the year end. The NAV bridge below summarizes the value movements discussed in more detail in the earlier slide. If we can turn to the next slide please.A key focus during the period has been the continued efforts with our debt partners to deliver long-term debt facilities that support the business. At the end of last year, we announced the GBP 50 million 7-year facility with Virgin Money.And in the first half, we have continued to strengthen our debt position with a GBP 50 million 5-year facility with NatWest, which increased from the GBP 26 million facility previously in play. Alongside this, we have extended the HSBC facility by further year to 2026.There was a small increase in the NatWest facility margin to 200 bps, reflecting the longer term facility and both banks agreed to reduce interest cover ratio of 200%, providing greater flexibility in a rising interest rate environment.These re-financings all supported the pay down of our Metro term debt, which was our most expensive debt with a margin of 265 bps.All of our facilities continue to be in full compliance with their covenants and are with strong partnership bank that are supportive of the quality of the underlying portfolios they are secured against.With these extensions, our debt facilities have grown to GBP 250 million and debt maturity has increased to 6.8 years. If the 2 1-year extensions are requested and approved, this increases to 7.2 years. If we can turn to the next slide please.With GBP 191 billion of debt drawn at the period end, hedging is an important consideration in delivering underlying returns to investors. We have benefited from a GBP 25 million 1% interest rate cap that was put in place 5 years ago. This expired in mid-June and our hedge position against drawn debt has reduced from 79% to 66%.GBP 75 million of interest rate protection is from our long-term fixed rate loan notes which mature in '23, 2035 and are fixed at 3%. A further GBP 50 million is from a 2-year 3% interest rate cap put in place at the beginning of the year.Overall, our weighted average cost of drawn debt at the period end is 4.85%, and with current hedging in place, this increases by 17 bps for every 50 bps increase in SONIA. And as we show in this slide, SONIA has increased by that amount by another 50 bps since the period end and therefore the current cost of debt is just over 5%.Our hedging policy is to have at least 75% of our drawn debt hedged and we are currently reviewing options to put this in place. If we turn to the next slide please.To summarize, we have a strong balance sheet with over GBP 50 million of unallocated liquidity headroom. We have delivered a 3.2% increase in NAV per share to 113.64p. We have declared a dividend of 3.39p per share, which is fully covered by adjusted earnings, overall contributing to a total return of 6.17% for the 5 month period.Andrew, I'm going to hand back to you to talk about the market and then our portfolio.
Thank you David. I'm going to step through the following slides a bit more briskly. We want to make sure we -- today's focus, of course, is on the results in first 6 months. If anyone feels I'm going too quick, the presentation we're using is on the company's website at the bottom of homepage. So the detail is there for you to have a look at if you want to look at it. And of course, we are always available to answer more detailed questions if you want to come back to us.So I think, thinking about our market, there are 2 key things we think to draw our attention to think about. So it's a larger market than some people realize. There are just over 12,000 buildings in the U.K. by care for the elderly. 480,000 beds. CBRE estimate the total value of real estate in this market is about GBP 40 billion.The point we want to emphasize here is how fragmented the market is. So what the chart, bottom-right here is showing is that the market share of the top 10 U.K. health care providers peaked in 2006 and since declined.It's quite unusual in a fragmented market. Normally expect to see the big guys consolidating what's been growing are successful middle market operators. By that, I mean, people who own and operate or operate between 3 and 80 care homes. And they're who our tenants are. Our tenants are in that successful growth area of middle market operators.And to put things in perspective, as we mentioned earlier, we own 7,700 beds today. That's 1.6% of the market just under 2% of a very fragmented market. So for the medium, longer term, we're very confident there will be attractive and interesting growth of opportunities for us.Second point, basic driver in any market, supply and demand. We know we're in a growth market. Like most economies around -- rich economies around the world, our population is aging rapidly. So there will be more demand for good quality care field the over the next 10, 20 years.And in the last 10, 15 years, supply has not been rising in line with potential increases in demand. So we think there's an interesting supply and demand dynamic in our market, and we don't expect that to change significantly in in the short to medium or longer term.So turning now to the portfolio we've built over the last 6 years. Beginning of this year, we owned a 135 buildings. During the first 6 months of the year, we acquired 6 buildings. We sold one, so we now own a 140 buildings rented to 14 tenants.For those of you who have known us from the inception 2017, you -- we began with a very concentrated portfolio in terms of tenant diversification. One of our main aims has been to diversify. We think we've been delivering on that, but there's further to go on this journey.How we put the money to work over that period to acquire these buildings? What we're trying to show here is, we've been pretty consistent in the yields we've been achieving. So there are the dark circles on this chart, achieving yields of around 7%.And we think relative to the quality of the assets we divide, those are very attractive yields, clearly over the last 12, 18 months to risk free rate, the bottom line here, 10 year Gilt yields have come up. And so, hence, the way we think about it is what's our margin of safety over that. That has declined, but we still got a much better margin of safety and positive carry over Gilt yields compared to many other forms of real estate.We did make one acquisition in in the period -- in January. And obviously, given the level of uncertainty, interest rate moves, how that will affect investment yields, property, we fought long and hard about would this acquisition be accretive. And we're really happy to report how well it's done in the first 6 months of our ownership.So we invested GBP 57 million. As David mentioned, we paid 20% of that acquisition price through issuing new equity. We acquired, the business or a yield of just over 7%, and, again, relative to quality of buildings we acquired and quality operations, it's a really good yield in new money terms, not old money terms.We thought the rent cover in this portfolio would be 2x we bought in January. Actually, in the first half, its rent cover was 2.4x. So it's performing ahead of our expectations, which were already pretty demanding. So we're really pleased with how that acquisition is going. And it will not -- it's not it will be accretive in immediate long-term, it will deliver to our bottom line this year.But clearly, in general, though, this is a time we need to be very cautious about acquisition activity and to make sure if we do anything, it is going to be genuinely accretive. I'll come back to that.And those of you who took time to look at Annual Report for '22, will see you there, we announced what our net-zero carbon strategy is and set some targets for ourselves. We've spent a lot of time in the first half of this year thinking what can we do to turn that strategy into reality?And we'll look forward to reporting back to you -- not necessarily on this. It's a long-term project. It's a demanding project. But we're going to look forward to reporting back to you at year end about what the plan is, how we're going to deliver on it, and what progress we are making.The world is not perfect. We told you earlier in the year that we did have a problem with one tenant. They came to us in January asking for a 6 month rent holiday. We did a deep dive into what the issue was for these 7 homes and decided that rather than burying our head in the sand, the correct thing to do was to re-tenant the portfolio.We went through a pretty thorough process to do that. And we did do the re-tenanting in -- the homes were re-tenanted on the 1st June, to an affiliate of Minster, our largest tenant. We supported that process. We wanted to make sure this was done so that they not -- this insolvency would create a lot of uncertainty in residents and living at homes and staff who worked at these homes of continued trading throughout.So it's a solvent transition. We supported that with a working capital facility of GBP 1.6 million. At the moment, GBP 1.1 million of that's been drawn down. We're receiving 8% on that. This will have a negative impact, as David mentioned, on our performance this year.First month of the handover was so far we've only got the management information for June. It was encouraging, slightly ahead of expectations. And turnarounds will begin to happen. But I'd emphasize 2 things.One is, one swallow does not make summer. One, you can't rely on one month's. Turnarounds are never easy. We can't get too happy about June. And also the fact the turnaround might be, a bit quicker than we've been expecting makes it all the more frustrating that these homes have been underperforming.But turning now to a wider, the performance of our other 13 towns. what we've seen in the first 6 months of this year is a continuation of the trends of 2022 and if anything, a slight improvement on those trends. So occupancies continue to recover. It's 87% across our -- average across our portfolio in January; July, it was 89%. We'd normally expect to see it in the low 90s. So the recovery from COVID lows to normal has been slow and hopeful, going in the right direction. There should be another 1%, 2% occupancy still to still to go.Fee growth was strong last year. These are tenants charged to the care they provide. It's accelerated this year. So on a 12 months to December, average fee growth across our portfolio was 13%. In the 12 months to June, it accelerated to 15%.And the thing that's become more positive this year compared to last year, the big problem our tenants were dealing with last year was staff costs, in particular spike in in agency staff use. That's come back under -- is coming back under control. It's going back down to normal levels. So positive thing. But also staff pay was up last year, also positive thing. So our tenant staff costs increased 12% in the year to June. But that was less for their fee growth.So where all that comes out is in rent cover. And I'll come back to rent cover in the slide after this one. So here's the detail -- a bit more detail about trends in our occupancy and average weekly fee growth, and tenant staff costs. And you'll see in that chart on the bottom right, that agency staff use peaked during the Omicron crisis, the Omicron wave of COVID.So Q4 '21, it spiked up to above 15%. It was 16% in Q4 '21. And it takes time to get that back on control. That is now clearly happening. There's always some agency staff that would be somewhere between 5% and 8%, there's holiday pay, a sick pay. But end of Q2 it was back down to 9%, and we're seeing encouraging trends that change come back down to more normal levels, which is good. So just turning to rent cover.So all these factors come out in -- average out in rent cover. What we're showing you in the chart on the bottom-left here is, if you go back to the last normal year as in pre-COVID 2019, our average rent cover was 1.8x. 2 years of COVID, 1 year of rising inflation, 6 months this year with even higher inflation, our rent cover has been pretty stable at around 1.8 times. It -- first 6 months of the year, it was slightly up on last year.And just before we move on, just thinking about inflation. 100% of our leases are inflation linked. 85% of them have a flooring cap of 1% to 4%. 14% the floor is 1%, cap is 5% and 1% have no floor in cap.The spike in inflation we've been living through is exactly why we put these caps in place to make sure our rents continue to be affordable over the long term. Of course, I'm not sure inflation is coming back down to 2%, but we hope it will be back below 4% in the foreseeable future. So the caps will be costing us bit less. But the caps have been working in the sense of that their main aim is to make sure our rents continue to be affordable and get paid.We often get asked about how other costs are affecting our tenants. So the chart on the bottom right is showing, while food prices are up very sharply, our tenants, they haven't broke up out the norm as for our tenants. They spend roughly 4% of their revenues on food costs. That hasn't broken up range.Utility costs for our tenants did increase by about 1%. It normally averages about 2.5% of revenues. They spiked up to above 4% at the end of -- beginning of this year. But they're now coming back down to more normal levels pretty quickly.Another question we often get asked is, how a high interest cost -- bank interest cost, affecting our tenants? The good news there is majority of our tenants have no bank debt, so they are not directly exposed to higher interest costs.So one -- I think the signal I sent you earlier, in terms of acquisition activity, we're not close to business, but we're being very cautious and very demanding about if we do anything that we've got to be really confident is accretive.The one area where we want to be a bit less cautious and more ambitious is asset management. This is where we're investing money on changing and improving the buildings we own. So here are 2 examples. Major projects, they're just coming to end of at Fairview and Bristol. And a new home, we'd forward funded in party for Merlin Manor, which is now open and trading ahead of expectations.In the first half of this year, we committed GBP 10 million to 4 new projects and actually we committed another GBP 1.25 million to our fifth project that's beginning of this week. This is always a work in progress.The 4 projects we committed to in the first half will deliver another 70 beds, so we'll increase the beds of those homes from 197 to 267.We'll significantly increase the number of good quality en suite bathrooms, the existing bedroom of those homes, and we'll make sure the EPC certificates towards homes are B or better.And the money we're putting work there, we rentalize at 8% per hour. So we get a -- we know this yield is attractive, accretive, we should get some capital upside in these projects and it's a win, win, win. It's not just about the money, Everyone benefits from these kind of projects with people living the homes, the staff of tenants running a larger modernized home, we own larger modernized home paying us significantly more rent.So this is one area where, we're not going to go crazy. It's tough environment up there. There's a lot of stress in contracted land. Construction costs are still higher than you'd like. So it's a not time to go crazy. But we want to be more not less ambitious these projects, make sure we are maximizing the value of our existing portfolio.So I think you've listened to us for long enough now. I'm not going to -- hope that you've got the key points here. We think we show in the first half continued high level of resilience. Our dividend is covered, balance sheet appears to be strong, and we're thinking very actively about how to maximize the value our existing portfolio.So thank you again for listening. We're open for questions.
[Operator Instructions]
[Technical Difficulty] for the residents, given the strong increase in fees that you've seen. And then the other one is you talked about hedging and increasing that. Could you talk about the potential for taking out caps that are effective below the current sort of market rates? Well, current SONIA rate?
Good morning, Julian. Am I right, your question is about fees residents pay, not about our rent. Well, there is a connection to those, of course.
Yeah, so affordability for residents within the homes.
Yeah. That's a really interesting question, something we spend a lot of time asking ourselves about. So I think there's been a step change in the government funded. So there's 2 ways of coming back in who's paying the fees, government or private families. So I'll talk about government first.We have seen some significant increases in fees paid both by local priorities, but also the NHS becoming a much more significant counterparty customer of [ care ]. With the NHS directly buying beds or contracting beds in care.And, honestly, what the NHS is doing there is saying, we need to reduce bed blocking, but also we need to make sure people aren't bouncing around, tossed in ambulances from home to hospital back again. They're in a better long term environment. And the NHS is not overpaying for beds, but it's solving an acuity. It needs beds to people with higher acuity. So they're by definition quite high fees.And local authorities, there are over 400 local authorities across England. There are over 400 different care home fee deals. It's a complex market. There's a lot of regional variation. But we're seeing some very significant local authority fee increases. And I will give you an example, Somerset Council, plus 30% in April, Wigan plus 29% in April.But they're outliers. But it's -- because think that's recognizing that local priorities have been over many years underpaying the care and they need to pay fees to reflect actual cost of care.I think the interesting question about all this in the private market. And what we've been seeing, the private market was hit harder by COVID. I think, people paying privately have got by definition more discretion. They've got more resources, bigger houses, more income. They've got more discretion. So private occupancy was hit harder by COVID. It has been slower to recover.And I think there is some -- yet having some parts of the private market has fee growth gone too far. Has it lost contact. And so once fees go north of GBP 2000 a week -- everyone can multiply GBP 2,000 by 52, that's a 6 figure number. It's a lot of money. Yet, are people paying that privately getting value for money, discussed.But I'd ask you a question, and not making a statement. I mean, I think -- my parallel in my mind in the private B market for care homes is private school. They've pulling up their fees and inflation plus the last 20, 30 years. And the result, they've come on a board with many people. I'm not saying that's happened in private care homes, but, yeah, at some point it might get an affordability question there.On hedging, so we have an option which expired in June, on GBP 25 million. That was linked to the Metro facility we repaid in June. We didn't replace it immediately, because option pricing in June, you do it for a living, you know it better than I do. Option pricing was very high in June.We have that disappointing May inflation number. Option pricing went through the roof. It's come down significantly since then, and we are discussing with the Board ways of which we can. We think options are now coming back down to a more affordable level, more interesting level, and we had discussion with the Board early this week about what we're going through to increase our current hedging levels, and we'll be reporting back to you on that in in due course.
Okay. Thank you.
There are no question anymore on my side. So I will hand you back to you, in order to take the question coming from the webcast.
Thank you. Our first question from the webcast comes from Mike Prew with Jefferies.Did Silverline carry any debt and why did the operator run into financial difficulties? And are there any other operators on your watch list? Also, is there upward pressure on the average 35 hours per week's staff time per bed?
Mike, so Silverline didn't have any financial back debt. Sorry. But it did have some -- the reason why the question mark, could we do a transfer [indiscernible], it had some payment of arrears to HMRC with PAYE, and it had some payment arrears to the agency that was using for agency staffing.The underlying problem was Silverline was, we initially did a deal with them in -- to 3 homes in West Yorkshire, which were -- we bought was a turnaround project. We paid turnaround pricing, 45,000 a bed, 8.3% yield. Because those homes needed turning around. They had 70% occupancy.The problem was, we bought those homes in March 2020, and -- at beginning of COVID. And I don't want to make excuses for us for Silverline, but it's really hard to turnaround care homes during lockdowns, during a pandemic.So for the next 2 years, those homes occupancy flat lined at 70%, which meant Silverline was losing -- they paid us the rent in full for those 2 years, but it was losing money. So that -- and that's what dug the hole. It wasn't bank debt. That's what dug the Silverline a hole.So, clearly, watch list -- are any other tenants on the watch list? Are we really worried about tenants? Not at the moment, but we keep it very careful eye. So we get very detailed reporting are from all our tenants, and we can track home level performance across the portfolio, and we watch everything very, very carefully.But the second part of your question, Mike, obviously, one of the things we are watching as staff costs really spiked up last year. Particularly there is -- [ hasty ] start is not always a bad thing. If it's bringing in a temporary staff member to deliver dedicated one to one care to someone for 3 months, that's not bad. Not right to people.But in general, as you start it's much more expensive, and it reduces care quality because you've got people coming and going. So it's probably not a good thing. So as that was cost spiked up you also had underlying wage pressure. Particularly one of the things we're watching very carefully was would our tenants cut back on start hours, would they cut corners. And we're reassured to see that their start hours worked per resident have been stable or slightly increased.And -- but that was -- so on average, the average resident of homes we owned gets 5 hours of staff time each a day. And that's been stable and, we would -- actually we expect to see that increase.
And there's another question on Silverline from Emma Bird at Winterflood. Was the Silverline issue very tenant/property specific? And have you reviewed the portfolio for similar issues?
So, yeah, if you have these kind of problems -- I'm talking very high level. Devil is always in the detail. But, yeah, they can cause by one of 3 things. You've got bad buildings, you've got buildings in the wrong locations, or you've got the wrong people operating those buildings for you, or you've got all free.So we had a view about what the problem was. But rather than just talking to ourselves, we brought in a consulting firm who specialized in turning unperformed care homes in January, February, in Q1. I said that we want you to go and spend 3 to 5 of your teams for 3 to 5 days in each of these homes and come back and tell us what you think the problem is. Is it is buildings, operational, is it compliance, is it financial? And what do you think these buildings could -- what they perform at?If you look at our presentation, Emma, you'll see, we've got some photographs of the buildings. I'm not saying they're perfect. Buildings are fine. Laurel Bank, bottom left there, 100% wet rooms. The problem isn't buildings. And so, unfortunately, we -- full group result can confirm what we thought, problem wasn't buildings, wasn't the locations. The problem was how they're being operated, which is why we bit the bullet and change the tenant.
Our next question is from ABI. They ask, with debt servicing likely to triple from GBP 3 million to GBP 10 million, based on a 5% new rate on higher debt of GBP 190 million, how safe is a dividend at current levels and potential growth for next year?As Dave, of GBP 14 million plus GBP 10 million debt cost will eat up a large proportion of the likely GBP 32 million net cash from operations?
Really good question. If you look at the RNS we published this morning, we've shown you there how a monthly interest cost will increase, average first half versus -- SONIA at its current level. So SONIA stays 5.4% at that level, our dividend will still be covered. We will not be using up cash reserves. Clearly, if SONIA does something surprising and goes to 6%, 7%, 8%, that calculation might change. But at current levels of SONIA, we can continue to the recovery of dividend.
And the next question comes from James Carswell from Peel Hunt.At your current average cost of debt, where is the dividend cover on a run rate basis?
I think I'd hope you just answered that question. David, would you like to have another go at it?
Yes. I mean, we have benefited in the first half of the year from the 1% interest rate cap. So that, hopefully, is clearly a factor in the 109% dividend cover. So we would expect it to come down slightly. But, again, there are a number of measures there.One, can we put in, additional hedging that will help preserve that underlying flow? Can we manage our cash position better, to sort of help reduce that debt? And can we make accretive investment, and deploy that to sort of improve?So I think, the focus is there on ensuring that we can continue to deliver a covered dividend. I won't give a specific number on run rate because I think there are too many variables there that we are sort of focusing on. But the key focus there is to make sure that we continue to deliver a cash covered dividend by adjusted earning.
The other way, I mean, we're not going to make any forward look -- we're not giving any forward-looking guidance. But, clearly -- we get pretty good questions. Our interest costs got up. Could go up further. And we've got a Silverline issue.But on the other hand, I think we're relatively confident that our rent, I mean -- unless anyone thinks inflation is coming down to 2% sooner or later, our rent reviews next year will be 4% plus. So we know what our top line growth will be as well, which offsets a lot of this.
And our next question comes from [ Shiva ], a private investor.Is there anything in the lease agreements which allows you to reset rents higher beyond any caps if hypothetically inflation levels were to remain consistently higher than what we have been accustomed to.
The short answer to the question is, no. I can give you a slightly longer answer. So we wanted to keep our leases simple and clear. So our tenants know where they stand, and they couldn't get any unpleasant surprises.But also when we were setting the business up, we spent quite a lot of time looking at -- so, 10, 15 years ago, the 2 biggest care operators in the U.K., Southern Cross and Four Seasons went bust. How did that happen, and how can we avoid that happening to us?One answer was they had far too much debt. Four seasons' peak had 14x EBITDA of debt on its balance sheet. That their leases were over engineered. They had inflation linkage, over market revenues and profit sharing ratchets. So the leases basically said, we landlord will never let you, the tenant, make any money. And we thought that's a mistake.We want our tenants to know where they stand and be able to make money. We want to be more profitable, not less over time. Than our business is sustainable. And, obviously, in the last 12, 18 months, our tenants have said to us, how dare you increase your rent? Do you know what pressure we're under from wages, heating bills, all those things. We said, we're the good guys here. Our rent is only going up 4%. You show us another cost going up by only 4%. Yeah. We're heading off you.
And our next question is from Andrew Rees from Numis.Has there been much transaction activity within investment markets in H1. Activity within the commercial property markets has obviously been notably subdued versus prior year or historic averages.
Really interesting question. The tickets has a marked evidence. So Q1 was pretty busy. But you have to ask a question -- obviously, we did a transaction in Q1. You have to ask a question, how many of those were things we've got agreed pre mini budget were being done on old money terms.Q2 there was a lot less transaction activity. The market hasn't frozen, but the activity was down sharply in Q2. Deal flow, though -- things coming to market, they saw it very high. And so, I wouldn't say there's a blockage in the market. Clearly, I think all buyers like us are being cautious at the moment and want to keep dry powder and aren't quite sure where yields heading next and, what might happen next. Everyone's being cautious. But, the incoming deal flow pipeline has never being stronger. So it's going to be me interesting to see how that plays out.Clearly, in our part of market, we're focused on buying good quality standing assets. We're not buying brand new empty buildings from developers. And in our part of market, often our competitors are trade buyers, other care operators who want to expand their business, and they rely on, bank funding. And, A, bank funding has gotten a lot more expensive; B, bank's risk appetite are down not up. So they're going to find it harder to finance that position. If you add all that up, we think in 2024 that could be some really interesting things to do with those acquisitions.
The next question is from Martyn King from Edison Investment Research.Going back to fees, what are your residents seeing, or what are you seeing in the market in terms of the gap between average public and private fees.
Oh, there's still -- Martyn, there still a substantial gap. But it's starting to narrow. And I mentioned earlier, the NHS is growing rapidly as a customer of the care homes and that will do more to close that gap. But it is -- it's really just a question mark. And I think one of the most, yet, unfair things in the market at the moment for private customer and a local party customer living in identical rooms, receiving identical care, identical food, everything's the same, but the private customer is paying a 1/3 more than the local party paying for the person next door. That that's just not fair. And so, over time, you'd like to see this gap flows.The government before the last one before the last one, and move to current governments, published a really good white paper in December '21. The strategy there to do something about this structural. So increase government funding and then allow private customers to have access to beds at government funding fee levels. But, unfortunately, interesting white paper, it's been put in the drawer and forgotten about it.
And we have another question from Andrew Rees at Numis. Before I ask that, [Operator Instructions] So Andrew's follow-up question is, is there any update on status of Planning Commission on the proposed new home in Norwich, which was identified last year, is this included in the GBP 35 million pipeline CapEx or is that only related to asset management and extension projects at existing homes?
So for actually, I don't know if any of you heard of this. That home in Norwich got caught up. There was a Natural England locked planning applications or progress on planning, I think, in 44 local priority areas, including around Norwich, because of concerns about run off of nutrients in the ground. Activity, creating runoff into ground water.That is now being -- and we got caught up on that because we had to revise the planning. Our planning got caught up in in that. That's now being resolved, we think. We now have got planning of consent to move ahead. And we are considering going out to tender on that.We've got, I think, we had last year with the wrong time to go out to tender because we -- tractors a year ago were not giving this fixed price contracts and just adding 20% to everything. Yeah, that situation is now stabilizing, improving, and it could be a better environment to go out to tender on that.There was a part 2 of the question, I think, I'm not -- I haven't answered.
Part 2 was -- I'm sorry, apologies, I wasn't fully in -- is this is this included in the GBP 35 million pipeline CapEx, or is that only related to asset management and extension projects at existing homes? That was the second half of the question.
That's just asset management.
Yeah. Those have been all the questions that have come in, Andrew. So if you would like to add any closing remarks?
No. I'd just like to repeat. That's all. Thank you very much for your time today, and listening to us such that for those of you who have listened as well. And we're I think everyone in this call knows it's quite well, you know where we are. Please, please, if something's not clear or you'd like more detail, please get a touch. We'll be happy to, to extent we can disclose in a public domain, we'll try and help you.Thank you very much everyone.
Thank you.