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Primary Health Properties - almost all sites still open

Sophie Lund-Yates, Equity Analyst | 1 April 2020 | A A A
Primary Health Properties - almost all sites still open

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Primary Health Properties Ordinary Shares

Sell: 154.00 | Buy: 154.40 | Change -0.80 (-0.52%)
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The vast majority of PHP's development sites in the UK and Ireland remain open, and construction is ongoing in the wake of the disruption caused by coronavirus.

The group has continued to collect rent and settled a number of rent reviews in the first quarter.

A second interim dividend of 1.475p per share has been declared, and PHP intends to make further dividend payments in August and November 2020.

The shares rose 1.9% following the announcement.

View the latest Primary Health Properties share price and how to deal

Our view

PHP is weathering the storm caused by coronavirus. Demand for the group's out-of-hospital care, which includes GP and community healthcare services that use PHP's properties, hasn't been disrupted.

It stands to reason these services are still very much needed during a pandemic, and we have reason to believe PHP's tenants will keep paying their rent. 90% of the group's rent roll is funded by the NHS or its Irish equivalent, meaning rental income should be more secure. But even without the current medical emergency, PHP had several features which underpin its long term income paying potential.

Investment in out-of-hospital care is set to run ahead of wider NHS spending. Meanwhile the increased interest in mega-surgeries which bring together multiple primary care services bodes well for PHP's purpose built properties.

And the merger with rival MedicX has hugely increased PHP's size. That's created opportunities for cost savings, both in the cost of debt and operating costs. That should provide a long term shot in the arm for profits. As a REIT, PHP has to pay out the vast majority of profits as dividends.

There are some things to keep in mind though. The pandemic means that at least for the short term, funding for new developments could be put on the back burner while health services prioritise fighting the virus.

We also note the loan-to-value ratio is high by industry standards - and that means that, while neither look likely at the moment, an uptick in interest rates or widespread increases in rental arears would be painful. LTV could fall as the group invests in new assets at lower multiples, but that will take time.

Because REITs have to pay out most of their profits it's difficult for them to fund growth organically. That means they often sell shares to fund new acquisitions, potentially diluting existing shareholders. Asking investors to stump up more cash in the current climate could be a difficult ask. Nothing's guaranteed, but if conditions are tough for a prolonged period it could mean the group's acquisition activity slows.

However, the biggest challenge facing investors in our opinion is a PE ratio of 26.5, which is well above the long term average. The shares currently offer a prospective yield of 3.7%, but remember dividends aren't guaranteed. Overall PHP still has better visibility over its rental income than other REITs, which is a good position to be in. But we can't rule out ups and downs from here, until the full extent of the disruption is known, we can't say what the outcome will be.

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Trading update

PHP confirmed 90% of its contracted rental income comes from the UK and Irish governments, either directly or indirectly. The remaining 10% mainly comes from pharmacies co-located at its properties.

Despite the disruption, rental collection has remained "robust". As at 31 March 2020 79% of rent for the first quarter had been collected, in line with the same time last year. 56 rent reviews were completed in the first quarter, which increased rent by 2.4% on a weighted average annualised basis.

Five asset management projects have been completed, £0.9m has been invested to enhance and extend existing assets.

Contracts have been exchanged for two forward funded acquisitions in South Wales and Surrey. The pipeline of potential acquisitions in the UK and Ireland totals around £124m - £58m of which is legal due diligence and the group said it "will continue to have regard to the current market before committing to these".

Two forward funded developments were completed between January and the end of March in Ireland, with a net development cost of £11.4m. There are a further seven developments currently on site with a net development cost of £56m.

The group said net debt stands at £1.1bn, a slight increase compared to December. On a pro-forma basis, the loan to value (LTV) ratio is 44.8%, and was 44.2% in December. After capital commitments PHP has access to undrawn loans and cash on deposit totalling £341.1m.

The group is currently not in breach of any of the terms set by its lenders. A breach will occur if PHP's portfolio were to fall in value by around £1bn, or 42% for the obligations set around the LTV level.

Looking ahead PHP believes the COVID-19 crisis "will highlight the important role primary healthcare will play in the future provision of health services and the continuing movement of services away from over-burdened hospital settings".

Find out more about PHP shares including how to invest

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