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Primary Health Properties - profits and dividends growing

Nicholas Hyett, Equity Analyst | 29 July 2020 | A A A
Primary Health Properties - profits and dividends growing

No recommendation

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: 150.30 | Buy: 150.60 | Change -0.10 (-0.07%)
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Net rental income rose 20.4% year-on-year to £64.8m, driven by the acquisition of MedicX in March last year. Together with good cost control, positive rent reviews and increases in property valuations that meant earnings per share rose 7.1% to 3.0p.

The group paid dividend in the half of 2.95p per share, up 5.4% year-on-year.

The shares rose 1.6% in early trading.

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

Our view

Primary Health Property's purpose built doctors surgeries have a long track record of delivering results for shareholders - now in its 24th consecutive year of dividend increases.

The current crisis probably increases the importance of top quality primary care facilities going forwards, and Primary Health Properties is raising £120m to deliver on that demand. There's a healthy pipeline of enhancements to the existing estate and new facilities lined up, potentially securing revenue growth for years to come. As a REIT (real estate investment trust), PHP has to pay out the vast majority of profits as a dividend so that should ultimately feed through to investors' pockets although of course there are no guarantees.

Looking to the future we think PHP has several features which underpin long-term dividend paying potential. Investment in out-of-hospital care, which includes the GP and community healthcare services which use PHP's properties, 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.

With 90% of the group's rent roll funded by the NHS or its Irish equivalent, we view the group's tenants as lower risk. An average lease length of 12.5 years should mean rental income is secure for years to come.

There are some reasons for caution too though. Loan-to-value (LTV) is high by industry standards. While neither look likely at the moment, a high LTV means an uptick in interest rates or widespread increases in rental arrears would be painful. The planned placing will reduce debt in the short term, and it's good to see the group cut its upper limit for debt from 55% LTV to 50% LTV. But it's a risk nonetheless.

The very fact of the group's REIT structure also means investors are likely to be asked to fork out extra cash from time-to-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.

However, the main challenge facing a bullish assessment of PHP's investment potential is, in our opinion, the stock's valuation. The stock is priced well above the book value of its assets. That's pushed the yield down to 4% (broadly in line with market average), with only modest growth in the future. That means that while we continue to see PHP as potentially interesting for income seeking portfolios, investors need to take a long term view, and be prepared for ups-and-downs along

PHP key facts

  • Price/Book ratio: 2.4
  • 10 year average Price/Book ratio: 1.6
  • Prospective yield over the next 12 months: 4.0%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Annualised rental income on a like-for-like basis rose 0.7% in the half. That reflects the completion of 127 rent reviews during the half, with an average uplift equivalent to 2.2% per annum and asset management activity. Coupled with the acquisition of 22 new properties that brings the total annual rent roll to £133.3m, up 4.4% year-on-year.

Primary Health Properties' saw the value of its property portfolio rise by 0.4% in the half to £2.5bn. That resulted in a valuation surplus of £10.5m.

Average administrative costs have increased 14.0% year-on-year, following the acquisition of MedicX. Growing slower than revenue growth meant the overall cost ratio fell from 12% to 11.6%, reflecting synergies from the MedicX deal.

The group has a pipeline of target acquisitions and asset management initiatives worth £128m, with £44m currently under offer. The current pipeline of 80 asset management opportunities are expected to cost approximately £36m in 2020 and 2021, generating £1.1m of additional income and extending the Weighted Average Unexpired Lease Term (WAULT) on these leases back to 21 years.

Across the portfolio occupancy currently stands at 99.5%, with a WAULT of 12.5 years.

Net debt stood at £1.2bn at the end of the quarter, representing a loan-to-value of 45.8%. The group has significant headroom on its covenants (financial terms set by lenders) with property values needing to fall by £1bn or 40% for LTV covenants to be threatened, and income fall by £76m or 57% for interest cover covenants to come under pressure.

Following the planned placing LTV has fallen to 40.3%. At the same time PHP will lower the upper range of its LTV ratio from 55% to 50%.

Find out more about PHP shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.