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Primary Health Properties - dividend up on good rental growth

Nicholas Hyett, Equity Analyst | 12 May 2021 | A A A
Primary Health Properties - dividend up on good rental growth

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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: 154.10 | Buy: 154.30 | Change -2.80 (-1.79%)
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Rent collection remains "robust", with 99% of Q2rents received by the end of April. Recent rent reviews on 91 proprieties have added £0.5m per annum to the rent roll, with average increases of 1.7%.

The company announced a quarterly dividend of 1.55p, equivalent to 6.2p a year, up 5.1% on 2020.

The shares were broadly flat in early trading.

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

Our view

Primary Health Properties' purpose built doctors surgeries have a long track record of delivering results for shareholders - now in its 25th consecutive year of dividend increases, although remember all dividends are variable and not guaranteed.

The pandemic probably increases the importance of top quality primary care facilities going forwards, and Primary Health Properties raised £140m last summer 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 doctors, pharmacists and nurses 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 12.1 years at the start of the January 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 in the near-term, a high LTV means an uptick in interest rates or widespread increases in rental arrears would be painful. 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 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. Instead they sell shares to fund new acquisitions, potentially diluting existing shareholders.

The purchase of Nexus is also worth a brief discussion. Until January Nexus was a third party management company responsible for managing PHP's assets. Bringing it in house should help reduce costs and also give the group access to an additional £80m worth of direct development opportunities. This marks the first time the company will be able to develop using its own balance sheet, creating opportunities for better returns, but also adding a certain degree of risk.

Overall we think the main challenge facing a bullish assessment of PHP's investment potential is the stock's valuation. The stock is priced well above the book value of its assets. That's pushed the yield down to 4.3%, with only modest growth expected in the future. That means that while we see PHP as potentially interesting for income seeking portfolios a long term view is essential.

PHP key facts

  • Price/Book ratio: 2.35
  • Ten year average Price/Book ratio: 1.72
  • Prospective dividend yield (next 12 months): 4.3%

All ratios are sourced from Refinitiv. 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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First Quarter Results

Primary Health Properties (PHP) has now integrated the management team acquired from the Nexus deal (which completed on the 5 January) into the wider group. That is expected to result in £4m of annual cost savings, lowering the group's market leading cost ratio still further.

Competitive market conditions meant the group completed just one acquisition during the quarter, a EUR3.8m deal in Ireland. Instead, the focus has been on developments - both direct and forward funded. The group has four live direct development projects under way, with a capital value of around £21m. PHP also completed a forwarded funded development during the quarter, with five others under construction.

PHP reported net debt of £1.1bn, representing a loan-to-value ratio of 41.9%, up from 41% at the start of the year.

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 Refinitiv. 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.