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PHP - rent reviews drive continued growth

In 2022, Primary Health Properties (PHP) reported net rental income of £141.5m...

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In 2022, Primary Health Properties (PHP) reported net rental income of £141.5m, up 2.4% on a like-for-like basis, driven mainly by rent reviews agreed between 2018 and 2020.

Underlying earnings grew by 6.6% to £88.7m, benefitting from the growth in rental income as well as lower interest costs. The lower financing charges were achieved by refinancings made in 2021 and early 2022, which locked in the current favourable rates.

Cash flow from operations was £117.6m down from £140.4m, reflecting a reversal in last year's increase in accounts payable.

Net debt rose by £61.8m to £1.26bn due to continued investment in the portfolio. Although, the rate of investment slowed in the second half of the year with management mindful of the deteriorating interest rate and economic outlook.

PHP expressed confidence that its rental income can benefit from the inflationary environment through inflation-linked rent reviews. The company also implied open market negotiations could boost rental income as the NHS seeks to deliver new larger primary care facilities and modernise the existing estate.

Total dividends for the year increased by 4.8% to 6.5p per share.

The shares fell 2.1% following the announcement.

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

Our view

Primary Health Properties' purpose-built doctor's surgeries have a long track record of delivering results for shareholders and is now in its 27th consecutive year of dividend increases. 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.

We believe that PHP's asset base is relatively defensive in the context of today's challenging macroeconomic environment. Rent collection rates were 99% in both 2021 and 2022, with 2023 rates trending in the same direction. Whilst total return levels have slowed recently, it's no surprise to us that the portfolio materially outperformed the wider UK property sector in 2022.

PHP has also successfully navigated the interest rate rises seen over 2022, entering 2023 with an average cost of debt of 3.2% - just 0.3 percentage points higher than that seen in the prior year. There is however a reluctance at Board level to take on new debt, which is likely to slow the potential for growth from new investments for the time being.

But the outlook for organic growth is improving. 25% of PHP's income is contracted to rise with inflation, no bad thing with UK inflation still in high single digits. Nearly two thirds of PHP's rent roll is under review too. And while growth from open market rent reviews has historically been 'suppressed', elevated levels of construction costs are now giving landlords like PHP more bargaining power at the negotiating table.

Looking to the future we think PHP has several features which underpin long-term dividend paying potential. The backlog of procedures in the NHS together with the needs of an aging population means investment in primary care facilities isn't going anywhere, particularly with 40% of UK healthcare facilities considered currently as unfit for purpose.

With 89% 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 11 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, and has risen over the past year. With an economic downturn looming, there's a slight chance governments could trim healthcare funding, which could become problematic in the short-term.

The group's REIT structure also means investors are likely to be asked to fork out extra cash from time-to-time especially as debt financing becomes more expensive. Because REITs have to pay out most of their profits it's difficult for them to fund growth organically.

PHP's valuation is now sitting at close to its book value, broadly in line with its peer group, and the dividend yield is one of the more attractive. This could be an interesting play for exposure to UK property. However, we caution that there remains a very real risk of falling property values in the near-term across the sector.

PHP key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 22nd February 2023