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Primary Health Properties - dividend increases

Full year underlying net profit rose 13.8% to £83.2m. This was driven by rising rental income due to upward rent reviews and development projects...

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Full year underlying net profit rose 13.8% to £83.2m. This was driven by rising rental income due to upward rent reviews and development projects. New loan agreements and cost saving efforts also contributed.

Underlying Net Tangible Assets (NTA) per share rose 3.4% to 116.7p, as the total portfolio value increased.

The group declared a 1.625p dividend for the first quarter. Over a 12 month period, this reflects a 4.8% increase over last year's dividend payment.

The shares rose 2.0% following the announcement.

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Our view

Primary Health Properties' purpose-built doctors surgeries have a long track record of delivering results for shareholders - now in its 26th consecutive year of dividend increases, although remember all dividends are variable and not guaranteed.

The pandemic has increased the importance of top quality primary care facilities, and Primary Health Properties rushing to meet 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. The backlog of procedures created by the pandemic together with the needs of an aging population means investment in primary care facilities isn't going anywhere. Plus, government healthcare spending looks set to funnel into cost-efficient ways to offer better patient outcomes. Preventative care through out-of-home care, which is PHP's area of expertise, is likely to be a big beneficiary.

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 11.6 years should mean rental income is secure for years to come.

PHP's also made strides toward becoming more efficient.

The purchase of Nexus, a third party management company responsible for managing PHP's assets, is on track to deliver savings worth £4m each year. PHP's also made headway improving the quality of its debt obligations and lowering finance costs. It's especially encouraging to see the group steer its finance costs away from interest rate-linked payments.

There are some reasons for caution too though. Loan-to-value (LTV) is high by industry standards, and has risen over the past year. In the unlikely event that an economic downturn meant governments cut healthcare funding, this could become problematic.

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.

Overall we think the main challenge facing a bullish assessment of PHP's investment potential is the stock's valuation which is well above the book value of its assets. That's kept the prospective yield from outpacing inflation. While we see PHP as potentially interesting for income seeking portfolios, if earnings growth can't close this gap the near-term appeal is limited.

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.

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.

Full Year Results

Rental income rose 4.1% to £140.7m, reflecting the addition of new properties to the portfolio. Excluding the impact of these new properties, the rent roll was up 1.8% to £2.4m over a 12 month period due to rent increases.

The overall property portfolio value rose 4.1% to £2.8bn, reflecting increased market values and new developments. Occupancy was relatively flat at 99.7% and there was a weighted average unexpired lease term (WAULT) of 11.6 years, down from 12.1 years.

The Nexus acquisition cost the group £37.0m this year, but is delivering around £4m in cost savings each year. The group also refinanced a number of old loans to reduce total finance costs. The new, lower interest loans are conditional on the group achieving sustainability targets.

PHP set out a net zero carbon commitment, with net zero targets for operations by 2023, new developments by 2025, all buildings by 2040, five years ahead of NHS targets.

The group's Loan-to-value ratio (LTV) rose from 41.0% to 42.9%, reflecting a £143.8m increase in net debt to £1.2bn. Excluding the £18.2m cost of the Nexus merger, free cash flow was £10.8m, down from £16m last year.

Find out more about PHP shares including how to invest

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 16th February 2022