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Primary Health Properties - rent reviews drive income higher

Primary Health Properties - rent reviews drive income higher

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Primary Health Properties (PHP) continues to benefit from higher rents as contracts come up for renewal. In the first nine-months an additional £3.3m of rental income was generated from 243 reviews. The group's expecting to achieve more than £4m of extra income by year end, having achieved £3m last year.

Asset management activities have generated an additional £0.2m, with a pipeline of 26 projects in place.

PHP recently agreed to acquire one of Irelands first Enhanced Community Care facilities for a total of €29.6m, with the deal expected to complete soon. The property is fully let, with a 25-year lease including 5-yearly inflation linked rent reviews.

At the end of the period, net debt was broadly flat at £1.3bn, with a loan to value of 45.8%. On 5 October, a fourth quarterly interim dividend of 1.675p was declared.

The planned secondary listing on the Johannesburg Stock Exchange is now live.

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 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 no shareholder returns are guaranteed.

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.

PHP has also successfully navigated the interest rate rises seen over the past year or so, with a stable average cost of debt of 3.3%. There is an impact on the investment market, largely relating to a lack of transactions as potential buyers try to wait out the higher-rate environment. That, plus the higher cost of capital, means PHP is relatively underweight in the development and investment arena for now. Instead, it's focused on the rental market, where it sees further upside.

We like the move. Those same elevated costs, and the lack of new supply, are giving landlords like PHP more bargaining power at the negotiating table. Plus, with 69% of rents up for review every three years and a further 25% index-linked, there's plenty of scope to benefit from the improving rental market.

Looking to the future, we think PHP has several features that underpin long-term dividend-paying potential. The backlog of procedures in the NHS and the needs of an ageing population means investment in primary care facilities isn't going anywhere.

And, 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 has come down a touch this year, broadly in line with its peer group, and the prospective dividend yield is attractive but remember yields are variable and not a reliable indicator of future income. Next year's CEO change shouldn't impact the overall strategy and we continue to like PHP as a play on a resilient segment of the UK property market. 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.

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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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 24th October 2023