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Primary Health Properties - strong rental growth feeds profits

In the six months to 30 June, net rental income rose 5.0% to £71.1m. The benefits of savings on interest costs following debt refinancing and the...

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In the six months to 30 June, net rental income rose 5.0% to £71.1m. The benefits of savings on interest costs following debt refinancing and the impact of upward rent reviews contributed to a 9.8% increase in underlying profits after tax to £44.7m.

In June, the group declared a 1.625p dividend to be paid in August and expects to pay another interim dividend in November.

Shares fell 1.8% 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 - now in its 26th consecutive year of dividend increases, Plus, PHP's dividend is well-covered by profits leaving room for more of the same. 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 has been 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 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 11.4 years should mean rental income is secure for years to come.

PHP's also made strides toward becoming more efficient.

The group's 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 with further rate rises still possible.

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.

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 issue new 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. It's come down somewhat recently, but it's still 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.

Half Year Results

The value of PHP's portfolio rose from £2.8bn to £2.9bn. Excluding the cost of spending on development projects, the total increase was 1.8% or £51.2m.

Annualised contracted rental income was up 2.5% to £144.2m compared to December 2021, reflecting a the impact of rent reviews, the optimisation of existing products and the acquisition of Chiswick and Chertsey.

Occupancy stood at 99.7% and the weighted average unexpired lease term (WAULT) was 11.4 years.

The group's acquisition pipeline stands at around £285m, including projects in both the UK and Ireland, with 58% at an advanced stage. PHP expects to invest roughly £52m to optimise existing projects, which should add £1.6m to annual rental income and extend the WAULT for these projects to 20 years.

Net debt rose £170.1m over the past year to 1.3bn thanks to increased investment. The Loan to Value ratio, which measures leverage, increased from 42.9% at the end of the year to 43.1%. This remains within management's target for between 40% and 50%.

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: 27th July 2022