Primary Health Properties (PHP) has offered to buy its peer Assura for £1.68bn, outbidding the all-cash offer by US private equity investors KKR and Stonepeak Partners made in April for £1.61bn.
PHP’s offer values Assura at 51.7p per share, comprising of 12.5p in cash and the remainder payable in PHP shares.
If fully accepted, Assura shareholders will own approximately 48% of the new combined company.
The shares were up 0.9% on the day of the announcement.
Our view
PHP’s bid for rival Assura promises to deliver both scale and efficiency. However, a competing bid on the table is just one of the potential obstacles that still stands in the way of a deal, so there’s no guarantee a combination will happen.
PHP’s purpose-built doctor's surgeries have a long track record of delivering results for shareholders and is now in its 29th 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.
PHP has successfully navigated the interest rate rises seen over the past couple of years. Now things have stabilised, its dipping its toe back into the development arena where it usually takes a cautious approach.
A higher cost of capital in today’s market means attractive sites are limited, and PHP is lobbying hard with bodies like the NHS to make projects more viable. There’s progress, but only in areas where the need for new buildings is strongest.
It’s a bit of a balancing act though, as performance over the past couple of years has been driven by rent hikes. Those same elevated costs that limit development opportunities are giving landlords like PHP more bargaining power at the negotiating table.
Looking to the future, we think PHP has several features that underpin long-term dividend-paying potential. The backlog of procedures in the NHS means improving access to primary care is a key component of the UK government’s latest plans to improve the NHS. 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.
Ireland is also a key growth driver, with arguably better market dynamics than here in the UK. Leases tend to be longer term, with better yields, and it’s a key area of focus for future growth.
There are some reasons for caution too though. Loan-to-value (LTV) is high by industry standards, and has risen over the past year as property values have struggled to grow. If the Assura deal does go through, the balance sheet could come under even more pressure.
We continue to like PHP as a play on a resilient segment of the UK property market and see it as a benefactor of interest rate cuts as and when they come. The valuation isn’t overly demanding, and the prospective dividend yield is attractive – though nothing is guaranteed. In the near term, twists and turns in the race to acquire rival Assura are likely to be a key driver of investor sentiment, so expect more volatility than usual.
Environmental, social and governance (ESG) risk
Real estate is relatively low risk in terms of ESG. One of the principal drivers of this risk is the capacity to integrate material ESG considerations into decision-making, risk management and public reporting; the most material ESG considerations are environmental, like carbon emissions reduction, energy efficiency and physical climate risk. The rise of hybrid working has also reduced demand for commercial property, making product governance and customer satisfaction a top priority. Other risks to monitor include labour relations, business ethics, and emissions & waste.
According to Sustainalytics, PHP’s overall management of material ESG issues is strong.
Responsibility for overseeing ESG issues is assigned to board level and there is an adequate environmental policy in place. Improvements could be made to ESG related disclosures and executive compensation does not appear to be linked to ESG performance. PHP has targets for increasing investment in sustainable buildings and deadlines to meet those targets, in line with industry best practice.
Primary Health Properties key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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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