Primary Health Properties plc (PHP) Ordinary Shares 12.5p
HL comment (28 July 2021)
In the six months to 30 June, net rental income rose 4.5% to £67.7m. The positive impact of cost savings, rent reviews and rising property values together with strong rental income growth fed into a 13.1% increase in underlying profits to £40.7m.
The group declared a 1.55p dividend to be paid in August, and intends to make another dividend payment in November 2021.
The shares were up 1.7% following the announcement.
Primary Health Properties' purpose-built doctors surgeries have a long track record of delivering results for shareholders - now in its 25th consecutive year of dividend increases, although remember all dividends are variable and not guaranteed.
The pandemic probably increases the importance of top quality primary care facilities going forwards, and Primary Health Properties raised £140m last summer to deliver on 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. Investment in out-of-hospital care, which includes the GP and community healthcare services which use PHP's properties, is set to run ahead of wider NHS spending. Meanwhile the increased interest in mega-surgeries which bring together doctors, pharmacists and nurses bodes well for PHP's purpose-built properties.
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 11.8 years as of the half year 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. While neither look likely in the near-term, a high LTV means an uptick in interest rates or widespread increases in rental arrears would be painful. It's good to see the group cut its upper limit for debt from 55% LTV to 50% LTV and the group's operating at the lower end of its target. But it's a risk nonetheless.
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.
The purchase of Nexus is also worth a brief discussion. Until January Nexus was a third party management company responsible for managing PHP's assets. This will be the first full year to benefit from the cost benefits of bringing the group in-house, and the purchase added £80m worth of direct development opportunities to the group's pipeline. It also marks the first time the company will be able to develop using its own balance sheet, creating opportunities for better returns, but also adding a certain degree of risk.
Overall we think the main challenge facing a bullish assessment of PHP's investment potential is the stock's valuation. The stock is priced well above the book value of its assets. That's pushed the prospective yield down to 3.9%, with only modest growth expected in the future. That means that while we see PHP as potentially interesting for income seeking portfolios, a long-term view is essential.
PHP key facts
- Price/Book ratio: 2.57
- 10-year Average Price/Book ratio: 1.75
- Prospective dividend yield (next 12 months): 3.9%
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 Trading Update
As at 30 June, the group's property portfolio was worth £2.7bn, a 3.1% increase from the start of the year. This set aside £66.9m as a revaluation surplus as the total value of the portfolio was increased, up from £10.5m in the same period last year.
Occupancy stands at 99.7% (99.6% in 2020) with a Weighted Average Unexpired Lease Term (WAULT) of 11.8 years, compared to 12.1 years in 2020.
Rental income rose 1% on a comparable basis, reflecting asset management projects, which optimise existing properties, and the completion of 213 rent reviews which delivered an annualised uplift of 1.5%. Together with the acquisition of Shankill in Dublin, total annual rent roll rose from £135.2m to £136.1m.
The group's pipeline of acquisitions and asset management projects is worth roughly £195m, with £155m under offer. This should extend the WAULT back to 22 years on those leases, and generate £1.4m of additional income at a cost of £46m per year over the next two years.
As at 30 June the group's net debt position had increased by 2.8% from the start of the year to £1.1bn. The group's loan to value ratio fell from 41% in 2020 to 40.9%. That's at the lower end of the group's target range between 40% and 50%, and represents ''significant'' headroom to remain within the limits set out by the group's lenders.
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.
Previous Primary Health Properties plc updates
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