Primary Health Properties plc (PHP) Ordinary Shares 12.5p

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Primary Health Properties (PHP) has made progress in its attempt to acquire Assura and create a £6bn property portfolio. The Assura board intends to recommend PHP’s latest offer to its shareholders, ahead of rival bids from private equity groups.

Under the terms of the deal, Assura shareholders will receive 0.3865 new PHP shares and 12.5p in cash for each share, along with a special dividend of 0.84p. Assura shareholders would own approximately 48% of the new combined company.

PHP’s offer values each Assura share at 55.0p, when including declared dividends, and values the company at around £1.79bn.

The deal will now be subject to shareholder and regulatory approval.

The shares fell 2.2% in early trading.

Our view

PHP’s acquisition and combination with Assura is making progress after several bidders were in the race. The Assura board has recommended PHP’s latest offer to shareholders, with votes and regulatory approvals still to come.

We can see the logic. Valuations for both businesses have been under pressure in recent years, making this a timely opportunity for consolidation.

Both portfolios focus on primary healthcare sites across the UK and Ireland, where demand for high-quality facilities is expected to rise. PHP has historically been the stronger operator, suggesting scope for both cost savings and improvements to Assura’s portfolio.

The deal includes a £1.2bn credit facility from a group of banks. The aim would be to repay this through asset disposals and joint ventures, to bring the loan-to-value down to within 40-50%.

PHP has tended to operate at the upper end of that range, which is also high by industry standards. If interest rates come down as expected, there should be a mechanic improvement as property values increase, but the balance sheet is something to keep an eye on.

A higher cost of capital in today’s market means attractive development 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 ahead, we think PHP (and Assura) have several features that underpin long-term dividend potential. NHS backlogs mean improving access to primary care is a key component of the UK government’s latest plans. And, with 89% of PHP’s rent roll funded by the NHS or its Irish equivalent (targeting 80–90% post-acquisition), tenant risk remains low.

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.

We continue to like PHP as a play on a resilient UK property segment and a potential beneficiary of interest rate cuts. The valuation isn’t stretched, and the dividend yield is attractive, though not guaranteed. In the near term, developments in the Assura deal are likely to drive 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.

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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