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NHS woes highlight Primary Health Properties' strengths

“It doesn’t matter who is in power, the GP is gatekeeper to the health service”
doctor
Medical centres now provide a whole range of services

While it may be a little early to Corbyn-proof your portfolio, Primary Health Properties (LON:PHP) would a prime candidate if a change of government is in the offing.

The trust owns 307 medical centres and doctors' surgeries across the UK and Ireland and is well known already among retail investors as an income stock.

WATCH: Primary Health Properties raises dividend again, rental growth picks up

In effect, PHP uses its money to take on the property cost for the government.

In return, the UK (and Irish) governments underwrite 90% of the rents.

That makes PHP about as copper-bottomed as it gets for a property company, especially as the NHS is going to be a key battleground whenever the next election is called.

NHS a political battleground

The last time Labour came to power sparked one of the biggest building booms the NHS has ever seen, says Harry Hyman, PHP’s chief executive.

And even if Theresa May does pull it out of the bag, PHP conceivably should do just as well.

“It doesn’t matter who is in power, the GP is gatekeeper to the health service.” he says.

So anyone wanting to use the NHS for anything other than an accident will still have to visit a GP.

What will change, though, is the type of practice they visit and again that should play into PHP’s hands.

The single GP looking after patients in a residential house is fading into history, says Hyman.

The future is super-centres with between 12-20 doctors that offer walk-in care and other treatments such as physiotherapy, diagnostics, health visiting and district nursing.

If the NHS is to cope with the increasing burdens being placed on it a lot more of these type of properties are needed, Hyman believes.

PHP is now focused on this large hub property, where new builds can cost up to £20mln.

That is a lot, but for the NHS the benefits of shifting minor walk-in ailments away from hospitals far outweigh the cost, he says.

As ever with the NHS, implementation remains the sticking point.

The fall-out from the last attempt at health service reform has resulted in approvals for new centres slowing to a trickle.

Irish expansion

To diversify, PHP has started to build a presence in Ireland.

There, the problems of an ageing population, poor general health and bad diets are, if anything, more acute than the UK.

Ireland wants to invest €1bn in new medical properties, out of which PHP has indicated it is prepared to fund 15% or €150mln.

Yields are higher and borrowing rates are lower in Ireland compared to the UK, but there is a balancing currency risk.

Ireland is still at a relatively early stage in PHP’s plans and the bulk of the portfolio, which is now worth £1.4bn, is overwhelmingly in the UK.

A lease typically runs for between 18-30 years, with the length reflective of the fact the buildings do not really have an alternative use, says Hyman.

PHP has started buying again he says, but selectively, while a lot of time is spent adding value through upgrades and extensions.

Rental growth returns

Encouragingly, Hyman says rental growth is starting to pick up.

When income is such an important part of the investor proposition that is an important consideration.

Rent roll in 2017 was £71mln and just 2% rental growth (double the current rate) would add £1.4mln to its bottom line.

Hyman hopes rental growth might rise to as much as 3% once the current round of reviews is complete.

That would give it more firepower for dividends though Primary Health has an enviable record here anyway, with the amount paid out rising for twenty-one years in a row.  

For 2017, the total was 5.25p, a yield of 4,5%, but the dividend for the first quarter of this year has already been raised to an implied full year 2018 total of 5.4p.

Borrowings are 53% of shareholders funds and well within the 50-60% target range, with a recent refinancing reducing the cost of debt.

Well-earned premium

At 116.6p, the shares also stand at an impressive 16% premium to the (EPRA) net asset figure of 100.7p.

The numbers put PHP at a premium to many of its listed property peers.

That looks well deserved due to the security of the income and unblemished dividend record.

Add in the political proofing as well and there is even a case for the premium to be even larger.

 

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