Further progress
Primary Health Properties PLC (LSE:PHP, OTC:PHPRF) (“PHP”), the FTSE 250 healthcare real estate investment company, is a leading investor in modern, flexible primary care accommodation across the UK and Ireland, has made two noteworthy announcements since we last reported on the company (on 14th December 2022).
Firstly, the most significant for us is the publication of the full-year results for the year ended 31 December 2022 noting continued strong operational and financial performance driven by a record year of rental growth. PHP expects to be a beneficiary of significant rises in construction costs seen in recent years which will help to drive future rental growth. Furthermore, with the majority of PHP’s debt either fixed or hedged for a weighted period of just over seven years and strong control over costs will help to underpin their predictable cash-flows and progressive dividend policy.
Secondly, the company has recently declared its second 1.675p quarterly dividend for 2023 equivalent to 6.7p on an annualised basis and a 3.1% increase over 2022 and the 27th consecutive year of growth, which is an impressive accomplishment and marks them out as a dividend aristocrat. At a share price of around 102.60p the shares are yielding an attractive 6.5% which is fully covered by earnings.
Dividend track record
PHP’s proposition is supported by long-term demographic, macro and political trends across both the UK and Ireland with populations that are growing, ageing and suffering more instances of chronic illness. These factors are increasing demand for healthcare affecting service provision, patient care and outcomes and are driving the NHS’s strategic move of transferring services away from hospital settings to modern primary care premises and consequently is not correlated to the wider economic environment.
Annual results for the year ended 31 December 2022
Primary Health Properties PLC (LSE:PHP, OTC:PHPRF)'s recent results announcements highlighted the continued operational and financial performance and of note are the following highlights:
- Strong rental growth partially offsetting yield expansion limiting exposure to the current rising and volatile interest rate environment
- The portfolio was valued at £2.8 billion (2021: £2.8 billion)
- Almost full occupancy at 99.7% (2021: 99.7%)
- Long, unexpired lease term of 11.0 years (2021: 11.6 years)
- 89% of the £145m rent roll funded by the UK or Irish governments (2021: 90%)
- 25% of all income is indexed (2021: 25%)
- 94% of net debt is fixed or hedged out for just over seven years (2021: 100%)
- Adjusted earnings increased by 6.6% to £88.7 million (2021: £83.2 million)
- Limited development exposure with just one scheme on site and future investment only
- Strategic acquisition of Axis in January 2023 gives a permanent presence in Ireland to source new opportunities which is the preferred location for future growth
- We note that given the current macroeconomic outlook, the company has prudently paused investment activity until there is greater clarity on the outlook.
Forecast
We have updated our forecast for FY23 and FY24 following the FY22 results announcement which are summarised below:
Year end Dec 31 · 2021 · 2022 · 2023 · 2024
Portfolio value (£mln) · 2,795.9 · 2,796.3 · 2,811.3 · 2,881.3
Net rental income (£mln) · 136.7 · 141.5 · 146.5 · 151.0
Adj. Earnings (£mln) · 83.2 · 88.7 · 88.0 · 92.1
Adj. EPS (GBp) · 6.1 · 6.6 · 6.6 · 6.9
DPS (GBp) · 6.2 · 6.5 · 6.7 · 6.9
Adj. NAV/Share (GBp) · 116.7 · 115.3 · 114.9 · 118.7
Gearing (LTV%) · 42.9 · 45.1 · 45.9 · 45.4
Profit and loss
Adjusted earnings for the 12 months ended 31st December 2022, increased by £5.5 million or 6.6% primarily as a result of a £4.8 million increase in net rental income of 3.5%, driven by an improving rental growth outlook and the impact of acquisitions in 2021 and the first half of 2022. Administration expenses also decreased by £0.9 million mainly as a result of lower performance-related pay and interest costs only increased slightly reflecting the benefits from various refinancings completed in the last two years.
The revaluation of the property portfolio resulted in a deficit of £64.4 million as a result of 18bps of yield expansion equivalent to £134 million although this was partially offset by the impact of rental growth in the year which generated a surplus of £70 million. In addition, a £2.9 million profit on the sale of 13 smaller assets was crystallised in the year. Increases in the valuation of the company's convertible bond and derivatives (by £32.6 million) resulted in a profit before tax as reported under IFRS of £56.9 million (FY21: £141.6 million).
Adjusting for revaluation gains and losses, profit on the sale of land and property and other things, adjusted earrings per share jumped by 6.5% to 6.6p (FY21: 6.2p).
Balance sheet
Total assets remained more-or-less unchanged at £2,864.5 million (FY21: £2,853.1 million), with the investment properties value almost the same at £2,796.3 million (FY21: £2,795.9 million), cash down by 13% at £29.1 million (FY21: £33.4 million) and derivative interest rate swaps up by 4x to £19.6 million (FY21: £5.2 million).
Total liabilities increased by 2.15% to £1,382.3 million (FY21: £1,353.2 million), with net debt increasing by 5.2% to £1,261.3 million (FY21: £1,199.5 million). The loan-to-value (LTV) ratio increased by 2.2% to 45.1% (FY21: 42.9%), which is in the middle of the company's targeted range (of between 40% to 50%).
Based on the International Financial Reporting Standards (IFRS), net assets decreased by 1.2% to £1,482.2 million (FY21: £1,499.9 million) equivalent to 110.4p per share (FY21: 112.5p per share).
Cash flow
Adjusted earnings of £88.7 million fully covered the dividends paid £86.7 million resulting in dividend cover of 102% (FY21: 101%).
Net cash flow used in investing activities decreased by 68.7% to £45.8 million (FY21: £146.4 million), reflecting the prudent pause and slowdown in investment activity due to the current uncertain economic outlook.
Financial and operational highlights
Source: Primary Health Properties PLC
It's important to keep in mind that as western populations continue to age and grow, there will be an increasing need for health services to address complex and chronic co-morbidities over the long term. To address this need, the government must invest in new structures that can deliver more healthcare in primary care and community settings, relieving the burden on over-stretched hospitals. Primary Health Properties is poised and ready to do its part by providing the modern and innovative real estate infrastructure necessary to meet this growing demand in the community.
It's worth mentioning that Primary Health Properties has taken a cautious approach, as we noted in its interim results from July 2022. The company has reconsidered its acquisition pipeline and prudently decided to pause its investment activities during the second half of the year due to the challenging interest rate and economic outlook. This decision will remain in effect until the economic and interest rate outlook becomes clearer, demonstrating the company's wise and careful approach to managing risk.
Acquisition
Primary Health Properties has recently acquired Axis Technical Services Limited, an Irish property management business, which manages a portfolio of over 30 properties, including the majority of PHP's Irish portfolio. This acquisition further solidifies Primary Health Properties' position in Ireland and strengthens its relationship with the Health Service Executive (HSE), Ireland's national health service provider. The acquired company also provides fit-out, property and facilities management services to the HSE and other businesses located across Ireland.
Moreover, Primary Health Properties has also signed a long-term development pipeline agreement with Axis Heath Care Assets Limited (Axis), a related company owned by Axis Technical Services Limited. The agreement provides Primary Health Properties with the option to acquire Axis's development pipeline over the next five years, which includes a strong pipeline of primary care projects in Ireland with an estimated gross development value of €50m. Axis is one of Ireland's leading developers of primary care properties and has already developed five properties over the last five years that have been acquired by Primary Health Properties.
It's worth noting that Primary Health Properties currently owns a portfolio of 20 assets in Ireland valued at €261 million
Financials
In light of the announcement, we have upgraded our forecasts for the current financial year (i.e. the 12-month period ending 31st December 2023) and issued forecasts for the following financial year.
Profit and loss
Balance sheet
Cash flow
Risks
As with any investment, investing in Primary Health Properties carries a level of risk. The degree of risk associated with an investment in Primary Health Properties is relatively low.
For us, currently, the biggest risk to the valuation of the company relates to macroeconomic factors, in particular unexpected and sudden changes in inflation and interest rate movements.
Reference and notes
- Dividend cover is the number of times the dividend payable (on an annual basis) is covered by Adjusted earnings. Adjusted earnings is EPRA earnings excluding the contract termination fee and amortisation of mark-to-market adjustments for fixed-rate debt acquired on the merger with MedicX.