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Primary Health Properties - secure with some sizzle

Published: 11:03 21 Oct 2019 BST

Primary Health Properties - secure with some sizzle
Low risk business model continues to deliver strong returns

Primary Health Properties (LON:PHP) is a UK & Ireland focused real estate investment trust (REIT), with a strong rental cash-flow base, and a low-risk profile, holding a portfolio of 484 primary healthcare properties.

The company has an impressive track record of dividend growth, increasing the payment every year since listing in 1997. In addition, the company has delivered steady capital gains on its portfolio that have translated into share price appreciation. On p2 we provide a reminder of how PHP’s returns model has delivered for shareholders.

Click here to watch Ed's comments on Primary Health Properties delivering 'impressive dividend track record and steady capital gains'

In March 2019 PHP completed its transformational merger with MedicX (another primary healthcare REIT), with objectives of lowering the cost ratio (now lowest in the UK REIT space), lowering financing costs, and other merger synergies. In our detailed initiation report (11 June 2019) we provided some details of how we expected the merger benefits to play out, as well as general positive drivers for the company. Some events in the last few months have proved supportive of our expectations.

Positive developments in the last few months

In June 2019 the company issued £150mln of convertible bonds, at par value and paying a coupon of 2.875%. Part of the proceeds was used to retire unsecured bonds of £75mln that had been bearing a cost of 5.375%. This transaction has benefited the company’s overall cost of financing.

In September 2019 PHP issued new senior secured notes to a value of €70mln, with 12 years maturity, at a fixed rate of 1.509%. The effect of this transaction was to extend the group’s debt maturity profile and lower the company’s average cost of debt to 3.68%.

Also in September, the company completed a share placing of £100mln (gross proceeds), to secure funding for the completion of development projects and standing let investments. These include projects under contract and others in the pipeline. The decision to raise capital at an early stage appears to us a conservative measure, keeping balance sheet leverage below 50%.

Finally, at the interim results stage in July, the company reported an average uplift of 1.9% per annum on rent review in the period, compared with 1.4% uplift during FY 2018. Rental uplifts are an important driver of capital appreciation, and we maintain our view that the rent review environment is moderately improving.

Year end Dec 31 2018 Current 2020 2021
         
Portfolio value (£mln) 1,502.9 2,411.0 2,573.0 2,743.0
Net rental income (£mln) 76.4 114.0 129.0 137.7
EPRA earnings (£mln) 36.8 59.7 70.3 75.7
EPRA EPS (GBp) 5.2 5.4 5.8 6.2
DPS (GBp) 5.4 5.6 5.8 6.0
EPRA NAV / share (GPp) 105.1 108.2 111.3 114.3
Gearing (LTV%) 44.8 44.7 46.5 48.1
         
 

 

Total shareholder returns of 14.8% (capital plus dividend) reflect a 13% return on the net asset portfolio

 

 

 

PHP returns on property portfolio
 
Source: Proactive Research

 

 

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