Primary Health Properties - Keeps delivering for investors
Primary Health Properties PLC (LON:PHP) recently announced the acquisition of a portfolio of 20 medical centres across England and Wales for a total of £47.1mln before costs, and a conditional contract to acquire two further medical centres for £6.9mln. These are primary healthcare facilities, with 91% of rental income being government-backed, in line with the existing property portfolio.
Other recent news
Within the news release on 11 May, PHP also disclosed that 98% of all UK rents for the second quarter have been collected, and 97% of all rents in Ireland up to 1 April. We expect PHP to continue to benefit from what is essentially uninterrupted rent collection. Additionally, on 1 April, PHP released a positive trading update, including the disclosure that three projects in Ireland, with a total development cost of €48.3mln, had reached project completion or near completion. This represents a significant de-risking of the development pipeline. In the same release, the company announced that it would maintain its progressive dividend policy, at a run-rate of 1.475p per quarter.
Finally, PHP also disclosed that its rent reviews during the first quarter of 2020 led to an average annualised increase of 2.4%. This compares with 1.9% annualised uplift during full-year (FY) 2019 and represents a continuation of a sequence of improving rent reviews.
Portfolio acquisition, and other news
The shares have outperformed the UK market year-to-date, having already strongly outperformed during FY 2019; however, we argue that the current valuation still offers compelling returns for investors, driven by the continued performance of the underlying asset portfolio. Factors supporting this thesis include:
- Dividend growth every year since inception – 23 years.
- 90% of rents covered by government national health bodies of the UK and Ireland. This supports 99.5% occupancy rates and minimal tenant defaults or similar unplanned costs.
- The lowest cost ratio (costs / rental income) in the whole of the UK REIT (real estate investment trust) space.
- Headroom to continue growing the portfolio of health centres in the UK and Ireland.
On p2 we provide an overview of how PHP’s portfolio performance drives returns for shareholders.
Investment performance
Year end Dec 31 · 2018 · 2019 · Current · 2021
Portfolio value (£mln) · 1,502.9 · 2,413.0 · 2,555.0 · 2,725.0
Net rental income (£mln) · 76.4 · 115.7 · 130.5 · 138.6
EPRA earnings (£mln) · 36.8 · 59.7 · 73.5 · 77.4
EPRA EPS (GBp) · 5.2 · 5.4 · 5.9 · 6.2
DPS (GBp) · 5.40 · 5.60 · 5.90 · 6.10
EPRA NAV / share (GPp) · 105.1 · 107.9 · 109.9 · 113.4
Gearing (LTV%) · 44.8 · 44.2 · 46.8 · 48.6
Going forward we believe it is realistic to expect a continuation of similar portfolio performance – broadly 5% income return and 3% capital gain, driving the continued growth in the dividend.
In the current financial markets, we believe that investors will find it increasingly hard to find investments that offer secure income with growth and an attractive income yield as a starting point. As investors seek secure yields, this could drive the PHP valuation multiples higher.