Primary Health Properties - income investing with growth
Primary Health Properties recently reported full-year (FY) 2020 results, in line with expectations and showing continued strong progress for the business. Adjusted earnings per share (EPS) increased by 5.5% and the dividend by 5.4%, while balance sheet gearing reduced to 41.0%. These results do not yet reflect the impact of the internalisation of the Nexus management function, which releases cost savings of an addition 0.3p per share.
The company has declared a first-quarter (Q1) 2021e dividend of 1.55p, the equivalent of 6.2p annualised, which is the 25th year of successive dividend increases (going back to the original listing of the company). PHP’s dependable dividend growth is underpinned by:
- 90% of rental income backed by government bodies (NHS and Irish HSE)
- Long lease durations, with an average weighted average unexpired lease term of 12.1 years
- The lowest cost structure of any real estate investment trust (REIT) in the UK market, allowing rental income to flow down to net profit and dividend payments.
Organic growth outlook:
We argue that demand drivers remain favourable for primary health facilities in the UK and Ireland despite the advent of video consultations. In the post-COVID environment, we believe that health authorities will remain focussed on moving more activity out of the A&E (accident & emergency) environment and back to general practitioners (GPs), as well as working to clear large backlogs that have built up during the pandemic as routine procedures have been deferred.
Within the release of the results, PHP outlined a pipeline of investment projects totalling £243mln including standing properties, developments, and upgrades to existing properties. The company has a strong track record of realising immediate shareholder value enhancement on new investments, and we regard this pipeline as a potential upside to the share price.
Business making strong progress, dividend growth continues
The shares currently offer a dividend yield of 4.1%, and this dividend has grown at a compounded annualised growth rate (CAGR) of 3.4% in the last five years. In the current market environment, we argue that investments that offer a safe income yield and inflation protection are scarce, and we believe that this scarcity value could drive the valuation of PHP higher.
Dividend and valuation
Year end Dec 31 · 2019 · 2020 · Current · 2022
Portfolio value (£mln) · 2,413.0 · 2,576.0 · 2,713.0 · 2,863.0
Net rental income (£mln) · 115.7 · 131.2 · 139.2 · 146.1
Adj. Earnings (£mln) · 59.7 · 73.1 · 82.7 · 87.7
Adj. EPS (GBp) · 5.5 · 5.8 · 6.2 · 6.5
DPS (GBp) · 5.6 · 5.9 · 6.2 · 6.4
Adj. NAV/Share (GBp) · 107.9 · 112.8 · 112.7 · 116.3
Gearing (LTV%) · 44.2 · 41.0 · 43.5 · 45.2
Primary Health Properties has grown its dividend every year since its market listing in 1997. The dividend has increased by 6.3% per year over the last 20 years. The increase for FY 2020 was 5.4%. We expect continued increases in the dividend over the coming years, which potentially lead to further increases in the share price, allowing investors to benefit from capital gains as well as the 4.1% yield.
The following chart shows the dividend progression.
Investment summary
Dividend growth
Source: Primary Health Properties historic data, Proactive Research forecasts
The company currently has a loan-to-value ratio of 41%, well below the target maximum of 50%. This would further reduce to 35.2% with the conversion of the current £150mln convertible bond, which is outstanding. We argue that the current balance sheet structure leaves significant headroom for further value-enhancing investments.
LTV ratio
Source: Primary Health Properties
Financial forecasts
Source: Proactive Research
Source: Proactive Research
Source: Proactive Research