Firmly on track, supported by favourable backdrop
Primary Health Properties (Primary Health Properties PLC (LSE:PHP, OTC:PHPRF)) released a solid first-quarter trading update in conjunction with its annual general meeting (AGM). It reported that rent reviews added 2.0% (2021: 1.7%) on an annualised basis to the rent roll over the quarter, supported by inflationary pressures, with a further £0.3mln added from asset management activities. The company made two acquisitions during the quarter while the pipeline has increased from £444mln to £482mln. PHP is paying quarterly dividends of 1.625p, or 6.5p on an annualised basis, representing a 4.8% increase on the prior year and reflecting an attractive 4.4% yield at the current share price.
Investment and development
PHP has made progress in converting its pipeline into committed deals, having recently announced the acquisition of a large, state-of-the-art diagnostic centre in Chiswick for £34.5mln, which is let to HCA Healthcare, and it has purchased a clinical facility in Chertsey for £6.95mln, which is let to the NHS. In addition, PHP has announced its first net zero carbon (NZC) direct development - a new purpose-built medical centre at Eastergate, West Sussex with a gross development value of £6.7mln. This demonstrates the group's strategic commitment to making all its activities operate on an NZC basis by 2030 and to help occupiers achieve NZC by 2040.
Including standing investments, direct and forward funded developments and asset management projects, PHP has a strong pipeline totalling £360mln in the UK and £122mln in Ireland, of which £65mln and £74mln respectively is in legal due diligence.
First quarter trading
While the shares have outperformed the UK market over the long run, they have lagged over the pandemic period. We believe that the current price level offers an attractive entry point for investors. We note the real estate sector typically outperforms during periods of rising interest rates. Company specific factors supporting our investment thesis include:
• Dividend growth every year since inception — 24 years.
• 90% of rents are covered by government national health bodies of the UK and Ireland. This supports 99.7% 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, with its EPRA (European Real Estate Association) cost ratio at 9.3%.
• A quarter of rent roll is explicitly linked to inflation and management argues that the balance is effectively linked to inflation through replacement cost.
• Headroom to continue growing the portfolio of health centres.
Investment case summary
Year end Dec 31 · 2020 · 2021 · 2022 · 2023
Portfolio value (£mln) · 2,576.1 · 2,795.9 · 2,939.5 · 3,084.7
Net rental income (£mln) · 131.2 · 136.7 · 141.2 · 146.2
Adj. Earnings (£mln) · 73.1 · 83.2 · 86.3 · 90.9
Adj. EPS (GBp) · 5.8 · 6.2 · 6.5 · 6.8
DPS (GBp) · 5.9 · 6.2 · 6.5 · 6.8
Adj. NAV/Share (GBp) · 112.8 · 116.7 · 118.6 · 121.3
Gearing (LTV%) · 41.0 · 42.9 · 44.6 · 46.1
In the first quarter of 2022 Primary Health Properties generated an additional £0.9mln or 0.6% (Q1 2021: £0.8mln or 0.6%) of rental income from its rent review and asset management activities.
An additional £0.6mln (Q121: £0.5mln) of income was generated in the quarter from 99 rent reviews that have been settled, equivalent to 2.0% (2021: 1.7%) on an annualised basis. A further £0.3mln (Q121: £0.3mln) has been generated in the quarter from asset management activities completing ten projects, while a further six schemes are currently on-site, which in addition to extending lease lengths will improve the environmental performance of the buildings.
As at 31 March 2022, the group's net debt stood at £1,217.3mln (31 December 2021: £1,199.5mln) and on a proforma basis, the loan to value (LTV) ratio was 43.3% (31 December 2021: 42.9%). After capital commitments the group has undrawn loan facilities and cash on deposit totalling £270mln (31 December 2021: £321mln) providing significant liquidity headroom. 97% of the group's net debt is fixed or hedged for a weighted average period of just over nine years providing significant protection from increasing interest rates.
First-quarter trading
Over the past ten years, PHP has delivered an annualised total shareholder return (TSR) of 10.7% (to April 27, 2022). Total shareholder return is defined as dividends plus capital gains. The total shareholder return closely reflects the underlying performance of the asset portfolio.
The chart below shows the ten-year record of PHP in terms of shareholder capital returns. This shows an annualised capital return for PHP of 5.9%, compared with 3.1% for the UK REIT sector and 5.5% for the UK 350. PHP has sustained a stronger trajectory, but the pull-back in recent months leaves it only slightly ahead of the UK 350 level. In addition, the REIT sector has lower volatility than the UK 350, as does PHP.
Investment performance
Relative share price performance over ten years
