Strong first half 2022 results from PHP

Primary Health Properties PLC (LON:PHP) produced a strong set of interim results, supported by an improving rental growth outlook. The total adjusted net tangible assets (NTA) return for the six-month period was 6.3%, up from 5% in the corr

Proactive Published 10/08/2022

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Primary Health Properties PLC (LSE:PHP, OTC:PHPRF) (Primary Health Properties PLC (LSE:PHP, OTC:PHPRF)) produced a strong set of interim results, supported by an improving rental growth outlook. The total adjusted net tangible assets (NTA) return for the six-month period was 6.3%, up from 5% in the corresponding period in 2021. This reflected a solid 4.3% total property return along with the benefits from leverage. Adjusted net tangible assets (NTA) per share improved by 3.5% to 120.8p, partly reflecting a seven basis point yield compression. Adjusted earnings per share rose by 9.7% to 3.4p and the dividend for the first half was increased by 4.8% to 3.25p.

Management is taking a cautious approach to investment, due to the current volatile environment, and the investment pipeline stood at £285mln, down from £444mln as at end-December. PHP recently sold a portfolio of 13 smaller properties for £27.7mln, which was at a 13% premium to book value.

We have adjusted our forecasts for the completed rent reviews and asset management projects as well as the disposal of 13 smaller properties. We have edged up our fiscal year 2023 (FY23) interest charge primarily reflecting the impact of rising interest rates on the acquisition pipeline. In all, our FY23 EPS, as well as our dividend forecasts, ease from 6.8p to 6.7p.

Interim results

Company-specific factors supporting our investment thesis include:

• An improving rental growth outlook — rent reviews and asset management projects completed in the period added £1.8m or 1.3% on a like-for-like basis.

• Dividend growth every year since inception — 26 years.

• 89% 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 10.5%.

• 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.

• 95% of group debt is hedged for almost eight years.

Valuation

The stock trades on 22.4x our FY22 earning forecast, which falls to 21.8x in FY23. On our forecasts, the dividend yields 4.5% this year, rising to 4.6% next year. We believe the valuation is attractive, given the strong track record, low operational risk profile and attractive business drivers.

Investment case summary

Year end Dec 31 · 2020 · 2021 · 2022 · 2023

Portfolio value (£mln) · 2,576.1 · 2,795.9 · 2,934.1 · 3,079.3

Net rental income (£mln) · 131.2 · 136.7 · 141.8 · 146.6

Adj. Earnings (£mln) · 73.1 · 83.2 · 86.7 · 88.8

Adj. EPS (GBp) · 5.8 · 6.2 · 6.5 · 6.7

DPS (GBp) · 5.9 · 6.2 · 6.5 · 6.7

Adj. NAV/Share (GBp) · 112.8 · 116.7 · 120.6 · 123.2

Gearing (LTV%) · 41.0 · 42.9 · 43.6 · 45.1

Primary Health Properties is a UK real estate investment trust (REIT) specialising in investing in modern primary healthcare premises in the United Kingdom and the Republic of Ireland. Primary health care is the first point of contact for health care and is mainly provided by general practitioners (GPs), along with pharmacists, opticians and dentists. PHP's focus is on area ‘hub’ facilities rather than very small neighbourhood GP practices, as these ‘hubs’ are a core feature of local health infrastructure that do not tend to shut down or relocate. These are local health centres usually encompassing GP surgeries, sometimes alongside other NHS services, pharmacies and dentists.

In the UK, GP contractors are eligible for rental reimbursements and in the case where the GPs are tenants in a building they receive leasehold cost reimbursements. Consequently, 89% of PHP's rental income is government-backed rent, with the balance being mainly from pharmacies.

The group's property portfolio is valued at just under £2.9bln. It has 512 assets, including 492 in the UK and 20 in Ireland, with an annual rent roll of £142.8mln.

A real estate investment trust focused on primary healthcare facilities

Over the past ten years, PHP has delivered an annualised total shareholder return (TSR) of 10.5% (to July 27). 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 3.2% for the UK 350 and 3.1% for the UK REIT sector. PHP has sustained a stronger trajectory.

Historical investment performance

Relative capital performance over ten years

Interim results

The total adjusted net tangible assets (NTA) return for the six-month period was 7.3p, or 6.3%, up from 5.0% in the corresponding period in 2021. The total return reflected 4.1p of capital growth along with the 3.2p of dividends paid, as shown in the table below.

The total property return for the six-month period of 4.3%, or £122.3mln. This reflected a net rental income increase of 5% to £71.1mln, helped by rent reviews and asset management projects completed in period which added £1.8m, along with a revaluation surplus and profit on sales totalling £51.2mln.

Adjusted net tangible assets (NTA) per share improved by 3.5% to 120.8p, partly reflecting a seven basis point yield compression. Adjusted earnings per share rose by 9.7% to 3.4p and the dividend for the first half was increased by 4.8% to 3.25p.

Adjusted Net Tangible Assets (NTA) per share

Source: Primary Health Properties

EPRA NDV: EPRA net disposal value

Investment and pipeline

The company has announced three acquisitions during the year to date totalling £48.7mln, as outlined in the table below. PHP recently sold a portfolio of 13 smaller properties for £27.7mln, which was at a 13% premium to book value. The disposals of smaller properties reflect the group's strategy to focus on larger hub centres.

Including standing investments, direct and forward funded developments and asset management projects, PHP has a pipeline totalling approximately £285mln - £187mln in the UK and £98mln (€114mln) in Ireland. Of this amount, £123mln and £43mln (€50mln) is in legal due diligence in UK and Ireland respectively. However, the aggregate pipeline is below the £444mln that it stood at end-December, reflecting management's more cautious approach to investment, in light of the current volatile economic and interest rate environment.

Acquisitions announced during FY22

Source: Regulatory news

Forecast changes

We have increased our net rental income forecasts to reflect the additional income from completed rent reviews and asset management projects, less the income from the portfolio of 13 smaller properties that were disposed of. At this stage, we are maintaining our capex forecast for the year of £110mln, excluding the disposal. We have increased our administrative expenses forecasts by 1.9% in both years, and we have edged up our FY23 interest charge primarily reflecting the impact of rising interest rates on the acquisition pipeline. In all, our FY22 EPS and dividend forecasts are maintained while our FY23 EPS and dividend forecasts both ease from 6.8p to 6.7p.

We have increased our forecast for revaluation gains in FY22 from £33.6mln to £55.9mln to reflect the strong first-half performance. Our adjusted NAV per share forecasts rise by 1.7% in FY22 and by 1.6% in FY23. Our LTV forecasts ease by 1.0% in FY22 to 43.6% and by 1.0% to 45.1% next year, which reflects the valuation gains as well as the disposal of the 13 smaller properties.

Net rental income forecast changes