Primary Health Properties

All the more reason to anticipate stable growth

10 Jan 2018 / Corporate research

PHP, a REIT, has served well as a defensive investment proposition, growing its dividend in each of the 21 years of its public quoted existence. 2017 saw two significant achievements, which have been portents for accelerated growth to be delivered in 2018 onwards. It is deploying the proceeds of previous equity raising at a strong pace and securing good acquisition momentum in the newer market of the Republic of Ireland (RoI), where rental yields are higher. It is exposed to a market where the visibility of (modest) acceleration in rates of rental growth is quite strong. Both sets of factors underpin good support for dividend growth.

  • Strategy: PHP buys one specific property class – modern primary medical. The unexpired lease term is 13.3 years (last reported) and net initial yield was 5.04% end June, last reported. Its exposure is 97.8% UK, rest RoI.
  • RoI is a significant growth driver: In December 2017, PHP acquired its third asset in RoI, increasing its total portfolio to 307, with a gross value of over £1.35bn and rent roll of £73m. 2.2% of the asset value is in RoI. In 2017, €27.5m of asset acquisitions were from RoI, 28% of the total.
  • Growth: A year ago the rent roll was £67.9m we estimate, with 295 assets valued at £1.2bn, of which 0.5% RoI. In 2015,6,7, asset growth (ex revaluations) was 3.3%, 9.0%, 6.7%. We anticipate 7.5% in 2018. The recent addition of RoI to the growth matrix is positive. So too is the rise in rents, up 1.6% at the interim stage. That was from 0.9% the year before. There is scope for rises to accelerate.
  • Risks: There is no rental-income or void risk. With debt costs low, we understand the policy is to lengthen the debt maturity profile, thereby reducing refinance risk, while also still lowering the cost of debt (and more here in 2018).
  • Investment summary:  Past five years’ Total Shareholder Return (TSR) CAGR is over 10%. In the past ten years, UK primary healthcare assets saw a CAGR just over 7%, (vs all property c.4.5%). PHP has fully kept pace and has managed its financing very well, growing its dividends through the macro-economic difficulties earlier this decade. With the good rental outlook, a strong balance sheet and RoI opportunities: all the more reason to anticipate stable growth.