Primary Health Properties

Gilt edged rent collector – accelerating dividends

23 Nov 2017 / Corporate research

PHP rental income is effectively entirely HM Government underwritten and PHP’s unbroken dividend growth is in its 21st year. In May 2017, PHP acquired its 300th primary care centre and now has 305. In 2018E, debt-financed investment continues in UK and Republic of Ireland (the latter on yields well above 6%). Interim results announced 27th July showed an acceleration in the rate of rent rises agreed (with more to come) and reduced cost of debt . We see good scope for acceleration in dividend growth, albeit 2018E may focus also on raising its cover.

  • Rental growth: PHP’s recent +1.6% rent reviews (up from 0.9%), with indications of further acceleration. Rising build costs drive this. These are important as there is a strong need for an expansion of the national stock of this asset type. For these to be brought into commission, rents need to drive adequate returns. This has knock-on benefits to PHP’s modern, standing stock.
  • Asset growth: Gross assets should rise by over 8% this year and similar next. Investment post the 2016 equity fund-raise remains an important feature, which re-gears EPS. Investment yields are particularly strong in Republic of Ireland and this has added a major ongoing new region for expansion in the past two years.
  • Valuation: After a number of successful other REIT flotations, there is an increasing number of ‘single asset class’ REITs quoted, particularly since the past year. The flow of funds to these, typically low-to-moderate risk assets, illustrates the sustained interest in the sub-sector, which trades at a premium to NAV.
  • Risks: There is no rental-income or void risk. With debt costs so low (5-year swaps under 1%, 10 year swaps 1.3%), we understand the policy is to lengthen the debt profile, thereby reducing risk, whilst also still lowering cost of debt.
  • Investment summary: Total Shareholder Return (TSR) CAGR is well over 10% over the past five years. In 2016 TSR was 7.3%, 2015 23.5%. In the past ten years, UK primary healthcare assets have returned a CAGR just over 7%, vs all property some 4.5%. PHP has fully kept up with this rise.