Primary Health Properties

Strong 2017 results and prospects

22 Feb 2018 / Corporate research

Positive 2017 results (dated 15th February) illustrate continuing good momentum. Currently, UK acquisitions achieve average 4.9% net initial yields and thus generate a 1.4% average yield pick-up after operating and interest costs. Investment in Republic of Ireland (RoI) yields a 3.0% pick-up in the net income yield versus cost of debt. Once again, PHP lowered its cost of debt. Also, one example of several, Aviva renewed a £75m loan facility to November 2028 at a fixed interest rate of 3.1%; this renewal results in interest savings of £675,000 p.a. to PHP (beginning November 2017). PHP has excellent assets and a ‘following wind’.

  • Strategy: Capital deployment continues well, with 2017 seeing a £77.3m asset investment and a £150m pipeline. For 2019, we estimate Loan to Value (LTV) of 51.4%, leaving plenty of headroom. While rental growth remained modest, at 1% (leases are upwards only, occupancy remains at 99.7%), acceleration is likely.
  • Capital deployment: Ten properties were acquired in 2017 for £71.9m – a large average lot size. The 1.4% positive cash return on gross UK investment remains healthy (this calculation is based on all-debt funding). RoI assets yield over 100bps more and debt is 50bps cheaper.
  • Valuation: PHP’s initial focus remains on steadily growing income, with a good proportion on guaranteed or RPI uplifts. This focus then also steadily enhances capital values. In 2017, PHP’s total asset NAV plus dividends returned 16.4% (vs. 9.7% in 2016), and it has had 21 years (since the IPO) of unbroken dividend rises.
  • Risks: There is no rental-income or void risk. With debt costs low, the policy is lengthening the debt maturity profile, thereby reducing refinancing risk, while still lowering the cost of debt as some historical higher-rate debt expires. The average debt maturity is 6.3 years and rising – funded from a variety of sources.
    Investment summary: We like the REIT sector’s stable, rising income. PHP’s leases are all upward-only rents (19% RPI-linked), averaging 13.2 years. It has scope to raise financial gearing modestly, enhancing EPS, particularly with the added RoI yield pick-up. This and falling debt costs generate long-term upside.