Primary Health Properties – rent reviews drive growth
Primary Health Properties (PHP) saw a 6.2% rise in net rental income over the first half, to £75.5m, with growth largely driven by rent reviews. Occupancy was 99.6% at the end of the period.
Underlying earnings rose £1.2m to £45.9m, driven by increased rental income which was somewhat offset by higher finance costs. The group’s EPRA cost ratio (costs as a percentage of rental income) rose slightly from 9.9% to 10.1% but remains one of the lowest in the sector.
The portfolio’s value as of 30 June was £2.8bn, broadly flat from the end of last year. A revaluation charge of £11.9m was taken, compared to a gain of £51.2m last year, reflecting a decline in the fair value of properties.
Loan to value for the portfolio rose from 45.1% to 45.6%, in the middle of the target range of 40-50%.
A third quarterly dividend of 1.675p was declared on 29 June.
The shares rose 3.0% on the day.
Primary Health Properties’ purpose-built doctor’s surgeries have a long track record of delivering results for shareholders and is now in its 27th consecutive year of dividend increases. As a REIT (real estate investment trust), PHP has to pay out the vast majority of profits as a dividend so that should ultimately feed through to investors’ pockets, although of course there are no guarantees.
We believe that PHP’s asset base is relatively defensive in the context of today’s challenging macroeconomic environment. Rent collection rates were 99% in both 2021 and 2022, with 2023 rates trending in the same direction.
PHP has also successfully navigated the interest rate rises seen over the past year or so, with a stable average cost of debt of 3.2%. There is an impact on the investment market, largely relating to a lack of transactions as potential buyers try to wait out the higher-rate environment. That, plus the higher cost of capital, means PHP is relatively underweight in the development and investment arena for now. Instead, it’s focused on the rental market, where it sees further upside.
We like the move. Those same elevated costs, and the lack of new supply, are giving landlords like PHP more bargaining power at the negotiating table. Plus, with 69% of rents up for review every three years and a further 25% index-linked, there’s plenty of scope to benefit from the improving rental market.
Looking to the future, we think PHP has several features which underpin long-term dividend-paying potential. The backlog of procedures in the NHS and the needs of an ageing population means investment in primary care facilities isn’t going anywhere.
And, with 89% of the group’s rent roll funded by the NHS or its Irish equivalent, we view the group’s tenants as lower risk. An average lease length of 11 years should mean rental income is secure for years to come.
There are some reasons for caution too though. Loan-to-value (LTV) is high by industry standards, and has risen over the past year. With an economic downturn looming, there’s a slight chance governments could trim healthcare funding, which could become problematic in the short-term.
The group’s REIT structure also means investors are likely to be asked to fork out extra cash from time-to-time, especially as debt financing becomes more expensive. Because REITs have to pay out most of their profits it’s difficult for them to fund growth organically.
PHP’s valuation has come down a touch this year, broadly in line with its peer group, and the dividend yield is one of the more attractive. This could be an interesting play for exposure to a resilient sector of the UK property market. However, we caution that there remains a very real risk of falling property values in the near-term across the sector.
PHP key facts
- Forward price/earnings ratio (next 12 months): 0.90
- Ten year average forward price/earnings ratio: 1.19
- Prospective dividend yield (next 12 months): 7.2%
- Ten year average prospective dividend yield: 4.9%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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