Rental growth further accelerates

Primary Health Properties 11 August 2022 Update
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Primary Health Properties

Rental growth further accelerates

H122 results

Real estate

11 August 2022

Price

147.5p

Market cap

£1,966m

Net debt (£m) at 30 June 2022

1,255

Net LTV at 30 June 2022

43.1%

Shares in issue

1,332.9m

Free float

97%

Code

PHP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.0

6.5

(10.1)

Rel (local)

1.2

2.7

(10.9)

52-week high/low

169.6p

131.1p

Business description

Primary Health Properties is a long-term investor in primary healthcare property in the UK and the Republic of Ireland. Assets are mainly let on long leases to GPs and the NHS or HSE, organisations backed by the UK and Irish governments, respectively. The tenant profile and long average lease duration provide an exceptionally secure rental income stream.

Next events

Q4 DPS declared

Exp. October 2022

Analyst

Martyn King

+44 (0)20 3077 5745

Primary Health Properties is a research client of Edison Investment Research Limited

As expected, Primary Health Properties (PHP) reported a strong financial and operational performance in H122 and is well into its 26th year of unbroken DPS growth. The company is ‘encouraged’ by strengthening rental growth and continues to selectively source accretive investment opportunities. With 95% of borrowings fixed rate or hedged, we expect further growth.

Year end

Net rental income (£m)

Adjusted EPRA earnings* (£m)

Adjusted EPS** (p)

NAV per share*** (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/20

131.2

73.1

5.8

112.9

5.90

1.31

4.0

12/21

136.7

83.2

6.2

116.7

6.20

1.26

4.2

12/22e

141.3

86.6

6.5

121.7

6.50

1.21

4.4

12/23e

146.9

89.0

6.7

123.9

6.70

1.19

4.5

Note: *Excludes valuation movements, amortisation of fair value adjustment to acquired debt and other exceptional items. **Non-diluted. ***Defined as adjusted EPRA net tangible assets (NTA) excluding fair value of derivative interest rate contracts and convertible bond, deferred tax and fair value adjustment on acquired debt.

Financial and operational progress

H122 adjusted EPRA EPS increased 9.7% to 3.4p, covering 3.25p of DPS (+4.8%) by 103%. Earnings benefited from acquisitions, rent growth and debt cost savings from refinancing activity. Adjusted EPRA NTA increased to 120.8p, up 3.5% from FY21 (116.7p), benefiting equally from rent growth and yield tightening, with investors continuing to be attracted by the strong fundamentals of the sector. Accounting total return was 6.3%. Rent reviews were settled at an average 3.0%, up from 1.7% in FY21. The acceleration is benefiting directly (25% of rents are index-linked) and indirectly (development costs are a key input into open market reviews) from inflation. Our revised forecasts allow for cost inflation and an increase in finance costs as unhedged debt is deployed, reflected in a slight reduction in FY23 and FY24 fully covered DPS growth.

Well-placed to meet health service investment needs

The long-term need for primary healthcare facilities is driven by demographic trends and is relatively unaffected by economic conditions. In both the UK and Ireland, populations are growing and ageing, with more complex healthcare needs. The pandemic has further increased the demands placed on hospitals and created a backlog of missed procedures. To relieve these pressures, the need for modern, integrated, local primary healthcare facilities has become yet more pressing. PHP is well-placed to help meet this need for investment and grow further; it has c £291m of available funding headroom and its strong, selective pipeline of investment opportunities has grown to c £285m, of which c £166m is in legal due diligence.

Valuation: Securely growing income

PHP’s valuation is driven by its income visibility and security, with strong prospects for further growth in income and dividends. Leases are long and substantially upward-only leases, 89% backed directly or indirectly by government bodies, with little exposure to the economic cycle or fluctuations in occupancy. The FY22e DPS of 6.5p, which is fully covered by adjusted EPRA earnings, represents a yield of 4.4%, supporting an H122 P/NA of c 1.2x.

Focusing on key H122 messages

A detailed description of PHP’s strategy and the positive fundaments of the market in which it operates can be found in our March 2022 Outlook. In this update we focus on what we think are the key messages from the interim report. These are PHP’s continued opportunities for acquisition growth, despite the rise in funding costs, the acceleration in organic rental growth, and its significant protection from rising interest rates. A summary of the interim results can be found towards the end of this note, along with our forecast updates and valuation analysis.

Selective recent investment

Driven by strong fundamentals, the investment market for modern, purpose-built primary healthcare properties continued to be competitive through H122, maintaining upward pressure on asset prices. This was reflected in PHP’s net initial yield, which tightened to 4.57% at end-H122 versus 4.64% at end-FY21. At the same time, with interest rates increasing, funding costs have increased. This is true for PHP as although the cost of its existing debt is 95% fixed rate or hedged, the marginal cost of borrowing has risen. In this environment, PHP was highly selective in respect of acquisitions during H122 and has since taken advantage of strong pricing to dispose of a portfolio of 13 properties at 13% above the FY21 valuation. The properties were smaller facilities (average lot size £2.1m) that were well below both PHP’s average lot size (£5.5m) and its targeted lot size, as reflected in recent investments and the investment pipeline. Modern, purpose-built facilities, capable of sustainably providing a wide range of facilities, are invariably of larger scale.

As previously announced, during H122 and subsequently PHP acquired:

A state-of-the-art diagnostic centre in Chiswick for £34.5m, let to HCA Healthcare, benefiting from five-yearly RPI led rent reviews, and with an unexpired lease term of just under 20 years.

A newly refurbished alcohol and rehabilitation centre in Chertsey for £7.0m. The property is let on a new 20-year fully repairing and insuring lease to the Surrey and Borders Partnership NHS Foundation Trust and benefits from RPI led rent reviews.

A medical centre in Newbury for £7.3m, let to two GP practices, providing 100% government- backed income with an unexpired lease term of 19 years.

PHP also continued to make good progress with the start of construction of the first net zero carbon (NZC) development at Croft Primary Care Centre, West Sussex, with a development value of £6.8m; it achieved practical completion of the forward funded development at Enniscorthy, County Wexford, Ireland, with a development value of c £11m; and expects soon to complete its remaining forward funded development at Arklow, County Wickford, Ireland, with a development value of c £15m. A total of 22 asset management projects were completed or are currently on-site, requiring investment of £14.9m, and will generate £0.3m of additional rental income. Just as importantly, these projects will extend the weighted average unexpired lease term (WAULT) on the properties to an average 20 years and improve their ESG performance.

Strong investment pipeline with a focus on higher-yielding assets

Although the interest rate outlook has caused PHP to reconsider some potential investments in recent months, the pipeline of opportunities remains strong, totalling c £187m in the UK and c £98m (€114m) in Ireland. Of this, c £123m and c £43m respectively is already in legal due diligence, a significant proportion of which is likely to complete. Approximately 42% of the acquisition pipeline represents opportunities in Ireland, PHP’s preferred area of investment due to higher net initial yields and larger lot sizes. It is already the largest primary healthcare investor in Ireland with a portfolio of 20 assets, valued at £228m, reflecting a large average lot size of c £11m. Similarly, direct and forward funded development opportunities represent c 64% of the acquisition total. With relatively fewer investors able to invest in development assets, competition for standing assets is greater.

Exhibit 1: H122 investment pipeline

UK

Ireland

Total

Number

Estimated cost

Average lot size

Number

Estimated cost

Average lot size

Number

Estimated cost

Average lot size

Standing investment

4

£60m

£15.0m

2

£24m (€28m)

£12.0m

6

£84m

£14.0m

Direct development

7

£56m

£8.0m

7

£56m

£8.0m

Forward funded development

2

£19m

£9.5m

5

£74m (€86m)

£14.8m

7

£93m

£13.3m

Total acquisitions

13

£135m

£10.4m

7

£98m (€114m)

£14.0m

20

£233m

£11.7m

Asset management:

Board approved

10

£10m

Advanced pipeline

40

£42m

Total asset management

50

£52m

50.0

£52m

Total pipeline

 

£187m 

 

 

£98m 

 

 

£285m

 

Source: PHP data

PHP fully anticipates that its selective approach to investment, and the assets identified within its pipeline of opportunities, will continue to generate accretive growth as illustrated in Exhibits 2 and 3 below.

Exhibit 2: Illustrative Irish acquisition net income

Exhibit 3: Illustrative UK acquisition net income

Source: PHP. Note: Based on 30 June 2022 portfolio yield; 27 June 2022 SONIA swap rate; PHP incremental debt margin. *PHP portfolio valuation yield 31 December 2021 (used as proxy for market purchases). **Sourced from Chatham Financial – 27 June 2022. ***Company incremental margin on debt facilities.

Exhibit 2: Illustrative Irish acquisition net income

Exhibit 3: Illustrative UK acquisition net income

Source: PHP. Note: Based on 30 June 2022 portfolio yield; 27 June 2022 SONIA swap rate; PHP incremental debt margin. *PHP portfolio valuation yield 31 December 2021 (used as proxy for market purchases). **Sourced from Chatham Financial – 27 June 2022. ***Company incremental margin on debt facilities.

It is nonetheless the case that the positive spread over funding costs has narrowed in recent months,1 and an increased focus on development assets will have the effect of deferring cash rental income until completion. This makes the continued acceleration in rent uplifts an increasingly important driver of rental income while also supporting PHP’s selective and patient approach to acquisitions. That patience may well pay off. Yield tightening has been a mixed blessing for a growing business like PHP; it generates capital growth but increases the cost of acquiring assets and inorganically growing income. With bond yields on a rising trend, PHP anticipates that the long downward trend in sector valuation yields is likely to flatten and may even increase slightly. It nevertheless expects positive revaluation movements as rent growth is capitalised.

  With the FY21 results presentation, a similar illustration, using 3 February 2022 swap rates (0.5% for Euribor and 1.3% for Libor), put the income return after debt costs at 3.0% in Ireland and 1.7% in the UK.

Exhibit 4: Long downward trend on PHP portfolio net initial yield

Source: PHP data

Inflation is contributing to accelerating rent growth

Rental growth has continued to accelerate, in part benefiting directly and indirectly from inflation, and as PHP is now internally managed, the resulting increase in rental income drops straight to the bottom line. The direct benefit from inflation relates to the 25% of income that is indexed (to RPI and CPI in Ireland) with recent increases progressively feeding into rent reviews. Another 6% of rents provide fixed uplifts at c 3.0% pa. However, the key opportunity to organically grow rental income lies in open market rent reviews, 69% of the total,2,3 which continue to pick up after relatively muted growth in recent years. For open market reviews, land prices and building cost inflation are important inputs into the rent review process for existing assets. New developments create rent benchmarks that in turn provide evidence in the rent setting process for existing assets. If rents for development assets do not keep pace with the cost of development, then the new supply of environmentally efficient, modern, purpose-built assets required by the NHS will be squeezed.

  Approximately one-third of UK index linked rents are collared (cannot fall below) and capped (cannot rise above), typically between 2% and 4%. Rents in Ireland increase by Irish CPI every 5 years, but any increase is capped at 25% or the equivalent of 5% pa.

  Open market reviews aim to set the rent at the current market level, defined as what would be paid by a free and willing tenant to a landlord in that area. The decision is that of the district surveyor, allowing for a range of factors including the size, condition, amenity and location of the premises as well as the terms of the lease itself.

Exhibit 5: The acceleration in rent growth is continuing

Source: PHP data

Rent reviews in the UK are typically on a three-year revolving basis and effectively upward only, at the option of the landlord.4 During H122, 192 UK rent reviews were concluded and documented, with a combined value of £24.4m, resulting in an uplift of £1.5m in annualised rents, or 6.1%, representing an average uplift of 3.0% pa. This compares with 1.7% in FY21 and is the highest rate since 2011.

  Irish rents (c 8% of the total) are linked to CPI and, in theory, may decrease as well as increase, although this seems a remote prospect. Irish CPI increased by 9.1% in the year to June 2022.

Exhibit 6 provides a breakdown of the H122 concluded rent reviews. Average uplifts of 5.9% pa were achieved on RPI-linked reviews and 2.7% pa on fixed uplifts. A total of 104 open market reviews were settled (H121: 132) at an average of 1.4% pa uplift (H121: 1.0%) including 24 reviews concluded with no uplift (H121: 42). In addition, a further 278 open market rent reviews were agreed in principle, which will add another £1.6m to the contracted rent roll when concluded and represent an uplift of 1.3% pa.

In many cases PHP holds off from settling open market reviews, awaiting the market evidence that will provide support for rent increases. At end-H122 there were 633 open reviews that remain outstanding and under negotiation, with the large number reflecting the requirement for all reviews to be agreed with the district valuer. These represent £85.4m of passing rent, £2.3m lower than the estimated rental value (ERV), a significant upside potential.

Exhibit 6: Last five years’ rent reviews in detail

2017

2018

2019

2020

2021

H121

H122

Number of completed reviews

101

187

312

309

375

213

192

Combined rental value (£m)

13

24

38

40

50

26

24.4

Achieved uplift pa (£m)

0.5

1.1

1.6

1.7

2.0

1.0

1.5

Achieved uplift

4.1%

4.7%

4.2%

4.3%

4.0%

3.8%

6.1%

Average achieved uplift pa on completed reviews

1.1%

1.4%

1.9%

1.8%

1.7%

1.5%

3.0%

Components of change:

Open market

0.3%

0.4%

1.1%

1.3%

1.1%

1.0%

1.4%

All index-linked

2.3%

2.7%

3.0%

2.3%

2.8%

2.2%

Index-linked UK

5.9%

Index-linked Ireland

2.7%

Fixed uplift

5.0%

2.6%

3.1%

2.9%

2.7%

2.7%

3.0%

Breakdown of reviews

Open market

74%

69%

69%

69%

69%

69%

69%

Index linked

19%

23%

24%

25%

25%

25%

25%

Fixed uplift

7%

8%

7%

6%

6%

6%

6%

Source: PHP data

95% of borrowing is fixed rate or hedged

PHP has £1,553.3m of debt facilities of which £1,285m was drawn at end-H122. The cash balance was £29.7m, with net debt at £1,255.3m, an LTV of 43.1%. Allowing for capital commitments and including the post-period purchase and portfolio sale investment headroom was £290.6m.

On a pro forma basis, 95% of drawn debt was fixed rate or hedged (compared with the c 92% reported position shown in Exhibit 7) for around eight years, providing significant protection against rising interest rates. The floating rate share of total debt facilities (drawn and undrawn) was 24.1% at end-FY22, at the bottom end of PHP’s 20% to 40% target for floating rate debt exposure.

The end-H122 average cost of borrowing was 3.0%, slightly up from 2.9% at end-FY21, the result of a higher balance of floating rate borrowing. Our forecasts for portfolio acquisition/investment indicate that most of the existing debt facilities will be drawn by end-FY24, increasing exposure to debt that is unhedged. In the near term, the governor of the Bank of England has signalled the potential for taking stronger action to bring down inflation, interpreted by many as a 0.5% increase in the base rate, to 1.75% in August. Meanwhile, financial markets appear to be pricing in an increase to c 3.0% by around the end of the year, before easing. We have sought to reflect this market expectation in our forecasts.

Exhibit 7: Summary of interest rate exposure

20 June 2022 (H122)

31 December 2021 (FY21)

Facilities

Drawn

Facilities

Drawn

£m

%

£m

%

£m

%

£m

%

Fixed rate debt

1,078.3

69.4

1,078.3

83.9

1,075.5

69.4

1,075.5

87.2

Hedged by fixed rate interest rate swaps

100.0

6.4

100.0

7.8

188.0

12.1

188.0

15.2

Hedged by fixed to floating rate interest rate swaps

(200.0)

(12.9)

(200.0)

(15.6)

(200.0)

(12.9)

(200.0)

(16.2)

Total fixed rate debt

978.3

63.0

978.3

76.1

1,063.5

68.6

1,063.5

86.3

Hedged by interest rate caps

200.0

12.9

200.0

15.6

200.0

12.9

200.0

16.2

Unhedged floating rate debt

375.0

24.1

106.7

8.3

287.0

18.5

(30.6)

(2.5)

Total fixed rate debt

1,553.3

100.0

1,285.0

100.0

1,550.5

100.0

1,232.9

100.0

Source: PHP

Further details on the H122 results

A hallmark of PHP’s performance in recent years has been the lack of surprise. Compared with our expectations this was the case in H122, other than a further tightening of valuation yields and a larger increase in NAV.

Exhibit 8: Detailed summary of H221 financial performance

£m unless stated otherwise

H122

H121

H122/H121

2021

Net rental income

71.1

67.7

5.0%

136.7

Administrative expenses

(5.5)

(4.3)

27.9%

(9.5)

Performance incentive fee accrual (PIF)

0.0

(0.7)

(100.0%)

(1.0)

Net finance expense

(20.9)

(22.0)

(5.0%)

(43.0)

Basic adjusted earnings*

44.7

40.7

9.8%

83.2

Amortisation of fair value adjustment on acquired debt

1.4

1.6

7.9

Costs/charges relating to acquisition of Nexus

(29.0)

(29.0)

Basic EPRA earnings

46.1

13.3

62.1

Property revaluation

51.2

66.9

110.2

Profit on sale of properties

0.0

0.0

0.3

Fair value gain/(loss) on interest rate derivative & convertible bond

10.4

(0.2)

1.6

Costs/charges relating to acquisition of Nexus

(8.0)

(8.0)

Exceptional item - early termination cost on debt refinancing

(24.6)

Tax charge

(0.6)

(0.6)

(1.5)

Basic IFRS earnings

107.1

71.4

140.1

Basic IFRS EPS (p)

8.0

5.4

10.5

Basic EPRA EPS (p)

3.5

1.0

4.7

Basic adjusted EPS (p)

3.4

3.1

9.4%

6.2

DPS (p)

3.25

3.10

4.8%

6.20

Dividend cover**

1.03

0.99

1.01

Adjusted EPRA NAV per share (p)***

120.8

115.4

4.7%

116.7

EPRA NAV total return

3.4%

5.0%

8.9%

Investment portfolio (bn)

2.91

2.66

2.80

Portfolio net initial yield (NIY)

4.57%

4.70%

4.64%

Net LTV

43.1%

40.9%

42.9%

EPRA cost ratio

10.5%

9.0%

9.3%

Source: PHP data. Note: *Adjusted earnings excludes valuation movements, amortisation of acquired fixed rate debt revaluation and other exceptional items. **Dividend cover is EPRA earnings as a percentage of dividends declared. ***Adjusted EPRA NAV excludes fair value movements in derivative interest rate contracts and convertible bonds, acquired fixed rate debt revaluation and deferred tax.

From the results we highlight:

Adjusted earnings increased by £4.0m or 9.8% to £44.7m compared with H121 reflecting:

A reduction in the average cost of debt arising from refinancing initiatives,

organic and acquisition-led rental growth,

partly offset by increased administrative expenses, including staff cost inflation and new hires in areas such as ESG and development.

The EPRA cost ratio remains the lowest in the UK REIT sector, although it increased to 10.5% (FY21: 9.3%).

Included in IFRS earnings, the net valuation surplus of £51.2m was c 50% driven by rent reviews and asset management and the balance from yield compression in both the UK and Ireland.

Adjusted EPRA NTA increased to 120.8p from 116.7p at end-FY21.

The two quarterly distributions in the period amounted to 3.25p per share, a 4.8% increase compared with H121, and were 103% covered.

The loan-to-value ratio of 43.1% remains well within the company’s target of 40% to 50%.

Forecasts

Our adjusted earnings forecast for the current year is effectively unchanged (other than for small rounding differences) and likewise DPS. Our EPRA NTA forecast rises with the strong H122 performance.

For FY23 and FY24 our DPS forecasts are slightly reduced in line with adjusted earnings, reflecting a combination of faster rental growth, rental income deferred by an increased focus on development investment, and higher administrative and finance expenses. We have assumed lower capital growth, allowing for the positive impact of rental growth to be partly offset by modest yield widening, reducing our expected rate of growth of EPRA NTA per share.

Exhibit 9: Forecast update

Net rental income (£m)

Adjusted earnings (£m)

Adjusted EPS (p)

DPS (p)

Adjusted EPRA NTAPS (p)

Old

New

Chge %

Old

New

Chge %

Old

New

Chge %

Old

New

Chge %

Old

New

Chge %

12/22e

141.1

141.3

0.2

86.7

86.6

-0.2

6.5

6.5

-0.2

6.5

6.5

0.0

120.8

121.7

0.9

12/23e

144.9

146.9

1.4

90.2

89.0

-1.4

6.8

6.7

-1.9

6.8

6.7

-1.5

126.1

123.9

-2.1

12/24e

150.9

155.8

3.2

93.0

91.6

-1.5

7.0

6.9

-1.9

7.0

6.9

-1.4

131.7

126.1

-5.6

Source: Edison Investment Research

Our forecasts continue to reflect c £120m pa in investment commitments (the cash flow shown in the financial statements differs, reflecting the timing of development spending) at a blended average c 4.5% and organic rent growth of £3.5–4.0m pa. The implied EPRA cost ratio in our forecast is between 10% and 11% and the blended average cost of borrowing increases from 3.0% in H122 to around 3.2% in FY24.

Valuation

Historical returns on primary healthcare assets have been higher than other sectors of the UK commercial property market, with a lower level of volatility. This has been a function of the strong fundamental backing for healthcare property, in turn generating secure and more resilient income, and less pronounced yield shifts through the property cycle.

PHP is well into its 26th year of unbroken dividend growth and is on track towards its targeted FY22 aggregate DPS of 6.5p (up 4.8% on FY21), a yield of 4.4% at the current share price. We forecast continuing growth in fully covered DPS (Exhibit 10).

Exhibit 10: PHP is in its 26th year of unbroken DPS growth

Source: PHP data, Edison forecasts for FY22/FY23/FY24

DPS paid represents c 52% of the cumulative NAV total return generated since end-FY16. Capital returns have contributed the balance, including the impact of asset management, rental growth and yield tightening. Since end-2016, the aggregate NAV total return has been 67.3% or an average 9.8% pa. We forecast income returns to represent a greater share of total returns in the coming years.

Exhibit 11: NAV* total return history (end-FY16 to end-H122)

2017

2018

2019

2020

2021

H122

End-FY16–H122

Opening NAV per share (p)

91.1

100.7

105.1

107.9

112.9

116.7

91.1

Closing NAV per share (p)

100.7

105.1

107.9

112.9

116.7

120.8

120.8

DPS paid in period (p)

5.25

5.40

5.60

5.90

6.20

3.25

31.6

Income return

5.8%

5.4%

5.3%

5.5%

5.5%

2.8%

34.7%

Capital return

10.5%

4.4%

2.7%

4.6%

3.4%

3.5%

32.6%

NAV total return

16.3%

9.8%

8.0%

10.1%

8.9%

6.3%

67.3%

Average annual return

9.8%

Source: PHP data, Edison Investment Research. Note: *Adjusted EPRA net tangible assets (NTA).

The security and visibility of income returns is the key driver of PHP’s valuation, in turn providing the support for a continuing valuation premium to NAV. PHP’s share price has not kept pace with strong DPS growth over the past three years (5.1% pa to end-FY22e) such that the P/NAV has compressed. We expect DPS to grow at c 3.6% over FY22–24, and total return by an average 7.8% pa, which, given the security of cash flow and quality of its portfolio, we believe is attractive.

Exhibit 12: Prospective dividend yield has increased over past three years and P/NAV has contracted

Source: Refinitiv prices at 11 August 2022

In Exhibit 13, we show the key valuation and performance metrics for PHP and a group of its closest peers, including Assura (another investor in primary healthcare assets), care home investors (Impact and Target) and social housing investors (Civitas, Secure Residential Income and Triple Point).

Over three years, PHP’s price performance is the strongest performer in the group, well ahead of the peer average, the broader UK property sector and the UK equity market.

Exhibit 13: Peer comparison

Price
(p)

Market cap
(£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

One month

Three months

12 months

Three years

Assura

71

2,094

1.17

4.2

7%

10%

-9%

25%

Civitas Social Housing

85

516

0.77

6.6

11%

-2%

-28%

-18%

Impact Healthcare

122

492

1.06

5.3

4%

-1%

3%

19%

Residential Secure Income

109

201

1.03

4.7

6%

2%

1%

15%

Target Healthcare

117

727

1.05

5.8

4%

6%

-7%

2%

Triple Point Social Housing

93

375

0.84

5.7

3%

3%

-17%

-12%

Average

0.98

5.4

6%

3%

-9%

5%

Primary Health Properties

148

1,968

1.26

4.4

7%

6%

-11%

27%

UK property sector index

1,715

6%

0%

-11%

-6%

UK equity market index

4,151

5%

2%

0%

-1%

Source: company data, Edison Investment Research, Refinitiv. Note: *Based on last reported EPRA NAV. **Based on 12-month trailing dividends declared. Prices at 11 August 2022.

Exhibit 14: Financial summary

Year end 31 December (£m)

£m

2019

2020

2021

2022e

2023e

2024e

PROFIT & LOSS

Revenue

 

 

115.7

131.2

136.7

141.3

146.9

155.8

Administrative expenses

(12.3)

(13.2)

(10.5)

(11.3)

(12.0)

(12.6)

EBITDA

 

 

103.4

118.0

126.2

130.0

134.8

143.2

Net result on property portfolio

49.8

51.4

110.5

64.4

27.5

22.9

Exceptional items related to corporate acquisition

(148.6)

0.0

(37.0)

0.0

0.0

0.0

Operating profit before financing costs

 

 

4.6

169.4

199.7

194.5

162.4

166.1

Finance income

1.4

1.2

0.8

0.8

2.0

2.0

Finance expense

(42.6)

(43.0)

(35.9)

(41.4)

(44.8)

(50.6)

Net other income/expense

(33.6)

(15.2)

(23.0)

10.4

0.0

0.0

Profit Before Tax

 

 

(70.2)

112.4

141.6

164.3

119.5

117.5

Tax

(1.1)

(0.4)

(1.5)

(0.6)

0.0

0.0

Profit After Tax

 

 

(71.3)

112.0

140.1

163.7

119.5

117.5

Adjusted for the following:

Net realised/unrealised gain/(loss) on investment property

(49.8)

(51.4)

(110.5)

(64.4)

(27.5)

(22.9)

Fair value gain/(loss) on derivatives & convertible bond

33.6

15.2

(1.6)

(10.4)

0.0

0.0

Exceptional items related to corporate acquisition

138.4

0.0

8.0

0.0

0.0

0.0

Other adjustments

1.1

0.4

26.1

0.6

0.0

0.0

EPRA earnings

 

 

52.0

76.2

62.1

89.5

92.0

94.6

Other non-recurring charges

10.2

0.0

29.0

0.0

0.0

0.0

Amortisation of fair value adjustment to acquired debt

(2.5)

(3.1)

(3.2)

(2.9)

(3.0)

(3.0)

MTM write off on early termination of bank debt

0.0

0.0

(4.7)

0.0

Adjusted EPRA earnings

 

 

59.7

73.1

83.2

86.6

89.0

91.6

Period end number of shares (m)

1,216.3

1,315.6

1,332.9

1,334.1

1,334.1

1,334.1

Average Number of Shares Outstanding (m)

1,092.0

1,266.4

1,330.4

1,333.8

1,334.1

1,334.1

Fully diluted average number of shares outstanding (m)

1,138.5

1,368.4

1,434.9

1,439.2

1,439.5

1,439.5

Basic IFRS EPS (p)

 

 

(6.53)

8.8

10.5

12.3

9.0

8.8

Basic Adjusted EPRA EPS (p)

 

 

5.47

5.77

6.20

6.5

6.7

6.9

EPS - normalised fully diluted (p)

 

 

5.4

5.7

6.1

6.3

6.5

6.7

Dividend per share (p)

5.60

5.90

6.20

6.50

6.70

6.90

Dividend cover (Adj. EPRA earnings/dividends paid)

101%

100%

101%

100%

100%

100%

Adjusted EPRA NTA total return

8.0%

10.1%

8.9%

9.8%

7.3%

7.4%

EPRA cost ratio

12.0%

11.9%

9.3%

10.7%

10.8%

10.6%

BALANCE SHEET

Non-current assets

 

 

2,413.6

2,576.1

2,801.4

2,971.1

3,127.8

3,310.1

Investment properties

2,413.1

2,576.1

2,795.9

2,957.5

3,114.2

3,296.5

Other non-current assets

0.5

0.0

5.5

13.6

13.6

13.6

Current Assets

 

 

159.8

121.0

51.7

37.7

33.3

33.1

Cash & equivalents

143.1

103.6

33.4

18.6

14.2

14.0

Other current assets

16.7

17.4

18.3

19.1

19.1

19.1

Current Liabilities

 

 

(66.0)

(68.1)

(70.5)

(75.1)

(75.1)

(75.1)

Current borrowing

(6.1)

(6.4)

(2.2)

0.0

0.0

0.0

Other current liabilities

(59.9)

(61.7)

(68.3)

(75.1)

(75.1)

(75.1)

Non-current liabilities

 

 

(1,278.9)

(1,214.6)

(1,282.7)

(1,351.3)

(1,470.9)

(1,620.5)

Non-current borrowings

(1,257.8)

(1,206.5)

(1,273.0)

(1,333.7)

(1,453.3)

(1,602.9)

Other non-current liabilities

(21.1)

(8.1)

(9.7)

(17.6)

(17.6)

(17.6)

Net Assets

 

 

1,228.5

1,414.4

1,499.9

1,582.4

1,615.0

1,647.6

Derivative interest rate swaps

13.0

0.1

(4.4)

(5.3)

(5.3)

(5.3)

Change in fair value of convertible bond

22.7

25.0

21.6

9.8

9.8

9.8

Other EPRA adjustments

48.6

45.8

38.8

36.8

33.8

30.8

Adjusted EPRA net tangible assets (NTA)

 

 

1,312.8

1,485.3

1,555.9

1,623.7

1,653.3

1,682.9

IFRS NAV per share (p)

101.0

107.5

112.5

118.6

121.1

123.5

Adjusted EPRA NTA per share (p)

107.9

112.9

116.7

121.7

123.9

126.1

CASH FLOW

Operating Cash Flow

 

 

94.0

118.9

140.4

114.4

134.8

143.2

Net Interest & other financing charges

(52.9)

(65.9)

(46.6)

(42.7)

(43.2)

(49.0)

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Acquisitions/disposals

(47.4)

(102.8)

(129.3)

(95.0)

(126.7)

(152.4)

Net proceeds from issue of shares

97.6

136.8

(0.1)

(0.1)

0.0

0.0

Debt drawn/(repaid)

110.5

(58.4)

82.8

68.3

120.0

150.0

Equity dividends paid (net of scrip)

(54.4)

(69.1)

(74.4)

(85.0)

(89.4)

(92.0)

Other cash movements and FX

(11.9)

1.6

(43.6)

25.4

0.0

(0.0)

Net change in cash

137.2

(39.5)

(70.2)

(14.8)

(4.5)

(0.2)

Opening cash & equivalents

 

 

5.9

143.1

103.6

33.4

18.6

14.2

Closing net cash & equivalents

 

 

143.1

103.6

33.4

18.6

14.2

14.0

Debt as per balance sheet

(1,263.9)

(1,212.9)

(1,275.2)

(1,269.1)

(1,388.7)

(1,538.3)

Convertible bond fair value adjustment

22.7

25.0

21.6

9.8

9.8

9.8

Unamortised borrowing costs

(14.6)

(13.8)

(13.7)

(12.5)

(9.9)

(7.3)

Acquired debt fair value a

45.4

42.4

34.4

31.4

28.4

25.4

Closing net debt/(cash)

(1,067.3)

(1,055.7)

(1,199.5)

(1,221.8)

(1,346.2)

(1,496.4)

Net LTV

44.2%

41.0%

42.9%

41.0%

42.9%

45.1%

Source: PHP historical data, Edison Investment Research forecasts

General disclaimer and copyright

This report has been commissioned by Primary Health Properties and prepared and issued by Edison, in consideration of a fee payable by Primary Health Properties. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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60325 Frankfurt

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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1185 Avenue of the Americas

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United States of America

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General disclaimer and copyright

This report has been commissioned by Primary Health Properties and prepared and issued by Edison, in consideration of a fee payable by Primary Health Properties. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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