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Research: Real Estate
Coinciding with its FY21 AGM, Primary Health Properties (PHP) has provided a trading update for the quarter ending 31 March 2022 (Q122). During the period it made good progress in converting its investment pipeline, which continues to grow, while organic rental growth accelerated, in part driven by the inflationary environment. With ample liquidity and 97% of debt fixed/hedged, it is well placed for further growth.
Primary Health Properties |
Progress with organic and acquisition-led growth |
Trading update |
Real estate |
29 April 2022 |
Share price performance
Business description
Next events
Analyst
Primary Health Properties is a research client of Edison Investment Research Limited |
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Coinciding with its FY21 AGM, Primary Health Properties (PHP) has provided a trading update for the quarter ending 31 March 2022 (Q122). During the period it made good progress in converting its investment pipeline, which continues to grow, while organic rental growth accelerated, in part driven by the inflationary environment. With ample liquidity and 97% of debt fixed/hedged, it is well placed for further growth.
Year end |
Net rental income (£m) |
Adjusted EPRA earnings* (£m) |
Adjusted EPS** (p) |
NAV per share*** (p) |
DPS |
P/NAV |
Yield |
12/20 |
131.2 |
73.1 |
5.8 |
112.9 |
5.90 |
1.30 |
4.0 |
12/21 |
136.7 |
83.2 |
6.2 |
116.7 |
6.20 |
1.25 |
4.2 |
12/22e |
141.1 |
86.7 |
6.5 |
120.8 |
6.50 |
1.21 |
4.4 |
12/23e |
144.9 |
90.2 |
6.8 |
126.1 |
6.80 |
1.16 |
4.6 |
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.
Well supported DPS growth
During Q122 PHP committed to, and has recently completed, the acquisition of two operational healthcare properties for a combined £41.5m. In line with its ‘Net Zero Carbon’ (NZC) Framework a first NZC direct development project has also been announced, with a gross development value of £6.7m. Rent reviews (£0.6m) and 10 completed asset management projects (£0.3m) added £0.9m (0.6%) to annualised rental income (FY21: £140.7m). Completed rent reviews reflected an average 2.0% pa uplift (FY21: 1.7%). PHP is in its 28th year of unbroken dividend increases and with H122 aggregate DPS of 3.25p is unsurprisingly well on track to meet its 6.5p annual target (+4.8%), fully covered by adjusted EPRA earnings.
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 £270m of available funding headroom and its strong pipeline of investment opportunities has grown to c £482m, of which c £139m is in legal due diligence. With the positive rent review data our FY22e adjusted EPRA earnings increases £0.5m/0.6%.
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, 90% backed directly or indirectly by government bodies, with little exposure to the economic cycle or fluctuations in occupancy. The FY22e DPS of 6.5p fully covered by adjusted EPRA earnings, represents a yield of 4.4%, supporting an FY21 P/NAV of 1.2x.
Further details
Our Outlook note published in March 2022 provides a detailed review of PHP’s strategy, recent financial performance and our forecasts, towards which the trading update indicates good progress.
The recently announced investments include:
■
The £34.5m acquisition of a large, state-of-the-art diagnostic centre in Chiswick, London, let to HCA healthcare.
■
The £7.0m acquisition of a clinical facility in Chertsey, let to the NHS.
■
The direct development of a NZC purpose-built medical centre at Eastergate in West Sussex, with a gross development value of £6.7m. The development will be one of the UK’s first NZC healthcare facilities and demonstrates PHP’s strategic commitment to transitioning all its operational, development and asset management activities to NZC by 2030 and to help occupiers achieve NZC by 2040.
In aggregate these transactions amount to £48.2m, representing good progress in converting the pipeline of investment opportunities into committed investments/acquisitions, and are in line with our assumption of c £120m for FY22.
The current investment pipeline comprises £360m in the UK and €145m (£122m equivalent) in Ireland. The potential transactions in legal due diligence are £65m in the UK and €87m (£74m equivalent) in Ireland.
The increase in rental uplifts on completed reviews is encouraging. Of total rents, 25% are indexed to RPI1 and recently increased inflation will progressively feed into rent reviews. Another 6% of rents provide fixed uplifts at c 3.0% pa. However, the key opportunity lies in open market rent reviews, 69% of the total, which have shown relatively muted growth in recent years, but where upward pressure on land and building costs is an important input into the rent review process. Rent reviews are on a three-year revolving basis in the UK and the amount of rent added in any period is a function of the number of reviews and the uplift achieved. A significant number of rent reviews remained outstanding and under negotiation at end-FY21, representing £84.9m of passing rent, £2.1m lower than the estimated rental value (ERV), a significant upside potential.
Retail Price Index
Pro forma2 LTV of 43.3% at end-Q122 remains at the low end of PHP’s 40–50% target. This reflects group net debt of £1,217m, slightly up on end-FY21 (£1,200m) when the cost of debt was 2.9%. With 97% of debt fixed or hedged for an average of nine years PHP has significant protection against a further increase in interest rates.
Based on FY21 valuations, adjusted for subsequent events.
Exhibit 1: Financial summary
£m |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
||
Year end 31 December (£m) |
||||||||
PROFIT & LOSS |
||||||||
Revenue |
|
|
115.7 |
131.2 |
136.7 |
141.1 |
144.9 |
150.9 |
Administrative expenses |
(12.3) |
(13.2) |
(10.5) |
(10.8) |
(11.3) |
(11.9) |
||
EBITDA |
|
|
103.4 |
118.0 |
126.2 |
130.3 |
133.6 |
139.0 |
Net result on property portfolio |
49.8 |
51.4 |
110.5 |
53.9 |
70.8 |
75.6 |
||
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 |
184.1 |
204.4 |
214.6 |
Finance income |
1.4 |
1.2 |
0.8 |
0.6 |
2.0 |
2.0 |
||
Finance expense |
(42.6) |
(43.0) |
(35.9) |
(41.3) |
(42.3) |
(45.0) |
||
Net finance expense |
|
|
(41.2) |
(41.8) |
(35.1) |
(40.6) |
(40.3) |
(43.0) |
Net other income/expense |
(33.6) |
(15.2) |
(23.0) |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
(70.2) |
112.4 |
141.6 |
143.5 |
164.0 |
171.6 |
Tax |
(1.1) |
(0.4) |
(1.5) |
0.0 |
0.0 |
0.0 |
||
Profit After Tax (FRS 3) |
|
|
(71.3) |
112.0 |
140.1 |
143.5 |
164.0 |
171.6 |
Adjusted for the following: |
||||||||
Net gain/(loss) on revaluation |
(48.4) |
(51.3) |
(110.2) |
(53.9) |
(70.8) |
(75.6) |
||
Profit on disposal |
(1.4) |
(0.1) |
(0.3) |
0.0 |
0.0 |
0.0 |
||
Fair value gain/(loss) on derivatives & convertible bond |
33.6 |
15.2 |
(1.6) |
0.0 |
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 |
0.0 |
0.0 |
0.0 |
||
EPRA earnings |
|
|
52.0 |
76.2 |
62.1 |
89.6 |
93.2 |
96.0 |
Costs/charges relating to acquisition of Nexus |
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 |
86.7 |
90.2 |
93.0 |
Period end number of shares (m) |
1,216.3 |
1,315.6 |
1,332.9 |
1,333.3 |
1,333.3 |
1,333.3 |
||
Average Number of Shares Outstanding (m) |
1,092.0 |
1,266.4 |
1,330.4 |
1,333.3 |
1,333.3 |
1,333.3 |
||
Fully diluted average number of shares outstanding (m) |
1,138.5 |
1,368.4 |
1,434.9 |
1,438.7 |
1,438.7 |
1,438.7 |
||
Basic IFRS EPS (p) |
|
|
(6.53) |
8.8 |
10.5 |
10.8 |
12.3 |
12.9 |
Basic Adjusted EPRA EPS (p) |
|
|
5.5 |
5.8 |
6.2 |
6.5 |
6.8 |
7.0 |
EPS - normalised fully diluted (p) |
|
|
5.4 |
5.7 |
6.1 |
6.3 |
6.6 |
6.8 |
Dividend per share (p) |
5.600 |
5.900 |
6.200 |
6.500 |
6.800 |
7.000 |
||
Dividend cover (Adj. EPRA earnings/dividends paid) |
101% |
100% |
101% |
100% |
100% |
100% |
||
Adjusted EPRA NTA total return |
8.0% |
10.1% |
8.9% |
9.0% |
10.0% |
10.1% |
||
EPRA cost ratio |
12.0% |
11.9% |
9.3% |
9.3% |
9.4% |
9.4% |
||
BALANCE SHEET |
||||||||
Non-current assets |
|
|
2,413.6 |
2,576.1 |
2,801.4 |
2,951.4 |
3,157.6 |
3,379.8 |
Investment properties |
2,413.1 |
2,576.1 |
2,795.9 |
2,945.9 |
3,152.1 |
3,374.3 |
||
Other non-current assets |
0.5 |
0.0 |
5.5 |
5.5 |
5.5 |
5.5 |
||
Current Assets |
|
|
159.8 |
121.0 |
51.7 |
38.6 |
35.8 |
41.8 |
Cash & equivalents |
143.1 |
103.6 |
33.4 |
21.0 |
18.2 |
24.2 |
||
Other current assets |
16.7 |
17.4 |
18.3 |
17.6 |
17.6 |
17.6 |
||
Current Liabilities |
|
|
(66.0) |
(68.1) |
(70.5) |
(68.3) |
(68.3) |
(68.3) |
Current borrowing |
(6.1) |
(6.4) |
(2.2) |
0.0 |
0.0 |
0.0 |
||
Other current liabilities |
(59.9) |
(61.7) |
(68.3) |
(68.3) |
(68.3) |
(68.3) |
||
Non-current liabilities |
|
|
(1,278.9) |
(1,214.6) |
(1,282.7) |
(1,364.6) |
(1,494.2) |
(1,643.8) |
Non-current borrowings |
(1,257.8) |
(1,206.5) |
(1,273.0) |
(1,354.9) |
(1,484.5) |
(1,634.1) |
||
Other non-current liabilities |
(21.1) |
(8.1) |
(9.7) |
(9.7) |
(9.7) |
(9.7) |
||
Net Assets |
|
|
1,228.5 |
1,414.4 |
1,499.9 |
1,557.1 |
1,630.9 |
1,709.5 |
Derivative interest rate swaps |
13.0 |
0.1 |
(4.4) |
(4.4) |
(4.4) |
(4.4) |
||
Change in fair value of convertible bond |
22.7 |
25.0 |
21.6 |
21.6 |
21.6 |
21.6 |
||
Other EPRA adjustments |
48.6 |
45.8 |
38.8 |
35.9 |
32.9 |
29.9 |
||
Adjusted EPRA net tangible assets (NTA) |
|
|
1,312.8 |
1,485.3 |
1,555.9 |
1,610.2 |
1,681.0 |
1,756.6 |
IFRS NAV per share (p) |
101.0 |
107.5 |
112.5 |
116.8 |
122.3 |
128.2 |
||
Adjusted EPRA NTA per share (p) |
107.9 |
112.9 |
116.7 |
120.8 |
126.1 |
131.7 |
||
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
94.0 |
118.9 |
140.4 |
130.7 |
134.0 |
139.4 |
Net Interest & other financing charges |
(52.9) |
(65.9) |
(46.6) |
(40.9) |
(40.7) |
(43.4) |
||
Tax |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Acquisitions/disposals |
(47.4) |
(102.8) |
(129.3) |
(96.1) |
(135.4) |
(146.7) |
||
Net proceeds from issue of shares |
97.6 |
136.8 |
(0.1) |
0.0 |
0.0 |
0.0 |
||
Debt drawn/(repaid) |
110.5 |
(58.4) |
82.8 |
80.0 |
130.0 |
150.0 |
||
Equity dividends paid (net of scrip) |
(54.4) |
(69.1) |
(74.4) |
(86.0) |
(90.7) |
(93.3) |
||
Other cash movements and FX |
(11.9) |
1.6 |
(43.6) |
(0.2) |
0.0 |
(0.0) |
||
Net change in cash |
137.2 |
(39.5) |
(70.2) |
(12.5) |
(2.8) |
6.0 |
||
Opening cash & equivalents |
|
|
5.9 |
143.1 |
103.6 |
33.4 |
20.9 |
18.1 |
Closing net cash & equivalents |
|
|
143.1 |
103.6 |
33.4 |
20.9 |
18.1 |
24.1 |
Debt as per balance sheet |
(1,263.9) |
(1,212.9) |
(1,275.2) |
(1,354.9) |
(1,484.5) |
(1,634.1) |
||
Convertible bond fair value adjustment |
22.7 |
25.0 |
21.6 |
21.6 |
21.6 |
21.6 |
||
Unamortised borrowing costs |
(14.6) |
(13.8) |
(13.7) |
(11.1) |
(8.5) |
(5.9) |
||
Acquired debt fair value a |
45.4 |
42.4 |
34.4 |
31.5 |
28.5 |
25.5 |
||
Closing net debt/(cash) |
(1,067.3) |
(1,055.7) |
(1,199.5) |
(1,292.0) |
(1,424.8) |
(1,568.8) |
||
Net LTV |
44.2% |
41.0% |
42.9% |
43.9% |
45.2% |
46.5% |
Source: PHP historical data, Edison Investment Research forecasts
|
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Research: Investment Companies
Gresham House Energy Storage Fund (GRID) invests in a diversified portfolio of utility-scale battery energy storage systems (BESS) in the UK and Ireland. This note provides an update to our February 2022 initiation note, following the release of GRID’s results for the financial year (ended 31 December 2021). FY21 was a good year for the fund. GRID’s revenues and NAV returns saw impressive growth, supported by growing demand for BESS services and upward revaluations to some of its portfolio assets. Also, Manager Ben Guest and the board are positive about the future. Operational capacity is set to rise dramatically in the next two years, as GRID’s existing project pipeline comes on stream and Guest plans to expand operations further, by investing in additional projects in US, European, Australian and Canadian markets (subject to shareholder and lender approvals). The stage is set for GRID to realise more significant NAV uplifts and increases in its already attractive dividend.
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