Primary Health Properties — Progress with organic and acquisition-led growth

Primary Health Properties (LSE: PHP)

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Last close As at 02/02/2023

GBP1.12

−0.30 (−0.27%)

Market capitalisation

GBP1,501m

Research: Real Estate

Primary Health Properties — Progress with organic and acquisition-led growth

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.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Primary Health Properties

Progress with organic and acquisition-led growth

Trading update

Real estate

29 April 2022

Price

146.4p

Market cap

£1,951m

Net debt (£m) as at 31 March 2022

1,217

Net LTV as at 31 March 2022

(31 December 2021 pro forma)

43.3%

Shares in issue

1,333.3m

Free float

97%

Code

PHP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

2.2

(2.3)

Rel (local)

(2.0)

2.6

(6.7)

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

H122 results

July 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

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)

P/NAV
(x)

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


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.

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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.

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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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Gresham House Energy Storage Fund — A great year, and better ones ahead?

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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