Half-year net rental income rose 0.9% to £76.2mn. Rent reviews contributed to £1.6mn in additional rent over the year, with a smaller contribution coming from extensions and refurbishments. Underlying profit rose 0.9% to £46.3mn.
The value of the investment portfolio fell 1.4% to £2.8bn, due to rising yields. With only two developments underway, exposure to higher build costs is limited. Occupancy was at 99.2% at the half-year mark.
Net debt was broadly flat at £1.3bn, with a loan-to-value of 48.0% (target 40-50%). On 27 June, the third quarterly interim dividend of 1.725p was declared.
The shares fell 1.9% in mid-morning trading.
Our view
Primary Health Properties' (PHP) purpose-built doctor's surgeries have a long track record of delivering results for shareholders and is now in its 28th 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.
PHP has successfully navigated the interest rate rises seen over the past couple of years. But there has been an impact on the portfolio value as well as 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 arena for now. Instead, it's focused on squeezing more from existing locations, where it sees further upside.
We like the move. Performance over the past couple of years has been driven by rent hikes. Those same elevated costs, and the lack of new supply, are giving landlords like PHP more bargaining power at the negotiating table.
Looking to the future, we think PHP has several features that 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 10 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 as property values have fallen. Plus, 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 remains expensive for now. Because REITs have to pay out most of their profits it's difficult for them to fund growth organically.
PHP's valuation isn’t overly demanding, and the prospective dividend yield is attractive, though nothing is guaranteed. We continue to like PHP as a play on a resilient segment of the UK property market and see it as a benefactor of interest rate cuts as and when they come. However, we caution that there remains a risk of falling property values if rates stay higher for longer.
Environmental, social and governance (ESG) risk
Real estate is relatively low risk in terms of ESG. One of the principal drivers of this risk is the capacity to integrate material ESG considerations into decision-making, risk management and public reporting; the most material ESG considerations are environmental, like carbon emissions reduction, energy efficiency and physical climate risk. The rise of hybrid working has also reduced demand for commercial property, making product governance and customer satisfaction a top priority. Other risks to monitor include labour relations, business ethics, and emissions & waste.
PHP’s overall management of material ESG issues is strong.
Responsibility for overseeing ESG issues is assigned to board level and there is an adequate environmental policy in place. Improvements could be made to ESG related disclosures and executive compensation does not appear to be linked to ESG performance. PHP has targets for increasing investment in sustainable buildings and deadlines to meet those targets, in line with industry best practice.
Primary Health Properties key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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