Primary Health Properties plc (PHP) Ordinary Shares 12.5p

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In the first 9 months, Primary Health Properties (PHP) has generated an additional £2.7mn in rental income (2023: £3.3mn). Of that, £2.4mn came from rent reviews on 241 properties, and £0.3mn was from asset management activities.

PHP is set to generate more than £3.0mn of extra income from rent reviews this year (2023: £4.0mn).

Investment activity has been held back given the market conditions, but the new interest rate environment is presenting “interesting” opportunities.

As of 30 September 2024, net debt stood at £1.3bn and the Loan to Value ratio was 48.1%, broadly unchanged from 2023.

As announced on 3 October 2024, a fourth quarterly interim dividend of 1.725p will be paid in November.

The shares rose 1.0% in early trading.

Our view

Things are ticking along nicely at Primary Health Properties (PHP), with rent increases for existing tenants driving most of its rental growth.

PHP’s 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.

Ireland is also a key growth driver, with arguably better market dynamics than here in the UK. Leases tend to be longer term and it’s a key area of focus for future growth.

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. There are also some question marks around growth beyond rent reviews, and with a relatively fresh CEO, there could be changes on the horizon.

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. The valuation isn’t overly demanding, and the prospective dividend yield is attractive – though nothing is guaranteed.

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.

According to Sustainalytics, 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.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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