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Primary Health Properties delivers during transformational year

Primary Health Properties buys medical centres portfolio for £47.1m

Primary Health Properties (PHP) has announced its annual results for the year ended 31 December 2019. This is a year that its managing director, Harry Hyman, describes as “transformational”, as it saw the completion of the company’s merger with MedicX, which brought together complementary portfolios in the UK and Ireland. Harry says that this has provided a much stronger platform for the future and has already created significant value delivering a total shareholder return of 49.2% in the year. He reports that the company has already delivered operating synergies of £4.0m per annum, which were outlined at the time of the merger, as well as a 50bp reduction in the average cost of debt.

The company has provided the following key highlights:

Earnings and dividend growth

  • Adjusted EPRA earnings per share increased by 5.8% to 5.5p (FY 2018: 5.2p)
  • Completion of all share merger with MedicX contributing £15.6m to Adjusted EPRA earnings in the 9.5 months since completion
  • Excluding the impact of the MedicX merger PHP’s recurring Adjusted EPRA earnings increased by £7.3m or 19.8% (FY 2018: £5.8m or 18.7% increase)
  • Average uplift of 1.9% p.a. on rent reviews agreed in the year, resulting in an uplift in rent of £1.6m p.a. (FY 2018: 1.4% with an uplift of £1.1m p.a.)
  • Quarterly dividends totalling 5.6p per share distributed in the year, a 3.7% increase over 2018 and representing the Company’s 23rd consecutive year of dividend growth
  • 9 income accretive properties, including six forward funded developments selectively acquired for £57.1m, with a large average lot size of £6.3m
  • EPRA cost ratio reduced to 12.0% (FY 2018: 14.3%) and administrative expense ratio reduced to 0.4% (FY 2018: 0.6%) driven by £4.0m p.a. of cost saving synergies arising from the merger with MedicX

Financial management

  • £100.0m (£97.7m net of expenses) over-subscribed equity issue at 128.0p per share or 21.7% premium to previously reported Adjusted EPRA NAV per share of 105.2p as at 30 June 2019
  • Average cost of debt reduced by 50bp to 3.5% from 4.0% as at completion of the merger with MedicX (31 December 2018: 3.9%)
  • £150m/2.875% unsecured convertible bond issued for a six-year term expiring in July 2025
  • €70m/1.509% Euro-denominated senior secured loan notes issued for a 12-year term expiring September 2031
  • £100m secured, multi-currency revolving credit facility refinanced with HSBC for an initial three-year term with options to extend by a further year at the first and second anniversaries of the facility
  • £75m/5.375% retail bond repaid in July 2019

Net asset value growth

  • Underlying property valuation surplus and profit on sales of £49.8m (FY 2018: £36.0m), showing growth of 2.1% (FY 2018: 2.5%); portfolio’s net initial yield increased slightly to 4.86% (31 December 2018: 4.85%) reflecting additional investment in Ireland; no change in the UK
  • Rental growth of £1.9m or 1.5% (FY 2018: £1.3m or 1.8%) accounting for the majority of the revaluation surplus created in the year
  • Portfolio in Ireland now comprises 16 assets, valued at €189m, and including four forward funded developments currently under construction which if valued as complete increases the value to approximately €207m
  • Strong pipeline of targeted acquisitions of approximately £160m of which £44m currently in legal due diligence
  • 36 asset management projects either completed, on-site or about to commence investing £13.4m (FY 2018: £4.4m), creating an additional £0.64m p.a. (FY 2018: £0.2m p.a.) of rental income, and strong pipeline of over 100 future projects being progressed
  • Only £1.9m or 1.5% of annualised rent roll expiring in the next three years of which 65% is subject to a planned asset management initiative and terms have been agreed to renew the lease.

Further portfolio growth since merger and balance sheet strengthened

PHP has continued to grow its portfolio following the merger, particularly in Ireland where it believes there is a significant opportunity. It has also strengthened its balance sheet with a successful, over-subscribed £100m equity issue, £150m unsecured convertible bond issue and €70m Euro-denominated private placement loan note.

23 consecutive years of dividend growth

Following its 23rd consecutive year of dividend growth, PHP says that continuing improvements to the rental growth outlook and further reductions in the cost of finance will help to maintain its strategy of paying a progressive dividend to shareholders which is fully covered by earnings.

[QuotedData attended the PHP results presentation this morning and among all the headline numbers showing the positive integration of the MedicX portfolio, one of the biggest cause for optimism going forward was the increase in rental growth in 2019. The company reported a 1.9% growth in its rent in 2019, which has increased from 0.9% in 2016, 1.1% in 2017 and 1.4% in 2018. The company has effectively an upward only rent roll – whereby 7% of its income is subject to fixed annual uplifts, 24% indexed linked and 69% subject to open market reviews (where rents are set a rates determined by recent deals in the wider primary health market). Due to its 69% weighting, open market rent reviews has the most influence on PHP’s rental growth. Managing director Harry Hyman said the prospect of increased rental growth in the sector for the foreseeable future is good as the government and NHS continues to look to modernise the provision of primary care in the UK to keep up with an ageing population. PHP could further benefit from significant rental growth across its London and South East portfolio at the conclusion of rent review negotiations with the NHS at its property in Clapham, South London. The rent review dispute relates to a March 2015 review that is currently being determined by an independent expert. The outcome of that rent review will determine a new market rental benchmark for its other London and South East assets (which makes up 21% of its portfolio by valuation) and, if positive, will provide substantial rental growth. At the moment, 44% of PHP’s outstanding rent reviews are focused in London and the South East as it waits for a resolution in the dispute (PHP is not losing any income while it waits as the new rental levels will be backdated to the rent review date and interest applied).]

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