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Hardman & Co

Primary Health Properties Final results show accelerating rental growth

2019 results were announced on 12 February. 90% of Primary Health Properties PLC (LON:PHP) income is backed by the UK or RoI governments. Occupancy consistently exceeds 99%. We are confident investors will still seek out REITs with a strong focus on categories that provide security of rising income. PHP’s DPS growth rate is accelerating, in contrast to the wider real estate market. 2019’s complementary MedicX merger was transformational, driving improvements that continue strongly in the short term, as well as being strategically beneficial. Primary Health Properties has reduced costs of borrowing and overhead ratios, benefiting 2019, but also impacting 2020 and 2021 onwards.

  • 2019 sees step jump expansion: There is a strong acquisition pipeline of £160m, including £44m in legals, with £356m undrawn bank facilities plus cash. Rental growth, which accelerated to 1.9% from 1.4%, and PHP’s 24 years of unbroken dividend growth, highlight the REIT bears some similarity to index-linked gilts.
  • 2019’s good financial results: The 3.7% dividend rise was above the prior year’s 2.8%. 1Q’20 rose 5.4%. This was driven by the MedicX merger in 1Q’19, rental growth and lower cost of finance. Cost ratios are highly efficient. Administrative costs are captured in the EPRA cost ratio, which, at 12.0%, is the lowest in the UK.
  • Valuation: The rating has risen, with a positive reaction to strategy execution. The MedicX merger was one of several factors driving raised DPS growth visibility. We note rent inflation and successful treasury management (blended new debt cost is 2.5%). Strong expansion in RoI raises blended returns.
  • Risks: No development risk is taken. Investment is focused tightly on this one sector. Assets are rented to top-quality covenant tenants on long leases. Interest cover is 2.7x, and the average unexpired lease length is 12.8 years. We estimate a 46.8% end-2020 loan to value (LTV).
  • Investment summary: The rental trend is important. Rents have seen modest growth in recent years, but are now set to move significantly ahead of UK real estate average rent inflation. Rental growth in the year drove the majority of the NAV uplift of £50m. There was a modest yield compression in RoI, which comprises 7% of the portfolio, and is growing. 1Q’20 dividends are fully covered.

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