Primary Health Properties: Results demonstrate growth as well as security

Hardman & Co

Primary Health Properties plc (LON:PHP) 17 February’s strong results for 2020 have prompted us to raise 2021E dividend to 6.25p, from 6.125p. Expansion of the market for modern primary medical assets accelerates and PHP’s confidence in its repeated ability to deploy the fresh equity raised in 2020 (and previous years) has had a direct positive effect on shareholder returns. We think this REIT has significant per-share value growth potential, through capital deployment prudently raising LTV, through measured but accelerating rent rises, prospective reductions in cost of debt and overhead cost efficiencies from the recent internalising of the management structure.

  • A stand-out performer: Adjusted NTA rose by 5% and EPRA EPS rose 6%, with adjusted earnings rising 22%. PHP deployed equity raises promptly. COVID-19 financial resilience has amply illustrated PHP’s index-linked, gilt-style character, with earnings-accretive execution of its expansion strategy, which is ongoing.
  • Investment summary: 25% of leases being index-linked and 6% on fixed uplifts enhance even further the attractions of the AAA covenant, we believe. Equity deployment on the £200m pipeline added to scope for reduction in the 3.5% debt cost point to growth. The latest (quarterly) dividend was up 5.4% YoY.
  • Efficiency: We estimate the group’s EPRA cost ratio to be at the lowest in the sector 2021E. 2020 was 11.9%, a fall vs. the 12.0% incurred during 2019. There has previously been a £4.0m p.a. cost saving from the merger with MedicX and a further £4.0m accrues post the January 2021 taking in-house of management.
  • Valuation: Real assets and upwards-only long leases back progressive dividends. 2019’s rating reacted positively to strategic growth execution and we expect growth in financial ratios to come. For 2022E, we see scope for ca.6% EPRA EPS increase and dividends growing well as a result.
  • Risks: The Primary Health Properties 2020 placing helped to maintain an appropriate loan to value (LTV) in the short term towards 40%. Interest cover is set to remain above 2.5x. The assets are modern and overwhelmingly EPC C or better. Development risk taken is minimal, and the long leases are upwards-only rents.

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