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Hardman & Co

Primary Health Properties Step change, with MedicX Fund merger

Hardman & Co Report Report DownloadsPrimary Health Properties  (LON:PHP) and MedicX Fund completed an all-share recommended merger on 14 March 2019. The latter is also a UK REIT, investing in assets similar to PHP, focused entirely on UK and Republic of Ireland (RoI) primary medical assets. These are localised hubs providing community-based GP surgeries and other closely related medical services. To date, PHP has expanded its presence strongly in this very specialist asset category. The complementary merger adds to capabilities for sourcing investments and enhances cost (fee- and finance-related) synergies, initially by a stated £4.0m p.a. 91% of PHP income is backed by the UK or RoI government. Occupancy consistently exceeds 99%.

Growth in 2019 sees step jump expansion: PHP’s merger with complementary MedicX Fund effectively adds well over £800m of investment assets of as high a quality as PHP’s, at nil stamp duty cost, saving £4m p.a. in synergy efficiencies and adding complementary routes to purchase new assets.

Strategy: PHP purchases modern standing stock, and forward-funds repeat development partners. No development risk is taken, on the forward funding, and the strategy is focused tightly on this sector. The PHP-MedicX Fund offer, just completed, was ‘all-shares’, on the basis of 0.77 new PHP per one MedicX share.

Valuation: The shares trade at a premium to historical EPRA NAV, and, in the time frame of the table below, PHP shares have always traded above NAV and EPRA NAV. At the last balance sheet (30 September), assets were valued at a 4.85% net initial yield (NIY). In this report, we initiate estimates for the merged entity.

Risks: Debt maturity is over eight years, from a wide variety of bank and bond sources. 2018 DPS cash cover was over 100%, and grew that year. Undrawn facilities exceed £200m. PHP states a 2.6% marginal rate of interest, vs. the 3.9% average cost in 2018, so cost continues to trend down (it fell again in 2018).

Investment summary: 22 years of unbroken dividend growth. Expansion into higher cash-generating Irish assets and a falling debt cost enhance EPRA EPS. Incremental management fees are below portfolio averages. Given these items, the enlargement through the merger, and the asset yield, recent acquisitions have been positive to EPS – and the merger even more so.

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