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Hardman & Co

Primary Health Properties Strong set of results, confirming ongoing rent rises

Primary Health Properties plc (LON:PHP) 29 July interims showed a 7.1% EPRA EPS increase, rising NAV and a continued rise in DPS. Illustrating the growth, rents rose 20.4%, and adjusted EPRA earnings rose 29.0%. On 9 July, PHP launched a £120m proposed placing, at a point in the REIT’s development that is underpinned by a strong and broad pipeline. The placing was expanded to £140m as a result of investor appetite. The short-term pipeline stands at £128m, and there is also growth from active management of existing assets. We consider this REIT has significant per share value growth potential, through capital deployment, rent rises and financing cost efficiencies.

  • A stand-out performer: Adjusted EPRA earnings rose 29%, or £8.1m. with £4.1m deriving from a full six months of the MedicX merger benefits, £2.2m from rental growth and reviews, and £1.8m from the reduced interest rate vs. the prior year. COVID-19 financial resilience illustrated PHP’s index-linked, gilt-style character.
  • Investment summary: 25% of leases being index-linked and 6% on fixed uplifts enhance even further the attractions of the AAA covenant, we believe. Also, the deployment success of the September 2019 equity raise is highly likely to be replicated on the latest oversubscribed raise, enhancing long-term dividends.
  • Expansion: PHP deploys into new development funding, but also secures opportunities to buy standing assets. This is a growing sector. Last September, Primary Health Properties raised growth equity at 128p; all of this has been deployed. With assets yielding 4.9% and new debt costing ca.2% or less, expansion is accretive.
  • Valuation: The rating reacted positively to 2019 strategy execution, including the MedicX merger and the reduction in debt costs. The progressive dividends are – and will remain, we estimate – fully covered by earnings. This is not the first time investor appetite has exceeded initial targets for equity issuance.
  • Risks: The recent placing helps to maintain an appropriate loan to value (LTV) in the short term, reducing the 30 June 2020 ratio by around 5.0ppts, from 45.8% to 40.3% on a pro-forma basis. Interest cover is over 2.9x. No direct development risk is taken, and the long leases are upwards-only rents.

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