Primary Health Properties (PHP) offers a high yield underpinned by revenues from the Treasury. Meanwhile, demand for the modern healthcare centres it builds looks set to grow for many years as the population gets larger and people live longer, and as the NHS attempts to cut costs by focusing on primary health. To top this all off, the company's dividend should finally be covered by its underlying earnings when it reports full-year results next month, making the shares an altogether more attractive proposition for income hunters.
- Attractive dividend - paid quarterly
- Very reliable rental income stream
- Strong demand for purpose built medical centres
- Cost ratio lowest of all real-estate companies
- Rental growth still slow
- High debt level
PHP's business model is straightforward; it identifies opportunities to build medical centres that are then leased back to GPs, who in turn pay the rent from funds provided by the Treasury. Income from the estate of 272 such centres looks rock solid, with about 90 per cent of rental income coming either directly or indirectly from the government and occupancy levels running just shy of 100 per cent. Indeed, there is massive need for the type of centres PHP builds, with 40 per cent of existing GP premises judged to be inadequate and 70 per cent too small to take on additional services, such as X-ray facilities, social care and pharmacies. The attraction of pushing healthcare provision to the general practice level was illustrated by a recent study by management consultants Deloitte that suggested the NHS could save £5 for every £1 spent on general practice.
But building new centres is about more than just saving money. Visits to the GP have shot up over the last decade and Peel Hunt estimates that the combination of a growing population and the increased needs of a rising number of elderly people means that GP visits will rise by 16 per cent by 2027. PHP is in a prime position to help address this need as well as to profit from it and share the rewards with shareholders through its quarterly dividend.
| PRIMARY HEALTH PROPERTIES (PHP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 105p | MARKET VALUE: | £471m | |
| TOUCH: | 105-105.5p | 12-MONTH HIGH: | 114p | LOW: 91p |
| FORWARD DIVIDEND YIELD: | 4.9% | TRADING PROPERTIES: | nil | |
| PREMIUM TO FORWARD NAV: | 13% | NET DEBT: | 203% | |
| INVESTMENT PROPERTIES: | £1.07bn | |||
| Year to 31 Dec | Net asset value (p)* | Net operating income (£) | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 76.3 | 32.7 | 2.6 | 4.6 |
| 2013 | 75.0 | 41.6 | 2.7 | 4.8 |
| 2014 | 80.0 | 59.3 | 4.1 | 4.9 |
| 2015* | 87.0 | 60.9 | 4.8 | 5.0 |
| 2016* | 94.0 | 65.9 | 5.6 | 5.1 |
| % change | +8 | +8 | +17 | +3 |
Normal market size: 3,000 Matched bargain trading Beta: 0.35 *Peel Hunt forecasts, EPRA adjusted NAV and adjusted EPS figures | ||||
Until recently PHP was paying dividends that were not covered by after-tax earnings. However, this is expected to end with annual results due next month, when rising rental income will be enough to cover the payout. Part of the reason for the rise in rental income is that many of its rental agreements with tenants are linked to new-build costs. Following a lull in activity, new build has started to gather pace which provides a yardstick against which costs, and therefore rent increases, can be measured. Following a hiatus, more centres are being built, which provides a benchmark for rent increases - and, importantly, build costs are rising.
Group debt is relatively high with the loan-to-value ratio standing at about 63 per cent. However, the defensive nature of the group's portfolio mean we're not worried. The higher level of debt also has the potential to enhance the effect of valuation increases on net asset value (NAV), which is good news given valuations can prove rather pedestrian in this part of the property market. PHP also has one of the lowest cost bases of any real estate company. As rental income has improved the cost ratio has fallen, and, using the European Public Real Estate Association (EPRA) as a reporting benchmark, the cost ratio is under 12 per cent.
