PHP's predictability makes us bullish again

What will Primary Health Properties' (PHP) results look like at the end of this year? The clues are all there in its results for the 2023 calendar year.

The hospital landlord paid a 1.725p quarterly dividend on 22 February, which was "equivalent to 6.9p on an annualised basis". It said this 6.9p dividend per share (DPS) would be a 3 per cent increase on the 6.7p DPS paid out in 2023 and marks the 28th year of consecutive dividend growth. As the company likes its dividend payments fully covered by EPRA earnings per share (EPS), investors can safely assume it will post EPRA EPS of 6.9p or more for this calendar, and consensus analysts' forecasts agree.

The confidence comes from the predictable nature of PHP's income. Most of its leases are to the NHS and the Irish health service, with contracted rent increases attached. Those leases are long, and its portfolio has little vacancy. High interest rates mean the company will not develop much this year, so most of its income will come from increasing rent from its current tenant line-up.

The headline numbers distract from this simplicity. Pre-tax profit more than halved last year due to higher interest rates hitting values. However, the EPRA EPS, which it bases its dividend payments on, ignores valuation changes. It tracks rental revenue minus the costs of running the buildings instead, and it rose 3 per cent to 6.8p, which is why DPS rose to 6.7p.

The double-digit discount to net asset value presents an opportunity to buy into this stock's predictability. We were once concerned political noise around the NHS and the real estate downturn would hit this stock. That hasn't played out, and, given the discount to net assets, we believe an upgrade is justified. Buy.

Last IC view: Hold, 95.7p, 26 Jul 2023