PHP’s revenue grows but so does its debt

Primary care centres are the front line of the NHS, so it makes sense that a real estate investment trust (Reit) that develops and owns these centres has a target market in the UK’s ageing population. In its results for the last calendar year, Primary Health Properties (PHP) posted an increase in net rental income thanks to upward rent reviews and rental growth following extensions and refurbishments.

The NHS is a good tenant to have. PHP has a 99.7 per cent occupancy rate and has so far collected 98 per cent of its rent due for the first quarter of this year. Because the NHS takes on the management of the buildings, PHP does not need to do much once the assets have been developed, giving it the best operating margin among the FTSE 350 Reits.

However, the downside of a model which is focused on development is debt. According to FactSet, it has the highest net debt relative to its total equity among the FTSE 350 Reits because it needs to finance building primary care centres for the NHS with borrowing. This debt-dependent, development-focused strategy will become more expensive going forward as it looks to negotiate new tranches of borrowing in a higher interest rate environment.

Hnterest rates were the primary cause of the company’s £61.5mn portfolio valuation hit and subsequent drop in pre-tax profit. The company blamed this on macroeconomic conditions – from inflation, to the Ukraine war, to last year’s mini-Budget – and it points out that there is little it can do against such forces. Meanwhile, the marginal discount to net asset value means the market believes valuations won’t fall much further. An encouraging sign perhaps, but the debt is less so. Hold.

Last IC view: Hold, 143p, 27 July 2022