PHP gains momentum

At the beginning, general practitioners usually operated in a partnership on premises owned by the GPs. This is changing as GPs retire and new entrants prefer not to run and own a surgery. The new trend is to sell and leaseback purpose-built healthcare centres, with rent paid to a landlord by funds provided by Her Majesty’s Treasury.

This is where Primary Health Properties (PHP) is steadily building up a portfolio of care centres, with rental income set to grow significantly in the next few years. The case for more new healthcare facilities has become acute, exacerbated by a growing population with a rising percentage of older people with greater medical needs.

To address this, spending on new primary health centres is set to rise from £9.6bn in 2015-16 to around £12bn by 2020-21. This is a win/win situation because the cost of two visits to A&E for one patient is more expensive than a whole year’s worth of GP visits. GPs will be encouraged to open longer hours, with new centres providing ancillary services such as minor injury, X-rays, physiotherapy and others. In fact, around three-quarters of all A&E attendees could be treated at primary health centres.

PHP’s rent roll is as secure as it gets, with around 90 per cent paid through GPs by the Treasury. Current occupancy is close to 100 per cent, and there has never been a tenant default. Rental growth has been slow, however, and there are two reasons for this. Around 6 per cent of rents are fixed, while 19 per cent are linked to the retail price index, which until recently recorded minimal inflation. The rest of the rental income is subject to open-market reviews, whereby rental values are assessed by a district valuer, taking into account build costs. However, until recently there has been very little new build to use as an estimation. Both of these factors have changed. Inflation is much higher than it was, while new construction will lead to higher valuations and higher rents. Rising rental income also means that the dividend should now be covered by earnings, and the dividend record is impressive, having risen every year for more than 20 years.

Shares in PHP trade at a premium to net asset value compared with a broader sector discount. But as analysts at Peel Hunt pointed out, each property valuation assumes that each surgery is valued individually, and at an average value of £2m-£3m these would not be attractive to institutional investors, whereas the portfolio, valued as a whole, would command a higher valuation.

PHP is also expanding its operation into Ireland where the yield on purchase at 6.5 per cent is more attractive than the 5 per cent in the UK. This is explained by the slightly higher risk, as GPs do not have their rents reimbursed by the Irish Health Authority (HSE). However, the new centres will be rented out to the HSE, which in turn will sub-let to local GPs, which in reality makes the income stream pretty safe.

Net debt is relatively high, but property price rises helped to pull the loan-to-value ratio down to 53 per cent, and new debt facilities were secured this month, taking the average cost of debt down from 4.26 per cent to 4.09 per cent.