Primary Health Properties 12 March 2019
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Primary Health Properties (LON:PHP) is a FTSE 250 REIT, aiming to deliver progressive returns for shareholders through a mixture of income and capital appreciation. It has recently announced an all-share merger with smaller rival fund MedicX.
The company invests in modern, purpose-built doctor’s surgery facilities that are let out on long leases across the UK and Ireland. Nexus, the managers of the trust, look for large scale projects, and as at the end of 2018, the average lot size across both the PHP and MedicX portfolios was £4.8m. The trust boasts strong fundamental attributes, including a weighted average unexpired lease term (WAULT) of 13.1 years and an occupancy rate of 99.8%. 90% of rents are government backed.
Over the past five years, we have seen PHP deliver strong returns, generating NAV returns of 111.7%. This is quadruple the IA open-ended direct property sector (27.8%), twenty times the FTSE All Share REIT index (5%), as well as double the Morningstar IT Property sector average (50%). The primary focus of the trust is the yield, and it aims to offer a growing level of income over time. Currently, the trust is yielding 4.8% and last year saw the trust deliver its 22nd year of dividend growth - now fully covered by earnings.
The merger with MedicX creates a portfolio of around 480 properties, worth a total of £2.3bn. As we explain in more detail in the portfolio section, the merger benefits both sets of shareholders, mainly due to the increase in scale of the combined business, and is expected to complete in late March.
PHP has largely traded at a consistent and significant premium to the published NAV. This reflects the strong and secure dividend yield, as well as the strong investor following that it has built up. It is worth noting that PHP employs significant gearing of 45%, based on a loan to value basis.
Primary healthcare property is a niche and difficult asset class to access. In our view, it has some unique attributes for the income seeker, principally due to strong fundamental attributes and government-backed income. With increasing pressure on the authorities to deliver cost effective care to patients, we see primary healthcare as a key area for investment, and one that will only continue to grow as demographics change across the UK and the Republic of Ireland.
Over the past five years, we have seen PHP deliver impressive returns, and an impressive run of dividend growth, which is currently fully covered by earnings. The trust continues to boast some standout characteristics, including the long weighted average unexpired lease term (WAULT) of 13.5 years once the merger completes. Additionally, the occupancy rate of 99.8%, of which 90% is government backed, further adds to the lower risk, long-term and non-cyclical returns the trust can offer.
The merger with MedicX creates one of the largest healthcare REITs in the UK, with a portfolio valued at £2.3bn. This decision brings together two highly complementary portfolios in both the UK and Ireland, and the combined company will offer lower OCFs and a stronger platform for further acquisitions and forward-funded developments.
|Track record of strong and steady total returns
|Premium rating could reduce if sentiment changes towards the sector
|22- year track record for increasing dividends, with the last four years covered by earnings
|Possible integration risks associated with the upcoming merger
|Strong fundamentals and government-backed income mean the trust should fare relatively well in volatile conditions
|Relative highly geared (LTV of 45%)