Primary Health Properties

Clear road, full tank, strong dividend prospects

02 Mar 2017 / Corporate research

PHP reported final results 16th February. PHP has paid 20 years’ unbroken dividend increases since first listed. Assets are all on long term leases, mostly upward only rents: a REIT with sustainable growth. At a relatively mature stage in the market cycle, this offers growth with resilience. With a successful £150m fund raise under its belt, visibility of steady expansion and re-gearing imparts upward momentum to EPS. We thus see scope for continuing further dividend growth. 2016 cash dividend cover was 100%. 2017 onwards we see growing, covered dividends.

  • Strategy: PHP grows its UK portfolio, now also entering Ireland, enhancing dividend growth. PHP’s 2016 EPRA Cost Ratio (admin costs as a proportion of net rental income) of 11.5% (11.5% 2015), we believe ranks best in sector. We estimate falls in all future years. This is another support to future dividends.
  • Stability and growth: Dividend cover is rising and set to rise further, underpinning good growth prospects. Post the £150m 2016 fund raise there is strong scope for re-gearing of the balance sheet which supports EPS enhancement. PHP has a good record of growth, having trebled its portfolio size in five years. PHP’s reputation, partners and track record assist when securing both standing assets and new stock. We also anticipate a gradual lengthening of debt maturity profile, PHP having wisely managed the cycle of falling rates.
  • Valuation: The healthcare real estate sub-sector trades at a premium to NAV. PHP’s ‘bond proxy’ status is the right area to be in at this cycle stage. Indeed, PHP has been among the strongest REIT share price performers long term too.
  • Risks: There is no rental income or void risk, but some exposure to interest rate trends circa five years from now. Addressing this, the average debt maturity is set to rise steadily. With incremental management costs which are below PHP’s average, ongoing expansion enhances dividend cover.
  • Investment summary: Total Shareholder Return (TSR) CAGR of well over 10% over the past five years. In 2016 TSR was 7.3%, 2015 23.5%.
  • 2019E: Estimates will be initiated shortly. We can confirm we estimate growth in NAV, EPS and DPS, assisted by modestly accelerating rental inflation. Note, in 2019 we anticipate the Convertible holders will elect to convert to equity.
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