Primary Health Properties

Growing the footprint; optimising income and NAV

29 Oct 2018 / Corporate research

PHP’s dividend growth is set to accelerate. In addition, we see a number of drivers to NAV growth. PHP invests in Government-income-backed, long leases. Two years ago, PHP extended into the Republic of Ireland (RoI), and has invested €101m in assets in newly built primary medical centres in that jurisdiction. UK assets are attractive to investors seeking low-risk assets and covenants, with upward-only rents on long leases. Notwithstanding possible rising bond yield valuations, we believe PHP’s UK assets will see an element of upward revaluation. The RoI assets have similar characteristics but trade off higher yields. We see an ongoing trend of a narrowing down of the RoI asset valuation discount vs. the UK.

  • Strategy: PHP’s UK assets are attractive, but this research focuses on RoI, where there is a stronger income yield and a good pipeline of assets to be acquired. RoI is still a relatively new market for modern centres, but as awareness grows, valuations should rise. Before then, PHP will have expanded its exposure further.
  • Further expansion in RoI: On 5 September 2018, PHP acquired three modern, purpose-built primary healthcare centres for €38.6m. Since the first RoI acquisition, in 2016, ca.30% of PHP’s total asset purchases have been in RoI, as PHP uses its expertise to expand, ahead of likely solid revaluations of the asset class.
  • Valuation: The secure income REIT sector (and thus PHP) should be judged by i) dividend yield, ii) sustainable growth of DPS and iii) the underlying assets’ attractions to future tenants. PHP’s yield is in line, and we consider the assets to bring relatively superior attractions. Modest DPS growth is set to accelerate.
  • Risks: Debt maturity has lengthened YoY (5.9 years’ average), reducing refinance risk YoY, while also still lowering cost of debt. Were rent growth to remain subdued, DPS growth should remain at ca.3%. 2018 dividends, cash paid, are fully covered, but cover builds to over 100% under any macroeconomic scenario.
  • Investment summary: PHP is in its 22nd year of stockmarket listing and its 22nd year of dividend rises. Investment, including the now fast-growing, higher-yielding market in RoI, added to deployment of equity and ongoing cost optimisation, all underpin good support for dividend growth for some years to come.
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