Accelerated dividend cover
Primary Health Properties' (LONDON:PHP) interim results showed strong profit growth with good operational gearing as a result of ongoing cost and funding efficiencies. Cover of the progressive dividend lifted to 89%. Our revised forecasts now show full cover in H2 of the current year, with a prospective yield of 4.9%. Following a conclusive election result, there is continuity of policy towards the NHS, providing political and financial support for its five-year plan. In this context, the prospects for continuing asset growth look good. Property yields have contracted but funding conditions remain strong, maintaining a healthy spread and opportunity for ongoing accretive growth.
Key messages from the interim results
Rental income grew 5% yoy, underlying EPRA earnings by 20%, and IFRS earnings by 46%. The operational gearing reflects the renegotiation of the management fee in May 2014 (which contributed to an 8% reduction in administration costs) and debt cost efficiencies resulting from active liability management. IFRS profits benefited from further significant revaluation gains, which also saw NAV per share grow despite the high payout of underlying earnings. A debt and swap restructuring completed in July will see the average cost of debt fall further and accelerate the move to full dividend cover; we now estimate this will occur in H215 (102%), one year earlier than previously forecast.
Market growth becoming clearer
PHP operates in an attractive market with good growth prospects. Tenant quality is excellent, being largely government risk or pharmacies with a natural flow of business as a result of colocation with GP practices. Leases are long and with upward-only rent revisions. We believe the medium- to long-term growth outlook remains strong, driven by an ageing population with growing healthcare needs, an underinvested primary healthcare estate and a general acceptance of the need for more integrated primary care services in the community. The new government has committed to the NHS five-year plan, providing £8bn pa in additional funding, while looking for the NHS to deliver significant operational efficiencies of £22bn pa. The anticipated changes in healthcare delivery to achieve these will require modern, purpose-built, flexible premises of the type in which PHP invests.
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