Primary Health Properties (LSE:PHP) — Interim Results Investor Presentation

0:00 Good afternoon, and welcome to the PRIMARY HEALTH PROPERTIES PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. You can be submitted any time by the Q and A tab situated in the right hand corner of your screen. So click Q and A, scroll to the bottom, type your question and press send. Company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where appropriate to do so. Before we begin, I'd to submit the following poll. I'd now like to hand you over to Harry Hyman, CEO. Good afternoon.

0:29 Hello, everybody. Let me introduce, my colleagues and myself. My name is Harry Hyman. I'm the founder and chief executive of PRIMARY HEALTH PROPERTIES. Richard Howe, finance director, is on my right. David Bateman, the chief investment officer, is on my left. Just before we start with the slides, I just wanted to give you a very brief overview of what the company actually does. We have a very simple business model. We buy properties, assets, which are let on a long term basis to health care users. In The UK, predominantly GPs and the NHS and pharmacy operators. And in Ireland, our other area of operation to the HSE, which is the Irish equivalent of the NHS, GPs, and pharmacy operators. And we derive the income from that, and net of all costs and our interest charges, we pay that out to investors in the shape of a dividend, which I'm proud to say has grown in each of the last twenty six years. And if you were to buy the shares today, the dividend yield is something like 4.5%.

1:31 So we have a very simple, very robust, low risk business model. We said that now, let's give you some highlights of our results before we drill down into the, detail of the presentation. So, clearly, just to say a few words at the beginning, we're fortunate to operate in a very good and growing sector. The good news is that populations in both Britain and Ireland are growing. They are getting older, and there is more incidence of chronic disease like type two diabetes, like drug and alcohol abuse, heart disease, and things like that, all of which put an enormous strain, as we know, on health care systems. And one of the best ways of dealing with that is to move a lot of the demand into the primary care arena. So gone are the days when the GP center was just the doctor's house, where a single doctor or maybe two doctors practice.

2:28 And the future is very much more the hub core primary center where a wide range of services and therapies are delivered alongside a large practice of doctors, six, ten, or even 20 in some cases. So this is a very good way for governments to reduce the pressure on their health care budgets, and and therefore, we have a vibrant future ahead of us as a business. We all know the incredible stresses and strains that COVID nineteen put on the health care systems, and that strain has not gone away. If for no other reason, then we still have to carry on with the vaccination program for people 50. And I can see that carrying on for quite some time. From our standpoint too, there is an enormously large opportunity to invest more in the primary care estate.

3:16 Some 40% of it, according to BMA statistics, is not fit for purpose. And we've estimated that that is a total capital requirement of between 4 and 5,000,000,000 here in The UK. And in Ireland, around a billion euros is needed to modernize the estate. We had a lot of talk about digital and the impact that that would have on medical centers. But so far, our experience is that that while the while the internal configuration of some of the buildings is changing to take into account online consultations, the actual amount of space that's needed within the primary care estate is not reducing but still increasing. Anyway, let's give you some highlights from our results that we came out with for the six months to June 30.

4:03 We carried on with our track record of paying a progressive dividend. We've already paid 3.25 p. We've announced the third quarterly payment, which is paid on the August 28, and we're on track for the 6.5 p that brokers are predicting our dividend to be for the year as a whole. And our dividend cover is very well is is is very good at a 103% of the amount that we paid out. Our accounting return, as we'll hear shortly, is very strong at 6.3% driven by a good accounting revaluation surplus, and our total property return also reflected that. We we, of course, are conscious of the fact that there's a lot of uncertainty in the various marketplace around the world, and we've taken a cautious stance toward up towards acquisitions, acquiring three assets for 49,000,000 during the period.

4:56 We've also done some capital recycling, selling a portfolio of 13 assets for just under 28,000,000, which closed after the period end. We do have a good pipeline, which you'll hear more about during the during the presentation, and we're focusing very much on our own on balance sheet development and our Irish opportunities. Many people think that we're exposed to higher interest rates and we'll be we'll be worse off from higher inflation. But in fact, we are 95% hedged out on the debt side, so the impact there will be very muted. And and in fact, both through the combination of our index linked income, where 25% of the portfolio is formerly linked to inflation, but also through the way the rental mechanism works, we believe that higher inflation will lead to a firming tone in the amount of rental growth that we are getting.

5:54 The first half saw an increase in the rent roll of some 1,800,000 in part from asset management opportunities and also inflation linked increase, but also a firmer tone on the open market value reviews. We're seeing the benefits of some of the excellent refinancings that we did in 'twenty one and the early part of 'twenty two. So our portfolio today stands at 2,900,000,000. Our rent roll is a 144,000,000. 89% of the total top line of the business comes from either the British or Irish government, balanced mainly from pharmacy operators. We have a portfolio that is almost a 100% let with a very long outstanding of over eleven years. And as I mentioned earlier, most of our debt is hedged out for the next eight years.

6:43 Just to reinforce that point, here is a chart showing our track record of paying an increased dividend. That's when we prepared the slide, our share price is just under 144 p, showing a 4.5% yield. And we have every intention of maintaining this track this track record from the financing of social infrastructure as we move forward. Looking at the relative performance of the business, on the next slide, you can see that we have done very well on a twenty year basis. We've done very well on a ten year basis and a five year basis and so on and so forth. And we believe that our our our returns are superior to that of our competitor.

7:28 But we're not here to talk about them. We're here to talk about us. And what we have is a very dependable source of high quality growing revenue, which comes out to our shareholders quarterly in February, in May, in August, and in November. And we can be safe in the knowledge that we're helping play our part not only in the leveling up agenda, but also in the modernization of social infrastructure across The UK. So that is our overview. And with that, I'm going to hand over to Richard, our CFO, who's going to talk about the financial the finances in a bit more detail. Over to you, Richard. Thanks, Harry. Yes. Just to look at some of the key financial highlights for the first six months of twenty twenty two. Net rental income was up just by GBP 3,400,000.

8:14 Very encouragingly, and we'll come back in touch on this a bit later, half of that increase came from rep reviews and asset management, where we saw an increase of GBP 1,700,000 in the six month period. The balance came from acquisitions and developments that we acquired last year and this year, and they added the balance of the number. So after we knock off interest and administrative costs, we come down to our adjusted earnings, and this is a number we like to pay out to shareholders in the form of an increasing dividend. So that was up by GBP 4,000,000, 44,700,000. And that was driven by those two factors I just touched upon, but also interest cost savings. We delivered around GBP 5,000,000 of interest cost savings last year. So some of that starts to flow through to this year, which resulted in GBP 1,100,000 of interest savings in the first six months of the year, notwithstanding additional debts that we've drawn down over the course of the year to finance new acquisitions and developments. We had a slight increase in admin costs of around GBP $05,000,000, which was down to additional staffing that we've taken on board to manage with the increasing size of the portfolio.

9:26 So on an adjusted earnings per share basis, that equaled 3.4p per share. As Harry mentioned, that was paid out to shareholders as a dividend, going to 3.25p. We had dividend cover at a healthy 103%. Like for like rental growth, GBP 1,800,000 or 1.3%. That was a record in the first six months of the year. We're very pleased with that. We'll come back and touch on that a bit later in year. As already mentioned, we saw very strong revaluation surplus, just over GBP 50,000,000.

9:53 That was driven by two key factors: half of it was the rental growth we've just touched upon. We've also seen continue to see a very strong investment market. We saw yields compressed by a further seven basis points in the period. Investment portfolio now valued at GBP 2,900,000,000. We're going touch on that a bit in a bit more detail a bit later in the presentation. Adjusted net tangible assets per share, just under GBP121p. There was up GBP4.1p in the first six months. Half of that sorry, GBP3.8p of that came from the valuation surplus with a balance from retained earnings. Loan to value ratio, we like to leverage this portfolio relatively high compared to most other REITs because we have a very strong government backed income stream. It's at the lower end of our target range between 4050%.

10:43 And at June 30, we were just above 43%. We also have GBP $290,000,000 of undrawn firepower from our various loan facilities, which was there to finance our pipeline, which we will talk about again in a bit more detail a bit later. These other metrics, Harry has already mentioned, pretty much fully occupied, long lease lengths and average cost of debt down at just 3%. We also have the lowest EPRA cost ratio at just over 10% in the whole U. K. REIT sector.

11:18 This next slide, we've touched on most of these key numbers, but this sort of pulls out the differential between our adjusted earnings, which we'd like to pay out to shareholders and accounting numbers, which are called IFRS. So when you add on the adjusted earnings, 44,700,000, add on the revaluation services, some gains on our derivatives and convertible bonds, we saw a total profit of just under £108,000,000 in the first six months of the year, gluing to 8p per share.

11:53 Looking at the balance sheet. We have adjusted net tangible assets, just over GBP 1,600,000,000. They were up 3.6% in the period. Most of that was driven by the revaluation surplus. So what this chart is trying to show you that although the starting net asset value, just under 117p, rose from the adjusted earnings 3.4p, that was paid out to shareholders in the form of a dividend. The revaluation surplus increased that by 3.8p, and the other is just the premium in the shares, which were issued through the scrip dividend mechanism. Turning to the debt portfolio. We have just under GBP 1,600,000,000 of various debt facilities with a wide range of lending partners.

12:41 There are a number of institutions. Aviva, very keen lenders to the sector. All the high street banks in the forms of revolving credit facilities, which provide a lot of flexibility in terms of when we have spare cash, we can pay the loans down and we will need cash to buy acquisitions. We can draw it down. We also have a number of bonds and private placements, including euro denominated borrowings, which hedge out our euro exposure in Ireland. That debt is fixed now for just under eight years. As Harry already mentioned, 95% fixed, so we have very little exposure to rising interest rates in the future. Pounds $290,000,000 of undrawn £5 which is set to finance our future capital commitments and our pipeline into the future.

13:27 When you look at the chart at the bottom of that graph, this is just showing the maturity profile of our debt. We don't have any particular large waterfall. And all of these facilities maturing in 2023 and 2024 are revolving credit facilities with typical UK high street banks. Those banks remain very supportive of this sector. They're keen to lend more to us. We're in the process of renewing those facilities at the moment. These pie charts or bar charts, I should say, show the improving debt metrics across the whole portfolio. Average cost of debt is pretty much an all time low, 3%. As we said, that's fixed out for just under eight years. Interest cover ratio continues to improve as we save money on the interest costs, but our rental income continues to grow from acquisitions and rental growth. Loan to value ratio at the lower end of our target range, and we will take that up towards 50%, but we prefer to be towards the lower end of our target range at the moment.

14:32 And debt maturity, just under eight years. So at this stage, I'm going to hand over I'll just touch upon sorry, just touch upon our net zero carbon ambitions. So we're very keen to green the portfolio. We want all of our operational developments and asset management activities to be net zero by 2030. Through our asset management program, which we'll come back and talk about a bit later, we are improving the environmental credentials of all of our assets. And by 2030, we want to get these assets to be at least an EPC rating of B. This is really to avoid a brown discount across the portfolio in future years as, obviously, letting requirements become more and more stringent in the future. We also have a very key role to play in the social side of ESG and World Properties are delivering well-being and health care for The UK and Irish populations.

15:30 And around 9% of The UK population is registered at one of our properties. So in that stage, I'm going to hand over to David, who's going to take you through the investment and development pipeline. Thank you, Richard. Well, notwithstanding the outlook for longer dated interest rates, I'm pleased to report that this year, we'd be able to sorry, this half year or this period, we've able to deliver a GBP 51,000,000 revaluation surplus. And this has further been underlined by a recent sale of 13 assets at 13% ahead of the December 2021 book value, which obviously bodes well for our valuation. During the course of the period and indeed just after the period end, we've acquired three assets for a total value of 49,000,000.

16:25 They are listed on the presentation page, I think you can now see. And we like all of these assets, obviously, but particularly, they've all got long leases. They've all got two of the three, sorry, have index led RPI, index led reviews. They all have strong underlying site values. And in two of the cases, they are effectively government backed income. And indeed, in the third case, which is the Chiswick Medical Center, the covenant of that tenant is extremely strong in HCA International. Looking to the rest of the year and the second half of the year, we anticipate continuing to make cautious but and indeed selecting further investments.

17:16 Moving on. We are progressing our development activity. On balance sheet development for us is relatively new, and we are proud to say that we have our first on balance sheet development now on-site taking place at the Croft Medical Center in West Sussex. Additionally, as well as delivering a higher yield on cost than we can generate from acquiring investments on the market, these assets allow us to bring forward cutting edge medical centers with very attractive sustainability credentials such as net zero carbon accreditations, PRIM excellent ratings and EPC grades of a. We have a growing pipeline of developments, one of which is listed on this slide in Spillsby in Lincolnshire, and we expect to have more developments on-site during the second half of the year.

18:17 The slide also briefly touches on two of our forward funded schemes that we have completed on in Ireland during the period, both of which recognize strong sustainable credentials, provide government backed tenancies via the HSE, which is Ireland Ireland's equivalent of the NHS, and provide for index linked rent reviews further driving our net profit line. Moving on and just picking up on the theme of those two Irish full funded developments that we've completed, we also plan to further our strategic expansion into Ireland. We already have 20 assets there with an approximate value of 200,000,000 in sterling.

19:02 And we have a pipeline there of approximately 43,000,000 via three assets. The Irish assets provide us with an opportunity to acquire products at a higher yield or should I say softer price than we can generate in The UK. And indeed, similar to The UK, the vast majority of the income is government led. I won't dwell too long on my final slide, which touches on our pipeline looking forward. But really, I'd highlight here that we have a strong pipeline across all our core investment spaces.

19:48 Effectively, in The UK to include development, we have a pipeline of GBP 123,000,000 spread across 12 assets, which includes our development pipeline. And in Ireland, 43,000,000 spread across three assets, which are predominantly forward funded schemes. I should also touch on our pipeline for asset management projects. This side of our investment in our infrastructure shouldn't go unnoticed. And during the course of the next three years, we plan to deploy approximately GBP 52,000,000 across 50 projects, whereby we'll be improving the buildings, lengthening the leases and using that capital to generate higher rents. So fundamentally, a positive picture for the portfolio,

20:35 ensuring it's future proofed. On on that note, I'll hand over to Harry to provide some summary comments. Thanks very much. But before we do that, I'm gonna talk a little bit about the property portfolio. As you can see, it's a very granular portfolio at the June 30 before making those disposals with 524 properties with 20 of which were in Ireland. Interestingly, the net initial yield was some 4.57%, and the average lot size, which has increased over the years, is now some £5,500,000 sterling. When you look at the income expiry profile, of the 10,200,000, which is Circle as being arriving in the next three years, the good news is that 80% of that has already had terms agreed or is in advanced discussion with the NHS tenants about renewal.

21:30 It's extremely un unusual for properties to come back. What normally happens is that we carry out an asset management project to improve the properties, both from an environmental standpoint, but also with a view to extending the lease. Our assets the distribution within our assets is shown in the bottom half of the slide. And as you can see, we have a large percentage, a third of the portfolio is invested in in assets valued at over 10,000,000, and only five, just five of the 524 are valued at under 1,000,000. And this is one of the reasons that we rotate capital round is in order to keep that size growing and remove the smaller assets, which in general have a higher degree of risk associated with them.

22:19 I mentioned at the outset that the prospects for rental growth after a very fallow period of some years is beginning to look up, and that's driven by both inflation, actually, on the index linked leases, but also because the rent review process within this sector kind of follows inflation. Because although 69% of the portfolio has got open market value reviews, what is an open market value review where the district valuer, an executive agency of HMRC, is responsible for agreeing the rent And who are the alternative tenants? Well, the honest answer is there aren't very many alternative tenants, and therefore, the open market value is kind of determined in practice by a proxy to index replacement cost. So you'll understand that as the replacement cost goes up, so the prospect for rental growth goes up too.

23:12 Plus, we're spending more on our buildings now because of the need to have environmental concerns taken account of. We've heard about our first net zero carbon development and all of the projects that we're looking at in asset management have as an important component of the work that we're doing and improvement in the PRIMARY rating and the EPC rating for the properties. Just to pick on one at LEAN, which is in West Bromwich, it's a fairly substantial building. We're spending 1,300,000 and receiving a further £78,000 in rent, so a yield on cost is of 5%. There are 10 doctors in that building, but a vast array of other medical services, and it services some 15,000 PROPERTIES, patients.

24:05 Following the project, the lease length will go out to twenty years, and the PRIMARY as you can see or EPC rating rather will move to a b. And that is illustrated across the other three projects that are listed there. So in order to leave plenty of time for questions, let me just summarize what we've told you. There are very strong demographic trends behind this business. We are playing our parts in a leveling up agenda by bringing capital into the less well off parts of the country, trying to reduce the health care disparities. We have very strong prospects for rental growth driven by our 25% of the rent roll that is index linked. The government in Ireland and Britain pays 89% of the total rent roll, and we are gradually getting towards our £3,000,000,000 gross asset value.

25:00 There's a lot of uncertainty in the marketplace, so we're taking a disciplined approach to further capital commitments in the second half of the year. We're likely to wait and see before doing anything radical and different for the rest of the year on into '23. So our strategy is very clear, and I think what we've got is a very diff defensive, predictable business, which pays good dividends to our shareholders. So with that, I'm going to return to the moderator who's going to deal with questions. Fantastic, Harry. Thank you very much indeed, and thank you to the team for the presentation. Ladies and gentlemen, do please continue submitting your questions via the Q and A tab situated just on the right hand corner of your screen. Just want the team to take a few moments to review those questions submitted. I'd like to remind you that recording of the presentation, along with a copy of the slides and the published Q and A can be accessed via investor dashboard on the Investor Me Company platform.

25:53 We did receive a couple of pre submitted questions. If I may, we'll start the q and a session with those. The first one reads as follows, having recently listened to a presentation from a PHP competitor with an average development size of 7 to 8,000,000, I'm interested in knowing more about the average size of investment for PHP's new property developments and some views to the extent to which the future development model is for fewer but larger scale developments in the polyclinic staff facilities. Well, thank you for that. I think is that question from Nick B? Or was that a separate question? That was a presubmitted question. Right. Okay. I think the answer is that firstly, I'd highlight that our average lot size now is circa 5,000,000. And as the portfolio is growing, it is logical to either seek to maintain or grow that lot size. As Harry had touched on earlier during the presentation, this isn't the case for all smaller assets, but indeed, certainly for some, the threat of obsolescence to smaller assets is perhaps greater.

26:57 And it's in line with our strategy to invest in larger hub facilities, which will attract larger patient lists and be fit for the for the future in terms of housing more services as they come out of secondary care into primary care. So I think the answer is in short, yes, we are looking to manage up our minimum lot size. Presently, that's about 5,000,000. And in terms of bringing our developments forward, as a a as a generalism, really, are at that size and indeed larger. So I don't think that's going to change the spots of our average lot average lot size in the portfolio.

27:45 We've actually rejected a couple of smaller ones recently because the size of the opportunity was too small for us. Yes. Yep. Absolutely. Both in terms of developments investments. So we're selective with what we buy. We like to ensure that it's fit for the future, and we like to believe that the assets that we're focusing on are those that are likely to see the best the the greatest patronage and furthermore, the best rental growth opportunities. Fantastic. Thank you. The second pretty similar question, I guess, really sort of a market question, but who who are your peers? How are they faring? You know, who are the competitors? Who are who are the comparable companies in your space? Okay. Well, let me have a go at that. I mean, our our nearest quoted competitor is Surer, which is very similar in size. It has a it's been later into the marketplace in Ireland.

28:38 It has a more it has different funding strategy from our own, and it's got a greater number of smaller buildings due to the history of what they've acquired. And it's further along the piece in terms of development with a bigger development pipeline that we've currently got.

28:55 But, actually, they're quite similar businesses. BlackRock have a $304,100,000,000 pound property portfolio, very similar stock, but they're not interested in disposing of it. And there's a couple of private owners that have smaller portfolios, and that's about it. In Ireland, there's one other competitor has a similar sized portfolio to ourselves. But one of the difficulties of primary care is actually assembling a portfolio of significant scale. And over the last twenty six years, the team has put together that portfolio, and that's one of the reasons why it's worth a premium as indeed is the high quality income that is driven from it, its consistency, its predictability, and its its its its its durability.

29:46 Fantastic. Thank you very much indeed. That concludes the presubmitted questions. And as you can see, we've had a number of questions that have come through throughout today's presentation. If I may just hand back to you just where appropriate to do so to to read out the question and give you a response, please. Okay. So the first question is from Nick. Thanks very much for this. What is the rationale for disposals from the estate?

30:07 When you have such great, I guess, should be properties, is it to take development returns to further expansion? Well, I think whenever we have a portfolio or if anyone's got a portfolio of stocks and shares, it's always a good idea to keep it under review and where you see better growth potential elsewhere to rotate that capital around. And that's what we did with the disposal portfolio, isn't it, David? Yeah. We felt there that those assets we felt, firstly, we could sell them for a strong price, which indeed was demonstrated by the premium to the December 2021 valuation. And indeed, we felt we could rotate that capital into new assets, perhaps at higher yields, I. E, to generate more income with perhaps stronger potential to deliver better returns going forward.

31:02 Shall we go on to the next question? This is from Ryan. With new developments, do the government put this out to tender for the build out of replacement sites that are fit for purpose, or are these new sites? And how is the development pipeline managed from that basis? Well, that's that's a brilliant question. As with everything with the NHS, it tends to be quite complex and could be driven by many different sources. Because GPs technically are not part of the NHS themselves, they're independent contractors. It's managed by the GPs, but, obviously, they need to get budget approval, which comes through a business case. Now this business case is written by the GPs or their advisers, sometimes in conjunction within the old days, CCGs, but now independent primary care networks.

31:51 And they will have a a shortlisting process with four or five developers in rights.org, and they will pick the person who is best suited to their needs. So that's the first part of that question. Many in many cases, the requirement for new surgeries is not is not just consolidation like our Eastbourne project, which you can see on slide 26. Maybe we can just flip to that quickly. So in Eastbourne, as you can see here, three older properties, which are converted residential, not fit, not purpose built, have been scrapped effectively, dealt with by the developer, which was not us in this case. We forward funded this deal and being replaced by a super duper £10,000,000 surgery or primary care center, really, with 20 GPs and a wide range of services. So that's one illustration of how new projects come about.

32:52 But a much more common way

32:54 is actually around new housing development. So the Spilsby development that we saw back on on that particular slide is is brought about because there's a vast a large number of houses being built in Lincolnshire, in particular, Spilsby. And the planning requirement is for a new medical center to be provided, and we won the the competition to become the preferred provider of that working in conjunction with the developer. So there is a competent it is a competitive process, which, of course, adds to the complexity and the time taken, but it's not as bad as being in a a full on competitive tender with for the government where the only real way of competing is on price. Here, specification is important as is control of the site and track record and the standard of fit out that goes into the building is also very important.

33:52 Thank you. That concludes the questions we've had so far. And if, of course, if there are further questions, the company will be able to review those, and we'll be able to publish responses on the investor meet company platform. Harry, before redirecting investors to provide you with their feedback, which I know is particularly important too, if I could just ask you for a few closing comments, please. Sure. Well, thank you very much. I think when times are volatile, somebody once said to me that PHP stands out as a beacon of stability. We operate in a in a sector which is an essential part of life as we've discovered through the pandemic. Having a vibrant and good health sector is very important. That means there's no shortage of demand for our buildings as you've seen. Because of prudent financial management, we're not overly exposed to higher interest rates. The inflationary tailwinds that people are so worried about are actually quite positive for our business.

34:48 And we're determined and committed to carrying on with our twenty six year track record of paying an increasing dividend. Stability, defensiveness, predictability, these are all great phrases to describe primary health properties, and we look forward to playing our part in the modernization of the health care infrastructure in The UK and in Ireland in a socially responsible and environmentally friendly way. And we're looking forward to being back with you and delivering a further update with our full year results in the early parts of twenty three. Thank you for attending. We appreciate it, and look forward to speaking to you all again. That's great. Thank you very much indeed for updating investors today. Could I please ask investors not to close the session? It should be automatically redirected to provide your feedback, and all the team can better understand your views and expectations.

35:37 This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of PRIMARY HEALTH PROPERTIES PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good afternoon to you all.