“Our favourite holding period is forever” is one of many famous quotes of legendary investor Warren Buffett. However, he’s also stressed it’s not a “commitment”. Things can and do change that can shorten his holding period, sometimes considerably.
I’ve long been bullish on real estate company Primary Health Properties (LSE: PHP). Back in the summer of 2017, I named it as a stock I’d buy and hold forever. And as recently as December, it was one of my three top FTSE 250 dividend picks for 2019 and beyond.
However, on 24 January, the company made an announcement of significant importance for its future. It said it had agreed an all-share merger with fellow healthcare property firm MedicX. Under the terms of the merger, existing shareholders of PHP would hold 69.4% and MedicX shareholders 30.6% of the enlarged group.
Now, a little less than a year ago, I wrote rather scathingly of a similar proposed all-share merger in the real estate sector between retail property groups Hammerson and Intu. Should I be equally negative about PHP’s deal with MedicX, or do I still see it as a stock to buy and hold forever?
Strategic rationale
One of reasons I was unimpressed by Hammerson’s proposed deal was that the company had been strategically reducing its exposure to the UK in favour of Europe. Its acquisition of Intu would have represented an inexplicable and unwise U-turn, in my view, significantly upping its exposure to the UK.
As a contrast, PHP’s proposed acquisition of MedicX is entirely consistent with its existing strategy. And the two companies’ portfolios are highly complementary.
Balance sheet matters
Intu’s elevated debt would have markedly weakened Hammerson’s financial position. Indeed, the company anticipated embarking on a disposal programme of at least £2bn, in order to strengthen its balance sheet and provide liquidity to reinvest in higher return opportunities. Finding buyers for £2bn+ of less-than-prime assets in a challenging retail property market didn’t sound a particularly straightforward matter to me.
PHP’s acquisition of MedicX has a less material impact on the strength of its balance sheet. And there’s no mention of any planned asset disposals post-merger.
Cost savings and financing optimisation
I criticised Hammerson’s deal for its relatively low quantified cost savings, and reckoned potential optimisation of the enlarged group’s borrowing arrangements was the primary attraction. I think PHP’s deal is similar on this score, although I calculate its quantified costs savings — pound for pound — are a little better than those Hammerson had hoped to realise.
Still positive
Under pressure from some of its major shareholders, Hammerson’s board ultimately backed out of the deal with Intu. But I believe shareholders of PHP will back their board, that MedicX’s shareholders will also likely be supportive, and that the deal will go ahead.
I view it favourably myself, for the relatively positive reasons discussed. In addition, execution risk appears limited, with the unification of property management under PHP’s existing property manager being the main source of the quantified cost synergies.
Operating in an area of the real estate market in which the income stream is particularly secure and predictable, PHP looks more than capable of extending its record of 22 years of annual dividend increases. At a share price of 116p, with a prospective yield of 4.8%, it remains a stock I’d be happy to buy today and hold ‘forever’.
