As a buy-to-let investor myself, squeezed rental yields and tougher regulations would stop me entering the business today. But the property sector still seems attractive to me, with a REIT-based approach looking a lot safer.
While the FTSE 250 as a whole has gained 17.5% over the past five years, Primary Health Properties (LSE: PHP) has come close to doubling that with a gain of 33.7%.
The company invests in purpose-built healthcare facilities in the UK and Ireland, and I see that as a serious long-term growth business.
Earnings can be a bit erratic over the short term, but Primary Health has put in some solid long-term growth. That’s now translated into an impressive 22 successive years of dividend growth, after the 2018 dividend was lifted by 2.9% to 5.4p per share (which is comfortably ahead of inflation).
With clear income visibility, the bulk of its earnings are paid out as dividends, and yields are currently standing at around 5%.
The value of the firm’s investment portfolio rose by 2.5% in 2018, with its contracted rent roll up 9.8% and net rental income up 7.2%.
The overshadowing event in 2019 so far, however, is the proposal to merge with MedicX in an all-share deal “to create one of the largest healthcare REITs in the UK with a portfolio of over 470 assets valued at £2.3bn.” It needs approval from both sets of shareholders, but if that’s achieved then it should be completed in late March.
Both look solid to me, and I can see the combined business as being a great provider of long-term income — with further growth thrown in too.
The price is still down 30% over the past two years, but I guess that’s what happens to a REIT that invests in commercial properties (including the retail sector, like shopping centres) when the high street is suffering.
But it’s still managed an impressive recent record of earnings growth, as EPS has soared from 5.2p in 2014 to 16p for the year ended March 2018. And there’s more growth on the cards, with forecasts suggesting EPS of 20.5p by 2021.
That’s translated into a rapidly-growing dividend too, with yields of around 10% currently forecast for this year and the next two.
A third-quarter update earlier in January reiterated New River’s key strengths, showing a high level of retail occupancy of 95.5%. That was down a little from 96.2% in September, though that was put down in part to a move by JD Sports at Priory Meadow, Hastings.
Average rents were down slightly, to £12.37 per square foot from £12.48, and the firm had collected an impressive 99.6% of its due rents by the time of the announcement.
With the share price having fallen so far, P/E ratios now stand at around 10-11.5, and I can’t help feeling that an upwards share price correction is due.
I doubt it will happen quickly, mind, as we’re surely heading for further retail turmoil in 2019, however badly Brexit turns out. But I’m seeing a solid long-term property buy here.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.