Property investment is a precarious business in pre-Brexit Britain, but Primary Health Properties (LSE:PHP) had the presence of mind to invest in property with a government guarantee. By investing in modern healthcare premises, the company protects itself from undesirable tenants, the problems associated with older buildings, and the worry of tenants not paying their rent or leaving after a short tenancy.
Primary Health Properties is a UK Real Estate Investment Trust (REIT). The company is focused on owning freehold or long leasehold agreements in local healthcare facilities. These are then leased directly to general practitioners, dentists, government healthcare bodies and other associated users such as pharmacies.
Foresight and acquisitions
Harry Hyman founded PHP in 1996 and remains managing director. Hyman’s good judgement and clarity of vision cannot be understated. With the UK’s ageing population and increasing health problems set to be an ongoing challenge, the healthcare system has never been so desperately needed with healthcare-linked properties also crucial.
On March 15 , the company completed an all-share merger with MedicX, a smaller, but complementary business. This move boosted PHP’s lead in the industry. The merger and subsequent acquisitions resulted in a current portfolio of 484 healthcare properties in the UK and Republic of Ireland. The company portfolio now has a gross book value of £2.3bn, a 54.4% increase since December 2018.
On June 18, PHP announced it is to issue convertible bonds worth £150m due 2025. Convertible bonds are issued to help the company raise capital. Investors will receive an annual interest payment until the bond loan period expires and they get their money back. In this case, the annual repayment is 2.875%. It will use the money received from selling the bonds to repay its £75m 5.375% senior unsecured bond at the end of July. The other £75m will be used to pay the annual interest and continued acquisition of properties.
This news brought the share price down slightly, but I expect it will recover.
Healthy returns
Average annual earnings are forecast to grow at 10% for the next two years. With a current market cap of £1.5bn and a price-to-earnings ratio (P/E) of just under 26, I think this is a strong company worth consideration.
It holds a 22-year record of annually increasing its dividends, which is another appealing aspect of this REIT.
A key reason people are attracted to investing in REITs is the potential of a growing dividend stream. Primary health is deemed to be one of the safest asset classes in real estate because it is simply so necessary.
In the case of PHP, 90% of its rents are government-backed. The average remaining lease time unexpired on its portfolio is 13 years and occupancy rates are above 99%. When real estate prices are weak, this can adversely affect REITs, but in this instance, the security of the government rent payer reduces the risk.
You might think this lower-risk business model would mean lower reward, but PHP’s yield is over 4% and the share has outperformed the FTSE 350 for the past five years and UK real estate for almost four years.
The future looks pretty good to me too. Dividends are expected to increase until 2021. The visibility of income streams makes performance fairly easy to predict and as long as PHP doesn’t go overboard in acquiring new properties, its steady and thoughtful approach should continue to bring financial gains, I believe.
