Primary Health Properties aims to increase its portfolio exposure in Ireland to around 15% in the near-term as its future development pipeline in the UK is held back by slow rental moves and high costs.
In its financial results for the six months to 30 June, the investor in healthcare facilities said Ireland continues to represent a core part of the firm’s strategy and preferred area of future growth.
Chief executive Mark Davies said: “We have established a strong footing there. We were an early mover about 10 years ago and we were able to buy well with limited competition.
“We would like to increase our weighting in Ireland and to do that we will rely on our team. We have 30 people on the ground, their eyes and ears we think are the best in the market, and we have a great technical capability out there as well.”
Davies told EG that the move comes amid a “very strong” economy and the Irish government running a “proactive, engaging and dynamic” health strategy focused on driving investment into primary and community health.
“One of the other things we like about Ireland is inflation-linked leases,” Davies added. “In a time when we have had higher inflation, obviously, inflation-linked leases perform better.”
PHP has concluded seven index-based reviews in Ireland so far in 2024, resulting in an uplift of 14.4% against the previous passing rent. In comparison, an average uplift on the previous passing rent in the UK over the same period stood at 7.8%.
Overall, PHP reported net rental income in H1 totalling £76.2m, up from £75.5m the year before. Contracted rent roll increased by 1.2% year-on-year to £152.6m.
Collaborative development approach
Turning to the development pipeline in the UK, the company noted that historically suppressed levels of open-market rental growth in the sector, alongside increases in construction costs, will be a significant headwind for future growth. It has calculated that developments will now need a shift of between 20% and 30% in rental values to make them economically viable.
Davies said: “The reason that rents need to go up is not because we are being unreasonable. It’s because we have had so much inflation, and that is reflected in bill costs.
“Costs aren’t going down, but the good news is they’re not really going up either, other than inflation, so it’s a cost benefit equation for both the NHS, integrated care board and district valuer. If they invest alongside us, they will get the cost benefit in the future.”
PHP has started to see positive movement in some locations where the NHS’s need for investments in new buildings is strongest. The firm has kicked off a £3.3m fit-out on its second health centre development at South Kilburn, NW6, which is due to achieve practical completion in Q2 2025. It forms a part of the wider masterplan, which in addition to the health centre features 308 homes, shops, gym and a creative hub.
The scheme has seen integrated care board and local authority stepping in with a capital contribution after the district valuer’s proposals prevented the scheme from progressing.
Davies said: “I would describe it as a partnership approach between ourselves, Countryside Properties, Brent Council and the local integrated care board, all of whom have put money into that scheme alongside us to reduce our net cost and enable us to undertake that development at a cost which is accretive to our shareholders. This is the first development that we have done in a while because of the inflation build costs and as we are waiting for rents to catch up.”
PHP is looking to embark on the second scheme this year, in Spilsby, Lincolnshire, partnering with housebuilder Gleeson Homes. The proposals, submitted in April, are awaiting approval and include 600 two-, three- and four-bedroom houses alongside a medical centre. Davies said: “The story is the same. The local authority I’m sure will participate, and the integrated care board. So there are some good signs coming through and now it is our job to capture that. We have a growing pipeline, we’ve got the team to do this, it’ll be accretive for our shareholders and help grow our NAV and our dividend.”
PHP’s adjusted NTA per share, which is used as a replacement to NAV, slipped to 105p on 30 June from 108p on the same day in 2023. IFRS NTA per share was also down by 2.8% year-on-year at 103.5p.
Great inheritance
The company will pay a dividend of 3.45p per share, up 3% on H1 2023, approaching its 30-year anniversary of continuous dividend growth in 2026
“I can’t take any credit for that because I just got here,” Davies jokes, having taken over the role from founder Harry Hyman following the firm’s annual general meeting in April this year. Hyman has remained with PHP as non-executive chairman.
Davies came from NewRiver REIT, which he co-founded in 2009 and was chief financial officer of for 12 years, helping to take the company from IPO to the FTSE 250. He stood down from NewRiver following the sale of Hawthorn and its 674 pubs in July 2021 to Admiral Taverns for £222m.
Davies said: “We, as a management team, are forensically focused on a continuation in growing dividend in the future. Not only do we want it to grow, we want it to be fully covered. How are we going to do that? We have an efficient cost base. We have one of the, if not the, lowest cost ratios in the sector and we have already taken £1m of cost out of the business in the short time that I have been here.”
The firm’s net rental income in H1 totalled £76.2m, up from £75.5m the year before. Contracted rent roll increased by 1.2% year-on-year to £152.6m. PHP posted pretax profit of £4.5m, an 84% fall. A revaluation deficit on its property portfolio topped £40m this year versus £11.9m a year ago, following a net initial yield shift to 5.18% from 5.05%. The value of the firm’s portfolio slipped to £2.75bn across 516 assets, including 21 in Ireland. At the end of June last year, PHP’s portfolio was valued at £2.78bn.
Davies said: “Anybody that is running a property company right now would agree with us that there has been a big readjustment to valuations as a consequence of a higher interest rate environment. There is very little volatility in our portfolio and certainly in our income stream because of the sector that we’re in and 90% of our income being paid by the UK and Irish government.
“So I’m definitely not feeling sorry for myself. I’ve got a great inheritance from Harry Hyman and I’m definitely far more upbeat than perhaps you think I might be.”
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