Primary Health Properties Plc (PHP.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Primary Health Properties Trading Update. I will now hand over to CEO, Mark Davies. Please go ahead.

Good morning, everybody. Happy New Year to everybody who we've not met yet, albeit, as you can tell, we've got off to a busy start to the year. Thanks to all of you for dialing in to listen to our update this morning. As you can see from the update that we made, it's a fairly long and detailed update. Richard, myself and the team just felt that with everything that we were doing last year and so many announcements up on the screen, as you are aware, this was a good opportunity to just bring everything together. So there's more facts and figures than you might expect from a typical update at this point of the year, but we felt that would be beneficial to you, and that's certainly the feedback we've been getting this morning. In terms of the highlights, it's clearly been a transformational year for PHP. The combination of PHP and Assura is going to prove to be a big success. And we created a strong platform, GBP 6 billion health care REIT. We got the CMA approval through on the 29th of October. So we got stuck into the integration on which we had a very detailed plan. And as we announced this morning, we're already through 60% delivered of the total annualized synergies of GBP 9 million. This has been -- the reason we're able to do this so quickly is there's obviously duplication of roles. So that impacts people and the people cost and duplication of things like professional fees. So we've acted on that. So we're 60% of the way through, and we'll continue to provide further updates to the market in due course. One of the really pleasing things about the combination of the companies because we got economic control of Assura from the 12th of August is the strong rent review performance that came through in that sort of 4-month period following the acquisition, an additional GBP 8.3 million of rent, which is 6.8%, but on an annualized basis, 3.2%, which is ahead of the guidance that we gave at the Capital Markets Day as recently as July when we told the market they were projecting a 3% increase. So that just, I think, just supports not just the positive rental growth outlook, but supports the combination of the companies, the increased exposure to inflation and long leases. So that's one of the highlights of the update obviously. The enlarged group is now really well placed to take advantage, I think, of that improving rental growth, and we're making good progress. You can see from the update, we provided some detail around the developments that we're pursuing. Assura had a strong development capability and a bigger team than PHP. So we're seeing the benefit of that. And of course, the read across from these projects, which are on the ground from a rent perspective, particularly those projects that we highlighted in the table in the update in Tetbury and Weston-super-Mare. They're going into the USS joint venture at a very attractive yield from our perspective, which makes those projects profitable. But also they're setting a rental tone and a rental evidence above GBP 300 a square meter. So that's good for the future. Just on the subject of JV, we are making good progress in expanding the existing joint venture with USS. I think we feel very fortunate to have such a credible and strategic joint venture partner as USS. They have, as you would imagine, a low cost of capital, probably as low as you could imagine. And that will enable us to do more with them. Currently, we've got GBP 170 million of assets in the JV with a target to get that to GBP 400 million. Of course, that's extremely advantageous to us at the time that we're seeking to raise some proceeds to pay down some debt. So more on that in a minute. USS are totally bought into the health care real estate sector in the U.K. And I'm pretty confident that once we get to that GBP 400 million level, which we will do quite quickly, that there will be capacity to expand that joint venture above and beyond its original mandate. A few sort of initial observations from the USS JV because we have had 3 or 4 meetings with them in a very sort of short space of time. They like the social impact of what we do, as do we, of course. And for that reason, we are working on a number of sort of strategic projects, including things like LIFT, which will become available to the market in the next sort of 2 to 3 years. So really, really good progress with USS. And also on the private hospital side, you can see from the announcement this morning, those private hospitals are performing well, which we're very pleased about. But also we are making progress in identifying a strategic partner to work alongside and the proceeds from the establishment of that joint venture will take the leverage back down in line with our policy. So we've got our results coming out in a few weeks. So we're expecting to make a further update on that. And of course, we've had strong support from the debt and the equity capital markets in the last few months. We're very grateful. We're very grateful to all of you for supporting us on a transformational transaction. And Richard and his team have been very busy on the sort of refinancing side and completed, as you can see from the announcement, a number of financing activities and the undrawn headroom available to us now has increased to GBP 552 million from -- I think it was GBP 300 million, Richard, wasn't it when we last updated the. Yes, so look, a transformational year. Those are the key highlights. And I think maybe just to finish it on the Assura joint venture, I think it's fair to say that we are pleasantly surprised, not just with the progress that we're making on the integration, but we think there's a lot of low-hanging fruit within the portfolio and in the way that, that portfolio has been run and managed. And therefore, that upside we're seeking to capture as soon as possible. And I think we're obviously very excited about the prospect of being able to do that. And it would be wrong of me not to mention our dividend has now increased for 30 consecutive years. So we're celebrating our 30th consecutive year of dividend growth. Those are the sort of key highlights. Richard, did you want to add anything to that at all?

No, no. I think the only thing perhaps just to mention, Mark, is the strategy and financial framework that we set out in the announcement, obviously, it's key to now get leverage back down below our 40% -- sorry, 50% cap. As Mark has already mentioned, we're working hard on delivering that through the joint ventures and a few other disposals. And obviously, that will drive the financial metrics of getting net debt to EBITDA 9x to 9.5x, interest cover target of 2.5x. And obviously, those are key targets we need to focus on over the coming years. There's obviously a lot of refinancing work to do over the course of '26 to refinance the GBP 1 billion bridging facility that's left. So there's a lot of work ongoing in the background. And as Mark said, hopefully deliver more news around that refinancing with the full year results in a couple of months.

Yes. So I think on that note, we'll -- we know there's many of you on the call this morning. So we thought we'd take the opportunity to allow you to ask us any questions.

[Operator Instructions] We will now take our first question from Oli Woodall of Kolytics.

Just a quick one on your LTV target you've mentioned. How are you balancing, trying to get down to below 50% versus making sure you don't take a hit on NAV and disposing at a higher yield than you'd like. Do you have any kind of more information around that you could give?

Yes. No, that's a good question, Oli. Thank you. The assets that we're injecting into the USS JV, I mentioned previously that the cost of capital of USS is an attractive proposition for us. I can't give an exact figure in terms of the commercial sensitivity that sits around that. But maybe the best way of me to answer that question is to say that we're very confident that those assets are being sold into the joint venture at book value or very close to book value, either slightly above or slightly below. The private hospital portfolio that we've acquired through the Assura merger is performing well. Operationally, it's also performing well. You can see the rental growth coming through in this update. And again, we're sort of in the mix of commercial negotiations with potential strategic JV partners right now. And I'm confident again that we will not be prejudicing our NAV with the transfer of those assets into the joint venture. There's a big transaction being done in the market in private hospitals at the moment. We're not actually involved in that transaction. It's over GBP 1 billion worth of [ Spire ] Hospitals and the valuation yield on that asset transfer -- sorry, disposal is helpful to us in terms of the evidence it's setting for the discussions and negotiations that we're having with our strategic JV partners. So sorry, that's a long answer to a short question. But yes, we're confident assets are being disposed into JVs at book value.

And just add to Mark's comments, I think those disposals will probably be at yields, which will not be too dissimilar to the marginal cost of debt on the bridging facility. So I think the impact on earnings won't be significant, Oli, which I think was sort of questioning.

Okay. Perfect. That's clear. And just one more quickly, if I may. Just I wonder if you could quantify the kind of gap between what district valuers are assessing versus what construction costs would kind of justify. How do you think rents need to develop within the U.K., if you can kind of turn that tap on again?

Well, yes, you'll have heard us say before, historically, that gap on projects that we've looked at in PHP has been as wide as 20% or sometimes even higher. But if you look at the projects that we announced this morning, there's obviously a weighting there to our Irish projects, as you can see. So clearly, rents in Ireland are now being set at a level which allows us to develop, but we don't have a district value there to think about. So that's helpful. But there's 2 primary care developments that are currently in process -- or progress, the Tetbury Primary Care Center in Gloucestershire and the Weston-super-Mare primary care scheme. These are really fantastic assets. They'll be sold into the USS JV at an attractive yield. And those rents are above GBP 300 a square meter, and that allows us to make an economic return, which is accretive to shareholders. So yes, we're seeing that evidence. We've talked about it before, and we've seen green shoots before, but that's now coming through in projects that we're currently on the ground.

Yes. And just to Mark's comment on the asset management program as well, we reported an announcement today where we're seeing rents increased from just below GBP 190 per square meter to just under GBP 220 per square meter, so 15% increase. And those are on existing assets, and they said great rental evidence for the rest of the portfolio, and those rental terms will be rolled out through the rent review program, albeit over time when the reviews come due.

I think we're definitely more confident, Oli, now on development. You'll not have seen PHP produce an update with as many projects as this for quite some time, many, many years, I think. And that reflects the bigger size of the business, the greater development capability that we have with the team in the combined business and the fact that economically, rents are getting to a level where we can pursue these projects. And we have the USS JV as well as a sort of strategic partner to work alongside with a lower cost of capital.

And we'll now move on to our next question from Tom Musson of Berenberg.

Just a question around your 3% organic rent growth target. Obviously, current performance just above 3%, supported by the index-linked leases and also the private hospitals. But if we assume inflation trends back towards 2% and as you're saying, private hospitals may feature in your disposal plans, I just wonder for how long we should expect you to be able to maintain that 3% organic rent growth because I think I'm right in saying open market rents have never really managed to outpace inflation over the long term, either at Assura or PHP.

Tom, thanks for the question. Yes, I think if you go back quite a long time, there was an extended period of time where those open market rents were ahead of inflation, but that was many years ago. And you can see from the announcement we made this morning, in primary care, those open market rent reviews that we did, and we did many closer to 2% than 3%. It was tempting to sort of try and update the market in terms of our forward-looking guidance at this update because we -- as you know, Tom, because you were in the room, we only updated the market at the Capital Markets Day as recently as July with that 3% forward-looking guidance, which clearly we were confident about. I think the time to review the guidance around our forward-looking rental growth prospects is either at the results, which are imminent in a few weeks' time, which is -- or certainly when we are absolutely sure what the portfolio mix looks like and the retained exposure to the private hospital portfolio. It's on public record from announcements that we made last year that we are expecting to sell assets in our private hospital portfolio and our preferred route in doing that is to do that into strategic joint venture. So at that point, we'll be able to forecast with very good and dependable accuracy what the forward-looking guidance looks like for rent and rent review going forward.

I just reference the 15% growth that's coming through the asset management program that I mentioned earlier because obviously, that is key to setting rental evidence for the rest of the portfolio.

[Operator Instructions] And we will now move on to our next question from James Carswell of Peel Hunt.

Just a follow on from some of the previous conversation on the development side. It sounds very encouraging in terms of some of those conversations. This obviously talks about the pipeline and it will be progressive, it's accretive. I mean, given where you are with some of those negotiations, I mean, are you expecting to commence more projects in the current period, the next kind of 3 to 6 months? Or will that be further down the line?

Yes. The pipeline is definitely growing. You know this company very well, James, and it's probably been quite some time, as I mentioned, that we reported an update with as many live projects as this. So it's extremely encouraging. So we feel -- we clearly feel we've got momentum in the U.K. and in Ireland. There is a growing pipeline. So for example, we won a significant contract with the East of England Ambulance Trust to develop new ambulance hubs across the East of England. It's a 10-year assignment, but there will be many opportunities for us to create new sites, probably as many as 20 new ambulance and emergency operation centers, which we have a track record of doing and development capability within the business. So, yes, I think it's really going to start to pick up. We will only pursue developments, of course, if we're satisfied on a risk control basis that we are getting the appropriate risk-adjusted returns. It's advantageous to us, as we've pointed out, particularly in our primary care portfolio where we're setting rental evidence above GBP 300 a square meter for future rental growth prospects. And of course, we've got the USS JV. I think we, maybe, undervalued the prospect of pursuing development projects and then effectively selling those assets into the JV with USS. Of course, we have a 20% stake. So we've retained that economic stake. The assets can be injected into the USS JV as we're seeing yields as low as 4.5%. So it's very attractive. So it feels very different, James. We'll be very conservative, not cautious, that's the wrong word, but we'll be looking at everything on a risk-adjusted basis. And if we think we can get the right returns by allocating capital into development projects, then that will be a good thing for our long-term prospects.

Great. And just maybe another quick one on the debt side. Obviously, some of the bridging loans have ready been repaid. And clearly, the deleveraging is going to be a big part of the kind of the strategy to repay the rest. But just for the kind of the remainder of that loan, and I appreciate you've got time and clearly kind of market rates, et cetera, can move. But here today, I mean, do you think it's likely to be bond issuance to replace that? Do you think it's like to be kind of bank debt or possibly a convertible? Just your kind of thinking on the kind of the refi of whatever will be left in the bridging loan post the deleveraging.

Yes. So I think, James, the key now is to deliver the deleveraging to get the LTV back to our target and then look to the bond market and the bank debt market because we do have a large number of shorter-dated bank facilities that need to get refinanced, particularly on the PHP side, move it to an unsecured basis and term it out for longer, for; different durations, but also term out some of this debt through the bond market. And we are sort of looking at options around that. And hopefully, there'll be more news around that when we come out with the full year results.