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

Welcome to the Primary Health Properties AGM Q&A. [Operator Instructions] Please note, this call is being recorded. Today, I am pleased to present Harry Hyman, Managing Director; and Richard Howell, Finance Director. Please begin your meeting.

Well, good afternoon, and welcome to our audiocast, where we're going to be talking today about the trading update that we issued this morning. Rather unusual circumstances. Unfortunately, we were not able to welcome you in person to our AGM, which went ahead this morning as planned but with just 2 attendees to make a quorum. And we've announced that those resolutions were passed successfully. The trading update that we came out with this morning summarizes where we are after the first quarter of the year. Just a few words of introduction for those who are new to PHP, who may be on the call. We have an extremely simple business model. We've been in existence for 25 years, and we've built up a portfolio of GBP 2.45 billion of primary care accommodation. So this is doctor surgeries, medical centers, not hospitals, originally, across the U.K. and from 3 years ago, increasingly in Ireland, where about 7% of our portfolio is now located. Across the group as a whole, 90% of the entire group's contracted rental income is paid for directly or indirectly by the U.K. and Irish governments, with the balance mainly coming from pharmacies that are co-located at our properties. You'll be able to see from our rental collection numbers that this business model has stood us in good stead because notwithstanding the travails that affected other parts of the property sector, our cash flow collection rate has been very good for the first quarter and as of the 31st of March, which is only some 5 to 6 days after the quarter date, we'd already received 79% of the contracted cash flow, which in fact was better than the fourth quarter collection rate for 2019. And it's bang in line with where collection rates were for the first quarter of last year on a comparable basis. And we know of no reason why the vast balance of this is not expected to be received over the next 2 weeks. It's true to say that we have experienced a very, very small 0.5% request for rental deferral and rental postponement from operations like small gyms and cafes, both in the U.K. portfolio and in Ireland. And as a responsible landlord, we're paying our parts and helping our tenants to get through the most extraordinary conditions that we have with COVID-19 in both countries. We've also -- because of the high-quality of our dividend and -- sorry, the high-quality of our cash flow and the ease of prediction of it, carried on with our dividend policy and we have declared the second quarterly dividend of 1.475p that will be paid in May, and we'll come back to that a bit later on. Having said that, I know that people will want to hear about our financing, which is in robust shape. And at this stage, I'm going to hand over to Richard Howell, our Finance Director, who will talk to you about that.

Thank you, Harry, and good afternoon, everybody on the call. As of 31st of March, the group's net debt stood at GBP 1.086 billion. That's a small increase of GBP 19 million since the end of the calendar year. And that really reflected the additional expenditure we've made on the developments, which Harry will come back and talk about a bit later on this call, in particular, the development at Bray and Athy, which were now completed, along with some of our asset management projects to regear leases and extend them -- our assets. So on a pro forma basis, the loan-to-value ratio had increased slightly to 44.8% from 44.2% at the year-end. Looking at our current liquidity position, we're in a very strong position. We have over GBP 341 million of undrawn loan facilities and cash on deposits. And cash on deposit currently stands at GBP 137 million. In order for the group to get close to breaching the loan-to-value covenants, the portfolio will need to fall in value by around GBP 1 billion or 42% in terms of capital value. So we have a lot of robustness and headroom built into the portfolio. Looking at the debt metrics, our average cost of debt still remains at 3.5%, no change since the loan -- since the year-end. Loan-to-value 44.8%. Interest cover has increased slightly to 2.8x in the first quarter of 2020, reflecting the reductions in the average cost of debt we achieved last year and some rental growth that we've seen in the first quarter. We still have a long weighted average debt maturity of just under 7 years and a lot of headroom, as already mentioned in terms of cash available to the group. We also have a small portfolio of unfettered assets just under GBP 42 million. And in the worst-case scenario, those assets could be used to cure any potential breaches in our facilities. So at this stage, I'll hand you back to Harry.

Thank you. Well, just to pick up on the detail of the dividend, we wanted to be certain that our stakeholders continued with their income. And we can't see a reason not to have declared our second quarterly interim dividend, which as I mentioned earlier, 1.475p, which will be paid on the 22nd of May, to those people on the register at the close business on the 3rd of April. And in our trading statement, which you'll find a copy of on our website, we set out the split of that between the property income distribution and the other part of it, which is classified as dividend. And we are intent on paying a progressive dividend, reflecting the very high-quality of the cash flows that come from the portfolio. We did purchase some assets during the period. We entered into 2 forward funded developments at Llanbradach in South Wales for just under GBP 3 million and at Epsom in Surrey for GBP 4 million, and these were exchanged in February and March, respectively. We have a strong active pipeline of potential acquisitions both here and in Ireland. But obviously, we're looking at those extremely closely in order to preserve operational flexibility through our cash balances and available bank lines. And we'll be thinking very carefully about any further changes that there may be to the market before committing to any of these. I should also say that our projects in Wales, at Mountain Ash and Llanbradach are proceeding. They are classed as essential by the Welsh government, and our project at Eastbourne is also proceeding. At Epsom, a relatively new commitment, whilst we bought the land, we won't be starting that project at the current time until the position with COVID-19 has become clearer. But there's adequate headroom in the calculations to allow for what we hope is a small delay in commencement of the construction. In Ireland, I'm pleased to say that both Bray and Rialto both have an exempt certificate from the Irish government. So work is allowed to continue there. And they are both within spitting distance of getting to completion, which we expect to have as the announcements are during the month of April, in fact, substantially quicker than that, but at any rate, by the end of April this year. Those will be 2 quite significant investments and will help the HSE, the Irish NHS, in their fight against COVID-19, with both of them, I believe, being used as community centers for the fight against COVID. Banagher, which is closed due to the government guidelines and Epsom, which has not yet commenced on development, all our other sites, as I said, remain open and construction continues to progress. I'm pleased to say that we've also enjoyed some rental income increases. And maybe, Richard, you would like to speak about that?

Yes, sure. So again, sort of carrying on the positive trend from 2019, we've seen an increase in rent of just under GBP 0.4 million, with a weighted average annualized increase of 2.4%, which carried on a positive trend. And that was across 56 reviews, including 2 reviews settled at annual increase. Those have a further 5 asset management on-site at the moment, which we are progressing. And when completed, we'll be investing a further GBP 0.9 million in those properties. And again, this is all about enhancing and extending the leases on the portfolio.

Okay. In terms of the outlook, clearly, the world is gripped by the COVID-19 pandemic, and we are playing our part in helping both the National Health Service and HSE gets facilities on board as fast as possible, and to redesignate some facilities that are currently underutilized or vacant, which in our case, a very, very small percentage of our portfolio, under 0.5% is vacant, to enable the health systems, both in the U.K. and in Ireland to deal with the unprecedented demands on it. One thing is certain, this has focused a lot of attention on the importance of health care in the economy. And it's my belief that the amount spent on health care will increase very dramatically, even once the COVID epidemic is safely out of the way. Indeed, during this epidemic, we're seeing how primary care can relieve the pressure on hospitals by dealing with lower intensity cases in modern integrated primary health care facilities, which can play their part in the future, moving forward. We anticipate that the crisis will highlight this role and will lead to there being more emphasis on primary health care in the future. So that deals with our presentation, and we are looking forward to playing our part, as I said, in beating the COVID epidemic -- pandemic. We have had some questions that have been sent via the appropriate link that we came out with on the trading statement. And I'm going to deal with those.

So the first question, which came from [ Damien Ryan ] of Jefferies, was do we have the top 10 holdings of properties. And the answer to that is, of course, we do. And both Bray and Mallow, an existing property, and St Catherine's in Chester are important components of our portfolio. But those elements of our portfolio still represent a very small percentage of the total because we have an extremely granular portfolio, with just shy of 500 assets. So Bray, to be precise, would be the 7th largest at GBP 21 million, and Mallow and Mullingar would now rank 9th and 10th at GBP 19 million each. And our 10 largest assets would only account for 10% of the portfolio and 2.5% of the whole of PHP is in the 3 largest assets that I just outlined. So that was one interesting question that we had. We also received a second question from a private investor, commenting that there are relatively few investments in East Anglia and none in Cambridge. And was there any particular reason for that? Well, when we look at the development of Primary Health Properties, it's true to say that the location of our facility is driven by covenant rather than location, and it ends up being more of a reflection of the distribution of population across the U.K. than any particular emphasis on one area. And because East Anglia is a relatively lowly populated, low-density population region, that's one of the reasons that it's featured quite low down our list of regions. However, it's true to say that when we bought the MedicX portfolio as part of our agreed merger last year, which added GBP 800 million worth of assets to our portfolio, we did pick up quite a few assets in the East Anglia region. So we don't hold anything against East Anglia and Cambridge, it's just the way that it reflects the British population map. So if you were to draw a line between the Northwest and London, a whole swathe of our portfolios would lie in that particular geographical location. So the third question that we've had is from Mike Foster of Hardman & Co., who asks, are there any indications or early indications of third-party general practitioners moving from closed GP surgeries into larger ones. I think the answer to that is that currently, the answer is no. However, the advent of what I call primary care networks across the U.K. means that there's much more cooperation between GP practices. And we've been talking to 1 or 2 of our advisers who have said that within primary care networks, there is some swapping around of staff and the use of triage centers in order to overcome short-term staff shortages that there are, as we read about in the medical space, because of the COVID-19 pandemic. So maybe this will be a trend that we see in the future, but we haven't seen any of that specifically in terms of changing of leases yet as far as we're concerned. So those were some of the questions that we received. I think to sum up, we've had rather an extraordinary first quarter, but through it all, the resilience and vibrancy of our cash flow has remained very strong. We are sympathetic to the pressures that are on the current health care system. And we want to work closely with some pharmacies that have been experiencing some difficulties in Ireland, which is a very small percentage of our portfolio and with the health care providers like the HSE and the NHS to make sure that we can play our part in making sure that the health services in both countries are well equipped to deal with COVID-19 pandemic. I'm sure that there will be some research notes published as a result of our trading statement. We've seen early copies all of those already being circulated on the Internet. There will be an audio recording rather of this audiocast placed on our website in due course. And if listeners who haven't had the opportunity of asking specific questions want to e-mail either Richard or myself, our contact details are on the website. We've been more than happy to deal with those questions in due course. Richard, would you like to add anything at your end?

Nothing further for me, Harry, but just to add, as you always said that we're always very happy to answer any shareholder questions at any time.

Yes. And I should have said that a big fact -- we're working very successfully from home and this audiocast is a testament to that. The business is up and running and functioning in part through to the efforts of modern technology and in part through extraordinary efforts from our team, so a big thank you to them. So having said that, I'm going to hand back to the modulator, who will close the meeting.

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.