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

Hello, and welcome to the Primary Health Properties Interim Results Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Harry Hyman, the Managing Director; Richard Howell, the Finance Director; and Chris Santer, the Chief Investment Officer. Please go ahead with your meeting.

Thank you very much. Well, good morning, it's Harry Hyman speaking. Thank you all very much indeed for joining our interim results presentation. I'm going to start off with a brief overview of the period. And you'll hear from Richard, our Finance Director; and also from Chris, our Chief Investment Officer. So as you might have expected from a business which has 90% of its total rent roll coming from either the British government or the Irish government through the NHS and the HSE, it's been a robust and resilient performance by PHP in the first half of the year. You'll hear later about our rental collection rates from Richard. We've also had a successful period in that we've deployed quite a lot of capital, more than the GBP 100 million that we raised last September. And just shortly after the period end, of course, we had an upscaled capital raise, raising GBP 140 million for future growth and enabling us to operate within a lower leverage ratio. The all-important dividend has been maintained and, in fact, grown. We've already paid 2 quarterly dividends of 1.475p, making 2.95p in the first half, and we've declared our third quarter dividend, which is coming out to investors in the last week of August at the same level. We have a strong and prudent capital base. Acquisitions during the last quarter of 2019 and the first half of 2020, including -- and I've now moved on to Page 4, included a portfolio of 22 purpose-built medical centers for GBP 54 million, which had a good initial yield and good asset management opportunities. We also bought a already built purpose-built medical center for GBP 8 million in Bolton. We entered into new forward funding commitments at Arklow, at just shy of GBP 17 million, and at Banagher, also in Ireland at just on EUR 5 million. Entered into forward funding commitments at Eastbourne, at Mountain Ash in Wales, at Epsom and at Llanbradach, also in Wales. Very importantly, we had a material derisking of our development portfolio by seeing the completion of projects at Athy and Bray and Rialto with a total development cost of GBP 44 million, which was very good news. Rental collections are robust, 96% collected in the U.K. and Ireland for the third quarter and with second quarter collections well over 99% now across both the U.K. and Ireland, with the balance expected to be received shortly. We have, as previously reported, allowed GBP 1.1 million of quarterly rents to be paid by monthly installments and given short-term rent deferrals of just GBP 0.3 million and concessions of GBP 0.2 million, which against our rent roll of over GBP 136 million, is a good results. We have, as I'll explain later, seen some significant changes in the way that health care is being delivered, but nothing will stand in the way of health care having a higher level of spending in order to maintain a resilient and a robust health service in both Britain and Ireland. We've seen an increase in the number of delayed and deferred appointments. We're seeing the movement of care out of hospital structures and into the primary care arena. And that's all notwithstanding the move to face-to-face consultations going down and with improvements in accessibility on the Internet and telephone and other methods, which have become the predominant way of seeing the doctor for the first time but do not remove the need to see the doctor subsequently for follow-up consultations and complex co-morbidity issues. During the period as well, we focused a lot on the existing portfolio and driven strong rental growth out, which Chris will talk about later in the presentation. Our team is working successfully from home, and both of our offices are open, although we're encouraging staff to work from home wherever possible. All of our development sites are working and functioning well, both here and in Ireland. And we have begun to make site visits again in a socially distanced and appropriate way. So robust and resilient is very much the message from us as a business as usual from the PHP team in the first half of the year. I'm going to hand over to Richard, who will take you through the detailed financials on Slide 5.

Thank you, Harry, and good morning, everybody. Yes, Slide 5, key financial highlights in the first 6 months of 2020. Net rental income was up GBP 11 million or just over 20%, reflecting a full 6-month contribution from MedicX, which added GBP 8.8 million, but we also had additional income from completed developments in 2019 and the first half of 2020, which added GBP 2.2 million to that number. Adjusted EPRA earnings per share, GBP 36 million, up 29%, or just over GBP 8 million. Again, the MedicX portfolio and the full 6-month contribution added just over GBP 4 million to that number. The rental growth numbers, which we just talked about, GBP 2.2 million. And a lower cost of finance negotiated in 2019 contributed a further GBP 1.8 million to that number. So overall, adjusted EPRA earnings per share, 3p per share, up 7% over the same period in 2019. Dividends paid, just under GBP 36 million. So they were fully covered by the EPRA earnings in the period, up 35% compared to the same period last year, again, reflecting a large share base from the MedicX merger in 2019. Dividend per share, 2.95p for the 6-month period, up 5.4%. We've already declared our third quarterly dividend of 1.475% -- sorry, 1.475p, and we expect to make a further dividend payment in November 2020. Investment portfolio, up at GBP 2.5 billion. There was a small revaluation surplus of GBP 10.5 million or 0.4%. So I'll come back and talk about that on the next slide. Adjusted EPRA earnings per share -- sorry, adjusted EPRA net tangible assets per share 109.1p, up 1.1%, reflecting the revaluation surplus. Loan-to-value, following the equity raise, 40.3%, falling from just over 45% at the end of the period. The group has also decided to lower the maximum targeted loan-to-value ratio from 55% to 50%, which we think is a prudent thing to do in the current economic environment. Average cost of debt, no change at 3.5%. Most of those synergy savings were delivered in 2019. Growth on rent reviews is 2.2%, and Chris will come back and talk about a bit more detail in a minute. WAULT down to 12.5 years. So despite another 6 months passing, it's only declined by 0.3 years, reflecting the accretion from acquisitions and the asset management projects completed in the first 6 months of the year. EPRA cost ratios continue to fall, reflecting the additional synergies and a full 6 months of those from the MedicX merger continues to be amongst the lowest in the whole of the U.K. REIT sector. Turning to Slide 6 and looking at the income statement in a bit more detail. I won't go through net rental income because we've already touched on that, but again, just to retrace that was up 20%, driven predominantly by the MedicX merger and additional income from rental growth and the developments that we've completed. Administrative expenses, up GBP 0.7 million, again, reflecting a full 6-month charge from the MedicX portfolio and increased scale of the portfolio. Performance incentive fee, down slightly, perhaps returns in the first 6 months of period weren't as strong as 2019, and that's reflected in that number. Net financing costs down 2.3% -- sorry, GBP 2.3 million, reflecting the lower cost of debt in negotiating in 2019 but offset slightly by the onboarding of the MedicX loan facilities last year. Adjusted EPRA earnings, GBP 36 million, were up 29%. We've touched on all the key drivers of that. Revaluation surplus, GBP 10.5 million, of that 1/3 of that came from Ireland where we saw some yield compression and 2/3 from the U.K., which is all driven by rental growth. A loss on the fair value of the derivatives and convertible bond, GBP 8.4 million reflected the fall in interest rates and gilt rates in the U.K. since the pandemic has started. But overall, there was an adjusted IFRS profit, excluding the exceptional items arising from the MedicX merger last year of GBP 38.4 million. Continues to be some small anomalies, the amortization of the MedicX debt from acquisition last year, GBP 1.5 million, resulted in an overall IFRS profit of GBP 39.6 million or 3.2p per share. Turning to Slide 7. Looking at the balance sheet and how the adjusted EPRA net tangible assets per share has increased since the start of the year. Adjusted EPRA earnings were all paid out as a dividend to shareholders in the period, so no real change from that. The portfolio revaluation equipment to 0.9p per share. It was a key driver of that. And then we had some slight increase from the shares that are issued through the scrip's scheme of 0.2p. So we ended up at 109.1p at the end of June. I'll now hand you over to Chris, and we're now on Slide 8.

Great. Thank you very much, Richard. Good morning, everybody. So following the activity in the first half of the year, the portfolio now comprises 510 buildings, including 17 in Ireland, and is valued at a total value of GBP 2.514 billion. This reflects a net initial yield of 4.86% across the U.K. and Ireland, and approximately 8.4% of the portfolio is now in Ireland, where the properties there were valued at EUR 214 million as they are today or EUR 233 million once completed. This net initial yield of 4.86% continues to reflect our ongoing strong fundamentals with an average WAULT of 12.5 years. Occupancy across the portfolio of 99.5% and 90% of our income, either directly or indirectly, we received from the NHS or its Irish equivalent, the HSC. Our strategy continues to be to focus on the larger integrated primary care hubs. And as you can see from the table at the bottom of Slide 8, over 80% of our portfolio has a lot size in excess of 3 million at speaking to this. Turning on to Slide 9. You can see some examples of the development pipeline. As mentioned, 3 schemes were completed during the period. These were large integrated primary care hubs in Ireland, the 5 BREEAM Rialto. When we started on-site a 3 new site -- 3 new schemes. This included in the top left-hand corner of Slide 9, our premises in Eastbourne, which I would highlight was also being built to BREEAM excellent rating, and that will provide a purposeful modern building for patient lists of approximately 20,000 patients. We also started on-site in Arklow in Ireland, which is a new premises, which is 93% let to the HSE. During the period, we also made a number of acquisitions. And on Slide 10, you can see some examples of some of those. 23 assets were acquired for GBP 62 million, one of which was acquired after the year-end on the 1st of July, which present good asset management opportunities. These buildings have strong patient lists, and we think have good opportunities for the practices to renew in due course. We also bought a largest premises at the Waters Meeting Center -- the Waters Meeting Health Center, apologies, in Bolton, which again had a medium-term WAULT, and we think, presents a good opportunity for asset management income growth and capital growth in due course. Asset management continued throughout the portfolio. And so far on the year-to-date, we have completed 12 projects, either completed or on-site, which some of which are shown on Slide 11. These projects together invest on GBP 4.1 million of CapEx adds an additional GBP 0.12 million of rent and importantly, extend the weighted average unexpired lease term on these properties back out to 21 years. We also have a strong pipeline of further asset management opportunities, where we have either agreed terms with the tenants and our occupiers and the various stakeholders or are in advanced negotiations at the moment, investing up to a further GBP 36 million of CapEx, generating additional rent of over GBP 1 million and extending the WAULT again back out to over 20 years. This includes a number of extensions to those buildings and new space. And again, as we work through the portfolio and we undertake these refurbishments, not only are we bringing them up to modern health care standards, but also from an environmental point of view, undertaking measures to mitigate the energy usage of the building and the emission of greenhouse gases. So flicking on to Slide 12, is just a reminder of our fundamentals of the portfolio, which I've touched upon already. I'll perhaps highlight that 69% of our portfolio includes income, which is reviewed to open market rents, typically every 3 years, whilst 31% of the portfolio is reviewed to either fixed or indexed increases. And on Slide 13, you can see our performance over time and from the first half of 2020, where rental income on the assets reviewed grew by 2.2%. This was a combination of open market rent reviews, which we're able to continue during the period and also indexation and RPI and CPI increases as well on the indexed reviews. So that gives a quick overview of the property portfolio. And I think at that point, I will hand back to Richard on Slide 14 to talk about the debt.

Thanks, Chris. Yes. So Slide 14, just looking at the liability side of the balance sheet. We continue to have a very broad and diverse range of our lending partners and facilities ranging from revolving credit facilities, sterling bonds quite a bit of debt with Aviva. So we haven't seen particularly much change in the debt portfolio over the last 6 months, which totals just under GBP 1.5 billion. But following the equity raise, net debt drawn is just over GBP 1 billion. So we have over GBP 400 million of cash on deposit and undrawn loan facilities, which gives a lot of firepower and headroom in the case of any further economic turbulence as we move forward. Group LTV ratio, down to just over 40%, following the equity raise. If you strip out the GBP 150 million convertible bond, that falls to 34% on a pro forma basis. No change in the average cost of debt. It's important to note we have a low marginal cost of debt, just over 2% going forward. As we look forward to the future, we have a number of facilities maturing in 2021 and 2022, which are revolving credit facilities, and we're already in very positive negotiations and discussions with those lending partners about renewing those facilities. We hope to make further announcements in the second half of the year. So at that point, I'm going to hand back to Harry, and he's going to summarize the dividend track record on Slide 15 and investment highlights on strategy.

Thank you very much, Richard. Well, of course, those of you will know that we have this resilient and robust cash flow, and that's enabled us to continue with our 24th year of consecutive dividend growth. And as I've mentioned at the beginning, we've already declared and/or paid the first 3 installments of what brokers predict will be a total year dividend of 5.9p, so we're well on track with that. And at 150p, which was this morning's opening price, that's a yield of just under 4%, which given that 90% of the total rent roll comes from the British or Irish governments. And predominantly, the U.K. government through the National Health Service is a very good and attractive and secure yield. Looking back at the period, we've shown resilience and strength. We've reached out to the NHS and the HSE to be as helpful as we can in enabling both health care systems to cope with the extraordinary pressures put on it by COVID and dealing with the pandemic generally. We're delighted to have had such a positive response to our capital raise, which puts us in an excellent position to continue with our expansionary policy on our portfolio, both here in the U.K. and in Ireland. But we're not overlooking work that needs to be done on the existing portfolio with a lot of effort going into driving out further rental growth, driving through asset management projects, and making sure that our buildings remain fit-for-purpose for the new age that awaits health care moving forward. I think when you reflect back on the extraordinary events of 2020 to date, you can see the benefits of locating more of health care out of expensive and inflexible hospitals that have had to be used for the pandemic. I think a large part of the population would prefer to go to a local health center. They prefer to have their diagnostics done there. They prefer to have minor procedures done there. And although, as I mentioned at the beginning, no one can doubt the beneficial impact of having Zoom and Skype consultations online. Further visits to the doctor are, more often than not, necessary to deal with more complex issues. And let's remember that we have the demographic tailwinds behind this business. Both countries have a growing population, both countries have an aging population. And as we've heard particularly this week, both countries have a large incidence of chronic disease, of which obesity and being overweight is one that the government is choosing to focus on. And social prescribing, which is an important part of the total health care package, is very often delivered by GPs or by services associated with the GP community. So one thing is certain, to my mind, that primary care has a robust and vibrant future ahead of it, and PHP is extremely well positioned to continue doing what it's done over the last 24 years and benefiting its shareholders accordingly. So that is the formal end of the presentation. I'll hand back to the moderator, who I think will deal with questions.

[Operator Instructions] And our first question comes from the line of Kanad Mitra of Barclays.

So a couple of questions from my end. First, on the timing of the equity issue, can you please comment on the equity issue why you approach the markets now as you were in the middle of your LTV range? Are you seeing an increased number of acquisition opportunities coming through beyond the pipeline that you mentioned? And secondly, even towards the beginning of the COVID-19 crisis when we interacted, you were still cautious on your business overall. I am specifically referring to open market rent reviews, acquisitions and developments like you were caveating them. Now that we have completed about 4 to 5 months in this crisis and having completed a few rent reviews, acquisitions and developments, how do you see these aspects panning out? Any delays expected, any softness in the rent reviews? Basically, a brief overview of how things are panning out.

Yes, thank you. So I'll deal with the first part of your questions, and Harry will deal with the second part. So looking at the pipeline, I mean, as Harry already mentioned, we had deployed the 100 million from the equity raise in September last year, but we still have a very active pipeline of GBP 128 million and there are further details on Slide 21 of the pack if people are interested. So we thought it was an opportune moment to really come to the market and ask for some more money to help us deliver that pipeline. If we have enough capacity in our existing loan facilities, we'd have taken a loan-to-value ratio closer to 50%. In the current economic climate, we thought it was prudent to bring that back down to closer to 40% in the short term. As a consequence, we did reduce our maximum targeted ratio from 55% to 50%. But I think that money will get deployed over the next year to 18 months. And obviously, the loan-to-value ratio will tick back up closer to the middle of the range, as you mentioned.

I think that's right. I suppose we didn't want to be constrained from what we now consider that the larger number of opportunities, which I think was the question you were asking. So we also have to be a little bit cautious earlier in the year because, for example, development activity was actually suspended in Ireland, but it's now back on site. And there were questions about whether or not development activity would be suspended in the U.K. And indeed, some brand-new developments were paused and delayed whilst the people got updated quotes. But that position has now worked through and barring some colossal second spike, which we all hope we won't have, developments are now proceeding apace in both Britain and Ireland. As regards to any softness in future rents, if we were sitting 3 years hence, then that might be a valid question, but you always have to remember that the rent reviews we're doing now look backwards 3 years or, in many cases, look backwards some more because we have a lag in the speed at which rent reviews can be done. So whilst I would be less optimistic about rental growth than I might have been at the beginning of the year, we're still expecting rental growth from both the open market values and obviously, the fixed and index link, but obviously, inflation has come down during the period as well, in part due to the pandemic. So I think we're seeing a balanced position. But to come back to the first part of your question, we didn't want to be constrained because who could doubt that both in Ireland and in Britain, people now are going to want to see a more robust and more resilient health care service and the sort of 9 or 10 years of austerity that we've had in the U.K., which is impinged on the NHS. People aren't going to tolerate that. And so more investment, more shovel-ready projects are needed in order to get more care out-of-hospital and into the primary care arena.

[Operator Instructions] And our next question comes from the line of Ed Stacey of Proactive Research.

Just one question from me, and it's about the sort of pace of investment that you might be able to manage because I'm looking at -- you sort of got GBP 400 million of firepower potentially sort of straight off the bat available and a pipeline of, would you say, GBP 128 million. And just looking at the yield spreads that you're getting now, I mean, it sort of -- it feels like just the more acquisitions you can do, the better it is for shareholders. So I'm sort of wondering what's the speed limit on getting that capital to work. Is it -- is the health services, the kind of the choke point? Or is it your own capacity to be able to actually process acquisitions? How quickly could you accelerate the rate of property acquisitions even further next year?

Good question. I mean the simple answer, it is the speed at which the 2 health services operate. And of course, that isn't meant as a critical comment because, of course, they're dealing with millions of patients every day, 1 million people a day visit a health service -- visit a health center. And we're still seeing regional outbreaks, and there is a huge backlog of somewhere between 7 million and 10 million of consultations and procedures that needs to be dealt with in the U.K. So it is just a question of -- and because it's public money that pays the rent, there has to be a proper due process gone through. But so it is very much working with the 2 health services, but we have seen a pronounced uptick in the rate of activity compared to the last 2 to 3 years when the NHS has been severely cash-constrained. And we're hoping that the government's call for shovel-ready projects will go -- we're standing ready to answer that call. So you're quite right, the more that we can do, particularly in Ireland in the short term, where the yield pickup is more substantial than in the U.K., the better. But we're not going to do things in an imprudent or incautious way, we're going to do things gradually and make sure we only buy the best assets for the future.

And we have no further questions on the line, so I'll hand back to our speakers for closing comments.

My closing comments very much to thank you all for attending this morning. We are available if anyone hasn't had the courage to ask a question directly on the telephone to ask by e-mail, either Richard, Chris or myself. And to the extent we're allowed to, under the rules, we will, of course, provide full answers. And the presentation is on the website as is a video presentation that we recorded earlier. So thanks once again. Robust and resilient are the watchwords, business as usual, and we look forward to delivering further results that show how we've delivered our pipeline in the future. Thanks very much for coming. Really appreciate it.

Thank you.

This now concludes our conference call. Thank you all for attending. Participants, you may disconnect your lines.