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

Good afternoon, and welcome to the Primary Health Properties Plc investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I hand you over to Mark Davies, CEO. Good afternoon, sir.

Good afternoon, everybody. Thanks for joining us this afternoon on a sunny summer afternoon. With us this afternoon, myself, Mark Davies, the CEO; and Richard Howell, our CFO. We're presenting to you this afternoon our interim results for the 6 months ended 30th of June, 2026. It's been an absolute transformational period for our company. You will see that in the financial performance that we will present to you shortly. This is the first financial period that we've published with the benefit of the Assura merger now coming through into our financial results. And we're delighted with the acquisition. We'll give an update on the integration, the synergies, how active we've been in the capital markets, particularly in the debt capital markets. There's lots to talk about on our joint ventures, which I'm going to get to. And also, we'll try and talk some case studies to you as well. So first of all, it's our interim results, a very strong set of financial results, a very busy period for our company. And Richard will be going through those results, which have delivered 9% increase in our earnings per share during the period, and we've made very good progress on our key strategic objectives. But before I move on, I know there are literally hundreds of people on this call this afternoon, some of whom we've not met before. So I just wanted to introduce PHP to those who've not met us before and also just remind everybody where we now sit as a business following the successful Assura merger of last year. PHP operates principally in 3 resilient health care markets, one of the largest health care infrastructure investors in both the U.K. and across Ireland. Our current portfolio is GBP 6 billion. So we manage, own and invest in GBP 6 billion of health care assets, real estate assets. Our core portfolio is our primary care portfolio in the U.K., which equates to about GBP 5 billion. We have 15% of the entire market share in U.K. primary care real estate. And that puts us in a very strong position, and I'll maybe come back to that in a moment. Principally, the income that we generate from our portfolio of primary care assets in the U.K. is government backed. So very secure income, stable and strong valuation performance, attractive fundamental tailwinds socially, demographically, economically. Principally, our assets are long income when we enter into new leases with our occupiers, often they're 20, 25 years or longer. And because we have a policy that over 80% of our rent roll is paid for by the U.K. or Irish government, we have a very strong and secure covenant. We do have many of our assets linked to inflation or fixed uplifts. And we'll give a breakdown of our portfolio metrics later on in the presentation. We have an undeniable track record at PHP. We've been doing this now for 30 years, and we have around 1,100 medical centers, GP surgeries all purpose-built in and around the U.K. Second part of our business is in Ireland. We've been owning, managing, investing and developing primary care assets in Ireland now since around 2015, 2016, equates to about GBP 0.3 billion of our total portfolio today. We also have significant market share in the Irish primary care real estate sector, which equates to about 15%. In terms of those investment characteristics, again, principally our core source of income is the HSE, which is the Irish version of the NHS. So the Irish government is ultimately paying the rent. Very strong demand for the facilities that we own and new ones that we can create, given the population growth, the aging population, the social and demographic drivers that sit behind our business, provide those fundamental tailwinds. Again, a very strong and secure covenant. And in fact, in Ireland, our entire portfolio pretty much is linked to inflation, and we'll talk a bit more about that performance later. And of course, the assets are well located, well maintained, and we would describe our portfolio as the best-in-class when we think about health care infrastructure, investing in the U.K. and in Ireland. The third and final part of our portfolio is our private hospital portfolio. The majority of these assets came across to us during the Assura merger. The Assura team in private hospitals that we have retained have been investing in private hospitals now for about 10 years. They have about GBP 0.8 billion of assets if you include the private hospital, private clinic business we have here in the U.K. and also an asset that we own over in Ireland. We have 5% of the total market share. So it's meaningful. It's significant enough to give us great access to information. But also we've established long-standing relationships with all the leading private hospital operators, including Ramsay, Nuffield, Circle, HCA, Laya and Spire. Again, attractive fundamental tailwinds, long income. In fact, our average lease length in our portfolio of private hospitals is over 20 years. And again, it's a very strong and secure covenant, all linked to inflation. So put all that together, and we -- fundamentally at the heart of our investment case is we have a very secure income stream, a very stable and strong asset base, and there are attractive structural trends that support the growth of our business in the future. In simplistic terms, we are in a growth sector. I described earlier the platform and I touched on the team. We are the U.K.'s largest health care REITs. We have over 1,100 properties across U.K. and Ireland, as I described on the previous slide, GBP 6 billion of assets, 99% occupancy. We're pretty much fully occupied in our portfolio. As the leading owner in the U.K. of purpose-built GP surgeries, medical centers, no one is building new medical centers, new GP surgeries other than us. And as you can imagine, the demand for these facilities is high and growing. It's a very low-risk, long-term, noncyclical secure government-backed income portfolio. And our investors tell us that's one thing that they, amongst other things, we like about our business and the investment case that sits around it. We have a 30-year track record. We've increased our dividend every year for the last 30 years, which remains fully covered. We've got confidence in our rental growth outlook. We're targeting 3% or more on an annual basis going forward. There's a slide in our presentation, we'll try to get to later. You can see where the current trend sits around 3.2%. We're confident we can be at 3% or more. We're operating in a growth sector, as I mentioned earlier, demographic tailwinds are high and growing. The other thing that really underpins the strength of our investment case is the government plan, the government shift, both here in the U.K. and in Ireland to get more clinical services out of hospitals into primary care, supported by the 10-year NHS plan, which came out last year, the government's commitment to build 250 new neighborhood health centers, we're very much front and center as part of that neighborhood health center model, the plan the government is looking to implement. We've already got 3 neighborhood health centers in our portfolio. We think that will increase significantly in the future. When Lord Darzi was asked by the current government to commission a research report on the NHS and health care in this country, he concluded amongst other things, that 50% of all existing U.K. primary care real estate is not fit for purpose. Now he's not talking about the real estate that we own, which is purpose-built, often modern, flexible space, which is what the NHS requires today. He's talking about the rest of the primary care estate and that creates a big, big opportunity for us in the future as the leading owner manager, investor and developer of new primary care real estate. We've got great relationships, as you can imagine, at the heart of government, the heart of NHS nationally and locally all around the country. And we're well placed to support the government in the implementation of this 10-year plan. On the financial side, because we've been doing this for 30 years, we've been listed for 30 years. In fact, we opened the stock exchange very recently. We've always delivered a strong financial performance. We've principally able to do that because of the strength of the team here, the strategy, the active management of the portfolio. We're recognized as a very competent, very able asset manager, which has helped us deliver that track record through principally stable income and a very disciplined approach. We are a very well-run business. We have a strong control on overhead. We target an EPRA cost ratio below 10%. The synergies that have come through the Assura transaction of about GBP 9 million, we're beginning to see the benefit of that now. We've delivered about 92% of those transaction synergies. So our EPRA cost ratio is now, I think, the second lowest in the entire sector. And when Richard talked to us about the debt later on, you can see we've got a really efficient capital structure, strong support from the debt capital markets, banks and beyond with a low average cost of debt of 3.8%, which will come down to 3.5% later this year. We've always delivered with clear focus and enhanced total property return and the growth rate on our dividend over that 30-year period equates to around 8%. That sort of sets the scene. Now on to our results, which we published last week, sorry, week before. These results are the first set of results that we have published, where you can now start to see the benefit of putting PHP and Assura together. The combination is delivering earnings growth, supported by our operational activities, all which goes to shareholder value. Our earnings per share is up over 9% during the half year. Our dividend has increased yet again and is fully covered. And as I mentioned earlier, we've been able to do that for 30 consecutive years. We have a real focus on rental growth, positive trend coming through. We'll talk a bit more about that later. You can see a 6% uplift on reviews settled during this period. Very focused on asset management. We want to do more deals, not less and the quality of the team, the expertise, the knowledge, the relationships, the access to data that we have as a combined business puts us in a stronger position to do that going forward. I've already touched on the focus, the forensic focus actually on cost and overheads and the low EPRA cost ratio. A very resilient asset class with a stable net asset value, which is currently at 104p and a growing pipeline of opportunities, asset management and development and beyond, which we'll talk about shortly. Management priorities following the Assura merger that we set out at the time were very clear. And we've been very focused on delivering those objectives over this last 6-month period. We've been very busy. Integration has gone well, is pretty much substantially complete. We've now delivered 92% of the total cost synergies on the merger, which totaled GBP 9 million. So the benefit of that started to come through in this period, but you'll get to see more of that in the second half and beyond. The team, we've combined the best of both focusing on generating future value from rent reviews, asset management and risk control development. We can definitely do that better as a combined business with more size and scale and a reduced cost of capital. At the time of the transaction, we took on a bit more leverage. So we have an elevated leverage post transaction, but we are well progressed in terms of deleveraging on plan, on track by principally selling assets into 2 joint venture vehicles. One is the existing U.K. primary care vehicle that was established by the Assura management team, which we inherited, which we're very pleased with. And secondly, we have agreed exclusive terms on our private hospital portfolio to establish with a new global institutional investor, a 50-50 on day 1 joint venture. And those terms were agreed some time ago, and we're now well advanced in all the due diligence that's required to complete that transaction. So very well advanced on that. And then finally, at the time of the transaction, I mentioned the leverage that we had taken on. We had a GBP 1.2 billion bridge facility. Sat here today, all of that's been repaid or refinanced with the exception of about GBP 260 million, which will get refinanced, repaid in the next few weeks following the receipt of proceeds coming in from those 2 joint ventures that I've just described. And Richard, when he talks to us about the capital structure in a moment, will highlight the 40 bps reduction in credit margins he and his team have managed to achieve principally as a consequence of the merger and the increased size and scale of the business. Once we have repaid that bridge facility in a few weeks' time, completed the joint ventures that I described, PHP will then seek a strong investment-grade credit rating. It's awaiting the proceeds of the JV, as I mentioned, but the work has been done on that in the background, and we're confident about the company's ability to do that in due course. I'll now pass you on to Richard, who's going to talk you through the financials.

Thanks, Mark, and good afternoon, everybody. Just looking at the key financial highlights for the first 6 months of the year. Obviously, the benefits of the combination with Assura last year are now flowing through to the enlarged group with strong earnings growth and operational performance. Adjusted earnings increased to GBP 98 million, driven by a full 6 months of income from Assura, which added an extra GBP 50 million of income. This resulted in adjusted earnings per share of 3.8p, up 9%. Like-for-like rental growth generated an extra GBP 4 million of income, driven predominantly by rent reviews where we saw rents increase by 6% over the previous passing rent. As Mark has already mentioned, we've delivered GBP 8 million or 92% of the anticipated cost saving synergies arising from the merger. And that has resulted in one of the lowest EPRA cost ratios in the whole sector at 8.7%, down from 10% last year. The underlying portfolio generated a valuation surplus of GBP 18 million, driven predominantly by rental growth, which generated a surplus of GBP 29 million, offset by a very small 1 basis point outward yield shift movement equivalent to GBP 11 million deficit. The yields across the portfolio have generally remained flat, which is consistent with the second half of last year. So notwithstanding the volatility in gilt rates and interest rate markets, we've seen values in our sector remain stable, which is a very common theme across our portfolio. Investment portfolio remains unchanged at GBP 6 billion as is the adjusted net tangible asset per share at 104p per share. We continue to maintain very strong operational metrics with pretty much full occupancy at 99% and a long WALT of just over 10 years. Looking at the strong progress we've made in terms of refinancing, a lot of the debt post-merger. As Mark has already mentioned, we've completed GBP 1.2 billion of refinancing in the year, which pretty much refinanced the bridging facility put in place when we acquired Assura last year. This remains -- leaves GBP 260 million outstanding, which will be cleared as part of the deleveraging plans that Mark mentioned earlier in the presentation. The first facility was a GBP 800 million revolving credit facility and term loan, where we have seen credit margins come in by 40 basis points, which really reflects the increased scale of the business. We've also put in a new GBP 400 million term facility for 2 years, which is really there to provide a bit of extra flexibility when we come to look at some further refinancing initiatives in the second half of the year. As a consequence of all of these actions, the average cost of debt still remains at a very low 3.8%, and that is expected to fall to 3.5% once we repay the balance of the bridge facility in the second half of the year. The group also has just over GBP 300 million of undrawn liquidity headroom after capital commitments. Looking at rental growth in a bit more detail. We continue to be encouraged by the improving rental growth outlook. The first 6 months of the year, we generated an extra GBP 4 million of rental income derived from our rent review activities, which resulted in annualized growth of 3.2%, which is slightly ahead of our previous guidance at 3%. Importantly, open market reviews delivered an uplift of 6.3% over the previous passing rent, and that outlook is continuing to improve. The rent review teams across both businesses are now fully integrated and sharing evidence which will benefit rental growth in the future, and none of that benefit is really reflected in the first 6 months results of this year. That rental growth coming from the combined group will really fall into future periods. We continue to focus on asset management and development activities where we're seeing strong rental growth with asset management schemes delivering growth of around 15% from the low GBP 200 per square meter increasing to around GBP 220 and developments seeing that increase even further to around GBP 280 per square meter, which is an increase of around 30%. All of these activities continue to set vital and important rental evidence, which we then apply across the wider portfolio. PHP has managed to achieve its 30th anniversary of consecutive dividend growth, and we continue to focus on this approach, supporting our progressive dividend policy on a fully covered basis. There are 3 key pillars to this growth, a portfolio with strong reversionary potential that will deliver future rental growth supported by the security of our long-term predominantly government-backed income stream, a strong focus on cost control with one of the lowest EPRA cost ratios in the whole sector and a strong record of balance sheet liability management with a low cost of debt of 3.8% expected to fall further to 3.5% in the second half of this year. These 3 pillars have supported the strong earnings growth in the first 6 months of this year. As we said, earnings 3.8p up 9% over the previous period. So I'll now hand you back to Mark, who will take a closer look at the group's property portfolio.

Thank you, Richard. Thanks for presenting the results. I think it's very proud moment for you and I to present such strong results to the market and the response that we've had from our investors in the last couple of weeks has been very, very positive. I'll now, sort of, take you through the sort of property section of the presentation. I think in some ways, this is my favorite part because it sort of brings to life some of the really good things that we are doing. But importantly, we find a way of presenting to you the way in which we make a financial return on the investments that we are making. So I'm going to start in Weston-super-Mare. As you can see on the left-hand side, this is a 5-story new development that we are currently building. And it meets the requirements of a neighborhood health center, which is quite topical because the government has committed to doing 250 of these in the future, and we are very well placed to help government with that plan. So the benefits of PHP are, firstly, we are funding this through our existing joint venture, which we have in place. And it's a very capital-light way for us to generate double-digit returns on a GBP 19 million scheme, which has a 25-year index or sorry, inflation-linked lease. The yield on cost for us and our shareholders is in excess of 8%. That's boosted by the management fees that we receive. We also get development management fees on this particular asset. And importantly, which refers back to the slide that Richard presented just now, it unlocks significant rental evidence well ahead of local averages. So in Weston-super-Mare and in Somerset, generally, we own other assets where often the rent is below GBP 200 a square meter or certainly in the low GBP 200s, and we're setting this -- or the terms, the economic terms on this asset, Weston-super-Mare in the high 200s so that all bodes very, very well. We have a strong reputation for providing new purpose-built medical centers. And I think this particular opportunity, I think, takes that on to another level because on the ground floor and the first floor in the picture in front of us, the services provided from that space will be what I would describe the sort of typical or core GP surgeries that we have 1,100 of those around the country. And then on the third and fourth floor, there will be social prescribing, other services, mental health, children's services. This is exactly what the government is trying to achieve by getting those services out of hospitals into the community. It will save the government money, well, well placed to work with government to achieve that goal. And we have the expertise, the knowledge and obviously, the relationships and then access to capital with the joint venture that we have with our established partner, USS. So lots to look forward to, not just in Weston-super-Mare when the scheme completes later in the year. But I think it sets a really, really helpful precedent to do more of these new neighborhood health centers all around the country in the future for which we know there is very, very strong demand. And of course, we are getting a very nice financial return on our capital investment along the way. The next slide I wanted to sort of showcase to you is in Tetbury in Gloucestershire. This is a new purpose-built medical center. I happen to visit this on the same day that I saw Weston-super-Mare a few weeks ago. This is going to be a really good scheme. I really liked it. There's a nice population. It's a fairly sort of affluent part of the country. Population is growing. Regional housebuilder gets planning consent. The community is crying out for a new medical center desperate in so many ways because of the growing and the aging population. We come in, the developer effectively gives us the land for free. We build the new medical center, which will complete either in December this year or January of next. We have a 30-year lease, all government backed fixed rental uplifts, yield on cost in excess of 9% total return well into the mid- to high teens from the fees that we will achieve. Again, we're unlocking vital rental evidence here well ahead of other assets that we own in this region, of which we have many. And it's a great example of public-private partnerships working together to create new medical centers, new medical facilities in line with the government's 10-year plan. And again, this particular opportunity is going to slot very nicely into our existing primary care joint venture. So again, very capital-light from a PHP perspective, but generating very high returns. And there's more of those coming through in our pipeline. And hopefully, when we talk to you next time, we'll get to show you about that. The next slide is an asset management project in Wakefield in Yorkshire. This is, in some ways, the other end of the extreme of what I've just described in that this is an asset we've owned for 25 years. And we're very, very pleased and proud of the historic success that we've achieved from owning this asset. I think at the time we originally bought the asset in 1998, the number of patients registered at the Trinity Medical Center in Wakefield was about 7,000 or less. We now have 27,000 patients and growing. We are expanding the site principally through a GBP 4 million capital investment, adding 13 consulting rooms, clinical procedures will be provided, including minor ops out of hours, maternity, midwifery and beyond. And we get a good return in excess of a 6% yield on cost, double-digit total profit on cost, setting a positive rental tone, and it's a great story. This is effectively a neighborhood health center in everything but name. And again, a good example of what we do best, generating good financial returns on the way through. Now moving on to private hospitals. I described earlier the portfolio of private hospitals that we own, and we are very well progressed in forming a joint venture. So in the future, we will own a 50% stake in the private hospital portfolio from the point that, that joint venture completes. We also have a capability within the business to develop new private hospitals, and there have been little few, in fact, almost no private hospitals built in the U.K. now for many, many years. This is a new build project. In fact, myself and the team are going up there tomorrow to Peterborough for the topping out ceremony. This is a brand-new private hospital next to Ramsay, who are one of the leading private hospital operators. This would principally be a facility to provide day care surgery and it's introducing additional capacity into the local area where the demand is very, very high. Ramsay across the U.K. and particularly in Peterborough generate a lot of their revenue, a lot of their footfall from the NHS and Peterborough is expected to be in excess of 80%. So outpatient clinics here, diagnostic units, all the usual sort of day-to-day services that you would expect from a new private hospital. It's a tried and tested model. We've now developed 6 of these over the last 10 years for Ramsay, and we believe that we will do more. On completion, we expect this asset to slot into the private hospital joint venture that I described earlier. So before I take the floor to questions, and there seems to be quite a few questions coming in on screen and many of you are kind to submit questions in advance. If I could just sort of close the presentation by saying this has been a transformational period for our company. The transaction objectives of putting PHP and Assura together are well on track. Many things that we have done, we've actually managed to achieve ahead of schedule. Synergies are pretty much materially delivered at 92% and integration substantially complete. Richard and his team have done a terrific job on the balance sheet side and our deleveraging plan is well advanced and the remains of the bridging facility of GBP 260 million will be fully repaid in the next few weeks from the JV proceeds coming in. Dividend growth is fundamental to the business, and we want to continue growing our dividend from the quality of the portfolio, the tailwinds that we have, the operational capability and the scale benefits coming through from the combination give us the confidence that we can be that continued income compounder, not just now, but in the foreseeable future. Our earnings growth is fundamentally supported by that operational excellence that we described earlier. And we see positive trend in rental growth, the ability to do more and enhanced volume of asset management deals. We want to do more of Wakefields, not less. Of course, this management team will retain a very close control of costs. It's, kind of, in the DNA of the company. We've worked hard to get ourselves in this position, and we intend to retain that strong position that we are in. And we're seeing a growing pipeline of opportunities in the U.K., in Ireland, in primary care and in private hospitals. And we have the track record, the team, the capability and the size and scale with a lower cost of capital post-merger to be able to do all of that. So I'd like to thank you all for attending the presentation this afternoon. And I'm now going to go on to questions. And I'm actually going to start with the questions that were submitted in advance. I can actually see now all questions that have come through to the management team. We might not get through all of these, but we will do our very best.

The first question has been pre-submitted. We can't actually see from where we're sat, who's actually submitted these questions. So forgive us for not being able to address you directly. But the first question is, has the takeover brought better-than-expected growth opportunities? I would say definitely yes. I think we were very optimistic about the merger of these 2 companies. It was a very obvious transaction to do. Both companies were very similar in size and scale and the strategies were not wildly different. However, I just think by being twice the size, we've got a lot of profile from the transaction that we did last year. I think that, by definition, has opened more doors to us. But I think this is the team and the expertise and the capability that we have, some of which we perhaps underappreciated, particularly on the Assura side, which gives me the confidence that I can answer that question that we think there are better-than-expected growth opportunities from putting the 2 companies for PHP going forward. Second question is what NAV multiple or yield is embedded in the USS GBP 103 million transfer at GBP 82 million net proceeds. Does that pricing read across to how the wider portfolio should be marked? I can address that question. The transaction hasn't completed yet. So you can appreciate there's some commercial sensitivities, which there always are. But I can say that the pricing of the assets is sort of a yield in the low 5s. Our average portfolio yield is 5.4%. So we think it's positive for -- don't read across just for our wider portfolio, but just the market generally. But it's a good quality portfolio of assets that we're transferring into the joint venture and the portfolio valuation very much reflects that. Richard, would you mind picking up question 3? I presume you can see that from [indiscernible] give me a little break.