TIDMPHP
RNS Number : 1725H
Primary Health Properties PLC
26 July 2023
Primary Health Properties PLC
Interim results for the six months ended 30 June 2023
Organic rental growth continuing to drive performance and
dividend fully covered at 102%
Primary Health Properties PLC ("PHP", the "Group" or the
"Company"), a leading investor in modern primary health facilities,
announces its interim results for the six months ended 30 June 2023
(the "period").
Harry Hyman , Chief Executive of PHP, commented:
"We are encouraged by the improvement in rental growth
experienced in the first half of the year and expect to deliver
over GBP4 million of extra income during 2023, another record and
continuing the trend seen in recent years. We believe PHP will be a
beneficiary of both the current inflationary environment and the
significant rise in construction costs seen in recent years both
through open market and index-linked reviews. Furthermore, with 97%
of PHP's debt either fixed or hedged for a weighted average period
of just under seven years, a strong control on costs and just one
development on site we have limited exposure to further cost
increases and development risk.
"The security and longevity of our income, near full occupancy
together with stronger rental growth are the key drivers of our
predictable cash-flows and underpin our progressive dividend policy
with 27 years of continued growth."
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Income statement and financial metrics Six months to Six months
30 June 2023 to 30 June Change
2022
--------------------- ---------------
Net rental income(1) GBP75.5m GBP71.1m +6.2%
Adjusted earnings(1,2) GBP45.9m GBP44.7m +2.7%
Adjusted earnings per share(1,2) 3.4p 3.4p -
IFRS profit for the period GBP39.5m GBP107.1m
IFRS earnings per share(2) 3.0p 8.0p
Dividends
Dividend per share(5) 3.35p 3.25p +3.1%
Dividends paid(5) GBP44.8m GBP43.3m +3.5%
Dividend cover(1) 102% 103%
------------------------------------------ --------------------- --------------- --------
Balance sheet and operational metrics 30 June 31 December
2023 2022 Change
------------------------------------------ --------------------- --------------- --------
Adjusted NTA per share(1,3) 111.1p 112.6p -1.3%
IFRS NTA per share(1,3) 110.6p 110.9p -0.3%
Property portfolio
Investment portfolio valuation(4) GBP2.783bn GBP2.796bn -0.4%
Net initial yield ("NIY") (1) 4.90% 4.82%
Contracted rent roll (annualised)(1,7) GBP147.4m GBP145.3m +1.4%
Weighted average unexpired lease term 10.6 years 11.0 years
("WAULT")(1)
Occupancy 99.6% 99.7%
Rent-roll funded by government bodies(1) 89% 89%
Debt
Average cost of debt 3.2% 3.2%
Loan to value ratio ("LTV")(1) 45.6% 45.1%
Weighted average debt maturity 6.9 years 7.3 years
Total undrawn loan facilities and GBP314.4m GBP325.9m
cash(6)
------------------------------------------ --------------------- --------------- --------
1 Definitions for net rental income, Adjusted earnings, Adjusted
earnings per share, earnings per share ("EPS"), dividend cover,
loan to value ("LTV"), net tangible assets ("NTA"), rent roll, NIY,
WAULT, total adjusted NTA return and net asset value ("NAV") are
set out in the Glossary of Terms.
2 See note 7 , earnings per share, to the financial statements.
3 See note 7 , net asset value per share, to the financial
statements. Adjusted net tangible assets, EPRA net tangible assets
("NTA"), EPRA net disposal value ("NDV") and EPRA net reinstatement
value ("NRV") are considered to be alternative performance
measures. The Group has determined that adjusted net tangible
assets is the most relevant measure.
4 Percentage valuation movement during the period based on the
difference between opening and closing valuations of properties
after allowing for acquisition costs and capital expenditure.
Includes assets held for sale.
5 See note 8, dividends, to the financial statements.
(6) After deducting the remaining cost to complete contracted
acquisitions, properties under development and asset management
projects.
(7) Percentage contracted rent roll increase during the period
is based on the annualised uplift achieved from all completed rent
reviews and asset management projects.
EARNINGS AND DIVID GROWTH
-- Adjusted earnings per share unchanged at 3.4p (30 June 2022: 3.4p)
-- IFRS earnings per share decreased by 62.5% to 3.0p (30 June 2022: 8.0p)
-- Contracted annualised rent roll increased by 1.4% to GBP147.4
million (31 December 2022: GBP145.3 million)
-- Additional annualised rental income on a like-for-like basis
of GBP2.2 million or 1.5% from rent reviews and asset management
projects (H1 2022: GBP1.8 million or 1.3%; FY 2022: GBP3.3 million
or 2.4%)
-- EPRA cost ratio 10.1% (FY 2022: 9.9%), representing one of the lowest in the UK REIT sector
-- First three quarterly dividends totalling 5.025 pence per
share distributed or declared in the year-to-date, equivalent to
6.7 pence per share on an annualised basis, a 3.1% increase over
2022 (6.5 pence per share) and marking the Company's 27(th)
consecutive year of dividend growth
-- The Company intends to maintain its strategy of paying a
progressive dividend fully covered by Adjusted earnings
NET ASSET VALUE AND PORTFOLIO MANAGEMENT
-- Adjusted Net Tangible Assets ("NTA") per share decreased by
1.3% to 111.1 pence (31 December 2022: 112.6 pence)
-- Property portfolio valued at GBP2.783 billion at 30 June 2023
(31 December 2022: GBP2.796 billion) reflecting a net initial yield
of 4.90% (31 December 2022: 4.82%)
-- Revaluation deficit in the period of GBP11.9 million (30 June
2022: surplus GBP51.2 million), representing a decline of -0.4% (30
June 2022: +1.8%), comprising a GBP45 million decline driven by NIY
widening of 8bps partially offset by gains of GBP33 million arising
from rental growth and asset management projects
-- The portfolio's metrics continue to reflect the Group's
secure, long-term and predictable income stream with occupancy at
99.6% (31 December 2022: 99.7%), WAULT of 10.6 years (31 December
2022: 11.0 years) and 89% (31 December 2022: 89%) of income funded
by government bodies
-- Portfolio in Ireland comprises 20 assets, valued at GBP219
million (EUR255 million) (31 December 2022: GBP231 million / EUR261
million) and continues to be the Group's preferred area of future
investment activity with a target to grow to around 15% of the
total portfolio
-- The acquisition of Axis Technical Services Limited, an Irish
property management business, in January 2023, gives the Group a
permanent presence in Ireland and is an important strategic move as
we seek out new investment, development and asset management
opportunities
-- Pipeline of 32 asset management projects and lease regears
planned over next two years , investing GBP23.7 million, creating
additional rental income of GBP1.2 million per annum and extending
the weighted average unexpired lease term (WAULT) back to over 20
years
-- Disciplined approach to future investment focused on Ireland,
direct developments and asset management projects are our preferred
areas of future investment
FINANCIAL MANAGEMENT
-- LTV ratio 45.6% (31 December 2022: 45.1%) in the middle of
the Group's targeted range of between 40% to 50%
-- 97% (31 December 2022: 94%) of net debt fixed or hedged for a
weighted average period of just under seven years
-- Weighted average debt maturity 6.9 years (31 December 2022: 7.3 years)
-- Significant liquidity headroom with cash and collateralised
undrawn loan facilities totaling GBP314.4 million (31 December
2022: GBP325.9 million) after capital commitments
DELIVERING STRONG TOTAL RETURNS
Six months ended Six months ended Year ended
30 June 2023 30 June 2022 31 December 2022
----------------------------------- ---------------- -----------------
Adjusted NTA return 1.6% 6.3% 2.1%
Income return 2.7% 2.5% 5.0%
Capital return (0.4%) 1.8% (2.2%)
--------------------------- ------ ---------------- -----------------
Total property return(1) 2.3% 4.3% 2.8%
--------------------------- ------ ---------------- -----------------
1 The de finition for total property return is set out in the Glossary of Terms.
RESPONSIBLE BUSINESS AND ESG
-- As previously announced, Net Zero Carbon ("NZC") Framework
published with the five key steps to achieve the Group's ambitious
target of being NZC by 2030 for all of PHP's operational,
development and asset management activities
-- Ongoing construction of PHP's first NZC development in West
Sussex expected to achieve practical completion in Q1 2024
Presentation and webcast:
An in-person presentation for analysts will be held today, 26
July 2023 at 9.30am at the offices of Numis Securities: 45 Gresham
Street, London EC2V 7BF. For those who cannot attend in person, the
meeting will be accessible via live video webcast and a live
conference call facility. Following the presentation, there will be
a managed Q&A session. To access the briefing, please log on or
dial in shortly before 9.30am via the details below:
Webcast:
https://stream.brrmedia.co.uk/broadcast/648c7d6ee1ace244e084c4b0
Conference call details:
UK: +44 (0) 33 0551 0200;
USA Local: +1 786 697 3501
Password (if prompted): Quote PHP Interim Results when prompted
by the operator.
If you would like to join the briefing, please contact Buchanan
via php@buchanan.uk.com to confirm your place. A recording of the
webcast will be made available from c.12.00pm on the PHP website,
https://www.phpgroup.co.uk/
If you would like to join the briefing, please contact Buchanan
via php@buchanan.uk.com to confirm your place.
For further information contact:
Harry Hyman Richard Howell
Chief Executive Officer Chief Financial Officer
Primary Health Properties PLC Primary Health Properties PLC
T: +44 (0) 7973 344768 T: +44 (0) 7766 072272
E: harry.hyman@phpgroup.co.uk E: richard.howell@phpgroup.co.uk
David Rydell/Jamie Hooper/Hannah Ratcliff/Verity
Parker
Buchanan Communications
T: +44 (0) 20 7466 5066
E: php@buchanan.uk.com
---------------------------------------------------- -----------------------------------
EXECUTIVE REVIEW
PHP is pleased to have continued to deliver another period of
robust operational and financial performance in the first half of
2023 despite the ongoing volatility in the economic and interest
rate outlook caused by both global and domestic events. The
negative interest rate outlook has continued to weigh heavily on
the real estate sector.
The Group's strong operational resilience throughout the period
reflects the security and longevity of our income which are
important drivers of our predictable income stream and underpin our
progressive dividend policy and we are now in our 27(th) year of
continued dividend growth.
We continue to maintain our strong operational property metrics,
with a long weighted average unexpired lease term ("WAULT") of 10.6
years (31 December 2022: 11.0 years), high occupancy at 99.6% (31
December 2022: 99.7%) and 89% (31 December 2022: 89%) of our rent
being securely funded directly or indirectly by the UK and Irish
Governments. Notwithstanding the fall in values in the period the
portfolio's average lot size remains at GBP5.4 million (31 December
2022: GBP5.4 million).
We have continued to see rental growth improving with rent
reviews in the six months ended 30 June 2023 generating an extra
GBP2.2 million (six months ended 30 June 2022: GBP1.5 million) an
uplift of 9.9% over the previous passing rent equivalent to 4.4% on
annualised basis (six months ended 30 June 2022: 6.1% uplift or
3.0% annualised). Over the course of 2023 the Group continues to
anticipate that rent reviews will generate in excess of GBP4.0
million (2022: GBP3.0 million) of incremental income driven by the
impact of inflation on both index-linked and open market value
("OMV") reviews, continuing the positive trend in growth seen over
the last couple of years. It should be noted that most of the
growth on OMV rent reviews came from the period 2019 to 2021 and
therefore does not yet reflect the impact of significantly higher
construction costs experienced in the last two years.
We are encouraged by the increasingly firmer tone of rental
growth and believe PHP in the medium term will be a beneficiary of
the current inflationary environment both through open market and
index-linked reviews. In particular, the significant increases in
construction costs, together with historically suppressed levels of
open market rental growth in the sector, will be significant pull
factors to future growth especially as the NHS seeks to deliver
new, larger primary care facilities and modernise the existing
estate.
The value of the property portfolio remains broadly unchanged
and currently stands at just under GBP2.8 billion (31 December
2022: GBP2.8 billion) across 513 assets (31 December 2022: 513
assets), including 20 in Ireland, with a rent roll of GBP147.4
million (31 December 2022: GBP145.3 million). As previously
reported with PHP's full year 2022 results, the deteriorating
interest rate environment and economic outlook caused us to
reconsider our acquisition pipeline and pause investment activity
until the economic and interest rate outlook becomes clearer. Our
prudent strategy means we currently have just one development on
site and consequently very limited exposure to further build cost
inflation and development risk.
Many of our primary care facilities and occupiers will need to
deal with the backlog of procedures and demand which has built up
over the last three years and the increasing pressures being placed
on the healthcare systems in both the UK and Ireland. We continue
to maintain close relationships with our key stakeholders and GP
partners to ensure we are best placed to help the NHS and Health
Service Executive ("HSE"), Ireland's national health service
provider, particularly in primary care, evolve and deal with the
increased pressures placed on them.
Acquisition of Axis Technical Services Limited ("Axis")
In January 2023, the Group successfully completed the
acquisition of Axis, an Irish property management business, and
signed a long-term development pipeline agreement providing access
to a strong pipeline of future primary care projects in
Ireland.
Axis currently manages a portfolio of over 30 properties,
including the majority of PHP's Irish portfolio, and the
acquisition gives the Group a permanent presence on the ground,
further strengthening its position in the country and relationship
with the HSE. The acquired company also provides fit-out, property
and facilities management services to the HSE and other businesses
located across Ireland.
As part of the acquisition, PHP signed a development pipeline
agreement with Axis Health Care Assets Limited, a related company
not acquired by the Company, which gives the Group the option to
acquire its development pipeline over the next five years. Axis
Health Care Assets Limited is one of Ireland's leading developers
of primary care properties, having developed five properties over
the last five years, all of which have been acquired by PHP. Axis
Health Care Assets Limited has a pipeline of projects with an
estimated gross development value of EUR50 million with further
potential schemes beyond that.
Overview of results
PHP's Adjusted earnings increased by GBP1.2 million or 2.7% to
GBP45.9 million (30 June 2022: GBP44.7 million) in the six months
to 30 June 2023, driven by strong organic rental growth from rent
reviews and asset management projects, plus income arising from the
acquisition of Axis, partially offset by higher interest costs on
the Group's variable rate debt. Using the weighted average number
of shares in issue in the period the Adjusted earnings per share
remained unchanged at 3.4 pence (30 June 2022: 3.4 pence).
A revaluation deficit of GBP11.9 million (30 June 2022: surplus
GBP51.2 million) was generated in the period from the portfolio,
equivalent to -0.9 pence per share. The valuation deficit was
driven by net initial yield ("NIY") widening of 8 bps in the
period, equivalent to a valuation reduction of around GBP45
million, albeit this was partially offset by gains equivalent to
GBP33 million arising from rental growth and asset management
projects.
A combined gain of GBP4.8 million (30 June 2022: gain of GBP11.8
million) from the fair value movements of interest rate derivatives
and convertible bonds, the amortisation of the fair value
adjustment on the MedicX fixed rate debt at acquisition, the
amortisation of the intangible asset and write off of costs arising
on the acquisition of Axis resulted in a profit before tax as
reported under IFRS of GBP38.8 million (30 June 2022: GBP107.7
million).
The Group's balance sheet remains robust with a loan to value
ratio of 45.6% (31 December 2022: 45.1%), which is in the middle of
the targeted range of between 40% and 50%, and we have significant
liquidity headroom with cash and collateralised undrawn loan
facilities, after capital commitments, totalling GBP314.4 million
(31 December 2022: GBP325.9 million). The Group continues to have
significant valuation headroom across the various loan facilities
with values needing to fall by around GBP1.2 billion or 42% before
the loan to value covenants are impacted.
Dividends and total shareholder return
The Company distributed a total of 3.35p per share in the six
months to 30 June 2023, equivalent to 6.7 pence on an annualised
basis, which represents an increase of 3.1% over the dividend per
share distributed in 2022 of 6.5 pence.
A third quarterly interim dividend of 1.675 pence per share was
declared on 29 June 2023. The dividend will be paid on 18 August
2023 to shareholders who were on the register at the close of
business on 7 July 2023. The dividend will comprise a Property
Income Distribution of 1.34 pence per share and a normal dividend
of 0.335 pence. The Company intends to maintain its strategy of
paying a progressive dividend, which is paid in equal quarterly
instalments, and covered by underlying earnings in each financial
year. A further interim dividend payment is planned to be made in
November 2023, which is expected to comprise a mixture of both
Property Income Distribution and normal dividend.
The total value of dividends distributed in the period increased
by 3.5% to GBP44.8 million (30 June 2022: GBP43.3 million), which
were fully covered by Adjusted earnings. As previously reported, we
suspended the scrip dividend scheme in light of the fall in the
share price in 2022 and first half of 2023 and are continuing to
offer a dividend re-investment plan in its place.
The Company's share price started the year at 110.8p per share
and closed on 30 June 2023 at 95.45p, a decrease of 13.9%.
Including dividends, those shareholders who held the Company's
shares throughout the period achieved a Total Shareholder Return of
-10.8% (30 June 2022: -7.8%). This compares to the total return
delivered by UK real estate equities (FTSE EPRA Nareit UK Index) of
-7.6% (30 June 2022: -21.2%) and the wider UK equity sector (FTSE
All-Share Index) of +2.6% (30 June 2022: -4.8%) in the period.
Environmental, Social and Governance ("ESG")
PHP has a strong commitment to responsible business. ESG matters
are at the forefront of the Board's and our various stakeholders'
considerations and the Group has committed to transitioning to net
zero carbon ("NZC"). We commenced construction of PHP's first NZC
development which is due to achieve practical completion in the
first quarter of 2024 and published, at the start of 2022, a NZC
Framework with the five key steps we are taking to achieve an
ambitious target of being NZC by 2030 for all of PHP's operational,
development and asset management activities. The NZC Framework also
sets out our ambition to help our occupiers achieve NZC by 2040,
five years ahead of the NHS's target of becoming the world's first
net zero carbon national health system by 2045 for the emissions it
can influence and ten years ahead of the UK and Irish Governments'
target of 2050. Further details on our progress in the year,
objectives for the future and approach to responsible business can
be found on pages 32 to 53 of the 2022 Annual Report and on our
website.
Board changes
As previously reported, Harry Hyman, Chief Executive Officer
("CEO"), intends to retire from his role at the Company's Annual
General Meeting ("AGM") in 2024. This intention is consistent with
the commitment made at the time of the MedicX merger, announced in
January 2019, that he manage PHP for a further five years. The
Company has now commenced the search for a new CEO which is
currently ongoing and hopes to make an announcement later in the
third quarter of the year with an appointment expected to take
effect from the 2024 AGM.
Market update and outlook
The primary care market continues to face challenges in meeting
the growing demand for healthcare services. The capacity of
existing facilities remains a significant obstacle to implementing
government policies aimed at expanding service delivery within
general practice, including social prescribing, clinical
pharmacists, physiotherapists, mental health, minor operations and
other activities. The need for additional space is driven by a
population that is growing, aging and suffering from increased
chronic illnesses, which are placing a greater burden on healthcare
systems in both the UK and Ireland. The extent of the NHS England
backlog remains a significant concern, with hospitals struggling to
meet objectives for cancer care and routine treatments. The number
of patients waiting for treatment has reached record highs,
exacerbating the need for improved and increased primary healthcare
infrastructure.
There is a growing expectation that many services in the
medium-term will progressively move from hospitals to primary care
settings, necessitating substantial investment in facilities to
accommodate these changes and alleviate the pressure on secondary
care. in the years to come. The UK government's new vision for
primary care premises, advocating the establishment of hubs or
"super hubs" is a step in this direction. The UK government's
vision is that these hubs is to promote collaboration among various
primary care staff and provide a wider range of services in a
single location. Larger GP practices with more staff and patients
are shown to produce better outcomes. This is in line with larger
purpose-built medical centres typical of PHP's portfolio.
Declining rents in real terms have made investing in the
transformation of GP facilities less appealing. Construction costs
have risen significantly over the past decade, surpassing the
growth in primary care rents, driven by material and labour costs
and increasing sustainability requirements, all of which has been
compounded by Brexit and the COVID-19 pandemic. Future developments
will now need a significant shift of between 20% to 30% in rental
values to make them economically viable and we continue to actively
engage with both the NHS, Integrated Care Boards and District
Valuer for higher rent settlements.
PHP's mission is to support the NHS, the HSE and other
healthcare providers, by being a leading investor in modern,
primary care premises. We will continue to actively engage with
government bodies, the NHS, the HSE in Ireland and other key
stakeholders to establish, enact (where we can), support and help
alleviate increased pressures and burdens currently being placed on
healthcare networks.
Primary care and property investment market update
The commercial property market continues to be impacted by
economic turbulence but primary care asset values have continued to
perform well relative to mainstream commercial property recognising
the security of their government backed income, crucial role in
providing sustainable healthcare infrastructure and more
importantly a much stronger rental growth outlook enabling
attractive reversion over the course of long leases.
The lack of recent transactions in the first half of the year
has resulted in valuers, to an extent, placing reliance on
sentiment to arrive at fair values.
We continue to see that for both the primary care and indeed the
wider commercial property markets, the high level of financial
market volatility and economic uncertainty has resulted in a
'wait-and-see' attitude amongst investors until the outlook settles
down.
Rising interest rates will undoubtedly continue to impact the
market. However, notwithstanding the significant increases and
volatility in interest rates seen in the first half of 2023 we
continue to believe further significant reductions in primary care
values are likely to be muted with a stronger rental growth outlook
offsetting the impact of any further yield expansion.
Additionally, the market for primary care assets is relatively
small with most assets tightly held by the main specialists in the
sector and consequently we anticipate most investors will likely
hold their existing assets in the current market primarily because
of:
-- Limited supplies of stock;
-- Very secure, rising income streams with an improving rental growth outlook;
-- The main specialists in the sector all having strong balance
sheets so there are unlikely to be any "forced sales"; and
-- A desire from investors to seek a "Safe Haven" with some
shifting from other property sectors.
PHP Outlook
Growth in the immediate future will continue to be focused on
increasing income from our existing portfolio and we are encouraged
by the firmer tone of rental growth experienced both in 2022 and
the first six months of 2023. As already noted, we believe the
favourable dynamics of higher inflation and increased build costs
combined with a demand for new primary care facilities and the need
to modernise the estate will continue to increase future rental
settlements.
We are currently on site with just one development and
consequently have very limited exposure to higher construction cost
pressures and supply chain delays. In our immediate development
pipeline we have just three projects with a total expected cost of
GBP15.2 million and will continue to evaluate these, together with
a wider medium term pipeline at various stages of progress, and
seek to negotiate rents with the NHS at the level required to
deliver an acceptable return.
In the current environment, Ireland continues to be the Group's
preferred area of future investment activity and we have ambitions
to continue to grow the portfolio there to around 15% of the total
(30 June 2023: 8%). The acquisition of Axis, in January 2023, gives
the Group a permanent presence in Ireland, an important strategic
move as we seek out new investment, development and asset
management opportunities and try to strengthen our relationship
with the HSE as the leading provider of modern primary care
infrastructure in the country.
With an improving rental growth outlook, a strong control on
costs resulting in one of the lowest EPRA cost ratio in the sector
and the vast majority of PHP's debt either fixed or hedged for a
weighted average period of just under seven years, we look forward
to the rest of 2023 with confidence.
We believe that our activities benefit not only our shareholders
but also our wider stakeholders, including occupiers, patients, the
NHS and HSE, suppliers, lenders, and the wider communities in both
the UK and Ireland.
Steven Owen Harry Hyman
Chairman Chief Executive Officer
25 July 2023
BUSINESS REVIEW
Investment and pipeline
In the first half of 2023 the Group did not acquire or dispose
of any assets because of the ongoing turmoil in the wider economy.
In the short term, we expect further investment activity will
continue to be muted and future acquisitions and developments will
only take place if accretive to earnings.
The Group currently has only one forward funded development in
legal due diligence, in Ireland for GBP12.8 million (EUR14.8
million) together with 32 asset management projects in the UK at a
cost of GBP23.7 million which will be progressed over the next two
years.
However, we continue to monitor a number of potential standing
investments, direct and forward funded developments, primarily in
Ireland - our preferred area of investment due to higher net
initial yields, larger lots sizes and cheaper cost of finance for
euro denominated debt.
Pipeline In legal due diligence Advanced pipeline
Number Cost Number Cost
--------------------------------------- ---------- -------------- -------- -------------
GBP12.8m GBP27.4m
Ireland - forward funded development 1 (EUR14.8m) 2 (EUR31.8m)
UK - direct development - - 3 GBP15.2m
UK - asset management 20 GBP16.8m 12 GBP6.9m
UK - investment - - - -
--------------------------------------- ---------- -------------- -------- -------------
Total pipeline 21 GBP29.6m 17 GBP49.5m
--------------------------------------- ---------- -------------- -------- -------------
Developments
At 30 June 2023, the Group had limited development exposure with
just one project on site at Croft Primary Care Centre, West Sussex
with GBP5.9 million of expenditure required to complete the project
which is being built to NZC standards.
The Group has currently paused an advanced direct development
pipeline across three schemes, with a total cost of GBP15.2
million, whilst negotiations with the NHS, Integrated Care Boards
and District Valuer continue to increase rental levels to make
these schemes economically viable. We are hopeful that previously
agreed rents will be increased by around 20%-30% across the three
pipeline developments.
We currently do not have any forward funded developments on-site
in Ireland.
PHP expects that all future direct developments will be
constructed to NZC standards.
Asset management
PHP's sector-leading metrics remain good and we continue to
focus on delivering the organic rental growth that can be derived
from our existing assets. This growth arises mainly from rent
reviews and asset management projects (extensions, refurbishments
and lease re-gears) which provide an important opportunity to
increase income, extend lease terms and avoid obsolescence whilst
ensuring that our properties continue to meet the communities'
healthcare needs and improve their ESG credentials.
In the first half of 2023 we have continued to see stronger
organic rental growth from our existing portfolio with income
increasing by GBP2.2 million or 1.5% (six months ended 30 June
2022: GBP1.8 million or 1.3%; year ended 31 December 2022: GBP3.3
million or 2.4%) on a like-for-like basis. The progress continues
the improving rental growth outlook seen over the last couple of
years and it should be noted that most of the increase comes from
rent reviews arising in the period 2019 to 2021, a period when
rental growth was muted and not reflecting the higher levels of
construction cost and general inflation experienced in recent
periods. We have also seen the improving rental growth outlook
reflected in the valuation of the portfolio with the independent
valuers' assessment of estimated rental values ("ERV") increasing
by 1.4% in the six months ended 30 June 2023 (six months ended 30
June 2022: 1.0%; year ended 31 December 2022: 2.2%).
Rent review performance
The Group completed 172 (six months ended 30 June 2022: 192;
year ended 31 December 2022: 318) rent reviews with a combined
rental value of GBP22.4 million (six months ended 30 June 2022:
GBP24.4 million; year ended 31 December 2022: GBP42.2 million),
adding GBP2.2 million and delivering an average uplift of 9.9%
against the previous passing rent (six months ended 30 June 2022:
GBP1.5 million / 6.1%; year ended 31 December 2022: GBP2.8 million
/ 6.7%).
In addition, a further 315 (31 December 2022: 286) open market
reviews have been agreed in principle, which will add another
GBP1.9 million (31 December 2022: GBP1.7 million) to the contracted
rent roll when concluded and represents an uplift of 4.3% (31
December 2022: 4.1%) against the previous passing rent.
69% of our rents are reviewed on an open market basis which
typically takes place every three years. The balance of the PHP
portfolio has either indexed (25%) or fixed uplift (6%) based
reviews which also provide an element of certainty to future rental
growth within the portfolio. Approximately one-third of index
linked reviews in the UK are subject to caps and collars which
typically range from 2% to 4%.
In Ireland, we concluded 13 index-based reviews, adding a
further GBP0.3 million (EUR0.4 million), an uplift of 15.3% against
the previous passing rent. In Ireland, all reviews are linked to
the Irish Consumer Price Index, upwards and downwards, with reviews
typically every five years. Leases to the HSE and other government
bodies, which comprise 75% of the income in Ireland, have increases
and decreases capped and collared at 25% over a five-year
period.
The growth from reviews completed in the period, noted above, is
summarised below:
Previous
rent Rent increase Total Annualised
(per annum) (per annum) increase increase
Number GBP million GBP million % %
---------------------- -------- -------------- --------------- ----------- ------------
UK - open market(1) 83 11.0 0.7 6.2 2.0
UK - indexed 67 8.2 1.1 14.0 8.1
UK - fixed 9 1.1 0.1 6.8 2.5
---------------------- -------- -------------- --------------- ----------- ------------
UK - total 159 20.3 1.9 9.4 4.5
Ireland - indexed 13 2.1 0.3 15.3 3.4
---------------------- -------- -------------- --------------- ----------- ------------
Total - all
reviews 172 22.4 2.2 9.9 4.4
---------------------- -------- -------------- --------------- ----------- ------------
(1) - includes 24 reviews where no uplift was achieved.
At 30 June 2023 the rent at 607 (31 December 2022: 656)
tenancies, representing GBP84.6 million (31 December 2022: GBP90.2
million) of passing rent, was under negotiation and the large
number of outstanding reviews reflects the requirement for all
awards to be agreed with the District Valuer. A great deal of
evidence to support open market reviews comes from the completion
of historical rent reviews and the rents set on delivery of new
properties into the sector. We continue to see positive momentum in
the demand, commencement and delivery for new, purpose-built
premises which are being supported by NHS initiatives to modernise
the primary care estate albeit previously agreed rental values are
having to be renegotiated to make a number of these viable in the
current economic environment.
Asset Management Projects
During the six months ended 30 June 2023, we exchanged on four
new asset management projects, four lease re-gears and one new
letting. These initiatives will increase rental income by GBP0.2
million investing GBP4.3 million and extending the leases back to
17 years. In the period, seven leases expired and the units became
vacant with the loss of GBP0.2m of income.
PHP continues to work closely with its occupiers and has a
strong pipeline of 32 similar asset management projects which are
at an advanced stage and are being progressed to further increase
rental income and extend unexpired occupational lease terms. The
asset management pipeline will require the investment of
approximately GBP23.7 million, generating an additional GBP1.2
million of rental income and extending the WAULT on those premises
back to an average of 20 years.
The Company will continue to invest capital in a range of
physical extensions or refurbishments through asset management
projects which help avoid obsolescence, including improving energy
efficiency, and which are key to maintaining the longevity and
security of our income through long term occupier retention,
increased rental income and extended occupational lease terms,
adding to both earnings and capital values.
Sector leading portfolio metrics
The portfolio's annualised contracted rent roll at 30 June 2023
was GBP147.4 million (31 December 2022: GBP145.3 million), an
increase of GBP2.1 million or +1.4% in the period driven entirely
by stronger organic growth from rent reviews and asset management
projects of GBP2.2 million (six months ended 30 June 2022: GBP1.8
million) offset by GBP0.1 million loss of income arising from
foreign exchange movements on our portfolio in Ireland.
The security and longevity of our income are important drivers
of our secure, long term predictable income stream and enable our
progressive dividend policy.
Security:PHP continues to benefit from secure, long term cash
flows with 89% (31 December 2022: 89%) of its rent roll funded
directly or indirectly by the NHS in the UK or HSE in Ireland. The
portfolio also benefits from an occupancy rate of 99.6% (31
December 2022: 99.7%).
Rental collections : These continue to remain robust and as at
25 July 2023 98% had been collected in both the UK and Ireland for
the first three quarters of 2023. This is in line with collection
rates experienced in both 2022 and 2021 which now stand at over 99%
for both countries. The balance of rent due for the third quarter
of 2023 is expected to be received shortly.
Longevity: The portfolio's WAULT at 30 June 2023 was 10.6 years
(31 December 2022: 11.0 years). Only GBP13.3 million or 9% of our
income expires over the next three years of which c. 70% have
agreed terms or are in advanced discussions to renew their lease.
GBP65.8 million or 45% expires in over 10 years. The table below
sets out the current lease expiry profile of our income:
Income subject to expiry GBPm %
-------------------------- ----------------------- ------------------------
< 3 years 13.3 9%
4 - 5 years 14.8 10%
5 - 10 years 53.5 36%
10 - 15 years 31.9 22%
15 - 20 years 22.6 15%
> 20 years 11.3 8%
-------------------------- ----------------------- ------------------------
Total 147.4 100%
-------------------------- ----------------------- ------------------------
Valuation and returns
During the period there were no acquisitions or disposals and as
at 30 June 2023, the Group's portfolio comprised 513 (31 December
2022: 513) assets independently valued at GBP2.783 billion (31
December 2022: GBP2.796 billion). After allowing for capital
expenditure on developments and asset management projects, the
portfolio generated a valuation deficit of GBP11.9 million or -0.4%
(Six months ended 30 June 2022: surplus of GBP51.2 million or
+1.8%).
The valuation deficit of GBP11.9 million in the period was
driven primarily by a loss arising from yield expansion of
approximately GBP45 million partially offset by gains of
approximately GBP33 million arising from an improving rental growth
outlook and asset management projects.
During the period the Group's portfolio NIY has expanded by 8
bps to 4.90% (31 December 2022: 4.82%) and the true equivalent
yield increased to 4.94% at 30 June 2023 (31 December 2022:
4.89%).
At 30 June 2023, the portfolio in Ireland comprised 20 standing
and fully let properties with no developments currently on site,
valued at GBP218.9 million or EUR254.8 million (31 December 2022:
20 assets/GBP230.9 million or EUR260.8 million). At 30 June 2023,
the portfolio in Ireland has been valued at a NIY of 5.4% (31
December 2022: 5.2%).
Despite the fall in values during the period the portfolio's
average lot size remained unchanged at GBP5.4 million (31 December
2022: GBP5.4 million) and 88% of the portfolio is valued at over
GBP3.0 million. The Group only has five assets valued at less than
GBP1.0 million.
Number of Valuation Average
properties GBP million lot size
% (GBP million)
--------------------- ------------ ------------- ----- ----------------
> GBP10m 58 886.2 32 15.3
GBP5m - GBP10m 137 928.8 34 6.8
GBP3m - GBP5m 155 615.9 22 4.0
GBP1m - GBP3m 158 344.8 12 2.2
< GBP1m (including
land GBP1.3m) 5 4.7 0 0.7
--------------------- ------------ ------------- ----- ----------------
Total(1) 513 2,780.4 100 5.4
--------------------- ------------ ------------- ----- ----------------
(1) Excludes the GBP3.0 million impact of IFRS 16 Leases with
ground rents recognised as finance leases.
The valuation deficit combined with the portfolio's growing
income, resulted in a total property return of 2.3% for the period
(six months ended 30 June 2022: +4.3%). The total property return
in the period compares with the MSCI UK Monthly Property Index of
+1.1% for the first six months of 2023 (six months ended 30 June
2022: +9.3%, year ended 31 December 2022: -10.4%).
Six months ended Six months ended Year ended
30 June 2023 30 June 2022 31 December 2022
----------------- ----------------------- ---------------------- -----------------------
Income return 2.7% 2.5% 5.0%
Capital return (0.4%) 1.8% (2.2%)
----------------- ----------------------- ---------------------- -----------------------
Total return 2.3% 4.3% 2.8%
----------------- ----------------------- ---------------------- -----------------------
FINANCIAL REVIEW
PHP's Adjusted earnings increased by GBP1.2 million or 2.7% to
GBP45.9 million in the six months to 30 June 2023, (30 June 2022:
GBP44.7 million). The increase in the period reflects the improving
organic rental growth from rent reviews and asset management
projects in both 2022 and the first half of 2023 partially offset
by increased interest costs on the Group's variable rate debt.
On 20 January 2023 the Group completed the acquisition of Axis
which contributed GBP0.5 million and is trading in line with
expectations and is forecast to generate a profit of approximately
GBP1.0 million in 2023.
Using the weighted average number of shares in issue in the
period the Adjusted earnings per share remained unchanged at 3.4p
(30 June 2022: 3.4p).
The financial results for the Group are summarised as
follows:
Six months Six months Year ended
ended ended 31 December
30 June 2023 30 June 2022 2022
GBPm GBPm GBPm
------------------------------------------------- ------ ------------- ----------------
Net rental income 75.5 71.1 141.5
Axis contribution 0.5 - -
Administrative expenses (1) (6.1) (5.5) (9.6)
------------------------------------------------- ------ ------------- ----------------
Operating profit before revaluation gain
and net financing costs 69.9 65.6 131.9
Net financing costs (24.0) (20.9) (43.2)
------------------------------------------------- ------ ------------- ----------------
Adjusted earnings 45.9 44.7 88.7
Revaluation (deficit)/surplus on property
portfolio and profit on sales (11.9) 51.2 (61.5)
Fair value gain on interest rate derivatives
and convertible bond 3.9 10.4 26.8
Amortisation of MedicX debt MtM at acquisition 1.5 1.4 2.9
Axis amortisation of intangible asset (0.4) - -
Axis acquisition costs (0.2) - -
------------------------------------------------- ------ ------------- ----------------
IFRS profit before tax 38.8 107.7 56.9
Corporation tax - 0.1 0.2
Deferred tax provision 0.7 (0.7) (0.8)
------------------------------------------------- ------ ------------- ----------------
IFRS profit after tax 39.5 107.1 56.3
------------------------------------------------- ------ ------------- ----------------
(1) Excludes amortisation of intangible asset and costs arising
on the acquisition of Axis.
Adjusted earnings increased by GBP1.2 million or 2.7% in the six
months to June 2023 to GBP45.9m (30 June 2022: GBP44.7m) and the
movement can be summarised as follows:
GBPm
-------------------------------- -------
Six months ended 30 June 2022 44.7
Net rental income 4.4
Axis contribution 0.5
Administrative expenses (0.6)
Net financing costs (3.1)
--------------------------------- -------
Six months ended 30 June 2023 45.9
--------------------------------- -------
Net rental income received in the six months to 30 June 2023
increased by 6.2% or GBP4.4 million to GBP75.5 million (30 June
2022: GBP71.7 million) reflecting GBP3.4 million of additional
income from completed rent reviews and asset management projects,
GBP0.8 million from the impact of acquisitions, disposals and
developments completed 2022 and a GBP0.2 million reduction in
non-recoverable property costs.
Notwithstanding the acquisition of Axis at the start of the year
administration expenses continue to be tightly controlled and the
Group's EPRA cost ratio remains one of the lowest in the sector at
10.1% (30 June 2022: 10.5%). The GBP0.6 million increase in
administration costs in the period is due to GBP0.4 million
increase in staff costs from annual pay increases and provision for
performance-related pay together with an additional GBP0.2 million
arising from the acquisition of Axis and cost of the team now based
in Ireland.
EPRA cost ratio Six months Six months ended Year ended
ended 30 June 2022 31 December
30 June 2023 2022
GBPm GBPm GBPm
--------------------------------------- ------------- ---------------- ------------
Gross rent less ground rent and
service charge income 78.2 73.5 147.0
--------------------------------------- ------------- ---------------- ------------
Direct property expense 7.9 5.7 12.6
Less: service charge and recoverable
costs (5.7) (3.2) (7.0)
--------------------------------------- ------------- ---------------- ------------
Non-recoverable property costs 2.2 2.5 5.6
Administrative expenses 6.1 5.5 9.6
Less: ground rent (0.1) (0.1) (0.2)
Less: other operating income (0.3) (0.2) (0.4)
--------------------------------------- ------------- ---------------- ------------
EPRA costs (including direct vacancy
costs) 7.9 7.7 14.6
--------------------------------------- ------------- ---------------- ------------
EPRA cost ratio 10.1% 10.5% 9.9%
--------------------------------------- ------------- ---------------- ------------
Total expense ratio - administrative
expenses as a
percentage of gross asset value
(annualised) 0.4% 0.4% 0.3%
--------------------------------------- ------------- ---------------- ------------
Net finance costs in the period increased by GBP3.1 million to
GBP24.0 million (30 June 2022: GBP20.9 million) because of a
GBP14.4 million increase in the Group's net debt since June 2022,
the impact of increased in interest rates on the Group's unhedged
debt and the loss of interest receivable on forward funded
developments which completed in 2022, now income producing and
accounted for as rent.
Shareholder value
The Adjusted Net Tangible Assets (NTA), per share decreased by
1.5 pence or 1.3% to 111.1 pence (31 December 2022: 112.6 pence per
share) during the period with the revaluation deficit of GBP11.9
million or 0.9 pence per share and cost of the Axis acquisition of
GBP7.3 million (EUR8.2 million) or 0.5 pence per share being the
main reason for the decrease.
The adjusted NTA return per share, including dividends
distributed, in the six months ended 30 June 2023 was 1.9 pence or
1.6% (30 June 2022: 7.3 pence or 6.3 %).
The table below sets out the movements in the Adjusted NTA and
EPRA Net Disposal Value (NDV) per share over the period under
review.
Adjusted Net Tangible Asset 30 June 2023 30 June 2022 31 December
(NTA) per share pence per share pence per share 2022 pence per
share
----------------------------------------- ------------------------ ----------------------- ------------------
Opening Adjusted NTA per share 112.6 116.7 116.7
Adjusted earnings for the period 3.4 3.4 6.6
Dividends paid (3.4) (3.2) (6.5)
Revaluation of property portfolio
and profit on sales (0.9) 3.8 (4.6)
Amortisation of intangible assets (0.5) - -
Net impact of Interest rate derivatives (0.1) - -
Foreign exchange movements - - 0.3
Shares issued - 0.1 0.1
Closing Adjusted NTA per share 111.1 120.8 112.6
Fixed rate debt and swap mark-to-market
value 12.6 3.2 8.7
Convertible bond fair value
adjustment 0.4 (0.7) 2.1
Deferred tax 0.1 (0.4) (0.1)
Intangible assets 0.5 - -
----------------------------------------- ------------------------ ----------------------- ------------------
Closing EPRA NDV per share 124.7 122.9 123.3
----------------------------------------- ------------------------ ----------------------- ------------------
Financing
The Group's balance sheet and financing position remains strong
with cash and committed undrawn facilities totalling GBP314.4
million (31 December 2022: GBP325.9 million) after contracted
capital commitments of GBP16.6 million (31 December 2022: GBP19.8
million).
At 30 June 2023, total available loan facilities were GBP1,600.8
million (31 December 2022: GBP1,607.0 million) of which GBP1,272.2
million (31 December 2022: GBP1,290.4 million) had been drawn. Cash
balances of GBP2.4 million (31 December 2022: GBP29.1 million)
resulted in Group net debt of GBP1,269.8 million (31 December 2022:
GBP1,261.3 million). Contracted capital commitments at the balance
sheet date totalled GBP16.6 million (31 December 2022: GBP19.8
million) and comprise development expenditure of GBP5.9 million,
asset management projects of GBP8.6 million and deferred
consideration on the acquisition of Axis of GBP2.1 million.
The Group's key debt metrics are summarised in the table
below:
Debt metrics 30 June 2023 31 December
2022
-------------------------------------------------- ------------ -----------
Average cost of debt - drawn 3.2% 3.2%
Average cost of debt - fully drawn 3.8% 3.5%
Loan to value 45.6% 45.1%
Loan to value - excluding convertible bond 40.2% 39.7%
Total net debt fixed or hedged 96.7% 93.7%
Net rental income to net interest cover 3.1 times 3.3 times
Net debt / EBITDA (annualised) 9.1 times 9.6 times
Weighted average debt maturity - drawn 6.9 years 7.3 years
facilities
Weighted average debt maturity - all facilities 5.9 years 6.4 years
Total drawn secured debt GBP1,122.2m GBP1,140.4m
Total drawn unsecured debt GBP150.0m GBP150.0m
Total undrawn facilities and cash available GBP314.4m GBP325.9m
to the Group(1)
Unfettered assets GBP80.7m GBP86.7m
-------------------------------------------------- ------------ -----------
(1) After deducting capital commitments.
Average cost of debt
Notwithstanding the recent and rapid increases in 3-month SONIA
interest rates since the start of the year which is used to
calculate interest on the unhedged element the Group's revolving
credit facilities we have managed to keep the average cost of debt
unchanged at 3.2% (31 December 2022: 3.2%).
Interest rate exposure
The analysis of the Group's exposure to interest rate risk in
its debt portfolio as at 30 June 2023 is as follows:
Facilities Drawn
GBP million % GBP million %
------------------------------------- ---------------------------- ------ ----------------------- -------
Fixed rate debt 1,075.8 67.2 1,075.8 84.5
Hedged by fixed rate interest rate
swaps 100.0 6.2 100.0 7.9
Hedged by fixed to floating rate
interest rate swaps (200.0) (12.5) (200.0) (15.7)
------------------------------------- ---------------------------- ------ ----------------------- -------
Total fixed rate debt 975.8 60.9 975.8 76.7
Hedged by interest rate caps 251.6 15.7 251.6 19.8
Floating rate debt - unhedged 373.4 23.4 44.8 3.5
------------------------------------- ---------------------------- ------ ----------------------- -------
Total 1,600.8 100.0 1,272.2 100.0
------------------------------------- ---------------------------- ------ ----------------------- -------
Interest rate swap contracts
On 18 April 2023, the Group converted EUR60.0 million (GBP51.6
million) of sterling equivalent denominated debt into euros across
its various revolving credit facilities to cover a small unhedged
euro denominated balance sheet exposure which had arisen primarily
because of historic valuation gains and retained earnings arising
on our portfolio in Ireland. As part of the transaction the Group
took advantage of cheaper euro denominated interest rates and
purchased 2.0% caps on EUR60 million nominal value for a period of
2.5 years for an all-in premium of GBP1.9 million (EUR2.2 million).
The transaction increased the proportion of net debt that is fixed
or hedged to 97% (31 December 2022: 94%).
Accounting standards require PHP to mark its interest rate swaps
to market at each balance sheet date. During the six months to 30
June 2023 there was an increase of GBP2.1 million (30 June 2022:
GBP0.9 million) on the fair value movement of the Group's interest
rate derivatives due primarily due to the EUR60 million caps
purchased in the period for GBP1.9 million along with increases in
interest rates assumed in the forward yield curves used to value
the interest rate swaps. The mark-to-market ("MtM") asset value of
the swap portfolio is GBP9.2 million (31 December 2022: asset
GBP7.1 million).
Currency exposure
The Group owns EUR254.8 million or GBP218.9 million (31 December
2022: EUR260.8 million / GBP230.9 million) of Euro denominated
assets in Ireland as at 30 June 2023 and the value of these assets
and rental income represented 8% (31 December 2022: 8%) of the
Group's total portfolio. In order to hedge the risk associated with
exchange rates, the Group has chosen to fund its investment in
Irish assets through the use of Euro denominated debt, providing a
natural asset to liability hedge, within the overall Group loan to
value limits set by the Board. At 30 June 2023 the Group had
EUR253.1 million (31 December 2022: EUR196.0 million) of drawn euro
denominated debt.
Euro rental receipts are used to first finance Euro interest and
administrative costs and surpluses are used to fund further
portfolio expansion. Given the large Euro to Sterling fluctuations
seen in recent years and continued uncertainty in the interest rate
market the Group entered a nil-cost FX collar hedge (between
EUR1.1675 and EUR1.1022: GBP1) for a two-year period to cover the
approximate Euro denominated net annual income of EUR10 million per
annum, minimising the downside risk of the Euro gaining in value
above EUR1.1675: GBP1.
Fixed rate debt mark-to-market ("MtM")
The MtM of the Group's fixed rate debt as at 30 June 2023 was an
asset of GBP171.0 million (31 December 2022: asset GBP141.3
million) equivalent to 12.8 pence per share (31 December 2022:
asset of 10.6 pence). The movement in the period is due primarily
to the significant increases in interest rates assumed in the
forward yield curves used to value the debt in the period. The MtM
valuation is sensitive to movements in interest rates assumed in
forward yield curves.
Convertible bonds
In July 2019, the Group issued for a six-year term new unsecured
convertible bonds with a nominal value of GBP150 million and a
coupon of 2.875% per annum. Subject to certain conditions, the new
bonds will be convertible into fully paid Ordinary Shares of the
Company and the initial exchange price was set at 153.25 pence per
Ordinary Share. The exchange price will be subject to adjustment,
in accordance with the dividend protection provisions in the terms
of issue, if dividends paid per share exceed 2.8 pence per annum
and in accordance with the dividend protection provisions the
conversion price was adjusted on 6 July 2023 to 134.16 pence (31
December 2022: 137.69 pence) per Ordinary Share.
The conversion of the GBP150 million convertible bonds into new
Ordinary Shares would reduce the Group's loan to value ratio by
5.4% from 45.6% to 40.2% and result in the issue of 111.8 million
(31 December 2022: 108.9 million) new Ordinary Shares.
Alternative Performance Measures ("APMs")
PHP uses Adjusted earnings and adjusted net tangible assets
amongst other APMs to highlight the recurring performance of the
property portfolio and business. The APMs are in addition to the
statutory measures from the condensed financial statements. The
measures are defined and reconciled to amounts presented in the
financial statements within this interim statement at note 7. The
Company has used EPRA earnings and EPRA net tangible assets to
measure performance and will continue to do so. However, these APMs
have also been adjusted to remove the impact of the adjustments
arising from the MtM on fixed debt acquired on completion of the
merger with MedicX in 2019. The reasons for the Company's use of
these APMs are set out in the Glossary and 2022 Annual Report.
Related party transactions
Related party transactions are disclosed in note 16 to the
condensed financial statements.
Responsible business - continued progress
Environmental impact
We continue to make good progress on our net zero carbon
framework commitments and achieved our first milestone of net zero
operations in 2022 one year ahead of target. We are also on site
with our first NZC development at Croft Medical Centre, West Sussex
and continue to progress a pipeline of further NZC schemes.
We continue to modernise existing buildings and improve the
environmental credentials of our existing portfolio through the
asset management programme and have completed five projects in the
period, improving EPC ratings to B from C and D. A further eight
projects are currently on site and due to be completed this year
with a long pipeline of additional schemes where we continue to
evaluate options for energy efficiency, renewable energy and net
zero refurbishments. 39% of assets now have an EPC rating of A or B
(31 December 2022: 35%) and 84% at A to C (31 December 2022:
81%).
As part of establishing the wider carbon impact of the buildings
in our portfolio, we have continued to engage with tenants and
increased the visibility of their energy and carbon performance and
improved the quality of data we hold, increasing this to 62% of the
portfolio (31 December 2022: 60%; 31 December 2021: 8%).
Social Impact
As a leading provider of modern primary care premises, we aim to
create a lasting positive social impact, particularly in the health
outcomes and wellbeing for the communities into which we
invest.
As part of our Community Impact Fund, we have renewed our
partnership with UK Community Foundations to target grants for
social prescribing in the communities around our buildings. In
2023, we are working with one large community foundation in the
heart of England covering an extended area in the Midlands as well
as aiming to deliver grants directly in combination with our asset
management programme.
People
PHP recognises the importance of the welfare of our employees
who work on behalf of the Group and are critical to its success. We
have continued to support our employees' personal and professional
development, improve diversity and equal opportunities within the
team and promote the highest standard of ethics, conduct and
inclusion. At the start of the year, we launched a mentoring
programme to provide another dimension of support for personal and
professional development.
Harry Hyman Richard Howell
Chief Executive Officer Chief Financial Officer
25 July 2023
Principal risks and uncertainties Risk management overview
Effective risk management is a key element of the Board's
operational processes. Risk is inherent in any business, and the
Board has determined the Group's risk appetite, which is reviewed
on an annual basis. Group operations have been structured in order
to accept risks within the Group's overall risk appetite, and to
oversee the management of these risks to minimise exposure and
optimise the returns generated for the accepted risk. The Group
aims to operate in a low-risk environment, appropriate for its
strategic objective of generating progressive returns for
shareholders. Key elements of maintaining this low-risk approach
are:
-- investment focuses on the primary health real estate sector
which is traditionally much less cyclical than other real estate
sectors;
-- the majority of the Group's rental income is received
directly or indirectly from government bodies in the UK and
Ireland;
-- the Group benefits from long initial lease terms, largely
with upwards-only review terms, providing clear visibility of
income;
-- debt funding is procured from a range of providers,
maintaining a spread of maturities and a mix of terms, with
interest costs either fixed or hedged across the majority of debt
drawn;
-- the Board funds its operations to maintain an appropriate mix of debt and equity; and
-- the Group has a very small (GBP1.4m) exposure as a direct
developer of real estate, which means that the Group is not
materially exposed to risks that are inherent in property
development.
The structure of the Group's operations includes rigorous,
regular review of risks and how these are mitigated and managed
across all areas of the Group's activities. The Group faces a
variety of risks that have the potential to impact on its
performance, position and its longer-term viability. These include
external factors that may arise from the markets in which the Group
operates, government and fiscal policy, general economic conditions
including interest rates and inflation together with internal risks
that arise from how the Group is managed and chooses to structure
its operations.
Principal risks and changes in risk factors
The Board has concluded that there should be no further
principal risks to be presented in the 2023 Interim Results
Announcement, and that the principal risks presented in the 2022
Annual Report remain relevant for this period.
Increasing risks
The Board has continued to undertake a robust assessment of
emerging and increasing risks faced by the Group.
Since the release of our 2022 full-year results, the global
economic uncertainty has continued. Within the UK, the main
challenges facing the economy are rising interest rates and
heightened inflation and the increasing risk of recession,
compounded by the impact of the ongoing war in Ukraine. The
potential adverse impact of these factors on our business includes
reduced demand for our assets impacting property values in the
investment market, the ability for us to continue to execute our
acquisition and development strategy and increased financing costs,
which could impact our rental income and earnings. The Board and
key Committees have continued to oversee the Group's response to
the impact of these challenges on our business and the wider
economic influences throughout the period.
Going concern analysis
The Group's financial review and budgetary processes are based
on an integrated model that projects performance, cash flows,
position and other key performance indicators including earnings
per share, leverage rates, net asset values per share and REIT
compliance over the review period. In addition, the forecast model
looks at the funding of the Group's activities and its compliance
with the financial covenant requirements of its debt facilities.
The model uses a number of key parameters in generating its
forecasts that reflect the Group's strategy, operating processes
and the Board's expectation of market developments in the review
period. In undertaking its financial review, these parameters have
been flexed to reflect severe, but realistic, scenarios both
individually and collectively. Sensitivities applied are derived
from the principal risks faced by the Group that could affect
solvency or liquidity and are as follows:
-- Declining attractiveness / possible obsolescence of the
Group's assets as a result of ESG initiatives or otherwise or
deteriorating economic circumstances impact investment values -
valuation parameter stress tested to provide for a one-off
10%/GBP278 million fall in the December 2023 valuation.
-- We have applied a 15% tenant default rate. In addition,
rental growth assumptions have been amended to see nil uplifts on
open market reviews.
-- Variable rate interest rates rise by an immediate 2%
effective from 1 July 2023, impacting the variable interest debt in
the portfolio.
-- Tightly controlled NHS scheme approval restricts investment
opportunity - investment quantum flexed to remove non-committed
transactions.
-- Impact on shareholder returns of all of the above occurrences
- projected dividend payments held at expected 2023 level, 6.7p per
share.
A number of specific assumptions have been made that overlay the
financial parameters used in the Group's models. It has been
assumed that the Group will be able to refinance or replace other
debt facilities that mature within the review period in advance of
their maturity and on terms similar to those at present.
Further details on going concern are set out in note 1 to the
Financial Statements.
INDEPENT REVIEW REPORT TO PRIMARY HEALTH PROPERTIES PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2023 which comprises the Condensed Group
Statement of Comprehensive Income, the Condensed Group Balance
Sheet, the Condensed Group Statement of Changes in Equity, the
Condensed Group Cash Flow Statement and related notes 1 to 19.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2023 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council for use in the
United Kingdom (ISRE (UK) 2410). A review of interim financial
information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not
enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
As disclosed in note 1, the annual financial statements of the
group will be prepared in accordance with United Kingdom adopted
international accounting standards. The condensed set of financial
statements included in this half-yearly financial report has been
prepared in accordance with United Kingdom adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
Conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in
accordance with ISRE (UK) 2410; however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly
financial report in accordance with the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
In preparing the half-yearly financial report, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly financial report, we are
responsible for expressing to the group a conclusion on the
condensed set of financial statements in the half-yearly financial
report. Our Conclusion, including our Conclusion Relating to Going
Concern, are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with
ISRE (UK) 2410. Our work has been undertaken so that we might state
to the company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the company, for our review work, for this
report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
25 July 2023
Condensed Group Statement of Comprehensive Income
For the six months ended 30 June 2023
Six months Six months Year ended
ended 30 ended 30 31 December
June June 2022
2023 2022
GBPm GBPm GBPm
Notes (unaudited) (unaudited) (audited)
------------------------------------------ ----- ------------------- -------------------- ------------------------
Rental and related income 2 83.9 76.8 154.1
Direct property expenses (7.9) (5.7) (12.6)
------------------------------------------ ----- ------------------- -------------------- ------------------------
Net rental and related income 76.0 71.1 141.5
------------------- -------------------- ------------------------
Administrative expenses (6.1) (5.5) (9.6)
Amortisation of intangible assets (0.4) - -
Axis acquisition costs (0.2) - -
------------------- -------------------- ------------------------
Total administrative expenses 3 (6.7) (5.5) (9.6)
------------------- -------------------- ------------------------
Revaluation (deficit)/ gain on property
portfolio 9 (11.9) 51.2 (64.4)
Profit on sale of land and properties - - 2.9
------------------- -------------------- ------------------------
Total revaluation (deficit)/ gain (11.9) 51.2 (61.5)
------------------- -------------------- ------------------------
Operating profit 3 57.4 116.8 70.4
Finance income 4 - 0.5 0.9
Finance costs 5 (22.5) (20.0) (41.2)
Fair value loss on derivative interest
rate swaps and
amortisation of cash flow hedging
reserve 5 (1.7) (1.4) (1.9)
Fair value gain on convertible bond 5 5.6 11.8 28.7
------------------------------------------ ----- ------------------- -------------------- ------------------------
Profit before taxation 38.8 107.7 56.9
Taxation credit/ ( charge) 6 0.7 (0.6) (0.6)
------------------------------------------ ----- ------------------- -------------------- ------------------------
Profit after taxation for the
period/year
(1) 39.5 107.1 56.3
Other comprehensive income:
Items that may be reclassified subsequently to profit and loss:
Fair value gain on interest rate
swaps treated as cash flow hedges
and amortisation of hedging reserve 1.9 2.3 4.5
Exchange (loss)/ gain on translation
of foreign balances (0.1) 1.3 3.2
------------------------------------------ ----- ------------------- -------------------- ------------------------
Other comprehensive income for the
period net of tax(1) 1.8 3.6 7.7
------------------------------------------ ----- ------------------- -------------------- ------------------------
Total comprehensive income for the
period net of tax(1) 41.3 110.7 64.0
------------------------------------------ ----- ------------------- -------------------- ------------------------
IFRS earnings per share
Basic 7 3.0p 8.0p 4.2p
Diluted 7 2.5p 6.8p 2.2p
Adjusted earnings per share(2)
Basic 7 3.4p 3.4p 6.6p
Diluted 7 3.3p 3.3p 6.4p
------------------------------------------ ----- ------------------- -------------------- ------------------------
(1) Wholly attributable to equity shareholders of Primary Health
Properties PLC
(2) See Glossary of Terms on pages 50 to 5 2.
The above relates wholly to continuing operations.
Condensed Group Balance Sheet As at 30 June 2023
30 June 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
Notes (unaudited) (unaudited) (audited)
---------------------------------- --------- ------------------ ----------- ----------------
Non-current assets
Investment properties 9 2,783.4 2,887.2 2,796.3
Derivative interest rate
swaps 14 22.6 13.1 19.6
Intangible assets 6.6 - -
Fixed assets 0.6 0.5 0.4
---------------------------------- --------- ------------------ ----------- ----------------
2,813.2 2,900.8 2,816.3
Current assets
Trade and other receivables 22.6 18.3 17.8
Cash and cash equivalents 10 2.4 29.7 29.1
Assets held for sale - 25.0 -
Development work in progress 1.4 0.8 1.3
---------------------------------- --------- ------------------ ----------- ----------------
26.4 73.8 48.2
---------------------------------- --------- ------------------ ----------- ----------------
Total assets 2,839.6 2,974.6 2,864.5
---------------------------------- --------- ------------------ ----------- ----------------
Current liabilities
Deferred rental income (30.3) (29.6) (29.2)
Trade and other payables (34.1) (45.5) (32.6)
Borrowings: term loans and
overdraft 11 (2.3) (2.2) (2.3)
---------------------------------- --------- ------------------ ----------- ----------------
(66.7) (77.3) (64.1)
---------------------------------- --------- ------------------ ----------- ----------------
Non-current liabilities
Borrowings: term loans and
overdraft 11 (669.5) (684.1) (682.5)
Borrowings: bonds 12 (603.8) (626.7) (614.6)
Derivative interest rate
swaps 14 (13.4) (7.8) (12.5)
Head lease liabilities 13 (3.0) (4.5) (3.2)
Deferred tax liability (4.5) (5.3) (5.4)
---------------------------------- --------- ------------------ ----------- ----------------
(1,294.2) (1,328.4) (1,318.2)
---------------------------------- --------- ------------------ ----------- ----------------
Total liabilities (1,360.9) (1,405.7) (1,382.3)
---------------------------------- --------- ------------------ ----------- ----------------
Net assets 1,478.7 1,568.9 1,482.2
---------------------------------- --------- ------------------ ----------- ----------------
Equity
Share capital 17 167.1 166.8 167.1
Share premium account 479.4 476.3 474.9
Merger and other reserves 18 416.6 414.8 416.7
Hedging reserve (9.2) (13.3) (11.1)
Retained earnings 424.8 524.3 430.1
---------------------------------- --------- ------------------ ----------- ----------------
Total equity (1) 1,478.7 1,568.9 1,482.2
---------------------------------- --------- ------------------ ----------- ----------------
Basic net asset value per
share
IFRS net assets - basic
and diluted 7 110.6 117.6 110.9p
Adjusted net tangible assets(2)
- basic 7 111.1 120.8 112.6p
Adjusted net tangible assets(2)
- diluted 7 113.1 122.4 114.5p
---------------------------------- --------- ------------------ ----------- ----------------
(1) Wholly attributable to equity shareholders of Primary Health
Properties PLC.
(2) See Glossary of Terms on pages 50 to 52.
Condensed Group Cash Flow Statement For the six months ended 30
June 2023
Six months Six months Year ended
ended 30 ended 30 June 31 December
June 2023 2022 2022
GBPm GBPm GBPm
Notes (unaudited) (unaudited) (audited)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Operating activities
Profit on ordinary activities after
tax 39.5 107.1 56.3
Taxation (credit) / charge 6 (0.7) 0.6 0.6
Finance income 4 - (0.5) (0.9)
Finance costs 5 22.5 20.0 41.2
Fair value loss on derivatives 1.7 1.4 1.9
Fair value gain on convertible bond (5.6) (11.8) (28.7)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Operating profit before financing
costs 57.4 116.8 70.4
Adjustments to reconcile Group operating
profit to net cash flows from operating
activities:
Revaluation deficit / (gain) on property
portfolio 9 11.9 (51.2) 64.4
Profit on sale of land and property - - (2.9)
Amortisation of intangible assets 0.4 - -
Long term incentive plan (LTIP) - 0.1 -
Effect of exchange rate fluctuations
on operations (0.1) - -
Fixed rent uplift (0.4) (0.5) (0.9)
Tax (paid) / received (0.1) 0.1 0.2
(Increase) / decrease in trade and
other receivables (4.5) (0.2) (0.7)
Increase / (decrease) in trade and
other payables 1.7 (15.1) (12.9)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Cash generated from operations 66.3 50.0 117.6
--------------------------------------------- ------ ----------- ----------------- ----------------------
Net cash flow from operating activities 66.3 50.0 117.6
--------------------------------------------- ------ ----------- ----------------- ----------------------
Investing activities
Payments to acquire and improve properties
and fixed assets (5.6) (39.1) (74.8)
Receipts from disposal of properties - - 27.5
Cash paid for acquisition of Axis (5.2) - -
Interest received on development loans - 0.4 1.5
--------------------------------------------- ------ ----------- ----------------- ----------------------
Net cash flow used in investing activities (10.8) (38.7) (45.8)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Financing activities
Costs of share issues - (0.1) (0.1)
Term bank loan drawdowns 126.8 88.9 161.6
Term bank loan repayments (138.7) (103.5) (175.7)
Proceeds from bond issue - 62.9 62.9
Loan arrangement fees (0.9) (2.5) (3.5)
Premium paid on derivatives financial
instruments (1.9) - -
Non-utilisation fees (1.1) (1.1) (2.0)
Interest paid (22.8) (19.1) (39.8)
Swap interest received 1.4 0.9 1.4
Equity dividends paid net of scrip
dividend 8 (44.8) (41.6) (81.6)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Net cash flow used in financing activities (82.0) (15.2) (76.8)
--------------------------------------------- ------ ----------- ----------------- ----------------------
Increase in cash and cash equivalents (26.5) (3.9) (5.0)
Effect of exchange rate fluctuations
on Euro denominated loans and cash
equivalents (0.2) 0.2 0.7
Cash and cash equivalents at start
of period / year 29.1 33.4 33.4
--------------------------------------------- ------ ----------- ----------------- ----------------------
Cash and cash equivalents at end
of period / year 10 2.4 29.7 29.1
--------------------------------------------- ------ ----------- ----------------- ----------------------
Condensed Group Statement of Changes in Equity For the six
months ended 30 June 2023 (unaudited)
Six months ended 30 June 2023 (unaudited)
Merger
Share Share & Hedging Retained
capital premium other reserve earnings Total
reserves
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------------- --------------- --------- ------------ ------------- -------
1 January 2023 167.1 479.4 416.7 (11.1) 430.1 1,482.2
Profit for the period - - - - 39.5 39.5
Other comprehensive
income
Exchange gain on translation
of foreign balances - - (0.1) - - (0.1)
Amortisation of hedging
reserve - - - 1.9 - 1.9
------------------------------- -------------- --------------- --------- ------------ ------------- -------
Total comprehensive
income - - (0.1) 1.9 39.5 41.3
Share issue expenses - - - - - -
Shares based awards - - - - - -
(LTIP)
Dividends paid - - - - (44.8) (44.8)
Scrip dividend in lieu - - - - - -
of cash
------------------------------- -------------- --------------- --------- ------------ ------------- -------
30 June 2023 167.1 479.4 416.6 (9.2) 424.8 1,478.7
------------------------------- -------------- --------------- --------- ------------ ------------- -------
Six months ended 30 June 2022 (unaudited)
Merger
Share Share & Hedging Retained
capital premium other reserve earnings Total
reserves
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- --------------- --------------- --------- ------------ ------------- -------
1 January 2022 166.6 474.9 413.5 (15.6) 460.5 1,499.9
Profit for the period - - - - 107.1 107.1
Other comprehensive
income
Exchange gain on translation
of foreign balances - - 1.3 - - 1.3
Amortisation of hedging
reserve - - - 2.3 - 2.3
------------------------------- --------------- --------------- --------- ------------ ------------- -------
Total comprehensive
income - - 1.3 2.3 107.1 110.7
Share issue expenses - (0.1) - - - (0.1)
Shares based awards - - - - - -
(LTIP)
Dividends paid - - - - (41.6) (41.6)
Scrip dividend in lieu
of cash 0.2 1.5 - - (1.7) -
------------------------------- --------------- --------------- --------- ------------ ------------- -------
30 June 2022 166.8 476.3 414.8 (13.3) 524.3 1,568.9
------------------------------- --------------- --------------- --------- ------------ ------------- -------
Condensed Group Statement of Changes in Equity (continued)
Year ended 31 December 2022 (audited)
Merger
Share Share & Hedging Retained
capital premium other reserve earnings Total
reserves
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- --------------- --------------- --------- ------------ ------------- -------
1 January 2022 166.6 474.9 413.5 (15.6) 460.5 1,499.9
Profit for the period - - - - 56.3 56.3
Other comprehensive
income
Exchange gain on translation
of foreign balances - - 3.2 - - 3.2
Amortisation of hedging
reserve - - - 4.5 - 4.5
------------------------------- --------------- --------------- --------- ------------ ------------- -------
Total comprehensive
income - - 3.2 4.5 56.3 64.0
Share issue expenses - (0.1) - - - (0.1)
Share-based awards - - - - - -
("LTIP")
Dividends paid - - - - (81.6) (81.6)
Scrip dividend in lieu
of cash 0.5 4.6 - - (5.1) -
------------------------------- --------------- --------------- --------- ------------ ------------- -------
31 December 2022 167.1 479.4 416.7 (11.1) 430.1 1,482.2
------------------------------- --------------- --------------- --------- ------------ ------------- -------
Notes to the condensed financial statements
1. Accounting policies General information
The financial information set out in this report does not
constitute statutory accounts as defined in Section 434 of the
Companies Act 2006. The Group's statutory financial statements for
the year ended 31 December 2022 have been filed with the Registrar
of Companies. The Auditor's Report on these condensed consolidated
interim financial statements was unqualified and did not contain a
statement under Sections 498(2) or 498(3) of the Companies Act
2006.
The condensed consolidated interim financial statements of the
Group are unaudited but have been formally reviewed by the auditor
and its report to the Company is included on pages 21 to 22. These
condensed consolidated interim financial statements of the Group
for the six months ended 30 June 2023 were approved and authorised
for issue by the Board on 25 July 2023.
Basis of preparation/statement of compliance
The condensed consolidated interim financial statements for the
six months ended 30 June 2023 have been prepared in accordance with
IAS 34 'Interim Financial Reporting'. The annual financial
statements of the Group will be prepared in accordance with United
Kingdom adopted international accounting standards.
The condensed consolidated interim financial statements do not
include all the information and disclosures required in the
statutory financial statements and should be read in conjunction
with the Group's financial statements as at 31 December 2022.
Convention
The condensed interim financial statements are presented in
Sterling, rounded to the nearest million.
Segmental reporting
The Directors are of the opinion that the Group currently has
one operating and reportable segment, being the acquisition and
development of property in the United Kingdom and Ireland leased
principally to GPs, Government and Healthcare organisations and
other associated healthcare users.
Going concern
The directors are required to assess the Group's ability to
continue as a going concern for a period of at least the next 12
months. In assessing the appropriateness of the going concern basis
used in preparing the interim report, the directors have performed
a review of the Group's financial performance and position,
continued access to borrowing facilities and the ability to
continue to operate the Group's facilities within its financial
covenants, as well the Group's budgetary model.
Notes to the condensed financial statements (continued) Going
concern (continued)
The Group's financial review and budgetary processes are based
on an integrated model that projects performance, cash flows,
position and other key performance indicators including earnings
per share, leverage rates, net asset values per share and REIT
compliance over the review period. In addition, the forecast model
looks at the funding of the Group's activities and its compliance
with the financial covenant requirements of its debt facilities.
The model uses a number of key parameters in generating its
forecasts that reflect the Group's strategy, operating processes
and the Board's expectation of market developments in the review
period. In undertaking its financial review, these parameters have
been flexed to reflect severe, but realistic, scenarios both
individually and collectively. Sensitivities applied are derived
from the principal risks faced by the Group that could affect
solvency or liquidity and are as follows:
-- Declining attractiveness / possible obsolescence of the
Group's assets as a result of ESG initiatives or otherwise, or
deteriorating economic circumstances impacts investment values -
valuation parameter stress tested to provide for a one-off
10%/GBP278m fall in December 2023 valuations.
-- We have applied a 15% tenant default rate. In addition,
rental growth assumptions have been amended to see nil uplifts on
open market reviews.
-- Variable rate interest rates rise by an immediate 2%
effective from 1 July 2023, impacting the variable interest debt in
the portfolio.
-- Tightly controlled NHS scheme approval restricts investment
opportunity - investment quantum flexed to remove non-committed
transactions.
-- Impact on shareholder returns of all of the above occurrences
- projected dividend payments held at expected 2023 level, 6.7p per
share.
The Group's property portfolio is let on long leases to tenants
with strong covenants and the business is substantially cash
generative. The Group's loan to-value ratio at 30 June 2023 was
45.6% (30 June 2022: 43.1%) and the Group's interest cover for the
period under review was 3.1 times (30 June 2022: 3.4), well above
the minimum Group banking covenant of 1.3 times (30 June 2022:
1.3).
The Board has continued to undertake a robust assessment of
emerging and increasing risks faced by the Group.
Since the release of our 2022 full-year results, the global
economic uncertainty has continued. Within the UK, the main
challenges facing the economy are rising interest rates and
heightened inflation and the increasing risk of recession,
compounded by the impact of the ongoing war in Ukraine. The
potential adverse impact of these factors on our business includes
reduced demand for our assets impacting property values in the
investment market, the ability for us to continue to execute our
acquisition and development strategy and increased financing costs,
which could impact our rental income and earnings. The Board and
key Committees have continued to oversee the Group's response to
the impact of these challenges on our business and the wider
economic influences throughout the period.
Taking these and others factors into account, the Directors are
satisfied that the Group has sufficient resources to continue in
operation for a period of not less than twelve months from the date
of this report. Accordingly, they continue to adopt the going
concern basis in preparing the condensed consolidated interim
financial statements.
Notes to the condensed financial statements (continued)
Accounting policies
The accounting policies adopted are consistent with those of the
previous financial year as set out in the Annual Report. There has
been a new accounting policy adopted during the period:
Intangible assets
Contract based intangible assets comprise the value of customer
contracts arising on business combinations. Intangible assets
arising on business combinations are initially recognised at fair
value. Intangible assets arising on business combinations are
amortised on a straight line basis to the income statement over
their expected useful lives, and are carried at depreciated
historical cost.
2. Rental and related income
Revenue comprises rental income receivable on property
investments in the UK and Ireland, which is exclusive of VAT, plus
facilities and properties management income. Revenue is derived
from one reportable operating segment.
3. Operating profit
Operating profit is stated after charging administrative expense
of GBP6.1m, amortisation of intangible assets of GBP0.4m and Axis
acquisition costs of GBP0.2m (30 June 2022: GBP5.5m).
Administrative expenses as a proportion of rental and related
income were 7.3% (30 June 2022: 7.2%). The Group's EPRA cost ratio
has decreased to 10.1%, compared to 10.5% for the same period in
2022.
Administrative expenses include staff costs of GBP3.4m (30 June
2022: GBP3.0m).
In the year PHP acquired Axis, an Irish property management
business. In the period Axis contributed GBP1.3m of related income
and incurred direct property expenses of GBP0.8m, contributing
GBP0.5m of net related income. After the deduction of GBP0.2m
administrative expenses Axis generated an operating profit of
GBP0.3m.
Notes to the condensed financial statements (continued)
4. Finance income
Six months Six months Year ended
ended 30 June ended 30 31 December
2023 June 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
------------------------------- ----------------------------------------- --------------------- ----------------
Interest income on financial
assets
Development loan interest - 0.5 0.9
------------------------------- ----------------------------------------- --------------------- ----------------
- 0.5 0.9
------------------------------- ----------------------------------------- --------------------- ----------------
5. Finance costs
Six months Six months Year ended
ended ended 31 December
30 June 30 June 2022 2022
2023
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
--------------------------------------- ----------- ------------- ----------------
Interest expense and similar charges
on financial liabilities
(i) Interest
Bank loan interest 13.4 11.2 23.0
Swap interest (1.8) (0.7) (1.4)
Bond interest 9.8 8.4 17.5
Bank facility non utilisation fees 1.1 1.0 2.0
Bank charges and loan arrangement
fees 1.6 1.5 3.0
--------------------------------------- ----------- ------------- ----------------
24.1 21.4 44.1
Interest capitalised (0.1) - -
Amortisation of MedicX debt MtM at
acquisition (1.5) (1.4) (2.9)
--------------------------------------- ----------- ------------- ----------------
22.5 20.0 41.2
--------------------------------------- ----------- ------------- ----------------
Six months Six months Year ended
ended 30 June ended 30 31 December
2023 June 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
------------------------------------ ------------------------------ --------------------- ----------------
(ii) Derivatives
Net fair value gain on interest
rate swaps 0.2 0.9 2.6
Amortisation of cash flow hedging
reserve (1.9) (2.3) (4.5)
------------------------------------ ------------------------------ --------------------- ----------------
(1.7) (1.4) (1.9)
------------------------------------ ------------------------------ --------------------- ----------------
The fair value loss on derivatives recognised in the Condensed
Group Statement of Comprehensive Income has arisen from the
interest rate swaps for which hedge accounting does not apply.
An amount of GBP1.9m (30 June 2022: GBP2.3m), (31 December 2022:
GBP4.5m) has been amortised from the cash flow hedging reserve in
the period.
Notes to the condensed financial statements (continued)
5. Finance costs (continued)
Six months Six months Year ended
ended ended 31 December
30 June 2023 30 June 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
--------------------------------- ------------- ------------- ----------------
(iii) Convertible bond
Fair value gain on Convertible
bond 5.6 11.8 28.7
--------------------------------- ------------- ------------- ----------------
5.6 11.8 28.7
--------------------------------- ------------- ------------- ----------------
The fair value movement in the convertible bonds is recognised
in the Group Statement of Comprehensive Income within profit before
taxation and is excluded from the calculation of EPRA earnings and
EPRA NTA (replacing EPRA NAV). Refer to note 12 for further details
about the Convertible bond.
Six months Six months Year ended
ended ended 31 December
30 June 2023 30 June 2022
2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
------------------------------------- ------------- ----------- ----------------
Finance income (Note 4 ) - 0.5 0.9
Finance costs (Note 5 (i)) (24.0) (21.4) (41.2)
------------------------------------- ------------- -----------
(24.0) (20.9) (40.3)
Amortisation of MedicX debt MtM on
acquisition 1.5 1.4 (2.9)
Net finance costs (22.5) (19.5) (43.2)
Notes to the condensed financial statements (continued)
6. Taxation
The Group elected to be treated as a UK-REIT with effect from 1
January 2007. The UK-REIT rules exempt the profits of the Group's
property rental business from corporation tax. Gains on properties
are also exempt from tax, provided they are not held for trading or
sold in the three years post completion of development. The Group
will otherwise be subject to corporation tax at 19% (2022:
19%).
Acquired companies are effectively converted to UK-REIT status
from the date on which they become a member of the Group.
As a UK-REIT, the Company is required to pay Property Income
Distributions ("PIDs") equal to at least 90% of the Group's rental
profit calculated by reference to tax rules rather than accounting
standards.
To remain as a UK-REIT there are a number of conditions to be
met in respect of the principal company of the Group, the Group's
qualifying activities and the balance of its business. The Group
remains compliant as at 30 June 2023.
The Group's activities in Ireland are conducted via Irish
companies or an Irish Collective Asset Vehicle ("ICAV"). The Irish
companies pay Irish Corporation Tax on trading activities and
deferred tax is calculated on the increase in capital values. The
ICAV does not pay any Irish Corporation Tax on its trading or
capital profits but a 20% withholding tax is paid on distributions
to owners.
Six months Six months Year ended
ended 30 ended 30 31 December
June 2023 June 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
--------------------
Taxation in the Condensed Group Statement
of Comprehensive Income:
Current tax
UK corporation tax charge on non-property - - -
income
Irish corporation tax charge/(credit) - (0.1) (0.2)
Deferred tax on Irish activities (0.7) 0.7 0.8
Taxation (credit)/ charge in the Condensed
Group Statement of
Comprehensive Income (0.7) 0.6 0.6
Notes to the condensed financial statements (continued)
7. Earnings per share Performance measures
In the tables below, we present earnings per share and net
assets per share calculated in accordance with IFRS, together with
our own adjusted measure and certain measures defined by the
European Public Real Estate Association ("EPRA"), which have been
included to assist comparison between European property companies.
Two of the Group's key financial performance measures are Adjusted
earnings per share and adjusted net tangible assets per share.
Adjusted earnings, which is a tax adjusted measure of revenue
profit, is the basis for the calculation of Adjusted earnings per
share. We believe Adjusted earnings and Adjusted earnings per share
provide further insight into the results of the Group's operational
performance to stakeholders as they focus on the net rental income
performance of the business and exclude capital and other items
which can vary significantly from year to year.
Earnings per share
30 June 2023 30 June 2022
(unaudited) (unaudited)
IFRS Adjusted EPRA IFRS Adjusted EPRA
earnings earnings earnings earnings earnings earnings
GBPm GBPm GBPm GBPm GBPm GBPm
Profit after taxation 39.5 39.5 39.5 107.1 107.1 107.1
Adjustments to remove:
Revaluation deficit/
(gain)
on property portfolio - 11.9 11.9 - (51.2) (51.2)
Profit on sale of land - - - - - -
and
property
Fair value movement on
derivatives - 1.7 1.7 - 1.4 1.4
Fair value movement and
issue
costs on
convertible bond - (5.6) (5.6) - (11.8) (11.8)
Taxation (credit)/
charge - (0.7) (0.7) - 0.6 0.6
Amortisation of
intangible
assets 0.4 0.4 - - -
Axis acquisition costs - 0.2 0.2 - - -
Amortisation of MtM loss
on
debt acquired - (1.5) - - (1.4) -
Basic earnings 39.5 45.9 47.4 107.1 44.7 46.1
Dilutive effect of
convertible
bond (3.5) 2.1 2.1 (9.6) 2.1 2.1
Diluted earnings 36.0 48.0 49.5 97.5 46.8 48.2
Number of shares
million million million million million million
Ordinary Shares 1,336.5 1,336.5 1,336.5 1,333.5 1,333.5 1,333.5
Dilutive effect of convertible
bond 108.9 108.9 108.9 105.4 105.4 105.4
Diluted Ordinary Shares 1,445.4 1,445.4 1,445.4 1,438.9 1,438.9 1,438.9
Profit per share attributable to shareholders:
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Basic 3.0 3.4 3.5 8.0 3.4 3.5
Diluted 2.5 3.3 3.4 6.8 3.3 3.4
Notes to the condensed financial statements (continued)
31 December 2022
(audited)
IFRS Adjusted EPRA
earnings earnings earnings
GBPm GBPm GBPm
Profit after taxation 56.3 56.3 56.3
Adjustments to remove:
Revaluation deficit on property
portfolio - 64.4 64.4
Profit on the sale of land - (2.9) (2.9)
Fair value movement on derivatives - 1.9 1.9
Fair value movement and issue
costs on
convertible bond - (28.7) (28.7)
Taxation charge - 0.6 0.6
Amortisation of MtM loss on debt
acquired - (2.9) -
Basic earnings 56.3 88.7 91.6
Dilutive effect of convertible
bond (24.3) 4.3 4.3
Diluted earnings 32.0 93.0 95.9
7. Earnings per share (continued) Earnings per share
Number of shares
million million million
Ordinary Shares 1,334.8 1,334.8 1,334.8
Dilutive effect of convertible
bond 108.9 108.9 108.9
Diluted Ordinary Shares 1,443.7 1,443.7 1,443.7
Profit per share attributable to shareholders:
IFRS Adjusted EPRA
pence pence pence
Basic 4.2 6.6 6.9
Diluted 2.2 6.4 6.6
Notes to the condensed financial statements (continued)
7. Earnings per share (continued)
Net assets per share
30 June 2023 30 June 2022
(unaudited) (unaudited)
IFRS Adjusted EPRA IFRS Adjusted EPRA
GBPm GBPm GBPm GBPm GBPm GBPm
Net assets attributable
to shareholders 1,478.7 1,478.7 1,478.7 1,568.9 1,568.9 1,568.9
Derivative interest rate
swaps liability - (9.2) (9.2) - (5.3) (5.3)
Deferred tax - 4.5 4.5 - 5.3 5.3
Intangible assets - (6.6) (6.6) - - -
Cumulative convertible bond
fair value
movement - (12.7) (12.7) - 9.8 9.8
MtM on MedicX loans net
of
amortisation - 30.0 - - 33.0 -
Net tangible assets ("NTA") 1,478.7 1,484.7 1,454.7 1,568.9 1,611.7 1,578.7
Intangible assets - - 6.6 - - -
Real estate transfer taxes - - 194.4 200.6
Net reinstatement value
("NRV") 1,478.7 1,484.7 1,655.7 1,568.9 1,611.7 1,779.3
Fixed rate debt and swap
mark-to-
market value - - 197.5 - - 75.5
Deferred tax - - (4.5) - - (5.3)
Cumulative convertible bond
fair value
movement - - 12.7 - - (9.8)
Real estate transfer taxes - - (194.4) - - (200.6)
Net disposal value ("NDV") 1,478.7 1,484.7 1,667.0 1,568.9 1,611.7 1,639.1
Number of shares
million million million million million million
Ordinary Shares 1,336.5 1,336.5 1,336.5 1,333.5 1,333.5 1,333.5
Dilutive effect of convertible
bond 108.9 108.9 108.9 105.4 105.4 105.4
Diluted Ordinary Shares 1,445.4 1,445.4 1,445.4 1,438.9 1,438.9 1,438.9
Basic net asset value per share(1)
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Net tangible assets ("NTA") 110.6 111.1 108.8 117.6 120.8 118.3
Net reinstatement value
("NRV") 123.9 133.4
Net disposal value ("NDV") 124.7 122.9
1 The above are calculated on a "basic" basis without the
adjustment for the impact of the convertible bond which is shown in
the diluted basis table below.
Diluted net asset value per share(2)
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Net tangible assets ("NTA") 112.7 113.1 111.0 110.3 122.4 120.1
Net reinstatement value
("NRV") 124.9 134.0
Net disposal value ("NDV") 125.7 124.3
2 The Company assesses the dilutive impact of the unsecured
convertible bond, issued by the Group on 15 July 2019, on its net
asset value per share with a current exchange price of 137.69 pence
(30 June 2022: 142.29 pence) (31 December 2022: 137.69 pence).
Notes to the condensed financial statements (continued)
7. Earnings per share (continued)
Net assets per share
31 December 2022
(audited)
IFRS Adjusted EPRA
GBPm GBPm GBPm
Net assets attributable
to shareholders 1,482.2 1,482.2 1,482.2
Derivative interest rate
swaps liability - (7.1) (7.1)
Deferred tax - 5.4 5.4
Cumulative convertible bond
fair value
movement - (7.1) (7.1)
MtM on MedicX loans net -
of 31.4 -
amortisation
Net tangible assets ("NTA") 1,482.2 1,504.8 1473.4
Real estate transfer taxes 189.1
Net reinstatement value
("NRV") 1,482.2 1,504.8 1,662.5
Fixed rate debt and swap
mark-to-
market value - - 172.7
Deferred tax - - (5.4)
Cumulative convertible bond
fair value
movement - - 7.1
Real estate transfer taxes - - (189.1)
Net disposal value ("NDV") 1,482.2 1,504.8 1,647.8
Number of shares
million million million
Ordinary Shares 1,334.8 1,334.8 1,334.8
Dilutive effect of convertible
bond 108.9 108.9 108.9
Diluted Ordinary Shares 1,443.7 1,443.7 1,443.7
Basic net asset value per share(1)
IFRS Adjusted EPRA
pence pence pence
Net tangible assets ("NTA") 110.9 112.6 110.2
Net reinstatement value
("NRV") 124.4
Net disposal value ("NDV") 123.3
1 The above are calculated on a "basic" basis without the
adjustment for the impact of the convertible bond which is shown in
the diluted basis table below.
Diluted net asset value per share(2)
IFRS Adjusted EPRA
pence pence pence
Net tangible assets ("NTA") 112.9 114.5 112.3
Net reinstatement value
("NRV") 125.4
Net disposal value ("NDV") 124.4
2 The Company assesses the dilutive impact of the unsecured
convertible bond, issued by the Group on 15 July 2019, on its net
asset value per share with a current exchange price of 137.69 pence
(30 June 2022: 142.29 pence) (31 December 2022: 137.69 pence).
Notes to the condensed financial statements (continued)
7. Earnings per share (continued)
Conversion of the convertible bond would result in the issue of
108.9 million (31 December 2022: 108.9 million) new Ordinary
Shares. The IFRS net asset value and EPRA NDV would increase by
GBP137.3 million (31 December 2022: GBP142.9 million) and the EPRA
NTA, Adjusted NTA and EPRA NRV would increase by GBP150.0 million
(31 December 2022: GBP150.0 million). The resulting diluted net
asset values per share are anti-dilutive to all measures and
therefore basic IFRS net assets value per share are presented
above.
8. Dividends
Six months Six months Year ended
ended 30 June 2023 ended 30 31 December
June 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
Quarterly interim dividend paid 23 February
2023 22.4 - -
Quarterly interim dividend paid 19 May
2023 22.4 - -
Quarterly interim dividend paid 25 February
2022 - 21.0 21.0
Scrip dividend in lieu of quarterly
cash dividend 25 February 2022 - 0.6 0.6
Quarterly interim dividend paid 20 May
2022 - 20.6 20.6
Scrip dividend in lieu of quarterly
cash dividend 20 May 2022 - 1.1 1.1
Quarterly interim dividend paid 19 August
2022 - - 18.1
Scrip dividend in lieu of quarterly
cash dividend 19 August 2022 - - 3.4
Quarterly interim dividend paid 25 November
2022 - - 21.9
Total dividends distributed 44.8 43.3 86.7
Per share 3.35p 3.25p 6.5p
The Company will pay a third interim dividend of 1.675 pence per
Ordinary Share for the year ending 31 December 2023, payable on 18
August 2023. The dividend will comprise a Property Income
Distribution ("PID") of 1.340 pence per share and an ordinary
dividend of 0.335 pence per share. The scrip dividend scheme was
suspended in light of the falls in the share price in 2022 and
first half of 2023 and the company continues to offer a dividend
reinvestment plan in its place.
Notes to the condensed financial statements (continued)
9. Investment properties and investment properties under construction
Investment
Investment Investment properties
properties long leasehold under construction
freehold Total
GBPm GBPm GBPm GBPm
As at 1 January 2023 (audited) 2,214.5 577.3 4.5 2,796.3
Reclassification of land(1) 0.9 - (0.9) -
Property additions 5.5 0.1 - 5.6
Impact of lease incentive
adjustment 0.1 0.2 - 0.3
Lease ground rent adjustment - (0.2) - (0.2)
Foreign exchange movements (4.3) (2.4) - (6.7)
Revaluations for the period (2.8) (5.7) (3.4) (11.9)
As at 30 June 2023 (unaudited) 2,213.9 569.3 0.2 2,783.4
(1) Includes development land held at GBP0.9m (31 December 2022:
GBP0.7m)
Total
GBPm
Fair value per AY UK valuation 1,217.6
Fair value of JLL UK valuation 1,343.9
Fair value of CBRE Ireland valuation 218.9
2,780.4
Ground rents recognised as finance leases 3.0
Fair value 30 June 2023 (unaudited) 2,783.4
The investment properties have been independently valued at fair
value by Avison Young ("AY"), Jones Lang LaSalle ("JLL") and CBRE
Chartered Surveyors and Valuers ("CBRE"), as at the balance sheet
date in accordance with accounting standards. The valuers have
confirmed that they have valued the properties in accordance with
the Practice Statements in the RICS Valuation Global Standards 2022
("Red Book"). There were no changes to the valuation techniques
during the period. The valuers are appropriately qualified and have
sufficient market knowledge and relevant experience of the location
and category of investment property and have had full regard to
market evidence when determining the values.
The properties are 99.6% let (31 December 2022: 99.7%). The
valuations reflected a 4.90% net initial yield (31 December 2022:
4.82%). Where properties have outstanding rent reviews, an estimate
is made of the likely rent on review in line with market
expectations and the knowledge of the valuer.
Notes to the condensed financial statements (continued)
9. Investment properties and investment properties under construction (continued)
In accordance with IAS 40, investment properties under
construction have also been valued at fair value by the independent
valuers. In determining the fair value, the valuer is required to
value development property as if complete, deduct the costs
remaining to be paid to complete the development and consider the
significant risks which are relevant to the development process
including, but not limited to, construction and letting risks and
the impact they may have on fair value. In the case of the Group's
portfolio under construction, where the sites are pre-let and
construction risk remains with the builder/developer, the valuer
has deemed that the residual risk to the Group is minimal. As
required by the Red Book, the valuers have deducted the outstanding
cost to the Group through to the completion of construction of
GBP6.3m (31 December 2022: GBP2.8m) in arriving at the fair value
to be included in the financial statements.
In addition to the above, capital commitments have been entered
into amounting to GBP9.2m (30 June 2022:
GBP11.8m; 31 December 2022: GBP9.9m) which have not been
provided for in the financial statements.
Right-of-use-assets
In accordance with IFRS 16 Leases, the Group has recognised a
GBP3.0m head lease liability and an equal and opposite finance
lease asset which is included in non-current assets.
Fair value hierarchy
All of the Group's properties are level 3, as defined by IFRS
13, in the fair value hierarchy as at 30 June 2023 and 31 December
2022. There were no transfers between levels during the period or
during 2022. Level 3 inputs used in valuing the properties are
those which are unobservable, as opposed to level 1 (inputs from
quoted prices) and level 2 (observable inputs either directly, i.e.
as prices, or indirectly, i.e. derived from prices).
10. Cash and cash equivalents
30 June 2023 31 December 2022
GBPm GBPm
(unaudited) (audited)
Cash held at bank 2.4 29.1
Notes to the condensed financial statements (continued)
11. Borrowings: term loans and overdrafts
The table indicates amounts drawn and undrawn from each
individual facility:
Expiry Facility Amounts drawn Undrawn
date
30 June 31 December 30 June 31 December 30 June 31 December
2023 2022 2023 2022 2023 2022
GBPm GBPm GBPm GBPm GBPm GBPm
Current
RBS Overdraft Jun 2024 5.0 5.0 - - 5.0 5.0
Aviva loan
1 Sep 2033 2.3 2.3 2.3 2.3 - -
7.3 7.3 2.3 2.3 5.0 5.0
Non-current
Aviva AV Lending Oct 2036 200.0 200.0 200.0 200.0 - -
Aviva loan Nov 2028 75.0 75.0 75.0 75.0 - -
Barclays loan Sep 2025 100.0 100.0 - - 100.0 100.0
HSBC loan Nov 2025 100.0 100.0 34.4 25.5 65.6 74.5
Lloyds loan Dec 2025 100.0 100.0 21.7 32.5 78.3 67.5
NatWest loan Oct 2024 100.0 100.0 32.9 41.8 67.1 58.2
Santander loan Jan 2025 50.0 50.0 37.4 38.6 12.6 11.4
Aviva loan
1 Sep 2033 221.7 222.9 221.7 222.9 - -
Aviva loan
1 Sep 2028 30.8 30.8 30.8 30.8 - -
977.5 978.7 653.9 667.1 323.6 311.6
Total 984.8 986.0 656.2 669.4 328.6 316.6
1 Acquired as part of the merger with MedicX.
At 30 June 2023, total facilities of GBP1,600.8m (31 December
2022: GBP1,607.0m) were available to the Group. This included term
loan facilities and the bonds in note 12. Of these facilities, as
at 30 June 2023, GBP1,272.2m was drawn (31 December 2022:
GBP1,290.4m).
Costs associated with the arrangement of the facilities,
including legal advice and loan arrangement fees, are amortised
using the effective interest rate.
Notes to the condensed financial statements (continued)
11. Borrowings: term loans and overdrafts (continued)
Any amounts unamortised as at the period end are offset against
amounts drawn on the facilities as shown in the table below:
30 June 31 December
2023 2022
GBPm GBPm
(unaudited) (audited)
Term loans drawn: due within one year 2.3 2.3
Term loans drawn: due in greater than one
year 653.9 667.1
Total term loans drawn 656.2 669.4
Plus: MtM on loans net of amortisation 26.0 27.1
Less: unamortised borrowing costs (10.4) (11.7)
Total term loans per the Condensed Group
Balance Sheet 671.8 684.8
The Group has been in compliance with all the applicable
financial covenants of the above facilities through the period.
12. Borrowings: Bonds
30 June 31 December
2023 2022
GBPm GBPm
(unaudited) (audited)
Unsecured
Convertible bond July 2025 at fair value 137.3 142.9
Total unsecured bonds 137.3 142.9
Secured
Secured Bond December 2025 70.0 70.0
Secured Bond March 2027 100.0 100.0
EUR51m Secured Bond (Euro private placement)
December 2028/30 43.8 45.1
EUR70 million secured bond (Euro private
placement) September 2031 60.2 62.0
EUR75 million secured bond (Euro private
placement) February 2034 64.4 66.4
Ignis loan note December 2028 50.0 50.0
Standard Life loan note September 2028 77.5 77.5
Less: unamortised issue costs (3.4) (3.6)
Plus: MtM on loans net of amortisation 4.0 4.3
Total secured bonds 466.5 471.7
Total bonds 603.8 614.6
Notes to the condensed financial statements (continued)
12. Borrowings: Bonds (continued)
Secured Bonds
On 18 December 2013, PHP successfully listed the floating rate
guaranteed secured bonds issued on 4 November 2013 (the "Secured
Bonds") on the London Stock Exchange. The Secured Bonds have a
nominal value of GBP70m and mature on or about 30 December 2025.
The Secured Bonds incur interest at an annualised rate of 220bps
plus a credit spread adjustment of 28bps above six-month SONIA,
payable semi-annually in arrears.
On 21 March 2017, a GBP100m Secured Bond was issued for a
10-year term at a fixed coupon of 2.83% that matures on 21 March
2027. Interest is paid semi-annually in arrears.
On 20 December 2018, senior secured notes for a total of EUR51
million (GBP43.8 million) were issued at a blended fixed rate of
2.4793% and a weighted average maturity of 10.4 years. Interest is
paid semi-annually in arrears. The notes represent PHP's first
Euro-denominated transaction in the private placement market. The
secured notes were placed with UK and Irish institutional investors
in two tranches:
-- EUR40 million 2.46% senior notes due December 2028.
-- EUR11 million 2.633% senior notes due December 2030.
On 16 September 2019, new senior secured notes for a total of
EUR70 million (GBP60.2 million) were issued at a fixed rate of
1.509% and a maturity of twelve years. Interest is paid
semi-annually in arrears. The secured notes are guaranteed by the
Company and were placed with UK and Irish institutional
investors.
On 11 February 2022, the Group issued a new EUR75.0 million
(GBP64.4 million) secured private placement loan note to MetLife
for a 12-year term at a fixed rate of 1.64%. The loan notes have
the option to be increased by a further EUR75 million to EUR150
million over the next three years at the Metlife's discretion.
Ignis and Standard Life loan notes
On 14 March 2019, the loan notes were added to the portfolio as
a part of the MedicX acquisition. The Ignis loan note incurs a
fixed coupon of 3.99% payable semi-annually in arrears and matures
on 1 December 2028.
The Standard Life loan note matures on 30 September 2028 and is
split into two tranches, GBP50m and GBP27.5m at fixed coupon rates
of 3.84% and 3.00% respectively. Interest is payable semi-annually
in arrears.
Convertible bond
On 15 July 2019, PHP Finance (Jersey No.2) Limited (the
"Issuer"), a wholly owned subsidiary of the Group, issued GBP150
million of 2.875% convertible bonds (the "Bonds") for a six-year
term and if not previously converted, redeemed or purchased and
cancelled, the Bonds will be redeemed at par on maturity in July
2025. The net proceeds were partially used to repay the Company's
GBP75 million, 5.375% senior unsecured retail bonds at maturity and
otherwise for general corporate purposes.
Subject to certain conditions, the bonds will be convertible
into fully paid Ordinary Shares of the Company and the initial
exchange price was set at 153.25 pence, a premium of 15% above the
volume weighted average price of the Company's shares on 18 June
2019, being 133.26 pence. Under the terms of the Bonds, the Company
will have the right to elect to settle exercise of any conversion
rights entirely in shares or cash, or with a combination of shares
and cash. The exchange price is subject to adjustment if dividends
paid per share exceed 2.8 pence per annum and other certain
circumstances and consequently the exchange price was adjusted to
134.16 pence on 6 July 2023 (31 December 2022: 137.69 pence).
Notes to the condensed financial statements (continued)
12. Borrowings: Bonds (continued) Convertible Bond
30 June 31 December
2023 2022
(unaudited) (audited)
GBPm GBPm
Opening balance - fair value 142.9 171.6
Cumulative fair value movement in convertible bond (5.6) (28.7)
Closing balance - fair value 137.3 142.9
The fair value of the convertible bond at 30 June 2023 was
established by obtaining quoted market prices. The fair value
movement is recognised in the Group Statement of Comprehensive
Income within profit before taxation and is excluded from the
calculation of EPRA earnings and EPRA NTA (replacing EPRA NAV).
13. Head lease liabilities
The Group holds certain long leasehold properties which are
classified as investment properties. The head leases are accounted
for as finance leases. These leases typically have lease terms
between 25 years and perpetuity and fixed rentals.
30 June 31 December
2023 2022
(unaudited) (audited)
GBPm GBPm
Due within one year 0.1 0.1
Due after one year 2.9 3.1
Closing balance - fair value 3.0 3.2
Notes to the condensed financial statements (continued)
14. Derivatives and other financial instruments
It is Group policy to maintain the proportion of floating rate
interest exposure at between 20% and 40% of total debt. The Group
uses interest rate swaps to mitigate its remaining exposure to
interest-rate risk in line with this policy. The fair value of
these contracts is recorded in the balance sheet and is determined
by discounting future cash flows at the prevailing market rates at
the balance sheet date.
The table below sets out the movements in the value of the
Group's interest rate swaps during the period:
Interest rate swaps not hedge accounted for
GBPm
Assets
As at 1 January 2023 (audited) 19.6
Premium on new Euro currency caps 1.9
Fair value movement in the period 1.1
As at 30 June 2023 (unaudited) 22.6
Liabilities
As at 1 January 2023 (audited) (12.5)
Fair value movement in the period (0.9)
As at 30 June 2023 (unaudited) (13.4)
Total - derivative financial instruments
As at 1 January 2023 (audited) 7.1
Premium on new Euro currency caps 1.9
Fair value movement in the period 0.2
As at 30 June 2023 (unaudited) 9.2
On 18 April 2023, the Group converted EUR60.0 million (GBP51.6
million) of sterling equivalent denominated debt into euros across
its various revolving credit facilities. The Group purchased 2.0%
caps on EUR60m nominal value for a period of 2.5 years until
October 2025 for an all-in premium of EUR2.2 million (GBP1.9
million).
Notes to the condensed financial statements (continued)
15. Financial risk management
Set out below is a comparison by class of the carrying amount
and fair values of the Group's financial instruments that are
carried in the financial statements.
Book value Fair value Book value Fair value
30 June 2023 30 June 2023 31 December 31 December
2022 2022
(unaudited) (unaudited) (audited) (audited)
GBPm GBPm GBPm GBPm
Financial assets
Trade and other receivables 22.6 22.6 17.8 17.8
Ineffective interest rate
swaps 22.6 22.6 19.6 19.6
Cash and short-term deposits 2.4 2.4 29.1 29.1
Financial liabilities
Interest-bearing loans
and
borrowings (1,272.2) (1,101.2) (1,290.4) (1,149.1)
Ineffective interest rate
swaps (13.4) (13.4) (12.5) (12.5)
Trade and other payables (34.1) (34.1) (32.6) (32.6)
The fair value of the financial assets and liabilities is
included as an estimate of the amount at which the instruments
could be transferred in a current transaction between willing
parties, other than a forced sale. The following methods and
assumptions were used to estimate fair values:
-- The fair values of the Group's cash and cash equivalents and
trade payables and receivables are not materially different from
those at which they are carried in the financial statements due to
the short- term nature of these instruments.
-- The fair value of floating rate borrowings is estimated by
discounting future cash flows using rates currently available for
instruments with similar terms and remaining maturities. The fair
value approximates their carrying values, gross of unamortised
transaction costs.
-- The fair values of the derivative interest rate swap
contracts are estimated by discounting expected future cash flows
using market interest rates and yield curves over the remaining
term of the instrument.
The Group held the following financial instruments at fair value
at 30 June 2023. The Group has no financial instruments with fair
values that are determined by reference to significant unobservable
inputs, i.e. those that would be classified as level 3 in the fair
value hierarchy, nor have there been any transfers of assets or
liabilities between levels of the fair value hierarchy. There are
no non-recurring fair value measurements.
Notes to the condensed financial statements (continued)
15. Financial risk management (continued)
Fair value measurements at 30 June 2023 are as follows:
Level 1(1) Level 2(2) Level 3(3) Total
Recurring fair value measurements GBPm GBPm GBPm GBPm
Financial assets
Derivative interest rate
swaps - 22.6 - 22.6
Financial liabilities
Derivative interest rate
swaps - (13.4) - (13.4)
Convertible bond (137.3) - - (137.3)
Fixed rate debt - (904.8) - (917.5)
Fair value measurements at 31 December 2022 were as follows:
Recurring fair value measurements Level 1(1) Level 2(2) Level 3(3) Total
GBPm GBPm GBPm GBPm
Financial assets
Derivative interest rate
swaps - 19.6 - 19.6
Financial liabilities
Derivative interest rate
swaps - (12.5) - (12.5)
Convertible bond (142.9) - - (142.9)
Fixed rate debt - (797.8) - (797.8)
(1) Valuation is based on unadjusted quoted prices in active
markets for identical financial assets and liabilities
(2) Valuation is based on inputs (other than quoted prices
included in Level 1) that are observable for the financial asset or
liability, either directly (i.e. as unquoted prices) or indirectly
(i.e. derived from prices)
(3) Valuation is based on inputs that are not based on
observable market data
The interest rate swaps whose fair values include the use of
level 2 inputs are valued by discounting expected future cash flows
using market interest rates and yield curves over the remaining
term of the instrument. The following inputs are used in arriving
at the valuation:
-- Interest rates;
-- Yield curves;
-- Swaption volatility;
-- Observable credit spreads;
-- Credit default swap curve; and
-- Observable market data.
Notes to the condensed financial statements (continued)
16. Related party transactions
Harry Hyman, Chief Executive Officer, is a Director and the
ultimate beneficial owner of a number of Nexus entities and is
considered to be a related party. Following the acquisition of
certain Nexus entities on the internalisation of management
structure on 5 January 2021, the Group has continued to share
certain operational services with Nexus.
Amounts paid during the period in relation to shared services
totalled GBP35,100 (30 June 2022: GBP35,100; 31 December 2022:
GBP70,200).
As at 30 June 2023, outstanding fees payable to Nexus totalled
GBPnil (31 December 2022: GBPnil; 30 June 2022: GBPnil).
17. Share capital
30 June 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
-----------
Issued and fully paid Ordinary Shares
at 12.5p each 167.1 166.8 167.1
-----------
At beginning of year 167.1 166.6 166.6
Scrip issues in lieu of cash dividends - 0.2 0.5
167.1 166.8 167.1
18. Merger and other reserves
30 June 30 June 31 December
2023 2022 2022
GBPm GBPm GBPm
(unaudited) (unaudited) (audited)
-----------
At beginning of year 416.7 413.5 413.5
Exchange gain on translation of
foreign balances (0.1) 1.3 3.2
416.6 414.8 416.7
-----------
19. Subsequent events
There have been no significant events affecting the Company
since the period ended 30 June 2023.
Notes to the condensed financial statements (continued)
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge this
condensed consolidated set of interim financial statements has been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the United Kingdom and that the operating and financial
review herein includes a fair review of the information required by
DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency rules
of the United Kingdom's Financial Services Authority namely:
-- an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed consolidated interim financial statements and a
description of the principal risks and uncertainties for the
remaining six months of the financial year; and
-- material related party transactions in the first six months
and any material changes in the related party transactions
described in the last Annual Report.
Shareholder information is as disclosed in the Annual Report and
is also available on the PHP website, www.phpgroup.co.uk .
By order of the Board
Steven Owen Chairman
25 July 2023
Glossary of terms
Adjusted earnings is EPRA earnings excluding the exceptional
contract termination payment and amortisation of MtM adjustments
for fixed rate debt acquired on the merger with MedicX.
Adjusted earnings per share is Adjusted earnings divided by the
weighted average number of shares in issue during the year.
Adjusted net tangible assets ("adjusted NTA") (which has
replaced the former adjusted EPRA net asset value alternative
performance measure) is EPRA net tangible asset value excluding the
MtM adjustment of the fixed rate debt, net of amortisation,
acquired on the merger with MedicX. The objective of the adjusted
NTA measure is to highlight the value of net assets on a long-term
basis and excludes assets and liabilities that are not expected to
crystallise in normal circumstances and continues to be used as a
measure to determine the PIF payment.
Adjusted NTA per share is adjusted NTA divided by the number of
shares in issue at the balance sheet date .
Annualised rental income on a like-for-like basis is the
contracted rent on a per annum basis assuming a consistent number
of properties between each year.
Average cost of debt is the total interest cost of drawn debt
and swaps, divided by the amount of drawn debt.
Building Research Establishment Environmental Assessment Method
("BREEAM") assesses the sustainability of buildings against a range
of criteria.
Clinical Commissioning Groups ("CCGs") are the groups of GPs and
other healthcare professionals that are responsible for designing
local health services in England with effect from 1 April 2013.
Company and/or Parent is Primary Health Properties PLC
("PHP").
Direct property costs comprise ground rents payable under head
leases, void costs, other direct irrecoverable property expenses,
rent review fees and valuation fees.
District Valuer ("DV") is the District Valuer Service, being the
commercial arm of the Valuation Office Agency ("VOA"). It provides
professional property advice across the public sector and in
respect of primary healthcare represents NHS bodies on matters of
valuation, rent reviews and initial rents on new developments.
Dividend cover is the number of times the dividend payable (on
an annual basis) is covered by Adjusted earnings.
Earnings per Ordinary Share from continuing operations ("EPS")
is the profit attributable to equity holders of the Parent divided
by the weighted average number of shares in issue during the
year.
EBITDA is operating profit excluding amortisation of
intangibles, Axis acquisition costs and investment property
revaluations.
EPC is an Energy Performance certificate.
European Public Real Estate Association ("EPRA") is a real
estate industry body, which has issued Best Practice
Recommendations in order to provide consistency and transparency in
real estate reporting across Europe.
EPRA cost ratio is the ratio of net overheads and operating
expenses against gross rental income (with both amounts excluding
ground rents payable). Net overheads and operating expenses relate
to all administrative and operating expenses, net of any service
fees, recharges or other income specifically intended to cover
overhead and property expenses.
EPRA earnings is the profit after taxation excluding investment
and development property revaluations, gains/losses on disposals,
changes in the fair value of financial instruments, associated
close-out costs and their related taxation, and amortisation of
non-monetary items such as intangible assets.
EPRA net assets ("EPRA NAV") are the balance sheet net assets
excluding own shares held, the MtM value of derivative financial
instruments and the convertible bond fair value movement and
intangible assets.
EPRA NAV per share is the balance sheet net assets excluding own
shares held, the MtM value of derivative financial instruments, the
convertible bond fair value movement and intangible assets, divided
by the number of shares in issue at the balance sheet date.
EPRA NNNAV is adjusted EPRA NAV including the MtM value of fixed
rate debt and derivatives.
EPRA net reinstatement value ("EPRA NRV") is the balance sheet
net assets including real estate transfer taxes but excluding the
MtM value of derivative financial instruments, deferred tax and the
convertible bond fair value movement. The aim of the metric is to
reflect the value that would be required to recreate the Company
through the investment markets based on its current capital and
financing structure. Refer to Note 7.
EPRA NRV per share is the EPRA net reinstatement value divided
by the number of shares in issue at the balance sheet date. Refer
to Note 7.
EPRA net disposal value "EPRA NDV" (replacing EPRA NNNAV) is
EPRA NRV including deferred tax and the MtM value of fixed rate
debt and derivatives. The aim of the metric is to reflect the value
that would be realised under a disposal scenario. Refer to Note
7.
EPRA net tangible assets ("NTA") (which has replaced the former
EPRA net asset value alternative performance measure) is the
balance sheet net assets but excluding the MtM value of derivative
financial instruments, deferred tax, intangible assets and the
convertible bond fair value movement. The aim of the metric is to
reflect the fair value of the assets and liabilities of the Group
that it intends to hold and does not intend in the long run to
sell. Refer to Note 7.
EPRA NTA per share is the EPRA net tangible assets divided by
the number of shares in issue at the balance sheet date. Refer to
Note 7.
EPRA vacancy rate is, as a percentage, the ERV of vacant space
in the Group's property portfolio divided by ERV of the whole
portfolio.
Glossary of terms (continued)
Equivalent yield (true and nominal) is a weighted average of the
net initial yield and reversionary yield and represents the return
a property will produce based upon the timing of the income
received. The true equivalent yield assumes rents are received
quarterly in advance. The nominal equivalent assumes rents are
received annually in arrears.
Estimated rental value ("ERV") is the external valuer's opinion
as to the open market rent which, on the date of valuation, could
reasonably be expected to be obtained on a new letting or rent
review of a property.
Gross rental income is the gross accounting rent receivable.
Group is Primary Health Properties PLC ("PHP") and its
subsidiaries.
HSE or the Health Service Executiveis the executive agency of
the Irish government responsible for health and social services for
people living in Ireland.
IASs are International Accounting Standards as adopted by the
United Kingdom.
IFRS is International Financial Reporting Standards as adopted
by the European Union.
IFRS or Basic net asset value per share ("IFRS NAV")are the
balance sheet net assets, excluding own shares held, divided by the
number of shares in issue at the balance sheet date.
Interest cover is the number of times net interest payable is
covered by net rental income.
Interest rate swap is a contract to exchange fixed payments for
floating payments linked to an interest rate, and is generally used
to manage exposure to fluctuations in interest rates.
London Interbank Offered Rate ("LIBOR") is the interest rate
charged by one bank to another for lending money.
Loan to value ("LTV") is the ratio of net debt to the total
value of property and assets.
Mark to market ("MTM") is the difference between the book value
of an asset or liability and its market value.
MedicX is MXF Fund Limited and its subsidiaries.
MSCI (IPD) provides performance analysis for most types of real
estate and produces an independent benchmark of property
returns.
MSCI (IPD) Healthcare is the UK Annual Healthcare Property
Index.
MSCI (IPD) Total Return is calculated as the change in capital
value, less any capital expenditure incurred, plus net income,
expressed as a percentage of capital employed over the period, as
calculated by MSCI (IPD).
Net asset value ("NAV") is the value of the Group's assets minus
the value of its liabilities.
Net initial yield ("NIY") is the annualised rents generated by
an asset, after the deduction of an estimate of annual recurring
irrecoverable property outgoings, expressed as a percentage of the
asset valuation (after notional purchasers' costs).
Net related income is the Related income after the payment
of direct property costs that include service charge
payments.
Net rental and related income is the sum of Net rental income
and Net related income.
Net rental income is the rental income receivable in the period
after payment of direct property costs. Net rental income is quoted
on an accounting basis.
Net zero carbon refers to the point at which a process,
activity, system etc. produces net zero carbon emissions, through
emissions reduction, use of low or zero carbon energy and removal
or offsetting of residual emissions. In the context of buildings
and activities associated with the construction, refurbishment,
maintenance and operation of buildings, PHP refers to the UK Green
Building Council "Net zero carbon, a framework definition" (.
NHSPS is NHS Property Services Limited, the company wholly owned
and funded by the Department of Health, which, as of 1 April 2013,
has taken on all property obligations formerly borne by Primary
Care Trusts.
Occupancy is the level of units occupied, after deducting the
ERV vacancy rate.
Parity value is calculated based on dividing the convertible
bond value by the exchange price.
Progressive returns / dividend is where it is expected to
continue to rise each year.
Progressive dividends is where it is expected to continue to
rise each year on a per share basis.
Property Income Distribution ("PID") is the required
distribution of income as dividends under the REIT regime. It is
calculated as 90% of exempted net income.
Real Estate Investment Trust ("REIT") is a listed property
company which qualifies for and has elected into a tax regime,
which exempts qualifying UK profits, arising from property rental
income and gains on investment property disposals, from corporation
tax, but which has a number of specific requirements.
Related income is the property and service charge income
generated from the Axis business.
Rent reviews take place at intervals agreed in the lease and
their purpose is usually to adjust the rent to the current market
level at the review date.
Rent roll is the passing rent, being the total of all the
contracted rents reserved under the leases.
Reversionary yield is the anticipated yield which the initial
yield will rise to once the rent reaches the ERV and when the
property is fully let. It is calculated by dividing the ERV by the
valuation.
Retail Price Index ("RPI") is the official measure of the
general level of inflation as reflected in the retail price of a
basket of goods and services such as energy, food, petrol, housing,
household goods, travelling fare, etc. RPI is commonly computed on
a monthly and annual basis.
RICS is the Royal Institution of Chartered Surveyors.
RPI linked leases are those leases which have rent reviews which
are linked to changes in the RPI.
Glossary of terms (continued)
Special reserve is a distributable reserve.
Sterling Overnight Interbank Average Rate ("SONIA") is the
effective overnight interest rate paid by banks for unsecured
transactions in the British Sterling market.
Total expense ratio ("TER") is calculated as total
administrative costs for the year divided by the average total
asset value during the year.
Total property return is the overall return generated by
properties on a debt-free basis. It is calculated as the net rental
income generated by the portfolio plus the change in market values,
divided by opening property assets plus additions.
GBPm
Net rental and related income 76.0
Revaluation surplus and
profit on sales (11.9)
64.1
Opening property assets 2,796.3
Weighted additions in the
period 2.8
Impact of foreign exchange
movements (3.4)
2,795.7
Total property return 2.3%
Total adjusted NTA return is calculated as the movement in
adjusted net tangible asset value for the period plus the dividends
paid, divided by opening EPRA net tangible asset value.
At 31 December 2022 112.6p
At 30 June 2023 111.1p
Increase / (decrease) (1.5)p
Add: Dividends paid
23/02/2023 Q1 interim 1.675p
19/05/2023 Q2 interim 1.675p
Total return 3.35p
Total adjusted NTA
return 1.6%
Total shareholder return is calculated as the movement in the
share price for the period plus the dividends paid, divided by the
opening share price.
Weighted average facility maturity is calculated by multiplying
each tranche of Group debt by the remaining period to its maturity
and dividing the result by total Group debt in issue at the year
end.
Weighted average unexpired lease term ("WAULT") is the average
lease term remaining to first break, or expiry, across the
portfolio weighted by contracted rental income.
Yield on cost is the estimated annual rent of a completed
development divided by the total cost of development, including
site value and finance costs expressed as a percentage return.
Yield shift is a movement (usually expressed in basis points) in
the yield of a property asset, or like-for-like portfolio over a
given period. Yield compression is a commonly used term for a
reduction in yields.
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END
IR DELFLXDLEBBF
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