Primary Health Properties : Interim Report 2021

Primary Health Properties PLC

Interim results for the six months ended 30 June 2021

Successful management internalisation and strong operational performance drive continued earnings growth

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 2021.

Harry Hyman, Chief Executive of PHP, commented:

"As lockdowns and restrictions in the UK and Ireland are lifted, the COVID-19 pandemic continues to highlight the need for modern, integrated, local primary healthcare facilities to help in the provision of COVID-19 vaccines for many years to come while addressing the backlog of procedures missed over the last two years.

"NHS initiatives to modernise the primary care estate supports the important role primary healthcare must play to re- focus services away from over-burdened hospital settings, and to satisfy the long-term demographic trends of populations that are growing, ageing and suffering from more instances of chronic illness. We continue to maintain close relationships with our key stakeholders, working closely with the NHS in the UK, HSE in Ireland, and our GP partners in both markets to help them evolve and adapt as the 'new normal' is established.

"Having successfully completed the internalisation of our management structure in the period and with our sector leading metrics and strong pipeline of acquisition and asset management opportunities, we remain well placed to meet these demands.

"The Board looks forward to delivering further earnings and dividend growth and remains confident in PHP's future outlook."

FINANCIAL AND OPERATIONAL HIGHLIGHTS

Income statement metrics	Six months to	Six months to
30 June 2021	30 June 2020	Change
Net rental income1	£67.7m	£64.8m	+4.5%
Adjusted earnings1,2	£40.7m	£36.0m	+13.1%
Adjusted earnings per share1,2	3.1p	3.0p	+3.3%
IFRS profit before tax excluding MedicX merger adjustments1,5	£70.4m	£38.1m	+84.8%
IFRS profit for the period	£71.4m	£39.5m
IFRS earnings per share2	5.4p	3.2p
Dividends
Dividend per share6	3.1p	2.95p	+5.1%
Dividends paid6	£41.1m	£35.9m	+14.5%
Dividend cover1	99%	100%
Balance sheet and operational metrics	30 June	31 December
2021	2020	Change
Adjusted EPRA NTA (NAV) per share1,3	115.4p	112.9p	+2.2%
IFRS NAV per share1,3	110.3p	107.5p	+2.6%
Property portfolio
Investment portfolio valuation4	£2.655bn	£2.576bn	+2.6%
Net initial yield ("NIY") 1	4.70%	4.81%
Contracted rent roll (annualised)1,8	£136.1m	£135.2m	+0.7%
Weighted average unexpired lease term ("WAULT")1	11.8 years	12.1 years
Occupancy	99.7%	99.6%
Rent-roll funded by government bodies1	90%	90%
Debt
Average cost of debt	3.4%	3.5%
Loan to value ratio ("LTV")1	40.9%	41.0%
Weighted average debt maturity	6.0 years	6.5 years
Total undrawn loan facilities and cash7	£335.0m	£361.5m
Primary Health Properties PLC			1
Interim statement for the six months ended 30 June 2021

1. Definitions for net rental income, adjusted earnings, adjusted earnings per share, earnings per share ("EPS"), dividend cover, loan to value ("LTV"), IFRS profit before tax excluding MedicX merger adjustments, net tangible assets ("NTA"), rent roll, NIY, WAULT and net asset value ("NAV") are set out in the Glossary of Terms.
2. See note 8, earnings per share, to the financial statements.
3. See note 8, 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.
5. The IFRS profit before tax excluding MedicX merger adjustments is set-out in detail in the summarised results table on page 11.
6. See note 9, dividends, to the financial statements.
7. After deducting the remaining cost to complete contracted acquisitions, properties under development and asset management projects.
8. Percentage contracted rent roll increase during the year is based on the annualised uplift achieved from all completed rent reviews and asset management projects.

DELIVERING EARNINGS AND DIVIDEND GROWTH

• Adjusted earnings per share increased by 3.3% to 3.1p (30 June 2020: 3.0p)
• Additional annualised rental income on a like-for-like basis of £1.3 million or 1.0%, from rent reviews and asset management projects (FY 2020: £2.0 million or 1.6%; FY 2019: £1.9 million or 1.5%)
• Average uplift of 1.5% per annum on rent reviews completed in the period, continuing the positive trend in rental growth (FY 2020: 1.8%; FY 2019: 1.9%)
• Contracted annualised rent roll increased to £136.1 million (31 December 2020: £135.2 million)
• Successfully completed the internalisation of the Group's management structure which is anticipated to result in immediate annual cost savings of approximately £4.0 million, equivalent to 0.3 pence per share
• Four forward funded developments completed in the period with a net development cost of £20.1 million at Mountain Ash, Wales, Llanbradach, Wales, Epsom, Surrey and Eastbourne, East Sussex
• Two quarterly dividends totalling 3.1p per share distributed in the period and third quarterly dividend of 1.55p per share declared, payable on 20 August 2021, equivalent to 6.2p on an annualised basis. This represents a 5.1% increase over the 2020 dividend per share and will mark the Company's 25th consecutive year of dividend growth
• The Company intends to make a further dividend payment in November 2021 and maintain its strategy of paying a progressive dividend, in equal quarterly instalments, covered by underlying earnings in each financial year

DELIVERING NET ASSET VALUE GROWTH

• Adjusted Net Tangible Assets (NTA) per share increased by 2.2% to 115.4 pence (31 December 2020: 112.9 pence)
• Property portfolio at 30 June 2021 valued at £2.655 billion (31 December 2020: £2.576 billion) reflecting a net initial
  yield of 4.70% (31 December 2020: 4.81%). A revaluation surplus was generated in the period of £66.9 million (30
  June 2020: £10.5 million), representing growth of 2.6% (30 June 2020: 0.4%)
• Portfolio in Ireland now comprises 19 assets, valued at £200 million (€234 million), including two forward funded developments currently under construction which, if valued as complete, increases the total asset value to approximately £217 million (€253 million)
• The Group is currently on site with two developments in Ireland with a net development cost of £26.2 million (€30.6 million). All sites in Ireland remain open and construction continues to progress
• Strong pipeline of targeted acquisitions and asset management projects with a value of approximately £195 million, of which £155 million is currently under offer and in legal due diligence; together with additional direct development pipeline of £146 million of which £21 million is at an advance stage
• Progression of asset management projects with 17 either completed or currently on-site, investing £10.8 million, creating additional rental income of £0.3 million per annum and extending the weighted average unexpired lease term (WAULT) back to 21 years
• The Group has a strong pipeline of over 100 incremental asset management projects which have either been approved by the Board or are in advanced negotiations. The pipeline of projects equates to investing approximately £46 million over the next two years generating £1.4 million of additional income and extending the WAULT on those leases back to 22 years
• Only £6.7 million or 4.9% of annualised rent roll expiring in the next three years of which c. 75% is subject to either a planned asset management initiative or terms having been agreed to renew the lease

Primary Health Properties PLC	2
Interim statement for the six months ended 30 June 2021

• The portfolio's metrics continue to reflect the secure, long-term and predictable income stream with occupancy at 99.7% (31 December 2020: 99.6%) and a WAULT of 11.8 years (31 December 2020: 12.1 years)

DELIVERING FINANCIAL MANAGEMENT

• At 30 June 2021 the Group's net debt stood at £1,085.2 million (31 December 2020: £1,055.7 million) and the LTV
  ratio was 40.9% (31 December 2020: 41.0%), the lower end of the Group's targeted range of between 40% to 50%
• After capital commitments the Group has undrawn loan facilities and cash on deposit totalling £335.0 million (31 December 2020: £361.5 million) providing significant liquidity headroom. Cash on deposit totals £72.5 million
• Significant headroom in LTV and interest cover covenants across the Group's various borrowing facilities
• Low, average marginal cost of debt of 1.7%

DELIVERING ROBUST RENTAL COLLECTION

• Of PHP's contracted rental income, 90% is paid either directly or indirectly by the UK and Irish governments, with the balance mainly coming from pharmacies co-located at our properties
• Rental collections continue to remain robust and as at 26 July 2021 97% had been collected in both the UK and Ireland for the third quarter of 2021 and in-line with collection rates experienced in 2020 and the first half of 2021 which now stand at over 99% for both countries. The balance of rent due for the third quarter of 2021 is expected to be received shortly

DELIVERING STRONG TOTAL RETURNS

Six months ended	Six months ended	Year ended
	30 June 2021	30 June 2020	31 December 2020
Increase in Adjusted EPRA NTA plus dividends paid	5.0%	3.8%	10.1%
Income return	2.6%	2.6%	5.2%
Capital return	2.6%	0.5%	2.2%
Total property return1	5.2%	3.1%	7.4%
MSCI UK Monthly Property Index	6.2%	(3.5%)	(0.8%)
(Under)/out performance over MSCI	(1.0%)	6.6%	8.2%

1 The definition for total property return is set out in the Glossary of Terms.

Presentation and webcast:

A virtual briefing for analysts will be held today, 28 July 2021 at 09.30am, via a live video webcast and conference call facility.

To access the briefing, please dial in or log on via the details below shortly before 09.30am. There will be a Q&A session following the presentation, with questions taken via the conference call phone lines and the webcast chat function.

UK Toll Free: 0800 358 9473

UK Toll: 0333 300 0804

International dial in numbers:https://event.sharefile.com/d-s7bae1d9235d495a8

Participant PIN code: 64977382#

Webcast:https://webcasting.brrmedia.co.uk/broadcast/60dee70e1ba1724bfa99e020

If you would like to join the briefing, please contact Buchanan via [e-mail] 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/

For further information contact:

Harry Hyman	Richard Howell
Primary Health Properties PLC	Primary Health Properties PLC
T [phone]	T [phone]
[e-mail]	[e-mail]
David Rydell/Steph Whitmore/Tilly Abraham
Buchanan
T [phone]
Primary Health Properties PLC	3
Interim statement for the six months ended 30 June 2021

EXECUTIVE REVIEW

As the lockdown and restrictions in the UK and Ireland start to come to an end the Group's portfolio has demonstrated strong resilience throughout the pandemic. The security and longevity of our income are important drivers of our secure, long term predictable income stream and underpin our progressive dividend policy and we have now entered our 25th year of continued dividend growth.

The first half of 2021 has been characterised by a very competitive investment market with a lack of suitable product and strong pricing. Despite this, the strong investment market together with continued organic rental growth across the portfolio has delivered a valuation uplift of £66.9 million equivalent to 5.0 pence per share helping to deliver a total property return of 5.2% (30 June 2020: 3.1%) in the period.

PHP has continued to actively work with the NHS in the UK, HSE in Ireland, and its GP partners in both markets to help them better utilise the Group's properties for deployment in the ongoing global health crisis. Many of our primary care facilities and occupiers have been and will be required to deliver COVID-19 vaccines for many years to come and to deal with the backlog of procedures missed over the last two years. We continue to maintain close relationships with our key stakeholders and GP partners to ensure we are best placed to help the NHS and HSE, and in particular primary care, evolve and deal with the pressures placed on them as the 'new normal' is established.

The Group now has a market capitalisation of over £2 billion and the property portfolio stands at over £2.6 billion across 514 assets, including 19 in Ireland. Notwithstanding, the competitive investment market, the Group continues to have a strong, active pipeline of potential acquisitions both in the UK and Ireland totalling approximately £195 million, including £155 million under offer, in addition to a wider pipeline of opportunities under negotiation. Additionally, following the acquisition of PHP Primary Care Developments Limited (formerly Nexus Primary Care Developments Limited) ("Nexus Developments") there is a direct development pipeline of £146 million of which £21 million is at an advanced stage.

Rental collections continue to remain robust and as at 26 July 2021 97% had been collected in both the UK and Ireland for the third quarter of 2021 and in-line with collection rates experienced in 2020 and the first half of 2021 which now stand at over 99% for both countries. The balance of rent due for the third quarter of 2021 is expected to be received shortly.

Two quarterly dividends totalling 3.1 pence per share were distributed in the period and a third quarterly dividend of 1.55 pence per share declared, payable on 20 August 2021, equivalent to 6.2 pence on an annualised basis. This represents a 5.1% increase over the 2020 dividend per share and will mark the Company's 25th consecutive year of dividend growth. The Company intends to make a further dividend payment in November 2021 and maintain its strategy of paying a progressive dividend, in equal quarterly instalments, covered by underlying earnings in each financial year.

Acquisition of Nexus and management internalisation

On 5 January 2021, the Group successfully completed the internalisation of its management structure with shareholders representing 99.95% of the votes cast voting in favour of the internalisation which is anticipated to result in immediate annual cost savings of approximately £4.0 million, equivalent to 0.3 pence per share. The Group acquired the entire share capital of PHP Tradeco Holdings Limited and certain subsidiaries ("Nexus"). The assumption of Nexus's existing management and overhead costs has resulted in lower ongoing administrative costs to the Company and the EPRA cost ratio, which was already among the lowest in the sector, has fallen further to 9.0% (FY 2020: 11.9%) in the period.

The management team, systems and procedures acquired with Nexus have now been successfully integrated into the wider Group.

Primary Health Properties PLC	4
Interim statement for the six months ended 30 June 2021

Direct developments

The acquisition of Nexus also enabled PHP to acquire the development expertise of Nexus Developments which at completion had a pipeline of £80 million of direct development opportunities at varying stages of progression.

During the period the Group has continued to make good progress and increase the number of live projects to four with an estimated capital value of approximately £21 million (5 January 2021: two projects/£10 million). The Company expects to be on-site with two of these projects by early Q1 2022. In addition, PHP continues to bring forward a wider medium-term pipeline at various stages of progress across 17 projects with an estimated capital value of approximately £125 million.

Overview of results

PHP's recurring Adjusted earnings increased by £4.7 million or 13.1% to £40.7 million (30 June 2020: £36.0 million) in the six months to 30 June 2021 driven by six months of cost savings arising from the acquisition of Nexus and internalisation of the management structure together with strong organic rental growth from rent reviews and asset management projects. Using the weighted average number of shares in issue in the period the Adjusted earnings per share increased to 3.1 pence (30 June 2020: 3.0 pence), an increase of 3.3%.

A revaluation surplus of £66.9 million (30 June 2020: £10.5 million) was generated in the period from the portfolio, equivalent to 5.0 pence per share. The valuation surplus was driven by net initial yield ("NIY") compression in the UK and rental growth and asset management activity across the portfolio.

The acquisition of Nexus resulted in an exceptional termination payment, goodwill impairment and acquisition costs totalling £37.0 million, equivalent to 2.4 pence per share, being expensed in the period.

Rent reviews and asset management projects completed in the period added £1.3 million or 1.0% (H1 2020: £0.9 million or 0.7%; FY 2020: £2.0 million or 1.6%) to the contracted rent roll with continued positive momentum on the number of rent reviews being settled. Annualised rental growth on reviews completed in the period was 1.5% compared to 1.8% and 1.9% achieved in FY 2020 and FY 2019 respectively.

The portfolio's average lot size has increased to £5.2 million and we continue to maintain our very strong metrics, with a long weighted average unexpired lease term ("WAULT") of 11.8 years, high occupancy at 99.7% and only 4.9% of our rent due to expire in the next three years.

Dividends and total shareholder return

The Company distributed a total of 3.1p per share in the six months to 30 June 2021, an increase of 5.1% over that distributed in the first half of 2020 of 2.95p per share. The total value of dividends distributed in the period increased by 14.5% to £41.1 million (30 June 2020: £35.9 million), which were materially covered by Adjusted earnings. Dividends totalling £4.7 million were satisfied through the issuance of shares via the scrip dividend scheme.

The Company's share price started the year at 152.8p per share and closed on 30 June 2021 at 153.9p, an increase of 0.7%. Including dividends, those shareholders who held the Company's shares throughout the period achieved a Total Shareholder Return of 2.7% (30 June 2020: -0.3%). This compares to the total return delivered by UK real estate equities (FTSE EPRA Nareit UK Index) of 15.5% (FY 2020: -28.5%) and the wider UK equity sector (FTSE All-Share Index) of 9.6% (FY 2020: -17.9%) in the period.

Primary Health Properties PLC	5
Interim statement for the six months ended 30 June 2021