The Right Medicine - Primary Health Properties (PHP)
8/2/2010
(119264)
The Right Medicine
Excellent news from Primary Health Properties (PHP), one of our safe and sound high yielders. It has spent £24.2m cash on a UK portfolio of 14 modern medical centres, buying them from quoted company CareCapital Group (CARE) on a yield of close to 6.25%.
Don’t quibble about the detail. The £24.2m includes all expenses, and going across to the CARE news release it appears that the rent roll is actually £1.409m, which suggests that the return is 6.1%. These small discrepancies are irrelevant. PHP knows what it is doing, and a return of more than 6% will be usefully earnings enhancing when compared with what comes in from holding cash these days.
The deal works nicely and has almost certainly been under contemplation for some time. CARE had become badly overstretched, and most of the sales price will go towards paying off debt against the medical centres and covering a £4.2m loan from chairman Dr Michael Sinclair. He has been casting around for a way to get the business back into shape for quite some time. PHP knows the properties it is buying well, and because it had cash and time on its side is likely to have got the best of the deal.
All 14 centres are fully let for occupation by general practitioners, primary care trusts, NHS bodies and pharmacy operators with an average weighted unexpired lease term of 17.8 years. A number of them have surplus land available for future gains through active asset management – PHP regularly makes additions and improvements on the assets it owns, generating higher rental returns and enhancing capital value.
As part of the deal, PHP has right of first refusal on all primary care property developments brought forward by CARE for the next three years. There are seven existing identified projects at various stags of negotiation, and clearly PHP will be acquiring some of them. PHP is not likely to acquire any of the assets outside the UK, however.
Harry Hyman, managing director of PHP, talks about his commitment to building his asset base rapidly through targeted acquisitions. This is the second largest portfolio PHP has acquired, and makes good use of the expanded borrowing power acquired when PHP re-arranged finances with a £60m rights issue at 230p last year.
As well as generating a greater return on cash, the acquisition brings further modest economies of scale to PHP, where management overheads are relatively static. Each deal takes PHP further up the scale to attract more interest and investment from large funds. PHP shares edged up to 291.5p, where the market capitalisation is £180m.
Forecasts suggest PHP will pay a dividend total of 17p from earnings of 16.6p for 2009, and this latest deal, which follows smaller acquisitions, ought to ensure that earnings for 2010 cover the expected 17.5p dividend. If these forecasts prove correct – and there is strong support for them – PHP shares yield just under 6% for 2009, and just over 6% for 2010. Since the company is fully listed, the shares can be held in an ISA and the return is subject only to 10% tax.
That is why PHP has been a solid recommendation here for a high return backed by useful capital gains prospects. The annual results are due on February 25 and will give more detail on the current state of the portfolio. They should attract broker interest and support.
As ever, the attraction is all the greater in these uneasy markets because all of the rents are effectively backed by the state, so revenues and dividends should be completely safe. Do not be distracted by periodic worries that a tougher line on health spending could threaten healthcare companies. PHP is in a sector where expansion looks assured, and income should be completely safe.
I have a holding in PHP.
PS. Some might recall that Speculator asked for comments on CARE on our bulletin board last week, with the price at around 2.5p. I suggested the property portfolio was sound, but that the company’s affairs looked too tangled to take seriously. Today’s deal has sent CARE up to 4p, but I feel relaxed about my bulletin board comment. While there could be value there now, almost all of today’s sale money will be used to repay debts, and future value will depend on how further developments proceed.
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