Final Results

RNS Number : 9858N

Primary Health Properties PLC

27 February 2009

 



Primary Health Properties PLC

Audited results extracted from the Annual Financial Report for the year ended 31 December 2008

Primary Healthcare Properties PLC, one of the UK's largest providers of modern primary healthcare facilities, is pleased to announce its audited results for the year ended 31 December 2008.

Group Financial Highlights

• Operating profit after financing costs of £5.6m * increased by 133% (2007: £2.4m)*

• Total cash dividend of 16.5p paid increased by 10% (2007: 15.0p)

• EPRA net asset value 320.3p per share (2007: 373.5p)

• New banking facilities of £65m secured taking total facilities to £265m

Group Operational Highlights

• Acquisition of £53.3m of completed and let assets

• Increase in the portfolio from 107 to 113 medical centres including commitments totalling £34.0m

• Portfolio owned, leased and committed increased by 9% to £354.2m (2007: £324.7m)

• Rental increases of £0.47m per annum on completed rent reviews

* before revaluation result, fair value loss on derivatives and UK-REIT charges

Harry Hyman, Managing Director, commented:

"The period under review has been a challenging one for the commercial property sector as a whole and I am delighted to report a year of strong trading and significant achievements. I am particularly pleased to announce an operating profit of £5.6m * which allows us to once again increase our overall dividend. Our NAV of £3.20 per share has declined far less than those of companies in other sectors and to have achieved the reported overall increase in rental income is a notable gain. This is against general trends in the sector where dividends are being cut, yields are moving out and rents are in decline.  

"PHP operates in the most resilient of commercial property sectors where we benefit from long lease lengths, nil voids, growing tenant demand and government-backed covenant strength. The Group has manageable debt with ample headroom and there is no squeeze on loan to value ratios. We have ambitions to grow the business and believe there are buying opportunities in today's market at historically low valuations. We look forward to the future with confidence."

- ends -

Enquiries:

Bell Pottinger Corporate and Financial

David Rydell / Victoria Geoghegan

Tel: [phone]

Primary Health Properties PLC

Harry Hyman

Managing Director

Tel: [phone]

Chairman's Statement

The economic outlook for the world has changed markedly since the last audited figures and indeed since the interims announced mid August. Despite the worsening economic environment, the Group has continued to grow its rent roll and underlying cashflow, notwithstanding the difficulties in the banking sector and the economy generally.

The primary care market continues to be underpinned by good fundamentals with tenant demand for modern purpose built primary care facilities remaining high. The Group remains a leader in its niche market with secure cashflows and a strong pipeline of potential deals. In addition, the available yields on new purchases and the much reduced levels of LIBOR interest rates should offset the higher margins that will be associated with new borrowings.

Achievements during the year include:

• Acquisition of £53.3m of assets

• Increase in the portfolio from 107 to 113 medical centres including commitments totalling £34.0m

• EPRA net asset value of £3.20 per share

• Rental increases of £0.47m per annum on completed rent reviews

• New term facilities of £65m secured in the year taking total facilities to £265m

• Cash dividends of 16.5p per share paid

Results

Group financial highlights

	Year to 31 December 2008	Eighteen months to 31 December 2007	Year to 31 December 2007
Passing rent*	£ 19.6m	£16.2m	£16.2m
Operating profit before revaluation result, financing and UK-REIT charges	14.7	14.3	10.0
Net financing costs	(9.1)	(10.8)	(7.6)
Operating profit before revaluation result, fair value loss on derivatives and UK-REIT charges	5.6	3.5	2.4
Fair value loss on derivatives	(10.7)	(2.8)	(2.8)
UK-REIT charges	(0.2)	(5.6)	-
	(5.3)	(4.9)	(0.4)
Revaluation (loss)/gain including write downs	(17.7)	1.2	(12.3)
Loss before tax	(23.0)	(3.7)	(12.7)
Dividends paid	5.5	6.0	4.3
(Loss)/earnings per share: basic	(68.5p)	59.4p	(43.9p)
Earnings per share: adjusted**	18.8p	8.2p	15.3p
Dividends paid during the period	16.50p	21.75p	15.00p
Net assets	£79.2m	£124.1 m	£124.1 m
EPRA net asset value***	320.3p	373.5p	373.5p
Net asset value per share	235.8p	369.4p	369.4p
Portfolio owned and leased	£319.9m	£288.3m	£288.3m
Portfolio commitments inc. development loans & deposits	£34.3m	£36.4m	£36.4m
Portfolio owned leased and committed	£354.2m	£324.7m	£324.7m

* Passing rent represents the annualised rent roll

** Adjusted for large one-off items and movements in fair value

*** EPRA net asset value is calculated as balance sheet net assets including the valuation result on trading properties, excluding fair value adjustments for debt and related derivatives ("EPRA" is the European Public Real Estate Association).

Property valuation

Asset valuations in the commercial property market have declined during the year and primary care property was no exception, although the strength of tenant covenant, little or no over supply and the length of our leases have mitigated the value reductions experienced. During the second half of the year, there was a further weakening of yields. At the year end, the initial yield on the portfolio was 5.97% and the expected reversionary yield was 6.16%. This resulted in an unrealised loss on revaluation of £13m in the second half which, when added to the unrealised loss in the first half, totalled £17.7m for the year as a whole. There has been no material change to the property valuation since 31 December 2008, being the date the property valuation was prepared.

Discounted cashflow property valuation

In addition to the open market valuation exercise performed by Lambert Smith Hampton ("LSH"), the Board monitors the value of the Group's completed investment portfolio based on a discounted cash flow analysis. On this basis, the valuation at 31 December 2008 was £367m compared with a market valuation of £317m. The difference is £50m, which amounts to £1.49 of net asset value per share. The assumptions used in the discounted cash flow analysis are a discount rate of 7%; an average increase of 3% per annum in the property rents at their respective review dates through the life of the lease and capital growth in residual values of 1% per annum. 

Borrowings and finance

During the year, the Group secured additional facilities of £65m - £50m in March 2008 and £15m in September 2008, resulting in total facilities of £265m at 31 December 2008, including £10m of overdraft. The term facilities mature in January 2013. Taking into account existing debt at the year end of £206m and further commitments of £34m, this leaves £25m of committed headroom available to the Group to continue with its acquisition policies. 

Total borrowings at 31 December 2008 were £206m. The Group had £193m of fixed rate cover including £88m of callable swaps. The loan to value ratio at the period end was 65% compared to a covenant level of 75% (open market value divided by gross borrowings). This gives a fall to breach percentage margin of approximately 14% at 31 December 2008.

Interest cover - as defined in the loan facility agreements as gross rental income divided by consolidated net interest payable - was 2.2 times compared to a covenant level of 1.3 times.

The future ability of the Group to borrow on acceptable terms has been affected by the contraction of available credit lines in the market generally and its re-pricing. The Group will restrict its gearing to 70% loan to value, which is a requirement of its existing credit facilities from October 2009. Until the availability of banking finance improves, gearing will be harder and more expensive to source and the Group will keep a prudent level of gearing.

Financial instruments

The large reduction in medium term interest rates that occurred in late 2008, whilst generally beneficial to the Group in so far as it reduces the future cost of borrowings and reduces the servicing cost of those parts of the Group's borrowings that are variable, does result in the reduction in the mark to market ("MTM") value of the Group's interest rate swaps. The valuation of the callable swaps is also impacted by the fall in interest rates and the amount of volatility in the market place at the valuation date of 31 December 2008. The amount of the MTM adjustment at the balance sheet date in relation to all of these swaps is a charge of £27m (2007: £1.4m) (reversed to the extent of £6m at 24 February 2009) of which £10.6m (2007: £2.8m), relating to swaps which are ineffective in IAS39 terms, passes through the Group Income Statement even though it is an unrealised loss. This reduction in the value of the swaps has been caused by the significant recent decline in interest rates which are now at extremely and historically low levels. As and when interest rates return to a range that is less abnormal the carrying value of the Group's interest rate swaps will increase.

EPRA NAV

Because of the materiality and the non-cash nature of the MTM adjustment of the financial instruments as required by IFRS, the Group is also disclosing (in line with many other property companies) the EPRA NAV, which adds back to the IFRS NAV the unrealised losses relating to financial instruments. The NAV per share on this basis is £3.20 (31 December 2007: £3.74).

Dividends

The Group paid an ordinary cash interim dividend of 8.25p per Ordinary Share on 28 March 2008 and a further interim cash dividend of 8.25p per Ordinary Share on 20 November 2008. The Board proposes to pay an interim cash dividend of 8.5p per Ordinary Share payable on 15 April 2009 to Shareholders on the register on 13 March 2009.

Rental growth

Although the process for agreeing rental increases on GP occupied space has been slower than the Board would have liked, the achieved increase on those leases agreed in the year to 31 December 2008 was 12.4% over three years compared to 11% reported in 2007. 

Revenues, administration expenses and net asset value

At a trading level, revenues for the year ended 31 December 2008 rose to £19.7m as a result of new deliveries and favourable rent reviews. Operating profit before revaluation result, fair value loss on derivatives and UK-REIT charges was £5.6m. On a pro rata basis, total administration expenses are down, principally due to the absence of a Performance Incentive Fee and reduced goodwill impairment charges. During the year the net asset value fell from 369.4p to 235.8p. On an EPRA basis the net asset value per share fell from 373.5p to 320.3p and on a discounted cashflow basis this net asset value fell from 471.8p to 384.2p.

Performance Incentive Fee

Given the reduction in net asset value over the year there is no Performance Incentive Fee payable for the year and, under the terms of the scheme, the deficit in total return has to be made up before any fee is payable in future years.

Portfolio

During the year the Group has taken delivery of £53.3m of completed and let properties at locations set out in the Managing Director's Report and also entered into new commitments of £32.8m.

The table below sets out the portfolio as at 31 December 2008.

	31 December 2008 £m	31 December 2007 £m
Investment properties	314.4	281.7
Properties in the course of development	2.5	3.6
Total properties	316.9	285.3
Finance leases	3.0	3.0
Total owned and leased	319.9	288.3
Development loans	0.3	0.7
Total owned and leased (including development loans)	320.2	289.0
Committed	34.0	35.7
Total owned, leased and committed	354.2	324.7
Closing annualised rent roll (on completed properties)	19.6	16.2

The Group's portfolio of 113 properties, including five contracted schemes, is almost 100% (99.9%) let with an average outstanding lease length of 18.0 years. 90% of the rent roll of £19.6m is paid for directly or indirectly by the NHS and almost all of the balance is let to pharmacy operators. The closing rent roll at 31 December 2008 was £19.6m compared to £16.2m at the beginning of the year. 85% of the increase related to new deliveries and 15% to rental increases secured during the period.

Financing

The Group has received indicative terms for a new 20 year secured facility of £50m and is also in discussion with existing and other lenders regarding obtaining additional facilities.

Other matters

The share plan allowing investors to purchase the Company's Ordinary Shares by lump sum or regular payment currently has 44 members holding 124,544 Ordinary Shares. Further details can be found on the website www.phpgroup.co.uk and www.capitaregistrars.com/php.

The notice of the Annual General Meeting, explanatory circular and proxy card for the Annual General Meeting to be held on 29 April 2009 at 10.30am will be posted separately.

The Board has appointed a third Independent Director, Mark Creedy, who joined the Board on 1 November 2008 and brings significant additional property experience to the Group.

Outlook

The primary care market continues to be underpinned by good fundamentals with tenant demand for modern purpose built primary care facilities remaining high. The primary care market has the advantage that the Government acts as the ultimate payer/effective guarantor of the rent for the accommodation used for providing approved NHS services, which in PHP's portfolio accounts for 90% of the total portfolio, with the balance almost all let to pharmacy operators.

At 31 December 2008, the Group had £34m of commitments, all of which are expected to be delivered by March 2010. All of the commitments can be funded out of current committed facilities. At the date of this Statement, there has been no change in the Group's commitment position since the year end.

Although the property and MTM adjustments to net asset value are material, neither affects the cashflow of the Group and PHP enjoys strong cashflow. As previously stated, the Board considers that cashflow and the cash returned to Shareholders via dividends represent tangible measures of the success of the Group.

The Group remains a leader in its niche market with secure cashflows and a strong pipeline of potential deals. Although, in these uncertain times, the Board has decided to adopt a prudent upper limit for gearing of 70% loan to value, further growth is anticipated through rental increases and further purchases. The higher available yields on new purchases and the much reduced levels of LIBOR interest rates should offset the higher margins that will be associated with new borrowings. 

The Group will continue to apply a prudent growth strategy. 

G A Elliot

Chairman

26 February 2009

Managing Director's Report

Property portfolio

The table in the Chairman's Statement sets out the development of our portfolio during the year under review. We took delivery of five new developments and entered into five commitments on developments in the course of construction at the year end. At the year end the portfolio, when commitments are included, reached £354.2m.

Portfolio purchases during the year

The Group completed the purchases of a number of properties during the year ended 31 December 2008, details of which are set out below:

Property	Acquisition cost (£m)	Occupational tenants
Northwich, Firdale Medical Centre*	3.0	Doctors' practice and pharmacy
Shavington, Rope Green Medical Centre*	5.0	Doctors' practice and pharmacy
Paisley, Anchor Mill Medical Centre	3.0	Doctors' practice and pharmacy
Loudwater, Cherrymead Surgery	1.7	Doctors' practice
Lossiemouth, Moray Coast Health Centre	6.7	Two doctors' practices, HM Government, PCT and pharmacy
Kirkintilloch, Regent Gardens Surgery	3.0	Doctors' practice
Kettering, Prospect House	11.4	Doctors' practice and pharmacy
Cullompton, Culm Valley Health Centre	7.9	Doctors' practice, PCT and pharmacy
Morriston , Strawberry Place Surgery	2.2	Doctors' practice and pharmacy
Belper,  Whitemoor Medical Centre	4.4	Doctors' practice and pharmacy
Sheerness, Central Sheerness Medical Centre	5.0	PCT for doctors' practice and pharmacy
Total**	53.3

* Acquired by company purchase (note 9)

** Total purchases will differ to the acquisitions in note 9 due to the fact that some of the properties were acquired in the previous year.

Property disposals during the year

There were no property disposals during the year.

Revaluation

Notwithstanding the attractions of the primary care property market as an asset class, the sector has not been immune from declines driven by wider issues in the commercial property market and the increased cost of debt. As reported in the Chairman's Statement, the property valuation has resulted in a deficit for the year which has been incorporated into the Group Balance Sheet, giving a closing investment property valuation of £314.4m excluding properties in the course of development and investment in finance leases (2007:£281.7m) and £319.9m including properties in the course of development and investments in finance leases (2007: £288.2m).

The decrease of £17.7m in valuations amounted to 52.7p per Ordinary Share.

Portfolio rental levels

	Tenant area (sqm)	Area (sqft)	Rent (£psm)	Rent (£psf)	% of portfolio
NHS Activities	105,772	1,138,538	164	15	93.2
Pharmacy	6,651	71,592	255	24	5.9
Other	1,101	11,850	154	14	0.9
Total	113,524	1,221,978	170	16	100.0

Tenancy split by floor area

The table below indicates tenancy split by floor area (psm). 

GPs	81%
HM Government	3%
PCTs	9%
Pharmacy	6%
Other	1%
Total	100%

Rent reviews

The Group completed a number of rent reviews during the period and there are a number of reviews outstanding that we expect to be resolved during the coming year. The results of the reviews completed during the period added £473k to our rent roll. There are further reviews due from the past year which amount to some £5.6m of rent passing. We have accounted for the majority of this based on expected outcomes.

The table below shows the timing of reviews across the portfolio. The average increase in rent as a percentage of passing rent over the three year review process has been 12.35% (2007: 11.00%) equating to 3.96% p.a. (2007: 3.39%p.a.).

PHP rent review performance against inflation

The table compares average levels of review for four recent periods against the RPI index for the same periods. Overall the four periods have seen an out-performance against RPI of some 0.85% p.a.

	RPI	Rents
Year to 30 June 2005	2.89%	3.85%
Year to 30 June 2006	3.28%	3.39%
Year to 31 December 2007	4.05%	3.39%
Year to 31 December 2008	0.95%	3.95%
Average of four periods	2.79%	3.65%

Finance and interest rate hedging

Bank borrowings increased from £159.9m to £205.6m during the year of which the amounts shown in the tables below have been hedged at an average weighted cost rate of 4.79% (2007: 4.78%) excluding the lenders' margins which equate to approximately 0.76%.

The Group has also taken out basis rate swaps under which the Group has swapped the right to receive one month LIBOR plus a margin for the right to pay three month LIBOR. 

The amounts outstanding in respect of all swaps are illustrated below:

Finance and interest rate hedging (assuming callable swaps are not called)

The table shows the level of bank borrowings economically hedged by interest rate swaps 

for each financial year to 31 December 2027.

Year	Swaps (£m)*
2008	181
2009	188
2010	202
2011	208
2012	212
2013	190
2014	178
2015	180
2016	164
2017	158
2018	168
2019	168
2020	168
2021	131
2022	80
2023	80
2024	80
2025	80
2026	50
2027	20

Finance and interest rate hedging

The table shows the level of bank borrowings covered by effective hedges for each financial year to 31 December 2027.

Year	Swaps (£m)*
2008	181
2009	107
2010	114
2011	120
2012	124
2013	102
2014	90
2015	92
2016	76
2017	70
2018	80
2019	80
2020	80
2021	80
2022	80
2023	80
2024	80
2025	80
2026	50
2027	20

* The tables above show the weighted average amount hedged throughout each financial year for the period to 31 December 2027. The tables assume that the term loans which the Group holds which expire in 2013 are highly likely to be renegotiated.

Portfolio characteristics

Covenant analysis by annual rent

The table shows the percentage of our portfolio by rent roll derived from each of our major tenant classes; GPs, PCTs, Health Authorities, pharmacy operators and others. Some 99% of our rent comes directly or indirectly from GPs, PCTs, Health Authorities and pharmacy operators.

GPs	78%
HM Govt	3%
PCTs	9%
Pharmacy	9%
Other	1%
Total;	100%

Length of leases

The table below shows the analysis of rent by expiry term. The second table reflects security of income by term certain. The first table indicates that some 80% (2007: 84%) of the lease income has more than 15 years unexpired whilst the security of the income by term certain table shows the rental cash flow as a percentage of the year end rent roll, ignoring any subsequent increases and lease renewals during the subsequent periods. This shows that in year 10 the Group is still receiving 97% of its current income, without further action.

Analysis of annual rent by unexpired lease term

Less than 5 years	1%
6-15 years	19%
15-20 years	51%
More than 20 years	29%
Total	100%

Security of income by term certain

Year	% of passing rent
1	100%
5	99%
10	97%
15	79%

Geographical spread

Annual rent by region

The table shows the percentage of the portfolio by rent roll derived from each of the NHS regions.

East Anglia	2%
East Midlands	12%
West Midlands	13%
North West	10%
Yorkshire & Humberside	9%
North	3%
Scotland	8%
Wales	3%
London	7%
South West	5%
South East	28%
Total	100%

Forthcoming rent reviews

The table shows the annual amount of rent (£19.6m) falling due for review in each of the next three years. £1m of rent is reviewed on a longer pattern and £0.5m is reviewed annually.

Year	Rent (£m)
2009	5.723
2010	5.494
2011	7.359
Longer pattern	0.995

Primary care property market

The primary care property market, although weakening during 2008, has not suffered the dramatic falls seen elsewhere in commercial property. Our own property portfolio saw yields soften from 5.5% at the start of the year to 5.9% at the end, a valuation reduction of almost 10%. Long leases, undoubted covenants and little or no oversupply are the principal reasons - in our view - why yields have remained relatively resilient. The dramatic falls in base rate and LIBOR seen during the last few months of the year have widened the gap between the yields on the property portfolio and the funding costs. Although margins have increased and there is less available finance, this widening yield gap has yet to have its influence on the property market generally and on primary care as well.

Adding value

Our portfolio now stands at some 113 properties.

The three year rent review pattern ensures that there is a large percentage of leases where rent reviews are under way at any time. We have challenged the appeals process procedure at judicial review. We are awaiting the outcome of our case which asks for a more transparent and independent process.

We have identified a number of situations in the portfolio where there are opportunities to extend the existing let space, extend leases and add pharmacies or build on adjacent land. We are working up these projects which, subject to contract and planning, will be undertaken as and when appropriate. 

We have also been involved in talks with IPD, and other substantial investors in the sector, about the possibility of creating a specific Annual UK Healthcare Index during 2009.

Future prospects

We believe that investment in the primary care property market will generate solid returns on a medium term basis. The high quality of the income, the enduring social requirement for medical facilities and the emphasis put by the Government and the NHS on renewing primary care stock and relocating more secondary care procedures into the primary care arena bode well for the medium term future of the sector. In the short term, price weakness could be seen as a good buying opportunity.

Harry Hyman

Managing Director

26 February 2009

Extract from the Group Directors' Report

The Directors present their report to Shareholders for the year ended 31 December 2008. The Group's last statutory accounting period was for the eighteen months ended 31 December 2007, but for ease of comparison, the results for the twelve months ended 31 December 2007 are also presented in the beginning of this statement.

Principal activity

The principal activity of the Group is the generation of rental income and capital growth through investment in primary health care property in the United Kingdom leased principally to GPs, Primary Care Trusts ("PCTs"), health authorities and other associated health care users.

Real estate

The Group became a Real Estate Investment Trust ("UK-REIT") on 1 January 2007. In the opinion of the Directors, the Group has conducted its affairs so as to be able to continue as a UK-REIT.

Results

The loss after tax for the year ended 31 December 2008 amounted to £23.0m (eighteen months ended 31 December 2007: profit £16.8m; twelve months to 31 December 2007: loss £12.7m). An analysis of the results is shown in the Chairman's Statement.

Business review for the year ended 31 December 2008 

The Group's investment policy is to acquire the freehold and long leaseholds of modern, purpose built primary healthcare properties. Each property considered for purchase by the Group is first evaluated for its income and asset value growth potential and impact on the environment. A review of the performance and the development of the Group's business during the year (as required by section 417 of the Companies Act 2006) is included in the Chairman's Statement incorporated into this Report by reference. The key performance indicators ("KPIs") comprise net assets, number of properties and rent roll. . The KPIs, the position at the year end and prospects are set out on in the Chairman's Statement and the Managing Director's Report. Due to the nature of the business, the KPIs are financial rather than non-financial. A description of the principal risks and uncertainties facing the Group and how they can be mitigated is detailed below. The Group has no employees and accordingly this business review does not contain any information regarding employees. The Board is not aware of any material environmental issues affecting the Group's utilisation of its assets. The Board has appointed an environmental consultant and considers the social, community and environmental issues of all of its properties.

During the year, the Group entered into a £65m secured debt facility agreement with Abbey National Treasury Services plc to add to its existing facilities of £200m, making total debt facilities available to the Group of £265m.

On 4 January 2008, the Group acquired the issued share capital and debt of two property companies, SPCD (Shavington) Limited and SPCD (Northwich) Limited(see note 9). The two properties acquired as a result were Rope Green Medical Centre, Shavington and Firdale Medical Centre, Northwich.

During the year, the Group took delivery of three completed fully let investment properties at Morriston, Sheerness and Belper. The Group also entered into purchase and funding agreements for the acquisition of a new medical centre in Connah's Quay, Clwyd, North Wales, for approximately £9.7m. 

The building, which is scheduled for completion in February 2010, will be let for occupation by three GP practices and the North East Wales NHS Trust. In December, the Group entered into purchase and funding agreements for the acquisition of a new medical centre at Treharris, Mid Glamorgan, South Wales, for approximately £4.4m. The building will be let to two local NHS trusts for occupation by GP practices and to Treharris Communities First, a pharmacy and the Rhondda Cynontaff Local Health Board and is expected to be completed in Spring 2010.

Details on the portfolio, capital and funding are given in the Chairman's Statement, Managing Director's Report and notes 9, 16, 17 and 18 to the financial statements. On 24 December 2008 the investment properties held by subsidiaries were transferred to the main subsidiary, Primary Health Investment Properties Limited, for administrative convenience and to reduce costs.

The Report contains forward looking statements relating to the Group's outlook. By their nature, forward looking statements involve risk and uncertainty because they relate to future events and circumstances. These statements reflect the knowledge and information available at the time of the preparation and publication of the Annual Report. Nothing in this Report should be construed as a profit forecast.

Valuation of the property portfolio

A valuation of the Group's property portfolio at 31 December 2008 was carried out by Lambert Smith Hampton Ltd, Chartered Surveyors and Valuers, on the basis of market value. Details are given in the Chairman's Statement.

Dividends

Interim dividends per Ordinary Share were paid during the year ended 31 December 2008 on 28 March 2008 (8.25p) and 20 November 2008 (8.25p). In order to accelerate dividend payments to Shareholders, the Board proposes to pay a further interim cash dividend of 8.5p per ordinary share in respect of the year ended 31 December 2008 to Shareholders on the register of members on 13 March 2009 for payment on 15 April 2009 instead of a final dividend. The Group's policy is to pay a minimum of 90% of the profits of its tax exempt business in dividends and in accordance with UK-REIT legislation.

Use of financial instruments

The Group's treasury operations are co-ordinated and managed in accordance with policies and procedures approved by the Board. They are designed to mitigate the financial risks faced by the Group as detailed below. The Group continues to monitor its exposure to interest rates and the Group's policy is to enter into interest rate swaps as necessary to hedge cashflow risk on bank borrowing requirements, over the long term.

The Group's financial instruments comprise bank borrowings, interest rate swaps, investments in financial leases, development loans and trade related debtors and creditors that arise directly from its property holding operations.

All swaps are taken out to mitigate exposure to interest rate rises, but under accounting rules only certain swaps qualify as "effective" hedges. The mark to market movement ("MTM") on these swaps is taken directly to reserves. The MTM movement on other swaps, not deemed to be effective hedges, is taken through the Group Income Statement, although the economic benefit of the hedges is not affected.

During the year, as part of its continuing liability management programme, the Group entered into the following swap agreements:

• £10m interest rate swap at 4.895% covering the period from March 2008 to March 2013.

• £10m interest rate swap at 4.8925% covering the period from March 2008 to March 2013.

• £15m interest rate swap at 4.915% covering the period September 2010 to September 2013.

The above swaps all qualify as effective hedges under IAS39.

The Group has also entered into a number of basis rate swaps, the MTM movement of which, together with the existing callable swaps (further detail is given in note 17 of this Report), were accounted for at fair value through the profit or loss within the Group Income Statement.

The callable swaps are cancellable by the counterparty bank on any of the future quarter dates at no cost to the Group. If not called, the swaps run to 11 August 2021. Whilst not qualifying for hedge accounting under IAS39, the instruments significantly stabilise the Group's cash interest costs. The revaluation profit or loss on the callable swap contracts, should they not be cancelled, is taken through the Group Income Statement and this year amounted to a loss of £10.7m. The swaps were not cancelled by the Bank during the year ended 31 December 2008 nor in the period to the date of signing of this Annual Report. 

Principal risks and uncertainties

The principal risks and uncertainties of the Group are summarised below. The Board has reviewed and agreed policies for managing each of the risks:

(i) Interest rate risk

The Group finances its operations through called up share capital, retained profits and bank borrowings. The Group borrows monies on a variable rate basis from its banks and generally enters into interest rate swaps and other instruments to mitigate its exposure to interest rate risk. At 31 December 2008, 88% of the Group's facilities were at fixed rates after taking account of interest rate swaps (see note 17 of the financial statements). All of the Group's financial instruments are in sterling.

(ii) Liquidity risk

The Board approves an annual plan which sets out the Group's expected financing requirements for the following twelve months. At 31 December 2008, the maturity analysis of the Group's facilities was as follows:

	Amount £	Maturity
Bank borrowings
Long term	255m	2013
Short term	10m	364 days
Total	265m

As at 31 December 2008, there was a total of £205.6m drawn under the long term bank facilities. In 2008, the Group added secured debt facilities of £65m with Abbey National Treasury Services plc, maturing in 2013, to its existing £200m long term liabilities.

The Group's objective is to maintain a balance between continuity of funding and flexibility in its use of bank loans. The Group's policy is to have a majority of borrowings maturing in more than twelve months.

(iii) Borrowings, security, gearing and covenants

The Banks' borrowings are secured by fixed and floating charges over the properties owned by the Group. The principal covenants are summarised below.

• Gearing
  The maximum gearing currently available to the Group permitted under the Articles of Association is 75% of gross assets. The bank facilities limit is 75% (based on open market value), reducing to 70% in October 2009 in accordance with the AIB facility agreement and March 2010 in respect of the other banking facility agreements. As at 31 December 2008, gearing was 65% of gross assets and was a maximum of 65% during the year.

• Interest cover
  The Group's banking facilities have covenants that require the Group to maintain an interest cover ratio (rents/interest charge) of 1.3/1. The ratio was 2.15 at 31 December 2008 and is regularly monitored.

• For the purposes of the UK-REIT legislation, the Group is required to satisfy a separate interest cover ratio (exempt profits/finance costs) of 1.25/1. For the year ended 31 December 2008 the cover was 1.76 (eighteen months to 31 December 2007: 1.34).

(iv) Property risks

The leases entered into by the Group's tenants are predominantly on terms such that the tenant is responsible for fully repairing and insuring the buildings, and, through regular inspections, the Group monitors its exposure to the risk of deterioration of the properties. Where the Group retains responsibility for the maintenance of the structure of the buildings, or has service charge responsibilities, it additionally retains experienced and qualified managing agents to fulfil these obligations on its behalf. In all cases, the Group maintains adequate insurance covering the usual risks of accidental damage and any resultant loss of rent.

(v) Industry specific risks

The Directors consider these to include the following:

• Availability of suitable property on favourable terms and conditions to enable expansion.

• Uncertainty over valuations and possible downturns in the primary care market.

• The availability of funding to finance the asset portfolio and particularly expansion in the future.

(vi) Specific risks relating to the Group

The Directors consider these to include the following:

• Loss of UK-REIT status. The Group cannot guarantee continued compliance with all of the UK-REIT conditions. There is a risk that the UK-REIT regime may cease to apply in some circumstances and the Group could lose its status by the action of third parties. The ability of the Group to pay property income distributions ("PIDs") and/or non PIDs on the Ordinary Shares is dependent on the availability of distributable reserves and upon receipt by it of dividends and other distributable reserves from its subsidiaries.

• Inability to control the Government's primary care initiative and policies.

• Retention of the Joint Managers. The Group has no employees and is highly dependent on its Directors and the Joint Managers and may be adversely affected, at least in the short term, if their services or the respective services of any of their key employees cease to be available to the Group.

Going concern

The Group's business activities together with the factors likely to affect its future development, performance and position are set out in the Managing Director's Report. The financial position of the Group, its cash flow liquidity position and borrowing facilities including the covenants are described in the Chairman's Statement. In addition, note 17 to the financial statements sets out the Group's financial risk objectives, and includes details of its hedging instruments and hedging activities and its exposure to credit and liquidity risk.

The Group's principal facilities, which mature in 2013, are more than sufficient to cover existing liabilities and all current commitments and the Directors do not foresee difficulty in replacing those facilities in due course. The revaluation result and the mark to market losses disclosed for the Group's derivatives are unrealised losses and the latter have reduced since the year end. The Group's properties are almost 100% let with a weighted average outstanding lease length of 18 years and some 91% of the rent roll is reimbursed or paid for by the NHS. The Group is cashflow positive at the operational level. As a consequence the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook

Having reviewed the Group's current position and cashflow projections, facilities and covenant cover, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue with current operations and its selective policy of acquiring appropriate properties for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this Annual Report.

Responsibility Statement required by Disclosure and Transparency Rule (DTR) 4.1.12.

(i) To the best of our knowledge and belief the financial statements for the year ended 31 December 2008, prepared in accordance with the International Financial Reporting Standards adopted by the European Union ("IFRS"), give a true and fair view of the assets, liabilities, financial position, result of the issuer and the undertaking included in the consolidated figures taken as a whole; and

(ii) the management report includes a fair review of the development and performance of the business and position of the issuer and its undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board of Primary Health Properties PLC

G A Elliot

Chairman

26 February 2009

Group Income Statement

for the year ended 31 December 2008

	Notes	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Rental income		19,312	21,301
Finance lease income		379	908
Rental and related income	2	19,691	22,209
Net valuation (loss)/gain on property portfolio	9	(17,707)	4,857
Impairment loss	9	-	(3,750)
Net gain on disposal of property	9	-	44
Administrative expenses: recurring	3	(4,229)	(7,646)
Administrative expenses: non-recurring	3	(794)	(5,746)
Operating (loss)/profit before financing costs	3	(3,039)	9,968
Finance income	4	2,919	2,178
Finance costs	5	(12,069)	(13,022)
Fair value loss on derivatives	5	(10,655)	(2,808)
Loss on ordinary activities before taxation		(22,844)	(3,684)
Current taxation	6	-	(100)
Conversion to UK-REIT charge	6	(160)	(5,157)
Deferred taxation charge for the period	6	-	(3,880)
Deferred taxation release on conversion to UK-REIT	6	(160)	29,622
Taxation (charge)/ credit		-	20,485
(Loss)/profit for the year/period		(23,004)	16,801
(Loss)/earnings per share (basic and diluted)	7	(68.5p)	59.4p
Adjusted earnings per share (basic and diluted)*	7	18.8p	8.2p
(Decrease)/increase in net asset value per share since 31 December 2007 (30 June 2006)	23	(133.7p)	54.9p
Total return per share (basic and diluted)	24	(117.2p)	76.7p
Dividends paid in the year/period per share	8	16.5p	21.75p

The above relates wholly to continuing operations.

* Adjusted for large one-off items and movements in fair value (see note 7).

Group Balance Sheet

as at 31 December 2008

	Notes	31 December2008 £000	31 December 2007 £000
Non current assets
Investment properties		316,862	285,348
Development loans		282	722
	9	317,144	286,070
Net investment in finance leases	11	2,989	2,914
Derivative interest rate swaps	17	-	1,651
		320,133	290,635
Current assets
Derivative interest rate swaps	17	454	-
Trade and other receivables	12	1,808	3,646
Net investment in finance leases	11	50	53
Cash and cash equivalents	13	675	3,862
		2,987	7,561
Total assets		323,120	298,196
Current liabilities
Derivative interest rate swaps	17	(13,917)	(2,808)
Corporation tax payable	14	(29)	(29)
UK-REIT conversion charge payable	15	(1,559)	(1,208)
Deferred rental income	15	(4,275)	(3,660)
Trade and other payables	15	(2,922)	(3,576)
		(22,702)	(11,281)
Non current liabilities
Term loans	16	(204,088)	(159,219)
Derivative interest rate swaps	17	(14,923)	(224)
UK-REIT conversion charge payable	15	(2,226)	(3,395)
		(221,237)	(162,838)
Total liabilities		(243,939)	(174,119)
Net assets		79,181	124,077
Equity
Share capital	18	16,794	16,794
Share premium	19	48,009	48,009
Capital reserve	20	1,618	1,618
Cash flow hedging reserve	21	(14,923)	1,427
Retained earnings	22	27,683	56,229
Total equity*		79,181	124,077
Net asset value per share	23	235.75p	369.42p
EPRA net asset value per share**	23	320.26p	373.53p

These financial statements were approved by the Board of Directors on 26 February 2009 and signed on its behalf by:

G A Elliot

Chairman

* Wholly attributable to equity Shareholders of Primary Health Properties PLC.

** Defined in the Chairman's Statement.

Group Statement of Changes in Equity

for the year ended 31 December 2008

	Share capital	Share premium	Capital reserve	Cashflow hedging reserve	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
1 January 2008	16,794	48,009	1,618	1,427	56,229	124,077
Loss for the period	-	-	-	-	(23,004)	(23,004)
Transfer to Group Income Statement on cashflow hedges	-	-	-	(2,430)	-	(2,430)
Income and expense recognised directly in equity:
Fair value losses on cashflow hedges taken to equity	-	-	-	(13,920)	-	(13,920)
Total recognised income and expense for the year	-	-	-	(16,350)	(23,004)	(39,354)
Dividends paid:
Third dividend for the period ended 31 December 2007 (8.25p)	-	-	-	-	(2,771)	(2,771)
First interim dividend for the year ended 31 December 2008 (8.25p)	-	-	-	-	(2,771)	(2,771)
31 December 2008	16,794	48,009	1,618	(14,923)	27,683	79,181
1 July 2006	11,339	12,022	1,618	939	45,407	71,325
Profit for the period	-	-	-	-	16,801	16,801
Transfer to Group Income Statement on cashflow hedges	-	-	-	(1,231)	-	(1,231)
Income and expense recognised directly in equity:
Fair value gains on cashflow hedges taken to equity	-	-	-	1,317	-	1,317
Deferred tax on cashflow hedges	-	-	-	402	-	402
Total recognised income and expense for the period	-	-	-	488	16,801	17,289
Issue of shares (net of expenses)	5,455	35,987	-	-	-	41,442
Dividends paid:
Final dividend for the year ended 30 June 2006 (6.75p)	-	-	-	-	(1,639)	(1,639)
First interim dividend for the period ended 31 December 2007 (7.5p)	-	-	-	-	(1,821)	(1,821)
Second interim dividend for the period ended 31 December 2007 (7.5p)	-	-	-	-	(2,519)	(2,519)
31 December 2007	16,794	48,009	1,618	1,427	56,229	124,077

Group Cashflow Statement

for the year ended 31 December 2008

	Notes	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Operating activities
Loss before tax		(23,004)	(3,684)
Less: Finance income		(2,919)	(2,178)
Plus: Finance costs		12,069	13,022
Plus: Fair value loss on derivatives		10,655	2,808
Operating (loss)/profit before financing		(3,199)	9,968
Adjustments to reconcile Group operating (loss)/profit to net cashflows from operating activities:
Revaluation loss/(gain) on property		17,707	(4,857)
Less: Gains on disposal of property	9	-	(44)
Plus: Goodwill impairment		90	5,551
Plus: Impairment loss	9	-	3,750
Decrease/(increase) in trade and other receivables		1,577	(1,177)
Increase/(decrease) in trade and other payables		51	(448)
Cash generated from operations		16,226	12,743
UK-REIT conversion charge instalment		(1,322)	(554)
Taxation paid		-	(272)
Net cashflow from operating activities		14,904	11,917
Investing activities
Receipts from disposal of investment properties		-	464
Payments to acquire investment properties		(41,465)	(48,972)
Development loans advanced		-	(2,671)
Interest received on developments		262	281
Bank interest received		160	83
Other interest		20	-
Acquisition of Cathedral	9	-	(30,924)
Cash acquired on acquisition of Cathedral		-	174
Acquisition of  SPCD companies	9	(7,846)	-
Net cashflow used in investing activities		(48,869)	(81,565)
Financing activities
Proceeds from issue of Shares (net of expenses)		-	41,443
Term bank loan drawdowns		45,750	47,050
Swap interest received		2,730	-
Interest paid		(12,160)	(12,977)
Equity dividends paid		(5,542)	(5,979)
Net cashflow from financing activities		30,778	69,537
Decrease in cash and cash equivalents for the year/period		(3,187)	(111)
Cash and cash equivalents at start of year/period		3,862	3,973
Cash and cash equivalents at end of year/period (note 13)		675	3,862

Notes to the Financial Statements

1 Accounting policies

Basis of preparation and statement of compliance

The Group's financial statements for the year ended 31 December 2008 were approved by the Board of the Directors on 26 February 2009 and the Balance Sheet were signed on the Board's behalf by the Chairman, G A Elliot. Primary Health Properties PLC is a public limited company incorporated and domiciled in England & Wales. The Company's Ordinary Shares are admitted to the Official List of the UK Listing Authority, a division of the Financial Services Authority and traded on the London Stock Exchange.

The Group prepares consolidated financial statements under 'International Financial Reporting Standards' ("IFRS") as adopted by the European Union and applied in accordance with the Companies Act 1985.

Convention

The financial statements are presented in Sterling rounded to the nearest thousand.

Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment of business and one geographical segment, being investment in property in the United Kingdom leased principally to GPs, Primary Care Trusts, Health Authorities and other associated health care users.

Change of accounting reference date

The Group changed its accounting reference date to 31 December with effect from 1 January 2007. The prior period's accounting reference period, which commenced on 1 July 2006, therefore comprises 18 months ended 31 December 2007.

Basis of consolidation

The Group's financial statements consolidate the financial statements of Primary Health Properties PLC and its wholly owned subsidiary undertakings. Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtained control and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement. The financial statements of the subsidiary undertakings are prepared for the accounting reference period ending 31 December each year using consistent accounting policies. All intercompany balances and transactions, including unrealised profits arising from them, are eliminated.

Investment properties

The Group's completed properties are held for long-term investment. Initially, investment properties are measured at cost including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value based on a professional valuation made as of each reporting date. The fair value of investment property does not reflect future capital expenditure that will improve or enhance the property and does not reflect future benefits from this future expenditure.

Gains or losses arising from changes in the fair value of investment properties are included in the Group Income Statement in the year in which they arise.

Investment properties cease to be recognised for accounting purposes when they have been disposed of. Any gains and losses arising are recognised in the Group Income Statement in the year of disposal.

Properties held for, or in the course of, development

Properties held for, or in the course of, development are included in the Group Balance Sheet at cost or, on redevelopment if originally held as an investment property, at the previous valuation together with subsequent costs.

Provision for impairment is made, if necessary, to reduce the carrying value of properties held for development and in the course of development to the recoverable amount.

Development loans

The Group has entered into development loan agreements with third party developers in respect of certain properties under development. These loans are repayable at the option of the developer at any time. The Group has entered into contracts to purchase the properties under development when they are completed in accordance with the terms of the contracts. The loans are repayable by the developers in the event that the building work is not completed in accordance with the purchase contracts. Interest is charged under the terms detailed in the respective development agreements and taken to the Group Income Statement in the year in which it accrues.

Goodwill arising from acquisition

Goodwill on acquisitions comprises the excess of the fair value of the consideration plus any associated costs of investments in subsidiaries over the fair value of the identifiable net assets acquired. Since the Group's typical acquisitions relate solely to investment properties it is the Group's policy to write off any goodwill as it arises.

Impairment of assets

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's, or cash-generating unit's, fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the Group Income Statement.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the Group Income Statement.

Income

Revenue is recognised to the extent that it is probable that the benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duty. The following criteria must also be met before revenue is recognised.

Rental income

Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease term.

Interest income

Revenue is recognised as interest accrues (using the effective interest method, that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).

Trade and other receivables

Trade receivables, which generally have a 30-90 day term, are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.

Cash and cash equivalents

Cash and cash equivalents are defined as cash and short term deposits with an original maturity of three months or less.

Trade and other payables

Trade payables, which generally have a term of 15-30 days, are recognised and carried at their invoiced value inclusive of any VAT that may be applicable.

Bank loans and borrowings

All loans and borrowings are initially measured at fair value less directly attributable transaction costs. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest method.

Borrowing costs

Borrowing costs are recognised as an expense when incurred.

Conversion to UK-REIT

The Group's conversion to UK-REIT status was effective from 1 January 2007. Conversion to a UK-REIT results in, subject to continuing relevant UK-REIT criteria being met, the Group's property profits, both income and gains, being exempt from UK taxation from 1 January 2007. On conversion to a UK-REIT, the Group was subject to a one off taxation charge based on the value of the properties as at the date of conversion, amounting to £5.2m. This amount is payable over four years.

Taxation

Taxation on the profit or loss for the period not exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised in the Group Income Statement except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Financial instruments

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category 'financial assets at fair value through profit or loss'. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains and losses on financial instruments held for trading are recognised in the Group Income Statement.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the Group Income Statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

De-recognition of financial assets and liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a Group of similar financial assets) is de-recognised where:

• the rights to receive cashflows from the asset have expired;

• the Group retains the right to receive cashflows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-though' arrangement; or

• the Group has transferred its right to receive cashflows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cashflows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities

A financial liability is de-recognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

Derivative financial instruments (derivatives) and hedge accounting

The Group uses interest rate swaps to help manage its interest rate risk.

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

All derivatives are initially recognised at fair value at the date the derivative is entered into and are subsequently remeasured at fair value. The fair values of the Group's interest rate swaps are calculated by J.C. Rathbone Associates Limited, an independent specialist which provides Treasury Management Services to the Group.

The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument.

• Cash Flow hedges: Where a derivative is designated as a hedge of the variability of a highly probable forecast transaction i.e. an interest payment, the element of the gain or loss on the derivative that is an effective hedge is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a Financial asset or a Financial liability, the associated gains or losses that were recognised directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement i.e. when interest income or expense is recognised.

• Derivatives that do not qualify for hedge accounting: The gain or loss on derivatives that do not qualify for hedge accounting, and the non-qualifying element of derivatives that do qualify for hedge accounting, are recognised in the income statement immediately.

Dividends payable to Shareholders

Dividends proposed by the Board of Directors and unpaid at the period end are not recognised in the financial statements as they are appropriations of income. Furthermore, any final dividends would not be recognised until they have been approved by Shareholders at the Annual General Meeting.

The individual financial statements of Primary Health Properties PLC and each of its subsidiary undertakings will continue to be prepared under UK GAAP and the use of IFRS at Group level does not affect the distributable reserves available to the Group.

Leases - Group as a lessor

Assets leased out under operating leases are included within investment properties and rental income, including the effect of lease incentives, is recognised on a straight line basis over the lease term.

Where the Group transfers substantially all the risks and benefits of ownership of the asset, the arrangement is classified as a finance lease and a receivable is recognised for the initial direct costs of the lease and the present value of the minimum lease payments. Finance income is recognised in the Group Income Statement so as to achieve a constant rate of return on the remaining net investment in the lease. Interest income on finance leases is restricted to the amount of interest actually received.

The Group determines whether an arrangement is or contains a lease based on the substance of the arrangement. In making this determination the Group assesses whether fulfilment of the arrangements is dependent on the use of a specific asset and whether the arrangement conveys a right to use the asset.

New standards and interpretations, which are applicable to the Group

During the year, the IASB and IFRIC have issued the following standards and interpretations which are specifically relevant to the Group with an effective date after the date of these financial statements, which have not been applied:

	Accounting periods commencing after (Effective date)
International Accounting Standards (IAS / IFRS)
IFRS 1: First-time Adoption of International Financial Reporting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate	1 July 2009
IFRS 8: Operating Segments	1 January 2009
IFRS 3R: Business Combinations (revised January 2008)	1 July 2009
IAS 27R: Consolidated and Separate Financial Statements (revised January 2008)	1 July 2009
IAS 1 Revised: Presentation of Financial Statement (revised September 2007)	1 January 2009
IAS 23: Borrowing Costs (revised March 2007)	1 January 2009
IAS 40: Investment Property	1 January 2009
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 15: Agreements for the Construction of Real Estate	1 January 2009
IAS 39: Financial Instruments: Recognitions and Measurement - Eligible hedged items (Amendment)	1 July 2009

IFRS 8 Operating Segments

IFRS 8 replaces IAS 14 Segment Reporting upon its effective date of 1 January 2009 and requires a direct link between the segment disclosures in the financial statements and the information reported to the board of directors or chief operating decision maker. The Group has a non-complex structure of business activities and therefore, the Directors consider that the operating segment determined in accordance with IFRS 8 is likely to be the same as the business segment currently identified under IAS 14.

IFRS 3R Business Combinations and IAS 27R Consolidated and Separate Financial Statements

These revised standards are effective for financial years beginning on or after 1 July 2009. IFRS 3R introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of any goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. IAS 27R requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes in IFRS 3R and IAS 27R will affect future acquisitions, transactions involving loss of control and transactions with minority interests.

IAS 1 Revised Presentation of Financial Statements

The revised standard becomes effective for financial years beginning on or after 1 January 2009. The standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group is still evaluating whether it will have one or two statements.  

IFRIC 15 Agreement for the Construction of Real Estate

IFRIC 15 becomes effective for financial years beginning on or after 1 January 2009. The interpretation is to be applied retrospectively. It clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18. IFRIC 15 will not have an immediate impact on the financial statements because the Group does not currently conduct such activity.

Scope of IAS 40 Investment Property 

For financial years beginning on or after 1 January 2009 the scope of IAS 40 will change such that property under construction or development for future use as an investment property is classified as investment property. Therefore, to be consistent with the Group's policy in respect of investment property, such assets would be measured at fair value. The Group does not presently have any investment property under construction and so there will be no immediate impact on the financial statements.

IAS 23 Borrowing Costs (Revised)

The revised IAS 23 is effective for accounting periods beginning on or after 1 January 2009 and requires capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying assets (such as investment property under construction) if that asset is not held at fair value. This will have no immediate impact on the Group as it is not currently constructing any property.

The adoption of these standards and interpretations will have no material impact upon the Group's financial statements in the period of initial application. The Group will adopt the above, to the extent applicable, on the relevant effective date.

Significant accounting estimates and judgements

The preparation of the Group financial statements requires management to make a number of estimates and judgements. These estimates and judgements affect the reported amounts of assets and liabilities. Estimates and assumptions may differ from future actual results. The estimates and assumptions that are considered most critical and that have a significant inherent risk of causing a material adjustment to the carrying amounts of assets and liabilities are:

a) Estimates

Fair value of investment properties

The market value of a property is deemed, by the independent property valuers, to be the estimated amount for which a property should exchange, on the date of valuation, in an arm's length transaction. Properties have been valued on an individual basis, envisaging that they will be sold individually over time. Allowances are made to reflect the purchaser's costs of professional fees and stamp duty.

In accordance with Appraisal and Valuation Standards, factors taken into account are current market conditions, annual rentals, state of repair, ground stability, contamination issues and fire, health and safety legislations.

Fair value of derivatives

In accordance with IAS39, the Group values its derivative financial instruments at fair value. Fair value is calculated by J.C Rathbone Associates Limited, an independent specialist which provides Treasury Management Services to the Group. The calculation uses a number of assumptions based upon market rates and discounted future cashflows. The derivative financial instruments have been valued by reference to the mid point of the yield curve prevailing on 31 December 2008. In this way, the valuations are neutral as to buyer or seller. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate.

b) Judgements

Leases

The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties, which are leased out on operating leases. In addition, the Group has entered into a number of finance lease arrangements where it has determined that it has transferred substantially all the risks and rewards incidental to ownership.

Hedge effectiveness

The Group has a number of interest rate swaps that mature after the Group's bank facilities are due to expire in 2013. In accordance with IAS39, in order to apply hedge accounting in relation to the interest rate swaps, the Group has determined that it is highly probable that the bank facilities will be re-negotiated on expiry in 2013.

2 Rental and related income

Turnover comprises rental income and finance lease income receivable on property investments in the UK, which is exclusive of VAT. Turnover is derived from one business segment. Details of the lease income is given below.

Group as a lessor

a) The future minimum lease payments under non-cancellable operating leases receivable by the Group are as follows:

Year ended 31 December 2008				Eighteen months ended 31 December 2007
Less than one year £000s	1-5 years £000s	More than 5 years £000s	Total £000s	Less than one year £000s	1-5 years £000s	More than 5 years £000s	Total £000s
19,905	89,702	747,001	856,608	16,897	72,810	635,684	725,391

b) There were no contingent rents recognised as income in the period.

The rental income earned on operating leases is recognised on a straight line basis over the lease term.

3 Group operating (loss)/profit is stated after charging

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Administration expenses: recurring
Management fees (i)	2,543	3,167
Performance incentive fee (ii)	-	2,591
Directors' fees (iii)	116	134
Property management fees & other services  payable to Nexus PHP Management Limited	93	109
Bank facility non-utilisation fees	151	190
Bank charges and loan commitment fees	306	92
Auditors' remuneration for
audit of the Financial Statements	146	119
audit of accounts of subsidiaries of the Company pursuant to legislation	14	56
taxation services	71	239
transaction advisory services	-	185
other services	-	58
Other professional fees	183	152
Property expenses in connection with vacant properties	-	2
Direct operating expenses arising from investment property that generated rental income	250	341
Other expenses	356	211
Total	4,229	7,646
Administration expenses: non-recurring
Goodwill impairment (note 9)	90	5,551
UK-REIT conversion costs	-	195
Expenses incurred in prior periods not previously recognised*	597	-
VAT incurred in prior periods not previously recognised**	107	-
	794	5,746

* The majority of this charge relates to rental premiums recognised on receipt in 2007 that should have been spread over the rental period. The non-recurring adjustment is considered immaterial for a prior year adjustment (PYA) so is reflected within the current year. 

** During 2008, it was recognised that some of the balance on the VAT control account related to disallowed VAT from prior periods as a result of the Group's partial exemption status. This had not previously been expensed in the Group Income Statement and has been corrected. 

JOHCML, a wholly owned subsidiary of J O Hambro Capital Management Group Limited, and Nexus, a subsidiary of Nexus Structured Finance Limited, are Joint Managers to the Company. Combined management fees (as per the Management Agreement) are 1% of the first £50m of the property assets of the Group and 0.75% thereafter, measured on a monthly basis.

The management fee calculated and payable for the period to 31 December was as follows:

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Nexus PHP Management Limited ("Nexus")	1,394	1,734
J O Hambro Capital Management Limited ("JOHCML")	1,149	1,433
	2,543	3,167

JOHCML is also Company Secretary.

As at 31 December 2008, £116,000 of management fees payable to JOHCML were outstanding (2007: £190,000), and £31,000 was payable to Nexus (2007: £39,000).

(ii) Performance Incentive Fee ("PIF"):

Following the expiry of the management share option agreement, on 16 November 2006, Shareholders approved the amendments to the Management Agreement whereby the Joint Managers are entitled to a performance incentive fee of 15% of any performance in excess of an 8% per annum increase in the Company's "Total Return" as derived from the audited financial statements for the respective financial period in respect of the accounting period of the Company immediately preceding the proposed date of payment. In the event the Total Return is less than 8%, any deficit in the Total Return has to be made up in subsequent years before any PIF is payable.

The Total Return is determined by comparing the variation in the stated net asset value per Ordinary Share (on a fully diluted basis, adjusting for deferred tax and the REIT conversion charge and adding back gross dividends paid or declared in such period) against the fully diluted net asset value per Ordinary Share from the previous period's audited accounts.

The PIF was initially calculated on an annual basis ending 30 June. However, following the Group's conversion to a UK-REIT and change in its accounting reference date to 31 December, it was necessary to calculate the fee based on the interim accounts for the prior period. From 1 January 2008, the fee is calculated on an annual basis, using the audited financial statements for the respective financial period. Included in the Group Income Statement for the eighteen month period ended 31 December 2007 is a performance fee of £2,591,000. There is no PIF payable for the year ended 31 December 2008.

(iii) Remuneration of Directors:

	Year ended 31 December 2008 £	Eighteen months ended 31 December 2007 £
Mr G A Elliot (Chairman)	22,500	30,000
Mr H A Hyman (Managing Director)	17,500	22,500
Mr A R Jones SID (appointed 1 May 2007)	18,750	10,000
Mr J D Hambro	17,500	22,500
Mr M J Gilbert	17,500	22,500
Mr P Sandford (resigned 27 July 2006)	-	3,750
Dr I P Rutter	17,500	22,500
Mr M P Creedy (appointed 1 November 2008)	5,000
Total fees	116,250	133,750

There were no employee costs, other than for the Directors listed above.

The Director's fees for Mr H A Hyman were paid to Nexus. Mr Hyman's family interests are the controlling shareholder of Nexus. The Company also paid to Nexus £73,000 (2007: £109,000) property management fees.

The Director's fees for Mr J D Hambro were paid to JOHCML. Mr J D Hambro is also Chairman of J O Hambro Capital Management Group Limited and an indirect shareholder of JOHCML.

The Director's fees for Mr M J Gilbert are paid to Aberdeen Asset Management PLC.

Details of the Joint Managers Management Agreement is given in the Directors' Remuneration Report and Group Directors Report.

4 Finance income 

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Interest income on financial assets
Not at fair value through profit or loss
Bank interest	164	80
Development loan interest	262	867
Other interest	63	-
At fair value through profit or loss
Bank swap interest	2,430	1,231
	2,919	2,178

5 Finance costs 

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Interest expense on financial assets
(i) Interest paid
Bank loan interest paid	11,874	13,018
Other interest paid	44	4
Notional UK-REIT interest	151	-
Interest expense on financial liabilities not at fair value	12,069	13,022
(ii) Derivatives
Net fair value loss on derivatives	10,655	2,808
	10,655	2,808

The fair value loss on derivatives recognised in the Group Income Statement has arisen from the interest rate swaps for which hedge accounting does not apply. A further fair value loss on hedges which meet the effectiveness criteria under IAS39 of £16.3m is charged directly against Equity.

6 Taxation

(a) Tax expense/(credit) in the Group Income Statement

The tax expense/(credit) is made up as follows:

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Current tax
UK corporation tax	-	27
Adjustments in respect of prior period/year	-	73
	-	100
Charge on conversion to UK-REIT status†	160	5,157
	160	5,257
Deferred tax
Deferred tax charge for the 6 months to 31 December 2006	-	3,880
Deferred tax release on conversion to UK-REIT status†	-	(29,622)
	-	(25,742)
Tax expense/(credit) in the Group Income Statement	160	(20,485)
Tax charge in equity
Deferred tax
Opening balance at beginning of period/year	-	402
Deferred tax release on conversion to UK-REIT status†	-	(402)
Tax charge in equity	-	-

† Following conversion to a UK-REIT the Group is no longer subject to UK corporation tax on its property related income. This enabled the Group to release its deferred tax liabilities in the prior period at the expense of suffering a conversion charge (£5.2m) plus additional legal costs (£0.2m).

(b) Factors affecting tax charge for the year/period

The comparative figures below show why the tax assessed for the eighteen months to 31 December 2007, during which time the Company became a UK-REIT, is lower than the standard rate of corporation tax in the UK. 

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Loss before taxation	(23,004)	(3,684)
Loss multiplied by the standard rate * of corporation tax in the UK of 28.5% (2007: 30%)	(6,556)	(1,105)
Effects of:
Adjustment in respect of current tax of prior year	-	73
Revaluation gains/(losses) on disposal	-	5,712
Other differences	-	27
Losses utilised	(32)	-
Charge on conversion to UK-REIT status	160	5,157
Exempt REIT expense/(income)	6,610	(727)
Release of deferred tax on conversion to UK-REIT	-	(29,622)
Finance lease adjustment	(21)	-
Capital allowances	(1)	-
Total tax expensed/(credited) for the period reported in the Group Income Statement	160	(20,485)

(c) Deferred tax 

Following the conversion to UK-REIT on 1 January 2007, the Group is no longer subject to UK corporation tax and therefore its deferred tax liability was released on conversion. The deferred tax included in the Group Income Statement for the prior period is as follows:

	Year ended 31 December 2008 £000	Eighteen months ended 31 December 2007 £000
Revaluation gains on investment properties	-	3,880
Release of deferred tax on conversion to UK-REIT status	-	(29,622)
Provision/(credit) for deferred tax	-	(25,742)
Deferred tax reconciliation:
Balance at beginning of the period/year	-	21,193
Charge for the period	-	3,880
Deferred tax liability on acquisition of Cathedral Healthcare Holdings Limited	-	4,951
Deferred tax on cash flow hedge	-	(402)
Deferred tax release on conversion to UK-REIT status	-	(29,622)
Balance at end of year/period	-	-

* With effect from 1 April 2008 the rate of UK Corporation tax was reduced from 30% to 28%. The computation above assumes an average rate of 28.5%.

7 (Loss)/earnings per share

The calculation of basic and diluted earnings per share is based on the following:

	Year to 31 December 2008			Eighteen months to 31 December 2007
	Net profit attributable to Ordinary Shareholders £000	Ordinary Shares (number)	Per Share (pence)	Net profit attributable to Ordinary Shareholders £000	Ordinary Shares (number)	Per Share (pence)
Basic and diluted earnings per share	(23,004)	33,587,094†	(68.5)	16,801	28,297,852†	59.4

† Weighted average number of Ordinary Shares in issue during the period.

Adjusted earnings per share:

	Year to 31 December 2008			Eighteen months to 31 December 2007
	Net loss attributable to Ordinary Shareholders £000	Ordinary Shares (number)	Per Share (pence)	Net profit attributable to Ordinary Shareholders £000	Ordinary Shares (number)	Per Share (pence)
Basic earnings per share	(23,004)	33,587,094†	(68.5)	16,801	28,297,852†	59.4
Adjustments to remove:
Performance incentive fee#	-			2,591
Goodwill impairment	90			5,551
UK-REIT conversion charge	160			5,157
Other non-recurring items	704			-
Deferred tax charge	-			3,880
Deferred tax release	-			(29,622)
Net valuation losses/(gains)	17,707			(4,857)
Fair value loss on derivatives**	10,655			2,808
Adjusted basic earnings per share	6,312	33,587,094	18.8	2,309	28,297,852	8.2

	Fair value loss on derivatives £000
Loss on "ineffective" interest rate swaps	11,109
Gain on basis rate swap	(454)
Fair value loss on derivatives, as above	10,655

† Weighted average number of Ordinary Shares in issue during the period.

# The Performance Incentive Fee depends primarily on revaluation gains, which are eliminated in calculating adjusted earnings per share. No fee was payable in respect of 2008.

** In view of the continuing volatility in the mark to market adjustment in respect of the period end valuation of derivatives that flows through the Group Income Statement, the Directors now believe that it is appropriate to remove the gain or loss in the calculation of adjusted results and the comparatives have been restated accordingly.

The adjusted earnings per share are adjusted for the large/one-off capital items affecting earnings per share during the year/period.

8 Dividends paid and declared 

Dividends paid in the period are as follows: 

	Number of shares dividend paid upon	Year ended 31 December 2008 £000	Eighteen months to 31 December 2007 £000
First interim dividend for the period ended
31 December 2008 (8.25p) paid 20 November 2008	33,587,094	2,771	-
Third dividend for the period ended 31 December 2007 (8.25p) paid 28 March 2008	33,587,094	2,771	-
Second interim dividend for the period ended 31 December 2007 (7.5p)	33,587,094	-	2,519
First interim dividend for the period ended 31 December 2007 (7.5p)	24,277,718	-	1,821
Final dividend for the year ended 30 June 2006 (6.75p)	24,277,718	-	1,639
		5,542	5,979
Per share		16.5p	21.75p

9 Investment properties, properties in the course of development and development loans 

As at 31 December 2008 

	Investment properties freehold£000	Investment properties long leasehold £000	Properties in the course of development £000	Develop- ment loans £000	Total  £000
As at 1 January 2008	235,529	46,195	3,624	722	286,070
Additions	12,496	4	28,594	-	41,094
Properties acquired during the year through Northwich and Shavington acquisitions	8,127	-	-	-	8,127
Transfer from properties in the course of development upon completion	25,666	-	(25,666)	-	-
Transfer from development properties upon completion	4,049	-	(4,049)	-	-
Development loan interest charged	-	-	-	262	262
Interest payments received	-	-	-	(702)	(702)
Revaluation for the year	(13,987)	(3,720)	-	-	(17,707)
As at 31 December 2008	271,880	42,479	2,503	282	317,144

As at 31 December 2007 

	Investment properties freehold £000	Investment properties long leasehold £000	Properties in the course of development** £000	Develop- ment loans £000	Total  £000
As at 1 July 2006	171,783	25,660	2,126	1,712	201,281
Additions	5,073	15,251	29,422	2,998	52,744
Properties acquired during the period through Cathedral acquisition	21,300		9,525		30,825
Disposals	(427)	-	-	-	(427)
Transfer from properties in the course of development upon completion	21,841	-	(21,841)	-	-
Transfer from development properties upon completion	8,576	3,282	(11,858)	-	-
Transfer from development loans upon completion	2,907	1,621	-	(4,528)	-
Development loan interest Charged	-	-	-	867	867
Interest payments received	-	-	-	(327)	(327)
Impairment loss*	-	-	(3,750)		(3,750)
Revaluation for the period	4,476	381	-	-	4,857
As at 31 December 2007	235,529	46,195	3,624	722	286,070

* The impairment reflects the difference between the estimated market value of properties in the course of development at the period-end and their contracted development cost. The estimated market value is determined by reference to the contracted rental income for each property and market yields at the period end as advised by Lambert Smith Hampton, Chartered Surveyors. The impairment has been reflected as an impairment provision against the capitalised cost of property. 

** Development properties in the course of development have been included with against development properties. In the prior year the amounts were separated out as they were held in different subsidiaries.  Development properties of £2,853k have been merged with properties in the course of development of £771k as at 31 December 2007.

Development loans include accrued interest amounting to £60,000 (2007: £182,000). Interest is charged between 1.1% and 1.5% above Bank of England Base Rate on development loans, and charged at 1% over LIBOR compounded every quarter on the development properties that were acquired on 22 December 2006 through the acquisition of Cathedral. 

Properties have been independently valued at fair value by Lambert Smith Hampton ('LSH'), Chartered Surveyors and Valuers, as at the Balance Sheet date in accordance with IAS 40: Investment Property. LSH confirm that they have valued the properties in accordance with the Practice Statements in the RICS Appraisal and Valuation Standards (Red Book). 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 historical cost of properties held by the Group, including properties in the course of development, was £268.3m (2007: £219.1m). 

Investment additions 

On 4 January 2008, the Group acquired 100% of the Ordinary Share capital of SPCD (Shavington) Limited and SPCD (Northwich) Limited from Sapphire Property Care Developments Limited ("SPCD") for a cash consideration of £4.8m and £3.0m respectively, SPCD (Shavington) owns Rope Green Medical Centre, Shavington and SPCD (Northwich) owns Firdale Medical Centre, Northwich.

The net assets acquired amounted to £7.8m and consisted of properties. There were no fair value adjustments and the post acquisition profits generated by the companies amounted to £403k. The annual rent roll from the two properties is £443k.

Book and fair values of the net assets at date of acquisition were as follows: 

	SPCD Northwich Limited £000	SPCD Shavington Limited £000	Total £000
Investment properties	3,130	4,997	8,127
Trade receivables	17	-	17
Trade payables	(170)	(218)	(388)
Net assets	2,977	4,779	7,756
Goodwill arising on acquisition (note 3)	35	55	90
	3,012	4,834	7,846

The goodwill arising on acquisition has been written off in the Group Income Statement in line with the accounting policy. It relates to transaction costs and has been expensed in the year.  

On 22 December 2006, the Company acquired 100% of the Ordinary Shares of Cathedral Healthcare Holdings Ltd ("CHH") for a consideration at book value of £31.0m equivalent to the fair value of the assets obtained. Post acquisition profits generated by the companies.

Post acquisition profits generated by the companies amounted to £3,843k, including realised revaluation gains of £2,153k. Pro forma turnover for the 18 month period to 31 December 2007 was £1,737k and pro forma profits for the same period were £130k.

CHH was the holding company of a group of companies that owned nine primary healthcare facilities across the UK which have been incorporated into the Group's portfolio. 

Consideration of £30.9m was paid upon completion with a further balance of £0.1m paid in April 2007. Cash acquired upon acquisition of CHH amounted to £0.2m. 

The total gross assets acquired once fully developed are expected to amount to £39.2m. These assets are expected to generate a total annual rental income of approximately £2.0m, reflecting an initial yield of approximately 5%. 

As the Company paid consideration equal to the assessed value of the acquired properties, goodwill arose in respect of the other net liabilities acquired, principally a deferred tax liability of £4.9m. However, on conversion to UK-REIT, the deferred tax liability was eliminated, resulting in an impairment of goodwill arising on acquisition. 

Pro forma turnover for the 18 month period to 31 December 2007 was £1,773k and pro forma profits for the same period were £130k.

Book and fair values of the net assets of Cathedral at date of acquisition were as follows: 

	£000
Investment properties	21,300
Development properties	9,525
Trade receivables	810
Cash	173
Trade payables	(1,346)
Deferred tax liabilities	(4,951)
Net assets acquired	25,511
Goodwill arising on acquisition (note 3)	5,551
	31,062

Property disposals during the year/period

	31 December 2008 £000	31 December 2007 £000
Net proceeds of sale	-	471
Less: carrying value	-	(427)
Realised gain on disposal of property	-	44

10 Investments 

The subsidiaries of the Company are stated below: 

Subsidiary	Principal activity	Proportion of voting rights and shares held
Primary Health Investment Properties Limited (PHIP)†	Property investment	100%
Primary Health Investment Properties (No. 2) Limited (PHIP No. 2)†	Property investment	100%
Primary Health Investment Properties (No. 3) Limited (PHIP No. 3)†	Property investment	100%
PHIP CHH Limited†	Property investment	100%
PHIP CH Limited*	Property investment	100%
PHIP (RHL) Limited*	Property investment	100%
PHIP (SSG Norwich) Limited*	Property investment	100%
PHIP (Hetherington Road) Limited*	Property investment	100%
PHIP (Hoddesdon) Limited*	Property investment	100%
PHIP (Milton Keynes) Limited*	Property investment	100%
PHIP (Sheerness) Limited*	Property investment	100%
AHG (2006) Limited	Property investment	100%
SPCD (Shavington) Limited*	Property investment	100%
SPCD (Northwich) Limited*	Property investment	100%

† Subsidiaries directly held by the Company.

* On 24 December 2008, investment properties held by various subsidiaries were transferred at market value to PHIP (the main trading subsidiary) for administrative convenience and to reduce costs.

11 Net investment in finance leases  

	31 December 2008 £000	31 December 2007 £000
Amounts due in more than five years	2,842	2,736
Amounts due between one and five years	147	178
	2,989	2,914
Amounts due in less than one year	50	53
	3,039	2,967

There were no additions to finance leases during the year ended 31 December 2008 nor the period ended 31 December 2007. 

	31 December 2008 £000	31 December 2007 £000
Gross investment in finance leases	10,085	10,345
Less: unearned financial revenues	(7.046)	(7,378)
Present value of future minimum lease payment receivables	3,039	2,967

12 Trade and other receivables  

	31 December 2008 £000	31 December 2007 £000
Trade receivables	405	865
VAT recoverable	-	1,320
Prepayments	1,403	1,461
	1,808	3,646

13 Cash and cash equivalents 

	31 December 2008 £000	31 December 2007 £000
Cash held at bank	675	3,862

There is a £10m overdraft facility in place, unutilised as at 31 December 2008. 

Bank interest is earned at floating rates depending upon the bank deposit rate. Short term deposits may be made for varying periods of between one day and one month dependent upon available cash and the forthcoming cash requirements of the Group. These deposits earn interest at various short term deposit rates. 

14 Tax payable  

	31 December 2008 £000	31 December 2007 £000
Corporation tax payable	29	29

15 Trade and other payables  

	31 December 2008 £000	31 December 2007 £000
UK-REIT Conversion charge	1,559	1,208
Rents received in advance: deferred rental income	4,275	3,660
Trade and other payables	2,372	3,576
VAT	550	-
	2,922	3,576
	8,756	8,444

The UK-REIT conversion charge totalled £5.2m, of which £1.3m has been paid, £1.5m is payable within the next twelve months and the balance of £2.2m in instalments over the next 

two years (2007: £3.4m over the next three years). 

16 Term loans 

On 14 March 2008 the Group entered into a facility of £50m with Abbey National Treasury Services plc, increased to £65m in September 2008. This facility matures in 2013. At 31 December 2008, total facilities of £265m (2007: £200m) were available. Of these facilities, as at 31 December 2008, £206m was drawn (2007: £160m) and secured by an unlimited guarantee from each subsidiary and a first fixed charge over the ownership of each property. Interest is payable on the loan at a fixed percentage rate above LIBOR and interest payable has fluctuated in the period between 3% and 6.81% (2007: 5.48% and 7.51%), including lenders' margins and costs (excluding margins and costs 2.3% and 6.1% (2007: 4.72% and 6.75%). However, the Group has entered into interest rate swaps to manage its exposure to interest rate fluctuations. These are set out in note 17. 

Interest on floating rate loans is payable over 3 months using underlying reference rates (e.g. LIBOR plus margin plus costs). The fixed rate margin above LIBOR is 0.76% (including lenders' costs of 0.06%). 

The table below indicates amounts drawn and undrawn from each individual facility. 

	Facility		Amounts drawn		Undrawn
	31 Dec 2008 £000	31 Dec  2007  £000	31 Dec 2008 £000	31 Dec  2007  £000	31 Dec 2008 £000	31 Dec  2007  £000
Current
364 day revolving*	10,000	10,000	-	-	10,000	10,000
Non-current
Term to January 2013*	140,000	140,000	129,000	132,050	11,000	7,950
Term to January 2013**	50,000	50,000	44,100	27,800	5,900	22,200
Term to January 2013***	65,000	-	32,500	-	32,500	-
	265,000	200,000	205,600	159,850	59,400	40,150

Provider:  

*     The Royal Bank of Scotland plc.  

**     Allied Irish Banks, p.l.c.  

***    Abbey National Treasury Services plc 

Since the term loan facilities have been in existence, the Group has suffered costs in association with the arrangement of the facilities including legal advice and loan arrangement fees. These costs are amortised over the remaining life of the related facility. 

Any amounts unamortised as at the period end are offset against amounts drawn on the facilities as shown in the table below: 

	31 December 2008 £000	31 December 2007 £000
Term loan drawn	205,600	159,850
Less: Unamortised borrowing costs	(1,512)	(631)
Term loan per Group Balance Sheet	204,088	159,219

17 Derivatives and other financial instruments 

An explanation of the Group's financial risk management objectives, policies and strategy can be found in the Group Directors' Report. All of the Group's financial instruments are Sterling denominated. 

a) Financial statements 

The maturity profile of interest bearing financial assets and liabilities is as follows: 

2008 Fixed rate assets and liabilities 

	Within 1 year £000	1 - 2 years £000	2 - 3 years £000	3 - 4 years  £000	4 - 5 years £000	More than 5 years £000	Total  £000	Effective interest rate %
Finance leases	50	50	47	29	21	2,842	3,039	11.1
Interest rate swap (liabilities)/assets	(13,463) *	-	-	-	-	(14,923)	(28,384)	4.8
Total	(13,413)	50	47	29	21	(12,081)	(25,347)

* This may be analysed into a current liability of £13,917k offset by an asset of £454k, as disclosed in the Group Balance Sheet.

2008 Floating rate assets and liabilities 

	Within 1 year £000	1 - 5 years £000	More than 5 years £000	Total  £000	Effective interest rate %
Cash	675	-	-	675	1.0
Development loans	282	-	-	282	3.1
Term loan	-	(204,088)	-	(204,088)	2.8
Total	957	(204,088)	-	(203,131)

2007 Fixed rate assets and liabilities

	Within 1 year £000	1 - 2 years £000	2 - 3 years £000	3 - 4 years £000	4 - 5 years £000	More  than 5 years  £000	Total £000	Effective interest rate %
Finance leases	53	52	49	48	29	2,736	2,967	11.3
Interest rate swap (liabilities)/assets	(2,808)	-	-	-	-	1,427*	(1,381)	4.8
Total	(2,755)	52	49	48	29	4,163	1,586

* net of £1,651k and (£224k) per the Group Balance Sheet.

2007 Floating rate assets and liabilities

	Within 1 year £000	1 - 5 years £000	More  than 5 years  £000	Total £000	Effective interest rate %
Cash	3,862	-	-	3,862	4
Development loans	-	722	-	722	6.6
Term loan	-	-	(159,219)	(159,219)	7.3
Total	3,862	722	(159,219)	(154,635)

Fair values of financial assets and financial liabilities

A comparison of the fair value of the Group's financial assets and financial liabilities is set out below. The fair value of derivatives and borrowings has been calculated by discounting the expected future cashflows at prevailing interest rates and the fair value of the net investment in finance leases has been determined by discounting the future receipts from those leases at the Group's current cost of capital. 

	Book value 2008 £000	Fair value 2008 £000	Book value 2007 £000	Fair value 2007 £000
Trade and other receivables	405	405	865	865
Trade and other payables*	(2,372)	(2,372)	(3,576)	(3,576)
Term loan	(204,375)	(204,375)	(159,792)	(159,792)
Finance leases:
due within one year	50	50	53	53
due in more than one year	2,989	5,924	2,914	4,008
Cash	675	675	3,862	3,862
Development loan interest accrued	282	282	722	722
Interest rate swap net liabilities	(28,386)	(28,386)	(1,381)	(1,381)

* Included within trade and other payables is £287k (2007: £573k) of term loan interest. 

The Group's borrowings have financial covenants. If these covenants were to be breached, the borrowings would become repayable immediately. These covenants require the Group to disclose gearing and interest cover to the lender on a quarterly basis. 

The 364 day revolving credit facility remained unchanged and in existence throughout the period. 

The actual borrowings (not inclusive of any unamortised borrowing costs) of £205.6m (2007: £159.9m) are secured unamortised on investment properties held. 

Details of the undrawn facilities of the term loan are provided in note 16. 

Hedging activities

The Group's treasury policies are reviewed periodically by the Board. The policies have the objective to manage the financial risk of investing and borrowing in relation to the business needs of the Group. 

The Group's policy is to enter into interest rate swaps as necessary to hedge cashflow risk on bank borrowing requirements over the long term. These hedges are entered into to avoid excessive concentrations of interest rate risk. 

Floating to fixed rate interest rate swaps that were effective at the period-ends were as follows: 

Contract value	Start date	Maturity	Fixed interest per annum %
2008
£50 million callable*	August 2007	February 2009	4.835
£38 million callable*	August 2007	February 2009	4.740
£65 million	January 2007	July 2009	4.805
£10 million	August 2005	August 2015	4.530
£10 million	March 2008	March 2013	4.895
£10 million	March 2008	March 2013	4.8925
£10 million	June 2006	June 2026	4.810
£193 million
2007
£70 million	January 2007	July 2008	4.805
£30 million	August 2007	February 2008	4.835
£25 million	August 2007	May 2008	4.74
£10 million	August 2005	August 2015	4.530
£10 million	June 2006	June 2026	4.810
£145 million

Floating to fixed interest rate swaps that are effective after the period-ends are as follows: 

Contract value	Start date	Maturity	Fixed interest per annum %
2007
£40 million callable*	February 2008	May 2008	4.835
£33 million callable*	May 2008	August 2008	4.740
£65 million	July 2008	July 2009	4.805
£55 million	July 2009	January 2010	4.805
£75 million	January 2010	July 2010	4.805
£65 million	July 2010	July 2012	4.805
£73.3 million	July 2012	April 2013	4.805
£63.3 million	April 2013	July 2013	4.805
£70 million	July 2013	July 2015	4.805
£80 million	July 2015	July 2016	4.805
£10 million	June 2016	June 2026	4.510
£10 million	July 2016	July 2026	4.400
£10 million	July 2016	July 2026	4.475
£10 million	July 2016	July 2026	4.455
£10 million	July 2016	July 2026	4.47875
£20 million	July 2017	July 2027	4.760

Contract value	Start date	Maturity	Fixed interest per annum %
2008
£55 million	July 2009	January 2010	4.805
£75 million	January 2010	July 2010	4.805
£65 million	July 2010	July 2012	4.805
£73.3 million	July 2012	April 2013	4.805
£63.3 million	April 2013	July 2013	4.805
£15 million	September 2010	September 2013	4.915
£70 million	July 2013	July 2015	4.805
£80 million	July 2015	July 2016	4.805
£10 million	June 2016	June 2026	4.510
£10 million	July 2016	July 2026	4.400
£10 million	July 2016	July 2026	4.475
£10 million	July 2016	July 2026	4.455
£10 million	July 2016	July 2026	4.47875
£20 million	July 2017	July 2027	4.760

* Callable swaps can be exercised at the bank's option on a set date each quarter at zero cost to the Group. As the Terms do not reflect those of the underlying debt facility, they cannot be considered as part of the Group's overall hedging strategy and therefore hedge accounting cannot be applied.

In addition to the above, the Group entered into a number of basis rate swaps as follows:

Contract value	Start date	Maturity	Interest rate %
£200 million	May 2009	February 2010	LIBOR + 0.18%
£50 million	November 2008	May 2009	LIBOR + 0.26%
£150 million	November 2008	May 2009	LIBOR + 0.26%

The Group has taken advantage of short-term pricing anomalies in the interbank market by entering into basis rate swaps, whereby 3m LIBOR has been swapped into 1m LIBOR plus a margin, which generates a relatively low risk revenue return. The primary aim is to generate additional revenue and, as such, the basis swaps cannot be included as part of the Group's overall hedging strategy and therefore hedge accounting is not applied. Income of £280k was generated on these swaps during the year (2007: £nil).

b) Risk management policies and procedures

In pursuing its investment objective, the Group is exposed to a variety of risks that could result in either a reduction in net assets or distributable profits. 

The Group's exposure to risk and the Directors' approach to risk management is set out below. The Joint Managers, in close cooperation with the Board, coordinate the Group's risk management. 

The objectives, policies and processes for managing the risks and the methods used to measure the risks, that are set out below, have not changed from the previous accounting period.

Market risk

The fair value or future cash flows of a financial instrument held by the Group may fluctuate because of changes in market prices. This market risk comprises two elements - interest rate risk and other price risk. The Joint Managers assess the exposure to market risk when making each investment decision and monitor the overall level of market risk on the investment property portfolio on an ongoing basis. 

Interest rate risk

Interest rate movements may affect: 

• the level of income receivable on cash deposits; 

• the interest payable on the Group's variable rate borrowings; 

• fair value of interest rate swaps. 

Management of risks

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and borrowing under the loan facility. 

The Group, generally, does not hold significant cash balances, with short-term borrowings being used when required. However, when rents are received on the rent quarter days, higher levels of cash may be held until utilised. The Group finances part of its activities through borrowings at levels approved and monitored by the Board. 

Interest rate exposure is managed within limits agreed by the Board and, as stipulated in the Articles of Association, gearing should not exceed 75% of gross assets. The Group aims to hedge its exposure to interest rate risk on the term loans by entering into interest rate swaps. At 31 December 2008, the fair value of the interest rate swaps was a liability of (£28.4m) (2007: (£1.4m) and these will impact upon cashflows up to July 2027. 

After taking account of interest rate swap cover at 31 December 2008, £193m (94%) (2007: £145m (91%)) of actual borrowings were at fixed rates and £13m (6%) (2007: £14m (9%)) were at variable rates. 

Borrowings subject to swap arrangements had a weighted average interest rate, including the lenders' margin of 3.6%.

Interest rate exposure

The exposure at 31 December 2008 of financial assets and financial liabilities to interest rate risk is shown by reference to the interest rate profile of the Group and is set out in section a) of this note. 

Interest receivable and finance costs are at the following rates:

• Interest received on cash balances is at a margin of 1.0% below (2007: 1.0% below) the Bank of England base rate. The weighted average effective interest rate on these investments was 3.7% (2007: 2.1%). 

• Interest paid on borrowings under the loan facility is at a margin of 0.76% over LIBOR (including costs) (see note 16 for details of interest rates). 

The above period end amounts are representative of the risks managed during the year, because the level of exposure changes as borrowings are drawn down and repaid and the mix of borrowings between floating interest rates and fixed interest rates changes. 

Interest rate sensitivity

The group has used a sensitivity analysis technique that measures the estimated change to the fair value of the Group's financial instruments, to the income statement and to equity of either an instantaneous increase or decrease of 0.5% (50 basis points) in market interest rates, from the rates applicable at 31 December 2008, for each class of financial instrument, with all other variables remaining constant. The analysis is for illustrative purposes only as, in practice, market rates rarely change in isolation.

The sensitivity analysis is based on the following:

• Fair value of derivative financial instruments which are not hedge accounted and which are reflected in the Group Income Statement.

• Changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed interest rates if these are recognised at their fair value.

• Changes in interest rates affect the fair value of derivative financial instruments designated as hedging instruments and all interest rate hedges are expected to be highly effective.  Such changes in fair value impact on equity in the sensitivity analysis.

• Changes in the fair values of derivative financial instruments and other financial assets and liabilities are estimated by discounting the future cash flows to net present value using appropriate market rates prevailing at the year end.

Sensitivity analysis table

	0.5% decrease in interest rates £000	0.5% increase in interest rates £000
At 31 December 2008
(Decrease)/increase in fair value of financial instruments	(10,061)	10,061
Impact on income statement: (loss)/gain	(2,942)	2,942
Impact on equity: (loss)/gain	(9,606)	9,606
At 31 December 2007
(Decrease)/increase in fair value of financial instruments	(11,100)	11,100
Impact on income statement: (loss)/gain	(4,932)	4,932
Impact on equity: (loss)/gain	(9,982)	9,982

The above analysis considers the fair value impact of all financial instruments including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities.

Liquidity risk

This is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities. The Group's assets are property investments and are therefore not readily realisable; should the lenders recall the term loans the Group would be exposed to liquidity risk. The Group has also entered into two callable swaps. 

Management of the risk

The Group has borrowing facilities in place, expiring in 2013, as stated in note 16, on which it can readily draw upon at any time. At 31 December 2008, it had total loan facilities of £265m (2007: £200m), of which £59.4m were undrawn (2007: £40.2m).

The Group regularly monitors compliance with financial covenants (including future compliance) connected with the term loans. No breaches have been noted to date or are expected. 

Liquidity risk exposure

The contractual maturities of the financial liabilities at the period-end, based on the earliest date on which payment can be required were as follows: 

	31 December 2008				31 December 2007
£000	Less than one year £000	1 - 5  years  £000	More than 5 years £000	Total  £000	Less than one year £000	1 - 5 years £000	More than 5 years £000	Total
Trade and other payables	2,372	-	-	2,372	3,003	-	-	3,003
Interest rates swaps	13,463	-	14,923	28,386	2,808	-	-	2,808
UK-REIT conversion charge	1,671	2,305	-	3,976	1,322	3,770	-	5,092
Term loans	4,318	222,870	-	227,188	11,690	46,760	160,824	219,274
Total	21,824	225,175	14,923	261,922	18,823	50,530	160,824	230,177

Credit risk

The Group trades with credit worthy third parties and all receivable balances are monitored on an ongoing basis. 

Maximum exposure to credit risk within the Group is equal to the carrying value of financial assets; such assets include cash and cash equivalents, interest rate swap assets and trade debtors. 

The failure of the counterparty to a transaction to meet its obligations under that transaction could result in the Group suffering a financial loss. 

Management of risks

This risk is managed as follows: 

• Transactions involving derivatives are entered into only with reputable banks, the credit rating of which are taken into account so as to minimise the risk to the Group of default 

• Where investment transactions are entered into, the Group utilises a limited number of specialist advisors 

• Cash at bank is held only with reputable banks with high quality external credit ratings 

• The Group monitors trade receivables for impairment on a case-by-case basis 

• A legally binding contract in existence for each tenant occupying rented properties.

Credit risk exposure

The maximum exposure to credit risk during the year ending 31 December 2008 and the period ending 31 December 2007 was as follows: 

	31 December 2008		31 December 2007
	Period end £000	Maximum exposure  £000	Period end £000	Maximum exposure  £000
Trade receivables	405	405	865	865
Cash at bank	675	675	3,862	3,862
Finance leases receivable	3,039	3,039	2,967	2,967
Derivative financial assets	454	454	1,651	1,651
Development property interest	282	282	722	722
	4,855	4,855	10,067	9,404

None of the Group's financial assets were impaired. The Group monitors receivables for impairment on a case-by-case basis. 

Credit quality of receivables 

	Carrying amount £000	Of which neither impaired nor past due £000	Of less than 30 days £000	between 30 and 60 days £000	between 61 and 90 days £000	between 91 and 180 days 18 £000	more than 180 days £000
As of 31 December 2008
Trade receivables	405	256	21	8	6	6	108
Cash at bank	675	675	-	-	-	-	-
Finance leases	3,039	3,039	-	-	-	-	-
Development property interest	282	282	-	-	-	-	-
Derivative financial assets	454	454	-	-	-	-	-
	4,855	4,706	21	8	6	6	108
As of 31 December 2007
Trade receivables	865	202	390	-	-	272	1
Cash at bank	3,862	3,862	-	-	-	-	-
Finance leases	2,967	2,967	-	-	-	-	-
Development property interest	722	722	-	-	-	-	-
Derivative financial assets	1,651	1,651	-	-	-	-	-
	10,067	10,067	390	-	-	272	1

Since the period end, £16k of the past dues as at 31 December 2008 have been collected, with the remainder being monitored. The Group is certain these past dues will be collected in full.

Summary of financial assets and financial liabilities by category 

The carrying amounts of the Group's financial assets and financial liabilities as recognised at the Group Balance Sheet date of the reporting periods under review are categorised as follows. The accounting policies explain how the category of financial instruments affects their subsequent measurement. 

	31 December 2008 £000	31 December 2007 £000
Financial assets
Loans and receivables:
Cash at bank	675	3,862
Trade and other receivables	405	865
Development property interest	282	722
Finance leases	3,039	2,967
Financial assets at fair value through profit or loss:
Basis swaps	454	-
Hedge accounted derivatives:
Derivative interest rate swaps	-	1,651
	4,855	10,067

All financial assets were designated as above on initial recognition. This designation is based upon the criteria in IAS39. 

	31 December 2008 £000	31 December 2007 £000
Financial liabilities
Measured at amortised cost:
Trade and other payables	2,372	3,576
Borrowings under the term loan facility	204,088	159,219
Financial liabilities at fair value through profit or loss:
Derivative interest rate swaps (note 17a)	13,917	2,808
Hedge accounted derivatives:
Derivative interest rate swaps (note 17a)	14,923	224
	28,840	3,032
	235,300	165,827

Capital management policies and procedures 

The Group's capital management objectives are: 

• to ensure that the Group will be able to continue as a going concern, and 

• to maximise the income and capital return to its equity shareholders. 

The Group aims to achieve this through an appropriate balance of equity capital and debt, as shown below. 

The Group's capital at the period-end comprises:

	31 December 2008 £000	31 December 2007 £000
Assets
Total assets	323,120	298,196
Debt
Term loans	204,088	159,219
Equity
Equity share capital	16,794	16,794
Retained earnings and other reserves	62,387	107,283
	79,181	124,077
Total capital	283,269	283,296
Debt as a % of total capital	72.0%	56.2%
Debt as a % of total assets	63.1%	53.4%

The Board, with the assistance of the Joint Managers, monitors and reviews the broad structure of the Group's capital on an ongoing basis. This review includes: 

• the planned level of gearing, which takes account of the Joint Managers' views on the market; 

• the opportunity to buy back equity shares for cancellation, which takes account of the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium); 

• the potential need for new issues of equity shares; and 

• the extent to which profit in excess of that which is required to be distributed should be retained. 

The Group is subject to several capital requirements, including those relating to its status as a UK-REIT. 

• The bank borrowings under the loan facilities are not to exceed 75% of gross assets, reducing to 70% in March 2010, with the exception of AIB which reduces to 70% in October 2009. 

• Rental income must exceed borrowing costs by the ratio 1.3:1. 

• UK-REIT compliance tests. These include loan to property value and gearing tests. The Group must satisfy these tests in order to continue trading as a UK-REIT. This is also an internal requirement imposed by the Articles of Association. 

The Group has complied with all known requirements.

18     Called up share capital 

	31 December 2008 Number	31 December 2008 £000	31 December 2007 Number	31 December 2007 £000
Authorised:
Ordinary Shares of 50p each	50,000,000	25,000	50,000,000	25,000
Issued and fully paid at 50p each	33,587,094	16,794	33,587,094	16,794
At beginning of year/period	33,587,094	16,794	22,677,718	11,339
Issued on exercise of Management Options	-	-	1,600,000	800
Issued following placing participation	-	-	9,309,376	4,655
At end of year/period	33,587,094	16,794	33,587,094	16,794

No Ordinary Shares were issued during the year ended 31 December 2008. On the same date the Shareholders approved an increase to the authorised share capital of the Group of 10m Ordinary Shares of 50p each (£5m). During the previous accounting period, on 11 April 2007, 9,309,376 Ordinary shares of 50 pence each were issued arising in respect of a Placing and Open Offer, raising £38.7m net of expenses.

Options to subscribe for Ordinary Shares of 50p each

On 21 September 2006, the Joint Managers exercised their Options to acquire 1.6m Ordinary Shares at £1.71 per share pursuant to the Management Option Agreement dated 17 September 2003. At 31 December 2007 there were no Options outstanding.

19 Share premium

	31 December 2008 £000	31 December 2007 £000
Balance at beginning of year/period	48,009	12,022
Premium on issue of 50p Ordinary Shares following placing and open offer participation	-	35,376
Premium on issue of 50p Ordinary Shares on exercise of Management Options	-	1,936
Premium on issue of 50p Ordinary Shares in lieu of cash dividend	-	-
Issue expenses	-	(1,325)
Balance at end of year/period	48,009	48,009

Company law restricts the applicability of the Share Premium account and in respect of the Company it may only be applied in paying unissued shares of the Company in respect of capitalisation issues and in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the Company.

20 Capital reserve 

The Capital reserve is held to finance any proposed repurchases of Ordinary Shares, following approval of the High Court in 1998.

	31 December 2008 £000	31 December 2007 £000
Balance at end of year/period	1,618	1,618

21 Cashflow hedging reserve

The interest rate swap derivatives disclosed above are designated as hedges against the term loan with the exception of the following swaps:

• 4.835% for principal amounts £20m from August 2007 to November 2007, £30m from November 2007 to February 2008, £40m from February 2008 to May 2008 and £50m thereafter. Hedge accounting will not apply for this swap, as it is callable upon at each quarterly anniversary at the counterparty bank's option. 

• 4.74% for principal amounts £25m from August 2007 to May 2008, £33m from May 2008 to August 2008 and £38m thereafter. Hedge accounting will not apply for this swap, as it is callable at each quarterly anniversary at the counterparty bank's option.

The swaps designated as hedges against the term loan are wholly effective hedges and therefore the gain or loss on each instrument is recognised directly in equity.

	31 December 2008 £000	31 December 2007 £000
Balance at beginning of year/period	1,427	939
Transfer (to)/from Group Income Statement	-	(1,231)
(Loss)/gain on cashflow hedge taken to equity	(16,350)	1,317
Deferred tax movement	-	402
Balance at end of year/period	(14,923)	1,427
Being:
Valuation at end of year/period	(14,923)	1,427
Deferred tax thereon recognised in equity	-	-
Recognised in equity at end of year/period	(14,923)	1,427

22 Retained earnings

	31 December	31 December
	2008	2007
	£000	£000
Balance at beginning of year/period	56,229	45,407
Retained (loss)/profit for the year/period	(23,004)	16,801
Third interim dividend for the previous period ended 31 December 2007 (2007: 30 June 2006)	(2,771)	(1,639)
First interim dividend for the current year ended 31 December 2008 (2007: 31 December 2007)	(2,771)	(1,821)
Second interim dividend for the period ended 31 December 2007	-	(2,519)
Balance at end of year/period	27,683	56,229

23 Net asset value per share

There is no difference between the normal and adjusted net asset values as at 31 December 2008 and 31 December 2007, due to the release of all deferred tax liabilities on conversion to UK-REIT status.

Following the exercise of the Management Options by the Joint Managers on 21 September 2006, there is no dilution and therefore no difference between adjusted basic and diluted net asset values as at 31 December 2008 and 31 December 2007.

Net asset values have been calculated as follows:

	31 December 2008 £000	31 December 2007 £000
Net assets per Group Balance Sheet	79,181	124,077
Derivative interest rate swaps (net) Basis swaps	28,840 (454)	1,381 -
EPRA NAV	107,567	125,458
	Number of shares	Number of shares
Ordinary Shares: Issued share capital	33,587,094	33,587,094
Net asset value per Share	235.75p	369.42p
EPRA NAV	320.26p	373.53p

EPRA NAV is calculated as Balance Sheet net assets including the valuation result on trading properties, excluding fair value adjustments for debt and related derivatives. 

24 Total return per share

The total return per share in a period is calculated as the increase in net asset value per share (as defined in note 23) plus the dividend per share paid. 

Decrease in Net Asset Value per share (note 23)	(133.67p)
Plus dividend paid per Share	16.5p
	(117.17p)

25 Capital commitments

Primary Health Investment Properties Limited, a wholly owned subsidiary of the Company, has entered into separate development agreements with third parties for the purchase of primary health developments; these agreements are conditional on the completion of certain building development work at a consideration of £34m plus VAT (2007: £35.7m plus VAT). 

26 Related party transactions

As shown in note 3, the Joint Managers of the Group, Nexus and JOHCML, receive a management fee, calculated at a combined 1% of the first £50m of the property assets of the Group and 0.75% thereafter, subject to a minimum of £120,000 per annum, the first £100,000 of which is paid to Nexus. Nexus also receives a property management fee and a fee for the preparation of the tax provisions based on a reimbursement of the costs of services of Nexus employees engaged directly on the Group's activities of £93k (2007: £109k). Amounts owing to these related parties are shown in note 3.

On 16 November 2006, Shareholders approved the amendments to the Management Agreement whereby the Joint Managers are entitled to a Performance Incentive Fee of 15% of any performance in excess of an 8% per annum increase in the Company's "Total Return" as derived from the audited financial statements for the respective financial period. 

Amounts owing to these related parties are shown in note 3.

The Total Return is determined by comparing the variation in the stated net asset value per share (on a fully diluted basis, adjusting for deferred tax and the REIT conversion charge and adding back gross dividends paid in such period) against the fully diluted net asset value per share from the previous period's audited accounts. No performance incentive fee was payable in respect of 2008 (2007: £2.6m).

Details of the amounts paid in relation to related party transactions are provided in note 3. 

There are no employees other than the Directors. 

 

END

 

 

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