Final Results

RNS Number : 7756X

Primary Health Properties PLC

21 February 2012

 



Primary Health Properties PLC

Annual Report for the year ended 31 December 2011  

Primary Health Properties PLC ("PHP", the "Group" or the "Company"), one of the largest providers of modern primary healthcare facilities, is pleased to announce its audited results for the year ended 31 December 2011.

GROUP FINANCIAL HIGHLIGHTS

·      Total debt of £300m secured or with agreed terms to refinance

o  New debt facilities totalling £125 million secured and operating as at 31 December 2011

o  Credit approved terms agreed with Royal Bank of Scotland and Santander to refinance £175 million club facility for new a four year term

·      Profit before revaluation result and change in fair value of derivatives rose from £9.1 million to £10.0 million

·      Payment of 18.0p of dividends during the year (2010: 17.5p); 9.25p second interim dividend for 2011 declared, payable on 5 April 2012

·      EPRA net asset value of 318.7p per share (2010: 311.5p)

GROUP OPERATIONAL HIGHLIGHTS

·      Rental and related income increased by £3.8 million to £30.7 million (2010: £26.9 million)

·      Eight high quality properties acquired during the year, at a cost of £45.7 million, adding £2.9 million to the rent roll

·      Including commitments, total portfolio value has increased by 7% to £539.7 million at an initial yield of 5.74% (2010: £503.6 million)

·      Average annualised uplift of 3.0% on reviews completed in the year, combined with acquisitions and commitments, increases annualised rent roll to £32.3 million (2010: £30.4 million)

·      Portfolio 100% let

·      Health and Social Care Bill should enhance the role of GPs and lead to increased demand for modern primary healthcare facilities in the medium term

Harry Hyman, Managing Director of Primary Health Properties, commented:

"I am delighted to announce a 15th successive year of dividend growth, underpinned by the strength of the Group's income as well as an increase on revaluation of the Group's property assets. Market drivers remain very positive for PHP; the Government has reaffirmed its commitment to the NHS, ring fenced its budget and provided for real terms increases in expenditure.

"We are pleased to have secured new banking facilities at competitive rates and welcome Clydesdale and Aviva as new banking partners.  We are also very pleased that Royal Bank of Scotland and Santander have continued to support the Group and agreed to extend the term of their loan facilities.  Accordingly, the Group will have capital and headroom for the acquisition of new assets.

"The Group is ideally positioned to take advantage of the new Health and Social Care Bill's enactment, and the services which are increasingly being demanded from new, modern specialist premises. The Board is confident in the current portfolio's ability to generate growth, whilst also having the potential to exploit a strong pipeline of acquisition opportunities."

For further information contact

Harry Hyman / Phil Holland

Primary Health Properties PLC

T [phone]

[e-mail]

[e-mail]

David Rydell / Victoria Geoghegan / Elizabeth Snow

Pelham Bell Pottinger

T [phone]

CHAIRMAN'S STATEMENT

I am pleased to present my report to shareholders for 2011, which has been a year of further progress for the Group.

The Group's asset base of primary care medical centres has performed well. This has enabled further growth in asset values, income and returns to shareholders.  This has been achieved against the backdrop of considerable volatility in the wider economy, in underlying financial markets and the healthcare sector, which awaits the enactment of the Health and Social Care Bill (the "Bill").

The Bill has been widely debated by both the House of Lords and Parliament, and is heading towards the final stages of its approval process. It is proposed that a new body, the NHS Commissioning Board, will assume overall responsibility for the creation of a new care commissioning structure.  The proposed Chairman, Chief Executive and Board of Directors of this body have been announced and some of the structural changes to be brought about by the Bill are starting to be implemented.

The Board believes that the increased demands made of the NHS and the transfer of services into communities and away from general hospitals, can only be met by the provision of modern, fit for purpose medical centres.  We see this as a positive backdrop for the Group's growth strategy.

Performance

The Group completed the acquisition of eight properties during the year for a total cost of £45.7 million.  This brings the total number of completed assets held by the Group to 156.  With forward funding commitments and conditional purchase contracts for a further five assets, the Group's property portfolio consists of 161 primary healthcare assets.  These modern medical centres provide care facilities for some 1.65 million patients.

The quality of the asset portfolio in terms of length of unexpired lease, occupancy levels and the strength of its underlying income, being largely reimbursed by Government funded bodies, is reflected in the year end revaluation of the property assets.  Including commitments, the total portfolio value stands at £539.7 million, including a revaluation uplift of £10.6 million for the year.

Group revenues received in 2011 increased by 14% to £30.7 million (2010: £26.9 million). Including committed purchases, the contracted annual rent roll would be £32.3 million (2010: £30.4 million).

In a difficult environment for the property sector, particularly outside London, the Group achieved satisfactory growth from rent reviews at around 3% per annum on those agreed during the year and has an efficient and tightly controlled cost base.

Profit before revaluation results and change in fair value of derivatives ("Profit from trading activities") during the year increased by 10% to £10.0 million (2010 - £9.1 million), including the expensing of arrangement fees on refinanced debt.

Increased capital base

The problems inherent in global markets have been widely publicised. These include the continuing sovereign debt issues and increased banking capital requirements in Europe, as well as general illiquidity and constraints in the global equity and debt capital markets.

Against this backdrop, the Group successfully completed a small share issue in April issuing 5.3 million shares at 305 pence, a discount of only 2.5% to the then share price.  The small dilution resulting from the issue has been recovered over the remainder of the year and EPRA net asset value per share stood at 318.7 pence at the year end, an increase of some 2.3% for the year.

Debt funding

As previously reported, the Group decided to refinance its older facilities ahead of their scheduled expiry in January 2013. Faced with a declining availability of credit, the Group has successfully agreed terms to refinance a significant majority of its shorter term debt.

The quality of the Group's assets and the security of the underlying rental income have continued to make PHP attractive to lenders, allowing new relationships to be developed with Clydesdale Bank and Aviva.  Existing lenders, Royal Bank of Scotland and Santander, have also confirmed their confidence in the Group by agreeing to renew current debt facilities, although, as in the wider market, the cost of these facilities has increased.

A total of £300 million of new debt facilities has been secured or terms have been agreed to refinance as at the date of this report. This will increase the pool of lenders to the Group and extend the average maturity of banking facilities.  The cost of using bank debt has increased in the year and is reflected in the higher margins that we will have to pay.  This will impact the income statement for 2012 and beyond, but the growth potential within the Group's rent roll and from asset management opportunities will compensate for this in the coming years.

Dividends

The Company paid a total of 18.0 pence per share in dividends to shareholders in the year.  This was the 15th successive year of dividend growth, and is fuelled by the strength of the Group's income.  The Board has approved the payment of a second interim dividend of 9.25 pence per share in respect of 2011.  This will be payable on 5 April 2012 to shareholders on the register on 9 March 2012, with an ex-dividend date of 7 March 2012.

Outlook

The Government has ring fenced the NHS budget and provided for small annual real terms increases in expenditure, reaffirming its commitment to the NHS.  The changing demands put upon health care provided by the NHS and the drive to increase patient choice are to be addressed by the provisions of the Health and Social Care Bill.

The country's general practitioners will continue to be the "gatekeepers" for the NHS. They will become more responsible for commissioning services as the Government looks to increase patient choice. Services will move into local communities and non-critical care and diagnostic activities will be devolved from general hospitals.  In order to do this in an efficient, cost effective manner there is, in PHP's view, a real demand for new, modern, specialist premises from which primary care is delivered.

2011 has seen the Group strengthen its balance sheet. This will enable the Group to take advantage of opportunities to expand its portfolio as we move into 2012 when the Bill is enacted and the service delivery changes are implemented.  The Board is confident in the ability of the current portfolio to generate growth. In addition, the Group has a strong pipeline of acquisition opportunities to further enhance the portfolio.

I look forward to reporting further progress in 2012.

Graeme Elliot

Chairman

20 February 2012

MANAGING DIRECTOR'S REVIEW

Trading performance

	2011	2010
	£m	£m
Rental and related income	30.7	26.9
Expenses	(5.6)	(5.0)
	25.1	21.9
Net financing costs	(15.4)	(12.8)
Profit on sale of AHMP shares	0.3	-
Profit before revaluation result and change in fair value of derivatives	10.0	9.1
Change in fair values of derivatives	(8.0)	(4.7)
Revaluation result on property portfolio	10.6	22.8
Profit before tax	12.6	27.2
Dividends paid - total	£11. 8m	£10.8m
Dividends paid - per share	18.0 pence	17.5 pence

Profits from the trading activities of the Group for the year increased by 10% to £10.0 million (2010 - £9.1 million). This included a profit of £0.3 million from the sale of a strategic investment in A H Medical Properties PLC ("AHMP") and the expensing of £0.4 million of arrangement fees relating to bank debt refinanced in the year.

Gross contracted rents have increased by 12.1% to £31.4 million as at 31 December 2011 (31 December 2010 - £28.0 million).  This increase has been driven by:

	£m
Acquisitions	2.9
Rent reviews	0.4
Asset management projects	0.1
Total	3.4

The Group's rent roll is subject to effectively upward only rent reviews.  The majority are reviewed to open market values with approximately 11% either formally index linked or with fixed increases. The Group achieved weighted average rental growth on reviews completed in the year of 3.0% per annum (2010 - 3.2%).  Growth is still being experienced in all regions within the Group's portfolio, with open market reviews keeping pace with inflation on average over time.  Average lease length within the portfolio stands at 16.3 years (2010 - 16.9 years).

The average fee rate paid to the joint managers has reduced by 5.7% to 0.77% of gross assets (2010 - 0.82%) as the sliding scale fee rate, introduced in 2011, has had an impact as gross assets have increased.  As the Group's asset portfolio grows further above £500 million, the average fee rate will reduce further.

Net finance costs have increased in the year by £2.7 million, as the significant growth in assets over the last two years has been partly funded by debt.  The 2011 charge also includes an amount of £0.4 million that represents the balance of arrangement fees relating to existing debt facilities that were refinanced in 2011, ahead of their contracted maturity.  The average cost of debt in 2011 was 5.02% (including margin and the impact of interest rate swaps) which is an increase of some 45 basis points over that of 2010.

Portfolio valuation and performance

	2011	2010
	£m	£m
Investment properties	521.2	462.1
Properties in the course of development	4.4	7.2
Total properties	525.6	469.3
Finance leases	3.1	3.1
Total owned and leased	528.7	472.4
Purchases committed at the period end	11.0	31.2
Total owned, leased and committed	539.7	503.6

The Group's real estate portfolio, including committed development properties, was independently valued by Lambert Smith Hampton ("LSH"), Chartered Surveyors and Valuers, as at 31 December 2011 at open market value, as defined by the Royal Institution of Chartered Surveyors.  On the basis that all development commitments are completed, the total value was £532.7 million. Adding an asset held on a finance lease and a property secured under a conditional purchase contract as at 31 December 2011, the Group's property portfolio is valued at an aggregate £539.7 million.

The average investment yield across the portfolio has tightened marginally during the year, with the 31 December 2011 valuation reflecting an initial yield of 5.74% (31 December 2010 - 5.79%) but a true equivalent yield of 6.06% compared to 6.00% at the end of 2010.  The tightening in yields, combined with the rent reviews achieved through the year, has led to an overall revaluation uplift of £10.6 million (2010 - £22.8 million) over cost or December 2010 valuation.

The Joint Managers have also undertaken a valuation of the real estate portfolio using a discounted cash flow ("DCF") methodology, reflecting the quasi infrastructure nature of the underlying assets. Using a DCF basis, the resulting value would be £589.4 million as opposed to the traditional yield based valuation of £539.7 million.  This difference in value represents 73 pence per share in net asset value terms. 

In the DCF valuation, cash flows from the assets are discounted at 7%.  This is based on a margin of 250 basis points over an historic long term gilt yield of 4.5%.  At current gilt yields, this would actually be a margin of approximately 430 basis points over a 16 year gilt.

The Group benchmarks its real estate performance against the IPD Healthcare Property Index.  At present, this index is published on an annual basis, although it is hoped to become six monthly in future.  The Group's assets outperformed the Index in 2010 delivering a total return of 13% against the Index of 11%.  The 2011 index will not be published until May 2012 and we will report our comparative performance with our interim statement.

The Group's property portfolio showed a total return of +8.24% in 2011, +7.13% per annum over the three years to the balance sheet date and +4.68% per annum over the five year period to this date.  This compares to the IPD All Property Index that showed +8.1%, -2.5% and +1.1% respectively.

Portfolio activity

The Group completed the acquisition of eight properties during the year for a total of £45.7 million, adding a total of £2.9 million to the Group's annual rent roll and 18,996 square metres of fully let space.

	m2	Occupational tenants
Cowbridge Medical Centre, Cowbridge	2,270	Two GP practices and local NHS Trust
Shefford Medical Centre, Shefford	2,117	GP practice, PCT and pharmacy
Newton Drive Medical Centre, Blackpool	1,613	GP practice, PCT and pharmacy
Oswestry Primary Care Centre, Oswestry	4,909	GP practice, PCT and retail tenant
Chess Medical Centre, Chesham	1,932	Two GP practices, PCT and pharmacy
South Queensferry Medical Centre, Queensferry	1,427	GP practice and local NHS Trust
Lombard Street Practice, Newark	1,434	GP practice and pharmacy
Weelsby View Health Centre, Grimsby	3,294	Five GP practices, NHS Trust, Local Authority and pharmacy

The Group looks to acquire modern, purpose built assets of significance to their local communities and that provide the opportunity for general practitioners to offer additional healthcare related services from these premises.  The average lot size of the Group's portfolio stood at £3.35 million at the balance sheet date, having grown by 6.7% through the year (2010 - £3.14 million).

PHP has a strong pipeline of potential investment purchases and opportunities to forward fund the development of new centres. The Group applies prudent acquisition policies to secure assets that contribute immediately to profitability but also have potential for future growth.

Commitments

The Group has entered into five forward funded commitments as at the year end. These are to acquire a mix of completed assets and development projects upon completion.

	Total commitment £'m	Outstanding £'m	Description
Contracted in 2011
Pelton	4.0	2.7	1,613 sq m medical centre (5 GP practice, PCT and pharmacy)
Arley	1.9	1.7	648 sq m medical centre (4 GP practice)
Ramsgate	2.4	1.8	773 sq m medical centre (2 GP practice and pharmacy)
Edinburgh	3.6	3.6	1,144 sq m medical centre (7 GP practice)
	11.9	9.8
Pre-existing commitments
Allesley	2.8	1.2	795 sq m medical centre (5 GP practice and pharmacy)
Total as at 31 December 2011	14.7	11.0

Asset management

An important element of managing the Group's portfolio is identifying opportunities to add to the income and value of owned assets through capital projects or lease re-gearing.  During 2011, five projects were completed at a total cost of £1.37 million.  Capital projects added an average 13.3 years to the unexpired lease term of the respective properties.  Total additional rent receivable over the extended term of these leases is some £2.40 million (excluding any growth), whilst these management actions generated an uplift in capital value of 35% over the monies invested.

Terms have been agreed for a further nine projects to be undertaken in 2012, a total capital spend of £3.45 million.  This will add an average of 14.4 years to the respective leases, generate additional rental income of £0.3 million per annum and show a valuation uplift of nearly 40% on cost.  Further projects have been identified and are at various different stages of negotiation with the parties involved.

Dividends and increase in capital base

A total of 18.0 pence per share was distributed to shareholders in 2011 (2010 - 17.5 pence), representing the 15th consecutive year of dividend growth.  Once again, no portion of this dividend represents a Property Income Distribution ("PID").  The total dividend paid was 89% covered by earnings in 2011 (2010 - 93%), excluding the revaluation result, the movement in the fair value of derivatives and the value of dividends met by the issue of scrip shares.

In April 2011, the Company undertook a small capital raising, issuing a total of 5,284,041 shares at a price of 305 pence per share, a discount of 2.5% to the then share price.  The net proceeds of the issue of £15.7 million have been used to fund property acquisitions. A further 185,856 shares have been issued in the year to satisfy the scrip alternative to the cash dividends paid.

Overall, total net assets have increased by 2.1% in the year, including the impact of the revaluation result and movement in the fair value of derivatives.  Net asset value per share, calculated in accordance with the European Public Real Estate Association (EPRA) guidelines, excluding fair value adjustments of debt and associated derivatives, increased by 2.3% to 318.73 pence.

Total shareholder return

Total shareholder return is also benchmarked by the Company to show how its performance compares to that of other investments that may be undertaken by shareholders.  The table below shows how PHP has performed, on an annualised basis, compared to the main alternative investment classes:

	One year	Three years	Five years
	%	%	%
Primary Health Properties	0.5	27.7	(0.4)
FTSE All-Share Real Estate Index	(8.8)	5.0	(17.1)
FTSE All-Share Index	3.5	12.9	1.2

Source: Investment Property Databank ("IPD")

Debt finance

As at the year end, the Group held a total of £303.0 million of bank debt.  This is an increase of £34.7 million from 2010, having been drawn to fund acquisitions and development projects during the year.  At 31 December 2011, the Group's loan to value ratio ("LTV") stood at 57.8% (31 December 2010 - 57.6%) against a covenant maximum of 70%.  Interest cover for the year was 2.0 times (2010 - 2.1 times) with a Group covenant minimum requirement of 1.3 times.

A major objective of the Group for 2011 was to progress the refinancing of its main banking facilities that were due to expire in January 2013.  In total, £300 million of debt facilities have been secured or have agreed terms to date, giving the Group a secure financial base for the coming years, widening the spread of debt providers working with the Group and extending and improving the profile of the maturity of the Group's facilities.

Underlying interest rates and gilt yields have fallen in the year to historic lows.  As banking capital has become scarcer, however, margins charged by banks to provide debt have increased during 2011.

In July a new £50 million, three year, interest only, revolving debt facility was completed with Clydesdale Bank, providing resource for the continued acquisition activity of the Group.  As at 31 December 2011, this loan had been drawn to the sum of £14.2 million and the balance will be used to finance further acquisitions in 2012.

On 28 November 2011, a £75 million, seven year interest only facility was completed with Aviva to refinance part of the Group's current portfolio.  £50 million of this loan was used to repay bi-lateral loans from Royal Bank of Scotland and Allied Irish Banks as part of the wider, refinancing of Group debt.  The balance of these proceeds will be used to finance commitments and future property acquisitions.  This loan was secured at a fixed, all inclusive interest rate of 4% per annum.

The Group has agreed fully credit approved terms to refinance the bi-lateral loans provided by Royal Bank of Scotland and Santander.  These facilities, totalling £175 million, will be renewed as a club facility on an interest only basis for a four year term.  The maximum LTV allowed under the new facility is capped at 65%, which is a small reduction from the current 70% covenant.  This facility is currently being documented and is expected to be completed in March 2012.

The bi-lateral facility with Allied Irish Banks, in a reduced amount of £30 million, will continue to its original maturity of January 2013.  Discussions continue to refinance this with a new provider, but cover is already in place from existing resources if needed.

The table below shows the spread of Group debt and maturity following the completion of the refinancing detailed above:

		Facility	Drawn at	Headroom
Provider	Maturity	maximum	31 Dec 2011	31 Dec 2011
		£'m	£'m	£'m
Allied Irish Banks	Jan 2013	30.0	30.0	-
Clydesdale Bank	July 2014	50.0	14.2	35.8
Royal Bank of Scotland/ Santander	Mar 2016	175.0	156.5	18.5
Aviva	Nov 2018	75.0	75.0	-
Aviva	Dec 2020	25.0	-	25.0
Aviva	Jan 2032	27.3	27.3	-
		382.3	303.0	79.3

The average weighted maturity of the Group's debt facilities will be increased to 5.6 years (31 December 2010 - 4.0 years).

Interest rate hedging

Alongside the agreement to refinance the Group's debt facilities that were due to expire in 2013, the Company decided to close out interest rate swaps with equivalent maturities.  A nominal amount of £35 million of interest rate swaps and a floor with a nominal value of £15 million were cancelled.  The premium payable on this transaction totalled £2.9 million and had been charged to income in previous periods within the total Mark to Model valuation of the Group's entire derivative portfolio.

Following the cancellation of the swaps above, a total of £173 million of  interest rate swaps were in effect at 31 December 2011 (31 December 2010 - £208 million).  As term interest rates have fallen through 2011, the Mark to Model liability of the Group's derivative portfolio has increased.  As at 31 December 2011, this stood at £49.5 million (31 December 2010 - £30.9 million).  There is no cash flow impact of these Mark to Model adjustments.

Underlying interest rates have been at historic lows in recent periods. This has led to the increase in the mark to model liability. If interest rates increase to more normal levels in the years ahead, this liability will reduce, whilst the underlying protection will remain in place.

Principal risks and uncertainties

In common with most businesses, the Group is affected by a number of risks and uncertainties, not all of which are wholly within the Group's control. The Board has reviewed and agreed policies for managing each of the risks and uncertainties which are summarisedbelow, but regards the following items as its principal risks at the present time:

Risk	Limited debt market capacity restricts ability to continue to fund operations.
Impact	Without confirmed debt facilities, PHP may be unable to meet current and future commitments or repay or refinance debt facilities as they become due.
Mitigation	PHP funds its operations through a mixture of income from its operations, equity and bank finance.  PHP constantly monitors its cash flow and debt funding requirements in order to ensure that it can meet its liabilities.  PHP keeps its debt facilities under review to ensure a spread of providers and maturities so that its refinance risk can be minimised.
	PHP has to date secured or agreed terms on £300 million of debt facilities from a variety of lenders, with a spread of maturities to refinance its short term loan facilities and provide further resource for forthcoming commitments and acquisitions.

Risk	Banking facilities include various covenant requirements.
Impact	Should the Group be unable to meet these covenants it could result in possible default or penalties being levied.
Mitigation	PHP monitors its covenant compliance on a continuing basis to ensure compliance or early warning of any issues that may arise.  The Group maintains its borrowings at levels well below its maximum covenant requirements and retains the flexibility of substituting security or refinancing loans should it need to.

Risk	Exposure to interest rate movements
Impact	Movement in underlying interest rates could adversely affect the Group's profits and cash flows.
Mitigation	The Group retains a proportion of its debt on a long term, fixed rate basis.  It looks to mitigate its exposure to interest rate movements through the use of a series of interest rate swaps and other derivative instruments.

Risk	Lack of capital resources to support the Group's activities
Impact	Without sufficient capital, PHP may become unable to progress investment opportunities as they arise or to counteract the impact of falling property values on the Group's balance sheet and finance commitments.
Mitigation	Liquidity and gearing are kept under constant review by the Joint Managers and the Board.  Forward fund commitments are only entered into if supported by committed, available funds.
	Historically, the Company has been able to access the equity markets to raise additional capital when required.  The Company undertook a share placing during 2011, raising an amount of £15.7 million net of costs.

Environmental matters 

PHP specialises in the ownership of freehold or long leasehold interests in modern purpose-built healthcare facilities, the majority of which are leased to general practitioners and other associated healthcare users. Environmental matters are considered as part of the assessment of the suitability of purchasing new medical centres to expand the portfolio, whether through forward purchase development agreements or through open market purchases. PHP undertakes an assessment of environmental risk as an important element of its due diligence process, obtaining an environmental desktop study and energy efficiency certificates. PHP has engaged an Environmental Consultant, Collier & Madge, to help in this process. PHP's ability to influence the energy efficiency of buildings is limited where completed properties are acquired and let on FRI terms. Where possible and as a norm for newly built premises, environmental issues are included in the leases entered into by the medical practitioners. More generally, new buildings acquired are usually specified to meet the NHS's exacting standards with regard to environmental considerations.

PHP is committed to the principles of continuous improvement in managing environmental issues, including the proper management and monitoring of waste, the reduction of pollution and emissions, and compliance with environmental legislation and codes of practice.

Relationships

Other than shareholders, the Group's performance and value are influenced by other stakeholders, principally its lessees (the GPs, NHS organisationsand healthcare users), the property developers, the District Valuers, lenders and the Joint Managers. The Group's approach to these relationships is based on the principle of mutual understanding of aims and objectives and the highest standards of ethics and business practice.

Social and community issues

The Group provides purpose built healthcare properties for use by GPs, NHS organisations, pharmacies and healthcare users, thus indirectly benefiting the communities in which they are based.

Harry Hyman

Managing Director

20th February 2012

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2011

		2011	2010
		£000	£000
Rental income		30,333	26,574
Finance lease income		343	341
Rental and related income		30,676	26,915
Direct property expenses		(436)	(398)
Administrative expenses		(5,123)	(4,646)
Operating profit before revaluation result on property portfolio		25,117	21,871
Profit on sale of Available For Sale ("AFS") investments		312	-
Net revaluation result on property portfolio		10,584	22,790
Operating profit before financing costs		36,013	44,661
Finance income		414	160
Finance costs		(15,831)	(12,882)
Fair value loss on interest rate swaps and amortisation of cash flow hedging reserve		(7,947)	(4,714)
Profit on ordinary activities before taxation		12,649	27,225
Current taxation		5	36
Conversion to UK-REIT charge		-	(1,586)
Taxation credit/(expense)		5	(1,550)
Profit for the year (1)		12,654	25,675
Other comprehensive income being:
Fair value movement on interest rate swaps treated as cash flow hedges		(13,613)	(6,013)
(Recycling of previously unrealised gain)/unrealised gain on current asset investment		(73)	79
Other comprehensive income for the year net of tax (1)		(13,686)	(5,934)
Total comprehensive income for the year net of tax (1)		(1,032)	19,741
Earnings per share (2)		18.97p	41.30p
Adjusted earnings per share (2) (3)		14.54p	14.72p

The above relates wholly to continuing operations.

(1) Wholly attributable to equity shareholders of Primary Health Properties PLC.

(2) There is no difference between basic and fully diluted EPS.

(3) Adjusted for large one-off items and movements in fair value of properties and derivatives.

GROUP BALANCE SHEET

as at 31 December 2011

		2011	2010 Restated**
		£000	£000
Non current assets
Investment properties		525,586	469,290
Net investment in finance leases		3,069	3,036
Derivative interest rate swaps		24	413
		528,679	472,739
Current assets
Current asset investments		-	555
Trade and other receivables		2,633	2,582
Net investment in finance leases		30	48
Cash and cash equivalents		77	370
		2,740	3,555
Total assets		531,419	476,294
Current liabilities
Term loans		(592)	(3,557)
Derivative interest rate swaps		(23,866)	(16,859)
Corporation tax payable		-	(48)
UK-REIT conversion charge payable		-	(1,998)
Trade and other payables		(5,831)	(4,837)
Deferred rental income		(6,624)	(5,942)
		(36,913)	(33,241)
Non-current liabilities
Term loans		(300,747)	(263,888)
Derivative interest rate swaps		(25,639)	(14,419)
		(326,386)	(278,307)
Total liabilities		(363,299)	(311,548)
Net assets		168,120	164,746
Equity
Share capital		34,136	31,401
Share premium account		54,430	53,934
Capital reserve		1,618	1,618
Special reserve		57,405	44,442
Cash flow hedging reserve		(26,892)	(13,279)
Retained earnings		47,423	46,630
Total equity *		168,120	164,746
Net asset value per share - basic		246.25p	262.32p
EPRA net asset value per share		318.73p	311.47p

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

** Principal repayments on Aviva fixed term loan of £0.6 million restated to current liabilities from non-current liabilities. This restatement has no impact on net assets.

These financial statements were approved by the Board of Directors on 20 February 2012 and signed on its behalf by:

Graeme Elliot

Chairman

GROUP CASH FLOW STATEMENT

for the year ended 31 December 2011

		2011	2010
		£000	£000
Operating activities
Profit on ordinary activities before tax		12,649	27,225
Less: Finance income		(414)	(160)
Plus: Finance costs		15,831	12,882
Plus: Fair value loss on derivatives		7,947	4,714
Operating profit before financing costs		36,013	44,661
Adjustments to reconcile Group operating profit to net cash flows from operating activities:
Revaluation gain on property portfolio		(10,584)	(22,790)
Profit on sale of AFS Investment		(312)	-
Increase in trade and other receivables (1)		(146)	(946)
Increase in trade and other payables (1)		1,095	4,003
Cash generated from operations		26,066	24,928
UK-REIT conversion charge instalments		(1,998)	(1,934)
Taxation paid (2)		(43)	(193)
Net cash flow from operating activities		24,025	22,801
Investing activities
Payments to acquire investment properties		(45,712)	(25,234)
Disposal of AFS Investment		788	-
Payments to acquire shares in AH Medical Properties PLC		-	(476)
Payments to acquire Anchor Meadow Limited		-	(5,498)
Payments to acquire Sinclair Montrose Properties Limited		-	(23,842)
Payments to acquire Abstract Integrated Healthcare Limited (3)		-	(1,856)
Payments to acquire Charter Medinvest Limited		-	(6,787)
Payments to acquire Health Investments Limited (3)		-	(7,214)
Interest received on developments		296	134
Bank interest received		35	4
Other interest		4	8
Net cash flow used in investing activities		(44,589)	(70,761)
Financing activities
Proceeds from issue of shares (net of expenses)		15,605	-
Term bank loan drawdowns		145,953	85,700
Term bank loan repayments		(111,007)	(15,924)
Swap interest payable		(8,833)	(8,461)
Non utilisation fee		(224)	-
Loan arrangement fees		(1,690)	(176)
Interest paid		(5,454)	(3,211)
Swap buy back costs		(2,880)	-
Dividends received		-	15
Equity dividends paid - net of scrip dividend		(11,199)	(9,825)
Net cash flow from financing activities		20,271	48,118
(Decrease)/increase in cash and cash equivalents for the year		(293)	158
Cash and cash equivalents at start of year		370	212
Cash and cash equivalents at end of year		77	370

(1) Asset movements include movements relating to acquisitions

(2) Taxation was paid in the period in order to settle the outstanding liabilities in the acquired companies. All amounts payable were included in the consideration calculation.

(3) Payment net of acquired debt commitments.

GROUP STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2011

					Cashflow
	Share	Share	Capital	Special	hedging	Retained
	capital	premium	reserve	Reserve*	reserve	earnings	Total
	£000	£000	£000	£000	£000	£000	£000
1 January 2011	31,401	53,934	1,618	44,442	(13,279)	46,630	164,746
Profit for the year	-	-	-	-	-	12,654	12,654
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps	-	-	-	-	(13,669)	-	(13,669)
Amortisation of cash flow hedging reserve	-	-	-	-	56	-	56
Recycling of previously unrealised gain	-	-	-	-	-	(73)	(73)
Total comprehensive income	-	-	-	-	(13,613)	12,581	(1,032)
Proceeds from capital raisings	2,642	-	-	13,474	-	-	16,116
Expenses of capital raisings	-	-	-	(511)	-	-	(511)
Dividends paid:
Second interim dividend for the year ended 31 December 2010 (9.00p)	-	-	-	-	-	(5,363)	(5,363)
Scrip dividends in lieu of second interim cash dividend (net of expenses)	45	244	-	-	-	(289)	-
First interim dividend for the year ended 31 December 2011 (9.00p)	-	-	-	-	-	(5,836)	(5,836)
Scrip dividend in lieu of first interim cash dividend (net of expenses)	48	252	-	-	-	(300)	-
31 December 2011	34,136	54,430	1,618	57,405	(26,892)	47,423	168,120
1 January 2010	30,729	50,664	1,618	44,442	(7,266)	31,728	151,915
Profit for the year	-	-	-	-	-	25,675	25,675
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps treated as cash flow hedges	-	-	-	-	(6,013)	-	(6,013)
Unrealised gains at fair value through equity	-	-	-	-	-	79	79
Total comprehensive income	-	-	-	-	(6,013)	25,754	19,741
Dividends paid:
Second interim dividend for the year ended 31 December 2009 (8.75p)	-	-	-	-	-	(5,061)	(5,061)
Scrip dividends in lieu of second interim cash dividend (net of expenses)	116	595	-	-	-	(711)	-
First interim dividend for the year ended 31 December 2010 (8.75p)	-	-	-	-	-	(4,764)	(4,764)
Scrip issue in lieu of first interim dividend (net of expenses)	54	262	-	-	-	(316)	-
Share consideration for the HIL acquisition	502	2,413	-	-	-	-	2,915
31 December 2010	31,401	53,934	1,618	44,442	(13,279)	46,630	164,746

* The Special Reserve is a distributable reserve

NOTES TO THE FINANCIAL STATEMENTS

1. Corporate information

The Group's financial statements for the year ended 31 December 2011 were approved by the Board of Directors on 20 February 2012 and the Balance Sheets 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.

2. Accounting policies

2.1 Basis of preparation

The Group's financial statements have been prepared on the historical cost basis, except for investment properties and derivative financial instruments that have been measured at fair value.

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

Statement of compliance

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 2006 and Article 4 of the IAS Regulations.

2.2 Summary of significant accounting policies

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 on consolidation.

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

Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment of business, being investment in property in the United Kingdom leased principally to GPs, NHS Organisations and other associated health care users.

Investment properties and investment properties under construction

The Group's investment properties are held for long-term investment. Initially, investment properties are measured at cost including transaction costs. Subsequent to initial recognition, investment properties and investment properties under construction are stated at fair value based on market data and 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 and investment properties under construction are included in the Group Statement of Comprehensive Income 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 Statement of Comprehensive Income in the year of disposal.

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 Statement of Comprehensive Income in the year in which it accrues.

Property acquisitions and business combinations

Where a property is acquired through the acquisition of corporate interests, the Board considers the substance of the assets and activities of the acquired entities in determining whether the acquisition represents the acquisition of a business. The basis of the judgement is set out in note 2.3(b).

Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values on the acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Otherwise, corporate acquisitions are accounted for as business combinations.

Current asset investments

Current asset investments are held as Available For Sale ("AFS") in accordance with IAS 39. Any unrealised gain or loss is recognised through the Group Statement of Comprehensive Income.

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 cash flows 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 are recognised in the Group Statement of Comprehensive Income.

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 Statement of Comprehensive Income.

Income

Revenue is recognised to the extent that performance has been provided and it is probable that economic benefits will flow to the Group which can be reliably measured. Revenue is measured at the fair value of the consideration receivable, excluding discounts, rebates, VAT and other sales taxes or duty.

Rental income

Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease term. A rent adjustment is recognised from the rent review date in relation to unsettled rent reviews. Incentives for lessees to enter into lease agreements are spread evenly over the lease terms, even if the payments are not made on such a basis.

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 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, including any bank overdrafts, with an original maturity of three months or less.

Trade and other payables

Trade payables 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 directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs the Group incurs in connection with the borrowing of funds.

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 of £5.2 million based on the value of the properties as at the date of conversion. This amount was payable over four years. Acquired companies are converted to UK-REIT status and further one off charges become payable on conversion.

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 Statement of Comprehensive Income 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 any non-REIT 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 at fair value through profit or loss include financial assets designated upon initial recognition as fair value through profit and loss. This category includes derivative financial instruments entered into by the Group that do not meet the hedge accounting criteria as defined by IAS39. Financial assets at fair value through profit and loss are carried in the Balance Sheet at fair value with gains or losses recognised in the Group Statement of Comprehensive Income.

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 Statement of Comprehensive Income when the loans and receivables are de-recognised 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 cash flows from the asset have expired;

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

• the Group has transferred its right to receive cash flows 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 cash flows 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 income.

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 meet the strict criteria for being described as "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 re-measured 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.

For swaps that have been cancelled which previously qualified for hedge accounting, the remaining value within the cash flow hedging reserve at the date of cancellation, is recycled to the Statement of Comprehensive Income on a straight line basis up to the original swap expiry date.

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

• 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 Group Statement of Comprehensive Income in the same period or periods during which the asset acquired or liability assumed affects the Group Statement of Comprehensive Income i.e. when interest income or expense is recognised.

• Derivatives that do not qualify for hedge accounting by virtue of not meeting the strict criteria for being "effective", i.e., 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 Group Statement of Comprehensive Income immediately. The treatment does not alter the fact that the derivatives are economic hedges of the underlying transaction.

Dividends payable to Shareholders

Dividends proposed by the Board of Directors and unpaid at the year 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.

Leases - Group as a lessor

The vast majority of the Group's properties are leased out under operating leases and are included within investment properties. 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 Statement of Comprehensive Income 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.

2.3 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:

Estimates

Fair value of investment properties

Investment property includes (i) completed investment property; and (ii) investment property under construction. Completed investment property comprises real estate held by the Group or leased under a finance lease in order to earn rentals or for capital appreciation, or both.

Investment property under construction is valued at fair value if it can be reliably determined. If a fair value cannot be reliably determined, the investment property under construction is measured at cost.

The market value of a property is deemed, by the independent property valuers appointed by the Group, 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.

In determining the fair value of investment properties under construction the valuer is required to consider the significant risks which are relevant to the development process including, but not limited to, construction and letting risks.

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. The calculation uses a number of assumptions based upon market rates and discounted future cash flows. The derivative financial instruments have been valued by reference to the bid price of the yield curve prevailing on 31 December 2011. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate.

Rent reviews

The Group's occupational leases include periodic rent review provisions. All reviews are effectively upwards only and either reviewed to Open Market Rent, linked to RPI or subject to a fixed uplift at the review date. The Group accrues for the potential uplift in rent from the date of the review. Estimated rents are established by the Joint Managers using their own data from previous reviews supported by estimates from third party advisers. The Group then accrues 90% of the estimated rental increase. Any additional rent receivable is booked on receipt when the rent review is agreed.

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 the vast majority of the properties, which are leased out on operating leases. The Group has entered into a small 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 accordance with IAS39, in order to apply hedge accounting in relation to these interest rate swaps, the Group has determined that it is highly probable that the bank facilities will be re-negotiated on or before expiry and that variable interest rate debt finance will be in place until the expiry date of the swaps.

Property acquisitions during the year

The Directors have reviewed the acquisitions during the year on an individual basis in accordance with the requirements of IFRS3R. They consider that they all meet the criteria of asset acquisitions rather than business combinations and have accounted for them as such. Although corporate entities were acquired, they were special purpose vehicles for holding properties rather than separate business entities.

2.4 Standards adopted during the year

The Group has considered and where appropriate, adopted the following amendments to IFRS in these financial statements:

• IAS 24 (amendment) introduced a new definition of a related party which emphasises a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government bodies. The adoption of the amendment did not have any impact on the financial position or performance of the Group.

• IAS 32 Financial Instruments: Presentation (amendment) altered the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain options or warrants as equity instruments. The amendment has had no affect on the financial position or performance of the Group because the Group does not have these types of instruments.

• Improvement to IFRSs (May 2010). IFRS 7 - Financial Instruments - Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context.

2.5 Standards issued but not yet effective

The IASB and IFRIC have issued a number of standards and interpretations with an effective date after the date of these financial statements. The directors have set out below only those which may have a material impact on the financial statements in future periods.

• IFRS9 Financial Instruments: Classification and measurement. IFRS9 as issued reflects the first phase of the IASB's work on the replacement of the IAS39 and applies to classification and measurement of financial assets as defined in IAS39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and de-recognition. The completion of this project is expected in the first half of 2012. The Directors will quantify the effect on the Group in conjunction with the other phases, when issued, to present a comprehensive picture.

• IFRS 13 Fair value measurement. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact this standard will have on the financial position and performance, which becomes effective beginning on or after 1 January 2013.

3. Finance income

	2011	2010
	£000	£000
Interest income on financial assets
Bank interest	70	3
Development loan interest	249	134
Other interest	95	8
Dividend income received	-	15
Total finance income	414	160

4. Finance costs

	2011	2010
	£000	£000
Interest expense and similar charges on financial liabilities
(i) Interest paid
Swap interest paid	8,768	8,518
Bank loan interest paid	5,792	3,812
Other interest paid	-	15
Notional UK-REIT interest	5	36
Bank facility non utilisation fees	288	105
Bank charges and loan commitment fees	978	396
Total	15,831	12,882
(ii) Derivatives
Net fair value loss on interest
rate swaps	7,891	4,714
Amortisation of cash flow hedging reserve	56	-
Total	7,947	4,714

The fair value loss of £7.9 million (2010 - £4.7 million) on derivatives recognised in the Group Statement of

Comprehensive Income for the year has arisen from the interest rate swaps for which hedge accounting does not apply.

During the year, three effective interest rate swaps were terminated early and fully repaid. Following the cancellation, the corresponding balances included within the cash flow hedging reserve are being recycled to the income statement, on a straight line basis, up to the respective former swap expiry date.

Net finance costs may be summarised as follows.

	2011	2010
	£000	£000
Finance income (note 3)	(414)	(160)
Finance costs	15,831	12,882
Net finance costs	15,417	12,722

5. Taxation

a)  Tax expense in the Group Statement of Comprehensive Income

The tax expense is made up as follows:

	2011	2010
	£000	£000
Current tax
UK corporation tax (1) (note 5b)	(5)	(36)
Charge on conversion to UK REIT status	-	1,586
Total tax (credit)/charge in Group Statement of Comprehensive Income	(5)	1,550

(1) The tax credit relates to the release of tax provisions from prior years and variances in the amount of corporation tax paid in acquired companies against the agreed provision at acquisition.

A reduction in the UK corporation tax rate from 28% to 26% was substantively enacted in March 2011 and is effective from 1 April 2011.  A further reduction from 26% to 25% was substantively enacted in July 2011 and will be effective from 1 April 2012.  Accordingly, these rates have been applied in the measurement of the Group's tax liability at 31 December 2011.

In addition, the Government announced its intention to further reduce the UK corporation tax rate to 24% from 1 April 2013 and to 23% from 1 April 2014.

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

The tax assessed for the year is lower than (2010 - lower) the standard rate of corporation tax in the UK. The differences are explained below:

	2011	2010
	£000	£000
Profit on ordinary activities before taxation	12,649	27,225
Theoretical tax at UK corporation tax rate of 26.5% (2010: 28%)	3,352	7,623
REIT exempt income	(2,651)	(2,658)
Non taxable items	(697)	(5,059)
Indexation allowance on capital gains	(7)	-
Finance lease adjustment	4	4
Other differences	(7)	-
Losses carried forward	6	90
Movement in tax provision relating to prior years	(5)	(36)
Current tax credit (note 5a)	(5)	(36)

(1) Conversion to a UK REIT means that the Group is no longer subject to UK corporation tax. The UK REIT charge of £1.6 million arose on the conversion of the companies acquired during the year ended 31 December 2010 to UK REIT status, based on the values of the individual properties held within those companies.

6. Earnings per share

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

	Net profit
	attributable
	to Ordinary	Ordinary	Per
	Shareholders	Shares	Share
Adjusted earnings per share	£000	(number) (1)	(pence)
2011
Basic earnings per share	12,654	66,696,096	18.97p
Adjustments to remove:
Net property valuation gains (Note 8)	(10,584)
Fair value loss on derivatives (2)	7,947
Profit on sale of AFS investment	(312)
UK corporation tax credit	(5)
Adjusted basic and diluted earnings per share	9,700	66,696,096	14.54p
2010
Basic earnings per share	25,675	62,162,797	41.30p
Adjustments to remove:
Net property valuation gains (Note 8)	(22,790)
Fair value loss on derivatives (2)	4,714
UK-REIT status	1,586
UK corporation tax credit	(36)
Adjusted basic and diluted earnings per share	9,149	62,162,797	14.72p

(1) Weighted average number of Ordinary Shares in issue during the year.

(2) In view of the continuing volatility in the mark-to-model adjustment in respect of the period end valuation of derivatives that flows through the Group Statement of Comprehensive Income, the Directors believe that it is appropriate to remove the gain or loss in the calculation of adjusted earnings.

7. Dividends

Amounts recognised as distributions to equity holders in the year:

	2011	2010
	£000	£000
Second interim dividend for the year ended 31 December 2010 (9.00p) paid 31 March 2011 (2010: 8.75p)	5,363	5,061
Scrip dividend in lieu of second interim cash dividend	289	711
First interim dividend for the year ended 31 December 2011 (9.00p) paid 28 October 2011 (2010: 8.75p)	5,836	4,764
Scrip dividend in lieu of first interim cash dividend	300	316
Total dividends	11,788	10,852
Per share	18.0p	17.5p

8. Investment properties, investment properties under construction

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 properties are fully let. The valuations reflected a 5.7% initial yield (2010 - 5.8%) and a 6.1% (2010 - 6.0%) true equivalent yield as detailed in the Managing Director's Review. Where properties have outstanding rent reviews, an estimate is made of the likely rent on review in line with market expectations and the knowledge of the valuer.

In addition to the market value exercise performed by LSH, the Joint Managers monitor the value of the Group's investment portfolio based on DCF analysis and with alternative discount rates. Full details can be found in the Managing Directors' Review.

In accordance with IAS 40, investment properties under construction have also been valued at fair value by LSH. In determining the fair value, the valuer is required to consider the significant risks which are relevant to the development process including, but not limited to, construction and letting risks. In the case of the Group's portfolio under construction, where the sites are pre-let and construction risk remains with the builder/developer, the valuers have used the special assumptions that, as at the valuation date, the developments, have been completed satisfactorily, the agreements of leases have been completed and the rents and other tenants lease obligations have commenced. A fair value increase of £401,000 (2010 - increase of £571,000) in respect of investment property under construction has been recognised in the Group Statement of Comprehensive Income, as part of the total net valuation gain on property portfolio in the year of £10.6m.

In line with Accounting Policies, the Group has treated the acquisitions during the year as asset purchases rather than business combinations as they were judged to be acquisitions of properties rather than businesses.

		Investment	Investment
	Investment	properties	properties
	properties	long	under
	freehold	leasehold	construction	Total
As at 1 January 2011	383,223	78,860	7,207	469,290
Property additions	786	2	28,088	28,876
Acquired investment property	12,580	4,256	-	16,836
Transfer from properties in the course of development	27,077	4,244	(31,321)	-
Revaluations for the year	9,579	604	401	10,584
As at 31 December 2011	433,245	87,966	4,375	525,586
As at 1 January 2010	280,739	57,655	3,496	341,890
Additions	517	262	20,442	21,221
Acquired investment property	3,641	-	-	3,641
Anchor Meadow Limited	5,498	-	-	5,498
Sinclair Montrose Properties Limited	22,073	1,792	-	23,865
Abstract Integrated Healthcare Limited	1,770	3,086	-	4,856
Charter Medinvest Limited	6,787	-	-	6,787
Health Investment Limited	22,924	15,818	-	38,742
Transfer from properties in the course of development	14,313	2,989	(17,302)	-
Revaluation for the year	24,961	(2,742)	571	22,790
As at 31 December 2010	383,223	78,860	7,207	469,290

9. Current asset investment

	2011	2010
	£000	£000
As at 1 January	555	-
Additions at cost	-	476
Disposals in the year	(555)	-
Unrealised gain recognised directly in equity	-	79
As at 31 December	-	555

The current asset investment of 1,970,500 ordinary shares in AH Medical Properties PLC ("AHMP"), an AFS asset, was disposed of on 19 January 2011 for £788,000, resulting in a realised gain of £312,000. Upon derecognition an unrealised gain of £73,000 was recycled to Other Comprehensive Income.

10. Term loans

The table indicates amounts drawn and undrawn from each individual facility:

	Facility		Amounts drawn		Undrawn
	2011	2010 Restated*	2011	2010 Restated*	2011	2010
	£000	£000	£000	£000	£000	£000
Current
364 day revolving (1)	10,000	10,000	-	-	10,000	10,000
Term to May 2011 (4)	-	3,350	-	3,000	-	350
Fixed term loan (5)	592	557	592	557	-	-
Non-current
Term to January 2013 (1)	110,000	140,000	91,500	134,300	18,500	5,700
Term to January 2013 (2)	30,000	50,000	30,000	37,900	-	12,100
Term to January 2013 (3)	65,000	65,000	65,000	65,000	-	-
Fixed term loan (5)	26,710	27,583	26,710	27,583	-	-
Term to December 2020 (6)	25,000	25,000	-	-	25,000	25,000
Term to July 2014 (7)	50,000	-	14,203	-	35,797	-
Term to November 2018 (8)	75,000	-	75,000	-	-	-
Total	392,302	321,490	303,005	268,340	89,297	53,150

* Principal repayments on Aviva fixed term loan restated to current liabilities from non-current liabilities. This restatement has no impact on net assets.

Provider:

(1) The Royal Bank of Scotland plc ("RBS").        

(2) Allied Irish Banks, plc ("AIB").

(3) Abbey National Treasury Services plc (branded Santander from January 2010). 

(4) Natwest Bank plc (acquired as part of Abstract acquisition).

(5) Aviva facility (acquired as part of HIL acquisition) repayable in tranches to 31 January 2032.

(6) Aviva GPFC facility.

(7) Clydesdale Bank facility (new facility in 2011).

(8) Aviva facility (new facility in 2011).

At 31 December 2011, total facilities of £392.3 million including the £10 million revolving facility (2010: £321.5 million) were available. Of these facilities, as at 31 December 2011, £303.0 million was drawn (2010: £268.3 million) and secured by an unlimited guarantee from each respective subsidiary and a first fixed charge over the ownership of the assigned properties. Interest is payable on the loans at a fixed percentage rate above LIBOR and interest payable has fluctuated in the period between 1.4% and 1.7% (2010: 1.4% and 1.5%), including lenders' margins and costs (excluding margins and costs 0.7% and 1.0% (2010: 0.6% and 0.8%)). However, the Group has entered into interest rate swaps to manage its exposure to interest rate fluctuations.

Clydesdale debt facility - On 29 July 2011, the Group entered into a new £50 million, three year interest only revolving debt facility with Clydesdale PLC. Interest is paid at a floating rate of Libor plus margin, the margin varies between 1.8%-2.0% depending on the loan to value ratio held.

Aviva debt facility - On 28 November 2011, the Group entered into a new £75 million, seven year, interest only facility with Aviva, this was immediately fully drawn. The all-inclusive interest rate is 4%, fixed for the term of the loan.

The proceeds of the Aviva loan have been used to repay and cancel £30 million of the current RBS revolving facility and £20 million of the AIB revolving facility. This leaves the total remaining facility available from these lenders at £110 million and £30 million respectively. The balance of £25 million (from the Aviva facility) increased resources available to the Group.

The bank loan with Natwest Bank plc of £3 million was fully repaid on 31 May 2011.

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:

	2011	2010 Restated*
	£000	£000
Term loans drawn: due within one year	592	3,557
Term loans drawn: due in greater than one year	302,413	264,783
Less: Unamortised borrowing costs	(1,666)	(895)
Total terms loan: due in greater that one year	300,747	263,888
Term loans in total per Group Balance Sheet	301,339	267,445

11. Net asset value per share

Net asset values have been calculated as follows:

	2011	2010
	£000	£000
Net assets per Group Balance Sheet	168,120	164,746
Derivative interest rate swaps (net liability)	49,481	30,865
EPRA NAV	217,601	195,611
	No. of shares	No. of shares
Ordinary Shares:
Issued share capital	68,272,229	62,802,333
Basic net asset value per Share	246.25p	262.32p
EPRA NAV per Share	318.73p	311.47p

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

12. Related party transactions

Mr Hyman is a director of Nexus Tradeco Limited ("Nexus") and Nexus Group Holdings Limited. Mr Hambro is a director of J O Hambro Capital Management Holdings Limited ("Holdings"), the parent company of J O Hambro Capital Management Limited ("JOHCML"). Both Nexus and JOHCML are Joint Managers to the Group and Messrs Hyman and Hambro are therefore deemed to have an interest in the Management Agreement with the Group and are thus related parties.

13. Subsequent events

Since the Balance Sheet date, the Group has received fully credit approved offers from Royal Bank of Scotland PLC and Santander Bank to refinance a total of £175 million of debt facilities that would otherwise mature in January 2013.  The covenants within the revised facility terms reduce the maximum allowable LTV to 65% from 70% and increase the minimum required Interest Cover ratio from 1.3 times to 1.4 times.  The facility extension is currently being documented and is expected to be completed in March 2012. The term of the extended facility will be four years, ending in March 2016.  Arrangement fees of £1.3 million will be payable upon completion of the facility which will be expensed during the extended term. Following the completion of the loan refinance the Group's average margin across its debt portfolio will be 220-230 basis points.

14. Annual report

The financial information set out above does not constitute the Group's statutory accounts fot the years ended 31 December 2011 or 2010 but is derived from those accounts.  Statutory accounts for 2010 have been delivered to the Registrar of Companies and those for 2010 will be delivered in due course.  The Auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Full financial statements for the year ended 31 December 2011 will be published on the Group's website at www.phpgroup.co.uk and will be posted to Shareholders on 2 March 2011.

Copies of this announcement are available from the Company Secretary of Primary Health Properties PLC, Ground Floor, Ryder Court, 14 Ryder Street, London SW1Y 6QB.

Directors' responsibility statement under the Disclosure and Transparency Rules

Each of the current Directors confirms that, to the best of their knowledge:

• the Group financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

• the Management report incorporated into the Managing Director's Review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Graeme Elliot

Chairman

20 February 2012

 

END

 

 

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