Final Results

RNS Number : 8449Y

Primary Health Properties PLC

28 February 2013

Primary Health Properties PLC

Annual Report for the year ended 31 December 2012

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 2012.

GROUP FINANCIAL HIGHLIGHTS

· Total of £250 million of new debt facilities were completed:

o new, four year £175 million club debt facility with RBS and Santander

o a £75 million, unsecured, seven year retail bond

· Equity raising (net of costs) of £18.4 million in May 2012

· Operating profit before revaluation result on property portfolio rose 10% from £25.1 million to £27.6 million

· Payment of 18.5p per share of dividends during the year (2011: 18.0p), the 16th successive year of dividend growth

· 9.5p per share second interim dividend for 2012 declared, payable on 22 April 2013

· EPRA net asset value of £231.9 million (2011: £217.6 million)

GROUP OPERATIONAL HIGHLIGHTS

· Group rental income increased by 8.1% to £33.2 million (2011: £30.7 million)

· Acquisition of 23 new high quality properties for a total consideration of some £110 million, adding £6.4 million to annual rent roll

· Including commitments, total portfolio value has increased to £645 million (2011: £540 million) at a net initial valuation yield of 5.72% (2011: 5.74%)

· Average annualised uplift of 2.4% on reviews completed in the year, combined with acquisitions and commitments, increases annualised rent roll by over 20% to £38.9 million (2010: £32.3 million)

· Portfolio 99.7% let

· The Health and Social Care Bill received Royal Assent on 27 March 2012

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

"I am delighted to announce another year of increased operating profits for PHP and the 16th consecutive year of dividend growth for the Group. This performance has been underpinned by an increase in rental income via rent reviews across the portfolio and the contribution from new and extended assets.

"Our operating and financial environment remains very positive with the new Health and Social Care Act maintaining the current GP premises cost reimbursement scheme and the strength of the Group's income base, where 90% of rental income is funded by the NHS. During the year, we acquired a large number of assets in 2012 which has increased the scale and long term visibility of our income stream. Financially, we secured a new four year £175 million debt facility with RBS and Santander and successfully completed a £75 million, unsecured, seven year retail bond issue, the first REIT to do so.

"The Group remains ideally placed to provide the services being demanded from new, modern specialist premises and we look forward to the future with confidence."

For further information contact

Harry Hyman / Phil Holland

Primary Health Properties PLC

T +44 (0) 20 7451 7050

harry.hyman@nexusgroup.co.uk

phil.holland@nexusgroup.co.uk

David Rydell / Victoria Geoghegan / Elizabeth Snow

Pelham Bell Pottinger

T +44 (0) 20 7861 3232

CHAIRMAN'S STATEMENT

I am delighted to present my review and report to the shareholders of Primary Health Properties PLC ("PHP") together with its subsidiaries (the "Group") for the financial year ended 31 December 2012. This has been an extremely busy year and one where the Group has achieved success in all of the major areas of its business.

In March 2012, the Health and Social Care Act (the "Act") passed into statute, paving the way for significant changes to the delivery of healthcare in England. The Act transfers responsibility for the commissioning of care to local Clinical Commissioning Groups ("CCGs") which will have a strong General Practitioner ("GP") representation in their management. CCGs will be overseen by the National Commissioning Board and will lead the continued drive to transfer the delivery of health services closer to the patient and create what we believe will be an increased demand for localised, primary care facilities. There is no change to the NHS structures in Scotland, Wales or Northern Ireland.

Alongside the replacement of Primary Care Trusts ("PCTs") with CCGs, is the establishment of the NHS Property Services company ("NHS PropCo"). The ownership of real estate assets held by PCTs will be transferred to NHS PropCo who we also expect to be responsible for the management of other PCT occupied space such as that provided by the Group. Whilst the full impact of this organisational change on things such as the procurement of new premises is yet to be known, we have seen continued demand for primary health facilities and the sanctioning of further development projects both by outgoing PCTs and some of the newly established local management structures.

There is nothing in the Act, however, that fundamentally changes the current GP premises cost reimbursement scheme and the strength of the Group's income base, where 90% of rental income is funded by the NHS. The Group has acquired a large number of assets in 2012 which increases the quantum and extends the longevity

of our income stream and provides opportunities to create additional value. I believe that this, combined with the major funding transactions completed in 2012, has created the structure and resources that position the Group to be a leading participant in satisfying the strong demand for third party investment into primary care properties.

Funding

Transactions in both debt and equity markets have illustrated stakeholders' confidence in the Group's strategy of investing solely in primary health property assets with their secure cash flows and stability of capital values.

A total of £250 million of new debt facilities were completed during the year, refinancing the Group's core banking facilities and providing new sources of finance to support PHP's expansion plans.

As detailed in my interim report to shareholders in 2012, the Group completed a new, four year facility with our long standing core bankers, Royal Bank of Scotland plc and Santander Banking Group to refinance the entirety of their expiring commitment to the PHP Group. Whilst the cost of this debt has increased, the belief of the banks in the underlying asset portfolio and strength of covenant of PHP's tenants meant that the facility was provided

with no change required to the underlying swap portfolio.

In July, PHP demonstrated its attraction to a wider range of investors when leading the property investment sector in accessing the Retail Bond market to issue a £75 million, unsecured, seven year bond. This was PHP's first venture away from traditional bank lenders, but the transparency and strength of PHP's underlying income resulted in significant demand from fixed income investors, such that the offer period for the issue was closed early.

PHP has also proven to be of continued attraction to equity investors with the Company raising fresh equity (net of costs) of £18.4 million in May 2012. This was from a mix of new and existing investors and has been used to invest in additional property assets. In December, the Group completed the acquisition of Apollo Medical Partners Limited ("Apollo") and, as part of the consideration, issued a further 1,231,395 shares to the vendors, demonstrating their confidence in PHP's portfolio and business model.

Investment activity

The Group has continued to invest in primary care assets, committing a mix of debt and equity to generate growing returns to shareholders. In the year under review, the Group added 23 new properties to its portfolio for a total consideration of some £110 million and took delivery of 3 previously committed assets.

At the balance sheet date, the Group held a total of 183 primary care centres that included 6 assets under construction, all due for delivery in 2013 and one standing let investment where completion of its acquisition was deferred to 1 February 2013.

The largest single transaction was the acquisition of Apollo in December with its portfolio of 14 assets. This transaction also included the establishment of a five year pipeline agreement with the vendors, where they and PHP will work together to create new, high quality premises for the primary care sector.

Performance

Group rental income increased by 8.1% for the year to £33.2 million (2011: £30.7 million). In addition to contributions from new and extended assets, growth has continued to be secured on rent reviews across the portfolio.

The primary care property sector has not escaped the tougher economic conditions and whilst rental growth has continued, the average annualised rate of growth has slowed to 2.4% (2011: 3.0%). At the year end, contracted rent roll had increased by over 20% in the year to £38.9 million (2011: £32.3 million).

Group profits before revaluation and the change in fair value of derivatives ("Profit from trading activities") and before the provision for early loan repayment fees were £7.4 million (2011: £9.7 million). This reflects the increased margins payable on the Group's debt, but with the gap between investment yields and the Group's incremental cost of debt being wider than for some time, acquisitions completed in 2012 and to be secured in 2013 will recover this and more.

The Group's property portfolio, including commitments, now totals over £645 million (2011: £540 million) in value. The underlying assets, once again demonstrated its attractiveness to the investment market with the average net initial yield remaining broadly unchanged at 5.72% (2011: 5.74%).

Dividends

PHP paid a total of 18.5 pence per share in dividends to shareholders in the year, the 16th successive year of dividend growth. The strength of the Group's income and the positive outlook for portfolio growth under-pinned the increased dividend in 2012. The Board has now approved the payment of a second interim dividend of 9.5 pence per share in respect of 2012. This will be payable on 22 April 2013 to shareholders on the register on 8 March 2013, with an ex-dividend date of 6 March 2013.

Outlook

The demands placed upon the NHS and the structural changes targeted by the Act are all strengthening the move to deliver more healthcare services in the local community.

The creation of local CCGs alongside this delivery change has seen continued demand for modern, purpose built facilities, the capital for which will continue to be provided by specialist investors such as PHP.

The abolition of PCTs in April 2013, being replaced by CCGs, will be the final action needed to bring about the changes envisaged by the Act. Whilst this will result in the inevitable period of administrative flux, the underlying funding of the NHS and GP premises costs will be unaffected. The strength of the Group's tenant covenant will remain, as will the longevity of its income. As new and enhanced premises are required to deliver the increasing care demands of the growing UK population the Board is confident of the opportunities for the Group to add to its investment portfolio and generate increasing returns from its assets.

In 2013, the Group has so far secured a further £6.3 million of new properties. PHP will continue to acquire high quality assets with secure rental streams as evidenced by a strong pipeline currently being documented by our advisors. The additional operating surpluses that these will generate will enable the Board to meet its prime objective of returning the Group to full dividend cover as quickly as possible.

The ability of PHP to access both debt and equity markets, due to its track record and portfolio quality, will enable the Group to take advantage of further opportunities to expand its portfolio through 2013. The Board has confidence in the current portfolio and its ability to deliver secure and growing returns which will be enhanced by the strong pipeline of additional acquisition opportunities available to the Group.

Graeme Elliot

Chairman

27 February 2013

MANAGING DIRECTOR'S REVIEW

The completion of £110 million of acquisitions in 2012, investing a large proportion of the additional capital secured in the year has put the Group well on its way to returning to full dividend cover. Shareholders saw a sixteenth consecutive year of dividend growth as revenues were grown to offset the increased margins charged on new debt. Further acquisitions and continued growth from rent reviews will grow operating profits to re-establish dividend cover.

Changing face of the NHS

In March 2012, the Health and Social Care Act (the "Act") entered into statute bringing about the start of the biggest structural change to the provision of healthcare by the NHS in modern times. From April 2013, responsibility for the commissioning of care will be transferred to local Clinical Commissioning Groups ("CCGs") in which GPs will have a major management involvement. The existing Primary Care Trusts ("PCTs") will be abolished and oversight will be provided by a National Commissioning Board. Throughout the period before and since the Act became legislation, we have engaged with senior executives within government and the NHS and have been advised that the Act will not change the current premises costs reimbursement provisions whereby GPs rent, rates and other property costs are funded by the NHS.

NHS Property Services Limited ("NHS PropCo"), a company wholly owned and funded by the Government, was created in the year. The abolition of PCTs will see the transfer of all PCT real estate interests to NHS PropCo which will also provide advisory services to the CCGs with regard to premises both old and new. The strategy of NHS PropCo and how it will interact with private sector investors such as PHP is not yet clear, but management is engaging with NHS PropCo so that PHP is involved and informed as NHS PropCo assumes its responsibilities and develops its operating agenda.

What remains unaltered by all of this structural change is the role of primary care in the delivery of healthcare in the UK and the continued drive to deliver more and more services from within the local community. To achieve this, specialist primary care facilities are and will continue to be required and we see a sustained demand for new premises across the UK that will require investment from third party investors such as PHP.

Investment portfolio

There has been a continuous supply of new investment and funding opportunities for the Group throughout the year. In total, PHP has completed £110 million of new transactions in 2012, adding 23 assets to the portfolio and securing an additional £6.4 million of rental income. These include a mix of standing let investments and new forward funding commitments. PHP also took delivery of 3 assets where construction was completed in the year.

As at 31 December 2012, the value of PHP's gross assets under management, including commitments, was £645.4 million, representing 183 properties. Of these, 176 were completed and rent producing, six were funding commitments, one of which has been delivered since the year end and the final asset was a contract to acquire a standing let investment that was completed on 1 February 2013.

The total rent roll from these 183 assets is £38.9 million, an increase of 20% over the rent roll at the end of 2011. The portfolio holds a number of value add opportunities which are secured by management's regular dialogue and discussion with our tenants and close monitoring of the portfolio and developments in the locality of our existing assets. Rental growth has been lower in 2012 than in the previous year, but growth of 2.4% per annum (2011: 3.0%) has contributed to the increased rent roll and the profitability of the Group.

Portfolio valuation and performance

	2012	2011
	£m	£m
Investment properties	606.7	521.2
Properties in the course of development	15.7	4.4
Total properties	622.4	525.6
Finance leases	3.1	3.1
Total owned and leased	625.5	528.7
Balance of commitments at the year end	19.9	11.0
Total owned, leased and committed	645.4	539.7

At the balance sheet date, the Group's real estate portfolio, including committed development properties, was independently valued at the balance sheet date by Lambert Smith Hampton ("LSH"), Chartered Surveyors and Valuers, at open market value, as defined by the Royal Institution of Chartered Surveyors ("RICS"). On the basis that all development commitments are completed, the total value was £642.3 million which together with an asset held on a finance lease and some land plots adjoining existing assets saw the Group's property portfolio valued at an aggregate £645.4 million. The average lot size of the Group's portfolio stood at £3.52 million, an increase of 5.1% over the year (2011 - £3.35 million).

Overall, investment yields in the portfolio have remained broadly unchanged, but there is increased competition emerging for new, larger premises in the market as investors are attracted by the secure, long term nature of the underlying income. The Group's portfolio shows an average net initial yield of 5.72%, a small improvement on that of 31 December 2011 at 5.74%. The true equivalent yield is 6.05% as compared to 6.06% at the end of 2011.

In December 2012, PHP announced the acquisition of Apollo Medical Properties Limited ("Apollo") for a total consideration of £10.2 million, including transaction costs of £0.6 million. The consideration was settled with the issue of 1,231,395 PHP shares to the vendors, the payment of £4.2 million of cash upon completion (including costs) and the deferral of £1.8 million against the completion of three assets under construction and due to complete in 2013.

The value of the assets acquired, using a traditional valuation methodology, applying standard purchaser's costs, was £62.3 million. This resulted in a revaluation deficit of £2.3 million when compared to the purchase values agreed with the vendor that reflected the overall savings from undertaking a corporate transaction rather than acquiring the assets directly, that were shared with the vendors.

In addition to the net consideration payable, PHP assumed Apollo's fixed cost debt, which had a fair value on acquisition of £52.4 million. Net negative working capital of £2.2 million, including restricted cash deposits of £6.6 million and accrued costs to complete the assets under construction was also taken on.

Excluding the valuation deficit arising from the Apollo acquisition, the stability of and growth secured in the remainder of the PHP portfolio realised a net valuation uplift of £0.5 million, which is after the write off of £1.4 million of acquisition costs on non-Apollo assets acquired in the year. The overall revaluation deficit for the year was £1.8 million (2011 surplus - £10.6 million).

The Group's property portfolio showed a total return of +6.99% in 2012, +10.07% per annum over the three years to the balance sheet date and +5.61% per annum over the five year period to 31 December 2012. This compares to the IPD All Property Index that showed +2.7%, +8.4% and +0.5% respectively. This illustrates the outperformance of the Group's assets due to their stability and the security of the underlying income.

PHP is also a member of the IPD Healthcare Property Index and benchmarks its performance against the portfolios held by other investors in the sector. The index is published on an annual basis, and the results for 2012 are not yet available. The Group once again outperformed the Index in 2011 delivering a total return of 10.1% against the Index of 9.4%. The 2012 index will be published in May 2012 following which we will report our 2012 comparative performance.

As in previous years, the Joint Managers have prepared an alternative valuation of the real estate portfolio on a discounted cash flow ("DCF") basis. The Joint Managers feel that this better reflects the quasi infrastructure nature of the underlying assets, looking at the long term, secure and growing cash flows of the Group. The DCF methodology produces a value of £720.4 million for the assets as compared to £645.4 million using a traditional yield based approach. This represents an additional 98.8 pence per share in net asset value terms. In the DCF valuation, we have been consistent year on year in discounting the cash flows at 7%.

Portfolio activity and commitments

The Group acquired or took delivery of 20 standing let investments in the year, 11 of which formed part of the Apollo acquisition. The majority of these assets include growth opportunities, either through the letting of vacant areas not valued upon purchase, or through physical or lease extensions from discussions with our tenants.

	Sq m	Occupational tenants
Conan Doyle Medical Centre, Edinburgh	1,144	7 GP practice
Wepre Pharmacy, Connah's Quay	145	A pharmacy adjacent to an existing Group asset
Watton Medical Centre, Watton, Norfolk	924	6 GP practice
Nantgarw Medical Centre, Caerphilly	1,250	3 GP practice, Health Board and pharmacy
Kingsway Health Centre, Luton	1,281	Wholly let to local PCT
Rotherham Community Health Centre, Rotherham	4,636	Wholly let to local PCT
Springhill Medical Centre, Old Arley, Warwickshire*	744	4 GP practice
Allesley Park Medical Centre, Coventry*	1,170	5 GP practice and pharmacy
Pelton Primary Care Centre, County Durham*	1,613	5 GP practice, PCT and pharmacy
Clydach Primary Care Centre, Clydach, South Wales**	1,549	8 GP practice, local Health Board and pharmacy
Fort William Health Centre, Fort William**	3,468	15 GPs in three practices, local Health Board and pharmacy
Rutland Surgery, Govan, Glasgow**	510	3 GP practice
Heckmondwicke Primary Care Centre, Heckmondwicke**	1,600	11 GPs in two practices and a pharmacy
The Glanrafon Medical Centre, Mold**	986	6 GPs in two practices
Old Kilpatrick Medical Centre, Old Kilpatrick**	571	3 GP practice
West Rhyl Primary Care Centre, Rhyl**	1,706	7 GP practice, local Health Board, Local Authority and pharmacy
Brig Royd Surgery, Rippendon**	1,090	6 GP practice and pharmacy
Shipley Health Centre, Shipley**	2,394	8 GP practice, local PCT, dentistry and pharmacy
The Surgery, Sudbury **	1,063	4 GP practice
The Girlington Health Centre, Bradford**	705	3 GP practice and pharmacy

* previous forward commitments completed in the year

** assets acquired with Apollo Medical Properties Limited

COMMITMENTS

In addition to these, PHP has secured five forward funded purchases during the year, three of which formed part of the Apollo transaction. A sixth funding commitment at Ramsgate was secured in 2011 and was delivered in January 2013. The purchase of a standing let investment at Poole, Dorset was contracted as at 31 December 2012 but completion deferred at the request of the vendor. This completed on 1 February 2013.

	Total	Out-
Contracted in 2012	commitment	standing	Description
	£m	£m
Stourbridge	8.6	7.0	2,600 sq m medical centre (10 GP practice and pharmacy)

Newton Abbot	3.0	2.2	1,373 sq m medical centre (6 GP practice)
SA1, Swansea*	8.2	1.4	2,901 sq m medical centre(2 GP practices, local Health Board, University space and pharmacy)

Rumney, Cardiff*	6.5	3.8	2,210 sq m medical centre (4 GP practice, local Health Board and pharmacy)
Cloughmore, Cardiff*	2.9	1.7	1,042 sq m medical centre (5 GP practice)
	29.2	16.1
Pre-existing commitments
Ramsgate	2.4	0.2	773 sq m medical centre (2 GP practice and pharmacy)

Total commitment to assets under development	31.6	16.3

Investment property acquired with delayed completion
Poole	3.6	3.6	1,312 sq m medical centre (6 GP practice, pharmacy and retail unit)

Total commitments as at 31 December 2012	35.2	19.9

* assets acquired with Apollo Medical Properties Limited

The outlook for further additions to the PHP portfolio is very positive. As set out above, since the year end we have completed two contracted commitments and the assets under development are progressing well toward their target completion dates. Earlier this month we announced that PHP has contracted to fund two assets currently under development, a commitment of £6.3 million as set out below.

	Total	Target
Contracted in 2012	commitment	delivery date	Description
	£m
St John's, Worcester	4.5	Dec 2013	1,205 sq m medical centre let to a 5 GP practice and pharmacy
Chard, Somerset	1.8	Dec 2013	653 sq m let to a 5 GP practice
	6.3

The Group has a strong pipeline of potential investment purchases and opportunities to forward fund the development of new centres. Terms for £81.7 million of transactions are agreed with vendors, subject to contract and are currently being documented by our solicitors. Negotiations for a number of other opportunities are also well progressed with vendors.

Asset management

The Joint Managers place a strong focus on the active management of the Group's portfolio, managing existing leases and seeking out opportunities to generate additional value from capital projects where possible. In 2012, five projects were completed, being a mix of physical extensions, refurbishment work and lease extensions. These cost a total of £0.36 million and produce additional rent of £0.03 million per annum and extended leases at these locations by an average of 12.5 years, producing a capital value uplift of 52% over cost.

Two projects are currently on site and a further six projects have been agreed with the respective tenants and approved by the Board for 2013. The total cost of these will be in the region of £4.4 million and they will add an average of over 17 years to the respective leases and generate additional rental income of £0.31 million per annum.

Equity capital and debt finance

In order to grow the portfolio as described above, the Group continues to combine the use of shareholder equity and debt facilities secured from a range of sources.

In May 2012, PHP issued 6.23 million shares, raising a net sum of £18.4 million and issued a further 1.23 million shares to the vendors of Apollo in December 2012. The take up of the Scrip Dividend Scheme resulted in an aggregate 0.3 million shares being issued through the year, resulting in a total of 76.03 million shares being in issue at 31 December 2012.

Alongside the equity issues, PHP completed the refinance of its core banking facilities, entering into a new £175 million, four year interest only "Club" facility with Royal Bank of Scotland plc and Santander Banking Group, to replace their expiring bi-lateral loans. As a result of the increased cost of funds in lending markets, following the completion of this loan, the average margin on PHPs debt facilities rose to 230 basis points from a previous 80 basis points.

In July, PHP became the first UK REIT to enter the Retail Bond market, issuing a £75 million, seven year, unsecured bond with an annual coupon of 5.375%. The flexibility offered by this unsecured source of funds has already proven advantageous to the Group allowing PHP to move quickly to secure a number of the transactions that Ihave detailed without the delays normally caused by banking agreements. The first bond coupon was paid on 31 January 2013.

The final elements of the refinancing of the Group's long standing bi-lateral loans were completed in December 2012 and January 2013. On 17 December, PHP drew down on a £25 million term loan facility provided by Aviva. This is a 10 year, interest only facility and the interest rate was fixed at 3.63% for the term of the loan. These proceeds were then used in the repayment of the £27 million loan from Allied Irish Banks plc ("AIB") upon its expiry on 31 January 2013. AIB also provide a number of interest rate swaps to the Group, but these were unaffected by the loan repayment and remain in place.

As part of the Apollo transaction, PHP assumed long term, fixed rate debt that Apollo held with Aviva. In agreeing the transaction pricing, an allowance of £2.6 million was agreed with the vendors in its valuation of this debt against the estimated cost of re-setting or breaking the loans. This fair valued the loans at £52.4 million at acquisition with an underlying principle amount outstanding of £49.8 million. PHP subsequently served the required three months' notice upon Aviva on 19 December 2012, to re-set or repay this debt.

A sum of £4.2 million has been provided for in the 2012 results as the estimated cost as at the year end of breaking these loans. This is partly offset by the purchase allowance, resulting in a net impact on the 2012 Income Statement of £1.6 million. The breakage or re-set cost is calculated with reference to underlying gilt rates which have risen since 31 December 2012 which is favourable to PHP. The final cost of this transaction will not be known until 19 March, but resetting the interest rate of the Aviva debt or replacing it with a new facility, will result in a greatly reduced interest cost to the Group, a saving of circa 200 basis points based on current options and market rates.

Terms have been agreed for a new, four year, £50 million, interest only facility with a leading real estate lending bank. This is a revolving facility that will cost the Group 220 basis points over LIBOR. PHP will protect the all in cost of this loan by procuring appropriate interest rate derivatives and locking in a historically low all-in-cost of debt. This facility is being documented and is planned to be closed in the coming weeks.

As at 31 December 2012, the Group held a total of £511.0 million of bank facilities and including the bond. Debt drawn totalled £406.0 million with £6.0 million of cash held on deposits with Aviva to fund the three Apollo development assets and £19.1 million of cash held in readiness for the AIB repayment. Net debt, therefore, stood at £380.9 million, with the Group's loan to value ratio ("LTV") being 60.9% (31 December 2011 - 57.8%). Interest cover for the year was 1.57 times (2011 - 2.0 times) with a Group covenant minimum requirement of 1.3 times.

Provider	Maturity	Facility	Drawn at	Headroom
		maximum	31 Dec 2012	31 Dec 2012
		£'m	£'m	£'m
RBS (overdraft)	March 2013	5.0	-	5.0
Allied Irish Banks	Jan 2013	27.0	27.0	-
Clydesdale Bank	July 2014	50.0	-	50.0
Royal Bank of Scotland/ Santander	Mar 2016	175.0	125.0	50.0
Aviva	Nov 2018	75.0	75.0	-
Aviva	Dec 2022	25.0	25.0	-
Aviva	Jan 2032	26.7	26.7	-
Aviva	Sept 2036*	52.3**	52.3	-
Retail Bond	July 2019	75.0	75.0	-
Total facilities		511.0	406.0	105.0
Average maturity	6.9 years
Cash on deposit			(19.1)	19.1
Restricted deposits with Aviva			(6.0)	6.0
			380.9	130.1
Commitments to be funded				(19.9)
Facility of 31 January 2013				(27.0)
Net headroom				83.2

* A repayment notice has been served to Aviva for the full quota of loans, PHP intends to repay the loans

on 19 March 2013

** Figure represents fair value of debt following Apollo acquisition. Underlying loan principal is £49.8 million.

Interest rate hedging

There has been no change to the nominal value of Group debt that is hedged by interest rate swaps during the year. The refinance of the Club facility was achieved without the requirement to break any swap contracts and it has been confirmed that the swaps held with AIB will continue undisturbed beyond the repayment of the associated loan. As a result, all refinancing has been achieved without crystallising any breakage costs.

Forward interest rates were particularly changeable through 2012, increasing at longer maturities (5 to 10 years) in the first quarter of the year, falling through the middle two quarters and then rising again in the quarter ending at the balance sheet date. Shorter term rates (3 year maturity) generally fell until the end of the summer and have marginally increased since then. Overall, rates across all maturities are lower at 31 December 2012 than they were at the beginning of the year. This has resulted in an increase in the Mark-to-Model valuation deficit of the interest rate swap portfolio of some £3.3 million to £52.8 million (2011: £49.5 million). There is no cash flow impact of this Mark-to-Model adjustment.

Trading performance

	2012	2011
	£m	£m
Rental and related income	33.2	30.7
Expenses	(5.6)	(5.6)
	27.6	25.1
Net financing costs	(20.2)	(15.4)
Profit before revaluation result and change in fair value
of derivatives and non-recurring items	7.4	9.7
Profit on sale of AHMP shares	-	0.3
Provision for loan repayment cost	(1.6)	-
Change in fair values of derivatives	(2.9)	(8.0)
Revaluation result on property portfolio	(1.8)	10.6
Profit before tax	1.1	12.6

Gross rental income received during 2012 increased by 8.1% to £33.2 million (2011: £30.7 million) as acquisitions, capital projects and rent reviews have added to the contracted rent roll. This growth in top line income will continue into 2013 as the impact of the Apollo acquisition is realised, evidenced by the 20% increase in contracted annual rent roll to £38.9 million as at 31 December 2012 (2011: £32.3 million).

We have continued to achieve growth from rent reviews, achieving average annualised growth of 2.4% on those reviews completed in 2012, a lower rate than that achieved in 2011 of 3% per annum. This has provided an increase of £374,000 on £5.9 million of rent reviewed and completed in the period. The Group's underlying rent roll is subject to effective upwards only reviews with 16% having fixed uplifts or reviewed with reference to RPI and the balance of 84% being reviewed to open market values. The majority of reviews operate on a three yearly cycle and so with an average remaining lease term of 16 years (2011: 16 years) we are confident of securing significant additional income from reviews.

The Joint Managers maintain tight control over both the non-recoverable costs associated with the portfolio and the administrative costs of the Group. Fees are paid to the Joint Managers on the basis of the gross asset value of the Group. This is levied on a sliding scale such that as gross assets increase, the incremental fee rate reduces. The average fee rate paid to the Joint Managers for 2012 fell to 0.75% (2011: 0.77%). Overall, total operating costs have fallen during 2012 and represent 0.93% of gross assets (2011: 1.07%).

Net interest costs rose overall in 2012 by £4.8 million, due to both the increased levels of debt drawn to facilitate the growth in the portfolio and the impact of the increased margins on core funding. A slight delay in investing the proceeds of the bond issue contributed to the increased interest costs with no associated increase in revenue.

Portfolio operating surpluses increased by 10.0% to £27.6 million (2011: £25.1 million) with profit from trading activities, i.e. after finance costs, but before revaluation result and change in fair value of derivatives, falling to £7.4 million (2011: £9.7 million). The fall is due to the increased margins payable on the core bank debt refinanced in the period.

The acquisitions completed later in 2012 and into 2013 which include £81.7 million currently in solicitor's hands, will be financed at the Groups' incremental cost of debt at rates of 180 to 250 basis points over LIBOR. This will result in a healthy gap to average acquisition yields of 5.5% to 6.25%, to boost the bottom line and take the Group back toward its aim of full dividend cover.

Dividends and Total Shareholder Return

2012 was the 16th consecutive year of dividend growth for PHP shareholders with a total of 18.5 pence per share being paid in the year (2011 - 18.0 pence). No portion of this dividend represents a Property Income Distribution ("PID"). As a result of the reduced trading surplus resulting from the increased debt costs in the year, dividend cover stood at 63% (2011 - 89%), excluding the revaluation result, the movement in the fair value of derivatives, the provision for loan breakage costs and the value of dividends met by the issue of scrip shares.

The total return to shareholders in 2012, measured as a combination of the dividend paid and movement in share price across the year, was 15.4% as compared to the total return of the FTSE All Share Index of 12.3%. As shown below, PHP has consistently outperformed real estate and general equities over the longer term.

	One year	Three years	Five years
	%	%	%
Primary Health Properties	15.4	14.1	14.3
FTSE All-Share Real Estate Index	30.6	9.1	(6.4)
FTSE All-Share Index	12.3	8.1	4.4

Source: Investment Property Databank ("IPD")

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 GP's and other associated healthcare providers. 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 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, PHP's performance and value are influenced by other stakeholders, principally its lessees (the GPs, NHS organisations and healthcare users), the property developers, the District Valuers, lenders and bondholders and the Joint Managers. PHP'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

PHP 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.

Outlook

The 2012 financial year was one of significant activity for the Group establishing a secure funding base and completing a collection of high quality acquisitions that have invested a large proportion of the additional funds that were raised. PHP continues to grow its assets under management, completing £6.3 million of transactions since the year end and working to close a further £81.7 million of acquisitions agreed with vendors.

The Board grew the Company's distribution to shareholders, but the impact of the increased cost of debt from refinancing in 2012 reduced dividend cover for the year. The acquisitions detailed in my report both in 2012 and 2013 to date have been funded at the Group's incremental cost of debt that leaves a healthy surplus from the rental yield on these assets, that will increase PHPs operating surplus and return the Group as quickly as possible back to full dividend cover.

The demand for good quality, purpose built primary care assets will remain as the new NHS management and delivery structures are established as the Act is implemented and the need for private capital provided by PHP shareholders to facilitate the development of these facilities will not abate.

The Board views the return to dividend cover as its main priority and will achieve this with acquisitions transacted in line with the Group's prudent acquisition policies, with all assets making an immediate contribution to profitability but also demonstrating the potential for future growth.

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 its control. Note 21 as detailed below provides further detail and quantitative information on the financial risks faced by the Group. The Board has reviewed and agreed policies for managing each of the risks and uncertainties which are summarised below, but regards the first four items as its principal risks at the present time:

Funding and available finance

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 debt 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 secured £250 million of debt facilities in 2012, with a spread of maturities and from a variety of lenders 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 also 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 funding 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 2012, raising an amount of £18.4 million net of costs.
	PHP became the first REIT to enter the Retail Bond market in July 2012, when it issued a £75 million, seven year, unsecured bond, with an annual coupon of 5.375%.

Property market risks

Risk	Lack of available properties or the inability to invest on acceptable terms
Impact	The Group may be unable to secure additional investment properties so as to enable PHP to continue to grow.
Mitigation	The Group maintains close relationships with a number of developers of, and other investors in, primary health care properties so as to afford the best possible opportunity to secure future acquisitions.
	The Group is not exclusively reliant on acquisitions to grow as it secures leases with effectively upwards only rent review mechanisms and is able to generate income and value from the management and development of its existing portfolio.

Risk	Property valuations may fall
Impact	Property valuations may fall to such a level that leads PHP to breach its borrowing covenants.
Mitigation	Whilst the specialist nature of the Group's assets can itself be a risk (see below) the inherent characteristics have historically demonstrated low volatility in terms of valuation movements.
	The Group manages its activities so as to always operate well within its banking covenant limits and constantly monitors the margins (i.e. fall to breach) that would have to be experienced in order to cause any default.
	The portfolio is effectively 100% let, on long lease terms with approximately 90% of rent being funded by the NHS. Rental growth is achieved on review, all of which helps in maintaining asset values.

Risk	PHP invests in a niche asset sector affected by Government decisions
Impact	A change of Government policy or a downturn in demand for primary care premises may adversely affect the Group's portfolio and performance.
Mitigation	The Group constantly monitors Government policy with regard to Primary Care so as to be able to anticipate any changes. The use of GPs within the NHS and the long term, established use of third party owned premises has not changed for some time and is not an area changed by the Health & Social Care Act. The Group has received written confirmation of the continued funding of its tenants by the NHS.
	The long term nature of the Group's occupational leases provides security of income and protection should a policy change need to be catered for.

Taxation risks

Risk	Failure to comply with REIT legislation
Impact	A breach of REIT requirements may lead to the Group losing its REIT status and the taxation benefits that affords.
Mitigation	Management monitor the activities and performance of the Group to ensure that all requirements of the REIT legislation are met at all times. New transactions are structured when undertaken so as to continue to meet these statutory requirements.

Risk	A change in Government legislation
Impact	Should the UK-REIT regime cease to apply the Group may become chargeable to taxation with a significant impact on performance and strategy.
Mitigation	The Group monitors communication from HMRC with regard to the ongoing maintenance of the REIT regime. The Group participates in a number of industry bodies and groups that engage in continuous dialogue with HMRC over proposed changes to legislation and their impact on PHP.
	The changes to the REIT regime introduced in 2012 are designed to encourage further REITs and confirm the continuance of the regime for the foreseeable future.

Operational risks

Risk	Continuance of Joint Manager contract
Impact	PHP has no employees and depends on services supplied by third parties for the efficient operation and management of the Group. The termination of the Joint Manager contract could adversely affect the Group's ability to effectively manage its operations.
Mitigation	The management agreement with the Joint Managers includes incentivisation linked to the performance of the Group and protection for efficient handover should the managers change.
	The Management Engagement Committee regularly reviews the performance of the Joint Managers.

Risk	Breach of Health and Safety and Environmental requirements
Impact	A breach of such requirements could have reputational, criminal or financial implications on the Group which could be significant.
Mitigation	The Board views the assessment of Health and Safety and environmental risk as an important element of its due diligence process when acquiring properties and employs specialist advisers to undertake risk assessments.
	Properties are modern and specifically designed for purpose including best practice with regards to environmental requirements thereby mitigating risks.
	Owned properties are inspected regularly in rotation and well maintained.

Key Performance Indicators ("KPIs")

Objective	To deliver sustainable long-term shareholder value and returns
Metric	Sustained real growth in EPS
	Sustained dividend growth
	Growth in NAV
Performance	Adjusted EPS fell from 14.5p to 10.2p
	16th successive year of dividend growth, 3% to 18.5p per share
	Net assets grew from £168.1 million to £179.1 million

Objective	To maximise the returns from the investment portfolio
Metric	Out-performance versus IPD benchmark
	Continued rental growth
Performance	One, three and five year portfolio performance better than the IPD benchmark
	Rental growth of 2.4% p.a. on reviews completed in the year

Objective	To manage our balance sheet effectively
Metric	Maintain longevity of debt facilities
	Maintain appropriate balance between debt and equity within covenanted levels
Performance	£250 million of debt facilities secured in 2012, including the retail bond
	LTV at 60.9%, well within current and future covenant limits
	Equity issue in the year raised net proceeds of £18.4 million

Objective	To grow property assets under management
Metric	Acquisitions achieved
	Positive movement in asset values
	Future commitments made
Performance	23 additional assets acquired or committed to in the year
	Portfolio revaluation uplift of £0.5 million for the year (excluding newly acquired Apollo assets)
	Balance of commitments outstanding as at the year end of £19.9 million

Objective	To maximise portfolio rent roll and maintain security of income
Metric	Continue to grow annualised rent roll
	Maintain core NHS tenant covenant
	Maintain weighted average remaining lease term
Performance	Contracted committed rent roll grew from £32.3 million to £38.9 million
	90% of income effectively funded by the NHS
	Weighted average lease length (including commitments) of 16 years (2011: 16 years)

Harry Hyman

Managing Director

27 February 2013

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2012

		2012	2011
	Notes	£000	£000
Rental income		32,806	30,333
Finance lease income		345	343
Rental and related income	3	33,151	30,676
Direct property expenses		(402)	(436)
Administrative expenses	4	(5,124)	(5,123)
Operating profit before revaluation result on property portfolio		27,625	25,117
Profit on sale of Available For Sale ("AFS") investments	13	-	312
Net revaluation result on property portfolio	10	(1,768)	10,584
Operating profit before financing costs		25,857	36,013
Finance income	5	518	414
Finance costs	6	(20,760)	(15,831)
Provision for early loan repayment fee	17	(1.564)	-
Fair value loss on interest rate swaps and amortisation of cash flow hedging reserve	6	(2,922)	(7,947)
Profit on ordinary activities before taxation		1,129	12,649
Taxation credit	7	1	5
Profit for the year (1)		1,130	12,654
Other comprehensive income/(loss) being:
Fair value movement on interest rate swaps treated as cash flow hedges	26	(285)	(13,613)
Recycling of previously unrealised gain on current asset investment	13	-	(73)
Other comprehensive loss for the year net of tax (1)		(285)	(13,686)
Total comprehensive income/(loss) for the year net of tax (1)		845	(1,032)
Earnings per share (2)	8	1.56p	18.97p
Adjusted earnings per share (2) (3)	8	10.16p	14.54p

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 (see note 8).

GROUP BALANCE SHEET

as at 31 December 2012

		2012	2011
	Notes	£000	£000
Non-current assets
Investment properties	10	622,447	525,586
Net investment in finance leases	12	3,100	3,069
Derivative interest rate swaps	20	-	24
		625,547	528,679
Current assets
Trade and other receivables	14	2,916	2,633
Net investment in finance leases	12	21	30
Cash and cash equivalents	15	25,096	77
		28,033	2,740
Total assets		653,580	531,419
Current liabilities
Term loans and overdrafts	18	(79,934)	(592)
Derivative interest rate swaps	20	(7,523)	(23,866)
Trade and other payables	16	(10,687)	(5,831)
Deferred rental income		(7,811)	(6,624)
Provisions for liabilities and charges	17	(1,564)	-
		(107,519)	(36,913)
Non-current liabilities
Term loans and overdrafts	18	(247,905)	(300,747)
Retail Bond	19	(73,755)	-
Derivative interest rate swaps	20	(45,311)	(25,639)
		(366,971)	(326,386)
Total liabilities		(474,490)	(363,299)
Net assets		179,090	168,120
Equity
Share capital	22	38,017	34,136
Share premium account	23	58,606	54,430
Capital reserve	24	1,618	1,618
Special reserve	25	59,473	57,405
Cashflow hedging reserve	26	(27,177)	(26,892)
Retained earnings	27	48,553	47,423
Total equity (1)		179,090	168,120
Net asset value per share - basic	28	235.54p	246.25p
EPRA net asset value per share (2)	28	305.03p	318.73p

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

(2) See definition in note 28.

These financial statements were approved by the Board of Directors on 27 February 2013 and signed on its behalf by:

Graeme Elliot

Chairman

GROUP CASH FLOW STATEMENT

for the year ended 31 December 2012

		2012	2011
	Notes	£000	£000
Operating activities
Profit on ordinary activities before tax		1,129	12,649
Less: Finance income	5	(518)	(414)
Plus: Finance costs	6	20,760	15,831
Plus: Provision for early loan repayment fee		1,564	-
Plus: Amortisation of cash flow hedge reserve		1,345	56
Plus: Fair value loss on derivatives	6	1,577	7,891
Operating profit before financing costs		25,857	36,013
Adjustments to reconcile Group operating profit to net cash flows from operating activities:
Revaluation (deficit)/gain on property portfolio	10	1,768	(10,584)
Profit on sale of AFS investment	13	-	(312)
Increase in trade and other receivables (1)		(133)	(146)
Increase in trade and other payables (1)		7,940	1,095
Cash generated from operations		35,432	26,066
UK-REIT conversion charge instalments		-	(1,998)
Taxation paid (2)		-	(43)
Net cash flow from operating activities		35,432	24,025
Investing activities
Payments to acquire investment properties		(42,221)	(45,712)
Disposal of AFS investment	13	-	788
Payments to acquire Apollo Medical Partners Limited		(3,298)	-
Interest received on developments		237	296
Bank interest received		199	35
Other interest		-	4
Net cash flow used in investing activities		(45,083)	(44,589)
Financing activities
Proceeds from issue of shares (net of expenses)		18,399	15,605
Term bank loan drawdowns		75,685	145,953
Term bank loan repayments		(100,101)	(111,007)
Proceeds of Retail bond issue (net of issue costs)		73,671	-
Swap interest paid		(6,736)	(8,833)
Non utilisation fee		(714)	(224)
Loan arrangement fees		(2,655)	(1,690)
Interest paid		(10,670)	(5,454)
Swap buy back costs	20	-	(2,880)
Equity dividends paid net of scrip dividend	9	(12,209)	(11,199)
Net cash flow from financing activities		34,670	20,271
Increase/(decrease) in cash and cash equivalents for the year		25,019	(293)
Cash and cash equivalents at start of year		77	370
Cash and cash equivalents at end of year	15	25,096	77

(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 STATEMENTS OF CHANGES IN EQUITY

for the year ended 31 December 2012

					Cash flow
	Share	Share	Capital	Special	hedging	Retained
	capital	premium	reserve	reserve(1)	reserve	earnings	Total
	£000	£000	£000	£000	£000	£000	£000
1 January 2012	34,136	54,430	1,618	57,405	(26,892)	47,423	168,120
Profit for the year	-	-	-	-	-	1,130	1,130
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps	-	-	-	-	(1,630)	-	(1,630)
Amortisation of cash flow hedging reserve	-	-	-	-	1,345	-	1,345
Total comprehensive income	-	-	-	-	(285)	1,130	845
Proceeds from capital raisings	3,115	-	-	15,885	-	-	19,000
Expenses of capital raisings	-	-	-	(601)	-	-	(601)
Share issue as part of consideration for
Apollo Medical Partners Limited	616	3,325	-	-	-	-	3,941
Share issue expenses	-	(6)	-	-	-	-	(6)
Dividends paid:
Second interim dividend for the year ended 31 December 2011 (9.25p)	-	-	-	(5,969)	-	-	(5,969)
Scrip dividends in lieu of second interim cash dividend (net of expenses)	54	292	-	(346)	-	-	-
First interim dividend for the year ended 31 December 2012 (9.25p)	-	-	-	(6,240)	-	-	(6,240)
Scrip dividend in lieu of first interim cash dividend (net of expenses)	96	565	-	(661)	-	-	-
31 December 2012	38,017	58,606	1,618	59,473	(27,177)	48,553	179,090

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) 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 2012 were approved by the Board of Directors on 27 February 2013 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 for the current year. 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 are recognised for accounting purposes upon completion of contract, unless a specific completion date is noted in the contract, in which case the property will be recognised on the date specified. Investment properties cease to be recognised 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.

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 that are separately identifiable and 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.

Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that an outflow or resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

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. Acquired companies were converted to a UK-REIT status; there were no charges payable following the abolition of the REIT conversion charge.

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.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedging relationships as defined by IAS 39. Gains or losses on liabilities held for trading are 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 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.

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 from the date of cancellation 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, such as 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;

•the gain or loss on derivatives that do not meet the strict criteria for being "effective" and so 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 an 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 that affect the reported amounts of assets and liabilities and may differ from future actual results. The estimates and judgements 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

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 by the Group 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, assuming 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 RICS 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. Where assets under construction are pre-let and construction risk remains with the respective developer or contractor, these facts are taken into account in estimating fair values.

Fair value of derivatives

In accordance with IAS39, the Group values its derivative financial instruments at fair value. Fair value is estimated by J.C. Rathbone Associates Limited on behalf of the Group, using 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 2012. 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.

Provision for early loan repayment fee

In accordance with IAS 37, the Group has recognised a provision for the early loan repayment fee of the Apollo Aviva mortgages. Following the Group's submission of the early repayment notice on 19 December 2012, a best estimate of the fee has been made based on reference gilt redemption yields as at 31 December 2012.

Contingent consideration

In accordance with IAS 39, the Group has considered its financial liability in respect of the Apollo transaction based on the estimated fair values of future consideration payable, discounted to its present value. Future consideration may become payable based on lettings achieved at various vacant areas, the completion of a Deed of Variation with respect to a specific lease as set out in accordance with Schedule 9 of the Sale and Purchase Agreement. The probability of these events has been factored into the fair value calculation.

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 to the occupiers.

Hedge effectiveness

The Group has a number of interest rate swaps that mature after the Group's bank facilities, to which they relate, 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 these 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 IFRS3(R). 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. This judgement was made due to the lack of processes inherent in the entities acquired.

2.4 Standards adopted during the year

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

• IFRS 7 Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements. The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group's financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about the entity's continuing involvement in derecognised assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after 1 July 2011. The Group does not have any assets with these characteristics so there has been no effect on the presentation of its financial statements.

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. The Group plans to adopt the policies below as and when they become effective.

• IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7. These amendments require an entity to disclosure information about rights to set-off and related arrangements (e.g. collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity's financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting agreement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group's financial position or performance and become effective for annual periods beginning on or after 1 January 2013.

• IFRS 9 Financial Instruments: Classification and Measurement. IFRS 9, as issued, reflects the first phase of the IASB's work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the effective date to 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group's financial assets, but will not have an impact on classification and measurements of financial liabilities. The Group will quantify the effect in conjunction with other phases, when the final standard including all phases is issued.

• IFRS 10 Consolidated Financial Statements. IFRS 10 replaces the portion of IAS 27; Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also addresses the issues raised in ISC-12 Consolidation - Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Based on the preliminary analyses performed, IFRS 10 is not expected to have any impact on the scope of the consolidation Group. This standard becomes effective for annual periods beginning on or after 1 January 2013.

• 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 that this standard will have on the financial position and performance, but based on the preliminary analyses, no material impact is expected. This standard becomes effective for annual periods beginning on or after 1 January 2013.

3. 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 reportable operating 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:

	Less than		More than
	one year	1-5 years	5 years	Total
	£000s	£000s	£000s	£000s
2012	38,208	152,536	421,031	611,775
2011	32,146	127,953	366,156	526,255

The future minimum lease payments include amounts due in future years from investment properties under development at the year end.

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

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

The Group leases medical centres to GPs, NHS organisations and other healthcare users, typically on long term occupational leases which provide for regular reviews of rent on an effectively upwards only basis.

4. Group operating profit is stated after charging

		2012	2011
		£000	£000
Administrative expenses: recurring
Management fees (note 4a)		4,166	3,886
Directors' fees (note 4c)		188	188
Property management fees and
other services payable to Nexus		50	71
Auditors' remuneration for:
• audit of the Financial Statements		120	139
• audit of accounts of subsidiaries		95	24
• taxation services	- compliance	30	82
	- advisory	52	50
Other professional fees		139	360
Other expenses		284	323
Total		5,124	5,123

a) Management fees

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

	2012	2011
	£000	£000
Nexus	2,497	2,295
JOHCML	1,669	1,591
	4,166	3,886

Further details on the Management Agreement can be found in the Directors' Report in the Annual Report.

As at 31 December 2012, £143,000 of management fees payable to JOHCML were outstanding (2011: £137,000) and £242,000 was payable to Nexus (2011: £206,000).

Further fees payable to Nexus in accordance with the Management Agreement of £55,000 (2011: £56,000) in respect of capital projects were capitalised in the year.

b) Performance Incentive Fee ("PIF")

Information about the Performance Incentive Fee ("PIF") is provided in the Directors' Report in the Annual Report.

c) Remuneration of Directors

Information about the remuneration of Individual Directors is provided in the Directors' Remuneration Report in the Annual Report.

5. Finance income

	2012	2011
	£000	£000
Interest income on financial assets
Bank interest	206	70
Development loan interest	257	249
Other interest	55	95
	518	414

6. Finance costs

	2012	2011
	£000	£000
Interest expense and similar charges on financial liabilities
(i) Interest payable
Swap interest payable	6,860	8,768
Bank loan interest payable	10,296	5,792
Bond interest payable	1,789	-
Notional UK-REIT interest	-	5
Bank facility non utilisation fees	733	288
Bank charges and loan commitment fees	1,082	978
	20,760	15,831

The above analysis excludes the one-off provision for early repayment of the Aviva loan acquired as part of the Apollo transaction of £1.564 million.

(ii) Derivatives

Net fair value loss on interest rate swaps	1,577	7,891
Amortisation of cash flow hedging reserve	1,345	56
	2,922	7,947

The fair value loss of £1.6million (2011: £7.9million) on derivatives recognised in the Group Statement of Comprehensive Income for the year has arisen from the interest rate swaps for which the hedge accounting concept does not apply.

Details of the fair value loss on hedges which meet the effectiveness criteria under IAS 39 are set out in note 26.

	2012	2011
	£000	£000
Net finance costs Finance income (note 5)	(518)	(414)
Finance costs	20,760	15,831
	20,242	15,417

7. Taxation

a) Tax credit in the Group Statement of Comprehensive Income

The tax credit is made up as follows:

	2012	2011
	£000	£000
Current tax
UK corporation tax (note 7b)	(1)	(5)

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 26% to 24% was effective from 1 April 2012. A further reduction from 24% to 23% has been substantively enacted and will be effective from 1 April 2013. Accordingly, these rates have been applied in the measurement of the Group's tax liability at 31 December 2012.

In addition, the Government announced its intention to further reduce the UK corporation tax rate to 21% from 1 April 2014.

b) Factors affecting the tax credit for the year

The tax assessed for the year is lower than (2011: lower) the standard rate of corporation tax in the UK. The differences are explained below:

	2012	2011
	£000	£000
Profit on ordinary activities
before taxation	1,129	12,649
Theoretical tax at UK corporation tax
rate of 24.5% (2011: 26.5%)	277	3,352
REIT exempt income	(1,857)	(2,651)
Transfer pricing adjustments	797	-
Non taxable items	819	(697)
Indexation allowance on capital gains	-	(7)
Finance lease adjustment	1	4
Other differences	-	(7)
Losses carried forward	(37)	6
Movement in tax provision
relating to prior years	(1)	(5)
Current tax credit (note 7a)	(1)	(5)

8. 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)
2012
Basic and diluted earnings per share	1,130	72,675,900	1.56p
Adjustments to remove:
Net property valuation deficit (Note 10)	1,768
Fair value loss on derivatives (2)	2,922
Provision for early loan repayment fees (3)	1,564
UK corporation tax credit	(1)
Adjusted basic and diluted earnings per share	7,384	72,675,900	10.16p

2011
Basic and diluted earnings per share	12,654	66,696,096	18.97p
Adjustments to remove:
Net property valuation gains (Note 10)	(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

(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.

(3) The provision for early loan repayment fees is considered a one-off exceptional item following the acquisition of Apollo Medical Partners Limited and its subsidiary. Directors believe that it is appropriate to remove the charge in the calculation of adjusted earnings on this basis.

9. Dividends

Amounts recognised as distributions to equity holders in the year:

	2012	2011
	£000	£000
Second interim dividend for the year ended 31 December 2011 (9.25p) paid 2nd April 2012 (2011: 9.00p)	5,969	5,363
Scrip dividend in lieu of second interim cash dividend	346	289
First interim dividend for the year ended 31 December 2012 (9.25p) paid 26 October 2012 (2011: 9.00p)	6,240	5,836
Scrip dividend in lieu of first interim cash dividend	661	300
Total dividends	13,216	11,788
Per share	18.5p	18.0p

10. 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 99.7% let. The valuations reflected a 5.72% initial yield (2011: 5.74%) and a 6.05% (2011: 6.06%) true equivalent yield as detailed in the Managing Directors' Review above. 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. Full details can be found in the Managing Directors' Review above. 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 decrease of £764,000 (2011: increase of £401,000) in respect of investment property under construction has been recognised in the Group Statement of Comprehensive Income, as part of the total net valuation loss on property portfolio in the year of £1.77 million (2011: gain of £10.58 million).

In line with Accounting Policies above, 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
	£000	£000	£000	£000
As at 1 January 2012	433,245	87,966	4,375	525,586
Property additions	30,111	1,021	10,234	41,366
Properties acquired during the year following Acquisition of Apollo Medical Partners Limited	41,966	4,247	11,550	57,763
Disposal 1	-	-	(500)	(500)
Transfer from properties in the course of development	9,164	-	(9,164)	-
Revaluations for the year	(1,141)	137	(764)	(1,768)
As at 31 December 2012	513,345	93,371	15,731	622,447
As at 1 January 2011	383,223	78,860	7,207	469,290
Property additions	13,366	4,258	28,088	45,712

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

(1) Disposal of long leasehold interest as part of acquisition of newly developed property at Pelton, County Durham.

11. Investments

Those subsidiaries listed below are considered to be the principal subsidiaries only of the Company:

Subsidiary

Primary Health Investment Properties Limited (PHIP) (1)

Primary Health Investment Properties (No. 2) Limited (1)

Primary Health Investment Properties (No. 3) Limited (1)

PHIP (5) Limited (2)

Patientfirst Partnerships Limited (2)

Patientfirst (Hinckley) Limited (2)

Patientfirst (Burnley) Limited (2)

Health Investments Limited (1)

Motorstep Limited (2)

PHP Investments No1 Limited (2)

PHP Investments No2 Limited (2)

PHP Investments (2011) Limited (1)

PHP AssetCo (2011) Limited (2)

PHP Healthcare Investments Limited (2)

PHP Empire Holdings Limited (1)

PHP (Stourbridge) Limited (1)

PHP Clinics Limited (1)

Apollo Capital Projects Limited (2) (3)

Apollo Medical Partners Limited (2) (4)

The principal activity of all of the above is Property Investment and all have 100% proportion of voting rights and shares held.

(1) Subsidiaries directly held by the Company.

(2) Subsidiaries held indirectly by the Company.

(3) Subsidiary acquired during the year (name changed to PHP Glen Spean Limited post acquisition)

(4) Subsidiary acquired during the year (name changed to PHP Medical Properties Limited post acquisition)

12. Net investment in finance leases

	2012	2011
	£000	£000
Amounts due in more than five years	3,086	3,026
Amounts due between one and five years	14	43
	3,100	3,069
Amounts due in less than one year	21	30
	3,121	3,099

There were no additions to finance leases during the year ended 31 December 2012 or the year ended 31 December 2011.

	2012	2011
	£000	£000
Gross investment in finance leases	8,781	9,104
Less: unearned financial revenues	(5,660)	(6,005)
Present value of future minimum lease payment receivables	3,121	3,099

13. Current asset investment

	2012	2011
	£000	£000
As at 1 January	-	555
Disposals in the year	-	(555)
	-	-

The current asset investment of 1,970,500 ordinary shares in AH Medical Properties PLC ("AHMP"), held as an Available For Sale ("AFS"), was disposed of on 19 January 2011 for £788,000. The Group accepted the cash alternative offer for the shares from Assura Group Limited, resulting in a realised gain of £312,000 and an unrealised gain of £73,000 was recycled to Other Comprehensive Income.

14. Trade and other receivables

	2012	2011
	£000	£000
Trade receivables	689	793
Other debtors	775	687
Prepayments and accrued income	1,275	1,153
VAT	177	-
	2,916	2,633

As at 31 December, the analysis of trade receivables, some of which were past due but not impaired, is set out below:

	2012	2011
	£000	£000
Neither past due nor impaired:
<30 days	425	533
Past due but not impaired:
30-60 days	69	72
60-90 days	-	13
90-120 days	15	12
>120 days	180	163
	689	793

15. Cash and cash equivalents

	2012	2011
	£000	£000
Cash held at bank	19,086	77
Restricted cash: Aviva deposits	6,010	-
	25,096	77

Restricted Cash: Three cash deposits, totalling £6.0 million at the year end, were purchased as part of the Apollo Medical Partners Limited acquisition. The cash deposits are restricted purely for the use of one PHP subsidiary company in order to settle capital commitments. The deposits are restricted and released to a PHP subsidiary upon presentation of an approved valuation certificate relating to the staged payments of development costs with regard to three properties under construction that were acquired as part of the Apollo portfolio.

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 six months dependent on available cash and forthcoming cash requirements of the Group. These deposits earn interest at various short term deposit rates.

Included in the above balance at 31 December 2012 the Group had £16 million held on a one month term deposit accruing an interest rate of 1.5% (2011: £nil).

16.Trade and other payables

	2012	2011
	£000	£000
Trade payables	951	1,286
Other payables	5,545	2,494
Bank loan and bond interest accrual	3,313	1,555
VAT	-	154
Accruals	878	342
	10,687	5,831

Trade payables included an amount of £250,000 for works on the development at Swansea. In 2011, trade payables included amounts of £731,000, £141,000 and £20,000 for works at the developments at Pelton, Ramsgate and Luton respectively. Other payables include an amount of £1.8 million of deferred consideration that is payable upon completion of the construction of three assets under development that were acquired with the acquisition of Apollo Medical Partners Limited and its subsidiary.

17. Provisions for liabilities and charges

	2012	2011
	£000	£000
Provision for early loan repayment fee	1,564	-
	1,564	-

As part of the acquisition of Apollo Medical Partners Limited and its subsidiary, Apollo Capital Projects Limited ("ACPL"), on 13 December 2012, PHP assumed fixed rate bank finance provided by Aviva with a total principle amount of £49.8 million. The Group has determined the fair value of the debt as at the date of acquisition to be £52.3 million, which has been recognised in the Group Balance Sheet.

On 19 December 2012, ACPL issued a repayment notice to Aviva giving the required three months notice of its intention to repay the ACPL loans in full on expiry of the notice period.

As at the balance sheet date, PHP has recognised a provision based on the difference between the carrying value of the debt and the estimated sum required to settle the debt and meet the charges that will crystallise on the repayment date. The Group's best estimate of the provision, based on applicable referenced gilt yields as at this date is £1.56 million, which has been recognised in the Group Statement of Comprehensive Income.

18. Term loans and overdrafts

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

	Facility		Amounts drawn		Undrawn
	2012	2011	2012	2011	2012	2011
	£000	£000	£000	£000	£000	£000
Current
Overdraft facility (1)	5,000	10,000	-	-	5,000	10,000
Fixed term loan (4)	629	592	629	592	-	-
Term to January 2013 (3)	27,000	-	27,000	-	-	-
Fixed Rate term Loan (8)	52,305	-	52,305	-	-	-
	84,934	10,592	79,934	592	5,000	10,000
Non Current
Term to March 2016 (2)	175,000	175,000	125,000	156,500	50,000	18,500
Term to January 2013 (3)	-	30,000	-	30,000	-	-
Fixed Rate term loan (4)	26,082	26,710	26,082	26,710	-	-
Fixed Rate term to December 2022 (5)	25,000	25,000	25,000	-	-	25,000
Term to July 2014 (6)	50,000	50,000	-	14,203	50,000	35,797
Fixed Rate term to November 2018 (7)	75,000	75,000	75,000	75,000	-	-
	351,082	381,710	251,082	302,413	100,000	79,297
	436,016	392,302	331,016	303,005	105,000	89,297

Providers:

(1) The Royal Bank of Scotland PLC expires 16 March 2013

(2) The Royal Bank of Scotland PLC ("RBS") and Abbey National Treasury Services plc (branded Santander from January 2010) ("The Club Facility")

(3) Allied Irish Banks, PLC

(4) Aviva facility repayable in tranches to 31 January 2032

(5) Aviva GPFC facility

(6) Clydesdale Bank facility

(7) Aviva facility

(8) Aviva facility (acquired as part of the Glen Spean acquisition in December 2012) repayable in tranches to September 2036

At 31 December 2012, total borrowings of £511.0 million (2011: £392.3 million) including the £75 million Retail Bond and £5 million revolving overdraft facility were available. Of these borrowings, as at 31 December 2012, £406.0million was drawn (2011: £303.0 million) and secured by an unlimited guarantee from each respective subsidiary and a first fixed charge over the ownership of the assigned properties. The Group has entered into interest rate swaps to manage its exposure to interest rate fluctuations. These are set out in note 20.

On 2 April 2012, PHP entered into a new £175 million club debt facility (the "Club Facility") with RBS and Santander. This facility is for a four year term and comprises of a term loan of £125 million and a revolving debt facility of £50 million. The key covenants for the facility are an overall Loan to Value maximum of 65% and a minimum Interest Cover requirement of 1.3 times.

There is a £5 million overdraft facility in place, unutilised as at 31 December 2012 (2011: £10 million).

As part of the completion of the Club Facility detailed above, the existing bilateral loan with AIB was separated and secured upon a specific security pool. A sum of £3 million was repaid from the loan as part of this process leaving a balance of £27 million. All terms and conditions of the AIB loan remained unchanged.

On 13 December 2012, as part of the Apollo Medical Partners Limited acquisition, PHP assumed the a portfolio of Aviva fixed debt with a fair value of £52.4 million secured against the property portfolio. Interest is payable at rates of between 4.57% - 6.10% with the principle repayable between 14 years - 25 years.

On 19 December 2012, PHP issued Aviva with a repayment notice for the full list of loans acquired as part of the Apollo Medical Partners Limited acquisition. It is PHP's intention to repay the loans on 19 March 2013, being three months from the date of the repayment notice. A provision for the difference between the estimated sum required to settle the loan repayment and early redemption fees and the carrying value of the loan of £1.56 million has been recognised in the year.

On 14 December 2012, PHP completed the draw down of a £25 million, 10 year, interest only debt facility with Aviva Public Private Finance Limited , locking into a fixed interest rate for the entire term of the facility of 3.63%.

On 31 January 2013, the AIB loan was repaid in full, without any requirement to redeem the pre-exisiting interest rate swaps or incur any related breakage fees.

Since the term loan facilities have been in existence, the Group has incurred 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:

	2012	2011
	£000	£000
Term loans drawn: due within one year	79,934	592
Term loans drawn: due in greater than one year	251,082	302,413
Less: Unamortised borrowing costs	(3,177)	(1,666)
Total terms loan: due in greater than one year	247,905	300,747
Term loans in total per Group Balance Sheet	327,839	301,339

The Group has been in compliance with all of the financial covenants of the above facilities as applicable through the year. Further details are shown in note 21e.

19. Retail Bond

	2012	2011
	£000	£000
Retail Bond July 2019	75,000	-
Issue costs	(1,245)	-
	73,755	-

On 23 July 2012, PHP announced that it had become the first UKREIT to issue a Retail Bond following the issue of a £75 million, unsecured, seven year bond, to retail investors with an annual interest rate of 5.375% paid semi-annually in arrears. The bond issue costs will be amortised on a straight line basis over seven years.

20. Derivatives and other financial instruments

The Group uses interest rate swaps to mitigate exposure to interest-rate risk. The fair value of these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date.

	2012	2011
	£000	£000
Fair value of interest rate swaps treated as cash flow hedges under IAS39 ("effective swaps")
Current liabilities	(3,778)	-
Non current liabilities	(23,637)	(25,639)
	(27,415)	(25,639)
Fair value of interest rate swaps not qualifying as cash flow hedges ("ineffective swaps")
Non current assets	-	24
Current liabilities	(3,745)	(23,866)
Non Current liabilities	(21,674)	-
	(25,419)	(23,842)
Total fair value of interest rate swaps	(52,834)	(49,481)

It is Group policy to maintain the proportion of floating rate interest exposure at between 20%-40% of total interest rate cost.

Changes in the fair value of the contracts that do not meet the strict IFRS 39 criteria to be designated as effective hedging instruments are taken to the Group Statement of Comprehensive Income. For contracts that meet the IFRS 39 criteria and are designated as 'effective' cash flow hedges, the change in the fair value of the contract is recognised in the Statement of Changes in Equity through the cash flow hedging reserve. The result recognised in the Group Statement of Comprehensive Income on 'ineffective' cash flow hedges in 2012 was a £1.6 million loss (2011: £7.9 million loss).

Floating to fixed rate interest rate swaps with a contract value of £181.3 million (2011: £173.0 million) were in effect at the year-end. Details of all floating to fixed rate interest rate swaps contracts held are as follows:

			Fixed
			interest per
Contract value	Start date	Maturity	annum %
2012
£50.0 million	August 2007	August 2021 (1)	4.835
£38.0 million	August 2007	August 2021 (1)	4.740
£73.3 million	July 2012	April 2013	4.805
£10.0 million	August 2005	August 2015	4.530
£10.0 million	June 2006	June 2026	4.810
£181.3 million
2011
£50.0 million	August 2007	August 2021	4.835
£38.0 million	August 2007	August 2021	4.740
£65.0 million	July 2010	July 2012	4.805
£10.0 million	August 2005	August 2015	4.530
£10.0 million	June 2006	June 2026	4.810
£173 million
Contracts not yet in effect
£63.3 million	April 2013	July 2013	4.805
£70.0 million	July 2013	July 2015	4.805
£80.0 million	July 2015	July 2016	4.805
£10.0 million	June 2016	June 2026	4.510
£10.0 million	July 2016	July 2026	4.400
£10.0 million	July 2016	July 2026	4.475
£10.0 million	July 2016	July 2026	4.455
£20.0 million	July 2016	July 2026	4.47875
£20.0 million	July 2017	July 2027	4.76

(1) On 27th February 2012 PHP signed an agreement to cancel the callability option held by the counter party on the £50.0 million and the £38.0 million swaps in place. The callability option has been cancelled for four years until 11 February 2016 at which time it will be reinstated.

Details of the two interest rate caps held by the Group are as follows:

				Floating rate
	Start	Maturity	Premium	cap per
Contract value	date	date	paid (1)	% annum (2)
£10.0 million	Oct 2011	Oct 2014	£31,000	3.00%
£10.0 million	Jan 2012	Jul 2014	£26,000	3.00%

(1) One-off fixed amount paid by PHP Group

(2) Payable by Clydesdale Bank PLC

21. Financial risk management

In pursuing its investment objectives, the Group is exposed to a variety of risks that could impact net assets or distributable profits.

The Group's principal financial liabilities, other than interest rates swaps, are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has trade and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

A review of the Group's objectives, policies and processes for managing and monitoring risk is set out in the Managing Directors' Review above. This note provides further detail on financial risk management and includes quantitative information on specific financial risks.

Financial risk factors

a) Interest rate risk

Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long-term debt obligations with floating rates as the Group, generally, does not hold significant cash balances, with short term borrowings being used when required. To manage its interest rate risk, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon principal amount. Note 20 provides details of interest swap contracts in effect at the year end.

The sensitivity analysis below shows the impact on profit before tax and equity of reasonably possible movements in interest rates with all other variables held constant. It should be noted that the impact of movement in the interest rate variable is not necessarily linear.

The mark to model value is arrived at with reference to the difference between the contracted rate of a swap and the market rate for the remaining duration at the time the valuation is performed. As market rates increase and this difference reduces, the associated mark to model value also decreases.

		Effect on fair	Effect on
		value of financial	profit before	Effect on
		instruments	taxation	equity
		£000	£000	£000
2012
London InterBank Offered Rate	Increase of 50 basis points	9,720	3,206	12,926
London InterBank Offered Rate	Decrease of 50 basis points	(9,720)	(3,206)	(12,926)
2011
London InterBank Offered Rate	Increase of 50 basis points	9,552	3,530	13,082
London InterBank Offered Rate	Decrease of 50 basis points	(9,552)	(3,530)	(13,082)

b) Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under financial instruments or customer contract, leading to a financial loss. The Group is exposed to credit risk from its principal financial assets being cash and cash equivalents, trade and other receivables, and finance lease receivables.

Trade receivables

Trade receivables, primarily tenant rentals, are presented in the balance sheet net of allowances for doubtful receivables and are monitored on a case-by-case basis. Impairment allowance is recorded where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable concerned. Credit risk is primarily managed by requiring tenants to pay rentals in advance. An analysis of trade receivables past due is shown in note 14. No trade receivables were impaired at the year end.

Bank and financial institutions

One of the principal credit risks of the Group arises from financial derivative instruments and deposits with banks and financial institutions. The Board of Directors believes that the credit risk on short-term deposits and interest rate swaps is limited because the counterparties are banks, who are committed lenders to the Group, with high credit ratings assigned by international credit-rating agencies.

Finance lease receivables

Finance lease receivables are not considered a significant credit risk as the tenants are of good financial standing.

c) Liquidity risk

The liquidity risk is that the Group will encounter difficulty in meeting obligations associated with its financial liabilities as the majority of the Group's assets are property investments and are therefore not readily realisable. The Group's objective is to maintain a mixture of available cash and committed bank facilities that are designed to ensure that the Group has sufficient available funds for its operations and to fund its committed capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by the joint managers.

The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments including interest.

		Less than	3 to 12	1 to 5
	On demand	3 months	months	years	> 5 years	Total
	£000	£000	£000	£000	£000	£000
2012
Interest-bearing loans and borrowings	-	80,667	10,534	173,116	217,633	481,950
Interest rate swaps (net)	-	1,925	5,771	25,170	48,962	81,828
Trade and other payables	88	6,196	2,292	1,619	492	10,687
	88	88,788	18,597	199,905	267,087	574,465
2011
Interest-bearing loans and borrowings	-	2,223	6,671	223,826	111,675	344,395
Interest rate swaps (net)	-	1,638	4,916	24,515	44,201	75,270
Trade and other payables	60	4,419	10	822	520	5,831
	60	8,280	11,597	249,163	156,396	425,496

The Group's borrowings have financial covenants which, if breached, could result in the borrowings becoming repayable immediately. Details of the covenants are given in the Borrowings section of the Managing Director's Review above and are disclosed to the facility providers on a quarterly basis. There have been no breaches during the year (2011: nil).

d) Market risk

Market risk is the risk that fair values of financial instruments will fluctuate because of changes in market prices. The Board of Directors has identified two elements of market risk that principally affect the Group - interest rate risk and other price risk.

Interest rate risk is outlined above. The Joint Managers assess the exposure to other price risks when making each investment decision and monitor the overall level of market risk on the investment portfolio on an ongoing basis through a discounted cash flow analysis. Details of this analysis can be found above within the Managing Director's Review.

Fair values

Set out below is a comparison by class of the carrying amount and fair values of the Group's financial instruments that are carried in the financial statements.

	Book value	Fair value	Book value	Fair value
	2012	2012	2011	2011
	£000	£000	£000	£000
Financial assets
Finance leases - due within one year	21	287	30	310
Finance leases - due in more than one year	3,100	4,516	3,068	4,493
Trade and other receivables	689	689	793	793
Cash and short-term deposits	25,096	25,096	77	77
Financial liabilities
Interest-bearing loans and borrowings	(401,594)	(406,016)	(301,339)	(303,005)
Effective interest rate swaps (net)	(27,415)	(27,415)	(25,615)	(25,615)
Ineffective interest rate swaps	(25,419)	(25,419)	(23,866)	(23,866)
Trade and other payables	(10,687)	(10,687)	(5,677)	(5,677)

The fair value of the financial assets and liabilities are included as an estimate of the amount at which the instruments could be exchanged in a current transaction between willing parties, other than a forced sale. The following methods and assumptions were used to estimate fair values:

• The fair values of the Group's cash and cash equivalents and trade payables and receivables are not materially different from those at which they are carried in the financial statements due to the short-term nature of these instruments.

• The fair value of floating rate borrowings and finance leases is estimated by discounting future cash flows using rates currently available for instruments with similar terms and remaining maturities. The fair value approximates their carrying values gross of unamortised transaction costs.

• The fair values of the derivative interest rate swap contracts are estimated by discounting expected future cash flows using market interest rates and yield curves over the remaining term of the instrument.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels are defined as follows:

Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data

		Level 1	Level 2	Level 3	Total
		£000	£000	£000	£000
Assets	2012 derivative interest rate swaps	-	-	-	-
	2011 derivative interest rate swaps	-	24	-	24
Liabilities	2012 derivative interest rate swaps	-	(52,834)	-	(52,834)
	2011 derivative interest rate swaps	-	(49,505)	-	(49,505)

e) Capital risk management

The primary objectives of the Group's capital management is to ensure that it remains a going concern, operates within its quantitative banking covenants and meets the criteria so as to continue to qualify for UK-REIT status.

The capital structure of the Group consists of shareholder's equity and net borrowings. The type and maturity of the Group's borrowings are analysed further in note 18 and the Group's equity is analysed into its various components in the Statement of Changes in Equity. The Board, with the assistance of the Joint Managers, monitors and reviews the Group's capital so as to promote the long-term success of the business, facilitate expansion and to maintain sustainable returns for Shareholders.

Under its banking facilities, the Group is subject to the following capital and covenant requirements:

• Total bank borrowings are not to exceed 65% of gross assets (see below).

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

• UK-REIT compliance tests. These include loan to property 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.

During the period the Group has complied with all of the requirements set out above.

	2012	2011
	£000	£000
Fair value of completed investment properties	606,716	521,212
Fair value of development properties	15,731	4,375
Net investment in finance leases	3,121	3,069
	625,568	528,656
Carrying value of interest-bearing loans and borrowings	401,594	301,339
Unamortised borrowing costs	4,422	1,666
Less cash held	(25,096)	(77)
Principal amount of interest-bearing loans and borrowings	380,920	302,928
Loan to value ratio	60.9%	57.8%

22. Called up share capital

	2012	2012	2011	2011
	Number	£000	Number	£000
Authorised: Ordinary Shares of 50p each	100,000,000	50,000	100,000,000	50,000
Issued and fully paid at 50p each	76,034,208	38,017	68,272,229	34,136
At beginning of year	68,272,229	34,136	62,802,333	31,401
Scrip issues in lieu of second interim cash dividends	107,332	54	89,617	45
Scrip issues in lieu of first interim cash dividends	193,743	96	96,238	48
Proceeds from capital raisings	6,229,509	3,115	5,284,041	2,642
Shares issued in consideration for Apollo Medical Partners Limited (December 2012)	1,231,395	616	-	-
At end of year	76,034,208	38,017	68,272,229	34,136

There has been one capital raising during the year (2011: one).

On 24 May 2012, the Group completed a small share placing at a price of 305 pence per share that represented a discount of 4.3% to 2011 year end EPRA NAV and 6.2% to the closing share price on the day prior to issue. 6,229,509 shares were issued generating net cash proceeds of £18.4 million, the cash to be used to finance future acquisitions.

On 26 December 2012, the Company issued 1,231,395 new Ordinary Shares of 50 pence each at an agreed price of 320 pence per share as part of the consideration for the acquisition of Apollo Medical Partners Limited and its subsidiary Apollo Capital Projects Limited. The Group has since changed the names of the acquired companies to PHP Medical Properties Limited and PHP Glen Spean Limited respectively.

On 12 April 2011, the Group completed a small share placing at a price of 305 pence per share that represented a discount of 2.5% to 2010 year end EPRA NAV and 5.3% to the closing share price on the day prior to the issue. 5,284,041 shares were issued generating net cash proceeds of £15.6 million. The cash has been used to finance acquisitions.

23. Share premium

	2012	2011
	£000	£000
Balance at beginning of year	54,430	53,934
Issue expenses	(6)	-
Shares issued in consideration for Apollo Medical Partners Limited acquisition	3,325	-
Scrip issues in lieu of interim cash dividends	857	496
Balance at end of year	58,606	54,430

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.

24. Capital reserve

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

	2012	2011
	£000	£000
Balance at end of year	1,618	1,618

25. Special reserve

The special reserve arose on the Firm Placing and Placing and Open Offer on 7 October 2009 and the Firm Placings on 12 April 2011 and 23 May 2012. It represents the share premium on the issue of the shares net of expenses.

	2012	2011
	£000	£000
Balance at start of year	57,405	44,442
Placing: 23 May 2012 (2011: 12 April 2011)	15,885	13,474
Associated costs	(601)	(511)
Second interim dividend for the year ended 31 December 2011 (2011: 31 December 2010)	(5,969)	-
Scrip issue in lieu of second interim cash dividend	(346)	-
First interim dividend for the year ended 31 December 2012	(6,240)	-
Scrip issue in lieu of interim cash dividends	(661)	-
Balance at end of year	59,473	57,405

As the special reserve is a distributable reserve, the dividends declared in the year have been distributed from this reserve.

26. Cash flow hedging reserve

Information on the Group's hedging policy and interest rate swaps is provided in note 20.

The transfer to Group Statement of Comprehensive Income and fair value movement on cash flow hedges taken to equity can be analysed as follows:

	2012	2011
	£000	£000
Balance at beginning of year	(26,892)	(13,279)
Fair value movement on cash flow hedges	(5,090)	(18,389)
Amortisation of cash flow hedge reserve	1,345	56
Reclassification adjustment for interest included in the
Statement of Comprehensive Income (1)	3,460	4,720
Net movement on cash flow hedges ("effective swaps") and amortisation of cash flow hedging reserve	(285)	(13,613)
Balance at end of year	(27,177)	(26,892)

(1) Included with finance costs in Group Statement of Comprehensive Income

The net movement on cash flow hedges is made up of the movement in the valuation of the effective swaps, a loss of £1,776,000 (2011: loss £13,605,000), less net accrued interest of £146,000 (2011: plus accrued interest of £64,000), less amortisation of cash flow hedge reserve £1,345,000 (2011: £56,000).

27. Retained earnings

	2012	2011
	£000	£000
Balance at beginning of year	47,423	46,630
Retained profit for the year	1,130	12,654
Unrealised gain on fixed asset investment	-	(73)
Second interim dividend for the year ended 31 December 2011 (2011: 31 December 2010)	-	(5,363)
Scrip issue in lieu of second interim cash dividend	-	(289)
First interim dividend for the year ended 31 December 2012 (2011: 31 December 2011)	-	(5,836)
Scrip issue in lieu of interim cash dividends	-	(300)
Balance at end of year	48,553	47,423

28. Net asset value per share

Net asset values have been calculated as follows:

	2012	2011
	£000	£000
Net assets per Group Balance Sheet	179,090	168,120
Derivative interest rate swaps (net liability)	52,834	49,481
EPRA NAV	231,924	217,601

	No. of shares	No. of shares
Ordinary Shares:
Issued share capital	76,034,208	68,272,229

Basic net asset value per Share	235.54p	246.25p

EPRA NAV per Share	305.03p	318.73p

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.

29. Capital commitments

As at 31 December, the Group 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 £16.3 million plus VAT (2011: £7.4 million plus VAT). The Group has also entered into an agreement to purchase an investment property at a future date at a consideration of £3.6 million plus VAT (2011: £nil).

30. Related party transactions

The terms and conditions of the Management Agreement are described in the Directors' Report and the Directors' Remuneration Report both contained within the Annual Report. Details of the amounts paid in relation to related party transactions are provided in note 4.

31. Contingent liabilities

The terms and conditions agreed on acquiring Apollo Medical Partners Limited ("Apollo"), may oblige the Group to pay a number of potential additional elements of consideration conditional upon events that may be achieved by the vendor in an agreed period after the acquisition.

Deferred consideration - included within Other Payables is an amount of £1.81 million that represents deferred consideration for three assets acquired with Apollo. These assets, at Swansea, Rumney, Cardiff and Cloughmore, Cardiff are currently under construction and the applicable proportion of the deferred consideration will be released as each asset reaches practical completion.

A number of the properties acquired with Apollo include small areas of vacant space to which no value has been ascribed on acquisition. PHP has agreed a three year period within which the vendor is engaged to let this space and should they be successful additional consideration may become payable, with the sums due being valued based on the underlying terms of each letting achieved, type of the tenant and the area of space let. The Group estimates the maximum potential payment for these events at £1.78 million. The new lettings will add value to the investment portfolio.

32. Subsequent events

The AIB loan facility was fully repaid on the loan termination date of 31 January 2013.

On 1 February 2013, PHP completed the acquisition of a newly developed modern, purpose built medical centre in Bearwood, Poole, for approximately £3.6 million that was contracted at the balance sheet date with a deferred completion.

On 5 February 2013, PHP acquired a newly incorporated single purpose company that has entered into a purchase and funding agreement for a purpose built medical centre under construction in Worcester for approximately £4.475 million.

On 5 February 2013, PHP entered into a purchase and funding agreement for the acquisition of a purpose built medical centre to be constructed in Chard, Somerset. PHP will pay approximately £1.8 million.

33. Annual report

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 December 2012 or 2011 but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 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 2012 will be published on the Group's website at www.phpgroup.co.uk and will be posted to Shareholders on 12 March 2013.

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.

Responsibility Statements 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 Company and the undertakings included in the consolidation taken as a whole; and

• the Management report incorporated into the Managing Director's Review on pages above includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Graeme Elliot

Chairman

27 February 2013

This information is provided by RNS

The company news service from the London Stock Exchange

END

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