Preliminary Results
Primary Health Properties PLC
10 April 2008
9 April 2008
PRIMARY HEALTH PROPERTIES PLC ('PHP')
Modern accommodation for the Provision of Primary Health
Care Services
Preliminary Results for the Eighteen month period ended
31 December 2007
Primary Health Properties PLC, one of the UK's largest providers of modern
primary healthcare facilities, is pleased to announce its Preliminary Results
for the eighteen months ended 31 December 2007.
Group Financial Highlights
• Profit after tax £16.8m (30 June 2006: £15.9m)
• Diluted NAV per share increased to 369.4 p (30 June 2006: 305.1p)
• Total dividends in respect of the financial period ended 31 December
2007 of 23.25p (2006: 13.5p)
• Net portfolio revaluation surplus over the period increased by £5m
(30 June 2006: £15m)
• Rent Roll increased to £16.2m per annum (2006: £11.3m)
• Portfolio owned, leased and committed increased by 44% to £324.2 m
(2006: £224.8m)
• Moved to calendar year end to align with UK-REIT conversion
• New term facilities of £50m have been arranged
Harry Hyman, Managing Director, commented:
"The period under review has been one of great change for PHP. During the 18
months, the Company was in the vanguard of converting to UK-REIT status,
completed the acquisition of Cathedral group for £31m and successfully raised
new money through an equity placing with new and existing investors. The last
six months of the period have been characterised by a weakening in values for
the commercial property market overall and this has impacted on PHP. However,
the niche market in which the Company operates remains strong in comparison to
the uncertainty afflicting other parts of the property sector.
"The provision of modern primary health care facilities in the UK continues to
enjoy strong tenant and investor demand and is supported by significant
Government spending programmes that are not impacted by traditional economic
factors. The Group remains a leader in its market with secure cash flows, good
visibility of long term revenue and a strong forward pipeline of new product.
The softening of yields offers opportunities for PHP to be opportunistic in its
acquisition policy and the Company continues to search for appropriate additions
to complement its existing portfolio. The Board looks to the future with
confidence."
- ends -
Enquiries:
Bell Pottinger Corporate and Financial
David Rydell/Victoria Geoghegan
Tel: 020 7861 3232
Primary Health Properties PLC
Harry Hyman
Managing Director
Mobile: 07973 344768
Chairman's Statement
Since the last reported audited figures, the Group has achieved a number of
important milestones:
• It has acquired or taken delivery of £76.7m of assets
• It's portfolio including commitments is now £324m
• It has over 106 primary care centres (99 completed and 8 contracted)
• Net asset value increased to 369.4p per Ordinary Share
• £40m gross of equity capital was raised
• New term loan facilities of £50m have been arranged
• 23.25p of dividends for the eighteen month period including 8.25p paid
per Ordinary Share on 28 March 2008
In addition, on 1 January 2007, PHP converted into a REIT, thereby releasing
£30m of deferred tax liabilities and incurring a conversion charge of £5.1m.
The market in which the Group operates remains strong and while there has been
uncertainty in other parts of the property sector, investor and tenant demand
for modern primary health care facilities remains high. The Group has an
excellent portfolio of modern properties with secure long leases, high quality
tenants and the prospect of continued rental growth flowing through into
dividends. The Group has substantial resources to continue with its strategy for
growth through:
• selective investment in appropriate new opportunities
• minimising development risk
• sourcing new investments from several developers.
These results cover the statutory reporting period for the eighteen months ended
31 December 2007, which follows the change of the Group's year-end to 31
December. The results of the Group for each of the past five periods of six
months are shown in the table below. The annualised results for the last two
calendar years (31 December 2007 and 31 December 2006) are also summarised. The
results of the previous statutory reporting year to 30 June 2006 are included in
the main body of the financial statements.
Financial information is provided in various sections of the Chairman's
Statement below. This information has been extracted from the following sources:
• Information at 31 December 2007 and the eighteen month period then
ended from the Group's financial statements;
• Information at 30 June 2006 and for the year then ended from the
Group's annual financial statements; and
• Information for various six month periods has been extracted from
interim accounts and other internal reports.
Results
Group financial highlights
Eighteen Six months Six Six months Six Six months Twelve
months to to 31 months to to 31 months to to 31 months
31 December 30 June December 30 June December to 30
December 2007 2007 2006 2006 2005 June
2007 2006
Income Statement
Annualised £16.2m £16.2m £14.5m £13.3m £11.3m £11.1m £11.3m
delivered rent
roll
(Loss)/profit (£3.7m) (£18.0m) £5.3m £9.0m £9.0m £9.4m £18.4m
before taxation
Profit/(loss) £16.8m (£18.0m) £5.2m £29.6m £8.2m £7.7m £15.9m
after taxation
Balance Sheet
Revaluation £4.9m (£13.6m) £5.1m £13.4m £7.2m £7.8m £15.0m
surplus/(deficit)
Net assets £124.1m £124.1m £151.1m £102.2m £71.3m £62.3m £71.3m
Shares in issue at 33.6m 33.6m 33.6m 24.3m 22.7m 22.7m 22.7m
period end
NAV per share 369.4p 369.4p 449.8p 420.9p 314.5p 274.7p 314.5p
Portfolio owned and £288.3m £288.3m £282.5m £260.3m £202.1m £185.9m £202.1m
leased including
leases
Commitments £35.9m £35.9m £38.5m £33.5m £22.7m £24.0m £22.7m
including
deposits and
development loans
Portfolio owned £324.2m £24.2m £321.0m £293.8m £224.8m £209.9m £224.8m
leased and committed
Earnings per 59.3p (53.6p) 18.9p 125.4p 36.2p 33.0p 70.3p
share - Basic
Dividends 23.25p 8.25p 7.5p 7.5p 6.75p 6.75p 13.5p
relating to the
period per share
Bank debt net of £155.3m £155.3m £132.0m £149.4m £108.8m £99.8m £108.8m
cash
Gearing debt as % 56.2% 56.2% 47.3% 60.0% 61.2% 62.1% 61.3%
gross assets
To enable a direct comparison on an annualised basis, the key results for the
twelve months ended 30 June 2007 and 2006 were as follows:
Twelve months to Twelve months to 30
30 June 2007 June 2006
Annualised delivered rent roll £14.5m £11.3m
Profit before taxation £14.3m £18.4m
Profit after taxation £34.8m £15.9m
Earnings per share - Basic 135.7p 70.3p
Dividends relating to the 15.0p 13.5p
period per share
To assist shareholders the profit (loss) for the respective periods has been
further analysed as shown below:
Eighteen Twelve months Twelve months Twelve months
months to to to to
31 December 31 December 31 December 30 June
2007 2007 2006 2006
£'m £'m £'m £'m
Rental and related income 22.2 15.7 12.2 11.1
Revaluation gains/(losses) on 4.9 (8.6) 20.6 15.0
property portfolio
Impairment loss (3.8) (3.8) - -
Gain on disposal of property - - 0.4 0.4
1.1 (12.4) 21.0 15.4
Administration expenses
Management fee (3.2) (2.2) (1.5) (1.5)
Incentive fee (2.6) (1.8) - -
Other (1.8) (1.4) (2.1) (1.2)
(7.6) (5.4) (3.6) (2.7)
Profit/(loss) before interest and 15.7 (2.1) 29.6 23.8
exceptional items
Exceptional items
UK-REIT conversion costs (0.2) - (0.2) -
Goodwill impairment (5.5) (0.2) (5.3) -
(5.7) (0.2) (5.5) -
Profit/(loss) after exceptional items 10.0 (2.3) 24.1 23.8
before interest
Development loan interest 0.9 0.8 0.2 0.3
Mark to market loss on non-hedging (2.8) (2.8) - -
derivatives
Loan interest (net of interest (11.8) (8.4) (6.3) (5.7)
receivable and swap interest)
(Loss)/profit before taxation (3.7) (12.7) 18.0 18.4
Current taxation (0.1) (0.1) 0.5 0.5
Conversion to UK-REIT charge (5.1) - (5.1) -
Deferred taxation (3.9) - (5.2) (2.9)
Deferred taxation release on 29.6 - 29.6 -
conversion to UK-REIT
Taxation credit/(expense) 20.5 (0.1) 19.8 (2.5)
Profit/(loss) after taxation 16.8 (12.8) 37.8 15.9
Performance
The performance for the eighteen months can be divided into three very distinct
periods. The six months prior to conversion to a UK-REIT when the property
market was firm, six months as a UK- REIT when the property market remained firm
and the most recent six months when the property market was weakening.
The property market performed differently in each six month period. During the
six months to 31 December 2006, the market was buoyant and yields continued to
fall. During the first half of 2007, yields fell but at a slower pace. In the
second half of 2007, the market began to decline with yields softening by about
35 basis points. The December balance sheet includes the results of the period
end valuation by LSH, has resulted in a surplus of £4.9m.
Financial Adjustments
The results for the eighteen month period have also been affected by various
other matters arising in the six months to 31 December 2006. These include the
release of deferred tax liabilities (£29.6m), the goodwill write off relating to
the purchase of Cathedral (£5.5m) and the REIT conversion charge (£5.1m). None
of these items had comparables in any other period.
The loss after tax of £18.0m for the six months to 31 December 2007 includes an
impairment loss of £3.8m on property under development.
Financial Instruments
As at 31 December 2007, the mark to market valuation of the Group's interest
rate swaps showed a £9.3m reduction in value from 30 June 2007 and a reduction
of £2.7m during the 18 month period under review, ( £0.1m has been recorded as a
movement in equity in relation to interest rate swaps qualifying for hedge
accounting and £2.8m has been recorded in the Group Income Statement). The
swaps were entered into at various dates to hedge the Group's exposure to higher
interest rates and improve cash flow. The mark to market value fluctuates with
movements in term interest rates and, in the case of the callable swap, with
market volatility. In the earlier two six month periods, the mark to market
valuation of the interest rate swaps qualifying for hedge accounting showed
gains of £6.0m and £ 0.5m respectively.
Both the revaluation adjustment to the property portfolio and the mark to market
valuation of swaps represent unrealised adjustments and do not affect cash flow.
During the period, the average rate of the swaps was lower than the prevailing
LIBOR rate, thus saving the Group considerable cash outflow. The swaps have also
mitigated the Group's exposure to interest rate risk.
Discounted Cash Flow Property Valuation
In addition to the market value exercise performed by LSH, the Joint Managers
monitor the value of the Group's completed investment portfolio based on a
discounted cash flow analysis. On this basis, the valuation at 31 December 2007
is £316.1m, compared to the market value of £281.7m. The difference of £34.4m
represents an additional 102.4p of net asset value per Share. The assumptions
used in the discounted cash flow analysis are a discount rate of 7%; an average
increase in the individual property rents at their respective review dates of
3%; and capital growth of residual values of 1% per annum.
Dividends
On 28 March 2008, the Group paid an ordinary cash interim dividend of 8.25p per
Ordinary Share in respect of the six months ended 31 December 2007. This
compares to 7.5p for each of the two previous interim dividends, paid on 22 May
and 23 November 2007. The decision to pay three interim dividends for the
eighteen month period rather than two interim and one final dividend was to
accelerate payment of dividends to Shareholders.
Borrowings
In March 2008, the Group entered into a £50m secured facility to augment its
existing facilities of £200m, resulting in current facilities of £250m. £160m
was drawn at 31 December 2007 and, taking into account existing outstanding
commitments of £36m, this leaves a further £54m of facilities available to the
Group to continue with its acquisition policies. These term facilities mature in
2013.
Total borrowings at 31 December 2007 were £160m. The Group has £145m of fixed
rate cover including £55m of callable swaps. Loan to value at the period end was
56% and interest cover (as defined within the loan facility agreements) was 1.8
times.
Revenues, Administration Expenses and Net Asset Value
At a trading level, revenues for the eighteen month period increased to £22.2m
as a result of favourable rent reviews and new deliveries and operating profit
before financing costs was £10.0m. The eighteen month period to 31 December 2007
saw the effect of the inclusion of a Management Incentive Fee of £2.6m rather
than the previous management share option scheme. The eighteen month period was
also affected by the UK-REIT Conversion charge of £5.1m and other non-recurring
costs. During the eighteen month period the diluted net asset value per share
rose from 305.1p to 369.4p.
Management Incentive Scheme
The results for the two six month periods ended 31 December 2006 and 30 June
2007 also incorporated the Management Incentive Fee approved by Shareholders in
November 2006 which replaced the management share option scheme. There is no
Management Incentive Fee payable for the last six month period and, under the
terms of the scheme, the deficit in Total Return will be made up before any fee
is payable in future years.
Portfolio
During this period, the Group has taken delivery of £76.7m completed and let
properties at locations noted in the acquisitions table in the Managing
Directors' Report, and also entered into additional new commitments totalling
£18.4m.
The table below sets out the portfolio as at 31 December 2007.
31 December 31 December 30 June
2007 2006 2006
£m £m £m
Investment properties 281.7 245.5 197.5
Development properties 2.8 9.5 -
Properties in the course of development 0.8 2.8 2.1
Total investment properties 285.3 257.8 199.6
Finance leases 3.0 2.5 2.5
Total owned and leased 288.3 260.3 202.1
Development Loans 0.2 1.2 1.7
Total owned and leased (including 288.5 261.5 203.8
development loans)
Deposits paid - 0.1 0.1
Committed 35.7 32.2 20.9
Total owned, leased and committed 324.2 293.8 224.8
Closing annualised rent roll 16.2 13.3 11.3
The Group's portfolio of 107 properties (including eight contracted schemes) is
almost 100% let with an average lease length outstanding of 18.4 years. 89% of
the rent roll is paid for directly or indirectly by the NHS and most of the
balance is let to pharmacy operators. The closing rent roll at 31 December 2007
was £16.2m compared to £14.5m at 30 June 2007. Between 31 December 2007 and 30
June 2006, 93% of the increase related to new deliveries and 7% to rental
increases secured during the period.
Financing
In April 2007, the Group completed a Placing and Open Offer, raising £38.7m net
of expenses and thereby expanding its shareholder base. The Placing and Open
Offer resulted in 9,309,376 new Ordinary Shares being issued on 11 April 2007.
Other matters
The Share Plan allowing investors to purchase the Company's Ordinary Shares by
lump sum or regular payments currently has 39 members holding 105,299 Ordinary
Shares. Further details can be found on the website www.phpgroup.co.uk and
www.capitaregistrars.com/php.
The Notice of the Annual General Meeting, explanatory circular and proxy card
for the Annual General Meeting to be held on 17 June 2008 at 2.30pm will be
enclosed with the Annual Report due to be delivered to Shareholders on or around
28 April 2008 .
The Board intends to appoint a third Independent Non Executive Director.
Outlook
Unlike some sectors of the property market the supply of new purpose built
accommodation for the delivery of primary care services is very limited with
nearly all space being developed on a pre-let basis. Accordingly, there is
little or no speculative building of space. As a result, the sector does not
suffer from the potential oversupply of space that may affect other sectors of
the property market.
As at 31 December 2007, the Group had £35.7m of commitments. By 31 March 2008
all of these transactions except two, amounting to £9.2m, had been delivered. At
the date of this statement that remains the Group's commitment position. The
Group has several deals in solicitors' hands but is currently adopting a prudent
policy with regard to entering into forward commitments.
The Group remains a leader in its niche market, with secure cash flows and
currently has a strong forward pipeline of new properties. Future growth will be
driven by these additions and further rental increases from the portfolio, which
continues to perform well. Despite the recent turmoil in banking and money
markets, the Board is satisfied with the Group's funding position and remains
optimistic about the prospects for the Group.
G A Elliot
Chairman
9 April 2008
Managing Director's Report
Property portfolio
The table in the Chairman's Statement sets out the development of our portfolio
during the period under review. We took delivery of twelve new developments and
acquired nine modern purpose built investments (2006: twelve new developments)
and entered into a further six commitments on developments in the course of
construction at the period end (2006: seven development commitments). At the
period end the portfolio, when commitments are included, reached £324.2m (2006:
£224.8m).
Portfolio Purchases during the Period
The Group completed the purchases of a number of properties during the period,
details of which are set out below:
Property Acquisition Occupational Tenants
Cost
£m
30 June 2006 to 31 December 2006
Barlow Medical Centre, Didsbury 4.2 Doctors' Practice and Pharmacy
Springs Health Centre, Clowne 3.5 Doctors' Practice and Pharmacy
Oaklands Health Centre, Hythe 2.7 Doctors' Practice and Pharmacy
Chapelfield Medical Centre, Wombwell 3.2 Doctors' Practice and Pharmacy
St Georges Medical Centre, Sheerness * 2.6 Doctors' Practice and Pharmacy
Hetherington Group Medical Practice, Clapham * 2.6 Doctors' Practice
Hailey View Surgery, Hoddesdon * 2.6 Doctors' Practice
Central Milton Keynes Medical Centre * 3.3 Doctors' Practice and Pharmacy
Oxted Therapies Unit * 4.0 PCT Treatment Centre
St Stephens Gate Medical Centre, Norwich * 6.1 Doctors' Practice and Pharmacy
31 December 2006 to 30 June 2007
Jubilee Health Centre, Wednesbury 1.6 Doctors' Practice and Pharmacy
Ouse Valley Practice, Handcross * 3.5 Doctors' Practice
Frederick Treves House, Poundbury 5.9 2 Doctors' Practices, PCT and Pharmacy
Penkridge Medical Practice 3.2 Doctors' Practice and Pharmacy
Leslie Medical Centre 2.3 Doctors' Practice and Pharmacy
30 June 2007 to 31 December 2007
Kippax Health Centre 4.9 Doctors' Practice, PCT and Pharmacy
Brough Ambulance Station 2.5 Ambulance Station and PCT Accommodation
The Glenn Medical Centre, Hebburn 5.2 Doctors' Practice, PCT and Pharmacy
Sandown Medical Centre, I.o.W. 3.7 Doctors' Practice and Pharmacy
Waterloo Health Centre, Huddersfield 2.0 Doctors' Practice and Pharmacy
Robin Hood Lane Health Centre, Sutton * 7.1 Doctors' Practice
TOTAL 76.7
* properties acquired as part of the Group's acquisition of Cathedral Healthcare
Holdings Limited (now PHIP CHH Limited).
Property Disposals during the Period
The Group disposed of one property during the period. This was a former doctors'
surgery, where the tenant had been relocated to a new PHP facility, and which
was sold for residential development at a price above its investment value. The
property was valued at £0.40 m at 30 June 2006 and disposed of in October 2006
realising a gain of £0.04m.
Revaluation
As reported in the Chairman's Statement, the portfolio valuations have resulted
in surplus for the eighteen month period of £4.9m which has been incorporated
into the Group Balance Sheet, giving a closing investment property valuation of
£281.7m (2006: £197.5m)
The revaluation adjustments for each of the three six month interim periods
were: 31 December 2007: loss of £13.6m, 30 June 2007: gain of £5.1m, 31 December
2006: gain of £13.4m.
The £4.9m increase amounted to 17.3p per Ordinary Share on both a basic and
diluted basis.
The valuation surplus reflects the impact of our successful rent reviews. There
has been a softening of investment yields throughout the UK commercial property
market in the latter half of 2007 and, despite the long leases and secure
covenants that typify our portfolio, it has not been immune. Notwithstanding
this, and an increased number of players in the market, the Group has a good
pipeline of investments.
Portfolio Rental Levels
The average rent for medical centres across the whole portfolio at the period
end is approximately £169 per square metre ('psm') (2006 £162 psm). The average
rent on accommodation let to the NHS (either directly or through the Doctors'
Rent and Rates Scheme) is approximately £196 psm (2006: £157 psm) and the
average pharmacy rent is approximately £239 psm (2006: £220 psm). The weighted
average length of time to the next review is 1.6 years (2006: 1.8 years) across
the portfolio.
Tenant Area (sqm) Area (sq ft) Rent (£psm) Rent (£ psf)
GP's 78,342 842,961 161 15
NHS 10,150 109,214 196 18
Pharmacy 5,742 61,779 239 22
Other 1,380 14,854 160 15
TOTAL 95,614 1,028,808 169 16
Tenancy split by Floor Area
The table below indicates the tenancy split by floor area (psm):
GP's 82%
NHS 11%
Pharmacy 6%
Other 1%
TOTAL 100%
Rent Reviews
The Group completed a number of rent reviews during the period and there are a
number of reviews outstanding that we expect to be resolved during the coming
year. The results of the reviews completed during the period added £365,000 to
our rent roll. There are further reviews due from the past year which amount to
some £3m of rent passing. We have accounted for an amount based on expected
outcomes. The "forthcoming rent reviews" table below shows the timing of reviews
across the portfolio. The pace of reviews is now picking up as more evidence is
presented through the market and more premises go through the review process.
The average increase in rent as a percentage of passing rent over the three year
review process has been 11% (2006 11%) equating to 3.39% p.a. (2006 3.39%p.a.).
Finance and Interest Rate Hedging
Bank borrowings increased from £112.8m to £159.9m during the period, of which
the amounts shown in the table below have been hedged by interest rate swaps at
an average weighted cost rate of 4.78% (2006: 4.89%) (excluding the lenders'
margins).
During the period, a number of interest rate swaps have been entered into
extending the maturity and quantum of the Group's cover under hedging
arrangements as shown below.
Year Swaps (£m)
2008 90.0
2009 80.0
2010 95.0
2011 85.0
2012 89.0
2013 89.0
2014 90.0
2015 92.0
2016 76.0
2017 70.0
2018 80.0
2019 80.0
2020 80.0
2021 80.0
2022 80.0
2023 80.0
2024 80.0
2025 80.0
2026 50.0
2027 20.0
The table above shows the level of bank borrowings hedged by interest rate swaps
for each of the next twenty financial years (assuming callable swaps are not
called).
Year Swaps (£m)
2008 165.8
2009 168.0
2010 178.0
2011 173.0
2012 177.2
2013 177.2
2014 178.0
2015 179.7
2016 163.8
2017 158.0
2018 168.0
2019 168.0
2020 168.0
2021 131.3
2022 80.0
2023 80.0
2024 80.0
2025 80.0
2026 50.0
2027 20.0
The table above shows the level of bank borrowings hedged by both hedge
accounted interest rate swaps and callable swaps for each of the next twenty
financial years.
Portfolio Characteristics
Users
The table below shows the percentage of our portfolio by rent roll derived from
each of our major tenant classes, GPs, PCTs, Health Authorities, pharmacy
operators and others. Some 99% (2006: 99%) of our rent roll comes directly or
indirectly from the NHS, GPs, PCTs and pharmacy operators.
Covenant Analysis by Annual Rent
GP's 78%
Pharmacy 10%
PCT's 9%
Health Authorities 2%
Other 1%
TOTAL 100%
Length of Leases
Analysis of Annual Rent by Term Unexpired
The table below shows an analysis of rent by expiry and indicates that some 84%
(2006: 95%) of the lease income has more than 15 years unexpired.
Less than 5 years 1%
6 - 15 years 15%
15 - 20 years 47%
More than 20 years 37%
TOTAL 100%
Security of Income by Term Certain
The table below shows the security of income by term certain and shows the
rental cash flow as a percentage of the year end rent roll, ignoring any
increases and any lease renewals during the subsequent periods. This shows that
by year 15 the Group would still be receiving 84% of its current income, without
further action.
Year % of Passing
Rent
1 100%
5 99%
10 96%
15 84%
Geographical Spread
The table below shows the percentage of the portfolio by rent roll derived from
each of the NHS regions.
Annual Rent by Region
East Anglia 3%
East Midlands 8%
London 9%
North 2%
North West 12%
South East 30%
South West 3%
West Midlands 15%
Yorkshire & Humberside 10%
Scotland 5%
Wales 3%
TOTAL 100%
Forthcoming Rent Reviews
The table below shows the annual amount of rent falling due for review in each
of the next 3 years.
Year Rent (£m)
2008 5.441
2009 5.005
2010 5.036
The Primary Care market
The National Health Service, ("NHS"), which this year celebrates its sixtieth
birthday, is an integral part of life in Britain and is an important and large
part of overall Government spending.
The NHS budget is some £110 bn for 2008/9. We believe that whichever political
party is in power, the twin drivers of demography (an ageing population) and
technology (the ability to perform more procedures and diagnostics outside of
major facilities) will continue to ensure that spending on health will rise by
at least the increase in the country's GDP. Moreover, Government policy is to
continue to switch large amounts of activity and budget into the primary care
arena.
To put it in context there are 1 million patient visits to primary care, per
day, and the GP remains the gatekeeper to the NHS.
This means that the demand for modern purpose built medical centres remains
high. Although at some stages and in some parts of the UK, revenue budgets, out
of which primary care rents are paid, remain under pressure, the NHS overall is
believed to have a surplus for 2007-8. Spending in parts of the UK that have
greater requirements and greater flexibility over funding such as Wales and
Scotland have seen greater amounts of new building sanctioned in the last 18
months.
However the period has seen a major dislocation in the re-organisation of the
PCT structure within England and this led to delays in approving new projects
within England.
The period under review also saw the publication of Professor Lord Darzi's
report "our NHS our future" which specifically identified the need for at least
100 more GP surgeries and 150 new polyclinics. This is all positive for the
continued expenditure of capital on the primary care estate.
Primary care property market
Within the primary care property market, the pricing of investments has followed
general market trends. For the 18 month period, this has meant that yields
tightened during the period to September 2007 after which, notwithstanding the
undoubted nature of the covenant behind some 89% of our rent roll and the long
lease lengths, yields have moved out. At 31 December, our advisers reported to
us that initial yields were approximately 5.5%. It is worth noting that the
sector has not seen the very dramatic movement out of yields seen in more
secondary property sectors because the demand from investors for this type of
property remains high. It is also our belief that there is little chance of
oversupply of product as there are few if any speculative developments of
primary care space for the NHS market and all new rent reimbursements are
subject to lengthy approval processes and are controlled both by the Heath
Authorities and PCTs and also by the District Valuer's office. Similarly there
are few voids in the sector and particularly in our portfolio. The risk of
oversupply and voids are twin spectres that affect pricing in other parts of the
property market.
These features are part of the reason why adequate banking finance continues to
be available - although it is worth noting that pricing for new facilities has
risen as banks and other funding institutions seek to recover losses incurred
elsewhere in their portfolios.
Adding Value
Our portfolio now has over 100 properties. We have a number of these properties
where there could be extensions or where there is land adjacent to the surgeries
for new development. We are exploring ways of adding value through the
development of these situations. In the period, we carried out our first small
'own development' - constructing on a pre-let basis a pharmacy adjacent to our
existing medical centre at Broxbourne. The returns from this for the Group were
satisfactory.
Elsewhere, as the majority of our leases have a three year review pattern we
have a large number of leases due for rent review in 2008 and in respect of the
last 18 month period. As reported elsewhere the average rental increase obtained
during the period was 11%. We are investigating challenging the judge and jury
nature of the review process in terms of the use by the Government of the
District Valuer's office.
Future prospects
As we are not a developer, our business model does not require us to continue to
buy property. However, we do have strong links with a number of developers who
have good pipelines of deals for us to transact at sensible prices in the
current period. Where necessary, we have adjusted purchase yields to reflect the
changes in the more general property market.
In addition, we are looking at a number of situations where vendors have
companies pregnant with capital gains to sell which enable us as a UK-REIT to
purchase the assets in a tax efficient manner.
We believe that the investments we are purchasing reflect good long term value
for the shareholders. We look forward to reporting more progress in the growth
of our portfolio over the coming 12 month period.
Harry Hyman
Managing Director
9 April 2008
GROUP INCOME STATEMENT
for the eighteen month period ended 31 December 2007
Eighteen months Year
ended ended
31 December 30 June
2007 2006
£'000 £'000
Rental income 21,301 10,850
Finance lease income 908 281
Rental and related income 22,209 11,131
Net valuation gain on property portfolio 4,857 14,997
Impairment loss (3,750) -
Net gain on disposal of property 44 401
Administrative expenses - exceptional goodwill impairment (5,551) -
Administrative expenses - exceptional UK-REIT conversion costs (195) -
Administrative expenses - other (7,646) (2,689)
Operating profit before financing costs 9,968 23,840
Finance income 2,178 258
Finance costs (13,022) (5,695)
Mark to market loss on derivatives (2,808) -
(Loss)/profit before taxation (3,684) 18,403
Current taxation (100) 465
Conversion to UK-REIT charge (5,157) -
Deferred taxation (3,880) (2,931)
Deferred taxation release on conversion to UK-REIT status 29,622 -
Taxation credit/(charge) 20,485 (2,466)
Profit for the period/year 16,801 15,937
Earnings per share - basic 59.4p 70.3p
- diluted 59.4p 67.7p
Adjusted earnings per share - basic (1.8p) 17.1p
- diluted (1.8p) 16.5p
Increased net asset value per share since previous annual report - basic 54.9p 62.6p
- diluted 64.3p 58.5p
Total return per share - basic 76.7p 76.1p
- diluted 86.1p 72.0p
Dividends paid in the period/year per share 21.75p 12.75p
The above relates wholly to continuing operations.
GROUP BALANCE SHEET
as at 31 December 2007
At 31 December At 30 June
2007 2006
£'000 £'000
Non current assets
Investment properties 282,495 199,569
Development properties 2,853 -
Development loans 182 1,712
285,530 201,281
Net investment in finance leases 2,914 2,492
Derivative interest rate swaps 1,651 1,415
290,095 205,188
Current assets
Trade and other receivables 4,186 1,033
Net investment in finance leases 53 12
Cash and cash equivalents 3,862 3,973
8,101 5,018
Total assets 298,196 210,206
Current liabilities
Derivative interest rate swaps (2,808) (74)
Corporation tax payable (29) (181)
UK-REIT conversion charge payable (1,208) -
Deferred rental income (3,660) (2,466)
Trade and other payables (3,576) (2,604)
(11,281) (5,325)
Non current liabilities
Term loan (159,219) (112,363)
Derivative interest rate swaps (224) -
Deferred taxation - (21,193)
UK-REIT conversion charge payable (3,395) -
(162,838) (133,556)
Total liabilities (174,119) (138,881)
Net assets 124,077 71,325
Equity
Share capital 16,794 11,339
Share premium 48,009 12,022
Capital reserve 1,618 1,618
Cash flow hedging reserve 1,427 939
Retained earnings 56,229 45,407
Total equity * 124,077 71,325
Net asset value per share - basic 369.42p 314.52p
- diluted 369.42p 305.06p
Adjusted net asset value per share - basic 369.42p 407.97p
- diluted 369.42p 392.35p
*Wholly attributable to equity shareholders of Primary Health
Properties PLC ("PHP PLC")
** Adjusted to remove deferred tax (applicable to 30 June 2006
only)
Group Statement of Changes in Equity
for the eighteen month period ended 31 December 2007
Cash flow
Share Share Capital hedging Retained
capital premium reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
30 June 2006 11,339 12,022 1,618 939 45,407 71,325
Profit for the period - - - - 16,801 16,801
Transfer to income statement on cash flow - - - (1,231) - (1,231)
hedges
Income and expense recognised directly in
equity:
Gains on cash flow hedges taken to equity - - - 1,317 - 1,317
Deferred tax on cash flow hedges - - - 402 - 402
Total recognised income and expense for the
period - - - 488 16,801 17,289
Issue of shares (net of expenses) 5,455 35,987 - - - 41,442
Dividends paid:
Final dividend for the year ended 30 June
2006 (6.75p) - - - - (1,639) (1,639)
First interim dividend for the period ended
31 December 2007 (7.5p) - - - - (1,821) (1,821)
Second interim dividend for the period ended - - - - (2,519) (2,519)
31 December 2007(7.5p)
31 December 2007 16,794 48,009 1,618 1,427 56,229 124,077
Group Statement of Changes in Equity
for the year ended 30 June 2006 (continued)
Cash flow
Share Share Capital hedging Retained
capital premium reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
1 July 2005 11,326 11,952 1,618 (1,292) 32,175 55,779
Profit for the year - - - - 15,937 15,937
Transfer from income statement on cash flow
hedges - - - 238 - 238
Income and expense recognised directly in
equity:
Gains on cash flow hedges taken to equity - - - 2,949 - 2,949
Deferred tax on cash flow hedges taken to
equity - - - (956) - (956)
Total recognised income and expense for the
year - - - 2,231 15,937 18,168
Issue of shares (net of expenses) 13 70 - - - 83
Share based payment adjustment - - - - 185 185
Dividends paid:
Final dividend for the year ended 30 June
2005 (6.0p) - - - - (1,359) (1,359)
Interim dividend for the year ended 30 June
2006 (6.75p) - - - - (1,531) (1,531)
30 June 2006 11,339 12,022 1,618 939 45,407 71,325
GROUP CASH FLOW STATEMENT
for the eighteen month period ended 31 December 2007
Eighteen months Year ended
ended 31 December 30 June
2007 2006
£'000 £'000
Operating activities
(Loss)/profit before tax (3,684) 18,403
Less: Finance income (2,178) (258)
Plus: Finance costs 13,022 5,695
Plus: Mark to market loss on derivatives 2,808 -
Operating profit before financing costs and financing income 9,968 23,840
Adjustments to reconcile Group operating profit to net cash flows from
operating activities
Less: Revaluation gains on property (4,857) (14,997)
Less: Gains on disposal of property (44) (401)
Plus: Impairment loss 3,750 -
Plus: Goodwill impairment 5,551 -
Plus: Shares based payment expense - 185
Increase in trade and other receivables (1,177) (54)
(Decrease)/increase in trade and other payables (448) 212
Cash generated from operations 12,743 8,785
UK-REIT conversion charge (554) -
Taxation paid (272) (34)
Net cash flow from operating activities 12,198 8,970
Investing activities
Receipts from disposal of investment properties 464 7,711
Payments to acquire investment properties (48,972) (25,770)
Interest received from developments 281 219
Development loans advanced (2,671) (2,612)
Bank interest received 83 47
Acquisition of Cathedral (30,924) -
Cash acquired on acquisition of Cathedral 174 -
Net cash flow used in investing activities (81,846) (20,624)
Financing activities
Term bank loan drawdowns 47,050 24,000
Placing and option exercise (net of expenses) 41,443 (4)
Interest paid (12,977) (6,678)
Equity dividends paid (5,979) (2,803)
Net cash flow from financing activities 69,537 14,515
(Decrease)/increase in cash and cash equivalents for the period/year (111) 2,861
Cash and cash equivalents at start of period/year 3,973 1,112
Cash and cash equivalents at end of period/year 3,862 3,973
NOTES:
The above results for the eighteen month period ended to 31 December 2007 are
audited.
1. Accounting policies
Basis of preparation and statement of compliance
The Group's financial statements for the period ended 31 December 2007 have been
presented under International Financial Reporting Standards (IFRS) as adopted by
the European Union.
The financial information contained in this report does not constitute statutory
accounts within the meaning of Section 240 Companies Act 1985. The auditors'
report on the full financial statements under section 235 Companies Act 1985,
for the eighteen month period ended 31 December 2007, contains a statement under
Section 237 (2) or (3) Companies Act 1985. This audit report, which was
unqualified, will be delivered to the Registrar of Companies, together with
financial statements for the eighteen months period ended 31 December 2007.
Convention
The financial statements are presented in Sterling rounded to the nearest
thousand.
Segmental reporting
The Group operates under one business segment and one geographical segment,
being investment in primary health care property within the United Kingdom.
Conversion to UK-REIT
The Group's conversion to UK-REIT status was effective from 1 January 2007.
Conversion to 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. Therefore, deferred tax liabilities
as at 31 December 2006 of £30.0m were released with £29.6m is credited to the
Group Income Statement and £0.4m to the cashflow hedging reserve.
On conversion to UK-REIT, the Group was subject to a one-off taxation charge
based on the value of properties as at the date of conversion, which amounted to
£5.1m. This amount is payable over four years.
Change of accounting reference date
The Group changed its accounting reference date to 31 December. The current
accounting reference period, which commenced on 1 July 2006, therefore comprises
18 months ended 31 December 2007.
Basis of consolidation
The Group's financial statements consolidate the financial statements of Primary
Health Properties PLC and its wholly owned subsidiary undertakings. Subsidiaries
are consolidated from the date of their acquisition, being the date on which the
Group obtained control and continue to be consolidated until the date that such
control ceases. Control comprises the power to govern the financial and
operating policies of the investee so as to obtain benefit from its activities
and is achieved through direct or indirect ownership of voting rights; currently
exercisable or convertible potential voting rights; or by way of contractual
agreement. The financial statements of the subsidiary undertakings are prepared
for the accounting reference period ending 31 December each year, using
consistent accounting policies. All intercompany balances and transactions,
including unrealised profits arising from them, are eliminated.
2. Acquisition of Cathedral Healthcare (Holdings) Limited ("CHH")
On 22 December 2006, the Group acquired 100% of the Ordinary Shares of
CHH for a cash consideration of £31.0m, equivalent to the fair value of the
assets obtained.
CHH was the holding company of a group of companies that owned nine
primary healthcare facilities across the UK which have been incorporated into
the Group's portfolio.
Consideration of £30.9m was paid upon completion with a further 0.1m paid in
April 2007. Cash acquired upon acquisition of CHH amounted to £0.2m.
The total gross assets acquired once fully developed are expected to
amount to £39.2m. These assets are expected to generate a total annual rental
income of approximately £2.0m, reflecting an initial yield of approximately 5%.
As the Group paid consideration equal to the assessed value of the
acquired properties, goodwill arises in respect of the other liabilities,
principally a deferred tax liability of £4.9m. However, on conversion to
UK-REIT, the deferred tax liability is eliminated resulting in an impairment of
goodwill arising on acquisition.
No further goodwill has deemed to have been acquired from other assets.
Fair values of the net assets at date of acquisition were as follows:
£'000
Investment properties 21,300
Development properties 9,525
Trade receivables 810
Cash 173
Trade payables (1,346)
Deferred tax liabilities (4,951)
-----------
Net assets acquired 25,511
Goodwill arising on acquisition 5,551
-----------
31,062
3 Investment properties
The freehold, leasehold and development properties have been independently
valued at fair value by Lambert Smith Hampton Chartered Surveyors and Valuers,
as at 31 December 2007 in accordance with IAS 40 "Investment Property"..
The revaluation loss for the six month period ended 31 December 2007 amounted to
£13.6m, giving an overall revaluation gain of £4.9m for the eighteen month
period ended 31 December 2007.
Property additions for the six months ended 31 December 2007 amounted to £21.7m,
giving total additions for the eighteen month period of £83.6m (including £30.8m
on the PHIP CHH acquisition). There were no properties disposed of in the six
months to 31 December 2007. Properties disposed of during the eighteen month
period ended 31 December 2007, valued at £0.4m as at 30 June 2006, realised a
gain of £0.04m.
An impairment of £3.75m has been reflected as an impairment provision against
the capitalised cost of property.
This impairment reflects the difference between the estimated market value of
the properties in the course of the development at the period-end and their
contracted development cost.
4 Earnings per share
The calculation of basic and diluted earnings per share is based on the
following:
Eighteen months to 31 December 2007 Year to 30 June 2006
Net profit Net profit
attributable to attributable to
Ordinary Ordinary^ Ordinary Ordinary^
Shareholders Shares Per Share Shareholders Shares Per Share
£'000 number pence £'000 Number pence
Basic earnings per 16,801 28,297,852 59.4 15,937 22,667,946 70.3
share
Option conversion * - - - 861,960
Diluted earnings per 16,801 28,297,852 59.4 15,937 23,529,906 67.7
share
Adjusted earnings
per share for the
period
Eighteen months to 31 December 2007 Year to 30 June 2006
Net profit Net profit
attributable to attributable to
Ordinary Ordinary^ Ordinary Ordinary^
Shareholders Shares Per Share Shareholders Shares Per Share
£'000 number pence £'000 number pence
Basic earnings per 16,801 28,297,852 59.4 15,937 22,667,946 70.3
share
Adjustment to remove:
Performance 2,591 -
Incentive fee#
Goodwill 5,551 -
impairment
UK-REIT
conversion charge 5,157 -
Deferred tax 3,880 2,931
charge
Deferred tax (29,622) -
release
Net valuation (4,857) (14,997)
gains
Adjusted basic (499) 28,297,852 (1.8) 3,871 22,667,946 17.1
earnings per share
Options conversion* - - - **861,960
Adjusted diluted (499) 28,297,852 (1.8) 3,871 23,529,906 16.5
earnings per share
^ Weighted average number of Ordinary Shares in issue during the period.
* Excess of the total number of potential shares on option exercise over the
number
that could be issued at fair value as calculated in accordance with IAS 33 '
Earning per share'
** All Management Options were exercised in full on 21 September 2006.
# The Performance Incentive Fee depends primarily on revaluation gains, which
are eliminated in calculating adjusted earnings per share.
5 Performance incentive scheme
On 16 November 2006, Shareholders approved the amendments to the Management
Agreement whereby the Joint Managers are entitled to a performance incentive fee
of 15% of any performance in excess of an 8% per annum increase in the Company's
"Total Return" as derived from the audited financial statements for the
respective financial period.
The Total Return shall be determined by comparing the variation in the stated
net asset value per share (on a fully diluted basis, adjusting for deferred tax
and the REIT conversion charge and adding back gross dividends paid or declared
per share in such period), against the fully diluted net asset value per share
from the previous period's audited accounts.
The performance incentive fee was initially calculated on an annual basis ending
30 June. However, following the Group's conversion to UK-REIT and change in its
accounting reference date to 31 December, it has been necessary to calculate the
fee based in six-monthly steps, using interim accounts. From 1 January 2008,
the fee will be calculated on an annual basis, using the audited financial
statements.
Included in Administration Expenses within the Income Statement is a performance
incentive fee expense of £2,591,000 (six months to 30 June 2007: £1,839,000, six
months to 31 December 2006: £752,000). There is no performance incentive fee
payable for the six months ended 31 December 2007.
6. Dividends paid
Dividends paid in the period are as follows:
No of shares Eighteen months Year
dividend paid to to
upon 31 December 30 June
2007 2006
£'000 £'000
Final dividend for the year 24,277,718 1,639 -
ended 30 June 2006 (6.75p)
First interim dividend for the 24,277,718 1,821 -
period ending 31 December 2007
(7.5p)
Second interim dividend for the 33,587,094 2,519 -
period ending 31 December 2007
(7.5p)
Final dividend for the year 22,677,718 - 1,359
ended 30 June 2005 (6.0p)
Interim dividend for the year 22,677,718 - 1,531
ended 30 June 2006 (6.75p)
5,979 2,890
A third interim dividend was paid on 28 March 2008, in respect of the
period ended 31 December 2007, of 8.25p per Ordinary Share (2006: final dividend
of 6.75p per Ordinary Share), amounting to a total of £2,770,935 (2006:
£1,530,746). No final dividend is proposed.
7 Taxation
31 December 2007 30 June 2006
£'000 £'000
Tax(credit)/charge in the Group Income
Statement:
The tax(credit)/charge is made up as follows:
Current tax
UK Corporation tax 27 181
Adjustment in respect of prior period/year 73 (646)
100 (465)
Charge on conversion to UK-REIT status 5,157 -
5,257 (465)
Deferred tax
Deferred tax charge for the 6 months to 31 3,880 2,931
December 2006/year
Deferred tax release on conversion to UK-REIT (29,622) -
status (see note 1)
(25,742) 2,931
Conversion to a UK-REIT means that the Group is
no longer subject to UK Corporation Tax. This
enables the Group to release its deferred tax
liabilities at the expense of suffering a
conversion (5.1m) plus additional legal costs
(£0.20m).
Taxation (credit)/charge in the Group Income (20,485) 2,466
Statement
Taxation in the Balance Sheet:
Deferred tax liability
- on temporary differences - 6,186
- on revaluation gains - 14,605
- on derivative interest rate swaps - 402
Deferred tax liability at end of period - 21,193
Deferred tax reconciliation:
Balance at beginning of period/year 21,193 17,860
Charge for the period 3,880 2,931
Deferred tax liability on acquisition of 4,951 -
Cathedral Healthcare (Holdings) Limited
Deferred tax on cash flow hedge (402) 402
Deferred tax release on conversion to UK-REIT (29,622 -
status
Balance at end of period/year - 21,193
8. Net asset value calculations
Net asset values have been calculated as follows
Eighteen months ended Year to
31 December 30 June
2007 2006
£'000 £'000
Net assets:
Per Group Balance Sheet * 124,077 71,325
Add - Receipts from the exercise of - 2,736
Management Options
124,077 74,061
No. of Shares No. of Shares
Ordinary Shares:
Issued share capital * 33,587,094 22,677,718
Add - New Shares issued assuming the - 1,600,000
exercise of Management Options
33,587,094 24,277,718
Basic net asset value per share 369.42p 314.52p
Diluted net asset value per share 369.42p 305.06p
* Figures for the basic net asset value calculations
Calculations assume that the dilution takes place on the respective Balance
Sheet dates.
Diluted adjusted net asset value has been calculated as follows:
Eighteen months ended Year to
31 December 30 June
2007 2006
£'000 £'000
Net assets: 124,077 71,325
Per Group Balance Sheet
Adjustments to add back:
Deferred tax on temporary differences - 6,186
Deferred tax on revaluation gains - 14,605
Deferred tax on derivatives - 402
Adjusted net assets 124,077 92,518
Add - Receipts from the exercise of Management Options - 2,736
124,077 95,254
No. of shares No. of shares
Ordinary Shares:
Issued share capital 33,587,094 22,677,718
Add - New Shares issued assuming the exercise of Management Options - 1,600,000
33,587,094 24,277,718
Basic adjusted net asset value per share 369.4p 408.0p
Diluted adjusted net asset value per share 369.4p 392.4p
Calculations assume that the dilution takes place on the respective Balance
Sheet dates.
The statutory accounts for the eighteen months ended 31 December 2007 will be
delivered to Registrar of Companies following the Company's Annual General
Meeting. The Annual Report was signed on 9 April 2008 and will be posted to
shareholders and those on the mailing list on or around 28 April 2008. The
Annual Report will thereafter be available on request from the Company
Secretary, J O Hambro Capital Management Limited, Ground Floor, Ryder Court, 14
Ryder Street, London, SW1Y 6QB. The Annual General Meeting is to be held on 17
June 2008 at 2.30 pm in the Board Room, at Ground Floor, Ryder Court, 14 Ryder
Street, London, SW1Y 6QB.
The financial information set out above does not constitute the Company's
statutory financial statements for the period ended 31 December 2007 or 30 June
2006. The auditors have reported on those financial statements; their reports
were unqualified and did not contain statements under section 237 (2) or (3) of
the Companies Act 1985.
This information is provided by RNS
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