Primary Health Properties PLC

Interim results for the six months ended 30 June 2024

28-year track record of dividend growth set to continue as new Government commits to increased investment in primary and community care

Primary Health Properties PLC ("PHP", the "Group" or the "Company"), a leading investor in modern primary health facilities, announces its interim results for the six months ended 30 June 2024 (the "period").

Mark Davies, Chief Executive Officer ("CEO") of PHP, commented:

"Following my appointment as CEO earlier in the year, I am delighted to be able to announce PHP's interim results for 2024. This is another period of robust operational and financial performance and we are encouraged by the continued improvement in open market value rental growth, together with a strong control on costs resulting in one of the lowest EPRA cost ratios in the REIT sector and with the vast majority of PHP's debt either fixed or hedged for a weighted average period of six years. It's clear that PHP's competitive advantage is built on these strong fundamentals and leading position in the UK, combined with our large exposure in Ireland.

"As PHP approaches its 30-year anniversary of continuous dividend growth in 2026, the management team appreciates the importance of driving further earnings growth in the future and this continues to be an important focus of the Group's business model.

"We welcome the new Labour Government's commitment to the NHS and, specifically in the first few days of taking power, the Health Secretary's identification of increased investment in primary care. As reported in the media, there are commitments to reform GP services and wider community care in order to expand service delivery in these settings, relieving the pressures on the NHS. PHP is extremely well placed to facilitate and benefit from these objectives, creating new and modern facilities to deliver services with huge social impact.

"I will also take this opportunity to thank my predecessor, Harry Hyman, for his long and successful leadership of the Company. I look forward to working with Harry in the future, in his new role as Non-executive Chair, providing both continuity and the benefit of his unrivaled experience in the sector."

FINANCIAL AND OPERATIONAL HIGHLIGHTS

1 Items marked with this footnote are alternative performance measures. Refer to the Glossary of Terms for a description of these measures and a reconciliation to the nearest statutory metric where appropriate.

2 See note 7, earnings per share, to the financial statements.

3 See note 7, net asset value per share, to the financial statements. Adjusted net tangible assets, EPRA net tangible assets ("NTA"), EPRA net disposal value ("NDV") and EPRA net reinstatement value ("NRV") are considered to be alternative performance measures. The Group has determined that adjusted net tangible assets is the most relevant measure.

4 Percentage valuation movement during the period based on the difference between opening and closing valuations of properties after allowing for acquisition costs and capital expenditure.

5 See note 8, dividends, to the financial statements.

⁶ Pro-forma after deducting the remaining cost to complete contracted acquisitions, properties under development and asset management projects.

⁷ Percentage contracted rent roll increase during the period is based on the annualised uplift achieved from all completed rent reviews and asset management projects.

EARNINGS AND DIVIDEND GROWTH

·   Adjusted earnings per share up 2.9% at 3.5p (30 June 2023: 3.4p)

·   IFRS earnings per share decreased by 90.0% to 0.3p (30 June 2023: 3.0p) reflecting non-cashflow losses arising on the valuation of the Group's property portfolio, convertible bond and interest rate derivatives

·   Contracted annualised rent roll increased by 1.2% to £152.6 million (31 December 2023: £150.8 million)

·   Additional annualised rental income on a like-for-like basis of £1.8 million or 1.2% from rent reviews and asset management projects (H1 2023: £2.2 million or 1.5%; FY 2023: £4.3 million or 3.0%)

·   EPRA cost ratio 10.0% (FY 2023: 10.1%) excluding PHP Axis overheads and direct vacancy costs, representing one of the lowest in the UK REIT sector, and which is expected to improve further from 2025 as a result of cost savings enacted post period end, primarily relating to reductions in staff headcount, totalling c. £1.0 million

·   First three quarterly dividends totalling 5.175 pence per share distributed or declared in the year-to-date, equivalent to 6.9 pence per share on an annualised basis, a 3.0% increase over 2023 (6.7 pence per share) and marking the Company's 28^th consecutive year of dividend growth

·   The Company intends to maintain its strategy of paying a progressive dividend, fully covered by Adjusted earnings

NET ASSET VALUE AND PORTFOLIO MANAGEMENT

·   The portfolio's metrics continue to reflect the Group's secure, long-term and predictable income stream with occupancy at 99.2% (31 December 2023: 99.3%), 89% (31 December 2023: 89%) of income funded by government bodies and a WAULT of 9.8 years (31 December 2023: 10.2 years)

·   Adjusted Net Tangible Assets ("NTA") per share decreased by 2.8% to 105.0 pence (31 December 2023: 108.0 pence)

·   Property portfolio valued at £2.750 billion (31 December 2023: £2.779 billion) reflecting a net initial yield of 5.18% (31 December 2023: 5.05%)

·   Revaluation deficit in the period of £40.0 million (30 June 2023: deficit £11.9 million), representing a decline of -1.4% (30 June 2023: -0.4%), comprising a £73 million decline driven by NIY widening of 13bps partially offset by gains of £33 million arising from rental growth and asset management projects

·   Pipeline of 23 asset management projects and lease regears planned over next two years, investing £15.3 million, creating additional rental income of £0.7 million per annum and extending the weighted average unexpired lease term (WAULT) back to over 19 years on these properties

·   Opportunistic acquisition of one standing let investment at Basingstoke for £4.5 million and commenced work on the Group's second development at South Kilburn, London for £3.3 million

·   Portfolio in Ireland comprises 21 assets, valued at £244 million (€288 million) (31 December 2023: £245 million / €282 million). The portfolio in Ireland represents 9% (31 December 2023: 9%) of the total portfolio and Ireland continues to represent a core part of the Group's strategy and preferred area of future growth

FINANCIAL MANAGEMENT

·      Significant liquidity headroom with cash and collateralised undrawn loan facilities totaling £307.8 million (31 December 2023: £321.2 million) after capital commitments providing the business with both the flexibility to execute its strategy and address any refinancing falling due in 2025

·      Agreed terms or in advanced discussions to refinance and extend £320 million of revolving credit facilities mitigating the refinancing risk of debt maturities falling due in 2025

·      96% (31 December 2023: 97%) of net debt fixed or hedged for a weighted average period of six years

·      LTV ratio 48.0% (31 December 2023: 47.0%) within the Group's targeted range of between 40% to 50%

·      Weighted average debt maturity 6.0 years (31 December 2023: 6.6 years)

RELATIVE TOTAL RETURNS

1 The definition for total property return is set out in the Glossary of Terms.

RESPONSIBLE BUSINESS AND ESG

·      Continued progress made on Net Zero Carbon ("NZC") Framework with the five key steps to achieve the Group's ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities

·      Completed PHP's first NZC asset management project at Long Stratton, Norfolk

·      Ongoing construction of PHP's first NZC development in West Sussex expected to achieve practical completion in Q4 2024 and commenced fit-out works on PHP's second NZC development at South Kilburn, London due to achieve practical completion in Q2 2025

 ·      Continuedimprovement in the portfolio's EPC rating with 46% and 86% (31 December 2023: 42% and 85%) rated A-B and A-C respectively driven by the asset management programme

Presentation and webcast:

An in-person presentation for analysts will be held today, 24 July 2024 at 10.00am (11.00am SAST) at the offices of Burson Buchanan, 107 Cheapside, London EC2V 6DN and for those who cannot attend in person, the meeting will be accessible via live video webcast and conference call facility. Following the presentation there will be a managed questions and answers session.

The presentation will be accessible via live video webcast and live conference call facility:

Webcast: https://stream.brrmedia.co.uk/broadcast/6656fff0173fd460b8116b1e

Telephone UK: +44 (0) 33 0551 0200

Telephone South Africa: toll free 0800 980 512

Password (if prompted): Quote "PHP half year results" when prompted by the operator.

If you would like to register your interest in attending the meeting please contact Burson Buchanan via php@buchanan.uk.com. A recording of the webcast will be made available from c.12.00pm (1.00pm SAST) on the PHP website, https://www.phpgroup.co.uk/

For further information contact:

EXECUTIVE REVIEW

PHP has continued to deliver on its 28-year track record of continuous dividend growth underpinned by another period of robust operational and financial performance in the first half of 2024. The performance in the period is a testament to the quality of PHP's business model, portfolio, management team and people against the backdrop of an uncertain interest rate environment which continues to weigh heavily on the real estate sector.

The Group's operational resilience throughout the period reflects the security and longevity of our income which are important drivers of our predictable income stream and underpin our progressive dividend policy. We have maintained our strong operational property metrics, with high occupancy at 99.2% (31 December 2023: 99.3%), 89% (31 December 2023: 89%) of our rent being securely funded directly or indirectly by the UK and Irish Governments and a long weighted average unexpired lease term ("WAULT") of 9.8 years (31 December 2023: 10.2 years).

The value of the property portfolio remains broadly unchanged and currently stands at just under £2.8 billion (31 December 2023: £2.8 billion) across 516 assets (31 December 2023: 514 assets), including 21 assets in Ireland, with a rent roll of £152.6 million (31 December 2023: £150.8 million). Notwithstanding the fall in values in the period the portfolio's average lot size is £5.3 million (31 December 2023: £5.4 million).

We continue to focus on driving rental growth from both rent reviews and asset management activities which is a critical factor in the Group's business model and underpins both the earnings and dividend outlook. Importantly, we have continued to see open market value ("OMV") growth improving with reviews completed in the six months ended 30 June 2024 generating an extra £0.6 million (six months ended 30 June 2023: £0.7 million) an uplift of 6.5% (2023: 5.4%) over the previous passing rent equivalent to 2.1% (2023: 1.8%) on an annualised basis. This continues the positive trend in growth seen over the last couple of years. The improving rental growth outlook has also been reflected in the valuation of the portfolio with the independent valuers' assessment of estimated rental values ("ERV") increasing by 1.7% in the six months ended 30 June 2024 (six months ended 30 June 2023: 1.4%; year ended 31 December 2023: 2.5%).

The significant increases in construction costs, together with historically suppressed levels of open market rental growth in the sector, will be significant pull factors to future growth and we are starting to see positive movement in some locations where the NHS need for investments in new buildings is strongest. We have recently commenced work on PHP's second development at South Kilburn, London which is an example of an Integrated Care Board ("ICB") and local authority stepping in with a capital contribution where the District Valuer's ("DV") proposals have prevented much needed schemes from progressing. This, along with the use of "top-up" rents and capital contributions, is starting to allow certain schemes to progress viably and we anticipate this will continue to accelerate.

We welcome the new Labour Government's commitment to the NHS together with its manifesto pledge to reform primary care along with a continuation of the shift of services out of hospitals and into the community and more information can be found in the statement below. Primary care will face challenges in meeting the new objectives set, with the capacity of existing facilities creating a significant obstacle to implementing the new government's policies aimed at expanding service delivery within general practice. Many of our primary care facilities and occupiers will need to deal with future reforms along with addressing the large backlog of procedures that has built up over recent years. We continue to maintain close relationships with our key stakeholders and GP partners to ensure we are best placed to help the NHS and Health Service Executive ("HSE"), Ireland's national health service provider, evolve and deal with the ever-increasing pressures being placed on them.

Overview of results

PHP's Adjusted earnings increased by £0.4 million or 0.9% to £46.3 million (30 June 2023: £45.9 million) in the six months to 30 June 2024, driven by organic rental growth from rent reviews and asset management projects, plus increased profit generated by PHP Axis, our Irish property management business, partially offset by higher interest costs on the Group's increased variable rate debt. Using the weighted average number of shares in issue in the period the Adjusted earnings per share increased by 2.9% at 3.5 pence (30 June 2023: 3.4 pence).

A revaluation deficit of £40.0 million (30 June 2023: deficit £11.9 million) was generated in the period from the portfolio, equivalent to -3.0 pence per share. The valuation deficit was driven by net initial yield ("NIY") widening of 13 bps in the period, equivalent to a valuation reduction of around £73 million, albeit this was partially offset by gains equivalent to £33 million arising from rental growth and asset management projects.

A combined loss of £1.8 million (30 June 2023: gain of £4.8 million) from the fair value movements of interest rate derivatives and convertible bonds, the amortisation of the fair value adjustment on the MedicX fixed rate debt at acquisition and the amortisation of the intangible asset arising on the acquisition of PHP Axis in 2023 resulted in a profit before tax as reported under IFRS of £4.5 million (30 June 2023: £38.8 million).

The Group's balance sheet remains robust with significant liquidity headroom with cash and collateralised undrawn loan facilities, after capital commitments, totalling £307.8 million (31 December 2023: £321.2 million). The loan to value ratio of 48.0% (31 December 2023: 47.0%) is in line with the targeted range of between 40% and 50% with significant valuation headroom across the various loan facilities with values needing to fall by around £1.0 billion or 38% before the loan to value covenants are impacted.

Dividends

The Company distributed a total of 3.45 pence per share in the six months to 30 June 2024, equivalent to 6.9 pence on an annualised basis, which represents an increase of 3.0% over the dividend per share distributed in 2023 of 6.7 pence. This will mark the 28^th year of consecutive dividend growth for PHP.

A third quarterly interim dividend of 1.725 pence per share was declared on 27 June 2024. The dividend will be paid on 16 August 2024 to shareholders who were on the register at the close of business on 5 July 2024. The dividend will comprise a Property Income Distribution of 1.45 pence per share and a normal dividend of 0.275 pence. The Company intends to maintain its strategy of paying a progressive dividend, which is paid in equal quarterly instalments, and covered by underlying earnings in each financial year. A further interim dividend payment is planned to be made in November 2024, which is expected to comprise a mixture of both Property Income Distribution and normal dividend.

The total value of dividends distributed in the period increased by 2.9% to £46.1 million (30 June 2023: £44.8 million), which were fully covered by Adjusted earnings. As previously reported, we suspended the scrip dividend scheme in light of the ongoing weakness in the share price and a dividend re-investment plan is being offered in its place.

Total shareholder returns

The Company's share price started the year at 103.8 pence per share and closed on 30 June 2024 at 91.75 pence, a decrease of 11.6%. Including dividends, those shareholders who held the Company's shares throughout the period achieved a Total Shareholder Return of -8.3% (30 June 2023: -10.8%).

Board changes

As previously reported, Mark Davies took over from Harry Hyman as Chief Executive Officer ("CEO") with effect from the conclusion of the 2024 Annual General Meeting ("AGM") on 24 April 2024. At the same time, Steven Owen retired from the Board as Non-executive Chairman and Harry was appointed as Non-executive Chair.

The Board believes that Harry's appointment as Chair is in the best interests of the Group and its stakeholders, particularly as Harry's knowledge and expertise gained over nearly 30 years in the primary care property sector, which is a niche sub-sector of the real estate market, will continue to be invaluable and highly relevant to the Group's future success. Harry founded PHP in 1996 and has served on the Board as Managing Director/CEO since that time until he stood down as CEO with effect from the end of the AGM. His track record in the listed real estate sector is outstanding and he has been the key driver in PHP's success since its inception.

Following Harry's appointment as Non-executive Chair and in order to ensure that the Board consists of a majority of independent Non-executive Directors and is therefore compliant with the UK Corporate Governance Code 2024, Dr Bandhana (Bina) Rawal was appointed as a fourth independent Non-executive director of the Company with effect from 27 February 2024 and the Board has increased in size from six to seven. Dr Rawal brings a wealth of experience from senior executive and non-executive roles across healthcare, including in strategy, partnerships, governance and risk management.

The Board is grateful to Steven for his commitment and dedication to the Company since his appointment as a Non-executive director in 2014 and for subsequently Chairing the Company from 2018 to 2024, a period of transformational growth and change particularly following the merger with MedicX, the process of internalising the management function and establishing PHP as a key member of the FTSE 250 Index.

Secondary Listing

On the 24 October 2023 the Company completed a secondary listing of PHP shares on the Johannesburg Stock Exchange ("JSE"). The Board of PHP believes that the secondary listing will contribute to liquidity in the Group's shares as a result of the growing interest in the Company and its increased profile in the South African market, where a number of investors have shown strong interest in the unique healthcare property investment opportunity.  Since listing on the JSE approximately six million shares, across 225 shareholders, have been transferred to date and we continue to help potential South African investors acquire PHP shares and provide further liquidity on the JSE with the objective of increasing the number of shares listed there to between 5% to 10% of the Group's total issued share capital.

Environmental, Social and Governance ("ESG")

PHP has a strong commitment to responsible business. ESG matters are at the forefront of the Board's and our various stakeholders' considerations and the Group has committed to transitioning to net zero carbon ("NZC"). PHP published, at the start of 2022, a NZC Framework setting out the five key steps we are taking to achieve an ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities.

We continue to make good progress on the delivery of our NZC framework commitments and achieved our first milestone of net zero operations in both 2022 and 2023 one year ahead of target. Additionally, the Group's first NZC development at Croft, West Sussex is due to achieve practical completion later in Q4 2024 and we have recently commenced work on a second NZC development at South Kilburn, London.

We continue to modernise existing buildings and improve the environmental credentials of our portfolio through the asset management programme and have completed two projects in the period all of which saw an improvement in the EPC ratings to a B. In the period, we also completed PHP's first net zero asset management project at Long Stratton, Norfolk where oil fired heating was replaced with air sourced heating, solar PV was installed and the residual carbon incurred was offset. A further seven projects are currently on site or committed with an advanced pipeline of additional schemes where we continue to evaluate options for energy efficiency, renewables and net zero asset management projects.

As at 30 June 2024, 46% of assets have an EPC rating of A or B (31 December 2023: 42%) and 86% at A to C (31 December 2023: 85%).

As part of establishing the wider carbon impact of the buildings and improve our access to energy performance data we have partnered with arbnco, the award-winning PropTech company addressing climate change, to increase and move towards 100% energy data coverage across the portfolio allowing us to proactively engage with and support tenants on improving their energy performance.

As a leading provider of modern primary care premises, we aim to create a lasting positive social impact, particularly in the health outcomes and wellbeing for the communities where we are invested.

Further details on our progress in the year, objectives for the future and approach to responsible business can be found in the 2023 Annual Report and on our website.

Market update and outlook

We welcome the new Labour Government's continued commitment to the NHS and its manifesto pledge to reform primary care along with three key proposals for change, in particular:

·    Change so that more people can get care at home in their community;

·    Changes so that the NHS has the workforce of the future, with the technology they need; and

·    Changes so the focus is on prevention to reduce pressures on the NHS

Labour's policy includes a continuation of the shift of services out of hospitals and into the community with healthcare close to home and there for individuals when they need it. As part of this commitment Labour acknowledge there needs to be a reform of primary care with patients needing new and more varied opportunities to access healthcare unlocking earlier diagnosis of progressive health conditions. Amongst the proposals for primary care are:

·    Improve GP access;

·    Bring back the family doctor;

·    Join up community health and social care services;

·    Open new referral routes;

·    Further expand the role of community pharmacy;

·    Free-up GP appointments by boosting mental health support; and

·    Create a Neighbourhood NHS Workforce

Primary care will continue to face challenges in meeting the above objectives. The growing demand for healthcare services alongside the capacity constraints of existing facilities represent a significant obstacle to implementing the new government's policies aimed at expanding service delivery within general practice and local communities. The need for additional space is compounded by a population that is growing, ageing and suffering from increased chronic illnesses, which is placing a greater burden on healthcare systems in both the UK and Ireland. The extent of the NHS backlog also remains a significant concern, with the number of patients waiting for treatment reaching record highs and hospitals struggling to meet objectives. All these factors make more urgent the need for improved and increased primary healthcare infrastructure with approximately one-third of the UK's current primary care estate in need of modernisation or replacement.

PHP stands ready to support the new Labour Government's ambition of building an NHS fit for the future but declining rents in real terms have made investing in the transformation of GP facilities less appealing. Construction costs have risen significantly over the past decade, surpassing the growth in primary care rents, driven by material and labour costs and increasing sustainability requirements, all of which have been compounded by Brexit, the COVID-19 pandemic and the volatile fiscal policy outlook.

PHP's mission is to support the NHS, the HSE and other healthcare providers, by being a leading investor in modern, primary care premises. We will continue to actively engage with government bodies, the NHS, the HSE in Ireland and other key stakeholders to establish, enact (where we can), support and help alleviate increased pressures and burdens currently being placed on healthcare networks.

Primary health and investment market update

The commercial property market continues to be impacted by economic turbulence and the uncertainty of interest rates continues to weigh on the real estate sector. This is severely impacting liquidity across the wider real estate market especially those sub-sectors impacted by changing behaviours such as offices and retail. Conversely, structurally supported sectors such as healthcare and distribution where income security and rental growth are more assured are starting to see pricing stabilise.

We believe healthcare and in particular primary care real estate, remains a structurally supported sector and benefits from the demographic tailwinds of a population that is growing, ageing and suffering from increased chronic illnesses, which is placing a greater burden on healthcare systems in both the UK and Ireland which in turn compounds the need for both fit-for-purpose and additional space. However, future developments will now need a significant shift of between 20% to 30% in rental values to make them economically viable and we continue to actively engage with both the NHS, ICB and DV for higher rent settlements. Despite these negotiations typically becoming protracted, we are starting to see positive movement in some locations where the health system's need for investment in new buildings is strongest such as our recent development at South Kilburn, London.

Primary care asset values have continued to perform well relative to mainstream commercial property due to recognition of the security of their government backed income, crucial role in providing sustainable healthcare infrastructure and more importantly a stronger rental growth outlook enabling attractive reversion over the course of long leases.

The continued lack of recent transactions in the year has resulted in valuers continuing to place reliance primarily on sentiment to arrive at fair values. Yields adopted by the Group's valuers have moved out by 13bps to 5.18% as at 30 June 2024 (31 December 2023: 5.05%) to reflect perceived market sentiment for the sector. We believe further significant reductions in primary care values are likely to be limited with a stronger rental growth outlook offsetting the impact of any further yield expansion.

PHP Outlook

Growth in the immediate future will continue to be focused on increasing income from our existing portfolio and we are encouraged by the firmer tone of rental growth experienced over the last couple of years. We believe the dynamics of inflation in recent years, including significantly increased build costs combined with demand for new primary care facilities and the need to modernise the estate will continue to drive future rental settlements.

We are currently on site with just two developments with costs to complete of £3.3 million and consequently have very limited exposure to higher construction cost pressures and supply chain delays. In our immediate pipeline we have one development and 23 asset management projects with a total expected cost of £15.3 million and will continue to evaluate these, together with a wider medium-term pipeline at various stages of progress and seek to negotiate rents with the NHS at the level required to deliver an acceptable return.

With an improving rental growth outlook, a strong control on costs resulting in one of the lowest EPRA cost ratios in the sector and the vast majority of the Group's debt either fixed or hedged for a weighted average period of six years we are well positioned for the future. These factors, along with the encouraging Labour Government commitments to increased investment in primary and community care, enable us to look forward to the rest of 2024 with confidence.

Harry Hyman                                                  Mark Davies

Chair                                                               Chief Executive Officer

23 July 2024