Primary Health Properties (PHP)

[richfool]

In addition to rising rent reviews, there is also the prospect/hope that by the time particular borrowings expire and need to be re-financed, interest rates will be at a lower level than currently.

[idpickering]

Primary Health Properties PLC, one of the UK's leading investors in modern primary healthcare facilities, today publishes a trading update for the third quarter of the year to 30 September 2023 ("Q3 2023") and announces the completion of its secondary Listing on the Johannesburg Stock Exchange ("JSE").

And later;

Dividend

On 5 October 2023, the Company declared its fourth quarterly interim dividend of 1.675p per Ordinary Share which will be paid on 24 November 2023 to shareholders who were on the share register at the close of business on 13 October 2023. The dividend will be paid by way of a property income distribution of 1.34 pence and a normal dividend of 0.335 pence. The dividend is equivalent to 6.7p on an annualised basis and represents a 3.1% increase over the 6.5p paid in 2022.

https://www.investegate.co.uk/announcem ... ng/7835243

Also posted on Company News here; viewtopic.php?p=622756#p622756

I hold these in my HYP and know others hereabouts do too, so this may be of interest here.

Ian.

[kempiejon]

Cheers Ian, interesting. Not sure what a Joburg listing would mean. Down 15% for the year, up a few percent on the day, 8% yield, an all time high I think, more than twice the FTSE100 with regular inflation beating increases over the decade, another 5% increase this year? I've looked at these guys quite a few times over the years, perhaps this is an opportune moment, except I do not have any investment money for the next few months as I'm making changes and holding onto cash.

[idpickering]

Cheers Ian, interesting. Not sure what a Joburg listing would mean. Down 15% for the year, up a few percent on the day, 8% yield, an all time high I think, more than twice the FTSE100 with regular inflation beating increases over the decade, another 5% increase this year? I've looked at these guys quite a few times over the years, perhaps this is an opportune moment, except I do not have any investment money for the next few months as I'm making changes and holding onto cash.

You're welcome, and thanks for your input too. I like this share and it's one of my favourite REITs. I like the fact that the rent is mostly paid by the NHS, which in my opinion makes them a safer bet in the REIT sector (maybe?). I bought more PHP earlier this month and am buying more next month too. Keep us up to date on your actions re this share please.

Ian.

[simoan]

Sorry to bore everyone, but having read more about the convertible bonds due in July 2025 it's important to note the following from the 2022 Annual Report:

Convertible bonds
In July 2019, the Group issued for a six-year term new unsecured convertible bonds with a nominal value of £150 million and a coupon of 2.875% per annum. Subject to certain conditions, the new bonds will be convertible into fully paid Ordinary Shares of the Company and the initial exchange price was set at 153.25 pence per Ordinary Share. The exchange price will be subject to adjustment, in accordance with the dividend protection provisions in the terms of issue, if dividends paid per share exceed 2.8 pence per annum and in accordance with those provisions the exchange price has been adjusted to 137.69 pence per Ordinary Share.

The conversion of the £150 million convertible bonds into new Ordinary Shares would reduce the Group’s loan to value ratio by 5.4% from 45.1% to 39.7% and result in the issue of 108.9 million new Ordinary Shares.

So the convertibles are well out of the money currently. However, given the dividend is above 2.8p per share, and likely to continue to be so, the exchange price will be reduced further and the amount of dilution will increase to more than 10% between now and the maturity date in 2025.

[Dod101]

Dilution has always been a problem with PHP and other similar shares. If it does not occur by conversion as in this case, it happens via placing. Raising additional funds is the only way that a REIT like this can expand as most of their earnings have to be distributed

[simoan]

Dilution has always been a problem with PHP and other similar shares. If it does not occur by conversion as in this case, it happens via placing. Raising additional funds is the only way that a REIT like this can expand as most of their earnings have to be distributed

That's true historically, but funding has been mostly debt based and there's been very little equity dilution for the past 4 years. That makes sense with cheap debt available, but that door has now closed and with an ever decreasing share price there is the potential for much more severe dilution in future should they use equity issuance in preference to debt for funding purposes. I'm just kicking the tyres here, it's no good just pointing to a lower share price and comforting yourself with the dividend yield being higher - this has all the hallmarks of a value trap. There are genuine reasons for concern that the dividend may not be sustainable in future given higher funding costs, be that the same dividend shared across more shares, or the need to pay the interest bill and cut dividend payouts.

[simoan]

Dilution has always been a problem with PHP and other similar shares. If it does not occur by conversion as in this case, it happens via placing. Raising additional funds is the only way that a REIT like this can expand as most of their earnings have to be distributed

That's true historically, but funding has been mostly debt based and there's been very little equity dilution for the past 4 years. That makes sense with cheap debt available, but that door has now closed and with an ever decreasing share price there is the potential for much more severe dilution in future should they use equity issuance in preference to debt for funding purposes. I'm just kicking the tyres here, it's no good just pointing to a lower share price and comforting yourself with the dividend yield being higher - this has all the hallmarks of a value trap. There are genuine reasons for concern that the dividend may not be sustainable in future given higher funding costs, be that the same dividend shared across more shares, or the need to pay the interest bill and cut dividend payouts.

Sorry to post again, but just to make clear my concern (and maybe also that of the market) with regard to future funding costs. The next fixed rate bond due is in March 2027. This £100m bond when launched in March 2017 had a coupon of 2.83%. At the time, the risk-free rate was 0.25%, so they paid 2.58% above base. Currently, the base rate is 5.25% so the equivalent, should they want to rollover right now, would be a bond with a coupon of 7.83% i.e. the interest costs would be 2.8x higher. The hope is that interest rates will be much lower by 2027 but they are not going back to anywhere near 0.25% again. And if that does not come to pass, many debt funded investment vehicles that relied on the availability of cheap debt since the GFC (e.g. REITs, Infrastructure funds) have got a serious problem. We have to remember a lot of these companies have only listed since the GFC and have never had to exist in a higher interest rate environment for a prolonged period.

[BullDog]

That's true historically, but funding has been mostly debt based and there's been very little equity dilution for the past 4 years. That makes sense with cheap debt available, but that door has now closed and with an ever decreasing share price there is the potential for much more severe dilution in future should they use equity issuance in preference to debt for funding purposes. I'm just kicking the tyres here, it's no good just pointing to a lower share price and comforting yourself with the dividend yield being higher - this has all the hallmarks of a value trap. There are genuine reasons for concern that the dividend may not be sustainable in future given higher funding costs, be that the same dividend shared across more shares, or the need to pay the interest bill and cut dividend payouts.

Sorry to post again, but just to make clear my concern (and maybe also that of the market) with regard to future funding costs. The next fixed rate bond due is in March 2027. This £100m bond when launched in March 2017 had a coupon of 2.83%. At the time, the risk-free rate was 0.25%, so they paid 2.58% above base. Currently, the base rate is 5.25% so the equivalent, should they want to rollover right now, would be a bond with a coupon of 7.83% i.e. the interest costs would be 2.8x higher. The hope is that interest rates will be much lower by 2027 but they are not going back to anywhere near 0.25% again. And if that does not come to pass, many debt funded investment vehicles that relied on the availability of cheap debt since the GFC (e.g. REITs, Infrastructure funds) have got a serious problem. We have to remember a lot of these companies have only listed since the GFC and have never had to exist in a higher interest rate environment for a prolonged period.

Thanks. I appreciate your thoughts.

[Dod101]

All of that is true but the real net effect permanently high interest rates is the question. Most of these companies are squeezing out higher rents and everyone will have to get used to higher rates but there might be a painful transition. That is why I was saying that we need to watch the LTV and why I have been watching this sort of thing for some time. I do not believe that the big responsible companies such as PHP are going forward on a wing and a prayer without being well aware of the threat from higher borrowing rates.

[idpickering]

All of that is true but the real net effect permanently high interest rates is the question. Most of these companies are squeezing out higher rents and everyone will have to get used to higher rates but there might be a painful transition. That is why I was saying that we need to watch the LTV and why I have been watching this sort of thing for some time. I do not believe that the big responsible companies such as PHP are going forward on a wing and a prayer without being well aware of the threat from higher borrowing rates.

Well said Dod. Have a thanks/rec.

Ian.