Primary Health Properties (PHP) recently held a capital markets day in the Republic of Ireland (RoI), where it now has eight assets and looks for further strong growth, towards 10% of the overall portfolio. The RoI market shares similar drivers and attractive characteristics to the UK and currently benefits from higher yields and lower funding costs. The visit provided additional comfort to our forecasts for further income and dividend growth driven by asset acquisition in both the UK and RoI, an improving outlook for rental growth and more opportunities to optimise average borrowing costs.
In both the UK and the RoI, there is broad political will to reform healthcare provision, placing more emphasis on primary care to meet the increasing healthcare needs of growing and ageing populations. This requires larger, more flexible, higher-quality premises and funding for their development. Like the UK, the RoI is catching up from a period of underinvestment, to meet the needs of an ageing population with increasingly complex healthcare needs. Its population growth is one of the fastest in Europe. It has plans to establish c 200 large, multidisciplinary primary care centres (PCCs) and PHP analysis indicates that there are currently around half this number, and relatively few that are fit for purpose.
PHP entered the RoI market in 2016 and the September acquisition of three large, recently purpose-built PCCs for €38.6m increased its portfolio in the country to eight assets with a value of more than €100m (c 6% of the group total). It sees further good growth opportunities, with the share of an otherwise growing portfolio rising to around 10%. PHP estimates Irish net initial yields to be currently c 6%, around 100bp above the yields currently available in the UK while marginal funding costs are lower. Euro-denominated borrowing will provide a natural hedge to FX risk. There are some differences between the RoI and the UK in terms of lease covenants, but we believe this is marginal, with 65–75% of the rents being derived from the HSE (the NHS equivalent) on long leases indexed to RoI CPI.
We expect FY18 DPS, in the 22nd year of unbroken growth, to be fully covered by earnings, for a yield of 4.9%, while asset management and rental growth provide capital appreciation potential even if yield tightening slows. Revenues are supported by secure, long-term income, substantially subject to upward-only review, with little exposure to the economic cycle, or fluctuations in occupancy.
