REG - Primary Health Props - Preliminary Results
22/02/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230222:nRSV6305Qa&default-theme=true
RNS Number : 6305Q Primary Health Properties PLC 22 February 2023
Primary Health Properties PLC
Preliminary results for the year ended 31 December 2022
Record year for rental growth driving performance
Primary Health Properties PLC ("PHP", the "Group" or the "Company"), a leading
investor in modern primary health facilities, announces its audited
preliminary results for the year ended 31 December 2022.
Harry Hyman, Chief Executive, commented:
"The Group's continued operational and financial resilience throughout the
year reflects the security and longevity of our income which are important
drivers of our predictable cash-flows and underpin our progressive dividend
policy as we enter the 27(th) year of continued dividend growth.
"We are encouraged by the rental growth experienced in the year from rent
reviews and asset management projects and believe PHP will be a beneficiary of
the significant rise in construction costs seen in recent years. Furthermore,
with the majority of PHP's debt either fixed or hedged for a weighted average
period of just over seven years, a strong control on costs and just one
development on site we have limited exposure to further cost increases and
development risk.
"In the longer term, the ageing and growing demographic of the UK and Irish
populations means that the health services in both countries will be called
upon to address more long-term, complex and chronic co-morbidities.
Consequently, the Government needs to respond and invest in new structures to
deliver more healthcare in primary care and community settings and away from
over-burdened hospitals. PHP stands ready to play its part in delivering and
modernising the real estate infrastructure required to meet this need."
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Income statement metrics Year to Year to
31 December 31 December Change
2022 2021
Net rental income(1) £141.5m £136.7m +3.5%
Adjusted earnings(1,2) £88.7m £83.2m +6.6%
Adjusted earnings per share(1,2) 6.6p 6.2p +6.5%
IFRS profit for the year £56.3m £140.1m -59.8%
IFRS earnings per share(2) 4.2p 10.5p -60.0%
Dividends
Dividend per share(5) 6.5p 6.2p +4.8%
Dividends paid(5) £86.7m £82.4m +5.2%
Dividend cover(1) 102% 101%
Balance sheet and operational metrics 31 December 31 December
2022 2021 Change
Adjusted NTA (NAV) per share(1,3) 112.6p 116.7p -3.5%
IFRS NTA per share(1,3) 110.4p 112.5p -1.9%
Property portfolio
Investment portfolio valuation(4) £2.796bn £2.796bn -2.2%
Net initial yield ("NIY")(1) 4.82% 4.64% +18 bps
Contracted rent roll (annualised)(1,7) £145.3m £140.7m +3.3%
Weighted average unexpired lease term ("WAULT")(1) 11.0 years 11.6 years
Occupancy(1) 99.7% 99.7%
Rent-roll funded by government bodies(1) 89% 90%
Debt
Average cost of debt(1) 3.2% 2.9% +30 bps
Loan to value ratio(1) 45.1% 42.9%
Weighted average debt maturity - drawn facilities 7.3 years 8.2 years -0.9 years
Total undrawn loan facilities and cash(6) £325.9m £321.2m
(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 9, earnings per share, to the financial statements. Per share
figures are presented on a basic basis.
(3) See note 9, 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 year based on the difference
between opening and closing valuations of properties after allowing for
acquisition costs and capital expenditure.
(5) See note 10, dividends, to the financial statements.
(6) After deducting the remaining cost to complete contracted acquisitions,
properties under development and committed asset management projects.
(7) Percentage contracted rent roll increase during the year is based on the
annualised uplift achieved from all completed rent reviews and asset
management projects.
EARNINGS AND DIVIDEND GROWTH
· Adjusted earnings per share increased by 6.5% to 6.6p (2021:
6.2p)
· IFRS earnings per share decreased by 60.0% to 4.2p (2021: 10.5p)
· Contracted annualised rent roll increased by 3.3% to £145.3
million (31 December 2021: £140.7 million)
· Additional annualised rental income on a like-for-like basis of
£3.3 million or 2.4% from rent reviews and asset management projects (2021:
£2.4 million or 1.8%)
· EPRA cost ratio 9.9% (2021: 9.3%), representing the lowest in the
UK REIT sector
· Quarterly dividends totalling 6.5 pence (2021: 6.2 pence) per
share distributed in the year, a 4.8% increase
· First quarterly dividend of 1.675 pence per share declared,
payable on 23 February 2023, equivalent to 6.7 pence on an annualised basis
and a 3.1% increase over the 2022 dividend per share, marking the Company's
27(th) consecutive year of dividend growth
· Dividends paid increased by 5.2% to £86.7 million (2021: £82.4
million); 102% covered by Adjusted earnings
NET ASSET VALUE AND PORTFOLIO MANAGEMENT
· Adjusted Net Tangible Assets ("NTA") per share decreased by 3.5%
to 112.6 pence (31 December 2021: 116.7 pence)
· Property portfolio valued at £2.8 billion at 31 December 2022
(31 December 2021: £2.8 billion) reflecting a net initial yield of 4.82% (31
December 2021: 4.64%)
· Revaluation deficit in the year of £64.4 million (2021: surplus
£110.2 million), representing a decline of -2.4% (2021: +4.1%) driven by NIY
widening of 18bps equivalent to around £134 million partially offset by gains
of £70 million arising from rental growth and asset management projects
· Active asset management driving disposal of 13 smaller assets for
£27.7 million, 13% above 31 December 2021 book values and represented 60 bps
of yield compression, generating a profit on sale of £2.9 million (2021:
£0.3 million / one property)
· The portfolio's metrics continue to reflect the Group's secure,
long-term and predictable income stream with occupancy at 99.7% (31 December
2021: 99.7%), WAULT of 11.0 years (31 December 2021: 11.6 years) and 89% (31
December 2021: 90%) of income funded by government bodies
· Portfolio in Ireland comprises 20 assets, valued at £231 million
(€261 million) (31 December 2021: £213 million / €253 million)
· The acquisition of Axis Technical Services Limited, in January
2023, gives the Group a permanent presence in Ireland and is an important
strategic move as we seek out new investment, development and asset management
opportunities
· Strong progression of asset management projects with ten
completed in the year and ten currently on-site, investing £17.2 million,
creating additional rental income of £0.5 million per annum and extending the
weighted average unexpired lease term (WAULT) back to over 19 years.
Additional 23 lease regears completed in the year
· Disciplined approach to future investment with pipeline of
accretive opportunities totalling £85.7 million focused on Ireland, direct
developments and asset management projects our preferred areas of future
investment
· Winner of MSCI's Highest 10-Year Risk Adjusted Total Return Award
for the UK in 2021
FINANCIAL MANAGEMENT
· LTV ratio 45.1% (31 December 2021: 42.9%) in the middle of the
Group's targeted range of between 40% to 50%
· 94% of net debt fixed or hedged for a weighted average period of
just over seven years
· Weighted average debt maturity 7.3 years (31 December 2021: 8.2
years)
· Significant liquidity headroom with cash and collateralised
undrawn loan facilities totaling £325.9 million (31 December 2021: £321.2
million) after capital commitments
· €75 million private placement loan note issued in the period
for a 12-year term at a fixed rate of 1.64% to finance continued expansion in
Ireland
· Refinanced the Group's revolving credit facilities due to mature
in 2023 and 2024, totaling £350 million, with no increase in credit margins
RELATIVE TOTAL RETURNS
Year ended Year ended
31 December 2022 31 December 2021
Increase in Adjusted NTA plus dividends paid 2.1% 8.9%
Total income return 5.0% 5.2%
Total capital return (2.2%) 4.3%
Total property return(1) 2.8% 9.5%
MSCI UK Monthly Property Index (10.4%) +20.0%
(1) The definition for income, capital and total property return is set out in
the Glossary of Terms.
RESPONSIBLE BUSINESS AND ESG
· As previously announced, Net Zero Carbon ("NZC") Framework published with
the five key steps the Group is looking to achieve the ambitious target of
being NZC by 2030 for all of PHP's operational, development and asset
management activities
· Commenced construction of PHP's first NZC development in West Sussex
expected to achieve practical completion in Q3 2023
· All developments completed in the period achieved BREEAM rating of
Excellent or Very Good and all asset management projects completed met EPC
target of B or above
· Published PHP's Levelling- Up Impact Report, as part of the Purpose
Coalition, detailing the work PHP is doing to level-up both locally and
nationally, and its strategy going forward
Presentation and webcast:
A virtual briefing for analysts will be held today, 22 February 2023 at
9.30am, via a live webcast and conference call facility.
The presentation will be accessible via live video webcast and a live
conference call facility:
Webcast: https://stream.brrmedia.co.uk/broadcast/63c1667fddbb3277238eaa71
(https://stream.brrmedia.co.uk/broadcast/63c1667fddbb3277238eaa71)
Tel: +44 (0)33 0551 0200
Password: Quote "PHP results" when prompted
If you would like to join the briefing, please contact Buchanan via
php@buchanan.uk.com to confirm your place.
For further information contact:
Harry Hyman Richard Howell
Chief Executive Officer Chief Financial Officer
Primary Health Properties PLC Primary Health Properties PLC
T: +44 (0) 7973 344768 T: +44 (0) 7766 072272
E: harry.hyman@phpgroup.co.uk (mailto:harry.hyman@phpgroup.co.uk) E: richard.howell@phpgroup.co.uk
David Rydell/Jamie Hooper/Hannah Ratcliff/Verity Parker
Buchanan Communications
T: +44 (0) 20 7466 5066
E: php@buchanan.uk.com (mailto:php@buchanan.uk.com)
Chairman's statement
I am pleased to report that PHP delivered a robust operational and financial
performance in 2022 despite the ongoing volatility in the economic and
interest rate outlook caused by both global and domestic events. For the
property sector the UK Government's "mini-budget" in September 2022 amplified
the turmoil caused by the war in Ukraine and rising inflationary pressures
and, despite the UK returning to some form of political stability in November
2022, the interest rate outlook has continued to weigh negatively on most
REITs, companies and funds within the sector.
The Group's continued operational resilience throughout the year reflects the
security and longevity of our income which are important drivers of our
predictable income stream and underpin our progressive dividend policy as we
enter the 27(th) year of continued dividend growth.
We continue to maintain our strong operational property metrics, with a long
weighted average unexpired lease term ("WAULT") of 11.0 years (2021: 11.6
years), high occupancy at 99.7% (2021: 99.7%) and 89% (2021: 90%) of our rent
which is securely funded directly or indirectly by the UK and Irish
Governments. Notwithstanding the fall in values and disposal of 13 smaller
assets in the second half of the year, the portfolio's average lot size
remains at £5.4 million (2021: £5.4 million).
On a like-for-like basis, 2022 was a record year for absolute rental growth
with £3.3 million or +2.4% (2021: £2.4 million or +1.8%) of additional
annualised income created from rent reviews and asset management projects,
continuing the positive trend in growth seen over the last couple of years. It
should be noted that most of this growth came from rent reviews arising in the
period 2018 to 2020 and therefore does not reflect the impact of significantly
higher construction costs experienced in the last few years.
We are encouraged by the increasingly firmer tone of rental growth and believe
PHP in the medium term will be a beneficiary of the current inflationary
environment both through open market and index-linked reviews. In particular,
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 especially as the NHS seeks to
deliver new larger primary care facilities and modernise the existing estate.
The property portfolio currently stands at just under £2.8 billion (2021:
£2.8 billion) across 513 assets (2021: 521 assets), including 20 in Ireland,
with a rent roll of £145.3 million (2021: £140.7 million). The Group
selectively added just four assets in the year for £52.9 million (2021:
£86.6 million across nine assets) and took advantage of the strong market
conditions seen in the first half of 2022 to dispose of a portfolio of 13
assets which comprised smaller facilities significantly below our average lot
size for £27.7 million (2021: £2.3 million), 13% above book value. As
previously reported with PHP's interim results, in July 2022, the
deteriorating interest rate and economic outlook caused us to reconsider our
acquisition pipeline and pause investment activity in the second half of the
year until the economic and interest rate outlook becomes clearer. We
currently have just one development on site and consequently very limited
exposure to further build cost inflation and development risk.
Many of our primary care facilities and occupiers will need to deal with the
backlog of procedures and demand which has built up over the last three years
and will be required to deliver COVID-19 vaccines for many years to come. We
continue to maintain close relationships with our key stakeholders and GP
partners to ensure we are best placed to help the NHS and HSE, particularly in
primary care, evolve and deal with the increased pressures placed on them.
We recognise that the success of the Group depends on our people and I would
again like to warmly thank the Board and all of our employees for their
continued commitment, dedication and professionalism in ongoing difficult and
uncertain times.
Acquisition of Axis Technical Services Limited
In January 2023, the Group successfully completed the acquisition of Axis
Technical Services Limited, an Irish property management business, and signed
a long term development pipeline agreement providing access to a strong
pipeline of future primary care projects in Ireland.
Axis Technical Services Limited currently manages a portfolio of over 30
properties, including the majority of PHP's Irish portfolio, and the
acquisition gives the Group a permanent presence on the ground, further
strengthening its position in the country and relationship with the Health
Service Executive ("HSE"), Ireland's national health service provider. The
acquired company also provides fit-out, property and facilities management
services to the HSE and other businesses located across Ireland.
As part of the acquisition, PHP signed a development pipeline agreement with
Axis Health Care Assets Limited ("Axis"), a related company, which gives the
Group the option to acquire Axis' development pipeline over the next five
years. Axis is one of Ireland's leading developers of primary care properties,
having developed five properties over the last five years, all of which have
been acquired by PHP. Axis also has a strong pipeline of near-term projects
with an estimated gross development value of €50 million with further
potential schemes beyond that.
Overview of results
PHP's Adjusted earnings increased by £5.5 million or +6.6% (2021: £10.1
million or +13.8%) to £88.7 million (2021: £83.2 million) in the year,
primarily driven by strong organic rental growth from rent reviews and asset
management projects together with interest cost savings arising from various
refinancings completed in 2021 and the first half of 2022. Using the weighted
average number of shares in issue in the year the adjusted earnings per share
increased to 6.6 pence (2021: 6.2 pence), an increase of 6.5%.
A revaluation deficit, partially offset by profit on sales, of £61.5 million
(2021: surplus of £110.5 million) was generated in the year from the
portfolio, equivalent to -4.6 pence (2021: +8.3 pence) per share. The
valuation deficit was driven by net initial yield ("NIY") widening of 18 bps
in the year, equivalent to a valuation reduction of around £134 million,
albeit this was partially offset by gains equivalent to £70 million arising
from rental growth and asset management projects.
A gain on the fair value of interest rate derivatives and convertible bonds
together with the amortisation of the fair value adjustment on the MedicX
fixed rate debt at acquisition of £29.7 million (2021: gain of £9.5 million)
resulted in a profit before tax as reported under IFRS of £56.9 million
(2021: £141.6 million).
The Group's balance sheet remains robust with a loan to value ratio of 45.1%
(2021: 42.9%), which is in the middle of the targeted range of between 40% and
50%, and we have significant liquidity headroom with cash and collateralised
undrawn loan facilities, after capital commitments, totalling £325.9 million
(2021: £321.2 million). The Group also has significant valuation headroom
across the various loan facilities with values needing to fall further by
around £1.2 billion or 42% before the loan to value covenants are impacted.
Dividends
The Company distributed a total of 6.5 pence per share in 2022, an increase of
4.8% over 2021 of 6.2 pence per share. The total value of dividends
distributed in the year increased by 5.2% to £86.7 million (2021: £82.4
million), which were fully covered by adjusted earnings. Dividends totalling
£5.1 million were satisfied through the issuance of shares via the scrip
dividend scheme. We have suspended the scrip dividend scheme in light of the
fall in the share price during the year and are offering a dividend
re-investment plan in its place.
A dividend of 1.675 pence per share was declared on 5 January 2023, equivalent
to 6.7 pence on an annualised basis, which represents an increase of 3.1% over
the dividend distributed per share in 2022. The dividend will be paid to
shareholders on 23 February 2023 who were on the register at the close of
business on 13 January 2023. The dividend will be paid by way of a property
income distribution of 1.34 pence and normal dividend of 0.335 pence.
The Company intends to maintain its strategy of paying a progressive dividend,
which the Company pays in equal quarterly instalments, that is covered by
adjusted earnings in each financial year. Further dividend payments are
planned to be made on a quarterly basis in May, August and November 2023 which
are expected to comprise a mixture of both property income distribution and
normal dividend.
Total shareholder returns
The Company's share price started the year at 151.4 pence per share and closed
on 31 December 2022 at 110.8 pence, a decrease of 26.8%. Including dividends,
those shareholders who held the Company's shares throughout the year achieved
a Total Shareholder Return of -22.5% (2021: +3.1%).
Over the last five years and including the impact of the merger with MedicX in
2019 we have delivered a total shareholder return of +20.0%. This compares
favourably to the total return delivered by UK real estate equities (FTSE EPRA
Nareit UK Index) of -16.1% and the wider UK equity sector (FTSE All-Share
Index) of +15.5% over the same period. During the year PHP was also announced
as the winner of MSCI's Highest 10-Year Risk Adjusted Total Return Award for
the UK in 2021.
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"). We commenced
construction of PHP's first NZC development which is due to achieve practical
completion later in 2023 and published, at the start of 2022, a NZC Framework
with 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. The NZC Framework also sets out our ambition to help our occupiers
achieve NZC by 2040, five years ahead of the NHS's target of becoming the
world's first net zero carbon national health system by 2045 for the emissions
it can influence and ten years ahead of the UK and Irish Governments' target
of 2050. Further details on our progress in the year, objectives for the
future and approach to responsible business can be found on pages 32 to 53 of
the 2022 Annual Report and on our website.
Board succession and changes
In December 2022, Harry Hyman, Chief Executive Officer ("CEO"), expressed his
intention to retire from his role at the Company's Annual General Meeting
("AGM") in 2024. This intention is consistent with the commitment made at the
time of the MedicX merger, announced in January 2019, that he would commit to
managing PHP for a further five years. The Company will be commencing the
search for a new CEO during 2023 with a view to making an appointment later in
the year and expected to take effect from the 2024 AGM.
The search for Harry Hyman's successor will be led by me as Chairman, and
after consultation with a number of the Group's major shareholders and with
the agreement of the Board, I intend to remain as Chairman, subject to
re-election at the 2023 AGM, until the conclusion of the 2024 AGM in order to
lead the process to deal with the appointment of the new CEO and to ensure an
orderly succession.
Having been appointed to the Board in January 2014, I have now served more
than nine years and am currently not considered to be independent under the
provisions of the UK Corporate Governance Code. After a review by the
independent Non-executive Directors they have concluded that I continue to act
independently and that the Company will benefit significantly from me leading
the CEO succession process. Accordingly, I will continue to be Chairman of the
Company and the Nomination Committee and a member of the ESG Committee until
my proposed retirement at the 2024 AGM but ceased to be a member of the
Remuneration Committee from 31 December 2022. The search for my successor
as Chairman will be led by Ian Krieger, Senior Independent Non-executive
Director.
Following a review of the composition of the Board in 2021, Ivonne Cantú was
appointed as an independent Non-executive Director of the Company with effect
from 1 January 2022.
Peter Cole, Non-executive Director and Chair of the Remuneration Committee,
retired from the Board at the Company's AGM in April 2022 and Ivonne Cantú
took over as Chair of the Remuneration Committee following the AGM.
The Board is grateful to Peter for his commitment and dedication to the
Company and for chairing the Remuneration Committee, particularly during the
process of internalising the management function in 2020 and the transition
period in 2021.
Paul Wright, who has acted as Company Secretary and Chief Legal Officer since
2016 will be retiring on 28 February 2023. The Board wish him well in his
retirement and is grateful for his support, commitment and dedication during a
transformational period of growth for the Group. The Board expects to appoint
Toby Newman, currently Company Secretary and Chief Legal Officer designate and
formerly Company Secretary and General Counsel at Nuffield Health, as his
successor on the same date.
Market update and outlook
The modernisation of the primary care estate been is becoming increasingly
important as the NHS seeks to work through the backlog of treatments created
by the COVID-19 pandemic, address staff shortages and recruitment issues and
deal with the inadequate provision of both primary and social care in the UK,
which is directing patients, who could be treated in the community, to
hospitals where many then remain longer than clinically necessary because
appropriate provision does not exist in the community or care sector where it
is needed.
In the longer term, the ageing and growing demographic of western populations
means that health services will be called upon to address more long-term,
complex and chronic co-morbidities. Consequently, the Government needs to
respond and invest in new structures to deliver more healthcare in primary
care and community settings and away from over-burdened hospitals. PHP stands
ready to play its part in delivering and modernising the real estate
infrastructure required to meet this need in the community.
In July 2021, the UK Government published a draft Health and Social Care Bill
setting out several reforms in order to implement the commitments of the NHS
England Long Term Plan. This included the introduction of regional Integrated
Care Boards and Partnerships tasked with co-ordination between NHS partners
and local government services and their budgets such as those for social care
and mental health, in a geographic area, for the first time - the idea being
that services are then pushed to the most efficient, cost-effective part of
the system (whether primary care, hospital or care home) for the best patient
outcomes. We welcome these reforms and are hopeful they will lead to better
outcomes for patients and to further development opportunities in primary care
in the medium to long term.
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
For both the primary care and indeed most commercial property markets, the
high levels of financial and interest rate volatility seen in the last quarter
of 2022 and resulting economic uncertainty have encouraged a "wait and see"
attitude amongst investors until the outlook settles down. The market has been
in a state of flux including the wider investment property sector, and we
expect prime assets which have experienced greater yield compression over the
last couple of years to show an adjustment aligned more closely to gilt rate
movements. However, in the longer term, we anticipate the market may improve
as the outlook for interest rates becomes more certain, particularly for those
assets with the strong social and sustainability credentials which are fast
becoming a fundamental requirement for investors and occupiers looking to meet
their ESG commitments.
Interest rate volatility will undoubtedly continue to impact the property
investment market in 2023, but some hope can be drawn from the likes of
10-year gilt rates which have fallen from their peak of around 4.5% at the end
of September 2022 to levels closer to 3.7% as at 31 December 2022 and 3.6% at
the time of reporting. Consequently, the impact on valuations may not be as
severe as first anticipated.
The current low levels of investment activity in the primary care investment
market make it difficult for valuers to value based upon specific investment
transactions and therefore valuations are to an extent based upon sentiment
but also reflect investment sales that transacted earlier this year and which
demonstrate the level at which the primary care investment market has been
operating. Consequently, we expect that further reductions in primary care
values via trading evidence are likely to be muted, with most investors likely
to continue to hold their existing assets in the current market primarily
because of:
· Limited supplies of stock;
· Very secure, rising income streams with an improving rental growth
outlook;
· The main specialists in the sector (PHP, Assura and BlackRock) all
having strong balance sheets so there are unlikely to be any "forced sales";
and
· A desire from investors to seek "safe haven" assets with some
shifting from other property sectors.
PHP Outlook
Growth in the immediate future will be focused on increasing income from our
existing portfolio and we are encouraged by the firmer tone of rental growth
experienced in 2022. As already noted, we believe the favourable dynamics of
higher inflation and increased build costs combined with a demand for new
primary care facilities and the need to modernise the estate will continue to
increase future rental settlements.
As previously reported with PHP's interim results in July 2022, the
deteriorating interest rate and economic outlook caused us to reconsider our
acquisition pipeline and pause investment activity in the second half of the
year until the economic outlook becomes clearer. In the short term, we expect
further investment activity will continue to be muted and future acquisitions
and developments will only take place if accretive to earnings.
We are currently on site with just one development and consequently have very
limited risk to higher construction cost pressures and supply chain delays. In
our immediate development pipeline we have three projects with a total
expected cost of £14.5 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.
In the current environment, Ireland continues to be the Group's preferred area
of future investment activity and we have ambitions to continue to grow the
portfolio there to around 15% of the total (31 December 2022: 8%). The
acquisition of Axis Technical Services Limited, in January 2023, now gives the
Group a permanent presence in Ireland, an important strategic move as we seek
out new investment, development and asset management opportunities and try to
strengthen our relationship with the HSE as the leading provider of modern
primary care infrastructure in the country.
With an improving rental growth outlook, a strong control on costs resulting
in the lowest EPRA cost ratio in the sector and the majority of PHP's debt
either fixed or hedged for a weighted average period of just over seven years,
we look forward to 2023 with confidence.
We believe that our activities benefit not only our shareholders but also our
wider stakeholders, including our occupiers, patients, the NHS and HSE,
suppliers, lenders, and the wider communities in both the UK and Ireland.
Steven Owen
Chairman
21 February 2023
BUSINESS REVIEW
Investment and pipeline
In the first half of 2022 the primary care investment market continued to
remain robust despite the deteriorating economic outlook. Consequently, we
invested selectively in four acquisitions totalling £52.9 million and took
advantage of these favourable market conditions to dispose of a portfolio of
13 smaller assets for £27.7 million.
The key acquisitions in the year were a large, state-of-the-art diagnostic
centre in Chiswick let to HCA Healthcare for £34.5 million, a newly
refurbished drug and alcohol rehabilitation facility in Chertsey for £7.0
million and a medical centre in Newbury for £7.3 million.
In the short term, we expect further investment activity will continue to be
muted and future acquisitions and developments will only take place if
accretive to earnings. The Group currently has only two developments in legal
due diligence, one in Ireland for £13.1 million (€14.8 million) and one in
the UK £3.5 million together with 15 asset management projects in the UK at a
cost of £12.7 million.
However, we continue to monitor a number of potential standing investments,
direct and forward funded developments and asset management projects with a
pipeline of opportunities totalling £16.3 million in the UK and £40.1
million (€45.3 million) in Ireland.
Pipeline In legal due diligence Advanced pipeline
Number Cost Number Cost
Ireland - forward funded development 1 £13.1m (€14.8m) 2 £40.1m (€45.3m)
UK - direct development 1 £3.5m 2 £11.0m
UK - asset management 15 £12.7m 7 £5.3m
UK - investment - - - -
Total pipeline 17 £29.3m 11 £56.4m
NZC direct developments
Over the course of 2022 the Group has continued to make good progress with the
construction of its first NZC development at Croft Primary Care Centre, West
Sussex, with a total development cost of £6.2 million with costs remaining to
complete the project of £2.8 million.
In addition, the Group has a significantly advanced pipeline across three
development projects with an estimated cost of approximately £14.5 million
which we expect to be on-site with in 2023, together with a wider medium term
pipeline at various stages of progress across a further 2 projects with an
estimated cost of approximately £20 million (31 December 2021: six
projects/£46 million).
PHP expects that all future direct developments will be constructed to NZC
standards.
Forward funded developments
During the year, the two forward funded developments in Ireland at
Enniscorthy, County Wexford, and Arklow, County Wicklow achieved practical
completion in March and August 2022 respectively. Both schemes have been built
to nearly Zero Energy Buildings ("nZEB") standards in Ireland.
We currently do not have any forward funded developments on-site.
Rental growth
PHP's sector-leading metrics remain good and we continue to focus on
delivering the organic rental growth that can be derived from our existing
assets. This growth arises mainly from rent reviews and asset management
projects (extensions, refurbishments and lease re-gears) which provide an
important opportunity to increase income, extend lease terms and avoid
obsolescence whilst ensuring that they continue to meet the communities'
healthcare needs and improve the properties' ESG credentials.
2022 was a record year for organic rental growth from our existing portfolio
with income increasing by £3.3 million (2021: £2.4 million) or 2.4% (2021:
1.8%) on a like-for-like basis. The progress continues the improving outlook
seen over the last couple of years and it should be noted that most of the
increase comes from rent reviews arising in the period 2018 to 2020, a period
when rental growth was muted and not reflecting the higher levels of
construction cost and general inflation experienced in recent years. We have
also seen the improving rental growth outlook reflected in the valuation of
the portfolio with the independent valuers' assessment of estimated rental
values ("ERV") increasing by 2.2% in 2022 (2021: 1.9%).
We believe the significant increases in construction costs together with
suppressed levels of rental growth in the sector, seen in recent years, will
be a significant pull factor to future growth especially as the NHS seeks to
deliver new larger, purpose-built primary care facilities and modernise the
existing estate.
Rent review performance
In the UK, the Group completed 318 (2021: 375) rent reviews with a combined
rental value of £42.2 million (2021: £49.5 million), adding £2.8 million
(2021: £2.0 million) and delivering an average uplift of 6.7% (2021: 4.0%)
against the previous passing rent. In addition, a further 286 (2021: 236) open
market reviews have been agreed in principle, which will add another £1.7
million (2021: £1.7 million) to the contracted rent roll when concluded and
represents an uplift of 4.1% (2021: 4.9%) against the previous passing rent.
69% of our rents are reviewed on an open market basis which typically takes
place every three years. The balance of the PHP portfolio has either indexed
(25%) or fixed uplift (6%) based reviews which also provide an element of
certainty to future rental growth within the portfolio. Approximately
one-third of indexed linked reviews in the UK are subject to caps and collars
which typically range from 2% to 4%.
In Ireland, we concluded 13 index-based reviews, adding a further £0.2
million (€0.2 million), an uplift of 9.2% against the previous passing rent.
In Ireland, all reviews are linked to the Irish Consumer Price Index, upwards
and downwards, with reviews typically every five years. Leases to the HSE and
other government bodies, which comprise 74% of the income in Ireland, have
increases and decreases capped and collared at 25% over a five-year period.
The growth from reviews completed in the year, noted above, is summarised
below:
Review type Number Previous rent Rent increase % increase total % increase annualized
(per annum) (per annum) % %
£ million £ million
UK - open market(1) 186 26.2 1.2 4.6 1.5
UK - indexed 118 13.2 1.4 11.0 7.4
UK - fixed 14 2.8 0.2 6.2 3.1
UK - total 318 42.2 2.8 6.7 3.4
Ireland - indexed 13 1.8 0.2 9.2 2.6
Total - all reviews 331 44.0 3.0 6.8 3.4
(1) - includes 33 reviews where no uplift was achieved.
At 31 December 2022 the rent at 656 (2021: 635) tenancies, representing £90.2
million (2021: £84.9 million) of passing rent, was under negotiation and the
large number of outstanding reviews reflects the requirement for all awards to
be agreed with the District Valuer. A great deal of evidence to support open
market reviews comes from the completion of historical rent reviews, and the
rents set on delivery of new properties into the sector. We continue to see
positive momentum in the demand, commencement and delivery for new,
purpose-built premises which are being supported by NHS initiatives to
modernise the primary care estate.
Asset Management Projects
During 2022, we completed ten asset management projects and 23 lease re-gears
and have a further ten projects currently on site to enhance and extend
existing assets within PHP's portfolio. These initiatives will increase rental
income by £0.5 million (2021: £0.4 million) investing £17.5 million (2021:
£15.0 million) and extending the leases back to 19 years.
PHP continues to work closely with its occupiers and has a strong pipeline of
22 similar projects which are at are an advanced stage and being progressed to
further increase rental income and extend unexpired occupational lease terms.
The asset management pipeline will require the investment of approximately
£18.0 million, generating an additional £0.9 million of rental income and
extending the WAULT on those premises back to an average of 20 years.
The Company will continue to invest capital in a range of physical extensions
or refurbishments through asset management projects which help avoid
obsolescence, including improving energy efficiency, and are key to
maintaining the longevity and security of our income through long term
occupier retention, increased rental income and extended occupational lease
terms, adding to both earnings and capital values.
Sector-leading portfolio metrics
The portfolio's annualised contracted rent roll at 31 December 2022 was
£145.3 million (2021: £140.7 million), an increase of £4.6 million or +3.3%
(2021: £5.5 million or +4.1%) in the year driven predominantly by organic
rent reviews and asset management projects of £3.3 million (2021: £2.4
million). Acquisitions and developments in the year added a further £2.5
million (2021: £4.1 million) although this increase was offset by the sale of
13 smaller properties in the year which resulted in the loss of £1.4 million
(2021: £0.1 million) of income.
The security and longevity of our income are important drivers of our
predictable cash-flows and underpin our progressive dividend policy.
Security: PHP continues to benefit from secure, long term cash flows with 89%
(2021: 90%) of its rent roll funded directly or indirectly by the NHS in the
UK or the HSE in Ireland. The portfolio also continues to benefit from an
occupancy rate of 99.7% (2021: 99.7%).
Rental collections: These continue to remain robust and as at 20 February 2023
98% had been collected in both the UK and Ireland for the first quarter of
2023. This is in line with collection rates experienced in both 2022 and 2021
which now stand at over 99% for both countries. The balance of rent due for
the first quarter of 2023 is expected to be received shortly.
Longevity: The portfolio's WAULT at 31 December 2022 was 11.0 years (31
December 2021: 11.6 years). Only £11.0 million or 7.6% of our income expires
over the next three years, of which c. 75% is either subject to a planned
asset management initiative or terms have been agreed to renew the lease.
£66.5 million or 45.8% expires in over ten years. The table below sets out
the current lease expiry profile of our income:
Income subject to expiry £ million %
< 3 years 11.0 7.6
4 - 5 years 13.7 9.4
5 - 10 years 54.1 37.2
10 - 15 years 31.4 21.6
15 - 20 years 22.4 15.4
> 20 years 12.7 8.8
Total 145.3 100.0
Valuation and returns
At 31 December 2022, the Group's portfolio comprised 513 (31 December 2021:
521) assets independently valued at £2.796 billion (31 December 2021: £2.796
billion). After allowing for acquisition costs and capital expenditure on
forward funded developments and asset management projects, the portfolio
generated a valuation deficit of £64.4 million or -2.4% (2021: surplus of
£110.2 million or +4.1%).
The valuation deficit of £64.4 million in the year was driven primarily by a
loss arising from yield expansion of approximately £134 million partially
offset by gains of approximately £70 million arising from an improving rental
growth outlook and asset management projects.
During the year the Group's portfolio NIY has expanded by 18bps to 4.82% (31
December 2021: 4.64%) and the true equivalent yield increased to 4.89% at 31
December 2022 (31 December 2021: 4.74%).
In July 2022, the Group disposed of 13 smaller medical centres, located across
England and Wales, generating a profit of £2.9 million (2021: £0.3 million)
net of sales costs. The sale price was 13% above 31 December 2021 book values
and represented 60bps of yield compression.
At 31 December 2022, the portfolio in Ireland comprised 20 standing and fully
let properties with no developments currently on site, valued at £230.9
million or €260.8 million (31 December 2021: 20 assets/£213.0 million or
€253.4 million). At 31 December 2022, the portfolio in Ireland has been
valued at a NIY of 5.2% (31 December 2021: 5.1%).
Despite the fall in values during the year the portfolio's average lot size
remained unchanged at £5.4 million (31 December 2021: £5.4 million) and
87.6% of the portfolio is valued at over £3.0 million. The Group only has
five assets valued at less than £1.0 million.
Number of Valuation Average
properties £ million % lot size (£ million)
> £10m 55 869.5 31.1 15.8
£5m - £10m 138 948.9 34.0 6.9
£3m - £5m 158 628.5 22.5 4.0
£1m - £3m 157 341.5 12.2 2.2
< £1m (including land £1.3m) 5 4.7 0.2 0.7
Total(1) 513 2,793.1 100.0 5.4
(1) Excludes the £3.2 million impact of IFRS 16 Leases with ground rents
recognised as finance leases.
The valuation deficit and profit on sales, combined with the portfolio's
growing income, resulted in a total property return of 2.8% for the year
(2021: 9.5%). The total property return in the year compares with the MSCI UK
Monthly Property Index of -10.4% for 2022 (2021: +20.0%).
Year ended Year ended
31 December 2022 31 December 2021
Income return 5.0% 5.2%
Capital return (2.2%) 4.3%
Total return 2.8% 9.5%
FINANCIAL REVIEW
PHP's adjusted earnings increased by £5.5 million or 6.6% to £88.7 million
in 2022 (2021: £83.2 million). The increase reflects the continued positive
rental growth from organic rent reviews and asset management projects together
with interest cost savings arising from various refinancing and hedging
initiatives put in place in 2021 and the early part of 2022.
Using the weighted average number of shares in issue in the year the adjusted
earnings per share increased to 6.6 pence (2021: 6.2 pence), an increase of
6.5%.
A revaluation deficit of £64.4 million (2021: surplus of £110.2 million) was
partially offset by a profit on sales of £2.9 million (2021: £0.3 million).
A gain on the fair value of interest rate derivatives and convertible bonds
together with the amortisation of the fair value adjustment on the MedicX
fixed rate debt at acquisition of £29.7 million (2021: gain of £9.5 million)
contributed to the profit before tax as reported under IFRS of £56.9 million
(2021: £141.6 million).
The financial results for the Group are summarised as follows:
Summarised results Year ended Year ended
31 December 2022 31 December 2021
£ million £ million
Net rental income 141.5 136.7
Administrative expenses (9.6) (10.5)
Operating profit before revaluation and net financing costs 131.9 126.2
Net financing costs (43.2) (43.0)
Adjusted earnings 88.7 83.2
Revaluation (deficit) / surplus on property portfolio (64.4) 110.2
Profit on sales 2.9 0.3
Fair value gain on interest rate derivatives and convertible bond 26.8 1.6
Amortisation of MedicX debt MtM at acquisition 2.9 7.9
Termination payment and impairment of goodwill on acquisition of Nexus - (35.3)
Nexus acquisition costs - (1.7)
Early termination cost on refinancing of Aviva debt - (24.6)
IFRS profit before tax 56.9 141.6
Corporation tax 0.2 (0.1)
Deferred tax provision (0.8) (1.4)
IFRS profit after tax 56.3 140.1
Net rental income receivable in the year increased by 3.5% or £4.8 million to
£141.5 million (2021: £136.7 million).
Excluding service charge costs recoverable, property and administrative costs
increased by £1.6 million or 11.8% to £15.2 million (2021: £13.6 million).
The increase in costs arose as a result of additional rent review fees payable
to agents arising from the improving rental growth, ESG costs, additional
staff recruited, inflationary pressures and utility costs, together with £0.7
million of one-off property repairs and development abortive costs; partially
offset by lower performance related pay as a result of the decreased total
returns in the year. Notwithstanding the increase in costs in the year they
continue to be closely controlled and monitored and the Group's EPRA cost
ratio continues to be the lowest in the sector at 9.9%, a slight increase over
9.3% in 2021.
EPRA cost ratio Year ended Year ended
31 December 2022 31 December 2021
£ million £ million
Gross rent less ground rent, service charge and other income 147.0 139.6
Direct property expense 12.6 8.9
Less: service charge costs recovered (7.0) (5.8)
Non-recoverable property costs 5.6 3.1
Administrative expenses 9.6 10.5
Less: ground rent (0.2) (0.2)
Less: other operating income (0.4) (0.4)
EPRA costs (including direct vacancy costs) 14.6 13.0
EPRA cost ratio 9.9% 9.3%
Total expense ratio (administrative expenses as a percentage of gross asset 0.3% 0.4%
value)
Despite net debt increasing in the year by £61.8 million as a result of
continued investment, net finance costs in the year increased by just £0.2
million to £43.2 million (2021: £43.0 million), reflecting the reductions in
the average cost of debt achieved from various refinancing and hedging
initiatives in both 2021 and the early part of 2022.
Shareholder value and total accounting return
The Adjusted Net Tangible Assets ("NTA") per share declined by 4.1 pence or
-3.5% to 112.6 pence (31 December 2021: 116.7 pence per share) during the year
with the revaluation deficit, partially offset by profit on sales, of £61.5
million or -4.6 pence per share being the main reason for the decrease.
Dividends distributed in the year were 102% covered by recurring adjusted
earnings resulting in a further 0.1 pence accretion to NTA. The impact of
foreign exchange movements and shares issued via the scrip dividend scheme
added a further 0.4 pence to NTA.
The total adjusted NTA (NAV) return per share, including dividends
distributed, in the year was 2.4 pence or 2.1% (2021: 10.0 pence or 8.9%).
Over the last five years, including the impact of our merger with MedicX in
2019, we have delivered a total NAV return of 41.2%.
The table below sets out the movements in the Adjusted NTA and EPRA Net
Disposal Value ("NDV") per share over the year under review.
Adjusted Net Tangible Assets ("NTA") per share 31 December 2022 pence per share 31 December 2021 pence per share
Opening Adjusted NTA per share 116.7 112.9
Adjusted earnings for the year 6.6 6.2
Dividends paid (6.5) (6.2)
Revaluation of property portfolio and profit on sales (4.6) 8.3
Shares issued 0.1 0.2
Foreign exchange movements 0.3 (0.3)
Net impact of Nexus acquisition - (2.4)
Net impact of Aviva refinancing - (1.9)
Interest rate derivative transactions - (0.1)
Closing Adjusted NTA per share 112.6 116.7
Fixed rate debt and swap mark-to-market value 8.7 (4.1)
Convertible bond fair value adjustment 2.1 (1.6)
Deferred tax (0.1) (0.3)
Closing EPRA NDV per share 123.3 110.7
Financing
During the year the Group renewed all of its shorter dated revolving credit
facilities, maturing in 2023 and 2024, for a further three-year term with
options to extend by a further year at both the first and second anniversaries
of each facility, including Santander (£50 million), Barclays (£100 million)
and HSBC (£100 million). The Lloyds revolving credit facility was also
increased by £50 million to £100 million and renewed for a further
three-year term. There were no increases in existing credit margins on renewal
of the above facilities and the new HSBC facilities margin will potentially
benefit from a sustainability linked discount.
Considering the volatile interest rate and economic outlook the above
addresses any short term refinancing risk faced by the Group in the next two
years.
In February 2022, the Group issued a new €75 million (£64.6 million)
secured private placement loan note to MetLife for a twelve-year term at a
fixed rate of 1.64%. The loan notes have the option to be increased by a
further €75 million to €150 million over the next three years at the
lender's discretion. The proceeds will be used to finance the Group's
continued investment in Ireland.
As at 31 December 2022, total available loan facilities were £1,607.0 million
(31 December 2021: £1,550.5 million) of which £1,290.4 million (31 December
2021: £1,232.9 million) had been drawn. Cash balances of £29.1 million (31
December 2021: £33.4 million) resulted in Group net debt of £1,261.3 million
(31 December 2021: £1,199.5 million). Contracted capital commitments at the
balance sheet date and post period end transactions totalled £19.8 million
(31 December 2021: £29.8 million) and resulted in headroom available to the
Group of £325.9 million (31 December 2021: £321.2 million).
Capital commitments and post period end transactions comprise costs to
complete development and asset management projects on site of £2.8 million
and £9.9 million respectively together with the acquisition of Axis Technical
Services Limited, in January 2023, for a maximum cost of £7.1 million (€8.0
million).
The Group's key debt metrics are summarised in the table below:
Debt metrics 31 December 2022 31 December 2021
Average cost of debt - drawn 3.2% 2.9%
Average cost of debt - fully drawn 3.5% 2.7%
Loan to value 45.1% 42.9%
Loan to value - excluding convertible bond 39.7% 37.5%
Total net debt fixed or hedged 93.7% 100.0%
Net rental income to net interest cover 3.3 times 3.2 times
Weighted average debt maturity - all facilities 6.4 years 7.3 years
Weighted average debt maturity - drawn facilities 7.3 years 8.2 years
Total drawn secured debt £1,140.4m £1,082.9m
Total drawn unsecured debt £150.0m £150.0m
Total undrawn facilities and available to the Group(1) £325.9m £321.2m
Unfettered assets £86.7m £104.9m
(1) - After deducting capital commitments.
Average cost of debt
The Group's average cost of debt rose as at 31 December 2022 to 3.2% (31
December 2021: 2.9%) following the recent and rapid increases in 3-month SONIA
interest rates during 2022 which are used to calculate interest on the
unhedged element the Group's revolving credit facilities.
Interest rate exposure
The analysis of the Group's exposure to interest rate risk in its debt
portfolio as at 31 December 2022 is as follows:
Facilities Net debt drawn
£ million % £ million %
Fixed rate debt 1,082.0 67.3 1,082.0 85.8
Hedged by fixed rate interest rate swaps 100.0 6.2 100.0 7.9
Hedged by fixed to floating rate interest rate swaps (200.0) (12.4) (200.0) (15.8)
Total fixed rate debt 982.0 61.1 982.0 77.9
Hedged by interest rate caps 200.0 12.4 200.0 15.8
Floating rate debt - unhedged 425.0 26.5 79.3 6.3
Total 1,607.0 100.0 1,261.3 100.0
Interest rate swap contracts
The Group did not enter into any new interest rate hedging arrangements during
the year.
Accounting standards require PHP to mark its interest rate swaps to market at
each balance sheet date. During the year there was a gain of £2.7 million
(2021: gain of £2.7million) on the fair value movement of the Group's
interest rate derivatives due primarily to increases in interest rates assumed
in the forward yield curves used to value the interest rate swaps. As at 31
December 2022 the mark-to-market ("MtM") value of the swap and cap portfolio
was an asset of £7.1 million (31 December 2021: asset of £4.4 million).
Currency exposure
The Group owns €260.8 million or £230.9 million (31 December 2021: €253.4
million or £213.0 million) of Euro denominated assets in Ireland as at 31
December 2022 and the value of these assets and rental income represented 8%
of the Group's total portfolio. In order to hedge the risk associated with
exchange rates, the Group has chosen to fund its investment in Irish assets
through the use of Euro denominated debt, providing a natural asset to
liability hedge, within the overall Group loan to value limits set by the
Board. At 31 December 2022 the Group had €196.0 million (31 December 2021:
€186.5 million) of drawn Euro denominated debt.
Euro rental receipts are used to first finance Euro interest and
administrative costs and surpluses are used to fund further portfolio
expansion. Given the large Euro to Sterling fluctuations seen in recent years
and continued uncertainty in the interest rate market the Group entered into a
nil-cost FX collar hedge (between €1.1675 and €1.1022: £1) for a two-year
period to cover the approximate Euro denominated net annual income of €10
million per annum, minimising the downside risk of the Euro gaining in value
above €1.1675: £1.
Fixed rate debt mark-to-market ("MtM")
The MtM of the Group's fixed rate debt as at 31 December 2022 was an asset of
£141.3 million (31 December 2021: liability of £58.9 million) equivalent to
10.6 pence per share (31 December 2021: liability of 4.4 pence). The
elimination of the MtM liability and creation of an asset during the year is
due primarily to the significant increases in interest rates assumed in the
forward yield curves used to value the debt in the year. The MtM valuation is
sensitive to movements in interest rates assumed in forward yield curves.
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.
Risk management and principal risks
How PHP assesses its prospects
Risk management overview
Effective risk management is a key element of the Board's operational
processes. Risk is inherent in any business, and the Board has determined the
Group's risk appetite, which is reviewed on an annual basis. Group operations
have been structured in order to accept risks within the Group's overall risk
appetite, and to oversee the management of these risks to minimise exposure
and optimise the returns generated for the accepted risk. The Group aims to
operate in a low risk environment, appropriate for its strategic objective of
generating progressive returns for shareholders. Key elements of maintaining
this low risk approach are:
• investment focuses on the primary healthcare
real estate sector which is traditionally much less cyclical than other real
estate sectors;
• the majority of the Group's rental income is
received directly or indirectly from government bodies in the UK and Ireland;
• the Group benefits from long initial lease
terms, largely with upwards-only review terms, providing clear visibility of
income;
• the Group has a very small (£1.5 million)
exposure as a direct developer of real estate, which means that the Group is
not exposed to risks that are inherent in property development;
• the Board funds its operations so as to
maintain an appropriate mix of debt and equity; and
• debt funding is procured from a range of
providers, maintaining a spread of maturities and a mix of terms so as to fix
or hedge the majority of interest costs.
The structure of the Group's operations includes rigorous, regular review of
risks and how these are mitigated and managed across all areas of the Group's
activities. The Group faces a variety of risks that have the potential to
impact on its performance, position and longer term viability. These include
external factors that may arise from the markets in which the Group operates,
government and fiscal policy, general economic conditions and internal risks
that arise from how the Group is managed and chooses to structure its
operations.
Approach to risk management
Risk is considered at every level of the Group's operations and is reflected
in the controls and processes that have been put in place across the Group.
The Group's risk management process is underpinned by strong working
relationships between the Board and the Management team which enables the
prompt assessment and response to risk issues that may be identified at any
level of the Group's business.
The Board is responsible for effective risk management across the Group and
retains ownership of the significant risks that are faced by the Group. This
includes ultimate responsibility for determining and reviewing the nature and
extent of the principal risks faced by the Group and assessing the Group's
risk management processes and controls. These systems and controls are
designed to identify, manage and mitigate risks that the Group faces but will
not eliminate such risks and can provide reasonable but not absolute
assurance.
The Management team assists the Board in its assessment and monitoring of
operational and financial risks and PHP has in place robust systems and
procedures to ensure risk management is embedded in its approach to managing
the Group's portfolio and operations. PHP has established a Risk Committee
that is formed of members of its senior management team and chaired by the
Chief Financial Officer, who is experienced in the operation and oversight of
risk management processes, with independent standing invitees attending
throughout the year.
The Audit Committee reviews the Group's systems of risk management and their
effectiveness on behalf of the Board. These systems and processes have been in
place for the year under review and remained in place up to the date of
approval of the Annual Report and Accounts.
PHP has implemented a wide-ranging system of internal controls and operational
procedures that are designed to manage risk as effectively as possible, but it
is recognised that risk cannot be totally eliminated. Staff employed by PHP
are intrinsically involved in the identification and management of risk.
Strategic risks are recorded in a risk register and are assessed and rated
within a defined scoring system.
The Risk Committee reports its processes of risk management and rating of
identified and emerging risks to the Audit Committee. The risk register is
reviewed and updated twice annually by the Director: Commercial Finance and
Financial Reporting assisted by members of the Risk Committee, and assesses
inherent and emerging risks the business faces, as well as the residual risk
after specific safeguards, mitigation and/or management actions have been
overlaid.
The risk register forms an appendix to the report which details risks that
have (i) an initial high inherent risk rating, and (ii) higher residual risk
ratings. The Audit Committee in turn agrees those risks that will be managed
by management and those where the Board will retain direct ownership and
responsibility for management and monitoring those risks.
The Board recognises that it has limited ability to control a number of the
external risks that the Group faces, such as government policy, but keeps the
possible impact of such risks under review and considers them as part of its
decision-making process.
Monitoring of identified and emerging risks
In completing this assessment the Board continues to monitor recently
identified and emerging risks and their potential impact on the Group. The
manner in which we have addressed the challenges of the last two years has
demonstrated the resilience of our business model, and our robust risk
management approach, to protect our business through periods of uncertainty
and adapt to a rapidly changing environment.
Since the release of our 2021 full-year results, there is greater global
economic uncertainty. Within the UK, the main challenges facing the economy
are rising interest rates and heightened inflation, compounded by the impact
of the ongoing war in Ukraine and the increasing risk of recession. The
potential adverse impact of these factors on our business includes reduced
demand for our assets impacting property values in the investment market, the
ability for us to continue to execute our acquisition and development strategy
and increased financing costs, which could impact our rental income and
earnings. The Board and key Committees have overseen the Group's response to
the impact of these challenges on our business and the wider economic
influences throughout the year.
The Board has considered the principal risks and uncertainties as set out in
the Annual Report, in light of the challenging macroeconomic environment, and
do not consider that the fundamental principal risks and uncertainties facing
the Group have changed. However, our current assessment is the interest rate
and property market principal risks have increased. Whilst there is still much
uncertainty around the future trajectory of the economy over the coming years,
we have set out in our principal risk tables on the following pages, an update
on the changes to our principal risks and expected impacts on our business of
the macroeconomic uncertainty, and the mitigating actions and controls we have
in place. The Group's continued ability to be flexible to adjust and respond
to these external risks as they evolve will be fundamental to the future
performance of our business.
The Board also considered, at its annual strategy day, emerging risks
affecting the current primary care delivery model, in particular the impact of
digital technologies.
With respect to Brexit and COVID-19, the Board continues to monitor the
situation but does not consider Brexit or COVID-19, in themselves, to
constitute a significant risk to the business.
Our risk management structure
Structure Responsibility
Board Sets strategic objectives and considers risk as part of this process.
Determines appropriate risk appetite levels.
Audit Committee Reports to the Board on the effectiveness of risk management processes and
controls:
External audit
Risk surveys
Health and safety
Insurance
Internal audit
Senior management Implements and monitors risk mitigation processes:
Policies and procedures
Risk management and compliance
Key performance indicators
Specialist third-party reviews
Principal risks and uncertainties
The Board has undertaken a robust assessment of the emerging and principal
risks faced by the Group that may threaten its business model, future
performance, solvency or liquidity and its ability to meet the overall
objective of the Group of delivering progressive returns to shareholders
through a combination of earnings growth and capital appreciation. As a result
of this assessment there have been no changes to the number of principal risks
faced by the business in the year which are all still deemed appropriate;
however, as a result of the current macroeconomic uncertainty noted above, we
have amended risk ratings accordingly. These are set out below and are rated
out of twenty, and presented within the strategic objective that they impact:
Grow property portfolio Commentary on risk in the year Mitigation
1. Property markets and competition In terms of values, the Group has previously benefited from a flight to income The reputation and track record of the Group in the sector mean it is able to
as a consequence of the wider economic uncertainty seen in previous years, source forward funded developments and existing standing investments from
Inherent risk movement in the year: Increased with demand increasing from investors seeking its long term, secure, developers, investors and owner-occupiers.
government backed cash flows against a backdrop of limited supply.
The primary care property market continues to be attractive to investors
As a result, the Group has several formal pipeline agreements and
attracted by the secure, government backed income, low void rates and long A revaluation deficit of -£64.4 million was generated in the year, driven by long-standing development relationships that provide an increased opportunity
lease. NIY widening of 18 bps in the year. to secure developments that come to market in the UK and Ireland.
The emergence of new purchasers in the sector and the recent slowing in the Interest rate volatility, in particular gilts and bonds, have had a negative Despite the unprecedented market conditions faced, the Group continues to have
level of approvals of new centres in the UK may restrict the ability of the impact on the property yields in the sector, despite gilt rates stabilising in a strong, identified pipeline of investment opportunities in the
Group to secure new investments. Q4. This reduces investor sentiment, competition and attractiveness of PHP's UK and Ireland.
assets and consequently impacted valuations.
Inherent risk rating: 15
High
Likelihood is high and impact of occurrence could be major.
Residual risk rating: 6
Medium
The Group's position within the sector and commitment to and understanding of
the asset class mean PHP is aware of a high proportion of transactions in the
market and potential opportunities coming to market.
Active management of the property portfolio generates regular opportunities to
increase income and lease terms and enhance value.
2. Financing Commentary on risk in the year Mitigation
Inherent risk movement in the year: Increased The Company successfully completed five debt refinances during the year, Existing and new debt providers are keen to provide funds to the sector and
entering into a €75 million Euro private placement, refinancing two RCFs of specifically to the Group, attracted by the strength of its cash flows.
The Group uses a mix of shareholder equity and external debt to fund its £100 million each with both Barclays and HSBC, a £50 million RCF with
operations. A restriction on the availability of funds would limit the Group's Santander, as well as extending the RCF facility with Lloyds from £50 million The Board monitors its capital structure and maintains regular contact with
ability to fund investment and development opportunities and implement to £100 million. existing and potential equity investors and debt funders. Management also
strategy.
closely monitors debt markets to formulate its most appropriate funding
Additionally, credit margins agreed on these new facilities remain in line structure.
Furthermore, a more general lack of equity or debt available to the sector with previous facilities, at a weighted average margin of 1.6% across these
could reduce demand for healthcare assets and therefore impact values. five refinances, reiterating the confidence in PHP's business model shown by The terms of the completed revolving credit facilities are three years with
the lending banks. the option to extend for a further two years at the lender's discretion. The
Inherent risk rating: 15
Euro private placement was executed for a twelve-year term, further increasing
The Group's undrawn facilities mean it currently has headroom of £326 PHP's average debt maturity of drawn facilities to 7.3 years.
High million.
Likelihood is high and impact of occurrence could be major. All covenants have been met with regard to the Group's debt facilities and
these all remain available for their contracted term.
Residual risk rating: 8
Medium
The Group takes positive action to ensure continued availability of resource,
maintains a prudent ratio of debt and equity funding and refinances debt
facilities in advance of their maturity.
Manage effectively and efficiently Commentary on risk in the year Mitigation
Lease expiry management Lease terms for all property assets will erode and the importance of active The Asset and Property Management teams meet with occupiers on a regular basis
management to extend the use of a building remains unchanged. to discuss the specific property and the tenant's aspirations and needs for
Inherent risk movement in the year: Unchanged its future occupation.
The bespoke nature of the Group's assets can lead to limited alternative use. Twenty projects either completed or started on site in the period, enhancing
Their continued use as fit-for-purpose medical centres is key to delivering income and extending occupational lease terms.
the Group's strategic objectives.
In addition, there is a strong pipeline of over 22 projects that will be
Inherent risk rating: 12 progressed in 2023 and the coming years.
Medium Only 7.6% of the Group's income expires in the next three years and management
is actively managing these lease expiries.
Likelihood of limited alternative use value is moderate but the impact of
such values could be serious.
Residual risk rating: 8
Medium
Management employs an active asset and property management programme and has a
successful track record of securing enhancement projects and securing
new long term leases.
4. People Commentary on risk in the year Mitigation
Inherent risk movement in the year: Increased With higher inflation forecast to continue into 2023 together with the Succession planning is in place for all key positions and will be reviewed
cost-of-living crisis the risk of losing a highly skilled and specialist staff regularly by the Nomination Committee.
The inability to attract, retain and develop our people to ensure we have the remains at an elevated state.
appropriate skill base in place in order for us to implement our strategy.
Remuneration incentives are in place such as bonuses and an LTIP for Executive
Despite business confidence subsiding in the latter half of 2022, the Directors and senior management to incentivise and motivate the team and are
Inherent risk rating: 12 recruitment market remains competitive. renewed annually and benchmarked to the market.
Medium Notwithstanding the robust financial and operational results in the year, Notice periods are in place for key employees.
current LTIP awards are not expected to meet threshold vesting conditions set
Likelihood and potential impact could be medium. on inception.
Residual risk rating: 9
Medium
The Remuneration Committee has benchmarked remuneration with the help of
remuneration consultants, and reviewed and updated policies to ensure
retention and motivation of the Management team.
5. Responsible business Commentary on risk in the year Mitigation
Inherent risk movement in the year: Unchanged Properties no longer meet occupiers' expected environmental requirements. PHP's ESG credentials remain at the forefront of its strategic planning and it
has established an ESG Committee to review and drive the Group's ESG agenda
Risk of non-compliance with Responsible Business practices and meeting Stakeholders including investors and debt providers see ESG as a key issue and forward. During the year PHP has:
stakeholders' expectations, leading to possible reduced access to debt and want to see a sufficiently developed plan to decarbonise the property
capital markets, weakened stakeholder relationships and reputational damage. portfolio. • reviewed the ESG risk and opportunities
register;
Inherent risk rating: 16 There is a risk that we may not meet the hurdles sought by stakeholders
including equity and debt investors should PHP not focus enough on ESG • completed the climate transition risk assessment
High matters, potentially impacting the funding of the business significantly. as part of TCFD recommendations, quantifying the business impact;
Likelihood is high and impact of occurrence could be major. Additionally, political and regulatory changes to the energy efficiency and • provided staff training covering individual
net carbon neutral targets of corporates are expected to be mandated in the personal development and ESG;
Residual risk rating: 8 short to medium term, notably minimum EPC ratings.
• continued to engage external experts WTW and
Medium Carbon Trust to review our current ESG agenda and appropriateness for a listed
REIT;
The Group is committed to meeting its obligations in line with its Responsible
Business Framework and feels it has introduced sufficient mitigants to • set, monitored and reported sustainability
continue to deliver its objectives. targets and hurdles to ensure acquired assets or asset management schemes meet
specific ESG criteria, with these same criteria aligned to investors and debt
providers;
• implemented Community Impact Fund to support
social prescribing activities at the Group's properties;
• set EPC rating benchmarks to ensure compliance
with the Minimum Energy Efficiency Standard (''MEES'') that could otherwise
impact the quality and desirability of our assets leading to higher voids,
lost income and reduced liquidity; we consider environmental and climate
change risk relating to our assets and commission reports; and
• worked with our occupiers to improve the
resilience of our assets to climate change as well as with contractors which
are required to conform to our responsible development requirements.
Diversified, long term funding
6. Debt financing Commentary on risk in the year Mitigation
Inherent risk movement in the year: Unchanged Negotiations with lenders have confirmed that the Group enjoys the confidence Existing lenders remain keen to finance PHP and new entrants to debt capital
of the lending markets both in terms of the traditional high street lenders markets have increased available resource. Credit margins agreed on new
Without appropriate confirmed debt facilities, PHP may be unable to meet and the bond markets. facilities in the year remain in line with what has been achieved in previous
current and future commitments or repay or refinance debt facilities as they
years, at a weighted average of 1.6% across these five refinances, reiterating
become due. The Company successfully completed five debt refinances during the year, the confidence in PHP's business model shown by the lending banks.
entering into a €75 million Euro private placement, refinancing two RCFs of
Inherent risk rating: 15 £100 million each with both Barclays and HSBC, a £50 million RCF with Management regularly monitors the composition of the Group's debt portfolio to
Santander, as well as extending the RCF facility with Lloyds from £50 million ensure compliance with covenants and continued availability of funds.
Medium to £100 million.
Management regularly reports to the Board on current debt positions and
The likelihood of insufficient facilities is moderate but the impact of such provides projections of future covenant compliance to ensure early warning of
an event would be serious. any possible issues.
Residual risk rating: 8
Medium
The Board regularly monitors the facilities available to the Group and looks
to refinance in advance of any maturity. The Group is subject to the changing
conditions of debt capital markets.
7. Interest rates Commentary on risk in the year Mitigation
Inherent risk movement in the year: Increased Interest rates have increased significantly and been volatile in the second The Group holds the majority of its debt in long term, fixed rate loans and
half of the year because of greater global uncertainty and the uncertain mitigates its exposure to interest rate movements on floating rate facilities
Adverse movement in underlying interest rates could adversely affect the macroeconomic/political environment in the UK. through the use of interest rate swaps.
Group's earnings and cash flows and could impact property valuations.
Interest rates are widely forecast to remain at higher levels for the As at the balance sheet date 94% of drawn debt is fixed or hedged.
Inherent risk rating: 16 foreseeable future, forcing us to critically re-evaluate investment yields on
acquisitions and developments, potentially limiting the Group's ability to MtM valuation on debt and derivative movements do not impact on the Group's
High profitably acquire investment and development opportunities and implement cash flows and are not included in any covenant test in the Group's debt
strategy. facilities.
The likelihood of volatility in interest rate markets is high and the
potential impact if not managed adequately could be major. Higher interest rates, in particular gilts and bonds, are likely to continue The Group continues to monitor and consider further hedging opportunities
having a negative impact on property yields and consequently valuations in in order to manage exposure to rising interest rates.
Residual risk rating: 6 2023, despite some hope being drawn from the fact that the Ten-year gilt has
fallen from the peak of 4.5% in Sept 2022 to 3.6% at the time of reporting.
Medium
Any new variable debt funding needs in 2023 will be subject to variable
The Group is currently well protected against the risk of interest rate rises interest rates, in addition to the 6%, of unhedged variable debt as at 31
but, due to its continued investment in new properties and the need to December 2022.
maintain available facilities, is increasingly exposed to rising interest rate
levels.
Property values are still subject to market conditions which will continue to
be impacted by the interest rate environment.
Deliver progressive returns
8. Potential over-reliance on the NHS and HSE Commentary on risk in the year Mitigation
Inherent risk movement in the year: Unchanged The UK and Irish Governments continue to be committed to the development of The commitment to primary care is a stated objective of both the UK and Irish
primary care services and initiatives to develop new models of care Governments and on a cross-party basis. Never has the modernisation of the
PHP invests in a niche asset sector where changes in healthcare policy, the increasingly focusing on greater utilisation of primary care. primary care estate been more important in order to reduce the huge backlog of
funding of primary care, economic conditions and the availability of finance
treatments, and to avoid patients being directed to understaffed and
may adversely affect the Group's portfolio valuation and performance. Despite the UK's economic outlook and the continued backlog of treatments over-burdened hospitals.
created by the COVID-19 pandemic, staff shortages and recruitment issues that
Inherent risk rating: 12 the NHS faces, we expect the demand for health services to continue to grow, Management engages directly with government and healthcare providers in both
driven by demographics. Despite future government funding levels in the UK and the UK and Ireland to promote the need for continued investment in modern
Medium Ireland likely being impacted by any long term, material change to economic premises.
performance, primary care remains a critical infrastructure with no
Likelihood is low but impact of occurrence may be major. indications of an area being considered for cuts. This continued investment provides attractive long term, secure income streams
that characterises the sector,
Residual risk rating: 8 A fundamental change in government policy could impact how the private sector
leading to stability of values.
regards its investment in this asset class and its willingness to further
Medium deploy private sector resources to improve the quality of primary care PHP continues to appraise and invest in other adjacent, government funded
facilities. healthcare related real estate assets.
Policy risk and general economic conditions are out of the control of the
Board, but proactive measures are taken to monitor developments and to
consider their possible implications for the Group.
9. Foreign exchange risk Commentary on risk in the year Mitigation
Inherent risk movement in the year: Unchanged The Group now has 20 investments in Ireland. Asset values, funding and net The Board has funded and will continue to fund its investments in Ireland with
income are denominated in Euros. Euros to create a natural hedge between asset values and liabilities in
Income and expenditure that will be derived from PHP's investments in Ireland
Ireland.
will be denominated in Euros and may be affected unfavourably by fluctuations The wider macroeconomic and political environment across the world continues
in currency rates, impacting the Group's earnings and portfolio valuation. to cause exchange rate volatility. To hedge out the Euro denominated income exposure PHP has executed a zero cost
Euro foreign exchange cap and collar hedging during 2022 to rates between a
Inherent risk rating: 12 range of €1.1675 : £1 and €1.1022 : £1, for a two-year period to cover
net annual income of €10 million per annum.
Medium
Management closely monitors the Euro to GBP currency rates with its banks to
Likelihood of volatility is high but the potential impact at present is formulate a formal hedging strategy against Irish net cash flow.
relatively low due to the quantum of investment in Ireland, albeit this is
increasing.
Residual risk rating: 4
Low
PHP has implemented a natural hedging strategy to cover balance sheet exposure
and has hedged out the income exposure for the period until July 2024.
Viability statement
In accordance with the 2018 UK Corporate Governance Code, the Board has
assessed the prospects of the Group over the longer term, taking account of
the Group's current position, business strategy, principal risks and outlook.
The Board believes the Company has strong long term prospects, being well
positioned to address the need for better primary care health centres in the
UK and Ireland.
The Directors confirm that, as part of their strategic planning and risk
management processes, they have undertaken an assessment of the viability of
the Group, considering the current position and the potential impact of the
principal risks and prospects over a three-year time horizon. Based on this
assessment, the Directors have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall due over
the period to 31 December 2025. Although individually the Group's assets may
have relatively long unexpired lease terms and will all have a defined asset
management strategy, the Board has undertaken its detailed financial review
over a three-year period because:
• the Group's financial review and budgetary
processes cover a three-year look forward period; and
• occupational leases within the Group's
property portfolio typically have a three-yearly rent review pattern and so
modelling over this period allows the Group's financial projections to include
a full cycle of reversion, arising from open market, fixed and index-linked
rent reviews.
The Group's financial review and budgetary processes are based on an
integrated model that projects performance, cash flows, position and other key
performance indicators including earnings per share, leverage rates, net asset
values per share and REIT compliance over the review period. In addition, the
forecast model looks at the funding of the Group's activities and its
compliance with the financial covenant requirements of its debt facilities.
The model uses a number of key parameters in generating its forecasts that
reflect the Group's strategy and operating processes and the Board's
expectation of market developments in the review period. In undertaking its
financial review, these parameters have been flexed to reflect severe, but
realistic, scenarios both individually and collectively. Sensitivities applied
are derived from the principal risks faced by the Group that could affect
solvency or liquidity.
The sensitivities applied are generally the same as was used for the 31
December 2021 year-end audit which included a 10% decline in valuations, and
2% increase in variable interest rates. We believe these remain realistic
reasonable worst case scenarios, having seen an absolute valuation decline of
4% in H2 2022. Across our various loan facilities valuations would need to
fall by a further £1.2 billion or 42% before the loan to value covenants are
impacted. Despite a 375bp increase in the BOE rate during 2022 and up to the
time of this report, many economists and market consensus is pricing in a
further 50-150bp increase during 2023, before inflation starts decreasing to a
more manageable level. We therefore feel the further 200bp increase in
variable interest rates should remain a sensitivity.
The sensitivities applied are as follows:
• declining attractiveness of the Group's assets
or extenuating economic circumstances impact investment values - valuation
parameter stress tested to provide for a one-off 10%/£282 million fall in
June 2023;
• 15% tenant default rate;
• rental growth assumptions amended to see nil
uplifts on open market reviews;
• variable rate interest rates rise by an
immediate 2% effective from 1 January 2023; and
• tightly controlled NHS scheme approval
restricts investment opportunity - investment quantum flexed to remove
non-committed transactions.
We have assessed the impact of these assumptions on the Group's key financial
metrics over the assessment period including profitability, net debt, loan to
value ratios and available financial headroom which are as follows:
Key metrics at 31 December 2025 31 December Viability
2022 scenario
Loan to value ratio 45.1% 53.8%
Net debt £1,261m £1,443m
Interest cover ratio 3.45x 2.48x
Adjusted net assets £1,505m £1,209m
Available financial headroom £326m £158m
In making its assessment, the Board has made a number of specific assumptions
that overlay the financial parameters used in the Group's models. The Board
has assumed that management will actively manage each of the individual loans
within covenant limits and in addition to the specific impact of new debt
facilities, the Group will be able to refinance or replace other debt
facilities that mature within the review period in advance of their maturity
and on terms similar to those at present. See note 15 to the financial
statements for a profile of the Group's debt maturity.
Harry Hyman
Chief Executive Officer
21 February 2023
Directors' responsibility statement
Statement of Directors' responsibilities in respect of the Group and Company
financial statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors are required to prepare the Group
financial statements in accordance with International Financial Reporting
Standards ("IFRSs") as adopted by the European Union and Article 4 of the IAS
Regulation and have elected to prepare the Parent Company financial statements
in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards and applicable law), including FRS 101
Reduced disclosure framework. Under company law the Directors must not approve
the accounts unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing the Parent Company financial statements, the Directors are
required to:
• select suitable accounting policies and then
apply them consistently;
• make judgements and accounting estimates that
are reasonable and prudent;
• state whether applicable UK Accounting
Standards have been followed, subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going
concern basis unless it is inappropriate to presume that the Company will
continue in business.
• In preparing the Group financial statements,
International Accounting Standard 1 requires that the Directors:
• properly select and apply accounting policies;
• present information, including accounting
policies, in a manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance
with the specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and conditions
on the entity's financial position and financial performance; and
• make an assessment of the Company's ability to
continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in
accordance with the relevant financial reporting framework, give a true and
fair view of the assets, liabilities, financial position and profit of the
Company and the undertakings included in the consolidation taken as a whole;
• the Strategic Report includes a fair review of
the development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they
face; and
• the Annual Report and Financial Statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's position,
performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 21
February 2023 and is signed on its behalf by:
For and on behalf of the Board
Steven Owen
Chairman
21 February 2023
Group statement of comprehensive income
for the year ended 31 December 2022
2022 2021
Notes £m £m
Rental income 154.1 145.6
Direct property expenses (12.6) (8.9)
Net rental income 3 141.5 136.7
Administrative expenses 4 (9.6) (10.5)
Revaluation (deficit)/gain on property portfolio 11 (64.4) 110.2
Profit on sale of land and property 11 2.9 0.3
Total revaluation (deficit)/gain (61.5) 110.5
Operating profit 70.4 236.7
Finance income 5 0.9 0.8
Finance costs 6a (41.2) (35.9)
Early loan redemption finance cost 6a - (24.6)
Termination payment and goodwill impairment on acquisition of Nexus 7 - (35.3)
Nexus acquisition costs 7 - (1.7)
Fair value loss on derivative interest rate swaps and amortisation of hedging 6b (1.9) (1.8)
reserve
Fair value gain on convertible bond 6c 28.7 3.4
Profit before taxation 56.9 141.6
Taxation charge 8 (0.6) (1.5)
Profit after taxation1 56.3 140.1
Other comprehensive income:
Items that may be reclassified subsequently to profit and loss
Fair value gain on interest rate swaps treated as cash flow hedges and 22 4.5 4.5
amortisation of hedging reserve
Exchange gain/(loss) on translation of foreign balances 3.2 (3.4)
Other comprehensive income net of tax1 7.7 1.1
Total comprehensive income net of tax1 64.0 141.2
IFRS earnings per share
Basic 9 4.2p 10.5p
Diluted 9 2.2p 9.8p
Adjusted earnings per share2
Basic 9 6.6p 6.2p
Diluted 9 6.4p 6.1p
1 Wholly attributable to equity shareholders of Primary Health
Properties PLC.
2 See Glossary of Terms.
The above relates wholly to continuing operations.
Group balance sheet
at 31 December 2022
2022 2021
Notes £m £m
Non-current assets
Investment properties 11 2,796.3 2,795.9
Derivative interest rate swaps 17 19.6 5.2
Fixed assets 0.4 0.3
2,816.3 2,801.4
Current assets
Trade and other receivables 12 17.8 17.6
Cash and cash equivalents 13 29.1 33.4
Developments work in progress 1.3 0.7
48.2 51.7
Total assets 2,864.5 2,853.1
Current liabilities
Deferred rental income (29.2) (28.3)
Trade and other payables 14 (32.6) (40.0)
Borrowings: term loans and overdraft 15a (2.3) (2.2)
(64.1) (70.5)
Non-current liabilities
Borrowings: term loans and overdraft 15a (682.5) (700.2)
Borrowings: bonds 15b (614.6) (572.8)
Derivative interest rate swaps 17 (12.5) (0.8)
Head lease liabilities 16 (3.2) (4.5)
Deferred tax liability (5.4) (4.4)
(1,318.2) (1,282.7)
Total liabilities (1,382.3) (1,353.2)
Net assets 1,482.2 1,499.9
Equity
Share capital 19 167.1 166.6
Share premium account 20 479.4 474.9
Merger and other reserves 21 416.7 413.5
Hedging reserve 22 (11.1) (15.6)
Retained earnings 23 430.1 460.5
Total equity1 1,482.2 1,499.9
Net asset value per share
IFRS net assets - basic and diluted 9 110.9p 112.5p
Adjusted net tangible assets2 - basic 9 112.6p 116.7p
Adjusted net tangible assets2 - diluted 9 114.5p 118.6p
1 Wholly attributable to equity shareholders of Primary Health
Properties PLC.
2 See Glossary of Terms.
These financial statements were approved by the Board of Directors on 21
February 2023 and signed on its behalf by:
Richard Howell
Chief Financial Officer
Registered in England Number: 3033634
Group cash flow statement
for the year ended 31 December 2022
2022 2021
Notes £m £m
Operating activities
Profit on ordinary activities after tax 56.3 140.1
Taxation charge 8 0.6 1.5
Finance income 5 (0.9) (0.8)
Finance costs 6a 41.2 35.9
Early loan redemption finance cost 6a - 24.6
Termination payment and goodwill impairment on acquisition of Nexus 7 - 35.3
Nexus acquisition costs 7 - 1.7
Fair value loss on derivatives 6b 1.9 1.8
Fair value loss on convertible bond 6c (28.7) (3.4)
Operating profit before financing costs 70.4 236.7
Adjustments to reconcile Group operating profit before financing to net cash
flows from operating activities:
Revaluation loss/(gain) on property portfolio 11 64.4 (110.2)
Profit on sale of land and property 11 (2.9) (0.3)
Long Term Incentive Plan ("LTIP") - 0.2
Effect of exchange rate fluctuations on operations - -
Fixed rent uplift (0.9) (1.2)
Tax paid 0.2 (0.4)
(Increase) in trade and other receivables (0.7) (0.3)
(Decrease)/increase in trade and other payables (12.9) 15.9
Cash generated from operations 117.6 140.4
Net cash flow from operating activities 117.6 140.4
Investing activities
Payments to acquire and improve investment properties (74.8) (129.6)
Receipts from disposal of properties 27.5 0.3
Cash paid for acquisition of Nexus, including fees - (18.2)
Cash acquired as part of merger - 0.4
Interest received on development loans 1.5 0.7
Net cash flow used in investing activities (45.8) (146.4)
Financing activities
Proceeds from issue of shares - -
Cost of share issues (0.1) (0.1)
Term bank loan drawdowns 15 161.6 335.6
Term bank loan repayments 15 (175.7) (252.8)
Proceeds from bond issues 62.9 -
Loan arrangement fees (3.5) (2.7)
Purchase of derivative financial instruments - (1.9)
Early loan redemption finance cost 6a - (24.6)
Swap interest received 1.4 -
Non-utilisation fees (2.0) (1.8)
Interest paid (39.8) (40.9)
Bank interest received - -
Equity dividends paid net of scrip dividend 10 (81.6) (74.4)
Net cash flow from financing activities (76.9) (63.6)
Decrease in cash and cash equivalents for the year (5.0) (69.6)
Effect of exchange rate fluctuations on Euro-denominated loans and cash 0.7 (0.6)
equivalents
Cash and cash equivalents at start of year 33.4 103.6
Cash and cash equivalents at end of year 13 29.1 33.4
Group statement of changes in equity
for the year ended 31 December 2022
Merger
Share Share and other Hedging Retained
capital premium reserve reserve earnings Total
£m £m £m £m £m £m
1 January 2022 166.6 474.9 413.5 (15.6) 460.5 1,499.9
Profit for the year - - - - 56.3 56.3
Other comprehensive income
Amortisation of hedging reserve - - - 4.5 - 4.5
Exchange gain on translation of foreign balances - - 3.2 - - 3.2
Total comprehensive income - - 3.2 4.5 56.3 64.0
Share issue expenses - (0.1) - - - (0.1)
Share-based awards ("LTIP") - - - - - -
Dividends paid - - - - (81.6) (81.6)
Scrip dividend in lieu of cash 0.5 4.6 - - (5.1) -
31 December 2022 167.1 479.4 416.7 (11.1) 430.1 1482.2
Merger
Share Share and other Hedging Retained
capital premium reserve reserve earnings Total
£m £m £m £m £m £m
1 January 2021 164.4 466.7 400.8 (20.1) 402.6 1,414.4
Profit for the year - - - - 140.1 140.1
Other comprehensive income
Amortisation of hedging reserve - - - 4.5 - 4.5
Exchange gain on translation of foreign balances - - (3.4) - - (3.4)
Total comprehensive income - - (3.4) 4.5 140.1 141.2
Shares issued on acquisition of Nexus 1.5 - 16.1 - - 17.6
Shares issued for other acquisitions 0.1 0.9 - - - 1.0
Share issue expenses - (0.1) - - - (0.1)
Share-based awards ("LTIP") - - - - 0.2 0.2
Dividends paid - - - - (74.4) (74.4)
Scrip dividend in lieu of cash 0.6 7.4 - - (8.0) -
31 December 2021 166.6 474.9 413.5 (15.6) 460.5 1,499.9
Notes to the financial statements
1. Corporate information
The Group's financial statements for the year ended 31 December 2022 were
approved by the Board of Directors on 21 February 2023 and the Group Balance
Sheet was signed on the Board's behalf by the Chairman, Steven Owen. Primary
Health Properties PLC is a public limited company incorporated in England and
Wales and domiciled in the United Kingdom, limited by shares. The Company's
Ordinary Shares are admitted to the Official List of the UK Listing Authority,
a division of the Financial Conduct Authority, and traded on the London Stock
Exchange.
2. Accounting policies
2.1 Basis of preparation
The Group's financial statements have been prepared on the historical cost
basis, except for investment properties, including investment properties under
construction and land and derivative financial instruments that have been
measured at fair value. The Group's financial statements are prepared on the
going concern basis (see page 109 of the Annual Report for further details)
and presented in Sterling rounded to the nearest million.
Statement of compliance
The consolidated financial statements for the Group have been prepared in
accordance with United Kingdom adopted International Accounting Standards and
applied in accordance with the Companies Act 2006 and Article 4 of the
IAS Regulation.
2.2 Standards adopted during the year
The accounting policies adopted are consistent with those of the previous
financial year.
2.3 Summary of significant accounting policies
Basis of consolidation
The Group's financial statements consolidate the financial statements of
Primary Health Properties PLC and its wholly owned subsidiary undertakings.
Subsidiaries are consolidated from the date of their acquisition, being the
date on which the Group obtained control, and continue to be consolidated
until the date that such control ceases. Control is exercised if and only if
an investor has all the following: power over an investee; exposure, or
rights, to variable returns from its involvement with the investee; and the
ability to use its power over the investee to affect the amount of the
investor's returns. The financial statements of the subsidiary undertakings
are prepared for the accounting reference period ending 31 December each year
using consistent accounting policies. All intercompany balances and
transactions, including unrealised profits arising from them, are eliminated
on consolidation.
The individual financial statements of Primary Health Properties PLC and each
of its subsidiary undertakings will be prepared under FRS 101. The use of
IFRSs at Group level does not affect the distributable reserves available to
the Group.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business, being investment property in the United Kingdom and Ireland
leased principally to GPs, government healthcare organisations and other
associated healthcare users.
Foreign currency transactions
Each Group company presents its individual financial statements in its
functional currency. The functional currency of all UK subsidiaries (with the
exception of PHP Euro Private Placement Limited and MXF Properties Ireland
Limited which are Euro) is Sterling and the functional currency of Primary
Health Properties ICAV and its Irish domiciled subsidiaries is Euro.
Transactions in currencies other than an individual entity's functional
currency (foreign currencies) are recognised at the applicable exchange rate
ruling on the transaction date. Exchange differences resulting from settling
these transactions, or from retranslating monetary assets and liabilities
denominated in foreign currencies, are included in the Group Statement of
Comprehensive Income.
Foreign operations
In preparing the Group's consolidated financial statements, the assets and
liabilities of foreign entities are translated into Sterling at exchange rates
prevailing on the balance sheet date. The income, expenses and cash flows of a
foreign entity are translated at the average exchange rate for the period,
unless exchange rates fluctuate significantly during the period, in which case
the exchange rates at the date of transactions are used.
The exchange rates used to translate foreign currency amounts in 2022 are as
follows:
• Group Balance Sheet: £1 = €1.1295 (2021:
€1.1893).
• Group Statement of Comprehensive Income: £1 =
€1.1490 (2021: €1.1778).
Investment properties and investment properties under construction
The Group's investment properties are held for long term investment.
Investment properties and those under construction are initially measured at
cost, including transaction costs. Subsequent to initial recognition,
investment properties and investment properties under construction are stated
at fair value based on market data and a professional valuation made as of
each reporting date. The fair value of investment property does not reflect
future capital expenditure that will improve or enhance the property and does
not reflect future benefits from this future expenditure.
Gains or losses arising from changes in the fair value of investment
properties and investment properties under construction are included in the
Group Statement of Comprehensive Income in the year in which they arise.
Investment properties are recognised on acquisition upon completion of
contract, which is when control of the asset passes to the Group. Investment
properties cease to be recognised when control of the property passes to the
purchaser, which is upon completion of the sales contract. Any gains and
losses arising are recognised in the Group Statement of Comprehensive Income
in the year of disposal.
All costs associated with the purchase and construction of investment
properties under construction are capitalised including attributable interest
and staff costs. Interest is calculated on the expenditure by reference to the
average rate of interest on the Group's borrowings. When properties under
construction are completed the capitalisation of costs ceases and they are
reclassified as investment properties.
The Group may enter into a forward funding agreement with third-party
developers in respect of certain properties under development. In accordance
with these agreements, the Group will make monthly stage payments to the
developer based on certified works on site at that time. Interest is charged
to the developer on all stage payments made during the construction period and
on the cost of the land acquired by the Group at the outset of the development
and taken to the Group Statement of Comprehensive Income in the year in which
it accrues.
Property acquisitions and business combinations
Where a property is acquired through the acquisition of corporate interests,
the Board considers the substance of the assets and activities of the acquired
entity in determining whether the acquisition represents the acquisition of a
business. The basis of the judgement is set out in Note 2.4(b).
Where such acquisitions are not judged to be an acquisition of a business,
they are not treated as business combinations. Rather, the cost to acquire the
corporate entity is allocated between the identifiable assets and liabilities
of the entity based on their relative fair values on the acquisition date.
Accordingly, no goodwill or additional deferred taxation arises. Where any
excess of the purchase price of business combinations over the fair value of
the assets, liabilities and contingent liabilities is acquired, goodwill is
recognised. This is recognised as an asset and is reviewed for impairment
immediately, and then at least annually. Any impairment is recognised
immediately in the income statement.
Gains on sale of properties
Gains on sale of properties are recognised on the completion of the contract,
and are calculated by reference to the carrying value at the end of the
previous reporting period, adjusted for subsequent capital expenditure and
sale costs.
Net rental income
Rental income arising from operating leases on investment properties is
accounted for on a straight line basis over the lease term. An adjustment to
rental income is recognised from the rent review date of each lease in
relation to unsettled rent reviews. Such adjustments are accrued at 100%
(2021: 100%) of the additional rental income that is expected to result from
the review. For leases which contain fixed or minimum deemed uplifts, the
rental income is recognised on a straight line basis over the lease term.
Incentives for lessees to enter into lease agreements are spread evenly over
the lease terms, even if the payments are not made on such a basis. Rental
income is measured at the fair value of the consideration receivable,
excluding discounts, rebates, VAT and other sales taxes or duty.
Net rental income is the rental income receivable in the period after payment
of direct property costs.
Interest income
Revenue is recognised as interest accrues, using the effective interest method
(that is, the rate that exactly discounts estimated future cash receipts
through the expected life of the financial instrument to the net carrying
amount of the financial asset).
Financial instruments under IFRS 9
Trade receivables
Trade receivables are recognised and carried at amortised cost as the Group's
business model is to collect the contractual cash flows due from tenants.
Provision is made based on the expected credit loss model which reflects the
Group's historical credit loss experience over the past three years but also
reflects the lifetime expected credit loss.
Cash and cash equivalents
Cash and cash equivalents are defined as cash and short term deposits,
including any bank overdrafts, with an original maturity of three months or
less, measured at amortised cost.
Trade and other payables
Trade payables are recognised and carried at their invoiced value inclusive of
any VAT that may be applicable.
Bank loans and borrowings
All loans and borrowings are initially measured at fair value less directly
attributable transaction costs. After initial recognition, all
interest-bearing loans and borrowings are subsequently measured at amortised
cost, using the effective interest method.
The interest due within the next twelve months is accrued at the end of the
year and presented as a current liability within trade and other payables.
Borrowing costs
Borrowing costs that are separately identifiable and directly attributable to
the acquisition or construction of an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale are
capitalised as part of the cost of the respective assets. All other borrowing
costs are expensed in the period in which they occur. Borrowing costs consist
of interest and other costs the Group incurs in connection with the borrowing
of funds.
Convertible bond
The convertible bond is designated as "at fair value through profit or loss"
and so is presented on the Group Balance Sheet at fair value with all gains
and losses, including the write-off of issuance costs, recognised in the Group
Statement of Comprehensive Income. The fair value of the convertible bond is
assessed in accordance with level 1 valuation techniques as set out within
"Fair value measurements" within these accounting policies. The interest
charge in respect of the coupon rate on the bond has been recognised within
the underlying component of net financing costs on an accruals basis. Refer to
Note 15b for further details. The amount of the change in fair value of the
financial liability designated at fair value through profit or loss that is
attributable to changes in credit risk will be recognised in other
comprehensive income.
De-recognition of financial assets and liabilities
Financial assets
A financial asset (or where applicable a part of a financial asset or part of
a group of similar financial assets) is de‑recognised where:
• the rights to receive cash flows from the
asset have expired; or
• the Group retains the right to receive cash
flows from the asset, but has assumed an obligation to pay them in full
without material delay to a third party under a "pass-through" arrangement; or
• the Group has transferred its right to receive
cash flows from the asset and either: (a) has transferred substantially all
the risks and rewards of the asset; or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but has
transferred control of the asset; or
• the cash flows are significantly modified.
Where the Group has transferred its rights to receive cash flows from an asset
and has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset is
recognised to the extent of the Group's continuing involvement in the asset.
Continuing involvement that takes the form of a guarantee over the transferred
asset is measured at the lower of the original carrying amount of the asset
and the maximum amount of consideration that the Group could be required to
repay.
Financial liabilities
A financial liability is de-recognised when the obligation under the liability
is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same
lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a
de-recognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognised
in profit or loss.
When the exchange or modification of an existing financial liability is not
accounted for as an extinguishment, any costs or fees incurred adjust the
liability's carrying amount and are amortised over the modified liability's
remaining term and any difference in the carrying amount after modification is
recognised as a modification gain or loss.
Tax
Taxation on the profit or loss for the period not exempt under UK REIT
regulations comprises current and deferred tax. Taxation is recognised in the
Group Statement of Comprehensive Income except to the extent that it relates
to items recognised as direct movements in equity, in which case it is also
recognised as a direct movement in equity.
Current tax is the expected tax payable on any non-REIT taxable income for the
period, using tax rates enacted or substantively enacted at the balance sheet
date, and any adjustment to tax payable in respect of previous years.
Fair value measurements
The Group measures certain financial instruments such as derivatives, and
non-financial assets such as investment property, at fair value at the end of
each reporting period. Also, fair values of financial instruments measured at
amortised cost are disclosed in the financial statements.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The fair value measurement is based on the presumption
that the transaction to sell the asset or transfer the liability takes place
either:
• in the principal market for the asset or
liability; or
• in the absence of a principal market, in the
most advantageous market for the asset or liability.
The Group must be able to access the principal or the most advantageous market
at the measurement date.
The fair value of an asset or liability is measured using the assumptions that
market participants would use when pricing the asset or liability, assuming
that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market
participant's ability to generate economic benefits using the asset in its
highest and best use or by selling it to another market participant that would
use the asset in its highest and best use.
The Group uses valuation techniques at three levels that are appropriate in
the circumstances and for which sufficient data is available to measure fair
value, maximising the use of relevant observable inputs and minimising the use
of unobservable inputs significant to the fair value measurement as a whole:
Level 1: Quoted (unadjusted) market prices in active markets for
identical assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Group determines whether transfers have occurred
between levels in the hierarchy by reassessing categorisation at the end of
each reporting period.
Hedge accounting
At the inception of a transaction the Group documents the relationship between
hedging instruments and hedged items, as well as its risk management
objectives and strategy for undertaking various hedging transactions. The
Group also documents its assessment, both at inception and on an ongoing
basis.
For cash flow hedging, the Group monitors the hedging instrument to check it
continues to meet the criteria of IAS 39, having applied the practical
expedient on transition, for being described as "highly effective" in
offsetting changes in the fair values or cash flows of hedged items.
For net investment hedge relationships, the Group monitors the hedging
instrument to check it continues to meet the criteria of IAS 39 for being
described as "highly effective".
i) Derivative financial instruments (the "derivatives")
The Group uses interest rate swaps to help manage its interest rate risk.
All interest rate derivatives are initially recognised at fair value at the
date the derivative is entered into and are subsequently remeasured at fair
value. The fair values of the Group's interest rate swaps are calculated by
Chatham (formally JCRA), an independent specialist which provides treasury
management services to the Group.
The method of recognising the resulting gain or loss depends on whether the
derivative is designated as an effective hedging instrument:
• Where a derivative is designated as a hedge of
the variability of a highly probable forecast transaction, such as an interest
payment, the element of the gain or loss on the derivative that is an
"effective" hedge is recognised directly in equity. When the forecast
transaction subsequently results in the recognition of a financial asset or a
financial liability, the associated gains or losses that were recognised
directly in the cash flow hedging reserve are reclassified into the Group
Statement of Comprehensive Income in the same period or periods during which
the asset acquired or liability assumed affects the Group Statement of
Comprehensive Income, i.e. when interest income or expense is recognised.
• The gain or loss on derivatives that do not
meet the strict criteria for being "effective" and so do not qualify for hedge
accounting and the non-qualifying element of derivatives that do qualify for
hedge accounting are recognised in the Group Statement of Comprehensive Income
immediately. The treatment does not alter the fact that the derivatives are
economic hedges of the underlying transaction.
For swaps that have been cancelled which previously qualified for hedge
accounting, the remaining value within the cash flow hedging reserve at the
date of cancellation is recycled to the Group Statement of Comprehensive
Income on a straight line basis from the date of cancellation to the original
swap expiry date where the hedged transaction is still expected to occur. If
the swaps have been cancelled and the hedged transaction is no longer expected
to occur, the amount accumulated in the hedging reserve is reclassified to
profit and loss immediately.
Leases - Group as a lessor
The vast majority of the Group's properties are leased out under operating
leases and are included within investment properties. Rental income, including
the effect of lease incentives, is recognised on a straight line basis over
the lease term.
Where the Group transfers substantially all the risks and benefits of
ownership of the asset, the arrangement is classified as a finance lease and a
receivable is recognised for the initial direct costs of the lease and the
present value of the minimum lease payments. Finance income is recognised in
the Group Statement of Comprehensive Income so as to achieve a constant rate
of return on the remaining net investment in the lease. Interest income on
finance leases is restricted to the amount of interest actually received.
Employee costs
Defined contribution pension plans
Obligations for contributions to defined contribution pension plans are
charged to the income statement as incurred.
Share-based employee remuneration
The fair value of equity-settled share-based payments to employees is
determined with reference to the fair value of the equity instruments at the
date of grant and is expensed on a straight line basis over the vesting
period, based on the Group's estimate of shares or options that will
eventually vest. The fair value of awards is equal to the market value at
grant date.
Capitalised salaries
Certain internal staff and associated costs directly attributable to the
management of major projects are capitalised. Internal staff costs are
capitalised from the start of the project until the date of practical
completion.
Properties held for sale
Investment property (and disposal groups) classified as held for sale are
measured at fair value consistent with other investment properties.
Investment property and disposal groups are classified as held for sale if
their carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale
is highly probable, and the asset (or disposal group) is available for
immediate sale in its present condition. Management must be committed to the
sale which should be expected to qualify for recognition as a completed sale
within one year from the date of classification.
Capitalised costs
A capitalised cost is an expense added to the cost basis of a fixed asset on
the Balance Sheet. Capitalised costs are incurred when purchasing fixed assets
following matching principle of accounting to record expenses in the same
period as related revenues or useful life of an asset. The historical costs
are recorded on the Balance Sheet and depreciated over the useful life of an
asset.
2.4 Significant accounting estimates and judgements
The preparation of the Group financial statements requires management to make
a number of estimates and judgements that affect the reported amounts of
assets and liabilities and may differ from future actual results. The
estimates and judgements that are considered most critical and that have a
significant inherent risk of causing a material adjustment to the carrying
amounts of assets and liabilities are:
a) Estimates
Fair value of investment properties
Investment properties include: (i) completed investment properties; and (ii)
investment properties under construction. Completed investment properties
comprise real estate held by the Group or leased by the Group under a finance
lease in order to earn rental income or for capital appreciation, or both.
The fair market value of a property is deemed by the independent property
valuer appointed by the Group to be the estimated amount for which a property
should exchange, on the date of valuation, in an arm's length transaction.
Properties have been valued on an individual basis, assuming that they will be
sold individually over time. Allowances are made to reflect the purchaser's
costs of professional fees and stamp duty and tax.
In accordance with RICS Appraisal and Valuation Standards, factors taken into
account are current market conditions, annual rentals, state of repair, ground
stability, contamination issues and fire and health and safety legislation.
Refer to Note 11 of the financial statements which includes further
information on the fair value assumptions and sensitivities.
In determining the fair value of investment properties under construction the
valuer is required to consider the significant risks which are relevant to the
development process including, but not limited to, construction and letting
risks. The valuer takes into account any pre-lets and whether construction
risk remains with the respective developer or contractor.
Fair value of derivatives
In accordance with IFRS 9, the Group values its derivative financial
instruments at fair value. Fair value is estimated by Chatham (formerly JCRA)
on behalf of the Group, using a number of assumptions based upon market rates
and discounted future cash flows. The derivative financial instruments have
been valued by reference to the mid-price of the yield curve prevailing on 31
December 2022. Fair value represents the net present value of the difference
between the cash flows produced by the contracted rate and the valuation rate.
Refer to Note 17 of the financial statements.
b) Judgements
Hedge effectiveness
The Group has a number of interest rate swaps that mature after the Group's
bank facilities, to which they relate, are due to expire. In accordance with
IAS 39, in order to apply hedge accounting in relation to these interest rate
swaps, the Group has determined that it is highly probable that these bank
facilities will be renegotiated on or before expiry and that variable interest
rate debt finance will be in place until the expiry date of the swaps.
The Group is exposed to foreign exchange rate movements due to operations in
Ireland. In accordance with IAS 39, in order to apply hedge accounting with
the Euro-denominated cash flows, the Group has determined that it is highly
probable that there will be corresponding Euro bank drawdowns and that these
will be renegotiated on or before expiry.
Property acquisitions during the year
The Directors have reviewed the acquisitions during the year on an individual
basis in accordance with the requirements of IFRS 3(R). Where corporate
entities were acquired through special purpose vehicles for holding properties
rather than separate business entities, these were accounted for as asset
acquisitions. Where business processes inherent in the entities were acquired,
these were accounted for as a business combination.
2.5 Standards issued but not yet effective
At the date of authorisation of these financial statements, the Group has not
applied the following new and revised IFRSs that have been issued but are not
yet effective and in some cases have not yet been adopted by the UK:
• amendments to IAS 1 Classification of
liabilities as current or non-current;
• amendments to IAS 1 Non-current liabilities
with covenants;
• amendments to IFRS 16 Lease Liability in a
Sale and Leaseback;
• amendments to IAS 12 Deferred Tax related to
Assets and Liabilities arising from a Single Transaction;
• IAS 8 Definition of accounting estimates; and
• annual improvements to IFRS standards
2018-2020.
A number of new standards and amendments to standards and interpretations are
effective for annual periods beginning on or after 1 January 2023, but are not
yet applicable to the Group and have not been applied in preparing these
consolidated financial statements. None of these are expected to have a
significant effect on the consolidated financial statements of the Group.
3. Rental and related income
Revenue comprises rental income receivable on property investments in the UK
and Ireland, which is exclusive of VAT. Revenue is derived from one reportable
operating segment and £132.0 million and £13.0 million of rental income is
derived from the UK and Ireland respectively. Details of the lease income are
given below.
Group as a lessor
a) The future minimum lease payments under non-cancellable operating leases
receivable by the Group are as follows:
Less than One to Two to Three to Four to More than Total
one year two years three years four years five years five years £m
£m £m £m £m £m £m
2022 142.9 138.1 133.9 129.6 122.7 910.2 1,577.4
2021 138.6 136.1 130.8 126.3 121.0 859.1 1,511.9
b) The rental income earned on operating leases is recognised on a straight
line basis over the lease term.
The Group leases medical centres to GPs, NHS organisations, the HSE in Ireland
and other healthcare users, typically on long term occupational leases which
provide for regular reviews of rent on an effectively upwards-only basis.
4. Group operating profit is stated after charging
2022 2021
£m £m
Administrative expenses including:
Advisory fees (Note 4a) - 0.1
Staff costs (Note 4b) 5.4 5.2
Performance Incentive Fees (Note 4c) - 1.0
Directors' fees 0.4 0.4
Audit fees
Fees payable to the Company's auditor and its associates for the audit of the 0.5 0.4
Company's annual accounts
Fees payable to the Company's auditor and its associates for the audit of the 0.1 0.1
Company's subsidiaries
Total audit fees 0.6 0.5
Total audit and assurance services 0.6 0.5
Non-audit fees
Fees payable to the Company's auditor and its associates for the interim 0.1 0.1
review
Advisory services - -
Total non-audit fees 0.1 0.1
Total fees 0.7 0.6
a) Advisory fees
On 5 January 2021 the Group completed the acquisition of Nexus and
internalised the management arrangements and consequently payments ceased at
this date with no further amounts payable in relation to advisory fees to
Nexus.
The advisory fees calculated and payable in the year of acquisition to 31
December 2021 were £0.1 million.
The Group shares certain operational services with Nexus. Amounts paid during
the year in relation to these shared services totalled £0.1 million (2021:
£0.1 million).
Refer to Note 7 for further information on the Nexus acquisition.
b) Staff costs
2022 2021
£m £m
Wages and salaries 6.0 5.6
Less staff costs capitalised in respect of development and asset management (1.4) (1.3)
projects
Social security costs 0.6 0.5
Pension costs 0.2 0.1
Equity-settled share-based payments - 0.3
5.4 5.2
The Group operates a defined contribution pension scheme for all employees.
The Group contribution to the scheme during the year was £0.2 million (2021:
£0.1 million), which represents the total expense recognised through the
income statement. As at 31 December 2022, there were no contributions (2021:
£nil) due in respect of the reporting period that had not been paid over to
the plan.
The average monthly number of Group employees during the year was 67 which
included 64 full time and 3 part time employees (2021: 59 which included 56
full time and 3 part time), and as at 31 December 2022 was 65 (2021: 62).
The Executive Directors and Non-executive Directors are the key management
personnel. Full disclosure of Directors' emoluments, as required by the
Companies Act 2006, can be found in the Remuneration Report in the Annual
Report.
The Group's equity-settled share-based payments comprise the following:
Scheme Fair value measure
Long Term Incentive Plan ("LTIP") Face value at grant date
Save As You Earn ("SAYE") Face value at grant date
The Group expenses an estimate of how many shares are likely to vest based on
the market price at the date of grant, taking account of expected performance
against the relevant performance targets and service periods, which are
discussed in further detail in the Remuneration Report.
c) Performance Incentive Fee ("PIF")
Information about the Performance Incentive Fee is provided in the Corporate
Governance section in the Annual Report.
A PIF of £1.2 million was paid in the period in respect of 2021 and at 31
December 2022 the balance on the notional cumulative PIF account was £nil
(2021: £9.2 million), of which £nil (2021: £1.3 million) will become
payable on approval of the Annual Report by the Board. The balance is
conditional on performance in future years and the restrictions noted in the
Financial Review on pages 24 to 28 of the Annual Report.
5. Finance income
2022 2021
£m £m
Interest income on financial assets
Bank interest - -
Development loan interest 0.9 0.8
0.9 0.8
6. Finance costs
2022 2021
£m £m
Interest expense and similar charges on financial liabilities
a) Interest
Bank loan interest 23.0 24.0
Swap interest (1.4) (0.3)
Bond interest 17.5 15.5
Bank facility non-utilisation fees 2.0 1.9
Early loan redemption finance cost - 24.6
Bank charges and loan arrangement fees 3.0 2.7
44.1 68.4
Interest capitalised - -
44.1 68.4
Amortisation of MedicX debt MtM on acquisition (2.9) (7.9)
41.2 60.5
2022 2021
£m £m
b) Derivatives
Net fair value gain on interest rate swaps 2.6 2.7
Amortisation of cash flow hedging reserve (4.5) (4.5)
(1.9) (1.8)
The fair value loss on derivatives recognised in the Group Statement of
Comprehensive Income has arisen from the interest rate swaps for which hedge
accounting does not apply. There was no fair value gain or loss accounted for
directly in equity on derivatives which do meet the hedge effectiveness
criteria under IAS 39 (2021: £nil). An amount of £4.5 million (2021: £4.5
million) has been amortised from the cash flow hedging reserve in the year
resulting from early termination of effective swap contracts (see Note 22).
Details of the fair value loss on hedges which meet the effectiveness criteria
for hedge accounting under IAS 39 are set out in Note 22.
2022 2021
£m £m
c) Convertible bond
Fair value loss on convertible bond fully redeemed in the year - -
Fair value loss on convertible bond issued in the year - -
Fair value gain on existing convertible bond 28.7 3.4
Convertible bond issue costs - -
28.7 3.4
The fair value movement in the convertible bonds is recognised in the Group
Statement of Comprehensive Income within profit before taxation and is
excluded from the calculation of EPRA earnings and EPRA NTA (replacing EPRA
NAV). Refer to Note 15 for further details about the convertible bonds.
2022 2021
£m £m
Net finance costs
Finance income (Note 5) 0.9 0.8
Finance costs (as per above) (41.2) (68.4)
(40.3) (67.6)
Interest capitalised - -
(40.3) (67.6)
Amortisation of MedicX debt MtM on acquisition (2.9) 7.9
(43.2) (59.7)
7. Business combination
On 5 January 2021 the Group's management function was internalised by
acquiring PHP Tradeco Holdings Limited (formerly Nexus Tradeco Holdings
Limited), which is the holding company of its long-standing external property
adviser, PHP Tradeco Limited (formerly Nexus Tradeco Limited), and certain
subsidiaries, including the primary care development business ("Nexus").
Primary Health Properties PLC acquired the entire issued ordinary share
capital of PHP Tradeco Holdings Limited at a total cost of £34.1 million,
including a termination payment of £29.0 million.
The total cost was met by £16.5 million payment in cash, and £17.6 million
satisfied by the issue of 11,485,080 new Ordinary Shares of 12.5 pence each in
the share capital of PHP at the quoted market price on completion of 152.8
pence per share.
The acquisition of PHP Tradeco Holdings Limited for a total fair value of
consideration of £5.1 million resulted in the transfer of certain assets and
liabilities and the fair value of the net liabilities acquired was £1.2
million, resulting in a goodwill on acquisition of £6.3 million.
The acquisition resulted in the termination of the advisory agreement. The
total cost of terminating the Nexus agreement and goodwill on acquisition was
calculated to be £35.3 million (fair value of consideration paid £34.1
million plus fair value of net liabilities acquired £1.2 million) when taking
into account the consideration and the net assets with fair value adjustments.
The goodwill on acquisition of £35.3 million was to effect the termination of
the management agreement with Nexus and reflects the termination notice
period, approximately 2 years and 2.5 months under the management agreement
totalling £29.0 million. The remaining £6.3 million represents a
discretionary payment on account of the acquisition of principally the
management team, assembled workforce, systems, operational platform and
know-how which were "re-branded" from Nexus to PHP.
Book Adjustments Total
value to fair value fair value
£m £m £m
Cash consideration 16.5 - 16.5
Equity instruments 17.6 - 17.6
Total cost 34.1 - 34.1
Less: termination payment - - (29.0)
Fair value of consideration paid - - 5.1
Fair value of net assets acquired
Tangible fixed assets 0.1 - 0.1
Cash and cash equivalents 0.4 - 0.4
Trade and other debtors 1.2 - 1.2
Total assets 1.7 - 1.7
Trade creditors and other creditors (1.4) (1.1) (2.5)
Amounts due to HMRC (0.4) - (0.4)
Total liabilities (1.8) (1.1) (2.9)
Fair value of net assets acquired (0.1) (1.1) (1.2)
Termination payment and goodwill arising on acquisition 35.3
Net cash flow arising on acquisition
Cash consideration 16.5
Acquisition costs 1.7
Less: cash and cash equivalent balances acquired (0.4)
17.8
Acquisition of the Nexus entities contributed £nil revenue and a cost saving
of approximately £3.9 million to the Group's profit for the period between
the date of acquisition and 31 December 2021. If the acquisition had completed
on the first day of the prior financial year, the impact on Group revenues for
that year would have been £nil and the impact on Group profit would have been
a cost saving of approximately £4.0 million.
8. Taxation
a) Taxation charge in the Group Statement of Comprehensive Income
The taxation charge is made up as follows:
2022 2021
£m £m
Current tax
UK corporation tax - -
Irish corporation tax (0.2) 0.1
Deferred tax on Irish activities 0.8 1.4
Total tax 0.6 1.5
The UK corporation tax rate of 19% (2021: 19%) and the Irish corporation tax
rate of 19% (2021: 20%) have been applied in the measurement of the Group's UK
and Ireland related activities tax liability at 31 December 2022.
b) Factors affecting the tax charge for the year
The tax assessed for the year is lower than (2021: lower than) the standard
rate of corporation tax in the UK. The differences are explained below:
2022 2021
£m £m
Profit on ordinary activities before taxation 56.9 141.6
Theoretical tax at UK corporation tax rate of 19% (2021: 19%) 10.8 26.9
REIT exempt income (11.2) (36.4)
Transfer pricing adjustment 7.1 4.7
Termination payment and goodwill impairment on acquisition of Nexus - 7.0
Fair value loss on convertible bond (5.4) (0.6)
Non-taxable items - (0.6)
Losses brought forward utilised (0.6) (0.2)
Difference in Irish tax rates (0.1) 0.7
Taxation charge (Note 8a) 0.6 1.5
The UK REIT rules exempt the profits of the Group's property rental business
from corporation tax.
c) Basis of taxation
The Group elected to be treated as a UK REIT with effect from 1 January 2007.
The UK REIT rules exempt the profits of the Group's property rental business
from corporation tax. Gains on properties are also exempt from tax, provided
they are not held for trading or sold in the three years post completion of
development. The Group will otherwise be subject to corporation tax at 19%
(2021: 19%).
Acquired companies are effectively converted to UK REIT status from the date
on which they become a member of the Group.
As a UK REIT, the Company is required to pay Property Income Distributions
("PIDs") equal to at least 90% of the Group's rental profit calculated by
reference to tax rules rather than accounting standards.
To remain as a UK REIT there are a number of conditions to be met in respect
of the principal company of the Group, the Group's qualifying activities and
the balance of its business. The Group remains compliant as at 31 December
2022.
The Group's activities in Ireland are conducted via Irish companies, a
Guernsey company and an Irish Collective Asset Vehicle ("ICAV"). The Irish
companies pay Irish corporation tax on trading activities and deferred tax is
calculated on the increase in capital values. The Guernsey company pays tax on
its net rental income. The ICAV does not pay any Irish corporation tax on its
profits but a 20% withholding tax is paid on distributions to owners.
9. Earnings per share
Performance measures
In the tables below, we present earnings per share and net assets per share
calculated in accordance with IFRSs, together with our own adjusted measure
and certain measures defined by the European Public Real Estate Association
("EPRA"), which have been included to assist comparison between European
property companies. Two of the Group's key financial performance measures are
adjusted earnings per share and adjusted net tangible assets per share.
Adjusted earnings, which is a tax adjusted measure of revenue profit, is the
basis for the calculation of adjusted earnings per share. We believe adjusted
earnings and adjusted earnings per share provide further insight into the
results of the Group's operational performance to stakeholders as they focus
on the net rental income performance of the business and exclude capital and
other items which can vary significantly from year to year.
Earnings per share
2022 2021
IFRS Adjusted EPRA IFRS Adjusted EPRA
earnings earnings earnings earnings earnings earnings
£m £m £m £m £m £m
Profit after taxation 56.3 56.3 56.3 140.1 140.1 140.1
Adjustments to remove:
Revaluation gain on property portfolio - 64.4 64.4 - (110.2) (110.2)
Profit on sale of land and property - (2.9) (2.9) - (0.3) (0.3)
Fair value movement on derivatives - 1.9 1.9 - 1.8 1.8
Fair value movement and issue costs on convertible bond - (28.7) (28.7) - (3.4) (3.4)
Taxation charge - 0.6 0.6 - 1.5 1.5
Termination payment and goodwill impairment on acquisition of Nexus - - - - 35.3 6.3
Nexus acquisition costs - - - - 1.7 1.7
Early termination fees on bank debt - - - - 24.6 24.6
MtM write-off on early termination of bank debt - - - -- (4.7) -
Amortisation of MtM loss on debt acquired - (2.9) - - (3.2) -
Basic earnings 56.3 88.7 91.6 140.1 83.2 62.1
Dilutive effect of convertible bond (24.3) 4.3 4.3 0.9 4.3 4.3
Diluted earnings 32.0 93.0 95.9 141.0 87.5 66.4
Number of shares
2022 weighted average 2021 weighted average
million million million million million million
Ordinary Shares 1,334.8 1,334.8 1,334.8 1,330.4 1,330.4 1,330.4
Dilutive effect of convertible bond 108.9 108.9 108.9 105.4 105.4 105.4
Diluted Ordinary Shares 1,443.7 1,443.7 1,443.7 1,435.8 1,435.8 1,435.8
Profit/(loss) per share attributable to shareholders:
2022 2021
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Basic 4.2 6.6 6.9 10.5 6.2 4.7
Diluted 2.2 6.4 6.6 9.8 6.1 4.6
Net assets per share
31 December 2022 31 December 2021
IFRS Adjusted EPRA IFRS Adjusted EPRA
£m £m £m £m £m £m
Net assets attributable to shareholders 1,482.2 1,482.2 1,482.2 1,499.9 1,499.9 1,499.9
Derivative interest rate swaps liability - (7.1) (7.1) - (4.4) (4.4)
Deferred tax - 5.4 5.4 - 4.4 4.4
Cumulative convertible bond fair value movement - (7.1) (7.1) - 21.6 21.6
MtM on MedicX loans net of amortisation - 31.4 - - 34.4 -
Net tangible assets ("NTA") 1,482.2 1,504.8 1,473.4 1,499.9 1,555.9 1,521.5
Real estate transfer taxes - - 189.1 - - 189.0
Net reinstatement value ("NRV") - - 1,662.5 - - 1,710.5
Fixed rate debt and swap MtM value - - 172.7 - - (20.1)
Deferred tax - - (5.4) - - (4.4)
Cumulative convertible bond fair value movement - - 7.1 - - (21.6)
Real estate transfer taxes - - (189.1) - - (189.0)
Net disposal value ("NDV") 1,482.2 1,504.8 1,647.8 1,499.9 1,555.9 1,475.4
Ordinary Shares
31 December 2022 31 December 2021
million million million million million million
Issued share capital 1,336.5 1,336.5 1,336.5 1,332.9 1,332.9 1,332.9
Basic net asset value per share1
31 December 2022 31 December 2021
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Net tangible assets ("NTA") 110.9 112.6 110.2 112.5 116.7 114.1
Net reinstatement value ("NRV") - - 124.4 - - 128.3
Net disposal value ("NDV") - - 123.3 - - 110.7
1 The above are calculated on a "basic" basis without the
adjustment for the impact of the convertible bond which is shown in the
diluted basis table below.
Diluted net asset value per share2
31 December 2022 31 December 2021
IFRS Adjusted EPRA IFRS Adjusted EPRA
pence pence pence pence pence pence
Net tangible assets ("NTA") 112.9 114.5 112.3 114.7 118.6 116.2
Net reinstatement value ("NRV") - - 125.4 - - 129.4
Net disposal value ("NDV") 124.4 113.0
2 The Company assesses the dilutive impact of the unsecured
convertible bond, issued by the Group on 15 July 2019, on its net asset value
per share with a current exchange price of 137.69 pence (31 December 2021:
142.29 pence).
Conversion of the convertible bond would result in the issue of 108.9 million
(31 December 2021: 105.4 million) new Ordinary Shares. The IFRS net asset
value and EPRA NDV would increase by £142.9 million (31 December 2021:
£171.6 million) and the EPRA NTA, adjusted NTA and EPRA NRV would increase by
£150.0 million (31 December 2021: £150.0 million). The resulting diluted net
asset values per share are anti-dilutive to all measures and are set out in
the table above.
10. Dividends
Amounts recognised as distributions to equity holders in the year:
2022 2021
£m £m
Quarterly interim dividend paid 25 February 2022 21.0 -
Scrip dividend in lieu of quarterly cash dividend paid 25 February 2022 0.6 -
Quarterly interim dividend paid 20 May 2022 20.6 -
Scrip dividend in lieu of quarterly cash dividend paid 20 May 2022 1.1 -
Quarterly interim dividend paid 19 August 2022 18.1 -
Scrip dividend in lieu of quarterly cash dividend paid 19 August 2022 3.4 -
Quarterly interim dividend paid 25 November 2022 21.9 -
Scrip dividend in lieu of quarterly cash dividend paid 25 November 2022 - -
Quarterly interim dividend paid 26 February 2021 - 18.7
Scrip dividend in lieu of quarterly cash dividend paid 26 February 2021 - 1.8
Quarterly interim dividend paid 21 May 2021 - 17.7
Scrip dividend in lieu of quarterly cash dividend paid 21 May 2021 - 2.9
Quarterly interim dividend paid 20 August 2021 - 18.3
Scrip dividend in lieu of quarterly cash dividend paid 20 August 2021 - 2.4
Quarterly interim dividend paid 26 November 2021 - 19.7
Scrip dividend in lieu of quarterly cash dividend paid 26 November 2021 - 0.9
Total dividends distributed in the year 86.7 82.4
Per share 6.5p 6.2p
On 5 January 2023, the Board declared an interim dividend of 1.675 pence per
Ordinary Share with regard to the year ended 31 December 2022, payable on 23
February 2023. This dividend will comprise wholly of a ordinary dividend of
0.335 pence and Property Income Dividend ("PID") of 1.340 pence.
11. Investment properties and investment properties under construction
Properties have been independently valued at fair value by Avison Young (UK)
Limited, Jones Lang LaSalle and CBRE Chartered Surveyors and Valuers, as at
the balance sheet date in accordance with accounting standards. The valuers
have confirmed that they have valued the properties in accordance with the
Practice Statements in the RICS Appraisal and Valuation Standards 2022 (the
"Red Book"). There were no changes to the valuation techniques during the
year. The valuers are appropriately qualified and have sufficient market
knowledge and relevant experience of the location and category of investment
property and have had full regard to market evidence when determining the
values.
The properties are 99.7% let (2021: 99.7%). The valuations reflected a 4.82%
(2021: 4.64%) net initial yield and a 4.89% (2021: 4.74%) true equivalent
yield. Where properties have outstanding rent reviews, an estimate is made of
the likely rent on review in line with market expectations and the knowledge
of the valuers.
In accordance with IAS 40, investment properties under construction have also
been valued at fair value by the valuers. In determining the fair value, the
valuer is required to value development property as if complete, deduct the
costs remaining to be paid to complete the development and consider the
significant risks which are relevant to the development process including, but
not limited to, construction and letting risks and the impact they may have on
fair value. In the case of the Group's portfolio under construction, where the
sites are pre-let and construction risk remains with the builder/developer,
the valuer has deemed that the residual risk to the Group is minimal. As
required by the Red Book, the valuers have deducted the outstanding cost to
the Group through to the completion of construction of £2.8 million (2021:
£9.0 million) in arriving at the fair value to be included in the financial
statements.
In addition to the above, capital commitments have been entered into amounting
to £9.9 million (2021: £19.0 million) which have not been provided for in
the financial statements.
A fair value increase of £0.6 million (2021: £0.4 million) in respect of
investment property under construction has been recognised in the Group
Statement of Comprehensive Income, as part of the overall total net valuation
loss on the property portfolio in the year of £64.4 million (2021: £110.2
million gain).
Of the £2,793.1 million (2021: £2,791.4 million) valuation, £2,562.2
million (91.7%) (2021: £2,578.4 million) relates to investment properties in
the UK and £230.9 million (8.3%) (2021: £213.0 million) relates to
investment properties in Ireland.
In line with accounting policies, the Group has assessed whether the
acquisitions during the year were asset purchases or business combinations.
Investment
Investment Investment properties -
properties - properties - under
freehold 1 long leasehold construction Total
£m £m £m £m
As at 1 January 2022 2,208.4 568.3 19.2 2,795.9
Property additions 66.8 0.7 10.6 78.1
Property disposals (23.4) (1.2) - (24.6)
Reclassification of freehold and leasehold (27.5) 27.5 - -
Transfer from properties under construction 26.4 - (26.4) -
Impact of lease incentive adjustment 0.8 0.3 - 1.1
Foreign exchange movements 8.9 2.1 0.5 11.5
Lease ground rent adjustment (1.3) - - (1.3)
2,259.1 597.7 3.9 2,860.7
Revaluations for the year (44.6) (20.4) 0.6 (64.4)
As at 31 December 2022 2,214.5 577.3 4.5 2,796.3
As at 1 January 2021 2,061.3 491.4 23.4 2,576.1
Property additions 52.4 48.1 22.4 122.9
Property disposals (2.0) - - (2.0)
Impact of lease incentive adjustment 0.7 0.4 - 1.1
Transfer from properties under construction 23.4 2.9 (26.3) -
Foreign exchange movements (9.7) (2.0) (0.7) (12.4)
2,126.1 540.8 18.8 2,685.7
Revaluations for the year 82.3 27.5 0.4 110.2
As at 31 December 2021 2,208.4 568.3 19.2 2,795.9
1 Includes development land held at £0.7 million (31 December
2021: £0.9 million).
Bank borrowings, bonds and interest rate swaps are secured on investment
properties with a value of £2,706.5 million (2021: £2,515.4 million).
Right of use assets
In accordance with IFRS 16 Leases, the Group has recognised a £3.2 million
head lease liability and an equal and opposite finance lease asset which is
included in non-current assets.
Fair value hierarchy
All of the Group's properties are level 3, as defined by IFRS 13, in the fair
value hierarchy as at 31 December 2022 and
31 December 2021. There were no transfers between levels during the year or
during 2021. Level 3 inputs used in valuing the properties are those which are
unobservable, as opposed to level 1 (inputs from quoted prices) and level 2
(observable inputs either directly, i.e. as prices, or indirectly, i.e.
derived from prices).
Valuation techniques used to derive level 3 fair values
The valuations have been prepared on the basis of fair market value ("FMV")
which is defined in the RICS Valuation Standards as:
"The estimated amount for which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm's length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion."
Valuation techniques: market comparable method
Under the market comparable method (or market comparable approach), a
property's fair value is estimated based on comparable transactions and using
certain unobservable inputs. These inputs are detailed below.
Unobservable input: estimated rental value ("ERV")
The rent at which space could be let in the market conditions prevailing at
the date of valuation. ERV is also used in determining expected rental uplift
on outstanding rent reviews.
2022 2021
ERV - range of the portfolio £26,500-£1,515,482 £30,000-£1,433,486
per annum
per annum
Unobservable input: equivalent yield
The equivalent yield is defined as the internal rate of return of the cash
flow from the property, assuming a rise to ERV at the next review date, but
with no further rental growth.
2022 2021
True equivalent yield - range of the portfolio 2.52%-17.50% 3.23%-19.58%
Unobservable input: net initial yield
The Net Initial Yield is the annualised rental income based on the cash rents
passing at the balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the property, increased with
(estimated) purchaser's costs.
Unobservable input: physical condition of the property
The properties are physically inspected by the valuer on a three-year rotating
basis.
Unobservable input: rental growth
The estimated average increase in rent based on both market estimations and
contractual situations.
Sensitivity of measurement of significant unobservable inputs
During 2022 the Group experiences an 18bps increase in the portfolio Net
initial yield, reducing investment property by £134 million (4.7% reduction),
before reflecting gains as a result of rental growth and asset management
projects. We have therefore applied the following sensitivities:
• A decrease in the estimated annual rent will
decrease the fair value. A 1% decrease/increase in annual rent would have an
approximately £28 million decrease/increase in the investment property
valuation.
• A decrease in the equivalent yield will increase
the fair value. A 0.10% shift of equivalent yield would have an approximately
£59 million impact on the investment property valuation.
• An increase in the Net initial yield will
decrease fair value. A further 10bp shift in the Net initial yield would have
approximately £57 million impact on the investment property valuation.
• A deterioration in the physical condition of the
property will decrease the fair value.
• An increase in the rental growth will increase
the fair value.
12. Trade and other receivables
2022 2021
£m £m
Trade receivables (net of provision for doubtful debts) 11.6 11.6
Prepayments and accrued income 6.0 5.4
Other debtors 0.2 0.6
17.8 17.6
The expected credit losses are estimated using a provision matrix by reference
to past experience and an analysis of the debtor's current financial position,
adjusted for factors that are specific to the debtor on the recoverability,
general economic conditions of the industry and an assessment of both the
current and the forecast direction of conditions at the reporting date.
Payment default is where PHP assesses there could be a probable failure of a
tenant making a contractual payment of rent. The Group has therefore not
recognised a loss allowance because historical experience has indicated that
the risk profile of trade receivables is deemed low.
The Group's principal customers are invoiced and pay quarterly in advance,
usually on English, Scottish and Gale quarter days. There is no significant
concentration of credit risk with respect to trade receivables, as the Group
has a large number of tenants.
13. Cash and cash equivalents
2022 2021
£m £m
Cash held at bank 29.1 33.4
29.1 33.4
Bank interest is earned at floating rates depending upon the bank deposit
rate. Short term deposits may be made for varying periods of between one day
and three months, dependent on available cash and forthcoming cash
requirements of the Group. These deposits earn interest at various short term
deposit rates.
14. Trade and other payables
2022 2021
£m £m
Trade payables 3.3 0.6
Bank and bond loan interest accrual 6.8 6.3
Other payables 9.1 9.1
VAT 5.9 6.6
Accruals 7.5 17.4
32.6 40.0
15. Borrowings
a) Term loans and overdrafts
The table indicates amounts drawn and undrawn from each individual facility as
at 31 December:
Facility Amounts drawn Undrawn
2022 2021 2022 2021 2022 2021
Expiry date £m £m £m £m £m £m
Current
RBS overdraft Jun 2023 5.0 5.0 - - 5.0 5.0
Aviva MXF loan Sep 2033 2.3 2.2 2.3 2.2 - -
7.3 7.2 2.3 2.2 5.0 5.0
Non-current
Aviva AV loan Oct 2036 200.0 200.0 200.0 200.0 - -
Aviva loan Nov 2028 75.0 75.0 75.0 75.0 - -
Barclays loan Sep 2025 100.0 100.0 - - 100.0 100.0
HSBC loan Nov 2025 100.0 100.0 25.5 25.5 74.5 74.5
Lloyds loan Dec 2025 100.0 50.0 32.5 38.7 67.5 11.3
NatWest loan Oct 2025 100.0 100.0 41.8 86.3 58.2 13.7
Santander Jan 2025 50.0 - 38.6 - 11.4 -
Aviva MXF loan Sep 2033 222.9 225.2 222.9 225.2 - -
Aviva MXF loan Sep 2028 30.8 30.8 30.8 30.8 - -
978.7 881.0 667.1 681.5 311.6 199.5
Total 986.0 888.2 669.4 683.7 316.6 204.5
2022 2021
£m £m
Balance as at 1 January 702.4 630.0
Changes from financing activities
Term bank loan drawdowns 161.6 335.6
New loan facilities drawn 161.6 335.6
Repayments of mortgage principal (2.2) (20.4)
Repayments of term bank loans (173.5) (232.4)
Repayments of term loan borrowings (175.7) (252.8)
Loan issue costs for new facilities/refinancing (3.4) (2.7)
Total changes from financing cash flows (17.5) 80.1
Other non-cash changes
MtM on loans net of amortisation (2.3) (7.2)
Amortisation of loan issue costs 2.5 2.2
Exchange (gain) on translation of foreign balances (0.3) (2.7)
Total other changes (0.1) (7.7)
Balance as at 31 December 684.8 702.4
At 31 December 2022, total facilities of £1,607.0 million (2021: £1,437.4
million) were available to the Group. This included a £70.0 million secured
bond, a £100.0 million secured bond, a £150.0 million nominal value
convertible bond, £44.5 million, £62.5 million and £66.4 million
Euro-denominated bonds, a £50.0 million Ignis loan note, a £77.5 million
Standard Life loan note and a £5.0 million overdraft facility. Of these
facilities, as at 31 December 2022, £1,290.4 million was drawn (2021:
£1,232.9 million).
On 6 January 2022, the Group refinanced a £50.0 million revolving credit
facility with Santander. The facility can be drawn in Sterling and Euros and
has an interest rate of 1.65% plus SONIA or EURIBOR.
On 10 October 2022, the Group has renewed its existing £100.0 million
revolving credit facility with Barclays for a further three‑year term with
options to extend by a further year on the first and second anniversaries of
the new facility.
On 3 November 2022, the existing NatWest facility was extended for another
year to October 2025.
On 16 December 2022, the Group has renewed its existing £100.0 million
revolving credit facility with HSBC for a further three-year term with options
to extend by a further year on the first and second anniversaries of the new
facility.
On 22 December 2022, the Group exercised an increase in facility size to the
existing Lloyds facility, increasing the revolving credit facility to £100.0
million, and extending the facility for a further three-year term to December
2025.
Costs associated with the arrangement and extension of the facilities,
including legal advice and loan arrangement fees, are amortised using the
effective interest rate.
Any amounts unamortised as at the period end are offset against amounts drawn
on the facilities as shown in the table below:
2022 2021
£m £m
Term loans drawn: due within one year 2.3 2.2
Term loans drawn: due in greater than one year 667.1 681.5
Total terms loans drawn 669.4 683.7
Plus: MtM on loans net of amortisation 27.1 29.3
Less: unamortised borrowing costs (11.7) (10.6)
Total term loans per the Group Balance Sheet 684.8 702.4
The Group has been in compliance with all of the financial covenants of the
above facilities as applicable through the year. Further details are shown in
Note 18e.
The Group has entered into interest rate swaps to manage its exposure to
interest rate fluctuations. These are set out in Note 17.
b) Bonds
2022 2021
£m £m
Unsecured:
Convertible bond July 2025 at fair value 142.9 171.6
Less: unamortised costs - -
Total unsecured bonds 142.9 171.6
Secured:
Secured bond December 2025 70.0 70.0
Secured bond March 2027 100.0 100.0
€51 million secured bond (Euro private placement) December 2028-30 45.1 42.9
€70 million secured bond (Euro private placement) September 2031 62.0 58.8
€75 million secured bond (Euro private placement) February 2034 66.4 -
Ignis loan note December 2028 50.0 50.0
Standard Life loan note September 2028 77.5 77.5
Less: unamortised bond issue costs (3.6) (3.1)
Plus: MtM on loans net of amortisation 4.3 5.1
Total secured bonds 471.7 401.2
Total bonds 614.6 572.8
There were no bond conversions during the year (2021: £nil).
Secured bonds
On 18 December 2013, PHP successfully listed the floating rate guaranteed
secured bonds issued on 4 November 2013 (the "Secured Bonds") on the London
Stock Exchange. The Secured Bonds have a nominal value of £70.0 million and
mature on 3 December 2025. The Secured Bonds incur interest at an annualised
rate of 220bps plus a credit spread adjustment of 28bps, above six-month
SONIA, payable semi‑annually in arrears.
On 21 March 2017, a £100.0 million Secured Bond was issued for a ten-year
term at a fixed coupon of 2.83% that matures on 21 March 2027. Interest is
paid semi-annually in arrears.
On 20 December 2018, senior secured notes for a total of €51.0 million
(£42.9 million) were issued at a blended fixed rate of 2.4793% and a weighted
average maturity of 10.4 years. Interest is paid semi-annually in arrears. The
notes represent PHP's first Euro-denominated transaction in the private
placement market. The secured notes were placed with UK and Irish
institutional investors in two tranches:
• €40.0 million 2.46% senior notes due
December 2028; and
• €11.0 million 2.633% senior notes due
December 2030.
On 16 September 2019, new senior secured notes for a total of €70.0 million
(£58.8 million) were issued at a fixed rate of 1.509% and a maturity of
twelve years. Interest is paid semi-annually in arrears. The secured notes are
guaranteed by the Company and were placed with UK and Irish institutional
investors.
On 11 February 2022, the Group issued a new €75.0 million (£66.4 million)
secured private placement loan note to MetLife for a twelve-year term at a
fixed rate of 1.64%. The loan notes have the option to be increased by a
further €75 million to €150 million over the next three years at MetLife's
discretion.
Ignis and Standard Life loan notes
On 14 March 2019, the loan notes were added to the portfolio as a part of the
MedicX acquisition. The Ignis loan note of £50.0 million incurs a fixed
coupon of 3.99% payable semi-annually in arrears and matures on 1 December
2028.
The Standard Life loan note matures on 30 September 2028 and is split into two
tranches, £50.0 million and £27.5 million at fixed coupon rates of 3.84% and
3.00% respectively. Interest is payable semi-annually in arrears.
Convertible bond
On 15 July 2019, PHP Finance (Jersey No.2) Limited (the "Issuer"), a wholly
owned subsidiary of the Group, issued £150.0 million of 2.875% convertible
bonds (the "Bonds") for a six-year term and if not previously converted,
redeemed or purchased and cancelled, the Bonds will be redeemed at par on
maturity in July 2025. The net proceeds were partially used to repay the
Company's £75.0 million 5.375% senior unsecured retail bonds at maturity and
otherwise for general corporate purposes.
Subject to certain conditions, the Bonds will be convertible into fully paid
Ordinary Shares of the Company and the initial exchange price was set at
153.25 pence, a premium of 15% above the volume weighted average price of the
Company's shares on 18 June 2019, being 133.26 pence. Under the terms of the
Bonds, the Company will have the right to elect to settle exercise of any
conversion rights entirely in shares or cash, or with a combination of shares
and cash. The exchange price is subject to adjustment if dividends paid per
share exceed 2.8 pence per annum and other certain circumstances and
consequently the exchange price has been adjusted to 137.69 pence as at 31
December 2022 (2021: 142.29 pence).
2022 2021
£m £m
Opening balance - fair value 171.6 175.0
Issued in the year - -
Cumulative fair value movement in convertible bond (28.7) (3.4)
Closing balance - fair value 142.9 171.6
The fair value of the Bonds at 31 December 2022 and 31 December 2021 was
established by obtaining quoted market prices. The fair value movement is
recognised in the Group Statement of Comprehensive Income within profit before
taxation and is excluded from the calculation of EPRA earnings and EPRA NTA
(replacing EPRA NAV).
c) Total borrowings
2022 2021
£m £m
Current liabilities:
Term loans and overdrafts 2.3 2.2
Bonds - -
Total current liabilities 2.3 2.2
Non-current liabilities:
Term loan and overdrafts 667.1 681.5
MtM on loans net of amortisation 27.1 29.3
Less: unamortised loan issue costs (11.7) (10.6)
Total non-current liabilities 682.5 700.2
Bonds 621.0 549.2
MtM on bonds net of amortisation 4.3 5.1
MtM on convertible bond (7.1) 21.6
Less: unamortised bond issue costs (3.6) (3.1)
Total non-current bonds 614.6 572.8
Total borrowings 1,299.4 1,275.2
16. Head lease liabilities
The Group holds certain long leasehold properties which are classified as
investment properties. The head leases are accounted for as finance leases.
These leases typically have lease terms between 25 years and perpetuity and
fixed rentals.
2022 2021
£m £m
Due within one year 0.1 0.1
Due after one year 3.1 4.4
Closing balance - fair value 3.2 4.5
17. Derivatives and other financial instruments
It is Group policy to maintain the proportion of floating rate interest
exposure at between 20% and 40% of total debt facilities. The Group uses
interest rate swaps to mitigate its remaining exposure to interest rate risk
in line with this policy. The fair value of these contracts is recorded in the
balance sheet and is determined by discounting future cash flows at the
prevailing market rates at the balance sheet date.
2022 2021
£m £m
Fair value of interest rate swaps treated as cash flow hedges under IAS 39
("effective swaps"):
Non-current liabilities - -
- -
Fair value of interest rate swaps not qualifying as cash flow hedges under IAS
39 ("ineffective swaps"):
Non-current assets 19.6 5.2
Non-current liabilities (12.5) (0.8)
7.1 4.4
Total fair value of interest rate swaps 7.1 4.4
Shown in the balance sheet as:
Total non-current assets 19.6 5.2
Total non-current liabilities (12.5) (0.8)
Changes in the fair value of the contracts that do not meet the strict IAS 39
criteria to be designated as effective hedging instruments are taken to the
Group Statement of Comprehensive Income. For contracts that meet the IAS 39
criteria and are designated as "effective" cash flow hedges, the change in
fair value of the contract is recognised in the Group Statement of Changes in
Equity through the cash flow hedging reserve. The result recognised in the
Group Statement of Comprehensive Income on "effective" cash flow hedges in
2022 was a £4.5 million gain (2021: £4.5 million gain), including the
amortisation of the cash flow hedging reserve of £4.5 million (2021: £4.5
million).
Interest rate swaps and caps with a contract value of £100.0 million (2021:
£188.0 million) were in effect at 31 December 2022. Details of all floating
to fixed rate interest rate swap contracts held are as follows:
Fixed interest
Contract value Product Start date Maturity per annum %
2022
£100.0 million Swap October 2021 November 2024 0.0699
£(66.0) million Reverse swap October 2021 November 2024 2.5200
£66.0 million Cap October 2021 November 2024 1.2500
£(67.0) million Reverse swap October 2021 November 2024 2.5200
£67.0 million Cap October 2021 November 2024 1.2500
£(67.0) million Reverse swap October 2021 November 2024 2.5200
£67.0 million Cap October 2021 November 2024 1.2500
£100.0 million
2021
£88.0 million Swap September 2020 March 2022 0.0397
£100.0 million Swap October 2021 November 2024 0.0699
£(66.0) million Reverse swap October 2021 November 2024 2.5200
£66.0 million Cap October 2021 November 2024 1.2500
£(67.0) million Reverse swap October 2021 November 2024 2.5200
£67.0 million Cap October 2021 November 2024 1.2500
£(67.0) million Reverse swap October 2021 November 2024 2.5200
£67.0 million Cap October 2021 November 2024 1.2500
£188.0 million
On 28 October 2021 the HSBC £100.0 million variable leg of the LIBOR swap was
converted to SONIA. The term and fixed rate were unchanged at November 2024
expiry and 0.0699%.
On 27 October 2021 three new swap agreements were entered into totalling
£200.0 million. All are effective until 29 November 2024 and receive a fixed
rate of 2.52%, with variable rates payable. These included a £66.0 million
swap agreement with HSBC paying a variable of SONIA + 1.6275%, a £67.0
million swap agreement with Barclays paying a variable of SONIA + 1.575% and a
£67.0 million swap agreement with NatWest paying a variable of SONIA +
1.5849%. A one-off payment of £1.8 million across all three new swap
agreements was made to cap SONIA at 1.25% for the length of the agreement,
equivalent to 0.1 pence per share on an adjusted net tangible asset value
basis.
18. Financial risk management
In pursuing its investment objectives, the Group is exposed to a variety of
risks that could impact net assets or distributable profits.
The Group's principal financial liabilities, other than interest rate swaps,
are loans and borrowings hedged by these swaps. The main purpose of the
Group's loans and borrowings is to finance the acquisition and development of
the Group's property portfolio. The Group has trade and other receivables,
trade and other payables and cash and short term deposits that arise directly
from its operations.
A review of the Group's objectives, policies and processes for managing and
monitoring risk is set out in the Strategic Report. This Note provides further
detail on financial risk management and includes quantitative information on
specific financial risks.
Financial risk factors
Interest rate risk
Interest rate risk is the risk that future cash flows of a financial
instrument will fluctuate because of changes in market interest rates. The
Group's exposure to the risk of changes in market interest rates relates
primarily to the Group's long term debt obligations with floating rates as the
Group, generally, does not hold significant cash balances, with short term
borrowings being used when required. To manage its interest rate risk, the
Group enters into interest rate swaps, in which the Group agrees to exchange,
at specified intervals, the difference between fixed and variable rate
interest amounts calculated by reference to an agreed-upon principal amount.
Note 17 provides details of interest swap contracts in effect at the year end.
The sensitivity analysis below shows the impact on profit before tax and
equity of reasonably possible movements in interest rates with all other
variables held constant. It should be noted that the impact of movement in the
interest rate variable is not necessarily linear.
The fair value is arrived at with reference to the difference between the
contracted rate of a swap and the market rate for the remaining duration at
the time the valuation is performed. As market rates increase and this
difference reduces, the associated fair value also decreases.
Effect on fair
value of Effect on
financial profit before Effect on
instruments taxation equity
£m £m £m
2022
Sterling Overnight Index Average Rate Increase of 50 basis points 120.1 5.0 125.1
Sterling Overnight Index Average Rate Decrease of 50 basis points 120.1 (5.0) 125.1
2021
London Interbank Offered Rate Increase of 50 basis points 5.5 6.0 11.5
London Interbank Offered Rate Decrease of 50 basis points (5.5) (6.0) (11.5)
b) Credit risk
Credit risk is the risk that a counterparty will not meet its obligations
under financial instruments or customer contracts, leading to a financial
loss. The Group is exposed to credit risk from its principal financial assets
being cash and cash equivalents, and trade and other receivables (see Note
12).
Trade receivables
Trade receivables, primarily tenant rentals, are recognised and carried at
amortised cost and presented in the balance sheet net of allowances for
doubtful receivables and are monitored on a case-by-case basis. Impairment
losses are recognised through the expected credit loss model. Credit risk is
primarily managed by requiring tenants to pay rentals in advance.
The Group has policies in place to ensure that rental contracts are entered
into only with lessees with an appropriate credit history, but the Group does
not monitor the credit quality of receivables on an ongoing basis.
Banks and financial institutions
One of the principal credit risks of the Group arises from financial
derivative instruments and deposits with banks and financial institutions. The
Board of Directors believes that the credit risk on short term deposits and
interest rate swaps is limited because the counterparties are banks, which are
committed lenders to the Group, with high credit ratings assigned by
international credit rating agencies.
c) Liquidity risk
The liquidity risk is that the Group will encounter difficulty in meeting
obligations associated with its financial liabilities as the majority of the
Group's assets are property investments and are therefore not readily
realisable. The Group's objective is to maintain a mixture of available cash
and committed bank facilities that is designed to ensure that the Group has
sufficient available funds for its operations and to fund its committed
capital expenditure. This is achieved by continuous monitoring of forecast and
actual cash flows.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments including interest.
Less than Three to One to More than
On demand three months twelve months five years five years Total
£m £m £m £m £m £m
2022
Interest-bearing loans and borrowings - 11.3 34.4 489.7 1,017.4 1,552.8
Interest rate swaps (net) - - - - - -
Trade and other payables 2.7 22.5 3.5 1.8 2.1 32.6
2.7 33.8 37.9 491.5 1,019.5 1,585.4
2021
Interest-bearing loans and borrowings - 9.8 29.7 514.6 1,001.4 1,555.5
Interest rate swaps (net) - - - - - -
Trade and other payables 1.6 29.6 3.2 2.9 2.0 39.3
1.6 39.4 32.9 517.5 1,003.4 1,594.8
The Group's borrowings have financial covenants which, if breached, could
result in the borrowings becoming repayable immediately. Details of the
covenants are given under I Capital risk management and are disclosed to the
facility providers on a quarterly basis. There have been no breaches during
the year (2021: none).
d) Market risk
Market risk is the risk that fair values of financial instruments will
fluctuate because of changes in market prices. The Board of Directors has
identified two elements of market risk that principally affect the Group -
interest rate risk and price risk.
Interest rate risk
Interest rate risk is outlined above. The Board assesses the exposure to other
price risks when making each investment decision and monitors the overall
level of market risk on the investment portfolio on an ongoing basis through a
discounted cash flow analysis. Details of this analysis can be found in the
Strategic Report in the Annual Report.
Price risk
The Group is exposed to price risk in respect of property price risk including
property rentals risk. Refer to Note 2.3. The Group has no significant
exposure to price risk in respect of financial instruments other than the
convertible bond and interest rate derivatives (see also Note 17), as it does
not hold any equity securities or commodities.
Fair values
Set out below is a comparison by class of the carrying amount and fair values
of the Group's financial instruments that are carried in the financial
statements.
Book value Fair value Book value Fair value
2022 2022 2021 2021
£m £m £m £m
Financial assets
Trade and other receivables 17.8 17.8 17.6 17.6
Effective interest rate swaps - - - -
Ineffective interest rate swaps 19.6 19.6 5.2 5.2
Cash and short term deposits 29.1 29.1 33.4 33.4
Financial liabilities
Interest-bearing loans and borrowings (1,290.4) (1,149.1) (1,232.9) (1,313.4)
Effective interest rate swaps - - - -
Ineffective interest rate swaps (net) (12.5) (12.5) (0.8) (0.8)
Trade and other payables (32.6) (32.6) (40.0) (40.0)
The fair value of the financial assets and liabilities is included as an
estimate of the amount at which the instruments could be exchanged in a
current transaction between willing parties, other than a forced sale. The
following methods and assumptions were used to estimate fair values:
• the fair values of the Group's cash and cash
equivalents and trade payables and receivables are not materially different
from those at which they are carried in the financial statements due to the
short term nature of these instruments;
• the fair value of floating rate borrowings is
estimated by discounting future cash flows using rates currently available for
instruments with similar terms and remaining maturities. The fair value
approximates their carrying values, gross of unamortised transaction costs;
• the fair value of fixed rate debt is estimated
using the mid yield to maturity on the reporting date. The valuations are on a
clean basis, which excludes accrued interest from the previous settlement date
to the reporting date; and
• the fair values of the derivative interest
rate swap contracts are estimated by discounting expected future cash flows
using market interest rates and yield curves over the remaining term of the
instrument.
Fair value hierarchy
The table below analyses financial instruments carried at fair value, by
valuation method. The different levels are defined as follows:
Level 1: Quoted (unadjusted) prices in active markets for identical
assets or liabilities.
Level 2: Other techniques for which all inputs which have a significant
effect on the recorded fair value are observable, either directly or
indirectly.
Level 3: Techniques which use inputs which have a significant effect on
the recorded fair value that are not based on observable market data.
Fair value measurements at 31 December 2022 were as follows:
Level 1 1 Level 2 2 Level 3 3 Total
Recurring fair value measurements £m £m £m £m
Financial assets
Derivative interest rate swaps -- 19.6 - 19.6
Financial liabilities
Derivative interest rate swaps - (12.5) - (12.5)
Convertible bond (142.9) - - (142.9)
Fixed rate debt - (797.8) - (797.8)
1 Valuation is based on unadjusted quoted prices in active markets
for identical financial assets and liabilities.
2 Valuation is based on inputs (other than quoted prices included
in level 1) that are observable for the financial asset or liability, either
directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices).
3 Valuation is based on inputs that are not based on observable
market data.
Fair value measurements at 31 December 2021 were as follows:
Level 1 1 Level 2 2 Level 3 3 Total
Recurring fair value measurements £m £m £m £m
Financial assets
Derivative interest rate swaps - 5.2 - 5.2
Financial liabilities
Derivative interest rate swaps - (0.8) - (0.8)
Convertible bond (171.6) - - (171.6)
Fixed rate debt - (921.3) - (921.3)
1 Valuation is based on unadjusted quoted prices in active markets
for identical financial assets and liabilities.
2 Valuation is based on inputs (other than quoted prices included
in level 1) that are observable for the financial asset or liability, either
directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices).
3 Valuation is based on inputs that are not based on observable
market data.
The interest rate swaps whose fair values include the use of level 2 inputs
are valued by discounting expected future cash flows using market interest
rates and yield curves over the remaining term of the instrument. The
following inputs are used in arriving at the valuation:
• interest rates;
• yield curves;
• swaption volatility;
• observable credit spreads;
• credit default swap curve; and
• observable market data.
e) Capital risk management
The primary objectives of the Group's capital management are to ensure that it
remains a going concern, operates within its quantitative banking covenants
and meets the criteria so as to continue to qualify for UK REIT status.
The capital structure of the Group consists of shareholders' equity and net
borrowings. The type and maturity of the Group's borrowings are analysed
further in Notes 15 and 17 and the Group's equity is analysed into its various
components in the Group Statement of Changes in Equity. The Board monitors and
reviews the Group's capital so as to promote the long term success of the
business, to facilitate expansion and to maintain sustainable returns for
shareholders.
Under several of its debt facilities, the Group is subject to a covenant
whereby consolidated Group rental income must exceed Group borrowing costs by
the ratio 1.3:1 (2021: 1.3:1). No debt facility has a Group loan to value
covenant.
Facility-level covenants also operate with regard to specific pools of
property assets provided to lenders to secure individual loan facilities.
These range as follows:
• interest cover1: 1.15 to 2.25 (2021: 1.05 to
2.25); and
• loan to value1: 55% to 75% (2021: 55% to 75%).
UK REIT compliance tests include loan to property value and gearing tests. The
Group must satisfy these tests in order to continue trading as a UK REIT. This
is also an internal requirement imposed by the Articles of Association.
During the year the Group has complied with all of the requirements set out
above.
1 See Glossary of Terms.
2022 2021
Group loan to value ratio £m £m
Fair value of completed investment properties 2,788.6 2,772.2
Fair value of development properties 4.5 19.2
Ground rent recognised as finance leases 3.2 4.5
2,796.3 2,795.9
Interest-bearing loans and borrowings (with convertible bond at nominal value) 1,290.4 1,232.9
Less cash held (29.1) (33.4)
Nominal amount of interest-bearing loans and borrowings 1,261.3 1,199.5
Group loan to value ratio 45.1% 42.9%
19. Share capital
Ordinary Shares issued, authorised and fully paid at 12.5 pence each
2022 2021
Number - Number -
million £m million £m
Balance at 1 January 1,332.9 166.6 1,315.6 164.4
Scrip issues in lieu of cash dividends 3.6 0.5 5.2 0.7
Share issues 5 January 2021 - - 11.5 1.4
Share issues on other acquisitions - - 0.6 0.1
Balance at 31 December 1,336.5 167.1 1,332.9 166.6
Issue of shares in 2022
Number
of shares - Issue
Date of issue million price
Scrip issue in lieu of cash dividend 25 February 2022 0.4 146.72p
Scrip issue in lieu of cash dividend 20 May 2022 0.7 149.58p
Scrip issue in lieu of cash dividend 19 August 2022 2.5 138.14p
Scrip issue in lieu of cash dividend 25 November 2022 - -
20. Share premium
2022 2021
£m £m
Balance at 1 January 474.9 466.7
Scrip issues in lieu of cash dividends 4.6 7.4
Share issues 5 January 2021 - -
Share issues on other acquisitions - 0.9
Share issue expense (0.1) (0.1)
Balance at 31 December 479.4 474.9
21. Merger and other reserves
The merger and other reserves are made up of the capital reserve which is held
to finance any proposed repurchases of Ordinary Shares, following approval of
the High Court in 1998, the foreign exchange translation reserve and the
premium on shares issued for the MedicX Fund Limited merger and the Nexus
merger.
2022 2021
£m £m
Capital reserve
Balance at 1 January and 31 December 1.6 1.6
Foreign exchange translation reserve
Balance at 1 January (2.2) 1.2
Exchange differences on translating the net assets of foreign operations 3.2 (3.4)
Balance at 31 December 1.0 (2.2)
Merger reserve
Balance at 1 January 414.1 398.0
Premium on shares issued for Nexus merger - 16.1
Balance at 31 December 414.1 414.1
Balance of merger and other reserves at 31 December 416.7 413.5
22. Cash flow hedging reserve
Information on the Group's hedging policy and interest rate swaps is provided
in Note 17.
The transfer to the Group Statement of Comprehensive Income and the fair value
movement on cash flow hedges which meet the effectiveness criteria under IAS
39, taken to equity, can be analysed as follows:
2022 2021
£m £m
Balance at 1 January (15.6) (20.1)
Fair value movement on cash flow hedges - -
Amortisation of cash flow hedging reserve 4.5 4.5
Net movement on cash flow hedges ("effective swaps") and amortisation of cash 4.5 4.5
flow hedging reserve
Balance at 31 December (11.1) (15.6)
The balance within the cash flow hedge reserve relating to cancelled swaps
will be amortised through the Group Statement of Comprehensive Income over the
remainder of the original contract period (see Note 6b).
23. Retained earnings
2022 2021
£m £m
Balance at 1 January 460.5 402.6
Retained profit for the year 56.3 140.1
Dividends paid (81.6) (74.4)
Scrip dividend in lieu of cash (5.1) (8.0)
Share-based awards ("LTIP") - 0.2
Balance at 31 December 430.1 460.5
24. Capital commitments
As at 31 December 2022, the Group has entered into forward funding development
agreements with third parties for the development of primary healthcare
properties in the UK and Ireland. The Group has acquired the land and advances
funds to the developers as the construction progresses. Total consideration of
£2.8 million (2021: £9.0 million) remains to be funded with regard to these
properties.
As at 31 December 2022, the Group has capital commitments totalling £9.9
million (2021: £10.0 million) being the cost to complete asset management
projects on site, and £2.8 million (2021: £10.7 million) being the cost to
complete investments. In addition to this we recognised a capital commitment
in relation to the acquisition of Axis Technical Services Limited of £7.1
million (€8.0 million) that was subsequently acquired in January 2023.
25. Related party transactions
Harry Hyman, Chief Executive Officer, is a Director and the ultimate
beneficial owner of a number of Nexus entities and is considered to be a
related party. Following the acquisition of certain Nexus entities on the
internalisation of management structure on 5 January 2021, the Group has
continued to share certain operational services with a Nexus entity, Nexus
Central Management Services Limited. Harry Hyman is a current Director and
ultimate controlling party of Nexus Central Management Services Limited.
Amounts paid during the period in relation to shared services totalled £0.1
million (31 December 2021: net receipt £0.1 million). Amounts paid in
relation to prior periods include an element of advisory fees up to the date
of internalisation.
As at 31 December 2022, outstanding fees payable to Nexus totalled £nil (31
December 2021: £nil).
26. Subsequent events
On 23 January 2023, the Group acquired the Irish property management business,
Axis Technical Services Limited ("Axis"). PHP acquired the entire issued
ordinary share capital of Axis for an initial completion consideration of
€5.5 million plus working capital estimated at €0.5 million, payable in
cash. A further deferred cash consideration of up to €2.5 million may become
payable in 2024 subject to the profit before tax for the year ended 31
December 2023 being greater than €1.3 million. If the profit before tax for
2023 is below the €1.3 million threshold then the deferred cash
consideration will be reduced by €8 for every €1 the profit before tax is
below €1.3 million. The €2.5 million deferred cash consideration of is the
maximum sum that could be payable.
27. Audit exemptions taken for subsidiaries
The following subsidiaries are exempt from the requirements of the Companies
Act 2006 relating to the audit of individual accounts by virtue of Section
479A of the Act.
Name Companies House registration number
Primary Health Investment Properties (No. 9) Limited 11328330
PHP Euro Private Placement ML Limited 11714222
PHP Epsom Limited 12004850
GP Property One Limited 10801028
PHP SPV Limited 12256431
PHP Primary Properties (Haymarket) Limited 08304612
MXF Properties Bridlington Limited 07763871
PHP Liverpool Holding Company Limited 07342781
PHP Tradeco Holdings Limited 09642987
PHP Cardiff Group Limited 10253987
PHP (Spilsby) Limited 13735391
PHP Health Solutions Limited 06949900
PHP Tradeco Limited 07685933
PHP Property Management Services Limited 02877191
PHP Primary Care Developments Limited 11862233
PHP Cardiff Limited 10254492
PHP Developments (Cardiff) Limited 04856121
PHP (Croft) Limited 13938144
PHP Chiswick Limited OE001635
Glossary of terms
Adjusted earnings is EPRA earnings excluding the contract termination fee and
amortisation of MtM adjustments for fixed rate debt acquired on the merger
with MedicX.
Adjusted earnings per share is adjusted earnings divided by the weighted
average number of shares in issue during the year.
Adjusted net tangible assets ("adjusted NTA") (which has replaced the former
adjusted EPRA net asset value alternative performance measure) is EPRA net
tangible asset value excluding the MtM adjustment of the fixed rate debt, net
of amortisation, acquired on the merger with MedicX. The objective of the
adjusted NTA measure is to highlight the value of net assets on a long term
basis and excludes assets and liabilities that are not expected to crystallise
in normal circumstances and continues to be used as a measure to determine the
PIF payment.
Adjusted NTA per share is adjusted NTA divided by the number of shares in
issue at the balance sheet date.
Adviser is PHP Tradeco Limited.
Annualised rental income on a like-for-like basis is the contracted rent on a
per annum basis assuming a consistent number of properties between each year.
Average cost of debt is the total interest cost of drawn debt and swaps,
divided by the amount of drawn debt.
Building Research Establishment Environmental Assessment Method ("BREEAM")
assesses the sustainability of buildings against a range of criteria.
Clinical Commissioning Groups ("CCGs") are the groups of GPs and other
healthcare professionals that are responsible for designing local health
services in England with effect from 1 April 2013.
Company and/or Parent is Primary Health Properties PLC ("PHP").
Direct property costs comprise ground rents payable under head leases, void
costs, other direct irrecoverable property expenses, rent review fees and
valuation fees.
District Valuer ("DV") is the District Valuer Service, being the commercial
arm of the Valuation Office Agency ("VOA"). It provides professional property
advice across the public sector and in respect of primary healthcare
represents NHS bodies on matters of valuation, rent reviews and initial rents
on new developments.
Dividend cover is the number of times the dividend payable (on an annual
basis) is covered by Adjusted earnings.
Earnings per Ordinary Share from continuing operations ("EPS") is the profit
attributable to equity holders of the Parent divided by the weighted average
number of shares in issue during the year.
EPC is an Energy Performance Certificate.
European Public Real Estate Association ("EPRA") is a real estate industry
body, which has issued Best Practice Recommendations in order to provide
consistency and transparency in real estate reporting across Europe.
EPRA cost ratio is the ratio of net overheads and operating expenses against
gross rental income (with both amounts excluding ground rents payable). Net
overheads and operating expenses relate to all administrative and operating
expenses, net of any service fees, recharges or other income specifically
intended to cover overhead and property expenses.
EPRA earnings is the profit after taxation excluding investment and
development property revaluations, gains/losses on disposals, changes in the
fair value of financial instruments and associated close-out costs and their
related taxation.
EPRA net assets ("EPRA NAV") is the balance sheet net assets excluding own
shares held, the MtM value of derivative financial instruments and the
convertible bond fair value movement.
EPRA NAV per share is the balance sheet net assets excluding own shares held,
the MtM value of derivative financial instruments and the convertible bond
fair value movement, divided by the number of shares in issue at the balance
sheet date.
EPRA NNNAV is adjusted EPRA NAV including the MtM value of fixed rate debt and
derivatives.
EPRA net reinstatement value ("EPRA NRV") is the balance sheet net assets
including real estate transfer taxes but excluding the MtM value of derivative
financial instruments, deferred tax and the convertible bond fair value
movement. The aim of the metric is to reflect the value that would be required
to recreate the Company through the investment markets based on its current
capital and financing structure. Refer to Note 9.
EPRA NRV per share is the EPRA net reinstatement value divided by the number
of shares in issue at the balance sheet date. Refer to Note 9.
EPRA net disposal value ("EPRA NDV") (replacing EPRA NNNAV) is adjusted EPRA
NRV including deferred tax and the MtM value of fixed rate debt and
derivatives. The aim of the metric is to reflect the value that would be
realised under a disposal scenario. Refer to Note 9.
EPRA net tangible assets ("NTA") (which has replaced the former EPRA net asset
value alternative performance measure) is the balance sheet net assets but
excluding the MtM value of derivative financial instruments, deferred tax and
the convertible bond fair value movement. The aim of the metric is to reflect
the fair value of the assets and liabilities of the Group that it intends to
hold and does not intend in the long run to sell. Refer to Note 9.
EPRA NTA per share is the EPRA net tangible assets divided by the number of
shares in issue at the balance sheet date. Refer to Note 9.
EPRA vacancy rate is, as a percentage, the ERV of vacant space in the Group's
property portfolio divided by ERV of the whole portfolio.
Equivalent yield (true and nominal) is a weighted average of the net initial
yield and reversionary yield and represents the return a property will produce
based upon the timing of the income received. The true equivalent yield
assumes rents are received quarterly in advance. The nominal equivalent
assumes rents are received annually in arrears.
Estimated rental value ("ERV") is the external valuers' opinion as to the open
market rent which, on the date of valuation, could reasonably be expected to
be obtained on a new letting or rent review of a property.
Gross rental income is the gross accounting rent receivable.
Group is Primary Health Properties PLC ("PHP") and its subsidiaries.
HSE or the Health Service Executive is the executive agency of the Irish
Government responsible for health and social services for people living in
Ireland.
IAS are International Accounting Standards as adopted by the United Kingdom.
IFRSs are International Financial Reporting Standards as adopted by the United
Kingdom.
IFRS or Basic net asset value per share ("IFRS NAV") is the balance sheet net
assets, excluding own shares held, divided by the number of shares in issue at
the balance sheet date.
Interest cover is the number of times net interest payable is covered by net
rental income.
Interest rate swap is a contract to exchange fixed payments for floating
payments linked to an interest rate, and is generally used to manage exposure
to fluctuations in interest rates.
Like-for-like compares prior year to current year excluding acquisitions,
disposals and developments
London Interbank Offered Rate ("LIBOR") is the interest rate charged by one
bank to another for lending money.
Loan to value ("LTV") is the ratio of net debt to the total value of
properties.
Mark to market ("MtM") is the difference between the book value of an asset or
liability and its market value.
MedicX is MXF Fund Limited and its subsidiaries.
MSCI (IPD) provides performance analysis for most types of real estate and
produces an independent benchmark of property returns.
MSCI (IPD) Healthcare is the UK Annual Healthcare Property Index.
MSCI (IPD) total return is calculated as the change in capital value, less any
capital expenditure incurred, plus net income, expressed as a percentage of
capital employed over the period, as calculated by MSCI (IPD).
Net asset value ("NAV") is the value of the Group's assets minus the value of
its liabilities.
Net initial yield ("NIY") is the annualised rents generated by an asset, after
the deduction of an estimate of annual recurring irrecoverable property
outgoings, expressed as a percentage of the asset valuation (after notional
purchasers' costs).
Net rental income is the rental income receivable in the period after payment
of direct property costs. Net rental income is quoted on an accounting basis.
Net zero carbon refers to the point at which a process, activity or system,
etc. produces net zero carbon emissions, through emissions reduction, use of
low or zero carbon energy and removal or offsetting of residual emissions. In
the context of buildings and activities associated with the construction,
refurbishment, maintenance and operation of buildings, PHP refers to the UK
Green Building Council's "Net zero carbon, a framework definition".
NHSPS is NHS Property Services Limited, the company wholly owned and funded by
the Department of Health, which, as of 1 April 2013, has taken on all property
obligations formerly borne by Primary Care Trusts.
Occupancy is the level of units occupied, after deducting the ERV vacancy rate
Parity value is calculated based on dividing the convertible bond value by the
exchange price.
Progressive returns is where it is expected to continue to rise each year.
Progressive dividends is where it is expected to continue to rise each year on
a per share basis.
Property Income Distribution ("PID") is the required distribution of income as
dividends under the REIT regime. It is calculated as 90% of exempted net
income.
Real Estate Investment Trust ("REIT") is a listed property company which
qualifies for and has elected into a tax regime, which exempts qualifying UK
profits, arising from property rental income and gains on investment property
disposals, from corporation tax, but which has a number of specific
requirements.
Rent reviews take place at intervals agreed in the lease and their purpose is
usually to adjust the rent to the current market level at the review date.
Rent roll is the passing rent, being the total of all the contracted rents
reserved under the leases.
Reversionary yield is the anticipated yield which the initial yield will rise
to once the rent reaches the ERV and when the property is fully let. It is
calculated by dividing the ERV by the valuation.
Retail Price Index ("RPI") is the official measure of the general level of
inflation as reflected in the retail price of a basket of goods and services
such as energy, food, petrol, housing, household goods, travelling fare, etc.
RPI is commonly computed on a monthly and annual basis.
RICS is the Royal Institution of Chartered Surveyors.
RPI linked leases are those leases which have rent reviews which are linked to
changes in the RPI.
Special reserve is a distributable reserve.
Sterling Overnight Interbank Average Rate ("SONIA") is the effective overnight
interest rate paid by banks for unsecured transactions in the British Sterling
market.
Total expense ratio ("TER") is calculated as total administrative costs for
the year divided by the average total asset value during the year.
Total property return is the overall return generated by properties on a
debt-free basis. It is calculated as the net rental income generated by the
portfolio plus the change in market values, divided by opening property assets
plus additions.
£m
Net rental income (A) 141.5
Revaluation deficit and profit on sales (B) (61.6)
Total return (C) 80.0
Opening property assets 2,795.9
Weighted additions in the period 45.3
Total weighted average closing property assets (D) 2,841.2
Income return (A/D) 5.0%
Property return (B/D) (2.2)%
Total property return (C/D) 2.8%
Total NTA return is calculated as the movement in adjusted net tangible asset
value for the period plus the dividends paid, divided by opening EPRA net
tangible asset value.
Adjusted NTA per share
At 31 December 2021 116.7p
At 31 December 2022 112.6p
Increase/(decrease) (4.1)
Add: dividends paid
Q1 interim 1.625
Q2 interim 1.625
Q3 interim 1.625
Q4 interim 1.625
Total NTA return 2.1%
Total shareholder return is calculated as the movement in the share price for
the period plus the dividends paid, divided by the opening share price.
Weighted average facility maturity is calculated by multiplying each tranche
of Group debt by the remaining period to its maturity and dividing the result
by total Group debt in issue at the year end.
Weighted average unexpired lease term ("WAULT") is the average lease term
remaining to first break, or expiry, across the portfolio weighted by
contracted rental income.
Yield on cost is the estimated annual rent of a completed development divided
by the total cost of development, including site value and finance costs
expressed as a percentage return.
Yield shift is a movement (usually expressed in basis points) in the yield of
a property asset, or like-for-like portfolio, over a given period. Yield
compression is a commonly used term for a reduction in yields.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR EAEAFADXDEAARecent news on Primary Health Properties
See all newsREG - Primary Health Props - Director/PDMR Shareholding
AnnouncementREG - Primary Health Props - Results of AGM voting
AnnouncementREG - Primary Health Props - Director/PDMR Shareholding
AnnouncementREG - Primary Health Props - Director/PDMR Shareholding
AnnouncementREG - Primary Health Props - Amendment of exchange price on Convertible Bonds
Announcement