US Edition Primary Health Properties
314¾p -1¼p
Questor says BUY
The company invests in GP surgeries and pharmacies with long leases with a view to generating solid, long-term income streams. This investment is therefore an income play with the added sweetener of long-term capital appreciation.
Placings can be an irritant for private investors that are locked of out buying the new shares, but if the funds are used successfully to boost earnings – or in this case rent rolls – then they are not necessarily a bad thing. The shares were issued at a 5.3pc discount to the share price before the announcement was made and a discount of about 2pc to the company's net asset value at the end of December.
Significantly, the placing will not have any impact on the company's dividend per share, which is the main reason to hold this investment when yield is hard to come by. The prospective yield in the current year is 5.7pc, rising to 5.9pc in 2012 and 6pc in 2013.
The money is to be used to target new acquisitions to add to its portfolio. Indeed there has already been £16.6m worth of new purchases in the current year so far. However, in the short term the money will be used to reduce gearing as borrowing costs move higher. Refinancing talks continue and should be completed this year.
The last time PHP raised equity funding was in 2009 and the group has acquired £117m of investment properties since then.
"The pipeline of properties remains significant, and the positive gap between yields and financing costs, together with the continued rental growth trend, provides opportunities for PHP to make immediately earnings enhancing and cash generating property investments," PHP said. "Accordingly, the company intends to use the proceeds of the placing to finance selected investment opportunities and expand its property portfolio."
The group also provided a trading update alongside the placing news. Its annualised rental growth from rent reviews completed in the first quarter was 3.27pc compared with 3.22pc at the same point last year. This level of rent increases is reassuring.
The Health and Social Care Bill proposals are still being worked out by the government, but PHP expects that this will lead to medium-term demand for modern primary healthcare facilities. Obviously this means that there is a slowdown in new GP surgery and pharmacy projects, but Harry Hyman, the group's managing director, sees significant opportunities in the secondary market.
The shares were first tipped at 263p on December 18, 2008, as a relatively safe home for investors seeking income. The December 2011 earnings multiple is a touch under 19 times, which is high – but this reflects the solid dividend and long-term revenue visibility.
The shares are up 20pc since the initial tip, although they are slightly below the price of 326½p that they were last tipped in January. The FTSE 100 is up 35pc over this time.
The shares remain a buy for income seekers because of the rising yield.