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* Primary Health Properties, the FTSE 250 healthcare real estate investment company, has announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which we estimate will take place between 1st April 2024 and 11th June 2024.
* Primary Health Properties, the FTSE 250 healthcare real estate investment company, has announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which we estimate will take place between 1st April 2024 and 11th June 2024.
* The company previously indicated/announced that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
* The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
* Accordingly, we have maintained our forecasts, and estimate that the expected return of an investment in Primary Health Properties over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc in 12-months time.
* Accordingly, we have maintained our forecasts, continue to note that the degree of risk associated with an investment in Primary Health Properties is relatively low and remain of the view that the valuation of the company is attractive.
* We note that the degree of risk associated with an investment in Primary Health Properties is relatively 'high', with the company's shares having an adjusted beta that is 47% below the market (0.531 vs. 1).
*
* All-in-all, assuming that a suitable return level in the next 12 months is 10% or more, then an investment in the company is considered to be a 'suitable' one.
*


== Succession Planning ==
== Succession Planning ==
On 12th December 2022, the company announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which, based on the dates of the company's last five AGMs, we estimate will take place between 1st April 2024 and 11th June 2024, and on a Wednesday.
On 12th December 2022, the company announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which, based on the dates of the company's last five AGMs, we estimate will take place between 1st April 2024 and 11th June 2024. The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
 
The company previously indicated/announced that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.  
 
The search for the next CEO is being led by the company's chairman and non-executive director Steven Owen. To help maintain the independence of a non-executive director position, the position is normally served by someone for a maximum nine years. For Mr. Owen, the nine years will elapse in January 2023; however, to ensure a smooth transition of the CEO position, he will remain as the chairman until the new CEO appointment, subject to shareholder approval. Also, he will remain a member of the Nomination Committee and ESG Committee until the appointment, and cease to be a member of the Remuneration Committee from 31<sup>st</sup> December 2022.
{| class="wikitable"
|+The dates of the company's last five AGMs
!#
!Date
!Day of the week
|-
|1
|27th April 2022
|Wednesday
|-
|2
|12th May 2021
|Wednesday
|-
|3
|1st April 2020
|Wednesday
|-
|4
|11th June 2019
|Tuesday
|-
|5
|18th April 2018
|Wednesday
|}
== Financials ==
== Financials ==


In light of the announcements, we have maintained our forecasts, which can be found by clicking [https://www.proactiveinvestors.co.uk/companies/news/989735/strong-first-half-2022-results-from-php-989735.html/long here].
== Risks ==
As with any investment, investing in Primary Health Properties carries a level of risk. Overall, based on the company's market beta (i.e. 0.531), the degree of risk associated with an investment in Primary Health Properties is relatively 'low'.


== Risks ==
Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
As with any investment, investing in Primary Health Properties carries a level of risk. Overall, based on the company's market beta (i.e. 0.531), the degree of risk associated with an investment in Primary Health Properties is relatively 'high'. Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice.


For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.
For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.


== Valuation ==
== Valuation ==
Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or less, the approach that is more accurate is the relative valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.


==== What's the expected return of an investment in Primary Health Properties using the relative valuation approach? ====
==== What's the expected return of an investment in Primary Health Properties using the absolute valuation approach? ====
Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc within 12-months from now. The assumptions used to estimate the return figure can be found in the table below.
Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is 59%. In other words, an £100,000 investment in the company is expected to return £159,000 in 12-months from now. The assumptions used to estimate the return figure can be found in the table below.


Assuming that a suitable return level in the 12 months is 10% and Primary Health Properties Plc achieves its expected return level (of ccc%), then an investment in the company is considered to be a 'suitable' one.
Assuming that a suitable return level in the 12 months is 10% and Primary Health Properties Plc achieves its expected return level (of 59%), then an investment in the company is considered to be a 'suitable' one.


==== What are the assumptions used to estimate the return figure? ====
==== What are the assumptions used to estimate the return figure? ====
Line 62: Line 34:
!Commentary
!Commentary
|-
|-
|Which type of multiple do you want to use?
|Which valuation model do you want to use?
|P/FFO
|Discounted cash flow
|The FFO does not account for depreciation in properties but rather adds back the depreciation value back to the net income. Furthmore, FFO deducts any gains or losses from the sale of assets, since including the transaction would result in discrepancies in the revenues reported in each period. Accordingly, we suggest valuing the company using the Price to Funds From Operations (P/FFO) ratio.
|Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
|-
|-
|In regards to the P/FFO multiple, for the FFO figure, which year to you want to use?
|Which type of discounted cash flow model do you want to use?
|Twelve months ahead
|Dividend discount model
|Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the FFO figure, we suggest using the twelve months ahead.
|The dividend discount model (DDM) is one of the most common discounted cash flow models.  
|-
|-
|In regards to the P/FFO multiple, what multiple figure do you want to use?
|How many distinct stage of growth do you want to use?
|18x
|One stage
|According to Bloomberg, Primary Health Properties Plc closest peers trade on a multiple of 18x.
|For simplicity, we have used the one stage pattern here.
|-
|-
|Which financial forecasts to use?
|What is the expected constant growth rate in dividends?
|3%
|We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. Over the last 10 years, the median dividend growth rate of the company is 2.78% and the mean is 3.47%.
|-
|Which forecasts to use for the one-year ahead expected dividend amount?  
|Proactive Investors
|Proactive Investors
|Here, we have used the forecasts of Proactive Investors.
|Here, we have used the forecasts of Proactive Investors.
|-
|What is the required return on equity?
|7%
|For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below.
|-
|-
|What's the current value of the company?
|What's the current value of the company?
|£981.20 million
|108.9 pence per share
|As at 22nd November 2022, the current value of Primary Health Properties Plc is £981.20 million.
|As at 12th December 2022, the current value of Primary Health Properties Plc is 108.9p per share.
|}
 
{| class="wikitable"
|+Cost of equity (%)
!Input
!Input value
!Additional information
|-
|-
|Which time period do you want to use to estimate the expected return?
|Risk-free rate (%)
|Between now and one year time
|3.55%
|Research suggests that when using the relative valuation approach, it's best to estimate the expected return of the company between now and one year time.
|Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 12th December 2022.
|-
|Beta
|0.531
|Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta; because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
|-
|Equity risk premium (%)
|6.00
|Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022 (<nowiki>https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html</nowiki>).
|-
|Cost of equity (%)
|6.74%
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|}
|}
Health Care REIT
 
== Sensitive analysis ==
The three main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):
 
# The discount rate (the default multiple is 6.74%);
#The dividend growth rate (the default multiple is 2.78%); and
# The dividend per share forecast (the default forecast is 6.69 pence per share).
 
The impact of a 30% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.
{| class="wikitable sortable"
|+Primary Health Properties investment expected return sensitive analysis
!Main input
!20% worse
!Unchanged
!20% better
|-
|Discount rate
|4%
|58%
|233%
|-
|Dividend per share
|11%
|58%
|106%
|-
|Growth rate
|28%
|58%
|106%
|}
 
== Appendix ==
 
=== Peers ===
{| class="wikitable"
{| class="wikitable"
|+Peers
|+Peers
Line 92: Line 125:
!Bloomberg ticker
!Bloomberg ticker
!Primary exchange
!Primary exchange
!Classification
!Industry
!Market capitalisation (GBP)
!Market capitalisation (GBP)
!BF P/FFO
!BF P/FFO
Line 102: Line 133:
|Primary Health  Properties PLC
|Primary Health  Properties PLC
|PHP LN
|PHP LN
|
|United Kingdom
|
|
|1,459m
|1,459m
|0.168
|0.168
Line 113: Line 142:
|Assura PLC
|Assura PLC
|AGR LN
|AGR LN
|
|United Kingdom
|Multi Asset Class Own & Develop
|Real Estate Owners & Developers
|1,578m
|1,578m
| --
| --
Line 124: Line 151:
|Aedifica SA
|Aedifica SA
|AED BB
|AED BB
|
|Belgium
|Multi Asset Class Own & Develop
|Real Estate Owners & Developers
|2,660m
|2,660m
|14.8279
|14.8279
Line 135: Line 160:
|Target Healthcare REIT PLC
|Target Healthcare REIT PLC
|THRL LN
|THRL LN
|
|United Kingdom
|Multi Asset Class Own & Develop
|Real Estate Owners & Developers
|477m
|477m
| --
| --
Line 146: Line 169:
|Cofinimmo SA
|Cofinimmo SA
|COFB BB
|COFB BB
|
|Belgium
|Multi Asset Class Own & Develop
|Real Estate Owners & Developers
|2,340m
|2,340m
|11.3873
|11.3873
Line 157: Line 178:
|Impact Healthcare Reit PLC
|Impact Healthcare Reit PLC
|IHR LN
|IHR LN
|
|United Kingdom
|Multi Asset Class Own & Develop
|Real Estate Owners & Developers
|404m
|404m
|0.1111
|0.1111
Line 167: Line 186:
|}
|}


== Sensitive analysis ==
=== Other information ===
The two main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):
Key things about the investment case of the company:
 
* Dividend growth every year since inception (i.e. for 26 years).
* 89% of rents are covered by government national health bodies of the UK and Ireland, supporting 99.7% occupancy rates and minimal tenant defaults or similar unplanned costs.
* The lowest cost ratio (costs / rental income) in the whole of the UK REIT (real estate investment trust) space, with a EPRA (European Real Estate Association) cost ratio at 10.5%.
* 95% of group debt is hedged for almost eight years.
* A quarter of rent roll is explicitly linked to inflation, and management argues that the balance is effectively linked to inflation through replacement cost.
* Headroom to continue growing the portfolio of health centres.
* An improving rental growth outlook, with rent reviews and asset management projects completed in the first half of this year adding £1.8m or 1.3% on a like-for-like basis.
 
 
 
Valuation


# The P/FFO multiple (the default multiple is 18x); and
The stock trades on 22.4x our FY22 earning forecast, which falls to 21.8x in FY23. On our forecasts, the dividend yields 4.5% this year, rising to 4.6% next year. We believe the valuation is attractive, given the strong track record, low operational risk profile and attractive business drivers.
# The twelve months ahead FFO forecast (the default forecast is €98.78 million).


The impact of a 10% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.
=== Dividends ===
{| class="wikitable sortable"
Over the last 10 years, the median dividend of the company is 2.78% and the mean is 3.47%.
|+Primary Health Properties investment expected return sensitive analysis
{| class="wikitable"
!Main input
|+Dividends
!10% worse
!Year
!Unchanged
!Q1
!10% better
!Q2
!Q3
!Q4
!Total
!Growth (%)
|-
|2022
|1.625
|1.625
|1.625
|1.625
|6.5
|4.84%
|-
|2021
|1.55
|1.55
|1.55
|1.55
|6.2
|5.08%
|-
|2020
|1.475
|1.475
|1.475
|1.475
|5.9
|5.36%
|-
|2019
|1.4
|1.4
|1.4
|1.4
|5.6
|3.70%
|-
|2018
|1.35
|1.35
|1.35
|1.35
|5.4
|2.86%
|-
|2017
|1.31
|1.31
|1.31
|1.32
|5.25
|2.44%
|-
|2016
|1.28125
|1.28125
|1.28125
|1.28125
|5.125
|2.50%
|-
|2015
|0
|2.5
|0
|2.5
|5
|2.56%
|-
|2014
|0
|2.4375
|0
|2.4375
|4.875
|2.63%
|-
|-
|The P/FFO multiple
|2013
|43%
|0
|57%
|2.375
|73%
|0
|2.375
|4.75
|2.70%
|-
|-
|The twelve months ahead FFO forecast
|2012
|43%
|0
|57%
|2.3125
|73%
|0
|2.3125
|4.625
|
|}
|}


== Appendix ==
== References and notes ==
 
 
 
healthcare properties in the UK and Ireland.

Latest revision as of 13:50, 13 December 2022

SummaryEdit

  • Primary Health Properties, the FTSE 250 healthcare real estate investment company, has announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which we estimate will take place between 1st April 2024 and 11th June 2024.
  • The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
  • Accordingly, we have maintained our forecasts, continue to note that the degree of risk associated with an investment in Primary Health Properties is relatively low and remain of the view that the valuation of the company is attractive.

Succession PlanningEdit

On 12th December 2022, the company announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which, based on the dates of the company's last five AGMs, we estimate will take place between 1st April 2024 and 11th June 2024. The company previously indicated that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.

FinancialsEdit

In light of the announcements, we have maintained our forecasts, which can be found by clicking here.

RisksEdit

As with any investment, investing in Primary Health Properties carries a level of risk. Overall, based on the company's market beta (i.e. 0.531), the degree of risk associated with an investment in Primary Health Properties is relatively 'low'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.

For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.

ValuationEdit

Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.

What's the expected return of an investment in Primary Health Properties using the absolute valuation approach?Edit

Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is 59%. In other words, an £100,000 investment in the company is expected to return £159,000 in 12-months from now. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level in the 12 months is 10% and Primary Health Properties Plc achieves its expected return level (of 59%), then an investment in the company is considered to be a 'suitable' one.

What are the assumptions used to estimate the return figure?Edit

Key inputs
Description Value Commentary
Which valuation model do you want to use? Discounted cash flow Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
Which type of discounted cash flow model do you want to use? Dividend discount model The dividend discount model (DDM) is one of the most common discounted cash flow models.
How many distinct stage of growth do you want to use? One stage For simplicity, we have used the one stage pattern here.
What is the expected constant growth rate in dividends? 3% We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. Over the last 10 years, the median dividend growth rate of the company is 2.78% and the mean is 3.47%.
Which forecasts to use for the one-year ahead expected dividend amount? Proactive Investors Here, we have used the forecasts of Proactive Investors.
What is the required return on equity? 7% For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below.
What's the current value of the company? 108.9 pence per share As at 12th December 2022, the current value of Primary Health Properties Plc is 108.9p per share.
Cost of equity (%)
Input Input value Additional information
Risk-free rate (%) 3.55% Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 12th December 2022.
Beta 0.531 Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta; because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
Equity risk premium (%) 6.00 Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022 (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html).
Cost of equity (%) 6.74% Cost of equity = Risk-free rate + Beta x Equity risk premium.

Sensitive analysisEdit

The three main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):

  1. The discount rate (the default multiple is 6.74%);
  2. The dividend growth rate (the default multiple is 2.78%); and
  3. The dividend per share forecast (the default forecast is 6.69 pence per share).

The impact of a 30% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.

Primary Health Properties investment expected return sensitive analysis
Main input 20% worse Unchanged 20% better
Discount rate 4% 58% 233%
Dividend per share 11% 58% 106%
Growth rate 28% 58% 106%

AppendixEdit

PeersEdit

Peers
Company name Bloomberg ticker Primary exchange Market capitalisation (GBP) BF P/FFO Yield (%) Interest cover (x) Total debt/total capital
Primary Health Properties PLC PHP LN United Kingdom 1,459m 0.168 5.95% N/A 46%
Assura PLC AGR LN United Kingdom 1,578m -- 5.77% 3.77 41%
Aedifica SA AED BB Belgium 2,660m 14.8279 4.75% 5.91 43%
Target Healthcare REIT PLC THRL LN United Kingdom 477m -- 8.78% 8.35 25%
Cofinimmo SA COFB BB Belgium 2,340m 11.3873 7.12% 7.80 44%
Impact Healthcare Reit PLC IHR LN United Kingdom 404m 0.1111 6.51% N/A 22%

Other informationEdit

Key things about the investment case of the company:

  • Dividend growth every year since inception (i.e. for 26 years).
  • 89% of rents are covered by government national health bodies of the UK and Ireland, supporting 99.7% occupancy rates and minimal tenant defaults or similar unplanned costs.
  • The lowest cost ratio (costs / rental income) in the whole of the UK REIT (real estate investment trust) space, with a EPRA (European Real Estate Association) cost ratio at 10.5%.
  • 95% of group debt is hedged for almost eight years.
  • A quarter of rent roll is explicitly linked to inflation, and management argues that the balance is effectively linked to inflation through replacement cost.
  • Headroom to continue growing the portfolio of health centres.
  • An improving rental growth outlook, with rent reviews and asset management projects completed in the first half of this year adding £1.8m or 1.3% on a like-for-like basis.


Valuation

The stock trades on 22.4x our FY22 earning forecast, which falls to 21.8x in FY23. On our forecasts, the dividend yields 4.5% this year, rising to 4.6% next year. We believe the valuation is attractive, given the strong track record, low operational risk profile and attractive business drivers.

DividendsEdit

Over the last 10 years, the median dividend of the company is 2.78% and the mean is 3.47%.

Dividends
Year Q1 Q2 Q3 Q4 Total Growth (%)
2022 1.625 1.625 1.625 1.625 6.5 4.84%
2021 1.55 1.55 1.55 1.55 6.2 5.08%
2020 1.475 1.475 1.475 1.475 5.9 5.36%
2019 1.4 1.4 1.4 1.4 5.6 3.70%
2018 1.35 1.35 1.35 1.35 5.4 2.86%
2017 1.31 1.31 1.31 1.32 5.25 2.44%
2016 1.28125 1.28125 1.28125 1.28125 5.125 2.50%
2015 0 2.5 0 2.5 5 2.56%
2014 0 2.4375 0 2.4375 4.875 2.63%
2013 0 2.375 0 2.375 4.75 2.70%
2012 0 2.3125 0 2.3125 4.625

References and notesEdit

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