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Nick Sudbury looks at a real estate investment trust where the returns should be relatively immune from any Brexit-related slowdown.
Income investors are often drawn to the high yields available from Real-Estate Investment Trusts (REITs), but the problem is that most of these vehicles are economically cyclical with the rents and capital values at risk during a downturn. One of the few exceptions is Primary Health Properties (LON:PHP), which provides exposure to a portfolio of healthcare facilities.
The majority of PHP’s 479 properties are GP surgeries, with other holdings let to NHS or Irish Health Service Executive organisations, pharmacies and dentists. These purpose-built facilities generate a reliable income stream as they benefit from long-term leases, backed by a secure covenant, with the UK rental income funded directly or indirectly by a government body.
There is no speculative development in Primary Care in the UK, with supply controlled by the NHS. The sector also benefits from strong occupier and investment market dynamics, underpinned by cross-party political support, which along with the reliable prospective yield of 4.3% explains the low volatility of PHP’s share price.
Earlier this year the fundcompleted an all-share merger with MedicX, a similar investment trust, which brought together two high quality portfolios and increased the market value to around £1.5bn. The broker Numis believes that this was an excellent result for shareholders and created a more liquid vehicle offering one of the most attractive low-cost income profiles amongst the listed REIT universe.
Another strong year
The accounts for the year ended 31 December 2018 show that it was another strong year for the fund with double-digit earnings growth and a positive revaluation of the properties resulting in an EPRA NAV total return of 9.7%.
PHP’s portfolio has an attractive rent review profile with 6% of the rents subject to a fixed uplift, 22% subject to an RPI uplift and the remainder determined on an open market review (OMR) basis. These OMRs are effectively upward only for primary health leases, with the reviews triggered by the landlord. This high quality income stream is further underpinned by the fact that 73% of the leases have more than 10 years remaining.
Numis say that PHP is well placed in a niche and growing real estate sub-sector and expect it to benefit from further dividend growth. They estimate that it will deliver a NAV total return (compound annual growth rate) of 8.1% per annum over the next three years.
High quality income stream
The fund’s high quality income stream and its low share price volatility has resulted in strong investor demand for the shares, which has pushed them on to a premium rating. This currently stands at 22% relative to the historic NAV, falling to 13% versus the 2021 estimated NAV.
Obviously this could be a massive risk for new investors, although Numis expect the premium rating to be retained given the favourable market dynamics, flexible balance sheet and attractive prospective dividend yield of 4.3%.
Primary Health Properties is a defensive fund with a solid and attractive yield. These characteristics are reflected in its premium rating, but if you are looking for a dependable source of income that could withstand an economic slowdown it would be well worth considering.
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