TIDMPHP
RNS Number : 4958A
Primary Health Properties PLC
20 February 2014
Primary Health Properties PLC
A dedicated healthcare REIT
Audited Results for the year ended 31 December 2013
- increased rental income and capital growth -
- portfolio significantly grown through strategic acquisitions
-
Primary Health Properties PLC ("PHP", the "Group" or the
"Company"), the UK's leading investor in modern primary healthcare
facilities, is pleased to announce its audited results for the year
ended 31 December 2013.
GROUP OPERATIONAL HIGHLIGHTS
-- Group rental income received increased by 27% to GBP42.0 million (2012: GBP33.2 million)
-- Acquisition of Prime Public Partnerships ("PPP") portfolio of
54 high quality properties for a gross consideration of some GBP233
million, adding GBP14.4 million to annual rent roll
-- Further 23 properties acquired or committed to fund at a
total cost of GBP70 million; contracted rent of GBP4.3 million,
including Primary Health Care Centres Limited
-- Investment property as at 31 December 2013 GBP941.6 million (31 December 2012: GBP622.4)
-- Including cost to complete development commitments, total
portfolio value has increased by 48% to GBP959 million (2012:
GBP645 million) at a net initial valuation yield of 5.65% (2012:
5.72%)
-- Average annualised uplift of 2.2% on reviews completed in the
year (2012: 2.4%), combined with acquisitions and commitments,
annualised rent roll increased by over 48% to GBP57.6 million
(2012: GBP38.9 million)
-- Portfolio 99.7% let with 16 years weighted average lease length (including commitments)
-- Revised terms for provision of property advisory and
administrative services to generate annualised savings in excess of
GBP0.8 million
-- Appointment of Alun Jones as Chairman and Steven Owen as a non-executive director
GROUP FINANCIAL HIGHLIGHTS
-- Operating profit before result on property portfolio rose
18.7% to GBP32.8 million (2012: GBP27.6 million)
-- Adjusted earnings increased by 28% to GBP9.5 million (2012: GBP7.4 million)
-- Total of GBP140 million of new debt facilities completed:
o new, four year GBP70 million revolving debt facility with Barclays Bank plc
o a GBP70 million, secured, twelve year floating rate corporate bond
-- Equity raising (net of costs) of GBP65.8 million in June 2013
-- PPP portfolio acquisition funded by assumption of GBP178
million of fixed rate debt, with allowance for refinance cost and
issue of GBP42.6 million in shares to vendors
-- First stage of restructuring of PPP debt undertaken with
effect from 1 January 2014, reducing running interest rate by 80
basis points, an annual saving of GBP1.4 million
-- Payment of 19.0p per share of dividends during the year
(2012: 18.5p), the 17th successive year of dividend growth
-- 9.75p per share second interim dividend for 2013 declared, payable on 25 April 2014
-- EPRA net asset value of GBP330.9 million (2012: GBP231.9 million)
Harry Hyman, Managing Director of Primary Health Properties,
commented:
"I am delighted to announce the results of another busy and
successful year for PHP. We have made significant investment in
high quality properties in the year that has been funded by
shareholder equity and accessing new sources of finance at
attractive rates.
"The Company has taken steps to progress its stated intention to
return to full dividend cover, including changing advisory fee
structures which will generate savings for the Group which when
added to the increased earnings from the portfolio will see
dividend cover grow materially in 2014. This growth has been
achieved whilst maintaining a progressive dividend policy with 2013
being the 17th consecutive year of increased dividend for the
Group.
"The acquisitions in the year have increased the Group's rent
roll and provide opportunity for growth on review and additional
income and capital value from asset management opportunities. Since
the year end, we have successfully refinanced the GBP178 million of
debt finance that we assumed with the acquisition of the PPP
portfolio which has a further positive impact on earnings.
"Across the UK there are an estimated 10,000 GP premises,
housing nearly 35,000 GPs, however a large part these are ageing,
converted residential premises where considerable investment is
needed in order to provide efficient, hygienic, modern premises.
The Group remains ideally placed to provide the services being
demanded from new, modern specialist premises and we look forward
to the future with confidence."
For further information contact
Harry Hyman Phil Holland
Primary Health Properties PLC Primary Health Properties
T +44 (0) 20 7451 7050 PLC
harry.hyman@nexusgroup.co.uk T +44 (0) 20 7451 7050
phil.holland@nexusgroup.co.uk
David Rydell / Victoria Geoghegan
/ Elizabeth Snow
Pelham Bell Pottinger
T +44 (0) 20 7861 3232
-------------------------------
Joshua Cryer / Robert Irvin
Broker Profile
T +44 (0) 207 448 3244
-------------------------------
Chairman's Statement
In my final report to shareholders as Chairman of PHP, I am
delighted to be commenting on such an acquisitive and successful
year as 2013 was for the Group.
The attractiveness of the Group's property portfolio and long
term, transparent income stream was a key factor as we raised fresh
equity finance and diversified and lengthened the Group's lending
sources, accessing low interest rates that prevailed throughout the
year. With this resource secured we demonstrated our ability to
invest successfully increasing rental income and earnings to make
progress toward meeting a key Board objective of restoring dividend
cover.
Performance
Rental income received in the year grew 27% to GBP42.0 million
(31 December 2012: GBP33.2 million) as the impact of prior
acquisitions was realised, rent commenced upon the delivery of new
stock and rent review increases were achieved. The rate of rental
growth for the year at 2.2% was lower than that of 2.4% achieved in
2012, but the return of growth to the UK economy and the increased
proportion of our portfolio with RPI linked or fixed reviews (21%
compared to 17%), should counteract lower open market reviews being
achieved.
Operating profit grew to GBP32.8 million (2012: GBP27.6 million)
and advisory fees for the year fell to an average rate of 0.71% of
gross assets (2012: 0.75%). Net debt costs increased to GBP26.0
million (2012: GBP20.2 million) reflecting the higher average debt
outstanding through the year as the property portfolio grew and
also a full year impact of the higher borrowing margins imposed on
the Group in April 2012.
Property portfolio
Over GBP300 million of assets were added to the Group's
portfolio in 2013. At the balance sheet date, Investment properties
stood at GBP941.6 million (31 December 2012: GBP622.4 million). The
portfolio comprised of 259 primary care centres which included 7
properties under construction at the year-end that are all due to
complete in 2014. The total cost to complete these developments is
GBP17.1 million taking the value of the portfolio when complete to
GBP958.7 million (31 December 2012: GBP645.4 million).
The portfolio saw a valuation uplift of 3.5%, an equivalent
yield of 5.92% (31 December 2012: 6.05%). The valuation and
tightening of yield in 2013 reflects the prime nature of the
assets, underpinned by a weighted average lease term remaining
("WAULT") of 16 years (31 December 2012: 16 years) and strong
Government covenant.
We have a good pipeline of further acquisition opportunities
which is enhanced by an agreement entered into with Prime plc in
December, a highly regarded developer in our sector, with regard to
future primary care developments they may undertake.
We expect the new fiscal year to see an increased number of
approvals of new primary care developments as the demand for modern
premises continues and operations normalise following the changes
to NHS management in England in 2013.
A number of opportunities have been identified to add value to
our properties through physical extensions and lease extensions and
renewals that will generate additional rental income and provide
capital growth.
Prime Public Partnerships ("PPP")
The acquisition of the PPP portfolio was the largest transaction
completed in 2013. 54 completed assets were acquired for an
aggregate of GBP233 million in December 2013. PHP assumed existing
debt of GBP178 million and issued 12.86 million ordinary shares to
the vendors, materially adding to PHP's property portfolio and
capital base. This material addition to PHP's portfolio enhances
the Group's WAULT and average lot size and increases the proportion
of total rent roll that is subject to increases linked to RPI.
Share capital
In June 2013, we raised GBP65.8 million of equity, net of costs,
issuing 21.7 million shares at 315 pence each. A total of 12.86
million shares were issued at an agreed value of 320 pence to the
vendors as consideration for the PPP portfolio. An initial 12.58
million were issued on completion and 0.28 million were issued in
January 2014 as the completion accounts were finalised.
Funding
In March 2013 we completed the refinance of the debt that we
assumed with our acquisition of the Apollo portfolio in December
2012. This saw a new GBP70 million four year facility arranged with
Barclays Bank PLC.
In November, the Group issued a 12 year GBP70 million secured
variable rate bond that is traded on the Main Market of the London
Stock Exchange. An initial sum of GBP60 million was funded with the
final GBP10 million to be received in June 2014, when a tranche of
forward funded assets are scheduled to be complete.
Net debt outstanding as at 31 December 2013 totalled GBP580
million (31 December 2012: GBP381 million) including the GBP178
million acquired with the PPP portfolio.
Headroom on debt facilities was GBP75 million. Adding cash
balances of GBP9.3 million and allocating headroom to fund the cost
to complete development commitments of GBP17.1 million reduces net
headroom to GBP67.2 million. Group loan to value was 61.6% (31
December 2012: 60.9%).
Additional headroom has been added in February 2014 with the
signing of an amendment to the Club facility, reinstating GBP25
million of resource that was repaid and cancelled upon the issue of
the secured bonds. Discussions are ongoing with other debt
providers that provide evidence that lending margins are
softening.
I can also announce that we have now completed the first stage
of the refinance of the debt assumed with PPP. With effect from 1
January 2014, the average interest rate charged on this debt has
been reduced by 80 basis points, saving the Group an estimated
GBP1.4m per annum.
Dividends
PHP paid a total of 19.0 pence per share in dividends to
shareholders in the year, the 17th successive year of dividend
growth. The strength of the Group's income and the positive outlook
for growth underpinned the increase for 2013. The Board has now
approved the payment of a second interim dividend of 9.75p per
share in respect of 2013. This will be payable on 25 April 2014 to
shareholders on the register on
14 March 2014, with an ex-dividend date of 12 March 2014.
Dividend cover improved marginally to 57% (2012: 56%) and is set
to improve further in 2014 as the activity of 2013 impacts earnings
together with reduced fee rates for advisory services and debt
costs for the PPP loans.
Changes to Advisory Services
The Board has taken action to restructure the costs of advisory
services provided to the Group. From 30 April 2014 advisory
services will be provided solely by Nexus, the existing joint
adviser, as they take on responsibility for delivering the
administrative and company secretarial services. In accordance with
the terms of their contract, the cost of compensating J O Hambro
Capital Management Limited for its early termination is GBP2.5
million. This is payable on 30 April 2014 but has been expensed in
2013.
New fixed compensation rates for these services have been agreed
with Nexus, effective from April 2014. No longer linked to the
value of gross assets, the saving is estimated to be in excess of
GBP800,000 per annum, representing a short payback period. The
saving will be more pronounced as the Group's portfolio continues
to grow.
In February 2014, we announced changes to the basis on which
property advisory fees are paid to Nexus. New, lower incremental
fee rates were introduced for gross assets above GBP1 billion,
between
GBP1 billion and GBP1.25 billion and then above GBP1.25
billion.
These changes are designed to reflect the fact that growth in
gross assets should not lead to a proportionate increase in
management costs as economies of scale are able to be secured.
Auditors
Following best governance practice, the Company tendered its
audit services during the first half of 2013. After detailed
deliberation following a thorough tender process, the Directors
appointed Deloitte LLP as auditors to the Group and look forward to
working with Deloitte through their term of office.
Board changes
As announced on 19 December 2013, I will not be seeking
re-election as Chairman. Alun Jones, who is the Chairman of the
Audit Committee, will assume the role of Chairman from the end of
the 2014 Annual General Meeting. The Board has appointed Steven
Owen as a non-executive director with effect from 1 January 2014
and he will chair the Audit Committee when Alun becomes Group
Chair.
Change to the NHS in England
2013 saw the implementation of major changes in the structure of
the NHS in England. Clinical Commissioning Groups ("CCGs") replaced
Primary Care Trusts ("PCTs") and responsibility for rent
reimbursement to GPs moved to the newly formed NHS England. PCT
lease liabilities were taken over by NHS Property Services
("NHSPS"), a company wholly owned by the Secretary of State for
Health. Although these changes have delayed the approval of new
projects, our rent collection performance has remained strong.
The changing demographic backdrop is placing increasing demands
on the primary care sector as technological advances provide the
opportunity for more services to be delivered from within the
community. This reinforces the importance of primary care in
delivering health services through General Practitioners with the
need for modern purpose built accommodation remaining strong.
We continue to develop relationships with the management of both
NHS England and NHSPS to ensure that the Group remains in the
strongest position to fund future development of primary care
centres in the UK.
Outlook
During 2013, we have taken a number of significant steps in
accordance with our strategic objectives and towards achieving the
Group's short term priority of returning to a fully covered
dividend, all whilst maintaining a progressive dividend policy.
The reduction in fee rates for advisory services will enhance
earnings as will the recent refinance of the PPP portfolio debt.
Our advisory team will secure value add opportunities within the
portfolio and continue to secure rental growth from reviews in the
portfolio.
We have entered into a number of key strategic pipeline
agreements that will deliver future opportunities to secure
additional modern primary care properties. PHP is in a good
position to deliver its business strategy of generating high
quality income and asset improvement in the medium term as the
demand for new, modern bespoke premises continues.
I would like to thank my colleagues for their hard work and
support and am confident that 2014 will be a further successful
year.
Graeme Elliot
Chairman
19 February 2014
Strategic Review
Strategic objectives
The overall objective of the Group is to create progressive
returns to shareholders through a combination of earnings growth
and capital appreciation. To achieve this, PHP invests in primary
health care properties across the United Kingdom let on long term
leases, backed by a secure underlying covenant where rents are
funded directly or indirectly by the UK government.
PHP's strategy is to:
(1) acquire modern, purpose built primary care premises that
provide secure long term income streams with the potential for
rental growth;
(2) manage its portfolio through ongoing discussion and
cooperation with its tenants and the NHS in order to increase its
rental potential, maintain the longevity of underlying income
streams and secure capital growth;
(3) fund its investment through a prudent mix of shareholder
equity and debt in order to generate a leveraged return to its
investors within an established range of risk parameters;
(4) secure a diversified range of debt funding sources and maturities; and
(5) maintain a progressive dividend policy where dividends are covered by adjusted profits; and
(6) deliver returns to shareholders through a combination of dividend and share price growth.
Business model and strategy
PHP's business model is to invest solely in the freehold or long
leasehold of modern purpose-built primary healthcare facilities
leased to general practitioners, NHS organisations and other
associated healthcare users, including on-site pharmacies. Usually
having original lease terms of 21 years or more, at effectively
upward only rentals, the large majority of income is received
either directly from the NHS or funded by the NHS by way of
reimbursing property costs to GP tenants.
The Group engages in development activity in partnership with a
number of specialist developers in the sector, committing to fund
and acquire new assets as they are constructed, but contracting to
do so only once the major areas of risk such as agreements to let
to GP occupiers have been entered into.
The Group also invests in completed, let properties acquired
from a range of investors, provided the underlying occupational
leases and other property fundamentals meet its investment
criteria.
Each potential investment is evaluated for its income and asset
value growth potential. In particular PHP seeks possibilities for
extending the term of the underlying leases and scope to add to the
income and value from providing additional space and facilities in
the future.
The Group finances its portfolio with a mix of equity and debt,
the proportions of which are kept under regular review to optimise
risk adjusted returns to shareholders over the long term. Debt
facilities are varied, accessing both traditional bank lenders and
debt capital markets in the form of unsecured retail bonds and
secured corporate bonds. Facilities are closely monitored to target
a spread of providers and range of maturities to ensure continuity
and availability that match the longevity of income streams.
Following the successful refinance of the Group's core banking
facilities in 2012, key strategic objectives for 2013 were:
-- increasing earnings in order to rebuild dividend cover,
aiming to return to full cover at the earliest opportunity; and
-- widening the sources of debt funding accessed by the Group,
with the aim of extending the average maturity of facilities to
better match the average duration of the Group's occupational
leases.
The Board aimed to achieve these objectives whilst maintaining
the core fundamentals of the property portfolio and the longer term
objectives of the Group, being;
-- to secure long term income;
-- maintain and enhance the WAULT within the portfolio;
-- increase the average lot size of its property assets;
-- lower its total expense ratio ("TER"); and
-- reduce its average cost of borrowing.
The Primary Care Property sector
The sector in which PHP chooses to invest has a number of key
characteristics that differentiate it from other property sectors
and underpin its attractiveness and growth potential.
Primary care is the foundation of the healthcare services
provided by the National Health Service ("NHS") in the UK. The GP
continues to be the first point of access to the NHS for UK
residents other than acute emergency care. Across the UK there are
an estimated 10,000 GP premises, housing nearly 35,000 GPs. A large
part of this primary care estate is comprised of ageing, converted
residential premises where considerable investment is needed in
order to provide efficient, hygienic, modern premises. The NHS
requires buildings that are capable of coping with the increasing
demands placed upon primary care and also of housing new and
improved equipment that has resulted from technological advances
and a widening array of services that are being provided locally in
their communities by GPs and their practices.
It is a long standing feature of the sector that GPs receive
reimbursement for costs associated with their premises from the
NHS. Where their premises take the form of properties leased from
PHP or others, the reimbursement is for the rent paid to the
landlord and for the costs of maintaining and insuring the
property. These principles are set out in legislation in the
constitution of the NHS and currently governed by the National
Health Service (General Medical Services - Premises Costs)
Directions 2013, which came into force on 1 April 2013 (the
"Directions").
The political drive to move health care services into the local
community, where they can be delivered more cost effectively and
provide greater choice to the patient, requires modern, purpose
built properties from which these services can be provided. There
is still a long way to go in modernising the primary care estate
and that development will require the investment capital that
private sector investors such as PHP can provide. PHP has an 18
year track record of investing in the primary care sector, working
with specialist developers, GP groups and the NHS to develop high
quality premises and adapt both the physical volume and
configuration of space to meet the changing needs of the
sector.
Summary
The Business Review brings together an overview of our business
model and strategy. We look at how we performed in the year and
progress made in the business and the Group's financial position,
and we assess the key risks and performance indicators.
These pages illustrate the progress made in recent years. Our
strategic priorities have not changed and we will continue to aim
to source attractive acquisitions through portfolio purchases and
individual property transactions in order to enhance returns to
shareholders and increase dividend cover.
The Chairman's Statement should be read together with the
Strategic Review of which it is deemed to be a part.
Business Review
Our key measurements of success
2013 2012 2011 2010 2009
------------------------------ ---------- ---------- ---------- ---------- ----------
Total Investment Property(1) GBP958.7m GBP645.4m GBP539.7m GBP503.6m GBP371.0
Average lot size GBP3.7m GBP3.5m GBP3.4m GBP3.1m GBP3.2m
Total property return
(ungeared) 8.23% 6.99% 8.25% 10.21% 2.93%
Rent roll GBP57.6m GBP38.9m GBP31.4m GBP28.0m GBP21.3m
Dividend per share 19.0p 18.5p 18.0p 17.5p 17.0p
Dividend cover 57% 56% 82% 84% 128%
Net asset value (EPRA) GBP330.9m GBP231.9m GBP217.6m GBP195.6m GBP172.0m
Net asset value per share
(EPRA) 300 p 305 p 319 p 311 p 280 p
------------------------------ ---------- ---------- ---------- ---------- ----------
(1) Includes value of ongoing developments as completed
Property portfolio
The Group's property portfolio as at 31 December comprised of a
total of 259 assets, 252 of which are completed, let investments
and 7 that were on site under construction.
(31 December 2012: total 183, 176 completed, 6 under
construction, one deferred completion).
Portfolio valuation and performance
2013 2012
GBPm GBPm
------------------------------------------ ------ ------
Investment properties 929.9 606.7
Properties in the course of development 11.7 15.7
------------------------------------------ ------ ------
Total properties 941.6 622.4
Finance leases - 3.1
------------------------------------------ ------ ------
Total owned and leased 941.6 625.5
Cost to complete development commitments 17.1 19.9
------------------------------------------ ------ ------
Total owned, leased and committed 958.7 645.4
------------------------------------------ ------ ------
Lambert Smith Hampton ("LSH"), Chartered Surveyors and Valuers,
independently valued the portfolio as at the balance sheet date at
market value as defined by the Royal Institution of Chartered
Surveyors ("RICS"). The valuation, undertaken on the basis that all
committed development properties and the deferred contract had
completed, totalled GBP958.7 million. This generated a net surplus
on revaluation of GBP2.3 million for the year.
The wider UK economic recovery has had a positive impact on the
property sector as a whole. Confidence is returning to most
commercial sectors resulting in "all-property" investment yields
tightening in the second half of 2013. The long term, secure nature
of primary care properties has traditionally resulted in a more
stable valuation environment with much less volatility in valuation
yields when compared to traditional commercial property
sectors.
The general improvement in property sentiment combined with
continued demand and increased competition for primary care assets,
as investors are attracted by the secure, long term nature of the
underlying income, has led to some minor yield tightening through
2013. The portfolio valuation as at 31 December 2013 reflected an
average net initial yield of 5.65% (31 December 2012: 5.72%) with a
true equivalent yield of 5.92% (31 December 2012: 6.05%).
The Group's property portfolio showed a total return of +8.2% in
2013, +5.6% per annum over the three years to the balance sheet
date and +8.1% per annum over the five year period to 31 December
2013. This compares to the IPD All Property Index that showed
+10.9%, +6.9% and +7.8% respectively.
IPD compile a specialist Healthcare Property Index which
provides for a more direct benchmark of PHP's performance against
its specific sector of focus. The index will be published on 28
February 2014 and an update will be given on PHP's relative
performance in our next public statement.
Were the Group's assets to be valued using a discounted cash
flow ("DCF") basis, the portfolio would show a value of GBP1,015.0
million as compared to GBP958.7 million using a traditional yield
based approach. This would represent an additional 51 pence per
share in net asset value terms. This DCF valuation has been
prepared by the Joint Advisers on a basis consistent with previous
years, discounting the rental cash flows at 7% per annum.
Property Portfolio Details
Lon-don South South East East West North York-shire North Scot-land Wales
West East Anglia Mid-lands Mid-lands West &
Humb-erside
------------ -------- ------- -------- ------- ---------- ---------- -------- ------------ -------- ---------- --------
No. of
properties 10 10 62 7 19 26 28 19 22 28 21
No. of
tenancies 14 16 123 11 39 62 56 39 41 52 72
Floor
area
(m2) 28,212 11,157 58,491 5,897 22,377 36,041 39,056 26,144 22,999 42,303 30,280
No. of
patients 86,877 89,762 651,676 82,713 211,709 298,718 288,898 196,399 217,452 262,647 232,035
Rent
roll
(GBP'm) 2.3 1.8 11.6 1.0 3.9 6.5 7.5 4.7 3.9 7.4 5. 6
Capital
value
(GBP'm) 40.5 30.0 190.7 16.6 65.1 104.9 127.3 77.8 62.3 125.9 91.9
No.of
pharmacies 2 4 34 2 15 20 20 15 12 7 14
------------ -------- ------- -------- ------- ---------- ---------- -------- ------------ -------- ---------- --------
The portfolio statistics and values above represent only
completed assets as at the balance sheet date. PHP has also
committed to fund seven properties that were under construction as
at 31 December 2013. The total cost of these assets is GBP24.7
million and all are scheduled to complete in 2014 and will generate
a total of GBP1.5 million of rent when completed.
Acquisitions
During 2013 the Group acquired or committed to develop and
acquire a total of 77 properties in transactions representing a
gross acquisition value of more than GBP300 million. The table
below provides an analysis of the assets acquired in 2013:
Lon-don South South East East West North York-shire North Scot-land Wales
West East Anglia Mid-lands Mid-lands West &
Humb-erside
------------- -------- ------ ------ ------- ---------- ---------- ------- ------------ ------- ---------- ------
No. of
properties 4 4 8 2 1 8 13 5 14 15 3
Floor
area
(m2) 3,677 3,660 8,803 1,551 952 12,956 19,388 4,495 13,968 23,345 3,099
Rent
roll
(GBP'm) 1.0 0.6 1.9 0.3 0.2 2.7 4.2 0.8 2.4 4.2 0.4
WAULT 20.2 18.1 13.4 19.8 21.0 15.1 20.6 16.8 13.3 17.1 18.0
Percentage
rent
funded
by UK
Government 100% 100% 92% 93% 83% 92% 92% 84% 93% 98% 92%
Acquisition
cost
(GBP'm) 16.8 10.4 29.7 4.4 3.0 43.3 70.2 13.0 39.6 68.5 7.1
------------- -------- ------ ------ ------- ---------- ---------- ------- ------------ ------- ---------- ------
On 1 July 2013, PHP acquired the entire share capital of Primary
Health Care Centres Limited ("PHCC") for cash. The PHCC portfolio
comprised of 11 fully occupied, standing let investment properties.
The assets were acquired for a total cost of GBP29 million, with a
contracted rent roll of GBP1.7 million and a WAULT of 19.3 years.
PHCC was acquired at its net asset value with PHP assuming net debt
facilities totalling GBP16.3 million. This acquisition was
accounted for as an asset purchase.
On 3 December 2013, PHP completed the acquisition of Prime
Public Partnerships (Holdings) Limited ("PPP"). The acquisition of
the entire share capital of PPP was undertaken for a consideration
of GBP42.6 million being met wholly by the issue of a total of
12.86 million PHP ordinary shares to the vendors, (see note 22).
These shares, subject to limited exemptions, will be locked up for
a period of 18 months from the completion date. This acquisition
was also accounted for as an asset purchase.
The PPP portfolio comprised 54 fully let primary care assets
with an acquisition value of GBP233 million. The portfolio had a
contracted rent roll of GBP14.4 million with a WAULT of 17 years. A
total of GBP178.4 million of fixed rate debt was acquired with the
transaction, secured by the PPP assets. A provision of GBP13.7
million was allowed by the vendor for the estimated cost of
repaying the debt early, reducing net asset value in arriving at
the purchase consideration. In addition to the acquisition of PPP,
a five year development pipeline agreement was entered into with
Prime plc, a sister company owned by the vendors of PPP. Prime plc
is a successful, long term developer of primary care assets and the
agreement will provide a valuable source of future investment
opportunities for PHP.
A further 12 assets were acquired in the period for a total of
GBP41 million with a contracted rent roll of GBP2.6 million.
Portfolio management
A key strategic focus of the Group is the active management of
its owned portfolio. This takes a number of forms that seek to
increase rental income and capture enhanced capital value:
-- capital expenditure that ranges from small extensions to more
major construction projects, increasing contracted rental income
and extending existing lease terms;
-- managing existing leases through re-gearing or refurbishment
and maintenance programmes in exchange for increased rents and
extended lease terms.
In 2013, three projects were completed with a total cost of
GBP0.4 million adding an average of 17 years to the lease terms of
these properties.
A further three projects were contracted during 2013, committing
GBP4.1 million of capital expenditure. An average of 21 years will
be added to the existing lease durations at these assets while
securing additional rent of GBP0.32 million per annum on
completion.
The largest of these projects is the development of PHP's centre
in Aylesbury. The existing medical centre comprises 725 square
metres that is fully let to the occupying GPs for a remaining term
of 10 years. Working with the practice to crystallise a transaction
that benefits all parties, PHP has acquired an adjoining land plot
and will develop a further 743 square metres of clinical space. The
entire enlarged building will, upon completion planned for October
2014, be let on a new 24 year lease. The transaction secures an
additional GBP0.15 million of income for PHP which is a yield on
cost of 6.5%, but as importantly extends the term of the lease at
this property by over 14 years.
A total of GBP3.0 million was committed and unpaid as at 31
December 2013 with regard to asset management projects.
The contracted rent roll from the portfolio as at 31 December
2013 totalled GBP57.6 million, an increase of more than 48% over
that as at 31 December 2012 of GBP38.9 million. A large proportion
of this increase results from the acquisitions detailed above, but
growth achieved from rent reviews also contributed a satisfactory
level in what are still difficult economic conditions. A total of
79 reviews were completed in the year, adding GBP0.57 million to
contracted rent roll, an average annual rate of growth of 2.2%,
down from 2.4% in 2012.
Acquisitions, development and project deliveries and rent
reviews have driven a 27.0% increase in gross rental income
received during 2013 to GBP42.0 million (2012: GBP33.2 million). As
detailed above, the addition of the PPP portfolio, completed in
December 2013, will significantly increase rents receivable in 2014
before any further property transactions in the current period.
Expenses are largely represented by advisory fees paid to the
Joint Advisers. In 2013, the fees for all advisory services were
calculated on the basis of the gross asset value of the Group. With
the fee rate applied reducing as gross assets increase, the average
fee rate paid to the Joint Advisors for 2013 fell to 0.71% (2012:
0.75%). The impact of the reducing advisory fee can also be seen in
overall operating costs which represented 0.88% of average gross
assets in 2013, a reduction from 0.93% in 2012.
At present, Nexus Tradeco Limited ("Nexus") provides property
advisory and management services to the PHP group with J O Hambro
Capital Management Limited ("JOHCM") providing administrative and
accounting services, as well as acting as the Company
Secretary.
On 26 September 2013, PHP announced the termination of the JOHCM
contract with effect from 30 April 2014, when Nexus will assume
responsibility for the administrative services JOHCM currently
provide. The change also removes the link to gross assets for the
cost of administrative services. Nexus will instead receive an
agreed fixed annual fee in relation to these services which may be
increased or decreased by up to 5% per annum, subject to movements
in the Retail Price Index (or such other appropriate independent
index agreed by Nexus and the Company).
JOHCM will continue to provide its services for the period up to
30 April 2014, being remunerated in accordance with its service
agreement. JOHCM will then receive a contractual termination
payment of GBP2.5 million in lieu of the remainder of its two year
notice period. As required by accounting standards, the termination
fee has been charged to the income statement in 2013.
In making these changes, the Board has broken the link between
gross assets and administrative costs and will secure estimated
annualised savings (based on gross assets at 31 December 2013) in
excess of GBP0.8 million per annum. The real underlying saving will
be greater than this as gross assets continue to grow.
Operations
2013 2012
GBPm GBPm
-------------------------------------------------------- ------- -------
Rental and related income 42.0 33.2
Property related and administrative expenses (6.5) (5.6)
-------------------------------------------------------- ------- -------
Operating profit before revaluation gain and financing 35.5 27.6
Net financing costs (26.0) (20.2)
-------------------------------------------------------- ------- -------
Adjusted profit 9.5 7.4
Profit on sale of asset held as a finance lease 0.6 -
Early loan repayment fee (0.9) (1.6)
Fair value gain/(loss) on interest rate swaps 11.4 (2.9)
Net result on property portfolio 2.3 (1.8)
Non-recurring expenses (2.7) -
-------------------------------------------------------- ------- -------
Profit before tax 20.2 1.1
-------------------------------------------------------- ------- -------
On 28 January 2014, the Company announced changes to the fee
rate structure for the property advisory services provided by
Nexus, introducing a reduced fee rate of 32.5 basis points for
gross assets between GBP1 billion and GBP1.25 billion and 30 basis
points for gross assets above GBP1.25 billion.
Gross Assets Fee
------------------------------------------- -------
First GBP250 million 0.500%
Between GBP250 million and GBP500 million 0.475%
Between GBP500 million and GBP750 million 0.400%
Between GBP750 million and GBP1 billion 0.375%
Between GBP1 billion and GBP1.25 billion 0.325%
Above GBP1.25 billion 0.300%
------------------------------------------- -------
The Group's overall debt costs rose in 2013 as the property
portfolio grew, including the Apollo assets acquired in December
2012 and as a full year's impact of the increased cost of borrowing
was felt following the significant debt refinance in 2012. Net
interest costs rose by 28% in 2013 to GBP26.0 million (2012:
GBP20.2 million). Significant work has been undertaken in 2013 to
provide additional and replacement debt facilities as the portfolio
increases, but secured at rates that take advantage of the
continued low interest rates that were seen through most of
2013.
Operating profit increased by 19% to GBP32.8 million (2012:
GBP27.6 million) and adjusted profit increased to GBP9.5 million
(2012: GBP7.4 million).
Dividends
2013 was the 17th consecutive year of dividend growth for PHP
shareholders with a total of 19.0 pence per share being paid in the
year (2012: 18.5 pence). No portion of this dividend represents a
Property Income Distribution ("PID").
A major strategic objective of the Board is to restore the
Company to full dividend cover at the earliest opportunity whilst
maintaining a progressive dividend policy. Adjusted profit
increased in 2013 to GBP9.5 million (2012: GBP7.4 million) with
dividend cover increasing from 56% to 57%. This small improvement
in dividend cover demonstrates that despite a sizeable equity raise
in 2013 and a small increase in the rate of dividends paid,
property transactions in the period and the successful refinancing
of associated debt have enhanced earnings to establish improved
dividend cover.
The acquisitions completed in 2013 and revised advisory fee
structures together with the completion of the first stage of the
refinance of the debt assumed with the PPP acquisition on 13
February 2014, but effective from 1 January 2014, will have a major
impact on dividend cover into 2014.
Total shareholder return
An important performance indicator monitored by the Board is
total return to shareholders. This is measured as a combination of
the dividend paid in a calendar year and the movement in share
price in the same period. Total return to PHP shareholders in 2013
was 7.6% as compared to the total return of the FTSE All Share
Index of 20.8%.
The table below compares PHP's total return performance with
that of general real estate equities and the FTSE over the longer
term.
One year Three years Five years
% % %
---------------------------------- --------- ------------ -----------
Primary Health Properties 7.6 8.3 14.0
FTSE All-Share Real Estate Index 19.6 14.1 14.4
FTSE All-Share Index 20.8 10.3 19.0
---------------------------------- --------- ------------ -----------
Source: Investment Property Databank ("IPD")
Capital resources and debt finance
Matching the considerable success in acquiring earnings
enhancing property assets in the year, significant activity has
been undertaken with regard to the funding base of the Group.
Share issues
A total of 21.7 million new shares were issued in June at 315
pence each, realising proceeds of GBP65.8 million, net of issue
costs. This saw the conclusion of a multi structure offer that
allowed existing shareholders to participate in the issue and also
saw a number of new institutional shareholders join the register,
widening and strengthening the Company's share-holder base. The
issue price reflected a small discount of 6.3% to the share price
immediately before announcing the issue, but was 3.3% ahead of the
European Public Real Estate Association net asset value per share
("EPRA NAV") as at 31 December 2012 of 305 pence.
At a General Meeting on 2 December 2013, the acquisition of PPP
was approved with the entire consideration being settled by the
issue of PHP shares to the vendors. The final consideration for PPP
was a total of GBP42.6 million, representing the agreed net asset
value of PPP with 12,577,771 shares being issued upon completion on
3 December (see note 22) and a further 282,768 shares issued on 28
January 2014 (see note 16) following agreement of the completion
accounts of PPP as well as a further 235,475 shares being issued,
following a Deed of Variation being entered into regarding the St
Catherine's property on the same date. All shares were issued to
the vendor at an agreed value of 320 pence per share, a premium of
6.2% over EPRA NAV per share as at 30 June 2013 and a discount of
just 1.2% on the share price at close on 14 November 2013, the day
immediately before the announcement of the transaction.
On 28 January 2014, a revision to an occupational lease
agreement at a property within
the PPP portfolio was completed. This crystallised an additional
amount of consideration in the sum of GBP0.75 million which was
settled by the issue of 235,475 shares PHP shares (see note
16).
Debt facilities
In March 2013, the Group completed the refinance of the debt
that was assumed with the acquisition of the Apollo portfolio in
December 2012. A new GBP70 million, four year revolving debt
facility was entered into with Barclays Bank PLC, establishing a
new lending relationship for the Group with a major lender to the
property sector. 50% of the sums drawn under this facility were
locked into historically low interest rates for the duration of the
facility through an interest rate swap that generated an all-in
cost of funding at below 3.5%.
In November 2013, a wholly owned subsidiary of PHP issued a
twelve year secured, corporate bond to a single institutional bond
investor. The issue was for a total of GBP70 million with a
maturity of 30 December 2025. An initial tranche of the proceeds,
totalling GBP59,999,800 was received on issue and the remaining
GBP10,000,200 will be received on 30 June 2014 as a number of
development commitments complete. The underlying bonds incur
interest on the paid up amount at an annualised rate of 220 basis
points above six month LIBOR, payable semi-annually. This
transaction demonstrates PHP's ability to access a wide range of
debt capital markets, underlining the attraction of the long term,
high covenant quality income characteristics of the property
portfolio.
The proceeds of the bond were used to refinance the expensive
debt assumed with the PHCC acquisition in July, utilising the
allowance agreed with the vendors of PHCC for the cost of
terminating the incumbent Aviva debt. A further tranche of the
proceeds repaid a facility advanced by Clydesdale Bank that was due
to expire in mid 2014 with the balance being used to pay down
elements of the Group's Club facility with RBS and Santander where
the borrowing cost would otherwise have increased in 2014 and
2015.
Since the year end, the Group completed the reinstatement of an
amount of GBP25 million to the Club facility that will be advanced
on the same terms as the existing Club debt.
The PPP acquisition saw the Group assume debt facilities
totalling GBP178.4 million secured upon the PPP assets. The debt is
provided by Aviva in their traditional, longer term amortising
form. A provision of GBP13.7 million was agreed with the vendors as
a reduction to the net asset value of PPP to allow for the
estimated costs of repaying the debt taken on. The average term of
these facilities was 17 years at acquisition and the debt carried a
weighted average coupon of 5.9%. Detailed discussions have been
ongoing with Aviva since completion of the PPP acquisition to agree
terms for the refinance and re-setting of the revised terms of
Aviva loans partly with Aviva and partly with other lenders to the
Group.
On 13 February 2014, the Group completed the first stage of the
restructuring and refinance of the Aviva loans assumed with the
acquisition of PPP. Stage 1 saw the payment of GBP13.7 million as
allowed by the vendor in the acquisition pricing, to re-set the
interest rates to current levels for the existing loans. Effective
from 1 January 2014, the rates have been reduced by an average of
80 basis points. A capital repayment of GBP15 million was also made
as part of Stage 2 that will see the re-tranching of the debt and a
further reduction in applicable rates.
The principal value of debt drawn as at 31 December 2013
totalled GBP589.0 million. The Group held cash balances of GBP9.3
million resulting in Group net debt of GBP579.7 million. The
Group's loan to value ratio ("LTV") was 61.6% (31 December 2012:
60.9%) and interest cover for the year was 1.55 times (2012: 1.57
times) with a Group covenant minimum requirement of 1.3 times.
Debt facilities available to the Group at 31 December 2013,
including the secured and retail bonds, totalled GBP677.6 million.
Deducting net debt and allowing for funding the cost to complete
development commitments of GBP17.1 million as at the balance sheet
date, results in net headroom of GBP67.2 million.
Summary of financing
Facility Drawn at Headroom
Provider Maturity maximum 31 Dec 31 Dec
2013 2013
GBPm GBPm GBPm
----------------------------------- ----------- --------- --------- ---------
RBS (overdraft) Mar 2015 5.0 - 5.0
Royal Bank of Scotland/ Santander Mar 2016 140.0 100.5 39.5
Barclays Mar 2017 70.0 49.5 20.5
Aviva Nov 2018 75.0 75.0 -
Aviva Dec 2022 25.0 25.0 -
Aviva Jan 2032 26.1 26.1 -
Aviva Dec 2030* 177.9** 177.9 -
Retail Bond July 2019 75.0 75.0 -
Secured Bond Dec 2025 70.0 60.0 10.0
----------------------------------- ----------- --------- --------- ---------
Total 664.0 589.0 75.0
------------------------------------------------ --------- --------- ---------
Average maturity 8.8 years
Cash on deposit (9.3) 9.3
------------------------------------------------ --------- ---------
Group Net Debt 579.7
Costs to complete
Forward funded developments (14.1)
Asset management projects (3.0)
------------------------------------------------ --------- --------- ---------
Net headroom 67.2
------------------------------------------------ --------- --------- ---------
* This is a weighted average maturity
** Figure represents the nominal value of debt as at 31 December
2013. Debt within the balance sheet is fair valued as at
acquisition to include an estimate of the cost to refinance the
facility.
Interest rate hedging
On inception of the Barclays bank facility, the Group entered
into a four year interest rate swap for a nominal value of debt of
GBP28.0 million, for a four year term expiring in March 2017 at a
fixed rate of 0.9%.
There have been no other changes to the Group's hedging
portfolio. The table below analyses the debt facilities available
to the Group in accordance with their interest rate bases.
Facilities Facilities Drawn Drawn
GBP'm % GBP'm %
------------------------------------ ----------- ----------- ------ ------
Fixed rate debt 379.0 57.1 379.0 64.3
Debt hedged by interest rate swaps 206.0 31.0 206.0 35.0
Floating rate debt 79.0 11.9 4.0 0.7
------------------------------------ ----------- ----------- ------ ------
664.0 100.0 589.0 100.0
------------------------------------ ----------- ----------- ------ ------
The incremental rate of debt from secured facilities is 3 month
LIBOR plus an average margin of 235 basis points.
Swap rates for the periods covered by the Group's hedging
portfolio increased toward the end of 2013 reflecting improved
economic data both in the UK and wider global economies. This has
resulted in a decrease in the net fair value liability of the
Groups derivative portfolio to GBP28.6 million as at 31 December
2013, down from GBP52.8 million as at 31 December 2012. GBP11.4
million of this is recognised in the Statement of Comprehensive
Income, but there is no cash flow impact of any element of the fair
value adjustment in 2013.
Net asset value
Balance Sheet net asset value has increased through 2013,
assisted by the share issues undertaken in the year and also the
reduction in the derivative portfolio fair value adjustment.
EPRA net assets have also increased in absolute terms driven
primarily by the share issue undertaken in June 2013 and the shares
issued with the acquisition of PPP. EPRA net assets per share have
fallen across 2013 by 1.6% to 300 pence per share (31 December
2012: 305 pence per share).
Environmental and social issues
Due to the nature of the external management arrangements, PHP's
direct greenhouse gas emissions are negligible. PHP places high
importance on the impact of such gases and is still working with
its tenants to develop ways in which to monitor and reduce
emissions.
Environmental matters are considered as part of the assessment
of the suitability of purchasing new medical centres to expand the
portfolio, whether through forward purchase development agreements
or open market purchases. PHP undertakes an assessment of
environmental risk as an important element of its due diligence
process, obtaining an environmental desktop study and energy
performance certificates ("EPC"). 75% of the newly completed assets
delivered in 2013 held an EPC with a rating of C or better.
PHP has engaged an Environmental Consultant, Collier &
Madge, to help in this process. PHP's ability to influence the
energy efficiency of buildings is limited where completed
properties are acquired and let on FRI terms. Where possible and as
a norm for newly built premises, environmental issues are included
in the leases entered into by the medical practitioners. More
generally, new buildings acquired are usually specified to meet the
NHS's exacting standards with regard to environmental
considerations.
PHP is committed to the principles of continuous improvement in
managing environmental issues, including the proper management and
monitoring of waste, the reduction of pollution and emissions, and
compliance with environmental legislation and codes of
practice.
PHP provides purpose built healthcare properties for use by GPs,
NHS organisations, pharmacies and healthcare users, thus indirectly
benefiting the communities in which they are based.
PHP is a founder member of the Social Stock Exchange ("SSE") The
SSE gives investors access to publicly listed businesses with
strong social and environmental purpose.
The Group has no employees and Directors do not have service
contracts. No disclosure has therefore been included in relation to
policies on employees and human rights as required by Section 414C
of the Companies Act.
Relationships
Other than shareholders, PHP's performance and value are
influenced by other stakeholders, principally its lessees (the GPs,
NHS organisations and healthcare users), the property developers,
the District Valuers, lenders and bondholders and the Joint
Advisers. PHP's approach to these relationships is based on the
principle of mutual understanding of aims and objectives and the
highest standards of ethics and business practice.
Outlook
PHP's business grew substantially during 2013. The acquisition
of PPP in December increased the portfolio by some 33%, securing a
portfolio of high quality, purpose built primary care centres that
enhanced the overall composition of the Group's real estate
portfolio. The positive contribution of these assets will be seen
in 2014 and will be further enhanced by the refinancing achieved in
early 2014 of the debt assumed with the portfolio, as was planned
at acquisition. The refinance provides a very large step toward
regaining full dividend cover, which remains the prime short term
objective of the Board, whilst retaining a progressive dividend
policy. The transaction secures a five year pipeline arrangement
for new developments with Prime plc, one of the leading developers
of primary care assets, and also provides PHP with the opportunity
to generate additional income and capital value afforded by the
asset management possibilities within this portfolio.
Actions taken by the Board in the last six months have also
paved the way for ongoing operating costs to be further contained.
Annual savings will be realised on the administrative services
procured by the Company and as the portfolio continues to grow, as
a proportion of gross assets, the incremental cost of property
advisory and management services will also reduce.
Primary Care and the GP remain the gatekeepers to the NHS. The
consensus is that more health care services should be moved into
the primary care setting and in order to do this further modern,
purpose built premises will be required. The demand and competition
for the good quality, long term, secure income streams that
characterise the Group's portfolio are strengthening, but the Board
see the Company as being well placed to lead the provision of
private capital and skilled management to secure future investment
opportunities.
The Board continues to prioritise the return to full dividend
cover as its main short term objective and will take further steps
toward this with its prudent acquisition policies, securing assets
that make an immediate contribution to profitability but also
demonstrate the potential for future growth in 2014 and beyond.
Principal Risks and Uncertainties
In common with most businesses, the Group is affected by a
number of risks and uncertainties, not all of which are wholly
within its control. Note 21 provides further detail and
quantitative information on the financial risks faced by the Group.
The Group aims to operate in a low risk environment, focusing on a
single sector of the real estate market. The Board has reviewed and
agreed policies for managing each of the risks and uncertainties
which are summarised below. The Board sees items 1, 2 and 5 as its
principal risks at the present time:
Funding and available finance
Risk 1. Exposure to interest rate movements
----------- -------------------------------------------------------------
Impact Movement in underlying interest rates could adversely affect
the Group's profits and cash flows.
----------- -------------------------------------------------------------
Mitigation -- The Group retains a proportion of its debt on a long
term, fixed rate basis. It also mitigates its exposure
to interest rate movements on floating rate facilities
through the use of a series of interest rate swaps and
other derivative instruments.
----------- -------------------------------------------------------------
Risk 2. Limited debt market capacity restricts ability to continue
to fund operations
----------- --------------------------------------------------------------
Impact Without confirmed debt facilities, PHP may be unable to
meet current and future commitments or repay or refinance
debt facilities as they become due.
----------- --------------------------------------------------------------
Mitigation -- PHP funds its operations through a mixture of income
from its operations, equity and debt finance. PHP regularly
monitors its cash flow and debt funding requirements in
order to ensure that it can meet its liabilities and looks
to retain a spread of providers and maturities so that
its refinance risk is less concentrated.
-- PHP secured GBP140 million of new debt facilities in
2013. This included a GBP70 million, twelve year secured
bond accessing the corporate debt market for the first
time. PHP widened its spread of maturities and lenders
with facilities secured and assumed in 2013.
-- Activity since the year end has added further capacity,
increased the variety of funders and maintained the broad
spread of maturities.
----------- --------------------------------------------------------------
Risk 3. Lack of capital resources to support the Group's activities
----------- ---------------------------------------------------------------
Impact Without sufficient capital, PHP may become unable to progress
investment opportunities as they arise or to counteract
the impact of potential falling property values on the
Group's balance sheet and finance commitments should property
values fall in the future.
----------- ---------------------------------------------------------------
Mitigation -- Liquidity and gearing are kept under review by the Joint
Advisers and the Board. Forward funding commitments are
only entered into if supported by committed, available
funds.
-- Historically, the Company has been able to access the
equity markets to raise additional capital when required.
The Company undertook a share placing during 2013, raising
an amount of GBP65.8 million net of costs.
-- PHP issued a GBP70 million twelve year, secured corporate
bond in 2013 at a margin of 220 basis points over six month
LIBOR.
----------- ---------------------------------------------------------------
Risk 4. Banking facilities include various covenant requirements
----------- ----------------------------------------------------------------
Impact Should the Group be unable to meet these covenants it could
result in possible default or penalties being levied.
----------- ----------------------------------------------------------------
Mitigation -- PHP monitors its covenant compliance on an ongoing basis
to ensure compliance or early warning of any issues that
may arise. The Group maintains its borrowings at levels
below its maximum covenant requirements and retains the
flexibility of substituting security or refinancing loans
should it need to. Covenants are set on a facility by facility
basis and by reference to the pool of assets used to secure
facilities (where appropriate).
----------- ----------------------------------------------------------------
Property market risks
Risk 5. PHP invests in a niche asset sector affected by Government
decisions
----------- --------------------------------------------------------------
Impact A change of Government policy or a downturn in demand for
primary care premises may adversely affect the Group's
portfolio and performance.
----------- --------------------------------------------------------------
Mitigation -- The Group monitors Government policy with regard to
Primary Care so as to be able to anticipate any changes.
The use of GPs within the NHS and the long term, established
use of third party owned premises has not changed for some
time and is not an area changed by the Health & Social
Care Act. The Group has received written confirmation of
the continued funding of its tenants by the NHS.
-- The long term nature of the Group's occupational leases
provides security of income and protection should a policy
change need to be catered for.
----------- --------------------------------------------------------------
Risk 6. Property valuations may fall
----------- -------------------------------------------------------------
Impact Property valuations may fall to such a level that leads
PHP to breach its borrowing covenants.
----------- -------------------------------------------------------------
Mitigation -- Whilst the specialist nature of the Group's assets can
itself be a risk (see below), the inherent characteristics
have historically demonstrated low volatility in terms
of valuation movements.
-- The Group manages its activities so as to always operate
within its banking covenant limits and constantly monitors
the margins (i.e. fall to breach) that would have to be
experienced in order to cause any default.
-- The portfolio is effectively 100% let, on long lease
terms with more than 90% of rent being funded by the NHS.
Rental growth is achieved on review, all of which helps
in maintaining asset values.
----------- -------------------------------------------------------------
Risk 7. Lack of available properties or the inability to invest
on acceptable terms
----------- ----------------------------------------------------------------
Impact The Group may be unable to secure additional investment
properties so as to enable PHP to continue to grow.
----------- ----------------------------------------------------------------
Mitigation -- The Group maintains close relationships with a number
of developers of, and other investors in, primary health
care properties so as to afford the best possible opportunity
to secure future acquisitions.
-- The Group is not exclusively reliant on acquisitions
to grow as it secures leases with effectively upwards only
rent review mechanisms and is able to generate income and
value from the management and development of its existing
portfolio.
-- Pipeline agreements have been entered into with recognised
developers in the sector (Apollo Capital Projects Developments
Limited and Prime plc).
----------- ----------------------------------------------------------------
Taxation risks
Risk 8. Failure to comply with REIT legislation
----------- --------------------------------------------------------------------
Impact A breach of REIT requirements may lead to the Group losing
its REIT status and the taxation benefits that affords.
----------- --------------------------------------------------------------------
Mitigation -- Management monitor the activities and performance of
the Group to ensure that all requirements of the REIT legislation
are met at all times. New transactions are structured when
undertaken so as to continue to meet these statutory requirements.
----------- --------------------------------------------------------------------
Risk 9. A change in Government legislation
----------- -----------------------------------------------------------------
Impact Should the UK-REIT regime cease to apply the Group may
become chargeable to taxation with a significant impact
on performance and strategy.
----------- -----------------------------------------------------------------
Mitigation -- The Group monitors communication from HMRC with regard
to the ongoing maintenance of the REIT regime. The Group
participates in a number of industry bodies and groups
that engage in continuous dialogue with HMRC over proposed
changes to legislation and their impact on PHP.
-- The changes to the REIT regime introduced in 2012 are
designed to encourage further REITs and confirm the continuance
of the regime for the foreseeable future.
----------- -----------------------------------------------------------------
Operational risks
Risk 10. Continuance of Adviser contracts
----------- ----------------------------------------------------------------
Impact PHP has no employees and depends on services supplied by
third parties for the efficient operation and management
of the Group. Following the concentration of the provision
of advisory services with Nexus from 30 April 2014, the
termination of the Advisory Agreement with Nexus could
adversely affect the Group's ability to effectively manage
its operations.
----------- ----------------------------------------------------------------
Mitigation -- The Advisory Agreement with Nexus includes provisions
requiring Nexus to serve all or any part of its notice
period should the Company decide to terminate providing
protection for an efficient handover.
-- The Advisory Agreement with the Nexus includes remuneration
linked to the performance of the Group in order to incentivise
long term levels of performance.
-- The Management Engagement Committee regularly reviews
the performance of the Joint Advisers.
----------- ----------------------------------------------------------------
Risk 11. Breach of Health and Safety and Environmental requirements
----------- ---------------------------------------------------------------
Impact A breach of such requirements could have reputational,
criminal or financial implications on the Group which could
be significant.
----------- ---------------------------------------------------------------
Mitigation -- The Board views the assessment of Health and Safety
and environmental risk as an important element of its due
diligence process when acquiring properties and employs
specialist advisers to undertake risk assessments.
-- Properties are modern and specifically designed for
purpose including best practice with regards to environmental
requirements thereby mitigating risks.
-- Owned properties are inspected regularly in rotation
and well maintained.
----------- ---------------------------------------------------------------
Key Performance Indicators ("KPIs")
The Board monitors KPIs as set out below to review the Group's
performance in meeting its Strategic Objectives.
Objective: To grow property assets under management (Strategic
Objective: 1)
Metric
-- Acquisitions achieved
-- Positive movement in asset values
-- Future commitments made
Performance
-- 77 additional assets acquired or committed to in the year
-- Portfolio revaluation uplift of GBP2.3 million for the year
-- Balance of commitments outstanding as at the year-end of GBP17.1 million
Objectives: To maximise portfolio rent roll and maintain
security of income (Strategic Objectives: 1 and 2)
Metric
-- Continue to grow annualised rent roll
-- Maintain core NHS tenant covenant
-- Maintain weighted average remaining lease term
Performance
-- Contracted committed rent roll grew from an annualised GBP38.9 million to GBP57.6 million
-- Over 90% of income effectively funded by the NHS
-- Weighted average lease length (including commitments) of 16 years (2012: 16 years)
-- Three asset management projects contracted in 2013 will add
an average of 21 years to the unexpired lease term for those
properties
Objective: To manage our balance sheet effectively (Strategic
Objectives: 3 and 4)
Metric
-- Maintain longevity of debt facilities
-- Maintain appropriate balance between debt and equity within covenanted levels
Performance
-- GBP140 million of debt facilities secured in 2013, including the secured bond
-- LTV at 61.6%, well within current and future covenant limits
-- Equity issue in the year raised net proceeds of GBP65.8 million
-- Average maturity of debt facilities extended to 8.8 years (2012: 6.6 years)
Objective: To deliver sustainable long-term shareholder value
and returns (Strategic Objective: 5)
Metric
-- Sustained growth in Adjusted EPS
-- Sustained dividend growth
-- Growth in EPRA NAV per share
Performance
-- Adjusted EPS increased from 10.2p to 10.6p
-- 17th successive year of dividend growth, 3% to 19.0 per share
-- EPRA NAV per share 300 pence (31 December 2012: 305 pence)
Objective: To maximise the returns from the investment portfolio
(Strategic Objective: 6)
Metric
-- Out-performance versus IPD benchmark
-- Continued rental growth
Performance
-- One, three and five year portfolio performance underperformed
the IPD all property benchmark, but PHP continued outperformance of
the IPD Healthcare Real Estate Index
-- Rental growth of 2.2% p.a. on reviews completed in the year
Harry Hyman
Managing Director
19 February 2014
Group Statement of Comprehensive Income
for the year ended 31 December 2013
2013 2012
Notes GBP000 GBP000
----------------------------------------------- ------ --------- ---------
Rental income 41,895 32,806
Finance lease income 87 345
----------------------------------------------- ------ --------- ---------
Rental and related income 3 41,982 33,151
Direct property expenses (398) (402)
Administrative expenses 4 (6,080) (5,124)
Non-recurring expenses: Termination Fee 4d (2,485) -
Non-recurring expenses: Costs associated (217) -
with PPP acquisition
----------------------------------------------- ------ --------- ---------
Operating profit before result on property
portfolio 32,802 27,625
Profit on termination of finance lease 5 638 -
Net result on property portfolio 11 2,313 (1,768)
----------------------------------------------- ------ --------- ---------
Profit before financing costs 35,753 25,857
Finance income 6 434 518
Finance costs 7a (26,450) (20,760)
Early loan repayment fees 7b (950) (1,564)
Fair value gain/(loss) on derivative interest
rate swaps and amortisation of Cash flow
hedging reserve 7c 11,432 (2,922)
----------------------------------------------- ------ --------- ---------
Profit on ordinary activities before taxation 20,219 1,129
----------------------------------------------- ------ --------- ---------
Taxation charge 8 1 1
----------------------------------------------- ------ --------- ---------
Profit for the year (1) 20,220 1,130
Items that may be reclassified subsequently
to profit and loss:
Fair value movement on interest rate swaps
treated as cash flow hedges 26 12,840 (285)
----------------------------------------------- ------ --------- ---------
Other comprehensive income/(loss) for the
year net of tax (1) 12,840 (285)
----------------------------------------------- ------ --------- ---------
Total comprehensive income for the year
net of tax (1) 33,060 845
----------------------------------------------- ------ --------- ---------
Earnings per share (2) 9 22.7p 1.6p
EPRA earnings per share (2) 9 6.6p 8.0p
Adjusted earnings per share (2) (3) 9 10.6p 10.2p
----------------------------------------------- ------ --------- ---------
The above relates wholly to continuing operations.
(1) Wholly attributable to equity shareholders of Primary Health
Properties PLC.
(2) There is no difference between basic and fully diluted
EPS.
(3) Adjusted for large one-off items and movements in fair value
of properties and derivatives (see note 9).
Group Balance Sheet
at 31 December 2013
2013 2012
Notes GBP000 GBP000
--------------------------------------- ------ ---------- ----------
Non current assets
Investment properties 11 941,548 622,447
Net investment in finance leases 13 - 3,100
Derivative interest rate swaps 20 472 -
--------------------------------------- ------ ---------- ----------
942,020 625,547
--------------------------------------- ------ ---------- ----------
Current assets
Trade and other receivables 14 4,764 2,916
Net investment in finance leases 13 - 21
Cash and cash equivalents 15 9,288 25,096
--------------------------------------- ------ ---------- ----------
14,052 28,033
--------------------------------------- ------ ---------- ----------
Total assets 956,072 653,580
--------------------------------------- ------ ---------- ----------
Current liabilities
Derivative interest rate swaps 20 (7,566) (7,523)
Corporation tax payable (23) -
Deferred rental income (11,934) (7,811)
Trade and other payables 16 (16,269) (10,687)
Provision for liabilities and charges 17 - (1,564)
Borrowings: Term loans and overdraft 18 (1,857) (79,934)
--------------------------------------- ------ ---------- ----------
(37,649) (107,519)
--------------------------------------- ------ ---------- ----------
Non-current liabilities
Borrowings: Term loans and overdraft 18 (462,171) (247,905)
Borrowings: Bonds 19 (132,408) (73,755)
Derivative interest rate swaps 20 (21,459) (45,311)
--------------------------------------- ------ ---------- ----------
(616,038) (366,971)
--------------------------------------- ------ ---------- ----------
Total liabilities (653,687) (474,490)
--------------------------------------- ------ ---------- ----------
Net assets 302,385 179,090
--------------------------------------- ------ ---------- ----------
Equity
Share capital 22 55,237 38,017
Share premium account 23 55,611 58,606
Capital reserve 24 1,618 1,618
Special reserve 25 135,483 59,473
Cashflow hedging reserve 26 (14,337) (27,177)
Retained earnings 27 68,773 48,553
--------------------------------------- ------ ---------- ----------
Total equity (1) 302,385 179,090
--------------------------------------- ------ ---------- ----------
Net asset value per share - basic 28 274p 236p
EPRA net asset value per share (2) 28 300p 305p
--------------------------------------- ------ ---------- ----------
(1) Wholly attributable to equity shareholders of Primary Health
Properties PLC.
(2) See definition in note 28.
These financial statements were approved by the Board of
Directors on 19 February 2014 and signed on its behalf by:
Graeme Elliot
Chairman
Group Cash Flow Statement
for the year ended 31 December 2013
2013 2012
Notes GBP000 GBP000
-------------------------------------------------- ------ ---------- ----------
Operating activities
Profit on ordinary activities before tax 20,219 1,129
Less: Finance income 6 (434) (518)
Plus: Finance costs 7 26,450 20,760
Plus: Provision for early loan repayment
fee 950 1,564
Plus: Amortisation of cash flow hedge reserve 571 1,345
(Less/plus): Fair value (gain)/loss on
derivatives 7 (12,003) 1,577
-------------------------------------------------- ------ ---------- ----------
Operating profit before financing costs 35,753 25,857
Adjustments to reconcile Group operating
profit to net cash flows from operating
activities:
Revaluation (gain)/deficit on property
portfolio 11 (2,313) 1,768
Profit on termination of finance lease 5 (638) -
Fixed rent uplift (905) -
Increase/(decrease) in trade and other
receivables (1) 4,402 (133)
Increase in trade and other payables (1) 383 7,940
-------------------------------------------------- ------ ---------- ----------
Cash generated from operations 36,682 35,432
Taxation paid (2) 8 (89) -
-------------------------------------------------- ------ ---------- ----------
Net cash flow from operating activities 36,593 35,432
-------------------------------------------------- ------ ---------- ----------
Investing activities
Payments to acquire investment properties (44,560) (42,221)
Proceeds from disposal of finance lease 5 3,768 -
Payments to acquire Apollo Medical Partners
Limited - (3,298)
Payments to acquire PHCC (net of cash acquired) (9,738) -
Payments to acquire PPP (net of cash acquired) 1,954 -
Payment to acquire Gracemount Medical Centre (6,155) -
Limited (net of cash acquired)
Interest received on developments 188 237
Bank interest received 48 199
-------------------------------------------------- ------ ---------- ----------
Net cash flow used in investing activities (54,495) (45,083)
-------------------------------------------------- ------ ---------- ----------
Financing activities
Proceeds from issue of shares (net of expenses) 65,772 18,399
Cost of share issue - PPP (540) -
Term bank loan drawdowns 120,718 75,685
Term bank loan repayments (195,740) (100,101)
Proceeds of bond issue (net of issue costs) 58,680 73,671
Swap interest paid (7,661) (6,736)
Non utilisation fee (1,023) (714)
Loan arrangement fees (1,274) (2,655)
Interest paid (18,328) (10,670)
Breakage fee on Aviva debt 7 (2,380) -
Equity dividends paid net of scrip dividend 10 (16,130) (12,209)
-------------------------------------------------- ------ ---------- ----------
Net cash flow from financing activities 2,094 34,670
-------------------------------------------------- ------ ---------- ----------
(Decrease)/increase in cash and cash equivalents
for the year (15,808) 25,019
Cash and cash equivalents at start of year 25,096 77
-------------------------------------------------- ------ ---------- ----------
Cash and cash equivalents at end of year 15 9,288 25,096
-------------------------------------------------- ------ ---------- ----------
(1) Asset movements include movements relating to
acquisitions
(2) Taxation was paid in the period in order to settle the
outstanding liabilities in the acquired companies. All amounts
payable were included in the consideration calculation.
Group Statement of Changes in Equity
for the year ended 31 December 2013
Cash
Special flow
Share Share Capital reserve hedging Retained
capital premium reserve (1) reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- --------- --------- --------- ---------- --------
1 January 2013 38,017 58,606 1,618 59,473 (27,177) 48,553 179,090
Profit for the year - - - - - 20,220 20,220
Income and expense
recognised directly
in equity:
Fair value movement
on interest rate swaps - - - - 12,269 - 12,269
Amortisation of cash
flow hedging reserve 571 571
--------------------------- --------- --------- --------- --------- --------- ---------- --------
Total comprehensive
income - - - - 12,840 20,220 33,060
Proceeds from capital
raisings 10,873 - - 57,627 - - 68,500
Expenses of capital
raisings - - - (2,728) - - (2,728)
Share issue as part
of consideration for
PPP 6,289 - - 35,344 - - 41,633
Share issue expenses - - - (1,040) - - (1,040)
Reserves transfer
(2) - (3,325) - 3,325 - - -
Dividends paid:
Second interim dividend
for the year ended
31 December 2012 (9.5p) - - - (7,006) - - (7,006)
Scrip dividends in
lieu of second interim
cash dividend (net
of expenses) 32 185 - (217) - - -
First interim dividend
for the year ended
31 December 2013 (9.5p) - - - (9,124) - - (9,124)
Scrip dividend in
lieu of first interim
cash dividend (net
of expenses) 26 145 - (171) - - -
--------------------------- --------- --------- --------- --------- --------- ---------- --------
31 December 2013 55,237 55,611 1,618 135,483 (14,337) 68,773 302,385
--------------------------- --------- --------- --------- --------- --------- ---------- --------
1 January 2012 34,136 54,430 1,618 57,405 (26,892) 47,423 168,120
Profit for the year - - - - - 1,130 1,130
Income and expense
recognised directly
in equity:
Fair value movement
on interest rate swaps - - - - (1,630) - (1,630)
Amortisation of cash
flow hedging reserve - - - - 1,345 - 1,345
--------------------------- --------- --------- --------- --------- --------- ---------- --------
Total comprehensive
income - - - - (285) 1,130 845
Proceeds from capital
raisings 3,115 - - 15,885 - - 19,000
Expenses of capital
raisings - - - (601) - - (601)
Share issue as part
of consideration for
Apollo 616 3,325 - - - - 3,941
Share issue expenses - (6) - - - - (6)
Dividends paid:
Second interim dividend
for the year ended
31 December 2011 (9.25p) - - - (5,969) - - (5,969)
Scrip dividends in
lieu of second interim
cash dividend (net
of expenses) 54 292 - (346) - - -
First interim dividend
for the year ended
31 December 2012 (9.25p) - - - (6,240) - - (6,240)
Scrip dividend in
lieu of first interim
cash dividend (net
of expenses) 96 565 - (661) - - -
--------------------------- --------- --------- --------- --------- --------- ---------- --------
31 December 2012 38,017 58,606 1,618 59,473 (27,177) 48,553 179,090
--------------------------- --------- --------- --------- --------- --------- ---------- --------
(1) The Special Reserve is a distributable reserve
(2) GBP3.3 million has been transferred from Share Premium to
the Special Reserve with regards to the Apollo transaction under
the merger relief provision of the Companies Act 2006.
Notes to the Financial Statements
1. Corporate information
The Group's financial statements for the year ended 31 December
2013 were approved by the Board of Directors on 19 February 2014
and the Balance Sheets were signed on the Board's behalf by the
Chairman, G A Elliot. Primary Health Properties PLC is a public
limited company incorporated and domiciled in England & Wales.
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 and
derivative financial instruments that have been measured at fair
value.
The Group's financial statements are presented in Sterling
rounded to the nearest thousand.
Statement of compliance
The Group prepares consolidated financial statements under
International Financial Reporting Standards ("IFRS") as adopted by
the European Union and applied in accordance with the Companies Act
2006 and Article 4 of the IAS Regulations.
2.2 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 comprises the power to govern the
financial and operating policies of the investee so as to obtain
benefit from its activities and is achieved through direct or
indirect ownership of voting rights; currently exercisable or
convertible potential voting rights; or by way of contractual
agreement. 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 Parent Company financial statements of Primary Health
Properties PLC and each of its subsidiary undertakings will
continue to be prepared under UK GAAP for the current year. The use
of IFRS 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 in property in the
United Kingdom leased principally to GPs, NHS Organisations and
other associated health care users.
Investment properties and investment properties under
construction
The Group's investment properties are held for long-term
investment. Initially, investment properties are 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 for accounting purposes
upon completion of contract, unless a specific completion date is
noted in the contract, in which case the property will be
recognised on the date specified. Investment properties cease to be
recognised when they have been disposed of. Any gains and losses
arising are recognised in the Group Statement of Comprehensive
Income in the year of disposal.
Development loans
The Group has entered into development loan agreements with
third party developers in respect of certain properties under
development. These loans are repayable at the option of the
developer at any time. The Group has entered into contracts to
purchase the properties under development when they are completed
in accordance with the terms of the contracts. The loans are
repayable by the developers in the event that the building work is
not completed in accordance with the purchase contracts. Interest
is charged under the terms detailed in the respective development
agreements 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 entities in determining
whether the acquisition represents the acquisition of a business.
The basis of the judgement is set out in note 2.3(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. Otherwise,
corporate acquisitions are accounted for as business
combinations.
Impairment of assets
The Group assesses, at each reporting date, whether there is an
indication that an asset may be impaired. If any such indication
exists, or when annual impairment testing for an asset is required,
the Group makes an estimate of the asset's recoverable amount. An
asset's recoverable amount is the higher of an asset's, or
cash-generating unit's, fair value less costs to sell and its value
in use and is determined for an individual asset, unless the asset
does not generate cash inflows that are largely independent of
those from other assets or groups of assets. Where the carrying
amount of an asset exceeds its recoverable amount, the asset is
considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset. Impairment losses are
recognised in the Group Statement of Comprehensive Income.
An assessment is made at each reporting date as to whether there
is any indication that previously recognised impairment losses may
no longer exist or may have decreased. If such indication exists,
the recoverable amount is estimated.
A previously recognised impairment loss is reversed only if
there has been a change in the estimates used to determine the
asset's recoverable amount since the last impairment loss was
recognised. If that is the case, the carrying amount of the asset
is increased to its recoverable amount. That increased amount
cannot exceed the carrying amount that would have been determined
had no impairment loss been recognised for the asset in prior
years. Such reversal is recognised in the Group Statement of
Comprehensive Income.
Income
Revenue is recognised to the extent that performance has been
provided and it is probable that economic benefits will flow to the
Group which can be reliably measured. Revenue is measured at the
fair value of the consideration receivable, excluding discounts,
rebates, VAT and other sales taxes or duty.
Rental income
Rental income arising from operating leases on investment
properties is accounted for on a straight-line basis over the lease
term. A rent adjustment is recognised from the rent review date in
relation to unsettled rent reviews, which are accrued at 90% of the
estimated rental income. 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.
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).
Trade and other receivables
Trade receivables are recognised and carried at the lower of
their original invoiced value and recoverable amount. Where the
time value of money is material, receivables are carried at
amortised cost. Provision is made when there is objective evidence
that the Group will not be able to recover balances in full.
Balances are written off when the probability of recovery is
assessed as being remote.
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.
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.
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.
Provisions
Provisions are recognised when the Group has a present
obligation as a result of a past event and it is probable that an
outflow or resources embodying economic benefits will be required
to settle the obligation and a reliable estimate can be made of the
amount of the obligation.
Conversion to UK-REIT
The Group's conversion to UK-REIT status was effective from 1
January 2007. Conversion to a UK-REIT results in, subject to
continuing relevant UK-REIT criteria being met, the Group's
property profits, both income and gains, being exempt from UK
taxation from 1 January 2007. Acquired companies were converted to
a UK-REIT status; there were no charges payable following the
abolition of the REIT conversion charge.
Taxation
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.
Financial instruments
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include
financial assets designated upon initial recognition as fair value
through profit and loss. This category includes derivative
financial instruments entered into by the Group that do not meet
the hedge accounting criteria as defined by IAS39. Financial assets
at fair value through profit and loss are carried in the Balance
Sheet at fair value with gains or losses recognised in the Group
Statement of Comprehensive Income.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss
include financial liabilities held for trading and financial
liabilities designated upon initial recognition at fair value
through profit or loss. Financial liabilities are classified as
held for trading if they are acquired for the purpose of selling in
the near term. This category includes derivative financial
instruments entered into by the Group that are not designated as
hedging instruments in hedging relationships as defined by IAS 39.
Gains or losses on liabilities held for trading are recognised in
the Group Statement of Comprehensive Income.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted on an active
market. Such assets are carried at amortised cost using the
effective interest method. Gains and losses are recognised in the
Group Statement of Comprehensive Income when the loans and
receivables are de-recognised or impaired, as well as through the
amortisation process.
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;
-- 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;
-- 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.
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
income.
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 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.
Derivative financial instruments (derivatives) and hedge
accounting
The Group uses interest rate swaps to help manage its interest
rate risk.
The Group documents at the inception of the transaction 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 hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions meet
the strict criteria for being described as "effective" in
offsetting changes in cash flows of hedged items.
All derivatives are initially recognised at fair value at the
date the derivative is entered into and are subsequently
re-measured at fair value. The fair values of the Group's interest
rate swaps are calculated by J.C. Rathbone Associates Limited, an
independent specialist which provides treasury management services
to the Group.
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
Statement of Comprehensive Income on a straight line basis from the
date of cancellation to the original swap expiry date.
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 equity 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.
Dividends payable to Shareholders
Dividends proposed by the Board of Directors and unpaid at the
year end are not recognised in the financial statements as they are
appropriations of income. Furthermore, any final dividends would
not be recognised until they have been approved by Shareholders at
an Annual General Meeting.
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.
2.3 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 property includes (i) completed investment property,
and (ii) investment property under construction. Completed
investment property comprises real estate held by the Group or
leased by the Group under a finance lease in order to earn rentals
or for capital appreciation, or both.
The market value of a property is deemed, by the independent
property valuers 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.
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, health and safety legislations.
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. Where assets under
construction are pre-let and construction risk remains with the
respective developer or contractor, these facts are taken into
account in estimating fair values.
Fair value of derivatives
In accordance with IAS39, the Group values its derivative
financial instruments at fair value. Fair value is estimated by
J.C. Rathbone Associates Limited 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 2013. Fair value represents the net present value of the
difference between the cash flows produced by the contracted rate
and the valuation rate.
Rent reviews
The Group's occupational leases include periodic rent review
provisions. All reviews are effectively upwards only and either
reviewed to Open Market Rent, linked to RPI or subject to a fixed
uplift at the review date. The Group accrues for the potential
uplift in rent from the date of the review. Estimated rents are
established by the Joint Advisers using their own data from
previous reviews supported by estimates from third party advisers.
The Group then accrues 90% of the estimated rental increase. Any
additional rent receivable is booked on receipt when the rent
review is agreed.
b) Judgements
Leases
The Group has entered into commercial property leases on its
investment property portfolio. The Group has determined that it
retains all the significant risks and rewards of ownership of the
vast majority of the properties, which are leased out on operating
leases. The Group has entered into a small number of finance lease
arrangements where it has determined that it has transferred
substantially all the risks and rewards incidental to ownership to
the occupier.
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 IAS39, 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 re-negotiated on or before expiry and that variable
interest rate debt finance will be in place until the expiry date
of the swaps.
Property acquisitions during the year
The Directors have reviewed the acquisitions during the year on
an individual basis in accordance with the requirements of
IFRS3(R). They consider that they all meet the criteria of asset
acquisitions rather than business combinations and have accounted
for them as such. Although corporate entities were acquired, they
were special purpose vehicles for holding properties rather than
separate business entities. This judgement was made due to the
absence of business processes inherent in the entities
acquired.
2.4 Standards adopted during the year
The accounting policies adopted are consistent with those of the
previous financial year, except for the following new and amended
IFRSs effective for this Group as of 1 January 2013. The nature and
the impact of each of the new standards and amendments are
described below.
Other amendments to certain standards apply for the first time
in 2013. However, they do not impact the annual consolidated
financial statements of the Group.
-- IFRS 13 Fair Value Measurement - IFRS 13 establishes a single
source of guidance for all fair value measurements. IFRS 13 does
not change when an entity is required to use fair value, but rather
provides guidance on how to measure fair value under IFRS when fair
value is required or permitted. The Group has considered the
specific requirements relating to highest and best use, valuation
premise, and principal (or most advantageous) market. The methods,
assumptions, processes and procedures for determining fair value
were revisited and adjusted where applicable. The resulting
calculations under IFRS 13 affected the principles that the Group
uses to assess the fair value, but the assessment of the fair value
under IFRS 13 has not materially changed the fair values recognised
or disclosed.
IFRS 13 mainly impacts the disclosures of the Group. It requires
specific disclosures about the fair value measurements and
disclosures of fair values, some of which replace existing
disclosure requirements in other standards, including IFRS 7
Financial Instruments: Disclosures.
The disclosure requirements of IFRS 13 apply prospectively and
need not be provided for comparative periods before initial
application. Consequently, comparatives of these disclosures have
not been provided.
-- IAS 1 Presentation of Other Items of Other Comprehensive
Income - Amendments to IAS 1: The amendments to IAS 1 became
effective 1 July 2012 and were first applied to the Group on 1
January 2013. The amendments introduce a grouping of items
presented in Other Comprehensive Income (OCI). Items that will be
reclassified ('recycled') to profit or loss at a future point in
time have to be presented separately from items that will not be
reclassified. The amendment affected presentation only and had no
impact on the Group's financial position or performance.
2.5 Standards issued but not yet effective
Standards issued but not yet effective as of the date of
issuance of the Group's financial statements are listed below. This
listing of standards and interpretations issued are those that the
Group reasonably expects to have an impact on disclosures,
financial position or performance when applied at a future date.
The Group intends to adopt these standards when they become
effective.
-- IFRS 9 Financial Instruments: Will impact both the management
and disclosures of Financial Instruments.
-- IFRS 12 will impact the disclosure of interests the Group has in other entities.
-- IFRS 10 Consolidated Financial Statements
-- IAS 27 Separate Financial Statements
-- IAS 28 (revised) Investments in Associate and Joint Ventures
The Directors do not expect the adoption of the Standards listed
above to have a significant impact on the financial statements of
the Group in future periods, other than IFRS 9 which will impact
both the measurement and disclosure of financial instruments.
Beyond the information above, it is not practicable to provide a
reasonable estimate of the effect of these new amended standards
until a detailed review has been completed.
3. Rental and related income
Turnover comprises rental income and finance lease income
receivable on property investments in the UK, which is exclusive of
VAT. Turnover is derived from one reportable operating segment.
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 More than
one year 1-5 years 5 years Total
GBP000s GBP000s GBP000s GBP000s
------ ----------- ---------- ---------- --------
2013 56,188 224,122 587,088 807,398
2012 38,208 152,536 421,031 611,775
------ ----------- ---------- ---------- --------
The future minimum lease payments include amounts due in future
years from investment properties under development at the year
end.
b) There were no contingent rents recognised as income in the
year.
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 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
2013 2012
GBP000 GBP000
---------------------------------------------------- ------- -------
Administrative expenses: recurring
Advisory fees (note 4a) 4,847 4,166
Directors' fees (note 4c) 219 188
Property advisory fees and other services payable
to Nexus 40 50
Other professional fees 315 139
Taxation Fees payable to corporate tax advisers
Fees payable for compliance work 110 30
Fees payable for advisory work 88 52
Other expenses 186 284
---------------------------------------------------- ------- -------
Fees payable to the Company's auditor and their
associates for the audit of the Company's annual
accounts 100 120
Fees payable to the Company's auditor and their
associates for other services to the audit of the
Company's subsidiaries 92 95
---------------------------------------------------- ------- -------
Total audit fees 192 215
---------------------------------------------------- ------- -------
Audit-related assurance services 40 -
Other assurance services 8 -
Corporate finance services 35 -
---------------------------------------------------- ------- -------
Total non-audit fees 83 -
---------------------------------------------------- ------- -------
Total 6,080 5,124
---------------------------------------------------- ------- -------
a) Advisory fees
The advisory fee calculated and payable for the period to 31
December was as follows:
2013 2012
GBP000 GBP000
------- ------- -------
Nexus 3,114 2,497
JOHCM 1,733 1,669
------- ------- -------
4,847 4,166
------- ------- -------
Further details on the Advisory Agreement can be found in the
Directors' Report on page 31.
As at 31 December 2013, GBP162,000 of advisory fees payable to
JOHCM were outstanding (2012: GBP143,000) and GBP352,000 was
payable to Nexus (2012: GBP242,000).
Further fees payable to Nexus in accordance with the Advisory
Agreement of GBP65,000 (2012: GBP55,000) in respect of capital
projects were capitalised in the year.
b) Performance Incentive Fee ("PIF")
Information about the Performance Incentive Fee ("PIF") is
provided in the Directors' Report in the Annual Report.
c) Remuneration of Directors
Information about the remuneration of individual directors is
provided in the Directors' Remuneration Report in the Annual
Report.
d) Termination Fee: Non recurring
Fee payment on termination of the Joint Advisory Agreement:
2013 2012
GBP000 GBP000
------ ------- -------
JOHCM 2,485 -
------ ------- -------
Following the announcement on 26 September 2013 by the Board of
PHP to terminate the Joint Advisory Agreement, it has been agreed
that a termination fee of GBP2.485m will be payable to JOHCM upon
termination of their services on 30 April 2014. Accordingly, an
appropriate provision has been recognised in the Group Statement of
Comprehensive Income.
5. Profit on termination of finance lease
2013 2012
GBP000 GBP000
--------------------------------------- ------- -------
Profit on termination of finance lease 638 -
--------------------------------------- ------- -------
On 27 March 2013, the Group recognised a profit on disposal of a
property held under a finance lease. Disposal proceeds of GBP3.77m
were received and the carrying value of the asset at the date of
disposal was GBP3.13m. A small amount of disposal costs were
incurred.
6. Finance income
2013 2012
GBP000 GBP000
------------------------------------- ------- -------
Interest income on financial assets
Bank interest 41 206
Development loan interest 388 257
Other interest 5 55
------------------------------------- ------- -------
434 518
------------------------------------- ------- -------
7. Finance costs
2013 2012
GBP000 GBP000
--------------------------------------------------- -------- --------
Interest expense and similar charges on financial
liabilities
a) Interest paid
Swap interest paid 7,699 6,860
Bank loan interest paid 12,021 10,296
Bond interest paid 4,314 1,789
Bank facility non-utilisation fees 976 733
Bank charges and loan commitment fees 1,440 1,082
--------------------------------------------------- -------- --------
26,450 20,760
--------------------------------------------------- -------- --------
b) Early loan repayment fees
Fee on breakage of Apollo debt 824 1,564
Fee on breakage of PHCC debt 126 -
--------------------------------------------------- -------- --------
950 1,564
--------------------------------------------------- -------- --------
Following the Apollo transaction in December 2012, the debt
assumed as part of the transaction was fully repaid in March 2013.
An additional charge to the Group Statement of Comprehensive Income
was made of GBP0.7 million in addition to an amount of GBP1.6
million provided for at December 2012. A contribution of GBP2.6
million was made by the vendors and factored into the acquisition
price.
Following the PHCC transaction in July 2013, the debt assumed as
part of the transaction was fully repaid in October 2013. An
additional charge to the Group Statement of Comprehensive Income
was made of GBP0.3 million.
2013 2012
GBP000 GBP000
--------------------------------------------------- --------- -------
c) Derivatives
Net fair value (gain)/loss on interest rate swaps (12,003) 1,577
Amortisation of cash flow hedging reserve 571 1,345
--------------------------------------------------- --------- -------
(11,432) 2,922
--------------------------------------------------- --------- -------
The fair value gain of GBP12.0 million (2012 loss:
GBP1.6million) on derivatives recognised in the Group Statement of
Comprehensive Income for the year has arisen from the interest rate
swaps for which hedge accounting does not apply.
Details of the fair value loss on hedges which meet the
effectiveness criteria for hedge accounting under IAS 39 are set
out in note 26.
2013 2012
GBP000 GBP000
------------------------------ -------- -------
Net finance costs
Finance income (note 6) (434) (518)
Finance costs (as per above) 26,450 20,760
------------------------------ -------- -------
26,016 20,242
------------------------------ -------- -------
8. Taxation
a) Tax credit in the Group Statement of Comprehensive Income
The tax credit is made up as follows:
2013 2012
GBP000 GBP000
------------------------------ ------- -------
Current tax
UK corporation tax (note 8b) (1) (1)
------------------------------ ------- -------
The tax credit relates to the release of tax provisions from
prior years and variances in the amount of corporation tax paid in
acquired companies against the agreed provision at acquisition.
A reduction in the UK corporation tax rate from 24% to 23% was
effective from 1 April 2013. In addition, the Government announced
its intention to further reduce the UK corporation tax rates from
23% to 21% from 1 April 2014 and 21% to 20% from 1 April 2015.
Accordingly, these rates have been applied in the measurement of
the Group's tax liability at 31 December 2013.
b) Factors affecting the tax credit for the year
The tax assessed for the year is lower than (2012: lower than)
the standard rate of corporation tax in the UK. The differences are
explained below:
2013 2012
GBP000 GBP000
----------------------------------------------------- -------- --------
Profit on ordinary activities before taxation 20,219 1,129
----------------------------------------------------- -------- --------
Theoretical tax at UK corporation tax rate of 23.3%
(2012: 24.5%) 4,711 277
REIT exempt income (3,280) (1,857)
Transfer pricing adjustments 1,863 797
Non taxable items (3,302) 819
Finance lease adjustment 1 1
Losses carried forward - (37)
Movement in tax provision relating to prior years (1) (1)
----------------------------------------------------- -------- --------
Current tax credit (note 8a) (1) (1)
----------------------------------------------------- -------- --------
9. Earnings per share
The calculation of basic and diluted earnings per share is based
on the following:
Net profit
attributable
to Ordinary Ordinary
Shareholders Shares Per Share
GBP000 (number) (pence)
(1)
------------------------------------------- -------------- ------------ ----------
2013
Basic earnings per share 20,220 89,121,611 22.7p
Adjustments to remove:
Net result on property (Note 11) (2,313)
Fair value gain on derivatives (2) (11,432)
Profit on termination of finance lease (637)
------------------------------------------- -------------- ------------ ----------
EPRA basic and diluted earnings per share 5,837 89,121,611 6.6p
------------------------------------------- -------------- ------------ ----------
Early loan repayment fee charges 950
Non-recurring expenses:
Costs associated with corporate purchase
(3) 217
Non-recurring expenses:
JOHCM Termination Fee 2,485
UK corporation tax credit (1)
------------------------------------------- -------------- ------------ ----------
Adjusted basic and diluted earnings per
share 9,487 89,121,611 10.6p
------------------------------------------- -------------- ------------ ----------
2012
Basic earnings per share 1,130 72,675,900 1.6p
------------------------------------------- -------------- ------------ ----------
Adjustments to remove:
Net result on property (Note 11) 1,768
Fair value loss on derivatives (2) 2,922
------------------------------------------- -------------- ------------ ----------
EPRA basic and diluted earnings per share 5,820 72,675,900 8.0p
------------------------------------------- -------------- ------------ ----------
Provision for early repayment fees 1,564
UK corporation tax credit (1)
------------------------------------------- -------------- ------------ ----------
Adjusted basic and diluted earnings per
share 7,383 72,675,900 10.2p
------------------------------------------- -------------- ------------ ----------
(1) Weighted average number of Ordinary Shares in issue during
the year.
(2) In view of the continuing volatility in the fair value
adjustment of derivatives in respect of the period end valuation of
derivatives that flows through the Group Statement of Comprehensive
Income, the Directors believe that it is appropriate to remove the
gain or loss in the calculation of adjusted earnings.
(3) Costs related to the PPP acquisition that were expensed as
incurred in accordance with Accounting Standards.
10. Dividends
Amounts recognised as distributions to equity holders in the
year:
2013 2012
GBP000 GBP000
-------------------------------------------------------- ------- -------
Second interim dividend for the year ended 31 December
2012 (9.50p) paid 22 April 2013 (2012: 9.25p) 7,006 5,969
Scrip dividend in lieu of second interim cash dividend 217 346
First interim dividend for the year ended 31 December
2013 (9.50p) paid 1 November 2013 (2012: 9.25p) 9,124 6,240
Scrip dividend in lieu of first interim cash dividend 171 661
-------------------------------------------------------- ------- -------
Total dividends 16,518 13,216
-------------------------------------------------------- ------- -------
Per share 19.0p 18.5p
-------------------------------------------------------- ------- -------
11. Investment properties, investment properties under
construction
Properties have been independently valued at fair value by
Lambert Smith Hampton ("LSH"), Chartered Surveyors and Valuers, as
at the balance sheet date in accordance with IAS 40: Investment
Property. LSH confirm that they have valued the properties in
accordance with the Practice Statements in the RICS Appraisal and
Valuation Standards ("Red Book"). 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. The valuations reflected a 5.65%
initial yield (2012: 5.72%) and a 5.92% (2012: 6.05%) 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 valuer.
In addition to the market value exercise performed by LSH, the
Joint Advisers monitor the value of the Group's investment
portfolio based on DCF analysis. Full details can be found in the
Strategic Report on page 6.
In accordance with IAS 40, investment properties under
construction have also been valued at fair value by LSH. In
determining the fair value, 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. 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 valuers have used the special assumptions
that, as at the valuation date, the developments have been
completed satisfactorily, the agreements of leases have been
completed and the rents and other tenants lease obligations have
commenced. A fair value increase of GBP478,000 (2012: decrease of
GBP764,000) in respect of investment property under construction
has been recognised in the Group Statement of Comprehensive Income,
as part of the total net valuation gain on property portfolio in
the year of GBP2.31 million (2012: loss of GBP1.77 million).
In line with Accounting Policies, the Group has treated the
acquisitions during the year as asset purchases rather than
business combinations as they were judged to be acquisitions of
properties rather than businesses.
Investment Investment Investment
properties properties properties
freehold long leasehold under construction Total
GBP000 GBP000 GBP000 GBP000
-------------------------------------- ------------ ---------------- -------------------- --------
As at 1st January 2013 513,345 93,371 15,731 622,447
Property Additions 19,927 9,750 18,447 48,124
Acquisition of PHCC (2) 23,711 5,171 - 28,882
Acquisition of PPP (2) 199,188 38,168 - 237,356
Impact of lease incentive adjustment 1,262 228 - 1,490
Transfer from properties in the
course of development 14,702 8,275 (22,977) -
Revaluations for the year (1,101) 3,872 478 3,249
-------------------------------------- ------------ ---------------- -------------------- --------
As at 31 December 2013 771,034 158,835 11,679 941,548
-------------------------------------- ------------ ---------------- -------------------- --------
As at 1 January 2012 433,245 87,966 4,375 525,586
Property additions 30,111 1,021 10,234 41,366
Properties acquired during the
year following
Acquisition of Apollo Medical
Partners Limited 41,966 4,247 11,550 57,763
Disposal (1) - - (500) (500)
Transfer from properties in the
course of development 9,164 - (9,164) -
Revaluations for the year (1,141) 137 (764) (1,768)
-------------------------------------- ------------ ---------------- -------------------- --------
As at 31 December 2012 513,345 93,371 15,731 622,447
-------------------------------------- ------------ ---------------- -------------------- --------
(1) Disposal of long leasehold interest as part of acquisition
of newly developed property at Pelton, County Durham.
(2) Figures include a fair value adjustment made on acquisition
as well as acquisition related costs.
Investment Investment Investment
properties properties properties
freehold long leasehold under construction Total
GBP000 GBP000 GBP000 GBP000
-------------------------------------- ------------ ---------------- -------------------- -------
Reconciliation of net result on
property portfolio
Additional consideration on property
transactions (17) (919) - (936)
Revaluations for the year (1,101) 3,872 478 3,249
-------------------------------------- ------------ ---------------- -------------------- -------
Year ending 31 December 2013 (1,118) 2,953 478 2,313
-------------------------------------- ------------ ---------------- -------------------- -------
Additional consideration on property transactions relate to
payments made following the letting of various areas of expansion
space on certain properties acquired as part of the Apollo
portfolio. Each letting has created additional rental income for
the Group leading to an additional capital payment being made to
the vendors.
Bank borrowings and bonds are secured on investment properties
for the value of GBP929.14 million.
Fair value hierarchy
The following table provides the fair value measurement
hierarchy for Investment property and investment property under
construction as at 31 December 2013:
Quoted
prices Significant Significant
in active observable unobservable
markets inputs inputs
Date of (Level (Level (Level
valuation Total 1) 2) 3)
GBP000 GBP000 GBP000 GBP000
------------------------- ------------ -------- ----------- ------------ --------------
Assets measured at fair
value:
Investment properties
(Note 11) 31-Dec-13 941,548 - - 941,548
------------------------- ------------ -------- ----------- ------------ --------------
The following table provides the fair value measurement
hierarchy for Investment property and investment property under
construction as at 31 December 2012:
Quoted
prices Significant Significant
in active observable unobservable
markets inputs inputs
Date of (Level (Level (Level
valuation Total 1) 2) 3)
GBP000 GBP000 GBP000 GBP000
------------------------- ------------ -------- ----------- ------------ --------------
Assets measured at fair
value:
Investment properties
(Note 11) 31-Dec-12 622,446 - - 622,446
------------------------- ------------ -------- ----------- ------------ --------------
There have been no transfers between Level 1 and Level 2 during
the year, nor have there been any transfers between Level 2 and
Level 3 during the year.
Valuation techniques used to derive Level 3 fair values
The information in this note presents the following for each
class of investment property:
-- The fair value measurements at the end of the reporting period
-- The level of the fair value hierarchy (e.g. Level 2 or Level
3) within which the fair value measurements are categorised in
their entirety
-- A description of the valuation techniques applied
-- A summary of the inputs used in the fair value measurement
-- For Level 3 fair value measurements, quantitative information
about the significant unobservable inputs used in the fair value
measurement
The valuations have been prepared on the basis of Market Value
(MV) 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."
The following descriptions and definitions relating to valuation
techniques and key unobservable inputs made in determining fair
values are as follows:
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.
Unobservable input: estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation. (Range: GBP30,000-GBP1,157,725
per annum).
Unobservable input: rental growth
The estimated average increase in rent based on both market
estimations and contractual situations.
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. (Range:
4.74%-6.58%)
Unobservable input: physical condition of the property
The properties are physically inspected on a three year rotating
basis.
Special assumptions
With regards to properties in the course of development and in
various stages of construction the following assumptions have been
applied:
-- That all works to construct the proposed developments have
been completed fully and to an acceptable standard in accordance
with plans and specifications;
-- The leases to the various occupiers have been completed in
accordance with the agreed lease terms you have provided to us;
and
-- The rent and other tenant and landlord obligations under the
leases commence at the valuation date.
Sensitivity of measurement of significant unobservable
inputs
-- A decrease in the estimated annual rent will decrease the fair value.
-- A decrease in the equivalent yield will increase the fair value.
-- An increase in the remaining lease term will increase fair value.
12. Investments
Those subsidiaries listed below are considered to be the only
principal subsidiaries of the Company:
Subsidiary
---------------------------------------------------------
Primary Health Investment Properties Limited (PHIP) (1)
Primary Health Investment Properties (No. 2) Limited (1)
Primary Health Investment Properties (No. 3) Limited (1)
Primary Health Investment Properties (No. 4) Limited (1)
PHIP (5) Limited (2)
Patientfirst Partnerships Limited (2)
Patientfirst (Hinckley) Limited (2)
Patientfirst (Burnley) Limited (2)
Health Investments Limited (1)
Motorstep Limited (2)
PHP Investments No1 Limited (2)
PHP Investments No2 Limited (2)
PHP Investments (2011) Limited (1)
PHP Bond Finance PLC (1)
PHP Healthcare Investments Limited (2)
PHP (Stourbridge) Limited (2)
PHP Clinics Limited (2)
PHP St. Johns Limited (2)
PHIP (Project Finance) Limited (2)
PHP Empire Holdings Limited (1)
PHP AssetCo (2011) Limited (2)
PHP Glen Spean Limited (2)
Gracemount Medical Centre Limited (2) (3) (4)
PHP Primary Properties Limited (2) (5)
---------------------------------------------------------
With the exception of PHP Bond Finance PLC and Primary Health
Investment Properties (No. 4) Limited the principal activity of all
of the above is property investment. PHP Bond Finance PLC and
Primary Health Investment Properties (No. 4) Limited both act as
intermediary financing companies within the Group. 100% of all
voting rights and shares held directly or indirectly by the
Company.
(1) Subsidiary directly held by the Company.
(2) Subsidiary indirectly held by the Company.
(3) Subsidiary acquired during the year.
(4) Subsidiary company registered in Scotland.
(5) Subsidiary acquired during the year (name changed from Prime
Public Partnerships Limited post acquisition).
13. Net investment in finance leases
2013 2012
GBP000 GBP000
---------------------------------------- -------- -------
Amounts due in more than five years - 3,086
Amounts due between one and five years - 14
---------------------------------------- -------- -------
- 3,100
------------------------------------------------- -------
Amounts due in less than one year - 21
---------------------------------------- -------- -------
- 3,121
------------------------------------------------- -------
The asset held under a finance lease was disposed of on 27 March
2013 (see note 5)
2013 2012
GBP000 GBP000
----------------------------------------------------------- -------- --------
Gross investment in finance leases - 8,781
Less: unearned financial revenues - (5,660)
----------------------------------------------------------- -------- --------
Present value of future minimum lease payment receivables - 3,121
----------------------------------------------------------- -------- --------
14. Trade and other receivables
2013 2012
GBP000 GBP000
-------------------------------- ------- -------
Trade receivables 2,626 689
Prepayments and accrued income 1,370 1,275
Other debtors 768 775
VAT - 177
-------------------------------- ------- -------
4,764 2,916
-------------------------------- ------- -------
As at 31 December, the analysis of trade receivables, some of
which were past due but not impaired, is set out below:
2013 2012
GBP000 GBP000
-------------------------------- ------- -------
Neither past due nor impaired:
<30 days 1,998 425
Past due but not impaired:
30-60 days 55 69
60-90 days 187 -
90-120 days 62 15
>120 days 324 180
-------------------------------- ------- -------
2,626 689
-------------------------------- ------- -------
15. Cash and cash equivalents
2013 2012
GBP000 GBP000
------------------- ------- -------
Cash held at bank 8,788 19,086
Restricted cash 500 6,010
------------------- ------- -------
9,288 25,096
------------------- ------- -------
Restricted cash as at 31 December 2013 represents a deposit held
by the Trustee of the Secured Bond issued by the Group. The deposit
is held as temporary collateral awaiting the completion of a
property asset that will be charged as security to the Trustee and
the cash deposit released.
In the prior year, there were three separate cash deposits held
with Aviva totalling GBP6.0m at the year end. The deposits were
restricted and released upon a certified valuation certificate
being issued against the three Apollo development properties. When
the Apollo Aviva loan facilities were repaid on 25 March 2013, the
cash deposits were set off against the loan facilities and formed
part of the repayment.
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 six months, dependent on available
cash and forthcoming cash requirements of the Group. Theses
deposits earn interest at various short term deposit rates.
16. Trade and other payables
2013 2012
GBP000 GBP000
------------------------------------- -------- -------
Trade payables 906 951
Bank and bond loan interest accrual 3,313 3,313
Other payables 7,671 5,545
VAT 2,302 -
Accruals 2,077 878
------------------------------------- -------- -------
16,269 10,687
------------------------------------- -------- -------
An additional 283,720 shares were issued on 31 January 2014 upon
agreement of the final completion accounts, and a further 235,475
shares were also issued on that date upon a Deed of Variation being
entered into regarding the St Catherine's property. Provision has
been made for these sums at the market price for a PHP share as at
31 December 2013 of 353 pence per share giving a total provision of
GBP1.8 million.
On 26 September 2013 the Company announced the termination of
Joint Advisors Agreement with JOHCM. A contractual termination fee
of GBP2.485 million will be payable to JOHCM upon termination of
their services on 30 April 2014. Accordingly, an appropriate
liability has been recognised in the Group Balance Sheet within
other payables.
17. Provisions for liabilities and charges
2013 2012
GBP000 GBP000
---------------------------------------- -------- -------
As at 1 January 2013 - -
Provision for early loan repayment fee - 1,564
---------------------------------------- -------- -------
As at 31 December 2013 - 1,564
---------------------------------------- -------- -------
As part of the acquisition of Apollo Medical Partners Limited
and its subsidiary, Apollo Capital Projects Limited ("ACPL"), on 13
December 2012, PHP assumed fixed rate bank finance provided by
Aviva with a total principal amount of GBP49.8 million. The Group
has determined the fair value of the debt as at the date of
acquisition to be GBP52.3 million, which has been recognised in the
Group Balance Sheet.
On 19 December 2012, ACPL issued a repayment notice to Aviva
giving the required three months' notice of its intention to repay
the ACPL loans in full on expiry of the notice period.
As at the 2012 balance sheet date, PHP had recognised a
provision based on the difference between the carrying value of the
debt and the estimated sum required to settle the debt and meet the
estimated early repayment charges that will crystallise on the
repayment date. The Group's best estimate of the provision, based
on applicable referenced gilt yields as at this date was GBP1.56
million, which had been recognised in the Group Statement of
Comprehensive Income. In practice, the amount payable was GBP2.29
million as a result of subsequent movement in reference gilt
yields.
18. Borrowings: Term loans and overdrafts
The table indicates amounts drawn and undrawn from each
individual facility:
Amounts Amounts
Facility Facility drawn drawn Undrawn Undrawn
2013 2012 2013 2012 2013 2012
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- --------- --------- ---------- --------- -------- ---------
Current
Overdraft facility
(1) 5,000 5,000 - - 5,000 5,000
Fixed term loan (4)
(10) 1,857 629 1,857 629 - -
Term to January 2013
(3) - 27,000 - 27,000 - -
Fixed Rate term loan
(8) - 52,305 - 52,305 - -
----------------------- --------- --------- ---------- --------- -------- ---------
6,857 84,934 1,857 79,934 5,000 5,000
----------------------- --------- --------- ---------- --------- -------- ---------
Non Current
Term to March 2016
(2) 140,000 175,000 100,500 125,000 39,500 50,000
Fixed Rate term loan
(4) 25,511 26,082 25,511 26,082 - -
Fixed Rate term loan
to December 2022 (5) 25,000 25,000 25,000 25,000 - -
Term to July 2014 (6) - 50,000 - - - 50,000
Term to November 2018
(7) 75,000 75,000 75,000 75,000 - -
Term to March 2017
(9) 70,000 - 49,470 - 20,530 -
Fixed rate term 22
- 30 year (10) 190,257* - 190,257* - - -
----------------------- --------- --------- ---------- --------- -------- ---------
525,768 351,082 465,738 251,082 60,030 100,000
----------------------- --------- --------- ---------- --------- -------- ---------
532,625 436,016 467,595 331,016 65,030 105,000
----------------------- --------- --------- ---------- --------- -------- ---------
Providers:
(1) The Royal Bank of Scotland plc
(2) The Royal Bank of Scotland plc ("RBS") and Abbey National
Treasury Services plc (branded Santander from January 2010) ("The
Club Facility")
(3) Allied Irish Banks, p.l.c
(4) Aviva facility (acquired as part of HIL acquisition)
repayable in tranches to 31 January 2032
(5) Aviva GPFC facility
(6) Clydesdale Bank facility
(7) Aviva facility
(8) Aviva facility (acquired as part of the Glen Spean
acquisition in December 2012) repayable in tranches to 2037 -
refinanced by Barclays loan
(9) Barclays facility
(10) Aviva facility (acquired with PPP)
* The nominal value of this debt equals GBP177.9 million but
includes an adjustment of GBP13.6 million to reflect the fair value
of the debt on acquisition of PPP.
At 31 December 2013, total facilities of GBP677.6 million (2012:
GBP511.0 million) including the GBP75 million Unsecured Retail
Bond, GBP70 million Secured Bond and GBP5 million revolving
overdraft facility were available. Of these facilities, as at 31
December 2013, GBP602.6 million was drawn (2012: GBP406.0 million)
and secured by an unlimited guarantee from each respective
subsidiary and a first fixed charge over the ownership of the
assigned properties. The Group has entered into interest rate swaps
to manage its exposure to interest rate fluctuations. These are set
out in note 20.
On 31 January 2013, the AIB GBP27 million loan facility was
repaid without any requirement to redeem the pre-existing interest
rate swaps and incur any related breakage fees.
On 25 March 2013, PHP successfully completed the refinancing of
the Aviva facility assumed on acquisition of Apollo, with a new
GBP50 million, four year, interest only, revolving loan facility
provided by Barclays Bank Plc. On 29 April 2013 the Group
subsequently increased the facility by GBP20 million to take total
available borrowings under this facility to GBP70 million.
Total early repayment fees of GBP4.9 million were paid to Aviva,
as compared to a provision of GBP4.2 million that was made in the
2012 full year accounts. The movement was due to fall in underlying
gilt yields mirrored in a reduction in swap rates. PHP had received
a contribution of GBP2.6 million toward this cost from the vendor
upon the acquisition of Apollo.
On 18 October 2013, the Clydesdale Facility, which was due to
expire in July 2014, was terminated early. The outstanding loan
balance of GBP10 million was repaid in full on the same date.
On 2 December 2013, as a part of the PPP acquisition, PHP
assumed GBP178.4 million in long term, fixed rate debt facilities
with Aviva Public Private Finance Limited. As part of the fair
value exercise performed at acquisition, the Group attributed the
fair value of these loans to be GBP192.1 million, which has been
recognised in the Group Balance Sheet. The loans have terms ranging
from 22 years to 30 years from inception of the loan and they have
current contracted interest rates of 5.33 per cent to 6.09 per
cent. Facility covenants include minimum levels of debt service
cover by rental income (DSCR), with a range of 91.7 per cent to 104
per cent. See also note 32.
Since the term loan facilities have been in existence, the Group
has suffered costs in association with the arrangement of the
facilities including legal advice and loan arrangement fees. These
costs are amortised over the remaining life of the related
facility.
Any amounts unamortised as at the period end are offset against
amounts drawn on the facilities as shown in the table below:
2013 2012
GBP000 GBP000
------------------------------------------------ --------- --------
Term loans drawn: due within one year 1,857 79,934
Term loans drawn: due in greater than one year 465,738 251,082
Less: Unamortised borrowing costs (3,567) (3,177)
------------------------------------------------ --------- --------
Total terms loan: due in greater than one year 462,171 247,905
------------------------------------------------ --------- --------
Term loans in total per Group Balance Sheet 464,028 327,839
------------------------------------------------ --------- --------
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 21e.
19. Borrowings: Bonds
2013 2012
----------------------- -------- --------
Retail Bond July 2019 75,000 75,000
Bond November 2025 60,000 -
Issue Costs (2,592) (1,245)
----------------------- -------- --------
132,408 73,755
----------------------- -------- --------
On 23 July 2012, PHP announced that it had become the first UK
REIT to issue a Retail Bond following the issue of a GBP75 million,
unsecured, seven year bond, to retail investors with an annual
interest rate of 5.375% paid semi-annually in arrears. The bond
issue costs will be amortised on a straight line basis over seven
years.
On 18 December 2013, PHP successfully listed the floating rate
guaranteed secured bonds issued on 4 November 2013 (the "Bonds") on
the London Stock Exchange. The Bonds have a nominal value of GBP70
million and mature on or about 30 December 2025. The remaining
GBP10 million will be received on 30 June 2014 following the
completion of four development assets acting as security. The Bonds
will incur interest on the paid up amount at an annualised rate of
220 basis points above six month LIBOR, payable semi-annually in
arrears.
20. Derivatives and other financial instruments
The Group uses interest rate swaps to mitigate exposure to
interest-rate risk. 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.
2013 2012
GBP000 GBP000
--------------------------------------------------- --------- ---------
Fair value of interest rate swaps treated as cash
flow hedges under IAS39 ("effective swaps")
Current liabilities (3,772) (3,778)
Non-current liabilities (10,499) (23,637)
--------------------------------------------------- --------- ---------
(14,271) (27,415)
--------------------------------------------------- --------- ---------
Fair value of interest rate swaps not qualifying
as cash flow hedges ("ineffective swaps")
Non-current assets 472 -
Current liabilities (3,794) (3,745)
Non-Current liabilities (10,960) (21,674)
--------------------------------------------------- --------- ---------
(14,282) (25,419)
--------------------------------------------------- --------- ---------
Total fair value of interest rate swaps (28,553) (52,834)
--------------------------------------------------- --------- ---------
Total non-current assets 472 -
Total current liabilities (7,566) (7,523)
Total non-current liabilities (21,459) (45,311)
--------------------------------------------------- --------- ---------
It is Group policy to maintain the proportion of floating rate
interest exposure at between 20%-40% of total interest rate cost.
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 Statement of Changes in
Equity through the cash flow hedging reserve. The result recognised
in the Group Statement of Comprehensive Income on 'ineffective'
cash flow hedges in 2013 was a GBP12.8 million profit (2012: GBP0.3
million loss).
Floating to fixed interest rate swaps with a contract value of
GBP178.0 million (2012: GBP181.3 million) were in effect at the
year-end. Details of all floating to fixed rate interest rate swaps
contracts held are as follows:
Fixed
interest
per annum
Contract value Start date Maturity %
----------------------------- -------------- ---------------- -----------
2013
GBP70.0 million October 2013 January 2014 4.805
GBP50.0 million August 2007 August 2021 4.835
GBP38.0 million August 2007 August 2021 4.740
GBP10.0 million August 2005 August 2015 4.530
GBP10.0 million June 2006 June 2026 4.810
----------------------------- -------------- ---------------- -----------
GBP178.0 million
----------------------------- -------------- ---------------- -----------
2012
GBP50.0 million August 2007 August 2021(1) 4.835
GBP38.0 million August 2007 August 2021(1) 4.740
GBP73.3 million July 2012 April 2013 4.805
GBP10.0 million August 2005 August 2015 4.530
GBP10.0 million June 2006 June 2026 4.810
----------------------------- -------------- ---------------- -----------
GBP181.3 million
----------------------------- -------------- ---------------- -----------
Contracts not yet in effect
GBP80.0 million July 2015 July 2016 4.805
GBP10.0 million June 2016 June 2026 4.510
GBP10.0 million July 2016 July 2026 4.400
GBP10.0 million July 2016 July 2026 4.475
GBP10.0 million July 2016 July 2026 4.455
GBP20.0 million July 2016 July 2026 4.479
GBP20.0 million July 2017 July 2027 4.760
----------------------------- -------------- ---------------- -----------
(1) On 27 February 2012 PHP signed an agreement to cancel the
callability option held by the counter party on the GBP50.0 million
and the GBP38.0 million swaps in place. The callability option has
been cancelled for four years until 11 February 2016 at which time
it will be reinstated.
Details of the two interest rate caps held by the Group are as
follows:
Floating
rate cap
Maturity Premium paid per % annum
Contract value Start date date (1) (2)
GBP10.0 million Oct 2011 Oct 2014 GBP31,000 3.00%
GBP10.0 million Jan 2012 Jul 2014 GBP26,000 3.00%
(1) One-off fixed amount paid by PHP Group
(2) Payable by Clydesdale Bank PLC
21. 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
rates swaps, are loans and borrowings. 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 Review on
pages 4 to 25. This note provides further detail on financial risk
management and includes quantitative information on specific
financial risks.
Financial risk factors
a) 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 20 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 Effect
value of on profit
financial before Effect
instruments taxation on equity
GBP000 GBP000 GBP000
-------------------------- ---------------------- ------------- ----------- -----------
2013
London InterBank Offered Increase of 50 basis
Rate points 8,615 2,916 11,531
London InterBank Offered Decrease of 50 basis
Rate points (8,615) (2,916) (11,531)
-------------------------- ---------------------- ------------- ----------- -----------
2012
London InterBank Offered Increase of 50 basis
Rate points 9,720 3,206 12,926
London InterBank Offered Decrease of 50 basis
Rate points (9,720) (3,206) (12,926)
-------------------------- ---------------------- ------------- ----------- -----------
b) Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations under financial instruments or customer contract,
leading to a financial loss. The Group is exposed to credit risk
from its principal financial assets being cash and cash
equivalents, trade and other receivables.
Trade receivables
Trade receivables, primarily tenant rentals, are presented in
the balance sheet net of allowances for doubtful receivables and
are monitored on a case-by-case basis. Impairment allowance is
recorded where there is objective evidence that the Group will not
be able to collect all amounts due according to the original terms
of the receivable concerned. Credit risk is primarily managed by
requiring tenants to pay rentals in advance. An analysis of trade
receivables past due is shown in note 14. No trade receivables were
impaired at the year end.
Bank 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, who 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 are 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 by the joint managers.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted payments
including interest.
Less than 3 to 12 1 to 5
On demand 3 months months years > 5 years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ---------- ---------- -------- -------- ---------- --------
2013
Interest-bearing loans
and borrowings - 7,209 21,627 268,525 534,200 831,561
Interest rate swaps
(net) - 2,042 6,127 46,013 66,581 120,763
Trade and other payables 119 7,890 4,080 1,182 511 13,782
-------------------------- ---------- ---------- -------- -------- ---------- --------
119 17,141 31,834 315,720 601,292 966,106
-------------------------- ---------- ---------- -------- -------- ---------- --------
2012
Interest-bearing loans
and borrowings - 80,667 10,534 173,116 217,633 481,950
Interest rate swaps
(net) - 1,925 5,771 25,170 48,962 81,828
Trade and other payables 88 6,196 2,292 1,619 492 10,687
-------------------------- ---------- ---------- -------- -------- ---------- --------
88 88,788 18,597 199,905 267,087 574,465
-------------------------- ---------- ---------- -------- -------- ---------- --------
The Group's borrowings have financial covenants which, if
breached, could result in the borrowings becoming repayable
immediately. Details of the covenants are given in the Borrowings
section of the Business Review on page 18 and are disclosed to the
facility providers on a quarterly basis. There have been no
breaches during the year (2012: nil).
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 other price
risk.
Interest rate risk is outlined above. The Joint Advisers assess
the exposure to other price risks when making each investment
decision and monitor 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 on page 13 of
the Strategic Report in the Annual Report.
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
2013 2013 2012 2012
GBP000 GBP000 GBP000 GBP000
--------------------------------------- ----------- ----------- ----------- ----------
Financial assets
Finance leases - due within one year - - 21 287
Finance leases - due in more than
one year - - 3,100 4,516
Trade and other receivables 2,626 2,626 689 689
Cash and short-term deposits 9,288 9,288 25,096 25,096
--------------------------------------- ----------- ----------- ----------- ----------
Financial liabilities
Interest-bearing loans and borrowings 596,436 602,595 (401,594) (406,016)
Effective interest rate swaps (net) (14,271) (14,271) (27,415) (27,415)
Ineffective interest rate swaps (14,282) (14,282) (25,419) (25,419)
Trade and other payables (13,784) (13,784) (10,687) (10,687)
--------------------------------------- ----------- ----------- ----------- ----------
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 and finance leases
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 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
Level Level Level Total
1 2 3
GBP000 GBP000 GBP000 GBP000
------------- ------------------------------- -------- --------- ------- ---------
2013 derivative interest rate
Assets swaps - 472 - 472
2012 derivative interest rate - - - -
swaps
------------- ------------------------------- -------- --------- ------- ---------
2013 derivative interest rate
Liabilities swaps - (29,025) - (29,025)
2012 derivative interest rate
swaps - (52,834) - (52,834)
------------------------------- ---------------------- --------- ------- ---------
e) Capital risk management
The primary objectives of the Group's capital management is 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 note 18 and the Group's equity
is analysed into its various components in the Statement of Changes
in Equity. The Board, with the assistance of the Joint Advisers,
monitors and reviews the Group's capital so as to promote the
long-term success of the business, facilitate expansion and to
maintain sustainable returns for Shareholders.
Under its banking facilities, the Group is subject to the
following capital and covenant requirements:
-- Rental income must exceed borrowing costs by the ratio 1.3: 1.
-- UK-REIT compliance tests. These include loan to property 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.
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 cover: 1:1 to 1.5:1
Loan to value: 60% to 100%
During the period the Group has complied with all of the
requirements set out above.
2013 2012
GBP000 GBP000
--------------------------------------------------------- --------- ---------
Fair value of completed investment properties 929,869 606,716
Fair value of development properties 11,679 15,731
Net investment in finance leases - 3,121
--------------------------------------------------------- --------- ---------
941,548 625,568
--------------------------------------------------------- --------- ---------
Carrying value of interest-bearing loans and borrowings 596,436 401,594
Unamortised borrowing costs 6,159 4,422
Less PPP fair value adjustment (see note 18) (13,589)
Less cash held (9,288) (25,096)
--------------------------------------------------------- --------- ---------
Nominal amount of interest-bearing loans and borrowings 579,718 380,920
--------------------------------------------------------- --------- ---------
Group loan to value ratio 61.6% 60.9%
--------------------------------------------------------- --------- ---------
22. Called up share capital
2013 2013 2012 2012
Number GBP000 Number GBP000
---------------------------------------- ------------ -------- ------------ -------
Issued and fully paid at 50p each 110,474,230 55,237 76,034,208 38,017
---------------------------------------- ------------ -------- ------------ -------
At beginning of year 76,034,208 38,017 68,272,229 34,136
Scrip issues in lieu of second
interim cash dividends 64,036 32 107,332 54
Scrip issues in lieu of first
interim cash dividends 52,183 26 193,743 96
Proceeds from capital raisings 21,746,032 10,873 6,229,509 3,115
Shares issued as consideration
for PPP (December 2013) 12,577,771 6,289 - -
Shares issued as consideration
for Apollo Medical Partners (December
2012) - - 1,231,395 616
---------------------------------------- ------------ -------- ------------ -------
At end of year 110,474,230 55,237 76,034,208 38,017
---------------------------------------- ------------ -------- ------------ -------
On 3 December 13, the Group issued 12,577,771 new Ordinary
Shares of 50 pence each at an agreed price of 320 pence per share
as part of the consideration for the acquisition of Prime Public
Partnerships Holdings Limited and its subsidiary Prime Public
Partnerships Limited ("PPP"). The market price of a PHP share on
the issue date was 331 pence. A further 283,720 Ordinary Shares of
50 pence each were issued on 31 January 2014 on agreement of the
completion accounts of PPP. The market price of a PHP share on
31 January 2013 was 357 pence.
On 13 June 2013, the Group completed a share placing at a price
of 315 pence per share. 21,746,032 shares were issued generating
net cash proceeds of GBP65.8 million.
On 20 December 2012, the Company issued 1,231,395 new Ordinary
Shares of 50 pence each at an agreed price of 320 pence per share
as part of the consideration for the acquisition of Apollo Medical
Properties Ltd and it subsidiary Apollo Capital Projects
Limited.
On 24 May 2012, the Group completed a small share placing at a
price of 305 pence per share. 6,229,509 shares were issued
generating net cash proceeds of GBP18.4 million.
23. Share premium
2013 2013
GBP000 GBP000
--------------------------------------------------- -------- -------
Balance at beginning of year 58,606 54,430
Reserves transfer (3,325) -
Share issue expenses - (6)
Shares issued as consideration for Apollo Medical
Partners Limited - 3,325
Scrip issues in lieu of interim cash dividends 330 857
--------------------------------------------------- -------- -------
Balance at end of year 55,611 58,606
--------------------------------------------------- -------- -------
During the year, an amount of GBP3.3 million has been
transferred from Share Premium to the Special Reserve in regards to
the Apollo transaction. This is in accordance with the merger
relief provision of the Companies Act 2006 (see note 25). Company
law restricts the applicability of the Share Premium account and in
respect of the Company it may only be applied in paying unissued
shares of the Company in respect of capitalisation issues and in
writing off the expenses of, or the commission paid or discount
allowed on, any issue of shares or debentures of the Company.
24. Capital reserve
The capital reserve is held to finance any proposed repurchases
of Ordinary Shares, following approval of the High Court in
1998.
2013 2013
GBP000 GBP000
------------------------ ------- -------
Balance at end of year 1,618 1,618
------------------------ ------- -------
25. Special reserve
The special reserve arose on the Firm Placing and Placing and
Open Offer on 7 October 2009, the Firm Placing on 12 April 2011 and
23 May 2012 and the Firm Placing, Placing, Open Offer and Offer for
Subscription on 12 June 2013. It represents the share premium on
the issue of the shares net of expenses.
2013 2012
GBP000 GBP000
-------------------------------------------------------- -------- ---------
Balance at start of year 59,473 57,405
Placing: 13 June 2013 (2012: 23 May 2012) 57,627 15,885
Associated costs (2,728) (601)
Second interim dividend for the year ended 31 December
2012 (2012: 31 December 2011) (7,006) (5,969)
Scrip issue in lieu of second interim cash dividend (217) (346)
First interim dividend for the year ended 31 December
2013 (2012: 31 December 2012) (9,124) (6,240)
Scrip issue in lieu of interim cash dividends (171) (661)
Shares issued in consideration for PPP (note 22) 35,344 -
Share issue expenses (1,040) -
Reserves transfer 3,325 -
Balance at end of year 135,483 59,473
-------------------------------------------------------- -------- ---------
As the special reserve is a distributable reserve, the dividends
declared in the year have been distributed from this reserve.
The issue of shares on 13 June 2013 (2012: 24 May 2012),
referred to in note 22, was effected by way of a cash box
mechanism. A cash box raising is a mechanism for structuring a
capital raising whereby the cash proceeds from investors are
invested in a subsidiary company of the parent instead of the
parent itself. Use of a cash box mechanism has enabled the share
premium arising from the issue of shares to be deemed to be a
distributable reserve and has therefore been shown as a special
reserve in these financial statements. Any issue costs are also
deducted from the special reserve.
In the year, GBP35.3 million has been included within the
Special Reserve which comprises the premium on the share placing
for the acquisition of PPP through the operation of the merger
relief provisions of the Companies Act 2006.
Also during the year, GBP3.3 million has been transferred from
Share Premium to the Special Reserve in regards to the Apollo
transaction under the same merger relief provisions (see note
23).
26. Cash flow hedging reserve
Information on the Group's hedging policy and interest rate
swaps is provided in note 20.
The transfer to Group Statement of Comprehen--sive 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:
2013 2012
GBP000 GBP000
------------------------------------------------------ --------- ---------
Balance at beginning of year (27,177) (26,892)
Fair value movement on cash flow hedges 8,457 (5,090)
Amortisation of cash flow hedge reserve 571 1,345
Reclassification adjustment for interest included
in the Statement of Comprehensive Income (1) 3,812 3,460
------------------------------------------------------ --------- ---------
Net movement on cash flow hedges ("effective swaps")
and amortisation of cash flow hedging reserve 12,840 (285)
------------------------------------------------------ --------- ---------
Balance at end of year (14,337) (27,177)
------------------------------------------------------ --------- ---------
(1) Included with finance costs in Group Statement of
Comprehensive Income
The net movement on cash flow hedges is made up of the movement
in the valuation of the effective swaps - gain GBP13,144,000 (2012:
loss GBP1,776,000), less net accrued interest of GBP9,000 (2012:
plus accrued interest of GBP146,000), add amortisation of cash flow
hedge reserve GBP571,000 (2012: GBP1,345,000), less an amount
posted to the Statement of Comprehensive Income reflecting the
credit value adjustment of effective swaps GBP866,000 (2012:
GBPnil).
27. Retained earnings
2013 2012
GBP000 GBP000
------------------------------ -------- --------
Balance at beginning of year 48,553 47,423
Retained profit for the year 20,220 1,130
------------------------------ -------- --------
Balance at end of year 68,773 48,553
------------------------------ -------- --------
28. Net asset value per share
Net asset values have been calculated as follows:
2013 2012
GBP000 GBP000
------------------------------------------------ -------------- --------------
Net assets per Group Balance Sheet 302,385 179,090
------------------------------------------------ -------------- --------------
Derivative interest rate swaps (net liability) 28,553 52,834
------------------------------------------------ -------------- --------------
EPRA NAV 330,938 231,924
------------------------------------------------ -------------- --------------
No. of shares No. of shares
------------------------------------------------ -------------- --------------
Ordinary Shares:
------------------------------------------------ -------------- --------------
Issued share capital 110,474,230 76,034,208
------------------------------------------------ -------------- --------------
Basic net asset value per Share 274p 236p
------------------------------------------------ -------------- --------------
EPRA NAV per Share 300p 305p
------------------------------------------------ -------------- --------------
EPRA NAV is calculated as Balance Sheet net assets including the
valuation result on trading properties but excluding fair value
adjustments for debt and related derivatives.
29. Capital commitments
As at 31 December 2013, the Group has entered into separate
development agreements with third parties for the purchase of
primary health developments; these agreements are conditional on
the completion of certain building development work at a
consideration of GBP17.1 million plus VAT
(2012: GBP16.3 million plus VAT).
In 2012, the Group had entered into an agreement to purchase an
investment property at a future date at a consideration of GBP3.6
million plus VAT. This purchase was completed on
1 February 2013.
30. Related party transactions
The terms and conditions of the Joint Advisers' Agreement are
described in the Directors' Report on page 28 and the Directors'
Remuneration Report in the Annual Report. Details of the amounts
paid in relation to related party transactions are provided in note
4.
31. Contingent liabilities
The terms and conditions agreed on acquiring Apollo Medical
Partners Limited ("Apollo") may oblige the Group to pay a number of
potential additional elements of consideration conditional upon
events that may be achieved by the vendor in an agreed period after
the acquisition.
A number of the properties acquired with Apollo include small
areas of vacant space to which no value was ascribed on
acquisition. PHP has agreed a three year period within which the
vendor is engaged to let this space and should they be successful,
additional consideration may become payable, with the sums due
being valued based on the underlying terms of each letting
achieved, type of the tenant and the area of space let. The Group
estimates the maximum potential payment for these events at GBP0.58
million as at 31 December 2013, but there is no certainty that such
lettings will be achieved within the agreed time frame. The new
lettings will add value to the investment portfolio.
32. Subsequent events
On 16 January 2014, PHP announced that it had contracted to fund
the development of and acquire a new, modern, purpose built medical
centre to be constructed in Wrexham. The total consideration will
be GBP2.25 million.
On 28 January 2014, PHP announced that it had issued 518,243 new
Ordinary Shares of 50 pence each in relation to the acquisition of
PPP. The issued shares have been issued to the vendors of PPP in
accordance with the terms of the Acquisition Agreement.
Since the year end, the Group has received credit approved
confirmation from RBS that an amount of GBP25 million has been
re-instated to the Club Facility. This will be advanced on the same
terms as the existing Club Facility.
33. Annual report
The financial information set out above does not constitute the
Group's statutory accounts for the years ended 31 December 2013 or
2012 but is derived from those accounts. Statutory accounts for
2012 have been delivered to the Registrar of Companies and those
for 2013 will be delivered in due course. The Auditor has reported
on those accounts; their reports were (i) unqualified, (ii) did not
include a reference to any matters to which the Auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498(2) or (3) of
the Companies Act 2006.
Full financial statements for the year ended 31 December 2013
will be published on the Group's website at www.phpgroup.co.uk and
will be posted to Shareholders on 5 March 2014.
Copies of this announcement are available from the Company
Secretary of Primary Health Properties PLC, Ground Floor, Ryder
Court, 14 Ryder Street, London SW1Y 6QB.
Responsibility Statements under the Disclosure and Transparency
Rules
The responsibility statement below has been prepared in
connection with the Company's full annual report for the year
ending 31 December 2013. Certain parts thereof are not included
within this announcement.
Each of the current Directors confirms that, to the best of
their knowledge:
-- the Group financial statements, prepared in accordance with
IFRSs as adopted by the European Union, 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; and
-- the Management report incorporated into the Managing
Director's Review on pages above 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 it faces.
For and on behalf of the Board
Graeme Elliot
Chairman
19 February 2014
This information is provided by RNS
The company news service from the London Stock Exchange
END
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