TIDMPHP
RNS Number : 0174O
Primary Health Properties PLC
04 February 2016
Primary Health Properties PLC
Audited results for the year ended 31 December 2015
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 2015.
FINANCIAL HIGHLIGHTS
-- IFRS profit before taxation increased by 51.9% to GBP56.0
million (2014: GBP36.9 million)
-- EPRA earnings(1) increased by 19.2% to GBP21.7 million
(2014: GBP18.2 million)
-- EPRA earnings(1) per share increased by 19.5% to 4.9 pence
(2014: 4.1 pence(2) )
-- IFRS net assets increased by 11.7% to GBP345.4 million
(2014: GBP309.1 million)
-- EPRA net asset value per share(3) increased by 10.0% to
87.7 pence (2014: 79.7 pence(2) )
-- Group Loan to Value(4) ratio 62.7% (2014: 64.1%), including
unsecured debt outstanding
-- Dividend cover(5) increased to 98% (2014: 84%); 2015 second
half dividend 107% covered
-- Total dividends of 5.0 pence per share paid in 2015, an
increase of 2.6% (2014: 4.875 pence(2) )
OPERATIONAL HIGHLIGHTS
-- Investment property as at 31 December 2015 GBP1.1 billion
(31 December 2014: GBP1.0 billion)
-- Eight properties added to portfolio in the year adding
GBP2.4 million of additional rent and an average of 21
years of unexpired lease term
-- Surplus on property valuation of GBP39.8 million for the
year, underlying like-for-like growth of 3.9%; net portfolio
initial valuation yield of 5.32% (2014: 5.52%)
-- Annualised rent roll, including commitments, increased
by 4.6% to GBP63.7 million (2014: GBP60.9 million)
-- Net rental income increased by 5.1% to GBP62.3 million
(2014: GBP59.3 million)
-- Average annualised uplift of 0.9% on reviews completed
in the year (2014: 1.8%)
-- Portfolio 99.7% let with 14.7 years weighted average unexpired
lease term (including commitments) (2014: 15.3 years)
-- EPRA cost ratio(6) reduced to 11.5% (2014: 12.0%)
(1) - See note 8 to financial statements
(2) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015
(3) - See note 25 to financial statements
(4) - See note 18 to financial statements
(5) - As defined in Glossary
(6) - See "Managing effectively and efficiently" in Strategic
Report
OUTLOOK
-- Strong pipeline of transactions across both the UK and
Ireland in solicitors hands and being documented
-- Further acquisition pipeline in both jurisdictions well
advanced in negotiation with vendors
-- First quarterly interim dividend for 2016 declared, 1.28125p
per share, payable on 26 February 2016
Harry Hyman, Managing Director of Primary Health Properties,
commented:
"2015 was another strong and active year for PHP marked by the
19(th) consecutive year of dividend growth and the achievement of
full dividend cover during the second half of the year. This
coupled with our continued investment in and effective management
and growth of our high quality portfolio, which offers long term
leases with secure government-backed income, has resulted in PHP
continuing to create strong returns for shareholders.
"We have identified and are progressing a number of healthcare
real estate investment opportunities in Ireland, an important step
for the Company. We are confident that, as we have long done in the
UK, we will be able to apply our strategy to a market which faces
similar challenges to its healthcare provision: a growing and
ageing population, increasing rates of chronic illness and outdated
GP premises.
"The fundamental drivers of the primary care arena remain in
place and increased spend committed by the NHS stresses the
important role primary care has to play in the future of the health
service."
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
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David Rydell / Victoria Geoghegan
/ Elizabeth Snow
Bell Pottinger
T +44 (0) 20 3772 2582
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Nicola Stewart
Capital Access Group
T +44 (0) 20 3763 3400
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This document may contain certain forward-looking statements. By
their nature, forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances.
Actual outcomes and results may differ materially from any outcomes
or results expressed or implied by such forward-looking
statements.
Any forward-looking statements made by or on behalf of the
Company speak only as of the date they are made and no
representation or warranty is given in relation to them, including
as to their completeness or accuracy or on the basis upon which
they were prepared. The Company does not undertake to update
forward-looking statements to reflect any changes in the Company's
expectations with regard thereto or any changes in events,
conditions or circumstances upon which any such statement is
based.
Information contained in this presentation relating to the
Company or Group should not be relied upon as a guide to future
performance.
Shareholders wishing to register for electronic notification of
any release or announcement made by the Company may do so using the
Company's website www.phpgroup.co.uk/investors/email-alerts.
Financial Highlights
Year ended Year ended
31 December 2015 31 December 2014
-------------------------------------- ------------------ ------------------
Investment portfolio GBP1.10bn GBP1.03bn
Net rental income GBP62.3m GBP59.3m
Weighted average unexpired 14.7 years 15.3 years
lease length
Contracted rent roll (annualised)(1) GBP63.7m GBP60.9m
EPRA results
EPRA Earnings Per Share(2) 4.9p 4.1p
EPRA Net Asset Value ("NAV") GBP391.6m GBP354.6m
EPRA NAV Per Share(2) 87.7p 79.7p
EPRA cost ratio 11.5% 12.0%
Dividends
Dividend per share(2) 5.0p 4.875p
Dividend cover 98% 84%
Reported results
IFRS profit for the period GBP56.0m GBP36.9m
Total equity GBP345.4m GBP309.1m
Diluted earnings per share(2) 11.2p 7.9p
--------------------------------------- ------------------ ------------------
(1) Includes development properties under construction and
purchase commitments at the period end as if completed
(2) Restated to reflect the Company's four for one share
sub-division undertaken in November 2015
Performance
Year ended Year ended
31 December 2015 31 December 2014
----------------------- ------------------ ------------------
Total property return 9.7% 9.2%
Total NAV return 16.3% 12.8%
Chairman's Statement
I am pleased to present the Group's Annual Report for 2015, a
year in which we have continued to deliver on our strategic
objectives. Further accretive property acquisitions, efficient
management and lower costs of borrowing in the year enabled the
Company to grow its dividend for the 19(th) successive year.
Importantly, this was coupled with achieving one of our key goals
of returning to full dividend cover in the second half of the
year.
Results highlights
Profit for the year rose by 51.9% to GBP56.0 million (2014:
GBP36.9 million). EPRA earnings have grown by 19.2% to GBP21.7
million (2014: GBP18.2 million), which equates to EPRA earnings per
share of 4.9 pence (2014: 4.1 pence(1) ). Net rental income
increased by 5.1% due to acquisitions, completing assets under
construction, enhancing and expanding existing assets and from rent
reviews completed in the year.
The efficient management structure of the Group, with a reducing
adviser fee rate as the portfolio grows, is once again evident. Our
EPRA cost ratio fell by 50 basis points to 11.5% (2014: 12.0%) and
continues to be the lowest cost ratio in the UK listed real estate
sector.
Debt facilities were actively managed in the year, securing two
facility extensions. We also added to our interest rate swap
portfolio, lengthening the term of our protection at current market
rates and lowering the average cost of the Group's debt.
Eight properties, including one forward purchase contract, were
added to the Group's portfolio for a total of GBP44 million. The
Group's property portfolio grew to GBP1.1 billion. With like for
like capital growth of 3.9%, an overall valuation surplus of
GBP39.8 million was generated after allowing for acquisition
costs.
EPRA net asset value per share increased by 10.0% to 87.7 pence
(2014: 79.7 pence(1) ) which together with dividends paid in the
year produced a Total NAV Return of 16.3% (2014: 12.8%).
Share Capital
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In November, shareholders approved the sub-division of the
Company's existing share capital into four new ordinary shares. The
purpose of this was to increase the marketability of our stock and
the ability for our smaller shareholders to more easily access the
value of their holding in PHP. The results and performance
indicators presented throughout this report are all reported on the
enlarged number of shares and prior year comparatives have been
converted accordingly.
Dividends
A total of 5.0 pence per share was paid in dividend to
shareholders in 2015, an increase of 2.6% (2014: 4.875 pence(1) ).
This continued the Company's unbroken record of dividend growth in
every year since its first dividend payment in 1997. The total
dividend for the year was covered 98% by EPRA earnings, increased
from 84% for 2014. Importantly, following investment and debt
management activity in the first part of 2015, second half year
earnings covered the dividend paid in that period 107%, resulting
in the Company meeting a key objective of returning to full
dividend cover.
When announcing the approval of the sub-division, the Board
confirmed its intention to move to paying a quarterly dividend from
2016 onwards. On 4 January, the Board approved its first quarterly
dividend, resolving to pay 1.28125 pence per ordinary share on 26
February 2016 to holders on the register as at close of business on
15 January 2016. We anticipate further dividend payments being made
in May, August and November this year.
Markets
In November 2015, the Chancellor, George Osborne, confirmed that
GBP6 billion of additional funding would be provided to the NHS by
the end of 2016-17 as part of an overall GBP10 billion pledged to
support the NHS Five Year Forward View ("FYFV").
(1) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015
The FYFV reconfirmed primary care as the bedrock of the National
Health Service. Alongside this, NHS England and its fellow health
and care agencies published guidance on how local health systems
will access this funding, stating that overall primary care spend
will increase by 4-5% each year to 2021. The Government has also
committed to providing 24/7 access to GP services by 2020.
Clinical Commissioning Groups ("CCGs") in England are required
to submit plans for the future of their local healthcare provision
in conjunction with their fellow health and social care providers.
These will cover operational plans but also accommodation
requirements.
Modern, flexible premises such as those in the Group's portfolio
will be key to achieving each of these plans and goals, allowing
more services to be delivered locally in an integrated manner away
from hospitals. There has been a slow improvement in the number of
new development schemes that have been approved by the NHS and we
expect the rate of approvals to increase further.
Investors are attracted to our sector by the long term, secure
income streams that primary care premises deliver. Pricing
expectations have increased, but we have continued to be prudent in
our acquisition activity, appraising targets for their initial
return, but also for their longer term viability and capability for
physical enhancement that can translate into greater returns to the
Group.
The Primary Care Transformation Fund, which commits GBP1 billion
over four years to improve access to GP services will, from
2016/17, see CCGs lead proposals for how the funding will be
invested. Twelve projects in the Group's portfolio received funding
in 2015, some of which were amongst a number of asset enhancement
projects completed by PHP in 2015. We will continue to work with
our GP practice tenants to deliver schemes that develop existing
premises to meet their and their patients' needs.
Outlook
After careful evaluation, we have taken our first steps to
invest in primary care property in the Republic of Ireland. The
challenges facing Ireland's healthcare provision are similar to
those in the UK with a growing, ageing population and increasing
rates of chronic illness but a disparate and outdated estate from
which services are delivered.
The Irish State's Health Service Executive ("HSE") is driving
forward significant change in healthcare provision in Ireland,
focussed on the modernisation of the primary care sector. This is
seeing the development of a number of new primary care centres with
the HSE itself as the majority occupier, providing a similar
covenant to that of the NHS in the UK.
We are a leading investor in healthcare real estate in the UK
and our reputation and experience will benefit our expansion into
Ireland. We are well placed to provide new premises to support the
modernisation of the NHS and to work alongside the HSE to
reposition healthcare provision in Ireland.
The fundamentals of the sector in both the UK and Ireland
provide confidence that the assets in which we invest will continue
to provide strong, reliable and growing long term returns. The
Group's operational structure ensures that our activities are
managed efficiently, whilst active management of our debt portfolio
will maintain a balanced maturity profile and an appropriate
blended cost of debt. This will all be reflected in the progressive
dividend that we pay to shareholders.
I would like to thank the Board and the team of advisers and
managers with whom we work at PHP and who contribute to the
continued success of the Group. In particular, I would like to
thank Jamie Hambro and William Hemmings, who will retire from the
Board following the forthcoming AGM, and who have done an excellent
job in helping steer the Group's impressive record over many years.
We will miss their wise counsel, but anticipate being able to
nominate their replacements in the near future. I look forward to
working with the continuing team again in 2016 and delivering
further growth of the Group.
Alun Jones
Chairman
3 February 2016
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 has invested in
healthcare real estate let on long term leases, backed by a secure
underlying covenant where the majority of rental income is funded
directly or indirectly by a government body.
The Group's portfolio is currently located in the UK. The
majority of tenants are general practitioners ("GP") and NHS
organisations, with over 90% of UK income funded directly or
indirectly by the NHS, providing a low risk, high covenant income
stream.
The Group is pursuing selected investments in the Republic of
Ireland. The principal tenant will typically be the Health Service
Executive ("HSE"), the executive agency of the Irish Government's
Department of Health, representing between 60% and 75% the rental
income and providing a similar low risk, high covenant income
stream to the NHS in the UK. Tenants will also include GPs but
their rent will represent a smaller proportion of total income than
in the UK and will not be funded by the HSE. Other occupiers in
both territories will include other associated healthcare users,
including on-site pharmacies.
Business model
The Group works in partnership with its stakeholders to create
and maintain a portfolio of fit for purpose facilities that provide
a long term home for local healthcare provision and that are easily
adapted to meet the changing needs of a community.
Initial lease terms in the UK are typically of 21 years or more,
at effectively upward only rentals. With the large majority of
income received either from the NHS or from NHS funded GPs, this
provides a secure, transparent income stream.
The HSE in Ireland, will typically enter into 25 year leases
with CPI linked rent reviews, providing similar long term income
streams to that of the NHS in the UK.
Achieving each of the strategic objectives outlined below will
enable PHP to meet its overriding aim of delivering progressive
shareholder returns through a mix of income and long term value
growth.
(i) The Group looks to grow its property portfolio by funding
and acquiring high quality, newly developed facilities and
investing in already completed, let properties. PHP concentrates on
assets with strong underlying fundamentals that it can acquire for
a fair price and secure an acceptable gap between the income yield
an asset generates and the cost of managing and funding that
investment.
(ii) PHP manages its portfolio effectively and efficiently
managing the risks faced by its business in order to achieve its
strategic objectives. This includes taking a long term view of its
properties in keeping with the strategic horizons of its tenants.
By providing additional space facilitating the provision of
additional services or extending the term of underlying leases, PHP
can increase and lengthen its income streams and create the
opportunity to add capital value.
The portfolio is managed by an experienced and innovative team
within an efficient management structure where operating costs are
tightly controlled by the Adviser and their fees are structured to
gain economies of scale as the Group continues to grow.
(iii) The Group funds its portfolio with a diversified mix of
equity and debt, in order to optimise risk adjusted returns to
shareholders. Debt facilities are arranged on both a secured and
unsecured basis, provided by traditional bank lenders and debt
capital markets, with a spread of maturities that ensures
flexibility and availability over the longer term to match the
longevity of income streams.
Our Markets
PHP is a long term investor in modern, flexible, purpose-built
healthcare properties, working with experienced development
partners, healthcare bodies and healthcare professionals to develop
premises that meet the ever-changing needs of primary care
provision.
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The demand for healthcare services is ever increasing as
populations grow and age and as, for example, the incidence of
chronic disease increases. As a result, the overall cost of
providing healthcare services has also increased.
It is widely recognised internationally that primary care is the
preferred setting for most health care to meet the demands of
increasing need, stabilise health care costs and accommodate
patient preference for care close to home. The primary care arena
also offers the opportunity to provide more efficient healthcare
services. In 2014, the Royal College of GPs in the UK commissioned
a survey by Deloitte that suggested that for every GBP1 increase in
the GP budget, a saving of GBP5 could be made in other areas of NHS
cost such as hospital admissions.
United Kingdom
Latest estimates place the UK population at circa 65 million(4)
. This included 11.4 million people aged 65 or over, an increase of
300,000 people in the year to June 2014. The total population is
projected to grow by 10% in the next 15 years, but the number over
the age of 70 will grow by more than 45%.
This is creating significant additional demand upon healthcare
services. By way of example, around 15 million people in England
alone have a long term condition which is managed by medicine and
other treatments. These cases account for approximately half of all
GP appointments. The number of people with three or more long-term
conditions is predicted to rise from 1.9 million in 2008 to 2.9
million in 2018 with long term conditions being more prevalent in
older people.
Primary care is the foundation of the NHS in the UK and the GP
continues to be the first point of access to healthcare services
for UK residents, other than acute emergency care. More than 1.3
million patients visit their GP practice each day(1) , representing
90% of all NHS patient contacts.
In October 2014, NHS England published its Five Year Forward
View ("FYFV"), its strategic plan for the development of healthcare
services for England. The FYFV reiterates that "the foundation of
NHS care will remain list-based primary care" and NHS England plans
to invest more in primary care and provide more services within the
local community. Here, these services can be delivered more cost
effectively, provide greater choice to the patient and be better
integrated with social care services, another stated aim of the
FYFV.
The UK Government has delivered on its support for the vision of
the FYFV and has a stated objective to improve access to GPs and
move to a 24/7 service. It has delivered on its funding pledge,
announcing in the November 2015 Spending Review that a total of
GBP10 billion would be provided with GBP6 billion of funding being
given to NHS England by the end of 2016-17. In exchange for this,
the NHS has to deliver internal cost savings of GBP22 billion per
annum as set out in the FYFV.
Changing models of care, the continued drive to deliver more
care services in the local community, greater integration of health
and care services and the objective to offer round the clock access
to primary care services will require more modern, purpose built,
flexible premises.
A large part of the primary care estate is comprised of ageing,
converted residential properties many of which need to be replaced
simply to meet minimum quality standards. 40% of GPs see their
existing properties as not being fit for purpose3 and 70% feel that
their existing premises are inadequate for them to deliver the
range of services they would like.
In December 2014, the Government announced GBP1.1 billion in
funding over four years specifically to improve GP premises,
establishing the Primary Care Transformation Fund. Following a
number of issues with the initial awards and access to the fund, a
series of changes have been introduced to allow funds to be applied
to a wider range of projects. PHP has worked with its tenants to
access these funds and continues to invest in its assets to
facilitate service expansion and cost efficiencies to be made. PHP
is primed to fund the larger scale capital investment that is
required to properly modernise the primary care estate.
Republic of Ireland
As of April 2015, Ireland had a population of 4.6 million
people(5) , projected to rise to 5.2 million by 2031. Currently
some 9% or 400,000 people are aged over 70, but this is predicted
to rise to 14% in 2031, a rate of increase that is nearly double
the European average.
Similar to the UK, chronic, long term disease rates are
increasing. An estimated 500,000(6) people in Ireland have a
serious lung disease, 10% of those aged over 50 have diabetes and
the overall incidence of chronic disease is rising by 4% per
annum.
Whilst the primary health care system in Ireland is based on a
system of insurance and private payment, it is still led by the
General Practitioner. A 2013 report(7) estimated over 14 million
visits to GPs, compared to 6.3 million hospital visits, but the GP
in Ireland also acts as the "gatekeeper" to secondary or specialist
care.
The Department of Health in Ireland ("DoHI") plans to implement
its objective of a single-tier health service, to enable the
population to have equal access to healthcare based on need, not
income. This includes the introduction of universal primary care,
including GP care without fees for all and universal hospital
care.
The DoHI strategy is based on primary care services meeting the
great majority of people's day-to-day healthcare needs, comprising
integrated team-based delivery by GPs and a wide range of other
health professionals, provided in the communities where people
live. It sees the development of the capacity and range of services
in primary care as a cornerstone of the changes to be made to
health systems to meet the rising demand.
The DoHI and the Health Service Executive ("HSE") are in the
process of rolling out an integrated portfolio of reform programmes
to ensure that their core objectives to deliver safe and effective
health and social care services for patients, services users,
carers and families in multiple settings are met. The 2015 Budget
saw a modest increase in health spending to EUR13.2 billion to
assist with this, a proportion of which was ear-marked for improved
and expanded service delivery, including the provision of free GP
services for those aged under six and over 70.
The HSE has recognised the role that modern, flexible premises
can play in providing extended integrated care and is looking to
procure a substantial number of new premises to facilitate this. To
support this, the HSE is typically entering into 25 year leases
with CPI linked rent reviews on a five year cycle for between 60%
to 75% of the property's rental income, providing a covenant
similar to that provided by the NHS funding of 90% of the Group's
UK income. The different characteristics of the Irish healthcare
real estate sector in terms of tenant mix, location etc. provide
for enhanced returns, compared to the UK, that are underpinned by
the HSE covenant.
Strong underlying property characteristics
The primary care premises market is controlled by the NHS in the
UK and largely influenced by the HSE in the Republic of Ireland,
meaning there is little or no speculative development of new
facilities. Buildings are often located within residential areas
which can lead to restricted alternative use potential. Against
this, initial lease terms are longer than in general commercial
markets, more than 20 years on average and locally provided
healthcare will continue to be a necessity for the foreseeable
future.
In the UK, PHP's income benefits from a shorter rent review
cycle, typically three yearly and on an upwards only basis. GPs
form the largest tenant group, receiving reimbursement for rent,
maintenance and insurance costs from the NHS, a practice set out in
legislation. Together with leases direct to the NHS, the sector
benefits from a very strong underlying rental covenant.
In Ireland, the HSE makes a strong commitment to each primary
care centre in order to create an integrated healthcare system
alongside GP services. The HSE presence, representing 60% to 75% of
rent received at a centre, will underpin the long term secure
income to be received from Irish properties.
Overall, these factors combine to create a long term, low risk
income environment where over the medium term, through a mix of
indexed linked and open market review characteristics, rental
growth has broadly tracked inflation.
The anticipated increase in the levels of development of new
medical centres will assist open market rent reviews, resulting in
a higher rate of growth than in recent years.
Returns
The secure long term underlying income and high quality covenant
derived from the predominance of government backed tenancies within
the healthcare sector has translated into stable long term returns
on primary care real estate.
MSCI/IPD established its UK Healthcare Property Index in 2007
(the "Index"). The Index is published toward the end of February
each year reflecting data collected for the year to the preceding
December.
The data in the table below is taken from the Index for the
period ended 31 December 2014 and illustrates how primary
healthcare real estate has produced superior risk adjusted returns
over that period. This reflects the low risk nature of its tenants
and lower volatility in capital values underpinned by the long term
nature of the income streams, generating a very compelling
investment case.
Sector Total Return
---------------------- -------------
Residential property 8.6%
Gilts 7.0%
Primary healthcare 6.9%
All healthcare 5.9%
Office property 4.7%
Equities 4.4%
Industrial property 3.8%
All property 3.4%
Retail property 2.3%
---------------------- -------------
Source: IPD - 8 year total return versus standard deviation
2007-2014
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The primary care real estate sector in Ireland is still in its
infancy and as a result, specific performance data is not yet
available. The sector has many characteristics in common with the
UK and the Board expects to see similar trends develop over the
medium term.
(1) - Royal College of General Practitioners January 2015
(2) - Health and Social Care Information Centre, General
practice trends in the UK, 23 January 2013
(3) - British Medical Association GP Committee Premises
Survey
(4) - ONS
(5) - Central Statistics Offise, Ireland
(6) - Health Service Executive Corporate Plan 2015-2017
(7) - Irish Journal of Medical Science, July 2013
Business Review
Delivering progressive returns
EPRA earnings per Dividend per EPRA NAV per Total NAV return
share share share 13.0 pence
4.9 pence 5.0 pence 87.7 pence 16.3%
+ 19.5% + 2.6% + 10.0%
------------------ ------------- ------------- -----------------
PHP has achieved further growth in earnings through 2015 as
we:
-- acquired further properties;
-- invested into existing sites achieving increased income and
extending the longevity of leases;
-- secured modest growth on rent reviews in what remains a challenging market;
-- managed the Group in an efficient manner; and
-- continued to lower the average cost of the Group's debt.
We have continued to increase the dividend paid to shareholders
and transactions in the year meant we have met our objective of
returning to full dividend cover.
Earnings
Property acquisitions, along with the delivery of some large
development properties completed in the year, have added to the
Group's contracted rent roll. Net rental income receivable in the
year increased by 5.1% to GBP62.3 million (2014: GBP59.3
million).
Total administrative costs were unchanged in 2015 and active
management of the Group's debt and hedging portfolio lowered the
average cost of the Group's debt finance, contributing to the
overall growth in earnings. EPRA earnings increased by 19.2% to
GBP21.7 million (2014: GBP18.2 million) and including another year
of strong valuation growth for the Group's property portfolio,
profit before tax rose by 51.8% to GBP56.0 million (2014: GBP36.9
million).
Summarised results 2015 2014
GBPm GBPm
----------------------------------------------- ------- --------
Net rental income 62.3 59.3
Administrative expenses (6.8) (6.8)
----------------------------------------------- ------- --------
Operating profit before revaluation gain and
financing 55.5 52.5
Net financing costs (33.8) (34.3)
EPRA earnings 21.7 18.2
Net result on property portfolio 39.8 29.2
Non-recurring: early loan repayment fee - (1.2)
Non-recurring: convertible bond issue costs - (2.4)
Fair value gain/(loss) on interest rate swaps 1.0 (2.4)
Fair value loss on convertible bond (6.5) (4.5)
IFRS profit before tax 56.0 36.9
----------------------------------------------- ------- --------
EPRA earnings per share 4.9p 4.1p(1)
----------------------------------------------- ------- --------
Dividends paid in the year increased by 2.6% to 5.0 pence per
share(1) (2014: 4.875 pence(1) ). A key priority of the Board has
been to return the Company to full dividend cover whilst
maintaining its progressive dividend policy. Dividend cover for the
year as a whole was 98% (2014: 84%) but importantly, in the second
half of the year PHP returned to paying a fully covered dividend.
The interim dividend paid in April 2015 was 89% covered, but as
earnings increased in the second half of 2015, the interim dividend
paid in October 2015 was 107% covered.
(1) - Restated due to reflect the Company's four for one share
sub-division undertaken in November 2015
Shareholder Value
Yields in the healthcare property sector have tightened further
during the year as demand for assets has continued and supply has
been restricted. The independent valuation of the Group's portfolio
at 31 December 2015 produced a net surplus of GBP39.8 million
(2014: GBP29.2 million). This equates to an additional 8.9 pence
per share of value growth.
In July, PHP completed the restructuring of an element of its
interest rate swap portfolio, lengthening the overall period of
this protection. This included terminating a short dated contract
resulting in a breakage payment being made. This totalled GBP3.2
million or 0.8 pence per share.
As at 31 December 2015, EPRA Net Asset Value per share stood at
87.7 pence (2014: 79.7 pence(1) ), an increase of 8.0 pence or
10.0%. Adding total dividends paid to shareholders in the year.
Total NAV Return for the period was 13.0 pence per share or 16.3%
(2014: 12.8%).
EPRA Net asset value per share 2015 2014
----------------------------------- ---------------- -------------------
pence per share pence per share(1)
Opening EPRA NAV per share 79.7 75.0
EPRA earnings for the year(2) 4.9 4.1
Net result on property portfolio 8.9 6.6
Dividend paid (5.0) (4.9)
Early repayment charges - (0.3)
Share issue - 0.1
Convertible Bond issue costs - (0.6)
Interest rate derivative fair
value cost (0.8) (0.3)
Closing EPRA NAV per share 87.7 79.7
----------------------------------- ---------------- -------------------
The Company's share price opened the year at 92.5 pence(1) .
Equity markets were at times quite volatile during the year, but
the improvement in earnings and attractiveness of the reliable
yield that PHP provides saw the share price perform well, rising to
108.75 pence as at 31 December 2015. Adding the dividends paid in
the year to the increase in share price gives a Total Shareholder
Return of 23.0%.
(1) - Restated due to reflect the Company's four for one share
sub-division undertaken in November 2015
Growing PHP's property portfolio
Total property Revaluation surplus Contracted rent WAULT
assets GBP39.8 million roll 14.7 years
GBP1.1 billion 8.9 pence per GBP63.7 million 2014: 15.3 years
+ 7.3% share + 4.6%
---------------- -------------------- ----------------- ------------------
Commercial property has experienced marked yield movements in
2015 as a weight of money has continued to flow into UK real
estate. The valuation of primary care property has historically
been much more stable due to the attractive qualities of the sector
with its long lease lengths and the security of its income with
such a large proportion derived from the NHS (directly or
indirectly). These are unchanged and many investors target
healthcare real estate to provide them with a stable, consistent
yield.
The supply of new premises has been restricted since the
structural changes implemented by the NHS in England ("NHSE") in
April 2013. This has led to some further yield tightening in 2015
due to continued investor appetite, but this movement has been of a
much lesser scale than wider commercial property.
The Group held a total of 273 property assets as at 31 December
2015. This comprised 267 that were completed and rent producing and
6 that were on-site, under construction. The entire portfolio was
independently valued by Lambert Smith Hampton ("LSH"), at market
value in accordance with RICS rules. The aggregate value of the
Group's property assets totalled GBP1.1 billion, generating a
surplus of GBP39.8 million for the year, after allowing for
acquisition costs, the cost to complete development properties and
capital invested in asset management projects. This represents a
like for like valuation increase of 3.9% equivalent to an increase
of 8.9 pence per share.
PHP's portfolio now reflects an average net initial yield of
5.32% (2014: 5.52%) and a true equivalent yield of 5.53% (2014:
5.75%).
2015 2014
GBPm GBPm
Investment properties 1,091.9 1,002.4
Properties in the course of development 8.7 23.9
----------------------------------------- -------- --------
Total properties owned and leased 1,100.6 1,026.3
Cost to complete developments and asset
management projects 21.8 11.2
----------------------------------------- -------- --------
Total completed and committed 1,122.4 1,037.5
----------------------------------------- -------- --------
In a sector where pricing has generally increased, the Group has
maintained its disciplined approach to acquisitions, underwriting
each opportunity for its fundamental characteristics, position in
its local health economy, its prospects for income and capital
growth and the ability to enhance and expand the building to
lengthen its period of use as a primary care centre.
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The Group added eight properties to its portfolio in the year,
comprising two standing let investments, one forward purchase
commitment and five development assets. These added GBP2.4 million
of additional rent and an average of 21 years of unexpired lease
term.
Asset Acquisition Acquisition Size WAULT at acquisition/
basis cost sqm on completion
------------------------ ------------ --------------- ------ ----------------------
Colwyn Bay Primary Development GBP4.6 million 1,535 20 years
Care Centre, North asset
Wales
------------------------ ------------ --------------- ------ ----------------------
Dinas Powys, South Development GBP3.4 million 1,148 20 years
Wales asset
------------------------ ------------ --------------- ------ ----------------------
Two Rivers Medical Development GBP6.7 million 1,987 25 years
Centre, Ipswich asset
------------------------ ------------ --------------- ------ ----------------------
Kimmerfields, Swindon Development GBP10.4 2,473 20 years
asset million
------------------------ ------------ --------------- ------ ----------------------
NHS Trust Building, Forward GBP2.5 million 929 21 years
Macclesfield commitment
------------------------ ------------ --------------- ------ ----------------------
Jubilee Medical Centre, Development GBP1.2 million 468 25 years
Croxteth asset
------------------------ ------------ --------------- ------ ----------------------
White Horse Medical Completed GBP7.7 million 2,033 27 years
Centre, Westbury investment
------------------------ ------------ --------------- ------ ----------------------
Thornaby Health Centre, Completed GBP7.5 million 2,637 14 years
North Yorkshire investment
------------------------ ------------ --------------- ------ ----------------------
The Jubilee Medical Centre, Croxteth was delivered in December
2015. Three development properties that had been contracted in 2014
were also delivered in the year, including the major investment in
the new Fountains Medical Centre in Chester. In total these
crystallised contracted rent of GBP1.5 million, for an average
lease term of 25 years.
Taking all development assets and commitments as complete, the
Group's contracted rent roll has increased by 4.6% to GBP63.7
million (31 December 2014: GBP60.9 million). More than 90% of
rental income is funded directly or indirectly by the NHS and the
portfolio has an average unexpired lease term of 14.7 years (2014:
15.3 years). Average lot size increases to GBP4.1 million (2014:
GBP3.9 million).
We work closely with GP "owner/occupiers" who are considering
disposing of their assets perhaps to allow partnership
restructuring or to access further capital to improve the premises
to allow expansion of services. PHPs long term track record and
experience of the sector and its understanding of the objectives
and concerns of GP tenants' means that we are able to help GPs
structure a sale appropriately and where an occupational lease may
be needed for the first time, assist them in liaising with the NHS
in order to obtain approval and reimbursement.
We continue to work with a number of specialist healthcare
developers and our customers to ensure that we deliver properties
that meets the needs of GPs and the NHS, and in future the HSE in
Ireland, to provide fit for purpose buildings that offer
flexibility for reconfiguration or expansion to meet the future
needs of their business.
Property Portfolio - completed properties only
South South East East West North Yorks
London West East Anglia Mids Mids West & H'side North Scotland Wales Total
--------------- ------ ----- ----- ------- ----- ----- ----- --------- ----- -------- ----- -------
Number
of properties 11 15 60 7 22 29 30 19 23 29 22 267
--------------- ------ ----- ----- ------- ----- ----- ----- --------- ----- -------- ----- -------
Number
of tenancies 18 28 123 11 46 73 63 40 52 53 76 583
--------------- ------ ----- ----- ------- ----- ----- ----- --------- ----- -------- ----- -------
Rent
roll
(GBPm) 2.5 2.7 11.7 1.0 4.5 7.9 8.8 4.7 4.3 7.9 5.8 61.8
--------------- ------ ----- ----- ------- ----- ----- ----- --------- ----- -------- ----- -------
Capital
value
(GBPm)(1) 47.3 50.8 199.5 17.6 79.7 139.3 162.3 81.3 74.5 140.1 100.1 1,092.5
--------------- ------ ----- ----- ------- ----- ----- ----- --------- ----- -------- ----- -------
1 - Includes cost to complete asset management projects of
GBP0.6 million
Managing effectively and efficiently
Rental growth on Capital projects EPRA cost ratio
review GBP2.5 million invested 11.5% for the year
0.9% per annum GBP0.3 million of additional Reduced by 50 basis
GBP0.4 m per annum rent points
of additional rent Average 19.4 years additional
WAULT
-------------------- ------------------------------- ---------------------
The majority of leases in PHP's UK portfolio have either
explicit or effectively upwards-only review terms (i.e. where the
review can only be triggered by the landlord). Some 23% of UK
leases have fixed periodic rental uplifts or increases that are
formally indexed linked, mostly in line with RPI. The most common
review is undertaken to "open market".
The portfolio has a well spread schedule of rent reviews with
10% of the portfolio reviewed annually, 77% on a three yearly basis
and 13% every five years. The weighted average uplift on 153
reviews completed in the year was 0.9% per annum, down from 1.8% on
reviews completed in 2014.
Fewer new development approvals by the NHS has limited the
stimulus this provides to support increases in rental levels. A
slow increase in the number of approvals has been seen and it is
expected that this will grow further as the provision of new
centres supports the development of care models and is used as an
enabler to drive efficiency saving the NHS. We expect to see rental
growth at similar levels for the immediate future, but to increase
as the rate of new development approvals increases.
In 2015, Nexus started the process of taking on all property
management functions for the portfolio, replacing a small number of
external agents who had previously managed service charges for
tenants or larger scale landlord management programmes for the
Group. This will enable yet higher standards of ongoing maintenance
and provide a more cost effective service to our tenants and for
PHP.
PHP's portfolio is substantially fully let. As at 31 December
2015, PHP's EPRA Vacancy Rate was 0.3% (2014: 0.2%).
We work closely with each of our tenants to ensure that, over
the longer term, the property continues to be fit for purpose and
offers the flexibility to be adapted and/or extended to meet the
aspirations and changing demands put upon primary care providers.
This ensures that we retain our tenants and enables us to increase
contracted rental income and lengthen occupational lease durations
which add to both earnings and capital value.
This regular contact with tenants and the development of
individual property and asset management strategies for each of the
Group's properties enables Nexus to identify and secure an
increasing number of asset management projects. These enhance the
configuration and suitability of the premises to continue to meet
the needs of our tenants for the longer term.
Projects take a number of forms that include:
-- capital expenditure, ranging from small extensions to major construction projects; and
-- managing existing leases through re-gearing or refurbishment
and planned or specific maintenance programmes.
The introduction of the Primary Care Transformation Fund
provided further opportunities where GP tenants were able to secure
funding from the Fund to be put alongside PHP's capital and secure
larger, more wide ranging improvements.
PHP completed seven projects in 2015 and invested a total of
GBP2.5 million of capital. The projects in total generated an
additional GBP0.3 million of rental income and secure an average of
19.4 additional years of lease term.
Two further projects are currently in progress on site, with a
total cost of GBP1.5 million, generating additional rent of GBP0.1
million for an average additional term of 12 years.
In 2014, the provision of advisory and administrative services
was consolidated with the Adviser, Nexus. This has resulted in
further reductions in the proportionate cost of managing the
Group's activities.
Nexus receives a property advisory fee, payable based on the
gross asset value of the Group's property portfolio. The
incremental rate reduces as the portfolio grows securing economies
of scale for the Group.
Administrative and company secretarial services provided by
Nexus are remunerated on a fixed annual fee basis, that may be
varied upwards or downwards in line with RPI annually from May
2016.
The total fee paid to Nexus averaged 50 basis points of gross
assets, a 9% reduction on the 2014 figure of 55 basis points. Total
overhead costs were broadly consistent in 2015 with those of 2014,
but with an increasing property portfolio, the Group's EPRA cost
ratio fell by 50 basis points to 11.5% (2014: 12.0%).
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EPRA cost ratio
Year ended Year ended
31 December 31 December
2015 2014
GBPm GBPm
------------------------------ ------------- -------------
Gross rent less ground rent 62.7 59.7
Direct property expense 0.8 0.8
Administrative expenses 6.8 6.8
Less: Ground rent (0.1) (0.1)
Less: Other operating income (0.3) (0.3)
EPRA costs (including direct
vacancy costs) 7.2 7.2
------------------------------- ------------- -------------
EPRA cost ratio 11.5% 12.0%
------------------------------- ------------- -------------
Diversified, long term funding
Net debt Weighted average facility Loan to value
maturity
GBP689.8 million 5.9 years 62.7%
(2014: GBP658.1 (2014: 6.2 years) (2014: 64.1%)
million)
------------------ -------------------------- ---------------
The Group is funded through a combination of shareholder equity
and external debt in order to enhance the returns that are
generated for shareholders. A key objective is to ensure that
appropriate facilities continue to be available to the Group to
enable future growth. This will include a range of instruments,
sources and maturities, combined to give an appropriate blended
cost of debt.
2014 was a particularly active year in which more than GBP440
million of debt facilities were either refinanced, restructured or
procured by the Group and an GBP82.5 million unsecured Convertible
Bond was issued. Activity in 2015 has sought to further extend
existing facilities and lengthen the period of the Group's interest
rate protection through management of the interest rate swap
portfolio.
In July 2015, the Group extended the maturity of its GBP50
million revolving credit facility with HSBC Bank plc for a new five
year term. All other terms of the loan remain unaltered.
With terms agreed in 2015, but completed on 7 January 2016, the
GBP100 million loan facility provided by Barclays plc was extended
by GBP15 million, with Allied Irish Banks plc ("AIB") providing the
additional capital and once again becoming a funding partner to the
Group. The enlarged facility will be made available for a new five
year term from January 2016 and allows the Group to more
efficiently use its collateral and provides additional available
headroom.
A swap contract for a notional GBP80 million of debt with a
coupon of 4.805% and maturing in July 2016 was terminated in July
2015. The termination cost totalled GBP3.2 million, but the saving
in interest costs for the Group will be GBP1.7 million in each of
2015 and 2016.
Two forward starting interest rate swaps were procured to
replace existing fixed rate loans and interest rate swaps as they
mature. These will provide protection for the Group from interest
rate rises expected to occur in the medium term, secured at rates
that are below those currently incurred on the facilities/contracts
that they will replace.
A nominal value of GBP25 million of debt has been swapped for a
five year period from January 2018 at 2.47% and GBP75 million of
debt has been swapped for a five year period from January 2019 at
2.65%.
The principal value of debt drawn as at 31 December 2015
totalled GBP692.7 million (2014: GBP670.1 million). Cash balances
were GBP2.9 million resulting in Group net debt of GBP689.8
million, 23% of which was held on an unsecured basis. The total
remaining cost of development work on-site at the year-end was
GBP21.8 million, resulting in headroom of GBP91.1 million from
existing facilities being available to the Group (2014: GBP116.7
million).
Debt metrics 31 December 31 December
2015 2014
-------------------------------- ------------ ------------
Loan-to-value 62.7% 64.1%
Interest cover 1.90 times 1.73 times
Weighted average debt maturity 5.9 years 6.2 years
Total drawn secured debt GBP535.2m GBP512.6m
Total drawn unsecured debt GBP157.5m GBP157.5m
-------------------------------- ------------ ------------
An analysis of the Group's exposure to interest rate risk in its
debt portfolio, including the additional headroom within the
extended Barclays/AIB loan, is as follows:
Facilities Drawn
------------------------- -------------- --------------
GBP'm % GBP'm %
------------------------- ------ ------ ------ ------
Fixed rate debt 395.2 49.2 395.2 57.1
Hedged by interest rate
swaps/caps 141.0 17.6 141.0 20.4
Floating rate debt -
unhedged 266.5 33.2 156.5 22.5
------------------------- ------ ------ ------ ------
Total 802.7 100.0 692.7 100.0
------------------------- ------ ------ ------ ------
Outlook
In 2015, we have seen further growth in earnings such that the
dividend for the second half of the year was more than fully
covered and cover for the year as a whole rose to 98%. We have
delivered this strong performance whilst continuing to raise the
dividend paid to shareholders each year.
We look forward to 2016 safe in the knowledge that the strong
income and covenant characteristics and underlying property
fundamentals of primary healthcare real estate remain. There is an
increasing appetite from lenders to provide funds for the sector
and with term interest rates still at historically low levels, the
sector offers the opportunity to lock in healthy spreads between
investment yields and cost of funds. Our operating model continues
to demonstrate its efficiency and incremental management costs, as
a percentage of the portfolio's value, reduce as the portfolio
grows.
We have a strong pipeline of opportunities in the UK with a
number of transactions in solicitors' hands and further
transactions in advanced stages of agreement with vendors. We will
continue to be selective in what we acquire, ensuring that we are
not overpaying in what is a more competitive market at present.
In addition to this, we have agreed terms and are documenting
our first investments in the Republic of Ireland. The Irish
Government is looking to make significant changes to Irish
healthcare provision and is committed to the provision of new,
modern integrated primary care centres to enable this. The Health
Service Executive are prepared to anchor the rental income in these
new centres and the covenant quality this adds means investment
yields in Ireland are very attractive compared to UK assets. We
have a good pipeline of potential acquisitions in Ireland, both of
income producing assets and the funding of new development
projects.
PHP is well placed to continue to support both the NHS and the
HSE as they look to implement new models of care and extract cost
savings from their healthcare systems.
RISK MANAGEMENT OVERVIEW
Effective risk management is a key element of the Board's
operational processes. The Group faces a variety of risks that have
the potential to impact on its performance, position and its longer
term viability. These include external factors that may arise from
the markets in which the Group operates, government and fiscal
policy and general economic conditions, and internal risks that
arise from how the Group is managed and chooses to structure its
operations.
The Board has structured operations in order to minimise the
Group's residual exposure to risks that it may face, but also to
ensure that risks that are accepted are appropriate to the returns
they may generate and within the overall risk appetite of the
Board. These operations include rigorous, regular review of risks
and how these are mitigated and managed across all areas of the
Group's activities.
The Group aims to operate in a relatively low risk environment,
appropriate for its strategic objective of generating progressive
returns for shareholders. Key elements of maintaining this low risk
approach are:
-- Investment focuses on the primary heath real estate sector
which is traditionally much less cyclical than other real estate
sectors;
-- The majority of the Group's rental income is received
directly or indirectly from government bodies;
-- The Group benefits from long initial lease terms, most with
upwards only review terms, that provides clear visibility of
income;
-- The Group is not a direct developer of real estate, which
although there is little or no speculative development in the
sector, means that the Group is not exposed to risks that are
inherent in property development; and
-- The Board funds its operations so as to maintain an
appropriate mix of debt and equity. Debt funding is procured from a
range of providers, maintains a spread of maturities and with a mix
of terms so as to fix or hedge the majority of interest costs.
APPROACH TO RISK MANAGEMENT
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The Board has overall responsibility for effective risk
management across the Group. The Audit Committee is delegated
responsibility for reviewing the Group's systems of risk management
and their effectiveness on behalf of the Board, which have been in
place for the year under review and up to the date of approval of
the Annual Report and accounts. The Adviser is delegated
responsibility for assessing and monitoring operational and
financial risks and has in place robust systems and procedures to
ensure this is embedded in its approach to managing the Group's
portfolio and business. Key risks are recorded in a Risk Register
and owned by the Board which is responsible for overseeing the
monitoring and mitigation of that risk.
The Adviser has established a Risk Committee that is formed of
members of its senior management team. The chairman of the
Adviser's Risk Committee is independent of both the Adviser and the
Group and experienced in the operation and oversight of risk
management processes. The Adviser's Risk Committee reports on its
processes of risk management and the rating of risks it identifies
to the Audit Committee, who agrees those risks that will be managed
by the Adviser and those where the Board will assume direct
responsibility for management and monitoring.
The Adviser has established a wide ranging system of internal
controls and operational procedures that are designed to manage
risk as effectively as possible, but it is recognised that risk
cannot be totally eliminated. Staff employed by the Adviser are
intrinsically involved in the identification and management of risk
and regular risk management workshops are undertaken to encourage
open participation and communication.
The Board recognises that it has limited ability to control a
number of the external risks that the Group faces, such as
Government policy, but keeps the possible impact of such risks
under review and considers them as part of its decision making
process.
Principal risks and uncertainties
The Board has undertaken a robust assessment of the principal
risks faced by the Group that may threaten its business model,
future performance, solvency or liquidity and its ability to meet
the overall objective of the Group of delivering progressive
returns to shareholders through a combination of earnings growth
and capital appreciation. These are set out below:
Risk Change Factors affecting Mitigation
to risk risk in the year
in 2015
----------------------- ---------- --------------------------- --------------------------
Delivering Progressive
Returns
----------------------------------- --------------------------- --------------------------
PHP invests in Unchanged In the UK, the Government The commitment to
a niche asset has committed additional primary care is a
sector where funding to the NHS stated objective
changes in healthcare with a resulting of both UK and Irish
policy the funding increase in funding Governments.
of primary care, for primary care.
economic conditions The drive to move Management regularly
and the availability services into the engages with the
of finance may local community is NHS and government
adversely affect further underpinned directly to promote
the Group's portfolio by the commitment the continued investment
valuation and to provide 24/7 access in primary care and
performance. to GP services. modern premises in
the UK and is developing
In Ireland, increasing similar relationships
pressures on health with bodies in Ireland.
care systems has
led the Irish Government The Board includes
to seek to restructure members experienced
its primary care and active in primary
provision with the care provision.
aim of achieving
universal primary The non-cyclical
care for residents nature of the sector
of Ireland. in which the Group
operates reduces
The attractiveness the impact of the
of the long term, wider economy.
secure and growing
income streams that
characterise the
sector leads to stability
of values.
----------------------- ---------- --------------------------- --------------------------
The value of Increased In 2015 the Board The investments will
income derived took its decision offer a natural hedge
from and expenses to seek to make its in meeting local
related to PHP's first investment property related
investment in outside of the UK. expenses from local
primary care Its investments and currency rental income.
assets in the related income and
Republic of Ireland costs will be Euro The Board will put
will be denominated denominated, whereas in place a policy
in Euros and the Group's main to hedge wherever
may be affected operating currency possible its exposure
unfavourably is Sterling. to Euro cash flows
by fluctuations and the valuation
in currency rates of its assets and
impacting the liabilities in Ireland.
Group's earnings This will include
and portfolio the use of currency
valuation. derivatives and matching
Euro denominated
assets with Euro
debt facilities.
----------------------- ---------- --------------------------- --------------------------
Risk Change to Factors affecting Mitigation
risk in 2015 risk in the year
----------------------- -------------- --------------------------- ---------------------------
Grow Property Portfolio
--------------------------------------- --------------------------- ---------------------------
The emergence Increased The sector has The Group has a
of new purchasers seen an increased number of formal
to the sector number of new development pipeline agreements
and the recent approvals through and long standing
slowing in the 2015 in the UK. development relationships
level of approvals In addition, the that provide an
of new centres continued availability increased opportunity
in the UK may of the Primary to secure developments
restrict the Care Transformation that come to market
ability of the Fund has provided in the UK.
Group to secure an increased ability
new investments. to secure projects The reputation
to enhance or extend and track record
existing properties. of the Group in
the sector means
The Group has identified it is able to source
a pipeline of primary investment in existing
care real estate standing investments
assets in Ireland, from investors
giving access to and owner occupiers
a pool of potential and is also proving
modern medical beneficial in dealing
centre investments. with vendors, developers
and users of primary
care properties
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in Ireland.
----------------------- -------------- --------------------------- ---------------------------
The Group uses Unchanged There has continued The Board monitors
a mix of shareholder to be a healthy its capital structure
equity and external appetite from both and maintains regular
debt to fund equity investors contact with funders.
its operations. and debt providers A programme of
A restriction to fund the sector meetings with existing
on the availability through 2015. There and potential equity
of funds would have been a number investors is supported
limit the Group's of new providers by regular discussions
ability to invest. to the sector in with debt providers.
the year.
----------------------- -------------- --------------------------- ---------------------------
Manage effectively and efficiently
--------------------------------------- --------------------------- ---------------------------
The bespoke Unchanged As the Group's The Adviser meets
nature of the portfolio grows with occupiers
Group's assets in the number of to discuss the
can lead to assets that it specific property
limited alternative owns and initial and the tenant's
use. Their continued lease terms erode, aspirations and
use as fit for the importance needs for their
purpose medical of active management future occupation.
centres is key to extend the use The Group is experienced
to delivering of a building is in identifying
on the Group's increased. and implementing
strategic objectives. asset management
projects that enhance
income and values
at properties and
extend occupational
lease terms.
----------------------- -------------- --------------------------- ---------------------------
The Group has Unchanged The provision of The Advisory Agreement
no employees. administrative with and performance
The continuance and company secretarial of Nexus is regularly
of the Adviser services was consolidated reviewed. Nexus
contract is with the Adviser remuneration is
a key for the in 2014, significantly linked to the performance
efficient operation reducing the costs of the Group to
and management of these services. incentivise long
of the Group. The consolidation term levels of
removed execution performance. Nexus
risk arising from can be required
the previous split to serve all or
responsibilities any part of its
of joint advisers. notice period should
the Group decide
to terminate providing
protection for
an efficient handover.
----------------------- -------------- --------------------------- ---------------------------
Risk Change to Factors affecting Mitigation
risk in 2015 risk in the year
------------------------ -------------- ------------------------- ----------------------------
Diversified, long term funding
---------------------------------------- ------------------------- ----------------------------
Without appropriate Unchanged The Group has been Management constantly
confirmed debt successful in extending monitors the composition
facilities, the availability of the Group's
PHP may be unable of certain debt debt portfolio
to meet current facilities in the to ensure compliance
and future commitments year. New entrants with covenants
or repay or to the debt capital and continued availability
refinance debt markets have increased of funds. The Adviser
facilities as available resource. regularly reports
they become to the Board on
due. current debt positions
and provides projections
of future covenant
compliance to ensure
early warning of
any possible issues.
------------------------ -------------- ------------------------- ----------------------------
Adverse movement Unchanged Competition in The Group retains
in underlying debt markets has a proportion of
interest rates increased during its debt on a long
could adversely the year lowering term, fixed rate
affect the Group's the cost of new basis. It also
earnings and facilities. The mitigates its exposure
cash flows. Group has continued to interest rate
to apply its defined movements on floating
policy as regards rate facilities
mitigating interest through the use
rate risk. of a series of
interest rate swaps
and other derivative
instruments.
------------------------ -------------- ------------------------- ----------------------------
Harry Hyman
Managing Director
3 February 2016
Group Statement of Comprehensive Income
for the year ended 31 December 2015
2015 2014
Notes GBP000 GBP000
----------------------------------------------------------------------------- --------- ------ --------- ---------
Rental income 63,115 59,985
Direct property expenses (852) (723)
---------------------------------------------------------------------------------------- ------ --------- ---------
Net rental income 3 62,263 59,262
Administrative expenses 4 (6,807) (6,782)
Non-recurring expenses: convertible bond expenses - (2,426)
Net result on property portfolio 10 39,767 29,204
---------------------------------------------------------------------------------------- ------ --------- ---------
Operating profit 95,223 79,258
Finance income 5 737 977
Finance costs 6a (34,464) (35,252)
Non recurring: Early loan repayment fees 6b - (1,187)
Fair value gain/(loss) on derivative interest rate swaps and amortisation of cash flow
hedging
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reserve 6c 1,005 (2,454)
Fair value loss on convertible bond 6d (6,469) (4,462)
---------------------------------------------------------------------------------------- ------ --------- ---------
Profit before taxation 56,032 36,880
---------------------------------------------------------------------------------------- ------ --------- ---------
Taxation charge 7 - -
----------------------------------------------------------------------------- --------- ------ --------- ---------
Profit for the year (1) 56,032 36,880
Other comprehensive income/(loss):
Items that may be reclassified subsequently to profit and loss
Fair value gain/(loss) on interest rate swaps treated as cash flow hedges 23 1,420 (9,980)
Other comprehensive income/(loss) for the year net of tax (1) 1,420 (9,980)
---------------------------------------------------------------------------------------- ------ --------- ---------
Total comprehensive income for the year net of tax (1) 57,452 26,900
---------------------------------------------------------------------------------------- ------ --------- ---------
Earnings per share Basic 8 12.6p 8.3p(2)
Diluted 8 11.2p 7.9p(2)
EPRA earnings per share Basic 8 4.9p 4.1p(2)
Diluted 8 4.8p 4.1p(2)
--------------------------------------------------------------------------------------- ------ --------- ---------
The above relates wholly to continuing operations.
(1) - Wholly attributable to equity shareholders of Primary
Health Properties PLC
(2) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015
Group Balance Sheet
at 31 December 2015
2015 2014
Notes GBP000 GBP000
---------------------------------------- ------ ---------- ----------
Non-current assets
Investment properties 10 1,100,612 1,026,207
Derivative interest rate swaps 17 9 25
---------------------------------------- ------ ---------- ----------
1,100,621 1,026,232
---------------------------------------- ------ ---------- ----------
Current assets
Trade and other receivables 12 4,153 5,668
Cash and cash equivalents 13 2,881 12,072
---------------------------------------- ------ ---------- ----------
7,034 17,740
---------------------------------------- ------ ---------- ----------
Total assets 1,107,655 1,043,972
---------------------------------------- ------ ---------- ----------
Current liabilities
Derivative interest rate swaps 17 (4,734) (5,802)
Corporation tax payable - -
Deferred rental income (13,169) (12,308)
Trade and other payables 14 (16,099) (14,244)
Borrowings: term loans and overdraft 15 (862) (711)
---------------------------------------- ------ ---------- ----------
(34,864) (33,065)
---------------------------------------- ------ ---------- ----------
Non-current liabilities
Borrowings: term loans and overdraft 15 (460,550) (437,022)
Borrowings: Bonds 16 (236,328) (229,543)
Derivative interest rate swaps 17 (30,553) (35,212)
---------------------------------------- ------ ---------- ----------
(727,431) (701,777)
---------------------------------------- ------ ---------- ----------
Total liabilities (762,295) (734,842)
---------------------------------------- ------ ---------- ----------
Net assets 345,360 309,130
---------------------------------------- ------ ---------- ----------
Equity
Share capital 19 55,785 55,638
Share premium account 20 57,422 56,416
Capital reserve 21 1,618 1,618
Special reserve 22 93,063 115,438
Cash flow hedging reserve 23 (22,402) (23,847)
Retained earnings 24 159,874 103,867
---------------------------------------- ------ ---------- ----------
Total equity (1) 345,360 309,130
---------------------------------------- ------ ---------- ----------
Net asset value per share - basic 25 77.4p 69.5p(2)
EPRA net asset value per share - basic 25 87.7p 79.7p(2)
---------------------------------------- ------ ---------- ----------
These financial statements were approved by the Board of
Directors on 3 February 2016 and signed on its behalf by:
Alun Jones
Chairman
(1) - Wholly attributable to equity shareholders of Primary
Health Properties PLC.
(2) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
Group Cash Flow Statement
for the year ended 31 December 2015
2015 2014
Notes GBP000 GBP000
------------------------------------------------- ------ --------- ----------
Operating activities
Profit on ordinary activities before
tax 56,032 36,880
Finance income 5 (737) (977)
Finance costs 6a 34,464 35,252
Early loan repayment fee 6b - 1,187
Fair value (gain)/loss on interest rate
swaps and amortisation of cash flow hedging
reserve 6c (1,005) 2,454
Fair value loss on convertible bond 6d 6,469 4,462
------------------------------------------------- ------ --------- ----------
Operating profit before financing costs 95,223 79,258
Adjustments to reconcile Group operating
profit to net cash flows from operating
activities:
Revaluation gain on property portfolio 10 (39,767) (29,204)
Fixed rent uplift (1,480) (1,025)
Convertible bond issue costs - 2,426
Decrease/(increase) in trade and other
receivables 999 (447)
Increase/(decrease) in trade and other
payables 2,170 (1,985)
------------------------------------------------- ------ --------- ----------
Cash generated from operations 57,145 49,023
Taxation paid - (23)
------------------------------------------------- ------ --------- ----------
Net cash flow from operating activities 57,145 49,000
------------------------------------------------- ------ --------- ----------
Investing activities
Payments to acquire investment properties (17,863) (54,921)
Payment to acquire Crestdown Limited(1) (3,869) -
Payment to acquire White Horse Centre (7,745) -
Limited(2)
Proceeds from disposal of investments
properties - 525
Interest received on development loans 1,311 478
Bank interest received 12 40
------------------------------------------------- ------ --------- ----------
Net cash flow used in investing activities (28,154) (53,878)
------------------------------------------------- ------ --------- ----------
Financing activities
Cost of share issues and sub-division (139) (15)
Term bank loan drawdowns 45,750 164,922
Term bank loan repayments (25,764) (176,343)
Termination of derivative financial instruments (3,286) -
Proceeds of bond issue - 92,500
Bond issue costs - (2,560)
Swap interest paid (6,724) (7,667)
Non-utilisation fees (875) (990)
Loan arrangement fees (270) (3,092)
Interest paid (25,791) (24,078)
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Breakage fee on Aviva debt - (14,327)
Equity dividends paid net of scrip dividend 9 (21,083) (20,688)
------------------------------------------------- ------ --------- ----------
Net cash flow from financing activities (38,182) 7,662
------------------------------------------------- ------ --------- ----------
(Decrease)/increase in cash and cash
equivalents for the year (9,191) 2,784
Cash and cash equivalents at start of
year 12,072 9,288
------------------------------------------------- ------ --------- ----------
Cash and cash equivalents at end of year 13 2,881 12,072
------------------------------------------------- ------ --------- ----------
(1) - acquisition of Thornaby property
(2) - acquisition of White Horse, Westbury property
Group Statement of Changes in Equity
for the year ended 31 December 2015
Cash flow
Share Share Capital Special hedging Retained
capital premium reserve reserve reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- --------- --------- --------- --------- ---------- ---------- ---------
1 January
2015 55,638 56,416 1,618 115,438 (23,847) 103,867 309,130
Profit for
the year - - - - - 56,032 56,032
Other comprehensive
income
Fair value
movement
on interest
rate swaps - - - - (132) - (132)
Amortisation
of cash flow
hedging reserve - - - - 1,552 - 1,552
Total comprehensive
income - - - - 1,420 56,032 57,452
Reclassification
of swap interest
accrual from
hedge reserve(1) - - - - 25 (25) -
Share issue
expenses - (30) - (109) - - (139)
Dividends
paid:
Second interim
dividend
for the year
ended 31
December
2014 (2.5p)
(2) - - - (10,733) - - (10,733)
Scrip dividends
in lieu of
second interim
cash dividend 51 344 - (395) - - -
First interim
dividend
for the year
ended 31
December
2015 (2.5p)
(2) - - - (10,350) - - (10,350)
Scrip dividend
in lieu of
first interim
cash dividend 96 692 - (788) - - -
--------------------- --------- --------- --------- --------- ---------- ---------- ---------
31 December
2015 55,785 57,422 1,618 93,063 (22,402) 159,874 345,360
--------------------- --------- --------- --------- --------- ---------- ---------- ---------
(1) - This relates to fair value changes in prior periods
incorrectly recognised within the cash flow hedging reserve
movement.
(2) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
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 2014 55,237 55,611 1,618 135,483 (14,337) 68,773 302,385
Profit for the
year - - - - - 36,880 36,880
Other comprehensive
income
Fair value movement
on interest rate
swaps - - - - (9,980) - (9,980)
Total comprehensive
income - - - - (9,980) 36,880 26,900
Interest rate derivative
fair value adjustment - - - - - (1,316) (1,316)
Reclassification
of swap from ineffective
to effective(1) - - - - 470 (470) -
Share issue as
part of consideration
for PPP 259 - - 1,605 - - 1,864
Share issue expenses
(PPP) - (15) - - - - (15)
Dividends paid:
Second interim
dividend for the
year ended 31 December
2013 (2.4375p)(2) - - - (10,542) - - (10,542)
Scrip dividends
in lieu of second
interim cash dividend 41 238 - (279) - - -
First interim dividend
for the year ended
31 December 2014
(2.4375p) (2) - - - (10,146) - - (10,146)
Scrip dividend
in lieu of first
interim cash dividend 101 582 - (683) - - -
--------------------------- --------- --------- --------- --------- --------- ---------- ---------
31 December 2014 55,638 56,416 1,618 115,438 (23,847) 103,867 309,130
--------------------------- --------- --------- --------- --------- --------- ---------- ---------
(1) -This relates to fair value changes in prior periods
incorrectly recognised within the cash flow hedge reserve
movements.
(2) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
Notes to the financial statements
1. Corporate information
The Group's financial statements for the year ended 31 December
2015 were approved by the Board of Directors on 3 February 2016 and
the Balance Sheets were signed on the Board's behalf by the
Chairman, Alun Jones. Primary Health Properties PLC is a public
limited company incorporated and domiciled in England and 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 prepared on the going
concern basis and 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.
While the financial information included in this preliminary
announcement has been prepared in accordance with the recognition
and measurement criteria of International Financial Reporting
Standards (IFRSs), this announcement does not itself contain
sufficient information to comply with IFRSs. The Company expects to
publish full financial statements that comply with IFRSs in
February 2016.
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 individual financial statements of Primary Health Properties
PLC and each of its subsidiary undertakings will continue to be
prepared under UK GAAP, the Board having chosen to adopt FRS 101
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 healthcare users.
Investment properties and investment properties under
construction
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The Group's investment properties are held for long term
investment. Investment properties and those under construction are
initially measured at cost, including transaction costs. Subsequent
to initial recognition, investment properties and investment
properties under construction are stated at fair value based on
market data and a professional valuation made as of each reporting
date. The fair value of investment property does not reflect future
capital expenditure that will improve or enhance the property and
does not reflect future benefits from this future expenditure.
Gains or losses arising from changes in the fair value of
investment properties and investment properties under construction
are included in the Group Statement of Comprehensive Income in the
year in which they arise.
Investment properties are recognised for accounting purposes
upon completion of contract, when the risks and rewards of
ownership are transferred to the Group. 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.
The Group may enter into a forward funding agreement with third
party developers in respect of certain properties under
development. In accordance with these agreements, the Group will
make monthly stage payments to the developer based on certified
works on site at that time. Interest is charged to the developer on
all stage payments made during the construction period and on the
cost of the land acquired by the Group at the outset of the
development and taken to the Group Statement of Comprehensive
Income in the year in which it accrues.
Property acquisitions and business combinations
Where a property is acquired through the acquisition of
corporate interests, the Board considers the substance of the
assets and activities of the acquired entity in determining whether
the acquisition represents the acquisition of a business. The basis
of the judgement is set out in Note 2.3(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.
Net rental income
Rental income arising from operating leases on investment
properties is accounted for on a straight line basis over the lease
term. An adjustment to rental income is recognised from the rent
review date of each lease in relation to unsettled rent reviews.
Such adjustments are accrued at 90% of the additional rental income
that is expected to result from the review. For leases which
contain fixed or minimum deemed uplifts, the rental income is
recognised on a straight line basis over the lease term. Incentives
for lessees to enter into lease agreements are spread evenly over
the lease terms, even if the payments are not made on such a basis.
Rental income is measured at the fair value of the consideration
receivable, excluding discounts, rebates, VAT and other sales taxes
or duty.
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.
Convertible bond
The convertible bond is designated as "at fair value through
profit or loss" and so is presented on the Group Balance Sheet at
fair value with all gains and losses, including the write-off of
issuance costs, recognised in the Group Statement of Comprehensive
Income. The fair value of the convertible bond is assessed in
accordance with Level 1 valuation techniques as set out within
"Fair value measurements" within these accounting policies. The
interest charge in respect of the coupon rate on the bond has been
recognised within the underlying component of net financing costs
on an accruals basis. Refer to Note 16 for further details.
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 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.
Other loans and payables
Other loans and payables are non-derivative financial
liabilities with fixed or determinable payments that are not quoted
on an active market. Such liabilities 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 payables are de-recognised or impaired, as well as
through the amortisation process.
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;
or
-- the Group has transferred its right to receive cash flows
from the asset and either (a) has transferred substantially all the
risks and rewards of the asset, or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
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.
When the exchange or modification of an existing financial
liability is not accounted for as an extinguishment, any costs or
fees incurred adjust the liability's carrying amount and are
amortised over the modified liability's remaining term.
Fair value measurements
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The Group measures certain financial instruments such as
derivatives, and non-financial assets such as investment property,
at fair value at the end of each reporting period. Also, fair
values of financial instruments measured at amortised cost are
disclosed in the financial statements.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
-- In the principal market for the asset or liability; or
-- In the absence of a principal market, in the most
advantageous market for the asset or liability.
The Group must be able to access the principal or the most
advantageous market at the measurement date.
The fair value of an asset or liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits using the asset in its highest and best use or by selling
it to another market participant that would use the asset in its
highest and best use.
The Group uses valuation techniques at three levels that are
appropriate in the circumstances and for which sufficient data is
available to measure fair value, maximising the use of relevant
observable inputs and minimising the use of unobservable inputs
significant to the fair value measurement as a whole:
Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2 Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable.
Level 3 Valuation techniques for which the lowest input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
reassessing categorisation at the end of each reporting period.
Derivative financial instruments (derivatives) and hedge
accounting
The Group uses interest rate swaps to help manage its interest
rate risk.
At the inception of the transaction the Group documents the
relationship between hedging instruments and hedged items, as well
as its risk management objectives and strategy for undertaking
various hedging transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions meet
the strict criteria of IAS 39 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.
The method of recognising the resulting gain or loss depends on
whether the derivative is designated as an effective hedging
instrument.
-- where a derivative is designated as a hedge of the
variability of a highly probable forecast transaction, such as an
interest payment, the element of the gain or loss on the derivative
that is an "effective" hedge is recognised directly in equity. When
the forecast transaction subsequently results in the recognition of
a financial asset or a financial liability, the associated gains or
losses that were recognised directly in the cash flow hedging
reserve are reclassified into the Group Statement of Comprehensive
Income in the same period or periods during which the asset
acquired or liability assumed affects the Group Statement of
Comprehensive Income i.e. when interest income or expense is
recognised;
-- the gain or loss on derivatives that do not meet the strict
criteria for being "effective" and so do not qualify for hedge
accounting and the non-qualifying element of derivatives that do
qualify for hedge accounting, are recognised in the Group Statement
of Comprehensive Income immediately. The treatment does not alter
the fact that the derivatives are economic hedges of the underlying
transaction.
For swaps that have been cancelled which previously qualified
for hedge accounting, the remaining value within the cash flow
hedging reserve at the date of cancellation is recycled to the
Group Statement of Comprehensive Income on a straight line basis
from the date of cancellation to the original swap expiry date.
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 fair 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. The valuer takes
into account where the Group's assets under construction are
pre-let and construction risk remains with the respective developer
or contractor.
Fair value of derivatives
In accordance with IAS 39, 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 2015. 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 Adviser 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
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The Directors have reviewed the acquisitions during the year on
an individual basis in accordance with the requirements of IFRS
3(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 2015. Their adoption
has not had any material impact on the disclosures or on the
amounts reported in these financial statements:
-- IFRIC 21 Levies
-- Annual improvements to IFRSs 2010-2012
-- Annual improvement to IFRSs: 2011-2013
2.5 Standards issued but not yet effective
At the date of authorisation of these financial statements, the
Group has not applied the following new and revised IFRSs that have
been issued but are not yet effective and in some cases had not yet
been adopted by the EU:
IFRS 9 Financial instruments
-------------------------------- ---------------------------------------
IFRS 15 Revenue from contracts with
customers
-------------------------------- ---------------------------------------
IFRS 16 Leases
-------------------------------- ---------------------------------------
IAS 16 and IAS 38 (amendments) Clarification of acceptable
methods of depreciation and
amortisation
-------------------------------- ---------------------------------------
IAS 16 and IAS 41 (amendments) Agriculture bearer plants
-------------------------------- ---------------------------------------
IAS 19 (amendments) Defined benefit plans: employee
contributions
-------------------------------- ---------------------------------------
IAS 27 (amendments) Equity method in separate financial
statements
-------------------------------- ---------------------------------------
IFRS 10 and IAS 28 (amendments) Sale or contribution of assets
between an investor and its
associate or joint venture
-------------------------------- ---------------------------------------
IFRS 11 (amendments) Accounting for acquisitions
of interests in joint operations
-------------------------------- ---------------------------------------
Annual improvements to IFRSs: Amendments to: IFRS 5 - non-current
2012-2014 assets held for sale and discontinued
operations, IFRS 7 - Financial
instruments: disclosures, IAS
19 - employee benefits and IAS
34 - Interim financial reporting
-------------------------------- ---------------------------------------
A number of new standards and amendments to standards and
interpretations are effective for annual periods beginning after 1
January 2015, but are not yet applicable to the Group and have not
been applied in preparing these consolidated financial statements.
None of these are expected to have a significant effect on the
consolidated financial statements of the Group, except for the
following set out below:
IFRS 9, 'Financial instruments', addresses the classification,
measurement and recognition of financial assets and financial
liabilities. The complete version of IFRS 9 was issued in July
2014. It replaces the guidance in IAS 39 that relates to the
classification and measurement of financial instruments. IFRS 9
retains but simplifies the mixed measurement model and establishes
three primary measurement categories for financial assets:
amortised cost, fair value through Other Comprehensive Income and
fair value through profit or loss.
The basis of classification depends on the entity's business
model and the contractual cash flow characteristics of the
financial asset. Investments in equity instruments are required to
be measured at fair value through profit or loss with the
irrevocable option at inception to present changes in fair value in
Other Comprehensive Income. There is now a new expected credit
losses model that replaces the incurred loss impairment model used
in IAS 39. For financial liabilities, there were no changes to
classification and measurement except for the recognition of
changes in own credit risk in other comprehensive income, for
liabilities designated at fair value through profit or loss. IFRS 9
relaxes the requirements for hedge effectiveness by replacing the
bright line hedge effectiveness tests. It requires an economic
relationship between the hedged item and hedging instrument and for
the 'hedged ratio' to be the same as the one management actually
use for risk management purposes. Contemporaneous documentation is
still required but is different to that currently prepared under
IAS 39. The standard is effective for accounting periods beginning
on or after 1 January 2018. Early adoption is permitted, subject to
EU endorsement. The Group is assessing the impact of IFRS 9.
IFRS 15, 'Revenue from contracts with customers' deals with
revenue recognition and establishes principles for reporting useful
information to users of financial statements about the nature,
amount, timing and uncertainty of revenue and cash flows arising
from an entity's contracts with customers. Revenue is recognised
when a customer obtains control of a good or service and thus has
the ability to direct the use and obtain the benefits from the good
or service. The standard replaces IAS 18 'Revenue' and IAS 11
'Construction contracts' and related interpretations. The standard
is effective for annual periods beginning on or after 1 January
2017 and earlier application is permitted, subject to EU adoption.
The Group is assessing the impact of IFRS 15 but it is not expected
to be material.
IFRS 16, 'Leases', establishes principles for the recognition,
measurement, presentation and disclosure of leases, with the
objective of ensuring that lessees and lessors provide relevant
information that faithfully represents those transactions. The
standard specifies how entities reporting in accordance with IFRS
will recognise, measure, present and disclose leases. The standard
provides a single lessee accounting model, requiring lessees to
recognise assets and liabilities for all leases unless the lease
term is 12 months or less or the underlying asset has a low value.
Lessors continue to classify leases as operating or finance, with
IFRS 16's approach to lessor accounting substantially unchanged
from its predecessor, IAS 17. The standard is effective for annual
periods beginning on or after 1 January 2019 and earlier
application is permitted if IFRS 15 'Revenue from contracts with
customers' has also been applied. The Group is assessing the impact
of IFRS 16 but it is not expected to be material.
3. Rental and related income
Revenue comprises rental income and finance lease income
receivable on property investments in the UK, which is exclusive of
VAT. Revenue 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 1 to 5 More than Total
one year years 5 years
GBP000 GBP000 GBP000 GBP000
------ ---------- -------- ---------- --------
2015 61,850 246,566 590,357 898,773
2014 58,811 234,577 591,842 885,230
------ ---------- -------- ---------- --------
b) The rental income earned on operating leases is recognised on
a straight line basis over the lease term.
The Group leases medical centres to GPs, NHS organisations 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
2015 2014
GBP000 GBP000
-------------------------------------------------- ------- -------
Administrative expenses including:
Advisory fees (Note 4a) 5,296 5,345
Directors' fees (Note 4c) 254 243
Audit fees
Fees payable to the Company's auditors and
their associates for the audit of the Company's
annual accounts 119 102
Fees payable to the Company's auditors and
their associates for the audit of the Company's
subsidiaries 114 120
-------------------------------------------------- ------- -------
Total audit fees 233 222
-------------------------------------------------- ------- -------
Audit-related assurance services for the
interim review 42 41
-------------------------------------------------- ------- -------
Total audit and assurance services 275 263
-------------------------------------------------- ------- -------
Non-audit fees
Tax compliance services 15 -
Tax advisory services 20 50
Total non-audit fees 35 50
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-------------------------------------------------- ------- -------
Total fees 310 313
-------------------------------------------------- ------- -------
The Group's policy on non-audit fees is discussed in the Audit
Committee Report.
a) Advisory fees
The advisory fees calculated and payable for the period to 31
December was as follows:
2015 2014
GBP000 GBP000
----------------------------------------- ------- -------
Nexus 5,296 4,697
J O Hambro Capital Management ("JOHCM") - 648
----------------------------------------- ------- -------
5,296 5,345
----------------------------------------- ------- -------
Further details on the Advisory Agreement can be found in the
Corporate Governance section of the Strategic Review in the Annual
Report.
As at 31 December 2015 GBP0.5 million was payable to Nexus
(2014: GBP0.4 million). There were no outstanding sums payable to
JOHCM (2014: GBPnil).
Further fees paid to Nexus in accordance with the Advisory
Agreement of GBP0.1 million (2014: GBP0.1 million) in respect of
capital projects were capitalised in the year.
Service charge management fees paid to Nexus in the year in
connection with the Group's properties totalled GBP0.1 million
(2014: GBPnil).
b) Performance Incentive Fee
Information about the Performance Incentive Fee is provided in
the Corporate Governance section of the Strategic Review 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.
5. Finance income
2015 2014
GBP000 GBP000
------------------------------------- ------- -------
Interest income on financial assets
Bank interest 9 37
Development loan interest 725 937
Other interest 3 3
------------------------------------- ------- -------
737 977
------------------------------------- ------- -------
6. Finance costs
2015 2014
GBP000 GBP000
--------------------------------------------------- ------- -------
Interest expense and similar charges on financial
liabilities
a) Interest
Bank loan interest 16,287 16,959
Swap interest 5,954 7,609
Bond interest 9,567 8,058
Bank facility non-utilisation fees 922 926
Bank charges and loan commitment fees 1,734 1,700
--------------------------------------------------- ------- -------
34,464 35,252
--------------------------------------------------- ------- -------
b) Early loan repayment fees
Fee on breakage of PPP debt - 1,187
--------------------------------------------------- ------- -------
- 1,187
--------------------------------------------------- ------- -------
A charge of GBP1.2 million was made to the Group Statement of
Comprehensive Income in 2014 with regard to costs associated with
the early repayment and restructuring of loans acquired with the
PPP portfolio in 2013.
2015 2014
GBP000 GBP000
------------------------------------------------- -------- --------
c) Derivatives
Net fair value gain/(loss) on interest rate
swaps 2,557 (2,454)
Amortisation of cash flow hedging reserve (1,552) -
1,005 (2,454)
------------------------------------------------- -------- --------
The fair value gain on derivatives recognised in the Group
Statement of Comprehensive Income has arisen from the interest rate
swaps for which hedge accounting does not apply. A fair value loss
on derivatives which do meet the hedge effectiveness criteria under
IAS 39 of GBP0.1 million (2014 loss: GBP9.9 million) is accounted
for directly in equity. An amount of GBP1.6 million has been
amortised from the cash flow hedging reserve in the year resulting
from the early termination of an effective swap contract (see Note
23).
Details of the fair value loss on hedges which meet the
effectiveness criteria for hedge accounting under IAS 39 are set
out in Note 23.
2015 2014
GBP000 GBP000
----------------------------------------- -------- --------
d) Convertible bond
Fair value loss on convertible bond (6,469) (4,462)
----------------------------------------- -------- --------
The fair value movement in the convertible bond is recognised in
the Group Statement of Comprehensive Income within profit before
taxation and is excluded from the calculation of EPRA earnings and
EPRA NAV. Refer to Note 16 for further details about the
convertible bond.
2015 2014
GBP000 GBP000
------------------------------ ------- -------
Net finance costs
Finance income (Note 5) (737) (977)
Finance costs (as per above) 34,464 35,252
------------------------------ ------- -------
33,727 34,275
------------------------------ ------- -------
7. Taxation
a) Taxation charge in the Group Statement of Comprehensive
Income
The taxation charge is made up as follows:
2015 2014
GBP000 GBP000
----------------------------- ------- -------
Current tax
UK corporation tax (Note 7b) - -
----------------------------- ------- -------
The UK corporation tax rate reduced from 21% to 20% on 1 April
2015. Accordingly, these rates have been applied in the measurement
of the Group's tax liability at 31 December 2015.
b) Factors affecting the tax credit for the year
The tax assessed for the year is lower than (2014: lower than)
the standard rate of corporation tax in the UK. The differences are
explained below:
2015 2014
GBP000 GBP000
----------------------------------------------- -------- --------
Profit on ordinary activities before taxation 56,032 36,880
----------------------------------------------- -------- --------
Theoretical tax at UK corporation tax rate
of 20.3% (2014: 21.5%) 11,375 7,929
REIT exempt income (6,940) (5,935)
Transfer pricing adjustments 4,023 2,886
Non-taxable items (7,035) (4,270)
Losses brought forward utilised (1,423) (610)
Taxation charge (Note 7a) - -
----------------------------------------------- -------- --------
At the balance sheet date, the Group has unused tax losses of
GBP14.3 million (2014: GBP20.6 million) available for offset
against future profits.
c) Basis of taxation
The Group elected to be treated as a UK REIT with effect from 1
January 2007. The UK REIT rules exempt the profits of the Group's
property rental business from corporation tax. Gains on properties
are also exempt from tax, provided they are not held for trading or
sold in the three years post completion of development. The Group
will otherwise be subject to corporation tax at 20% (2014:
21%).
Acquired companies are effectively converted to UK-REIT status
from the date on which they become a member of the Group.
As a UK REIT, the Company is required to pay Property Income
Distributions ("PIDs") equal to at least 90% of the Group's rental
profit calculated by reference to tax rules rather than accounting
standards.
To remain as a UK REIT there are a number of conditions to be
met in respect of the principal company of the Group, the Group's
qualifying activities and the balance of its business. The Group
remains compliant as at 31 December 2015.
8. 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)(1) (pence)
----------------------------------------- -------------- ------------ ----------
2015
Basic and diluted earnings
Basic earnings 56,032 445,606,491 12.6
Dilutive effect of convertible bond 3,506 84,615,385
----------------------------------------- -------------- ------------ ----------
Diluted earnings 59,538 530,221,876 11.2
----------------------------------------- -------------- ------------ ----------
EPRA basic and diluted earnings
Basic earnings 56,032
Adjustments to remove:
Net result on property (Note 10) (39,767)
Fair value gain on derivatives (1,005)
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Fair value movement on convertible
bond 6,469
EPRA basic earnings 21,729 445,606,491 4.9
----------------------------------------- -------------- ------------ ----------
Dilutive effect of convertible bond 3,506 84,615,385
----------------------------------------- -------------- ------------ ----------
EPRA diluted earnings 25,235 530,221,876 4.8
2014(1)
Basic and diluted earnings
Basic earnings 36,880 444,176,340 8.3
Dilutive effect of convertible bond 2,170 52,391,992
----------------------------------------- -------------- ------------ ----------
Diluted earnings 39,050 496,568,332 7.9
----------------------------------------- -------------- ------------ ----------
EPRA basic and diluted earnings
Basic and diluted earnings 36,880
Adjustments to remove:
Net result on property (Note 11) (29,204)
Fair value loss on derivatives 2,454
Fair value movement on convertible
bond 4,462
Early loan repayment fee charges(2) 1,187
Issue costs of convertible bond 2,426
----------------------------------------- -------------- ------------ ----------
EPRA basic and diluted earnings 18,205 444,176,340 4.1
----------------------------------------- -------------- ------------ ----------
(1) Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
(2) Revised EPRA best practice guidance was issued in January
2014 which advised that early repayment fees associated with the
close out of debt instruments should be excluded from EPRA
earnings. This has been reflected in the calculation of EPRA
earnings for both 2014 and 2015. As a result of these changes the
Group no longer calculates an "adjusted" earnings figure.
On 20 May 2014, the Group issued GBP82.5 million of unsecured
convertible bonds, refer to Note 16 for further details. In
accordance with IAS 33 (Earnings per Share) the Company is required
to assess and disclose the dilutive impact of the contingently
issuable shares within the convertible bond. The impact is not
recognised where it is anti-dilutive.
The dilutive impact to basic EPS of convertible bonds is
represented by the accrued bond coupon which has been included in
the results of the year ended 31 December 2015. The number of
dilutive shares is calculated as if the contingently issuable
shares within the convertible bond had been in issue for the period
from issuance of the bonds to 31 December 2015.
9. Dividends
Amounts recognised as distributions to equity holders in the
year:
2015 2014
GBP000 GBP000
------------------------------------------------ ------- ----------
Second interim dividend for the year ended
31 December 2014 (2.5p) (1) paid 1 April 2015
(2014: 2.375p) (1) 10,733 10,542
Scrip dividend in lieu of second interim cash
dividend 395 279
First interim dividend for the year ended
31 December 2015 (2.5p)(1) paid 30 October
2015 (2014: 2.375p) (1) 10,350 10,146
Scrip dividend in lieu of first interim cash
dividend 788 683
------------------------------------------------ ------- ----------
Total dividends distributed in the year 22,266 21,650
------------------------------------------------ ------- ----------
Per share 5.0p 4.875p(1)
------------------------------------------------ ------- ----------
(1) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
On 4 January 2016, the Board declared an interim dividend of
1.28125 pence per Ordinary Share with regard to the year ended 31
December 2015, payable on 26 February 2016. This dividend will not
be a Property Income Distribution ("PID").
10. 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"). There were no changes to the
valuation techniques during the year. The Valuers are appropriately
qualified and have sufficient market knowledge and relevant
experience of the location and category of investment property and
have had full regard to market evidence when determining the
values.
The properties are 99.7% let (2014: 99.7%). The valuations
reflected a 5.32% net initial yield (2014: 5.52%) and a 5.53%
(2014: 5.75%) 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 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. Management deduct the outstanding cost to
the Group through to the completion of construction in arriving at
the fair value to be included in the financial statements. A fair
value increase of GBP0.6 million (2014: increase of GBP2.8 million)
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 GBP39.8 million (2014: gain of GBP29.2 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 1(st) January 2015 825,274 177,075 23,858 1,026,207
Property additions 18,078 148 14,839 33,065
Impact of lease incentive
adjustment 629 944 - 1,573
Transfer from properties under
construction 6,853 23,750 (30,603) -
-------------------------------- ------------ ---------------- -------------------- ----------
850,834 201,917 8,094 1,060,845
Revaluations for the year 31,182 7,944 641 39,767
-------------------------------- ------------ ---------------- -------------------- ----------
As at 31 December 2015 882,016 209,861 8,735 1,100,612
-------------------------------- ------------ ---------------- -------------------- ----------
As at 1(st) January 2014 759,781 170,088 11,679 941,548
Property additions 22,833 2,051 30,071 54,955
Property disposals (525) - - (525)
Impact of lease incentive
adjustment 857 168 - 1,025
Transfer from properties under
construction 20,698 - (20,698) -
803,644 172,307 21,052 997,003
Revaluations for the year 21,630 4,768 2,806 29,204
-------------------------------- ------------ ---------------- -------------------- ----------
As at 31 December 2014 825,274 177,075 23,858 1,026,207
-------------------------------- ------------ ---------------- -------------------- ----------
Bank borrowings, bonds and interest rate swaps are secured on
investment properties with a value of GBP1,051 million (2014:
GBP997.3 million).
Fair value hierarchy
All of the Group's properties are level 3, as defined by IFRS
13, in the fair value hierarchy as at 31 December 2015 and 31
December 2014. There were no transfers between levels during the
year or during 2014. Level 3 inputs used in valuing the properties,
are those which are unobservable, as opposed to level 1 (inputs
from quoted prices) and level 2 (observable inputs either directly,
i.e. as prices, or indirectly, i.e. derived from prices).
Valuation techniques used to derive Level 3 fair values
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The valuations have been prepared on the basis of Fair Market
Value (FMV) which is defined in the RICS Valuation Standards
as:
"The estimated amount for which a property should exchange on
the date of valuation between a willing buyer and a willing seller
in an arm's-length transaction after proper marketing wherein the
parties had each acted knowledgeably, prudently and without
compulsion."
Valuation techniques: market comparable method
Under the market comparable method (or market comparable
approach), a property's fair value is estimated based on comparable
transactions and using certain unobservable inputs. These inputs
are detailed below.
Unobservable input: estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation.
ERV - range of the portfolio
--------------------------------------------------------------------
2015 2014
--------------------------------- ---------------------------------
GBP55,436-GBP1,159,877 per annum GBP55,436-GBP1,158,011 per annum
--------------------------------- ---------------------------------
Unobservable input: equivalent yield
The equivalent yield is defined as the internal rate of return
of the cash flow from the property, assuming a rise to ERV at the
next review date, but with no further rental growth.
TRUE EQUIVALENT YIELD - range of the portfolio
-------------------------------------------------
2015 2014
------------------------- ----------------------
4.58%-6.696% 4.83%-6.76%
------------------------- ----------------------
Unobservable input: physical condition of the property
The properties are physically inspected by the Valuer on a three
year rotating basis.
Unobservable input: rental growth
The estimated average increase in rent based on both market
estimations and contractual situations.
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 provided to the Valuer;
and
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.
11. Group entities
Subsidiaries of the Company, all of which are 100% owned and
incorporated in the UK except as noted, are listed below:
Subsidiaries held directly by the Company
PHP Empire Holdings Limited PHP Finance (Jersey) Limited(3)
Primary Health Investment Properties
Limited PHP Investments (2011) Limited
Primary Health Investment Properties
(No. 2) Limited PHP 2013 Holdings Limited
Primary Health Investment Properties
(No. 3) Limited PHIP (Gorse Stacks) Limited
PHIP CH Limited Anchor Meadow Limited
PHP Healthcare (Holdings) Limited PHP Bond Finance PLC
Health Investments Limited PHP Primary Properties (Haymarket)
Limited
Primary Health Investment Properties
(No. 4) Limited PHP Medical Investments Limited
White Horse Centre Limited(1) Apollo (Ipswich) Limited
Crestdown Limited(1)
Subsidiaries indirectly held by
the Company
SPCD (Northwich) Limited Leighton Health Limited(1)
SPCD (Shavington) Limited PHP (Portsmouth) Limited
PHIP (5) Limited PHP (Chandler's Ford) Limited
PatientFirst Partnerships Limited PHP (FRMC) Limited
PatientFirst (Hinckley) Limited PHP (Basingstoke) Limited
PatientFirst (Burnley) Limited PHP Healthcare Investments Limited
AHG (2006) PHP St. Johns Limited
PHIP (Hoddesdon) Limited PHP Clinics Limited
PHIP (Milton Keynes) Limited PHIP (Stourbridge) Limited
PHIP (RHL) Limited PHP (Project Finance) Limited
PHIP (Sheerness) Limited PHP Medical Properties Limited
PHP Healthcare Investments (Holdings)
Limited PHP Glen Spean Limited
PHP Investments No.1 Limited Gracemount Medical Centre Limited(2)
PHP Investments No.2 Limited PHP AssetCo (2011) Limited
Motorstep Limited PHP Primary Properties Limited
With the exception of PHP Bond Finance PLC, Primary Health
Investment Properties (No. 4) Limited and PHP Finance (Jersey)
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
are held directly or indirectly by the Company.
(1) - Subsidiary acquired during the year.
(2) - Subsidiary company registered in Scotland.
(3) - Subsidiary company registered in Jersey
12. Trade and other receivables
2015 2014
GBP000 GBP000
-------------------------------- ------- -------
Trade receivables 1,686 1,916
Prepayments and accrued income 1,379 2,527
Other debtors 908 459
Development loan interest 180 766
4,153 5,668
-------------------------------- ------- -------
As at 31 December, the analysis of trade receivables, some of
which were past due but not impaired, is set out below:
2015 2014
GBP000 GBP000
-------------------------------- ------- -------
Neither past due nor impaired:
<30 days 1,224 1,260
Past due but not impaired:
30-60 days 54 99
60-90 days - 2
90-120 days 95 257
>120 days 313 298
-------------------------------- ------- -------
1,686 1,916
-------------------------------- ------- -------
The Group's principal customers are invoiced and pay quarterly
in advance, usually on the English quarter days. No bad debt
provision was required (2014: GBPnil) and no receivables were
considered impaired. There is no significant concentration of
credit risk with respect to trade receivables, as the Group has a
large number of tenants.
13. Cash and cash equivalents
2015 2014
GBP000 GBP000
------------------- ------- -------
Cash held at bank 2,881 8,472
Restricted cash - 3,600
------------------- ------- -------
2,881 12,072
------------------- ------- -------
Restricted cash at 31 December 2014 represented an amount held
as security in relation to debt service and repayment of bank
borrowings and was released in June 2015.
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. These deposits
earn interest at various short term deposit rates.
14. Trade and other payables
2015 2014
GBP000 GBP000
------------------------------------- ------- -------
Trade payables 1,520 954
Bank and bond loan interest accrual 4,389 4,287
Other payables 7,302 6,752
VAT 2,105 1,237
Accruals 783 1,014
------------------------------------- ------- -------
16,099 14,244
------------------------------------- ------- -------
15. Borrowings: Term loans and overdrafts
The table indicates amounts drawn and undrawn from each
individual facility as at 31 December:
Facility Amounts drawn Undrawn
2015 2014 2015 2014 2015 2014
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- -------- -------- -------- -------- ------- --------
Current
Overdraft facility(1) 5,000 5,000 - - 5,000 5,000
Fixed rate term loan(3) 755 711 755 711 - -
Term loan to November
2028(9) 107 - 107 - - -
--------------------------- -------- -------- -------- -------- ------- --------
5,862 5,711 862 711 5,000 5,000
--------------------------- -------- -------- -------- -------- ------- --------
Non-current
Term loan to August
2017(2) 165,000 165,000 146,250 123,500 18,750 41,500
Fixed Rate term loan(3) 23,948 24,702 23,948 24,702 - -
Fixed Rate term loan
to December 2022(4) 25,000 25,000 25,000 25,000 - -
Term loan to July 2020(5) 50,000 50,000 21,513 21,513 28,487 28,487
Fixed rate term loan
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to November 2018(6) 75,000 75,000 75,000 75,000 - -
Term loan to August
2019(7) 100,000 100,000 57,160 59,160 42,840 40,840
Fixed rate term loan
to August 2024(8) 50,000 50,000 50,000 50,000 - -
Fixed rate term loan
August 2029 year(8) 63,000 63,000 63,000 63,000 - -
Term loan to November
2028(9) 2,415 - 2,415 - - -
--------------------------- -------- -------- -------- -------- ------- --------
554,363 552,702 464,286 441,875 90,077 110,827
--------------------------- -------- -------- -------- -------- ------- --------
560,225 558,413 465,148 442,586 95,077 115,827
--------------------------- -------- -------- -------- -------- ------- --------
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) Aviva facility (acquired as part of HIL acquisition)
repayable in tranches to 31 January 2032
(4) Aviva GPFC facility
(5) HSBC Bank facility
(6) Aviva facility
(7) Barclays facility
(8) Aviva facility
(9) RBS facility (acquired with Crestdown Limited)
At 31 December 2015, total facilities of GBP787.7 million (2014:
GBP785.9 million) were available to the Group. This included a
GBP75 million Unsecured Retail Bond, a GBP70 million Secured Bond,
a GBP82.5 million Convertible Bond and a GBP5 million overdraft
facility. Of these facilities, as at 31 December 2015, GBP692.8
million was drawn (2014: GBP670.1 million).
As part of the acquisition of Crestdown Limited on 29 June 2015,
the Group acquired an existing loan with the Royal Bank of Scotland
PLC in the sum of GBP2.5 million. The loan incurs interest at a
rate of 100 basis points over LIBOR and matures in 2028.
On 16 July 2015, the GBP50 million revolving credit facility
with HSBC Bank plc was extended for a new five year term. All other
terms of the loan remain unaltered.
On 7 January 2016, the GBP100 million loan facility provided by
Barclays Bank plc was successfully extended by GBP15 million. The
enlarged facility will be made available for a new five year term
from January 2016. All other terms of the facility remain
unchanged.
Costs associated with the arrangement and extension of the
facilities, including legal advice and loan arrangement fees, 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:
2015 2014
GBP000 GBP000
---------------------------------------------- -------- --------
Term loans drawn: due within one year 862 711
Term loans drawn: due in greater than one
year 464,286 441,875
---------------------------------------------- -------- --------
Total terms loans drawn 465,148 442,586
Less: Unamortised borrowing costs (3,736) (4,853)
---------------------------------------------- -------- --------
Total term loans per the Group Balance Sheet 461,412 437,733
---------------------------------------------- -------- --------
The Group has been in compliance with all of the financial
covenants of the above facilities as applicable through the year.
Further details are shown in Note 18e.
The Group has entered into interest rate swaps to manage its
exposure to interest rate fluctuations. These are set out in Note
17.
16. Borrowings: bonds
2015 2014
GBP000 GBP000
---------------------------- -------- --------
Secured
Secured Bond December 2025 70,000 70,000
Unsecured
Retail Bond July 2019 75,000 75,000
Convertible Bond May 2019 93,431 86,962
Unamortised issue costs (2,103) (2,419)
---------------------------- -------- --------
236,328 229,543
---------------------------- -------- --------
Secured Bond
On 18 December 2013, PHP successfully listed the floating rate
guaranteed secured bonds issued on 4 November 2013 (the "Secured
Bonds") on the London Stock Exchange. The Secured Bonds have a
nominal value of GBP70 million and mature on or about 30 December
2025. GBP60 million was paid up on the issue of the Secured Bonds
with the remaining GBP10 million being received on 30 June 2014
following the completion of the construction of four further
secured assets. The Secured Bonds incur interest on the paid up
amount at an annualised rate of 220 basis points above six month
LIBOR, payable semi-annually in arrears.
Retail Bond
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 Retail
Bond issue costs will be amortised on a straight line basis over
seven years.
Convertible Bond
On 20 May 2014, PHP Finance (Jersey) Limited ("the Issuer"), a
wholly owned subsidiary of the Group issued GBP82.5 million 4.25%
of convertible bonds due 2019 (the "Bonds") at par. The Company has
guaranteed the due and punctual performance by the Issuer of all of
its obligations (including payments) in respect of the Bonds.
Subject to certain conditions, the Bonds are convertible into
preference shares of the Issuer which will be automatically and
mandatorily exchangeable into fully paid Ordinary Shares of the
Company (the "Shares"). The initial conversion price was set at 390
pence per Share (the "Exchange Price"), which has subsequently been
revised to 97.5 pence following the Company's four for one share
sub-division undertaken in November 2015. Under the terms of the
Bonds, the Company will have the right to settle any conversion
rights entirely in Shares, in cash or with a combination of Shares
and cash.
The bondholders have the right to convert the Bonds up until 20
May 2017 only where the Parity Value (as defined in the Bond's
terms) is greater than the Exchange Price.
On or after 20 May 2017, the Bonds may be redeemed at par at the
Company's option subject to the Parity Value equalling or exceeding
GBP130,000. If not previously converted, redeemed or purchased and
cancelled, the Bonds will be redeemed at par on the maturity
date.
Convertible bond
2015 2014
GBP000 GBP000
----------------------------------------- ------- -------
Nominal value on issue on 20 May 2014 - 82,500
As at 1 January 86,962 -
Fair value movement in convertible bond 6,469 4,462
----------------------------------------- ------- -------
Balance at 31 December 93,431 86,962
----------------------------------------- ------- -------
The fair value of the convertible bond at 31 December 2015 was
established by obtaining quoted market prices. The fair value
movement is recognised in the Group Statement of Comprehensive
Income within Profit before Taxation and is excluded from the
calculation of EPRA earnings and EPRA NAV.
17. Derivatives and other financial instruments
It is Group policy to maintain the proportion of floating rate
interest exposure at between 20% and 40% of total debt. The Group
uses interest rate swaps to mitigate its remaining exposure to
interest-rate risk in line with this policy. The fair value of
these contracts is recorded in the balance sheet and is determined
by discounting future cash flows at the prevailing market rates at
the balance sheet date.
2015 2014
GBP000 GBP000
-------------------------------------------------- --------- ---------
Fair value of interest rate swaps treated
as cash flow hedges under IAS39 ("effective
swaps")
Non-current assets 9 -
Current liabilities (1,403) (2,825)
Non-current liabilities (19,383) (20,956)
-------------------------------------------------- --------- ---------
(20,777) (23,781)
-------------------------------------------------- --------- ---------
Fair value of interest rate swaps not qualifying
as cash flow hedges under IAS39 ("ineffective
swaps")
Non-current assets - 25
Current liabilities (3,331) (2,977)
Non-current liabilities (11,170) (14,256)
-------------------------------------------------- --------- ---------
(14,501) (17,208)
-------------------------------------------------- --------- ---------
Total fair value of interest rate swaps (35,278) (40,989)
-------------------------------------------------- --------- ---------
Shown in the Balance Sheet as:
Total non-current assets 9 25
Total current liabilities (4,734) (5,802)
Total non-current liabilities (30,553) (35,212)
-------------------------------------------------- --------- ---------
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Changes in the fair value of the contracts that do not meet the
strict IAS 39 criteria to be designated as effective hedging
instruments are taken to the Group Statement of Comprehensive
Income. For contracts that meet the IAS 39 criteria and are
designated as "effective" cash flow hedges, the change in fair
value of the contract is recognised in the Group Statement of
Changes in Equity through the cash flow hedging reserve. The result
recognised in the Group Statement of Comprehensive Income on
"ineffective" cash flow hedges in 2015 was a GBP1.0 million gain,
including the amortisation of the cash flow hedging reserve of
GBP1.6 million (2014: GBP2.5 million loss).
Floating to fixed interest rate swaps with a contract value of
GBP126.0 million (2014: GBP206.0 million) were in effect at 31
December 2015. Details of all floating to fixed rate interest rate
swaps contracts held are as follows:
Fixed interest
Contract value Start date Maturity per annum %
-------------------- ------------- ------------- ---------------
2015
GBP28.0 million March 2013 March 2017 0.900
GBP50.0 million(1) August 2007 August 2021 4.835
GBP38.0 million(1) August 2007 August 2021 4.740
GBP10.0 million June 2006 June 2026 4.810
-------------------- ------------- ------------- ---------------
GBP126.0 million
-------------------- ------------- ------------- ---------------
2014
GBP70.0 million July 2013 July 2015 4.805
GBP28.0 million March 2013 March 2017 0.900
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
-------------------- ------------- ------------- ---------------
GBP206.0 million
-------------------------------------------------- ---------------
Contracts not Fixed interest
yet in effect Start date Maturity per annum %
GBP25.0 million(1) January 2018 January 2023 2.470
GBP75.0 million(1) January 2019 January 2024 2.650
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
-------------------- -------------- -------------- ---------------
GBP180.0 million
---------------------------------------------------- ---------------
(1) In July 2015, two new forward starting swap contracts were
entered into. These will replace the interest rate protection
provided by existing fixed rate loans and interest rate swaps as
they mature that are currently incurring interest well in excess of
these rates.
Details of the single interest rate cap held by the Group is as
follows:
Floating
rate cap
Maturity Premium per annum
Contract value Start date date paid %
GBP15.0 million April 2014 April 2017 GBP176,000 2.000
18. Financial risk management
In pursuing its investment objectives, the Group is exposed to a
variety of risks that could impact net assets or distributable
profits.
The Group's principal financial liabilities, other than interest
rates swaps, are loans and borrowings hedged by these swaps. The
main purpose of the Group's loans and borrowings is to finance the
acquisition and development of the Group's property portfolio. The
Group has trade and other receivables, trade and other payables and
cash and short term deposits that arise directly from its
operations.
A review of the Groups objectives, policies and processes for
managing and monitoring risk is set out in the Strategic Review.
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 17 provides details of interest
swap contracts in effect at the year end.
The sensitivity analysis below shows the impact on profit before
tax and equity of reasonably possible movements in interest rates
with all other variables held constant. It should be noted that the
impact of movement in the interest rate variable is not necessarily
linear.
The fair value is arrived at with reference to the difference
between the contracted rate of a swap and the market rate for the
remaining duration at the time the valuation is performed. As
market rates increase and this difference reduces, the associated
fair value also decreases.
Effect
on fair Effect
value on profit
of financial before Effect
instruments taxation on equity
GBP000 GBP000 GBP000
------------------ ---------------------- -------------- ----------- -----------
2015
London InterBank Increase of 50 basis
Offered Rate points 9,922 3,377 13,299
London InterBank Decrease of 50 basis
Offered Rate points (9,922) (3,377) (13,299)
------------------ ---------------------- -------------- ----------- -----------
2014
London InterBank Increase of 50 basis
Offered Rate points 9,089 4,549 13,638
London InterBank Decrease of 50 basis
Offered Rate points (9,089) (4,549) (13,638)
------------------ ---------------------- -------------- ----------- -----------
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.
The Group has policies in place to ensure that rental contracts
are entered into only with lessees with an appropriate credit
history, but the Group does not monitor the credit quality of
receivables on an ongoing basis. An analysis of trade receivables
past due is shown in Note 12.
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 Adviser.
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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
------------------ ---------- ---------- -------- -------- ---------- --------
2015
Interest-bearing
loans and
borrowings - 6,350 20,577 535,724 286,642 849,293
Interest
rate swaps
(net) - 1,002 4,142 31,599 27,152 63,895
Trade and
other payables 2,899 9,922 778 1,828 102 15,529
------------------ ---------- ---------- -------- -------- ---------- --------
2,899 17,274 25,497 569,151 313,896 928,717
------------------ ---------- ---------- -------- -------- ---------- --------
2014
Interest-bearing
loans and
borrowings - 6,186 20,038 528,325 295,132 849,681
Interest
rate swaps
(net) - 1,910 5,597 31,030 27,772 66,309
Trade and
other payables 2,166 7,333 2,909 1,312 92 13,812
------------------ ---------- ---------- -------- -------- ---------- --------
2,166 15,429 28,544 560,667 322,996 929,802
------------------ ---------- ---------- -------- -------- ---------- --------
The Group's borrowings have financial covenants which, if
breached, could result in the borrowings becoming repayable
immediately. Details of the covenants are given below in under (e)
capital risk management and are disclosed to the facility providers
on a quarterly basis. There have been no breaches during the year
(2014: none)
d) Market risk
Market risk is the risk that fair values of financial
instruments will fluctuate because of changes in market prices. The
Board of Directors has identified two elements of market risk that
principally affect the Group - interest rate risk and price
risk.
Interest rate risk
Interest rate risk is outlined above. The Board, with the
assistance of the Adviser, assesses the exposure to other price
risks when making each investment decision and monitors the overall
level of market risk on the investment portfolio on an ongoing
basis through a discounted cash flow analysis. Details of this
analysis can be found in the Strategic Review in the Annual
Report.
Price risk
The Group is exposed to price risk in respect of property price
risk including property rentals risk. Refer to Note 2.3. The Group
has no significant exposure to price risk in respect of financial
instruments other than the convertible bond and interest rate
derivatives (see also Note 17), as it does not hold any equity
securities or commodities.
Fair values
Set out below is a comparison by class of the carrying amount
and fair values of the Group's financial instruments that are
carried in the financial statements.
Book value Fair value Book value Fair value
2015 2015 2014 2014
GBP000 GBP000 GBP000 GBP000
------------------------------- ----------- ----------- ----------- -----------
Financial assets
Trade and other receivables 2,364 2,364 2,682 2,682
Effective interest rate swaps 9 9 - -
Ineffective interest rate
swaps - - 25 25
Cash and short term deposits 2,881 2,881 12,072 12,072
------------------------------- ----------- ----------- ----------- -----------
Financial liabilities
Interest-bearing loans and
borrowings (692,648) (731,532) (662,814) (771,727)
Effective interest rate swaps (20,776) (20,776) (23,782) (23,782)
Ineffective interest rate
swaps (net) (14,502) (14,502) (17,233) (17,233)
Trade and other payables (15,529) (15,529) (14,244) (14,244)
------------------------------- ----------- ----------- ----------- -----------
The fair value of the financial assets and liabilities is
included as an estimate of the amount at which the instruments
could be exchanged in a current transaction between willing
parties, other than a forced sale. The following methods and
assumptions were used to estimate fair values:
-- The fair values of the Group's cash and cash equivalents and
trade payables and receivables are not materially different from
those at which they are carried in the financial statements due to
the short term nature of these instruments;
-- The fair value of floating rate borrowings is estimated by
discounting future cash flows using rates currently available for
instruments with similar terms and remaining maturities. The fair
value approximates their carrying values, gross of unamortised
transaction costs; and
-- The fair values of the derivative interest rate swap
contracts are estimated by discounting expected future cash flows
using market interest rates and yield curves over the remaining
term of the instrument.
Fair value hierarchy
The table below analyses financial instruments carried at fair
value, by valuation method. The different levels are defined as
follows:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities
Level 2: Other techniques for which all inputs which have a
significant effect on the recorded fair value are observable,
either directly or indirectly
Level 3: Techniques which use inputs which have a significant
effect on the recorded fair value that are not based on observable
market data
Fair value measurements at 31 December 2015 are as follows:
Level 1(1) Level 2(2) Level 3(3) Total
Recurring fair value GBP000 GBP000 GBP000 GBP000
measurements
----------------------- ----------- ----------- ----------- ---------
Financial assets
Derivative interest
rate swaps - 9 - 9
----------------------- ----------- ----------- ----------- ---------
Financial liabilities
Derivative interest
rate swaps - (35,287) - (35,287)
Convertible bond (93,431) - - (93,431)
----------------------- ----------- ----------- ----------- ---------
Fair value measurements at 31 December 2014 are as follows:
Level 1(1) Level 2(2) Level 3(3) Total
Recurring fair value GBP000 GBP000 GBP000 GBP000
measurements
----------------------- ----------- ----------- ----------- ---------
Financial assets
Derivative interest
rate swaps - 25 - 25
----------------------- ----------- ----------- ----------- ---------
Financial liabilities
Derivative interest
rate swaps - (41,014) - (41,014)
Convertible bond (86,962) - - (86,962)
----------------------- ----------- ----------- ----------- ---------
(1) Valuation is based on unadjusted quoted prices in active
markets for identical financial assets and liabilities.
(2) Valuation is based on inputs (other than quoted prices
included in Level 1) that are observable for the financial asset or
liability, either directly (i.e. as unquoted prices) or indirectly
(i.e. derived from prices).
(3) Valuation is based on inputs that are not based on observable market data.
The interest rate swaps whose fair values include the use of
level 2 inputs are valued by discounting expected future cash flows
using market interest rates and yield curves over the remaining
term of the instrument. The following inputs are used in arriving
at the valuation:
-- Interest rates
-- Yield curves
-- Swaption volatility
-- Observable credit spreads
-- Credit default swap curve
-- Observable market data
e) Capital risk management
The primary objectives of the Group's capital management are to
ensure that it remains a going concern, operates within its
quantitative banking covenants and meets the criteria so as to
continue to qualify for UK-REIT status.
The capital structure of the Group consists of shareholders'
equity and net borrowings. The type and maturity of the Group's
borrowings are analysed further in Notes 15 and 16 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 Adviser,
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 (2014: 1.3:1); and
-- 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: 1.0 to 1.5:1 (2014: 1:0 to 1.5:1); and
Loan to value: 50% to 75% (2014: 50% to 75%).
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During the period the Group has complied with all of the
requirements set out above.
2015 2014
GBP000 GBP000
----------------------------------------------- ---------- ----------
Fair value of completed investment properties 1,091,877 1,002,350
Fair value of development properties 8,735 23,857
1,100,612 1,026,207
----------------------------------------------- ---------- ----------
Carrying value of interest-bearing loans
and borrowings 686,809 662,814
Unamortised borrowing costs 5,839 7,272
Less cash held (2,881) (12,072)
----------------------------------------------- ---------- ----------
Nominal amount of interest-bearing loans
and borrowings 689,767 658,014
----------------------------------------------- ---------- ----------
Group loan to value ratio 62.7% 64.1%
----------------------------------------------- ---------- ----------
19. Share capital
Issued and fully paid at 12.5p each
------------------------------------------------- ------- --------------- -------
2015 2015 2014 2014
Number GBP000 Number GBP000
-------------------------------- --------------- ------- --------------- -------
Balance at 1 January 445,106,648(1) 55,638 441,896,920(1) 55,237
Scrip issues in lieu of second
interim cash dividend 406,396(1) 51 326,216(1) 41
Scrip issues in lieu of first
interim cash dividend 768,304(1) 96 810,540(1) 101
Shares issued as consideration
for PPP - - 2,072,972(1) 259
Balance at 31 December 446,281,348(1) 55,785 445,106,648(1) 55,638
-------------------------------- --------------- ------- --------------- -------
Issue of shares in 2015 Date of issue Number Issue price(1)
of shares(1)
Scrip issue in lieu of second
interim cash dividend 1 April 2015 406,396 97.125p
Scrip issue in lieu of first 30 October
interim cash dividend 2015 768,304 102.5375p
------------------------------- --------------- -------------- ---------------
At a General Meeting of the Company on 11 November 2015,
shareholders approved the resolution to sub-divide each issued
Ordinary Share of 50.0 pence each into four Ordinary Shares of 12.5
pence. The sub-division of the Ordinary Shares became effective on
12 November 2015
(1) - Restated to reflect the Company's four for one share
sub-division undertaken in November 2015.
20. Share premium
2015 2014
GBP000 GBP000
------------------------------------------------ ------- -------
Balance at 1 January 56,416 55,611
Share issue expense (30) (15)
Scrip issues in lieu of interim cash dividends 1,036 820
------------------------------------------------ ------- -------
Balance at 31 December 57,422 56,416
------------------------------------------------ ------- -------
21. Capital reserve
The capital reserve is held to finance any proposed repurchases
of Ordinary Shares, following approval of the High Court in
1998.
2015 2014
GBP000 GBP000
-------------------------------------- ------- -------
Balance at 1 January and 31 December 1,618 1,618
-------------------------------------- ------- -------
22. 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.
2015 2014
GBP000 GBP000
----------------------------------------------------- --------- ---------
Balance at 1 January 115,438 135,483
Second interim dividend for the year ended 31
December 2014 (2014: 31 December 2013) (10,733) (10,542)
Scrip issue in lieu of second interim cash dividend (395) (279)
First interim dividend for the year ended 31
December 2015 (2014: 31 December 2014) (10,350) (10,146)
Scrip issue in lieu of first interim cash dividend (788) (683)
Share capital related expenses (109) -
Shares issued in consideration for PPP - 1,605
Balance at 31 December 93,063 115,438
----------------------------------------------------- --------- ---------
As the special reserve is a distributable reserve, the dividends
declared in the year have been distributed from this reserve.
23. Cash flow hedging reserve
Information on the Group's hedging policy and interest rate
swaps is provided in Note 18.
The transfer to Group Statement of Comprehensive Income and the
fair value movement on cash flow hedges which meet the
effectiveness criteria under IAS 39, taken to equity, can be
analysed as follows:
2015 2014
GBP000 GBP000
------------------------------------------------ --------- ---------
Balance at 1 January (23,847) (14,337)
Fair value movement on cash flow hedges (132) (9,980)
Amortisation of cash flow hedging reserve 1,552 -
Reclassification of swap from ineffective to
effective 25 470
Net movement on cash flow hedges ("effective
swaps") and amortisation of cash flow hedging
reserve 1,445 (9,510)
Balance at 31 December (22,402) (23,847)
------------------------------------------------ --------- ---------
In July 2015, an interest rate swap for a notional amount of
GBP80 million was terminated early. The termination cost totalled
GBP3.2 million. This sum is being amortised through the Statement
of Comprehensive Income over the remainder of what was its contract
period through to 2 July 2016 (see note 6c).
24. Retained earnings
2015 2014
GBP000 GBP000
------------------------------------------------ -------- --------
Balance at 1 January 103,867 68,773
Reclassification of swap from ineffective to
effective (25) (470)
Interest rate derivative fair value adjustment - (1,316)
Retained profit for the year 56,032 36,880
------------------------------------------------ -------- --------
Balance at 31 December 159,874 103,867
------------------------------------------------ -------- --------
25. Net asset value per share
Net asset values have been calculated as follows:
2015 2014
GBP000 GBP000
-------------------------------------- -------------- --------------
Net assets per Group Balance Sheet 345,360 309,130
Derivative interest rate swaps (net
liability) 35,278 40,989
Convertible bond fair value movement 10,931 4,462
-------------------------------------- -------------- --------------
EPRA net asset value 391,569 354,581
-------------------------------------- -------------- --------------
Ordinary Shares No. of shares No. of shares
Issued share capital 446,281,348 445,106,648
-------------------------------------- -------------- --------------
Net asset value per share:
Basic net asset value per Share 77.4p 69.5p
-------------------------------------- -------------- --------------
EPRA NAV per Share 87.7p 79.7p
-------------------------------------- -------------- --------------
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.
As detailed in note 8, the Company is required to assess the
dilutive impact of the unsecured convertible bond on its net asset
value per share, but only report any impact if it is dilutive. With
an initial conversion price of 97.5 pence (390 pence upon issue,
restated to reflect the Company's four for one share sub-division
undertaken in November 2015), the unsecured convertible bond issued
by the Group on 20 May 2014 is non-dilutive to all measures of net
asset value per share.
26. Capital commitments
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As at 31 December 2015, the Group has entered into separate
development agreements with third parties for the purchase of
primary health developments. The Group has acquired the land on
which they are being built and advanced funds to the developer as
the construction has progressed. Upon completion of the building
development work, the Group will acquire ownership of the completed
asset. Total consideration of GBP21.8 million plus VAT (2014:
GBP11.2 million plus VAT) remains to be funded with regard to these
properties.
In addition, the Group has entered into a forward contract to
acquire a building in Macclesfield from its developer once
construction has been completed. The contract is conditional upon
completion and the total consideration of GBP2.5 million will be
paid to the developer once completion has been achieved.
27. Related party transactions
The terms and conditions of the Advisory Agreement are described
in the Directors' Report and the Directors' Remuneration Report in
the Annual Report.
Nexus, the Adviser, is a related party due to the Managing
Director being a shareholder and director of Nexus. JOHCM was
previously a related party as a Joint Adviser due to Mr Hambro, a
non-executive Director, being a shareholder and director of
JOHCM.
Details of the amounts paid in relation to related party
transactions are provided in Note 4.
28. 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 GBP0.1
million as at 31 December 2015 (2014: GBP0.2 million), 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.
29. Subsequent events
On 7 January 2016, the GBP100 million loan facility provided by
Barclays Bank plc was successfully extended by GBP15 million, with
the introduction of Allied Irish Banks plc to the facility to
provide this additional sum. The enlarged facility will be made
available for a new five year term from January 2016. All other
terms of the facility remain unchanged.
30. Annual Report
The financial information set out above does not constitute the
Group's statutory accounts for the years ended 31 December 2015 or
2014 but is derived from those accounts. Statutory accounts for
2014 have been delivered to the Registrar of Companies and those
for 2015 will be delivered in due course. The auditors have
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 2015
will be published on the Group's website at www.phpgroup.co.uk and
will be posted to shareholders on 16 February 2016.
Copies of this announcement can be obtained from the Company
Secretary of Primary Health Properties PLC, 5(th) Floor, Greener
House, 66-68 Haymarket, London SW1Y 4RF.
Directors' Responsibility Statement
The responsibility statement below has been prepared in
connection with the Company's full Annual Report for the year
ending 31 December 2015. 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;
-- the Strategic Review 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; and
-- the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group's performance,
business model and strategy.
Going concern
The Group's business activities together with the factors likely
to a ect its future development, performance and position, together
with the nancial position of the Group, its cash ows, liquidity
position and borrowing facilities are set out in the Strategic
Review.
The Group's property portfolio is 99.7% occupied with 91% of its
income funded directly or indirectly by the UK Government.
In July 2015, the Group extended its GBP50 million revolving
credit facility with HSBC Bank PLC for a new five-year term with
all other aspects of the facility remaining unchanged. In addition,
on 7 January 2016 the Group completed the expansion and extension
of its GBP100 million mixed revolving credit/term loan facility
with Barclays Bank plc. The facility was increased to GBP115
million, with the additional capacity being provided by Allied
Irish Banks plc and the enlarged facility provided for a new
five-year term.
As at 31 December 2015, the Group had GBP110.0 million of
headroom on its debt facilities, with a further GBP2.9 million of
cash. The Group has total commitments of GBP21.8 million
outstanding to fund on properties under construction through the
course of 2016. The Group's consolidated loan to value ratio,
including drawn, unsecured debt, is 62.7%, with all banking
covenants being met during the year and subsequent to the year
end.
The Directors believe that the Group is well placed to manage
its business risks successfully. Having reviewed the Group's
business activities, financial development, performance and
position including its cash flows, liquidity position, borrowing
facilities and covenant cover, the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence and meet its liabilities as they fall due for
a period of at least twelve months from the date of this report.
For this reason the Directors continue to adopt the going concern
basis of accounting in preparing the nancial statements.
For and on behalf of the Board
Alun Jones
Chairman
3 February 2016
Glossary of Terms
Adviser is Nexus Tradeco Limited.
Building Research Establishment Environmental Assessment Method
("BREEAM") assesses the sustainability of buildings against a range
of criteria.
Clinical Commissioning Groups ("CCGs") are the groups of GPs and
other healthcare professionals that are responsible for designing
local health services in England with effect from 1 April 2013.
Company and/or Parent is Primary Health Properties PLC.
Direct Property Costs comprise ground rents payable under head
leases, void costs, other direct irrecoverable property expenses,
rent review fees and valuation fees.
District Valuer ("DV") is the District Valuer Service being the
commercial arm of the Valuation Office Agency ("VOA"). It provides
professional property advice across the public sector and in
respect of primary healthcare represents NHS bodies on matters of
valuation, rent reviews and initial rents on new developments.
Dividend Cover is the number of times the dividend payable (on
an annual basis) is covered by EPRA earnings.
Earnings per Ordinary Share from continuing operations ("EPS")
is the profit attributable to equity holders of the parent divided
by the weighted average number of shares in issue during the
period.
European Public Real Estate Association ("EPRA") is a real
estate industry body, who have issued Best Practices
Recommendations in order to provide consistency and transparency in
real estate reporting across Europe.
EPRA Cost Ratio is the ratio of net overheads and operating
expenses against gross rental income (with both amounts excluding
ground rents payable). Net overheads and operating expenses relate
to all administrative and operating expenses, net of any service
fees, recharges or other income specifically intended to cover
overhead and property expenses.
EPRA earnings is the profit after taxation excluding investment
and development property revaluations and gains/losses on
disposals, changes in the fair value of financial instruments and
associated close-out costs and their related taxation.
EPRA net assets ("EPRA NAV") are the balance sheet net assets
excluding own shares held and mark-to-market derivative financial
instruments.
EPRA Vacancy Rate is, as a percentage, the ERV of vacant space
in the Group's property portfolio divided by the ERV of the whole
portfolio.
Equivalent Yield (true and nominal) is a weighted average of the
Net Initial Yield and Reversionary Yield and represents the return
a property will produce based upon the timing of the income
received. The true equivalent yield assumes rents are received
quarterly in advance. The nominal equivalent assumes rents are
received annually in arrears.
Estimated Rental Value ("ERV") is the external valuers' opinion
as to the open market rent which, on the date of valuation, could
reasonably be expected to be obtained on a new letting or rent
review of a property.
Exchange Price is 116% of the share price at the date of
issue.
Gross Rental Income is the gross accounting rent receivable.
Group is Primary Health Properties PLC and its subsidiaries.
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