TIDMPHP
RNS Number : 6063O
Primary Health Properties PLC
31 January 2019
Primary Health Properties PLC
Audited annual results for the year ended 31 December 2018
Strengthened balance sheet and high-quality portfolio driving
strong performance
Primary Health Properties PLC ("PHP", the "Group" or the
"Company"), a leading investor in modern primary health facilities,
announces its audited annual results for the year ended 31 December
2018.
Harry Hyman, Managing Director of PHP, commented:
"We have selectively and successfully invested the proceeds from
the over-subscribed equity raise in April 2018 and further
strengthened the balance sheet. PHP's high-quality portfolio and
capital base has helped to deliver another year of strong
performance and our 22nd year of unabated dividend growth.
Continuing improvements to the rental growth outlook and further
reductions in the cost of finance will help to maintain our
strategy of paying a progressive dividend to our shareholders which
is fully covered by earnings.
We have recently announced the proposed all share merger with
MedicX bringing together two highly complementary portfolios in the
UK and Ireland and the combined business will represent a stronger
platform for the future. Combining the two businesses in this
transformational deal is expected to create significant value for
the shareholders of the enlarged group and importantly, the
potential to deliver significant operating and financial savings.
We are excited by the opportunities that will be created. The
merger represents another significant and important step in our
strategy of selectively growing the portfolio, focusing on large
hub primary care centres which are reducing pressures on the NHS,
and it significantly extends the scale of the business and asset
value."
OPERATIONAL AND FINANCIAL HIGHLIGHTS
Year ended Year ended
31 December 2018 31 December
2017
(audited) (audited) Change
---------------------------------- ----------------- ------------ ---------
Key highlights
EPRA earnings GBP36.8m GBP31.0m +18.7%
EPRA earnings per share(2) 5.2p 5.2p Unchanged
EPRA NAV per share(1,3) 105.1p 100.7p +4.4%
Dividend per share(6) 5.40p 5.25p +2.9%
Property portfolio
Investment portfolio valuation(4) GBP1.503bn GBP1.362bn +2.5%
Net initial yield ("NIY") 4.85% 4.91%
Contracted rent roll (annualised) GBP79.4m GBP72.3m +9.8%
Weighted average unexpired lease 13.1 years 13.2 years
term ("WAULT")
Occupancy 99.8% 99.7% .
Rent-roll funded by government
bodies 91% 90%
Net rental income(1) GBP76.4m GBP71.3m +7.2%
Reported IFRS results
IFRS profit for the year GBP74.3m GBP91.9m -19.2%
IFRS earnings per share(2) 10.5p 15.3p -31.4%
IFRS NAV per share(1,3) 102.5p 94.7p +8.2%
Dividends
Dividends paid(6) GBP36.6m GBP31.4m +16.6%
Dividend cover 101% 99%
Debt
Average cost of debt 3.90% 4.09%
Loan to value ratio(1) 44.8% 52.9%
Weighted average debt maturity 5.4 years 6.3 years
Total undrawn loan facilities(7) GBP190.6m GBP101.0m
---------------------------------- ----------------- ------------ ---------
(1) Definitions for net rental income, loan to value ("LTV") and
net asset value ("NAV") are set out in the Glossary of Terms.
(2) See note 8, earnings per share, to the financial
statements.
(3) See note 25, net asset value per share, to the financial
statements.
(4) Percentage valuation movement during the year based on the
difference between opening and closing valuations of properties
after allowing for acquisition costs and capital expenditure
(5) The Company uses a number of alternative performance
measures in this annual results statement. See note 32.
(6) See note 9, dividends, to the financial statements.
(7) After deducting the remaining cost to complete contracted
acquisitions, properties under development and asset management
projects.
DELIVERING EARNINGS AND DIVID GROWTH
-- Eight income accretive properties selectively acquired in the
year for GBP106.2m, with a large average lot size of GBP13.3m
-- Average annualised uplift of 1.4% on rent reviews agreed in
the period, resulting in an uplift in rent of GBP1.1m p.a. (2017:
1.1% with an uplift of GBP0.5m)
-- First 2019 quarterly dividend of 1.40p per share, payable on
22 February 2019, equivalent to 5.6p on an annualised basis and a
3.7% increase over the 2018 dividend per share and will represent
the Company's 23(rd) consecutive year of dividend growth
DELIVERING FINANCIAL MANAGEMENT
-- Successful, over-subscribed equity issue completed in April
2018, raising GBP115.0m (GBP111.2m net of expenses) at a 7% premium
to EPRA NAV at 31 December 2017
-- GBP45.8m (EUR51.0m) senior secured euro-denominated loan
notes issued in the year with a blended rate of 2.4973% and
weighted average maturity of 10.4 years
-- GBP40.0m of convertible bond conversions in the year with a
further GBP6.2m converted post period end leaving just GBP17.0m in
issue
-- LTV reduced to 44.8% (2017: 52.9%)
-- Average cost of debt reduced by 19bp to 3.90% (2017: 4.09%)
DELIVERING NET ASSET VALUE GROWTH
-- Property valuation surplus and profit on sales of GBP36.1m
(2017: GBP64.5m), growth of 2.5% (2017: 5.0%); portfolio net
initial valuation yield of 4.85% (2017: 4.91%)
-- Like-for-like rental growth of GBP1.3m or 1.8% (2017: GBP0.5m
or 0.7%) accounting for approximately 60% (2017: 10%) of the
revaluation surplus created in the year with contraction of the net
initial yield ("NIY") accounting for the balance
-- Portfolio in Ireland now comprises eight assets, valued at
EUR92.3m, and including the forward funded development at Bray as
complete, the value increases to around EUR110m
-- Strong pipeline of targeted acquisitions of approximately
GBP190m of which GBP30m currently in legal due diligence
-- 16 asset management projects completed investing GBP4.4m
(2017: GBP4.4m), creating an additional GBP0.2m p.a. (2017: GBP0.2m
p.a.) of rental income, and strong pipeline of five approved
projects due to commence imminently and a further 36 potential
projects being progressed
-- Only GBP1.2m or 1.5% of annualised rent roll expiring in the
next three years of which GBP0.4m or 33% is subject to a planned
asset management initiative or terms have been agreed to renew the
lease
DELIVERING STRONG TOTAL RETURNS
Year ended Year ended
31 December 2018 31 December
2017
---------------------------- ----------------- ------------
Total EPRA NAV return 9.7% 16.4%
Income return 5.3% 5.5%
Capital return 2.7% 5.3%
---------------------------- ----------------- ------------
Total property return 8.0% 10.8%
MSCI All Property return(1) 7.3% 11.0%
Outperformance over MSCI 0.7% (0.2%)
---------------------------- ----------------- ------------
1 MSCI UK Monthly Property Index.
Presentation and webcast:
A presentation for analysts will be held on 31 January 2019 at
9.30am at the offices of Buchanan, 107 Cheapside, London EC2V
6DN.
For further information contact:
Harry Hyman Richard Howell
Primary Health Properties PLC Primary Health Properties PLC
T +44 (0) 20 7451 7050 T +44 (0) 20 7104 2004
harry.hyman@nexusgroup.co.uk richard.howell@nexusgroup.co.uk
--------------------------------------- --------------------------------
David Rydell/Steph Watson/Tilly Abraham
Buchanan
T +44 (0) 20 7466 5066
--------------------------------------- --------------------------------
Chairman's statement
Following my appointment as Chairman of PHP in April, I am
delighted to present my first annual results for 2018, which has
been another successful and transformative period in the Company's
history. Our strategy of selective and disciplined investment and
asset management activity underpinned by a strong, well-financed
balance sheet has enabled us to deliver the 22nd successive year of
dividend per share growth of 2.9% and a total NAV return of 9.8p,
an increase of 9.7%.
In the first half of the year the Group strengthened its balance
sheet with an oversubscribed capital raise, generating GBP115.0m of
equity capital (GBP111.2m net of expenses) from a combination of
both new and existing investors. We have now deployed the proceeds
of this equity raise by selectively acquiring eight properties in
the UK and Ireland, including a forward funded development, for a
total of GBP106.2m and investing a further GBP4.4m in 16 asset
management projects to create additional value into the portfolio.
The result of this activity is that as at 31 December 2018 the
portfolio comprised 313 assets valued at just over GBP1.5bn.
The Group passed another significant milestone following the
equity raise and entered the FTSE 250 Index on the London Stock
Exchange in April 2018.
PHP was also announced as the winner of the "Highest 10 Year
Risk Adjusted Absolute Return" award by MSCI Investment Property
Forum in March 2018.
Proposed merger with MedicX Fund Limited ("MedicX")
On 24 January 2019 the Boards of PHP and MedicX jointly
announced a proposed all-share merger to create one of the largest
healthcare REITs in the UK with a portfolio of over 470 assets
valued at GBP2.3bn. The merger is subject to the approval of both
PHP and MedicX shareholders; subject to those approvals, we expect
the merger to complete in late March. The full announcement,
presentation and webcast regarding the proposed merger are
available on our website and provide further information.
The merger brings together two highly complementary portfolios
in both the UK and Ireland and the combined business will represent
a stronger platform for further acquisitions and forward funded
developments. Combining the two businesses is expected to create
significant value for the shareholders of the enlarged Group and we
are excited by the opportunities that will be created. The merger
represents another significant and important step in our strategy
of selectively growing the portfolio, focusing on large hub primary
care centres, and it significantly extends the scale of the
business and asset value.
Results highlights
The property acquisitions in both 2017 and 2018, together with
continued and increasing organic rental growth, helped to deliver
another set of strong results in the year with EPRA earnings up
18.7% to GBP36.8m (2017: GBP31.0m up 15.7%) and EPRA earnings per
share unchanged at 5.2p (2017: 5.2p) reflecting the dilution from
the equity raise in April 2018. The Group's portfolio was valued at
just over GBP1.5bn which generated a revaluation surplus, including
the profit on sales, of GBP36.1m (2017: GBP64.5m) after allowing
for costs associated with acquisitions and capital expenditure.
The EPRA earnings, revaluation surplus and a gain on the mark to
market valuation of our derivative portfolio and convertible bond
of GBP1.4m resulted in an IFRS profit of GBP74.3m (2017: GBP91.9m),
a decrease of 19.2% due principally to a lower revaluation surplus
in 2018 compared with 2017.
Rent reviews and asset management projects completed in the year
added GBP1.3m or 1.8% (2017: GBP0.7m or 1.0%) to the contracted
rent roll and the continued positive momentum on rent reviews has
seen annualised rental growth improve to 1.4% compared to 1.1% and
0.9% achieved in 2017 and 2016 respectively.
Rent reviews and asset management projects accounted for
approximately 60% of the revaluation surplus generated in the year.
Continued, albeit slowing, yield compression in the sector resulted
in the portfolio's net initial yield contracting by 6bp to 4.85%
(31 December 2017: 4.91%) which accounted for the balance of the
revaluation surplus.
The revaluation surplus and profit on sales in the year of
GBP36.1m (2017: GBP64.5m) is equivalent to 4.7p per share and was
the main factor for the increase in the EPRA NAV by 4.4p or 4.4% to
105.1p (2017: 100.7p) which when added to the dividends paid
produced a total NAV return for the year of 9.8p (2017: 14.9p).
The portfolio's average lot size continues to grow and is now
GBP4.8m (31 December 2017: GBP4.5m) and we continue to maintain our
very strong metrics, with a long weighted average unexpired lease
term ("WAULT") of 13.1 years, high occupancy at 99.8% and only 1.5%
of our rent due to expire in the next three years. The WAULT of
13.1 years for 2018 compares very favourably with the WAULT of 13.2
years for 2017 which, given the effluxion of time, would be
expected to decrease by one year for each year that passes. The
maintaining of the WAULT is testament to our acquisition and asset
management capabilities.
Dividends
The Company distributed a total of 5.4p per share in the year to
31 December 2018, an increase of 2.9% over the 2017 total of 5.25p
per share, and marked the Company's 22nd successive year of
dividend growth. The total cost of dividends distributed in the
year increased by 16.6% to GBP36.6m (2017: GBP31.4m) which was
fully covered by EPRA earnings. Dividends totalling GBP1.9m were
satisfied through the issuance of shares via the scrip dividend
scheme.
A dividend of 1.4p per share was declared on 3 January 2019,
equivalent to 5.6p on an annualised basis, which represents an
increase of 3.7% over the dividend distributed per share in 2018.
The dividend will be paid to shareholders on 22 February 2019 who
were on the register at the close of business on 11 January 2019.
The dividend will comprise a Property Income Distribution ("PID")
of 0.75p and an ordinary dividend of 0.65p per share. Further
dividend payments are planned to be made on a quarterly basis.
The Company intends to maintain its strategy of paying a
progressive dividend that is covered by underlying earnings in each
financial year.
The Company's share price started the year at 117.0p per share
and closed on 31 December 2018 at 111.0p, a decrease of 5.1%.
Including dividends, those shareholders who held the Company's
shares throughout the year achieved a total shareholder return
("TSR") of -0.5% (2017: 9.6%). This compares to the total return
delivered by the EPRA UK Index of -13.0% and the wider UK equity
sector (FTSE All-Share Index: -9.5%) in the year.
Board changes
As previously reported, Alun Jones retired as Chairman at the
Annual General Meeting ("AGM") on 18 April 2018 and was replaced by
Steven Owen, previously Senior Independent Director and the
Chairman of the Audit Committee. Non-Executive Directors Dr Ian
Rutter and Mark Creedy also retired at the AGM.
Three new Non-Executive Directors, Ian Krieger, Dr Stephen Kell
OBE, and Peter Cole were appointed during the first half of
2018.
Nick Wiles took over from Mark Creedy as Chairman of the Adviser
Engagement Committee at the end of January 2018 and replaced Steven
Owen as the Senior Independent Director at the AGM. Ian Krieger was
appointed as Chairman of the Audit Committee, replacing Steven Owen
at the AGM.
As separately announced, following completion of the merger with
MedicX, which is subject to shareholder approval, Helen Mahy will
join the Board as Deputy Chairman and Senior Independent Director
and Laure Duhot will join the Board as a Non-executive Director and
Chairman of the Adviser Engagement Committee. In order to maintain
an appropriate size and balance between the Company and MedicX
directors, post the merger, Nick Wiles and Geraldine Kennell will
step down from the Board.
Helen Mahy CBE is Chairman of The Renewables Infrastructure
Group Limited, a FTSE 250 investment company, and is a
Non-Executive Director of SSE plc and Bonheur ASA, a company listed
on the Oslo Stock Exchange. She was formerly Company Secretary and
General Counsel of National Grid plc until she retired in 2013 and
is also an Equality and Human Rights Commissioner.
Laure Duhot acts for a number of property firms and investors
across Europe, providing strategic advice and transaction support,
with a focus on alternative real estate assets and is currently a
Non-Executive Director of InLand Homes plc, MIC Limited and The
Guinness Partnership. Until the end of 2016 she was also a Managing
Director at Grainger plc, where she was responsible for fund
management and corporate finance for a number of fund vehicles
operating in the UK and Germany.
I look forward to working with Helen and Laure and I am
confident that our Board will have the skill, diversity and culture
to drive the merged business forward. I am also very grateful to my
colleagues Nick and Geraldine for their commitment and dedication
to the Company over the past three years, and their contribution to
and support for the Merger.
Market update and outlook
We consider the wider, macro-economic consequence of Brexit in
the risk management section but whatever the final outcome and
consequences of Brexit for the UK it is unlikely to have a direct
impact on the primary health centres we invest in, which perform a
vital role in the provision of healthcare across the UK and
Ireland. Demand for our properties is driven by demographics and in
particular populations that are growing, ageing and suffering from
more instances of chronic illness.
Despite the continued volatility in the economic and political
environment and the prolonged era of low, albeit increasing,
interest rates, there continues to be an unrelenting search for
income yield across most sectors. Primary healthcare, with its
strong fundamental characteristics and government-backed income,
has been a significant beneficiary. The UK market for primary
healthcare property investment continues to be highly competitive
with strong yields and prices being paid by investors for assets in
the sector and we have continued to see yields compress further
during 2018 although at a slower rate than that witnessed in
2017.
Primary healthcare performs a critical function, providing a key
part of the NHS's Five-Year Forward View ("FYFV"), operating as
most patients' first point of call when unwell. The primary care
estate has faced underinvestment over the last decade, with
approximately 50% of the 8,000 GP surgeries in England and Wales
now considered by medical professionals to be unfit for purpose.
Building on the FYFV, the follow-up "Next Steps on the Five-Year
Forward View", published in March 2017, reiterated that shift,
setting out targets for growth in the primary care workforce,
expansion of access to general practice and the need for improved
primary care premises.
In January 2018, the Government published a response to the
Naylor review, which acknowledged the importance of land and
property to the transformation of the health system and how the NHS
will be able to supplement public capital with other sources of
finance from the private sector. The response also confirms that
the use of private finance has been particularly effective as a
source of investment and innovation in primary and community care
in the past and will still be used in the future where it
represents good value for money. Demand for healthcare is driven by
demographics and the NHS is supported on a cross-party basis in the
UK.
We welcome recent announcements made this year by the Government
to increase funding for the NHS and how the GBP20.5bn budget
settlement, announced on its 70th anniversary, will be spent over
the next five years. The new NHS Long Term Plan, announced in
January 2019, sets out how the NHS plans to improve the quality of
patient care and health outcomes. The plan also includes measures
to improve out-of-hospital care, supporting primary medical and
community health services, and investment in these services will
grow faster than the overall NHS budget, worth an extra GBP4.5bn a
year in real terms by 2023/24 with the aim of reducing pressure on
emergency hospital services. These additional resources may in time
lead to increased activity in the building of new facilities and
the modernisation of existing primary care premises and we look
forward to helping deliver the modernisation of the estate by
actively pursuing attractive investment opportunities of both
existing assets and developments.
We believe that our activities benefit not only our shareholders
but also our other stakeholders, including our occupiers, patients,
the NHS and HSE, suppliers, lenders and the wider communities in
both the UK and Ireland.
The Company is in a strong position to continue to deliver long
term value to shareholders and the Board looks forward with
confidence to the forthcoming year.
Steven Owen
Chairman
30 January 2019
Business review
The Chairman's Statement sets out the continued strong progress
made in the year to ensure PHP's portfolio is aligned to the
structural needs and challenges that face both the NHS in the UK
and the HSE in Ireland.
In April 2018, the Company completed an over-subscribed equity
issue raising GBP115.0 million of new share capital. Despite the
competitive investment market these funds have been successfully
invested over the course of the year in a selective and disciplined
way in acquisitions and asset management projects. In particular,
we have made good progress in Ireland, increasing the portfolio to
eight carefully selected assets valued at over EUR100 million,
valuing developments as complete.
The Group has continued to focus its activities on large hub
primary care facilities both in the UK and Ireland and together
with asset management activity this resulted in the portfolio's
average lot size increasing to GBP4.8 million at the end of 2018
(2017: GBP4.5 million). We now only have one investment property
valued at less than GBP1.0 million, which will be subject to a
future asset management project, and continue to maintain our very
strong metrics, with a long WAULT of 13.1 years (31 December 2017:
13.2 years), high occupancy at 99.8% and only 1.5% of our rent due
to expire in the next three years.
Investment activity
We have continued to maintain a strict selection criteria and
pricing methodology to ensure investments are high quality,
accretive to net earnings and offer the opportunity for future
growth. This has resulted in the acquisition of just eight assets,
two in the UK and six in Ireland, for GBP106.2 million during 2018
(2017: GBP71.9 million).
Area Acquisition WAULT
Asset (Sqm) price (years) Key tenants
--------------------------- ------------ ------ ----------- -------- ----------------------
GP practices x
4 + HSE +
pharmacy + dentist
Mallow, County Cork, GBP17.7m +
Ireland Investment 6,500 (EUR20.0m) 21.9 optician + physio
Moredon, Swindon, UK Investment 1,446 GBP6.1m 27.5 GP practice + pharmacy
GP practice + HSE
+
Bray, County Wicklow, GBP20.0m pharmacy + coffee
Ireland Development 4,805 (EUR22.5m) 24.8 shop
GP practice + HSE
+
Navan Road, Dublin, GBP10.9m pharmacy + coffee
Ireland Investment 3,110 (EUR12.2m) 21.9 shop
GP practice + HSE
Celbridge, County Kildare, GBP11.6m +
Ireland Investment 3,480 (EUR13.0m) 23.9 pharmacy + Tulsa*
GP practice + HSE
Newbridge, County Kildare, GBP12.0m +
Ireland Investment 3,090 (EUR13.4m) 20.3 pharmacy + KWETB*
Northumbria Healthcare
Maple & Elm Court, NHS Foundation
Ashington, UK Investment 2,750 GBP22.8m 29.5 Trust
Mountmellick, County GBP5.1m GP practice + HSE
Laois, Ireland Investment 1,850 (EUR5.8m) 17.7 + pharmacy
--------------------------- ------------ ------ ----------- -------- ----------------------
Total 27,031 GBP106.2m 23.5
----------------------------------------- ------ ----------- -------- ----------------------
* Irish Government covenant.
Mallow Primary Health Centre, Mallow, County Cork is one of
Ireland's largest primary healthcare facilities and comprises
6,500m2 and was acquired in February 2018. The Irish Government's
Health Service Executive ("HSE") has signed a new 25-year lease,
accounting for 65% of the rent roll, with the remainder derived
from four separate GP practices, a dentist, an optician and a
physiotherapist. The property also benefits from a pharmacy and has
considerable unused land for future expansion.
Moredon Medical Centre, Swindon, was acquired in June 2018 and
comprises 1,446m2 and is fully let to a GP practice and pharmacy
with a patient list of over 11,500 and a long WAULT of 27.5
years.
Three primary healthcare centres at Navan Road in Dublin and at
Newbridge and Celbridge, two commuter towns just outside Dublin in
County Kildare, were acquired in September 2018 for a cost of
GBP34.5 million (EUR38.6 million). The properties are fully let to
the HSE and other government bodies including Child and Family
Agency ("Tulsa") and the Kildare Wicklow Education Training Board
("KWETB") which account for 63% of the total rent roll at the
properties which have a combined unexpired lease term of
approximately 21 years. The balance of income is from Centric
Health, a leading UK and Irish general practice primary healthcare
provider, and pharmacies.
Maple & Elm Court, Ashington, a modern keyworker
accommodation facility located next to Wansbeck General Hospital,
was acquired in September 2018 for GBP22.8 million. The property
comprises 2,750m2, and benefits from a long WAULT of 29.5 years and
is fully let to the Northumbria Healthcare NHS Foundation Trust
with fixed rental uplifts of just over 3% per annum.
Mountmellick Primary Healthcare Centre, County Laois, Ireland,
was acquired in November 2018 for GBP5.1 million (EUR5.8 million).
The property comprises 1,850m2, a long WAULT of 17.7 years and is
fully let to the HSE, a GP practice and a pharmacy.
During the year, an investment property at Bicester was sold for
GBP1.0 million, at book value, as was a small piece of land surplus
to requirements and as part of the Company's focus to increase the
average lot size of the portfolio.
Investment pipeline
PHP continues to have a strong pipeline of potential
acquisitions both in the UK and Ireland totalling over GBP190.0
million.
Developments
A forward funded development was acquired in July 2018 at Bray,
County Wicklow in Ireland, with a net development cost of GBP20.0
million (EUR22.5 million) and is currently under construction and
is expected to complete on schedule in the autumn of 2019.
Net
Anticipated Area development Costs to
Asset PC date (Sqm) cost complete
--------------------- ----------- ------ ------------------- -------------------
Bray, County Wicklow,
Ireland Q4 2019 4,805 GBP20.0m (EUR22.5m) GBP16.0m (EUR17.8m)
--------------------- ----------- ------ ------------------- -------------------
The forward funded development at Churchdown, Gloucestershire,
acquired in 2017, successfully completed on time and within budget,
opening to patients in March 2018. The asset is a purpose-built
healthcare centre and comprises 1,184m2 of space fully let to a GP
practice and pharmacy both for 20 years.
In a competitive investment market, development opportunities
present an attractive alternative to acquiring new, long WAULT,
purpose-built primary care facilities. PHP will continue to work
with experienced development partners, healthcare bodies and
professionals to procure assets that meet our strict criteria of
pre-let, derisked and short cycle developments. PHP will not
undertake any developments on a speculative basis.
Asset management
PHP's sector leading metrics continue to remain strong and we
continue to focus on the organic rental growth that can be derived
from our existing assets. This growth arises mainly from rent
reviews and asset management projects (extensions, refurbishments
and lease re-gears) which provide an important opportunity to
increase income, extend lease terms and avoid obsolescence whilst
ensuring that our premises meet the communities' healthcare
needs.
Rent reviews
During 2018, PHP concluded and documented 187 rent reviews with
a combined rental value of GBP23.6 million, resulting in an uplift
of GBP1.1 million or 4.7% which equates to 1.4% per annum,
continuing the positive trend in rental growth over the last two
years (2017: 1.1% per annum with an uplift of GBP0.5 million; 2016:
0.9% per annum with an uplift of GBP0.3 million).
In 2018, 0.4% per annum was achieved on open market reviews
(1.3% per annum excluding nil increases), 2.7% per annum on
RPI-based reviews and 2.6% per annum on fixed uplift reviews. In
addition, a further 29 open market reviews were agreed in
principle, which will add another GBP0.1 million to the contracted
rent roll when concluded and represent an uplift of 1.0% per
annum.
69% of our rents are reviewed on an open market basis, typically
every three years, and are impacted by land and construction
inflation. Over recent years, there have been significant increases
in these costs which are expected to result in further rental
growth in the future. The balance of the PHP portfolio has either
RPI (23%) or fixed uplift (8%) based reviews which also provide an
element of certainty to future rental growth within the
portfolio.
At 31 December 2018, the rent at 303 tenancies, representing
GBP39.3 million of passing rent (2017: 265 tenancies/ GBP35.3
million), was under negotiation and the increase in the year
reflects the improving environment for rental growth across both
the portfolio and sector. However, the large number of outstanding
reviews also reflects the requirement for all awards to be agreed
with the District Valuer. A great deal of evidence to support open
market reviews comes from the completion of reviews at comparable
properties in nearby areas along with the delivery of new
properties into the sector. As the volume of both of these
continues to improve this should have a positive impact on future
rental growth for the rest of the portfolio.
Asset management projects
We have continued to make strong progress in the year to 31
December 2018 to enhance and extend existing assets within the
portfolio with 16 projects completed following investment of GBP4.4
million, generating an additional GBP0.2 million of rental income
and extending the WAULT on those premises to an average of just
under 20 years. A further five projects are approved and due to
commence shortly, requiring the investment of GBP0.9 million and
will generate GBP0.1 million of additional rental income but, just
as importantly, will extend the WAULT on those premises back to an
average of just over 20 years.
PHP continues to work closely with its tenants, has a strong
pipeline of 36 potential projects and will continue to invest
capital in a range of physical extensions or refurbishments.
Asset management projects help to avoid obsolescence and are key
to maintaining the longevity and security of our income through
long term tenant retention, increased rental income and extended
occupational lease terms, adding to both earnings and capital
values.
High quality portfolio metrics
Including development properties as completed, the portfolio's
annualised contracted rent roll at 31 December 2018 was GBP79.4
million, an increase of 9.8% in the year (31 December 2017: GBP72.3
million). The security and longevity of our income are important
drivers of our secure, long term, predictable income stream and
enable our progressive dividend policy.
Security: PHP continues to benefit from secure, long term cash
flows with 91% of its rent roll funded directly or indirectly by
the NHS in the UK and HSE or government-funded bodies in Ireland.
The portfolio also benefits from an occupancy rate of 99.8%.
Longevity: The portfolio's WAULT at 31 December 2018 was 13.1
years (31 December 2017: 13.2 years). Only GBP1.2 million or 1.5%
of our income expires over the next three years and GBP51.9 million
or 65.4% expires in over ten years. The table below sets out the
current lease expiry profile of our income:
Income subject to expiry GBPm %
------------------------- ---- ------
<3 years 1.2 1.5%
4-5 years 4.1 5.2%
5-10 years 22.2 28.0%
10-15 years 26.0 32.7%
15-20 years 14.3 18.0%
>20 years 11.6 14.6%
------------------------- ---- ------
Total 79.4 100.0%
------------------------- ---- ------
Valuation and returns
At 31 December 2018, the portfolio comprised 313 assets
independently valued at GBP1.503 billion (2017: GBP1.362 billion).
The strong investment market together with our sector leading
portfolio metrics and asset management initiatives resulted in a
valuation surplus and profit on sale of land of GBP36.1 million or
2.5%, after allowing for capital expenditure, in the year to 31
December 2018 (2017: GBP64.5 million or 5.0%). The net initial
yield ("NIY") contracted by 6bps in the year to 4.85% (2017: 4.91%)
with the true equivalent yield reducing to 4.99% (2017: 5.09%).
Importantly, the improving environment for rental growth from rent
reviews and asset management projects accounted for approximately
60% of the surplus whilst the contraction in the NIY accounted for
the balance. In 2017, rental growth and yield compression accounted
for 10% and 90% of the surplus respectively.
The portfolio in Ireland now comprises eight assets, including
the development at Bray, valued at GBP83.0 million or EUR92.3
million (2017: two assets/GBP13.7 million) and represents 6% of the
total portfolio (2017: 1%). The costs to complete the development
at Bray are GBP16.0 million (EUR17.8 million) which have been
deducted from the valuation as at 31 December 2018. Once complete
the assets in Ireland will be valued at around GBP99 million
(EUR110 million) with a large average lot size of GBP12.4 million
(EUR13.8 million).
The portfolio's average lot size continues to grow at GBP4.8
million (2017: GBP4.5 million) and 82% of the portfolio is valued
at over GBP3.0 million.
Number Average
of Valuation lot size
properties GBPm % (GBPm)
--------------------------------- ----------- --------- ----- ---------
>GBP10m 27 419.1 27.9 15.5
GBP5m-GBP10m 61 419.9 27.9 6.9
GBP3m-GBP5m 103 398.5 26.5 3.9
GBP1m-GBP3m 121 262.8 17.5 2.2
<GBP1m (including land, GBP1.6m) 1 2.6 0.2 1.0
--------------------------------- ----------- --------- ----- ---------
Total 313 1,502.9 100.0 4.8
--------------------------------- ----------- --------- ----- ---------
The valuation uplift, combined with the portfolio's growing
income, helped to deliver a total property return of 8.0% in the
year to 31 December 2018 (2017: 10.8%), outperforming the MSCI UK
Monthly Property Index by 70bps.
Year ended Year ended
31 December 31 December
2018 2017
--------------- ----------- -----------
Income return 5.3% 5.5%
Capital return 2.7% 5.3%
--------------- ----------- -----------
Total return 8.0% 10.8%
--------------- ----------- -----------
Financial review
The equity issue in April 2018, raising GBP115.0 million of new
capital (GBP111.2 million net of expenses), has enabled us to
strengthen the balance sheet significantly, reduce the level of
gearing and provide additional resource for future investment. The
strong asset management activity in the year along with the
acquisitions made in 2017 and 2018 have enabled us to continue to
deliver earnings growth.
Recurring EPRA earnings increased by GBP5.8 million, or 18.7%,
to GBP36.8 million in the year to 2018 (2017: GBP31.0 million)
which, using the weighted average number of shares in issue in the
year, equates to EPRA earnings per share of 5.2 pence (2017: 5.2
pence), the nil increase reflecting the dilution from the equity
raise in April 2018.
A revaluation surplus and profit on sales of GBP36.1 million
(2017: GBP64.5 million) and a gain on the fair value of interest
rate derivatives and convertible bond of GBP1.4 million (2017: loss
of GBP3.6 million) contributed to the profit as reported under IFRS
of GBP74.3 million (2017: GBP91.9 million).
Summarised results
The financial results for the Group are summarised as
follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
----------------------------------------------------------- ----------- -----------
Net rental income 76.4 71.3
Administrative expenses (8.6) (8.2)
Performance incentive fee ("PIF") (1.3) (0.5)
----------------------------------------------------------- ----------- -----------
Operating profit before revaluation gain and net financing
costs 66.5 62.6
Net financing costs (29.7) (31.6)
----------------------------------------------------------- ----------- -----------
EPRA earnings 36.8 31.0
Revaluation surplus on property portfolio 36.0 64.5
Profit on sales 0.1 -
Fair value loss on interest rate derivatives (1.8) (0.3)
Fair value gain/(loss) on convertible bond 3.2 (3.3)
----------------------------------------------------------- ----------- -----------
IFRS profit before tax 74.3 91.9
----------------------------------------------------------- ----------- -----------
Net rental income receivable in the year to 31 December 2018
increased by GBP5.1 million or 7.2% to GBP76.4 million (2017:
GBP71.3 million). Acquisitions in 2017 and 2018 contributed GBP3.7
million to this increase, with developments completed in 2017 and
2018 adding GBP0.7 million. Rent reviews and asset management
projects contributed a further GBP0.7 million.
Operational costs have continued to be managed closely and
effectively. Overall administrative costs, excluding the PIF, have
risen by GBP0.4 million or 4.9% (2017: GBP8.2 million) reflecting
the increased size of the portfolio and additional regulatory
costs. The Group's EPRA cost ratio continues to be amongst the
lowest in the sector at 14.3% for the year, a slight increase over
the 13.2% incurred during the 2017 financial year which reflects
the additional PIF payable in the year.
Year ended Year ended
31 December 31 December
2018 2017
EPRA cost ratio GBPm GBPm
------------------------------------------------------- ------------ ------------
Gross rent less ground rent and service charge income 77.6 72.1
------------------------------------------------------- ------------ ------------
Direct property expense 3.2 1.2
Administrative expenses 8.6 8.2
Performance incentive fee ("PIF") 1.3 0.5
Less: service charge costs (1.7) -
Less: ground rent (0.1) (0.1)
Less: other operating income (0.2) (0.3)
------------------------------------------------------- ------------ ------------
EPRA costs (including direct vacancy costs) 11.1 9.5
------------------------------------------------------- ------------ ------------
EPRA cost ratio 14.3% 13.2%
------------------------------------------------------- ------------ ------------
EPRA cost ratio excluding PIF 12.6% 12.5%
------------------------------------------------------- ------------ ------------
Administrative expenses as a percentage of gross asset
value 0.6% 0.6%
------------------------------------------------------- ------------ ------------
Net finance costs decreased by GBP1.9 million in the year to
GBP29.7 million (2017: GBP31.6 million) due to the lower cost of
debt secured in 2017 and 2018 from various refinancing initiatives,
the conversion of convertible bonds during both years and the
application of the equity issue proceeds received in April to repay
the Group's revolving credit facilities. The effect of these
activities increased interest cover to 2.6 times for 2018 compared
with 2.25 times for 2017.
Performance incentive fee ("PIF")
The strong performance in both 2017 and 2018 resulted in a PIF
being earned by the Adviser for the year as a whole and
consequently a GBP1.3 million provision has been provided in the
year (2017: GBP0.5 million).
Nexus is entitled to 11.25% of the "total return" above a hurdle
rate of 8.0%, based on the change in EPRA net asset value ("NAV")
plus dividends paid less equity raised which is credited to a
notional cumulative account. If the hurdle is not achieved a sum
equal to 11.25% of the underperformance is deducted from the
notional cumulative account.
Controls are in place so that the PIF eligible for payment in
respect of any year is restricted to the lower of:
-- half of the fee earned in respect of that year, unless it is
a shortfall, in which case the full amount is applied, together
with the notional cumulative account balance (both positive and
negative) on the earned but unpaid PIF brought forward from
previous years;
-- 20% of the property management fee paid to Nexus in the year; and
-- GBP2.0 million.
Half of any PIF payable is deferred to the following year in the
notional cumulative account, with performance against the hurdle
rate calculated each year and any payment subject to the account
being in a surplus position.
Furthermore, for the three years from 1 January 2017, the PIF is
restricted if it would otherwise cause PHP's dividend cover to fall
below 98%.
A PIF of GBP0.5 million was paid to Nexus in the year in respect
of 2017 and at 31 December 2018 the balance on the notional
cumulative PIF account is GBP6.9 million (2017: GBP5.2 million) of
which GBP1.1 million (2017: GBP0.5 million) will become payable on
approval of the Annual Report by the Board. The balance is
conditional on performance in future years and the restrictions
noted above.
Equity raise
In April 2018, the Company completed an over-subscribed equity
issue, successfully raising GBP115.0 million of new share capital
(GBP111.2 million net of expenses). New shares were issued to
existing and new shareholders at 108 pence each, a premium of 7.2%
to EPRA NAV as at 31 December 2017.
The net proceeds from the equity raise were used to repay the
Group's revolving credit facilities which are available to be
redrawn to fund investment opportunities and capital
commitments.
Shareholder value
The table below sets out the movements in EPRA net asset value
per share over the year under review.
31 December 31 December
2018 2017
pence pence
EPRA net asset value per share per share per share
------------------------------------------ ----------- -----------
Opening EPRA NAV per share 100.7 91.1
EPRA earnings for the year 5.2 5.2
Dividends paid (5.2) (5.2)
Revaluation surplus on property portfolio 4.7 10.4
Shares issued 0.4 0.2
Interest rate derivative cancellation (0.7) (1.0)
------------------------------------------ ----------- -----------
Closing EPRA NAV per share 105.1 100.7
------------------------------------------ ----------- -----------
The revaluation surplus and profit on sale of land of GBP36.1
million in the year to 31 December 2018 is the main reason for the
increase in EPRA NAV per share. Dividends distributed in the year
were fully covered by recurring EPRA earnings with no material
impact on EPRA NAV. The GBP4.0 million premium over EPRA NAV, net
of expenses, from the equity raise and the impact of the conversion
of GBP40.0 million convertible bonds in the year added a further
0.4 pence.
In July 2018 we selectively used the premium over NAV on the
equity issue in April 2018 to cancel for two years effective until
July 2020, various fixed rate swaps with a nominal value of
GBP70.0m and a blended rate of 4.52%, for a one-off payment of
GBP5.0 million equivalent to 0.7 pence per share on an EPRA net
asset value basis. The cancellation results in total interest
savings of GBP2.5 million per annum over two years from July 2018.
The mark to market ("MtM") of the cancelled derivatives were
reflected in the financial statements as at 31 December 2017.
The 4.4 pence or 4.4% increase in EPRA NAV per share to 105.1
pence (31 December 2017: 100.7 pence per share) together with the
dividends distributed in the year resulted in a total NAV return
per share of 9.8 pence per share or 9.7% in the year ended 31
December 2018 (2017: 14.9 pence or 16.4%).
Financing
As at 31 December 2018, total available loan facilities were
GBP879.9 million (2017: GBP844.3 million) of which GBP679.1 million
(2017: GBP724.2 million) had been drawn. Cash balances of GBP5.9
million (2017: GBP3.8 million) resulted in Group net debt of
GBP673.2 million (2017: GBP720.3 million). Contracted capital
commitments at the balance sheet date totalled GBP16.1 million
(2017: GBP23.0 million) and result in headroom available to the
Group of GBP190.6 million (2017: GBP101.0 million).
Capital commitments comprise forward funded development at Bray
of GBP16.0 million and asset management projects of GBP0.1
million.
31 December 31 December
Debt metrics 2018 2017
------------------------------------------------- ----------- -----------
Average cost of debt 3.90% 4.09%
Loan to value 44.8% 52.9%
Loan to value excluding the convertible bond 43.2% 48.2%
Interest cover 2.6 times 2.25 times
Weighted average debt maturity 5.4 years 6.3 years
Total drawn secured debt GBP580.9m GBP585.9m
Total drawn unsecured debt GBP98.2m GBP138.2m
Total undrawn facilities available to the Group1 GBP190.6m GBP101.0m
------------------------------------------------- ----------- -----------
1 After deducting the remaining cost to complete properties
under development and asset management projects.
The equity raise in April 2018, the conversion of the
convertible bond and the growth in the valuation of the portfolio
during the year has seen the loan to value ratio fall to 44.8%
(2017: 52.9%).
New long-term financing
In December 2018, the Company issued its first euro-denominated
senior secured loan notes for EUR51 million (GBP45.8 million) at a
blended rate of 2.4973% with a weighted average maturity of 10.4
years. The secured notes were placed with UK and Irish
institutional investors in two tranches:
-- EUR40 million 2.46% senior notes due December 2028; and
-- EUR11 million 2.633% senior notes due December 2030.
The use of euro-denominated debt also provides a natural hedge
against movements in exchange rates for its portfolio of assets in
Ireland.
In July 2018, a GBP30.6 million secured revolving credit
facility was entered into with Santander for an initial three-year
term and will be used to fund acquisitions in the UK.
Post period end a GBP50 million unsecured revolving credit
facility was entered into with HSBC, for an 18-month period,
conditional and commencing on completion of the merger with
MedicX.
Interest rate swap contracts
Accounting standards require PHP to mark its interest rate swaps
to market at each balance sheet date. During the year to 31
December 2018 there was a gain of GBP2.2 million (2017: gain of
GBP2.6 million) on the fair value movement of the Group's interest
rate derivatives due primarily to increases in interest rates
assumed in the forward yield curves used to value the interest rate
swaps. This reduced the MtM liability of the swap portfolio to
GBP17.3 million (2017: GBP24.5 million).
Convertible bonds
During 2018, convertible bonds with a nominal value of GBP40.0
million (2017: GBP19.3 million) were, at the holders' option,
converted resulting in 41.5 million (2017: 19.8 million) of new
Ordinary Shares being issued. The nominal value of the convertible
bonds outstanding at 31 December 2018 was GBP23.2 million (2017:
GBP63.2 million).
On 11 October 2018 the conversion price was adjusted from 97.5
pence to 96.16 pence in accordance with the dividend protection
provisions as set out in accordance with the conditions of issue of
the convertible bond.
The conversion of the remaining GBP23.2 million convertible
bonds into Ordinary Shares would reduce the Group's loan to value
ratio by 1.5%, from 44.8% to 43.2%, on a pro-forma basis as at 31
December 2018, and result in the issue of 24.1 million new Ordinary
Shares. A further GBP6.2 million of convertible bonds have been
converted post the year end.
Average cost of debt
The various financing initiatives noted above have allowed us to
make good progress in reducing the Group's average cost of debt by
a further 19bps during the year to 3.90% (31 December 2017: 4.09%).
We expect the average cost of debt will continue to fall during
2019 following the conversion and/or repayment of the remaining
convertible and retail bonds which mature in May and July 2019
respectively.
Interest rate and currency exposure
The analysis of the Group's exposure to interest rate risk in
its debt portfolio as at 31 December 2018 is as follows:
Facilities Drawn
---------- ------ ----- ------
GBPm % GBPm %
----------------------------------- ---------- ------ ----- ------
Fixed rate debt 479.3 54.5% 479.3 70.6%
Hedged by fixed rate interest rate
swaps 188.0 21.4% 188.0 27.7%
Floating rate debt - unhedged 212.6 24.1% 11.8 1.7%
----------------------------------- ---------- ------ ----- ------
Total 879.9 100.0% 679.1 100.0%
----------------------------------- ---------- ------ ----- ------
The above analysis excludes the impact of a GBP70 million
forward starting swap commencing in June and July 2020.
The Group's drawn loan facilities are over 98% fixed or hedged
and there is little exposure to future possible increases in
interest rates.
The Group now owns EUR92.3 million (GBP83.0 million) (2017:
EUR15.4 million/GBP13.7 million) of euro-denominated assets in
Ireland as at 31 December 2018 and the value of these assets and
rental income represented just 6% of the Group's total portfolio.
In order to hedge the risk associated with exchange rates, the
Group has chosen to fund its investment in Irish assets through the
use of euro-denominated debt, providing a natural asset to
liability hedge, within the overall Group loan to value limits set
by the Board.
Euro rental receipts are used to first finance euro interest and
administrative costs and surpluses are used to fund further
portfolio expansion.
Risk management and principal risks
Risk management overview
Effective risk management is a key element of the Board's
operational processes. Risk is inherent in any business, and the
Board has determined the Group's risk appetite, which is reviewed
on an annual basis. Group operations have been structured in order
to accept risks within the Group's overall risk appetite, and to
oversee the management of these risks to minimise exposure and
optimise the returns generated for the accepted risk. The Group
aims to operate in a 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 health 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 in the UK and
Ireland;
-- the Group benefits from long initial lease terms, largely
with upwards-only review terms, providing clear visibility of
income;
-- the Group is not a direct developer of real estate, which
means that the Group is not exposed to risks that are inherent in
property development;
-- the Board funds its operations so as to maintain an
appropriate mix of debt and equity; and
-- debt funding is procured from a range of providers,
maintaining a spread of maturities and a mix of terms so as to fix
or hedge the majority of interest costs.
The structure of the Group's operations includes rigorous,
regular review of risks and how these are mitigated and managed
across all areas of the Group's activities. 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, general economic conditions
and internal risks that arise from how the Group is managed and
chooses to structure its operations.
Approach to risk management
Risk is considered at every level of the Group's operations and
is reflected in the controls and processes that have been put in
place across the Group. The Group's risk management process is
underpinned by strong working relationships between the Board, the
Adviser and members of the Adviser's team which enables the prompt
assessment and response to risk issues that may be identified at
any level of the Group's business.
The Board is responsible for effective risk management across
the Group and retains ownership of the significant risks that are
faced by the Group. This includes ultimate responsibility for
determining and reviewing the nature and extent of the principal
risks faced by the Group and assessing the Group's risk management
processes and controls. These systems and controls are designed to
identify, manage and mitigate risks that the Group faces but will
not eliminate such risks and can provide reasonable but not
absolute assurance.
The Adviser assists the Board in its assessment and monitoring
of operational and financial risks and the Adviser has in place
robust systems and procedures to ensure risk management is embedded
in its approach to managing the Group's portfolio and operations.
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 Audit Committee reviews the Group's
systems of risk management and their effectiveness on behalf of the
Board. These systems and processes have been in place for the year
under review and remained in place up to the date of approval of
the Annual Report and Accounts.
The Adviser has implemented 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. Strategic risks are recorded in a Risk Register and are
assessed and rated within a defined scoring system.
The Adviser's Risk Committee reports its processes of risk
management and rating of identified risks to the Audit Committee.
The Risk Register forms an appendix to the report which details
risks that have (i) an initial high rating; and (ii) higher
residual ratings once the effectiveness of mitigation and/or
management actions have been overlaid. The Audit Committee in turn
agrees those risks that will be managed by the Adviser and those
where the Board will retain direct ownership and responsibility for
managing and monitoring those risks.
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.
Brexit
The external environment remains difficult, and the Board is
continuing to monitor the potential risks associated with the UK
leaving the European Union ("Brexit"). As exit negotiations are
ongoing, the final outcome remains unclear and it is too early to
understand fully the impact Brexit will have on our business and
our sector. The main impact of Brexit is the potential negative
impact on the macro-economic environment, potentially leading to
political uncertainty and volatility in interest and exchange
rates, but it could also impact our investment and occupier market,
our ability to execute our investment strategy and our income
sustainability in the long term.
Emerging risks
The Board has also considered emerging risks and their potential
impact on the Group. In this regard, the Board has recently added
climate change and environmental issues to the Risk Register.
Whilst it is not yet regarded as a principal risk and uncertainty
and therefore is not included in the tables that follow, the
Group's approach to the subject matter is considered in more detail
in the Responsible Business section of the Annual Report.
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:
Change
to
Inherent risk risk in Commentary on Residual risk
Risk rating 2018 risk in the year Mitigation rating
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Deliver progressive
returns
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Potential Medium Unchanged The UK and Irish The commitment Medium
over-reliance Likelihood governments to primary Policy risk
on the NHS is low but continue care is a stated and general
and HSE impact of occurrence to be committed objective of economic conditions
PHP invests may be major. to the development both the UK are out of
in a niche of primary care and Irish the control
asset sector services and governments of the Board,
where changes initiatives and on a cross-party but proactive
in healthcare to develop new basis. measures are
policy, the models of care Management taken to monitor
funding of that increasingly engages directly developments
primary care, focus on greater with government and consider
economic conditions utilisation of and healthcare their possible
and the availability primary care. providers in implications
of finance Despite the UK's both the UK for the Group.
may adversely likely exit from and in Ireland
affect the the European Union, to promote
Group's portfolio the demand for the need for
valuation and health services continued investment
performance. will continue in modern premises.
to grow regardless, The attractiveness
driven by of long term,
demographics. secure income
Whilst the streams that
uncertainty characterise
surrounding the the sector
exit may lead leads to stability
to fluctuations of values.
in the value of
the Group's assets,
there is no
evidence
of this at present.
Future government
funding levels
in the UK may
be impacted by
any long term,
material change
to economic
performance
as a consequence
of Brexit.
A fundamental
change in
government
policy could impact
how the private
sector regards
its investment
in this asset
class and its
willingness to
further deploy
private sector
resources to
improve
the quality of
primary care
facilities.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Foreign exchange Medium Increased The Group has The Board has Low
risk Likelihood completed its and will continue PHP has implemented
Income and of volatility eighth acquisition to fund its a hedging strategy
expenditure is high but in Ireland. Asset investments in the form
that will be the potential values, funding in Euros so of a natural
derived from impact at present and net income as to create hedge so as
PHP's investments is relatively are denominated a natural hedge to manage exchange
in Ireland low due to in Euros. between asset rate risk.
will be denominated the quantum The UK's decision values and
in Euros and of investment to leave the liabilities
may be affected in Ireland, European in Ireland.
unfavourably albeit this Union continues
by fluctuations quantum is to cause exchange
in currency increasing. rate volatility
rates, impacting whilst the exit
the Group's process is ongoing.
earnings and
portfolio valuation.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Grow property portfolio
----------------------------------------------------------------------------------------------------------------------
Competition High Unchanged In terms of values, The reputation Medium
The emergence Likelihood the Group has and track record The Group's
of new purchasers is high and benefited from of the Group position within
in the sector impact of occurrence a flight to income in the sector the sector
and the recent could be major. as a consequence means it is and commitment
slowing in of the current able to source to and understanding
the level of wider economic forward funded of the asset
approvals of uncertainty - developments class mean
new centres investors have and existing PHP is aware
in the UK may been attracted standing investments of a high proportion
restrict the to the sector from developers, of transactions
ability of due to its long investors and in the market
the Group to term, secure, owner-occupiers. and potential
secure new government-backed The Group has opportunities
investments cash flows. Lack a number of coming to market.
at a price of supply, as formal pipeline Active management
that delivers a consequence agreements of the property
an appropriate of the low number and long standing portfolio generates
return to of new development development regular
shareholders. approvals in the relationships opportunities
UK, has also that provide to increase
contributed an increased income and
to the increase opportunity lease terms
in values. to secure and enhance
However, the same developments value.
increase in demand that come to
and lack of supply market in the
has meant that UK and Ireland.
the Group is facing The Group has
increased a strong, identified
competition pipeline of
for viable investment
opportunities. opportunities
in the UK and
Ireland.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Financing High Unchanged The Company Existing and Medium
The Group uses Likelihood successfully new debt providers The Group takes
a mix of shareholder of a restricted completed an are keen to positive action
equity and supply is moderate over-subscribed provide funds to ensure continued
external debt and the potential equity issue in to the sector availability
to fund its impact of such April 2018, raising and specifically of resource,
operations. a restriction GBP115.0 million to the Group, maintain a
A restriction could be major. (GBP111.2 millon attracted by prudent ratio
on the availability net of expenses) the strength of debt and
of funds would at a 7% premium of its cash equity funding
limit the Group's to EPRA NAV as flows. and refinances
ability to at 31 December The Board monitors debt facilities
invest. 2017. its capital in advance
Furthermore, In addition, the structure and of their maturity.
a more general Group secured maintains regular
lack of equity a new three-year contact with
or debt available GBP30.6 million existing and
to the sector revolving credit potential equity
could reduce facility with investors and
demand for Santander in July debt funders.
healthcare 2018 and in
assets and December
therefore impact 2018 the Group
values. secured a EUR51
million 10.4-year
private placement
secured against
its investment
properties held
in Ireland.
The Group's undrawn
facilities mean
it currently has
headroom of
GBP190.6
million.
All covenants
have been met
with regard to
the Group's debt
facilities and
these all remain
available for
their contracted
term.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Manage effectively and efficiently
----------------------------------------------------------------------------------------------------------------------
Lease expiry Medium Unchanged The Group's The Adviser Medium
management Likelihood property meets with The Adviser
The bespoke of limited portfolio has occupiers to employs an
nature of the alternative grown by eight discuss the active asset
Group's assets use value is assets in the specific property management
can lead to moderate but period. Lease and the tenant's programme and
limited alternative the impact terms for all aspirations has a successful
use. Their of such values property assets and needs for track record
continued use could be serious. will erode and their future of securing
as fit-for-purpose the importance occupation. enhancement
medical centres of active 16 projects projects and
is key to delivering management either completed securing new
the Group's to extend the or started long term leases.
strategic use of a building on site in
objectives. remains unchanged. the period,
enhancing income
and extending
occupational
lease terms.
In addition,
there is a
strong pipeline
of over 40
projects that
will be progressed
in 2019.
Only 6.7% of
the Group's
income expires
in the next
five years
and management
is actively
managing these
leases expiries.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
PHP and Nexus Medium Unchanged As well as The advisory Medium
relationship The likelihood management agreement with The interests
The Group has of any unexpected fees, the Adviser and performance of the Adviser
no employees. change is low has earned a of the Adviser are aligned
The continuance but, if that performance is regularly with the objectives
of the Adviser occurred, the incentive fee reviewed. Nexus' of the Group
contract is impact could during the period, remuneration and the composition
key for the be significant. some of which is linked to of its team
efficient operation is only payable the performance is monitored
and management in future periods of the Group by the Board.
of the Group. and is dependent to incentivise
on continued out long term levels
performance of of performance.
hurdle rates. Nexus can be
required to
serve all or
any part of
its notice
period should
the Group decide
to terminate
providing protection
for an efficient
handover.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Diversified, long term funding
----------------------------------------------------------------------------------------------------------------------
Debt financing Medium Unchanged Total Group Existing lenders Medium
Without appropriate The likelihood borrowing remain keen The Board constantly
confirmed debt of insufficient has increased to finance monitors the
facilities, facilities in the period PHP and new facilities
PHP may be is moderate but negotiations entrants to available to
unable to meet but the impact with lenders have debt capital the Group and
current and of such an confirmed that markets have looks to refinance
future commitments event would at the current increased available in advance
or repay or be serious. time and off the resource. of any maturity.
refinance debt back of the Management The Group is
facilities successful constantly subject to
as they become equity raise in monitors the the changing
due. April 2018, the composition conditions
Group enjoys the of the Group's of debt capital
confidence of debt portfolio markets.
the lending markets to ensure compliance
both in terms with covenants
of the traditional and continued
high street availability
lenders, of funds.
as well as the The Adviser
bond markets. regularly reports
The Group secured to the Board
a new GBP30.6 on current
million revolving debt positions
credit facility and provides
with Santander projections
in July 2018 and of future covenant
in December 2018 compliance
the Group secured to ensure early
a EUR51 million warning of
private placement any possible
secured against issues.
its investment
properties held
in Ireland.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Interest rates Medium Unchanged Term interest The Group holds Low
Adverse movement The likelihood rate markets a proportion The Group is
in underlying of volatility remained of its debt currently well
interest rates in interest volatile during in long term, protected against
could adversely rate markets the period and fixed rate the risk of
affect the is high and this volatility loans and mitigates interest rate
Group's earnings the potential is likely to its exposure rises, but,
and cash flows, impact if not continue to interest due to its
and could impact managed adequately in the near future. rate movements continued investment
property valuations. could be major. Over the year, on floating in new properties
term interest rate facilities and the need
rates have risen through the to maintain
which has impacted use of interest available
the mark to market rate swaps. facilities,
("MtM") valuations As at the balance will be exposed
of the Group's sheet date to future interest
interest rate 98% of drawn rate levels.
derivative debt is fixed
portfolio, or hedged.
reducing its "out MtM valuation
of the money" movements do
status. not impact
on the Group's
cash flows
and are not
included in
any covenant
test in the
Group's debt
facilities.
-------------------- -------------------- --------- ------------------- -------------------- --------------------
Viability Statement
The Directors confirm that, as part of their strategic planning
and risk management processes, they have undertaken an assessment
of the viability of the Group, considering the current position and
the potential impact of the principal risks and prospects over a
three-year time horizon. Based on this assessment, the Directors
have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the period to 31 December 2021. Although individually the
Group's assets may have relatively long unexpired lease terms and
will all have a defined asset management strategy, the Board has
undertaken its detailed financial review over a three-year period
because:
---- the Group's financial review and budgetary processes cover
a three-year look forward period; and
---- occupational leases within the Group's property portfolio
typically have a three-yearly rent review pattern and so modelling
over this period allows the Group's financial projections to
include a full cycle of reversion, arising from open market, fixed
and index-linked rent reviews.
The Group's financial review and budgetary processes are based
on an integrated model that projects performance, cash flows,
position and other key performance indicators including earnings
per share, leverage rates, net asset values per share and REIT
compliance over the review period. In addition, the forecast model
looks at the funding of the Group's activities and its compliance
with the financial covenant requirements of its debt facilities.
The model uses a number of key parameters in generating its
forecasts that reflect the Group's strategy, operating processes
and the Board's expectation of market developments in the review
period. In undertaking its financial review, these parameters have
been flexed to reflect severe, but realistic, scenarios both
individually and collectively. Sensitivities applied are derived
from the principal risks faced by the Group (see Risk Management)
that could affect solvency or liquidity. These include the rate of
investment in new properties and the return achieved from those
investments, the availability and cost of debt finance, any
potential reasonable decline in asset valuations and the ability to
meet debt facility covenants. Sensitivities also flex assumed
rental growth rates. In making its assessment, the Board has made a
number of specific assumptions that overlay the financial
parameters used in the Group's models. The Board has assumed that
there is little or no change to healthcare policies or reduction in
the levels of funding for primary care. In addition to the specific
impact of the new debt facilities, the Board has reflected its
reasonable confidence that the Group will be able to refinance or
replace other debt facilities that mature within the review period
in advance of their maturity and on terms similar to those at
present.
Harry Hyman
Managing Director
30 January 2019
Group statement of comprehensive income
for the year ended 31 December 2018
2018 2017
Notes GBPm GBPm
------------------------------------------------- ----- ------ ------
Rental income 79.6 72.5
Direct property expenses (3.2) (1.2)
------------------------------------------------- ----- ------ ------
Net rental income 3 76.4 71.3
Administrative expenses 4 (9.9) (8.7)
Net result on property portfolio 10 36.0 64.5
------------------------------------------------- ----- ------ ------
Operating profit 102.5 127.1
Finance income 5 0.1 0.3
Finance costs 6a (29.8) (31.9)
Profit on sale of land and property 0.1 -
Fair value loss on derivative interest rate
swaps and amortisation of hedging reserve 6b (1.8) (0.3)
Fair value gain/(loss) on convertible bond 6c 3.2 (3.3)
------------------------------------------------- ----- ------ ------
Profit before taxation 74.3 91.9
------------------------------------------------- ----- ------ ------
Taxation charge 7 - -
------------------------------------------------- ----- ------ ------
Profit for the year1 74.3 91.9
------------------------------------------------- ----- ------ ------
Other comprehensive income:
Items that may be reclassified subsequently
to profit and loss
Fair value gain on interest rate swaps treated
as cash flow hedges and amortisation of hedging
reserve 23 4.1 2.8
------------------------------------------------- ----- ------ ------
Other comprehensive income for the year net
of tax1 4.1 2.8
------------------------------------------------- ----- ------ ------
Total comprehensive income for the year net
of tax1 78.4 94.7
------------------------------------------------- ----- ------ ------
Earnings per share
Basic 8 10.5p 15.3p
Diluted 8 9.8p 14.7p
------------------------------------------------- ----- ------ ------
EPRA earnings per share
Basic 8 5.2p 5.2p
Diluted 8 5.2p 5.1p
------------------------------------------------- ----- ------ ------
1 Wholly attributable to equity shareholders of Primary Health Properties PLC.
The above relates wholly to continuing operations.
Group balance sheet
at 31 December 2018
2018 2017
Notes GBPm GBPm
---------------------------------------------- ----- ------- -------
Non-current assets
Investment properties 10 1,502.9 1,361.9
Derivative interest rate swaps 17 0.6 -
---------------------------------------------- ----- ------- -------
1,503.5 1,361.9
---------------------------------------------- ----- ------- -------
Current assets
Derivative interest rate swaps 17 - 0.3
Trade and other receivables 12 4.6 6.4
Cash and cash equivalents 13 5.9 3.8
---------------------------------------------- ----- ------- -------
10.5 10.5
---------------------------------------------- ----- ------- -------
Total assets 1,514.0 1,372.4
---------------------------------------------- ----- ------- -------
Current liabilities
Derivative interest rate swaps 17 - (2.7)
Deferred rental income (16.0) (15.0)
Trade and other payables 14 (16.1) (15.4)
Borrowings: term loans and overdraft 15 (0.9) (0.8)
Borrowings: bonds 16 (101.5) -
---------------------------------------------- ----- ------- -------
(134.5) (33.9)
---------------------------------------------- ----- ------- -------
Non-current liabilities
Borrowings: term loans and overdraft 15 (360.5) (411.5)
Borrowings: bonds 16 (213.2) (318.1)
Derivative interest rate swaps 17 (17.8) (22.1)
---------------------------------------------- ----- ------- -------
(591.5) (751.7)
---------------------------------------------- ----- ------- -------
Total liabilities (726.0) (785.6)
---------------------------------------------- ----- ------- -------
Net assets 788.0 586.8
---------------------------------------------- ----- ------- -------
Equity
Share capital 19 96.1 77.5
Share premium 20 220.6 80.7
Other reserve 21 2.5 1.6
Special reserve 22 124.8 161.4
Hedging reserve 23 (25.8) (29.9)
Retained earnings 24 369.8 295.5
---------------------------------------------- ----- ------- -------
Total equity1 788.0 586.8
---------------------------------------------- ----- ------- -------
Net asset value per share - basic and diluted 25 102.5p 94.7p
EPRA net asset value per share 25 105.1p 100.7p
---------------------------------------------- ----- ------- -------
1 Wholly attributable to equity shareholders of Primary Health Properties PLC.
These financial statements were approved by the Board of
Directors on 30 January 2019 and signed on its behalf by:
Steven Owen
Chairman
Registered in England Number: 3033634
Group cash flow statement
for the year ended 31 December 2018
2018 2017
Notes GBPm GBPm
--------------------------------------------------------- ----- ------- -------
Operating activities
Profit on ordinary activities before tax 74.3 91.9
Finance income 5 (0.1) (0.3)
Finance costs 6a 29.8 31.9
Profit on sale of land and property (0.1) -
Fair value loss on derivatives 6b 1.8 0.3
Fair value loss on convertible bond 6c (3.2) 3.3
--------------------------------------------------------- ----- ------- -------
Operating profit before financing costs 102.5 127.1
Adjustments to reconcile Group operating profit
before financing
to net cash flows from operating activities:
Revaluation gain on property portfolio 10 (36.0) (64.5)
Fixed rent uplift (1.6) (1.4)
Decrease/(increase) in trade and other receivables 2.2 (3.1)
Increase in trade and other payables 1.4 2.0
--------------------------------------------------------- ----- ------- -------
Cash generated from operations 68.5 60.1
--------------------------------------------------------- ----- ------- -------
Net cash flow from operating activities 68.5 60.1
--------------------------------------------------------- ----- ------- -------
Investing activities
Payments to acquire and improve investment properties (101.9) (75.4)
Interest received on development loans - 0.3
--------------------------------------------------------- ----- ------- -------
Net cash flow used in investing activities (101.9) (75.1)
--------------------------------------------------------- ----- ------- -------
Financing activities
Proceeds from issue of shares 115.0 -
Cost of share issues (4.0) (0.1)
Term bank loan drawdowns 15 123.0 137.8
Term bank loan repayments 15 (174.0) (155.5)
Proceeds from bond issue 45.4 100.0
Bond issue costs (0.8) (1.1)
Termination of derivative financial instruments (5.0) (6.2)
Swap interest paid (2.4) (3.5)
Non-utilisation fees (1.2) (0.5)
Loan arrangement fees (1.3) (1.8)
Interest paid (25.2) (26.1)
Equity dividends paid net of scrip dividend 9 (34.7) (29.8)
--------------------------------------------------------- ----- ------- -------
Net cash flow from financing activities 34.8 13.2
--------------------------------------------------------- ----- ------- -------
Increase/(decrease) in cash and cash equivalents
for the year 1.4 (1.8)
--------------------------------------------------------- ----- ------- -------
Effect of exchange rate fluctuations on Euro-denominated
loans and cash equivalents 0.7 0.5
--------------------------------------------------------- ----- ------- -------
Cash and cash equivalents at start of year 3.8 5.1
--------------------------------------------------------- ----- ------- -------
Cash and cash equivalents at end of year 13 5.9 3.8
--------------------------------------------------------- ----- ------- -------
1 Payment of liabilities acquired with subsidiaries.
Group statement of changes in equity
for the year ended 31 December 2018
Share Share Other Special Hedging Retained
capital premium reserve reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------- ------- ------- ------- ------- -------- ------
1 January 2018 77.5 80.7 1.6 161.4 (29.9) 295.5 586.8
Profit for the year - - - - - 74.3 74.3
Other comprehensive income
Fair value movement on interest
rate swaps - - - - 2.6 - 2.6
Reclassification to profit
and loss - amortisation of
hedging reserve - - - - 1.5 - 1.5
--------------------------------- ------- ------- ------- ------- ------- -------- ------
Total comprehensive income - - - - 4.1 74.3 78.4
Shares issued on conversion
of convertible bonds 5.1 40.5 - - - - 45.6
Shares issued as part of capital
raise 13.3 101.7 - - - - 115.0
Share issue expenses - (4.0) - - - - (4.0)
Dividends paid - - - (34.7) - - (34.7)
Scrip dividend in lieu of cash 0.2 1.7 - (1.9) - - -
Exchange gain on translation
of foreign balances - - 0.9 - - - 0.9
--------------------------------- ------- ------- ------- ------- ------- -------- ------
31 December 2018 96.1 220.6 2.5 124.8 (25.8) 369.8 788.0
--------------------------------- ------- ------- ------- ------- ------- -------- ------
Share Share Capital Special Hedging Retained
capital premium reserve reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------- ------- ------- ------- ------- -------- ------
1 January 2017 74.8 59.1 1.6 192.8 (32.7) 203.6 499.2
Profit for the year - - - - - 91.9 91.9
Other comprehensive income
Fair value movement on interest
rate swaps - - - - 2.6 - 2.6
Amortisation of hedging reserve - - - - 0.2 - 0.2
-------------------------------- ------- ------- ------- ------- ------- -------- ------
Total comprehensive income - - - - 2.8 91.9 94.7
Shares issued on conversion
of convertible bonds 2.5 20.3 - - - - 22.8
Share issue expenses - (0.1) - - - - (0.1)
Dividends paid - - - (29.8) - - (29.8)
Scrip dividend in lieu of cash 0.2 1.4 - (1.6) - - -
-------------------------------- ------- ------- ------- ------- ------- -------- ------
31 December 2017 77.5 80.7 1.6 161.4 (29.9) 295.5 586.8
-------------------------------- ------- ------- ------- ------- ------- -------- ------
Notes to the financial statements
1. Corporate information
The Group's financial statements for the year ended 31 December
2018 were approved by the Board of Directors on 30 January 2019 and
the Group Balance Sheet was signed on the Board's behalf by the
Chairman, Steven Owen. Primary Health Properties PLC is a public
limited company incorporated in England and Wales and domiciled in
the United Kingdom. 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, including
investment properties under construction and land and derivative
financial instruments that have been measured at fair value. The
Group's financial statements are prepared on the going concern
basis (see note 31 for further details) and presented in Sterling
rounded to the nearest million.
Statement of compliance
The consolidated financial statements for the Group have been
prepared under International Financial Reporting Standards
("IFRSs") as adopted by the European Union and applied in
accordance with the Companies Act 2006 and Article 4 of the IAS
Regulation.
2.2 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 the Group as of 1 January 2018. Their adoption
has not had any material impact on the disclosures or on the
amounts reported in these financial statements:
-- Annual improvements to IFRSs 2014-2016. Amendments to: IFRS 1
First-time adoption of International Financial Reporting Standards,
and IAS 28 Investments in associates and joint ventures
-- Amendments to IAS 40 Investment property
-- IFRS 15 Revenue from contracts with customers
-- IFRIC 22 Foreign currency transactions and advanced consideration
IFRS 9 Financial instruments
The Group has applied IFRS 9 from 1 January 2018, but will not
restate comparatives on initial application.
Directors of the Group have reviewed its financial assets and
liabilities and the impact from the adoption of the new standard is
as follows:
(i) Classification and measurement
IFRS 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
profit and loss and fair value through other comprehensive
income.
The Group's financial assets at 31 December 2018 consist
primarily of trade receivables which will continue to be reflected
at amortised cost. Trade receivables are classified as amortised
cost as they meet the test of Solely Payments of Principal and
Interest ("SPPI test") as the Group's model is to collect the
contracted cash flows due from tenants.
There was no impact in respect of classification and measurement
of financial liabilities under IFRS 9.
(ii) Impairment
The new impairment model requires the recognition of impairment
provisions based on expected credit losses rather than only on
incurred losses as was the case under IAS 39. It is therefore no
longer necessary for a credit event to have occurred before credit
losses are recognised.
IFRS 9 requires a simplified approach for measuring the loss
allowance at an amount equal to lifetime expected credit losses
("ECLs") for trade receivables without a significant financing
component.
The main area of focus to the Group is considered to be
impairment provisioning of trade receivables.
Gross trade receivables held at 31 December 2018 were GBP3.0
million (2017: GBP2.3 million) with an impairment provision
recognised under IAS 39 of GBPnil (2017: GBP0.1 million). The
credit risk associated with unpaid rent is deemed low.
We have performed an assessment of the impact of impairment
losses recognised for trade receivables under IFRS 9 at 31 December
2018 through estimating the expected credit loss based on actual
credit loss experienced over the past three years and taking into
consideration future expected losses. Based on this assessment,
there was no material impact of impairment losses recognised under
IFRS 9.
The impact of non-substantial debt modifications has been
reviewed and there is no material impact on the financial
statements at transition.
(iii) Hedge accounting
On initial application of IFRS 9, an entity may choose, as its
accounting policy, to continue to apply the hedge accounting
requirements of IAS 39 instead of the hedge accounting requirements
of IFRS 9. The Group will continue to apply the hedge accounting
requirements of IAS 39.
IFRS 15 Revenue from contracts with customers
The Group has applied IFRS 15 from 1 January 2018 and will adopt
the modified retrospective approach without restatement of
comparatives.
The new standard is based on the principle that revenue is
recognised when control of a good or service transfers to a
customer. The majority of the Group's income is from tenant leases
and there is no material impact on rental income as a result of
adopting the new standard.
The main impact of IFRS 15 has been to show service charge
income gross within rental income and service charge expense gross
within direct property expenses. The cumulative effect before
initial application of the standard is GBPnil.
2.3 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 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 property in the United
Kingdom and Ireland leased principally to GPs, government
healthcare organisations and other associated healthcare users.
Foreign currency transactions
Each Group company presents its individual financial statements
in its functional currency. The functional currency of all UK
subsidiaries (with the exception of PHP Euro Private Placement
Limited which is Euro) is Sterling and the functional currency of
Primary Health Properties ICAV and its Irish domiciled subsidiaries
is Euro.
Transactions in currencies other than an individual entity's
functional currency (foreign currencies) are recognised at the
applicable exchange rate ruling on the transaction date. Exchange
differences resulting from settling these transactions, or from
retranslating monetary assets and liabilities denominated in
foreign currencies, are included in the Group Statement of
Comprehensive Income.
Foreign operations
In preparing the Group's consolidated financial statements, the
assets and liabilities of foreign entities are translated into
Sterling at exchange rates prevailing on the balance sheet date.
The income, expenses and cash flows of a foreign entity are
translated at the average exchange rate for the period, unless
exchange rates fluctuate significantly during the period, in which
case the exchange rates at the date of transactions are used.
The exchange rates used to translate foreign currency amounts in
2018 are as follows:
Group Balance Sheet: GBP1 = EUR1.1126 (2017: EUR1.1262). Group
Statement of Comprehensive Income: GBP1 = EUR1.1301 (2017:
EUR1.1413).
Investment properties and investment properties under
construction
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 on acquisition upon
completion of contract, which is when control of the asset passes
to the Group. Investment properties cease to be recognised when
control of the property passes to the purchaser, which is upon
completion of the sales contract. 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..
Gains on sale of properties
Gains on sale of properties are recognised on the completion of
the contract, and are calculated by reference to the carrying value
at the end of the previous reporting period, adjusted for
subsequent capital expenditure and sale costs.
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 100% (2017: 100%) 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.
Net rental income is the rental income receivable in the period
after payment of direct property costs.
The Group has applied IFRS 15 Revenue from contracts with
customers from 1 January 2018.
The main impact of IFRS 15 has been to show service charge
income gross within rental income and service charge expense gross
within direct property expenses. The comparatives have not been
restated as the transitional provisions within the standard have
been used to retrospectively apply the cumulative GBPnil effect
before initial application of the standard being recognised at the
date of initial application.
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).
Financial instruments under IFRS 9
Trade receivables
Trade receivables are recognised and carried at amortised cost
as the Group's business model is to collect the contractual cash
flows due from tenants. Provision is made based on the expected
credit loss model which reflects on the Group's historical credit
loss experience over the past three years but also reflects the
lifetime expected credit loss.
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, measured at amortised cost.
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.
The interest due within the next twelve months is accrued at the
end of the year and presented as a current liability within trade
and other payables.
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. The
amount of the change in fair value of the financial liability
designated at fair value through profit or loss that is
attributable to changes in credit risk will be recognised in other
comprehensive income. This is different to IAS 39 accounting
treatment where the entire change in fair value of the financial
liability is recognised in the Group Statement of Comprehensive
Income.
Financial instruments under IAS 39
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. 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.
Loans and receivables
Loans and receivables are non-derivative financial assets. 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.
De-recognition of financial assets and liabilities
Financial assets
A financial asset (or where applicable a part of a financial
asset or part of a group of similar financial assets) is
de-recognised where:
-- the rights to receive cash flows from the asset have expired;
-- the Group retains the right to receive cash flows from the
asset, but has assumed an obligation to pay them in full without
material delay to a third party under a "pass-through"
arrangement;
-- the Group has transferred its right to receive cash flows
from the asset and either (a) has transferred substantially all the
risks and rewards of the asset; or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset, but
has transferred control of the asset; or
-- when the cash flows are significantly modified.
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
profit or loss.
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 and any
difference in the carrying amount after modification is recognised
as a modification gain or loss.
Tax
Taxation on the profit or loss for the period not exempt under
UK-REIT regulations comprises current. 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.
Fair value measurements
The Group measures certain financial instruments such as
derivatives, and non-financial assets such as investment property,
at fair value at the end of each reporting period. Also, fair
values of financial instruments measured at amortised cost are
disclosed in the financial statements.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
-- in the principal market for the asset or liability; or
-- in the absence of a principal market, in the most
advantageous market for the asset or liability.
The Group must be able to access the principal or the most
advantageous market at the measurement date.
The fair value of an asset or liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits using the asset in its highest and best use or by selling
it to another market participant that would use the asset in its
highest and best use.
The Group uses valuation techniques 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.
Hedge accounting
At the inception of a 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 inception and on an ongoing basis, of whether
the hedging instrument meets the criteria of IAS 39 for being
described as "highly effective" in offsetting changes in the fair
values or cash flows of hedged items.
i) Derivative financial instruments ("derivatives")
The Group uses interest rate swaps to help manage its interest
rate risk.
All interest rate derivatives are initially recognised at fair
value at the date the derivative is entered into and are
subsequently remeasured at fair value. The fair values of the
Group's interest rate swaps are calculated by JCRA, 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; and
-- 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
where the hedged transaction is still expected to occur. If the
swaps have been cancelled and the hedged transaction is no longer
expected to occur, the amount accumulated in the hedging reserve is
reclassified to profit and loss immediately.
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.
2.4 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 properties include (i) completed investment
properties, and (ii) investment properties under construction.
Completed investment properties comprise real estate held by the
Group or leased by the Group under a finance lease in order to earn
rental income or for capital appreciation, or both.
The fair market value of a property is deemed by the independent
property valuer 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 and tax.
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 legislation. Refer to Note 10 of the
financial statements which includes further information on the fair
value assumptions and sensitivities.
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 any pre-lets and whether construction risk remains
with the respective developer or contractor.
Fair value of derivatives
In accordance with IFRS 9, the Group values its derivative
financial instruments at fair value. Fair value is estimated by
JCRA 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 2018. Fair
value represents the net present value of the difference between
the cash flows produced by the contracted rate and the valuation
rate. Refer to Note 18 of the financial statements.
b) Judgements
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 IAS 39, 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 renegotiated on or before expiry and that variable interest
rate debt finance will be in place until the expiry date of the
swaps.
Property acquisitions during the year
The Directors have reviewed the acquisitions during the year on
an individual basis in accordance with the requirements of 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.
2.5 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 have not
yet been adopted by the EU:
-- IFRS 16 Leases
-- Annual improvements to IFRSs 2015-2017 cycle
-- Long term interests in associates and joint ventures
A number of new standards and amendments to standards and
interpretations are effective for annual periods beginning on or
after 1 January 2019, 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 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 IFRSs
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 twelve 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 Leases. 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. As IFRS 16 does not
apply to assets that meet the definition of investment property,
the impact on the Group is not material. For long leasehold
properties where PHP is the lessee, the impact is expected to be
immaterial in relation to ground rents.
3. Rental and related income
Revenue comprises rental income receivable on property
investments in the UK and Ireland, which is exclusive of VAT.
Revenue is derived from one reportable operating segment and
GBP73.7 million and GBP5.7 million of annualised rental income is
derived from the UK and Ireland respectively. 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 One to More than
one year five years five years Total
GBPm GBPm GBPm GBPm
----- --------- ---------- ---------- -------
2018 78.1 307.1 627.6 1,012.8
----- --------- ---------- ---------- -------
2017 72.1 286.5 593.3 951.9
----- --------- ---------- ---------- -------
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, the
HSE in Ireland, 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:
2018 2017
GBPm GBPm
--------------------------------------------------------- ---- ----
Administrative expenses including:
Advisory fees (Note 4a) 6.6 6.2
Performance incentive fees (Note 4b) 1.3 0.5
Directors' fees (Note 4c) 0.4 0.3
--------------------------------------------------------- ---- ----
Audit fees
Fees payable to the Company's auditor and its associates
for the audit of the Company's annual accounts 0.1 0.1
Fees payable to the Company's auditor and its associates
for the audit of the Company's subsidiaries 0.2 0.2
--------------------------------------------------------- ---- ----
Total audit fees 0.3 0.3
--------------------------------------------------------- ---- ----
Total audit and assurance services 0.3 0.3
--------------------------------------------------------- ---- ----
Non-audit fees
Advisory services 0.2 -
--------------------------------------------------------- ---- ----
Total non-audit fees 0.2 -
--------------------------------------------------------- ---- ----
Total fees 0.5 0.3
--------------------------------------------------------- ---- ----
a) Advisory fees
The advisory fees calculated and payable for the period to 31
December were as follows:
2018 2017
GBPm GBPm
-------------------------------- ---- ----
Nexus Tradeco Limited ("Nexus") 6.6 6.2
-------------------------------- ---- ----
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 2018 GBP0.6 million was payable to Nexus
(2017: GBP0.5 million).
Further fees paid to Nexus in accordance with the Advisory
Agreement of GBP0.2 million (2017: GBP0.2 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 GBP0.2 million
(2017: GBP0.3 million).
b) Performance incentive fee ("PIF")
Information about the performance incentive fee is provided in
the Corporate Governance section of the Strategic Review in the
Annual Report.
A PIF of GBP0.5 million was paid to Nexus in the period in
respect of 2017 and at 31 December 2018 the balance on the notional
cumulative PIF account was GBP6.9 million (2017: GBP5.2 million) of
which GBP1.1 million (2017: GBP0.5 million) will become payable on
approval of the Annual Report by the Board. The balance is
conditional on performance in future years and the restrictions
noted in the Financial Review.
c) Remuneration of Directors
Further information about the remuneration of individual
Directors is provided in the Directors' Remuneration Report in the
Annual Report.
5. Finance income
2018 2017
GBPm GBPm
------------------------------------ ---- ----
Interest income on financial assets
Development loan interest 0.1 0.3
------------------------------------ ---- ----
0.1 0.3
------------------------------------ ---- ----
6. Finance costs
2018 2017
GBPm GBPm
-------------------------------------------------------------- ---- ----
Interest expense and similar charges on financial liabilities
a) Interest
Bank loan interest 13.8 14.6
Swap interest 1.9 3.4
Bond interest 11.0 11.6
Bank facility non-utilisation fees 1.3 0.5
Bank charges and loan commitment fees 1.8 1.8
-------------------------------------------------------------- ---- ----
29.8 31.9
-------------------------------------------------------------- ---- ----
2018 2017
GBPm GBPm
-------------------------------------------------- ----- -----
b) Derivatives
Net fair value (loss)/gain on interest rate swaps (0.3) 0.7
Amortisation of cash flow hedging reserve (1.5) (1.0)
-------------------------------------------------- ----- -----
(1.8) (0.3)
-------------------------------------------------- ----- -----
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 gain
on derivatives which do meet the hedge effectiveness criteria under
IAS 39 of GBP2.6 million (2017: GBP2.6 million) is accounted for
directly in equity. An amount of GBP1.5 million (2017: GBP0.2
million) has been amortised from the cash flow hedging reserve in
the year resulting from early termination of effective swap
contracts (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.
2018 2017
GBPm GBPm
------------------------------------------- ---- -----
c) Convertible bond
Fair value gain/(loss) on convertible bond 3.2 (3.3)
------------------------------------------- ---- -----
During the year, 41,457,272 (2017: 19,794,870) new Ordinary
Shares of 12.5 pence were issued on the conversion of GBP40.0
million (2017: GBP19.3 million) nominal of convertible bonds.
Following the conversion of the bonds there were GBP23.2 million
(2017: GBP63.2 million) nominal of convertible bonds outstanding
(see Note 29 for details of bond conversions after the Balance
Sheet date).
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.
2018 2017
GBPm GBPm
----------------------------- ----- -----
Net finance costs
Finance income (Note 5) (0.1) (0.3)
Finance costs (as per above) 29.8 31.9
----------------------------- ----- -----
29.7 31.6
----------------------------- ----- -----
7. Taxation
a) Taxation charge in the Group Statement of Comprehensive
Income
The taxation charge is made up as follows:
2018 2017
GBPm GBPm
---------------------------- ---- ----
Current tax
UK corporation tax (Note 7b) - -
---------------------------- ---- ----
The UK corporation tax rate of 19% (2017: 19.25%) has been
applied in the measurement of the Group's tax liability at 31
December 2018.
A reduction in the UK corporation tax rate from 20% to 19% was
effective from 1 April 2017. Accordingly, these rates have been
applied in the measurement of the Group's tax liability at 31
December 2018.
b) Factors affecting the tax credit for the year
The tax assessed for the year is lower than (2017: lower than)
the standard rate of corporation tax in the UK. The differences are
explained below:
2018 2017
GBPm GBPm
--------------------------------------------------------- ------ ------
Profit on ordinary activities before taxation 74.3 91.9
--------------------------------------------------------- ------ ------
Theoretical tax at UK corporation tax rate of 19% (2017:
19.25%) 14.1 17.7
REIT exempt income (16.6) (8.5)
Transfer pricing adjustments 3.3 4.0
Non-taxable items (0.8) (12.0)
Losses brought forward utilised - (1.2)
--------------------------------------------------------- ------ ------
Taxation charge (Note 7a) - -
--------------------------------------------------------- ------ ------
The UK REIT rules exempt the profits of the Group's property
rental business from corporation tax.
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 19% (2017:
19.25%).
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 2018.
8. Earnings per share
The calculation of basic and diluted earnings per share is based
on the following:
Weighted
Net profit average
attributable Ordinary
to Ordinary Shares
Shareholders (number - Per share
GBPm million) (pence)
---------------------------------------- ------------ --------- ---------
2018
Basic and diluted earnings
Basic earnings 74.3 708.6 10.5
Dilutive effect of convertible bond (2.2) 24.1
---------------------------------------- ------------ --------- ---------
Diluted earnings 72.1 732.7 9.8
---------------------------------------- ------------ --------- ---------
EPRA basic and diluted earnings
Basic earnings 74.3
Adjustments to remove:
Net result on property (Note 10) (36.0)
Profit on sale of land (0.1)
Fair value loss on derivatives 1.8
Fair value movement on convertible bond (3.2)
---------------------------------------- ------------ --------- ---------
EPRA basic earnings 36.8 708.6 5.2
---------------------------------------- ------------ --------- ---------
Dilutive effect of convertible bond 1.0 24.1
---------------------------------------- ------------ --------- ---------
EPRA diluted earnings 37.8 732.7 5.2
---------------------------------------- ------------ --------- ---------
2017
Basic and diluted earnings
Basic earnings 91.9 600.7 15.3
Dilutive effect of convertible bond 5.9 64.8
---------------------------------------- ------------ --------- ---------
Diluted earnings 97.8 665.5 14.7
---------------------------------------- ------------ --------- ---------
EPRA basic and diluted earnings
Basic earnings 91.9
Adjustments to remove:
Net result on property (Note 10) (64.5)
Fair value loss on derivatives 0.3
Fair value movement on convertible bond 3.3
---------------------------------------- ------------ --------- ---------
EPRA basic earnings 31.0 600.7 5.2
---------------------------------------- ------------ --------- ---------
Dilutive effect of convertible bond 2.7 64.8
---------------------------------------- ------------ --------- ---------
EPRA diluted earnings 33.7 665.5 5.1
---------------------------------------- ------------ --------- ---------
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 2018. 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 2018.
9. Dividends
Amounts recognised as distributions to equity holders in the
year:
2018 2017
GBPm GBPm
----------------------------------------------------- ----- -----
Quarterly interim dividend paid 23 February 2018 8.1 -
Scrip dividend in lieu of quarterly cash dividend 23
February 2018 0.3 -
Quarterly interim dividend paid 25 May 2018 7.7 -
Scrip dividend in lieu of quarterly cash dividend 25
May 2018 0.7 -
Quarterly interim dividend paid 24 August 2018 9.6 -
Scrip dividend in lieu of quarterly cash dividend 24
August 2018 0.3 -
Quarterly interim dividend paid 23 November 2018 9.3 -
Scrip dividend in lieu of quarterly cash dividend 23
November 2018 0.6 -
Quarterly interim dividend paid 24 February 2017 - 7.7
Scrip dividend in lieu of quarterly cash dividend 24
February 2017 - 0.1
Quarterly interim dividend paid 26 May 2017 - 7.2
Scrip dividend in lieu of quarterly cash dividend 26
May 2017 - 0.7
Quarterly interim dividend paid 25 August 2017 - 7.1
Scrip dividend in lieu of quarterly cash dividend 25
August 2017 - 0.7
Quarterly interim dividend paid 24 November 2017 - 7.8
Scrip dividend in lieu of quarterly cash dividend 24
November 2017 - 0.1
----------------------------------------------------- ----- -----
Total dividends distributed in the year 36.6 31.4
----------------------------------------------------- ----- -----
Per share 5.40p 5.25p
----------------------------------------------------- ----- -----
On 3 January 2019, the Board declared an interim dividend of 1.4
pence per Ordinary Share with regard to the year ended 31 December
2018, payable on 22 February 2019. This dividend will comprise a
Property Income Distribution ("PID") of 0.75 pence and ordinary
dividend of 0.65 pence per share.
10. Investment properties and investment properties under
construction
Properties have been independently valued at fair value by
Lambert Smith Hampton UK ("LSH") Chartered Surveyors and Valuers,
as at the balance sheet date in accordance with IAS 40 Investment
property. LSH confirms that it has 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 99.8% let (2017: 99.7%). The valuations
reflected a 4.85% net initial yield (2017: 4.91%) and a 4.99%
(2017: 5.09%) 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 value
development property as if complete, deduct the costs remaining to
be paid to complete the development and consider the significant
risks which are relevant to the development process including, but
not limited to, construction and letting risks and the impact they
may have on fair value. 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 valuer has deemed that the
residual risk to the Group is minimal. As required by the Red Book,
LSH has deducted the outstanding cost to the Group through to the
completion of construction of GBP16.0 million (2017: GBP5.7
million) in arriving at the fair value to be included in the
financial statements. A fair value increase of GBPnil (2017: GBP0.4
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 GBP36.0 million (2017: GBP64.5 million).
Of the GBP1,502.9 million valuation, GBP1,419.9 million (94%)
relates to investment properties in the UK and GBP83.0 million (6%)
relates to investment properties in Ireland.
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 long under
freehold1 leasehold construction Total
GBPm GBPm GBPm GBPm
-------------------------------------------- ---------- ---------- ------------ -------
As at 1 January 2018 1,104.9 255.9 1.1 1,361.9
Property additions 81.4 12.9 10.1 104.4
Property disposals (1.0) - - (1.0)
Impact of lease incentive adjustment 0.9 0.7 - 1.6
Transfer from properties under construction - 5.2 (5.2) -
-------------------------------------------- ---------- ---------- ------------ -------
1,186.2 274.7 6.0 1,466.9
Revaluations for the year 26.3 9.7 - 36.0
-------------------------------------------- ---------- ---------- ------------ -------
As at 31 December 2018 1,212.5 284.4 6.0 1,502.9
-------------------------------------------- ---------- ---------- ------------ -------
As at 1 January 2017 987.1 225.7 7.4 1,220.2
Property additions 64.0 0.3 11.5 75.8
Impact of lease incentive adjustment 0.6 0.8 - 1.4
Transfer from properties under construction - 18.2 (18.2) -
-------------------------------------------- ---------- ---------- ------------ -------
1,051.7 245.0 0.7 1,297.4
Revaluations for the year 53.2 10.9 0.4 64.5
-------------------------------------------- ---------- ---------- ------------ -------
As at 31 December 2017 1,104.9 255.9 1.1 1,361.9
-------------------------------------------- ---------- ---------- ------------ -------
1 Includes development land held at GBP1.0 million (31 December 2017: GBP0.9 million).
Bank borrowings, bonds and interest rate swaps are secured on
investment properties with a value of GBP1,434 million (2017:
GBP1,260 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 2018 and 31
December 2017. There were no transfers between levels during the
year or during 2017. 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
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.
2018 2017
---------------------------- ---------------------- ----------------------
GBP32,307-GBP1,273,630 GBP32,307-GBP1,225,071
ERV - range of the portfolio per annum 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.
2018 2017
---------------------------------------------- ----------- -----------
True equivalent yield - range of the portfolio 3.84%-7.54% 4.31%-7.61%
---------------------------------------------- ----------- -----------
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.
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.
-- A deterioration in the physical condition of the property
will decrease the fair value.
-- An increase in the rental growth will increase the fair value.
11. Group entities
All subsidiaries of the Company are 100% owned and listed below.
All are incorporated in the UK and their registered office is 5th
Floor, Greener House, 66-68 Haymarket, London SW1Y 4RF, except as
noted.
Subsidiaries held directly by the Company
Primary Health Investment Properties
Limited PHP Bond Finance PLC
Primary Health Investment Properties PHP Primary Properties (Haymarket)
(No. 2) Limited Limited
Primary Health Investment Properties
(No. 3) Limited PHP Medical Investments Limited
PHP Healthcare (Holdings) Limited PHP (FRMC) Limited
Primary Health Investment Properties
(No. 4) Limited Primary Health Properties ICAV2,3
White Horse Centre Limited PHIP (Milton Keynes) Limited
PHIP (5) Limited Carden Medical Investments Limited4
Primary Health Investment Properties
(No. 7) Limited Wincanton Healthcare Limited
Primary Health Investment Properties
(No. 8) Limited PHP SB Limited
Primary Health Investment Properties
(No. 9) Limited Chelmsley Associates Limited
Primary Health Investment Properties
(Sutton) Limited PHP STL Limited
PHP Finance (Jersey) Limited1 HMC Estates Holdings Limited1
PHP 2013 Holdings Limited PHP Euro Private Placement Limited
Primary Health Investment Properties
(No. 10) Limited
------------------------------------ -----------------------------------
Subsidiaries indirectly held by the Company
PHP Bingham Limited PHP Investments No.2 Limited
PHIP (Chester) Limited Motorstep Limited
Anchor Meadow Limited Leighton Health Limited
PHP (Ipswich) Limited PHP Healthcare Investments Limited
PHP Healthcare Investments (Holdings)
Limited PHP St. Johns Limited
PHP Investments No.1 Limited PHP Clinics Limited
PHP (Project Finance) Limited PHIP (Stourbridge) Limited
PHP Medical Properties Limited Gracemount Medical Centre Limited4
PHP Glen Spean Limited PHP AssetCo (2011) Limited
PHP Empire Holdings Limited PHP Primary Properties Limited
Health Investments Limited Crestdown Limited
Primary Health Investment Properties
PatientFirst Partnerships Limited (No. 6) Limited
PatientFirst (Hinckley) Limited Jellia Holdings Limited3
PatientFirst (Burnley) Limited PHPI Newbridge Limited3
PHP Investments (2011) Limited PHPI Navan Road Limited3
PHP Ashington Limited (previously
HMC Estates Limited) PHPI Celbridge Limited3
------------------------------------- ------------------------------------
1 Subsidiary company registered in Jersey. Registered office: 44
Esplanade, St Helier, Jersey JE4 9WG.
2 An Irish collective asset management vehicle established in Ireland.
3 Subsidiary company registered in Ireland. Registered office:
Riverside 1, Sir John Rogerson's Quay, Dublin 2, Ireland.
4 Subsidiary company registered in Scotland. Registered office:
3rd Floor, 1 West Regent Street, Glasgow, Scotland G2 1RW.
With the exception of PHP Bond Finance PLC, Primary Health
Investment Properties (No. 4) Limited, PHP SB Limited, PHP Finance
(Jersey) Limited and PHP Euro Private Placement Limited the
principal activity of all of the above is property investment. PHP
Bond Finance PLC, Primary Health Investment Properties (No. 4)
Limited, PHP SB Limited, PHP Finance (Jersey) Limited and PHP Euro
Private Placement Limited act as intermediary financing companies
within the Group. 100% of all voting rights and shares are held
directly or indirectly by the Company.
12. Trade and other receivables
2018 2017
GBPm GBPm
-------------------------------------------------------- ---- ----
Trade receivables (net of provision for doubtful debts) 3.0 2.2
Prepayments and accrued income 1.6 2.1
Other debtors - 2.1
-------------------------------------------------------- ---- ----
4.6 6.4
-------------------------------------------------------- ---- ----
The expected credit losses are estimated using a provision
matrix by reference to past default experience and an analysis of
the debtor's current financial position, adjusted for factors that
are specific to the debtor, general economic conditions of the
industry and an assessment of both the current as well as the
forecast direction of conditions at the reporting date. The Group
has therefore not recognised a loss allowance because historical
experience has indicated that the risk profile of trade receivables
is deemed low.
At 31 December 2017, the analysis of trade receivables, some of
which were past due or impaired, is set out below:
2017
GBPm
------------------------------ ----
Neither past due nor impaired
<30 days 1.0
Past due but not impaired
30-60 days 0.9
60-90 days 0.1
90-120 days 0.1
>120 days 0.1
------------------------------ ----
2.2
------------------------------ ----
The Group's principal customers are invoiced and pay quarterly
in advance, usually on English, Scottish and Gale quarter days.
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
2018 2017
GBPm GBPm
------------------ ---- ----
Cash held at bank 5.9 3.8
------------------ ---- ----
5.9 3.8
------------------ ---- ----
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 three 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
2018 2017
GBPm GBPm
------------------------------------ ---- ----
Trade payables 1.6 1.3
Bank and bond loan interest accrual 4.6 4.4
Other payables 4.7 5.5
VAT 3.3 3.1
Accruals 1.9 1.1
------------------------------------ ---- ----
16.1 15.4
------------------------------------ ---- ----
15. Borrowings: term loans and overdrafts
The table indicates amounts drawn and undrawn from each
individual facility as at 31 December:
Amounts
Facility drawn Undrawn
-------- ----- ------- ----- ------- -----
2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- -------- ----- ------- ----- ------- -----
Current
Overdraft facility1 5.0 5.0 - - 5.0 5.0
Fixed rate term loan2 0.9 0.8 0.9 0.8 - -
------------------------- -------- ----- ------- ----- ------- -----
5.9 5.8 0.9 0.8 5.0 5.0
------------------------- -------- ----- ------- ----- ------- -----
Non-current
Fixed rate term loan2 21.4 22.3 21.4 22.3 - -
Term loan to March 20211 100.0 100.0 65.9 52.5 34.1 47.5
Fixed rate term loan
to December 20223 25.0 25.0 25.0 25.0 - -
Term loan to July 20204 50.0 50.0 - 21.5 50.0 28.5
Fixed rate term loan
to November 20285 75.0 75.0 75.0 75.0 - -
Term loan to January
20216 115.0 115.0 55.0 105.9 60.0 9.1
Fixed rate term loan
to August 20247 50.0 50.0 50.0 50.0 - -
Fixed rate term loan
to August 20297 63.0 63.0 63.0 63.0 - -
Term loan to December
20218 30.0 30.0 - - 30.0 30.0
Term loan to July 20219 30.6 - 8.9 - 21.7 -
------------------------- -------- ----- ------- ----- ------- -----
560.0 530.3 364.2 415.2 195.8 115.1
------------------------- -------- ----- ------- ----- ------- -----
565.9 536.1 365.1 416.0 200.8 120.1
------------------------- -------- ----- ------- ----- ------- -----
Providers:
1 The Royal Bank of Scotland plc.
2 Aviva facility (acquired as part of HIL acquisition) repayable
in tranches to 31 January 2032.
3 Aviva GPFC facility.
4 HSBC Bank facility.
5 Aviva facility.
6 Barclays/AIB facility.
7 Aviva facility.
8 Lloyds facility.
9 Santander facility.
2018 2017
GBPm GBPm
------------------------------------------------- ------- -------
Balance as at 1 January 412.3 430.2
Changes from financing cash flows
Term bank loan drawdowns 123.0 137.8
------------------------------------------------- ------- -------
New loan facilities drawn 123.0 137.8
------------------------------------------------- ------- -------
Repayments of mortgages principal (0.9) (0.8)
Repayments of term bank loans (173.1) (154.7)
------------------------------------------------- ------- -------
Repayments of term loan borrowings (174.0) (155.5)
------------------------------------------------- ------- -------
Loan issue costs for new facilities/ refinancing 1.3 1.1
------------------------------------------------- ------- -------
Total changes from financing cash flows (49.7) (16.6)
------------------------------------------------- ------- -------
Other non-cash changes
Amortisation of loan issue costs (1.2) (1.3)
------------------------------------------------- ------- -------
Total other changes (1.2) (1.3)
------------------------------------------------- ------- -------
Balance as at 31 December 361.4 412.3
------------------------------------------------- ------- -------
At 31 December 2018, total facilities of GBP879.9 million (2017:
GBP844.3 million) were available to the Group. This included a
GBP75 million unsecured retail bond, a GBP70 million secured bond,
a GBP100 million secured bond, a GBP23.2 million fair value
convertible bond, a GBP45.8 million Euro-denominated bond and a
GBP5 million overdraft facility. Of these facilities, as at 31
December 2018, GBP679.1 million was drawn (2017: GBP724.2
million).
On 8 May 2018, the Aviva HIL (GBP22.3 million) and Aviva GPFC
(GBP25.0 million) loan facilities were amended with the amendments
having no material impact on the terms of the facilities.
On 27 July 2018, a new GBP30.6 million facility was successfully
completed with Santander. The new loan can be drawn in Sterling,
and has a variable interest rate of LIBOR plus 170bps. The new loan
facility expires in July 2021.
Costs associated with the arrangement and extension of the
facilities, including legal advice and loan arrangement fees, are
amortised using the effective interest rate.
Any amounts unamortised as at the period end are offset against
amounts drawn on the facilities as shown in the table below:
2018 2017
GBPm GBPm
----------------------------------------------- ----- -----
Term loans drawn: due within one year 0.9 0.8
Term loans drawn: due in greater than one year 364.2 415.2
----------------------------------------------- ----- -----
Total terms loans drawn 365.1 416.0
Less: unamortised borrowing costs (3.7) (3.7)
----------------------------------------------- ----- -----
Total term loans per the Group Balance Sheet 361.4 412.3
----------------------------------------------- ----- -----
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
2018 2017
GBPm GBPm
-------------------------------------- ----- -----
Unsecured:
Retail bond July 2019 75.0 75.0
Convertible bond May 2019 26.6 75.5
Less: unamortised costs (0.1) (0.3)
-------------------------------------- ----- -----
Total unsecured bonds 101.5 150.2
-------------------------------------- ----- -----
Secured:
Secured bond December 2025 70.0 70.0
Secured bond March 2027 100.0 100.0
Secured bond (Euro private placement) 45.8 -
Less: unamortised issue costs (2.6) (2.1)
-------------------------------------- ----- -----
Total secured bonds 213.2 167.9
-------------------------------------- ----- -----
Total bonds 314.7 318.1
-------------------------------------- ----- -----
The fair value of the bonds that converted during the year was
GBP45.7 million (2017: GBP22.8 million).
Secured bonds
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. The Secured Bonds incur interest at an annualised rate of
220bps above six-month LIBOR, payable semi-annually in arrears.
On 21 March 2017, a new GBP100 million Secured Bond was issued
for a ten-year term at a fixed coupon of 2.83% that matures on 21
March 2027. Interest is paid semi-annually in arrears.
On 20 December 2018, new senior secured notes for a total of
EUR51 million (GBP45.8 million) were issued at a blended fixed rate
of 2.4793% and a weighted average maturity of 10.4 years. Interest
is paid semi-annually in arrears. The notes represent PHP's first
Euro-denominated transaction in the private placement market. The
secured notes were placed with UK and Irish institutional investors
in two tranches:
EUR40 million 2.46% senior notes due December 2028
EUR11 million 2.633% senior notes due December 2030.
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 are amortised using the effective interest rate
method. The retail bond matures on 31 July 2019.
Convertible bond
On 20 May 2014, PHP Finance (Jersey) Limited (the "Issuer"), a
wholly owned subsidiary of the Group, issued GBP82.5 million of
4.25% 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. In October 2018, the
conversion price was adjusted to 96.16 pence. The adjustment is in
accordance with the dividend protection provisions set out in
condition 6(b)(iii)(B) of the conditions of the Bonds and is
triggered by the Ordinary Shares trading ex-dividend. The adjusted
exchange price shall be applied in respect of all conversion
notices in respect of the Bonds from 11 October 2018. 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.
During the year, 41,457,272 (2017: 19,794,870) new Ordinary
Shares of 12.5 pence were issued on the conversion of GBP40.0
million (2017: GBP19.3 million) nominal of convertible bonds.
Following the conversion of the Bonds there were GBP23.2 million
(2017: GBP63.2 million) nominal of convertible bonds
outstanding.
2018 2017
GBPm GBPm
---------------------------------------- ------ ------
Balance at 1 January 75.5 95.0
Bond conversions (45.7) (22.8)
Fair value movement in convertible bond (3.2) 3.3
---------------------------------------- ------ ------
Balance at 31 December 26.6 75.5
---------------------------------------- ------ ------
The fair value of the convertible bond at 31 December 2018 and
31 December 2017 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%-40% of total debt facilities. 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.
2018 2017
GBPm GBPm
------------------------------------------------------- ------ ------
Fair value of interest rate swaps treated as cash flow
hedges under IAS 39 ("effective swaps")
Current liabilities - (2.5)
Non-current liabilities (6.2) (22.1)
------------------------------------------------------- ------ ------
(6.2) (24.6)
------------------------------------------------------- ------ ------
Fair value of interest rate swaps not qualifying as
cash flow hedges under IAS 39 ("ineffective swaps")
Current assets - 0.3
Current liabilities - (0.2)
Non-current assets 0.6 -
Non-current liabilities (11.6) -
------------------------------------------------------- ------ ------
(11.0) 0.1
------------------------------------------------------- ------ ------
Total fair value of interest rate swaps (17.2) (24.5)
------------------------------------------------------- ------ ------
Shown in the balance sheet as:
Total current assets - 0.3
Total non-current assets 0.6 -
Total current liabilities - (2.7)
Total non-current liabilities (17.8) (22.1)
------------------------------------------------------- ------ ------
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
"effective" cash flow hedges in 2018 was a GBP4.1 million gain
(2017: GBP2.8 million gain), including the amortisation of the cash
flow hedging reserve of GBP1.5 million (2017: GBP0.2 million).
Floating to fixed interest rate swaps with a contract value of
GBP183 million (2017: GBP158.0 million) were in effect at 31
December 2018. Details of all floating to fixed rate interest rate
swap contracts held are as follows:
Fixed interest
Contract value Start date Maturity per annum %
----------------- ------------- ------------- --------------
2018
GBP50.0 million August 2007 August 2021 0.870
GBP38.0 million August 2007 August 2021 0.870
GBP10.0 million June 2020 June 2026 4.810
GBP10.0 million June 2020 June 2026 4.510
GBP10.0 million July 2020 July 2026 4.400
GBP10.0 million July 2020 July 2026 4.475
GBP10.0 million July 2020 July 2026 4.455
GBP20.0 million July 2020 July 2026 4.479
GBP25.0 million January 2018 January 2023 2.470
----------------- ------------- ------------- --------------
GBP183.0 million
----------------- ------------- ------------- --------------
2017
GBP50.0 million August 2007 August 2021 0.870
GBP38.0 million August 2007 August 2021 0.870
GBP10.0 million June 2006 June 2026 4.810
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
----------------- ------------- ------------- --------------
GBP158.0 million
----------------------------------------------- --------------
Fixed interest
Contracts not yet in effect Start date Maturity per annum %
---------------------------- ------------- ------------- --------------
GBP75.0 million January 2019 January 2024 2.650
---------------------------- ------------- ------------- --------------
On 17 July 2018, six 4.52% (blended) fixed rate swaps with a
total nominal value of GBP70.0 million, effective until July 2026,
were cancelled for the next two years for a one-off payment of
GBP5.0 million equivalent to 0.7 pence per share on an EPRA net
asset value basis. The balance within the cash flow hedge reserve
relating to these swaps has been amortised through the Group
Statement of Comprehensive Income over the remainder of the
original contract period to July 2026 (see Note 6b).
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
rate 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 Group's 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 of on
profit Effect
financial before on
instruments taxation equity
GBPm GBPm GBPm
------------------------- ---------------------------- ----------- -------- ------
2018
London Interbank Offered
Rate Increase of 50 basis points 5.5 3.0 8.0
London Interbank Offered
Rate Decrease of 50 basis points (5.5) (3.0) (8.0)
------------------------- ---------------------------- ----------- -------- ------
2017
London Interbank Offered
Rate Increase of 50 basis points 7.3 1.0 8.3
London Interbank Offered
Rate Decrease of 50 basis points (7.3) (1.0) (8.3)
------------------------- ---------------------------- ----------- -------- ------
b) Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations under financial instruments or customer contracts,
leading to a financial loss. The Group is exposed to credit risk
from its principal financial assets being cash and cash
equivalents, and trade and other receivables (see Note 12).
Trade receivables
Trade receivables, primarily tenant rentals, are recognised and
carried at amortised cost and presented in the balance sheet net of
allowances for doubtful receivables and are monitored on a
case-by-case basis. Impairment losses are recognised through the
expected credit loss model. 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.
Banks 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, which 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.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted payments
including interest.
Less than Three to One to More than
twelve
On demand three months months five years five years Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- ------------ -------- ---------- ---------- -----
2018
Interest-bearing loans
and borrowings - 5.5 18.7 311.6 425.9 761.7
Interest rate swaps (net) - 0.4 1.3 18.1 7.6 27.4
Trade and other payables 0.8 13.9 0.4 0.4 0.1 15.6
-------------------------- --------- ------------ -------- ---------- ---------- -----
0.8 19.8 20.4 330.1 433.6 804.7
-------------------------- --------- ------------ -------- ---------- ---------- -----
2017
Interest-bearing loans
and borrowings - 5.8 20.7 599.1 237.3 862.9
Interest rate swaps (net) - 1.1 5.8 23.5 11.5 41.9
Trade and other payables 1.1 12.5 0.6 0.8 - 15.0
-------------------------- --------- ------------ -------- ---------- ---------- -----
1.1 19.4 27.1 623.4 248.8 919.8
-------------------------- --------- ------------ -------- ---------- ---------- -----
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 under (e)
Capital risk management and are disclosed to the facility providers
on a quarterly basis. There have been no breaches during the year
(2017: 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
2018 2018 2017 2017
GBPm GBPm GBPm GBPm
-------------------------------------- ---------- ---------- ---------- ----------
Financial assets
Trade and other receivables 4.3 4.3 4.8 4.8
Effective interest rate swaps - - 0.3 0.3
Ineffective interest rate swaps 0.6 0.6 - -
Cash and short term deposits 5.9 5.9 3.8 3.8
-------------------------------------- ---------- ---------- ---------- ----------
Financial liabilities
Interest-bearing loans and borrowings 679.1 707.2 (724.2) (772.0)
Effective interest rate swaps (6.2) (6.2) (24.6) (24.6)
Ineffective interest rate swaps (net) (11.6) (11.6) (0.2) (0.2)
Trade and other payables (16.1) (16.1) (15.0) (15.0)
-------------------------------------- ---------- ---------- ---------- ----------
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;
-- the fair value of fixed rate debt is estimated using the mid
yield to maturity on the reporting date. The valuations are on a
clean basis, which exclude accrued interest from the previous
settlement date to the reporting date; 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 2018 are as follows:
Level 1 Level 2 Level 3
1 2 3 Total
Recurring fair value measurements GBPm GBPm GBPm GBPm
---------------------------------- ------- ------- ------- -------
Financial assets
Derivative interest rate swaps - 0.6 - 0.6
---------------------------------- ------- ------- ------- -------
Financial liabilities
Derivative interest rate swaps - (17.8) - (17.8)
Convertible bond (26.6) - - (26.6)
Fixed rate debt - (480.8) - (480.8)
---------------------------------- ------- ------- ------- -------
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.
Fair value measurements at 31 December 2017 are as follows:
Level 1 Level 2 Level 3
1 2 3 Total
Recurring fair value measurements GBPm GBPm GBPm GBPm
---------------------------------- ------- ------- ------- -------
Financial assets
Derivative interest rate swaps - 0.3 - 0.3
---------------------------------- ------- ------- ------- -------
Financial liabilities
Derivative interest rate swaps - (24.8) - (24.8)
Convertible bond (75.5) - - (75.5)
Fixed rate debt - (450.1) - (450.1)
---------------------------------- ------- ------- ------- -------
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; and
-- 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 Group
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, to facilitate
expansion and to maintain sustainable returns for shareholders.
Under several of its debt facilities, the Group is subject to a
covenant whereby consolidated Group rental income must exceed Group
borrowing costs by the ratio 1.3:1 (2017: 1.3:1). No debt facility
has a Group loan to value covenant.
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 1.75:1 (2017: 1.0 to 1.7:1); and
-- loan to value: 50% to 75% (2017: 50% to 75%).
UK REIT compliance tests include loan to property value 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.
During the period the Group has complied with all of the
requirements set out above.
2018 2017
Group loan to value ratio GBPm GBPm
-------------------------------------------------------- ------- -------
Fair value of completed investment properties 1,496.9 1,360.8
Fair value of development properties 6.0 1.1
-------------------------------------------------------- ------- -------
1,502.9 1,361.9
-------------------------------------------------------- ------- -------
Interest-bearing loans and borrowings (with convertible
bond at nominal value) 672.6 718.1
Unamortised borrowing costs 6.5 6.1
Less cash held (5.9) (3.8)
-------------------------------------------------------- ------- -------
Nominal amount of interest-bearing loans and borrowings 673.2 720.4
-------------------------------------------------------- ------- -------
Group loan to value ratio 44.8% 52.9%
-------------------------------------------------------- ------- -------
19. Share capital
Ordinary Shares issued and fully paid at 12.5 pence each
2018 2017
Number Number
- 2018 - 2017
millions GBPm millions GBPm
--------------------------------------- -------- ---- -------- ----
Balance at 1 January 619.4 77.5 598.2 74.8
Scrip issues in lieu of cash dividends 1.7 0.2 1.4 0.2
Share issue 19 April 2018 106.5 13.3 - -
Shares issued on bond conversions 41.5 5.1 19.8 2.5
--------------------------------------- -------- ---- -------- ----
Balance at 31 December 769.1 96.1 619.4 77.5
--------------------------------------- -------- ---- -------- ----
Issue of shares in 2018
Number
of shares
- Issue
Date of issue millions price
------------------------------------- ----------------- --------- -------
Scrip issue in lieu of cash dividend 23 February 2018 0.2 114.00p
Share issue 19 April 2018 106.5 108.00p
Scrip issue in lieu of cash dividend 25 May 2018 0.6 109.50p
Scrip issue in lieu of cash dividend 24 August 2018 0.3 115.96p
Scrip issue in lieu of cash dividend 23 November 2018 0.6 109.52p
------------------------------------- ----------------- --------- -------
20. Share premium
2018 2017
GBPm GBPm
------------------------------------- ----- -----
Balance at 1 January 80.7 59.1
Scrip issue in lieu of cash dividend 1.7 1.4
Share issue 19 April 2018 101.7 -
Shares issued on bond conversions 40.5 20.3
Share issue expense (4.0) (0.1)
------------------------------------- ----- -----
Balance at 31 December 220.6 80.7
------------------------------------- ----- -----
21. Other reserve
The other reserve is made up of the capital reserve which is
held to finance any proposed repurchases of Ordinary Shares,
following approval of the High Court in 1998 and the foreign
exchange translation reserve.
2018 2017
GBPm GBPm
--------------------------------------------------- ---- ----
Capital reserve
Balance at 1 January and 31 December 1.6 1.6
--------------------------------------------------- ---- ----
Foreign exchange translation reserve
Balance at 1 January - -
Exchange differences on translating the net assets
of foreign operations 0.9 -
--------------------------------------------------- ---- ----
Balance at 31 December 0.9 -
--------------------------------------------------- ---- ----
Balance of other reserve at 31 December 2.5 1.6
--------------------------------------------------- ---- ----
22. Special reserve
2018 2017
GBPm GBPm
------------------------------------- ------ ------
Balance at 1 January 161.4 192.8
Dividends paid (34.7) (29.8)
Scrip issue in lieu of cash dividend (1.9) (1.6)
------------------------------------- ------ ------
Balance at 31 December 124.8 161.4
------------------------------------- ------ ------
The special reserve has arisen on previous issues of the
Company's shares. It represents the share premium on the issue of
the shares, net of expenses, from issues effected by way of a cash
box mechanism.
A cash box raising is a mechanism for structuring a capital
raising whereby the cash proceeds from investors are invested in a
subsidiary company of the parent instead of the parent itself. Use
of a cash box mechanism has enabled the share premium arising from
the issue of shares to be deemed to be a distributable reserve and
has therefore been shown as a special reserve in these financial
statements. Any issue costs are also deducted from the special
reserve.
As the special reserve is a distributable reserve, the dividends
distributed in the period 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 the 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:
2018 2017
GBPm GBPm
----------------------------------------------------------- ------ ------
Balance at 1 January (29.9) (32.7)
Fair value movement on cash flow hedges 0.8 0.4
Amortisation of cash flow hedging reserve 1.5 0.2
Reclassification of swap between ineffective and effective 1.8 2.2
----------------------------------------------------------- ------ ------
Net movement on cash flow hedges ("effective swaps")
and amortisation of cash flow hedging reserve 4.1 2.8
----------------------------------------------------------- ------ ------
Balance at 31 December (25.8) (29.9)
----------------------------------------------------------- ------ ------
On 4 July 2017, an interest rate swap for a notional amount of
GBP20 million was terminated early. The termination cost totalled
GBP6.2 million, and the cash flow hedge reserve has been amortised
through the Group Statement of Comprehensive Income over the
remainder of what was its contract period through to 24 July
2027.
On 17 July 2018, six 4.52% (blended) fixed rate swaps with a
total nominal value of GBP70.0 million, effective until July 2026,
were cancelled for the next two years for a one-off payment of
GBP5.0 million equivalent to 0.7 pence per share on an EPRA net
asset value basis (see Note 6b).
24. Retained earnings
2018 2017
GBPm GBPm
----------------------------- ----- -----
Balance at 1 January 295.5 203.6
Retained profit for the year 74.3 91.9
----------------------------- ----- -----
Balance at 31 December 369.8 295.5
----------------------------- ----- -----
25. Net asset value per share
Net asset values have been calculated as follows:
2018 2017
GBPm GBPm
----------------------------------------------- ----- -----
Net assets per Group Balance Sheet 788.0 586.8
Derivative interest rate swaps (net liability) 17.2 24.5
Convertible bond fair value movement 3.4 12.3
----------------------------------------------- ----- -----
EPRA net asset value 808.6 623.6
----------------------------------------------- ----- -----
Number Number
of shares of shares
- -
million million
-------------------------------- --------- ---------
Ordinary Shares
Issued share capital 769.1 619.4
-------------------------------- --------- ---------
Net asset value per share
Basic net asset value per share 102.5p 94.7p
-------------------------------- --------- ---------
EPRA NAV per share 105.1p 100.7p
-------------------------------- --------- ---------
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 assesses the dilutive impact
of the unsecured convertible bond on its net asset value per share.
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 and in October 2018
restated in accordance with the dividend protection rules and
triggered by the Ordinary Shares trading ex-dividend), the
unsecured convertible bond issued by the Group on 20 May 2014 is
anti-dilutive to all measures of net asset value per share.
26. Capital commitments
As at 31 December 2018, the Group has entered into a forward
funding development agreement with a third party for the
development of a primary healthcare development in Ireland. The
Group has acquired the land and advances funds to the developer as
the construction progresses. Total consideration of GBP16.0 million
plus VAT remains to be funded with regard to this property.
At 31 December 2017 the Group had entered into a development
agreement with a third party for the purchase of a primary
healthcare development. At 31 December 2017, total consideration of
GBP4.2 million plus VAT remained to be funded with regard to this
property.
As at 31 December 2018, the Group has capital commitments
totalling GBPnil (2017: GBP1.5 million plus VAT) being the cost to
complete asset management projects on site.
27. Contingent liabilities
An independent expert has been appointed to adjudicate on
whether an adjustment to the conversion price of the convertible
bond should have been made in respect of the open offer element of
the equity raises in both 2016 and 2018. If the independent expert
determines an adjustment should have been made then approximately
450,000 additional ordinary shares of 12.5p may need to be issued
to bond holders who have converted to date and a further 140,000
could potentially be issued over and above current bondholders'
entitlement, at the holders' option to convert. The results of the
independent expert's findings are due to be received shortly.
28. Related party transactions
The terms and conditions of the Advisory Agreement are described
in the Directors' Report and the Directors' Remuneration
Report.
Nexus, the Adviser, is a related party due to the Managing
Director being a shareholder and Director of Nexus.
Details of the amounts paid in relation to related party
transactions are provided in Note 4.
29. Subsequent events
0n 24 January 2019 the Boards of the Company and MedicX jointly
announced a proposed all share merger to create a leading primary
healthcare REIT in the UK with a portfolio of over 470 assets
valued at GBP2.3 billion. The merger is subject to the approval of
both the Company and MedicX shareholders; subject to these
approvals the merger is expected to complete in late March.
Conditional on the completion of the merger with MedicX, the
group will enter into a GBP50 million unsecured revolving credit
facility with HSBC Bank for an 18-month period.
In January 2019, convertible bonds with a nominal value of
GBP6.2 million converted into 6,447,584 new ordinary shares of 12.5
pence each. Following the cancellation of the bonds the nominal
value of the remaining convertible bonds was GBP17.0 million.
30. Annual Report
The financial information set out above does not constitute the
Group's statutory accounts for the years ended 31 December 2018 or
2017 but is derived from those accounts. Statutory accounts for
2017 have been delivered to the Registrar of Companies and those
for 2018 will be delivered in due course. The Auditor has reported
on those accounts and 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 2018
will be published on the Group's website at www.phpgroup.co.uk and
will be posted to shareholders in February 2019.
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.
31. Going concern
A review of the Group's business activities and the factors that
may impact its future development, performance and position,
together with a summary and review of the nancial position of the
Group, its cash ows, liquidity position and borrowing facilities
are set out in the Risk Management section.
The Group's property portfolio is 99.8% occupied with 91% of its
income funded directly or indirectly by the Government bodies in
the UK and Republic of Ireland. The nature of the Group's tenant
base and long term lease agreements, provides secure, transparent
cash flows that are collected promptly. A strategy of maintaining a
prudent level of hedging combined with stable and predictable
administrative costs enables the Board to have great visibility on
the Group's liquidity.
In April 2018, the Company completed an over-subscribed equity
issue, successfully raising GBP115.0 million of new share capital
(GBP111.2 million net of expenses). New shares were issued to
existing and new shareholders at 108 pence each, a premium of 7.2%
to EPRA NAV as at 31 December 2017.
The net proceeds from the equity raise were used to repay the
Group's revolving credit facilities which are available to be
redrawn to fund investment opportunities and capital
commitments.
In December 2018, the Company issued its first euro-denominated
senior secured loan notes for EUR51 million (GBP45.8 million) at a
blended rate of 2.4973% with a weighted average maturity of 10.4
years. The secured notes were placed with UK and Irish
institutional investors in two tranches:
-- EUR40 million 2.46% senior notes due December 2028; and
-- EUR11 million 2.633% senior notes due December 2030.
The use of euro-denominated debt also provides a natural hedge
against movements in exchange rates for its portfolio of assets in
Ireland.
In July 2018, a GBP30.6 million secured revolving credit
facility was entered into with Santander for an initial three-year
term and will be used to fund acquisitions in the UK.
Post period end a GBP50m unsecured revolving credit facility was
entered into with HSBC, for an 18-month period, conditional and
commencing on completion of merger with MedicX.
Further opportunities are being pursued by the Group in wider
debt capital markets which may result in additional term debt
facilities being secured during the course of 2019.
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.
32. Alternative Performance Measures ("APMs")
PHP uses EPRA earnings and EPRA net assets as APMs which are
widely used by public real estate companies to highlight the
underlying and recurring performance of the property portfolio. The
APMs are in addition to the statutory measures from the condensed
financial statements. The measures are defined and reconciled to
amounts presented in the financial statements within this annual
results statement at notes 8 and 25. The APMs used by the Company
are consistent with those used in the 2018 Annual Report and the
reasons for the Company's use of these APMs are set out
therein.
Directors' responsibility statement
Statement of Directors' responsibilities in respect of the Group
and Company financial statements
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
("IFRSs") as adopted by the European Union and Article 4 of the IAS
Regulation and have elected to prepare the Parent Company financial
statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and
applicable law), including FRS 101 "Reduced Disclosure Framework"
.Under company law, the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss of
the Company for that period.
In preparing the Parent Company financial statements, the
Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
In preparing the Group financial statements, International
Accounting Standard 1 requires that the Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the
relevant financial reporting framework, 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 Report 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 they face; 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 Company's position,
performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 30 January 2019 and is signed on its behalf by:
For and on behalf of the Board
Steven Owen
Chairman
30 January 2019
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
("PHP").
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
year.
European Public Real Estate Association ("EPRA") is a real
estate industry body, which has issued Best Practice
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, 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, the MtM value of derivative financial
instruments and the convertible bond fair value movement.
EPRA NAV per share is the balance sheet net assets excluding own
shares held, the MtM value of derivative financial instruments and
the convertible bond fair value movement, divided by the number of
shares in issue at the balance sheet date.
EPRA vacancy rate is, as a percentage, the ERV of vacant space
in the Group's property portfolio divided by 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 valuer's 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 ("PHP") and its
subsidiaries.
HSE or the Health Service Executive is the executive agency of
the Irish government responsible for health and social services for
people living in Ireland.
IFRS is International Financial Reporting Standards as adopted
by the European Union.
IFRS or Basic net asset value per share ("IFRS NAV") are the
balance sheet net assets, excluding own shares held, divided by the
number of shares in issue at the balance sheet date.
Interest cover is the number of times net interest payable is
covered by net rental income.
Interest rate swap is a contract to exchange fixed payments for
floating payments linked to an interest rate, and is generally used
to manage exposure to fluctuations in interest rates.
MSCI (IPD) is the Investment Property Databank Limited which
provides performance analysis for most types of real estate and
produces an independent benchmark of property returns.
MSCI (IPD) Healthcare is the Investment Property Databank's UK
Annual Healthcare Property Index.
MSCI (IPD) Total Return is calculated as the change in capital
value, less any capital expenditure incurred, plus net income,
expressed as a percentage of capital employed over the period, as
calculated by MSCI (IPD).
JCRA is J.C. Rathbone Associates Limited.
London Interbank Offered Rate ("LIBOR") is the interest rate
charged by one bank to another for lending money.
Loan to Value ("LTV") is the ratio of net debt to the total
value of property and assets.
Mark to Market ("MTM") is the difference between the book value
of an asset or liability and its market value.
Net initial yield is the annualised rents generated by an asset,
after the deduction of an estimate of annual recurring
irrecoverable property outgoings, expressed as a percentage of the
asset valuation (after notional purchasers' costs).
Net rental income is the rental income receivable in the period
after payment of direct property costs. Net rental income is quoted
on an accounting basis.
NHSPS is NHS Property Services Limited, the company wholly owned
and funded by the Department of Health, which, as of 1 April 2013,
has taken on all property obligations formerly borne by Primary
Care Trusts.
Parity value is calculated based on dividing the convertible
bond value by the exchange price.
Property Income Distribution ("PID") is the required
distribution of income as dividends under the REIT regime. It is
calculated as 90% of exempted net income.
Real Estate Investment Trust ("REIT") is a listed property
company which qualifies for and has elected into a tax regime,
which exempts qualifying UK profits, arising from property rental
income and gains on investment property disposals, from corporation
tax, but which has a number of specific requirements.
Rent reviews take place at intervals agreed in the lease and
their purpose is usually to adjust the rent to the current market
level at the review date.
Rent roll is the passing rent being the total of all the
contracted rents reserved under the leases.
Reversionary yield is the anticipated yield which the initial
yield will rise to once the rent reaches the ERV and when the
property is fully let. It is calculated by dividing the ERV by the
valuation.
Retail Price Index ("RPI") is the official measure of the
general level of inflation as reflected in the retail price of a
basket of goods and services such as energy, food, petrol, housing,
household goods, travelling fare, etc. RPI is commonly computed on
a monthly and annual basis.
RICS is the Royal Institution of Chartered Surveyors.
RPI linked leases are those leases which have rent reviews which
are linked to changes in the RPI.
Special reserve is a distributable reserve.
Total expense ratio ("TER") is calculated as total
administrative costs for the year divided by the average total
asset value during the year.
Total property return is the overall return generated by
properties on a debt-free basis. It is calculated as the net rental
income generated by the portfolio plus the change in market values,
divided by opening property assets plus additions.
GBPm's
------------------------------- -------
Net rental income 76.4
Revaluation surplus and profit
on sales 36.1
------------------------------- -------
112.5
Opening property assets 1,361.9
Weighted additions in the
period 45.5
------------------------------- -------
1,407.4
Total property return 8.0%
------------------------------- -------
Total NAV return is calculated as the movement in EPRA net
assets for the period plus the dividends paid, divided by opening
EPRA net assets.
NAV
------------------------- ------
At 31 December 2017 100.70
At 31 December 2018 105.10
Increase/(decrease) 4.40
Add: Dividends paid
23/02/2018 Q1 interim 1.35
25/05/2018 Q2 interim 1.35
24/08/2018 Q3 interim 1.35
24/11/2018 Q4 interim 1.35
------------------------- ------
Total shareholder return 9.80
------------------------- ------
Total shareholder return is calculated as the movement in the
share price for the period plus the dividends paid, divided by the
opening share price.
Weighted average facility maturity is calculated by multiplying
each tranche of Group debt by the remaining period to its maturity
and dividing the result by total Group debt in issue at the year
end.
Weighted average unexpired lease term ("WAULT") is the average
lease term remaining to first break, or expiry, across the
portfolio weighted by contracted rental income.
Yield on cost is the estimated annual rent of a completed
development divided by the total cost of development, including
site value and finance costs expressed as a percentage return.
Yield shift is a movement (usually expressed in basis points) in
the yield of a property asset, or like-for-like portfolio over a
given period. Yield compression is a commonly used term for a
reduction in yields.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LFFFLLAIIVIA
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