Given the consolidation and delisting trend among property stocks, it may seem like an unusual time to bring a new real estate offering to the JSE.
Money flow to the sector has, after all, slowed sharply in recent years as earnings and dividend payouts have come under pressure — initially because of the pandemic and, more recently, high interest rates.
That has forced many to look for better returns elsewhere. However, that’s not deterring London-listed Primary Health Properties (PHP) from making its debut on the JSE later this month.
The real estate investment trust (Reit), which is part of the FTSE 250 index, owns more than 500 buildings across the UK and Ireland that are let to doctors, pharmacies, dentists and other health-care service providers.
Harry Hyman, the chartered accountant who founded PHP and listed the company on the LSE in 1996, believes the timing for a secondary listing on the JSE could in fact not be better.
“It is the first time since the global financial crisis in 2008 that we are trading at a discount to NAV,’’ he says. “So at current pricing, PHP offers South African investors a relatively cheap entry point and a high dividend yield.’’
The stock is down nearly 40% over the past 18 months to 91p, due to the sharp rise in interest rates, tighter capital markets and recessionary fears, which prompted a global sell-down of Reits.
Last week, PHP was trading at an 18% discount to NAV of 111p and a sterling-based dividend yield of 7.4%. Of course, one could argue that most JSE-listed Reits are even cheaper, with several trading at discounts of as much as 40%-50% to NAV.
However, there seem to be plenty of other reasons — besides its value proposition — for South Africans to consider PHP shares.
For one, the company has never in its 27-year history on the LSE cut or suspended dividends — not even during the pandemic, when most other Reits were forced to do so.
PHP’s uninterrupted dividend track record — at a compound annual growth rate of 8.5% in pounds — has been supported by an income stream that is virtually guaranteed.
That’s because most of its health-care tenants are contracted to the National Health Service (NHS) and its Ireland counterpart, known as the Health Service Executive (HSE). These two entities effectively (directly or indirectly) pay health-care practitioners’ rent.
“About 90% of our rent roll is backed by the NHS and HSE, so you’re getting a secure and growing income stream with a strong bond-like underpin,’’ says Hyman. “The number of defaults we’ve had over the past 27 years are less than I can count on one hand.’’
He adds that primary health care is a robust and defensive part of the UK economy. “We’re not exposed to the same travails as retail and office landlords.’’
PHP’s portfolio is 100% let and leases are typically signed for long periods, often 20 years or more. As Hyman puts it, “that makes for a solid, low-risk income play”.
However, he notes there’s also potential for healthy capital growth, “when UK interest rates start dropping again’’.
Though the focus is not on growing the portfolio presently — capital being scarce and expensive — Hyman nevertheless sees opportunity to grow PHP’s footprint, particularly in Ireland where only 21 (8%) of a total 514 properties are located.
“We would like to double our exposure to Ireland, where entry yields are higher than in the UK and interest rates are lower. It’s an attractive growth market for us,’’ he says.
PHP doesn’t plan to initially raise capital on the JSE but hopes to attract new sources of capital over time and diversify its existing shareholder base. The latter include large asset managers such as BlackRock and Legal & General as well as private wealth managers and index tracker funds.
The UK Reit will be the JSE’s first and only specialist health-care property offering. Though a handful of existing Reits such as Growthpoint Properties and Attacq own hospitals and medical centres, the segment accounts for a tiny part of their large, diversified portfolios.
At a market cap of about R28bn, PHP will be the JSE’s fifth-largest property share after London-focused Shaftesbury Capital, East European-focused Nepi Rockcastle, Growthpoint and UK mall owner Hammerson.
It will also be the largest new listing on the JSE since Hammerson made its debut on the JSE in September 2016 at the height of the property listings boom.
Since 2018, only five new real estate stocks have joined the bourse, of which most are illiquid and small with market caps below R4bn, according to JSE data.
Nicolas Lyle, property analyst and portfolio manager at Stanlib, says South African investors should welcome the addition of more rand hedge options on the JSE.
Historically, niche property companies and Reits that focus on specific sectors have outperformed diversified property companies over the long term
— Nicolas Lyle
He adds: “Historically, niche property companies and Reits that focus on specific sectors have outperformed diversified property companies over the long term because the quality of earnings tends to be higher.’’
Johan Holtzhausen, CEO of PSG Capital, which is handling the listing, believes PHP’s entry to the JSE reconfirms global confidence in South Africa’s capital markets.
“PHP offers investors an opportunity to diversify away from South African listed property counters hamstrung by load-shedding and interest rate uncertainty,” he says.
“You’re getting exposure to the highly regarded UK primary health-care market, while also enjoying high-yield returns in British pounds.”
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