Primary Health Properties (PHP), a rand hedge property stock, had a rather uneventful first 12 months on the JSE and garnered limited buy-in from local fund managers.
But investor interest in PHP is expected to perk up considerably after the UK-based real estate counter was included in several key local indices this month.
These are the FTSE/JSE all share index, all property index, capped property index and Africa index series. Index inclusion is typically based on size and trading volumes.
Nicolas Lyle, property analyst and portfolio manager at Stanlib, says the upshot of PHP’s recent index inclusion is that more institutional investors, especially those that track property benchmarks, will start to include PHP in their portfolios.
Though PHP is regarded mainly as an income play, Lyle says increased demand for the stock should also underpin share price growth over time.
It seems higher trading volumes have already supported PHP’s share price in recent weeks. The stock is up about 15% since mid-June, when it touched a 12-month low of R20.
The company has a market cap of about R31bn, placing it among the JSE’s top 10 largest real estate investment trusts (Reits). It has been listed on the London Stock Exchange (LSE) since 1995, initially on the junior AIM market and later on the main board.
Today, PHP is part of the FTSE 250 index. It owns 514 buildings worth £2.8bn across the UK and Ireland. They are let exclusively to doctors, pharmacies, dentists and other health-care service providers.
Importantly, the UK’s National Health Service (NHS) and its Ireland counterpart, the Health Service Executive (HSE), fund (directly or indirectly) about 90% of the rentals paid by health-care practitioners.
At a current share price level of 102p on the LSE and about R23.50 on the JSE, PHP offers a decent forward dividend yield of 6.9% (in pounds).
Lyle says the stock offers an “incredibly’’ stable dividend given that the bulk of PHP’s income is backed by the UK and Irish governments. “It’s the most bond-like Reit you can get in the UK,’’ he notes.
This year will be PHP’s 28th consecutive year of uninterrupted dividend growth
The Reit achieved 3% dividend growth for the six months to June. More impressive is that this year will be PHP’s 28th consecutive year of uninterrupted dividend growth.
There are few — if any — other property stocks on the JSE that can claim that achievement. In recent years, most Reits have slashed or suspended dividends, especially during the pandemic.
Lyle also likes the company’s single-sector focus on health care, providing South Africans with an offshore diversification opportunity unlike any of the JSE’s other rand hedge offerings.
PHP became the JSE’s first and only specialist health-care property offering after its secondary listing in October last year. Still, the company has until recently been largely overlooked by local fund managers.
That’s mainly because of lack of liquidity, given that PHP didn’t issue new shares in South Africa.
But PHP CEO Mark Davies, who took over from co-founder Harry Hyman in April, tells the FM that liquidity on the JSE has already increased fivefold since listing, which has supported the stock’s recent index inclusions.
He expects the tradability of the company’s shares on the JSE to increase further over the coming months.
But why is it a good time for South African investors to buy the stock?
Davies argues that PHP’s investment case will be bolstered by proposed changes to the new Labour government’s health-care policies.
The NHS recently commissioned a report, which identified a critical shortage of community-based facilities — general practitioner surgeries, consulting rooms, day clinics and the like, known as primary health-care services.
Proposed changes aim to keep an ageing population with greater levels of chronic disease such as cancer, obesity, diabetes and mental health issues out of major hospitals and get them into primary care facilities within communities.
Davies says hospitals will receive proportionately less money, with more funding channelled into community-based care to relieve pressure on the NHS and to help set up what has been termed the “Neighbourhood Health Service”.
Citing the NHS report, Davies says a large percentage of existing primary care facilities in the UK are outdated and not fit for purpose.
“As the UK’s leading developer and manager of modern, purpose-built health-care properties, PHP is well placed to benefit from these government reforms.’’
He sees potential to double PHP’s portfolio, given increased government funding for the sector. Ireland’s HSE is battling similar health-care challenges as the NHS, with an even greater shortage of primary health-care facilities.
Referring to the 2023 acquisition of local development specialist Axis, Davies says PHP has a first-mover advantage and plans to grow its Irish footprint from 9% to 15% of the portfolio value.
“We can build scale in Ireland fairly quickly as individual properties tend to be much larger than those in the UK.”
As far as PHP’s fledgling South African investor base is concerned, Davies hopes to further diversify the company’s local shareholder representation, which represents just less than 1% now, to at least 5%-10% in the short term.
He cites the company’s government-backed rental proposition as its most important differentiator from other rand hedge Reit offerings.
“The UK government has never not paid its bills. So PHP offers unparalleled income stability at a time when the wider property market is incredibly volatile,’’ he says.
UK-based investment bank Peel Hunt has a buy recommendation on PHP, with a 12-month target price of 110p. The stock is trading at a discount to net tangible value of about 5%, against a premium of typically 10%-plus up to late 2021 before interest rates shot up.
A recent research note on the Reit by Peel Hunt says: “It’s pleasing to see the rental growth story building. PHP’s income quality remains among the best in our coverage universe.’’
PHP is also favoured for its strong cost control, delivering one of the lowest earnings per share cost ratios in the UK Reit sector.
Peel Hunt expects PHP to achieve dividend growth of about 3% a year for the 2024, 2025 and 2026 financial years.
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