Primary Health Properties : Financial Document

Primary Health Properties PLC

Interim results for the six months ended 30 June 2022

Organic rental growth continuing to drive strong property returns in a turbulent market

Uplift in NAV per share and dividend fully covered at 103%

Primary Health Properties PLC ("PHP", the "Group" or the "Company"), a leading investor in modern primary health facilities, announces its interim results for the six months ended 30 June 2022 (the "period").

Harry Hyman, Chief Executive of PHP, commented:

"We are encouraged by the firmer tone of rental growth experienced in the period from the ongoing rent reviews and asset management projects successfully completed. Furthermore, with the majority of PHP's debt either fixed or hedged for a weighted average period of just under eight years the Board remains confident that PHP can continue to deliver further earnings and dividend growth.

"Notwithstanding the outlook for longer-dated interest rates the investment market has remained robust in the first half of the year and we have continued to see further net initial yield compression in both the UK and Ireland.

"NHS initiatives to modernise and invest in the primary care estate support the important role that primary healthcare as a first line of defence must play to re-focus services away from over-burdened hospital settings, and to satisfy increased demand, driven by the long-term demographic trends of populations that are growing, ageing and suffering from more instances of chronic illness. We continue to maintain close relationships with our key stakeholders, working closely with the NHS in the UK, HSE in Ireland, and our GP partners in both markets to help them evolve and adapt as the 'new normal' is established."

FINANCIAL AND OPERATIONAL HIGHLIGHTS

Income statement and financial metrics	Six months to	Six months to
30 June 2022	30 June 2021	Change
Net rental income1	£71.1m	£67.7m	+5.0%
Adjusted earnings1,2	£44.7m	£40.7m	+9.8%
Adjusted earnings per share1,2	3.4p	3.1p	+9.7%
IFRS profit for the period	£107.1m	£71.4m
IFRS earnings per share2	8.0p	5.4p
Total adjusted NTA return1	6.3%	5.0%
Dividends
Dividend per share5	3.25p	3.1p	+4.8%
Dividends paid5	£43.3m	£41.1m	+5.4%
Dividend cover1	103%	99%
Balance sheet and operational metrics	30 June	31 December
2022	2021	Change
Adjusted NTA per share1,3	120.8p	116.7p	+3.5%
IFRS NTA per share1,3	117.6p	112.5p	+4.5%
Property portfolio
Investment portfolio valuation4	£2.912bn	£2.796bn	+1.8%
Net initial yield ("NIY") 1	4.57%	4.64%
Contracted rent roll (annualised)1,7	£144.2m	£140.7m	+1.3%
Weighted average unexpired lease term ("WAULT")1	11.4 years	11.6 years
Occupancy	99.7%	99.7%
Rent-roll funded by government bodies1	89%	90%
Debt
Average cost of debt	3.0%	2.9%
Loan to value ratio ("LTV")1	43.1%	42.9%
Weighted average debt maturity	7.8 years	8.2 years
Total undrawn loan facilities and cash6,8	£290.6m	£321.2m

Primary Health Properties PLC	1
Interim results statement for the six months ended 30 June 2022

1. Definitions for net rental income, adjusted earnings, adjusted earnings per share, earnings per share ("EPS"), dividend cover, loan to value ("LTV"), net tangible assets ("NTA"), rent roll, NIY, WAULT, total adjusted NTA return and net asset value ("NAV") are set out in the Glossary of Terms.
2. See note 7, earnings per share, to the financial statements.
3. See note 7, net asset value per share, to the financial statements. Adjusted net tangible assets, EPRA net tangible assets ("NTA"), EPRA net disposal value ("NDV") and EPRA net reinstatement value ("NRV") are considered to be alternative performance measures. The Group has determined that adjusted net tangible assets is the most relevant measure.
4. Percentage valuation movement during the period based on the difference between opening and closing valuations of properties after allowing for acquisition costs and capital expenditure. Includes assets held for sale.
5. See note 8, dividends, to the financial statements.
6. After deducting the remaining cost to complete contracted acquisitions, properties under development and asset management projects.
7. Percentage contracted rent roll increase during the period is based on the annualised uplift achieved from all completed rent reviews and asset management projects.
8. Pro-formaincluding asset acquisitions and disposals completed post period end.

DELIVERING EARNINGS AND DIVIDEND GROWTH

• Adjusted earnings per share increased by 9.7% to 3.4p (30 June 2021: 3.1p)
• Contracted annualised rent roll increased by 2.5% to £144.2 million (31 December 2021: £140.7 million)
• Additional annualised rental income on a like-for-like basis of £1.8 million or 1.3% from rent reviews and asset management projects (H1 2021: £1.3 million or 1.0%; FY 2021: £2.4 million or 1.8%)
• EPRA cost ratio 10.5% (FY 2021: 9.3%), representing the lowest in the UK REIT sector
• Three quarterly dividends totalling 4.875 pence per share distributed or declared in the year-to-date equivalent to 6.5 pence per share on an annualised basis, a 4.8% increase over 2021 (6.2 pence per share) and marking the Company's 26th consecutive year of dividend growth

DELIVERING NET ASSET VALUE GROWTH

• Adjusted Net Tangible Assets ("NTA") per share increased by 3.5% to 120.8 pence (31 December 2021: 116.7 pence)
• Property portfolio valued at £2.9 billion at 30 June 2022 (31 December 2021: £2.8 billion) reflecting a net initial
  yield of 4.57% (31 December 2021: 4.64%)
• Revaluation surplus in the period of £51.2 million (30 June 2021: £66.9 million), representing growth of 1.8%
  (30 June 2021: 2.6%) with approximately half of the valuation surplus coming from rental growth driven by rent reviews and asset management projects
• Post period end disposal of 13 smaller assets for £27.7 million, sale price was 13% above 31 December 2021 book values and represented 60 bps of yield compression
• Strong pipeline of targeted acquisitions, developments and asset management projects with a value of approximately £187 million in the UK and £98 million (€114 million) in Ireland of which £123 million and £43 million (€50 million) is in legal due diligence in both countries
• Portfolio in Ireland now comprises 20 assets, valued at £228 million (€265 million) (31 December 2021: £213 million / €253 million)
• The portfolio's metrics continue to reflect the Group's secure, long-term and predictable income stream with occupancy at 99.7% (31 December 2021: 99.7%) and a WAULT of 11.4 years (31 December 2021: 11.6 years)
• Strong progression of asset management projects with 14 completed in the period and a further 8 currently on-site, investing £14.9 million, creating additional rental income of £0.3 million per annum and extending the weighted average unexpired lease term (WAULT) back to over 20 years

DELIVERING FINANCIAL MANAGEMENT

• LTV ratio 43.1% (31 December 2021: 42.9%), towards the lower end of the Group's targeted range of between 40% to 50%
• Including post period end transactions 95% of net debt fixed or hedged for a weighted average period of just under eight years
• Weighted average debt maturity 7.8 years (31 December 2021: 8.2 years)
• Significant liquidity headroom with cash and collateralised undrawn loan facilities totalling £290.6 million (31 December 2021: £321.2 million) after capital commitments and including post-period end transactions
• €75 million private placement loan note issued in the period for a 12-year term at a fixed rate of 1.64% to finance continued expansion in Ireland

Primary Health Properties PLC	2
Interim results statement for the six months ended 30 June 2022

DELIVERING STRONG TOTAL RETURNS

	Six months ended	Six months ended	Year ended
	30 June 2022	30 June 2021	31 December 2021
Adjusted NTA return	6.3%	5.0%	8.9%
Income return	2.5%	2.6%	5.2%
Capital return	1.8%	2.6%	4.3%
Total property return1	4.3%	5.2%	9.5%

1 The definition for total property return is set out in the Glossary of Terms.

DELIVERING RESPONSIBLE BUSINESS AND ESG

• As previously announced, Net Zero Carbon ("NZC") Framework published with the five key steps the Group is taking to achieve the ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities
• Commenced construction of PHP's first NZC development in West Sussex
• All developments completed in the period achieved BREEAM rating of Excellent or Very Good and all asset management projects completed met EPC target of B or above
• Published PHP's Levelling- Up Impact Report, as part of the Purpose Coalition, detailing of the work PHP is doing to level-up both locally and nationally, and its strategy going forward

Presentation and webcast:

An in-person presentation for analysts will be held on the day at 10am at the offices of Buchanan: 107 Cheapside, London EC2V 6DN. For those who cannot attend in person, the meeting will be accessible via live video webcast and a live conference call facility. Following the presentation, there will be a managed Q&A session.

To access the briefing, please log on or dial in shortly before 10am via the details below:

Webcast:https://stream.brrmedia.co.uk/broadcast/62b982f471203e42c1fbee33

UK Toll-freeDial In: [phone]

Participant PIN code: 2633375

If you would like to join the briefing, please contact Buchanan via [e-mail] confirm your place. A recording of the webcast will be made available from c.12.00pm on the PHP website, https://www.phpgroup.co.uk/

For further information contact:

Harry Hyman	Richard Howell
Primary Health Properties PLC	Primary Health Properties PLC
T [phone]	T [phone]
[e-mail]	[e-mail]

David Rydell/Steph Whitmore/Hannah Ratcliff/Verity Parker

Buchanan

T [phone]

Primary Health Properties PLC	3
Interim results statement for the six months ended 30 June 2022

EXECUTIVE REVIEW

PHP is pleased to have continued to deliver a strong and robust operational and financial performance despite the ongoing volatility in the economic outlook because of persistent price inflation resulting in recent and rapid interest rate increases along with the outlook for longer-dated interest rates stemming from global supply issues, BREXIT, COVID-19, higher wage pressures and the on-going war in the Ukraine. The Group's portfolio has continued to demonstrate strong resilience throughout the first half of 2022. The security and longevity of our income are important drivers of our predictable income stream and underpin our progressive dividend policy and we are now in our 26th year of continued dividend growth.

We are encouraged by the firmer tone of rental growth experienced in the period from the rent reviews and asset management projects completed, and with the majority of PHP's debt either fixed or hedged for a weighted average period of just under eight years, we remain confident that adjusted earnings growth will not be negatively impacted in future periods.

Notwithstanding the outlook for longer-dated interest rates the investment market has remained robust in the first half of the year and we have continued to see further net initial yield compression in both the UK and Ireland. We have taken advantage of the strong prices in the market to dispose of a portfolio of 13 medical centres, for £27.7 million post period end, which comprise smaller facilities significantly below our average lot size.

The interest rate outlook has also caused us to reconsider a number of pipeline acquisitions and we have selectively acquired just three standing investments for £48.8 million, including one post-period end. We also commenced construction of PHP's first Net Zero Carbon development at Croft, West Sussex with a development value of £6.8 million. We believe that significant yield compression in our sector has probably run its course and therefore it is the improving rental growth outlook that will be the principal driver to maintaining and increasing values in future periods.

Including post period end activity, the property portfolio currently stands at just under £2.9 billion across 512 assets, including 20 in Ireland, with a rent roll of £142.8 million.

PHP has continued to actively work with the NHS in the UK, HSE in Ireland, and its GP partners in both markets to help them better utilise the Group's properties for deployment in the recent global health crisis. Many of our primary care facilities and occupiers will need to deal with the backlog of procedures missed over the last three years and will be required to deliver COVID-19 vaccines for many years to come. We continue to maintain close relationships with our key stakeholders and GP partners to ensure we are best placed to help the NHS and HSE, and particularly in primary care, evolve and deal with the pressures placed on them.

Overview of results

PHP's Adjusted earnings increased by £4.0 million or 9.8% to £44.7 million (30 June 2021: £40.7 million) in the six months to 30 June 2022, driven by strong organic rental growth from rent reviews and asset management projects together with interest cost savings arising from various refinancing's completed in 2021 and the first half of 2022. Using the weighted average number of shares in issue in the period the Adjusted earnings per share increased to 3.4 pence (30 June 2021: 3.1 pence), an increase of 9.7%.

A revaluation surplus of £51.2 million (30 June 2021: £66.9 million) was generated in the period from the portfolio, equivalent to 3.8 pence per share. Encouragingly, approximately half of the valuation surplus came from rental growth driven by rent reviews and asset management projects completed in the period and the remainder from further net initial yield compression in the UK and Ireland.

The robust performance in the period has delivered a total adjusted NTA return of 6.3% (30 June 2021: 5.0%).

Primary Health Properties PLC	4
Interim results statement for the six months ended 30 June 2022

Rent reviews and asset management projects completed in the period added £1.8 million or 1.3% (H1 2021: £1.3

million or 1.0%; FY 2021: £2.4 million or 1.8%) to the contracted rent roll with continued positive momentum on the number of rent reviews being settled.

Rental growth from rent reviews settled in the period resulted in an uplift of £1.5 million per annum or 6.1% which equates to 3.0% per annum continuing the positive trend in rental growth over the last two years

The portfolio's average lot size has increased to £5.5 million and we continue to maintain our strong property metrics, with a long weighted average unexpired lease term ("WAULT") of 11.4 years, high occupancy at 99.7% and 89% of our rent funded directly or indirectly by the UK and Irish governments.

Dividends and total shareholder return

The Company distributed a total of 3.25p per share in the six months to 30 June 2022, equivalent to 6.5 pence on an annualised basis, which represents an increase of 4.8% over the dividend distributed per share in 2021 of 6.2 pence.

A third quarterly interim dividend of 1.625 pence per share was declared on 30 June 2022. The dividend will be paid on 19 August 2022 to shareholders who were on the register at the close of business on 8 July 2022. The dividend will comprise a normal dividend of 0.825 pence and a property income distribution of 0.8 pence per share. The Company intends to maintain its strategy of paying a progressive dividend, which is paid in equal quarterly instalments, and covered by underlying earnings in each financial year. A further interim dividend payment is planned to be made in November 2022, which is expected to comprise a mixture of both property income distribution and normal dividend.

The total value of dividends distributed in the period increased by 5.4% to £43.3 million (30 June 2021: £41.1 million), which were fully covered by Adjusted earnings. Dividends totalling £1.7 million were satisfied through the issuance of shares via the scrip dividend scheme.

The Company's share price started the year at 151.4p per share and closed on 30 June 2022 at 136.3p, a decrease of 10.0%. Including dividends, those shareholders who held the Company's shares throughout the period achieved a Total Shareholder Return of -7.8% (30 June 2021: +2.7%). This compares to the total return delivered by UK real estate equities (FTSE EPRA Nareit UK Index) of -21.2% (30 June 2021: +15.5%) and the wider UK equity sector (FTSE All-Share Index) of -4.8% (30 June 2021: +9.6%) in the period.

Environmental, Social and Governance ("ESG")

PHP has a strong commitment to responsible business and ESG matters are at the forefront of the Board's and our various stakeholders' considerations and the Group has committed to transitioning to net zero carbon ("NZC"). We have commenced construction of PHP's first NZC development in the first half of 2022 and published, at the start of the year, a NZC Framework with the five key steps we are taking to achieve an ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities and to help our occupiers achieve NZC by 2040, five years ahead of the NHS's target of becoming the world's first net zero carbon national health system by 2045 for the emissions it can influence and 10 years ahead of the UK and Irish Governments' targets of 2050. Further details on our progress in the year to date and approach to responsible business can be found on pages 15 to 16, the 2021 Annual Report and on our website.

Board changes

Following a review of the composition of the Board in 2021, Ivonne Cantú was appointed as an independent Non-Executive director of the Company with effect from 1 January 2022.

Peter Cole, Non-Executive Director and Chair of the Remuneration Committee, retired from the Board at the

Primary Health Properties PLC	5
Interim results statement for the six months ended 30 June 2022