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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Primary Health Properties Plc | LSE:PHP | London | Ordinary Share | GB00BYRJ5J14 | ORD 12.5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.10 | -0.11% | 92.90 | 92.90 | 93.05 | 94.15 | 92.90 | 94.15 | 840,355 | 09:24:51 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Agents & Mgrs | 169.8M | 27.3M | 0.0204 | 45.76 | 1.25B |
From Apr 2019 to Apr 2024
TIDMPHP
RNS Number : 0181X
Primary Health Properties PLC
16 February 2017
Primary Health Properties PLC
Audited results for the year ended 31 December 2016
Primary Health Properties PLC ("PHP", the "Group" or the "Company"), the UK's leading investor in modern primary healthcare facilities, is pleased to announce its audited results for the year ended 31 December 2016.
STRONG OPERATIONAL PERFORMANCE
Hot Features
Premium
-- Net rental income increased by 6.9% to GBP66.6
million (2015: GBP62.3 million)
-- IFRS profit before tax of GBP43.7 million
(2015: GBP56.0 million) including surplus
on property valuation of GBP20.7 million
(2015: GBP39.8 million)
-- EPRA Earnings(1, 2) increased by 23.5% to
GBP26.8 million (2015: GBP21.7 million)
-- EPRA Earnings per share 4.8 pence (2015:
4.9 pence), a fall of 2% due to the impact
of additional shares issued in April 2016,
as equity raise proceeds of GBP145.3 million
(net of issue costs) invested through remainder
of 2016 and into 2017
-- Dividends per share paid in the year increased
by 2.5% to 5.125 pence (2015: 5.0 pence),
the 20th successive year of dividend growth
-- Total cost of dividends paid in the year
GBP26.8 million (2015: GBP22.2 million)
fully covered by EPRA Earnings(1, 2) (2015:
98%)
-- EPRA Net Asset Value per share(2, 3) increased
by 3.9% to 91.1 pence (2015: 87.7 pence)
-- EPRA cost ratio(4) maintained at 11.5% (2015:
11.5%)
-- Interest rate on GBP88 million of swap contracts
reduced from 4.79% to 0.87% at a one-off
cash outlay of GBP14.5 million(5) , saving
interest of GBP16.4 million for the period
November 2016 to August 2021
STRENGTHENED BALANCE SHEET
-- Successful, oversubscribed equity issue
completed in April 2016 raised GBP145.3
million net of issue costs
-- Shares issued at a 14% premium to EPRA
NAV per share as at 31 December 2015
-- A total of 24 properties acquired for an
aggregate consideration of GBP74.2 million(6)
, adding GBP4.2 million to annual contracted
rent roll
-- Balance of proceeds used to lower Group
Loan to Value ratio to 53.7%(7, 8) (2015:
62.7%) pending further property investment
in 2017
FURTHER GROWTH IN PROPERTY PORTFOLIO
-- Investment property grown by 11% to GBP1.2
billion (31 December 2015: GBP1.1 billion);
underlying like-for-like growth of 2.3%
-- Portfolio valuation net initial yield
of 5.17% (31 December 2015: 5.32%)
-- Total property return 7.9% (2015: 9.7%)
outperforms IPD UK Quarterly Property
Index, All Property total return at 3.6%
-- First primary care centre acquired in
Republic of Ireland in October 2016 for
EUR6.7 million
-- Average annualised uplift of 0.9% on rent
reviews completed or closed in the period
(2015: 0.9%)
-- Annualised rent roll, including commitments,
increased by 6.8% to GBP68.0 million (2015:
GBP63.7 million)
-- Portfolio 99.7% let with 13.7 years weighted
average unexpired lease term (including
commitments) (31 December 2015: 14.7 years)
CONTINUED POSITIVE OUTLOOK DRIVEN BY SUPPORTIVE MARKET
-- Capital raised in 2016 continues to be
invested in further earnings accretive
primary care properti
-- NHS Environment and Technology Transformation
Fund has sanctioned 200 new primary care
developments in England
-- Strong pipeline of high quality acquisition
opportunities in both the UK - GBP72 million,
and Republic of Ireland - EUR53 million,
to capture yield spread on lower debt
costs
-- First quarterly interim dividend for 2017
declared, 1.31p per share, payable on
24 February 2017
(1) See Note 8 to the financial statements.
(2) The Company uses a number of Alternative Performance Measures in this Preliminary Announcement. See page 25, EPRA performance measures.
(3) See Note 25 to the financial statements (4) See page 20, Business Review (5) See Note 23 to the financial statements. (6) Consideration before costs of acquisition. (7) See Note 18 to the financial statements. (8) Including unsecured debt outstanding
Harry Hyman, Managing Director of Primary Health Properties, commented:
"2016 was a year of significant milestones for PHP, in which the Company celebrated the 20th anniversary of being listed on the London Stock Exchange; secured the largest ever equity issue in its history; and expanded outside of the UK, following the acquisition of its first asset in the Republic of Ireland.
"The Group's activities throughout the year continued to focus on growing earnings through selective acquisitions, strategic asset management activity, careful debt management and securing growth from rent reviews. This enabled the Company to pay an increased, fully covered dividend to shareholders, the 20th consecutive year of dividend growth.
"The demand for healthcare services remains higher than ever and, as a result, the role played by primary care in communities across the UK and the Republic of Ireland is set to increase. PHP remains alive to the strong pipeline of potential acquisition and forward funding opportunities in both the UK and Ireland and is in a strong position to grow its portfolio, building on its track record of providing GPs with flexible, purpose built medical centres which meet the needs of modern, integrated care systems."
For further information contact:
Harry Hyman Phil Holland Primary Health Properties Primary Health Properties PLC PLC T +44 (0) 20 7451 7050 T +44 (0) 20 7104 5599 harry.hyman@nexusgroup.co.uk phil.holland@nexusgroup.co.uk ------------------------------ ------------------------------- David Rydell / Elizabeth Snow / Eve Kirmatzis Bell Pottinger T +44 (0) 20 3772 2582 ------------------------------ -------------------------------
This document may contain certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.
Any forward-looking statements made by or on behalf of the Company speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or on the basis upon which they were prepared. The Company does not undertake to update forward-looking statements to reflect any changes in the Company's expectations with regard thereto or any changes in events, conditions or circumstances upon which any such statement is based.
Information contained in this presentation relating to the Company or Group should not be relied upon as a guide to future performance.
Shareholders wishing to register for electronic notification of any release or announcement made by the Company may do so using the Company's website www.phpgroup.co.uk/investors/email-alerts.
This announcement includes inside information.
Financial highlights
Year ended Year ended
31 December 31 December
2016 2015
---------------------------- ------------- -------------
Investment portfolio GBP1.2bn GBP1.1bn
Net rental income GBP66.6m GBP62.3m
Weighted average unexpired 13.7 years 14.7 years
lease term
Contracted rent roll GBP68.0m GBP63.7m
(annualised)
EPRA results (see pages
25 and 26)
EPRA Earnings GBP26.8m GBP21.7m
EPRA Earnings per share 4.8p 4.9p
EPRA Net Assets GBP545.0m GBP391.6m
EPRA NAV per share 91.1p 87.7p
EPRA Cost Ratio 11.5% 11.5%
Dividends
Dividend per share(1,
2) 5.125p 5.0p
Dividend cover(3) 100% 98%
Reported results
IFRS profit for the GBP43.7m GBP56.0m
period
Total equity GBP499.2m GBP345.4m
Diluted earnings per
share 7.3p 11.2p
----------------------------- ------------- -------------
(1) See note 9 to the financial statements.
(2) Paid in quarterly instalments. New shares issued in April 2016 qualified for final two instalments only. See page 6, Chairman's Statement.
(3) See page 14, Business Review.
Performance
Year ended Year ended
31 December 31 December
2016 2015
----------------------- ------------- -------------
Total property return 7.9% 9.7%
Total EPRA NAV return 9.7% 16.3%
------------------------ ------------- -------------
Chairman's statement
I am delighted to present PHP's Annual Report for 2016, another successful year in which the Group has continued to grow and reach several significant milestones.
In March 2016, PHP celebrated the 20th anniversary of the Company becoming listed on the London Stock Exchange. In each of those 20 years, we have provided our shareholders with an unbroken record of dividend growth and at this year-end held a portfolio that now consists of 296 primary care assets valued at over GBP1.2 billion whose secure underlying income supports our commitment to long term sustained dividend growth.
The Group's strong capital base and access to equity has underpinned the growth in its property portfolio. We have looked to equity markets at times over the years to raise fresh funds to enable the Group to acquire additional properties, whilst ensuring that a prudent ratio of debt to equity is maintained.
The Company successfully closed its largest ever capital raise in April 2016, raising GBP145.3 million, net of issue costs. The issue was over-subscribed and strongly supported by existing shareholders in addition to adding several new institutional investors to our register. The equity raised represented an increase of 37% in the Company's EPRA Net Assets as at 31 December 2015 and was achieved at a 14% premium to EPRA NAV per share at that date. This underlines the attractiveness of PHP's long-term, secure income streams to investors.
PHP has traditionally focused on the UK market, building a large, high quality portfolio of primary care properties in the UK. In 2016, the Group added to its domestic assets by completing its first property transaction outside of the UK. After careful appraisal of the primary care property market in the Republic of Ireland, as a first step in the market, PHP acquired the Tipperary Primary Care Centre in October 2016.
The Group has built strong relationships with developers, existing owners, agents and advisers in Ireland and has a deep pipeline of further opportunities that we aim to contract in 2017. Investment in primary care assets in Ireland represents an opportunity to secure high quality, well let properties as the Irish government seeks to modernise its primary care infrastructure, procuring numerous new, purpose built facilities which it anchors as a tenant through the Health Service Executive.
Results highlights
We added prudently to our property portfolio through the selective acquisition of GBP74.2 million of fully let assets, adding a total of GBP4.2 million to the Group's annual rent roll. We maintained our discipline in the pricing that we agreed with vendors, ensuring that PHP acquired well priced assets that provide strong income returns and the potential for further growth.
Acquisitions combined with the contribution of successful asset management activity and rent reviews led to net rental income for the year increasing by 6.9% to GBP66.6 million (2015: GBP62.3 million). The costs of managing the Group represented 11.5% of net rents, unchanged from 2015. Revolving Group debt was temporarily repaid from the proceeds of the equity issue, which together with a marginally reduced average cost of Group debt saw net finance costs fall by 3.7% in 2016.
The revaluation of the Group's property portfolio generated a surplus of GBP20.7 million (2015: GBP39.8 million), with underlying like-for-like growth of 2.3%. The portfolio valuation average net initial yield tightened to 5.17% (31 December 2015: 5.32%). The lower valuation surplus resulted in IFRS profit for the year falling by 22.0% to GBP43.7 million (2015: GBP56.0 million)
The growth in the portfolio, underpinned by a fully covered dividend payment, has resulted in EPRA NAV per share increasing by 3.9% to 91.1 pence (2015: 87.7 pence) which when added to the dividend paid produces a total EPRA NAV return for the year of 9.7% (2015: 16.3%).
Earnings and dividends
EPRA Earnings increased by 23.5% to GBP26.8 million (2015: GBP21.7 million), however, EPRA Earnings per share fell marginally, by 2% to 4.8 pence per share for the year (2015: 4.9 pence per share). This was to be expected as the proceeds of the equity issue are effectively invested "in arrears" with acquisitions through the remainder of 2016 and in the early part of 2017 to date.
PHP maintained its 20-year unbroken record of annual dividend growth, paying a total of 5.125 pence per share to shareholders in 2016 (2015: 5.0 pence), an increase of 2.5%. The dividend was paid in four equal instalments in February, May, August and November with the new shares issued by the Company in April 2016, qualifying to receive the final two instalments. Accordingly, total dividends paid to shareholders in the year were fully covered by EPRA Earnings, in line with one of the Board's ongoing objectives, having returned the Company to full dividend cover in the second half of 2015.
We will continue to pay dividends quarterly for the foreseeable future and, on 4 January 2017, the Board approved its first quarterly dividend for 2017. The Company will pay 1.31 pence per ordinary share on 24 February 2017 to holders on the register as at close of business on 13 January 2017.
Our markets
The UK experienced a major political event in June 2016, with the majority of the British public voting to leave the European Union. The long term impact that this will have on the UK will be unknown until Brexit negotiations have concluded.
What is certain is that the demands that are being placed upon the NHS will continue to increase and a growing, ageing population and increased incidence of chronic conditions will bring more pressure to bear on the NHS budget. New models of care are being developed that recognise the ability of primary care settings to help ease the burden on hospitals and provide greater access to healthcare services located in the communities that they serve. Leaving the EU will not change this and PHP will continue to move forward with its strategy unchanged.
In my Interim statement, I detailed how the NHS had expanded upon its wider Five Year Forward View, with a direct plan for primary care. The General Practice Forward View ("GPFV") was published in April 2016 setting out plans to recruit 5,000 more GPs over the next five years together with additional healthcare professionals and support staff.
To do this, a further GBP2.4 billion per annum is to be invested into general practice, an increase of 25% over the 2015/16 GP budget. This will help to meet commitments to provide greater "out of hours" access and to develop clinical hubs and reform urgent care facilities.
The second half of 2016 saw the first series of projects approved for funding from the Estates and Technology Transformation Fund ("ETTF"). Numerous premises improvement projects have been given the green light by the NHS with varying levels of NHS capital contributions being made available alongside private funds to enhance, enlarge or reposition existing premises. PHP has approval for 8 projects from this first set of approved schemes.
The ETTF process has also sanctioned the construction of a number of new medical centres, many of which will be developed by PHP's development partners, providing the opportunity for PHP to fund and acquire properties as they are realised.
Toward the end of the year, Sustainability and Transformation Plans ("STPs") were published for the 44 STP areas in England. STPs comprise a plan of how local services will evolve over the next five years to create long term, sustainable and fundable integrated care systems for an area. STPs include estates plans for primary care premises that are required to deliver these care objectives.
PHP will play a key role in the implementation of these initiatives providing new premises and enhancing and enlarging existing properties. There is a very clear movement toward the formation of larger practices and local alliances, and demand for larger, hub-style medical centres to replace outdated, smaller, often converted residential, properties. PHP is working with GP practices, federations (groups of GPs that join together to provide and develop services collaboratively), emerging "super-practices" (practices merging to create larger patient lists and benefit from economies of scale) and other NHS bodies to contribute towards estates planning and STPs as well as the procuring and funding of new premises across the UK.
In the Republic of Ireland, the Health Service Executive ("HSE") of the Irish government plans to procure a total of 100 modern, purpose built primary care centres across the country. Ireland is experiencing similar rates of growth in the demand for healthcare services as in the UK. As GP services, however, are not state funded or integrated with HSE provided secondary care, greater strain is being placed on hospital services. The HSE is actively looking to establish integrated primary care centres across the country that will provide local access to a greater range of services alongside the traditional GP, in a more cost efficient and sustainable manner.
Board membership
We welcomed Geraldine Kennell and Nick Wiles to the Company's Board in April, replacing the retiring Jamie Hambro and William Hemmings. Geraldine and Nick have immersed themselves in getting to understand the Group's affairs and are making a valuable contribution to Board meetings.
We have previously informed shareholders that Phil Holland will stand down from the Board at the end of March this year, leaving PHP to take on a commercial, property development role. I would like to thank Phil for his contribution to the growth and success of the Group in his six years working with us and I and the Board wish him well for the future.
I am delighted to announce the appointment of Richard Howell as Finance Director Designate, to take over from Phil upon his departure. Richard joins us from his position as Finance Director, Joint Ventures with LondonMetric Property plc and brings many years' experience of working in senior finance positions with listed property companies. I look forward to working with Richard, who will join Nexus in the middle of March.
Outlook
In times when there is increased volatility in economic and financial markets, largely brought about by Brexit and political changes both in and outside of Europe, the increasing requirement for healthcare services continues. The populations of the UK and Republic of Ireland continue to grow and age and with this comes a greater burden on healthcare systems and the need for healthcare to be delivered in a new, more cost-efficient and integrated manner.
Strategic publications such as the GPFV and delivery plans such as STPs reinforce the importance of primary care in replacing elements of secondary care to modernise healthcare systems and improve access to services and the efficiency with which they are delivered. They also recognise the importance of the need for sufficient, appropriate premises in delivering these new models of care.
PHP has a strong pipeline of opportunities in both the UK and Republic of Ireland, working with specialist development partners to procure and fund the development of new facilities to expand its portfolio and support the modernisation of healthcare services. This will enable us to capture yield spread on lower debt costs in both territories. In addition, the Group is progressing numerous value-add projects from within its existing portfolio that will secure additional rental income and extend the unexpired duration of associated lease terms.
The possibility of higher rates of inflation will be positive for PHP with 20% of portfolio rents being reviewed in line with RPI increases. In addition, increased development activity will have a positive impact on rental levels as inflationary factors lead to higher initial rents for new centres which in turn will generate greater increases on review at existing centres.
PHP is well funded with a large proportion of its debt cost fixed, providing a hedge against possible interest rate increases if inflation does continue to rise.
We are well positioned in both the UK and Ireland to continue to grow our portfolio through prudent acquisition and accretive asset management activity. Through this we will continue to increase earnings and maintain our progressive, covered dividend policy to provide attractive returns to shareholders.
I thank all those who have contributed to the success of 2016 and look forward to working with the team to deliver further growth within the Group in 2017.
Alun Jones
Chairman
15 February 2017
Strategic Review
Strategic objectives
The overall objective of the Group is to create progressive returns to shareholders through a combination of earnings growth and capital appreciation. To achieve this, PHP invests in healthcare real estate let on long term leases, backed by a secure underlying covenant where the majority of rental income is funded directly or indirectly by a government body.
The Group's portfolio is predominantly located in the UK with tenants mostly comprising general practitioners ("GP") and NHS organisations. The funding of these enterprises means that over 90% of UK income is funded directly or indirectly by the NHS, providing a low risk, high covenant income stream.
The Group widened its geographical scope in 2016 with its first property investment in the Republic of Ireland. The principal tenant in the series of new, modern primary care centres that PHP is targeting in Ireland will be the Health Service Executive ("HSE"), the executive agency of the Irish government's Department of Health. The HSE typically accounts for up to as much as 75% of the rental income at a centre, providing a similar low risk, high covenant income stream to the NHS in the UK. Tenants will also include GPs but their rent will represent a smaller proportion of total income than in the UK and will not be funded by the HSE. Other occupiers in both territories will include other associated healthcare users, including on-site pharmacies.
Business model
The Group works in partnership with its stakeholders to create and maintain a portfolio of fit for purpose facilities that provide a long term home for local healthcare provision and that are easily adapted to meet the changing needs of a community.
Initial lease terms in the UK are typically of 21 years or more, at effectively upward-only rentals. With the large majority of income received either from the NHS or from NHS funded GPs, this provides a secure, transparent income stream.
The HSE in Ireland typically enters into 25-year leases with CPI linked rent reviews, providing similar long term income streams to those of the NHS in the UK.
Achieving each of the strategic objectives outlined below will enable PHP to meet its overriding aim of delivering progressive shareholder returns through a mix of income and long term value growth.
(i) The Group looks to grow its property portfolio by funding and acquiring high quality, newly developed facilities and investing in already completed, let properties. PHP concentrates on assets with strong underlying fundamentals that it can acquire for a fair price and secure an acceptable gap between the income yield an asset generates and the cost of managing and funding that investment.
(ii) PHP manages its portfolio effectively and efficiently managing the risks faced by its business in order to achieve its strategic objectives. This includes taking a long term view of its properties in keeping with the strategic horizons of its tenants. By providing additional space facilitating the provision of additional services or extending the term of underlying leases, PHP can increase and lengthen its income streams and create the opportunity to add capital value.
The portfolio is managed by an experienced and innovative team within an efficient management structure where operating costs are tightly controlled by the Adviser and their fees are structured to gain economies of scale as the Group continues to grow.
(iii) The Group funds its portfolio with a diversified mix of equity and debt, in order to optimise risk adjusted returns to shareholders. Debt facilities are arranged on both a secured and unsecured basis, provided by traditional bank lenders and debt capital markets, with a spread of maturities that ensures flexibility and availability over the longer term to match the longevity of income streams.
Our markets
PHP targets long term investment in modern, flexible, purpose built healthcare properties that are located either in the UK or the Republic of Ireland. Across both territories, the Group's assets are leased on a long term basis to GPs, government health departments, pharmacy operators and other associated healthcare users.
In both territories, the demand for healthcare services continues to increase as populations grow and age and we unfortunately see a greater incidence of chronic conditions. There is a growing recognition of the important role that primary care plays in the provision of health services, providing local services for greater ease of access and proving to be more efficient as technology advances and more services can be provided away from over-burdened hospital settings.
The Group works with experienced development partners, engaging with government, healthcare bodies and healthcare professionals to procure and continue to improve and reconfigure premises that are able to meet the ever-changing needs of primary care provision. This interaction continues through the life of an occupational lease with PHP building long-standing relationships that enable forward planning of premises enhancement.
The primary care premises market is controlled by the NHS in the UK and largely influenced by the HSE in the Republic of Ireland, meaning there is little or no speculative development of new modern, flexible facilities. Initial lease terms are typically longer than in general commercial markets, more than 20 years on average.
In the UK, GPs form the largest tenant group, receiving reimbursement for rent, maintenance and insurance costs from the NHS, a practice set out in legislation. Together with leases direct to the NHS, the sector benefits from a very strong underlying rental covenant.
In the Republic of Ireland, the HSE makes a strong commitment to each primary care centre to create an integrated healthcare system alongside GP services. The HSE presence, representing 60% to 75% of rent received at a centre, underpins the long term secure income to be received from Irish properties.
United Kingdom
The latest projections of the Office for National Statistics suggested that the UK population will rise by 15% over the 25-year period from 2014 to 2039 to over 74 million people. Whilst the overall growth rate may slow a little as the Government places immigration control as a key outcome of Brexit, the projected change in the age profile will be realised, with an additional 4.7 million people aged 75 or over, a full 5% of the population more than in 2014. This changing demographic is creating significant additional demand on healthcare services. A Kings Fund study in autumn 2016 revealed a 10% increase in the number of GP patient contacts in the previous two years. Those aged over 85 accounted for 26% of all GP appointments and are growing at a rate more than twice as high as any other age group.
Primary care is the foundation of the NHS in the UK and the GP continues to be the first point of access to healthcare services for UK residents, other than acute emergency care. In October 2014, NHS England published its Five Year Forward View ("FYFV"), its strategic plan for the development of healthcare services for England, reiterating the importance of primary care as "the foundation of NHS care". In April 2016, this was backed up by the publication of the General Practice Forward View ("GPFV").
The GPFV set out targets for all aspects of GP services for the next five years, including recruitment targets, access to "out of hours" services and reforming urgent care. Funding to general practice will be increased by 25% over the 2015/16 GP budget, a further GBP2.4 billion per annum.
A GBP900 million funding pool was established specifically for capital investment into GP estate and infrastructure. In late 2016, the ETTF made its first awards of funding, supporting 600 projects, with more than 200 of these to be "new build" primary care facilities.
Alongside this, NHS organisations across England were asked to develop a plan for the future delivery of health services in their area, a Sustainability and Transformation Plan ("STP"). The country was split into 44 STP "footprints" and plans were to include details of how an area would interact with local authorities and other care providers.
These plans were released toward the end of 2016 and once again emphasise the increasingly important role of primary care and the GP in the future of the National Health Service. Total savings of GBP22 billion per annum need to be realised by the NHS within the STP timeframe and many identify the movement of non-acute hospital based services into the community as a means of achieving some of this.
Republic of Ireland
Similar pressures are being experienced in the Republic of Ireland with its population predicted to rise by 17% in the period between 2016 and 2036 to 5.5 million. This will be more noticeable in older age groups also, as the proportion aged 65 or over is estimated to rise to 20.6% in 2036, from 13.3% in 2016.
Chronic, long term illness rates are also increasing. Currently, 38% of the Irish population has a chronic illness. This is predicted to rise to 40% of the adult population by 2020. 40% of all hospitalisations in Ireland in 2011 were as a direct or indirect result of such conditions.
In December 2016, the Department of Health in Ireland ("DoHI") published its strategy document for 2016-2019. In this it stressed that "...the starting point for a more effective and integrated model of care is the development of comprehensive primary care." DoHI plans to develop a comprehensive range of primary care services that will be integrated with other care services, but where primary care will be the first point of contact with the health system in Ireland.
Whilst the primary health care system in Ireland is based on a system of insurance and private payment, it is still led by the General Practitioner. A 2013 report estimated over 14 million visits to GPs, compared to 6.3 million hospital visits, but the GP in Ireland also acts as the "gatekeeper" to secondary or specialist care.
The DoHI plans to implement its objective of a single-tier health service, to enable the population to have equal access to healthcare based on need, not income. This includes the introduction of universal primary care, including GP care without fees for all and universal hospital care.
The DoHI strategy is based on primary care services meeting the great majority of people's day-to-day healthcare needs, comprising integrated team-based delivery by GPs and a wide range of other health professionals, provided in the communities where people live. It sees the development of the capacity and range of services in primary care as a cornerstone of the changes to be made to health systems to meet the rising demand.
The DoHI and the Health Service Executive continue to develop an integrated portfolio of reform programmes to ensure that their core objectives to deliver safe and effective health and social care services for patients, services users, carers and families in multiple settings are met. Recent budgetary increases have funded the provision of free GP services to those aged under six and over 70 years old, and targeted initiatives for asthma and diabetes care.
More modern, flexible primary care premises have been delivered to assist with the development of an integrated care system and the HSE is looking to procure numerous additional new premises. The HSE is typically entering into 25 year leases with CPI linked rent reviews on a five-year cycle for between 60% to 75% of the property's rental income, providing a covenant similar to that provided by the NHS funding of some 90% of the Group's UK income.
Stable, secure returns on investment
There are several different characteristics within the Irish healthcare real estate sector from those in the UK, but the underlying security of the NHS and HSE covenants provide for superior risk adjusted returns for PHP.
In the UK, PHP's income benefits from a shorter rent review cycle, typically three yearly and on an upwards only basis, with 20% of leases reviewed upwards only in line with RPI. In Ireland, leases to the HSE vary without restriction in line with the change in Irish CPI over a five-year period.
The government backed funding for tenants and positive rent review terms, combine to create a long term, low risk income environment where over the medium term, through a mix of indexed linked and open market review characteristics, rental growth has broadly tracked inflation.
An anticipated increase in the levels of development of new medical centres in the UK will see initial rents increase due to building costs inflation in recent times. This will provide strong comparable evidence to assist open market rent reviews, resulting in a higher rate of growth than in recent years. A fifth of PHP's UK portfolio is formally linked to RPI and recent increases in the rate of inflation will feed through to rental increases in coming periods.
The secure long term underlying income and high quality covenant derived from the predominance of government backed tenancies within the healthcare sector has translated into stable long term returns on primary care real estate.
The data in the table below is with reference to UK real estate only. It is taken from the MSCI/IPD UK Healthcare Property Index for the nine-year period ended 31 December 2015. The results illustrate how primary healthcare real estate has produced superior risk adjusted returns over that period, reflecting the low risk nature of its tenants and lower volatility in capital values underpinned by the long-term nature of the income streams, generating a very compelling investment case.
Total
Sector Return
-------------------- --------
Residential
property 8.6%
Primary healthcare 7.3%
All healthcare 6.4%
Bonds 6.3%
Office property 6.0%
Industrial
property 5.2%
Secondary
healthcare 4.9%
All property 4.4%
Equities 3.6%
Retail property 3.1%
-------------------- --------
Source: IPD - 9 year risk adjusted total returns 2007-2015
The primary care real estate sector in Ireland is still in its infancy and as a result, specific performance data is not yet available. The sector has many characteristics in common with the UK and the Board expects to see similar trends develop over the medium term
Business review
Delivering progressive returns
Key performance indicators ------------------------------------------------ EPRA earnings per share Dividend cover 4. 8p 100% -2.0% (2015: 98%) ------------------------ ---------------------- Other performance measures ------------------------------------------------ EPRA NAV per share Total EPRA NAV return 91.1p 8.5p +3.8% +9.7% ------------------------ ----------------------
2016 was a further year of growth across PHP's business that built upon the major equity issue that the Company successfully completed in April 2016. The proceeds of this issue were immediately put to work for shareholders with selective property acquisitions and effective debt management that were accretive to the Group's earnings.
This was supported by further investment into existing assets through a series of asset management projects, modest growth secured on rent reviews and continued efficient administration of the Group.
This investment combined with debt management to generate increased profitability for PHP that accrued to shareholders through an increased, fully covered dividend and growth in the value of the Group's assets, that is reflected in NAV growth and impressive total returns in a volatile period in wider markets.
Earnings
The Group acquired further property assets in the year, maintaining its strict selection criteria and pricing approach to ensure that additions are high quality, immediately accretive to earnings and offer the opportunity for future growth.
New property additions, coupled with the completion of several development properties, generated increased rental income for the Group with net rental income receivable in the year increasing by 6.9% to GBP66.6 million (2015: GBP62.3 million).
The costs of managing the Group continue to benefit from the reducing scale structure of management fees and careful control of overhead costs. Whilst administrative expenses increased by GBP0.5 million in 2016, total costs as a proportion of income remained unchanged with the Group's EPRA Cost Ratio being 11.5% (2015: 11.5%).
The net proceeds of the equity issue were applied so as to ensure that funds not immediately invested in acquisitions were applied to the Group's debt and hedging portfolio to achieve savings in Group debt costs for the year and lower the average cost of Group debt finance for this and future years.
PHP's consistent year-on-year growth in EPRA Earnings continued, with an increase of 23.5% in the year to GBP26.8 million (2015: GBP21.7 million). The attractiveness of the Group's property assets with their long term, secure income streams led to steady valuation growth, albeit at a lesser rate than that of 2015. A net property valuation surplus of GBP20.7 million (2015: GBP39.8 million) was partially offset by fair value movements on interest rate swaps and the Group's convertible bond, resulting in a fall in IFRS profit from GBP56.0 million to GBP43.7 million.
Summarised results 2016 2015
GBPm GBPm
------------------------------------- ------- -------
Net rental income 66.6 62.3
Administrative expenses (7.3) (6.8)
------------------------------------- ------- -------
Operating profit before revaluation
gain and financing 59.3 55.5
Net financing costs (32.5) (33.8)
EPRA earnings 26.8 21.7
Net result on property portfolio 20.7 39.8
Fair value (loss)/gain on interest
rate swaps (2.2) 1.0
Fair value loss on convertible
bond (1.6) (6.5)
IFRS profit before tax 43.7 56.0
------------------------------------- ------- -------
The Company recorded its 20th successive year of dividend growth in 2016, paying a total of 5.125 pence per share in the year. This represents an increase of 2.5% over that paid in 2015 of 5.0 pence per share.
The equity raise in April 2016 saw the Company issue 150 million new Ordinary Shares, which qualified for dividends paid only in the second half of 2016. As the proceeds of the issue were not immediately fully invested in new acquisitions EPRA Earnings per share fell marginally to 4.8 pence (2015: 4.9 pence). The total value of dividends distributed to shareholders across the year rose by 21% to GBP26.8 million (2015: GBP22.2 million) and were fully covered by EPRA Earnings (2015: 98%).
Dividend cover Year ended Year ended
31 December 31 December
2016 2015
GBP'm GBP'm
---------------------- ------------- -------------
EPRA Earnings 26.8 21.7
Total dividends paid 26.8 22.2
Dividend cover for
the period 100% 98%
----------------------- ------------- -------------
Shareholder value
The Company issued shares in April 2016 at a price of 100 pence per new share, a premium of 14% over EPRA Net Asset Value per share as at the end of 2015. After deducting the costs of the issue, a premium of GBP13.8 million was realised over the underlying EPRA Net Asset Value of the Company's shares prior to the issue.
The Group used this premium to reset two interest swaps in May 2016. A one-off cash payment of GBP14.5 million was made to achieve a total interest saving of GBP16.4 million over the term of these swaps to August 2021.
The strength of the Group's property portfolio was evident in the year end, independent valuation. Yields in the healthcare property sector saw a modicum of tightening and the Group recorded a revaluation surplus of GBP20.7 million year (2015: GBP39.8 million).
EPRA Net Assets grew by 39% to GBP545.0 million (2015: GBP391.6 million) as at 31 December 2016 with EPRA Net Asset Value per share rising to 91.1 pence per share (2015: 87.7 pence), an increase of 3.9% in the year. Adding dividends paid to shareholders, total EPRA NAV return for the period was 8.5 pence per share or 9.7% (2015: 16.3%).
EPRA Net Asset Value per 2016 2015
share
---------------------------- ---------- ----------
pence per pence per
share share
Opening EPRA NAV per share 87.7 79.7
EPRA Earnings for the
year 4.8 4.9
Net result on property
portfolio 3.5 8.9
Dividend paid (4.8) (5.0)
Share issue 2.2 -
Re-coupon of interest (2.3) -
rate swaps
Termination of interest
rate derivative - (0.8)
Closing EPRA NAV per share 91.1 87.7
---------------------------- ---------- ----------
At the start of 2016, the Company's share price stood at 108.75 pence. The many political and economic events of the year have led to some volatility in equity markets, but the strong income characteristics of PHP's portfolio and the attractiveness of the reliable yield that PHP provides have seen PHP's share price remain steady through the year. PHP's closed the year with a share price of 111.5 pence which with dividends paid in the year gave a total shareholder return of 7.3%.
Growing PHP's property portfolio
Key performance indicators ----------------------------------------------------------- Total property Total property assets return GBP1.2 billion 7.9% + 10.9% (2015: 9.7%) -------------------- ----------------- ------------------ Other performance measures ----------------------------------------------------------- Revaluation surplus Contracted rent WAULT GBP20.7 million roll 13.7 years 3.5 pence per GBP68.0 million 2015: 14.7 years share + 8.5% -------------------- ----------------- ------------------
The wider UK property sector experienced a turbulent period in 2016 as uncertainty both before and after the EU referendum saw values fall overall. The UK primary care property sector is characterised by the security and longevity of its income streams, underlying fundamentals that have made the asset class increasingly attractive to investors seeking a secure yield in volatile times. These characteristics are mirrored in the Republic of Ireland, where PHP acquired its first non-UK asset in October 2016.
In the UK, a large proportion of the Group's rent is derived from the NHS (directly or indirectly), whereas in Ireland, the majority payer is the Health Service Executive. Accordingly, many investors look to healthcare real estate to provide them with a stable, consistent yield.
Acquisitions in the year saw the Group hold a total of 296 property assets as at 31 December 2016, 295 of these located in the UK and one in the Republic of Ireland. One UK asset is on site, under construction, and due to complete in early 2017.
Lambert Smith Hampton ("LSH") independently valued the UK and Irish assets at market value in accordance with RICS rules. The aggregate value of the Group's property portfolio totalled GBP1.2 billion as at 31 December 2016, with a valuation surplus of GBP20.7 million being achieved for the year, after allowing for acquisition costs, the cost to complete development properties and capital invested in asset management projects. This represents like-for-like valuation growth of 2.3% equivalent to an increase of 3.5 pence per share.
The demand for healthcare real estate saw the average net initial yield of PHP's UK portfolio tighten slightly to 5.17% (2015: 5.32%) with a true equivalent yield of 5.38% (2015: 5.53%).
2016 2015
GBPm GBPm
Investment properties 1,212.3 1,091.9
Properties in the course of development 7.9 8.7
----------------------------------------- -------- --------
Total properties owned and leased 1,220.2 1,100.6
Cost to complete developments
and asset management projects 3.3 21.8
----------------------------------------- -------- --------
Total completed and committed 1,223.5 1,122.4
----------------------------------------- -------- --------
The Group has continued to be disciplined in its approach to acquiring new assets. Increased demand for healthcare assets has seen pricing become more competitive, but PHP has continued to focus its due diligence on an asset's underlying fundamental characteristics and its current and planned position in its local health economy. PHP will buy an asset only if it is priced to provide a satisfactory initial return but where the property also demonstrates prospects for future income and capital growth and where there is the prospect of enhancing and expanding the building to extend its life as a primary care centre.
PHP invested a total of GBP68.5 million in acquiring 23 properties in the UK in the year and completed its first acquisition in the Republic of Ireland for GBP5.7 million (both before acquisition costs). All properties acquired were standing let investments.
London South South East East North North Ireland
West East Anglia Midlands West
---------------- ------- ------ ------ -------- ---------- ------ ------ --------
Number
of properties 8 3 4 1 1 3 3 1
Floor
area
(m(2)
) 4,828 1,659 3,082 2,687 1,300 4,973 1,603 2,448
Rent
roll
(GBPm) 1.3 0.3 0.6 0.4 0.2 0.8 0.2 0.4
Rent
roll
(%) 29% 6% 14% 11% 5% 19% 6% 10%
WAULT
(years) 10.7 14.1 15.3 7.5 18.8 16.7 10.6 25.0
Percentage
of rent
funded
by government 88% 100% 100% 80% 100% 100% 100% 79%
Acquisition
cost
(GBPm) 22.2 4.8 10.2 7.4 4.1 15.4 4.4 5.7 ---------------- ------- ------ ------ -------- ---------- ------ ------ --------
The above acquisitions added a total of GBP4.2 million to the Group's rent roll for an average unexpired term of 14 years. Including the impact of asset management projects and rent reviews, the total contracted Group rent roll increased by 6.8% to GBP68.0 million (31 December 2015: GBP63.7 million).
As at 31 December 2016, the portfolio had an average unexpired lease term of 13.7 years (2015: 14.7 years) and an EPRA Vacancy Rate of just 0.3%. The properties that the Group owns and will continue to invest in are purpose built primary care premises that form a key element of the social infrastructure of the UK and Republic of Ireland.
There is no speculative development of new primary care premises in either territory with the NHS and HSE controlling the number and location of properties through a longstanding approval process. In the UK, there has been limited new development approvals by the NHS in recent years. This landscape is now changing, however, as the ETTF initiative has produced a series of new centre approvals alongside improvement projects for existing centres.
PHP's strength and track record in the UK market continues and close ties to a number of specialist healthcare developers will give the Group access to projects approved by the ETTF and provide opportunities to secure further investment in modern primary care assets in the UK.
In Ireland, PHP has developed strong relationships with healthcare bodies and regional developers to create a comprehensive offering to the HSE for the funding and construction of the numerous primary care centres that it plans to procure in the coming years.
The Group has a strong pipeline of opportunities in both the UK and Ireland to continue to grow the number of fit for purpose, flexible primary care premises it provides. This continued investment will support the ongoing movement of healthcare services away from expensive, inflexible hospitals into the community. The importance of appropriate, accessible premises in facilitating new models of healthcare delivery and the integration of wider care services is understood as a contributor to achieving the budgetary efficiencies that are sought by government healthcare agencies.
PHP works closely with its customers to ensure that we deliver properties that meet the needs of GPs, the NHS and HSE not only now, but in the years to come as demands on healthcare systems increase. The Board is confident in the strength of the Group's current property values and its ability to continue to invest in earnings enhancing assets to grow the portfolio.
Geographical analysis of the property portfolio - completed properties only
Properties Tenancies Rent roll Capital
(GBPm) value (GBPm)
--------------- ----------- ---------- ---------- --------------
London 16 24 3.4 63.8
South West 18 31 3.1 57.2
South East 67 132 12.7 219.4
East Anglia 9 18 1.9 32.5
East Midlands 23 48 4.7 85.5
West Midlands 31 76 8.6 155.5
North West 32 65 9.0 178.4
Yorkshire
& Humberside 19 40 4.7 82.5
North 25 55 4.6 72.0
Scotland 29 53 7.9 144.5
Wales 25 85 6.5 115.0
Ireland 1 3 0.4 6.0
--------------- ----------- ---------- ---------- --------------
Total 295 630 67.5 1,212.3
--------------- ----------- ---------- ---------- --------------
Managing effectively and efficiently
Key performance indicators ---------------------------------------------------- Capital projects EPRA cost ratio GBP1.8 million invested 11.5% for the year GBP0.2 million of additional Unchanged rent (2015: 11.5%) Average 12 years additional WAULT ------------------------------ -------------------- Other performance measures ---------------------------------------------------- Rental growth on review 0.9% per annum GBP0.3 million per annum of additional rent ------------------------------ --------------------
Effective management
A total of 166 rent reviews were completed on tenancies within the Group's portfolio in 2016. 58% of these represented leases with open market review clauses with 64 reviews being index linked and six fixed rental uplifts being applied in the year. A significant majority of all leases in the portfolio are either explicitly or effectively upwards only, where a review can only be triggered by the landlord.
There continued to be low levels of new development approval by the NHS in 2016, meaning that benchmarks for open market rental levels showed little growth over 2015. Whilst reported rates of inflation rose in the latter parts of the year, index-linked reviews look backward and so the impact of these increases will be seen in future periods rather than 2016. The weighted average uplift on the reviews completed in 2016 was on a par with that of 2015 at 0.9% per annum.
Work has continued to enhance and extend existing assets within the Group's portfolio. PHP completed 7 projects in 2016, investing a total of GBP1.8 million to secure an additional GBP0.2 million of new rental income and, as importantly, extending the unexpired occupational lease term at the project properties by an average of 12 years.
The Group is working to deliver a strong pipeline of asset management projects for 2017. Capital will be invested in a range of physical extension or refurbishment projects, the major redevelopment of one asset and the re-gearing of several existing leases. The outcome of these projects will be the long-term retention of tenants and an increase in contracted rental income through the extension of occupational leases adding to both earnings and capital value.
PHP worked closely with its tenants in submitting 23 applications for funding from the ETTF. The projects covered by these applications will ensure that the respective properties continue to be fit for purpose and can meet the aspirations and objectives of local healthcare bodies as their strategic plans are implemented.
The Group had 8 of these 23 projects approved for first wave funding and many others are moving ahead to the next series of approvals. PHP will invest GBP5.3 million into these 8 projects, generating additional rental income of GBP325,000 per annum and securing an average additional 13 years' unexpired lease term at each project.
In addition to this, the Group has 10 other projects that have different stages of NHS or other required approvals. A total of GBP4.6 million would be invested into these projects, with total additional rent of GBP222,000 being secured and an average of eleven years added to each occupational lease.
The conclusion of the first round of ETTF project approvals will generate greater development activity with many new centre developments having been approved alongside enhancement and refurbishment projects. This will in turn provide a stimulus to open market rental levels that will result in higher settlements on review as these assets are delivered over the coming years. The prospect of sustained higher levels of inflation will not only directly translate into stronger rental growth on index-linked reviews but will also feed into open market increases as underlying construction costs impact new starting rental levels. We expect to see rental growth slowly increasing over that of 2016 as inflation rises and the rate of new development activity increases.
Efficient management
As reported at the interim stage, the initial discounted pricing period for the provision of administrative services by Nexus Tradeco Limited to the Group came to an end on 30 April 2016. Still on a fixed basis and in line with the contract signed in 2014, the price for these services increased with effect from 1 May 2016 to GBP904,000 per annum from GBP749,000 per annum.
Despite this increase, the reducing scale basis for the property advisory fee continues to demonstrate its efficiency as assets added to the portfolio in the year between GBP1 billion and GBP1.25 billion incurred fees at just 32.5 basis points.
With other overhead costs being held constant at GBP1.5 million, total administrative costs rose by 7.3% to GBP7.3 million (2015: GBP6.8 million) as the Group's portfolio continued to grow. The efficiency of the Group's management model is evident, however, with its EPRA Cost Ratio unchanged at 11.5% (2015: 11.5 %), the lowest in the listed property sector.
EPRA cost ratio
Year Year
ended ended
31 December 31 December
2016 2015
GBPm GBPm
------------------------------------- ------------- -------------
Gross rent less ground rent 66.9 62.7
Direct property expense 0.9 0.8
Administrative expenses 7.3 6.8
Less: Ground rent (0.1) (0.1)
Less: Other operating income (0.4) (0.3)
EPRA costs (including and excluding
direct vacancy costs) 7.7 7.2
-------------------------------------- ------------- -------------
EPRA cost ratio 11.5% 11.5%
-------------------------------------- ------------- -------------
Diversified, long term funding
Key performance indicators
------------------------------------------------------
Loan to value Average cost of debt
53.7% 4.65%
(2015: 62.7%) (2015: 4.67%)
-------------------------- --------------------------
Other performance measures
------------------------------------------------------
Net debt Weighted average facility
GBP655.7 million maturity
(2015: GBP689.8 million) 5.1 years
(2015: 5.9 years)
-------------------------- --------------------------
We look to finance the Group using a prudent blend of shareholder equity and external debt finance to generate enhanced returns to shareholders. A key objective of the Board is to ensure the longer-term availability of resources to the Group to facilitate its growth objectives, with appropriate limits on the use of debt funding in order to manage shareholder risk.
Action has been taken through the year to strengthen the balance sheet and reduce the average cost of the Group's debt.
Capital raise
In April 2016, the Company completed an over-subscribed equity issue, successfully raising GBP150 million of new share capital (GBP145.3 million, net of expenses). New shares were issued to existing and new shareholders at 100 pence each, a premium of 14% to EPRA NAV per share as at 31 December 2015. This issue price represented a discount of 9.5% to the closing share price on 21 March 2016, the day before the offer was announced.
At the same time as securing the additional resource to fund the next stage of growth for the Group, the Board took the opportunity of the equity raise to review how it balances its use of shareholder equity and external debt when funding operations. In the short to medium term, the Group will work to a target Group loan-to-value ratio of no more than 60%.
Debt facilities
In January 2016, the Group extended its GBP100 million loan facility with Barclays plc by an additional GBP15 million, provided by Allied Irish Banks plc. The enlarged facility was made available to the Group for a new five-year term from its completion.
PHP seeks to avoid holding significant cash balances, as the returns available on cash deposits are extremely low. The Group follows a net debt strategy, applying surplus cash to temporarily pay down revolving debt facilities, saving the Group's incremental cost of funds and representing a more efficient use of cash resource. The proceeds of the equity issue initially paid down the Group's revolving debt facilities but the funds remain available to PHP to be redrawn when needed to fund investment in new and existing properties.
The Board reviews its resource requirements periodically to ensure an appropriate blend of facility type, tenor and cost. Following the pay down of revolving debt facilities from the equity issue proceeds, a GBP50 million revolving tranche of the Group's Club facility with RBS and Santander was cancelled in order to save non-utilisation costs.
The remaining GBP115 million term loan element of this facility matures in August 2017. In recent weeks, we have agreed fully credit approved terms to renew this facility up to GBP100 million, for a maximum five-year term, at a marginally reduced cost to that of the current loan. Other conditions of the facility are unchanged.
Management has met with several new potential debt providers to identify additional long term sources of debt for the Group. These include institutional lenders who would look to provide facilities on a secured basis for longer maturities than the current Group average term and at competitive rates.
Total debt
Total debt facilities available to the Group reduced in 2016 following the cancellation of the Club revolving tranche. At 31 December 2016, the Group had access to debt facilities totalling GBP749.5 million.
The net impact of funds raised and assets acquired in 2016 led to an overall reduction in total drawn debt to GBP660.8 million at the balance sheet date (31 December 2015: GBP692.7 million). Year-end cash balances were GBP5.1 million (31 December 2015: GBP2.9 million), resulting in Group net debt of GBP655.7 million (31 December 2015: GBP689.8 million).
The Group had one asset on site under development at the year end, with a remaining cost of development of GBP3.3 million (31 December 2015: GBP21.8 million). Resulting headroom from existing debt facilities available to the Group therefore totalled GBP90.5 million (31 December 2015: GBP91.1 million).
Net finance costs for the year fell by 3.6% to GBP32.5 million (2015: GBP33.7 million), primarily due to the application of the proceeds of the equity issue.
Despite the new equity paying down less costly, revolving debt facilities, the average cost of Group debt fell marginally to 4.65% from 4.67% in 2015.
Debt metrics 31 December 31 December
2016 2015
-------------------------------- ------------ ------------
Loan-to-value 53.7% 62.7%
Interest cover 2.05 times 1.90 times
Weighted average debt maturity 5.1 years 5.9 years
Total drawn secured debt GBP503.3m GBP535.2m
Total drawn unsecured debt GBP157.5m GBP157.5m
Total undrawn facilities GBP90.5m GBP91.1m
and cash available to the
Group(1)
-------------------------------- ------------ ------------
(1) - After deducting the remaining cost to complete properties under development
Hedging
Interest rate swap contracts
An element of the funds generated by the issue of shares was applied to re-coupon two interest rate swap contracts in May 2016, which hedged a total nominal value of debt of GBP88 million.
A one-off payment of GBP14.5 million was made to the swap counterparty to reset the contracted rates applied to both swaps from 4.79% to 0.87%, effective from November 2016 to their maturity in August 2021. A total saving of GBP16.4 million in interest costs will be realised by the Group over that period.
Changes in the fair value of the re-couponed swaps had been recorded in the income statement in previous financial periods. The cash payment to re-coupon the contracts crystallised a significant proportion of the fair value liability already held in the balance sheet for these swaps and the residual movement in fair value resulting from their re-couponing was recognised in the income statement in the year.
There has been considerable volatility in term interest rates across the year with a noticeably sharp fall in rate immediately following the EU referendum result. This has been followed by both upward and downward movements as periodic statements have been made on the likely path of Brexit, new economic data has been released and the potential impact of President Trump's proposed spending policies has been appraised.
The overall outcome is that rates ended 2016, circa 40% below those at the start of the year. This has led to a net increase in the mark-to-market ("MtM") liability of the Group's swap portfolio of GBP12.5 million in the year.
These movements are accounting entries only and do not represent cash flows. No interest rate swaps fair value liability is included in any debt facility covenant test and no debt facility held by the Group has a net asset value covenant. The Group's debt is 88% fixed or hedged as at 31 December 2016, limiting any exposure to movements in market interest rates.
The analysis of the Group's exposure to interest rate risk in its debt portfolio as at 31 December 2016 is as follows:
Facilities Drawn
-------------------- -------------- --------------
GBP'm % GBP'm %
-------------------- ------ ------ ------ ------
Fixed rate debt 394.4 52.6 394.4 59.7
Hedged by interest
rate swaps 186.0 24.8 186.0 28.2
Floating rate debt
- unhedged 169.1 22.6 80.4 12.1
-------------------- ------ ------ ------ ------
Total 749.5 100.0 660.8 100.0
-------------------- ------ ------ ------ ------
Currency exposure
The Group acquired its first Euro-denominated asset in the Republic of Ireland in the year, with associated Euro-denominated income flows and costs. The value of this asset and its rental income represents just 0.5% of the Group's total portfolio. In order to hedge the risk associated with exchange rates, the Group has chosen to fully fund its investment in Irish assets through the use of Euro-denominated debt, always within the overall Group LTV limits set by the Board.
Initially, this debt has been sourced by establishing Euro--denominated tranches within existing Sterling collateralised revolving credit facilities. As further assets are acquired in the Republic of Ireland, direct Euro debt facilities will be procured in Ireland, but PHP will continue to fund the balance of its investment from Group-level, Euro debt resource so as to maintain a natural asset to liability hedge.
Euro rental receipts are used first to finance Euro interest and administrative costs and surpluses will be used to fund portfolio expansion.
Convertible bond
As previously reported, no change to the conversion price of the convertible bond was required following the equity issue. The issue price of 100 pence per share was within allowable pricing parameters such that no adjustment was required to the conversion price of the convertible bond.
Notwithstanding the increased dividend to equity shareholders in the year, the impact of total dividends paid was also within maximum dilution parameters and so no adjustment to the conversion price was required and it remains unchanged at 97.5 pence. There has been no conversion of any bonds during the period.
Outlook
We strengthened the Company's balance sheet considerably in 2016 raising new equity capital to fund further growth in the Group's portfolio. Our careful, well appraised acquisition strategy has added assets that have made an immediate contribution to earnings. Notwithstanding the increased number of shares on which we have paid a growing dividend in the year, we have achieved our objective of fully covering our dividend with underlying rental profits.
We have worked hard with healthcare bodies in the UK to position PHP as a partner of choice for the real estate elements of the new strategic plans that seek to modernise care delivery in the UK. The publication of STPs and the approval of enhancement and development projects by the ETTF point to an increase in the development of new healthcare properties. PHP is well positioned to provide the capital that is needed to be invested on a standalone basis or alongside the NHS to develop further purpose built, flexible premises to facilitate change and modernisation.
Alongside this, we also have an existing strong pipeline of opportunities in the UK with several transactions in solicitors' hands. As we seek to add more properties to the portfolio with negotiations well advanced with vendors for a number of possibilities, we will continue to apply our strict acquisition criteria to ensure we that do not overpay for assets in our sector and that we are investing where there is potential for future growth.
PHP completed its first property purchase in the Republic of Ireland in 2016, the culmination of detailed research into Irish primary care real estate and its underlying economic, healthcare and covenant fundamentals. We have established good working relationships with developers of healthcare real estate in Ireland and have a healthy pipeline of potential acquisitions of both income-producing assets and new development projects. We are committed to investing capital into the territory to support the Irish government's drive to provide new, integrated primary care centres to develop a modern primary care infrastructure to the country.
We move ahead into 2017 with clear potential to grow the number of assets the Group owns and add to the contracted rent roll. As an element of inflation returns to the UK economy we also expect to see increased growth on rent reviews albeit slowly at first. We operate with a well-defined, tightly controlled management structure that incurs a reducing proportionate cost as the portfolio grows.
With well-priced debt resources available to the Group to fund its investment, we will continue to deliver growth in earnings through 2017. This will allow PHP to achieve its objective of continuing to pay an increased, fully covered dividend to its shareholders.
Harry Hyman
Managing Director
15 February 2017
EPRA performance measures
The Company is a member of the European Public Real Estate Association ("EPRA"). EPRA has developed a series of measures that aim to establish best practices in accounting, reporting and corporate governance and to provide transparent and comparable information to investors.
We use EPRA measures to illustrate PHP's performance and to enable stakeholders to benchmark the Group against other property investment companies.
Set out below is a description of each measure and how PHP has performed.
EPRA Earnings per share
EPRA EPS: 4.8 pence, down 2.0% (2015: 4.9 pence)
Diluted EPRA EPS: 4.7 pence, down 1.5% (2015: 4.8 pence)
Definition: Earnings from operational activities
Purpose: A key measure of a company's underlying operating results and an indication of the extent to which current dividend payments are supported by earnings.
Calculation: see Note 8 to the financial statements.
EPRA NAV per share
EPRA NAVPS: 91.1 pence, up 3.9% (2015: 87.7 pence)
Definition: Net Asset Value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business model.
Purpose: Makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy.
Calculation: see Note 25 to financial statements.
EPRA Net Initial Yield
EPRA NIY: 5.17%, down 13bps (2015: 5.30%)
Definition: Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs.
Purpose: A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of the Group's portfolio compares with others.
Calculation 2016 2015
GBPm GBPm
Investment property (excluding
those under construction) 1,212.3 1091.9
Allowance for estimated purchaser's
costs 77.6 63.3
----------------------------------------- -------- --------
Grossed up completed property portfolio
valuation (B) 1,289.9 1,154.2
----------------------------------------- -------- --------
Annualised cash passing rental
income 67.5 62.0
Property outgoings (0.8) (0.8)
----------------------------------------- -------- --------
Annualised net rents (A) 66.7 61.2
----------------------------------------- -------- --------
EPRA Net Initial Yield (A/B) 5.17% 5.30%
EPRA Vacancy Rate
EPRA Vacancy Rate: 0.29%, down 3bps (2015: 0.32%)
Definition: Estimated Market Rental Value (ERV) of vacant space divided by ERV of the whole portfolio.
Purpose: A 'pure' (%) measure of investment property space that is vacant, based on ERV.
Calculation 2016 2015
GBPm GBPm
ERV of vacant space 0.2 0.2
ERV of completed property portfolio
(including vacant space) 67.7 62.1
EPRA Vacancy Rate 0.29% 0.32%
EPRA Cost Ratio
EPRA Cost Ratio: 11.5% (including and excluding costs of direct vacancy), unchanged (2015: 11.5%)
Definition: Administrative & operating costs (including & excluding costs of direct vacancy) divided by gross rental income.
Purpose: A key measure to enable meaningful measurement of the changes in a company's operating costs.
Calculation: see page 20, "Business review: managing effectively and efficiently".
Risk management and principal risks
Risk management overview
The Board has structured operations in order to minimise the Group's exposure to the risks that it may face, but also to ensure that risks that are accepted are appropriate to the returns they may generate and within the Group's overall risk appetite that is defined by the Board and reviewed on an annual basis.
The Group aims to operate in a relatively low risk environment, appropriate for its strategic objective of generating progressive returns for shareholders. Key elements of maintaining this low risk approach are:
-- investment focuses on the primary heath real estate sector which is traditionally much less cyclical than other real estate sectors;
-- the majority of the Group's rental income is received directly or indirectly from government bodies;
-- the Group benefits from long initial lease terms, most with upwards only review terms, that provide clear visibility of income;
-- the Group is not a direct developer of real estate, which, whilst there is little or no speculative development in the sector, means that the Group is not exposed to risks that are inherent in property development; and
-- the Board funds its operations so as to maintain an appropriate mix of debt and equity. Debt funding is procured from a range of providers, 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 longer term viability. These include external factors that may arise from the markets in which the Group operates, government and fiscal policy and general economic conditions, and internal risks that arise from how the Group is managed and chooses to structure its operations.
Approach to risk management
Risk is considered at every level of the Group's operations and the Board's appetite for risk is embedded in the controls and processes that have been put in place across the Group. The 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 Audit Committee is delegated responsibility for reviewing 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 is delegated responsibility for assessing and monitoring operational and financial risks and has in place robust systems and procedures to ensure this is embedded in its approach to managing the Group's portfolio and operations. The Adviser has established a Risk Committee that is formed of members of its senior management team, with a chairman who is independent of both the Adviser and the Group and experienced in the operation and oversight of risk management processes.
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 and regular risk management workshops are undertaken to encourage open participation and communication. Significant risks are recorded in a Risk Register and are assessed and rated within a defined scoring system. The Risk Register is updated for each quarterly meeting of the Adviser's Risk Committee and the risks are identified and their ratings are reviewed.
The Adviser's Risk Committee reports its processes of risk management and rating of risks identified 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) the 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 management 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.
Principal risks and uncertainties
The Board has undertaken a robust assessment of the principal risks faced by the Group that may threaten its business model, future performance, solvency or liquidity and its ability to meet the overall objective of the Group of delivering progressive returns to shareholders through a combination of earnings growth and capital appreciation. These are set out below.
Risk Inherent Change Factors Mitigation Residual
risk rating to risk affecting risk rating
in 2016 risk in
the year
------------------ --------------- ---------- -------------------- -------------------- ---------------
Delivering progressive returns
------------------------------------------------------------------------------------------------------------
PHP invests Medium Unchanged UK and Irish The commitment Medium
in a niche as likelihood governments to primary Policy
asset sector is low continue care is risk is
where changes but impact to be committed a stated out of
in healthcare of occurrence to the development objective the control
policy, may be of primary of both of the
the funding very major. care services UK and Irish Board,
of primary and initiatives governments. but proactive
care, economic to develop Management measures
conditions new models engages are taken
and the of care directly to monitor
availability increasingly with government developments
of finance focus on and healthcare and ensure
may adversely greater management prudent
affect the utilisation in both financing
Group's of primary the UK and and continued
portfolio care. in Ireland availability
valuation The eventual to promote of resources
and performance. outcome the need to the
of EU exit for continued Group.
negotiations investment
is unknown in modern
but the premises.
demand for The attractiveness
health services of long
will continue term, secure
regardless. income streams
Future funding that characterise
levels in the sector
the UK may leads to
be impacted stability
by any long of values.
term, material The Group
change to has reduced
economic its borrowing
performance levels following
and the its capital
uncertainty raise in
caused by April 2016,
the referendum maintains
may lead headroom
to fluctuations in its covenant
in the value tests and
of the Group's holds a
assets, pool of
but no evidence unfettered
of this assets.
can be seen
at present.
The attractiveness
of the long
term, secure
and growing
income streams
that characterise
the sector
leads to
stability
of values.
------------------ --------------- ---------- -------------------- -------------------- ---------------
Risk Inherent Change Factors Mitigation Residual
risk rating to risk affecting risk rating
in 2016 risk in
the year
--------------------- ----------------- ---------- --------------------- ---------------------- -----------------
Income and Medium Increased The Group The Board Low
expenditure as likelihood has completed has and Action
that will of volatility its first will continue has been
be derived is high acquisition to fund taken
from PHP's but the of a primary its investments to implement
investment potential care centre so as to a hedging
in the Republic impact in Ireland. create a strategy
of Ireland at present Asset values, natural so as
will be is low funding hedge between to manage
denominated due to and net asset values exchange
in Euros the quantum income are and liabilities rate risk.
and may of investment denominated in Ireland.
be affected in Ireland. in Euros. Operating
unfavourably The UK referendum cash flows
by fluctuations vote to will be
in currency leave the hedged wherever
rates impacting EU has seen possible
the Group's Sterling to limit
earnings exchange exposure
and portfolio rates fall to exchange
valuation. sharply. rate fluctuations.
Volatility This will
will continue include
whilst the the use
exit process of currency
is ongoing. derivatives
and matching
Euro-denominated
assets with
Euro debt
facilities.
--------------------- ----------------- ---------- --------------------- ---------------------- -----------------
Grow property portfolio
----------------------------------------------------------------------------------------------------------------------
The emergence High Unchanged A flight The reputation Medium
of new purchasers as likelihood to income and track The Group's
to the sector is high is emerging record of position
and the and impact post-referendum the Group within
recent slowing of occurrence which has in the sector the sector
in the level could attracted means it and commitment
of approvals be major. property is able to and
of new centres investors to source understanding
in the UK to the sector investment of the
may restrict due to its in existing asset
the ability long term, standing class
of the Group secure government investments sees PHP
to secure cash flows. from developers, being
new investments. The sector investors aware
continues and owner-occupiers. of a high
to experience The Group proportion
a low number has a number of transactions
of new development of formal in the
approvals pipeline market.
in the UK. agreements Active
The Group and longstanding management
has an identified development of the
pipeline relationships property
of primary that provide portfolio
care real an increased generates
estate assets opportunity regular
in the UK to secure opportunity
and Ireland, developments to increase
giving access that come income
to a pool to market and enhance
of potential in the UK. value.
modern medical The ETTF
centre investments. has approved
several
projects
within PHP's
portfolio
which enhance
or extend
existing
properties.
--------------------- ----------------- ---------- --------------------- ---------------------- -----------------
The Group High Reduced The Company Overall Medium
uses a mix as likelihood successfully debt levels The Group
of shareholder of a restricted raised GBP145.3 have been takes
equity and supply million reduced positive
external is medium (after costs) in the period action
debt to and the of equity and the to ensure
fund its potential capital quantum continued
operations. impact in April of unfettered availability
A restriction of such 2016. Proceeds assets increased. of resource,
on the availability a restriction were initially Existing maintain
of funds could used to and new a prudent
would limit be major. pay down debt providers ratio
the Group's revolving are keen of debt
ability credit facilities, to provide and equity
to invest. but these funds to funding
funds remain the sector, and refinance
available attracted debt facilities
to be redrawn by the strength in advance
as needed of its cash of their
by the Group. flows. maturity.
All covenants The Board
have been monitors
met with its capital
regard to structure
the Group's and maintains
debt facilities regular
and these contact
all remain with existing
available and potential
for their equity investors
contracted and debt
term with funders.
significant
overall
headroom.
--------------------- ----------------- ---------- --------------------- ---------------------- -----------------
Risk Inherent Change Factors Mitigation Residual
risk rating to risk affecting risk rating
in 2016 risk in
the year
------------------- ----------------- ---------- ------------------- --------------------- ----------------
Manage effectively and efficiently
----------------------------------------------------------------------------------------------------------------
The bespoke Medium Unchanged The Group's The Adviser Medium
nature of as likelihood property meets with The Adviser
the Group's of limited portfolio occupiers employs
assets can alternative has grown to discuss an active
lead to use value by 24 assets the specific asset
limited is medium in the period. property management
alternative and the Lease terms and the programme
use. Their impact for all tenant's and has
continued of such property aspirations a successful
use as fit values assets will and needs track
for purpose could erode and for their record
medical be serious. the importance future occupation. of securing
centres of active Ten projects enhancement
is key to management procured projects,
delivering to extend in the period including
on the Group's the use and ten lease
strategic of a building bids successfully extensions.
objectives. remains approved
unchanged. for ETTF
funding.
These all
enhance
income and
extend occupational
lease terms.
------------------- ----------------- ---------- ------------------- --------------------- ----------------
The Group Medium Unchanged None. The Advisory Medium
has no employees. as the Agreement The Adviser
The continuance likelihood with and is aligned
of the Adviser of any performance with the
contract unexpected of Nexus objectives
is key for change is regularly of the
the efficient is low, reviewed. Group
operation but if Nexus' remuneration and the
and management that occurred, is linked composition
of the Group. the impact to the performance of its
could of the Group team is
be significant. to incentivise monitored
long term by the
levels of Board.
performance.
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
Without Medium Unchanged Total Group Existing Medium
appropriate as the borrowing lenders The Board
confirmed likelihood has been remain keen constantly
debt facilities, of insufficient decreased to finance monitors
PHP may facilities in the period PHP and the facilities
be unable is medium and a short new entrants available
to meet and the term (twelve to debt to the
current impact months remaining) capital Group
and future of such revolving markets and looks
commitments an event credit facility have increased to refinance
or repay would has been available in advance
or refinance be serious. cancelled. resource. of any
debt facilities The Group Management maturity.
as they was successful constantly The Group
become due. in extending monitors is subject
the quantum the composition to the
and term of the Group's changing
of a facility debt portfolio conditions
with Barclays to ensure of debt
Bank plc compliance capital
and Allied with covenants markets.
Irish Banks and continued
plc in January availability
2016. The of funds.
facility The Adviser
is for a regularly
total of reports
GBP115 million to the Board
for a new on current
five-year debt positions
term. and provides
Fully credit projections
approved of future
terms have covenant
been agreed compliance
with RBS to ensure
to refinance early warning
the Group's of any possible
Club facility issues.
that matures
in August
2017 for
a new term
of up to
five years.
------------------- ----------------- ---------- ------------------- --------------------- ----------------
Risk Inherent Change Factors Mitigation Residual
risk rating to risk affecting risk rating
in 2016 risk in
the year
--------------- --------------- ---------- ------------------- ------------------ ----------------
Adverse High Increased Term interest The Group Medium
movement as the rate markets holds a The Group
in underlying likelihood experienced proportion is currently
interest of volatility significant of its debt well protected
rates could in interest volatility in long against
adversely rate markets across the term, fixed the risk
affect the is high year falling rate loans of interest
Group's and the sharply and mitigates rate rises
earnings potential following its exposure but, due
and cash impact the result to interest to its
flows. if not of the referendum rate movements continued
managed but seeing on floating investment
adequately spikes as rate facilities in new
could information mainly through properties
be major. has come the use and the
to market of interest need to
concerning rate swaps. maintain
the exit As at the available
process balance facilities,
and upon sheet date will be
the election 88% of drawn exposed
of a new debt is to future
US president. fixed or interest
Over the hedged. rate levels.
year, term MtM valuation
interest movements
rates have do not impact
fallen leading on the Group's
to an increase cash flows
in the mark and are
to market not included
liability in any covenant
("MtM") test in
valuations the Group's
of the Group's debt facilities.
interest
rate derivative
portfolio.
--------------- --------------- ---------- ------------------- ------------------ ----------------
Viability statement
In accordance with provision C.2.2 of the UK Corporate Governance Code as revised in 2014, the Directors confirm that, as part of their strategic planning and risk management processes, they undertake an assessment of the current position of the Group, its principal risks and prospects over a period that is longer than the twelve months required in order to adopt the going concern principle as the basis of the preparation of its financial statements.
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. This period is selected as:
-- The Group's financial review and budgetary processes cover a three-year look forward period; and
-- Most occupational leases within the Group's property portfolio have a three-yearly rent review pattern. Modelling over this period allows the Group's financial projections to include a full cycle of reversion, including fixed and indexed increases, to be assessed.
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 on pages 27 to 31) 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 agreed refinance of the Group's "Club" debt facility with Royal Bank of Scotland, 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.
Based on the results of their assessment and on the assumptions that have been made, 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 three-year assessment period.
Harry Hyman
Managing Director
15 February 2017
Group Statement of Comprehensive Income
for the year ended 31 December 2016
2016 2015
Notes GBP000 GBP000
--------------------------------------- --------- ------ --------- ---------
Rental income 67,439 63,115
Direct property expenses (868) (852)
-------------------------------------------------- ------ --------- ---------
Net rental income 3 66,571 62,263
Administrative expenses 4 (7,332) (6,807)
Net result on property portfolio 10 20,686 39,767
-------------------------------------------------- ------ --------- ---------
Operating profit 79,925 95,223
Finance income 5 464 737
Finance costs 6a (32,954) (34,464)
Non recurring: Early loan
repayment fees 6b (24) -
Fair value (loss)/gain on
derivative interest rate swaps
and amortisation of hedging
reserve 6c (2,185) 1,005
Fair value loss on convertible
bond 6d (1,525) (6,469)
-------------------------------------------------- ------ --------- ---------
Profit before taxation 43,701 56,032
-------------------------------------------------- ------ --------- ---------
Taxation charge 7 - -
--------------------------------------- --------- ------ --------- ---------
Profit for the year (1) 43,701 56,032
Other comprehensive income/(loss):
Items that may be reclassified
subsequently to profit and
loss
Fair value (loss)/gain on
interest rate swaps treated
as cash flow hedges and amortisation
of hedging reserve 23 (10,370) 1,420
Foreign currency translation 6 -
gain on net investment in
foreign subsidiary
--------------------------------------- --------- ------ --------- ---------
Other comprehensive (loss)/income
for the year net of tax (1) (10,364) 1,420
-------------------------------------------------- ------ --------- ---------
Total comprehensive income
for the year net of tax (1) 33,337 57,452
-------------------------------------------------- ------ --------- ---------
Earnings per share Basic 8 7.8p 12.6p
Diluted 8 7.3p 11.2p
EPRA earnings per share Basic 8 4.8p 4.9p
Diluted 8 4.7p 4.8p
------------------------------------------------- ------ --------- ---------
The above relates wholly to continuing operations.
(1) - Wholly attributable to equity shareholders of Primary Health Properties PLC
Group Balance Sheet
at 31 December 2016
2016 2015
Notes GBP000 GBP000
-------------------------------------- ------ ---------- ----------
Non-current assets
Investment properties 10 1,220,155 1,100,612
Derivative interest rate swaps 17 - 9
-------------------------------------- ------ ---------- ----------
1,220,155 1,100,621
-------------------------------------- ------ ---------- ----------
Current assets
Trade and other receivables 12 3,343 4,153
Cash and cash equivalents 13 5,099 2,881
-------------------------------------- ------ ---------- ----------
8,442 7,034
-------------------------------------- ------ ---------- ----------
Total assets 1,228,597 1,107,655
-------------------------------------- ------ ---------- ----------
Current liabilities
Derivative interest rate swaps 17 (3,795) (4,734)
Corporation tax payable - -
Deferred rental income (14,062) (13,169)
Trade and other payables 14 (13,600) (16,099)
Borrowings: term loans and overdraft 15 (803) (862)
-------------------------------------- ------ ---------- ----------
(32,260) (34,864)
-------------------------------------- ------ ---------- ----------
Non-current liabilities
Borrowings: term loans and overdraft 15 (429,433) (460,550)
Borrowings: Bonds 16 (238,197) (236,328)
Derivative interest rate swaps 17 (29,511) (30,553)
-------------------------------------- ------ ---------- ----------
(697,141) (727,431)
-------------------------------------- ------ ---------- ----------
Total liabilities (729,401) (762,295)
-------------------------------------- ------ ---------- ----------
Net assets 499,196 345,360
-------------------------------------- ------ ---------- ----------
Equity
Share capital 19 74,773 55,785
Share premium account 20 59,102 57,422
Capital reserve 21 1,618 1,618
Special reserve 22 192,894 93,063
Hedging reserve 23 (32,772) (22,402)
Retained earnings 24 203,575 159,874
Translation reserve 6 -
-------------------------------------- ------ ---------- ----------
Total equity(1) 499,196 345,360
-------------------------------------- ------ ---------- ----------
Net asset value per share - basic 25 83.5p 77.4p
EPRA net asset value per share
- basic 25 91.1p 87.7p
-------------------------------------- ------ ---------- ----------
These financial statements were approved by the Board of Directors on 15 February 2017 and signed on its behalf by:
Alun Jones
Chairman
(1) - Wholly attributable to equity shareholders of Primary Health Properties PLC.
Group Cash Flow Statement
for the year ended 31 December 2016
2016 2015
Notes GBP000 GBP000
--------------------------------------- ------ ---------- ---------
Operating activities
Profit on ordinary activities
before tax 43,701 56,032
Finance income 5 (464) (737)
Finance costs 6a 32,954 34,464
Early loan repayment fee 6b 24 -
Fair value loss/(gain) on interest
rate swaps and amortisation
of cash flow hedging reserve 6c 2,185 (1,005)
Fair value loss on convertible
bond 6d 1,525 6,469
--------------------------------------- ------ ---------- ---------
Operating profit before financing
costs 79,925 95,223
Adjustments to reconcile Group
operating profit before financing
costs to net cash flows from
operating activities:
Revaluation gain on property
portfolio 10 (20,686) (39,767)
Fixed rent uplift (1,498) (1,480)
Decrease in trade and other
receivables 616 999
(Decrease)/increase in trade
and other payables (1,519) 2,170
--------------------------------------- ------ ---------- ---------
Cash generated from operations 56,838 57,145
Taxation paid(1) (51) -
--------------------------------------- ------ ---------- ---------
Net cash flow from operating
activities 56,787 57,145
--------------------------------------- ------ ---------- ---------
Investing activities
Payments to acquire and improve
investment properties (97,359) (17,863)
Payment to acquire Crestdown
Limited(2) - (3,869)
Payment to acquire White Horse
Centre Limited(3) - (7,745)
Interest received on development
loans 576 1,311
Bank interest received 59 12
--------------------------------------- ------ ---------- ---------
Net cash flow used in investing
activities (96,724) (28,154)
--------------------------------------- ------ ---------- ---------
Financing activities
Proceeds from issue of shares 150,000 -
Cost of share issues and sub-division (4,768) (139)
Term bank loan drawdowns 68,453 45,750
Term bank loan repayments (100,290) (25,764)
Termination of derivative financial
instruments (14,512) (3,286)
Swap interest paid (4,987) (6,724)
Non-utilisation fees (886) (875)
Loan arrangement fees (794) (270)
Interest paid (25,318) (25,791)
Loan breakage costs (24) -
Equity dividends paid net of
scrip dividend 9 (24,734) (21,083)
--------------------------------------- ------ ---------- ---------
Net cash flow from financing
activities 42,140 (38,182)
--------------------------------------- ------ ---------- ---------
Increase/(decrease) in cash
and cash equivalents for the
year 2,203 (9,191) Effect of exchange rate fluctuations 15 - on cash and cash equivalents(4) --------------------------------------- ------ ---------- --------- Cash and cash equivalents at start of year 2,881 12,072 --------------------------------------- ------ ---------- --------- Cash and cash equivalents at end of year 13 5,099 2,881 --------------------------------------- ------ ---------- ---------
(1) - payment of liabilities acquired with subsidiaries
(2) - acquisition of Thornaby property
(3) - acquisition of White Horse, Westbury property
(4) - exchange difference on euro denominated loan used to hedge net investment in foreign operation, see Note 2.2 to the Financial Statements
Group Statement of Changes in Equity
for the year ended 31 December 2016
Share Share Capital Special Hedging Translation Retained
capital premium reserve reserve reserve reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------- --------- --------- --------- --------- --------- ------------ ---------- ---------
1 January
2016 55,785 57,422 1,618 93,063 (22,402) - 159,874 345,360
Profit
for the
year - - - - - - 43,701 43,701
Other comprehensive
income
Fair value
movement
on interest
rate swaps - - - - (11,930) - - (11,930)
Foreign
currency
translation
gain on
net investment
in subsidiary - - - - - 6 - 6
Amortisation
of hedging
reserve - - - - 1,560 - - 1,560
Total
comprehensive
income - - - - (10,370) 6 43,701 33,337
Shares
issued 18,750 - - 131,250 - - - 150,000
Share
issue
expenses - (101) - (4,667) - - - (4,768)
Dividends
paid:
Dividends
paid - - - (24,733) - - - (24,733)
Scrip
dividend
in lieu
of cash 238 1,781 - (2,019) - - - -
31 December
2016 74,773 59,102 1,618 192,894 (32,772) 6 203,575 499,196
----------------- --------- --------- --------- --------- --------- ------------ ---------- ---------
Share Share Capital Special Hedging Retained
capital premium reserve reserve reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
1 January 2015 55,638 56,416 1,618 115,438 (23,847) 103,867 309,130
Profit for
the year - - - - - 56,032 56,032
Other comprehensive
income
Fair value
movement on
interest rate
swaps - - - - (132) - (132)
Amortisation
of hedging
reserve - - - - 1,552 - 1,552
Total comprehensive
income - - - - 1,420 56,032 57,452
Reclassification
of interest
accrual from
hedging reserve(1) - - - - 25 (25) -
Share issue
expenses - (30) - (109) - - (139)
Dividends paid:
Dividends paid - - - (21,083) - - (21,083)
Scrip dividends
in lieu of
cash 147 1,036 - (1,183) - - -
31 December
2015 55,785 57,422 1,618 93,063 (22,402) 159,874 345,360
--------------------- --------- --------- --------- --------- --------- ---------- ---------
(1) This relates to fair value changes in prior periods incorrectly recognised within the cash flow hedging reserve movements
Notes to the financial statements
1. Corporate information
The Group's financial statements for the year ended 31 December 2016 were approved by the Board of Directors on 15 February 2017 and the Balance Sheets were signed on the Board's behalf by the Chairman, Alun Jones. Primary Health Properties PLC is a public limited company incorporated and domiciled in England and Wales. The Company's Ordinary Shares are admitted to the Official List of the UK Listing Authority, a division of the Financial Conduct Authority, and traded on the London Stock Exchange.
2. Accounting policies
2.1 Basis of preparation
The Group's financial statements have been prepared on the historical cost basis, except for investment properties and derivative financial instruments that have been measured at fair value.
The Group's financial statements are prepared on the going concern basis (see page 69 for further details) and presented in Sterling rounded to the nearest thousand.
Statement of compliance
The Company prepares consolidated financial statements for the Group under International Financial Reporting Standards ("IFRS") as adopted by the European Union and applied in accordance with the Companies Act 2006 and Article 4 of the IAS Regulations.
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in February 2017.
2.2 Summary of significant accounting policies
Basis of consolidation
The Group's financial statements consolidate the financial statements of Primary Health Properties PLC and its subsidiary undertakings, all of which are wholly owned. 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 in healthcare property assets 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 is Sterling and the functional currency of Primary Health Properties ICAV 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, except for exchange differences on foreign currency loans that hedge the Group's investment in foreign subsidiaries where exchange differences are booked in equity until the investment is realised.
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 that period, in which case the exchange rates at the date of transactions are used.
Exchange differences are recognised in a separate component of equity reserves and recognised in the Statement of Comprehensive Income on disposal of a foreign entity.
The only exchange rates used to translate foreign currency amounts in 2016 are as follows (the Group did not have any foreign operations in 2015).
Balance Sheet: GBP1 = EUR1.1722. Statement of Comprehensive Income: GBP1 = EUR1.1843
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 for accounting purposes upon completion of contract, when the risks and rewards of ownership are transferred to the Group. Investment properties cease to be recognised when they have been disposed of. Any gains and losses arising are recognised in the Group Statement of Comprehensive Income in the year of disposal.
The Group may enter into a forward funding agreement with third-party developers in respect of certain properties under development. In accordance with these agreements, the Group will make monthly stage payments to the developer based on certified works on site at that time. Interest is charged to the developer on all stage payments made during the construction period and on the cost of the land acquired by the Group at the outset of the development and taken to the Group Statement of Comprehensive Income in the year in which it accrues.
Property acquisitions and business combinations
Where a property is acquired through the acquisition of corporate interests, the Board considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business. The basis of the judgement is set out in Note 2.3(b).
Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values on the acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Otherwise, corporate acquisitions are accounted for as business combinations.
Net rental income
Rental income arising from operating leases on investment properties is accounted for on a straight line basis over the lease term. An adjustment to rental income is recognised from the rent review date of each lease in relation to unsettled rent reviews. Such adjustments are accrued at 90% of the additional rental income that is expected to result from the review. For leases which contain fixed or minimum deemed uplifts, the rental income is recognised on a straight line basis over the lease term. Incentives for lessees to enter into lease agreements are spread evenly over the lease terms, even if the payments are not made on such a basis. Rental income is measured at the fair value of the consideration receivable, excluding discounts, rebates, VAT and other sales taxes or duty.
Interest income
Revenue is recognised as interest accrues, using the effective interest method (that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).
Trade and other receivables
Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.
Cash and cash equivalents
Cash and cash equivalents are defined as cash and short term deposits, including any bank overdrafts, with an original maturity of three months or less.
Trade and other payables
Trade payables are recognised and carried at their invoiced value inclusive of any VAT that may be applicable.
Bank loans and borrowings
All loans and borrowings are initially measured at fair value less directly attributable transaction costs. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest method.
Borrowing costs
Borrowing costs that are separately identifiable and directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs the Group incurs in connection with the borrowing of funds.
Convertible bond
The convertible bond is designated as "at fair value through profit or loss" and so is presented on the Group Balance Sheet at fair value with all gains and losses, including the write-off of issuance costs, recognised in the Group Statement of Comprehensive Income. The fair value of the convertible bond is assessed in accordance with level 1 valuation techniques as set out within "Fair value measurements" within these accounting policies. The interest charge in respect of the coupon rate on the bond has been recognised within the underlying component of net financing costs on an accruals basis. Refer to Note 16 for further details.
Taxation
Taxation on the profit or loss for the period not exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised in the Group Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.
Current tax is the expected tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Financial instruments
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedging relationships as defined by IAS 39. Gains or losses on liabilities held for trading are recognised in the Group Statement of Comprehensive Income.
Other loans and payables
Other loans and payables are non-derivative financial liabilities with fixed or determinable payments that are not quoted on an active market. Such liabilities are carried at amortised cost using the effective interest method. Gains and losses are recognised in the Group statement of comprehensive income when the loans and payables are de-recognised or impaired, as well as through the amortisation process.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the Group Statement of Comprehensive Income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.
De-recognition of financial assets and liabilities
Financial assets
A financial asset (or where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:
-- the rights to receive cash flows from the asset have expired;
-- the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or
-- the Group has transferred its right to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in income.
When the exchange or modification of an existing financial liability is not accounted for as an extinguishment, any costs or fees incurred adjust the liability's carrying amount and are amortised over the modified liability's remaining term.
Fair value measurements
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 "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 re-measured at fair value. The fair values of the Group's interest rate swaps are calculated by J.C. Rathbone Associates Limited, an independent specialist which provides treasury management services to the Group.
The method of recognising the resulting gain or loss depends on whether the derivative is designated as an effective hedging instrument.
-- where a derivative is designated as a hedge of the variability of a highly probable forecast transaction, such as an interest payment, the element of the gain or loss on the derivative that is an "effective" hedge is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognised directly in the cash flow hedging reserve are reclassified into the Group Statement of Comprehensive Income in the same period or periods during which the asset acquired or liability assumed affects the Group Statement of Comprehensive Income i.e. when interest income or expense is recognised;
-- the gain or loss on derivatives that do not meet the strict criteria for being "effective" and so do not qualify for hedge accounting and the non-qualifying element of derivatives that do qualify for hedge accounting, are recognised in the Group Statement of Comprehensive Income immediately. The treatment does not alter the fact that the derivatives are economic hedges of the underlying transaction.
For swaps that have been cancelled which previously qualified for hedge accounting, the remaining value within the cash flow hedging reserve at the date of cancellation is recycled to the Group Statement of Comprehensive Income on a straight line basis from the date of cancellation to the original swap expiry date.
(ii) Hedging net investments in foreign entities
The Group uses foreign currency borrowings to fund and hedge its investment in foreign entities. Any gain or loss on the loan designated as a hedging instrument is recognised in other comprehensive income and accumulated in a foreign currency translation reserve. Gains or losses on the hedge that are accumulated in the foreign currency translation reserve are reclassified to the Statement of Comprehensive Income on disposal of a foreign entity.
Leases - Group as a lessor
The vast majority of the Group's properties are leased out under operating leases and are included within investment properties. Rental income, including the effect of lease incentives, is recognised on a straight line basis over the lease term.
Where the Group transfers substantially all the risks and benefits of ownership of the asset, the arrangement is classified as a finance lease and a receivable is recognised for the initial direct costs of the lease and the present value of the minimum lease payments. Finance income is recognised in the Group Statement of Comprehensive Income so as to achieve a constant rate of return on the remaining net investment in the lease. Interest income on finance leases is restricted to the amount of interest actually received.
2.3 Significant accounting estimates and judgements
The preparation of the Group financial statements requires management to make a number of estimates and judgements that affect the reported amounts of assets and liabilities and may differ from future actual results. The estimates and judgements that are considered most critical and that have a significant inherent risk of causing a material adjustment to the carrying amounts of assets and liabilities are:
a) Estimates
Fair value of investment properties
Investment property includes (i) completed investment property, and (ii) investment property under construction. Completed investment property comprises real estate held by the Group or leased by the Group under a finance lease in order to earn rentals or for capital appreciation, or both.
The fair market value of a property is deemed by the independent property valuers appointed by the Group to be the estimated amount for which a property should exchange, on the date of valuation, in an arm's length transaction. Properties have been valued on an individual basis, assuming that they will be sold individually over time. Allowances are made to reflect the purchaser's costs of professional fees and stamp duty.
In accordance with RICS Appraisal and Valuation Standards, factors taken into account are current market conditions, annual rentals, state of repair, ground stability, contamination issues and fire, health and safety legislations.
In determining the fair value of investment properties under construction the valuer is required to consider the significant risks which are relevant to the development process including, but not limited to, construction and letting risks. The valuer takes into account where the Group's assets under construction are pre-let and construction risk remains with the respective developer or contractor.
Fair value of derivatives
In accordance with IAS 39, the Group values its derivative financial instruments at fair value. Fair value is estimated by J.C. Rathbone Associates Limited on behalf of the Group, using a number of assumptions based upon market rates and discounted future cash flows. The derivative financial instruments have been valued by reference to the mid-price of the yield curve prevailing on 31 December 2016. Fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate.
b) Judgements
Leases
The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of the vast majority of the properties, which are leased out on operating leases. The Group has entered into a small number of finance lease arrangements where it has determined that it has transferred substantially all the risks and rewards incidental to ownership to the occupier.
Hedge effectiveness
The Group has a number of interest rate swaps that mature after the Group's bank facilities, to which they relate, are due to expire. In accordance with 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.
2.4 Standards adopted during the year
The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS effective for the Group as of 1 January 2016. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements:
-- Annual improvement to IFRSs: 2012-2014
-- IAS 16 and IAS 38 (amendments): Clarification of acceptable methods of depreciation and amortisation
-- IAS 16 and IAS 41 (amendments): Agriculture bearer plants -- IAS 19 (amendments): Defined benefit plans: employee contributions -- IAS 27 (amendments): Equity method in separate financial statements -- IFRS 11 (amendments): Accounting for acquisitions of interests in joint operations
2.5 Standards issued but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective and in some cases had not yet been adopted by the EU:
IFRS 9 Financial instruments
-------------------------------- --------------------------------
IFRS 15 Revenue from contracts
with customers
-------------------------------- --------------------------------
IFRS 16 Leases
-------------------------------- --------------------------------
IFRS 10 and IAS 28 (amendments) Sale or contribution
of assets between an
investor and its associate
or joint venture
-------------------------------- --------------------------------
Annual improvements to Amendments to: IFRS 1
IFRSs: 2014-2016 - First-time Adoption
of International Financial
Reporting Standards,
IFRS 12 - Disclosure
of Interests in Other
Entities, IAS 28 - Investments
in Associates and Joint
Ventures
-------------------------------- --------------------------------
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2017, but are not yet applicable to the Group and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except for the following set out below:
IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through Other Comprehensive Income and fair value through profit or loss.
The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss, with the irrevocable option at inception to present changes in fair value in Other Comprehensive Income. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the "bright line" hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the 'hedged ratio' to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted, subject to EU endorsement. The Group is assessing the impact of IFRS 9.
IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted, subject to EU adoption. The Group is assessing the impact of IFRS 15 but it is not expected to be material.
IFRS 16, 'Leases', establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. The standard specifies how entities reporting in accordance with IFRS will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted if IFRS 15 'Revenue from contracts with customers' has also been applied. The Group is assessing the impact of IFRS 16 but it is not expected to be material.
3. Rental and related income
Revenue comprises rental income receivable on property investments in the UK and Republic of Ireland, which is exclusive of applicable VAT. Revenue is derived from one reportable operating segment. Details of the lease income are given below.
Group as a lessor
a) The future minimum lease payments under non-cancellable operating leases receivable by the Group are as follows:
Less 1 to More Total
than 5 years than
one year 5 years
GBP000 GBP000 GBP000 GBP000
------ ---------- --------- --------- --------
2016 66,894 264,895 575,480 907,269
2015 61,850 246,566 590,357 898,773
------ ---------- --------- --------- --------
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 in the UK, the Health Service Executive 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
2016 2015
GBP000 GBP000
---------------------------------------- ------- -------
Administrative expenses including:
Advisory fees (Note 4a) 5,806 5,296
Directors' fees (Note 4c) 285 254
Audit fees
Fees payable to the Company's auditors
and their associates for the audit
of the Company's annual accounts 120 119
Fees payable to the Company's auditors
and their associates for the audit
of the Company's subsidiaries 135 114
---------------------------------------- ------- -------
Total audit fees 255 233
---------------------------------------- ------- -------
Audit-related assurance services
for the interim review 22 42
---------------------------------------- ------- -------
Total audit and assurance services 277 275
---------------------------------------- ------- -------
Non-audit fees
Tax compliance services 5 15
Tax advisory services 34 20
Total non-audit fees 39 35
---------------------------------------- ------- -------
Total fees 316 310
---------------------------------------- ------- -------
a) Advisory fees
The advisory fees calculated and payable for the period to 31 December were as follows:
2016 2015
GBP000 GBP000
------- ------- -------
Nexus 5,806 5,296
------- ------- -------
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 2016 GBP0.5 million was payable to Nexus (2015: GBP0.5 million).
Further fees paid to Nexus in accordance with the Advisory Agreement of GBP0.1 million (2015: GBP0.1 million) in respect of capital projects were capitalised in the year.
Service charge management fees paid to Nexus in the year in connection with the Group's properties totalled GBP0.1 million (2015: GBP0.1 million).
b) Performance Incentive Fee
Information about the Performance Incentive Fee is provided in the Corporate Governance section of the Strategic Review in the Annual Report.
c) Remuneration of Directors
Information about the remuneration of individual Directors is provided in the Directors' Remuneration Report in the Annual Report.
5. Finance income
2016 2015
GBP000 GBP000
------------------------------------- ------- -------
Interest income on financial assets
Bank interest 57 9
Development loan interest 405 725
Other interest 2 3
------------------------------------- ------- -------
464 737
------------------------------------- ------- -------
6. Finance costs
2016 2015
GBP000 GBP000
---------------------------------------- ------- -------
Interest expense and similar charges
on financial liabilities
a) Interest
Bank loan interest 15,647 16,287
Swap interest 5,061 5,954
Bond interest 9,577 9,567
Bank facility non-utilisation fees 846 922
Bank charges and loan commitment
fees 1,823 1,734
---------------------------------------- ------- -------
32,954 34,464
---------------------------------------- ------- -------
b) Early loan repayment fees
Fee on breakage of Crestdown debt 24 -
---------------------------------------- ------- -------
2016 2015
GBP000 GBP000
-------------------------------------------- -------- --------
c) Derivatives
Net fair value (loss)/gain on interest
rate swaps (625) 2,557
Amortisation of cash flow hedging
reserve (1,560) (1,552)
(2,185) 1,005
-------------------------------------------- -------- --------
The fair value gain on derivatives recognised in the Group Statement of Comprehensive Income has arisen from the interest rate swaps for which hedge accounting does not apply. A fair value loss on derivatives which do meet the hedge effectiveness criteria under IAS 39 of GBP11.9 million (2015: GBP0.1 million) is accounted for directly in equity. An amount of GBP1.6 million has been amortised from the cash flow hedging reserve in the year resulting from an early termination of an effective swap contract (see Note 23).
Details of the fair value loss on hedges which meet the effectiveness criteria for hedge accounting under IAS 39 are set out in Note 23.
2016 2015
GBP000 GBP000
------------------------------------ -------- --------
d) Convertible bond
Fair value loss on convertible
bond (1,525) (6,469)
------------------------------------ -------- --------
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.
2016 2015
GBP000 GBP000
------------------------------ ------- -------
Net finance costs
Finance income (Note 5) (464) (737)
Finance costs (as per above) 32,954 34,464
------------------------------ ------- -------
32,490 33,727
------------------------------ ------- -------
7. Taxation
a) Taxation charge in the Group Statement of Comprehensive Income
2016 2015
GBP000 GBP000
----------------------------- ------- -------
Current tax
UK corporation tax (Note 7b) - -
----------------------------- ------- -------
The UK corporation tax rate of 20% has been applied in the measurement of the Group's tax liability at 31 December 2016.
b) Factors affecting the tax credit for the year
The tax assessed for the year is lower than (2015: lower than) the standard rate of corporation tax in the UK. The differences are explained below:
2016 2015
GBP000 GBP000
-------------------------------------- -------- --------
Profit on ordinary activities before
taxation 43,701 56,032
-------------------------------------- -------- --------
Theoretical tax at UK corporation
tax rate of 20.0% (2015: 20.3%) 8,740 11,375
REIT exempt income (9,044) (6,940)
Transfer pricing adjustments 4,106 4,023
Non-taxable items (3,578) (7,035)
Losses brought forward utilised (224) (1,423)
Taxation charge (Note 7a) - -
-------------------------------------- -------- --------
At the balance sheet date, the Group has unused tax losses of GBP15.0 million (2015: GBP14.3 million) available for offset against future taxable profits.
c) Basis of taxation
The Group elected to be treated as a UK REIT with effect from 1 January 2007. The UK REIT rules exempt the profits of the Group's property rental business from corporation tax. Gains on properties are also exempt from tax, provided they are not held for trading or sold in the three years post completion of development. The Group will otherwise be subject to corporation tax at 20% (2015: 20%).
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 2016.
8. Earnings per share
The calculation of basic and diluted earnings per share is based on the following:
Net profit
attributable
to Ordinary Ordinary Per
Shareholders Shares Share
GBP000 (number) (pence)
------------------------------------ -------------- ------------ --------
2016
Basic and diluted earnings
Basic earnings 43,701 560,026,372 7.8
Dilutive effect of convertible
bond 3,506 84,615,385
------------------------------------ -------------- ------------ --------
Diluted earnings 47,207 644,641,757 7.3
------------------------------------ -------------- ------------ --------
EPRA basic and diluted
earnings
Basic earnings 43,701
Adjustments to remove:
Net result on property
(Note 10) (20,686)
Fair value loss on derivatives 2,185
Early loan repayment
fee charges(1) 24
Fair value movement
on convertible bond 1,525
EPRA basic earnings 26,749 560,026,372 4.8
------------------------------------ -------------- ------------ --------
Dilutive effect of convertible
bond 3,506 84,615,385
------------------------------------ -------------- ------------ --------
EPRA diluted earnings 30,255 644,641,757 4.7
2015
Basic and diluted earnings
Basic earnings 56,032 445,606,491 12.6
Dilutive effect of convertible
bond 3,506 84,615,385
------------------------------------ -------------- ------------ --------
Diluted earnings 59,538 530,221,876 11.2
------------------------------------ -------------- ------------ --------
EPRA basic and diluted
earnings
Basic and diluted earnings 56,032
Adjustments to remove:
Net result on property
(Note 10) (39,767)
Fair value loss on derivatives (1,005)
Fair value movement
on convertible bond 6,469
EPRA basic and diluted
earnings 21,729 445,606,491 4.9
------------------------------------ -------------- ------------ --------
Dilutive effect of convertible
bond 3,506 84,615,385
------------------------------------ -------------- ------------ --------
EPRA diluted earnings 25,235 530,221,876 4.8 ------------------------------------ -------------- ------------ --------
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 2016. 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 2016.
9. Dividends
Amounts recognised as distributions to equity holders in the year:
2016 2015
GBP000 GBP000
------------------------------------- ------- -------
Quarterly interim dividend paid 5,357 -
26 February 2016
Scrip dividend in lieu of quarterly 361 -
cash dividend 26 February 2016
Quarterly interim dividend paid 5,170 -
27 May 2016
Scrip dividend in lieu of quarterly 552 -
cash dividend 27 May 2016
Quarterly interim dividend paid 6,832 -
26 August 2016
Scrip dividend in lieu of quarterly 819 -
cash dividend 26 August 2016
Quarterly interim dividend paid 7,374 -
25 November 2016
Scrip dividend in lieu of quarterly 287 -
cash dividend 25 November 2016
Interim dividend paid 1 April 2015 - 10,733
Scrip dividend in lieu of interim
cash dividend 1 April 2015 - 395
Interim dividend paid 30 October
2015 - 10,350
Scrip dividend in lieu of cash
dividend 30 October 2015 - 788
------------------------------------- ------- -------
Total dividends distributed in
the year 26,752 22,266
------------------------------------- ------- -------
Per share 5.125p 5.0p
------------------------------------- ------- -------
On 5 January 2017, the Board declared an interim dividend of 1.31 pence per Ordinary Share with regard to the year ended 31 December 2016, payable on 24 February 2017. This dividend will not be a Property Income Distribution ("PID").
10. Investment properties, investment properties under construction
Properties have been independently valued at fair value by Lambert Smith Hampton ("LSH"), Chartered Surveyors and Valuers, as at the balance sheet date in accordance with IAS 40 'Investment property'. LSH confirm that they have valued the properties in accordance with the Practice Statements in the RICS Appraisal and Valuation Standards ("Red Book"). There were no changes to the valuation techniques during the year. The Valuers are appropriately qualified and have sufficient market knowledge and relevant experience of the location and category of investment property and have had full regard to market evidence when determining the values.
The properties are 99.7% let (2015: 99.7%). The valuations reflected a 5.17% net initial yield (2015: 5.32%) and a 5.38% (2015: 5.53%) 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 Valuers are 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 Valuers have 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 GBP3.3 million (2015: GBP21.8 million) in arriving at the fair value to be included in the financial statements. A fair value increase of GBP0.8 million (2015: increase of GBP0.6 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 GBP20.7 million (2015: gain of GBP39.8 million).
In line with Accounting Policies, the Group has treated the acquisitions during the year as asset purchases rather than business combinations as they were judged to be acquisitions of properties rather than businesses.
Investment Investment
Investment properties properties
properties long under
freehold leasehold construction Total
GBP000 GBP000 GBP000 GBP000
--------------------------- ------------ ------------ -------------- ----------
As at 1(st) January
2016 882,016 209,861 8,735 1,100,612
Property additions 70,335 9,000 18,033 97,368
Impact of lease incentive
adjustment 657 832 - 1,489
Transfer from properties
under construction 19,703 - (19,703) -
972,711 219,693 7,065 1,199,469
Revaluations for the
year 14,219 5,642 825 20,686
--------------------------- ------------ ------------ -------------- ----------
As at 31 December 2016 986,930 225,335 7,890 1,220,155
--------------------------- ------------ ------------ -------------- ----------
As at 1(st) January
2015 825,274 177,075 23,858 1,026,207
Property additions 18,078 148 14,839 33,065
Impact of lease incentive
adjustment 629 944 - 1,573
Transfer from properties
under construction 6,853 23,750 (30,603) -
850,834 201,917 8,094 1,060,845
Revaluations for the
year 31,182 7,944 641 39,767
--------------------------- ------------ ------------ -------------- ----------
As at 31 December 2015 882,016 209,861 8,735 1,100,612
--------------------------- ------------ ------------ -------------- ----------
Bank borrowings, bonds and interest rate swaps are secured on investment properties with a value of GBP1,069 million (2015: GBP1,051 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 2016 and 31 December 2015. There were no transfers between levels during the year or during 2015. 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.
ERV - range of the portfolio
------------------------------------------------
2016 2015
----------------------- -----------------------
GBP57,722-GBP1,183,453 GBP55,436-GBP1,159,877
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.
TRUE EQUIVALENT YIELD - range of the portfolio
-------------------------------------------------
2016 2015
------------------------ -----------------------
4.334%-7.753% 4.580%-6.696%
------------------------ -----------------------
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. -- An increase in the remaining lease term will increase 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 5(th) Floor, Greener House, 66-68 Haymarket, London SW1Y 4RF, except as noted.
Subsidiaries held directly by the Company
PHP Finance (Jersey)
PHP Empire Holdings Limited Limited(1)
Primary Health Investment PHP Investments (2011)
Properties Limited Limited
Primary Health Investment
Properties (No. 2) Limited PHP 2013 Holdings Limited
Primary Health Investment
Properties (No. 3) Limited PHIP (Gorse Stacks) Limited
PHIP CH Limited Anchor Meadow Limited
PHP Healthcare (Holdings)
Limited PHP Bond Finance PLC
Health Investments Limited PHP Primary Properties
(Haymarket) Limited
Primary Health Investment PHP Medical Investments
Properties (No. 4) Limited Limited
White Horse Centre Limited PHP (Ipswich) Limited
Crestdown Limited PHP (Portsmouth) Limited
PHP (Chandler's Ford) Limited PHP (FRMC) Limited
PHP (Bingham) Limited (previously Primary Health Properties
PHP (Basingstoke) Limited) ICAV(2, 3)
Subsidiaries indirectly
held by the Company
SPCD (Northwich) Limited Leighton Health Limited
PHP Healthcare Investments
SPCD (Shavington) Limited Limited
PHIP (5) Limited PHP St. Johns Limited
PatientFirst Partnerships
Limited PHP Clinics Limited
PatientFirst (Hinckley)
Limited PHIP (Stourbridge) Limited
PHP (Project Finance)
PatientFirst (Burnley) Limited Limited
PHP Medical Properties
AHG (2006) Limited
PHIP (Hoddesdon) Limited PHP Glen Spean Limited
Gracemount Medical Centre
PHIP (Milton Keynes) Limited Limited(4)
PHIP (RHL) Limited PHP AssetCo (2011) Limited
PHP Primary Properties
PHIP (Sheerness) Limited Limited
PHP Healthcare Investments PHP Investments No.2
(Holdings) Limited Limited
PHP Investments No.1 Limited Motorstep Limited
With the exception of PHP Bond Finance PLC, Primary Health Investment Properties (No. 4) Limited and PHP Finance (Jersey) Limited, the principal activity of all of the above is property investment. PHP Bond Finance PLC and Primary Health Investment Properties (No. 4) Limited both act as intermediary financing companies within the Group. 100% of all voting rights and shares are held directly or indirectly by the Company.
(1) - Subsidiary company registered in Jersey, registered office 44 Esplanade, St Helier, Jersey JE4 9WG.
(2) - An Irish Collective Asset-management Vehicle ("ICAV") established in the Republic of Ireland.
(3) - Registered in the Republic of Ireland, registered office Riverside 1, Sir John Rogerson's Quay, Dublin 2.
(4) - Subsidiary company registered in Scotland, 3(rd) Floor, 1 West Regent Street, Glasgow G2 1RW..
12. Trade and other receivables
2016 2015
GBP000 GBP000
------------------------------------- ------- -------
Trade receivables (net of provision
for doubtful debts) 1,276 1,686
Prepayments and accrued income 1,463 1,379
Other debtors 595 908
Development loan interest 9 180
3,343 4,153
------------------------------------- ------- -------
As at 31 December, the analysis of trade receivables, some of which were past due but not impaired, is set out below:
2016 2015
GBP000 GBP000
-------------------------------- ------- -------
Neither past due nor impaired:
<30 days 461 1,224
Past due but not impaired:
30-60 days 541 54
60-90 days 154 -
90-120 days 64 95
>120 days 56 313
-------------------------------- ------- -------
1,276 1,686
-------------------------------- ------- -------
The Group's principal customers are invoiced and pay quarterly in advance, usually on English quarter days. No bad debt provision was required in the year (2015: GBPnil) and no receivables arising in the year were considered impaired. There is no significant concentration of credit risk with respect to trade receivables, as the Group has a large number of tenants.
Following the acquisition of Crestdown Limited in 2015, aged receivables of GBP81k were considered impaired as management is not expecting collection (2015:GBPnil). This sum was provided for within the agreed consideration paid for Crestdown Limited.
13. Cash and cash equivalents
2016 2015
GBP000 GBP000
------------------- ------- -------
Cash held at bank 4,944 2,881
Restricted cash 155 -
------------------- ------- -------
5,099 2,881
------------------- ------- -------
Restricted cash at 31 December 2016 represented an amount held as security in relation to repayment of bank borrowings.
Bank interest is earned at floating rates depending upon the bank deposit rate. Short term deposits may be made for varying periods of between one day and six months, dependent on available cash and forthcoming cash requirements of the Group. These deposits earn interest at various short term deposit rates.
14. Trade and other payables
2016 2015
GBP000 GBP000
------------------------------------- ------- -------
Trade payables 188 1,520
Bank and bond loan interest accrual 4,331 4,389
Other payables 5,679 7,302
VAT 2,536 2,105
Accruals 866 783
------------------------------------- ------- -------
13,600 16,099
------------------------------------- ------- -------
15. Borrowings: Term loans and overdrafts
The table indicates amounts drawn and undrawn from each individual facility as at 31 December:
Facility Amounts drawn Undrawn
2016 2015 2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- -------- -------- -------- -------- ------- -------
Current
Overdraft facility(1) 5,000 5,000 - - 5,000 5,000
Fixed rate term
loan(3) 803 755 803 755 - -
Term loan to November
2028 - 107 - 107 - -
----------------------- -------- -------- -------- -------- ------- -------
5,803 5,862 803 862 5,000 5,000
----------------------- -------- -------- -------- -------- ------- -------
Non-current
Term loan to August
2017(2) 115,000 165,000 115,000 146,250 - 18,750
Fixed Rate term
loan(3) 23,145 23,948 23,145 23,948 - -
Fixed Rate term
loan to December
2022(4) 25,000 25,000 25,000 25,000 - -
Term loan to July
2020(5) 50,000 50,000 6,398 21,513 43,602 28,487
Fixed rate term
loan to November
2018(6) 75,000 75,000 75,000 75,000 - -
Term loan to August
2019(7) 115,000 100,000 74,974 57,160 40,026 42,840
Fixed rate term
loan to August
2024(8) 50,000 50,000 50,000 50,000 - -
Fixed rate term
loan August 2029
year(8) 63,000 63,000 63,000 63,000 - -
Term loan to November
2028 - 2,415 - 2,415 - -
----------------------- -------- -------- -------- -------- ------- -------
516,145 554,363 432,517 464,286 83,628 90,077
----------------------- -------- -------- -------- -------- ------- -------
521,948 560,225 433,320 465,148 88,628 95,077
----------------------- -------- -------- -------- -------- ------- -------
Providers:
(1) The Royal Bank of Scotland plc
(2) The Royal Bank of Scotland plc ("RBS") and Abbey National Treasury Services plc (branded Santander from January 2010) ("The Club Facility")
(3) Aviva facility (acquired as part of HIL acquisition) repayable in tranches to 31 January 2032
(4) Aviva GPFC facility (5) HSBC Bank facility (6) Aviva facility (7) Barclays/AIB facility (8) Aviva facility
At 31 December 2016, total facilities of GBP749.4 million (2015: GBP787.7 million) were available to the Group. This included a GBP75 million unsecured retail bond, a GBP70 million secured bond, an GBP82.5 million convertible bond and a GBP5 million overdraft facility. Of these facilities, as at 31 December 2016, GBP660.8 million was drawn (2015: GBP692.8 million).
On 7 January 2016, the GBP100 million loan facility provided by Barclays Bank plc was successfully extended by GBP15 million, with the additional resource being provided by Allied Irish Banks plc. The enlarged facility is available for a new five year term from January 2016. All other terms of the facility remain unchanged.
On 22 January 2016, the GBP2.4 million term loan to 2028 with the Royal Bank of Scotland PLC was repaid in full. The loan had been acquired as part of the acquisition of Crestdown Limited on 29 June 2015.
On 10 June 2016, the revolving element of the RBS facility was voluntarily cancelled. This reduced the facility to GBP115 million, which is fully drawn on a term basis, and removes any further non-utilisation charges. No penalties were incurred.
On 17 August 2016, a Euro denominated tranche was agreed within the GBP50 million revolving credit facility with HSBC Bank plc. This allows an equivalent of GBP25 million to be drawn in Euro, secured by existing sterling denominated collateral. Euro drawings incur interest at Euribor plus the current UK loan facility margin. All other terms of the loan remain unaltered.
On 7 October 2016, a Euro denominated tranche was agreed within the GBP115 million revolving credit facility provided by Barclays Bank plc and Allied Irish Banks plc allowing an equivalent of GBP12 million to be drawn in Euro, secured by existing sterling denominated collateral. Euro drawings incur interest at Euribor plus the current UK loan facility margin. All other terms of the loan remain unaltered.
Costs associated with the arrangement and extension of the facilities, including legal advice and loan arrangement fees, are amortised over the remaining life of the related facility.
Any amounts unamortised as at the period end are offset against amounts drawn on the facilities as shown in the table below:
2016 2015
GBP000 GBP000
----------------------------------- -------- --------
Term loans drawn: due within one
year 803 862
Term loans drawn: due in greater
than one year 432,517 464,286
----------------------------------- -------- --------
Total terms loans drawn 433,320 465,148
Less: Unamortised borrowing costs (3,084) (3,736)
----------------------------------- -------- --------
Total term loans per the Group
Balance Sheet 430,236 461,412
----------------------------------- -------- --------
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
2016 2015
GBP000 GBP000
---------------------------- -------- --------
Secured
Secured Bond December 2025 70,000 70,000
Unsecured
Retail Bond July 2019 75,000 75,000
Convertible Bond May 2019 94,956 93,431
Unamortised issue costs (1,759) (2,103)
---------------------------- -------- --------
238,197 236,328
---------------------------- -------- --------
Secured Bond
On 18 December 2013, PHP successfully listed the floating rate guaranteed secured bonds issued on 4 November 2013 (the "Secured Bonds") on the London Stock Exchange. The Secured Bonds have a nominal value of GBP70 million and mature on or about 30 December 2025. The Secured Bonds incur interest at an annualised rate of 220 basis points above six month LIBOR, payable semi-annually in arrears.
Retail Bond
On 23 July 2012, PHP announced that it had become the first UK REIT to issue a Retail Bond following the issue of a GBP75 million, unsecured, seven-year bond, to retail investors with an annual interest rate of 5.375% paid semi-annually in arrears. The Retail Bond issue costs are being amortised on a straight line basis over seven years.
Convertible Bond
On 20 May 2014, PHP Finance (Jersey) Limited ("the Issuer"), a wholly owned subsidiary of the Group issued GBP82.5 million 4.25% of convertible bonds due 2019 (the "Bonds") at par. The Company has guaranteed the due and punctual performance by the Issuer of all of its obligations (including payments) in respect of the Bonds.
Subject to certain conditions, the Bonds are convertible into preference shares of the Issuer which will be automatically and mandatorily exchangeable into fully paid Ordinary Shares of the Company (the "Shares"). The initial conversion price was set at 390 pence per Share (the "Exchange Price"), which has subsequently been revised to 97.5 pence following the Company's four for one share sub-division undertaken in November 2015. Under the terms of the Bonds, the Company will have the right to settle any conversion rights entirely in Shares, in cash or with a combination of Shares and cash.
The bondholders have the right to convert the Bonds up until 20 May 2017 only where the Parity Value (as defined in the Bond's terms) is greater than the Exchange Price.
On or after 20 May 2017, the Bonds may be redeemed at par at the Company's option subject to the Parity Value equalling or exceeding GBP130,000. If not previously converted, redeemed or purchased and cancelled, the Bonds will be redeemed at par on the maturity date.
Convertible bond
2016 2015
GBP000 GBP000
------------------------------------ ------- -------
As at 1 January 93,431 86,962
Fair value movement in convertible
bond 1,525 6,469
------------------------------------ ------- -------
Balance at 31 December 94,956 93,431
------------------------------------ ------- -------
The fair value of the convertible bond at 31 December 2016 was established by obtaining quoted market prices. The fair value movement is recognised in the Group Statement of Comprehensive Income within profit before taxation and is excluded from the calculation of EPRA earnings and EPRA NAV.
17. Derivatives and other financial instruments
It is Group policy to maintain the proportion of floating rate interest exposure at between 20% and 40% of total debt. The Group uses interest rate swaps to mitigate its remaining exposure to interest-rate risk in line with this policy. The fair value of these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date.
2016 2015
GBP000 GBP000
------------------------------------- --------- ---------
Fair value of interest rate swaps
treated as cash flow hedges under
IAS39 ("effective swaps")
Non-current assets - 9
Current liabilities (3,395) (1,403)
Non-current liabilities (29,311) (19,383)
------------------------------------- --------- ---------
(32,706) (20,777)
------------------------------------- --------- ---------
Fair value of interest rate swaps
not qualifying as cash flow hedges
under IAS39 ("ineffective swaps")
Non-current assets - -
Current liabilities (400) (3,331)
Non-current liabilities (200) (11,170)
------------------------------------- --------- ---------
(600) (14,501)
------------------------------------- --------- ---------
Total fair value of interest rate
swaps (33,306) (35,278)
------------------------------------- --------- ---------
Shown in the Balance Sheet as:
Total non-current assets - 9
Total current liabilities (3,795) (4,734)
Total non-current liabilities (29,511) (30,553)
------------------------------------- --------- ---------
Changes in the fair value of the contracts that do not meet the strict IAS 39 criteria to be designated as effective hedging instruments are taken to the Group Statement of Comprehensive Income. For contracts that meet the IAS 39 criteria and are designated as "effective" cash flow hedges, the change in fair value of the contract is recognised in the Group Statement of Changes in Equity through the cash flow hedging reserve. The result recognised in the Group Statement of Comprehensive Income on "ineffective" cash flow hedges in 2016 was a GBP2.2 million loss, including the amortisation of the cash flow hedging reserve of GBP1.6 million (2015: GBP1.6 million loss).
Floating to fixed interest rate swaps with a contract value of GBP186.0 million (2015: GBP126.0 million) were in effect at 31 December 2016. Details of all floating to fixed rate interest rate swaps contracts held are as follows:
Fixed interest
per annum
Contract value Start date Maturity %
------------------ ------------- ------------- ---------------
2016
GBP28.0 million March 2013 March 2017 0.900
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
------------------ ------------- ------------- ---------------
GBP186.0 million
------------------ ------------- ------------- ---------------
2015
GBP28.0 million March 2013 March 2017 0.900
GBP50.0 million August 2007 August 2021 4.835
GBP38.0 million August 2007 August 2021 4.740
GBP10.0 million June 2006 June 2026 4.810
------------------ ------------- ------------- ---------------
GBP126.0 million
------------------------------------------------ ---------------
Contracts Fixed interest
not yet in per annum
effect Start date Maturity %
GBP25.0 million January 2018 January 2023 2.470
GBP75.0 million January 2019 January 2024 2.650
GBP20.0 million July 2017 July 2027 4.760
------------------ -------------- -------------- ---------------
GBP120.0 million
-------------------------------------------------- ---------------
On 11 May 2016, PHP paid a one-off cash sum of GBP14.5 million to re-set the contracted rates on two interest rate swaps. The contracts were as follows:
-- for a nominal value of GBP50.0 million, at a rate of 4.835%, maturing on 11 August 2021; and
-- for a nominal value of GBP38.0 million, at a rate of 4.74%, maturing on 11 August 2021.
The contracted rate on both swaps was bought down to the prevailing market rate of 0.87% for the period of the contract between 11 November 2016 and maturity. The swaps are no longer callable at the option of the bank. All other terms remain unchanged.
These swap contracts were classified as ineffective swaps. As such, Mark to Market valuation movements have been recognised in the Income Statement in the period they arose. The payment made to re-set the rates on these contracts crystallised part of the value held in the balance sheet at that time. Further fair value movements resulting from the re-coupon of these swaps are recognised in the Income Statement (see above).
Details of the single interest rate cap held by the Group is as follows:
Floating
rate cap
Maturity Premium per annum
Contract value Start date date paid %
GBP15.0 million April 2014 April 2017 GBP176,000 2.000
18. Financial risk management
In pursuing its investment objectives, the Group is exposed to a variety of risks that could impact net assets or distributable profits.
The Group's principal financial liabilities, other than interest rates swaps, are loans and borrowings hedged by these swaps. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has trade and other receivables, trade and other payables and cash and short term deposits that arise directly from its operations.
A review of the Groups objectives, policies and processes for managing and monitoring risk is set out in the Strategic Review. This note provides further detail on financial risk management and includes quantitative information on specific financial risks.
Financial risk factors
a) Interest rate risk
Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long term debt obligations with floating rates as the Group, generally, does not hold significant cash balances, with short term borrowings being used when required. To manage its interest rate risk, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon principal amount. Note 17 provides details of interest swap contracts in effect at the year end.
The sensitivity analysis below shows the impact on profit before tax and equity of reasonably possible movements in interest rates with all other variables held constant. It should be noted that the impact of movement in the interest rate variable is not necessarily linear.
The fair value is arrived at with reference to the difference between the contracted rate of a swap and the market rate for the remaining duration at the time the valuation is performed. As market rates increase and this difference reduces, the associated fair value also decreases.
Effect
on fair Effect
value on profit
of financial before Effect
instruments taxation on equity
GBP000 GBP000 GBP000
------------------ ------------------ -------------- ----------- -----------
2016
London InterBank Increase of
Offered Rate 50 basis points 9,382 1,982 11,364
London InterBank Decrease of
Offered Rate 50 basis points (9,382) (1,982) (11,364)
------------------ ------------------ -------------- ----------- -----------
2015
London InterBank Increase of
Offered Rate 50 basis points 9,922 2,326 12,248
London InterBank Decrease of
Offered Rate 50 basis points (9,922) (2,326) (12,248)
------------------ ------------------ -------------- ----------- -----------
b) Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under financial instruments or customer contract, leading to a financial loss. The Group is exposed to credit risk from its principal financial assets being cash and cash equivalents, trade and other receivables.
Trade receivables
Trade receivables, primarily tenant rentals, are presented in the balance sheet net of allowances for doubtful receivables and are monitored on a case-by-case basis. Impairment allowance is recorded where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable concerned. Credit risk is primarily managed by requiring tenants to pay rentals in advance.
The Group has policies in place to ensure that rental contracts are entered into only with lessees with an appropriate credit history, but the Group does not monitor the credit quality of receivables on an ongoing basis. An analysis of trade receivables past due is shown in Note 12.
Bank and financial institutions
One of the principal credit risks of the Group arises from financial derivative instruments and deposits with banks and financial institutions. The Board of Directors believes that the credit risk on short term deposits and interest rate swaps is limited because the counterparties are banks, who are committed lenders to the Group, with high credit ratings assigned by international credit-rating agencies.
c) Liquidity risk
The liquidity risk is that the Group will encounter difficulty in meeting obligations associated with its financial liabilities as the majority of the Group's assets are property investments and are therefore not readily realisable. The Group's objective is to maintain a mixture of available cash and committed bank facilities that are designed to ensure that the Group has sufficient available funds for its operations and to fund its committed capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by the Adviser.
The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments including interest.
Less
than 3 to 1 to
On demand 3 months 12 months 5 years > 5 years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------ ---------- ---------- ----------- --------- ---------- --------
2016
Interest-bearing
loans
and
borrowings - 6,004 133,658 386,559 273,566 799,787
Interest
rate
swaps
(net) - 873 3,005 24,275 21,417 49,570
Trade
and
other
payables 1,242 10,249 529 1,008 110 13,138
------------------ ---------- ---------- ----------- --------- ---------- --------
1,242 17,126 137,192 411,842 295,093 862,495
------------------ ---------- ---------- ----------- --------- ---------- --------
2015
Interest-bearing
loans
and
borrowings - 6,350 20,577 535,724 286,642 849,293
Interest
rate
swaps
(net) - 1,052 4,342 33,082 28,513 66,989
Trade
and
other
payables 2,899 9,922 778 1,828 102 15,529
------------------ ---------- ---------- ----------- --------- ---------- --------
2,899 17,324 25,697 570,634 315,257 931,811
------------------ ---------- ---------- ----------- --------- ---------- --------
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 (2015: 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
2016 2016 2015 2015
GBP000 GBP000 GBP000 GBP000
-------------------- ----------- ----------- ----------- -----------
Financial
assets
Trade and
other receivables 2,012 2,012 2,364 2,364
Effective
interest rate
swaps - - 9 9
Ineffective - - - -
interest rate
swaps
Cash and short
term deposits 5,099 5,099 2,881 2,881
-------------------- ----------- ----------- ----------- -----------
Financial
liabilities
Interest-bearing
loans and
borrowings (660,820) (708,505) (692,648) (731,532)
Effective
interest rate
swaps (32,706) (32,706) (20,777) (20,777)
Ineffective
interest rate
swaps (net) (600) (600) (14,501) (14,501)
Trade and
other payables (13,104) (13,104) (15,529) (15,529)
-------------------- ----------- ----------- ----------- -----------
The fair value of the financial assets and liabilities is included as an estimate of the amount at which the instruments could be exchanged in a current transaction between willing parties, other than a forced sale. The following methods and assumptions were used to estimate fair values:
-- The fair values of the Group's cash and cash equivalents and trade payables and receivables are not materially different from those at which they are carried in the financial statements due to the short term nature of these instruments;
-- The fair value of floating rate borrowings is estimated by discounting future cash flows using rates currently available for instruments with similar terms and remaining maturities. The fair value approximates their carrying values, gross of unamortised transaction costs; and
-- The fair values of the derivative interest rate swap contracts are estimated by discounting expected future cash flows using market interest rates and yield curves over the remaining term of the instrument.
Fair value hierarchy
The table below analyses financial instruments carried at fair value, by valuation method. The different levels are defined as follows:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;
Level 3: Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
Fair value measurements at 31 December 2016 are as follows:
Level Level Level Total
1(1) 2(2) 3(3)
Recurring fair GBP000 GBP000 GBP000 GBP000
value measurements
----------------------- --------- --------- ------- ---------
Financial assets
Derivative interest - - - -
rate swaps
----------------------- --------- --------- ------- ---------
Financial liabilities
Derivative interest
rate swaps - (33,306) - (33,306)
Convertible bond (94,956) - - (94,956)
----------------------- --------- --------- ------- ---------
Fair value measurements at 31 December 2015 are as follows:
Level Level Level Total
1(1) 2(2) 3(3)
Recurring fair GBP000 GBP000 GBP000 GBP000
value measurements
----------------------- --------- --------- ------- ---------
Financial assets
Derivative interest
rate swaps - 9 - 9
----------------------- --------- --------- ------- ---------
Financial liabilities
Derivative interest
rate swaps - (35,287) - (35,287)
Convertible bond (93,431) - - (93,431)
----------------------- --------- --------- ------- ---------
(1) Valuation is based on unadjusted quoted prices in active markets for identical financial assets and liabilities.
(2) Valuation is based on inputs (other than quoted prices included in Level 1) that are observable for the financial asset or liability, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices).
(3) Valuation is based on inputs that are not based on observable market data.
The interest rate swaps whose fair values include the use of level 2 inputs are valued by discounting expected future cash flows using market interest rates and yield curves over the remaining term of the instrument. The following inputs are used in arriving at the valuation:
-- Interest rates; -- Yield curves; -- Swaption volatility; -- Observable credit spreads; -- Credit default swap curve; -- Observable market data.
e) Capital risk management
The primary objectives of the Group's capital management are to ensure that it remains a going concern, operates within its quantitative banking covenants and meets the criteria so as to continue to qualify for UK-REIT status.
The capital structure of the Group consists of shareholders' equity and net borrowings. The type and maturity of the Group's borrowings are analysed further in Notes 15 and 16 and the Group's equity is analysed into its various components in the Statement of Changes in Equity. The Board, with the assistance of the Adviser, monitors and reviews the Group's capital so as to promote the long term success of the business, facilitate expansion and to maintain sustainable returns for shareholders.
Under 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 (2015: 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 1.5:1 (2015: 1:0 to 1.5:1); and
Loan to value: 50% to 75% (2015: 50% to 75%).
UK-REIT compliance tests. These include loan to property and gearing tests. The Group must satisfy these tests in order to continue trading as a UK-REIT. This is also an internal requirement imposed by the Articles of Association.
During the period the Group has complied with all of the requirements set out above.
Group loan to value ratio 2016 2015
GBP000 GBP000
-------------------------------------- ---------- ----------
Fair value of completed investment
properties 1,212,265 1,091,877
Fair value of development properties 7,890 8,735
1,220,155 1,100,612
-------------------------------------- ---------- ----------
Carrying value of interest-bearing
loans and borrowings 655,977 686,809
Unamortised borrowing costs 4,843 5,839
Less cash held (5,099) (2,881)
-------------------------------------- ---------- ----------
Nominal amount of interest-bearing
loans and borrowings 655,721 689,767
-------------------------------------- ---------- ----------
Group loan to value ratio 53.7% 62.7%
-------------------------------------- ---------- ----------
19. Share capital
Ordinary shares issued and
fully paid at 12.5p each
-------------------------------------- ------- ------------ -------
2016 2016 2015 2015
Number GBP000 Number GBP000
------------------------ ------------ ------- ------------ -------
Balance at 1 January 446,281,348 55,785 445,106,648 55,638
Scrip issues in lieu
of cash dividends 1,903,844 238 1,174,700 147
Share issue 14 April
2016 150,000,000 18,750 - -
Balance at 31 December 598,185,192 74,773 446,281,348 55,785
------------------------ ------------ ------- ------------ -------
Issue of shares in Date of Number Issue
2016 issue of shares price
Scrip issue in lieu 26 February
of cash dividend 2016 345,669 104.575p
14 April
Share issue 2016 150,000,000 100.0p
Scrip issue in lieu
of cash dividend 27 May 2016 544,520 101.35p
Scrip issue in lieu 26 August
of cash dividend 2016 756,949 108.2p
Scrip issue in lieu 25 November
of cash dividend 2016 256,706 111.75p
--------------------- ------------- ------------ ---------
On 13 April 2016, a general meeting of the Company approved the issue of 150,000,000 new Ordinary Shares at a price of 100 pence each. The shares were issued and admitted to trading on the Main Market of the London Stock Exchange on 14 April 2016.
At a general meeting of the Company on 11 November 2015, shareholders approved the resolution to sub-divide each issued Ordinary Share of 50.0 pence each into four Ordinary Shares of 12.5 pence. The sub-division of the Ordinary Shares became effective on 12 November 2015.
20. Share premium
2016 2015
GBP000 GBP000
-------------------------------------- ------- -------
Balance at 1 January 57,422 56,416
Scrip issue in lieu of cash dividend 1,781 1,036
Share issue expense (101) (30)
Balance at 31 December 59,102 57,422
-------------------------------------- ------- -------
21. Capital reserve
The capital reserve is held to finance any proposed repurchases of Ordinary Shares, following approval of the High Court in 1998.
2016 2015
GBP000 GBP000
-------------------------------------- ------- -------
Balance at 1 January and 31 December 1,618 1,618
-------------------------------------- ------- -------
22. Special reserve
2016 2015
GBP000 GBP000
-------------------------------------- --------- ---------
Balance at 1 January 93,063 115,438
Share issue 14 April 2016 131,250 -
Share issue expenses (4,667) (109)
Dividends paid (24,733) (21,083)
Scrip issue in lieu of cash dividend (2,019) (1,183)
Balance at 31 December 192,894 93,063
-------------------------------------- --------- ---------
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. The issue of shares on 14 April 2016, referred to in note 16, was also effected by way of a cash box.
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 declared 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 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:
2016 2015
GBP000 GBP000
------------------------------------------- --------- ---------
Balance at 1 January (22,402) (23,847)
Fair value movement on cash flow
hedges (11,930) (132)
Amortisation of cash flow hedging
reserve 1,560 1,552
Reclassification of swap from ineffective
to effective - 25
Net movement on cash flow hedges
("effective swaps") and amortisation
of cash flow hedging reserve (10,370) 1,445
Balance at 31 December (32,772) (22,402)
------------------------------------------- --------- ---------
On 11 May 2016, PHP paid a one-off cash sum of GBP14.5 million to re-set the contracted rates on two interest rate swaps. The contracts were as follows:
-- for a nominal value of GBP50.0 million, at a rate of 4.835%, maturing on 11 August 2021; and
-- for a nominal value of GBP38.0 million, at a rate of 4.74%, maturing on 11 August 2021.
The contracted rate on both swaps was brought down to the prevailing market rate of 0.87% for the period of the contract between 11 November 2016 and maturity. The swaps are no longer callable at the option of the bank. All other terms remain unchanged.
These swap contracts are classified as ineffective swaps. As such, Mark to Market valuation movements have been recognised in the Income Statement in the period they arose. The payment made to re-set the rates on these contracts crystallised part of the value held in the balance sheet at that time. Further fair value movements resulting from the re-couponing of these swaps are recognised in the Income Statement (see above).
In July 2015, an interest rate swap for a notional amount of GBP80 million was terminated early. The termination cost totalled GBP3.2 million. This sum has been amortised through the Statement of Comprehensive Income over the remainder of what was its contract period through to 2 July 2016 (see note 6c).
24. Retained earnings
2016 2015
GBP000 GBP000
------------------------------------------- -------- --------
Balance at 1 January 159,874 103,867
Reclassification of swap from ineffective
to effective - (25)
Retained profit for the year 43,701 56,032
------------------------------------------- -------- --------
Balance at 31 December 203,575 159,874
------------------------------------------- -------- --------
25. Net asset value per share
Net asset values have been calculated as follows:
2016 2015
GBP000 GBP000
------------------------------ -------------- --------------
Net assets per Group Balance
Sheet 499,196 345,360
Derivative interest rate
swaps (net liability) 33,306 35,278
Convertible bond fair value
movement 12,456 10,931
------------------------------ -------------- --------------
EPRA net asset value 544,958 391,569
------------------------------ -------------- --------------
Ordinary Shares No. of shares No. of shares
Issued share capital 598,185,192 446,281,348
------------------------------ -------------- --------------
Net asset value per share:
Basic net asset value per
Share 83.5p 77.4p
------------------------------ -------------- -------------- EPRA NAV per Share 91.1p 87.7p ------------------------------ -------------- --------------
EPRA NAV is calculated as Balance Sheet net assets including the valuation result on trading properties but excluding fair value adjustments for debt and related derivatives.
As detailed in note 8, the Company is required to assess the dilutive impact of the unsecured convertible bond on its net asset value per share, but only report any impact if it is dilutive. With an initial conversion price of 97.5 pence (390 pence upon issue, restated to reflect the Company's four for one share sub-division undertaken in November 2015), the unsecured convertible bond issued by the Group on 20 May 2014 is non-dilutive to all measures of net asset value per share.
26. Capital commitments
As at 31 December 2016, the Group has entered into a development agreement with a third party for the purchase of a primary health development. The Group has acquired the land on which it is being built and advanced funds to the developer as the construction has progressed. Upon completion of the building development work, the Group will acquire ownership of the completed asset. Total consideration of GBP3.3 million plus VAT (2015: GBP21.8 million plus VAT) remains to be funded with regard to this property.
27. Related party transactions
The terms and conditions of the Advisory Agreement are described in the Directors' Report and the Directors' Remuneration Report in the Annual Report.
Nexus, the Adviser, is a related party due to the Managing Director being a shareholder and director of Nexus.
Details of the amounts paid in relation to related party transactions are provided in Note 4.
28. Subsequent events
On 20 January 2017, the Company acquired the entire share capital of Carden Medical Investments Limited ("Carden"). Carden is a company registered in Scotland whose sole activity was the ownership and letting of two medical centre properties near Aberdeen.
The underlying property assets were valued at GBP7.2 million for the purposes of the transaction and PHP acquired the shares in Carden for their estimated net asset value, being GBP3.1 million after deducting loans and associated breakage costs. This sum may vary by up to GBP100,000 more or less as completion accounts are agreed in due course.
Immediately upon completion, PHP repaid the existing bank loans with no termination costs incurred by PHP.
29. Annual Report
The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 December 2016 or 2015 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 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 2016 will be published on the Group's website at www.phpgroup.co.uk and will be posted to shareholders on 28 February 2016.
Copies of this announcement can be obtained from the Company Secretary of Primary Health Properties PLC, 5(th) Floor, Greener House, 66-68 Haymarket, London SW1Y 4RF.
Directors' Responsibility Statement
The responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ending 31 December 2016. Certain parts thereof are not included within this announcement.
Each of the current Directors confirms that, to the best of their knowledge:
-- the Group financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole;
-- the Strategic Review above includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces; and
-- the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.
Going concern
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 Strategic Review.
The Group's property portfolio is 99.7% occupied with 90% 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.
On 7 January 2016, the Group completed the expansion and extension of its GBP100 million mixed revolving credit/term loan facility with Barclays Bank plc. The facility was increased to GBP115 million, with the additional capacity being provided by Allied Irish Banks plc and the enlarged facility provided for a new five-year term.
On 13 April 2016, PHP successfully raised GBP150 million of new capital (GBP145.3 million, net of expenses) from an oversubscribed offer of shares to new and existing shareholders. Initially the funds were used to pay down revolving credit facilities which are available to PHP to be redrawn as investment opportunities are secured.
As at 31 December 2016, the Group had GBP88.9 million of headroom on its debt facilities, with a further GBP5.1 million of cash. The Group has total commitments of GBP3.3 million outstanding to fund on properties under construction through the course of 2017 and acquired two further properties for a total of GBP7.2 million on20 January 2017. Net headroom available to the Group, therefore amounts to GBP83.1 million.
The Group's consolidated loan to value ratio, including drawn, unsecured debt, was 53.7% as at 31 December 2016, with all banking covenants being met during the year and subsequent to the year end.
The Group is currently fully drawn on a GBP115 million term loan provided by The Royal Bank of Scotland plc ("RBS") and Santander Corporate Banking. This loan facility expires in August 2017. The Group has agreed terms with RBS to renew this facility on a bi-lateral basis that have been fully approved by RBS credit committees and are currently being documented. The new loan will be for up to GBP100 million for a term of up to five years.
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 2017.
The Directors believe that the Group is well placed to manage its business risks successfully. Having reviewed the Group's business activities, financial development, performance and position including its cash flows, liquidity position, borrowing facilities and covenant cover, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence and meet its liabilities as they fall due for a period of at least twelve months from the date of this report. For this reason the Directors continue to adopt the going concern basis of accounting in preparing the nancial statements.
For and on behalf of the Board
Alun Jones
Chairman
15 February 2017
Glossary of Terms
Adviser is Nexus Tradeco Limited.
Company and/or Parent is Primary Health Properties PLC.
Direct Property Costs comprise ground rents payable under head leases, void costs, other direct irrecoverable property expenses, rent review fees and valuation fees.
District Valuer ("DV") is the District Valuer Service being the commercial arm of the Valuation Office Agency ("VOA"). It provides professional property advice across the public sector and in respect of primary healthcare represents NHS bodies on matters of valuation, rent reviews and initial rents on new developments.
Dividend Cover is the number of times the dividend payable (on an annual basis) is covered by EPRA earnings.
Earnings per Ordinary Share from continuing operations ("EPS") is the profit attributable to equity holders of the parent divided by the weighted average number of shares in issue during the period.
European Public Real Estate Association ("EPRA") is a real estate industry body, who have issued Best Practices Recommendations in order to provide consistency and transparency in real estate reporting across Europe.
EPRA Cost Ratio is the ratio of net overheads and operating expenses against gross rental income (with both amounts excluding ground rents payable). Net overheads and operating expenses relate to all administrative and operating expenses, net of any service fees, recharges or other income specifically intended to cover overhead and property expenses.
EPRA Earnings is the profit after taxation excluding investment and development property revaluations and gains/losses on disposals, changes in the fair value of financial instruments and associated close-out costs and their related taxation.
EPRA Net Assets ("EPRA NAV") are the balance sheet net assets excluding own shares held and mark-to-market derivative financial instruments.
EPRA Vacancy Rate is, as a percentage, the ERV of vacant space in the Group's property portfolio divided by the ERV of the whole portfolio.
Equivalent Yield (true and nominal) is a weighted average of the Net Initial Yield and Reversionary Yield and represents the return a property will produce based upon the timing of the income received. The true equivalent yield assumes rents are received quarterly in advance. The nominal equivalent assumes rents are received annually in arrears.
Estimated Rental Value ("ERV") is the external valuers' opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property.
Exchange Price is 116% of the share price at the date of issue.
Gross Rental Income is the gross accounting rent receivable.
Group is Primary Health Properties PLC and its subsidiaries.
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.
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.
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.
IPD Healthcare is the Investment Property Databank's UK Annual Healthcare Property Index.
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 IPD.
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.
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 purchaser's 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 is 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 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.
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.
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 company news service from the London Stock Exchange
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