Good morning, everyone, and welcome to the interim results for Primary Health Properties. My name is Harry Hyman, I'm the Chief Executive and Founder of the business, and I'm joined today by my CFO, Richard Howell and my CIO, David Bateman. We're very pleased to be presenting a strong set of results for the first half of the year. All the very hard work that we put in during last year in refinancing debt has really paid handsome dividends, and we move forward with a very secure and stable funding base with over 95% of our debt hedged out for the next eight years. Our business, as you know, is collecting rent from buildings in primary care, the first point of call in the patient journey across the U.K. and in Ireland.
Our results showed that our portfolio performed very strongly in the first half of the year. We did make GBP 49 million worth of prudent acquisitions, both here and in Ireland, and we have a strong and deep pipeline for the second half of the year and on into 2023, with an emphasis in Ireland. Our GBP 144 million rent roll is 89% funded by British and Irish government. We have 99.7% occupancy in the portfolio, a very long WAULT at almost 11.5 years. In fact, we're a net beneficiary from the inflationary tailwinds that we're now experiencing as an economy, and we've seen a much firmer tone to rental growth with GBP 1.8 million of additional rent coming in in the first half of the year, compared to GBP 1.3 million for the equivalent period last year.
The refinancing that I talked about at the beginning of the presentation has really shown a good benefit to the company. We've also done some capital recycling, selling a portfolio for GBP 27.7 million, 13% above the book values at December 2021. During the period, we saw a further amount of modest yield compression coupled with that rental growth that led to a GBP 51 million investment valuation uplift during the period. Importantly, because this is a stock that is all focused on rental growth and dividend growth, we are in our 26th year of consecutive dividend growth, and brokers are forecasting across the piece a 6.5p per share dividend, which is just under 5% ahead of the previous year.
Just on the demographic side, the demographic drivers behind our business are extremely strong, and we will hear more about that during the presentation. If we can go to the chart that shows our dividend growth, there it is to remind you that year in, year out for 26 years we've been delivering this. For investors, now that the tech boom has vanished into the distance, what investments are about is about that ongoing annual cash flow. Our dividend, I'm pleased to say, is 103% covered by earnings. Our relative performance has been very strong on three, five, 10, and 20 years. Total shareholder returns have been very impressive. Our total property return has also been very strong. The first half property return was 4.3% compared to 9.5% for the whole of last year.
If we deliver a similar amount of property return in the second half, it will be very similar to last year's return. On a long-term basis, we have consistent steady returns from our portfolio. I'll come back a bit later on to talk about our asset management initiatives, and the property portfolio and wrap up. Now I'm gonna hand over to Richard, who's going to take you through the financials in a bit more detail. Over to you, Richard.
Thanks, Harry. Good morning, everybody. Just looking at the key financial highlights for the first half of 2022, net rental income was up just over GBP 3 million. Most of that increase came from acquisitions and developments last year and the first half of this year, that added GBP 2.6 million. As Harry's already mentioned, we started to see a lot of income started to come through from rent reviews and asset management projects. They added a further GBP 1.7 million to the income in the period. We did have some additional property costs, which came in at just under GBP 900,000. Those increases, along with some significant interest cost savings, led to a nearly 10% increase in adjusted earnings, up GBP 4 million- GBP 44.7 million.
The interest savings in the first half of the year were just around GBP 4 million, but we had an extra GBP 170 million of debt compared to the comparative period last year, which cost an extra GBP 3 million. Obviously, that was helping to finance the income coming through from the acquisitions. Admin costs were up GBP 500,000, driven predominantly by extra staff that we've taken on to deal with issues such as ESG, property management, and the development program. Adjusted earnings per share, 3.4p. That's fully covered the dividends paid out, 3.25p, 103% dividend cover, so very strong results for the first half of the year. Like-for-like rental growth, GBP 1.8 million of additional income. Most of that came from rent reviews, GBP 1.5 million, but asset management projects added a further GBP 300,000. As Harry's already mentioned, we had a strong revaluation surplus, GBP 51 million.
Now, half of that came from rent review and asset management activity in the period, and we had a further seven basis points of yield compression. It's investment property portfolio now valued at GBP 2.9 billion, and we've seen a strong 4.4p increase in adjusted net asset value per share just under 121p. Most of that came from the valuation surplus equivalent to 3.8p. Loan-to-value ratio is at bottom end of our target range, 43%. Following the sales post-period end, that drops to around 42.5%, but we do have around GBP 290 million of undrawn firepower, which is there to finance the pipeline, which David will come and talk about a bit later in the presentation.
The key statistics for the portfolio, long WAULT, 11.4 years, fully occupied. Lowest LTV in the whole of the sector, 10.5%. I think the next peer company is LondonMetric at 12.5%. Average cost of debt up ever so slightly reflecting the recent interest rate increases we've seen in the first half of the year. I won't draw too much on this because we've covered a lot of the numbers, but obviously, adjusted earnings, 24.7p, we had on the revaluation surplus to sort of recurring IFRS profit, excluding exceptional items, just under £96 million.
We've seen a gain on the convertible bond reflecting the reduction in the share price and further gains on our derivatives that we've taken out over the last couple of years. Overall, the IFRS profit, just under GBP 108 million equivalent to 8p per share. Again, this slide just tracks the movement in net tangible assets. Obviously, our adjusted earnings, 3.4p, were pretty much paid out in full. As a dividend, 3.2p. The revaluation surplus, 3.8p. And then the other is just the premium on the shares we issue through the scrip dividend scheme, 0.1p. Closing NAV, just under 121 pence per share. 3.5% increase in the period.
Looking at the sort of liability side of the balance sheet, debt. We have total debt facilities, pretty much unchanged since the year-end, just under GBP 1.6 billion. 90% of that is secured. 10% is unsecured through the convertible bond. We continue to have a very wide and diverse number of debt providers who are all very supportive of the sector, notwithstanding this sort of current economic headwinds at the moment. Net debt drawn, GBP 1.26 billion. We have GBP 291 million of undrawn headroom after capital commitments and all the post-period transactions. 95% of our debt is completely fixed or hedged out for just under 8 years, so we are sort of fully protected from further increases in interest rates.
As already mentioned, LTV towards the bottom end of our target range. We have looked at refinancing some of the legacy MedicX debt, but where the current interest rate market is at the moment, those facilities are now in the money, so we won't be doing anything with those at the moment. Our sort of the shorter-dated maturities, all of our revolving credit facilities, all those banks remain very positive on the sector, and we've already agreed to renew one of those facilities in 2023, and that should all be completed in the second half of the year. We also agreed terms to increase one of our other revolving credit facilities with one of our lending partners. Again, that should happen in the second half of the year.
We haven't seen any increase in credit spreads since the start of the year. Fortunately, we did do a refinancing last year, which is obviously starting to see the benefits of that flowing through to the income statement. We also completed a EUR 75 million private placement right at the start of the year, probably at a historically low level of 1.64% fixed for 12 years. Very unlikely we'll ever be able to raise debt like that in the current market. We also renewed our Santander revolving credit facility for GBP 50 million. All of the debt metrics continue to improve. I think we're in very good shape from a liability side on position on the balance sheet. I'm just gonna turn to ESG quickly.
We announced most of this stuff with our year-end results, but we're very much on track to delivering our sort of target of being net-zero carbon by 2030 for all of our operational development and asset management activities. We're on track to get all of our development operations to net- zero by the end of this year. We've started work on our first net- zero development at Croft in West Sussex. That's on site now. We're excited about that. We're working with our asset management team to try and get those activities down to net- zero by 2030 and get the portfolio up to EPC-B or better. This is all about protecting the value of the portfolio from a brown discount and making sure the properties remain fit for purpose for the foreseeable future.
We're also very involved with Levelling Up. We've been working with a number of institutions around that, around Levelling Up, and there's some good information on our website. I would encourage you to have a look at that. We do estimate it's gonna cost between GBP 35 million and GBP 40 million to bring the portfolio up to EPC-B over the next sort of eight years or so. At that stage, I'm gonna hand over to David, who is gonna talk to us about the investment. Is that forward?
Yeah. Yeah.
Thank you.
Thank you, Richard. Good morning, everyone. Notwithstanding the outlook for longer-dated interest rates, I'm pleased to say that the primary care property market has remained firm. Not only is that underlined by our revaluation uplift of GBP 51 million, but also by our recent sale of 13 assets for GBP 27.725 million, reflecting a price that was 13% ahead of the book value. We've also cautiously continued to select new acquisitions, three of them are listed here. We like these assets because they've all got long leases, so in fact, almost to the day, they've got 20 years unexpired. Two of the three assets have RPI-led indexed rent reviews to generate growing income to feed through to the net revenue line.
Two of the assets are effectively government-let, with Chertsey being let to Foundation Trust, and Newbury being let to 100% to GPs. Interestingly, the larger asset in Chiswick is let to HCA, which is a very, very strong covenant. Both by covenant, unexpired term, income growth potential, and indeed for all three, the underlying asset value, we really like these assets. Looking forward, and I'll come onto it later in the presentation, we anticipate making more acquisition announcements in the second half of the year. As both Richard and Harry alluded to, we continue to work on our development activity. As Richard just mentioned, we now have, and we're very proud to have our first on-balance-sheet development on site in Croft, in West Sussex.
The asset's forecast to be worth approximately GBP 6.8 million, with a yield on cost of 4.5%. Obviously, markedly ahead of the sorts of yields you can generate via direct investment in the market. Equally, Croft will represent our first asset with the net- zero carbon status, and indeed, it will have excellent other sustainability credentials to include an EPC rating of A and a BREEAM rating of Excellent. In terms of our development, you can see listed next to Croft, second one in, Spilsby, which we anticipate to be our next scheme to come on site with similar credentials. Albeit a slightly smaller lot size, a similar yield on cost, so that's productive.
Indeed, behind that, including Spilsby, we have a growing pipeline of circa GBP 60 million across seven assets, which we will be continuing to build on given the attractive yield on cost that they generate, which obviously feeds through to our net revenue line. I would like to remind you all that the type of development that we carry out at PHP is actually very low risk. I would call it development with a lowercase D. We don't acquire any sites until we've got planning permission secured, tenants signed up to an agreement for lease, whereby the rental commitment in that lease has been signed off by the CCG via their rental advisor, which is effectively the Valuation Office Agency.
Ultimately, we think it's very attractive income, which we can generate on a low risk and risk-adjusted basis to feed through to attractive rental yields, obviously benefiting our profit line. As has been the case for some time, perhaps it comes into sharper focus now with the changing interest rate environment. Ireland continues to be a focus of expansion for us. Fundamentally, Ireland is faced with similar challenges to us here in the U.K. with a growing and aging population.
Albeit via a slightly different set of circumstances, they too are reorientating their care system to have a greater focus on primary care, and that's a fantastic opportunity for us at PHP, particularly on the basis that yields there are at a discount to those which we are faced with here in the U.K. A fantastic opportunity for us, and I anticipate being able to announce further acquisitions and expansion into the Irish market in the second half of the year. To wrap up, it's a relatively self-explanatory slide. I hope you can see we've got a strong pipeline. In the U.K., we effectively have 12 assets under offer, which also includes our direct development pipeline with a value of approximately GBP 123 million.
Similarly, on the same basis in Ireland, albeit without any direct development, we have three assets under offer with a combined value of GBP 43 million. As I said, I think we'll be looking to continue to expand our reach in Ireland. We're already the largest private landlord in the space there in the second half of the year. It should be noted, both Harry and Richard touched on it, similarly at the bottom of this slide, we highlight our asset management project pipeline, which certainly shouldn't go unrecognized. Over the course of the next three years, we anticipate deploying a further GBP 52 million, sorry, in, across 50 projects. In each of those circumstances, it shouldn't be forgotten that the buildings are future-proofed.
The sustainability credentials are improved, often via the capital expenditure, the leases are extended, and the rents are grown. I think a perfectly positive picture there coupled with the acquisition pipeline. Hope that's helpful. I'll hand over to Harry to finish off.
Thanks very much, David. Just looking at the overall property portfolio, we've been through a number of these stats already. What I'd like to draw your attention to is that on the income expiry profile, looks like quite a lot of income coming up for expiry in the next three years, but actually 80% of this is covered by agreements to extend, which we're in the process of documenting or advanced discussions. 50% of it is actually agreed, and we're moving forward through the documentation process, and 30% is at advanced discussions.
This is one of the beauties of our space, which is that by and large, if you keep the properties fit for purpose, and if they're large enough, then the tenants are going to renew because there's no speculative development of primary care space in either Britain or Ireland. The other metric I'd like to draw to your attention is that our average lot size is very high at GBP 5.5 million, and I can tell you that out of the assets that we sold, which we completed on recently, none of those were anywhere near the GBP 5.5 million. Although it's a relatively small amount, that will help.
The capital recycling is helping us to move out of smaller, nothing wrong with the assets, but smaller assets into the bigger core hub centers that we see as the very future for the NHS in Britain and Ireland. Now, the very exciting slide, which is that at long last, we're seeing the green shoots of recovery in rental growth. Although it makes the developer's task hard, cost pressure is actually very positive for rental growth in our space. Because although open market value rentals are delivered by open market values, what is the open market value in the context of a U.K. medical center? The answer to that is like indexed replacement cost.
As the replacement cost of the buildings goes up, so there's a very, very strong argument that the rent that you need, both on new buildings but also on existing ones, goes up, not pound for pound, but it certainly has a very strong pull attraction. We're looking forward to delivering further progress on this in the second half of the year. Clearly, the numbers are helped by the higher levels of inflation that we have, because 25% of our portfolio is actually on an index-linked basis. Some is capped and collared, some isn't. It's a whole melange or medley of different things. In Ireland, it's all CPI-linked to Irish CPI with a 5% per annum cap. No doubt we'll come back to that in questions at the end.
On the asset management side, we've had a very active period. I won't go into all of these, but they each illustrate the fact that existing buildings can be made fit for purpose. We can reduce the environmental footprint, we can improve the buildings for modern service delivery, where services are coming out of hospitals into these buildings. This means that the buildings have a very, very good useful life, and they're not just limited to the remaining weighted average unexpired lease term. Basically, nearly all of our buildings, I can't really think of more than a handful across the portfolio, will renew. This is an incredibly important part. It's not just about adding new buildings, it's about investing in the existing estate.
Just to summarize before we go on to deal with questions, first from the floor and then online and then the webcast. The position that PHP finds itself in is a blessed one in the sense that the demographic tailwinds are very, very strong. We have an aging population, we have a population that is growing both here and in particular in Ireland, percentage-wise, and we have a population that has an ever higher incidence of chronic disease. COVID, the terrible COVID pandemic has led to a backlog of procedures, diagnostics, and it will take several years for that to come through. Both here and in Ireland, the strategic direction is to invest in primary care. Still, 40% of the entire stock in Britain is in need of being updated.
The digital threat that we heard about so much of in the pandemic, undoubtedly, working procedures have changed, and initial triage can be carried out digitally, but very often the doctors have to do that from their medical centers, and inevitably, it can be followed up with a hands-on and face-to-face appointment. Digital has not led to a re-reduction in demand for space. Some of it may need to be reconfigured, but that's perfectly within our capability of doing that. The important message is that rental growth is coming through. That is very positive for our outlook for earnings growth. We've explained that our debt is hedged out.
In fact, in a way, a slight widening of yields in our marketplace would be very good because we don't like operating in a market where it's white hot and everything is going for tip-top, and the only price, and the only thing you compete on is price. It's kind of a zero-sum game. We are going to focus on delivering further income growth and further dividend growth. Doing that in an environmentally responsible, and with a big emphasis on the social impact that we can have on the healthcare disparities in both the U.K. and in Ireland. We're very happy with our results. I hope that our shareholders will be, and our stakeholders will be too. I now look forward to answering questions. We're going to take questions from the floor. Can I remind you, please, to give us your name and where you're.
Who you are representing, not only for us, but for the benefit of our listeners online and on the webcast. May I have the first question, please?
Morning, it's James from Peel Hunt. Obviously the open market rent reviews, I appreciate the way the mechanism works in terms of build cost inflation. I mean, how quickly would you like to see that feeding through? Is that a couple years longer? And then maybe also just on your new investments, all else being equal, what's the pricing differential between the index-linked leases and the open market? And what's your preference today, given your upbeat kind of tone on rental growth?
Thanks very much. Well, you make a very good point there, James, that obviously it's not all going to happen overnight. Rent reviews look backwards. We are already beginning to see, both in rents that are being agreed for new developments, which we obviously see now that we're our own balance sheet developer, but we're seeing a firmer tone. Not only that, but we have made representations and we'll be making representations to the Valuation Office in England, in Scotland and in Wales because they each have their own, in order to reinforce the point that costs are going up, and that we won't be able to build buildings unless the rentals go up too.
Not only that, but where we are adapting the buildings to be more environmentally to have a lower footprint, that needs to be paid for as well. Both of those messages we're delivering at a local and at a central level. The point that you make about index-linked is a very good one. I think index-linked leases are tighter, not by much. Maybe David, you'd like to comment on how much tighter for index-linked.
Sure. I think the reality, James, is that the differential between the pricing for leases with open market rent reviews and index-linked reviews is, as Harry says, there's not a big difference. I think depending on your view of rental growth, you could convince yourself that the index-linked leases are underpriced in comparison.
I think it depends where the cap is, to avoid the question. If it's capped at four, it's less valuable than being capped at five. If it's uncapped, who would sign an uncapped lease today? Well, lots of people did in the past, and they're quite attractive. Whether that leads to over-renting, of course, is another theoretical question, but you don't have to face that till the end of the lease term.
Thank you.
Morning. Kieran Lee at Berenberg. Just a quick one on yields and your cost of debt. You've mentioned that you locked in your debt costs at pretty good levels pre all of these movements we're seeing where yields have gone. If we look at a new acquisition, how the debt costs stack up, and is that influencing your LTV targets at all?
Well, it's not influencing our LTV targets 'cause we consider those to be very moderate. It's influencing the pace of expansion, and not unnaturally, we're being rather cautious at the moment because there is so much volatility in the marketplace. You might argue theoretically that we're at a very interesting inflection point, but it's not yet reflected in the prices that all purchasers are paying. You've still got a lot of people that are buying without leverage. Pension funds, some insurance companies and life companies. Richard, would you like to add anything to that?
The other thing to add is, we have started to recycle some of our capital, as seen by the recent sales. We recycle that capital into high yielding assets, most importantly perhaps in Ireland and the developments which are yielding much more. We still see that accretion to earnings despite interest rates, the margins which are variable going up.
Of course, where we're interested in assets that have taken time to get to the final stages of negotiation, then it may well be that we do not pay quite what we thought we were going to pay three months ago because of debt price increases. I mean, that's got to be the answer, hasn't it? Anything else from the floor, or shall we go to our second source of questions, which is online? Are there any questions to come online? Looks like there may be.
Thank you. If you would like to ask a question over the phone, please press star one on your telephone keypad. That's star one to ask a question. We will pause for just a moment. There are no questions on the audio at the moment.
We must have done a good job on the presentation then. Are there any questions from the webcast?
Yes, we've had a few questions from the online audience. The first one is from Miranda Cockburn at Panmure Gordon. Can you give us the acquisition yields for the three investment assets?
We could, but we're not going to. Historically, we've never done that, but they're at the kind of levels that you might expect for us to have paid in the marketplace. Obviously on alternatives, which is an area that we are interested in, there we see better value, so the prices are a bit weaker than they would have been if they were full on NHS leases of equivalent length. Maybe by 25 basis points.
It's worth noting as well, we see quite a bit of reversion in those acquisitions as well from future rental growth.
Good point.
We have a second question from Edoardo Gili at Green Street, and that's: Where do you see EPRA cost ratio settling in FY 2022 and FY 2023?
That's a question for the CFO.
I think it was set for around 10%. Around that level.
Okay, thank you.
We have another question from Andrew Gill at Jefferies: In a scenario where financing costs remain elevated, do you expect the development supply to reduce? Or given the need to update healthcare real estate, will this force a further increase in rental growth to compensate?
Great question from Andrew. The answer is the last bit, we expect rental levels to go up, and we've already seen that in our pipeline, where we've not only for us, but forward funders, where the developer or we have been back to the district valuer and said, "Look, this just isn't gonna work now, given the lead time of construction, the difficulty of getting fixed price building contracts, the difficulty around supply, so we need more rent." We've been a little bit successful. I imagine the other players in the market also imagine that that will be a continuing dialogue with the district valuer's office and indeed the HSE in Ireland, where appropriate. Good question.
We have another question from Kanad Mitra at Barclays: In the current rising rate scenario, while there is a decent yield spread to the government bonds for primary care assets, the practical situation for an investment like yours is pinned to a degree. What is your general outlook for yields in this sector?
I think the answer to that is that in Britain, yields are going to remain steady, my view. There might be a little bit of yield expansion, which I think is a theoretical answer, but rental growth prospects improving should help keep the yields steady. I think we're not looking at further yield contraction in the U.K., right? That doesn't mean values necessarily go down because of rental growth. In Ireland, pretty much the same story there. Although our leases 100% of our lease income effectively is linked to Irish CPI, which no doubt will be higher than it's been historically, 'cause Ireland has the same inflationary issues that we do over here.
Thank you. We have one final question from Kanad Mitra at Barclays: Your pipeline of both U.K. and Ireland currently sits at GBP 285 million, which has reduced since last published at GBP 444 million. Along with final year results, can you please walk us through why the reduction as acquisitions are circa GBP 50 million and other development has moved on site?
I think the simple answer is that we've rejected some acquisitions that would have been feasible with a lower cost to finance and focused on those that remain feasible. If that means that we've dropped out of the bidding on an asset, then so be it. As I said earlier, we're taking a cautious and prudent approach to life, given all the macro-volatility that there is in the marketplace.
Thank you. There are no further questions from the online audience. I would like to hand back for any closing remarks.
Well, thank you very much to all the people who've attended physically. Nice to see you all. To the people who've attended online and through the webcast. I think that what we can say is that with PHP, we have a very solid income line which translates into very dependable earnings. The stronger outlook for rental growth is undoubtedly a bull point for the company. As we've said, if it means that we have to slow down the pace of expansion both in the U.K. and Ireland, that's not a problem for us because we still see the ability to grow the dividend from rental growth and tight cost control and asset management projects. We will be carrying on buying assets.
Don't misinterpret my remarks, but we're going to do it selectively and cautiously and carry on with our fully covered 26-year track record of delivering an increased dividend for our stakeholders. Thank you all very much.