Good morning, everyone, welcome to PHP's interim results presentation. My name is Harry Hyman. I'm the CEO and founder of the business. On my right is Richard Howell, who's the CFO. On my left is David Bateman, who is the CIO. In this morning's presentation, I'm going to give you the highlights from what was a very strong and resilient performance. Richard will drill down into the details of the financial performance during the period. David will talk about the property portfolio, and in particular, the rental growth that we have experienced. Just to remind you all that we have a very simple business model. We own properties that are let on a long-term basis to the NHS and GPs in Britain and the Irish equivalent, the HSE and GPs in Ireland.
We have 513 properties, a property portfolio of GBP 2.8 billion, which is pretty close to 100% let, with 89% of the total rent roll, 89% coming from the British and Irish governments, which is why we can operate at a slightly higher level of leverage than some of our other competitors in the REIT space. The key highlight for us this year, this half year, has been the much stronger performance on rental growth. This has been driven by inflation, which accounts for 25% of our actual lease rent roll, but also a marked firming in tone on the open market value increases that we drive out from the 69% of the portfolio that is let on open market value reviews.
This is very important because it leads to greater cash flow and income, and this has been and will be sufficient to enable us to carry on with our progressive dividend policy. Just to say a few words about the background of the sector we work in. As we all know, the demographic drivers are very strong for primary care. Both countries have growing populations, both countries have aging populations, and both countries have an ever higher incidence of chronic disease, like type two diabetes, like obesity, and like dementia, all of which needs to be treated. Healthcare policy in most Western countries is about taking care out of overcrowded, expensive, and sometimes disease-ridden hospitals and putting it into the primary care setting. You can't do that from dilapidated buildings.
It needs to be done from modern, purpose-built premises, that's where PHP steps in. The financial highlights for us are that we've already paid half of the 6.7p dividend that analysts have been projecting, and indeed, we've declared the third quarterly installment, which will be paid on the 18th of August. Moreover, this has been well covered from a coverage standpoint at 102% of dividend cover. Our property return, notwithstanding the fact that we saw a slight weakening of values in the first half, remained positive with a huge impact on that from the higher level of rent that we've already experienced and that we predict in the years to come. The benefits of this will become apparent to you as we move through the presentation. Our exposure to development is very limited.
We have one project on site on the south coast of Britain. We confidently expect that to be delivered in the early part of 2024. We've maintained a disciplined approach to both acquisitions and also our development pipeline. We've put a lot of our acquisition activity on hold because of the higher level of interest rates and because of the lack of adequate rental levels in order to fund those developments. We put a lot of effort, though, into lobbying government at all sorts of levels to get policy shift in order to improve those rents and to enable our pipeline to get back on track.
Moreover, we spent a lot of time, as you'll hear later on in the presentation, on asset management, keeping our existing portfolio fit for purpose, negotiating rental growth associated with those fit outs, and maintaining the portfolio and improving our environmental scores and reducing our carbon footprint. We confidently expect our rent review level to be over GBP 4 million for the current year, which is a marked improvement on last year, which was a 50% increase on the year before. This endowment effect of the growth in rental income needs to be understood properly to understand the defensive nature of our business. Our cost of debt, very importantly, has been hedged out, 97% hedged out, up from 94% at the end of last year, and Richard will tell you a little bit more about that later in the presentation.
We have a lot of undrawn headroom. We have no current intention of raising any capital anytime soon. We don't need to. We have a full agenda of work on asset management, we hope very much to get our Irish acquisitions back on track in the second half of the year. If we move now to remind you of the dividend track record, you can see it set out there in all its glory. As I've mentioned already, 102% covered for the first half.
A statistic that I'd like to draw your attention to on a comparative basis is that PHP has performed better than its leading competitor on a property basis and better than the overall commercial index, which is not surprising given the high quality of our income, the disciplined approach to acquisitions, and our emphasis on driving rental growth out from the portfolio. It really has been a focus of all of our activity in the first half of the year. Just let me show you the paradigm shift that I'm talking about in primary care. Many of you will have seen this slide before. Here it is.
This really represents a fantastic story, moving the care out of the three rather dilapidated old residential properties that you see at the top of the slide, top right, moving into this, or transmogrifying into this wonderful modern medical center at the bottom. 22 GPs, 100 healthcare professionals, a whole suite of activities, keeping people from the unnecessary journey to hospital, doing procedures that could only have been done in the hospital before, and acting very much as a walk-in center, again, to relieve pressure on secondary care. These are the sort of buildings that we see our focus of activity in, both here and in Ireland. Having given you that brief overview, with the emphasis on rental growth, I'll hand over to Richard, who will take you through the financials.
Good morning, everybody. I'm on slide seven if you're following the presentation. Just looking at the key financial highlights for the first six months of 2023. Net rental income was up GBP 4.4 million, or just over 6%, and that increase was driven predominantly by rental growth coming from rent reviews, GBP 3.4 million, which is a very strong number. The impact of a full six months from acquisitions and disposals last year added a further GBP 0.8 million, and we also saw a small reduction in property costs of GBP 200,000. After admin and interest costs, which I'll come back and touch on those a bit later, we saw an overall increase of GBP 1.2 million in adjusted earnings to just under GBP 46 million, or a 2.7% increase.
Earnings per share were unchanged at 3. 4p It led to a fully covered dividend, which we saw those payments going up by 3.5%. Dividend per share 3.35p for the first six months of the year. Dave will come back and touch on this in a bit more detail for later on. We saw rental growth of 1.5% in the first six months, or GBP 2.2 million. Rent reviews driving pretty much all of that performance, with asset management adding around GBP 200,000. We saw a few vacancies come through this period, which reduced that by GBP 200,000.
Small revaluation deficit, just under GBP 12 million, where we had 8 basis points of yield expansion, equivalent to GBP 35 million. That really was sort of partially mitigated by rental growth, which added GBP 33 million to the valuation. Overall, down at GBP 12 million, or 0.4% deficit. That revaluation deficit, along with the cost of acquiring Axis, which we'll come back and touch on a bit later in the presentation, resulted in the adjusted net assets falling to 111p, or a reduction of 1.3%. That reduction in valuation has also led to a small 50 basis points increase in leverage to 45.6%. That still remains in the middle of our target range of 40%-50%. WALT declined slightly by 0.4 years.
Despite this passing of time, asset management projects have helped mitigate that, so 10.6 years, and pretty much a full occupancy of 99.6%. We still have one of the lowest separate cost ratios in the whole of the U.K. REIT sector, at just over 10%, and the average cost of debt remains at 3.2%. No change from the year-end. Just drilling down into the detailed income statement in a bit more detail. I won't go through the net rental income increase again, but just to highlight, we had GBP 500,000 of income from our new acquisition, Axis, in Ireland, and we expect the results for the second half of the year to be slightly stronger in the second half. Admin expenses up GBP 600,000.
That reflected GBP 200,000 of costs for the team in Ireland, which has now come on board, additional pay rises for the team, and a bigger provision for performance-related pay. Net financing costs up just over GBP 3 million in a period of GBP 24 million. That was really driven by additional debt, a GBP 15 million increase from this time last year. That is about GBP 1 million. That interest cost and the impact of rising interest rates across our variable rate debt, which is about GBP 50 million unhedged at the moment. We also lost, in our interest line, GBP 500,000 of interest receivable from our developments.
That is now accounted for as rent, was really in that entry, increase in net rental income of GBP 800,000 coming through our acquisitions and disposals. Revaluation deficit is already touched upon, just below GBP 12 million to be an adjusted profit, adjusted earnings of just below GBP 46 million. There are a few other sort of exceptional adjustments relating to our various acquisitions, acquisition costs relating to the Axis acquisition at the start of the year, which related in IFRS profit before tax of just below GBP 39 million. Reduction of 64%, that really reflects the strong surplus we saw in the first half of last year, that obviously reversed out in the second half. Just looking at the movement in the net tangible asset or net asset value.
Opening net asset value, 112.6p. Adjusted earnings were fully paid out as a dividend, and the portfolio revaluation adjustment of just under GBP 12 million, were equivalent to 0.9p. The Axis acquisition cost EUR 8 million, and that was equivalent to 0.5p per share. The other sort of key highlight here to note is the portfolio is now valued at 4.9% net initial yield, an increase of 8 basis points, and we continue to see stronger value at ERV growth of 1.4%, and that compares to 2.2% in the whole of last year. Just looking at the debt summary in a bit more detail.
We haven't had any refinancings in the period, but we did do some further hedging, and I'll touch on that in a bit. We had drawn facilities of just below GBP 1.3 billion, we had GBP 314 million of undrawn headroom after capital commitments and post-prudential transactions. As Harry's already mentioned, 97% of our debt is now fixed or capped out for just under seven years, and our LTV ratio remains in the middle of our target range of 40%-50%. Just to highlight the sort of level of hedging we have, for every 50 basis point increase in interest rate, only adds 2 basis points to the blended average cost of debt.
For us to get close to hitting our loan-to-value covenants across the portfolio, the valuation needs to fall by GBP 1.2 billion or a 42% decline. We don't have any re-financings till July 2025, when the convertible bond is up for maturity. It's very much on our radar, and we're looking at various options to refinance that over the second course of this year or maybe the first quarter of next year. What we did do in terms of financing the first half of the year was convert GBP 52 million of sterling debt into GBP 60 million of euro-denominated debt, taking advantage of the cheaper euro interest rates. That saves us around 100 basis points on that debt, but we also did some caps, purchased 2% caps for two and a half years.
Obviously, much cheaper to buy those in euros than it is, sterling. Across all of our sort of key debt metrics, they all remain very robust. Average cost of debt unchanged at 3.2%. A strong interest cover ratio, over three times. Loan-to-value at 45.6%, at just under seven years, weighted average debt maturity. At that point, I'll hand over to David, who'll take you through the property portfolio.
Thank you, Richard. It's probably worth just recapping on how our rents are reviewed. 25% of our rent reviews are reviewed to indexation, typically with collars of 2% and caps of 4%. 6% of our reviews are fixed, and the remaining 69% of our reviews are effectively upwards only market-led reviews, which obviously gives you a feel for the nature of the predictability of our rental growth. Year to date, we settled 172 rent reviews, generating an additional GBP 2.2 million worth of income, which on an annualized rental growth basis, would reflect 4.4%. In allowing for bill cost inflation, and the increasing costs of development, we're perfectly comfortable to see an increasingly positive rental growth trend. Moving on to slide 14.
I think this slide really fundamentally underlines why we're so positive about rental growth. Just to draw your attention to a key line, if one looks at the table to the right of the page, you can see that we've highlighted the number of reviews that have been completed during different years. Obviously, the period of greatest inflation is more recently, and if you look at the year for 2022, you can see that to date, we've only settled six reviews of an outstanding 210 to go. Therefore, I think you should see that positively in terms of generating future positive rental growth from the open market side of our portfolio, which, as I said earlier, reflects 69% of our rent roll.
Moving on, obviously, we remain cognizant that maintaining the existing portfolio is very important, defending against WALT decline, and seeking to increase rents. During the course of the year, we've completed five asset management projects. We have a further eight on site. We've done four lease re-gears, and we have a strong pipeline of 32 projects with a capital value of about GBP 24 million. It's important to point out that these projects, we ensure they carry an attractive yield on cost, and on average, for our pipeline, we can see that at about 5%. While carrying out these asset management projects, we seek to improve the environmental ratings of our buildings, typically targeting an improvement of two grades on the EPC ratings or a B.
Positively, most of our asset management projects do allow for extensions, which I hope underlines the strong demand for our primary care space, both from services coming out of secondary environments, and indeed, to tackle NHS backlogs, or as ever, to allow for us to manage the growing and aging population. Moving on to Slide 16, if people are following the numbers. It's probably just worth standing back and highlighting the defensive nature of our portfolio. It's very granular. We have over 1,200 tenancies. It's effectively 100% let, of the rent roll, 89% or 90% of the income is generated from the UK government.
It's worth pointing out that in terms of delinquency, which we tightly control, only about 9% of our income is due to expire in terms of rent roll during the course of the next three years, and with the large majority of those tenants, we're already in conversations about re-gearing and extending those leases, quite possibly around asset management projects, while at the same time, as I pointed out in the prior slide, improving the environmental credentials of the buildings. Moving on, I think as both Harry and Richard touched on, Ireland remains a key opportunity for us. In looking at the cash-on-cash opportunity or the accretion to earnings, bar charts to the right of the page, you can see that perhaps the level of profitability from these acquisitions has reduced, but it still remains positive and attractive.
The schemes we can acquire in Ireland are larger than in the U.K., and benefit similarly from high proportions of government income. We are working on a near-term pipeline, although development in Ireland remains challenged for the same reasons, frankly, as it does here in the U.K., while rents need to catch up with inflationary pressures, with a lower cost of capital and higher yields, we do see near-term opportunities to acquire standing let investments. With this theme in mind, moving on to the next slide, as Harry touched on, our acquisition of Axis Technical Services, the property management company in Ireland, is proving to be a very good move. It's giving us an increased bandwidth to carry out asset management projects in Ireland, which is already proving to be good news.
It comes with a very strong relationship with our key tenants in Ireland, the HSE, and is allowing us greater to allowing us to have greater communication with them. As a result, we think that we'll be able to drive the portfolio better with, if you like, boots on the ground. We did have, via a sister company of Axis Technical Services, a development pipeline. That pipeline, a bit like our UK development program, is essentially on hold while rents catch up with costs, but we do expect to come back to that in the near or medium term.
Moving on, as we always say, we have a disciplined approach to our pipeline, as you'd expect, and sort of as I've already articulated, our focus really at the moment is on potential expansion in Ireland, where it makes most sense, and on profitable asset management deals. We think that development will feature more significantly in this chart, perhaps later in the year, once our positive conversations with the district valuer or ICBs progress and we can positively agree to move rents on in order to ensure viability for our development. In coming on to development, I've now raced ahead to slide 21. As I've said before, development at PHP is really very low risk.
We don't commit to acquiring sites until those sites have got planning permission, until a lease been agreed with the core tenants, particularly in the U.K., the GPs or in Ireland, the HSE. Indeed, the rents have been agreed such that we can see that development will be profitable and viable. We are having very positive conversations with the relevant ICBs regarding the three UK schemes you can see here, being South Kilburn, Spilsby and Colliers Wood, and we're starting to see potential rent increases coming through of between 20% and 30%, which would be very positive, not only for freeing up, liberating these schemes, but equally as a read across to rental growth for the rest of the portfolio.
I'm not necessarily saying that would be a direct read across, but I'm saying it would be remarkably positive. The schemes we've listed here or behind me, are historic schemes, but it's also worth pointing out that we're having conversations regarding new schemes, where there is a slightly different approach to setting the rents at the outset. On that note, I'm going to pass back to Harry, who's going to round up the presentation.
Thanks, David, and thanks, Richard. There we are. PHP has demonstrated another resilient and robust period of its trading history. We remain keen to assist in the modernization of the NHS and the HSE in Ireland. Our social infrastructure assets are really key to the delivery of the national health in both countries. Across party support, I think we don't need to be worried about political change because both parties, both major parties, remain committed to the NHS in Britain, and both parties in Ireland, Fianna Fáil and Fine Gael, are the same. People expressed a fear about digital during the pandemic. In fact, whilst digital accounts for a large number of initial consultations, interestingly, the number of face-to-face consultations in Britain is already higher than it was pre the pandemic.
Whilst your initial triage may be done on Zoom or Teams, a follow-up, particularly for people with complex medical needs, comorbidities, to use the jargon, has to be done really by the doctor, who can make an informed assessment about the holistic nature of the patient's woes. We don't need to. We keep a weather eye on it, obviously, but digital is not a life-threatening threat to PHP. The key message that we wanted to get over to you today, as well as saying that our portfolio is 100% let, with 89% of the income coming from the British and Irish governments, is that the improved rental outlook puts us in a very good position to withstand the volatility that we've seen in the economy and in the interest rate environment.
As inflation abates, which we all hope it does gradually, and as interest rates return to a more normal level once they've had a chance to operate, the prospects are that PHP will get back on track for its expansion policy. Meantime, we see attractive possibilities in Ireland. We've maintained a very disciplined approach to the market, and that's shown up through our property returns. We're pleased with our acquisition of Axis. Although it was small, it gives us a very important strategic benefit in Ireland. I see no reason for us to change our focus on dividend growth, continuing the track record of the last 27 years.
Estimates in the market are that we'll pay 6.7p for the current year, and as I said at the outset, we've already paid half of that, and we've declared the third quarterly installment, which is due on the 18th of August. We're focusing on our low-carbon approach to making sure that our impact on the environment is reduced, and overall, we're helping to deliver a robust healthcare system and service fit for the 21st century. That completes the formal part of the presentation. I'd now like to open to questions from the floor. Maybe if you have got a question, you can just say, for the benefit of others, who you are representing, and we can take it from there. Any questions, please?
Morning, it's James Carswell from Peel Hunt. Just on the pipe, I appreciate you've scaled back and put things on hold, just in terms of the rents you're now talking to, both in Ireland and the U.K., the increased rents, what kind of returns they'll translate into and kind of the return hurdles you're looking to achieve before you kind of press the button, so to speak?
I think in simple terms, you can reverse engineer the answer to that, because if you had to fund the developments of today's interest rates, you'd be looking at a much stronger rental level that would be needed to make it stack up. As David said, they could be anywhere between 20% and 35%. Before everyone gets excited, you couldn't make a direct read across from that into rental growth, but some of it will be reflected. You know, if a current project was at GBP 230 a meter, and we would need GBP 265 or GBP 270 to get it going in Britain, when you're reviewing a surgery nearby, which might be of GBP 190 or GBP 200 a meter, it becomes much more...
a much easier argument to say that there needs to be some growth on that. You know, index replacement costs, in my experience, over the last 27 years, have been quite a good proxy for the rental levels of open market value projects in Britain.
Okay, thanks. Maybe just on yields on costs and again, on those appraisers, how have they changed from, say, 12, 18 months ago? Are you now looking at trying to achieve significantly higher yield on costs on those developments?
Yeah. I mean, you know, the portfolio yield for our projects, so for our properties overall, we've stated at around 4.9%. Obviously, new deals are tighter than that, but those levels have gone up from, frankly, unsustainable levels that they were when interest rates were extremely low or close to zero, where people were paying 3.5% initial yields, and they'd be probably closer to 4.25% initial yields across the space. Higher in Ireland.
Thank you.
Rob Murphy, Edison. Just coming back to the developments and just general planning. You talked about interest rates returning to normal levels. I mean, some might argue that interest rates are normal now. My question would be, how are you... When you're looking at those, you know, talking about the rental increases, are you planning on current rates lasting for a long time, or are you assuming they're going to fall? Thanks.
I'm not in the business of predicting interest rates. That's a foolish pastime, but the Bank of England's target, at any rate, remains 2% for inflation, and there would need to be a margin above that. I guess my comments were not that interest rates are gonna go back to zero, but that they might level out at 3.5% or 4%. That's my own personal view, not the company's view. It will take time.
However, our debt is on average, hedged out for seven years, and if we see rental growth of 3%- 4% per annum across the piece during that period, there won't be any need, you could work this out in a little spreadsheet, I'm sure, for there to be a reduction in dividends by the time we get to refinance the debt. It's a question of those rental growth numbers feeding through into the income account, which is, it's all well and good to talk about property valuations, but you can't spend a property revaluation. What you can do is spend rental growth income, and that is coming into our P&L account and will have a huge impact on the P&L account moving forward. Of course, what people tend to forget is it's cumulative.
You know, your 4% rental growth this year, you will still get next year, plus another 4%, hopefully, or higher, as inflation comes through. When David said, you know, the impact on rental growth is lagged because it takes a long time in this sector to get your rental reviews settled. We're working hard and diligently at it, but it just takes time.
Hi, it's Max Nimmo, Numis. Just a quick one on the Axis development pipeline. At the current pace of the rent growth that we're seeing at the moment, appreciate you've kind of got a bit of a forward look on that, when would you be able to expect to kind of commit to those developments?
Well, I mean, it's hard to say because, when those developments become viable, we'll be keen to press on with them. I suppose it's probably fair to say that the situation in Ireland with the realization around rents arresting development potential has kinda probably hit them a bit later than it has us, partly in line with what's happened with the European economy versus the U.K. economy. What I would say, going forward, is that once those schemes become viable, we'll be very keen to press on with them. Whether that's early next year or later next year, I really couldn't say, but I think that's the message that we've anticipating to become viable once the government there have reviewed the rents and come to a determination as to what they're prepared to pay.
I think there's also, you have to bear in mind that because we're dealing with public sector projects and public sector money, some of the projects will probably have to be re-tendered, which is quite a long bureaucratic process. Whether they do an accelerated re-tender or not, I don't know. But we have raised these issues with senior people within health ministries and politicians to make them aware that unless we get a return to more sensible levels of rent, there just won't be any new medical centers built. That's a policy question for the NHS, and it's a policy question for the Irish Ministry of Health. Because no one can magic these numbers out of thin air. We've moved from a position, you don't need me to tell you, where zero interest rates were very much the norm.
Indeed, negative interest rates were the norm in Ireland and the European area, where inflation didn't really exist. Now inflation has come back to bite, and that means that rental levels will have to go up. It's a simple economic mathematical calculation.
Thank you.
Hi, I'm Shayan, from Gravis Capital. Just a quick clarification. Obviously, you mentioned the direct development you sort of paused on, but then you've got EUR 14.8 million of a forward-funded project in Ireland. I sort of wanna understand why you're happy to sort of progress with that rather than and keep the direct developments on hold?
This is quite simple, actually. For the project in Ireland, it's viable based on the cost to develop it and the rent that exists. It's a different territory. Whereas in the U.K., as it stands, the development costs required to build those projects out would make the scheme unviable until, as we said before, the rent increases. It's kind of a consistent theme, but there are some differences in some cases, perhaps nuance between projects by geographical location and jurisdiction. The scheme you're pointing out in Birr, in Ireland, is just one scheme that should things work out in line with what we hope, it would be viable.
Well, we seem to have exhausted questions in the room. We're now going to go to questions from our listeners online.
Thank you. If you'd like to ask a question over the phone, please press star one, star one on your telephone keypad. We'll take the first question from Kanad Mitra, from Barclays. Please go ahead.
Hi, morning, thank you for the presentation. One question from me is: How would you see your business model evolve if interest rates and your marginal cost of debt settles at current levels or maybe at higher levels until compared to very recent past averages? Do you also see the conversations with NHS evolving if such a situation kind of stabilizes?
I wasn't sure about the second part.
What would be your second order in the capital structure? That would be all.
I didn't quite catch the second part of your question, Kanad. Could you just repeat that bit?
Yeah, if such a higher interest cost environment persists, how would you see conversations with the NHS evolving? Would they be flexible regarding their conversations?
Well, I think they live in the real world, as do we. I think we were trying to indicate that on new projects, there is some flexibility creeping into the conversations. They're not documented as yet, but as and when they are, then that will be more good news to bring forward. I think it's a moving dynamic with the interplay of rental levels, with underlying long-term interest rates. Rental growth will come through to make the model work because the capital cannot be found by either government. You know, there is quite a shortage of capital. The governments in Britain, well, in Britain anyway, is a very large borrower. It doesn't have a lot of headroom on the capital account.
This method of funding the needed improvements in primary care will have to come from the private sector, in part, and it will have to come from the private sector, in part, in Ireland. This investment in social infrastructure will continue, but it will take a period of adjustment, which is what we're seeing now, for the system to change, and to adjust. We're very confident about our ability to carry on, but it will need the higher rental levels that I indicated, which will need to pay for the higher costs of construction and the higher overall cost to finance.
The key point is that doesn't threaten our income model, because over time, the, let's say, 3%, to be conservative, or 4% rental growth over the next seven years, will enable us to fund that higher cost of interest moving forward.
Sure. [crosstalk]
There [crosstalk] are no further questions on the phone at this time.
Okay, well, let's close the presentation there. Thank you all for attending, both online and in the room, and we'll be around to answer more questions or have a chat for those who want to stay. Thanks a lot.