10th Apr 2008 07:01
Primary Health Properties PLC10 April 2008 9 April 2008 PRIMARY HEALTH PROPERTIES PLC ('PHP') Modern accommodation for the Provision of Primary Health Care Services Preliminary Results for the Eighteen month period ended 31 December 2007 Primary Health Properties PLC, one of the UK's largest providers of modernprimary healthcare facilities, is pleased to announce its Preliminary Resultsfor the eighteen months ended 31 December 2007. Group Financial Highlights • Profit after tax £16.8m (30 June 2006: £15.9m) • Diluted NAV per share increased to 369.4 p (30 June 2006: 305.1p) • Total dividends in respect of the financial period ended 31 December 2007 of 23.25p (2006: 13.5p) • Net portfolio revaluation surplus over the period increased by £5m (30 June 2006: £15m) • Rent Roll increased to £16.2m per annum (2006: £11.3m) • Portfolio owned, leased and committed increased by 44% to £324.2 m (2006: £224.8m) • Moved to calendar year end to align with UK-REIT conversion • New term facilities of £50m have been arranged Harry Hyman, Managing Director, commented: "The period under review has been one of great change for PHP. During the 18months, the Company was in the vanguard of converting to UK-REIT status,completed the acquisition of Cathedral group for £31m and successfully raisednew money through an equity placing with new and existing investors. The lastsix months of the period have been characterised by a weakening in values forthe commercial property market overall and this has impacted on PHP. However,the niche market in which the Company operates remains strong in comparison tothe uncertainty afflicting other parts of the property sector. "The provision of modern primary health care facilities in the UK continues toenjoy strong tenant and investor demand and is supported by significantGovernment spending programmes that are not impacted by traditional economicfactors. The Group remains a leader in its market with secure cash flows, goodvisibility of long term revenue and a strong forward pipeline of new product.The softening of yields offers opportunities for PHP to be opportunistic in itsacquisition policy and the Company continues to search for appropriate additionsto complement its existing portfolio. The Board looks to the future withconfidence." - ends - Enquiries: Bell Pottinger Corporate and FinancialDavid Rydell/Victoria GeogheganTel: 020 7861 3232 Primary Health Properties PLCHarry HymanManaging DirectorMobile: 07973 344768 Chairman's Statement Since the last reported audited figures, the Group has achieved a number ofimportant milestones: • It has acquired or taken delivery of £76.7m of assets • It's portfolio including commitments is now £324m • It has over 106 primary care centres (99 completed and 8 contracted) • Net asset value increased to 369.4p per Ordinary Share • £40m gross of equity capital was raised • New term loan facilities of £50m have been arranged • 23.25p of dividends for the eighteen month period including 8.25p paid per Ordinary Share on 28 March 2008 In addition, on 1 January 2007, PHP converted into a REIT, thereby releasing£30m of deferred tax liabilities and incurring a conversion charge of £5.1m. The market in which the Group operates remains strong and while there has beenuncertainty in other parts of the property sector, investor and tenant demandfor modern primary health care facilities remains high. The Group has anexcellent portfolio of modern properties with secure long leases, high qualitytenants and the prospect of continued rental growth flowing through intodividends. The Group has substantial resources to continue with its strategy forgrowth through: • selective investment in appropriate new opportunities • minimising development risk • sourcing new investments from several developers. These results cover the statutory reporting period for the eighteen months ended31 December 2007, which follows the change of the Group's year-end to 31December. The results of the Group for each of the past five periods of sixmonths are shown in the table below. The annualised results for the last twocalendar years (31 December 2007 and 31 December 2006) are also summarised. Theresults of the previous statutory reporting year to 30 June 2006 are included inthe main body of the financial statements. Financial information is provided in various sections of the Chairman'sStatement below. This information has been extracted from the following sources: • Information at 31 December 2007 and the eighteen month period then ended from the Group's financial statements; • Information at 30 June 2006 and for the year then ended from the Group's annual financial statements; and • Information for various six month periods has been extracted from interim accounts and other internal reports. Results Group financial highlights Eighteen Six months Six Six months Six Six months Twelve months to to 31 months to to 31 months to to 31 months 31 December 30 June December 30 June December to 30 December 2007 2007 2006 2006 2005 June 2007 2006 Income Statement Annualised £16.2m £16.2m £14.5m £13.3m £11.3m £11.1m £11.3mdelivered rentroll (Loss)/profit (£3.7m) (£18.0m) £5.3m £9.0m £9.0m £9.4m £18.4mbefore taxation Profit/(loss) £16.8m (£18.0m) £5.2m £29.6m £8.2m £7.7m £15.9mafter taxation Balance Sheet Revaluation £4.9m (£13.6m) £5.1m £13.4m £7.2m £7.8m £15.0msurplus/(deficit) Net assets £124.1m £124.1m £151.1m £102.2m £71.3m £62.3m £71.3m Shares in issue at 33.6m 33.6m 33.6m 24.3m 22.7m 22.7m 22.7mperiod end NAV per share 369.4p 369.4p 449.8p 420.9p 314.5p 274.7p 314.5p Portfolio owned and £288.3m £288.3m £282.5m £260.3m £202.1m £185.9m £202.1mleased includingleases Commitments £35.9m £35.9m £38.5m £33.5m £22.7m £24.0m £22.7mincludingdeposits anddevelopment loans Portfolio owned £324.2m £24.2m £321.0m £293.8m £224.8m £209.9m £224.8mleased and committed Earnings per 59.3p (53.6p) 18.9p 125.4p 36.2p 33.0p 70.3pshare - Basic Dividends 23.25p 8.25p 7.5p 7.5p 6.75p 6.75p 13.5prelating to theperiod per share Bank debt net of £155.3m £155.3m £132.0m £149.4m £108.8m £99.8m £108.8mcash Gearing debt as % 56.2% 56.2% 47.3% 60.0% 61.2% 62.1% 61.3%gross assets To enable a direct comparison on an annualised basis, the key results for thetwelve months ended 30 June 2007 and 2006 were as follows: Twelve months to Twelve months to 30 30 June 2007 June 2006Annualised delivered rent roll £14.5m £11.3mProfit before taxation £14.3m £18.4mProfit after taxation £34.8m £15.9mEarnings per share - Basic 135.7p 70.3pDividends relating to the 15.0p 13.5pperiod per share To assist shareholders the profit (loss) for the respective periods has beenfurther analysed as shown below: Eighteen Twelve months Twelve months Twelve months months to to to to 31 December 31 December 31 December 30 June 2007 2007 2006 2006 £'m £'m £'m £'m Rental and related income 22.2 15.7 12.2 11.1 Revaluation gains/(losses) on 4.9 (8.6) 20.6 15.0property portfolioImpairment loss (3.8) (3.8) - -Gain on disposal of property - - 0.4 0.4 1.1 (12.4) 21.0 15.4 Administration expenses Management fee (3.2) (2.2) (1.5) (1.5)Incentive fee (2.6) (1.8) - -Other (1.8) (1.4) (2.1) (1.2) (7.6) (5.4) (3.6) (2.7) Profit/(loss) before interest and 15.7 (2.1) 29.6 23.8exceptional items Exceptional items UK-REIT conversion costs (0.2) - (0.2) -Goodwill impairment (5.5) (0.2) (5.3) - (5.7) (0.2) (5.5) - Profit/(loss) after exceptional items 10.0 (2.3) 24.1 23.8before interest Development loan interest 0.9 0.8 0.2 0.3Mark to market loss on non-hedging (2.8) (2.8) - -derivativesLoan interest (net of interest (11.8) (8.4) (6.3) (5.7)receivable and swap interest) (Loss)/profit before taxation (3.7) (12.7) 18.0 18.4 Current taxation (0.1) (0.1) 0.5 0.5Conversion to UK-REIT charge (5.1) - (5.1) -Deferred taxation (3.9) - (5.2) (2.9)Deferred taxation release on 29.6 - 29.6 -conversion to UK-REITTaxation credit/(expense) 20.5 (0.1) 19.8 (2.5) Profit/(loss) after taxation 16.8 (12.8) 37.8 15.9 Performance The performance for the eighteen months can be divided into three very distinctperiods. The six months prior to conversion to a UK-REIT when the propertymarket was firm, six months as a UK- REIT when the property market remained firmand the most recent six months when the property market was weakening. The property market performed differently in each six month period. During thesix months to 31 December 2006, the market was buoyant and yields continued tofall. During the first half of 2007, yields fell but at a slower pace. In thesecond half of 2007, the market began to decline with yields softening by about35 basis points. The December balance sheet includes the results of the periodend valuation by LSH, has resulted in a surplus of £4.9m. Financial Adjustments The results for the eighteen month period have also been affected by variousother matters arising in the six months to 31 December 2006. These include therelease of deferred tax liabilities (£29.6m), the goodwill write off relating tothe purchase of Cathedral (£5.5m) and the REIT conversion charge (£5.1m). Noneof these items had comparables in any other period. The loss after tax of £18.0m for the six months to 31 December 2007 includes animpairment loss of £3.8m on property under development. Financial Instruments As at 31 December 2007, the mark to market valuation of the Group's interestrate swaps showed a £9.3m reduction in value from 30 June 2007 and a reductionof £2.7m during the 18 month period under review, ( £0.1m has been recorded as amovement in equity in relation to interest rate swaps qualifying for hedgeaccounting and £2.8m has been recorded in the Group Income Statement). Theswaps were entered into at various dates to hedge the Group's exposure to higherinterest rates and improve cash flow. The mark to market value fluctuates withmovements in term interest rates and, in the case of the callable swap, withmarket volatility. In the earlier two six month periods, the mark to marketvaluation of the interest rate swaps qualifying for hedge accounting showedgains of £6.0m and £ 0.5m respectively. Both the revaluation adjustment to the property portfolio and the mark to marketvaluation of swaps represent unrealised adjustments and do not affect cash flow.During the period, the average rate of the swaps was lower than the prevailingLIBOR rate, thus saving the Group considerable cash outflow. The swaps have alsomitigated the Group's exposure to interest rate risk. Discounted Cash Flow Property Valuation In addition to the market value exercise performed by LSH, the Joint Managersmonitor the value of the Group's completed investment portfolio based on adiscounted cash flow analysis. On this basis, the valuation at 31 December 2007is £316.1m, compared to the market value of £281.7m. The difference of £34.4mrepresents an additional 102.4p of net asset value per Share. The assumptionsused in the discounted cash flow analysis are a discount rate of 7%; an averageincrease in the individual property rents at their respective review dates of3%; and capital growth of residual values of 1% per annum. Dividends On 28 March 2008, the Group paid an ordinary cash interim dividend of 8.25p perOrdinary Share in respect of the six months ended 31 December 2007. Thiscompares to 7.5p for each of the two previous interim dividends, paid on 22 Mayand 23 November 2007. The decision to pay three interim dividends for theeighteen month period rather than two interim and one final dividend was toaccelerate payment of dividends to Shareholders. Borrowings In March 2008, the Group entered into a £50m secured facility to augment itsexisting facilities of £200m, resulting in current facilities of £250m. £160mwas drawn at 31 December 2007 and, taking into account existing outstandingcommitments of £36m, this leaves a further £54m of facilities available to theGroup to continue with its acquisition policies. These term facilities mature in2013. Total borrowings at 31 December 2007 were £160m. The Group has £145m of fixedrate cover including £55m of callable swaps. Loan to value at the period end was56% and interest cover (as defined within the loan facility agreements) was 1.8times. Revenues, Administration Expenses and Net Asset Value At a trading level, revenues for the eighteen month period increased to £22.2mas a result of favourable rent reviews and new deliveries and operating profitbefore financing costs was £10.0m. The eighteen month period to 31 December 2007saw the effect of the inclusion of a Management Incentive Fee of £2.6m ratherthan the previous management share option scheme. The eighteen month period wasalso affected by the UK-REIT Conversion charge of £5.1m and other non-recurringcosts. During the eighteen month period the diluted net asset value per sharerose from 305.1p to 369.4p. Management Incentive Scheme The results for the two six month periods ended 31 December 2006 and 30 June2007 also incorporated the Management Incentive Fee approved by Shareholders inNovember 2006 which replaced the management share option scheme. There is noManagement Incentive Fee payable for the last six month period and, under theterms of the scheme, the deficit in Total Return will be made up before any feeis payable in future years. Portfolio During this period, the Group has taken delivery of £76.7m completed and letproperties at locations noted in the acquisitions table in the ManagingDirectors' Report, and also entered into additional new commitments totalling£18.4m. The table below sets out the portfolio as at 31 December 2007. 31 December 31 December 30 June 2007 2006 2006 £m £m £mInvestment properties 281.7 245.5 197.5Development properties 2.8 9.5 -Properties in the course of development 0.8 2.8 2.1 Total investment properties 285.3 257.8 199.6Finance leases 3.0 2.5 2.5Total owned and leased 288.3 260.3 202.1Development Loans 0.2 1.2 1.7Total owned and leased (including 288.5 261.5 203.8development loans) Deposits paid - 0.1 0.1Committed 35.7 32.2 20.9Total owned, leased and committed 324.2 293.8 224.8 Closing annualised rent roll 16.2 13.3 11.3 The Group's portfolio of 107 properties (including eight contracted schemes) isalmost 100% let with an average lease length outstanding of 18.4 years. 89% ofthe rent roll is paid for directly or indirectly by the NHS and most of thebalance is let to pharmacy operators. The closing rent roll at 31 December 2007was £16.2m compared to £14.5m at 30 June 2007. Between 31 December 2007 and 30June 2006, 93% of the increase related to new deliveries and 7% to rentalincreases secured during the period. Financing In April 2007, the Group completed a Placing and Open Offer, raising £38.7m netof expenses and thereby expanding its shareholder base. The Placing and OpenOffer resulted in 9,309,376 new Ordinary Shares being issued on 11 April 2007. Other matters The Share Plan allowing investors to purchase the Company's Ordinary Shares bylump sum or regular payments currently has 39 members holding 105,299 OrdinaryShares. Further details can be found on the website www.phpgroup.co.uk andwww.capitaregistrars.com/php. The Notice of the Annual General Meeting, explanatory circular and proxy cardfor the Annual General Meeting to be held on 17 June 2008 at 2.30pm will beenclosed with the Annual Report due to be delivered to Shareholders on or around28 April 2008 . The Board intends to appoint a third Independent Non Executive Director. Outlook Unlike some sectors of the property market the supply of new purpose builtaccommodation for the delivery of primary care services is very limited withnearly all space being developed on a pre-let basis. Accordingly, there islittle or no speculative building of space. As a result, the sector does notsuffer from the potential oversupply of space that may affect other sectors ofthe property market. As at 31 December 2007, the Group had £35.7m of commitments. By 31 March 2008all of these transactions except two, amounting to £9.2m, had been delivered. Atthe date of this statement that remains the Group's commitment position. TheGroup has several deals in solicitors' hands but is currently adopting a prudentpolicy with regard to entering into forward commitments. The Group remains a leader in its niche market, with secure cash flows andcurrently has a strong forward pipeline of new properties. Future growth will bedriven by these additions and further rental increases from the portfolio, whichcontinues to perform well. Despite the recent turmoil in banking and moneymarkets, the Board is satisfied with the Group's funding position and remainsoptimistic about the prospects for the Group. G A ElliotChairman9 April 2008 Managing Director's Report Property portfolio The table in the Chairman's Statement sets out the development of our portfolioduring the period under review. We took delivery of twelve new developments andacquired nine modern purpose built investments (2006: twelve new developments)and entered into a further six commitments on developments in the course ofconstruction at the period end (2006: seven development commitments). At theperiod end the portfolio, when commitments are included, reached £324.2m (2006:£224.8m). Portfolio Purchases during the Period The Group completed the purchases of a number of properties during the period,details of which are set out below: Property Acquisition Occupational Tenants Cost £m30 June 2006 to 31 December 2006Barlow Medical Centre, Didsbury 4.2 Doctors' Practice and PharmacySprings Health Centre, Clowne 3.5 Doctors' Practice and PharmacyOaklands Health Centre, Hythe 2.7 Doctors' Practice and PharmacyChapelfield Medical Centre, Wombwell 3.2 Doctors' Practice and PharmacySt Georges Medical Centre, Sheerness * 2.6 Doctors' Practice and PharmacyHetherington Group Medical Practice, Clapham * 2.6 Doctors' PracticeHailey View Surgery, Hoddesdon * 2.6 Doctors' PracticeCentral Milton Keynes Medical Centre * 3.3 Doctors' Practice and PharmacyOxted Therapies Unit * 4.0 PCT Treatment CentreSt Stephens Gate Medical Centre, Norwich * 6.1 Doctors' Practice and Pharmacy 31 December 2006 to 30 June 2007Jubilee Health Centre, Wednesbury 1.6 Doctors' Practice and PharmacyOuse Valley Practice, Handcross * 3.5 Doctors' PracticeFrederick Treves House, Poundbury 5.9 2 Doctors' Practices, PCT and PharmacyPenkridge Medical Practice 3.2 Doctors' Practice and PharmacyLeslie Medical Centre 2.3 Doctors' Practice and Pharmacy 30 June 2007 to 31 December 2007Kippax Health Centre 4.9 Doctors' Practice, PCT and PharmacyBrough Ambulance Station 2.5 Ambulance Station and PCT AccommodationThe Glenn Medical Centre, Hebburn 5.2 Doctors' Practice, PCT and PharmacySandown Medical Centre, I.o.W. 3.7 Doctors' Practice and PharmacyWaterloo Health Centre, Huddersfield 2.0 Doctors' Practice and PharmacyRobin Hood Lane Health Centre, Sutton * 7.1 Doctors' Practice TOTAL 76.7 * properties acquired as part of the Group's acquisition of Cathedral HealthcareHoldings Limited (now PHIP CHH Limited). Property Disposals during the Period The Group disposed of one property during the period. This was a former doctors'surgery, where the tenant had been relocated to a new PHP facility, and whichwas sold for residential development at a price above its investment value. Theproperty was valued at £0.40 m at 30 June 2006 and disposed of in October 2006realising a gain of £0.04m. Revaluation As reported in the Chairman's Statement, the portfolio valuations have resultedin surplus for the eighteen month period of £4.9m which has been incorporatedinto the Group Balance Sheet, giving a closing investment property valuation of£281.7m (2006: £197.5m) The revaluation adjustments for each of the three six month interim periodswere: 31 December 2007: loss of £13.6m, 30 June 2007: gain of £5.1m, 31 December2006: gain of £13.4m. The £4.9m increase amounted to 17.3p per Ordinary Share on both a basic anddiluted basis. The valuation surplus reflects the impact of our successful rent reviews. Therehas been a softening of investment yields throughout the UK commercial propertymarket in the latter half of 2007 and, despite the long leases and securecovenants that typify our portfolio, it has not been immune. Notwithstandingthis, and an increased number of players in the market, the Group has a goodpipeline of investments. Portfolio Rental Levels The average rent for medical centres across the whole portfolio at the periodend is approximately £169 per square metre ('psm') (2006 £162 psm). The averagerent on accommodation let to the NHS (either directly or through the Doctors'Rent and Rates Scheme) is approximately £196 psm (2006: £157 psm) and theaverage pharmacy rent is approximately £239 psm (2006: £220 psm). The weightedaverage length of time to the next review is 1.6 years (2006: 1.8 years) acrossthe portfolio. Tenant Area (sqm) Area (sq ft) Rent (£psm) Rent (£ psf)GP's 78,342 842,961 161 15NHS 10,150 109,214 196 18Pharmacy 5,742 61,779 239 22Other 1,380 14,854 160 15TOTAL 95,614 1,028,808 169 16 Tenancy split by Floor Area The table below indicates the tenancy split by floor area (psm): GP's 82%NHS 11%Pharmacy 6%Other 1%TOTAL 100% Rent Reviews The Group completed a number of rent reviews during the period and there are anumber of reviews outstanding that we expect to be resolved during the comingyear. The results of the reviews completed during the period added £365,000 toour rent roll. There are further reviews due from the past year which amount tosome £3m of rent passing. We have accounted for an amount based on expectedoutcomes. The "forthcoming rent reviews" table below shows the timing of reviewsacross the portfolio. The pace of reviews is now picking up as more evidence ispresented through the market and more premises go through the review process.The average increase in rent as a percentage of passing rent over the three yearreview process has been 11% (2006 11%) equating to 3.39% p.a. (2006 3.39%p.a.). Finance and Interest Rate Hedging Bank borrowings increased from £112.8m to £159.9m during the period, of whichthe amounts shown in the table below have been hedged by interest rate swaps atan average weighted cost rate of 4.78% (2006: 4.89%) (excluding the lenders'margins). During the period, a number of interest rate swaps have been entered intoextending the maturity and quantum of the Group's cover under hedgingarrangements as shown below. Year Swaps (£m)2008 90.02009 80.02010 95.02011 85.02012 89.02013 89.02014 90.02015 92.02016 76.02017 70.02018 80.02019 80.02020 80.02021 80.02022 80.02023 80.02024 80.02025 80.02026 50.02027 20.0 The table above shows the level of bank borrowings hedged by interest rate swapsfor each of the next twenty financial years (assuming callable swaps are notcalled). Year Swaps (£m)2008 165.82009 168.02010 178.02011 173.02012 177.22013 177.22014 178.02015 179.72016 163.82017 158.02018 168.02019 168.02020 168.02021 131.32022 80.02023 80.02024 80.02025 80.02026 50.02027 20.0 The table above shows the level of bank borrowings hedged by both hedgeaccounted interest rate swaps and callable swaps for each of the next twentyfinancial years. Portfolio Characteristics Users The table below shows the percentage of our portfolio by rent roll derived fromeach of our major tenant classes, GPs, PCTs, Health Authorities, pharmacyoperators and others. Some 99% (2006: 99%) of our rent roll comes directly orindirectly from the NHS, GPs, PCTs and pharmacy operators. Covenant Analysis by Annual Rent GP's 78%Pharmacy 10%PCT's 9%Health Authorities 2%Other 1%TOTAL 100% Length of Leases Analysis of Annual Rent by Term Unexpired The table below shows an analysis of rent by expiry and indicates that some 84%(2006: 95%) of the lease income has more than 15 years unexpired. Less than 5 years 1%6 - 15 years 15%15 - 20 years 47%More than 20 years 37%TOTAL 100% Security of Income by Term Certain The table below shows the security of income by term certain and shows therental cash flow as a percentage of the year end rent roll, ignoring anyincreases and any lease renewals during the subsequent periods. This shows thatby year 15 the Group would still be receiving 84% of its current income, withoutfurther action. Year % of Passing Rent1 100%5 99%10 96%15 84% Geographical Spread The table below shows the percentage of the portfolio by rent roll derived fromeach of the NHS regions. Annual Rent by Region East Anglia 3%East Midlands 8%London 9%North 2%North West 12%South East 30%South West 3%West Midlands 15%Yorkshire & Humberside 10%Scotland 5%Wales 3%TOTAL 100% Forthcoming Rent Reviews The table below shows the annual amount of rent falling due for review in eachof the next 3 years. Year Rent (£m)2008 5.4412009 5.0052010 5.036 The Primary Care market The National Health Service, ("NHS"), which this year celebrates its sixtiethbirthday, is an integral part of life in Britain and is an important and largepart of overall Government spending. The NHS budget is some £110 bn for 2008/9. We believe that whichever politicalparty is in power, the twin drivers of demography (an ageing population) andtechnology (the ability to perform more procedures and diagnostics outside ofmajor facilities) will continue to ensure that spending on health will rise byat least the increase in the country's GDP. Moreover, Government policy is tocontinue to switch large amounts of activity and budget into the primary carearena. To put it in context there are 1 million patient visits to primary care, perday, and the GP remains the gatekeeper to the NHS. This means that the demand for modern purpose built medical centres remainshigh. Although at some stages and in some parts of the UK, revenue budgets, outof which primary care rents are paid, remain under pressure, the NHS overall isbelieved to have a surplus for 2007-8. Spending in parts of the UK that havegreater requirements and greater flexibility over funding such as Wales andScotland have seen greater amounts of new building sanctioned in the last 18months. However the period has seen a major dislocation in the re-organisation of thePCT structure within England and this led to delays in approving new projectswithin England. The period under review also saw the publication of Professor Lord Darzi'sreport "our NHS our future" which specifically identified the need for at least100 more GP surgeries and 150 new polyclinics. This is all positive for thecontinued expenditure of capital on the primary care estate. Primary care property market Within the primary care property market, the pricing of investments has followedgeneral market trends. For the 18 month period, this has meant that yieldstightened during the period to September 2007 after which, notwithstanding theundoubted nature of the covenant behind some 89% of our rent roll and the longlease lengths, yields have moved out. At 31 December, our advisers reported tous that initial yields were approximately 5.5%. It is worth noting that thesector has not seen the very dramatic movement out of yields seen in moresecondary property sectors because the demand from investors for this type ofproperty remains high. It is also our belief that there is little chance ofoversupply of product as there are few if any speculative developments ofprimary care space for the NHS market and all new rent reimbursements aresubject to lengthy approval processes and are controlled both by the HeathAuthorities and PCTs and also by the District Valuer's office. Similarly thereare few voids in the sector and particularly in our portfolio. The risk ofoversupply and voids are twin spectres that affect pricing in other parts of theproperty market. These features are part of the reason why adequate banking finance continues tobe available - although it is worth noting that pricing for new facilities hasrisen as banks and other funding institutions seek to recover losses incurredelsewhere in their portfolios. Adding Value Our portfolio now has over 100 properties. We have a number of these propertieswhere there could be extensions or where there is land adjacent to the surgeriesfor new development. We are exploring ways of adding value through thedevelopment of these situations. In the period, we carried out our first small'own development' - constructing on a pre-let basis a pharmacy adjacent to ourexisting medical centre at Broxbourne. The returns from this for the Group weresatisfactory. Elsewhere, as the majority of our leases have a three year review pattern wehave a large number of leases due for rent review in 2008 and in respect of thelast 18 month period. As reported elsewhere the average rental increase obtainedduring the period was 11%. We are investigating challenging the judge and jurynature of the review process in terms of the use by the Government of theDistrict Valuer's office. Future prospects As we are not a developer, our business model does not require us to continue tobuy property. However, we do have strong links with a number of developers whohave good pipelines of deals for us to transact at sensible prices in thecurrent period. Where necessary, we have adjusted purchase yields to reflect thechanges in the more general property market. In addition, we are looking at a number of situations where vendors havecompanies pregnant with capital gains to sell which enable us as a UK-REIT topurchase the assets in a tax efficient manner. We believe that the investments we are purchasing reflect good long term valuefor the shareholders. We look forward to reporting more progress in the growthof our portfolio over the coming 12 month period. Harry HymanManaging Director9 April 2008 GROUP INCOME STATEMENTfor the eighteen month period ended 31 December 2007 Eighteen months Year ended ended 31 December 30 June 2007 2006 £'000 £'000 Rental income 21,301 10,850 Finance lease income 908 281 Rental and related income 22,209 11,131 Net valuation gain on property portfolio 4,857 14,997Impairment loss (3,750) -Net gain on disposal of property 44 401Administrative expenses - exceptional goodwill impairment (5,551) -Administrative expenses - exceptional UK-REIT conversion costs (195) -Administrative expenses - other (7,646) (2,689) Operating profit before financing costs 9,968 23,840 Finance income 2,178 258Finance costs (13,022) (5,695)Mark to market loss on derivatives (2,808) - (Loss)/profit before taxation (3,684) 18,403 Current taxation (100) 465Conversion to UK-REIT charge (5,157) -Deferred taxation (3,880) (2,931)Deferred taxation release on conversion to UK-REIT status 29,622 -Taxation credit/(charge) 20,485 (2,466) Profit for the period/year 16,801 15,937 Earnings per share - basic 59.4p 70.3p - diluted 59.4p 67.7p Adjusted earnings per share - basic (1.8p) 17.1p - diluted (1.8p) 16.5p Increased net asset value per share since previous annual report - basic 54.9p 62.6p - diluted 64.3p 58.5p Total return per share - basic 76.7p 76.1p - diluted 86.1p 72.0p Dividends paid in the period/year per share 21.75p 12.75p The above relates wholly to continuing operations. GROUP BALANCE SHEETas at 31 December 2007 At 31 December At 30 June 2007 2006 £'000 £'000Non current assets Investment properties 282,495 199,569Development properties 2,853 -Development loans 182 1,712 285,530 201,281 Net investment in finance leases 2,914 2,492Derivative interest rate swaps 1,651 1,415 290,095 205,188Current assets Trade and other receivables 4,186 1,033Net investment in finance leases 53 12Cash and cash equivalents 3,862 3,973 8,101 5,018 Total assets 298,196 210,206 Current liabilities Derivative interest rate swaps (2,808) (74)Corporation tax payable (29) (181)UK-REIT conversion charge payable (1,208) -Deferred rental income (3,660) (2,466)Trade and other payables (3,576) (2,604) (11,281) (5,325) Non current liabilities Term loan (159,219) (112,363)Derivative interest rate swaps (224) -Deferred taxation - (21,193)UK-REIT conversion charge payable (3,395) - (162,838) (133,556) Total liabilities (174,119) (138,881) Net assets 124,077 71,325 Equity Share capital 16,794 11,339 Share premium 48,009 12,022Capital reserve 1,618 1,618Cash flow hedging reserve 1,427 939Retained earnings 56,229 45,407 Total equity * 124,077 71,325 Net asset value per share - basic 369.42p 314.52p - diluted 369.42p 305.06p Adjusted net asset value per share - basic 369.42p 407.97p - diluted 369.42p 392.35p *Wholly attributable to equity shareholders of Primary HealthProperties PLC ("PHP PLC") ** Adjusted to remove deferred tax (applicable to 30 June 2006only) Group Statement of Changes in Equityfor the eighteen month period ended 31 December 2007 Cash flow Share Share Capital hedging Retained capital premium reserve reserve earnings Total £'000 £'000 £'000 £'000 £'000 £'000 30 June 2006 11,339 12,022 1,618 939 45,407 71,325 Profit for the period - - - - 16,801 16,801 Transfer to income statement on cash flow - - - (1,231) - (1,231)hedges Income and expense recognised directly inequity: Gains on cash flow hedges taken to equity - - - 1,317 - 1,317 Deferred tax on cash flow hedges - - - 402 - 402 Total recognised income and expense for theperiod - - - 488 16,801 17,289Issue of shares (net of expenses) 5,455 35,987 - - - 41,442Dividends paid:Final dividend for the year ended 30 June2006 (6.75p) - - - - (1,639) (1,639)First interim dividend for the period ended31 December 2007 (7.5p) - - - - (1,821) (1,821)Second interim dividend for the period ended - - - - (2,519) (2,519)31 December 2007(7.5p) 31 December 2007 16,794 48,009 1,618 1,427 56,229 124,077 Group Statement of Changes in Equityfor the year ended 30 June 2006 (continued) Cash flow Share Share Capital hedging Retained capital premium reserve reserve earnings Total £'000 £'000 £'000 £'000 £'000 £'000 1 July 2005 11,326 11,952 1,618 (1,292) 32,175 55,779 Profit for the year - - - - 15,937 15,937 Transfer from income statement on cash flowhedges - - - 238 - 238 Income and expense recognised directly inequity: Gains on cash flow hedges taken to equity - - - 2,949 - 2,949Deferred tax on cash flow hedges taken toequity - - - (956) - (956) Total recognised income and expense for theyear - - - 2,231 15,937 18,168Issue of shares (net of expenses) 13 70 - - - 83Share based payment adjustment - - - - 185 185Dividends paid:Final dividend for the year ended 30 June2005 (6.0p) - - - - (1,359) (1,359)Interim dividend for the year ended 30 June2006 (6.75p) - - - - (1,531) (1,531) 30 June 2006 11,339 12,022 1,618 939 45,407 71,325 GROUP CASH FLOW STATEMENTfor the eighteen month period ended 31 December 2007 Eighteen months Year ended ended 31 December 30 June 2007 2006 £'000 £'000Operating activities(Loss)/profit before tax (3,684) 18,403Less: Finance income (2,178) (258)Plus: Finance costs 13,022 5,695Plus: Mark to market loss on derivatives 2,808 -Operating profit before financing costs and financing income 9,968 23,840 Adjustments to reconcile Group operating profit to net cash flows fromoperating activitiesLess: Revaluation gains on property (4,857) (14,997)Less: Gains on disposal of property (44) (401)Plus: Impairment loss 3,750 -Plus: Goodwill impairment 5,551 -Plus: Shares based payment expense - 185Increase in trade and other receivables (1,177) (54)(Decrease)/increase in trade and other payables (448) 212 Cash generated from operations 12,743 8,785UK-REIT conversion charge (554) -Taxation paid (272) (34) Net cash flow from operating activities 12,198 8,970 Investing activitiesReceipts from disposal of investment properties 464 7,711Payments to acquire investment properties (48,972) (25,770)Interest received from developments 281 219Development loans advanced (2,671) (2,612)Bank interest received 83 47Acquisition of Cathedral (30,924) -Cash acquired on acquisition of Cathedral 174 - Net cash flow used in investing activities (81,846) (20,624) Financing activitiesTerm bank loan drawdowns 47,050 24,000Placing and option exercise (net of expenses) 41,443 (4)Interest paid (12,977) (6,678)Equity dividends paid (5,979) (2,803) Net cash flow from financing activities 69,537 14,515 (Decrease)/increase in cash and cash equivalents for the period/year (111) 2,861 Cash and cash equivalents at start of period/year 3,973 1,112 Cash and cash equivalents at end of period/year 3,862 3,973 NOTES: The above results for the eighteen month period ended to 31 December 2007 areaudited. 1. Accounting policies Basis of preparation and statement of compliance The Group's financial statements for the period ended 31 December 2007 have beenpresented under International Financial Reporting Standards (IFRS) as adopted bythe European Union. The financial information contained in this report does not constitute statutoryaccounts within the meaning of Section 240 Companies Act 1985. The auditors'report on the full financial statements under section 235 Companies Act 1985,for the eighteen month period ended 31 December 2007, contains a statement underSection 237 (2) or (3) Companies Act 1985. This audit report, which wasunqualified, will be delivered to the Registrar of Companies, together withfinancial statements for the eighteen months period ended 31 December 2007. Convention The financial statements are presented in Sterling rounded to the nearestthousand. Segmental reporting The Group operates under one business segment and one geographical segment,being investment in primary health care property within the United Kingdom. Conversion to UK-REIT The Group's conversion to UK-REIT status was effective from 1 January 2007. Conversion to UK-REIT results in, subject to continuing relevant UK-REITcriteria being met, the Group's property profits, both income and gains, beingexempt from UK taxation from 1 January 2007. Therefore, deferred tax liabilitiesas at 31 December 2006 of £30.0m were released with £29.6m is credited to theGroup Income Statement and £0.4m to the cashflow hedging reserve. On conversion to UK-REIT, the Group was subject to a one-off taxation chargebased on the value of properties as at the date of conversion, which amounted to£5.1m. This amount is payable over four years. Change of accounting reference date The Group changed its accounting reference date to 31 December. The currentaccounting reference period, which commenced on 1 July 2006, therefore comprises18 months ended 31 December 2007. Basis of consolidation The Group's financial statements consolidate the financial statements of PrimaryHealth Properties PLC and its wholly owned subsidiary undertakings. Subsidiariesare consolidated from the date of their acquisition, being the date on which theGroup obtained control and continue to be consolidated until the date that suchcontrol ceases. Control comprises the power to govern the financial andoperating policies of the investee so as to obtain benefit from its activitiesand is achieved through direct or indirect ownership of voting rights; currentlyexercisable or convertible potential voting rights; or by way of contractualagreement. The financial statements of the subsidiary undertakings are preparedfor the accounting reference period ending 31 December each year, usingconsistent accounting policies. All intercompany balances and transactions,including unrealised profits arising from them, are eliminated. 2. Acquisition of Cathedral Healthcare (Holdings) Limited ("CHH") On 22 December 2006, the Group acquired 100% of the Ordinary Shares ofCHH for a cash consideration of £31.0m, equivalent to the fair value of theassets obtained. CHH was the holding company of a group of companies that owned nineprimary healthcare facilities across the UK which have been incorporated intothe Group's portfolio. Consideration of £30.9m was paid upon completion with a further 0.1m paid inApril 2007. Cash acquired upon acquisition of CHH amounted to £0.2m. The total gross assets acquired once fully developed are expected toamount to £39.2m. These assets are expected to generate a total annual rentalincome of approximately £2.0m, reflecting an initial yield of approximately 5%. As the Group paid consideration equal to the assessed value of theacquired properties, goodwill arises in respect of the other liabilities,principally a deferred tax liability of £4.9m. However, on conversion toUK-REIT, the deferred tax liability is eliminated resulting in an impairment ofgoodwill arising on acquisition. No further goodwill has deemed to have been acquired from other assets. Fair values of the net assets at date of acquisition were as follows: £'000 Investment properties 21,300Development properties 9,525Trade receivables 810Cash 173Trade payables (1,346)Deferred tax liabilities (4,951) ----------- Net assets acquired 25,511 Goodwill arising on acquisition 5,551 ----------- 31,062 3 Investment properties The freehold, leasehold and development properties have been independentlyvalued at fair value by Lambert Smith Hampton Chartered Surveyors and Valuers,as at 31 December 2007 in accordance with IAS 40 "Investment Property".. The revaluation loss for the six month period ended 31 December 2007 amounted to£13.6m, giving an overall revaluation gain of £4.9m for the eighteen monthperiod ended 31 December 2007. Property additions for the six months ended 31 December 2007 amounted to £21.7m,giving total additions for the eighteen month period of £83.6m (including £30.8mon the PHIP CHH acquisition). There were no properties disposed of in the sixmonths to 31 December 2007. Properties disposed of during the eighteen monthperiod ended 31 December 2007, valued at £0.4m as at 30 June 2006, realised again of £0.04m. An impairment of £3.75m has been reflected as an impairment provision againstthe capitalised cost of property. This impairment reflects the difference between the estimated market value ofthe properties in the course of the development at the period-end and theircontracted development cost. 4 Earnings per share The calculation of basic and diluted earnings per share is based on thefollowing: Eighteen months to 31 December 2007 Year to 30 June 2006 Net profit Net profit attributable to attributable to Ordinary Ordinary^ Ordinary Ordinary^ Shareholders Shares Per Share Shareholders Shares Per Share £'000 number pence £'000 Number pence Basic earnings per 16,801 28,297,852 59.4 15,937 22,667,946 70.3 share Option conversion * - - - 861,960 Diluted earnings per 16,801 28,297,852 59.4 15,937 23,529,906 67.7 share Adjusted earnings per share for theperiod Eighteen months to 31 December 2007 Year to 30 June 2006 Net profit Net profit attributable to attributable to Ordinary Ordinary^ Ordinary Ordinary^ Shareholders Shares Per Share Shareholders Shares Per Share £'000 number pence £'000 number pence Basic earnings per 16,801 28,297,852 59.4 15,937 22,667,946 70.3 shareAdjustment to remove: Performance 2,591 - Incentive fee# Goodwill 5,551 - impairment UK-REIT conversion charge 5,157 - Deferred tax 3,880 2,931 charge Deferred tax (29,622) - release Net valuation (4,857) (14,997) gains Adjusted basic (499) 28,297,852 (1.8) 3,871 22,667,946 17.1 earnings per shareOptions conversion* - - - **861,960 Adjusted diluted (499) 28,297,852 (1.8) 3,871 23,529,906 16.5 earnings per share ^ Weighted average number of Ordinary Shares in issue during the period. * Excess of the total number of potential shares on option exercise over thenumber that could be issued at fair value as calculated in accordance with IAS 33 'Earning per share' ** All Management Options were exercised in full on 21 September 2006. # The Performance Incentive Fee depends primarily on revaluation gains, whichare eliminated in calculating adjusted earnings per share. 5 Performance incentive scheme On 16 November 2006, Shareholders approved the amendments to the ManagementAgreement whereby the Joint Managers are entitled to a performance incentive feeof 15% of any performance in excess of an 8% per annum increase in the Company's"Total Return" as derived from the audited financial statements for therespective financial period. The Total Return shall be determined by comparing the variation in the statednet asset value per share (on a fully diluted basis, adjusting for deferred taxand the REIT conversion charge and adding back gross dividends paid or declaredper share in such period), against the fully diluted net asset value per sharefrom the previous period's audited accounts. The performance incentive fee was initially calculated on an annual basis ending30 June. However, following the Group's conversion to UK-REIT and change in itsaccounting reference date to 31 December, it has been necessary to calculate thefee based in six-monthly steps, using interim accounts. From 1 January 2008,the fee will be calculated on an annual basis, using the audited financialstatements. Included in Administration Expenses within the Income Statement is a performanceincentive fee expense of £2,591,000 (six months to 30 June 2007: £1,839,000, sixmonths to 31 December 2006: £752,000). There is no performance incentive feepayable for the six months ended 31 December 2007. 6. Dividends paid Dividends paid in the period are as follows: No of shares Eighteen months Year dividend paid to to upon 31 December 30 June 2007 2006 £'000 £'000 Final dividend for the year 24,277,718 1,639 -ended 30 June 2006 (6.75p) First interim dividend for the 24,277,718 1,821 -period ending 31 December 2007 (7.5p)Second interim dividend for the 33,587,094 2,519 -period ending 31 December 2007 (7.5p)Final dividend for the year 22,677,718 - 1,359ended 30 June 2005 (6.0p) Interim dividend for the year 22,677,718 - 1,531ended 30 June 2006 (6.75p) 5,979 2,890 A third interim dividend was paid on 28 March 2008, in respect of theperiod ended 31 December 2007, of 8.25p per Ordinary Share (2006: final dividendof 6.75p per Ordinary Share), amounting to a total of £2,770,935 (2006:£1,530,746). No final dividend is proposed. 7 Taxation 31 December 2007 30 June 2006 £'000 £'000 Tax(credit)/charge in the Group IncomeStatement:The tax(credit)/charge is made up as follows: Current tax UK Corporation tax 27 181Adjustment in respect of prior period/year 73 (646) 100 (465) Charge on conversion to UK-REIT status 5,157 - 5,257 (465) Deferred tax Deferred tax charge for the 6 months to 31 3,880 2,931December 2006/yearDeferred tax release on conversion to UK-REIT (29,622) -status (see note 1) (25,742) 2,931Conversion to a UK-REIT means that the Group isno longer subject to UK Corporation Tax. Thisenables the Group to release its deferred taxliabilities at the expense of suffering aconversion (5.1m) plus additional legal costs(£0.20m). Taxation (credit)/charge in the Group Income (20,485) 2,466Statement Taxation in the Balance Sheet:Deferred tax liability - on temporary differences - 6,186 - on revaluation gains - 14,605 - on derivative interest rate swaps - 402 Deferred tax liability at end of period - 21,193 Deferred tax reconciliation:Balance at beginning of period/year 21,193 17,860Charge for the period 3,880 2,931Deferred tax liability on acquisition of 4,951 -Cathedral Healthcare (Holdings) LimitedDeferred tax on cash flow hedge (402) 402Deferred tax release on conversion to UK-REIT (29,622 -status Balance at end of period/year - 21,193 8. Net asset value calculations Net asset values have been calculated as follows Eighteen months ended Year to 31 December 30 June 2007 2006 £'000 £'000 Net assets:Per Group Balance Sheet * 124,077 71,325Add - Receipts from the exercise of - 2,736Management Options 124,077 74,061 No. of Shares No. of SharesOrdinary Shares:Issued share capital * 33,587,094 22,677,718Add - New Shares issued assuming the - 1,600,000exercise of Management Options 33,587,094 24,277,718 Basic net asset value per share 369.42p 314.52pDiluted net asset value per share 369.42p 305.06p * Figures for the basic net asset value calculations Calculations assume that the dilution takes place on the respective BalanceSheet dates. Diluted adjusted net asset value has been calculated as follows: Eighteen months ended Year to 31 December 30 June 2007 2006 £'000 £'000 Net assets: 124,077 71,325Per Group Balance SheetAdjustments to add back:Deferred tax on temporary differences - 6,186Deferred tax on revaluation gains - 14,605Deferred tax on derivatives - 402 Adjusted net assets 124,077 92,518 Add - Receipts from the exercise of Management Options - 2,736 124,077 95,254 No. of shares No. of sharesOrdinary Shares:Issued share capital 33,587,094 22,677,718Add - New Shares issued assuming the exercise of Management Options - 1,600,000 33,587,094 24,277,718 Basic adjusted net asset value per share 369.4p 408.0pDiluted adjusted net asset value per share 369.4p 392.4p Calculations assume that the dilution takes place on the respective BalanceSheet dates. The statutory accounts for the eighteen months ended 31 December 2007 will bedelivered to Registrar of Companies following the Company's Annual GeneralMeeting. The Annual Report was signed on 9 April 2008 and will be posted toshareholders and those on the mailing list on or around 28 April 2008. TheAnnual Report will thereafter be available on request from the CompanySecretary, J O Hambro Capital Management Limited, Ground Floor, Ryder Court, 14Ryder Street, London, SW1Y 6QB. The Annual General Meeting is to be held on 17June 2008 at 2.30 pm in the Board Room, at Ground Floor, Ryder Court, 14 RyderStreet, London, SW1Y 6QB. The financial information set out above does not constitute the Company'sstatutory financial statements for the period ended 31 December 2007 or 30 June2006. The auditors have reported on those financial statements; their reportswere unqualified and did not contain statements under section 237 (2) or (3) ofthe Companies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Primary Health