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I’ve just reintroduced a passive income stock I used to own back into my Stocks and Shares ISA. The 3,250 shares in Primary Health Properties (LSE:PHP) cost me £2,975 and should pay roughly £237 a year.
The Nobel committee handed out its Peace Prize on Friday. Nobody’s nominating the gilt market – the 30-year yield broke 6% last week – and that’s exactly why this opportunity exists.
A landlord with an unusual tenant
Primary Health Properties owns GP surgeries, health centres and hospitals across the UK and Ireland. Most of its rent comes from the NHS or Ireland’s HSE, so default risk is about as low as property gets.
Since merging with Assura, it’s also by far the sector’s biggest landlord. That matters in rent reviews, where less competition means a stronger negotiating hand.
| Metric | Figure |
|---|---|
| Government-backed income | 76% |
| WAULT | 10.4 years |
| Loan-to-value | 57% |
| Average debt maturity | 4 years |
| IFRS NTA per share | 99p |
Leases run for over a decade with built-in rent reviews. Around 25% of UK rents are index-linked and Irish leases track CPI, while most others reset to open market levels every three years.
Reviews this year added 3.1% a year – slightly ahead of target – and the dividend has gone up for 30 consecutive years. It was also covered by adjusted earnings in the first half of the year.
What’s the stock market worried about?
An 8% yield is what caught my eye, but investors should always ask questions when they see something like this. Specifically, they should ask what the stock market is worried about.
In this case, the answer is debt. Borrowing is becoming more expensive and Primary Health Properties has an average debt maturity of around four years, which is soon enough to be relevant.
On top of this, the firm’s loan-to-value (LTV) ratio is 57% – above its 50% target. The stock also isn’t trading at a huge discount to the company’s net tangible asset value.
This means there isn’t a huge amount of protection on that front if rising interest rates weigh on property prices. That’s why the yield is high, but I think it’s a calculated risk.
My view
The balance sheet is always key to any real estate investment trust (REIT). With Primary Health Properties, however, the question is whether things are as bad as the share price implies.
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Management isn’t sitting still. There’s a £700m private hospital joint venture and a plan to move £103m of assets into its USS venture for £82m, which the proceeds being used to pay down debt.
The number I’m watching is net debt to EBITDA. That was at 10.4 times at the start of the year, against a target below 9.5. Getting there could take a lot of the sting out of refinancing.
The stock market is nervous right now about the refinancing risk, but that’s something investors can see and evaluate. And I think it looks like an opportunity.
Summary
There’s a lot more to investing than looking at dividend yields, but it’s a key metric when it comes to REITs. I owned PHP before and sold when it got expensive, but at 8.2%, I’m interested again.
The upcoming Budget might bring more volatility. I’ll be watching the balance sheet – but I’ve been buying and I’m planning to continue.
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Stephen Wright owns shares in Primary Health Properties.
This story originally appeared on Motley Fool
