Half Yearly Report

RNS Number : 5689M

Primary Health Properties PLC

18 August 2011

 



Primary Health Properties PLC

Half year report for the period ended 30 June 2011

Primary Health Properties PLC, one of the UK's largest providers of modern primary healthcare facilities, is pleased to announce its half year report for the six months ended 30 June 2011.

GROUP FINANCIAL HIGHLIGHTS

• Increased interim dividend of 9.0p for the period ended 30 June 2011 (30 June 2010: 8.75p)

• Underlying profit for the interim period before revaluation gain, change in fair value movement on interest rate swaps and profit on sale of investment rose by 35% to £5.4million (30 June 2010: £4.0million)

• Loan to value ratio 55.6% at 30 June 2011 against covenant of 70% (31 December 2010: 57.6%)

• Basic net asset value increased by 5% to 275.8p per share (31 December 2010: 262.3p)

• EPRA net asset value increased by 2% to 317.8p per share (31 December 2010: 311.5p)

• Adjusted EPS increased by 30% to 8.3p (30 June 2010: 6.4p)

• Interest cover of 2.1 times compared to a covenant requirement of 1.3 times (31 December 2010: 2.1 times)

• £16.1million gross proceeds from share placing in April to finance future acquisitions (approximately £15.7million net)

GROUP OPERATIONAL HIGHLIGHTS

• Real estate portfolio (including commitments) rose to £514million from £504million at 31 December 2010, reflecting an initial yield of 5.75% as at 30 June 2011

• Property revaluation gain for six month period of £5.2million, an increase of 1.1% (30 June 2010: £17.8million - 3.8%)

• Rent roll at 30 June 2011 of £29.0million (31 December 2010: £28.0million)

• Annualised rental growth on rent reviews agreed in the period of approximately 3.4% (year to 31 December 2010: 3.2%)

• Portfolio 100% let

• New £50million interest only debt facility closed with Clydesdale

• Offer received for a new seven year £75million facility with Aviva

Harry Hyman, Managing Director of Primary Health Properties, commented:

"I am pleased to report another excellent set of results. During the period, the Group has increased its dividend, increased underlying profit and achieved a greater net asset value per share.

The fundamentals of the primary care market remain very attractive due to the protection in income flow it provides and the solid foundations of full occupancy means PHP's portfolio delivers consistently strong returns and rental growth. Whilst the ultimate outcome of the Health and Social Care Bill is still unclear, the key position of primary care in the provision of health care services has been reinforced.

PHP remains focused on further, selective acquisitions, where they meet the Group's investment criteria, in order to increase shareholder cash flows and values. The Group remains ideally positioned to take advantage of further opportunities."

Enquiries:

Pelham Bell Pottinger

David Rydell / Victoria Geoghegan / Elizabeth Snow

Tel: [phone] 

Primary Health Properties

Harry Hyman

Managing Director

Tel: [phone]

OPERATING AND FINANCIAL REVIEW

Overview

The first half of 2011 has been a period of consolidation for the Group following a very active 2010.  We have continued to experience a stable environment for medical centre property that emerged in the second half of 2010 and investment yields have tightened marginally during the period. Meanwhile, investors continue to look for good quality, secure income returns which PHP provides.  In April the Group executed a small share placing, issuing 5.28million shares for a gross consideration of £16.1million.  The proceeds will be used to fund acquisitions to be contracted in the second half of the year.

The Government engaged in a period of consultation to conduct a listening exercise in relation to the proposed Health and Social Care Bill, taking on the views of stakeholders following the response to the initial draft.  This has caused a degree of uncertainty within the sector and decision making regarding premises within the NHS has been affected. What is clear is that primary care will remain at the forefront of healthcare provision in the UK. Whilst there will be a delay until the precise impact of the legislation on the management of primary care will be known, we believe that once it has been passed, the prospects for primary care properties will be enhanced.  We have however received written confirmation from the Department of Health that the system of reimbursement of GPs' rent costs etc. will not be impacted by the proposed transfer of responsibility for such costs away from PCTs to the NHS Commissioning Board.

Trading performance

An analysis of the trading performance for the six months ended 30 June 2011 is set out below:

	Six months	Six months	Year
	to 30 June	to 30 June	to 31 Dec
	2011	2010	2010
	£m	£m	£m
Rental and related income	15.2	12.0	26.9
Expenses	(2.6)	(2.2)	(5.0)
Operating profit before revaluation gain and financing	12.6	9.8	21.9
Net financing costs	(7.2)	(5.8)	(12.8)
Underlying profit before revaluation gain, fair value movement on interest rate swaps and profit on sale of investment	5.4	4.0	9.1
Fair value gain/(loss) on interest rate swaps (1)	1.0	(5.0)	(4.7)
Profit on sale of AHMP shares (see Note 4)	0.3	-	-
Revaluation gain on property portfolio	5.2	17.8	22.8
Profit before tax	11.9	16.8	27.2
Dividends paid	5.7	5.4	10.8

(1) The interest rate swaps portfolio is revalued on a mark-to-model basis as opposed to mark-to-market, as there is no secondary market in interest rate swaps.

The underlying profit attributable to the business before the revaluation gain and the fair value movement on derivatives was £5.4million (30 June 2010: £4.0million) an increase of 35%.  As the portfolio has grown, administrative expenses as a proportion of income have fallen to 16.1% (year to 31 December 2010: 17.3%).

The results of the Group for the six months ended 30 June 2011 show a profit before taxation of £11.9million compared with £16.8million for the comparable period to 30 June 2010.  This is after a revaluation gain of £5.2million as compared to a larger gain of £17.8million in the corresponding period of 2010, when investment yields moved significantly as real estate markets recovered from the financial crisis.  The results also include a mark-to-model gain on derivatives of £1.0million (30 June 2010: loss of £5.0million) and a profit of £0.3million arising from the sale of the Group's minority investment in AHMP shares. The property and derivative revaluation results are unrealised and do not affect the operating cash flow of the business.

Rental growth

Thirty four rent reviews have been completed in the period under review.  These have produced an overall uplift of 10.6% (year to 31 December 2010: 10.0%) which equates to an annualised increase of 3.4% (2010: 3.2%). The contracted rent roll as at 30 June 2011 stood at £29.0million (31 December 2010: £28.0million)

Rent reviews continue to show a correlation to underlying rates of inflation that has been evident in recent years, a feature that we expect to continue and which is supported by the expanding specification of newer buildings leading to higher replacement costs and associated rents.

The average duration of the remaining lease terms across the Group's portfolio is 16.5 years, with 90% of rent being received from GPs, PCTs or other government backed sources and the remainder from pharmacies.

Portfolio activity and valuations

The Company has taken delivery of a number of forward funded developments during the period.  The projects at Cowbridge and Shefford were delivered on time in February and March respectively at a total cost of £12million. This has added £0.8million to the annualised rent roll.

The investment portfolio performed well in the period.  The primary care property market has continued to be stable and investment yields firmed marginally in the first six months of the year.  The portfolio as at 30 June 2011 was valued at £513.5million representing an initial yield of 5.75% and a true equivalent yield of 5.99%. The independent open market valuation by Lambert Smith Hampton gave rise to a property revaluation gain of £5.2million for the six months, compared to £17.8million for the period ended 30 June 2010. 

	30 June 2011	31 December 2010
	£m	£m
Investment properties	479.9	462.1
Properties in the course of development	9.6	7.2
Total properties	489.5	469.3
Finance leases	3.1	3.1
Total owned and leased	492.6	472.4
Committed as at period end	20.9	31.2
Total owned, leased and committed	513.5	503.6
Closing annualised rent roll (on completed properties)	29.0	28.0

The IPD Healthcare index for 2010 was published in May 2011.  This showed that the Group's property portfolio outperformed the IPD healthcare sector benchmark in the financial year, delivering a total return of 13% against a benchmark return of 11%.  This outperformance also extends to the prior three year period, where the Group delivered an average total return of 6% compared to the sector benchmark return of 5%.

IPD data for the last five years shows that healthcare real estate generated total returns in excess of 5% adjusted for RPI, whereas general commercial property showed negative returns of over 2%. We believe that this highlights the security offered by healthcare real estate.

As previously reported, the Board also evaluates the portfolio with reference to its future cash flows. Using a discounted cash flow method ('DCF') to value the assumed future income flows from the Group's portfolio, both completed and committed, would show a DCF value of £565.2million as compared to the open market valuation as at 30 June 2011 of £513.5million.  This would represent an additional 76 pence per share of shareholder value.

The assumptions used in the DCF analysis are:

• A discount rate of 7% (2010: 7%)

• An average annual increase in the individual property rents at review of 2.5% (2010: 2.5%)

• Capital growth in residual values of 1% per annum (2010: 1%)

Asset management

The active management of the Group's portfolio is an important element in generating additional value for shareholders. In the first six months of the year, we delivered a new pharmacy let to Lloyds at Burton Latimer, Northamptonshire adding £30,000 per annum to the rent roll. We also commenced on site at our centre in Consett, County Durham to provide a pharmacy extension for Boots. Completion is expected during August 2011.

The Board has approved nine further projects which are at various stages in the development process.  These projects have an expected cost of £5million, at attractive returns on capital.

Commitments

As at 30 June 2011, the Group had six forward purchase commitments as follows, all of which were in progress, 100% pre-let and scheduled to complete as planned:

	Total
	commitment	Outstanding
Scheme	£m	£m	Details
South Queensferry	4.3	4.3	1,442 sqm medical centre (six GP practice and NHS Trust), constructed in 2002
Chesham	5.6	4.6	1,802 sqm medical centre (eight GPs in two practices and PCT) and 130 sqm pharmacy
Oswestry	8.8	2.3	3,750 sqm medical centre (four GP practice and PCT) with 804 sqm expansion space and 75 sqm retail unit
Blackpool	4.1	4.0	1,493 sqm medical centre (six GP practice and PCT) and 120 sqm pharmacy
Allesley	2.8	1.4	795 sqm medical centre (five GP practice) with 294 sqm expansion space and 154 sqm pharmacy
Newark	4.3	4.3	1,275 sqm medical centre (11 GP practice) and 159 sqm pharmacy
Total new commitments	29.9	20.9

The acquisition of the South Queensferry asset was completed on 11 August 2011. The developments at Oswestry and Blackpool were completed in the first weeks of August and at both sites the GPs and tenants are now in occupation and operating from these premises.

Whilst a slow down in approvals for new premises has been observed due to delays in the passing of the Health and Social Care Bill, the Group has continued to seek out appropriate new investment opportunities. Terms have been agreed on acquisitions and forward commitments totalling £43million, which are in solicitors' hands and at various stages of contract completion.

Net assets and EPRA NAV

	30 June	30 June	31 Dec
	2011	2010	2010
Net assets	£188.0m	£157.3m	£164.7m
Net asset value per share	275.8p	251.4p	262.3p
EPRA net asset value per share (1)	317.8p	304.2p	311.5p

(1) EPRA net asset value is calculated as balance sheet net assets including the valuation result on trading properties, excluding fair value adjustments for debt and related derivatives ("EPRA" is the European Public Real Estate Association).

Financing

On 12 April 2011, the Group completed a small share placing at a price of 305 pence per share that represented a discount of 2.1% to 2010 year end EPRA NAV and 5.3% to the closing share price on the day prior to the issue. 5,284,041 shares were issued generating net cash proceeds of £15.7million.  The cash will be used to finance future acquisitions.

The loan to value ratio as at 30 June 2011 was 55.6% (30 June 2010: 55.9%) compared to a covenant requirement of 70%. Interest cover was 2.1 times, (30 June 2010: 2.1 times) compared to a covenant requirement of 1.3 times.

As reported at the year end, the Group made it a priority to start the process of re-financing its current debt facilities to diversify lenders and provide a range of maturities and additional resources to allow it to add to its portfolio as suitable acquisition opportunities arise.

This process started with the completion of a £50million, three year, interest only revolving credit facility with Clydesdale Bank.  The facility was closed on 29 July 2011 and was used to partly finance the closing of the South Queensferry acquisition.

In addition to this, the Group has received an offer of a new £75million, seven year, interest only facility from Aviva which has full credit committee approval from Aviva. The release of the requisite security from the current bi-lateral loans is underway and documentation on the facility has commenced.

Discussions have started with the Group's main lenders to renew and extend the current bi-lateral facilities which expire in January 2013. 

Interest rate hedging

There has been no change during the period in the amount of fixed rate cover that the Group holds.  As at 30 June 2011, a total of £208million of interest rate derivatives were in place, including £88million of callable swaps (2010: £88million). In light of current market conditions the Board does not expect these to be called in the near future.

The mark-to-model liability of the Group's "effective" interest rate swaps decreased by £1.2million in the period to 30 June 2011 (six months to 30 June 2010: increase of £7.8million), as medium term interest rates were lower at that point in time than previous measurement dates.  This masks the considerable volatility in interest rate markets that has been experienced across 2011 to date, some of which is currently being driven by European sovereign debt concerns. The value of the mark-to-model swap portfolio was a liability of £29.8million at 30 June 2011 (31 December 2010: a liability of £31.3million), including swaps regarded as ineffective for accounting purposes.

Dividend

The Group has continued to pay regular and progressive dividends to shareholders funded by its secure underlying rent roll where 90% of the Group's income is paid directly or indirectly by HM Government. On 31 March 2011, the Group paid an ordinary cash dividend of 9.0p per Ordinary Share in respect of the six months ended 31 December 2010. The Board proposes to pay an interim dividend of 9.0p per share payable to Ordinary Shareholders on the register at 7 October 2011 on 28 October 2011 in respect of the six months ended 30 June 2011 (six months ended 30 June 2010: 8.75p). This interim distribution will not be a property income distribution ("PID").

Principal risks and uncertainties

Other than the uncertainty surrounding the Health and Social Care Bill referred to in the overview, there have been no changes to the principal risks and uncertainties of the Group which remain as disclosed on page 10 of the Annual Financial Report for the year ended 31 December 2010.

Outlook

The Group has continued its strategy of focusing purely on investment in primary care premises and in generating secure, growing returns to shareholders. The progress made during the period in widening the equity base and in restructuring and extending the debt facilities available to the Group, means that we are well positioned to take advantage of opportunities to acquire suitable investment properties or fund newly developed assets as they arise.

We continue to believe that the primary care market remains attractive due to the inherent protection in income flow. Our existing portfolio produces consistently strong returns with rental growth continuing to be obtained against a backdrop of full occupancy.  This will be enhanced as the acquisition of further high quality stock, that is in solicitors' hands, is delivered.

Graeme Elliot                            Harry Hyman

Chairman                                  Managing Director

17 August 2011

CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30 June 2011

		Six	Six
		months	months	Year
		ended	ended	ended
		30 June	30 June	31 Dec
		2011	2010	2010
		£000	£000	£000
	Notes	(unaudited)	(unaudited)	(audited)
Rental income		15,079	11,829	26,574
Finance lease income		171	170	341
Rental and related income		15,250	11,999	26,915
Direct property expenses		(182)	(203)	(398)
Administrative expenses		(2,450)	(2,037)	(4,646)
Operating profit before net valuation gain on property portfolio		12,618	9,759	21,871
Profit on sale of AFS investment	4	312	-	-
Net valuation gain on property portfolio	2	5,219	17,821	22,790
Operating profit before financing costs		18,149	27,580	44,661
Finance income	6	212	46	160
Finance costs	7	(7,451)	(5,848)	(12,882)
Fair value gain/(loss) on derivatives	7	1,041	(5,037)	(4,714)
Profit on ordinary activities before tax		11,951	16,741	27,225
Current taxation credit	8	2	29	36
Conversion to UK-REIT charge	8	-	(1,586)	(1,586)
Taxation credit/(expense)		2	(1,557)	(1,550)
Profit for the period (1)		11,953	15,184	25,675
Fair value movement on interest rate swaps treated as cash flow hedges		1,165	(7,773)	(6,013)
(Recycling of previously unrealised gain)/unrealised
gain on current asset investment		(73)	128	79
Other comprehensive income/(loss)		1,092	(7,645)	(5,934)
Total comprehensive income for the period
net of tax		13,045	7,539	19,741
Earnings per share • basic and diluted (2)	5	18.3p	24.7p	41.3p
Adjusted earnings per share (3) • basic and diluted
	5	8.3p	6.4p	14.7p

The above relates wholly to continuing operations.

(1) Wholly attributable to equity shareholders of Primary Health Properties PLC.

(2) There is no difference between basic and fully diluted EPS.

(3) Adjusted for large one-off items and movements in fair value of properties and derivatives. See note 5.

CONDENSED GROUP BALANCE SHEET

at 30 June 2011

		At	At	At
		30 June	30 June	31 Dec
		2011	2010	2010
		£000	£000	£000
	Notes	(unaudited)	(unaudited)	(audited)
Non current assets
Investment properties	2,3	489,516	460,815	469,290
Net investment in finance leases		3,052	3,025	3,036
Interest rate swaps		1,196	21	413
		493,764	463,861	472,739
Current assets
Current asset investment	4	-	605	555
Trade and other receivables		3,045	2,709	2,582
Net investment in finance leases		39	48	48
Cash and cash equivalents		915	1,068	370
		3,999	4,430	3,555
Total assets		497,763	468,291	476,294
Current liabilities
Interest rate swaps		(15,818)	(17,182)	(16,859)
Corporation tax payable		-	(69)	(48)
UK-REIT conversion charge payable		-	(1,866)	(1,998)
Deferred rental income		(6,144)	(6,335)	(5,942)
Trade and other payables		(4,875)	(11,443)	(4,837)
Term loans		-	-	(3,000)
		(26,837)	(36,895)	(32,684)
Non-current liabilities
Term loans	11	(268,874)	(256,792)	(264,445)
UK-REIT conversion charge payable		-	(1,422)	-
Interest rate swaps		(14,019)	(15,873)	(14,419)
		(282,893)	(274,087)	(278,864)
Total liabilities		(309,730)	(310,982)	(311,548)
Net assets		188,033	157,309	164,746
Equity
Share capital		34,088	31,286	31,401
Share premium		54,178	53,339	53,934
Capital reserve		1,618	1,618	1,618
Special reserve		57,405	44,442	44,442
Cash flow hedging reserve		(12,114)	(15,039)	(13,279)
Retained earnings		52,858	41,663	46,630
Total equity (1)		188,033	157,309	164,746
Net asset value per share
• basic	12	275.8p	251.4p	262.3p
• EPRA net asset value per share	12	317.8p	304.2p	311.5p

(1) Wholly attributable to equity shareholders of Primary Health Properties PLC.

CONDENSED GROUP CASH FLOW STATEMENT

for the six months ended 30 June 2011

		Six	Six
		months	months	Year
		ended	ended	ended
		30 June	30 June	31 Dec
		2011	2010	2010
		£000	£000	£000
		(unaudited)	(unaudited)	(audited)
Operating activities
Profit before tax		11,953	16,741	27,225
Less: Finance income		(212)	(46)	(160)
Plus: Finance costs		7,451	5,848	12,882
Plus: Fair value (gain)/loss on derivatives		(1,041)	5,037	4,714
Operating profit before financing		18,151	27,580	44,661
Adjustments to reconcile Group operating profit to net cash flows from operating activities:
Revaluation gain on property portfolio		(5,219)	(17,821)	(22,790)
Profit on sale of AFS investment		(312)	-	-
Increase in trade and other receivables		(504)	(678)	(946)
Increase in trade and other payables		39	2,065	4,003
Cash generated from operations		12,155	11,146	24,928
UK REIT conversion charge instalment		(1,998)	(637)	(1,934)
Taxation paid (1)		(48)	(193)	(193)
Net cash flow from operating activities		10,109	10,316	22,801
Investing activities
Payments to acquire investment properties		(15,007)	(12,612)	(25,234)
Disposal/(acquisition) of shares in AH Medical Properties PLC		788	(476)	(476)
Payments to acquire Anchor Meadow Limited		-	(5,498)	(5,498)
Payments to acquire Sinclair Montrose Properties Limited		-	(23,842)	(23,842)
Payments to acquire Abstract Integrated Healthcare Limited		-	(1,856)	(1,856)
Payments to acquire Charter Medinvest Limited		-	(6,787)	(6,787)
Payments to acquire Health Investments Limited		-	(7,214)	(7,214)
Interest received on developments		58	41	134
Bank interest received		25	2	4
Other interest received		-	3	8
Net cash flow used in investing activities		(14,136)	(58,239)	(70,761)
Financing activities
Proceeds from issue of shares (net of expenses)		15,605	-	-
Term bank loan drawdowns		18,250	61,450	85,700
Term bank loan repayments		(3,274)	(2,250)	(15,924)
Temporary offset of proceeds of share issue
against revolving bank loan		(13,450)	-	-
Net swap interest paid		(4,457)	(4,043)	(8,461)
Loan arrangement fees		(54)	-	(176)
Interest paid		(2,685)	(1,317)	(3,211)
Dividends received		-	-	15
Equity dividends paid		(5,363)	(5,061)	(9,825)
Net cash flow from financing activities		4,572	48,779	48,118
Increase in cash and cash equivalents for the period		545	856	158
Cash and cash equivalents at start of period		370	212	212
Cash and cash equivalents at end of period		915	1,068	370

(1) Taxation was paid in the period in order to settle the outstanding liabilities in the acquired companies. All amounts payable were included in the consideration calculation.

CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY

					Cash flow
	Share	Share	Capital	Special	hedging	Retained
	capital	premium	reserve	reserve	reserve	earnings	Total
	£000	£000	£000	£000	£000	£000	£000
Six months ended 30 June 2011 (unaudited)
1 January 2011	31,401	53,934	1,618	44,442	(13,279)	46,630	164,746
Profit for the period	-	-	-	-	-	11,953	11,953
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps treated as cash flow hedges	-	-	-	-	1,165	-	1,165
Recycling of previously unrealised gain (1)	-	-	-	-	-	(73)	(73)
Total Comprehensive Income	-	-	-	-	1,165	11,880	13,045
Proceeds from capital raisings	2,642	-	-	13,474	-	-	16,116
Expenses of capital raisings	-	-	-	(511)	-	-	(511)
Dividends paid:
Second interim dividend for period ended 31.12.10 (9.00p)	-	-	-	-	-	(5,363)	(5,363)
Scrip dividends in lieu of interim cash dividends	45	244	-	-	-	(289)	-
30 June 2011	34,088	54,178	1,618	57,405	(12,114)	52,858	188,033
Six months ended 30 June 2010 (unaudited)
1 January 2010	30,729	50,664	1,618	44,442	(7,266)	31,728	151,915
Profit for the period	-	-	-	-	-	15,184	15,184
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps treated as cash flow hedges	-	-	-	-	(7,773)	-	(7,773)
Unrealised gains on current asset investment	-	-	-	-	-	128	128
Total Comprehensive Income	-	-	-	-	(7,773)	15,312	7,539
Dividends paid:
Second interim dividend for period ended
31.12.09 (8.75p)	-	-	-	-	-	(5,061)	(5,061)
Scrip dividends in lieu of interim cash dividends	54	262	-	-	-	(316)	-
Share consideration for the HI acquisition	503	2,413	-	-	-	-	2,916
30 June 2010	31,286	53,339	1,618	44,442	(15,039)	41,663	157,309
Year ended 31 December 2010 (audited)
1 January 2010	30,729	50,664	1,618	44,442	(7,266)	31,728	151,915
Profit for the year	-	-	-	-	-	25,675	25,675
Income and expense recognised directly in equity:
Fair value movement on interest rate swaps treated as cash flow
hedges	-	-	-	-	(6,013)	-	(6,013)
Unrealised gains on current asset investment	-	-	-	-	-	79	79
Total Comprehensive Income	-	-	-	-	(6,013)	25,754	19,741
Dividends paid:
Second interim dividend for period ended
31.12.09 (8.75p)	-	-	-	-	-	(5,061)	(5,061)
First interim dividend for year ended
31.12.10 (8.75p)	-	-	-	-	-	(4,764)	(4,764)
Scrip dividends in lieu of interim cash dividend
(net of expenses)	54	262	-	-	-	(316)	-
Scrip issue in lieu of second interim dividend
(net of expenses)	116	595	-	-	-	(711)	-
Share consideration for the HI acquisition	502	2,413	-	-	-	-	2,915
31 December 2010	31,401	53,934	1,618	44,442	(13,279)	46,630	164,746

(1) Previously unrealised gain recycled through Statement of Comprehensive Income on disposal of investment.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. Accounting policies

General information

The financial information set out in this report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2010 have been filed with the Registrar of Companies. The auditors' report on these financial statements was unqualified and did not contain a statement under section 498(2) of the Companies Act 2006.

Basis of preparation/Statement of compliance

The half year report for the six months ended 30 June 2011 has been prepared in accordance with IAS 34 'Interim Financial Reporting' and reflects the accounting policies set out in the Group's financial statements at 31 December 2010 which have been prepared in accordance with IFRS as adopted by the European Union.

The half year report does not include all the information and disclosures required in the statutory financial statements and should be read in conjunction with the Group's financial statements as at 31 December 2010.

Convention

The financial statements are presented in Sterling rounded to the nearest thousand.

Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment of business, being investment in property in the United Kingdom leased principally to GPs, NHS organisations and other associated health care users.

Going concern

The Group's property portfolio is 100% let to tenants with strong covenants. The majority of the Group's borrowing facilities are due for renewal in 2013. Some facilities beyond this date have been secured and positive discussions have commenced with all parties to agree the extension of the Group's bi-lateral loans by the end of the current year. The loan to value ratio is currently 55.6%, well below the banking covenant of 70%. The pipeline of properties is strong. Having reviewed the Group's current position, cash flow projections, existing and prospective loan facilities and covenant cover, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt a going concern basis in preparing the financial statements.

2. Investment and investment properties under construction

Properties have been independently valued at fair value by Lambert Smith Hampton, Chartered Surveyors and Valuers, as at 30 June 2011 in accordance with IAS 40: Investment Property.

The revaluation gain for the six months ended 30 June 2011 amounted to £5.2million. The revaluation gain for the year ended 31 December 2010 amounted to £22.8million and the gain for the six months ended 30 June 2010 amounted to £17.8million.

Property additions for the six months ended 30 June 2011 amounted to £15.0million. There were no properties disposed of in the six months to 30 June 2011. Commitments at 30 June 2011 amounted to £20.9million (31 December 2010: £31.2million).

Property additions for the 12 months ended 31 December 2010 and the six months ended 30 June 2010 amounted to £102.6million and £101.1million respectively. There were no property disposals during these periods.

3. Property acquisitions

		Investment	Investment
	Investment	properties	properties
	properties	long	under
	freehold	leasehold	construction	Total
	£000	£000	£000	£000
As at 1st January 2011	383,223	78,860	7,207	469,290
Additions	431	1	14,575	15,007
Transfer from properties in the course
of development	12,492	-	(12,492)	-
Revaluation for the period	4,533	399	287	5,219
As at 30 June 2011	400,679	79,260	9,577	489,516

4. Current asset investment

This represents the acquisition in 2010 of 1,970,500 ordinary shares in A H Medical Property PLC ("AHMP"). In accordance with IAS39 it was treated as an Available For Sale ("AFS") asset. On 19 January 2011, the Group accepted the cash alternative offer for the shares from Assura Group Limited, resulting in a realised gain of £312,000.

5.  Earnings per share

The purpose of calculating an adjusted earnings per share is to provide a better indication of dividend cover for the period by excluding large one-off items affecting earnings per share during the period.

	Net profit attributable to Ordinary Shareholders			Number of Ordinary Shares (1)			Pence per share
	Six	Six		Six	Six		Six	Six
	months	months	Year	months	months	Year	months	months	Year
	ended	ended	ended	ended	ended	ended	ended	ended	ended
	30 June	30 June	31 Dec	30 June	30 June	31 Dec	30 June	30 June	31 Dec
	2011	2010	2010	2011	2010	2010	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)	(unaudited)	(unaudited)	(audited)	(unaudited)	(unaudited)	(audited)
Basic profit	11,953	15,184	25,675	65,157,643	61,561,192	62,162,797	18.3	24.7	41.3
Adjusted profit
Adjustments to remove:
Net gain on revaluation of property	(5,219)	(17,821)	(22,790)
Fair value (gain)/loss on derivatives (2)	(1,041)	5,037	4,714
UK REIT conversion charge	-	1,586	1,586
Profit on sale of AFS investment	(312)	-	-
Taxation	(2)	(29)	(36)
Adjusted basic and diluted earnings (3)	5,379	3,957	9,149	65,157,643	61,561,192	62,162,797	8.3	6.4	14.7

(1) Weighted average number of Ordinary Shares in issue during the period. In April 2011 the Group issued 5.3million New Shares by way of a Placing.

(2) In view of the continuing volatility in the mark to model adjustment in respect of the period end valuation of derivatives that flows through the Condensed Group Statement of Comprehensive Income, the Directors believe that it is appropriate to remove the (gain)/loss in the calculation of adjusted earnings.

(3) There is no difference between basic and fully diluted EPS.

6. Finance income

	Six months	Six months	Year
	ended	ended	ended
	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Interest income on financial assets
Not at fair value through profit or loss
Bank interest	33	2	3
Development loan interest	177	41	134
Other interest	2	3	8
Dividend income received	-	-	15
	212	46	160

7. Finance costs

	Six months	Six months	Year
	ended	ended	ended
	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Interest expense on financial liabilities
Not at fair value through profit or loss
(i) Interest paid
Bank loan interest paid	2,690	1,292	3,812
Bank swap interest paid	4,438	4,259	8,518
Other interest paid	13	4	15
Notional UK-REIT interest	5	28	36
Bank facility non utilisation fees	60	65	105
Bank charges and loan commitment fees	245	200	396
	7,451	5,848	12,882
At fair value through profit or loss
(ii) Derivatives
Net fair value gain/(loss) on interest rate swaps	1,041	(5,037)	(4,714)

The fair value gain on derivatives recognised in the Condensed Group Statement of Comprehensive Income has arisen from the interest rate swaps for which hedge accounting does not apply. A further fair value gain on hedges which meet the hedge effectiveness criteria under IAS39 of £1.2million (31 December 2010: loss of £7.8million) is accounted for directly in equity.           

	Six months	Six months	Year
	ended	ended	ended
	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Total net finance costs	7,239	5,802	12,722
Weighted average finance cost %	4.64	4.8	4.57

8. Taxation

	Six months	Six months	Year
	ended	ended	ended
	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Taxation in the Condensed Group Statement  of Comprehensive Income:
Current tax
UK Corporation tax credit on non property income	(2)	(29)	(36)
Charge on conversion to UK-REIT status	-	1,586	1,586
Taxation (credit)/expense in the Condensed Group Statement of Comprehensive Income	(2)	1,557	1,550

The UK REIT charge of £1.6million arose on the conversion of the companies acquired during the six months ended 30 June 2010 to UK-REIT status based on the values of the individual properties held.

9. Dividends paid

	Six months	Six months	Year
	ended	ended	ended
	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Second interim dividend for the period
ended 31 December 2010 (9.00p)
paid 31 March 2011 (2010: 8.75p)	5,363	5,061	5,061
Scrip dividend in lieu of second interim cash dividend	289	316	316
First interim dividend for the period
ended 31 December 2010: (8.75p)
paid 29 October 2010 (2009: 8.50p)	-	-	4,764
Scrip dividend in lieu of first interim cash dividend	-	-	711
	5,652	5,377	10,852
Per share	9.00p	8.75p	17.50p

The Board proposes to pay an interim cash dividend of 9.0p per Ordinary Share for the six months to 30 June 2011, payable on 28 October 2011. This dividend will not be a PID.

10. Administrative expenses

As the portfolio has grown, administrative expenses as a proportion of rental and related income fell to 16.1% (year ended 31 December 2010: 17.3%). This equates to an annualised rate of 1% of gross real estate assets (year ended 31 December 2010: 1.5%).

No performance incentive fee is payable to the Joint Managers for the period ended 30 June 2011(six months to 30 June 2010 and year ended 31 December 2010: £nil). Under the terms of the management agreement there is a deficit of some £41million to be made up in the net asset value before any further performance incentive fee becomes payable.

11. Bank borrowings reconciliation

	Drawn		Total
	down	Headroom	facility
	£000	£000	£000
As at 1 January 2011	268,340	53,150	321,490
Net of prepaid loan arrangement fees	(895)	-	(895)
	267,445	53,150	320,595
Term bank drawdowns	18,250	(18,250)	-
Temporary offset of proceeds of share issue against revolving bank facility	(13,450)	13,450	-
Repayment of Aviva mortgage	(274)	-	(274)
	4,526	(4,800)	(274)
	271,971	48,350	320,321
Aviva accrued interest	(282)	-	(282)
Repayment of Natwest Bank loan	(3,000)	(350)	(3,350)
Movement in prepaid loan arrangement fees	185	-	185
Total term loans	268,874	48,000	316,874

12. Net asset value calculations

Net asset values have been calculated as follows:

	30 June	30 June	31 Dec
	2011	2010	2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Net assets per Condensed Group Balance Sheet	188,033	157,309	164,746
Derivative interest rate swaps liability (net)	28,641	33,034	30,865
EPRA net asset value	216,674	190,343	195,611
	Number	Number	Number
	of shares	of shares	of shares
Ordinary Shares:
Issued share capital	68,175,990	62,571,174	62,802,333
Basic net asset value per share	275.8p	251.4p	262.3p
EPRA net asset value per share	317.8p	304.2p	311.5p

13. Related party transactions

The only change to the related party arrangements relates to the changes to the Management Agreement as reported in the statutory Annual Financial Report for the year ended 31 December 2010. Management fees payable were:

	30 June 2011	30 June 2010	31 Dec 2010
	£000	£000	£000
	(unaudited)	(unaudited)	(audited)
Nexus PHP Management Limited	1,105	842	1,844
J O Hambro Capital Management Limited	782	694	1,520

14. Post balance sheet events

On 29 July 2011, the Group entered into a new £50million, three year, interest only revolving debt facility with Clydesdale Bank PLC.  In addition, an offer has been received for the provision of a £75million seven year, fixed rate interest only facility from Aviva.

On 11 August 2011, the Group completed the purchase of a medical centre in South Queensferry, Scotland at a cost of £4.3million. Forward development commitments at Blackpool and Oswestry were completed on 1 August and 12 August respectively. The total cost of these assets was £12million. These completions were funded from debt facilities that had been used to underwrite the contractual commitment.

INDEPENDENT REVIEW REPORT TO PRIMARY HEALTH PROPERTIES PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 which comprises the Condensed Group Statement of Comprehensive Income, Condensed Group Balance Sheet, Condensed Group Cash Flow Statement, Condensed Group Statement of Changes in Equity and the related notes 1 to 14. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410  (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE 2410") issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards "IFRS" as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly report based on our review.

Scope of review

We conducted our review in accordance with ISRE 2410 (UKand Ireland) issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP

London

17 August 2011

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the operating and financial review herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure and Transparency rules of the United Kingdom's Financial Services Authority namely:

• an indication of important events that have occurred during the first six months and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

• material related party transactions in the first six months and any material changes in the related party transactions described in the last Annual Financial Report.

The Directors of Primary Health Properties PLC are listed in the Annual Financial Report for the year ended 31 December 2010. Shareholder information is as disclosed in the Annual Financial Report and is also available on the PHP website www.phpgroup.co.uk.

Graeme Elliot

Chairman         

17 August 2011

 

END

 

 

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