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Edited Transcript of PHP.L earnings conference call or presentation 25-Jul-19 10:00am GMT

Half Year 2019 Primary Health Properties PLC Earnings Call

Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Primary Health Properties PLC earnings conference call or presentation Thursday, July 25, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Santer

Primary Health Properties Plc - CIO

* Harry Abraham Hyman

Primary Health Properties Plc - MD & Director

* Richard Howell

Primary Health Properties Plc - Finance Director & Director

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Conference Call Participants

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* James Carswell

Peel Hunt LLP, Research Division - Analyst

* Kieran Adrian Lee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Martyn King

Edison Investment Research Limited - Head of Financial, Property and Investment Trust & Analyst

* Richard Williams

Marten & Co. Limited - Other Professional

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Presentation

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [1]

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Fine. It's now 11:00. Welcome to our interim results presentation. My name is Harry Hyman. I'm the founder and Managing Director of Primary Health Properties. And I'm here -- I'm pleased to be joined today by Richard Howell, our Finance Director; and by Chris Santer, who is our Chief Investment Officer. Thank you to all of you for braving the heat and coming out in the middle of our summer.

And we are delighted to have come out this morning with which I think are excellent results that really vindicate the fact that our all-share merger with MedicX was a transformational transaction. Our portfolio now, including a modicum of revaluation surplus for the first half, is now at GBP 2.35 billion, making us the largest, and I'd say, the best portfolio in primary care across Britain and Ireland.

Importantly, we've moved into the top half of the FTSE 250 and our market cap has grown from under GBP 1 billion when we announced the transaction to over GBP 1.5 billion. Why is that important? Not only for size purposes, but it's led to a marked improvement in liquidity in the share price. Not only that, but we have now delivered, put in place the savings of some GBP 4 million that we announced with the transaction. GBP 3 million of that GBP 4 million came about from adopting the supercompetitive revised fee structure for the combined business, which saved GBP 3 million in management costs moving forward. And the remainder of that, the GBP 1 million, is pretty much all driven from head office savings because we only need 1 head office as opposed to having 2 on a pro forma basis. Richard will speak in a bit more detail about the improvements that, that have led to in our EPRA cost ratio and indeed our total expense ratio.

Moreover, as we'll tell you a bit more about later on, we're delighted to have announced our GBP 150 million new convertible bond, which gives us access to 6-year unsecured bullet finance at 2.875%, fully vindicating the fact that we will be able to drive out, in my personal view, more than 25 basis points of savings across the debt stack of over GBP 1.1 billion, not all in 1 year, but over time. And we've already deployed GBP 75 million of that GBP 150 million in repaying our relatively expensive retail bond. Although we took the retail bond out 7 years ago, so it's not really an apples-on-apples comparison, but nonetheless, we've got rid of that expensive debt at 5.375%. And that's now replaced GBP 75 million of it with a 2.875%. And we've got more to grow -- more to go on that side, which Richard will tell you about for the second half of the year.

Importantly, we've continued to see stronger rental growth, and Chris Santer, our CIO, will tell you more about that. It's driven by improvements in the level of rental returns -- sorry, rental growth, but also by asset management projects, which account for the substantial part of the revaluation surplus that we've announced. Pretty much, we're in a static yield environment in the U.K., maybe basis point -- maybe yield shifted in by 1 or 2 basis points during the period. But we think that the rental growth in asset management will continue to drive returns for us on a positive basis.

Our pipeline at GBP 150 million is very strong. GBP 50 million of the GBP 70 million worth of our deals that are on legals are in Ireland, so GBP 50 million of the GBP 70 million in legals is in Ireland. And of our total pipeline of GBP 150 million, GBP 75 million -- GBP 70 million to GBP 75 million is in the Irish Republic.

We believe that we are largely Brexit-proof. No doubt there will be some questions on that later in the presentation. And importantly, as we'll -- I'll come back to round up at the end, we think the structural backdrop for our business is very strong.

Just as a reminder, population growth, aging population, more incidents of chronic disease leads to cost pressures on the British and Irish healthcare system. Moving care out of expensive, inflexible secondary care into more accessible, larger modern primary care centers is the way forward. And that's being assisted by the digital process, which enables many more things to be done in the primary care centers. So we got a big job of work ahead of us.

The integration period has now finished, finished some time ago. But now we're into July, towards the end of July, we're now ready to crack on with business as usual for the enlarged portfolio.

So with that having been said, I'm going to hand over to Richard who is going to take you through the next few slides.

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [2]

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Good morning, everybody. Just turning to the financial results. So I'm on Slide 8 of your presentations. Just looking at the key financial highlights.

Net rental income, up GBP 16.4 million or a 44% increase. That was driven predominantly by the acquisition of MedicX, which added GBP 13.5 million in the 3.5 months since ownership.

Acquisitions and developments, which we acquired in 2018 and first half of 2019, added another GBP 2 million. But rent review income and uplifts added a further GBP 900,000. And Chris will come and talk about the uplifts from rent reviews, which are continuing an upward trend, a bit later on.

Adjusted EPRA earnings, up GBP 10.8 million to GBP 27.9 million, a 63% increase. Again, predominantly driven by a GBP 7.6 million contribution from MedicX; reduction in the costs of financing, adding a further GBP 900,000; and as already mentioned, the increase in net rental income from the underlying portfolio, an increase of GBP 2.9 million, offset by slightly higher admin fees, reflecting the increased size of the portfolio and an increase in the performance incentive fee provision. Again, reflecting the great performance we've seen over the last 6 months and over the last couple of years.

Dividends paid, GBP 26.7 million, again, a 59% increase, reflecting the additional shares issued on the merger with MedicX. But dividend cover has continued to improve at 104%. Dividend per share up 3.7% to 2.8p.

As Harry has already mentioned, the investment property portfolio up to GBP 2.35 billion, driven by GBP 800 million of additions from the MedicX portfolio at acquisition. We had a revaluation surplus of GBP 18 million, which I'll talk about in a bit more detail, plus also CapEx expenditure around GBP 22 million from developments and the new investment acquisitions.

NAV flat at 105.2p, with the revaluation surplus equivalent to 1.6p, offsetting the impact of the MedicX merger, which are predominantly all of the deal costs and Octopus termination costs of minus 1.4p. Loan-to-value up to 48%, again reflecting the debts we acquired with the MedicX portfolio, but also it's come down slightly with the balance of the old convertible bond that has now fully converted back in May.

Average cost of debt, down 25 basis points to 3.75% since the merger with MedicX when it stood at 4% following the merger. Rental growth on rent reviews, 1.9%. And that was a key driver in the revaluation surplus. WAULT, fairly constant at 13 years. And the EPRA cost ratio, we're now pleased to say is now the lowest in the U.K. REIT sector, as we expected. And now that ratio also only reflects 3.5 months of savings since the merger, and we expect that to fall lower in the future.

Looking at the detail of the income statement. There were some funny movements in this. The net rental income, as I already said, up GBP 16.4 million, due mainly to MedicX and the acquisitions. Admin expenses, up GBP 0.8 million, reflecting the larger property portfolio. And the PIF performance fee, up GBP 0.3 million, reflecting the improved performance and larger management fees that get paid to PHP -- sorry, to Nexus. Net financing costs, down GBP 0.9 million, reflecting the convertible bond that has converted, but also the refinancing initiatives that we delivered over the course of last year and the finance cost savings.

So overall, adjusted EPRA earnings, up GBP 10.8 million to GBP 27.9 million. The interesting number here is the PHP column, GBP 20.3 million, up GBP 3.2 million on the underlying business or just under 19%, reflecting the underlying increases in net rental income from rent reviews and acquisitions and reduced finance costs.

There was a small loss on the derivatives of GBP 4.1 million, fair value. But overall, this is probably the key number in terms of IFRS profit before tax when comparing to the previous period's GBP 41.5 million, an increase of 7.2% compared to GBP 38.7 million in 2018.

Now we come on to the relatively funny bookkeeping adjustments here. So there was a goodwill, if that's the right word to use, the accountants, auditors won't like me using that word, write-off of GBP 138.4 million going through the books. But it's important to note, there was an opposite adjustment, which has to go through reserves for accounting purposes, of GBP 82.2 million. So overall, there was a net impact of around GBP 65 million, which is -- really reflects the mark-to-market value on the MedicX debt that was acquired at acquisition and the deal costs of GBP 14.5 million. There's a further GBP 10.2 million cost to terminate the management agreement with Octopus, the previous managers of -- with Octopus or previous managers of MedicX. So overall, the overall loss from a reported IFRS basis was a loss of GBP 106.1 million. But please don't drill on that too much. The key number from an IFRS point of view is the GBP 41.5 million. So overall, adjusted EPRA earnings per share, 2.8p, an increase of 12%.

Just looking at the EPRA cost ratio. Previously, we had pretty good EPRA cost ratio for PHP. MedicX was around 18.4%. But obviously, the combined business, we've reduced that down to 12.2%. I've already said that is the lowest now in the whole of the U.K. REIT sector. And we hope to be able to help deliver further savings over the second half of the year and into the future. Total expense ratio, that's fallen from 0.6% to 0.5%, again, reflecting the good value for money in terms of the management fee structure that Nexus charges.

Looking at the movements in the EPRA NAV. We started the year at 105.1p. Adjusted EPRA earnings 2.8p were fully paid out as a dividend, exactly the same amount, 2.8p. The revaluation surplus, GBP 17.7 million, equivalent to 1.6p per share. And the net impact of the MedicX merger, 1.4p, reflecting the deal transaction costs. There's a small adjustment for shares issued, reflecting the slight dilution from the convertible bond that issued. So overall, closing NAV 105.2p, flat compared to the start of the year.

I'm now going to hand you over to Chris. He's going to talk you through the property portfolio.

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Chris Santer, Primary Health Properties Plc - CIO [3]

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All right. Thank you, Richard. So good morning, everybody. Chris Santer, Chief Investment Officer.

And I thought I'd start off by going the right way on the slides, by giving you a bit of an overview of the property portfolio, and of the enlarged property portfolio, and really combining -- setting out and emphasizing how the 2 portfolios really are very complementary and really is more of the business plan which we've been adapting to date in PHP.

So you can see here, the PHP original legacy portfolio and the MedicX portfolio that was added and merged and combined to create the portfolio of 485 properties, of which -- 484 properties, of which we have 15 in Ireland. And really by so many of these metrics, you can see that they are very, very similar and complementary portfolios.

We have a contracted rent roll now across the enlarged group of GBP 125.6 million and a net initial yield of 4.85%. Our average lot size has stayed around the same at GBP 4.9 million. The WAULT of the 2 portfolios was extremely similar and now sits at 13 years unexpired. And our occupancy across the portfolios remains extremely high across both of the portfolios, averaging 99.5%. And as you would expect, 90% of our rent roll remains government-backed, both in the U.K. and in Ireland. I also tried to give a sense here of just the capital value spread across the portfolio. And you can see, we have an average lot size of GBP 4.9 million, and by value, a number of properties in the higher end of that range as well.

In terms of geographic location, the portfolio is very evenly spread across the country, as it was before and it continues to be very evenly spread across the U.K., and increasingly in Ireland, where we have now 15 properties. If anything, between the 2 portfolios, one had slightly more in London, and the other in Scotland, so actually those 2 worked out very well. And we have 20% of the portfolio, for example, is now in London and the Southeast, with 90% of the rent roll coming from government-backed, and 9% from pharmacies and other on-site users.

And really to continue the theme, this is high-quality, recurring income. And to talk actually about, in a little more detail, about some of the things Harry and Richard have mentioned. We've seen like-for-like income and rental growth across the portfolio of GBP 1 million over the first 6 months of the year, which has been driven predominantly by rent reviews.

We've conducted 182 rent reviews across the portfolio in the first 6 months of the year. We have 70% of the portfolio is on an open market rent review cycle, every 3 years. And the remainder is either linked to inflation or with fixed uplifts, which frequently happen on an annual basis. So we have a large number of rent reviews in the portfolio. We've conducted 182, which resulted in an uplift of GBP 0.9 million of rental income over that period, which equates to 1.9% per annum increase on the rent reviewed and a 0.8% overall increase in portfolio income from this.

We also have on completed, have on-site or are about to go on-site and are currently documenting 22 asset management projects which are across the U.K. where we work with our tenants to refurbish properties in return for an increase in rent and also the capital value through -- and also the lease, the unexpired lease term of the properties, which is a key driver of capital value. And together, these rent review and asset management initiatives have been a very key driver of valuation growth in the portfolio during the first half of the year.

I think with that, I shall hand back to Richard Howell to take you through the next slides.

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [4]

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Do you want settling to the end?

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Chris Santer, Primary Health Properties Plc - CIO [5]

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You need to wiggle the mouse. Turn it off and on again. Just press snooze.

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [6]

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Okay. All right. Thanks. And just looking at the passing rent, we started the year passing rent, GBP 79 million. The acquisition of MedicX added a further GBP 44 million. Acquisitions in the year, GBP 31 million, added a further GBP 800,000 to the passing rent. But importantly, organic rental growth from rent reviews and asset management projects, as Chris mentioned, added a further GBP 1 million. Now that was the key driver to the revaluation surplus, GBP 17.7 million. That accounted for approximately 70% to 80% of that surplus. So we ended up 30th of June passing rents just under GBP 126 million. But we have a number of ongoing activities to help drive that further.

So we have a number of developments which are currently in legal hands, GBP 70 million in total, and that will add a further GBP 3.8 million to the rent roll once those have been contracted. And we also have a number of outstanding rent reviews and those asset management projects that Chris also touched upon which should add a further GBP 1.8 million. So in due course, perhaps over second half of this year, maybe into early 2020, we will see the rent roll rising to over GBP 130 million.

Looking at the sort of the lease expiry profile, pie chart. Again, the sort of resilience of the income and the low risk nature of it, we've only got 1.6% of the portfolio up for expiry within the next 3 years. And probably around 2/3 of that is subject to an asset management project that we will touch on in a bit more detail in the future. We've only got 6% in that 3 to 5-year window. Obviously, we're very active in the 5 to 10-year window, talking to tenants, engaging with them about re-gearing their leases. But the key here is that there's pretty much very low risk about any future income coming back to us and space coming back as void.

Rent review profile, 68% is on an open market value basis, with 25% index linked and just under 7% on the fixed basis. Obviously, open market values is driven by building cost inflation. And what we are starting to see is a great improvement not only in our own pipeline, but our peers also reported similar things. And new developments coming online, this is setting a firmer turn for rental growth. We've reported firmer, better results on our rent reviews, and we'd hope to see that improving into the future.

Harry, are you going to talk to these slides?

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [7]

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So just to look at some of the acquisitions that we've made during the period.

On the right-hand side, we've got a couple of projects in Bray. We announced that last year, but it continues to make progress. And it's on track for completion, either the very end of this year or early next year. It's a large building, EUR 22.4 million, GBP 20 million, just shy of 50,000 square feet with a WAULT of 21.5 years, just located south of Bray, which is a commuter town to the south of Dublin. Then underneath that, we've got Athy, which is a regional town in Ireland, EUR 13 million, 28 years. All of the rent there linked to Irish CPI.

Then a couple of projects that have come through from the MedicX portfolio in Kew, just shy of GBP 5 million purchase. In the bottom half of a -- or the bottom floor rather of a new residential development in Kew, very upmarket part of London, as everyone will probably know. And then underneath that, a project at Peterborough, not quite sure why in my copy we've got a euro conversion rate of that. It seems wrong. So a GBP 3.5 million investment, to show you that we are buying stuff in the U.K.

And then we announced earlier this week, I think, the completion of the acquisition of the Meath, which is not in Meath. But it's actually at the Meath Hospital, which is 10 to 15 minutes south of St. Stephen's Green in Dublin, very, very urban area right in the -- very close to the center of Dublin, and another U.K. acquisition in Leeds.

Chris is going to talk about the asset management opportunities.

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Chris Santer, Primary Health Properties Plc - CIO [8]

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Thank you.

And in terms of asset management opportunities, we have a very large number of these across the portfolio. Eight have been completed already this year. We have 3 on-site and another 10 or 11 are being documented. And we have numerous others in the pipeline. And these, to just give an example of the sort of work that we are doing. And whilst we're always engaging with our tenants and the occupiers, we particularly engage with the tenants probably as their lease is starting to approach 10 years unexpired. They've signed a long lease in the first place. They've probably been in occupation for 15 years. And then we can speak to the GPs and work with them to understand what it is they need to be providing the best outcomes they need for their practice, provide the outcomes they need for their health service. And so these just are 3 examples where we work at the moment. Sometimes there's a small extension of the property. Sometimes it's just an internal refurbishment of the property. But really, we can help really with some, actually at times, very simple improvements to the buildings to make this more future proof for the GPs going forward.

This property in Robin Hood -- I'm sorry, Robin Lane Medical Center in Pudsey, which is Leeds, for an investment in the building there and they're building the extension. The GPs entered into a new 25-year lease. So there was a small uptick in rent, but that also is accretive to the portfolio in terms of the WAULT and in terms of the valuation applied to the property, the cap rate or the multiplier.

And really similar again in Milton Keynes Village Practice. This was a project that we completed actually in 2018. It's quite a significant extension of 330 square meters to the side of the property. And that's another part, one of the key features of the portfolio is that, within it, there are a number of assets where we can expand on-site. It doesn't always have to be about brand-new medical centers or relocating. There is room to expand on the site, and so there we were able to build the extension. And the tenant entered into a new 21-year lease. And you can see the pretty significant patient numbers as well, the list size there, of 18,000 patients being serviced by 6 GPs.

And this opportunity, we expect to see more of in the future as the NHS is moving towards more and more care being provided in the primary care setting and asking the primary care service providers to provide a wider variety of care. What the GPs are providing is expanding, and therefore, we work with them to -- so their premises can expand with them to do these things.

One final point we want to touch on as well is in terms of environmental and social. So we have been working through our portfolio and actually completed EPC ratings across the entire portfolio. Actually, the one of the first healthcare REITs to do that in the entire portfolio. Pleased to report that 82% of the portfolio now has an EPC rating of C or better. That's a very high percentage of good, quality rating there. We also addressed where there are a handful of situations a property has a very low EPC rating. That's something that we can address during asset management projects to improve the EPC rating on the property.

100% of our developments, as you would expect, that are currently on site or about to go on site have a BREEAM rating of Very Good or Better. And actually, we have recently just approved -- the Board has recently approved a new investment opportunity which will target BREEAM Excellent.

In Ireland, all our developments that we currently have on-site have a BER rating, which is the Irish equivalent, slightly different from necessarily EPCs or BREEAM, but have A3 or better, which is a very high rating.

And on the social side as well, we also see that the NHS and the move there is towards prevention as well as cure, and part of that is a trend towards what is called social prescribing. This is something that the NHS is trialing at the moment. And we've made some space available in a new building that is currently under construction in Kew for a charity providing social prescribing, which is a nonclinical solution for people around well-being. So it may be sort of counseling, maybe tackling loneliness and maybe tackling engagement with the community. And so this is something again which is increasingly we are seeing in the primary care setting and is part of that holistic primary care offering.

I will hand back to Richard to talk further about the funding.

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [9]

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I've already touched on a number of these points already.

We continue to deliver financial management. And obviously, the cost of finance is key to us in terms of delivering future earnings growth, along with the rental growth story, which we've covered. So average cost of debt down to 3.75%, following the issue of the new GBP 150 million unsecured convertible bond and repayment of the GBP 75 million retail bond. Interest cover reflects improving net rental income metrics, which we've talked about, but also the lower average cost of debt, so that's up to 2.7x and continuing an upward trend. Loan to value ratio just under 48%, again, reflecting the acquisition of MedicX. And debt maturity, again, that's improved following the repayment of the retail bond and the new convertible bond and the acquisition of some of the MedicX debt, so that now stands at 7.6 years.

So total debt facilities, GBP 1.37 billion. We're drawn on just over GBP 1.1 billion. So after capital commitments, we got total firepower of just over GBP 200 million, so that means we are sort of a got plenty of headroom to see us through for a little bit and will definitely cover the pipeline. The other important thing to note is that 93% of our debt is either fixed or hedged out, so we have little exposure to rising interest rates in the future. And also all of our exposure to euros in Ireland again is completely hedged out in terms of balance sheet because we borrow 100% in euros against those euro-denominated assets.

Looking at the debt maturity profile chart. We haven't got any refinancing now left in 2019. 2020, we've got GBP 55 million, which is predominantly GBP 30 million with HSBC. And we're already in positive discussions to refinance that and hope to be able to make further announcements second half this year. 21, 22 onwards, again, all of our revolving credit facilities. And again, we're in very -- having very good discussions with a number of our lending partners to refinance a number of those, so we hope to be able to make further announcements around the average cost of debt and making further improvements and reducing that further over the course of the second half of the year.

So finally, I think Harry is going to wrap up with a site overview.

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [10]

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So as we started by saying the highlight of the first year was our transformational transaction merger with MedicX. We spent a lot of time on that, but we didn't lose momentum on the underlying business. In essence, there were no unforeseen problems that arose out of it and we wouldn't expect there to be because the portfolios are very, very complementary. We are through the slightly awkward position of having to run 2 teams. We completed the integration of that earlier this month and we're now moving forward full steam ahead.

A lot of the things that we've talked about, the overhead saving, the reduction in debt cost, the improved outlook for rental growth, the asset management opportunities, actually NHS getting its act together in the U.K. And just as a small aside, it's fantastic from our standpoint that Matt Hancock has been reappointed as the Health Secretary, brackets, 'pro tem' maybe, but who knows.

What all that means is that we are looking forward to not only deliver what brokers are estimating our dividend for the current year is going to be at 5.6p. And we've already paid and declared 3/4 of that. But indeed, the prospects, the outlook for 2020 really look much better because of the fact we've got a much lower fixed cost base as a percentage of total income. We've got a lot of momentum in the pipeline. We're going gangbusters in Ireland, and the prospect for rental growth is growing. So -- and the demographic backdrop and the economic backdrop, sort of the health care system is very strong.

So with that, that's our presentation. We are very pleased with how it went in the first half and we're looking forward to the second half very positively with a lot of confidence.

So now what we're going to do for those listening on the telephone is take questions in the room. There is a roving microphone that will come to you. And if you could, for everyone's benefit, tell us your name, and where you come from and your question. The team and I will try to answer that. And when we finished with questions in the room, we'll go to questions online, which the adjudicator, if that's the right word, will monitor once we finished the questions in the room.

All right. Thank you.

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Questions and Answers

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [1]

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Kieran Lee from Berenberg. Just a couple from me. I appreciate, given the transaction, your LTVs sort of edged up slightly. There'd been a big point of reducing that over the past few years. Where do you see looking forward the appropriate level of leverage?

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [2]

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As we've said before in the past, we're quite happy to operate a leverage ratio between 40% and 55%. It's just under 48% now. Now we've got a GBP 150 million pipeline. So if we invested all of that, that will take the leverage ratio to around 53% for the enlarged group, but still within our accepted range. We've got over GBP 200 million of firepower at the moment, so we don't necessarily need any money immediately.

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Kieran Adrian Lee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [3]

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And the last one. You're going sort of gung-ho acquiring and developing out in Ireland. If we look long term, where do you see the ideal sort of portfolio split and weighting between the 2 geographies?

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [4]

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MedicX had a target of 15%. Our announced target is 10% of gross assets. So I guess it will end up somewhere in between. For the moment, we're operating at a 10% level. And in broad-brush terms, depending on how you take exchange rates, we've got a working target of about EUR 300 million.

Right now, we're at EUR 200 million, so we've got plenty of capacity there. There's actually -- we'll never be more than 10% to 15% because actually Ireland is not that big in population terms, with a population of 5 million compared to 65 million growing to 70 million over here.

So we don't want to give you the impression we're not doing anything in the U.K. But in the immediate short term, we're doing a lot more in Ireland and we're investing a lot more -- we want to make sure there's value for money. And in your presentation, there is a slide that looks at the relative dropdown to the bottom line from the deals. And in broad-brush terms, the Irish deals are twice as accretive to the bottom line as the British ones are. Of course, it's not apples-on-apples because there is slightly more operational risk on the Irish assets, but we think we are more than capable in dealing with that.

So I think it's better value for money for the earnings outlook to be investing in Ireland. They are much larger buildings overall. They've got very long WAULTs. It's all linked to Irish CPI. And although there may be some risk of a hard Brexit being negative for parts of Ireland, we don't see that as life-threatening for the prospects of Ireland looking forward.

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James Carswell, Peel Hunt LLP, Research Division - Analyst [5]

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James Carswell from Peel Hunt. You mentioned MedicX has been no kind of bad surprise or anything. I mean what about the other way around? Is there any kind of pleasant surprises in there, maybe in terms of some asset management initiatives that you, with your capital, you can now proceed that maybe MedicX couldn't?

And then maybe just kind -- yes, kind of slightly linked to that. But in terms of some of the rent reviews you're having, MedicX obviously more weighted to London and Southeast than your original portfolio mix. That was quite a bit -- and particularly about Clapham, I appreciate that's not going to be the case with all the London assets. But I mean what are you seeing in terms of the rental outlook across the country, London versus the other regions?

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [6]

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Well, let me deal with the acquisition side of it and maybe Chris will pick up on the rental side. And you're right, we haven't mentioned Clapham so far in the presentation today. Broadly speaking, there were some positive things that came out of MedicX, but not least that we tended to work with one group of developers on forward funders and acquisitions and they work with a different group. So together, we now have a broader set of pipelines to come through. They also had a slightly different approach to development. And I've shown you a couple of examples of developments that they've got over the line. So we see that as actually being pleasantly surprising, not that we didn't know about it. But now that we've got the 2 teams together, that's great.

Secondly, there were some things that they did better than us and some things that they did worse than us. So hopefully, we're going to adopt the better things from both teams and sets of procedures moving forward, with the view to improving things generally. I mean they're not major things, but they're minor things.

On Clapham, before handing over to Chris, that's still stuck with the District Valuer deciding whether or not to accept the independent experts' or arbitrators' view of what the reimbursed rent should be.

But I will hand over to Chris. He will tell you a bit more about our rental experience and the MedicX experience in London.

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Chris Santer, Primary Health Properties Plc - CIO [7]

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Yes, indeed. And actually, we give them some guidance on Slide 30 in your packs. There is some information there just about where the rent reviews have come from, what we call the vintage of those rent reviews across the portfolio and about some of the outlook that we have across the portfolio. As I mentioned earlier, we do have -- we have a number of reviews. And actually, we have close to 200 reviews actually which we're looking at that moment where we think there is an opportunity for an uplift. It is as ever slow. If you think getting an appointment with a GP is hard, then doing a rent review is at times slower. So it's something that we continue to work through.

As you would expect, there are some opportunities across the portfolio. And we continue to try and work hard to drive ahead those growth -- those numbers that we can achieve, particularly in London and Southeast where there's higher land values.

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [8]

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I think all in all there are more deals coming through across Britain slowly, and that is overall a positive for the rental outlook because these newer deals tend to be agreed at higher rental levels.

Now it's quite hard for people who are not sort of working all day every day in the sector to understand what that means. But what it does mean is that the index replacement cost of assets is going up, and that is very useful in terms of the team's discussion with the District Valuer's office. So there is an increase -- we'd agree with Assura that there is a more positive tone to the level of rent reviews that we are both experiencing in the marketplace.

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Martyn King, Edison Investment Research Limited - Head of Financial, Property and Investment Trust & Analyst [9]

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Martyn King from Edison. MedicX had previously identified a number of properties that they thought were likely to be disposed of. Is that still the case?

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [10]

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Yes. Now that the merger is completed, we are working through both portfolios to look at obvious areas of overlap, where there are projects that we completed or recent asset management opportunity or which just don't fit in to the portfolio looking to the future. Yes, that we have got that on our horizon. And I would expect us to be doing something either late fourth quarter or early first quarter of next year. But the quantum of that won't be particularly significant. There's nothing terrible in either of the portfolios that we need to dispose of. The sharp-eyed would've noticed that as opposed to 1 asset under GBP 1 million there are now 8 across the combined portfolio.

So those would be the ones that we'll be looking to rotate out with some of the ones that we'd recently done an asset management project on. So the reason we'd rotate the ones out that we've done an asset management project on recently, are that there's nothing really much more to add in terms of value. And in a strong market where people are interested in buying assets at top dollar, top sterling prices for assets that you've completed on an AM project, there's an argument to say you should rotate your capital around into something where there is greater upside opportunity.

I don't think there are any more questions in the room. So can somebody tell me whether anyone up waiting to ask a question on the telephone lines?

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Operator [11]

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(Operator Instructions) There are currently no questions on the phones.

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [12]

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All right. Okay. No one brave enough to -- oh, we have another question in the room. Right. Please. Just hold on for the microphone.

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Richard Williams, Marten & Co. Limited - Other Professional [13]

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Rich Williams from Marten & Co. And just wanted to talk about the cost synergies. You said GBP 4 million since the merger. Are you expecting any more? And where will they come from?

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [14]

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Well, there will be a gradual decline in the EPRA cost ratio and the TER as the business expands because it's just an arithmetic function of the level of fixed costs for running the business as a percentage of the portfolio overall. But nothing as significant as the GBP 4 million that we've knocked out as a result of moving off a very full set of charges that existed within MedicX on to a very high value for money set of charges that Nexus is providing PHP.

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Richard Howell, Primary Health Properties Plc - Finance Director & Director [15]

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It's also used to say this will come from a lower cost of finance.

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Harry Abraham Hyman, Primary Health Properties Plc - MD & Director [16]

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Yes. Which I think we have -- which we can talk about because we're not in an offer period anymore. And if it were to be 25 basis points, across GBP 1.1 billion, it doesn't sound like a lot of money. But actually, it is a lot of money. It's not all going to come in, in one year, but we've already WACC'ed in quite a considerable cost saving on the convertible. And over time, when we get to announcing the results of our renegotiation on the bilateral lines later in the year, I'd be very surprised if there weren't further margin savings to come. And over time, that will occur.

Clearly, there is a lot of long-term fixed rate debt. We mustn't overstate this because both portfolios had a big tranche of Aviva debt, and that is fixed, fixed, fixed. And we have no plans to break that in the immediate future.

So right, if there are no further formal questions, Chris, and Richard and I will be around for a little bit to socialize with you. Thank you all very much for coming. And we are looking forward to knocking in a similar performance in the second half of this year. Thanks very much.