Stories
Just three days before Christmas, Primary Health Properties (PHP) announced plans to fund the development and acquisition of its 18th primary care centre in Ireland. The FTSE-250 company said it would stump up €12.6 million in development funding for the construction of a new primary care centre in Enniscorthy, Co Wexford. The deal came complete with agreements for a lease with the Health Service Executive and a local GP practice for 25 years.
PHP said it hoped to sign additional leases with Tusla and a pharmacy to finish out the centre on practical completion by the first quarter of 2022. Combined with another primacy care facility in Liverpool this will take its overall portfolio to 513 assets in Ireland and the UK. Unlike some other commercial property businesses, which have been hit by Covid-19 wiping out main street retailers and office blocks, PHP’s occupancy rate stands at 99.5 per cent and it is generating a rent roll of £135.3 million. Its commitment to Ireland is big and getting bigger. But just where does it hope to go here?
More time and effort
David Bateman is in his office on the fifth floor of Greener House when we talk. Behind him is a grey wall of filing cabinets with a window to one side looking out on the streets between Picadilly Circus and Trafalgar Square in London. Bateman is head of investment in PHP, a position he has held for the last four years after previously working in Jersey for a property unit trust backed by one of Britain’s oldest private equity firms Electra Partners. Prior to Covid-19, Bateman was a regular visitor to Ireland looking for acquisitions or funding deals.
“I was in Ireland every other week driving the length and breadth of the country,” he said. “I am frustrated like all of us not being able to go there, and the UK not being able to meet people.”
Despite this, Bateman said PHP had managed to keep growing steadily in 2020. “Covid hasn’t significantly slowed us down because we had momentum,” he said. “We have adapted to the environment and we are fortunate that we have long term relationships in both jurisdictions,” he said.
Will it impact PHP’s pipeline in 2021? “In simple terms I think doing the same requires more effort and more time,” Bateman said. “We are lucky to be an industry not particularly disadvantaged by this crisis and I am grateful for that.”
A half a billion euro plan
PHP is not a household name in Ireland, but it has become a serious player in delivering primary care infrastructure here. It entered the Irish market in 2017, and has ramped up its presence here through a series of smaller acquisitions, a merger with a rival with interests here and in the UK, and through the development of new facilities.
Its interim results to June 2020, show that its 17 assets in Ireland were valued at £194 million including two forward funded developments.
When these projects are completed PHP said the value of these 17 assets in Ireland would be worth £211 million, not including its new deal last December. This is significant growth in a relatively small market in a short space of time.
One of the ways Bateman and his colleagues pulled this off was through the March 2019 merger with rival MedicX in an all-share deal that was transformational for the business in terms of scale. Prior to the deal PHP had eight assets in Ireland with a capital value of £83 million and rent roll of £5.7 million. It had just one asset on the Navan Road in Dublin with the rest stretching across the country from Bray, Co Wicklow to Carrigaline, Co Cork. MedicX meanwhile had five assets with a capital value of £56 million, and a rent roll of £3.1 million. The second biggest asset the MedicX merger brought into PHP’s portfolio was Kilnamanagh Tynon in Tallaght worth €17 million which involved the conversion of a 62,000 sq ft office building into a primary care centre.
The capacity for PHP to grow further in Ireland is significant. There are an estimated 536 primary care centres required in Ireland, and only 81 have been built to date. PHP has, Bateman tells me, adjusted its targets for growth in Ireland since entering the market.
“Our original stated objective back in late 2016 or early 2017 was we would have up to 10 per cent of our assets in Ireland,” he said. “More recently we have made a public announcement to increase that objective to 15 per cent.”
Bateman said the capacity for PHP in Ireland was “clearly a lot more”. With its portfolio currently worth in excess of €200 million, does Bateman want to take it to €500 million? “That would be a next step ambition, yes,” he told me.
How quickly do you plan to do that, within three years? “I would stick to the 15 per cent target,” he said. “That would take us to a little bit less than €500 million currently. 15 per cent is our current target but equally we will obviously continue to expand our portfolio in the UK. So the actual number is a moving target as it is a percentage we are committed to and not a numeric figure.”
“Our equation is based on demographics.”
Like stocks the world over, PHP endured a torrid March 2020 when its share price fell sharply. Within a short period, it bounced back, and the business currently has a market capitalisation of more than £2 billion. In Ireland and the UK most of its income is government backed with its major tenants including the NHS in Britain and the HSE in Ireland. In July it raised £140 million, and its assets are helping ease the strain on the healthcare system in both Ireland and Britain brought on by Covid-19.
Bateman said PHP intends to step this up further. “We have a strong balance sheet,” he said. “We have a little under £400 million to invest in our asset class in the UK or Ireland. Where we can, we will continue to support government ambitions in primary care.”
The Irish state has allocated about €4 billion more to the health budget, but under strain dealing with Covid-19, it hasn’t made building more primary care facilities a priority in terms of this new spending. “I think it is a shame there isn’t a greater allocation towards primary care but what I am not here to do is to comment on government policy,” Bateman said diplomatically. “What I am here today to say is that we will support Ireland’s primary care ambitions where we can and that we have the expertise and balance sheet to do that.
“It makes sense to move high volume, low complexity procedures out of hospitals and into primary care settings. They are more accessible, and they are cheaper.
“If you were building a healthcare economy from scratch you would reorientate more of it around primary care. Most developed countries with health services similar to the UK or Ireland are looking to a greater or lesser extent improve the provision of primary care.”
With only 81 primary care centres built to-date in Ireland, Bateman said the rollout to reach more than 500 was “somewhat behind schedule”, adding: “The process is speeding up, however. I think private capital and a business like PHP has the ability to play a big part in supporting the state to procure more primary care centres.”
PHP is known to be looking at lots of different sites around Ireland. Its sites are currently clustered around Dublin down towards Cork, with stop-offs in other counties, but it no real presence in the West of Ireland.
Is that next? “It is more by luck than design that our portfolio is pretty much triangular between Limerick, Cork and Dublin. This reflects population densities but that doesn’t mean to say we wouldn’t look at primary care centres in alternative locations – quite the opposite. We have and we continue to look. If you look at the map and where dots are where we are – and if we are having this conversation in 12 or 24 months there will be much more dots and in a broader area.”
Bateman said that PHP was currently looking at a potential scheme near Tralee for example. “We are investing in community healthcare infrastructure which is backed by long term government income,” he explained. “In many ways location isn’t the most important part unlike say an office investor. It is a different equation for us. Our equation is based on demographics.”
“There are predictions which will take your national patient visits from circa 20 million a year to circa 26 million by 2021. Or to put it another way currently your population of over 65s is roughly one third but that is supposed to increase by 2036 by 65 per cent.
“If you think about the demand that will place on healthcare infrastructure in general and primary care infrastructure specifically it is huge.
“We are really investing in healthcare demographics and as long as the primary care proposition is appropriate from that perspective it shouldn’t make a big difference to us whether we are in central Dublin or Enniscorthy.”
PHP owns some primary care centres which were previously offices. With the downturn in demand for offices might it seek to carry out more conversions?
“Typically we are buyers of purpose built accommodation,” Bateman said. “That doesn’t mean we don’t look at opportunities where there is an angle to repurpose a building but the end result needs to be the same.”
“The building will need to meet the specifications of tenants which are strict in terms of room sizes, air handling capacity, disability access, health and safety and so on.”
“That doesn’t mean we won’t (look at conversions) but what it comes down to is whether it is cost efficient. I would certainly never say never.”
With vaccines being rolled out in Ireland, will PHP play a role? “We are a property company,” Bateman noted first. “But PHP will stand ready to facilitate tenants where it can.
“They may want to put in temporary buildings in car parks for duck in and out injection opportunities. We provide facilities for our tenants to allow them to do their good work. I do believe primary care will be an important part of administering the vaccine.”
Long-term players
Some UK plcs and British private investors are reigning in their investment in Ireland, because of uncertainty around Brexit as well as Covid-19. Bateman said PHP’s investment time horizons and belief in the primary care market meant it wasn’t one of those doing so. “We are a long term investor. In our 23 history we have sold two assets and neither by choice more by situation,” he said.
“We are an income fund and we are not looking to acquire assets in order to turn them or benefit from valuation improvements. PHP is a long term play and that is underlined by the lack of sales we have undertaken over the long term.” Bateman said he believed issues like both Brexit and Covid-19 would be resolved, while the demand for primary care was going nowhere. “We intend to be part of the primary health care scene in Ireland for a long time to come.”
Further reading:
Ireland’s €1.2bn private hospital industry: The margins, the market share, the profits and the debts
