Primary Health Regulatory News (PHP)

Primary Health Properties PLC

Preliminary results for the year ended 31 December 2021

Successful management internalisation, refinancing and operational performance drive earnings growth

Primary Health Properties PLC ("PHP", the "Group" or the "Company"), a leading investor in modern primary health facilities, announces its audited preliminary results for the year ended 31 December 2021.

Harry Hyman, Chief Executive, commented:

"2021 has been another strong year of progress for PHP, having successfully completed the internalisation of our management structure and refinanced a number of legacy loan facilities which have delivered substantial annual cost savings. In addition, we have a strong targeted pipeline and continue to see good organic rental growth from rent reviews and asset management projects with record levels of activity during the year.

"Throughout 2021 PHP has successfully worked with the NHS, HSE and the Group's GP tenants to help them utilise our properties for deployment in the front line of the COVID-19 pandemic, delivering vaccines and boosters across the UK and Ireland. The need for modern, integrated, local primary healthcare facilities is becoming ever more pressing in order to relieve the pressures being placed on hospitals and A&E departments and to catch up on the back-log of missed procedures.

"Having successfully delivered 25 years of secure and reliable growth for our shareholders, we have firmly established ourselves as a sector leader and the Board looks forward to delivering further earnings and dividend growth in 2022 and remains confident in PHP's future outlook."

FINANCIAL AND OPERATIONAL HIGHLIGHTS

1 Definitions for net rental income, adjusted earnings, adjusted earnings per share, earnings per share ("EPS"), dividend cover, loan to value ("LTV"), net tangible assets ("NTA"), rent roll, NIY, WAULT, Total Adjusted NTA return and net asset value ("NAV") are set out in the Glossary of Terms.

2 See note 9, earnings per share, to the financial statements.

3 See note 9, net asset value per share, to the financial statements. Adjusted net tangible assets, EPRA net tangible assets ("NTA"), EPRA net disposal value ("NDV") and EPRA net reinstatement value ("NRV") are considered to be alternative performance measures. The Group has determined that adjusted net tangible assets is the most relevant measure.

4 Percentage valuation movement during the year based on the difference between opening and closing valuations of properties after allowing for acquisition costs and capital expenditure.

5 See note 10, dividends, to the financial statements.

6 After deducting the remaining cost to complete contracted acquisitions, properties under development and asset management projects.

7 Percentage contracted rent roll increase during the year is based on the annualised uplift achieved from all completed rent reviews and asset management projects.

8 Pro-forma including debt facilities secured post year-end.

DELIVERING EARNINGS AND DIVIDEND GROWTH

· Adjusted earnings per share increased by 6.9% to 6.2p (2020: 5.8p)

· Contracted annualised rent roll increased by 4.1% to £140.7 million (31 December 2020: £135.2 million)

· Additional annualised rental income on a like-for-like basis of £2.4 million or 1.8% from rent reviews and asset management projects (FY 2020: £2.0 million or 1.6%; FY 2019: £1.9 million or 1.5%)

· Successful refinancing of a number of legacy loan facilities with Aviva Investors reducing average cost of debt to 2.9% (31 December 2020: 3.5%) resulting in annualised interest cost savings of approximately £5.0 million

· Successfully completed the internalisation of the Group's management structure which resulted in annual cost savings of approximately £4.0 million, equivalent to 0.3 pence per share

· EPRA cost ratio reduced to 9.3% (FY 2020: 11.9%) the lowest in the UK REIT sector

· Quarterly dividends totalling 6.2 pence per share distributed in the year, a 5.1% increase over 2020 (5.9 pence per share)

· First quarterly dividend of 1.625 pence per share declared, payable on 25 February 2022, equivalent to 6.5 pence on an annualised basis and a 4.8% increase over the 2021 dividend per share, marking the Company's 26th consecutive year of dividend growth

DELIVERING NET ASSET VALUE GROWTH

· Adjusted Net Tangible Assets ("NTA") per share increased by 3.4% to 116.7 pence (31 December 2020: 112.9 pence)

· Property portfolio at 31 December 2021 valued at £2.8 billion (31 December 2020: £2.6 billion) reflecting a net initial yield of 4.64% (31 December 2020: 4.81%)

· Revaluation surplus, including profit on sales, was generated in the year of £110.5 million (31 December 2020: £51.4 million), representing growth of 4.1% (2020: 2.0%)

· Strong pipeline of targeted acquisitions, developments and asset management projects with a value of approximately £337 million in the UK and £107 million (€127 million) in Ireland of which £72 million and £80 million (€95 million) is in legal due diligence in both countries

· Portfolio in Ireland now comprises 20 assets, valued at £213 million (€253 million)

· The portfolio's metrics continue to reflect the secure, long-term and predictable income stream with occupancy at 99.7% (31 December 2020: 99.6%) and a WAULT of 11.6 years (31 December 2020: 12.1 years)

· Strong progression of asset management projects with 30 completed in the year and a further nine currently on-site, investing £15.0 million, creating additional rental income of £0.4 million per annum and extending the weighted average unexpired lease term (WAULT) back to over 20 years

DELIVERING FINANCIAL MANAGEMENT

· LTV ratio 42.9% (31 December 2020: 41.0%), towards the lower end of the Group's targeted range of between 40% to 50%

· Weighted average debt maturity extended to 8.2 years (31 December 2020: 6.5 years)

· Post period end €75 million private placement loan note issued for a 12-year term at a fixed rate of 1.64% to finance continued expansion in Ireland

· Refinanced a number of legacy loan facilities with Aviva Investors, with a new sustainability linked £200 million facility for a 15-year term at a fixed rate of 2.52% and renewed existing facilities with NatWest and Santander

· Significant liquidity headroom with cash and collateralised undrawn loan facilities totalling £321.2 million (2020: £361.5 million) after capital commitments

DELIVERING STRONG TOTAL RETURNS

1 The definition for total property return is set out in the Glossary of Terms.

DELIVERING RESPONSIBLE BUSINESS AND ESG

· Net Zero Carbon ("NZC") Framework published with the five key steps the Group is taking to achieve the ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities

· Construction of PHP's first two NZC developments in Lincolnshire and West Sussex about to commence in the first quarter of 2022

· All developments completed in the year achieved BREEAM rating of Excellent or Very Good and all asset management projects completed met EPC target of B or above

· £300 million of sustainability linked loan facilities with Aviva and NatWest raised in the year

· £0.2 million distributed from the Community Impact Program to charities and groups focused on social prescribing and wellbeing linked to the patients and communities served by PHP's properties

Presentation and webcast:

A virtual briefing for analysts will be held today, 16 February 2022 at 9.30am, via a live webcast and conference call facility.

The presentation will be accessible via live video webcast and a live conference call facility:

Webcast: https://webcasting.brrmedia.co.uk/broadcast/61e13c18e3976b4d1b2d6e85 

Tel: +44 (0)330 336 9601

Participant PIN code: 3760982

If you would like to join the briefing, please contact Buchanan via php@buchanan.uk.com to confirm your place.

For further information contact:

Chairman's statement

Despite the uncertainty and volatility in the economic environment over the last two years we have continued to deliver a strong and robust operational and financial performance and the Group's portfolio has continued to demonstrate strong resilience throughout this period. The security and longevity of our income are important drivers of our predictable income stream and underpin our progressive dividend policy and we have now entered our 26th year of continued dividend growth.

Thankfully, the speed and effectiveness of the COVID-19 vaccine rollout has allowed us to return to some semblance of normality after the latest lockdown and we must offer our heartfelt thanks to the brilliant people who devised, mass produced and administered vast numbers of vaccines and boosters.

Since the start of the COVID-19 pandemic, we have seen a significant increase in the digitalisation and adaptation of triage in both the UK and Ireland with many initial consultations being carried out online. However, we have not seen and do not expect to see, any reduction in space requirements across our portfolio. This is because of the increasing burden being placed on healthcare systems in both the UK and Ireland as a consequence of the ongoing COVID-19 pandemic, along with the long-term demographic trends of populations that are growing, ageing and suffering from more instances of chronic illness. Many services are now expected to move away from hospitals and into primary care facilities which will undoubtedly require substantial investment in the future to enable non-urgent and periphery procedures to be dealt with in such facilities.

PHP has continued to actively work with the NHS in the UK, HSE in Ireland, and its GP partners in both markets to help them better utilise the Group's properties for deployment in the ongoing global health crisis. Many of our primary care facilities and occupiers have been and will be required to deliver COVID-19 vaccines and boosters for many years to come and to deal with the backlog of procedures missed over the last two years. We continue to maintain close relationships with our key stakeholders and GP partners to ensure we are best placed to help the NHS, HSE, and in particular primary care, evolve and deal with the pressures placed on them as the 'new normal' is established.

We recognise that the success of the Group depends on our people and I would again like to warmly thank the Board and all of our employees for their continued commitment, dedication and professionalism in ongoing difficult circumstances.

Acquisition of Nexus and management internalisation

On 5 January 2021, the Group successfully completed the internalisation of its management structure with shareholders representing 99.95% of the votes cast voting in favour of the internalisation which resulted in annual cost savings of approximately £4.0 million, equivalent to 0.3 pence per share, compared to the position if the business were still externally managed. The assumption of Nexus's existing management and overhead costs has resulted in lower ongoing administrative costs to the Group and the EPRA cost ratio has fallen further to 9.3% (2020: 11.9%) in the year and is now the lowest in the UK REIT sector by some margin.

Overview of results

PHP's recurring Adjusted earnings increased by £10.1 million or 13.8% to £83.2m (2020: £73.1 million) and the increase in the year was driven by cost savings arising from the internalisation of the management structure, the refinancing of a number of legacy loans with Aviva together with rental growth from our investment, rent review and asset management activities.

A revaluation surplus and profit on sales of £110.5 million (2020: £51.4 million) was generated in the year from the portfolio, equivalent to 8.3 pence per share. The valuation surplus was driven by net initial yield ("NIY") compression in the UK together with rental growth from rent reviews and asset management projects.

The acquisition of Nexus and the refinancing of a number of legacy loans with Aviva resulted in exceptional costs of £37.0 million and £24.6 million respectively being expensed in the year.

A gain on the fair value of interest rate derivatives and convertible bonds together with the amortisation of the fair value adjustment on the MedicX fixed rate debt at acquisition of £9.5 million (2020: loss of £12.1 million) resulted in a profit before tax as reported under IFRS of £141.6 million (2020: £112.4 million).

The Group has continued to selectively grow its portfolio in the year, adding nine assets for £86.6 million and selling one for £2.3 million. Rent reviews and asset management projects completed in the year, or currently on-site, added £2.4 million or 1.8% (2020: £2.0 million or 1.6%) to the contracted rent.

The Group's balance sheet remains robust with a loan to value ratio of 42.9% (2020: 41.0%), which is at the lower end of the targeted range of 40% to 50%, and has significant liquidity headroom with cash and collateralised undrawn loan facilities totalling £321.2 million (2020: £361.5 million).

Dividends

The Company distributed a total of 6.2 pence per share in 2021, an increase of 5.1% over 2020 of 5.9 pence per share. The total value of dividends distributed in the year increased by 12.4% to £82.4 million (2020: £73.3 million), which were covered by Adjusted earnings. Dividends totalling £8.0 million were satisfied through the issuance of shares via the scrip dividend scheme.

A dividend of 1.625 pence per share was declared on 6 January 2022, equivalent to 6.5 pence on an annualised basis, which represents an increase of 4.8% over the dividend distributed per share in 2021. The dividend will be paid to shareholders on 25 February 2022 who were on the register at the close of business on 13 January 2022. The dividend will comprise entirely of a normal dividend of 1.625 pence.

The Company intends to maintain its strategy of paying a progressive dividend, which the Company pays in equal quarterly instalments, that is covered by underlying earnings in each financial year. Further dividend payments are planned to be made on a quarterly basis in May, August and November 2022 which are expected to comprise a mixture of both property income distribution and normal dividend.

Total shareholder returns

The Company's share price started the year at 152.8 pence per share and closed on 31 December 2021 at 151.4 pence, a decrease of 0.9%. Including dividends, those shareholders who held the Company's shares throughout the year achieved a Total Shareholder Return of 3.1% (2020: -0.8%).

Over the three years since our merger with MedicX in 2019 we have delivered a total shareholder return of 50.2%. This compares to the total return delivered by UK real estate equities (FTSE EPRA Nareit UK Index) of 28.5% and the wider UK equity sector (FTSE All-Share Index) of 13.2% over the same period. 

Environmental, Social and Governance ("ESG")

PHP has a strong commitment to responsible business and ESG matters which are at the forefront of the Board's and our various stakeholders' considerations and the Group has committed to transitioning to net zero carbon ("NZC"). We are about to start construction of PHP's first two NZC developments in the first quarter of 2022 and have published with these results, for the first time, a NZC Framework with the five key steps we are taking to achieve an ambitious target of being NZC by 2030 for all of PHP's operational, development and asset management activities and to help our occupiers achieve NZC by 2040, five years ahead of the NHS's target of becoming the world's first net zero carbon national health system by 2045 and 10 years ahead of the UK and Irish Governments' targets of 2050. Further details on our approach to responsible business can be found in the Annual Report and website.

Board changes

In December 2021, following a review of the composition and diversity of the Board, it was announced that Ivonne Cantú would be appointed as an independent Non-executive director of the Company with effect from 1 January 2022.

The Company also announced that Peter Cole, Non-executive director and Chair of the Remuneration Committee, will not stand for re-election at the Company's Annual General Meeting ("AGM") scheduled for April 2022 and will accordingly retire from the Board at that time. It is intended that Ivonne Cantú will take over as Chair of the Remuneration Committee following the AGM.

The Board is grateful to Peter for his commitment and dedication to the Company and for chairing the Remuneration Committee, particularly during the process of internalising the management in 2020 and the transition period in 2021.

Market update and outlook

PHP's mission is to support the NHS, HSE and other healthcare providers, by being a leading investor in modern, primary care premises. Never has this been more important as the NHS seeks to work through the backlog of procedures created by the COVID-19 pandemic and the Government delivers its Levelling Up agenda. In the longer term, the ageing demographic of western populations means that health services will also be called upon to address more ongoing, complex, chronic co-morbidities. PHP stands ready to play its part in delivering the real estate infrastructure required to meet this need in the community.

We will continue to actively engage with government bodies, the NHS, HSE in Ireland and other key stakeholders to establish, enact (where we can), support and help alleviate increased pressures and burdens currently being placed on healthcare networks.

In July 2021, the UK Government published a draft Health and Social Care Bill setting out a number of reforms in order to implement the commitments of the NHS England Long Term Plan. This included the introduction of regional Integrated Care Boards and Partnerships tasked with co-ordinating NHS partners with local government services and budgets such as social care and mental health, in a geographic area, for the first time; the idea being that services are then pushed to the most efficient, cost-effective part of the system (whether primary care, hospital or care home) for the best patient outcomes. We welcome these reforms and are hopeful they will lead to better outcomes for patients and to further development opportunities in primary care in the medium to long-term.

Despite the continued volatility in the economic and political environment and the prolonged era of low interest rates, there continues to be an unrelenting search for secure, long and reliable income. Primary healthcare, with its strong fundamental characteristics and government-backed income, has been a significant beneficiary of this trend. The UK and Irish markets for primary healthcare property investment continues to be highly competitive with strong yields and prices being paid by investors for assets in the sector throughout 2021.

We believe that our activities benefit not only our shareholders but also our wider stakeholders, including our occupiers, patients, the NHS and HSE, suppliers, lenders and the wider communities in both the UK and Ireland.

We look forward to 2022 with confidence in our ability to create further stakeholder value.

Steven Owen

Chairman

15 February 2022 

BUSINESS REVIEW

Investment and pipeline

During 2021, the market was characterised by a lack of suitable product, strong pricing and a very competitive market. However, we continued to make strong progress in the second half of the year selectively acquiring nine assets in 2021 for £86.6 million (2020: 27 assets, £93.0 million) and selling one asset for £2.3 million.

Including standing investments, direct and forward funded developments and asset management projects, we have continued to generate and grow a strong pipeline totalling approximately £337 million in the UK and £107 million (€127 million) in Ireland of which £72 million and £80 million (€95 million) is in legal due diligence in both countries.

Net zero carbon ("NZC") direct developments

The acquisition of Nexus in January 2021, enabled PHP to acquire the development expertise of Nexus Developments which at the time of completion had a pipeline of approximately £80 million of direct development opportunities at varying stages of progression.

Over the course of 2021 the Group has continued to make good progress, increase the number of live projects and is on schedule to commence construction of PHP's first NZC developments in Lincolnshire and West Sussex in the first quarter of 2022. The two projects have an estimated capital value of £11 million and are expected to generate a profit on cost of approximately 11%.

In addition to the above, the Group has a significantly advanced pipeline of £42 million across five projects of direct developments which will be progressed over the course of 2022 together with a wider medium-term pipeline at various stages of progress across 14 projects with an estimated capital value of £110 million.

PHP expects that all future direct developments will be constructed to NZC standards.

Forward funded developments

During the year, four UK forward funded developments at Mountain Ash, Wales, Llanbradach, Wales, Epsom, Surrey and at Eastbourne, East Sussex were completed on time and on budget with a net development cost of £20.1 million.

The Group now has two forward funded developments currently on site at Arklow, County Wicklow (£15.1 million/€18.0 million) and Enniscorthy, County Wexford (£10.6 million/€12.6 million) which continue to progress on schedule, remain on site and are due to reach practical completion in Q1 2022 as previously indicated.

Rental growth

PHP's sector leading metrics remain good and we continue to focus on delivering the organic rental growth that can be derived from our existing assets. This growth arises mainly from rent reviews and asset management projects (extensions, refurbishments and lease re-gears) which provide an important opportunity to increase income, extend lease terms, avoid obsolescence and improve the environmental performance of our assets whilst ensuring that they continue to meet the communities' healthcare needs.

Rent reviews

During 2021, the Group concluded and documented 375 rent reviews, including 74 reviews where no uplift was achieved, in the UK with a combined rental value of £49.5 million resulting in an uplift of £2.0 million (2020: £1.7 million) per annum or 4.0% (2020: 4.3%) which equates to 1.7% (2020: 1.8%) per annum. The positive rate of rental growth is broadly in line with the rate of growth experienced in the last couple of years.

In the year, an aggregate 1.5% per annum uplift (2020: 1.3%) was achieved on 159 open market reviews. Uplifts of 2.8% (2020: 2.3%) per annum were achieved on RPI-based reviews and 2.7% (2020: 2.9%) per annum on fixed uplift reviews. In addition, a further 236 open market reviews have been agreed in principle, which will add another £1.7 million to the contracted rent roll when concluded and represents an uplift of 1.6% per annum.

69% of our rents are reviewed on an open market basis, typically every three years and are impacted by land and construction inflation. Over recent years, there have been significant increases in these costs which is expected to result in further rental growth in the future. The balance of the PHP portfolio has either indexed/RPI (25%) or fixed uplift (6%) based reviews which also provide an element of certainty to future rental growth within the portfolio. In Ireland all rents are linked to the Irish Consumer Price Index.

At 31 December 2021 the rent at 635 tenancies, representing £84.9 million of passing rent (2020: 669 tenancies/£90.4 million of passing rent), was under negotiation and the large number of outstanding reviews reflects the requirement for all awards to be agreed with the District Valuer. A great deal of evidence to support open market reviews comes from the completion of historic rent reviews, delivery of new properties into the sector and we continue to see positive momentum in the demand, commencement and delivery for new, purpose-built premises which are being supported by NHS initiatives to modernise the primary care estate.

In Ireland, we concluded 12 indexed based reviews adding a further £0.1 million (€0.1 million) equivalent to 0.8% per annum to the contracted rent roll.

Asset Management Projects

30 asset management projects have been completed in the year and a further nine are currently on site which will increase rental income by a further £0.4 million per annum, investing £15.0 million to enhance and extend existing assets within PHP's portfolio.

PHP continues to work closely with its occupiers and has a strong pipeline of over 100 similar projects which are being progressed to further increase rental income and extend unexpired occupational lease terms. The asset management pipeline will require the investment of approximately £67 million, generating an additional £1.3 million of rental income and extending the WAULT on those premises back to an average of over 20 years.

The Company will continue to invest capital in a range of physical extensions or refurbishments through asset management projects which help avoid obsolescence and are key to maintaining the longevity and security of our income through long-term occupier retention, increased rental income and extended occupational lease terms, adding to both earnings and capital values.

Sector leading portfolio metrics

The portfolio's annualised contracted rent roll at 31 December 2021 was £140.7 million, an increase of £5.5 million or 4.1% in the year (31 December 2020: £135.2 million) driven predominantly by acquisitions in the UK and Ireland that contributed £4.1 million. Organic rental growth from rent reviews and asset management projects added a further £2.4 million although these gains were offset slightly by foreign exchange movements since the start of the year.

The security and longevity of our income are important drivers of our predictable income stream and underpin our progressive dividend policy.

Security: PHP continues to benefit from secure, long term cash flows with 90% of its rent roll funded directly or indirectly by the NHS in the UK or HSE in Ireland. The portfolio also benefits from an occupancy rate of 99.7% (2020: 99.6%).

Rental collections: continue to remain robust and as at 15 February 2022 97% had been collected in both the UK and Ireland for the first quarter of 2022. This is in-line with collection rates experienced in both 2021 and 2020 which now stand at over 99% for both countries. The balance of rent due for the first quarter of 2022 is expected to be received shortly.

Longevity: The portfolio's WAULT at 31 December 2021 was 11.6 years (31 December 2020: 12.1 years). Only £8.9 million or 6.3% of our income expires over the next three years of which c. 70% is either subject to a planned asset management initiative or terms have been agreed to renew the lease. £73.1 million or 52.0% expires in over 10 years. The table below sets out the current lease expiry profile of our income:

Valuation and returns

At 31 December 2021, the Group's portfolio comprised 521 assets independently valued at £2.796 billion (31 December 2020: £2.576 billion). After allowing for acquisition costs and capital expenditure on forward funded developments and asset management projects, the portfolio generated a valuation surplus of £110.2 million or 4.1% (2020: £51.4 million or 2.0%). One asset was sold in the year generating a profit on sale of £0.3 million. The valuation surplus was driven mainly by NIY compression in the UK for government backed, long-dated income together with rental growth from rent reviews and asset management projects.

During the year the Group's portfolio NIY has contracted by 17bps to 4.64% (31 December 2020: 4.81%) and the true equivalent yield reduced to 4.74% at 31 December 2021 (31 December 2020: 4.84%).

At 31 December 2021, the portfolio in Ireland comprised 20 assets, including two assets currently under development, valued at £213.0 million or €253.4 million (31 December 2020: 18 assets/£197.7 million or €221.1 million). The costs to complete the developments are £9.0 million (€10.7 million) and once complete the assets in Ireland will be valued at approximately £222.1 million (€264.2 million).

The portfolio's average lot size has increased to £5.4 million (31 December 2020: £5.0 million) and 86.6% of the portfolio is valued at over £3.0 million. The Group only has five assets valued at less than £1.0 million.

1 Excludes the £4.5m impact of IFRS 16 Leases with ground rents recognised as finance leases.

The underlying valuation uplift and profit on sales of £110.5 million, combined with the portfolio's growing income, helped to deliver a total property return of 9.5% in the year (2020: 7.4%).

FINANCIAL REVIEW

PHP's Adjusted earnings increased by £10.1 million or 13.8% to £83.2 million in 2021 (2020: £73.1 million). The increase reflects twelve months of cost saving synergies arising from the acquisition of Nexus and internalisation of the management structure at the start of the year, good organic rental growth from rent reviews and asset management projects together with interest cost savings arising from the reduction in the Group's cost of finance following the refinancing of a number of legacy loan facilities with Aviva.

Using the weighted average number of shares in issue in the year the Adjusted earnings per share increased to 6.2 pence (2020: 5.8 pence), an increase of 6.9%.

A revaluation surplus and profit on sales of £110.5 million (2020: £51.4 million) was generated in the year from the portfolio driven by yield compression in the UK for government backed income together with rental growth from rent reviews and asset management projects.

The acquisition of Nexus at the start of the year resulted in an exceptional termination payment and impairment of goodwill totalling £35.3 million and represents the fair value of the consideration paid of £34.1 million plus the fair value of the net liabilities acquired of £1.2 million. In addition, acquisition costs totalling £1.7 million have been expensed.

The refinancing of a number of legacy loan facilities with Aviva Investors, with a new sustainability linked £200 million facility for a 15-year term at a fixed rate of 2.52% resulted in an exceptional early termination cost of £24.6 million.

A gain on the fair value of interest rate derivatives and convertible bonds together with the amortisation of the fair value adjustment on the MedicX fixed rate debt at acquisition of £9.5 million (2020: loss £12.1 million) contributed to the profit before tax as reported under IFRS of £141.6 million (2020: £112.4 million).

The financial results for the Group are summarised as follows:

Net rental income receivable in the year increased by 4.2% or £5.5 million to £136.7 million (2020: £131.2 million).

Following the internalisation of the management structure, operational costs have continued to be managed closely and effectively. Overall property and administrative costs, excluding service charge costs recoverable, have fallen by £3.1 million or 18.6% to £13.6 million (2020: £16.7 million). The Group's EPRA cost ratio is now the lowest in the sector at 9.3%, a decrease against the 11.9% incurred during the 2020 financial year reflecting the cost savings of approximately £4.0 million per annum, arising from the internalisation of the management structure partially offset by larger performance related pay, due to the strong performance in the year, additional staff and cost inflation on administrative costs.

Despite net debt increasing in the year by £143.8 million as a result of continued investment, net finance costs in the year decreased to £43.0 million (2020: £44.9 million) reflecting the reductions in the average cost of debt achieved from various refinancing initiatives in both 2021 and 2020.

Shareholder value and total accounting return

The Adjusted Net Tangible Assets ("NTA"), per share increased by 3.8 pence or 3.4% to 116.7 pence (31 December 2020: 112.9 pence per share) during the year with the revaluation surplus and profit on sales of £110.5 million or 8.3 pence per share being the main reason for the increase although this was partially offset by the £37.0 million or 2.4 pence per share cost of the Nexus acquisition and internalisation of the management structure and £24.6 million or 1.9 pence per share early termination cost on refinancing a number of Aviva legacy loans. Dividends distributed in the year were covered by recurring Adjusted earnings with no impact on NTA.

The total adjusted NTA (NAV) return per share, including dividends distributed, in the year was 10.0 pence or 8.9% (2020: 10.9 pence or 10.1%). Over the three years since our merger with MedicX in 2019 we have delivered a total NAV return of 27.9%.

The table below sets out the movements in the Adjusted NTA and EPRA Net Disposal Value (NDV) per share over the year under review.

Financing

In October 2021, the Group refinanced a number of legacy loan facilities with Aviva Investors with a new £200 million facility for a 15-year term at a fixed rate of 2.52% and renewed its existing £100 million facility with NatWest. Sustainability KPIs have been incorporated into both facilities based around PHP's existing environment targets and the Group will benefit from a margin reduction, conditional on achieving these targets.

Post year-end, the Group issued a new €75 million (£63 million) secured private placement loan note to MetLife for a 12-year term at a fixed rate of 1.64%. The loan notes have the option to be increased by a further €75 million to €150 million over the next three years at the lender's discretion. The proceeds will be used to finance the Group's continued investment in Ireland.

Post year-end, the Group also renewed its existing revolving credit facility with Santander (£50 million) for an initial three-year term with options to extend by a further year at both the first and second anniversaries of the facility.

Including the facilities secured post year-end, the Group has £1,550.5 million (31 December 2020: £1,456.8 million) of debt facilities available to it, of which £1,232.9 million (31 December 2020: £1,159.3 million) had been drawn.

Cash balances of £33.4 million (31 December 2020: £103.6 million) resulted in Group net debt of £1,199.5 million (31 December 2020: £1,055.7 million). Contracted capital commitments at the balance sheet date totalled £29.8 million (31 December 2020: £39.6 million) and result in headroom available to the Group of £321.2 million (31 December 2020: £361.5 million).

Capital commitments comprise investment expenditure of £10.7 million, forward funded development expenditure of £9.0 million and asset management projects on site of £10.1 million.

The Group's key debt metrics are summarised in the table below:

1 - Pro-forma including debt facilities secured post year-end.

2 - After deducting capital commitments.

Average cost of debt

The Group's marginal cost of debt on its revolving credit facilities is just 1.8% following the refinancing's noted above. As these facilities are drawn the Group's average cost of drawn debt will continue to fall from the current 2.9% to 2.7%, assuming fully drawn.

The Group still has £386 million of legacy loans, acquired with the merger of MedicX in 2019, at a blended fixed rate of 4.2% and a weighted average maturity of 9.7 years. Excluding these facilities, the Group's average cost of debt is 2.3% and we continue to look at further opportunities to reduce the Group's average cost of debt and deliver further finance cost-saving synergies.

Interest rate exposure

The analysis of the Group's exposure to interest rate risk in its debt portfolio as at 31 December 2021 is as follows:

1 - Pro-forma including debt facilities secured post year-end.

Interest rate swap contracts

Following the refinancing of a number of legacy loan facilities with Aviva Investors with a new £200 million facility the Group swapped the 2.52% fixed rate back to variable rate, 3-month SONIA plus a spread of 160bps, for a limited three-year period to take advantage of the shorter dated variable interest rates and to offset the short-term over-hedged position regarding fixed rate debt. To mitigate the risk of further interest rate rises we purchased 1.25% caps with a nominal value of £200 million to cover the same period at a cost of £1.8 million or 0.1 pence per share.

Accounting standards require PHP to mark its interest rate swaps to market at each balance sheet date. During the year there was a gain of £2.7 million (2020: loss £8.5million) on the fair value movement of the Group's interest rate derivatives due primarily to increases in interest rates assumed in the forward yield curves used to value the interest rate swaps. As at 31 December 2021 the mark-to-market ("MtM") value of the swap and cap portfolio was an asset of £4.4 million (31 December 2020: liability of £0.1 million).

Currency exposure

The Group now owns €253.4 million or £213.0 million (31 December 2020: €221.1 million / £197.7 million) of Euro denominated assets in Ireland as at 31 December 2021 and the value of these assets and rental income represented just 8% of the Group's total portfolio. In order to hedge the risk associated with exchange rates, the Group has chosen to fund its investment in Irish assets through the use of Euro denominated debt, providing a natural asset to liability hedge, within the overall Group loan to value limits set by the Board. At 31 December 2021 the Group had €186.5 million (31 December 2020: €163.6 million) of drawn euro denominated debt.

Euro rental receipts are used to first finance Euro interest and administrative costs and surpluses are used to fund further portfolio expansion.

Fixed rate debt mark-to-market ("MtM")

The MtM of the Group's fixed rate debt as at 31 December 2021 was £58.9 million (31 December 2020: £130.3 million) equivalent to 4.4 pence per share (31 December 2020: 9.9 pence). The large decrease in the MtM during the year is due to the refinancing of various legacy loans with Aviva Investors and increases in interest rates assumed in the forward yield curves used to value the debt during the year. The MtM valuation is sensitive to movements in interest rates assumed in forward yield curves.

Convertible bonds

In July 2019, the Group issued for a six-year term new unsecured convertible bonds with a nominal value of £150 million and a coupon of 2.875% per annum. Subject to certain conditions, the new bonds will be convertible into fully paid Ordinary Shares of the Company and the initial exchange price was set at 153.25 pence per Ordinary Share. The exchange price is subject to adjustment if dividends paid per share exceed 2.8 pence per annum and in accordance with the dividend protection provisions the conversion price has been adjusted to 142.29 pence per Ordinary Share.

The conversion of the £150 million convertible bond into new Ordinary Shares would reduce the Group's loan to value ratio by 5.4% from 42.9% to 37.5% and result in the issue of 105.4 million new Ordinary Shares.

RISK MANAGEMENT AND PRINCIPAL RISKS

The Board believes the Group has strong long term prospects, being well positioned to address the need for better primary healthcare buildings in the UK and Ireland.

Risk management overview

Effective risk management is a key element of the Board's operational processes. Risk is inherent in any business, and the Board has determined the Group's risk appetite, which is reviewed on an annual basis. Group operations have been structured in order to accept risks within the Group's overall risk appetite, and to oversee the management of these risks to minimise exposure and optimise the returns generated for the accepted risk. The Group aims to operate in a low risk environment, appropriate for its strategic objective of generating progressive returns for shareholders. Key elements of maintaining this low risk approach are:

• Investment focuses on the primary health real estate sector which is traditionally much less cyclical than other real estate sectors.

• The majority of the Group's rental income is received directly or indirectly from government bodies in the UK and Ireland.

• The Group benefits from long initial lease terms, largely with upwards-only review terms, providing clear visibility of income.

• The Group has a very small (£0.7 million) exposure as a direct developer of real estate, which means that the Group is not materially exposed to risks that are inherent in property development.

• The Board funds its operations so as to maintain an appropriate mix of debt and equity.

• Debt funding is procured from a range of providers, maintaining a spread of maturities, currencies and a mix of terms so as to fix or hedge the majority of interest costs.

• The structure of the Group's operations includes rigorous, regular review of risks and how these are mitigated and managed across all areas of the Group's activities. The Group faces a variety of risks that have the potential to impact on its performance, position and longer term viability. These include external factors that may arise from the markets in which the Group operates, government and fiscal policy and general economic conditions and internal risks that arise from how the Group is managed and chooses to structure its operations.

Approach to risk management

Risk is considered at every level of the Group's operations and is reflected in the controls and processes that have been put in place across the Group. The Group's risk management process is underpinned by strong working relationships between the Board and the management team which enables the prompt assessment and response to risk issues that may be identified at any level of the Group's business.

The Board is responsible for effective risk management across the Group and retains ownership of the significant risks that are faced by the Group. This includes ultimate responsibility for determining and reviewing the nature and extent of the principal risks faced by the Group and assessing the Group's risk management processes and controls. These systems and controls are designed to identify, manage and mitigate risks that the Group faces but will not eliminate such risks and can provide reasonable but not absolute assurance.

The management team assists the Board in its assessment and monitoring of operational and financial risks and PHP has in place robust systems and procedures to ensure risk management is embedded in its approach to managing the Group's portfolio and operations. PHP has established a Risk Committee that is formed of members of its senior management team and chaired by the CFO who is experienced in the operation and oversight of risk management processes, with independent standing invitees attending throughout the year.

The Audit Committee reviews the Group's systems of risk management and their effectiveness on behalf of the Board. These systems and processes have been in place for the year under review and remained in place up to the date of approval of the Annual Report and Accounts.

PHP has implemented a wide-ranging system of internal controls and operational procedures that are designed to manage risk as effectively as possible, but it is recognised that risk cannot be totally eliminated. Staff employed by PHP are intrinsically involved in the identification and management of risk. Strategic risks are recorded in a risk register and are assessed and rated within a defined scoring system.

The Risk Committee reports its processes of risk management and rating of identified risks to the Audit Committee. The risk register is reviewed and updated twice annually by the secretary assisted by members of the Risk Committee, and assesses inherent risks the business faces, as well as the residual risk after specific safeguards, mitigation and/or management actions have been overlaid. The risk register forms an appendix to the report which details risks that have (i) an initial high inherent risk rating, and (ii) higher residual risk ratings. The Audit Committee in turn agrees those risks that will be managed by management and those where the Board will retain direct ownership and responsibility for managing and monitoring those risks.

The Board recognises that it has limited ability to control a number of the external risks that the Group faces, such as government policy, but keeps the possible impact of such risks under review and considers them as part of its decision-making process.

Principal risks and uncertainties

The Board has undertaken a robust assessment of the emerging and principal risks faced by the Group that may threaten its business model, future performance, solvency or liquidity and its ability to meet the overall objective of the Group of delivering progressive returns to shareholders through a combination of earnings growth and capital appreciation. A result of this assessment was to remove COVID-19 as a principal risk in the year as a result of the impact being less material than envisaged, and to introduce a new principal risk, responsible business. The new principal risk is a direct result of the greater scrutiny by both regulators and investors, as well as recent political agendas that are expected to impose that further environmental initiatives be mandated. These are set out below:

Viability Statement

In accordance with the 2018 UK Corporate Governance Code, the Board has assessed the prospects of the Group over the longer term, taking account of the Group's current position, business strategy, principal risks and outlook.

The Board believes the Company has strong long term prospects, being well positioned to address the need for better primary care health centres in the UK and Ireland.

Emerging risks

In completing this assessment the Board continues to monitor emerging risks and their potential impact on the Group. Development delivery risk was added to the Risk Register during 2020, and continues to be monitored, however the Board still believe the current exposure to this risk is not yet considered a principal risk and is therefore not included in the table above.

The Board also considered, at its annual strategy day, emerging risks affecting the current primary care delivery model, in particular the impact of digital technologies. As part of the outcome of the Board's evaluation process it was agreed to include a formal emerging risk review in conjunction with the annual strategy review.

With respect to Brexit, the Board continues to monitor the situation but, as disclosed in the Annual Report, does not consider Brexit, in itself, to constitute a significant risk to the business. With respect to COVID-19, whilst the Board also continues to monitor the situation, it no longer feels that it in itself constitutes a significant risk to the business, and so it has been removed from the principal risks.

Viability statement

The Directors confirm that, as part of their strategic planning and risk management processes, they have undertaken an assessment of the viability of the Group, considering the current position and the potential impact of the principal risks and prospects over a three-year time horizon. Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2024. Although individually the Group's assets may have relatively long unexpired lease terms and will all have a defined asset management strategy, the Board has undertaken its detailed financial review over a three-year period because:

• the Group's financial review and budgetary processes cover a three-year look forward period; and

• occupational leases within the Group's property portfolio typically have a three-yearly rent review pattern and so modelling over this period allows the Group's financial projections to include a full cycle of reversion, arising from open market, fixed and index-linked rent reviews.

The Group's financial review and budgetary processes are based on an integrated model that projects performance, cash flows, position and other key performance indicators including earnings per share, leverage rates, net asset values per share and REIT compliance over the review period. In addition, the forecast model looks at the funding of the Group's activities and its compliance with the financial covenant requirements of its debt facilities. The model uses a number of key parameters in generating its forecasts that reflect the Group's strategy and operating processes and the Board's expectation of market developments in the review period. In undertaking its financial review, these parameters have been flexed to reflect severe, but realistic, scenarios both individually and collectively. Sensitivities applied are derived from the principal risks faced by the Group that could affect solvency or liquidity and are as follows:

• declining attractiveness of the Group's assets or extenuating economic circumstances impact investment values - valuation parameter stress tested to provide for a one-off 10% / £283 million fall in June 2022;

• 15% tenant default rate;

• rental growth assumptions amended to see nil uplifts on open market reviews;

• variable rate interest rates rise by an immediate 2% effective from 1 January 2022; and

• tightly controlled NHS scheme approval restricts investment opportunity - investment quantum flexed to remove non-committed transactions.

We have assessed the impact of these assumptions on the Group's key financial metrics over the assessment period including profitability, net debt, loan to value ratios and available financial headroom which are as follows:

\* The above analysis takes into account the two debt facilities completed immediately post year end.

In making its assessment, the Board has made a number of specific assumptions that overlay the financial parameters used in the Group's models. The Board has assumed that, in addition to the specific impact of new debt facilities, the Group will be able to refinance or replace other debt facilities that mature within the review period in advance of their maturity and on terms similar to those at present.

Harry Hyman

Chief Executive Officer

15 February 2022

Group statement of comprehensive income

for the year ended 31 December 2021

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

2 See Glossary of Terms.

The above relates wholly to continuing operations.

Group balance sheet

at 31 December 2021

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

2 See Glossary of Terms.

These financial statements were approved by the Board of Directors on 15 February 2022 and signed on its behalf by:

Richard Howell

Chief Financial Officer

Registered in England Number: 3033634

Group cash flow statement

for the year ended 31 December 2021

Group statement of changes in equity

for the year ended 31 December 2021

Notes to the financial statements

1. Corporate information

The Group's financial statements for the year ended 31 December 2021 were approved by the Board of Directors on 15 February 2022 and the Group Balance Sheet was signed on the Board's behalf by the Chairman, Steven Owen. Primary Health Properties PLC is a public limited company incorporated in England and Wales and domiciled in the United Kingdom. The Company's Ordinary Shares are admitted to the Official List of the UK Listing Authority, a division of the Financial Conduct Authority, and traded on the London Stock Exchange.

2. Accounting policies

2.1 Basis of preparation

The Group's financial statements have been prepared on the historical cost basis, except for investment properties, including investment properties under construction and land and derivative financial instruments that have been measured at fair value. The Group's financial statements are prepared on the going concern basis (see page 102 of the Annual Report for further details) and presented in Sterling rounded to the nearest million.

Statement of compliance

The consolidated financial statements for the Group have been prepared under International Financial Reporting Standards ("IFRSs") as adopted by the United Kingdom and applied in accordance with the Companies Act 2006 and Article 4 of the IAS Regulation.

2.2 Standards adopted during the year

The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRSs effective for the Group as of 1 January 2021.

First time application of IFRS 2 Share-based payments

The Group has applied IFRS 2, which had not been applicable in prior years, for the first time in the current year. The standard requires an entity to recognise share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.

2.3 Summary of significant accounting policies

Basis of consolidation

The Group's financial statements consolidate the financial statements of Primary Health Properties PLC and its wholly owned subsidiary undertakings. Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; through currently exercisable or convertible potential voting rights; or by way of contractual agreement. The financial statements of the subsidiary undertakings are prepared for the accounting reference period ending 31 December each year using consistent accounting policies. All intercompany balances and transactions, including unrealised profits arising from them, are eliminated on consolidation.

The individual financial statements of Primary Health Properties PLC and each of its subsidiary undertakings will be prepared under FRS 101. The use of IFRSs at Group level does not affect the distributable reserves available to the Group.

Segmental reporting

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

Foreign currency transactions

Each Group company presents its individual financial statements in its functional currency. The functional currency of all UK subsidiaries (with the exception of PHP Euro Private Placement Limited and MXF Properties Ireland Limited which are Euro) is Sterling and the functional currency of Primary Health Properties ICAV and its Irish domiciled subsidiaries is Euro.

Transactions in currencies other than an individual entity's functional currency (foreign currencies) are recognised at the applicable exchange rate ruling on the transaction date. Exchange differences resulting from settling these transactions, or from retranslating monetary assets and liabilities denominated in foreign currencies, are included in the Group Statement of Comprehensive Income.

Foreign operations

In preparing the Group's consolidated financial statements, the assets and liabilities of foreign entities are translated into Sterling at exchange rates prevailing on the balance sheet date. The income, expenses and cash flows of a foreign entity are translated at the average exchange rate for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of transactions are used.

The exchange rates used to translate foreign currency amounts in 2021 are as follows:

• Group Balance Sheet: £1 = €1.1893 (2020: €1.1185).

• Group Statement of Comprehensive Income: £1 = €1.1778 (2020: €1.105).

Investment properties and investment properties under construction

The Group's investment properties are held for long term investment. Investment properties and those under construction are initially measured at cost, including transaction costs. Subsequent to initial recognition, investment properties and investment properties under construction are stated at fair value based on market data and a professional valuation made as of each reporting date. The fair value of investment property does not reflect future capital expenditure that will improve or enhance the property and does not reflect future benefits from this future expenditure.

Gains or losses arising from changes in the fair value of investment properties and investment properties under construction are included in the Group Statement of Comprehensive Income in the year in which they arise.

Investment properties are recognised on acquisition upon completion of contract, which is when control of the asset passes to the Group. Investment properties cease to be recognised when control of the property passes to the purchaser, which is upon completion of the sales contract. Any gains and losses arising are recognised in the Group Statement of Comprehensive Income in the year of disposal.

All costs associated with the purchase and construction of investment properties under construction are capitalised including attributable interest and staff costs. Interest is calculated on the expenditure by reference to the average rate of interest on the Group's borrowings. When properties under construction are completed the capitalisation of costs ceases and they are reclassified as investment properties.

The Group may enter into a forward funding agreement with third-party developers in respect of certain properties under development. In accordance with these agreements, the Group will make monthly stage payments to the developer based on certified works on site at that time. Interest is charged to the developer on all stage payments made during the construction period and on the cost of the land acquired by the Group at the outset of the development and taken to the Group Statement of Comprehensive Income in the year in which it accrues.

Property acquisitions and business combinations

Where a property is acquired through the acquisition of corporate interests, the Board considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business. The basis of the judgement is set out in Note 2.4(b).

Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values on the acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Where any excess of the purchase price of business combinations over the fair value of the assets, liabilities and contingent liabilities is acquired, goodwill is recognised. This is recognised as an asset and is reviewed for impairment immediately, and then at least annually. Any impairment is recognised immediately in the income statement.

Gains on sale of properties

Gains on sale of properties are recognised on the completion of the contract, and are calculated by reference to the carrying value at the end of the previous reporting period, adjusted for subsequent capital expenditure and sale costs.

Net rental income

Rental income arising from operating leases on investment properties is accounted for on a straight line basis over the lease term. An adjustment to rental income is recognised from the rent review date of each lease in relation to unsettled rent reviews. Such adjustments are accrued at 100% (2020: 100%) of the additional rental income that is expected to result from the review. For leases which contain fixed or minimum deemed uplifts, the rental income is recognised on a straight line basis over the lease term. Incentives for lessees to enter into lease agreements are spread evenly over the lease terms, even if the payments are not made on such a basis. Rental income is measured at the fair value of the consideration receivable, excluding discounts, rebates, VAT and other sales taxes or duty.

Net rental income is the rental income receivable in the period after payment of direct property costs.

Interest income

Revenue is recognised as interest accrues, using the effective interest method (that is, the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).

Financial instruments under IFRS 9

Trade receivables

Trade receivables are recognised and carried at amortised cost as the Group's business model is to collect the contractual cash flows due from tenants. Provision is made based on the expected credit loss model which reflects the Group's historical credit loss experience over the past three years but also reflects the lifetime expected credit loss.

Cash and cash equivalents

Cash and cash equivalents are defined as cash and short term deposits, including any bank overdrafts, with an original maturity of three months or less, measured at amortised cost.

Trade and other payables

Trade payables are recognised and carried at their invoiced value inclusive of any VAT that may be applicable.

Bank loans and borrowings

All loans and borrowings are initially measured at fair value less directly attributable transaction costs. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest method.

The interest due within the next twelve months is accrued at the end of the year and presented as a current liability within trade and other payables.

Borrowing costs

Borrowing costs that are separately identifiable and directly attributable to the acquisition or construction of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs the Group incurs in connection with the borrowing of funds.

Convertible bond

The convertible bond is designated as "at fair value through profit or loss" and so is presented on the Group Balance Sheet at fair value with all gains and losses, including the write-off of issuance costs, recognised in the Group Statement of Comprehensive Income. The fair value of the convertible bond is assessed in accordance with level 1 valuation techniques as set out within "Fair value measurements" within these accounting policies. The interest charge in respect of the coupon rate on the bond has been recognised within the underlying component of net financing costs on an accruals basis. Refer to Note 15b for further details. The amount of the change in fair value of the financial liability designated at fair value through profit or loss that is attributable to changes in credit risk will be recognised in other comprehensive income.

De-recognition of financial assets and liabilities

Financial assets

A financial asset (or where applicable a part of a financial asset or part of a group of similar financial assets) is de-recognised where:

• the rights to receive cash flows from the asset have expired;

• the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a "pass-through" arrangement;

• the Group has transferred its right to receive cash flows from the asset and either: (a) has transferred substantially all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset; or

• when the cash flows are significantly modified.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities

A financial liability is de-recognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

When the exchange or modification of an existing financial liability is not accounted for as an extinguishment, any costs or fees incurred adjust the liability's carrying amount and are amortised over the modified liability's remaining term and any difference in the carrying amount after modification is recognised as a modification gain or loss.

Tax

Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Taxation is recognised in the Group Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.

Current tax is the expected tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Fair value measurements

The Group measures certain financial instruments such as derivatives, and non-financial assets such as investment property, at fair value at the end of each reporting period. Also, fair values of financial instruments measured at amortised cost are disclosed in the financial statements.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• in the principal market for the asset or liability; or

• in the absence of a principal market, in the most advantageous market for the asset or liability.

The Group must be able to access the principal or the most advantageous market at the measurement date.

The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques at three levels that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole:

Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

Level 3: Valuation techniques for which the lowest input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.

Hedge accounting

At the inception of a transaction the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at inception and on an ongoing basis.

For cash flow hedging, the Group monitors the hedging instrument to check it continues to meet the criteria of IAS 39, having applied the practical expedient on transition, for being described as "highly effective" in offsetting changes in the fair values or cash flows of hedged items.

For net investment hedge relationships, the Group monitors the hedging instrument to check it continues to meet the criteria of IAS 39 for being described as "highly effective".

i) Derivative financial instruments ("derivatives")

The Group uses interest rate swaps to help manage its interest rate risk.

All interest rate derivatives are initially recognised at fair value at the date the derivative is entered into and are subsequently remeasured at fair value. The fair values of the Group's interest rate swaps are calculated by Chatham (formally JCRA), an independent specialist which provides treasury management services to the Group.

The method of recognising the resulting gain or loss depends on whether the derivative is designated as an effective hedging instrument:

• Where a derivative is designated as a hedge of the variability of a highly probable forecast transaction, such as an interest payment, the element of the gain or loss on the derivative that is an "effective" hedge is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognised directly in the cash flow hedging reserve are reclassified into the Group Statement of Comprehensive Income in the same period or periods during which the asset acquired or liability assumed affects the Group Statement of Comprehensive Income, i.e. when interest income or expense is recognised.

• The gain or loss on derivatives that do not meet the strict criteria for being "effective" and so do not qualify for hedge accounting and the non-qualifying element of derivatives that do qualify for hedge accounting are recognised in the Group Statement of Comprehensive Income immediately. The treatment does not alter the fact that the derivatives are economic hedges of the underlying transaction.

For swaps that have been cancelled which previously qualified for hedge accounting, the remaining value within the cash flow hedging reserve at the date of cancellation is recycled to the Group Statement of Comprehensive Income on a straight line basis from the date of cancellation to the original swap expiry date where the hedged transaction is still expected to occur. If the swaps have been cancelled and the hedged transaction is no longer expected to occur, the amount accumulated in the hedging reserve is reclassified to profit and loss immediately.

Leases - Group as a lessor

The vast majority of the Group's properties are leased out under operating leases and are included within investment properties. Rental income, including the effect of lease incentives, is recognised on a straight line basis over the lease term.

Where the Group transfers substantially all the risks and benefits of ownership of the asset, the arrangement is classified as a finance lease and a receivable is recognised for the initial direct costs of the lease and the present value of the minimum lease payments. Finance income is recognised in the Group Statement of Comprehensive Income so as to achieve a constant rate of return on the remaining net investment in the lease. Interest income on finance leases is restricted to the amount of interest actually received.

Employee costs

Defined contribution pension plans

Obligations for contributions to defined contribution pension plans are charged to the income statement as incurred.

Share-based employee remuneration

The fair value of equity-settled share-based payments to employees is determined with reference to the fair value of the equity instruments at the date of grant and is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares or options that will eventually vest. The fair value of awards is equal to the market value at grant date.

Capitalised salaries

Certain internal staff and associated costs directly attributable to the management of major projects are capitalised. Internal staff costs are capitalised from the start of the project until the date of practical completion.

2.4 Significant accounting estimates and judgements

The preparation of the Group financial statements requires management to make a number of estimates and judgements that affect the reported amounts of assets and liabilities and may differ from future actual results. The estimates and judgements that are considered most critical and that have a significant inherent risk of causing a material adjustment to the carrying amounts of assets and liabilities are:

a) Estimates

Fair value of investment properties

Investment properties include: (i) completed investment properties; and (ii) investment properties under construction. Completed investment properties comprise real estate held by the Group or leased by the Group under a finance lease in order to earn rental income or for capital appreciation, or both.

The fair market value of a property is deemed by the independent property valuer appointed by the Group to be the estimated amount for which a property should exchange, on the date of valuation, in an arm's length transaction. Properties have been valued on an individual basis, assuming that they will be sold individually over time. Allowances are made to reflect the purchaser's costs of professional fees and stamp duty and tax.

In accordance with RICS Appraisal and Valuation Standards, factors taken into account are current market conditions, annual rentals, state of repair, ground stability, contamination issues and fire and health and safety legislation. Refer to Note 11 of the financial statements which includes further information on the fair value assumptions and sensitivities.

In determining the fair value of investment properties under construction the valuer is required to consider the significant risks which are relevant to the development process including, but not limited to, construction and letting risks. The valuer takes into account any pre-lets and whether construction risk remains with the respective developer or contractor.

Fair value of derivatives

In accordance with IFRS 9, the Group values its derivative financial instruments at fair value. Fair value is estimated by Chatham (formerly JCRA) on behalf of the Group, using a number of assumptions based upon market rates and discounted future cash flows. The derivative financial instruments have been valued by reference to the mid-price of the yield curve prevailing on 31 December 2021. Fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate. Refer to Note 17 of the financial statements.

b) Judgements

Hedge effectiveness

The Group has a number of interest rate swaps that mature after the Group's bank facilities, to which they relate, are due to expire. In accordance with IAS 39, in order to apply hedge accounting in relation to these interest rate swaps, the Group has determined that it is highly probable that these bank facilities will be renegotiated on or before expiry and that variable interest rate debt finance will be in place until the expiry date of the swaps.

The Group is exposed to foreign exchange rate movements due to operations in Ireland. In accordance with IAS 39, in order to apply hedge accounting with the Euro-denominated cash flows, the Group has determined that it is highly probably that there will be corresponding Euro bank drawdowns and that these will be renegotiated on or before expiry.

Property acquisitions during the year

The Directors have reviewed the acquisitions during the year on an individual basis in accordance with the requirements of IFRS 3(R). Where corporate entities were acquired through special purpose vehicles for holding properties rather than separate business entities, these were accounted for as asset acquisitions. Where business processes inherent in the entities were acquired, these were accounted for as a business combination.

2.5 Standards issued but not yet effective

At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective and in some cases have not yet been adopted by the UK:

• Amendments to IAS 1 Classification of liabilities as current or non-current.

• IAS 8 Definition of accounting estimates.

• IFRS 3 Reference to the conceptual framework.

• Annual improvements to IFRS standards 2018-2020.

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2022, but are not yet applicable to the Group and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group.

3. Rental and related income

Revenue comprises rental income receivable on property investments in the UK and Ireland, which is exclusive of VAT. Revenue is derived from one reportable operating segment and £134.7 million and £10.9 million of rental income is derived from the UK and Ireland respectively. Details of the lease income are given below.

Group as a lessor

a) The future minimum lease payments under non-cancellable operating leases receivable by the Group are as follows:

b) The rental income earned on operating leases is recognised on a straight line basis over the lease term.

The Group leases medical centres to GPs, NHS organisations, the HSE in Ireland and other healthcare users, typically on long term occupational leases which provide for regular reviews of rent on an effectively upwards-only basis.

4. Group operating profit is stated after charging:

a) Advisory fees

On 5 January 2021 the Group completed the acquisition of Nexus and internalised the management arrangements and consequently payments ceased at this date with no further amounts payable in relation to advisory fees to Nexus.

The advisory fees calculated and payable for the period to 31 December are as follows:

As at 31 December 2021 £nil was payable to Nexus (2020: £0.8 million).

There were no other fees paid to Nexus during the year in respect of capital projects and service charge management fees (2020: £0.4 million and £0.4 million respectively).

The Group shares certain operational services with Nexus. Amounts paid during the year in relation to these shared services totalled £0.1 million, and amounts received during the year totalled £0.2 million.

Refer to Note 7 for further information on the Nexus acquisition.

b) Staff costs

The Group operates a defined contribution pension scheme for all employees. The Group contribution to the scheme during the year was £0.1 million (2020: £nil), which represents the total expense recognised through the income statement. As at 31 December 2021, there were no contributions (2020: £nil) due in respect of the reporting period that had not been paid over to the plan.

The average monthly number of Group employees during the year was 59 (2020: nil), and as at 31 December 2021 was 62 (2020: nil).

The Executive Directors and Non-executive Directors are the key management personnel. Full disclosure of Directors' emoluments, as required by the Companies Act 2006, can be found in the Remuneration Report in the Annual Report.

The Group's equity-settled share-based payments comprise the following:

The Group expenses an estimate of how many shares are likely to vest based on the market price at the date of grant, taking account of expected performance against the relevant performance targets and service periods, which are discussed in further detail in the Remuneration Report.

c) Performance Incentive Fee ("PIF")

Information about the Performance Incentive Fee is provided in the Corporate Governance section of the Strategic Review in the Annual Report.

A PIF of £1.4 million was paid in the period in respect of 2020 and at 31 December 2021 the balance on the notional cumulative PIF account was £9.2 million (2020: £8.1 million), of which £1.3 million (2020: £1.5 million) will become payable on approval of the Annual Report by the Board. The balance is conditional on performance in future years and the restrictions noted in the Financial Review on pages 23 to 27.

5. Finance income

6. Finance costs

The exceptional early loan redemption finance cost was an amount paid in the year to terminate the Aviva facilities. The weighted average interest rate on the loans redeemed was 4.99% with associated early repayment costs of £24.6 million.

The fair value loss on derivatives recognised in the Group Statement of Comprehensive Income has arisen from the interest rate swaps for which hedge accounting does not apply. There was no fair value gain or loss accounted for directly in equity on derivatives which do meet the hedge effectiveness criteria under IAS 39 (2020: loss of £0.4 million). An amount of £4.5 million (2020: £4.4 million) has been amortised from the cash flow hedging reserve in the year resulting from early termination of effective swap contracts (see Note 23).

Details of the fair value loss on hedges which meet the effectiveness criteria for hedge accounting under IAS 39 are set out in Note 23.

The fair value movement in the convertible bonds is recognised in the Group Statement of Comprehensive Income within profit before taxation and is excluded from the calculation of EPRA earnings and EPRA NTA (replacing EPRA NAV). Refer to Note 15 for further details about the convertible bonds.

7. Business combination

On 5 January 2021 the Group's management function was internalised by acquiring PHP Tradeco Holdings Limited (formerly Nexus Tradeco Holdings Limited), which is the holding company of its long-standing external property adviser, PHP Tradeco Limited (formerly Nexus Tradeco Limited), and certain subsidiaries, including the primary care development business ("Nexus"). Primary Health Properties PLC acquired the entire issued ordinary share capital of PHP Tradeco Holdings Limited at a total cost of £34.1 million, including a termination payment of £29.0 million.

The total cost was met by £16.5 million payment in cash, and £17.6 million satisfied by the issue of 11,485,080 new Ordinary Shares of 12.5 pence each in the share capital of PHP at the quoted market price on completion of 152.8 pence per share.

The acquisition of PHP Tradeco Holdings Limited for a total fair value of consideration of £5.1 million resulted in the transfer of certain assets and liabilities and the fair value of the net liabilities acquired was £1.2 million, resulting in a goodwill on acquisition of £6.3 million.

The acquisition resulted in the termination of the advisory agreement. The total cost of terminating the Nexus agreement and goodwill on acquisition has been calculated to be £35.3 million (fair value of consideration paid £34.1 million plus fair value of net liabilities acquired £1.2 million) when taking into account the consideration and the net assets with fair value adjustments. The goodwill on acquisition of £35.3 million was to affect the termination of the management agreement with Nexus and reflects the termination notice period, approximately 2 years and 2.5 months under the management agreement totalling £29.0 million. The remaining £6.3 million represents a discretionary payment on account of the acquisition of principally the management team, assembled workforce, systems, operational platform and know-how which were "re-branded" from Nexus to PHP.

Acquisition of the Nexus entities contributed £nil revenue and a cost saving of £3.9 million to the Group's profit for the period between the date of acquisition and the reporting date. If the acquisition had completed on the first day of the financial year, the impact on Group revenues for the year would have been £nil and the impact on Group profit would have been a cost saving of £4.0 million.

8. Taxation

a) Taxation charge in the Group Statement of Comprehensive Income

The taxation charge is made up as follows:

The UK corporation tax rate of 19% (2020: 19%) and the Irish corporation tax rate of 20% (2020: 20%) have been applied in the measurement of the Group's UK and Ireland related activities tax liability at 31 December 2021.

b) Factors affecting the tax charge for the year

The tax assessed for the year is lower than (2020: lower than) the standard rate of corporation tax in the UK. The differences are explained below:

The UK REIT rules exempt the profits of the Group's property rental business from corporation tax.

c) Basis of taxation

The Group elected to be treated as a UK REIT with effect from 1 January 2007. The UK REIT rules exempt the profits of the Group's property rental business from corporation tax. Gains on properties are also exempt from tax, provided they are not held for trading or sold in the three years post completion of development. The Group will otherwise be subject to corporation tax at 19% (2020: 19%).

Acquired companies are effectively converted to UK REIT status from the date on which they become a member of the Group.

As a UK REIT, the Company is required to pay Property Income Distributions ("PIDs") equal to at least 90% of the Group's rental profit calculated by reference to tax rules rather than accounting standards.

To remain as a UK REIT there are a number of conditions to be met in respect of the principal company of the Group, the Group's qualifying activities and the balance of its business. The Group remains compliant as at 31 December 2021.

The Group's activities in Ireland are conducted via Irish companies, a Guernsey company and an Irish Collective Asset Vehicle ("ICAV"). The Irish companies pay Irish corporation tax on trading activities and deferred tax is calculated on the increase in capital values. The Guernsey company pays tax on its net rental income. The ICAV does not pay any Irish corporation tax on its profits but a 20% withholding tax is paid on distributions to owners.

9. Earnings per share

Performance measures

In the tables below, we present earnings per share and net assets per share calculated in accordance with IFRSs, together with our own adjusted measure and certain measures defined by the European Public Real Estate Association ("EPRA"), which have been included to assist comparison between European property companies. Two of the Group's key financial performance measures are adjusted earnings per share and adjusted net tangible assets per share.

Adjusted earnings, which is a tax adjusted measure of revenue profit, is the basis for the calculation of adjusted earnings per share. We believe adjusted earnings and adjusted earnings per share provide further insight into the results of the Group's operational performance to stakeholders as they focus on the net rental income performance of the business and exclude capital and other items which can vary significantly from year to year.

Earnings per share

Number of shares