Primary Health Regulatory News (PHP)

Primary Health Properties PLC

Preliminary results for the year ended 31 December 2020

Continued strong performance throughout COVID-19 pandemic and successful management internalisation

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 2020.

Harry Hyman, Chief Executive, commented:

"We have continued to support the NHS in the UK, HSE in Ireland and our GP occupiers throughout the COVID-19 pandemic which has highlighted the demands on health systems around the world. Many of our primary care facilities and occupiers are now in the front-line of delivering Covid-19 vaccines. We continue to see demand for extra space to help enable the redirection of activities out of hospitals. 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.

"In early 2021, we successfully completed the internalisation of the Group's management structure which will immediately deliver material financial and operational benefits driving further earnings and dividend growth, enhancing shareholder returns, whilst simultaneously broadening our appeal to a wider investment community and underpinning the next stage of the Company's growth."

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"), IFRS profit before tax excluding MedicX exceptional adjustments, net tangible assets ("NTA"), rent roll, NIY, WAULT and net asset value ("NAV") are set out in the Glossary of Terms.

2 See note 8, earnings per share, to the financial statements.

3 See note 8, net asset value per share, to the financial statements. From 1 January 2020 Adjusted EPRA NAV, EPRA NAV and EPRA NNNAV have been replaced with four new metrics: adjusted net tangible assets, EPRA net tangible assets ("NTA"), EPRA net disposal value ("NDV") and EPRA net reinstatement value ("NRV") which are considered to be alternative performance measures. The Group has determined that adjusted net tangible assets is the most relevant measure and hence is now reported in place of adjusted EPRA NAV.

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 The IFRS profit before tax excluding MedicX exceptional adjustments is set-out in detail in the summarised results table on page 14.

6 See note 9, dividends, to the financial statements.

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

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

9 £123.9m of non-cash losses are composed of £138.4m exceptional revaluation loss arising on the merger with MedicX less the £14.5m exceptional transactions costs.

DELIVERING EARNINGS AND DIVIDEND GROWTH

· Adjusted earnings per share increased by 5.5% to 5.8p (2019: 5.5p)

· Notwithstanding the impact of Covid-19, average uplift of 1.8% per annum on rent reviews completed in the year, continuing the trend in rental growth (FY 2019: 1.9%; FY 2018: 1.4%)

· Additional annualised rental income on a like-for-like basis of £2.0 million or 1.6%, from rent reviews and asset management projects (FY 2019: £1.9 million or 1.5%; FY 2018: £1.3 million or 1.8%)

· Contracted annualised rent roll increased by 5.9% to £135.2 million (31 December 2019: £127.7 million)

· 23 purpose-built medical centres acquired in the year for £58.8 million with good asset management opportunities

· Four forward funded developments acquired in the year with a net development cost of £34.2 million at Arklow and Enniscorthy in Ireland, Epsom, Surrey and Llanbradach, Wales

· Post period end, successful completion of the internalisation of the Group's management structure, at a cost including fees of £35.7m, with shareholders representing 99.95% of the votes cast voting in favour of the internalisation which is anticipated to deliver annual cost savings of approximately £4.0 million.

· Quarterly dividends totalling 5.9p per share distributed in the year, a 5.4% increase over 2019 (5.6p per share)

· First quarterly dividend of 1.55p per share declared, payable on 26 February 2021, equivalent to 6.2p on an annualised basis. This represents a further 5.1% increase over the 2020 dividend per share and marks the start of the Company's 25th consecutive year of dividend growth

· The Company intends to make further dividend payments in May, August and November 2021 and maintain its strategy of paying a progressive dividend, in equal quarterly instalments, covered by underlying earnings in each financial year

DELIVERING NET ASSET VALUE GROWTH

· Adjusted Net Tangible Assets (NTA) per share increased by 4.6% to 112.9 pence (31 December 2019: 107.9 pence)

· Property portfolio at 31 December 2020 valued at £2.576 billion (31 December 2019: £2.413 billion) reflecting a net initial yield of 4.81% (31 December 2019: 4.86%). A revaluation surplus was generated in the year of £51.4 million (2019: £49.8 million), representing growth of 2.0% (2019: 2.1%)

· Portfolio in Ireland now comprises 18 assets, valued at £198 million (€221 million), including two forward funded developments currently under construction which, if valued as complete, will increase the total asset value to approximately £220 million (€246 million)

· The Group completed the forward funded developments at Athy, Bray, Rialto and Banagher in Ireland during the year and has six developments currently on site with a net development cost of £47.4 million. All sites in the UK and Ireland remain open and construction continues to progress

· Strong pipeline of targeted acquisitions and asset management projects with a value of approximately £129 million, of which £59 million is currently under offer, together with additional pipeline from Nexus Developments

· Post period end the development expertise of Nexus Developments acquired as part of the internalisation transaction together with control of an £80 million pipeline of direct development opportunities of which two projects are at an advanced stage. This is the first time that the Company will be developing through utilising its own balance sheet

· Progression of asset management projects with 24 either completed or currently on-site, investing £8.1 million, creating additional rental income of £0.3 million per annum and extending the weighted average unexpired lease term (WAULT) for those leases back to 20 years

· The Group has a strong pipeline of over 80 incremental asset management projects which have either been approved by the Board or are in advanced negotiations. The pipeline of projects equates to investing approximately £34 million in 2021 and 2022 generating £1.1 million of additional income and extending the WAULT on those leases back to 21 years

· The portfolio's metrics continue to reflect the secure, long-term and predictable income stream with occupancy at 99.6% (31 December 2019: 99.5%) and a WAULT of 12.1 years (31 December 2019: 12.8 years)

DELIVERING FINANCIAL MANAGEMENT

· £140.0m (£136.9m net of expenses) over-subscribed equity placing in July 2020 at 145p per share or 32.9% premium to reported Adjusted NTA of 109.1p as at 30 June 2020

· Following the equity placing the Company lowered the upper range for the Group's loan to value ("LTV") ratio from 55% to 50%

· At 31 December 2020 the Group's net debt stood at £1,055.7 million (31 December 2019: £1,067.3 million) and the LTV ratio was 41.0% (31 December 2019: 44.2%)

· The Group has undrawn loan facilities and cash on deposit post capital commitments totalling £361.5 million (31 December 2019: £356.6 million) providing significant liquidity headroom. Cash on deposit totals £103.6 million

· Significant headroom in LTV and interest cover covenants in the Group's various borrowing facilities

· Low, average marginal cost of debt of 1.7% following refinancing of revolving credit facilities with Barclays and Lloyds

DELIVERING ROBUST RENTAL COLLECTION

· Of PHP's contracted rental income, 90% is paid either directly or indirectly by the UK and Irish governments, with the balance mainly coming from pharmacies co-located at our properties

· Rental collections continue to remain robust and as at 17 February 2021 99% and 94% had been collected in both the UK and Ireland respectively for the first quarter of 2021 and in-line with collection rates experienced for 2020 which now stand at over 99% for both countries. The balance of rent due for the first quarter of 2021 is expected to be received shortly

· The Group has allowed £4.8 million of annualised rents, predominantly pharmacies, to be paid by monthly instalments, given short-term rent deferrals of £1.2 million and concessions of £0.5 million

DELIVERING STRONG TOTAL RETURNS

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

Presentation and webcast:

A virtual briefing for analysts will be held today, 18 February 2021 at 9.30am, via a live webcast and conference call facility.

The presentation will be accessible via a live conference call:

UK Toll-free: 0800 358 9473

International dial in numbers: https://event.sharefile.com/d-s7bae1d9235d495a8 

Participant PIN code: 59260771#

A live listen-only webcast of the presentation will also be available via this link:

https://webcasting.brrmedia.co.uk/broadcast/5ffed6e536bc5f2c49e14d10

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

I am delighted to present my third annual report, as Chairman of PHP, for what has been an unprecedented year in the UK and around the world as result of the COVID-19 pandemic. Despite the uncertainty and volatility in the economic environment we have continued to deliver a strong and robust operational and financial performance over the course of 2020.

The Group's portfolio continues to demonstrate good resilience despite the uncertainty caused by COVID-19. During the pandemic, PHP has been actively working 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 current global health crisis with many of our primary care facilities and occupiers now in the front-line of delivering COVID-19 vaccines. We continue to maintain close relationships with our key stakeholders and GP partners to ensure we are best placed to help the NHS and HSE, and in particular primary care, evolve and deal with the pressures placed on them by the COVID-19 pandemic.

The PHP team of over 50 staff have worked successfully from home throughout the pandemic and the Group's Disaster Recovery plan has and continues to operate as expected with systems and communications maintained and none of our staff having been furloughed. The Group has not utilised any of the Government's loan or incentive scheme introduced during the pandemic and has continued to pay all taxes due on the normal due date. I would like to express on behalf of the Board our gratitude and thanks for the team's commitment, dedication and professionalism over this past year.

In July 2020, we successfully completed an over-subscribed equity placing raising £140m (£136.9m net of expenses) to capitalise on the Group's strong pipeline of standing investments, forward funded developments and asset management projects. The placing increased the Group's market capitalisation to around £2bn and the property portfolio now stands at just under £2.6bn across 513 assets, including 18 in Ireland. The July placing followed the deployment of the £100m raised from the September 2019 equity raise by the first half of 2020 demonstrating the Group's ability to successfully invest in opportunities that are generating value for all of our stakeholders.

The net proceeds from the July placing further improved the Group's already robust capital position providing significant levels of liquidity and loan covenant headroom with £361.5m of undrawn loan facilities and cash, helping to maintain an appropriate loan to value ("LTV") ratio at 41.0% as at 31 December 2020. As previously announced with the July placing, the Company lowered the upper range of the LTV ratio from 55% to 50%.

The Group continues to have a strong, active pipeline of potential acquisitions both in the UK and Ireland totalling approximately £129m, including £59m under offer, together with the additional pipeline from Nexus Developments totalling £80m noted below.

Rental collections continue to be robust and as at 17 February 2021 99% and 94% had been collected in both the UK and Ireland respectively for the first quarter of 2021 and in-line with collection rates experienced for 2020 which now stand at over 99% for both countries.

Internalisation of Nexus

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 is anticipated to result in immediate annual cost savings of approximately £4.0 million, equivalent to 0.3 pence per share. The assumption of Nexus's existing management and overhead costs are anticipated to result in lower ongoing administrative costs to the Company and the EPRA cost ratio, which is already among the lowest in the sector, is therefore expected to fall further. The total cost of the acquisition was £35.7m comprising the fair value of the total consideration at completion of £34.1m and related fees and expenses of £1.6m.

As outlined in the Circular posted to shareholders in December 2020, the Board believes that there are a number of compelling financial and strategic benefits of the internalisation such as the delinking of the Company's administrative costs from its gross asset value which will provide further cost benefits and longer-term earnings enhancement as the portfolio grows in the future. The internalised structure is also more appropriate to a UK-REIT of the scale of PHP, broadening the universe of potential investors in the Company, in particular among those investors unwilling or unable to invest in externally managed vehicles.

The acquisition also helps to secure the continuity of a well-regarded and experienced management team, led by Harry Hyman as Chief Executive, who have a deep understanding of both the sector and the portfolio together with a fully operational management platform with the transfer of the systems, structure and proprietary market knowledge that Nexus had developed since 1996.

The acquisition also enabled PHP to acquire the development expertise of Nexus Developments with a pipeline of £80m of direct development opportunities, at varying stages of progression which will allow PHP to bring forward future primary care developments utilising its own balance sheet. The Board believes that momentum is growing in the NHS, with increasing pressure on government, for the approval of new medical centre developments and now PHP has its own development capabilities will make it a more attractive partner for such new development opportunities. This is the first time that the Company will be developing through utilising its own balance sheet and undertaking non-speculative developments on its balance sheet should provide a greater yield on cost and potential valuation uplift. The internalisation is expected to further benefit the long-term future of the business and help to underpin the next stage of the Company's growth.

Overview of results

In 2020, PHP's recurring Adjusted earnings increased by £13.4m or 22.4% to £73.1m (2019: £59.7m) driven by a full year's contribution from the merger with MedicX completed in March 2019, acquisitions, continued rental growth from our asset management activities and reductions in the average cost of finance in both 2019 and 2020. Using the weighted average number of shares in issue in the year Adjusted earnings per share increased to 5.8p (2019: 5.5p), an increase of 5.5%.

A revaluation surplus of £51.4m (2019: £49.8m) was generated in the year from the portfolio equivalent to 3.9p per share. The valuation surplus was driven by net initial yield ("NIY") compression in both the UK and Ireland for government backed income, rental growth from rent reviews and asset management projects, partly offset by a deterioration in the rental outlook for pharmacies in the UK.

A loss 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 £12.1m (2019: loss of £31.1m) resulted in a profit before tax as reported under IFRS of £112.4m (2019: loss £70.2m).

The Group has continued to selectively grow its portfolio in the year, adding 23 assets and four forward-funded developments.

Rent reviews and asset management projects completed in the year added £2.0m or 1.6% (2019: £1.9m or 1.5%) to the contracted rent. However, we have seen a marginal reduction in the annualised rate of growth on rent reviews in 2020 at 1.8% (2019: 1.9%) and the outlook is becoming more muted for pharmacy rents as the consequences of the COVID-19 crisis become more apparent.

The portfolio's average lot size continues to grow and is now £5.0m, and we are maintaining our very strong metrics, with a long weighted average unexpired lease term ("WAULT") of 12.1 years, high occupancy at 99.6% and only 3.9% of our rent due to expire in the next three years and 57.1% expiring in over 10 years.

Dividends and total shareholder return

The Company distributed a total of 5.9p per share in 2020, an increase of 5.4% over 2019 of 5.6p per share. The total value of dividends distributed in the year increased by 23.4% to £73.3m (2019: £59.4m), which were covered by Adjusted earnings, notwithstanding the additional shares issued in 2020 from the £140.0m equity raise in July 2020. Dividends totalling £4.2m were satisfied through the issuance of shares via the scrip dividend scheme.

A dividend of 1.55p per share was declared on 6 January 2021, equivalent to 6.2p on an annualised basis, which represents an increase of 5.1% over the dividend distributed per share in 2020. The dividend will be paid to shareholders on 26 February 2021 who were on the register at the close of business on 14 January 2021. The dividend will comprise entirely of a Property Income Distribution ("PID") of 1.55p. Further dividend payments are planned to be made on a quarterly basis in May, August and November 2021.

The Company intends to maintain its strategy of paying a progressive dividend, which the Company intends to pay in equal quarterly instalments, that is covered by underlying earnings in each financial year.

The Company's share price started the year at 160.0p per share and closed on 31 December 2020 at 152.8p, a decrease of 4.5%. Including dividends, those shareholders who held the Company's shares throughout the year achieved a Total Shareholder Return of -0.8% (2019: 49.2%). This compares to the total return delivered by UK real estate equities (FTSE EPRA Nareit UK Index) of -20.4% and the wider UK equity sector (FTSE All-Share Index) of -9.8% in the year.

Environmental, Social and Governance ("ESG") Committee

In October 2020, the NHS adopted a multi-year plan to become the world's first carbon net zero national health system by 2045 and with an ambition for an interim 80% reduction by 2036-2039. PHP is committed to helping the NHS achieve this target and is pro-actively engaging and working with our various healthcare occupiers to help them achieve this. Consequently, the ESG Committee, originally established by Nexus in 2019, became a full Committee of the Board in 2020 following the appointment of two Non-Executive Directors, Laure Duhot as Chair and Peter Cole, to the Committee. The Committee also comprises the Executive Directors and Senior Executives responsible for the implementation of ESG policies, targets and monitoring actual performance.

The ESG Committee is responsible for considering and implementing our commitment and approach to responsible business addressing the key areas of the environment, social and governance matters which are embedded into our investment, asset management, development and corporate activities. We are committed to acting responsibly, having a positive impact on our communities, improving our responsible business disclosures, mitigating sustainability risks and capturing environmental and stakeholder opportunities. During 2020 we have set a number of challenging targets and joined Real Estate Balance to further develop gender diversity within PHP. Further details can be found in the Annual Report and Responsible Business section of our website.

Board changes

In November 2019 it was announced that, following the successful merger and integration of the MedicX portfolio and team, Helen Mahy would retire from the Board at the Company's Annual General Meeting ("AGM") on 1 April 2020.

In January 2020 it was announced that, following a review of the skills, experience and knowledge of the Board and the consideration of its size and composition as part of the Nomination Committee's annual evaluation process, a Board of six, consisting of four independent non-executive directors and two executive directors, is the appropriate size for the Group going forward, given the relative simplicity of the business model. Accordingly, a replacement for Helen Mahy was not made and Dr Stephen Kell also retired from the Board at the AGM.

Following the completion of the AGM Ian Krieger became the Senior Independent Director and Peter Cole became Chairman of the Remuneration Committee.

The Board is grateful to Helen and Stephen for their commitment and dedication to the Company during their service, and for their contribution to and support for the merger with MedicX in 2019.

Market update and outlook

Healthcare provision in the UK has been transformed in 2020, as the NHS has responded to the requirements of dealing with the COVID-19 pandemic. Despite a large number of consultations now being carried out remotely we have also seen a large increase in workload for GPs and wider primary care teams at our buildings with many of our assets and occupiers now engaged in the delivery of COVID-19 vaccines as well as dealing with the resultant backlog of non-COVID-19 treatments that need to be addressed, with more services expected to move away from hospitals and into primary care facilities in the future. This trend will undoubtedly require substantial investment into other areas, most notably primary care that will be able to take on the non-urgent and peripheral procedures. We will continue to actively engage with government bodies, the NHS, HSE in Ireland and other key stakeholders to establish and enact where we can support and help to alleviate increased pressures and burdens currently being placed on healthcare networks.

The NHS has, over time, been moving on from some of the structures put in place by the Health and Social Care Act 2012. These reforms, often referred to as the Lansley reforms, sought to put in place market structures within the NHS to seek to drive efficiencies through competition. In a recent draft White Paper, the Government is now seeking to put in place Integrated Care Systems ("ICS") with a target date of April 2022. The new proposals focus more on collaboration, than competition, in achieving population health goals. The 44 ICS that are proposed in England and Wales will each be responsible for a single commissioning budget for funds that were previously spread across various separate pools, such as primary care, secondary care, acute hospitals, mental health, ambulance services, social care and public health. It is hoped that by bringing these budgets under a single organisational structure that better health outcomes can be achieved for local populations by offering the most effective and efficient overall services for their needs. PHP believes that primary care is extremely well placed to deliver more services in the community, especially those based around health and wellbeing.

The conclusion of Brexit for the UK is unlikely to have a direct impact on the primary health centres we invest in, which perform a vital role in the provision of healthcare across the UK and Ireland. Demand for our properties is driven by demographics and in particular populations that are growing, ageing and suffering from more instances of chronic illness.

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 and reliable income. Primary healthcare, with its strong fundamental characteristics and government-backed income, has been a significant beneficiary of this trend. The UK market 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 2020 and in particular in the second half of the year.

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

As the UK and Ireland prepare for the 'new normal' and how this impacts the NHS and HSE respectively and those reliant on them, we are ideally placed to support their needs, with the financial strength, sector expertise and knowledge to enable them to succeed, whilst simultaneously delivering long term value to shareholders and wider stakeholders. Despite the unprecedented level of uncertainty in the UK and around the world, the Board continues to look forward with confidence to the future, particularly following the internalisation of the Group's management and the acquisition of a direct development capability in January 2021. The Board believes that these transformational transactions will help drive further earnings and asset growth for the benefit of all of the Group's stakeholders.

Steven Owen

Chairman

17 February 2021 

BUSINESS REVIEW

Investment and development activity

The majority of the investment activity in the year came from the acquisition of 23 assets acquired in the UK for £58.8m as well as four forward funded developments acquired with a net development cost of £34.2m. The four forward funding developments acquired consist of two in each of Ireland (£27.4m) and the UK (£6.8m).

Investment pipeline

PHP continues to have a strong active pipeline of potential acquisitions both in the UK and Ireland totalling approximately £129m including £59m currently under offer.

Developments

During the year the developments at Athy, County Kildare, Bray, County Wicklow, Rialto, Dublin and Banagher, County Offaly all in Ireland were completed on time with a net development cost of £46.3m (€51.8m).

The Group has six forward funded developments currently on site with a net development cost of £47.4m:

All sites in the UK and Ireland remain open and construction continues to progress.

Following the acquisition of Nexus Developments in 2021 a further potential development pipeline of £80m was acquired including two projects (£10m) that are at an advanced stage and currently seeking planning permission although none will be progressed to construction until de-risked and pre-let.

Asset management

PHP's sector leading metrics remain strong 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 and avoid obsolescence whilst ensuring that our premises meet the communities' healthcare needs.

Rent reviews

During 2020, the Group concluded and documented 309 rent reviews in the UK with a combined rental value of £40.0m resulting in an uplift of £1.7m (2019: £1.6m) per annum or 4.3%, equating to 1.8% (2019: 1.9%) per annum which represents a marginal reduction in the annualised rate of growth as the outlook is becoming more muted for pharmacy rents as the consequences of the COVID-19 crisis become more apparent.

In the year, an aggregate 1.3% per annum uplift (2019: 1.1%) was achieved on 159 open market reviews (including 48 reviews where no uplift was achieved). Uplifts of 2.3% per annum (2019: 3.0%) were achieved on RPI-based reviews and 2.9% per annum (2019: 3.1%) on fixed uplift reviews. In addition, a further 199 open market reviews were agreed in principle, which will add another £1.1m to the contracted rent roll when concluded and represents an uplift of 1.2% 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.

At 31 December 2020, the rent at 669 tenancies, representing £90.4m 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. We expect the COVID-19 pandemic will increase the future provision of health services and continued re-focusing of services away from over-burdened hospital settings. As technology continues to drive digital consulting and triage in the future, the crisis has highlighted the important role primary healthcare must play and we continue to see more new properties being approved.

In Ireland, we concluded 11 indexed and fixed uplifts resulting in £0.1m (€0.12m) of additional rental income equivalent to 1.1% per annum.

Asset Management Projects

We have continued to make good progress in the year to enhance and extend existing assets within the portfolio with 24 projects either completed or currently on-site. The projects require the investment of £8.1m and will generate £0.3m of additional rental income but, just as importantly, will extend the WAULT on those premises back to an average 20 years.

PHP continues to work closely with its tenants and has a strong pipeline of over 80 projects either Board approved or in advanced negotiations. The pipeline of projects will require the investment of approximately £34 million, generating an additional £1.1m of rental income and extend the WAULT on those premises back to an average 21 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 tenant 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 2020 was £135.2m, an increase of £7.5m or 5.9% in the year (31 December 2019: £127.7m) driven predominantly by the acquisition of 23 assets in the UK that contributed £3.1m. New forward funded developments at Arklow and Enniscorthy in Ireland, Epsom, Surrey and Llanbradach, Wales added a further £1.8m to the contracted rent roll. The security and longevity of our income are important drivers of our secure, long term predictable income stream and enable 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 99.6%.

Longevity: The portfolio's WAULT at 31 December 2020 was 12.1 years (31 December 2019: 12.8 years). Only £5.3m or 3.9% of our income expires over the next three years of which £4.2m is either subject to a planned asset management initiative or terms have been agreed to renew the lease. £77.2m or 57.1% expires in over 10 years. The table below sets out the current lease expiry profile of our income:

Valuation and returns

At 31 December 2020, the Group's portfolio comprised 513 assets independently valued at £2.576bn (31 December 2019: £2.413bn). After allowing for acquisition costs and capital expenditure on forward funded developments and asset management projects, the portfolio generated a valuation surplus of £51.4m or 2.0% (2019: £49.8m or 2.1%). The valuation surplus was driven by net initial yield compression in both the UK and Ireland for government backed income, rental growth from rent reviews and asset management projects, partly offset by a deterioration in the rental outlook for pharmacies in the UK.

During the year the Group's portfolio NIY has contracted by 5bp to 4.81% (31 December 2019: 4.86%) and the true equivalent yield reduced to 4.84% at 31 December 2020 (31 December 2019: 5.04%).

At 31 December 2020, the portfolio in Ireland comprised 18 assets, including two assets currently under development, valued at £197.7m or €221.1m (31 December 2019: 16 assets/£160.0m or €189.2m). The costs to complete the developments are £22.8m (€25.5m) and once complete the assets in Ireland will be valued at approximately £220m (€246m).

The portfolio's average lot size has increased slightly to £5.0m (31 December 2019: £4.9m) and 84.3% of the portfolio is valued at over £3.0m. The Group now only has five assets valued at less than £1.0m.

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

The underlying valuation uplift of £51.4m, combined with the portfolio's growing income, helped to deliver a total property return of 7.4% in the year (2019: 7.7%) outperforming the MSCI UK Monthly Property Index by 820bp.

FINANCIAL REVIEW

PHP's Adjusted earnings increased by £13.4m or 22.4% to £73.1m in 2020 (2019: £59.7m). The increase reflects a full year's contribution from the merger with MedicX in March 2019 which contributed £20.9m (2019: £15.6m) with the balance driven by rental growth and reduction in the Group's cost of finance.

Using the weighted average number of shares in issue in the year the Adjusted earnings per share increased to 5.8p (2019: 5.5p), an increase of 5.5%.

A revaluation surplus of £51.4m (2019: £49.8m) was generated in the year from the portfolio driven by yield compression in both the UK and Ireland for government backed income, rental growth from rent reviews and asset management projects offset by a deterioration in the rental outlook for pharmacies in the UK.

A loss 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 £12.1m (2019: loss £179.7m) contributed to the profit before tax as reported under IFRS of £112.4m (2019: loss £70.2m).

The financial results for the Group are summarised as follows:

Summarised results

Net rental income receivable in the year increased by 13.4% or £15.5m to £131.2m (2019: £115.7m).

Operational costs have continued to be managed closely and effectively. Overall administrative costs, excluding the Performance Incentive Fee ("PIF"), have risen by £1.1m or 10.5% to £11.6m (2019: £10.5m) reflecting the annualised effect of the larger Group following the merger with MedicX. The Group's EPRA cost ratio continues to be amongst the lowest in the sector at 11.9% for the year, a decrease against the 12.0% incurred during the 2019 financial year reflecting the annualised effect of the £4.0m cost saving synergies arising from the merger with MedicX.

Net finance costs in the year increased slightly to £44.9m (2019: £43.7m) reflecting a full year's charge of the debt acquired with the merger with MedicX in 2019, offset by the reductions in the average cost of debt achieved from various refinancing initiatives and conversion of convertible bonds in 2019 and 2020.

Performance incentive fee ("PIF")

Another period of strong performance in both 2019 and 2020 resulted in a PIF being earned by the Adviser, Nexus, for the year as a whole and consequently a £1.6m provision has been provided (2019: £1.8m).

Nexus is entitled to 11.25% of the "total return" above a hurdle rate of 8.0%, based on the change in Adjusted EPRA Net Tangible Assets (formerly Adjusted EPRA Net Asset Value) plus dividends paid less equity raised, net of non-cash and other adjustments the Board believe are appropriate, which is credited to a notional cumulative account. If the hurdle is not achieved a sum equal to 11.25% of the underperformance is deducted from the notional cumulative account.

Controls are in place so that the PIF eligible for payment in respect of any year is restricted to the lower of:

· Half of the fee earned in respect of that year, unless it is a shortfall in which case the full amount is applied, together with the notional cumulative account balance (both positive and negative) on the earned but unpaid PIF brought forward from previous years;

· 20% of the property management fee paid to Nexus in the year; and

· £2.0m.

Half of any PIF payable is deferred to the following year in the notional cumulative account, with performance against the hurdle rate calculated each year and any payment subject to the account being in a surplus position.

A PIF of £1.3m was paid to Nexus in the year in respect of 2019 and at 31 December 2020 the balance on the notional cumulative PIF account was £8.1m (31 December 2019: £7.0m) of which £1.5m (31 December 2019: £1.3m) will become payable on approval of the Annual Report by the Board. The PIF incentive scheme will partly carry on for up to a further two years as part of the new remuneration arrangements following the internalisation of the Adviser, Nexus post year-end. Any further payments are conditional on performance in future years; further details can be found in the Remuneration Committee Report included in the Annual Report.

Equity raise

In July 2020, the Group successfully completed an over-subscribed equity issue raising £140.0m (£136.9m net of expenses). The new ordinary shares were issued at 145p per share or a 32.9% premium to reported Adjusted Net Tangible Assets (NTA) of 109.1p as at 30 June 2020. The placing price of 145p per Ordinary Share represented a discount of 1.9 per cent to the intra-day price on the day the placing price was agreed.

The net proceeds from the equity raise are being used to finance the Group's pipeline of acquisitions and asset management projects both in the UK and Ireland.

Shareholder value

The Adjusted NTA, formerly Adjusted EPRA NAV, per share increased by 5.0p or 4.6% to 112.9p (31 December 2019: 107.9p per share) during the year with the revaluation surplus of £51.4m or 3.9p per share being the main driver of the increase. Dividends distributed in the year were covered by recurring Adjusted earnings with no material impact on Adjusted NAV.

The total NAV return per share, including dividends distributed, in the year was 10.9p or 10.1% (2019: 8.4p or 8.0%).

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

As at 31 December 2020, total available loan facilities were £1,456.8m (31 December 2019: £1,452.0m) of which £1,159.3m (31 December 2019: £1,210.4m) had been drawn. Cash balances of £103.6m (31 December 2019: £143.1m) resulted in Group net debt of £1,055.7m (31 December 2019: £1,067.3m). Contracted capital commitments at the balance sheet date totalled £39.6m (31 December 2019: £28.1m) and result in headroom available to the Group of £361.5m (31 December 2019: £356.6m).

Capital commitments comprise forward funded development expenditure of £32.1m and asset management projects on site of £7.5m.

1 - After deducting capital commitments.

In December 2020, new secured revolving credit facilities with Barclays (£100m) and Lloyds (£50m) were entered into for an initial three-year period with options to extend by a further year at the first and second anniversaries of each facility. The Lloyds facility also has the option to be increased by a further £50m to £100m.

Average cost of debt

The Group's marginal cost of debt on its revolving credit facilities is now just 1.7% following the refinancing's noted above. As these facilities are drawn, following the deployment of the cash proceeds from the equity raise in July, the Group's average cost of drawn debt will continue to fall from the current 3.5% to 3.1%, assuming fully drawn. We continue to look at other opportunities to reduce the Group's average cost of debt and deliver further finance cost-saving synergies.

Convertible bonds

In July 2019, the Group issued for a six-year term new unsecured convertible bonds with a nominal value of £150m 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 153.25p per Ordinary Share. The exchange price will be subject to adjustment if dividends paid per share exceed 2.8p per annum and in accordance with the dividend protection provisions the conversion price has been adjusted to 147.1p per Ordinary Share.

The conversion of the £150m convertible bond into new Ordinary Shares would reduce the Group's loan to value ratio by 5.8% from 41.0% to 35.2% and result in the issue of 102.0 million new Ordinary Shares.

Interest rate and currency exposure

The analysis of the Group's exposure to interest rate risk in its debt portfolio as at 31 December 2020 is as follows:

The Group's drawn loan facilities are 100% fixed.

The Group now owns €221.1m or £197.7m (2019: €189.2m/£160.0m) of Euro denominated assets in Ireland as at 31 December 2020 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 2020 the Group had €163.6m (31 December 2019: €161.2m) 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.

Interest rate swap contracts

In September 2020, we selectively used the premium over the Adjusted NTA on the equity raise in July 2020 to cancel 4.5%/£70m fixed rate swaps for a one-off payment of £18.5m. A further £3.3m was used to re-coupon swaps with a nominal value of £188m from a blended fixed rate of 0.77% to 0.05%. The one-off payments total £21.8m, equivalent to 1.5p per share on an Adjusted NTA basis, and results in total interest savings of £22.3m over the period to July 2026.

Accounting standards require PHP to mark its interest rate swaps to market at each balance sheet date. During the year there was a loss of £12.9m (2019: loss £3.7m) on the fair value movement of the Group's interest rate derivatives due primarily to reductions in interest rates assumed in the forward yield curves used to value the interest rate swaps. As at the 31 December 2020 the mark-to-market ("MtM") liability of the swap portfolio was £0.1m (31 December 2019: £13.5m).

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

The MtM of the Group's fixed rate debt as at 31 December 2020 was £130.3m (31 December 2019: £94.5m) equivalent to 9.9p per share (31 December 2019: 7.8p). The large increase in the MtM during the year is due primarily to the historical reductions in interest rates assumed in the forward yield curves used to value the debt in the year. The MtM valuation is sensitive to movements in interest rates assumed in forward yield curves.

Risk management and principal risks

Principal risks and uncertainties

The Board has undertaken a robust assessment of the 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. These are set out below:

Brexit

On 31 January 2020, the United Kingdom left the European Union ("EU"), and a trade deal with the EU was successfully negotiated on 30 December 2020 ("Brexit"). The Board continues to monitor the UK's relationship with the EU but believes that following the conclusion of Brexit, for the UK, it is unlikely to have a direct impact on the primary health centres we invest in, which perform a vital role in the provision of healthcare. The longer term impact of Brexit will continue to be monitored to assess the potential negative impact on the macro-economic environment, political uncertainty and volatility in interest and exchange rates, as well as its impact on our investment and occupier market, and our ability to execute our investment strategy and our income sustainability in the long term.

Climate change and environmental risk

In 2018, the Board added climate change and environmental issues to the Risk Register. Whilst it is not yet regarded as a principal risk and uncertainty and therefore is not included in the table above, the Group's approach to the subject matter is considered in more detail in the Responsible Business section of the Annual Report.

COVID-19

The disruption from COVID-19 and the risks of a prolonged, severe economic downturn is such that this risk is inextricably interlinked with and likely to exacerbate the other principal risks and uncertainties faced by the Group. Despite this, the risk of Covid-19 to both the business model and the environment it operates in the Board determined COVID-19 should be added to the principal risks and uncertainties in 2020.

Emerging risks

The Board has also considered emerging risks and their potential impact on the Group. During the year, development delivery risk has been added to the Group's Risk Register. The Group enters into forward funding arrangements with developers who then engage contractors to build out the scheme, as well as developments on its own balance sheet following the internalisation of the Management structure in 2021. There is a risk that the developer or the contractor or both could become insolvent causing delays and losses. However, the likelihood, impact and mitigation factors mean that, despite the Group's increasing exposure to this risk, it is not yet considered a principal risk and therefore is 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.

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 2023.

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, 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. Given the significant impact of COVID-19 on the macro-economic conditions in the year, additional stress-testing has been carried out on the Group's ability to continue in operation under extremely unfavourable operating conditions including a scenario where 15% of all rent is not collected for the three-year forecast period. The sensitivities applied are as follows:

• declining attractiveness of the Group's assets or extenuating economic circumstances impacts investment values - valuation parameter stress tested to provide for a one-off 10%/£261 million fall in June 2021 valuation;

• 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 2021; 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:

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

17 February 2021

Group statement of comprehensive income

for the year ended 31 December 2020

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 2020

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 17 February 2021 and signed on its behalf by:

Steven Owen

Chairman

Registered in England Number: 3033634

Group cash flow statement

for the year ended 31 December 2020

Group statement of changes in equity

for the year ended 31 December 2020

Notes to the financial statements

1. Corporate information

The Group's financial statements for the year ended 31 December 2020 were approved by the Board of Directors on 17 February 2021 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 pages 59 and 60 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 European Union 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 2020. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements:

Amendments to IAS 1 and IAS 8 Definition of material

The Group has adopted the amendments to IAS 1 and IAS 8 for the first time in the current year. The amendments relate to the definition of material. Within IAS 1, the concept of using immaterial information to obscure material information has been included in the new definition. The threshold for materiality influencing users has been changed from "could influence" to "could reasonably be expected to influence". The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. There has been no impact on the Group for the period beginning 1 January 2020.

Amendments to references to the conceptual framework in IFRS standards

The Group has adopted the amendments included in Amendments to references to the conceptual framework in IFRS standards for the first time in the current year. The amendments include consequential amendments to affected Standards so that they refer to the new framework. The standards which are amended are IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22 and SIC-32. There is no impact on the Group for the period beginning 1 January 2020.

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 IFRS 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 2020 are as follows:

Group Balance Sheet: £1 = €1.1185 (2019: €1.1825). Group Statement of Comprehensive Income: £1 = €1.105 (2019: €1.1787).

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.

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.

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% (2019: 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 16 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; and

• 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.

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 10 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 JCRA (now part of Chatham) 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 2020. 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). They consider that they all meet the criteria of asset acquisitions rather than business combinations and have accounted for them as such. Although corporate entities were acquired, they were special purpose vehicles for holding properties rather than separate business entities. This judgement was made due to the absence of business processes inherent in the entities acquired.

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 EU:

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

• Annual improvements to IRFS 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 2021, 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 £128.2 million and £10.8 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:

Please refer to the Audit Committee Report in the Annual Report for analysis of non-audit fees.

a) Advisory fees

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

Further details on the Advisory Agreement can be found in the Corporate Governance section of the Annual Report.

As at 31 December 2020 £0.8 million was payable to Nexus (2019: £0.7 million).

Further fees paid to Nexus in accordance with the Advisory Agreement of £0.4 million (2019: £0.1 million) in respect of capital projects were capitalised in the year.

Service charge management fees paid to Nexus in the year in connection with the Group's properties totalled £0.4 million (2019: £0.3 million).

b) 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 £1.3 million was paid to Nexus in the period in respect of 2019 and at 31 December 2020 the balance on the notional cumulative PIF account was £8.1 million (2019: £7.0 million), of which £1.5 million (2019: £1.3 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.

c) Remuneration of Directors

Further information about the remuneration of individual Directors is provided in the Directors' Remuneration Report in the Annual Report.

5. Finance income

6. Finance costs

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. A fair value loss on derivatives which do meet the hedge effectiveness criteria under IAS 39 of £0.4 million (2019: loss of £1.3 million) is accounted for directly in equity. An amount of £4.4 million (2019: £3.0 million) has been amortised from the cash flow hedging reserve in the year resulting from early termination of effective swap contracts (see Note 22).

Details of the fair value loss on hedges which meet the effectiveness criteria for hedge accounting under IAS 39 are set out in Note 22.

On 15 July 2019, PHP Finance (Jersey No.2) Limited (the "Issuer"), a wholly owned subsidiary of the Group, issued £150 million of 2.875% convertible bonds (the "Bonds") for a six-year term and if not previously converted, redeemed or purchased and cancelled, the Bonds will be redeemed at par on maturity in July 2025.

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 NAV. Refer to Note 14 for further details about the convertible bonds.

7. 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% (2019: 19%) and the Irish corporation tax rate of 20% (2019: 20%) have been applied in the measurement of the Group's UK and Ireland related activities tax liability at 31 December 2020.

b) Factors affecting the tax charge for the year

The tax assessed for the year is lower than (2019: 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% (2019: 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 2020.

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.

8. Earnings per share

Performance measures

In the tables below, we present earnings per share and net assets per share calculated in accordance with IFRS, 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

Profit/(loss) per share attributable to shareholders:

In the year ended 31 December 2019 the effect of the convertible bond has been excluded from the diluted loss and weighted average diluted number of shares when calculating IFRS diluted loss per share because they are not dilutive.

Net assets per share