I love the dividends that real estate investment trust (REIT) Primary Health Properties (LSE:PHP) pays me. This particular REIT is more reliable than most, having raised shareholder payouts every year since the mid-1990s.
I found myself with some spare tax relief in my Self-Invested Personal Pension (SIPP) last month. So I decided to increase my existing holdings in the FTSE 250 company. Unfortunately, news last week suggests I may have made a big mistake.
So what’s happened? And could Primary Health shares end up costing me money?
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Budget holes?
Primary Health Properties owns and operates medical properties like GP surgeries, diagnostics hubs, and community health centres. The majority of the REIT’s 1,142-strong property estate is located in the UK, where most of its rent rolls are government funded.
The theory is demand for these kinds of assets will grow over time, reflecting demographic changes that are driving demand for frontline health services. Not only is Britain’s population rapidly rising, but the number of elderly people in particular is rocketing.
In this landscape, I think Primary Health could remain a dividend goldmine. The problem is that risks to healthcare budgets — and with it the REIT’s profits — could be in danger following a new US-UK trade deal.
On Thursday (2 July), the British Medical Journal (BMJ) said “around £45bn in NHS funding will be diverted from other NHS care by 2036 to pay more for new medicines” under the deal. That is “unless more funding is made available to cover the additional costs“.
Is that kind of extra funding available given the current state of the public finances? I’m not so sure.
Risks and opportunities…
Cutting spending elsewhere in the healthcare budget to pay for drugs could hit Primary Health in multiple ways. It might, for instance:
- Limit rent increases during tenant contract reviews.
- Stifle the development pipeline for modern medical centres.
- Raise vacancy risks for commercial tenants like pharmacies and dentists.
But I’ve reflected further on the news, and I’m not sure it is as bad as I feared. In fact, if the BMJ’s predictions of NHS cost-cutting are right, it may play into the hands of my REIT.
Primary healthcare is more cost-effective than hospital treatments. So it stands to reason policymakers will maintain (or even increase) spending on community-based care. On top of this, the NHS may become more reliant on the private sector to build and maintain facilities given their stretched budgets.
A 7.8% REIT income opportunity?
On balance, then, I believe my decision to buy more Primary Health shares in June was the right call. The long-term outlook remains bright, and especially if — as seems likely — Andy Burnham becomes Prime Minister and more money is found for healthcare spending.
In the meantime, I expect it to continue delivering those huge and growing dividends I’ve become used to. Under REIT rules, it must pay at least 90% of rental profits to shareholders, which underpins a huge 7.8% dividend yield for this year.
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Royston Wild owns shares in Primary Health Properties.
