Primary Health Properties PLC

Annual Report
for the Year Ended
31 December 2014

Directors' Report

The Directors present their Annual Report to Shareholders for the year ended 31 December 2014. Further information on the Group’s business, which is required by Section 417 of the Companies Act 2006, can be found in the following sections of the annual report, which are incorporated by reference into this report:

  • Chairman’s Statement on pages 4 to 5, and
  • Strategic Review on pages 6 to 29.

PRINCIPAL ACTIVITY

The principal activity of the Group (of which Primary Health Properties PLC is the parent company) continues to be the generation of rental income and capital growth through investment in primary health care property throughout the United Kingdom.

The Group became a Real Estate Investment Trust (‘UK REIT’) on 1 January 2007. It is the opinion of the Directors that the Group has conducted its affairs so as to be able to continue as a UK REIT.

FINANCIAL

The results for the year are shown in the Group Statement of Comprehensive Income on page 54.

Interim ordinary dividends totalling 19.5p per Ordinary share were paid during the year (year ended 31 December 2013: 19.0p).

The Board proposes to pay an interim ordinary dividend of 10.0p per Ordinary share on 1 April 2015. Further information on dividends can be found in the Shareholder Information section on page 92.

DIRECTORS

Biographical information for the current Directors can be found on pages 32 and 33.

The Company’s Articles of Association require that Directors should submit themselves for election at the first Annual General Meeting following their appointment and thereafter for re-election at least every three years. The Company has, however, adopted the requirements of the UK Corporate Governance Code in relation to the annual re-election of Directors. Phil Holland, who was appointed by the Board with effect from 18 February 2015, will offer himself for election at the AGM. All directors, who served throughout the year, will retire and, being eligible, offer themselves for re-election.

Information on the performance evaluation of the Board is shown in the Corporate Governance report on page 34. Details of Directors’ interests in the share capital and equity of the Company and Directors’ Remuneration are contained in the Directors’ Remuneration Report on pages 41 to 44.

POWERS OF THE DIRECTORS

The Directors have been authorised to allot and issue Ordinary shares and to make market purchases of the Company’s Ordinary shares. These powers are pursuant to the passing of resolutions at the Company’s Annual General Meeting.

Details of the resolutions regarding the allotment, issue and purchase of the Company’s shares are set out in the explanatory notes to the Notice of Annual General Meeting which can be found in the separate document posted to shareholders with this Annual Report.

SUBSTANTIAL INTERESTS

As at 18 February 2015, the Company had been notified or was otherwise aware of the following shareholders who were directly or indirectly interested in 3% or more of the voting rights in the Company’s issued share capital:

Voting rights

%

Investec Wealth & Investment

6,518,513

5.86

Unicorn Asset Management

6,151,026

5.53

Blackrock

5,588,517

5.02

Brooks Macdonald Asset Management

5,170,474

4.65

CCLA Investment Management

4,781,300

4.30

Charles Stanley

4,737,655

4.26

Troy Asset Management

4,720,000

4.24

R Laing

4,012,184

3.61

Nexus Group Holdings Limited

4,000,000

3.59

Neptune Investment Management

3,423,671

3.08

The Ordinary Shares held by Nexus Group Holdings Limited (“Nexus Group”) are subject to a debenture and fixed charge over all of Nexus Group assets. As at the date of this report, Nexus Group has confirmed that it is not in default of any of its banking commitments and that it has no current intention to sell any of its holding. Nexus Group is connected to Harry Hyman.

SHARE CAPITAL

The Company has one class of share in issue, being Ordinary Shares of 50 pence each. At the date of this report, the Company had 111,276,662 Ordinary Shares of 50 pence each in issue, each carrying the right to one vote. Details of changes in share capital are set out in Note 20 of the financial statements.

CORPORATE GOVERNANCE

A report on corporate governance and compliance with the provisions of the UK Corporate Governance Code, which forms part of this Directors’ Report, is contained on pages 34 to 35.

REPORT ON GREENHOUSE GAS EMISSIONS

The Group has no employees or premises and is externally advised and administered by the Adviser. The Group is financially but not operationally responsible for emissions related to its property portfolio. Any emissions are therefore negligible. Further information on the Group’s social and environmental impact can be found on page 28.

REQUIREMENTS OF THE LISTING RULES

None of the requirements of the Listing Rule 9.8.4Rare applicable to the Group and therefore a separate identifiable section or table has not been included.

ARTICLES OF ASSOCIATION

The Company’s Articles of Association (adopted by special resolution on 6 October 2009) may only be amended by special resolution at a General Meeting of the shareholders.

SIGNIFICANT AGREEMENTS

The Company is required to disclose details of any agreements that it considers to be essential to the business. The Board do not consider the banking facility agreements with the Group’s lenders to fall into this category as if any one of these arrangements ended, the Group would seek alternative funding and the loss or disruption caused should only be temporary.

The Advisory Agreement with the Adviser (further details of which can be found in the Related Party Transactions section below) is considered essential to the business as the Group has no employees. The agreement is reviewed at least annually by the Advisers Engagement Committee.

During the financial year and as at the date of this report, none of the Directors other than those referred to below was materially interested in any significant agreements relating to the Group’s business or in any proposed transactions.

RELATED PARTY TRANSACTIONS

Mr Hyman is a director of Nexus Tradeco Limited (“Nexus”) and Nexus Group. Nexus is the Adviser to the Group and as a result, Mr Hyman is deemed to have an interest in the Advisory Agreement referred to above and is thus a related party.

Mr Hambro is chairman of J O Hambro Capital Management Holdings Limited, the parent company of J O Hambro Capital Management Limited (“JOHCM”). Until the termination of the Joint Advisory Agreement on 30 April 2014, JOHCM was Joint Adviser to the Group (see below). Mr Hambro is therefore deemed to have had an interest in the Joint Advisory Agreement (see below) and thus was a related party during that period.

ADVISORY AGREEMENT

On 30 April 2014, the Company terminated the provision of Administrative Services by JOHCM and its appointment as Company Secretary, pursuant to notice served on 25 September 2013.

Nexus has been retained by the Company under an agreement dated 14 March 1996 (the “Advisory Agreement”) to provide property advisory and management services to the Group. The Advisory Agreement gave Nexus the right to appoint and remove one person as a Director of the Company and to receive the applicable Director’s fee. Nexus provides the services of the Managing Director. On 30 April 2014, the Advisory Agreement was amended and Nexus was appointed to provide the Administrative Services previously provided by JOHCM and to provide the services of Company Secretary.

The Advisory Agreement contains no provisions to amend, alter or terminate the Advisory Agreement upon a change of control of the Group following a takeover bid.

Advisory Fees
The fees received by Nexus comprise of three components designed to compensate them for their ongoing activity at rates appropriate to the different services provided, together with a performance related element in order to align their objectives with those of shareholders.

  1. Property Advisory Services
    Nexus receives a fee based on a proportion of the gross asset value of the Group. With effect from 1 May 2014 the Advisory Agreement has been amended and a revised rate structure has been applied in calculating property advisory and management fees paid to Nexus. The fee rates are as set out on page 31.

    Additional payments may be made to Nexus for non- standard real estate related services but are capped at 10% of the total annual Property Advisory Services fee payable to Nexus in a financial year.

    The Advisory Agreement as regards Property Advisory Services is terminable by not less than two years’ written notice.

  2. Administrative Services
    The Company pays Nexus a fixed annual fee of £748,621 in relation to Administrative Services for a period of two years from 1 May 2014 (the “Effective Date”) and an annual fee of £935,776 after that date (the “Administrative Services Fee”). The Administrative Services Fee may be increased or decreased by up to 5 percent subject to movements in RPI.

    The appointment of Nexus to provide the Administrative Services shall continue for a period of two years from the Effective Date and thereafter the notice period to terminate such services shall be 12 months given by Nexus or the Company.

  3. Performance Incentive Fee (“PIF”)
    Nexus is entitled to a PIF equal to 11.25% of any performance in excess of an 8% per annum increase in the Group’s “Total Return” (as derived from the audited accounts for the immediately preceding financial period prior to the date of payment) provided that if the Total Return is less than 8% in any one year, the deficit must be made up in subsequent years before any subsequent PIF is paid.No performance fee was payable in 2014 or 2013 and there is a deficit of some £41.9 million (2013: £51.3 million) to be made up in the net asset value before any further PIF becomes payable under the terms of the Agreement.

    Using the relevant audited accounts, the Total Return for the purpose of PIF is determined by calculating the change in the net asset value per ordinary share, on a fully diluted basis, after any adjustment for any increase or reduction in the issued share capital and adding back gross dividends paid per ordinary share.

EMPLOYEES

The Group has no employees, nor any employee share scheme and there are no agreements between the Company and its Directors providing for compensation for loss of office or employment (whether through resignation, proposed redundancy or otherwise) that may occur because of a takeover bid.

DONATIONS

The Group does not make any political or charitable donations.

SHARE SERVICE

The Shareholder Information section on pages 92 to 93 provides details of the share services available.

FINANCIAL INSTRUMENTS

The Group’s financial risk management objectives and policies are discussed in Notes 18 and 19.

POST BALANCE SHEET EVENTS

Details of events occurring since the year end are given in Note 30 on page 83.

FUTURE DEVELOPMENTS

Details of future developments are included in the Strategic Review and the Chairman’s Statement.

GOING CONCERN

The Group’s business activities together with the factors likely to affect its future development, performance and position are set out in the Strategic Review on pages 6 to 29. The financial result of the Group, its position, its cash flows, liquidity position and borrowing facilities are described on pages 20 to 21 and Notes 16 and 17 on pages 72-74. In addition, Notes 18 and 19 to the financial statements include the Group’s financial risk objectives, capital position, details of financial instruments and hedging activities and its exposure to credit risk and liquidity risk.

The Group’s property portfolio is 91% let to tenants with strong covenants and the property acquisition pipeline is currently adequate. During 2014, the Group refinanced the debt assumed with the PPP portfolio. This was achieved through (i) the procurement of a new £50 million, five year revolving debt facility with HSBC Bank PLC, (ii) the restructuring of £113 million of the facilities assumed with the acquisition with Aviva into a £50 million, ten year interest only tranche and a £63 million, 15 year tranche, interest free for the first 5 years with limited amortisation thereafter and (iii) the utilisation of an element of the headroom within the Group’s existing debt facilities.

On 20 May 2014, the Group issued an unsecured £82.5 million, five year, convertible bond.

In addition, in August 2014, the Group (i) extended the term of its £165 million Club facility with Royal Bank of Scotland plc and Santander Banking Group plc for a new three year term, and (ii) enlarged its facility with Barclays Bank plc to £100 million, for a new five year term.

As at 31 December 2014, the Group had £116.7 million of headroom within existing facilities, with a further £12.0 million of cash. The Group’s current loan to value ratio is 64.1%, with all banking covenants being met during the year and subsequent to the year end.

The Directors believe that the Group is well placed to manage its business risks successfully. Having reviewed the Group’s current position and cash flow projections, actual and prospective loan facilities and covenant cover, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

DIRECTORS’ STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS

The Directors who were members of the Board at the time of approving the Directors’ report are listed on page 33. Having made enquiries of fellow Directors and of the Company’s Auditors, each of the Directors confirms that:

  • to the best of each Director’s knowledge and belief, there is no information (that is, information needed by the Group’s Auditors in connection with preparing the report) of which the Company’s Auditors are unaware; and
  • each Director has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of S418 of the Companies Act 2006.

ANNUAL GENERAL MEETING

The Annual General Meeting will be held on 22 April 2015 at 10.30 a.m. The Notice convening the Annual General Meeting and explanatory notes for the resolutions sought are set out in the separate document enclosed.

The Directors consider that all of the resolutions proposed are in the best interests of the Company and it is their recommendation that shareholders support these proposals as they intend to do so in respect of their own shareholdings.

AUDITOR

A resolution to reappoint Deloitte LLP as the Group’s auditor and to authorise the Board to determine their remuneration will be put to Shareholders at the forthcoming Annual General Meeting.

By order of the Board

Nexus Management Services Limited
Company Secretary
18 February 2015

Primary Health Properties PLC
Registered office: 5th Floor, Greener House,
66-68 Haymarket, London SW1Y 4RF

Registered in England No: 3033634