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Of the dozens of companies that gave presentations last week at NAREIT’s REITWeek event in New York City, some made the trip from overseas. That includes Primary Health Properties, a London-based healthcare REIT that owns 75 facilities across the UK. PHP specializes in primary-care facilities and is strictly an asset owner, not a developer. One thing that differentiates the firm from its US counterparts is that 89% of its leases are paid by the National Health Service, a government agency that directly negotiates leases with physicians and medical groups. The balances of its leases are paid for by pharmacy operators. Additionally, PHP has long lease terms with its tenants–at an average of nearly 19 years. Harry Hyman, the firm’s managing director took some time to talk to GlobeSt.com at the conference to talk about what’s happening in his corner of the real estate world.

GlobeSt.com: What are some trends impacting health care properties in the UK right now?

Hyman: There is a move away from the provision of care in a secondary-care setting, which in the UK means in hospitals, into more of a primary-care arena. It is a topic that the government is keen to foster, principally because it’s cheaper, it’s better for patients to be treated closer to where they live. And medical technology and the Internet make diagnostics much more deliverable in a locality-based setting than they were 10 years ago.

Also, because of this movement to primary-care activity, the average size is getting much longer. We exchanged contracts for a project in Wales for about $33 million, and that’s the largest one we’ve bought. Ten or 12 years ago, we were buying centers with an average cost of $2 million. Our average for 2008 is going to be around $10 million. The size is greatly increasing. We’re not about buying the smaller properties, like converted houses, shops and offices. We have about 11,000 medical centers across the UK, 35,000 physicians and a very large number of those are in single and double-handed practices. There is going to be a reduction in the number of physical practices and an increase in the size of the remaining properties.

GlobeSt.com: Since your leases are paid for by the government, how much do lease payments vary between different types of tenants?

Hyman: The price that we have to pay, for having our rent effectively paid for by the government, is that part of our IRS–called the District Valuer’s Office–is responsible for district property rents and gets involved in setting the initial rents, and then the rents at each rent review. Usually in the UK, we have rent reviews every three years. The standard review pattern in the UK is five, but in the NHS it’s three years and the DV’s office gets involved on a three-yearly basis on each of our leases. The DV only assesses the rent on the general practitioner’s space, but most of the other space in the building for us is occupied by pharmacies, and they pay a market-based rent. Although there is a bit of regional variation, the average rent for places like London being higher and the outer fringes of Scotland being lower, in general, in the middle of the country is about 165 pounds per meter, so in dollars that’s about $34 per sf.

GlobeSt.com: What is your acquisition goal for this year?

Hyman: We have a target of about $80 million. Our overall ambition in the next two years is to grow our portfolio to about $1 billion because, in speaking to a number of US institutions, they seem to think that when we get to $1 billion we’ll be on their radar. What we want to do is take advantage of our REIT status to be of more interest to international REIT investors that are looking for geographical diversification. I know healthcare REITs have had a rocky time over here recently, but healthcare is a terrifically stable part of the economy, particularly in the UK, where it is effectively paid for by the government.

GlobeSt.com: Are there any changes in the UK REIT industry lately?

Hyman: There was an initial flurry of about eight companies that came and converted to being REITs on Jan. 1, 2007, which is when the legislation enabled them to exist. Now there are about 18. Unfortunately, though, the launch of REITs has been coupled with a decline in property values and, more recently, the credit crunch. So an investor in REITs in January 2007 would have bought at the top and seen quite a bit of a decline in their investment. Property is, of course, a long-term investment model. If you were skeptical in investing in REITs in 2007, perhaps at some stage in 2008, we’ll be close to the bottom of the cycle. That, of course, is the $64-billion question.

GlobeSt.com: How has the credit crunch impacted your business?

Hyman: On the tenant side it hasn’t impacted us at all. Eighty-nine percent is paid for tenants by the government, and the balance is paid by pharmacy operators, and you’d have to be a zombie next to a medical center and not make money. Where it has affected us is the availability of finance and the cost of finance. Margins and fees have gone up. It hasn’t affected us enormously, nonetheless, it is a negative impact on the ability to grow. I think the other major point is that it impacts sentiment enormously. The people who know that property is a highly-leveraged investment put two and two together and think that we are adversely affected as other players. The very interesting thing about healthcare economics in the UK is that there is no excess supply of property. It’s all built to order. There are no empty medical centers in the UK that are new and fit for purpose. That’s very different from almost every other sector in the property market. That, coupled with the covenant and the very long lease terms, make this a very, very low-risk investment. That’s why yields have remained remarkably firm. At the peak of the market we were getting yields at around 5% and that slipped out to 5.5%. It’s nowhere as dramatic as the slippage we’ve seen in the UK in other sectors.

GlobeSt.com: Is it your choice not to develop your own assets?

Hyman: We could develop because we’re allowed to as a REIT, provided that we hold the property for three years after it’s completed. But since development is a risky business and because we don’t want to do things that impinge on the ability to pay a dividend, we, at the outset, decided not to go into development and completed a strategic review last year and concluded it was not worth our while developing at the moment. Where we do develop is on our own portfolio, but we’re not about greenfield development because it’s a very risky business. There is the question of cost overruns and planning permissions. In good times, it appears to be a very straight-forward way of making a lot of money. In tough times, some of the issues come out.

GlobeSt.com: Does the weakness of the dollar make acquisitions over here attractive?

Hyman: The American system is completely different. We have looked at some healthcare joint ventures in the US, but frankly, we have enough to do in our domestic marketplace, and it would be difficult to see what we brought to the party, other than money. So we’ve decided not to go down that route for the moment and carry on expanding in our UK marketplace.

GlobeSt.com: What are you mainly looking to accomplish at REITWeek?

Hyman: It’s really about getting the company in front of more institutional investors and advisors. It’s also about getting the name of the company more widely known to try and develop a following among the American investors. Obviously, that’s difficult for us as a UK company because of securities laws and the fact that the US is a big country. But if we are successful in getting someone like Cantor Fitzgerald or someone like that to follow the stock, it would make life a little bit easier for us. And I suppose I’ll learn in my own way what’s happening in the rest of the world.

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