The £450m investment trust’s latest results highlight the good, long-term prospects for the UK care-home market, as adult social-care reforms bring the potential to transform the sector.
Impact Healthcare REIT (LON: IHR) owns a high-quality portfolio of UK care homes that generates an attractive and dependable stream of revenue. It is one of the only property investment companies that managed to achieve full rent collection and maintain its dividend throughout the pandemic.
Interim results for the six months to the end of June reveal a solid if unspectacular net asset value (NAV) total return of 3.9% with adjusted earnings of 3.26 pence per share. Dividends of 3.21p have been declared for the period, which is in line with the target of 6.41p for the year.
With the shares currently trading at 119p, this is equivalent to a yield of 5.4%, with the distributions fully covered by earnings. Impact has a progressive dividend policy and aims to increase its aggregate payout in line with the inflation-linked rental uplifts received in the previous financial year.
The broker Winterflood says that the fund offers an attractive yield, especially considering the conservative gearing of just 10 percent. It is underpinned by the portfolio’s long-term, inflation-linked leases, which are fully repairing and insuring with no break clauses.
Impact has continued to increase the number of care-home provider tenants and this now stands at 13, with the company owning 111 properties that between them contain a total of 6,141 beds. The portfolio is fully let with a weighted average unexpired lease term of 19.5 years.
It has just completed a successful rights issue and will probably continue to grow its assets to enable further diversification. The management team has a proven ability to deploy capital at attractive yields either by buying existing care homes or via forward-funded developments.
Government social-care reform
The government has recently announced a major reform of adult social care in England that will see individual care costs capped at £86,000. Anyone who has assets of less than £20,000 will have their care costs fully met by the state. Extra funding will come from higher national insurance and an increase in the tax on dividends, with manager Andrew Cowley describing the news as positive and “potentially transformational” for the care-home sector.
He thinks that the proposals address two of the three key problems in the market: the concern about whether it is fair for a person to have to sell their house to pay for care; and how the additional money that is needed for the sector will be funded. The one unresolved issue is how the new money will be used to increase fees for care operators, in order to pay their staff better and improve the quality of care for their residents.
IHR is currently trading on an eight percent premium to NAV, while its closest peer, the Target Healthcare REIT (LON: THRL) is on a five percent premium and yielding 5.7%.These are attractive yields, especially given the reliability of the underlying revenue streams.