Most real-estate investment trusts (REITs) have struggled to collect their rent and have had to cut their dividends because of the pandemic, but this is not the case for care home provider Impact Healthcare, which has worked with its tenants to get through the crisis.
The £342m Impact Healthcare REIT (LON:IHR) owns a portfolio of 94 care homes in the UK that are operated by ten tenants and has recently exchanged contracts to acquire a further nine homes operated by a new tenant.
Each property is let on a fixed rent basis, so that the amount due is not affected by the turnover or trading of the occupier, which means that there is no direct exposure to their operating performance. This robust business model has enabled the fund to collect 100% of the rent due for the year-to-date without having to vary any of its leases.
In the eye of the storm
The fund has worked closely with its tenants throughout the pandemic and has provided assistance wherever possible. This included putting in a large order for PPE and then distributing it as required and paying for thermal scanners at all of its homes so as to enable the remote reading of the body temperature of those entering the buildings.
At first it was difficult to know the extent of infections in each property due to the lack of testing, but a clearer picture has now emerged. In early July, six of the homes had some residents testing positive for Covid-19, although by the end of the month they were all free of the virus.
Occupancy rates across the portfolio fell by eight percent between the start of March and the end of June, but the numbers are now recovering, with care homes starting to accept new admissions. It is thought that an average of four beds per home need to be filled to get back to the pre-pandemic level of occupancy.
Early on in the crisis the tenants experienced additional costs as they competed for scarce supplies of PPE, although these have now started to return to more normal levels. The use of agency workers is also declining as staff who were required to self-isolate have been able to return to work. These cost pressures have been offset by strong average fee increases, with the average weekly fees 12.5% higher in April 2020 than in April 2019.
In the six months to the end of June the fund generated a NAV total return of 3.25%, which was below the target of nine percent per annum due to the impact of the pandemic, but it hasn’t affected the dividends, with payments of 3.15p being declared in the period. These payments were in line with the planned 6.29p for the calendar year.
The fund has a progressive dividend policy and aims to grow its target dividend in line with the inflation-linked rental uplifts contained in the leases. With the shares trading at just over a pound, they offer an attractive prospective yield of six percent.
The analysts at Winterflood believe that the fund offers a well-managed exposure to the UK care home market, which is expected to benefit from the country’s ageing population. They like the long-term, inflation-linked leases with no break clauses that should support its progressive dividend policy.
IHR offers an attractive yield of six percent that should increase in line with inflation and is being achieved with a modest level of gearing of just 18%. Its shares are currently trading on a four percent discount to NAV, which offers value relative to its closest peers. The main risk is the concentrated nature of the tenant base, as it would be badly affected if even one of them experienced severe financial difficulties.