The UK care home provider that pays a 5.5% inflation-linked yield

The markets seem to be facing two equally unappealing scenarios; either runaway inflation or recession brought on by too much central bank tightening. There are not many investment propositions that can withstand these diametrically opposite threats, which makes the Impact Healthcare REIT (LON: IHR) something of a rarity.

IHR provides a well-managed exposure to UK care homes with a property portfolio valued at £569m at the end of June. This takes the form of long-term, inflation-linked leases with no breaks that are fully repairing and insuring in nature.

It will come as no surprise that it was one of the few property investment companies that continued to achieve 100% rent collection and maintain its dividend targets, despite the Covid-19 pandemic.

Looking after vulnerable, elderly people is obviously an essential social service that will continue regardless of the state of the economy, with the care home provider tenants in good financial shape. Even if the central bank backs off and lets inflation run hotter for longer, the real returns would still be protected by the inflation-linked nature of the leases.

Impressive results

An analysis of the interim accounts for the six months to the end of June reveal an NAV total return of 6.2%, with the trust on track to meet its nine percent total return target for the year. The contractual rent roll was up 10.7% from the equivalent period in 2021, while the adjusted earnings per share showed a 12% increase.

IHR’s portfolio consists of 131 properties with 7,161 beds and is fully let with the weighted average unexpired lease term to the first break being 19.9 years. The fund now offers a prospective yield of 5.5% with quarterly distributions that is fully covered by earnings, which the broker Winterflood describes as attractive, particularly given that it is being achieved with a conservative level of gearing of 20%.

All of the leases are long-term and inflation-linked, although 90% are re-set annually at RPI with a floor of two percent per annum and a cap of four percent, while a further eight percent have a floor of one percent and a cap of five percent. There are also two leases with the NHS that are re-set annually in line with the CPI.

Attractive prospects

The inflation linkage should support the fund’s progressive dividend policy, which is likely to appeal to a growing number of investors in the current inflationary environment. However, the caps will mean that the fund will not capture the full extent of RPI observed at present, although in many ways these are a positive characteristic as they help to ensure the ongoing resilience of the underlying care home provider tenants.

IHR is currently trading on a small one percent premium to NAV and although this does not offer particular value compared to some of the more economically sensitive property investment companies, it should be supported by the resilient, inflation-linked income. It is actually quite normal for the fund to trade at a slightly higher premium rating.

Winterflood believe that Impact Healthcare provides a well-managed exposure to UK care homes and describe it as a compelling proposition, with the potential for strong long-term total shareholder returns. They continue to recommend it within the property section of their model portfolio for those looking for resilient, inflation-linked income.