One of the more specialist areas of the property market that can easily get overlooked is the UK healthcare sector. This consists of two trusts that invest in care homes, which are then rented out to different providers, with both paying attractive yields that are fully covered by earnings.
In theory, these sorts of properties should provide a reliable and growing source of income, but there have been problems in recent years, most notably with occupancy levels after the pandemic and demands for higher wages. Some care home operators have experienced financial difficulties as a result.
Each of the two funds has recently provided a trading update that suggests that conditions for care operators are becoming more benign. This should help to support higher rent rolls, which should enable the trusts to increase their dividends.
When interest rates finally start to come down, it should make these sorts of income-paying mandates with high and reliable distributions that much more attractive. The double digit discounts should also start to narrow, thereby providing a capital gain.
Impact Healthcare
The £650m Impact Healthcare REIT (LON: IHR) aims to acquire, own, lease, renovate, extend and redevelop, high quality healthcare assets in the UK. Its particular focus is residential care homes, of which it currently has 140, with the plan being to rent them out to suitable providers under full repairing and insuring leases.
Impact’s trading update for the fourth quarter of 2023 showed further resilience in the operational performance of tenants, with the rent cover estimated to have improved to 2x for the year as a whole. This is underpinned by higher underlying occupancy rates that rose to 88.2% by the end of December, as well as the 12% growth in average weekly fees.
The fund has declared a 1.6925p dividend in respect of the last quarter and has announced that it is targeting a total distribution of 6.95p for 2024. This represents a 2.7% increase on 2023 and gives the shares a prospective yield of 8.5% that is fully covered by earnings.
Care home providers have faced a number of operational difficulties in recent years, but the broker Numis says that investors are being compensated for the risk by the high yield. The shares are currently trading on a discount to NAV of 19%.
Target Healthcare
Its closest rival is the £930m Target Healthcare REIT (LON: THRL), which owns a portfolio of 98 care homes.Theseare let to specialist operators on full repairing and insuring leases that are subject to annual uplifts based on the UK retail prices index (subject to caps and collars) or fixed percentage increases.
Occupancy at the end of December was 87%, which is slightly lower than the stable pre-pandemic level of 93%. Its largest tenant, Ideal CareHomes, was recently bought by HCOne, the UK’s biggest care home operator that currently runs 275 homes.
Target’s NAV total return in the last three months of 2023 was 2.4%, with the fund declaring a dividend of 1.428p in respect of the previous quarter, which equates to a prospective yield of 6.9% that is fully covered by earnings. Its shares are currently trading on a discount to NAV of 22%.
Numis says that THRL’s average rent cover is typically lower than closest peer IHR, because of its greater focus on private pay residents. They describe the 6.9% yield and 22% discount as undemanding, although they think that Impact offers slightly better value.