The healthcare sector is an interesting investment opportunity. People inevitably need some medical guidance in their life, whether it is visiting a GP surgery, hospital or receiving support in a care home and an ageing population is increasing demand for these services.

One way to gain exposure is through UK-listed healthcare-focused real estate investment trusts (REITs) which invest in a range of health and care-related properties.

These include MedicX (MXF), Primary Health Properties (PHP), Assura (AGR), Target Healthcare (THRL) and Impact Healthcare (IHR) which we will discuss in this article.

The structure of REITs, which stipulates that they pay out the bulk of their earnings in dividends, makes them ideal for income investors and this particular group aims to offer healthy dividend yields of between 4% and 6%.

HEALTHY DIVIDEND YIELDS

MedicX used to trade on a 7.7% dividend yield, but this is no longer the case after cutting its payout in May as the dividends were only covered by 61.5% of earnings – it converted to REIT status in October 2017.

In the year to 30 September 2019, the dividend is expected to fall from 6p to 3.8p, leaving the prospective dividend yield at 4.7%.

The highest prospective yields can be found with Impact Healthcare (5.9%) and Target Healthcare (5.8%).

Despite MedicX cutting its payout, some analysts remain bullish about its prospects.

Liberum’s David Brockton argues MedicX pursues consolidation more conservatively than its peer Assura by focusing on dominant GP practices that are likely to remain strategically important as healthcare needs evolve.

Brockton forecasts 10% annual total returns until 2020.

SUPPORTING THE NHS

With an ageing (and growing) population, healthcare provision has become more vital than ever, particularly as the NHS is under pressure.

A potential solution is to encourage more people to visit local GPs for non-urgent medical concerns.

This is where MedicX, Primary Health Properties and Assura come into play, by investing in modern primary care centres.

Primary Health Properties has a portfolio of 308 assets worth £1.4bn as of 30 June.

Managing director Harry Hyman says the investment trust is helping the NHS by offering care outside of a hospital.

Returns are generated through rent paid by GPs, which is reimbursed by the Government, reducing income risk. Thanks to strong demand, rent usually increases between 3% and 5% every three years.

Primary Health Properties also pays builders to develop properties and look for new builds in areas that will benefit from a good demographic underpinning as well as doctors and room for extra facilities.

Stifel analyst John Cahill has trimmed his earnings per share forecasts for PHP by 1.8% to 5.3p in 2018 and by 5.3% to 5.6p in 2019 on an expected slowdown in acquisitions.

Cahill believes Primary Health Properties will cut spending from £175m every year to £150m.

WHAT DOES MEDICX DO?

Rival MedicX has a similar agenda as it aims to acquire freehold or long leasehold interests in modern, purpose-built primary healthcare properties, some of which have potential for expansion.

MedicX has a portfolio of 166 properties valued at £797.9m as of 30 June.

The real estate investment trust is interested in property that can be used long-term and wants to ensure occupiers can deliver services for a large number of people.

Management believes MedicX benefits from longer leases, larger businesses and a newer portfolio than its competitors. Similar to Primary Health, MedicX regularly negotiates rental hikes.

In the short-term, MedicX has warned of pressure in primary care and a potential slowdown in NHS capital expenditure.

Mitigating this is an increase in open market rates and anticipated benefits of investment in four primary care centres in Ireland.

Primary Health Properties also has a footprint in Ireland with three properties as it hopes to take advantage of growing demand for out of hours care services.

One of the drawbacks in Ireland is that rent is not supported by the government and people have to pay to see their GP, which could suppress demand.

BOTTOM-UP APPROACH

Focused solely in the UK, Assura has the biggest portfolio with 525 properties valued at £1.7bn.

Assura designs, builds, invests in and manages GP surgery buildings and primary care centres.

Chief executive Jonathan Murphy says the investment trust has a ‘bottom-up’ approach by working with GPs to establish whether there is demand for a new facility and to provide support.

Assura has a database of GP buildings allowing the company to pinpoint which facilities might be re-developed or in need of refurbishment.

Murphy expects no impact from Brexit as demand for new buildings and treatment has not been affected, but there has been speculation over potential recruitment risks.

ON THE HUNT FOR M&A

Over the last five years, Assura has been on an M&A drive, more than doubling the size of its portfolio. In 2017 alone, the investment trust allocated £300m to acquisitions.

Murphy says the performance of the underlying business is strong and is optimistic about the outlook as Assura has a pipeline of developments worth £70m.

While conceding that MedicX and Primary Health are strong rivals with robust cash flow, Murphy argues one of Assura’s strengths is that it is internally managed instead of through a fund.

The company can be more cost-effective and benefits from a conservative financing structure according to the chief executive.

Stifel analyst Miranda Cockburn believes Assura’s share price has been unfairly impacted by MedicX’s dividend cut.

She flags Assura continues to make good acquisitions in a competitive market, which should drive three-year earnings and dividends by 3% at a compound annual growth rate.

INVESTING IN CARE HOMES

Demand for high-quality care in a residential setting is expected to surge as the number of 85s or older doubles over the next 20 years. Impact and Target Healthcare want to tap into this trend by investing in care homes.

Target Healthcare chief executive Kenneth MacKenzie says the quality of care homes in general is poor with just 20% of total rooms featuring an en-suite wet room.

Currently there are 49 assets in Target’s portfolio and seven under construction.

When looking for investments, the company exclusively focuses on purpose-built and appropriate care facilities with a wet room attached to every room alongside good public and private space.

Rent hikes are connected to the Retail Price Index (RPI), leading to an annual increase of between 2% and 4% for the tenants, which are traditionally local Government operators.

MacKenzie says property tenants could come under pressure on potential staffing issues, making sustaining rents and occupancies a priority. Before Target invests in a care home, their operational and financial ability is assessed, to ensure they will continue to thrive in difficult situations.

Numis says it is hard to compare Target and rival Impact Healthcare amid limited information on property and operator metrics, but notes they both target a 6% yield, which is partially uncovered by earnings as they deploy growth funds.

FOCUS ON HIGH QUALITY CARE

Impact Healthcare invests in any real estate that provides healthcare in the UK with a core focus on residential care homes.

The investment trust seeks out high quality tenants that can provide good care with appropriate facilities.

Unlike Target, Impact managing partner Andrew Cowley rules out investing in greenfield developments.

He says the the company is keen to spend money to extend or improve buildings they own if there is sufficient demand.

Future growth is expected to be fuelled by annual rent increases linked to RPI with a limit of between 2% and 4%. Impact has a war chest of around £20m for aquisitions.

As Brexit negotiations continue, Cowley is concerned the Government is not focused on healthcare policy, which needs a long-term funding solution.

Heavy cuts in local Government spending is putting pressure on hospitals as local authorities are more likely to defer referring patients to care homes.

Winterflood analyst Emma Bird says the long term, inflation-linked leases are appealing in the current environment and is impressed by the amount of asset management activity since Impact’s debut in March 2017. (LMJ)

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