Investors looking for a resilient, well-run, financially stable business to ride out the current uncertainty should look at Impact Healthcare REIT (IHR). It invests in a diversified portfolio of residential and nursing care homes.

With an increasing number of elderly people needing care and a constrained supply of fit-for-purpose residences, the company is set to continue growing whatever happens in the wider economy.

MARKET OPPORTUNITY

People aged over 85 are the fastest-growing part of the UK population and make up the core client group for care homes.

According to the ONS, the proportion of the population over 85 years old in the UK is forecast to more than double over the next three decades from 2.5% in 2021 to 5.2% in 2051.

Research by social care consultant LaingBuisson predicts that up to an additional 93,000 beds will be required to satisfy this increased demand over the next 10 years, an increase of over 20% on demand today.

At the same time, the number of care homes in the UK has shrunk by 9% between 2010 and 2020 as older, obsolete buildings have been closed and replaced with larger, more modern homes.

Moreover, the top 10 independent operators have lost market share from 27% to 20% over the last decade and the number of sole traders also shrank while mid-sized operators, which make up most of Impact Healthcare REIT’s tenants, dramatically increased their market share from 24% to 47%.

Due to the increasing demand for care and limited new capacity, fees have grown above the retail price index over the last 20 years and Impact Healthcare REIT’s leases all include inflation linkage to protect it against rising prices.

QUALITY CARE ASSETS

The group owns 131 healthcare properties, mainly residential care homes, with a total of 7,161 beds as of the end of June.

A key focus of its investments has been in homes dedicated to people with dementia, which make up close to 70% of all residents in care homes.

Sadly, around 850,000 people in the UK suffer some form of dementia, according to the Alzheimer’s Society, with that number expected to rise to over one million by 2025 and two million by 2051.

The company’s business model is simple, as managing partner Andrew Cowley explains: ‘First of all we look for high-quality care providers who we can work with long term. The first question is always, have we got the right partner?’

The second thing Cowley and his team look to get right is the level of rent. ‘The rent has to be affordable for the tenants, it’s not in our interests for them to go bust. We would rather under-monetise our assets (i.e. charge the tenant too little) than the other way round.’

As long as the tenants are doing well, they won’t be tempted to cut corners when it comes to the provision of care, adds Cowley.

The team looks to optimise the portfolio by selling selective assets and reinvesting the proceeds either in acquiring new properties or modernising existing ones.

In the first half of this year, the company acquired seven properties and exchanged contracts on a portfolio of three further properties adding 596 beds.

It also completed the internal refurbishment of a home in Harrogate and the upgrade of three homes in Northern Ireland, while there are ongoing upgrades at homes in Bristol and Carlisle and further projects are either in the planning or tender phase.

SECURE INCOME

Demonstrating the resilience of the business, Impact Healthcare REIT collected 100% of rent due during the first half – as it has every period since it floated in 2017 – with an ‘average rent cover’ among its tenants of 1.85 times during the 12 months to June, underlining its tenants’ ability to manage the current inflationary environment.

The weighted average unexpired lease term across the portfolio was almost 20 years at the end of the half-year period, providing exceptional long-term visibility, with all leases subject to inflation-linked upward-only reviews.

Occupancy across the group’s homes climbed to 85.4%, the highest since early 2020, which was better than management expected thanks to the ending of restrictions on personal movement, which meant people were more willing to move their elderly relatives into care.

The firm’s underlying net asset value rose 13.7% – or 3.3% allowing for dilution from the recent capital increase – to 116.2p per share, driven by the market value uplift on its property portfolio, while pre-tax profit rose 88% on last year.

After dividends of 3.27p per share, which were 1.3 times covered by earnings, on a fully diluted basis the total accounting return for the first half was 6.2%, putting the company well on track to deliver its 9% annual medium-term total return target.

The group has one of the lowest gross loan-to-value ratios in the REIT sector at 23%, and 73% of its drawn debt was hedged against rising interest rate costs as of June.

Meanwhile, it has more than £110 million in available funds which it can use to continue investing in attractive growth opportunities for the future such as taking on a new tenant with an innovative approach to dementia care, as announced earlier this month.

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