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Last close As at 25/03/2023
GBP0.94
▲ −0.50 (−0.53%)
Market capitalisation
GBP392m
Research: Real Estate
Impact Healthcare REIT (IHR) has invested £56m, on an accretive basis, in a portfolio of six quality care homes, to be operated by existing tenant Welford Healthcare. The transaction is innovatively funded by a blend of new equity issued to the vendors, attractively priced at the last published NAV, and cash/newly hedged debt, managing near-term interest rate risks.
Impact Healthcare REIT |
Attractive growing income, innovatively funded |
Portfolio investment |
Real estate |
13 January 2023 |
Share price performance
Business description
Next events
Analyst
Impact Healthcare REIT is a research client of Edison Investment Research Limited |
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Impact Healthcare REIT (IHR) has invested £56m, on an accretive basis, in a portfolio of six quality care homes, to be operated by existing tenant Welford Healthcare. The transaction is innovatively funded by a blend of new equity issued to the vendors, attractively priced at the last published NAV, and cash/newly hedged debt, managing near-term interest rate risks.
Year |
Net rental income (£m) |
EPRA |
EPRA |
EPRA NTA/ |
DPS |
P/NAV |
Yield |
12/20 |
30.8 |
23.1 |
7.3 |
109.6 |
6.29 |
0.96 |
6.0 |
12/21 |
36.4 |
27.4 |
8.1 |
112.4 |
6.41 |
0.94 |
6.1 |
12/22e |
41.6 |
31.5 |
8.2 |
115.7 |
6.54 |
0.91 |
6.2 |
12/23e |
49.2 |
32.9 |
8.1 |
115.5 |
6.76 |
0.91 |
6.4 |
Note: *EPRA earnings exclude fair value movements on properties and interest rate derivatives. **P/NAV and yield are based on the current share price.
No equity dilution and additional funding capacity
Full details of the investment can be found on the company’s website. The portfolio comprises more than 400 beds, mostly with en-suite bathrooms, EPC ratings for the homes are good, and each has an established track record of delivering strong operational performance. Of the £56m consideration, £44.8m (or 80%) is in cash with the balance in new shares issued to the vendors and priced at 116.62p per share, the Q322 NAV, a significant premium to the current price. The debt drawn to fund the cash element has been hedged through a new £50m interest rate cap at a cost of £1.5m, which caps SONIA at 3.0% for two years. The group has now hedged the interest rates on 80% (£150m) of its current drawn debt of £187m with a gross LTV after this transaction of 27.6%. A further £54m of undrawn debt facilities remain available.
Immediately income generating and accretive
In line with similar recent transactions, IHR’s investment is initially funded by way of a loan to Welford, enabling it to take immediate operational control of the homes, avoiding a potentially lengthy transition period while regulatory approvals are sought. Once these approvals are received, IHR has the option to acquire the property assets, and we expect it will do so. IHR receives interest at 8.4% on the loan, generating immediate income, and has pre-agreed a new 35-year lease with Welford, assuming it acquires the properties. The agreed initial rent is £3.9m, subject to annual Retail Price Index reviews (capped and collared), reflecting a gross initial yield of 7.0%. On page 2 we provide an analysis of the estimated immediate accretion to earnings and the prospects for this to increase over time.
No changes to forecasts ahead of Q422 update
We will review our forecasts following the Q422 trading update later in January, which we expect to include a new FY23 DPS target. We anticipate this to be consistent with IHR’s clear and progressive policy, which seeks dividend growth in line with the inflation-linked rental uplifts received in the preceding financial year. Market expectations remain for a softening of property yields across all real estate sectors as interest rates rise, at least in part reflected in the current share price.
Analysis of estimated accretion to earnings from day 1
The portfolio investment is significant, at £56m compared with a Q322 portfolio total value of £543m. Importantly, we expect a positive net earnings impact on day 1 and for this contribution to increase for as long as RPI-indexed rental growth exceeds any rise in debt funding costs. In Exhibit 1, we show this effect for the first two years, during which the debt funding costs are known with certainty. Based on the increased number of shares in issue and assuming 4% pa rental growth (in line with the RPI cap), we expect a 0.2p enhancement to adjusted EPS in the first year and for this enhancement to increase to 0.3p in the second year. Assuming no change in borrowing costs after expiry of the SONIA cap, and continued 4% pa rental growth, the total enhancement would be 0.4p at the end of the fifth year. While borrowing costs may increase beyond the period covered by the SONIA cap, it is also possible they may fall. The three-month SONIA curve is currently indicating less than 4% pa for early 2025 which, including the 200bp loan margin, would represent an all-in-cost of less than 6% pa compared with the 6.5% pa we expect for the next two years.
Exhibit 1: Estimated accretion to earnings over the first two years
Year 1 |
Year 2 |
|
Debt drawn to fund cash consideration (£m) |
44.8 |
44.8 |
Loan margin |
2.0% |
2.0% |
Capped SONIA rate |
3.0% |
3.0% |
Amortisation of cap fee |
1.5% |
1.5% |
Total cost of drawn debt |
6.5% |
6.5% |
Additional debt cost (£m) |
(2.9) |
(2.9) |
Annualised rent income (£m) |
3.9 |
4.1 |
Indexation |
4% |
|
Annualised rental income net of finance costs (£m) |
1.0 |
1.1 |
Existing number of shares (m) |
404.8 |
404.8 |
Vendor shares issued (m) |
9.6 |
9.6 |
Enlarged number of shares (m) |
414.4 |
414.4 |
Additional rental income less finance costs per share (p) |
0.24 |
0.28 |
Source: Edison Investment Research
Exhibit 2: Financial summary
Year to 31 December (£m) |
2017 |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
INCOME STATEMENT |
|||||||
Cash rental income |
9.5 |
13.9 |
19.1 |
25.9 |
30.5 |
36.0 |
42.8 |
Rental income arising from recognising rental premiums, fixed rent uplifts & lease incentives |
(0.1) |
3.4 |
4.9 |
4.9 |
5.9 |
5.6 |
6.5 |
Net rental income |
9.4 |
17.3 |
24.0 |
30.8 |
36.4 |
41.6 |
49.2 |
Administrative & other expenses |
(2.3) |
(4.3) |
(4.6) |
(5.3) |
(5.8) |
(6.6) |
(7.0) |
Realised gain on disposal |
0.0 |
0.0 |
0.0 |
0.2 |
0.3 |
0.0 |
0.0 |
Operating profit before change in fair value of investment properties |
7.1 |
13.0 |
19.4 |
25.7 |
30.9 |
34.9 |
42.3 |
Unrealised change in fair value of investment properties |
2.4 |
4.1 |
9.1 |
5.6 |
4.2 |
7.1 |
(6.5) |
Operating profit |
9.5 |
17.2 |
28.5 |
31.3 |
35.2 |
42.0 |
35.8 |
Loan related interest |
0.0 |
0.0 |
0.0 |
0.0 |
0.1 |
2.6 |
0.0 |
Other net finance cost |
0.0 |
(0.7) |
(2.1) |
(2.5) |
(3.3) |
(5.9) |
(9.4) |
Profit before taxation |
9.5 |
16.5 |
26.3 |
28.8 |
32.0 |
38.8 |
26.4 |
Tax |
(0.0) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit for the year (IFRS) |
9.5 |
16.5 |
26.3 |
28.8 |
32.0 |
38.8 |
26.4 |
Adjust for: |
|||||||
Change in fair value of investment properties |
(2.4) |
(4.1) |
(9.1) |
(5.6) |
(4.2) |
(7.1) |
6.5 |
Gain on disposal |
0.0 |
0.0 |
0.0 |
(0.2) |
(0.3) |
0.0 |
0.0 |
Change in fair value of interest rate derivatives |
0.0 |
0.1 |
0.4 |
0.1 |
(0.1) |
(0.2) |
0.0 |
EPRA earnings |
7.1 |
12.4 |
17.6 |
23.1 |
27.4 |
31.5 |
32.9 |
Rental income arising from recognising rental premiums & fixed rent uplifts |
0.1 |
(3.4) |
(4.9) |
(4.9) |
(6.0) |
(5.6) |
(6.5) |
Amortisation of loan arrangement fees |
0.0 |
0.2 |
0.4 |
0.7 |
1.0 |
1.2 |
1.2 |
Amortisation of lease incentive |
0.1 |
0.0 |
0.0 |
||||
Non-recurring costs |
0.0 |
0.7 |
0.2 |
0.0 |
0.0 |
0.0 |
0.0 |
Gain on disposal |
0.0 |
0.0 |
0.0 |
0.2 |
0.3 |
0.0 |
0.0 |
Adjusted earnings |
7.1 |
9.9 |
13.4 |
19.1 |
22.7 |
27.0 |
27.6 |
Average number of shares in issue (m) |
162.6 |
192.2 |
254.0 |
319.0 |
339.8 |
385.5 |
404.8 |
Basic & diluted IFRS EPS (p) |
5.82 |
8.57 |
10.37 |
9.02 |
9.41 |
10.06 |
6.53 |
EPRA EPS (p) |
4.35 |
6.47 |
6.95 |
7.25 |
8.05 |
8.16 |
8.12 |
Adjusted EPS (p) |
4.39 |
5.17 |
5.26 |
5.98 |
6.68 |
7.01 |
6.82 |
Dividend per share (declared) |
4.50 |
6.00 |
6.17 |
6.29 |
6.41 |
6.54 |
6.76 |
EPRA earnings dividend cover |
97% |
108% |
113% |
115% |
126% |
125% |
120% |
Adjusted earnings dividend cover |
98% |
86% |
85% |
95% |
104% |
107% |
101% |
NAV total return |
5.9% |
8.5% |
9.5% |
8.5% |
8.4% |
8.7% |
5.6% |
BALANCE SHEET |
|||||||
Investment properties |
156.2 |
220.5 |
310.5 |
405.7 |
437.6 |
581.3 |
586.9 |
Other non-current assets |
1.7 |
5.7 |
10.1 |
15.9 |
62.0 |
30.3 |
36.7 |
Non-current assets |
157.9 |
226.2 |
320.7 |
421.6 |
499.7 |
611.6 |
623.6 |
Cash and equivalents |
38.4 |
1.5 |
47.8 |
8.0 |
13.3 |
13.1 |
2.4 |
Other current assets |
0.1 |
0.6 |
0.6 |
0.1 |
1.6 |
1.8 |
1.8 |
Current assets |
38.5 |
2.1 |
48.3 |
8.1 |
14.8 |
14.9 |
4.3 |
Borrowings |
0.0 |
(24.7) |
(23.5) |
(74.2) |
(110.9) |
(148.8) |
(150.0) |
Other non-current liabilities |
(1.7) |
(1.9) |
(1.8) |
(2.8) |
(2.6) |
(2.6) |
(2.6) |
Non-current liabilities |
(1.7) |
(26.6) |
(25.2) |
(77.0) |
(113.5) |
(151.4) |
(152.6) |
Borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other current liabilities |
(1.2) |
(3.3) |
(3.1) |
(3.1) |
(6.7) |
(6.6) |
(7.5) |
Current Liabilities |
(1.2) |
(3.3) |
(3.1) |
(3.1) |
(6.7) |
(6.6) |
(7.5) |
Net assets |
193.5 |
198.3 |
340.7 |
349.5 |
394.2 |
468.5 |
467.8 |
Adjust for derivative financial liability/(asset) |
0.0 |
(0.5) |
(0.1) |
(0.0) |
(0.1) |
(0.3) |
(0.3) |
EPRA net tangible assets (NTA) |
193.5 |
197.9 |
340.6 |
349.5 |
394.2 |
468.2 |
467.5 |
Period end shares (m) |
192.2 |
192.2 |
319.0 |
319.0 |
350.6 |
404.8 |
404.8 |
IFRS NAV per ordinary share |
100.6 |
103.2 |
106.8 |
109.6 |
112.4 |
115.8 |
115.6 |
EPRA net tangible assets (NTA) per share |
100.6 |
102.9 |
106.8 |
109.6 |
112.4 |
115.7 |
115.5 |
CASH FLOW |
|||||||
Net cash flow from operating activities |
8.2 |
10.0 |
14.9 |
21.0 |
23.6 |
24.8 |
36.7 |
Purchase of investment properties (including acquisition costs) |
(153.3) |
(55.1) |
(73.4) |
(88.5) |
(28.1) |
(125.0) |
(8.0) |
Capital improvements |
(0.5) |
(3.9) |
(8.2) |
(1.7) |
(1.1) |
(6.7) |
(4.0) |
Other cash flow from investing activities |
0.0 |
0.0 |
0.1 |
0.9 |
(35.9) |
39.6 |
0.0 |
Net cash flow from investing activities |
(153.8) |
(58.9) |
(81.5) |
(89.3) |
(65.1) |
(92.1) |
(12.0) |
Issue of ordinary share capital (net of expenses) |
189.3 |
(0.1) |
132.2 |
0.0 |
34.6 |
60.9 |
0.0 |
(Repayment)/drawdown of loans |
0.0 |
26.0 |
(0.9) |
51.2 |
38.2 |
37.1 |
0.0 |
Dividends paid |
(5.3) |
(11.6) |
(16.1) |
(20.0) |
(21.9) |
(25.4) |
(27.1) |
Other cash flow from financing activities |
0.0 |
(2.3) |
(2.2) |
(2.8) |
(4.1) |
(5.4) |
(8.2) |
Net cash flow from financing activities |
184.0 |
12.0 |
112.9 |
28.5 |
46.8 |
67.1 |
(35.4) |
Net change in cash and equivalents |
38.4 |
(36.9) |
46.3 |
(39.8) |
5.3 |
(0.2) |
(10.6) |
Opening cash and equivalents |
0.0 |
38.4 |
1.5 |
47.8 |
8.0 |
13.3 |
13.1 |
Closing cash and equivalents |
38.4 |
1.5 |
47.8 |
8.0 |
13.3 |
13.1 |
2.4 |
Balance sheet debt |
0.0 |
(24.7) |
(23.5) |
(74.2) |
(110.9) |
(148.8) |
(150.0) |
Unamortised loan arrangement costs |
0.0 |
(1.3) |
(1.7) |
(2.2) |
(3.6) |
(2.8) |
(1.6) |
Net cash/(debt) |
38.4 |
(24.5) |
22.7 |
(68.4) |
(101.3) |
(138.5) |
(149.2) |
Gross LTV (net debt as % gross assets) |
0.0% |
11.4% |
6.8% |
17.8% |
22.3% |
24.2% |
24.1% |
Source: Impact Healthcare REIT historical data, Edison Investment Research forecasts
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Research: Healthcare
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