Impact Healthcare REIT — On track to meet dividend target

Impact Healthcare REIT (LSE: IHR)

Last close As at 20/04/2024

GBP0.84

1.00 (1.20%)

Market capitalisation

GBP349m

More on this equity

Research: Real Estate

Impact Healthcare REIT — On track to meet dividend target

Impact Healthcare REIT’s Q323 total return was 2.6%, or 8.5% over the first nine months of the year (9M23). With rent cover continuing to strengthen, rent collection back to 100% and 98% of drawn debt fixed or hedged, the company is well on track to meet its FY23 DPS target of 6.77p (+3.5%), fully covered by adjusted ‘cash’ earnings, with a yield of 8.6%.

Martyn King

Written by

Martyn King

Director, Financials

Impact Healthcare REIT_resized

Real Estate

Impact Healthcare REIT

On track to meet dividend target

Trading update

Real estate

26 October 2023

Price

79p

Market cap

£327m

Gross debt at 30 September 2023

£178.8m

Gross LTV at 30 September 2023

27.0%

Shares in issue

414.4m

Free float

90%

Code

IHR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

(13.9)

(21.5)

Rel (local)

(1.8)

(9.5)

(24.6)

52-week high/low

108p

79p

Business description

Impact Healthcare REIT, traded on the Main Market of the London Stock Exchange, invests in a diversified portfolio of UK healthcare assets, primarily residential and nursing care homes, let on long leases to high-quality operators. It aims to provide shareholders with attractive and sustainable returns, primarily in the form of dividends, underpinned by structural growth in demand for care.

Next event

Q323 DPS paid

24 November 2023

Analyst

Martyn King

+44 (0)20 3077 5700

Impact Healthcare REIT is a research client of Edison Investment Research Limited

Impact Healthcare REIT’s Q323 total return was 2.6%, or 8.5% over the first nine months of the year (9M23). With rent cover continuing to strengthen, rent collection back to 100% and 98% of drawn debt fixed or hedged, the company is well on track to meet its FY23 DPS target of 6.77p (+3.5%), fully covered by adjusted ‘cash’ earnings, with a yield of 8.6%.

Year end

Net rental
income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

EPRA NTA/
share (p)

DPS
(p)

P/NAV
(x)**

Yield
(%)**

12/22

45.4

30.8

8.4

110.1

6.54

0.72

8.3

12/23e

53.4

33.9

8.2

114.5

6.77

0.69

8.6

12/24e

56.2

34.6

8.3

118.9

6.96

0.66

8.8

12/25e

59.4

38.4

9.3

123.9

7.10

0.64

9.0

Note: *EPRA earnings exclude fair value movements on properties and interest rate derivatives. **P/NAV and yield are based on the current share price.

100% of rents due collected in Q3

The Q323 total return comprised a 1.1% increase in EPRA NTA per share to 114.38p and a quarterly dividend of 1.6925p. The main driver of NTA growth was a 1.3% like-for-like increase in property valuation and some slight yield tightening in certain assets with consistently strong rent cover. Completed rent reviews were at an average uplift of 4.69% per year and added £0.3m to contracted rent (£48.4m). 100% of Q3 rents due were received, as was consistently the case until the beginning of the year, when one of Impact’s 13 care home tenants (Silverline) ceased payment. The seven homes that were previously leased to Silverline are now in a process of turnaround under the new operator, during which time no rent is due. Having dipped to 98% in H1, collection year to date is now 99%, with no indications of any wider tenant stress. Our EPRA NTA per share forecasts are each increased by c 2% for FY23–FY25, with no other changes to forecasts.

Continued strengthening of rent cover

Strong fee growth, improved occupancy and easing staff shortages continue to offset inflationary cost pressures on tenants. Underlying rent cover had already reached pre-pandemic levels, at 1.8x in H1 (on a rolling 12-month basis). Currently available tenant reporting data, covering 80% of the portfolio, indicate that it increased further in Q3. Annual underlying fee growth for Impact’s tenants was 15% in June, and resident occupancy had increased to 88.2% from 86.6% in December (and a pandemic low of 79%). Occupancy was stable during Q3 and in this respect we note indications across the sector that some operators are increasingly focused on ensuring that fees for new residents are appropriate to the level of required care, as opposed to simply prioritising occupancy. Nevertheless, further progress towards the pre-COVID-19 ‘norm’ of a low 90% level would only reinforce rent cover.

Valuation: Income-driven, long-term returns

The FY23 DPS target represents an attractive yield of 8.6% and we forecast continued growth in adjusted ‘cash’ earnings. Meanwhile, the shares trade at a c 30% discount to EPRA NTA per share.

Additional details

Q323 marked the third consecutive quarter of investment property valuation growth following the significant weakness experienced in Q422, broadly across the property sector. Care home properties have continued to prove more resilient than the wider sector, supported by strong sector fundamentals, long leases (Impact’s weighted average unexpired lease term is 21 years) and indexed income growth. Rental income is again driving valuation uplifts, with some additional benefit from slight yield tightening. The Q3 EPRA ‘topped-up’ net initial yield was 6.91% versus 6.95% in June (December 2022: 6.98%).

Exhibit 1: Quarterly movement in NAV/NTA

Pence per share

EPRA NTA

IFRS NAV

Opening value

113.08

113.64

Revaluation gains on investment properties

1.30

1.30

Purchase of interest rate caps

(0.42)

Revaluation loss on interest rate cap

(0.28)

Net remaining contribution to reserves

2.11

2.11

Q223 dividend paid

(1.69)

(1.69)

Closing value

114.38

115.08

Percentage quarterly change

1.1%

1.3%

Source: Impact Healthcare REIT data, Edison Investment Research

The positive valuation performance has driven positive total accounting returns in each quarter year to date.

Exhibit 2: Quarterly EPRA NTA total return

Pence per share

Q123

Q223

Q323

9M23

Opening NAV

110.1

112.2

113.1

110.1

Closing NAV

112.2

113.1

114.4

114.4

Dividends paid

1.6

1.7

1.7

5.0

Annualised NAV total return

3.4%

2.3%

2.6%

8.5%

Of which dividends paid

1.5%

1.5%

1.5%

4.6%

Of which change in NAV

2.0%

0.7%

1.1%

3.9%

Source: Impact Healthcare REIT data, Edison Investment Research

The year-to-date return continues a strong track record of positive NAV/accounting total returns since listing in March 2017, with an average of 7.1% pa. Even in 2022, IHR’s robust cash flows enabled the company to report a dividend-driven total return of 3.7%. Since listing, progressive dividends have generated 70% of returns.

Exhibit 3: Strong long-term track record of EPRA NTA total returns

Pence per share

2017

2018

2019

2020

2021

2022

9M23

FY17-9M23

Opening NAV

97.9

100.6

102.9

106.8

109.6

112.4

110.08

97.9

Closing NAV

100.6

102.9

106.8

109.6

112.4

110.1

114.5

114.5

Dividends paid

3.0

6.0

6.1

6.3

6.4

6.5

5.0

39.3

Annualised NAV total return

7.2%

8.2%

9.7%

8.5%

8.4%

3.7%

8.6%

57.1%

Of which dividends paid

3.1%

6.0%

6.0%

5.9%

5.8%

5.8%

4.6%

40.1%

Of which change in NAV

2.8%

2.3%

3.7%

2.6%

2.6%

-2.1%

4.0%

17.0%

Average annualised return

7.1%

Source: Impact Healthcare REIT data, Edison Investment Research

Dividends have been fully covered by EPRA earnings in each year since listing and, as cash rents have continued to increase, have been well covered on an adjusted ‘cash’ basis. We expect Impact to continue to target progressive dividends and, despite the increased cost of borrowing, we forecast a fully covered dividend in both this year and next, albeit with cash cover slightly lower than in previous years.

With an additional £50m of hedging acquired during Q31, the interest costs on 98% of drawn debt (£179m) are now fixed or hedged, removing the primary risk to our earnings forecasts. The current average cost of drawn debt, including hedging and fixed-rate borrowings, is 4.47% and although the hedging is of relatively short duration (£50m matures at end-2024 and £50m in August 2025), we note that:

  1 A further £50m interest rate cap at a cost of £1.76m, which caps SONIA at 4.0% for two years.

this provides Impact with the flexibility to review its longer-term financing at a point when a decline in interest rates is implied by the current market yield curve; and

the completion of development and asset management projects, a restoration of rents from the properties in turnaround, as well as continuing indexed rental growth that we forecast will provide an additional offsetting uplift in revenues.

Exhibit 4: Progressive dividends and cash cover

Source: Impact Healthcare REIT data, Edison Investment Research

Exhibit 5: Financial summary

Year to 31 December (£m)

2020

2021

2022

2023e

2024e

2025e

Cash rental income*

25.9

30.5

39.1

46.3

47.6

50.0

IFRS adjustments for guaranteed uplifts and lease incentives

4.9

5.9

6.4

7.4

8.6

9.4

Gross rental income

30.8

36.5

45.4

53.7

56.2

59.4

Net other income/(expense)

(0.0)

0.0

0.0

0.0

0.0

0.0

Bad debt charge

(0.4)

Net rental income

30.8

36.5

45.4

53.4

56.2

59.4

Administrative & other expenses

(5.3)

(5.8)

(7.0)

(7.6)

(7.7)

(7.8)

Realised gain on disposal

0.2

0.3

0.1

(0.0)

0.0

0.0

Operating profit before change in fair value of investment properties

25.7

31.0

38.6

45.7

48.5

51.6

Unrealised change in fair value of investment properties

5.6

4.2

(16.3)

12.9

10.0

10.4

Operating profit

31.3

35.2

22.3

58.6

58.5

62.0

Net finance cost

(2.5)

(3.3)

(5.4)

(10.8)

(13.9)

(13.9)

Profit before taxation

28.8

32.0

16.9

47.9

44.5

48.1

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Profit for the year (IFRS)

28.8

32.0

16.9

47.9

44.5

48.1

Adjust for:

Realised and unrealised gain/(loss) on investment properties

(5.7)

(4.5)

14.3

(12.9)

(10.0)

(10.4)

Change in fair value of interest rate derivatives

0.1

(0.1)

(0.4)

(1.1)

0.0

0.7

EPRA earnings

23.1

27.4

30.8

33.9

34.6

38.4

Rental income arising from recognising rental premiums & fixed rent uplifts

(4.9)

(6.0)

(6.5)

(7.5)

(8.6)

(9.4)

Amortisation of loan arrangement fees

0.7

1.0

1.2

1.5

1.5

1.5

Interest received on rate cap

0.0

0.0

0.1

1.5

2.5

0.4

Other adjustments

0.2

0.4

2.1

0.1

0.0

0.0

Adjusted earnings

19.1

22.7

27.7

29.5

29.9

30.9

Average number of shares in issue (m)

319.0

339.8

390.1

414.2

414.4

414.4

Basic & diluted IFRS EPS (p)

9.02

9.41

4.33

11.56

10.75

11.60

EPRA EPS (p)

7.25

8.05

8.37

8.19

8.34

9.26

Adjusted EPS (p)

5.98

6.68

7.11

7.11

7.22

7.45

Dividend per share (declared)

6.29

6.41

6.54

6.77

6.96

7.10

EPRA earnings dividend cover

115%

126%

128%

121%

120%

130%

Adjusted earnings dividend cover

95%

104%

109%

105%

104%

105%

NAV total return

8.5%

8.4%

3.8%

10.7%

9.3%

9.7%

EPRA cost ratio

17.1%

15.8%

16.6%

15.2%

13.7%

13.1%

BALANCE SHEET

Investment properties

405.7

437.6

504.3

616.7

640.6

659.0

Other non-current assets

15.9

62.0

68.1

38.0

46.6

56.0

Non-current assets

421.6

499.7

572.4

654.6

687.2

715.0

Cash and equivalents

8.0

13.3

22.5

17.1

15.6

10.2

Other current assets

0.1

1.6

1.5

5.3

2.2

1.3

Current assets

8.1

14.8

24.1

22.4

17.8

11.4

Borrowings

(74.2)

(110.9)

(122.4)

(186.1)

(197.6)

(199.1)

Other non-current liabilities

(2.8)

(2.6)

(4.3)

(2.4)

(2.4)

(2.4)

Non-current liabilities

(77.0)

(113.5)

(126.7)

(188.5)

(200.0)

(201.5)

Borrowings

0.0

0.0

(14.8)

0.0

0.0

0.0

Other current liabilities

(3.1)

(6.7)

(9.1)

(10.8)

(11.4)

(12.1)

Current Liabilities

(3.1)

(6.7)

(23.9)

(10.8)

(11.4)

(12.1)

Net assets

349.5

394.2

445.9

477.7

493.6

512.9

Adjust for derivative financial liability/(asset)

(0.0)

(0.1)

(0.4)

(3.2)

(0.8)

0.3

EPRA net tangible assets (NTA)

349.5

394.2

445.6

474.5

492.9

513.2

Period end shares (m)

319.0

350.6

404.8

414.4

414.4

414.4

IFRS NAV per ordinary share

109.6

112.4

110.2

115.3

119.1

123.8

EPRA net tangible assets (NTA) per share

109.6

112.4

110.1

114.5

118.9

123.9

CASH FLOW

Net cash flow from operating activities

21.0

(13.9)

29.5

38.2

41.1

42.8

Purchase of investment properties (including acquisition costs)

(88.5)

(28.1)

(71.9)

(48.6)

(6.0)

0.0

Capital improvements

(1.7)

(1.1)

(11.2)

(4.5)

(8.0)

(8.0)

Other cash flow from investing activities

0.9

1.6

5.4

2.2

0.0

0.0

Net cash flow from investing activities

(89.3)

(27.6)

(77.7)

(50.8)

(14.0)

(8.0)

Issue of ordinary share capital (net of expenses)

0.0

34.6

60.5

(0.0)

0.0

0.0

(Repayment)/drawdown of loans

51.2

38.2

27.7

48.5

10.0

0.0

Dividends paid

(20.0)

(21.9)

(25.7)

(27.8)

(28.6)

(28.8)

Other cash flow from financing activities

(2.8)

(4.1)

(5.1)

(13.5)

(10.0)

(11.3)

Net cash flow from financing activities

28.5

46.8

57.4

7.2

(28.6)

(40.2)

Net change in cash and equivalents

(39.8)

5.3

9.3

(5.5)

(1.5)

(5.4)

Opening cash and equivalents

47.8

8.0

13.3

22.5

17.1

15.6

Closing cash and equivalents

8.0

13.3

22.5

17.1

15.6

10.2

Balance sheet debt

(74.2)

(110.9)

(137.2)

(186.1)

(197.6)

(199.1)

Unamortised loan arrangement costs

(2.2)

(3.6)

(5.1)

(4.7)

(3.2)

(1.6)

Net cash/(debt)

(68.4)

(101.3)

(119.7)

(173.7)

(185.2)

(190.6)

Gross LTV (net debt as % gross assets)

17.8%

22.3%

23.8%

28.2%

28.5%

27.6%

Source: Impact Healthcare REIT historical data, Edison Investment Research. Note: *Including interest on investments via loans.

General disclaimer and copyright

This report has been commissioned by Impact Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Impact Healthcare REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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New Zealand

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General disclaimer and copyright

This report has been commissioned by Impact Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Impact Healthcare REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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abrdn Private Equity Opportunities Trust — Resilient NAV and stable balance sheet

abrdn Private Equity Opportunities Trust (APEO) posted a 12-month NAV TR of 5.1% to end-September 2023 amid persistently muted exit activity across PE markets and FX headwinds from stronger sterling. APEO’s drawdowns continue to outpace distributions, but the 12-month net capital calls were more than offset by the proceeds APEO received from the partial sale of its co-investment in non-food discount retailer Action. As a result, APEO’s balance sheet headroom, as measured by its commitment coverage ratio, remained broadly stable versus end-2022. Its discount to NAV of 44% is wider than its 10-year average of 23% and the c 10% average discount for buyout portfolios traded in the secondary markets in H123.

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