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Research: Real Estate
With care home COVID-19 infection rates continuing to decline, and continuing full rent collection, Impact has reaffirmed its intention to pay its Q220 DPS in line with expectations. Across the sector, the pandemic has created operational challenges for care home operators, including Impact’s tenants, but it has also highlighted the essential service that the sector provides. This may have the positive effect of permanently improving resident funding and support investment to meet the increasing care needs of a growing elderly population.
Impact Healthcare REIT |
Q220 DPS reaffirmed |
Business update |
Real estate |
14 July 2020 |
Share price performance
Business description
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Analyst
Impact Healthcare REIT is a research client of Edison Investment Research Limited |
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With care home COVID-19 infection rates continuing to decline, and continuing full rent collection, Impact has reaffirmed its intention to pay its Q220 DPS in line with expectations. Across the sector, the pandemic has created operational challenges for care home operators, including Impact’s tenants, but it has also highlighted the essential service that the sector provides. This may have the positive effect of permanently improving resident funding and support investment to meet the increasing care needs of a growing elderly population.
Year end |
Net rental income (£m) |
EPRA earnings* (£m) |
EPRA |
EPRA NAV/ |
DPS |
P/NAV/ |
Yield |
12/18 |
17.3 |
12.4 |
6.47 |
102.9 |
6.00 |
0.93 |
6.2 |
12/19 |
24.0 |
17.6 |
6.95 |
106.8 |
6.17 |
0.90 |
6.4 |
12/20e |
30.4 |
22.6 |
7.08 |
108.7 |
6.29 |
0.88 |
6.5 |
12/21e |
35.3 |
26.5 |
8.30 |
112.2 |
6.40 |
0.86 |
6.7 |
Note: *EPRA earnings exclude fair value movements on properties and interest rate derivatives. **P/NAV and yield are based on the current share price.
Business model continues to be resilient
Impact collected all rents due to the end of June and as of 6 July had received 100% of the rent payable in advance in respect of the forthcoming period. Of the total rent due this month 76% is rent payable quarterly in advance and 24% is rent payable monthly in advance. We expect a Q220 DPS of 1.5725p to be declared, in line with Q120 and the full year target of 6.29p (+1.9%), fully covered by EPRA earnings.
Impact continues to work closely with tenants and with more widespread testing now available it has a clearer picture of the spread of the pandemic through the homes in its portfolio. At 6 July, six of the group’s 96 homes had a small number of isolated confirmed cases of COVID-19 and the number of related deaths peaked in late April in line with the wider sector. With homes closed to new admissions in many cases, the number of occupied beds across the portfolio reduced by c 8% during the 17-week period from early March, when the first UK COVID-19 death was registered. The additional costs incurred by tenants in managing the pandemic have been mitigated by government support and increased fees, and tenants are again focusing on reopening homes to new admissions. Impact has agreed to support this careful reopening process in a number of ways, including the purchase and installation of thermal scanners at all its homes.
The continuing robust performance of tenants is encouraging. Entering the pandemic, the average financial performance of Impact’s tenants was strong (2019 rent cover of 1.8x with little or no external debt), while the company itself has low gearing, good liquidity and significant access to undrawn debt, suggesting a resumption of acquisition-led portfolio growth in due course.
Valuation: DPS growth linked to rental uplifts
Impact targets aggregate DPS of 6.29p in FY20 (+1.9%), barring a material COVID-19 impact on rent collection, representing an attractive yield of 6.5% while the c 6% discount to NAV compares with an average 3% premium since IPO (peak of 11%).
Exhibit 1: Financial summary
Year to 31 December (£000s) |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
INCOME STATEMENT |
||||||
Cash rental income |
9,453 |
13,866 |
19,113 |
25,312 |
30,490 |
32,107 |
Rental income arising from recognising rental premiums & fixed rent uplifts |
(61) |
3,443 |
4,867 |
5,059 |
4,858 |
4,666 |
Gross rental income |
9,392 |
17,309 |
23,980 |
30,371 |
35,349 |
36,773 |
Net other income/(expense) |
0 |
(3) |
(2) |
0 |
0 |
0 |
Net rental income |
9,392 |
17,306 |
23,978 |
30,371 |
35,349 |
36,773 |
Administrative & other expenses |
(2,318) |
(4,270) |
(4,589) |
(5,266) |
(5,429) |
(5,668) |
Operating profit before change in fair value of investment properties |
7,074 |
13,036 |
19,389 |
25,104 |
29,920 |
31,105 |
Change in fair value of investment properties |
2,378 |
4,134 |
9,070 |
3,602 |
4,817 |
5,247 |
Operating profit |
9,452 |
17,170 |
28,459 |
28,706 |
34,737 |
36,351 |
Net finance cost |
6 |
(698) |
(2,127) |
(2,507) |
(3,435) |
(3,611) |
Profit before taxation |
9,458 |
16,472 |
26,332 |
26,199 |
31,302 |
32,741 |
Tax |
(1) |
0 |
0 |
0 |
0 |
0 |
Profit for the year (IFRS) |
9,457 |
16,472 |
26,332 |
26,199 |
31,302 |
32,741 |
Adjust for: |
||||||
Change in fair value of investment properties |
(2,378) |
(4,134) |
(9,070) |
(3,602) |
(4,817) |
(5,247) |
Change in fair value of interest rate derivatives |
0 |
105 |
383 |
0 |
0 |
0 |
EPRA earnings |
7,079 |
12,443 |
17,645 |
22,597 |
26,485 |
27,494 |
Rental income arising from recognising rental premiums & fixed rent uplifts |
61 |
(3,443) |
(4,867) |
(5,059) |
(4,858) |
(4,666) |
Non-recurring costs |
0 |
742 |
171 |
0 |
0 |
0 |
Adjusted earnings |
7,140 |
9,742 |
12,949 |
17,538 |
21,627 |
22,828 |
Average number of shares in issue (m) |
162.6 |
192.2 |
254.0 |
319.0 |
319.0 |
319.0 |
Basic & diluted IFRS EPS (p) |
5.82 |
8.57 |
10.37 |
8.21 |
9.81 |
10.27 |
Basic & diluted EPRA EPS (p) |
4.35 |
6.47 |
6.95 |
7.08 |
8.30 |
8.62 |
Basic & diluted adjusted EPS (p) |
4.39 |
5.07 |
5.10 |
5.50 |
6.78 |
7.16 |
Dividend per share (declared) (p) |
4.50 |
6.00 |
6.17 |
6.29 |
6.40 |
6.53 |
EPRA earnings dividend cover |
97% |
108% |
113% |
113% |
130% |
132% |
Adjusted earnings dividend cover |
98% |
84% |
83% |
87% |
106% |
110% |
BALANCE SHEET |
||||||
Investment properties |
156,226 |
220,463 |
310,542 |
401,799 |
449,616 |
457,863 |
Other non-current assets |
1,651 |
5,725 |
10,111 |
15,170 |
20,028 |
24,694 |
Non-current assets |
157,877 |
226,188 |
320,653 |
416,969 |
469,644 |
482,557 |
Cash and equivalents |
38,387 |
1,470 |
47,790 |
17,161 |
15,916 |
15,479 |
Other current assets |
119 |
587 |
554 |
554 |
554 |
554 |
Current assets |
38,506 |
2,057 |
48,344 |
17,715 |
16,470 |
16,033 |
Borrowings |
0 |
(24,709) |
(23,461) |
(82,915) |
(123,369) |
(123,823) |
Other non-current liabilities |
(1,712) |
(1,866) |
(1,768) |
(1,768) |
(1,768) |
(1,768) |
Non-current liabilities |
(1,712) |
(26,575) |
(25,229) |
(84,683) |
(125,137) |
(125,591) |
Borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
Other current liabilities |
(1,221) |
(3,333) |
(3,086) |
(3,086) |
(3,086) |
(3,086) |
Current Liabilities |
(1,221) |
(3,333) |
(3,086) |
(3,086) |
(3,086) |
(3,086) |
Net assets |
193,450 |
198,337 |
340,682 |
346,914 |
357,891 |
369,913 |
Adjust for derivative financial liability/(asset) |
0 |
(477) |
(94) |
(94) |
(94) |
(94) |
EPRA net assets |
193,450 |
197,860 |
340,588 |
346,820 |
357,797 |
369,819 |
Period end shares (m) |
192.2 |
192.2 |
319.0 |
319.0 |
319.0 |
319.0 |
IFRS NAV per ordinary share |
100.6 |
103.2 |
106.8 |
108.8 |
112.2 |
116.0 |
EPRA NAV per share |
100.6 |
102.9 |
106.8 |
108.7 |
112.2 |
115.9 |
CASH FLOW |
||||||
Net cash flow from operating activities |
8,236 |
9,991 |
14,941 |
20,046 |
25,062 |
26,439 |
Purchase of investment properties (including acquisition costs) |
(153,338) |
(55,076) |
(73,416) |
(84,655) |
(40,000) |
0 |
Capital improvements |
(510) |
(3,886) |
(8,226) |
(3,000) |
(3,000) |
(3,000) |
Other cash flow from investing activities |
6 |
39 |
110 |
26 |
16 |
16 |
Net cash flow from investing activities |
(153,842) |
(58,923) |
(81,532) |
(87,629) |
(42,984) |
(2,984) |
Issue of ordinary share capital (net of expenses) |
189,279 |
(53) |
132,156 |
0 |
0 |
0 |
(Repayment)/drawdown of loans |
0 |
26,000 |
(873) |
59,000 |
40,000 |
0 |
Dividends paid |
(5,286) |
(11,611) |
(16,143) |
(19,967) |
(20,325) |
(20,719) |
Other cash flow from financing activities |
0 |
(2,321) |
(2,229) |
(2,079) |
(2,997) |
(3,172) |
Net cash flow from financing activities |
183,993 |
12,015 |
112,911 |
36,955 |
16,677 |
(23,891) |
Net change in cash and equivalents |
38,387 |
(36,917) |
46,320 |
(30,629) |
(1,245) |
(437) |
Opening cash and equivalents |
0 |
38,387 |
1,470 |
47,790 |
17,161 |
15,916 |
Closing cash and equivalents |
38,387 |
1,470 |
47,790 |
17,161 |
15,916 |
15,479 |
Balance sheet debt |
0 |
(24,709) |
(23,461) |
(82,915) |
(123,369) |
(123,823) |
Unamortised loan arrangement costs |
0 |
(1,291) |
(1,666) |
(1,212) |
(758) |
(304) |
Net cash/(debt) |
38,387 |
(24,530) |
22,663 |
(66,966) |
(108,211) |
(108,648) |
Gross LTV (net debt as % gross assets) |
0.0% |
11.4% |
6.8% |
19.4% |
25.5% |
24.9% |
Source: Impact Healthcare REIT historical data, Edison Investment Research forecasts
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Research: Financials
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