Specialist care home real estate investment trusts (Reits) are enjoying a return to growth while stabilising rents strengthen their dividends.

Recent results from £346m Impact Healthcare (IHR ) and £511m Target Healthcare (THR ) Reits, the smallest funds in their sub-sector, reported a turnaround in fortunes since the trying days of Covid followed by a valuation slump as inflation and interest rates rose.

Target Healthcare, which has a portfolio of 98 properties leased to 32 tenants, reported a 2.1% increase in net tangible assets to 106.7p per in the six months to end of December 2023. The underlying net asset value (NAV) total return, including dividends, totalled 4.9% and marked a recovery from the same period in 2022 when the portfolio dropped 5.4%.

Earnings also increased 1.3% to 3.05p per share, meaning the 2.856p dividend is now 107% covered, offering a 6.9% yield with the stock trailing on a 24% discount to NAV. 

The value of the portfolio value increased 4.9% to £911.1m, driven by a 1.4% rise in like-for-like property valuations and improving rents. Contractual rents increased 2.4% to £57.9m, including like-for-like rental growth of 1.9%.

Target’s care home tenants have benefited from a brighter trading environment with rent collection rising to 99% to cover borrowing costs by 1.9 times, the highest since launch in 2017.

Chair Alison Fyfe said the Reit had grown total returns and earnings ‘against one of the more challenging backdrops in recent times’.

While Fyfe said the real estate sector still faced headwinds, she said there was a ‘clear bifurcation in sentiment towards high quality assets with a solid long-term future in their current or near-current state, and those that cannot be described in that way’.

‘Investors increasingly value energy efficiency, social impact, and positive experience for users and we remain deeply proud to be running a portfolio and strategy with real impact and longevity,’ she said.

Positive Impact

Full-year results from Impact Healthcare showed a similar recovery with NAV per share rising 4.7% to 115.83p last year.

The increase reflected a 4.1% like-for-like portfolio valuation increase, underpinned by inflation-linked rental growth and a tightening in yields and a rise in property values. Contracted rent increased 13.2% to £48.8m over the year, while earnings per share increased 2.4% to 7.28p.

This fully covered the 6.77p dividend which drove the total NAV return of 10.8% for the 12-month period. 

The 8.1%-yielding portfolio of 7,721 beds across 140 properties is fully let and Impact confirmed 99% of rent was collected, with the shortfall relating to just one tenant, Silverline, which entered financial difficulty over the year.

Impact replaced Silverline with Melrose Holdings, an affiliate party of the largest tenant, Minster Care Group. Excluding those seven properties let by Melrose, rent cover increased to double, reflecting the increase in occupancy to 88.2% and growth in average weekly fees of 13%.

Chair Simon Laffin said Impact aimed to deliver quality and affordable care homes to tenants, and the private sector was playing an ‘even more significant role in providing care for elderly people and helping the NHS, deploying capital and resources to enhance and grow affordable care home provision.’

He said the healthcare real estate sector has the potential to take thousands of patients out of hospital beds.

‘As the economy recovers from 2023’s high inflation and interest rate rises, and as government begins to recognise the larger role that this sector can play in the health infrastructure, we believe that there will be opportunities for Impact,’ said Laffin.

‘We are well-positioned to play a larger role in helping both residents and the NHS, while delivering long-term sustainable returns to shareholders.’

Impact is the Deutsche Numis property healthcare sector’s best performer over three and five years, with underlying returns rising 27% and 51%. The shares have not performed as well, falling 10% over three years and by 2.2% over five years to stand on a 25% discount to NAV.