Impact Healthcare (IHR ) has increased its dividend target for 2024 as tenant rent cover racked up its strongest performance since launch in 2017 thanks to improving occupancy and higher fees.

The 8%-yielding £360m portfolio of 138 care homes has bounced back since the dark days of the pandemic and reported a 13.2% increase in contracted rent to £48.8m in 2023, equivalent to an extra £5.7m of rent each year. Rents are inflation-linked but increases are capped at 4% a year, ensuring they remain affordable for tenants running the care homes.

With rental roll growing, the trust delivered a 3.5% increase in dividends for 2023, declaring a fourth-quarter dividend of 1.6925p per share, in line with the 6.77p target for the year. The dividend target for 2024 has been increased 2.7% to 6.95p.

However, the shares remain weighed down by uncertainty over high interest rates. Trading on a 24% discount to net asset value, they fell nearly 4% in January and are down 12% over one year with a modest 13.2% total return including dividends over five years.

Tenant rent cover, a key metric Impact uses for assessing the ability of tenants in its care homes to sustainably pay rents, looks at the operational cash earnings of the home before rent versus the agreed rent. This grew to 2.2 times in the final quarter of last year from 1.9 times in the same quarter a year earlier – the strongest quarterly tenant performance since the company’s inception.

‘Stronger tenant cover is driven by several factors: improving room occupancy, growth in average weekly fees charged by tenants, and rent increases largely being capped at 4%,’ said managing partner at Impact Healthcare Andrew Cowley.

The trust received 100% of rent payments in the final quarter of 2023 as ‘tenants maintained their profit recovery’, and occupancy at the end of the year was 88.2%, up from 87.4% in the same quarter the previous year.

The managers undertook 119 rent reviews, which delivered an extra £1.6m of rent. 

Deutsche Numis investment company analyst Andrew Rees said the trading update provided ‘further indications that trading conditions for care operators are becoming more benign following the pandemic and inflationary pressures over the past few years’.

Rees looked particularly at the performance of care home operator Melrose, which took over seven care homes in the portfolio after former tenant Silverline faced financial difficulties.

He said Impact’s overall portfolio was ‘unlikely to be immune from operational challenges’ but that it was ‘positive to note that Melrose appears to have stabilised performance at these assets’.

‘Investors are to a degree being compensated for the risk associated with weaker tenant covenants by the fully covered prospective 8% dividend yield that Impact’s shares are currently offering based on the 2024 dividend target of 6.95p,’ said Rees.