Recent updates from Impact Healthcare Reit (IHR ) show the care home investor has managed to grow both rents and property values despite battling a £1m rent default and stubborn inflation that has hiked costs for its tenants.

Interim results earlier this month highlighted how the £372m real estate investment trust (Reit) has had a testing few years, first being hit by the pandemic then a spike in inflation and rising interest rates that ‘while less deadly, has presented its own challenges’, said manager Andrew Cowley.

While care home operator tenants have seen the cost of food, energy and staff skyrocket, Cowley pointed to stable levels of adjusted rent cover, which is ‘their home-level, pre-tax and pre-rent profitability divided by the amount of rent they owe to the group’.

In 2019, the last year before the pandemic and inflation hit, the group’s average level of adjusted rent cover was 1.8 times. It remained at that level during and after the pandemic and in the first half of this year.

‘This stability is not accidental,’ said Cowley, who insists all the Reit’s leases are inflation-linked but are sustainable so that the vast majority of rental agreements cap increases to 4% a year, well below the double-digit peak inflation seen earlier this year.

Rent increases and stable rent yields saw the fund’s investment property value increase 2.4% in the first half of the year. As a result, net asset value grew 5.6%. The trust paid a dividend of 1.6925p in the second quarter, in line with the 3.5% increased target for this year of 6.77p per share, which is 122% covered by earnings calculated under the real estate industry Epra standard.

Cowley said the need for stability requires ‘careful tenant selection, setting the initial rent at a prudent level and putting in place floors and caps on rent increases in most of our leases to give our tenants some level of protection against a spike in inflation… while in periods of low inflation providing the group with progressive rental uplifts’.

One tenant that was not so resilient was Silverline, which got into difficulties earlier this year. The trust rented seven homes to Silverline, which had its contract terminated in June owing £1.6m. Silverline was replaced as an operator by existing tenant Minster Care, a company operated by Impact partner Mahesh Patel.

‘Delivering a turnaround is rarely quick and easy,’ said Cowley. ‘We will report back later in the year on progress made at these homes. The rental default from Silverline will temporarily reduce the level of rent received by the group.’

He is expecting a £1m hit to the budget from the Silverline default this year.

Cowley is unconcerned about inflation impacting more tenants, and said occupancy in homes was ‘broadly stable’ and pay rises were ‘affordable’ as tenants got ‘staffing issues under control’ and were relying less on expensive agency staff.

Over the period, six care homes were added to the portfolio and one was sold, meaning the Reit now owns 140 properties with 7,725 beds. The contracted rent roll increased 11.6% to £48.1m over the period, versus £43.1m in the six months to the end of 2022, which included rent reviews for 90 homes that added £1.1m to rental take.

As well as purchasing new properties, Cowley has invested in existing buildings, spending £3.2m to link two buildings and add bedrooms in a general modernising of a care home in Bristol.

‘When we bought the home in 2018, the rent was £356,000,’ he said. ‘After five years of inflation-linked rent increases and rentalising our capex in the home, we have grown the annual rent to £690,000.’

Another £9.8m has been committed to asset management projects at four homes across the country, and there are 24 more projects in the pipeline that will cost an estimated £35m over the next two to three years.

Winterflood investment companies analyst Emma Bird said the share price discount of around 20% ‘offers value’, especially given the trust has traded at a premium for most of its six years.

The derating reflects investor concern that higher-for-longer interest rates in response to stubborn inflation could erode Reit margins and dividend cover. To address this since the results, IHR has spent £1.76m on a £50m interest rate cap to limit the cost of its £175m borrowings at 4% for two years. At 30 June, its loan-to-value ration stood at 28.5%.