The Daily Telegraph
Diversify your defences against inflation with this well-run property company
Wise investors seek multiple ways to achieve their goals. This portfolio of care homes complements our other inflation plays, writes Russ Mould
The American economist Robert Solow once asserted: “Economists are often asked to predict what the economy is going to do – but economic projections require predictions about what politicians are going to do, and nothing is more unpredictable.” The same predicament faces stock pickers, at least to some degree, and everyone will have their views on whether the new
Prime Minister’s plans to pursue fracking and license new North Sea oil fields, eschew further windfall taxes, remove “green” levies and support households with their energy bills are the right things to do or not.
Supporters of free markets will probably welcome the first three as parts of a long-term solution and accept the last one as the only practical approach to a massive near-term problem, even if, in effect, it represents a substantial fresh bout of fiscal stimulus and borrowing. That could have an inflationary impact further down the road, at least until the supply-side reforms start to exert a welcome influence on prices.
Inflation could therefore yet remain the enemy of the investor, especially as governments from Turkey to Germany are also awarding handouts and support packages that will maintain or boost demand for energy at a time when supply is the problem.
As discussed here often, having exposure to hydrocarbon producers such as Shell and i3 Energy, and oil equipment and services providers such as Hunting, is one hedge against some leaders mistaking a supply problem for a price problem.
But no hedge is perfect and going “all in” on one theme or sector is not a wise move (oil prices are still gently falling, after all) so it may pay to look for other sources of protection.
Businesses with the rare asset of pricing power are the way to go. Pricing power can come from a technological lead, market share, brands or (near) guaranteed service and maintenance revenues but a shortage of supply and limited new capacity are as good a combination as any and that brings Impact Healthcare Reit into the equation.
The £484m company owns more than 130 healthcare properties, mainly residential homes. Wretchedly, the number of dementia sufferers continues to grow, but the supply of suitable residences remains badly constrained and Impact Healthcare Reit is particularly active in this niche.
The fruits can be seen in last month’s first-half results. The trust reported a further increase in net asset value per share, a dividend in line with its target, a strong balance sheet and another increase in earnings.
Pre-tax income has increased every year since its stock market debut in 2017, helped by Impact Healthcare’s unbroken record of collecting 100pc of rent from its carefully selected tenants and management’s knack for selling assets and then recycling the capital into the purchase of new sites or the refurbishment of existing properties.
July’s £22m capital raising provides further firepower here.
In addition, the shortage of suitable beds and properties underpins care homes fees, while the leases signed by the Reit’s 13 tenants have an indexlinked element to offer additional inflation proofing to rental income.
This all sounds promising, but investors must still be careful not to focus too much on the narrative and forget about valuation, because the price paid to own a business and a share of its assets and cash flows is the ultimate arbiter of investment return.
The shares trade roughly in line with the June 2022 NAV of 116p per share. This does mean there is no discount, but neither is there a meaningful premium to pay, so buyers are not giving away some of the potential from the portfolio before they even start.
In addition, the dividend yield comfortably exceeds 5pc. While that no longer covers the headline rate of inflation it nicely supplements any capital returns. Better still, the balance sheet carries very little debt, especially relative to the £569m value of the property portfolio, so interest cover is good and earnings comfortably cover the dividend.
Impact Healthcare Reit looks like a solid buttress against inflation.
Questor says: buy
Share price at close: 119.8p
Russ Mould is investment director at AJ Bell, the stockbroker
Read Questor’s rules of investment before you follow our tips: telegraph.co.uk/go/ questorrules; telegraph.co.uk/questor