I’ve been researching companies poised to benefit from the new government. In my last column, I highlighted Mercia Asset Management , the fund manager charged with allocating billions to UK small and medium-sized businesses, as an interesting, undervalued play on Labour’s investment plans . Two other companies worth a look are Assura (LSE: AGR) and Primary Health Properties (LSE: PHP) . These real-estate investment trusts (REITs) specialise in building, managing and leasing healthcare facilities, such as GP practices and hospitals. The demand for these facilities is expanding, owing to the country’s ageing population . The locations are largely rented out to the NHS , which is, of course, backed by the UK government.
Despite setting out to be a pro-growth government, within weeks of walking into number 11, the chancellor, Rachel Reeves , announced she was going to axe former premier Boris Johnson’s scheme to build 40 new hospitals around the country. Cutting investment might be a quick way to balance the books, but it’s not pro-growth, and it’s certainly not what the country needs after decades of underinvestment. Record waiting lists aren’t going to vanish, and the pressure on the NHS is only going to grow. With the government cutting investment, private providers are likely to have to step in to fill the gap.
Healthcare REITs to consider
Assura has secured two major deals. The first, announced at the end of May, took the form of a £250 million joint venture with Britain’s Universities Superannuation Scheme (USS) , which has £75 billion of assets under management. The joint venture will focus on assets let directly to NHS or GP tenants with rents linked to inflation , or with fixed rent increases . The company retained a 20% stake in the joint venture, with its larger partner taking the remaining 80%. The deal freed up capital for Assura to invest elsewhere. The goal is to grow the portfolio to £400 million over the next five years or so as part of an initial joint venture term of 20 years.
The company’s next move was to recycle £54 million of the proceeds from the deal into a transformative acquisition of private healthcare assets. In early August, Assura announced a £500 million acquisition of a portfolio of 14 private hospitals from a Canadian REIT. The transaction has transformed Assura’s portfolio, which had been dominated by NHS-run GP surgeries. The new private-run facilities have a longer unexpired average lease length of 26 years, and rental growth is index-linked. In addition to the cash portion, the company used £100 million of new shares and debt to fund the deal that will, when completed, boost its portfolio by 20%. Investment bank Panmure Liberum thinks Assura can bring its magic touch to these assets, which “may benefit from strong rental growth” as they are “currently under-rented”.
All of this has occurred alongside the group’s organic growth plan. In its latest update, it said it had completed three developments with a total spend of £46 million, including the largest project to date. A further five schemes, worth £46 million, were also in progress, with negotiations progressing on others. Forty-two rent reviews were settled, covering £7 million of rent and generating an 8% increase on previous rent. While the company does have a fair bit of leverage, with a loan-to-value ratio of 48%, the cost of debt is fixed at around 3% for the next six years. That’s not terribly concerning with inflation-linked rental rises and average leases of more than 20 years.
PHP is in a slightly different position from Assura. The company welcomed a new CEO, Mark Davies, a few months ago, and he has yet to lay out his plans for the group. However, he has acknowledged the fact that there is significant room for growth and tremendous growth opportunities. Miranda Cockburn, an analyst at Berenberg , a private bank, thinks one of those opportunities could be a merger with Assura, which would create a behemoth with around £6 billion of healthcare properties. “PHP needs additional growth drivers,” notes Berenberg. “We expect Mark Davies to explore different ways of growing PHP,” with joint ventures and acquisitions on the cards.
Should you invest in healthcare REITs?
At present, 89% of its income is paid for by the UK and Irish governments. The ratio at Assura was 10 percentage points lower before its latest £500 million private healthcare deal. That mix is reflected in PHP’s growth. Average annual rental growth has been relatively low, averaging 1.9% over the past 10 years and 3.2% at present, according to Berenberg. One lever the company is already pulling to unlock value is asset management. It’s currently working on two asset management projects, which management has said could deliver a 6% yield on cost.
Of the two, Assura looks to be the better buy. The stock is trading at around 80% of book value and has an 8.2% forward dividend yield . PHP is around 10% more expensive on a book-value basis and only offers a forward dividend yield of 7.4%. Considering the latter’s slower rental growth, I don’t think that premium is justified.
That said, both Assura and PHP look well placed to benefit from Labour’s drive to increase investment in the UK economy and improve access to healthcare. A portfolio of both would provide exposure to these themes while reducing company-specific risk. There are also high single-digit dividend yields on offer. With interest rates heading lower, these companies may start to look much more attractive from an income perspective.
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