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Earlier this month, I offered my shares in FTSE 250 actual property funding belief (REIT) Major Well being Properties (LSE:PHP). And my timing arguably couldn’t have been worse.
My view on the corporate hasn’t modified, however the share value jumped 5% shortly after I offered the inventory. So have I made a doubtlessly expensive mistake?
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Tons to love
Major Well being Properties owns and leases buildings like GP surgical procedures and healthcare centres. Nearly all of its lease comes from the NHS.
As a REIT, the agency distributes 90% of its revenue as dividends to shareholders and this makes it engaging from a passive revenue perspective. And there’s extra to love concerning the enterprise.
Relying on a single supply for a lot of its lease is a threat. However the firm has persistently maintained excessive occupancy charges and the specter of the NHS defaulting on its lease appears low.
One other potential concern is the steadiness sheet. Major Well being Properties has simply over £1.3bn in whole debt, which is quite a bit within the context of an organization with a market worth of £1.2bn.
Once more although, I feel it’s simple to overestimate this. The debt may need to be repaid in some unspecified time in the future, however even when the agency doubles its share depend to do it, issues don’t look too unhealthy to me.
Growing the share depend would halve the dividend per share, bringing the yield to round 3.75%. For a inventory with a rising dividend, I don’t suppose that’s a horrible end result.
So why promote?
Why have I been promoting? The brief reply is I discovered one thing else I wished to personal – however that solely adjustments the query to why this inventory, slightly than a special one?
Like a variety of REITs, Major Well being Properties has restricted capability to reinvest for development. So the funding return’s largely pushed by the dividend – which has a present yield of seven.5%.
Compounding an funding at that price of return’s fairly engaging, however issues aren’t fairly so easy. Since 2019, the share depend has elevated by a median of 6% a 12 months.
This implies two issues. The primary is that shareholders have to reinvest 6% of their stake within the firm annually in an effort to proceed proudly owning the identical quantity of the underlying enterprise.
The second is that Major Well being Properties wants to extend the quantity it distributes by 6% annually to maintain the dividend per share the identical. And this might be a problem.
That is why I’ve determined there are higher alternatives elsewhere in the meanwhile. A 7.5% dividend yield’s engaging, however the equation seems much less thrilling when it’s offset by a 6% shareholder dilution.
Timing
It’s honest to say my timing might have been higher. Simply after I offered, Assura – an identical operation – reported information of a takeover bid sending shares in Major Well being Properties increased.
An additional 5% from the sale would have been good, however I don’t suppose there was any apparent means for me to see this coming. So I’m joyful sufficient with the choice.
I nonetheless view Major Well being Properties extra favourably than different REITs and I feel it’s price contemplating for revenue traders. However the rising share depend means it’s vital to look previous the excessive dividend yield.
