We wouldn't normally recommend shares in a company that isn't generating enough income to cover its dividend, but with MedicX we're making an exception. Most property funds are vulnerable to a drop in rental income when the economic cycle turns down, so it is a positive bonus when around 90 per cent of your rental stream is paid for by the UK Treasury in a market where demand will only increase.
- Government-backed rents
- Expanding into high-yielding Irish market
- Long-term demand for new medical centres
- Prospect of higher longer-term rental growth
- Short-term rental growth remains sluggish
- Dividend uncovered by earnings
This is where MedicX Fund (MXF) finds itself as a provider of purpose-built medical centres that it leases to GPs. Demand for such properties is extremely strong as most surgeries are not suitable to be expanded to include a sort of one-stop shop for patients seeking a consultation and treatment in such areas as x-ray, physiotherapy, a pharmacy and a host of other facilities. Providing these would help to unclog badly overburdened hospital A&E departments. And unlike other parts of the real estate sector, demand is not cyclical.
The population of the UK is expected to rise by over 10 per cent in the next 15 years, and the number of over-75s is expected to jump to 7.7m by 2027 compared with 5m in 2012. And MedicX has a higher exposure to London and the south-east than the other two specialist Primary Health Properties (PHP) and Assura (AGR) which should power stronger rental growth.
| MEDICX FUND (MXF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 85.75p | MARKET VALUE: | £321m | |
| TOUCH: | 85.75-86.5p | 12-MONTH HIGH: | 89p | LOW:77p |
| FORWARD DIVIDEND YIELD: | 7.0% | TRADING PROPERTIES: | nil | |
| FORWARD PREMIUM TO NAV: | 11% | |||
| £553m | NET DEBT: | 111% | ||
| Year to 30 Sep | Net asset value (p) | Net operating income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 62.2 | 24.2 | 3.6 | 5.7 |
| 2014 | 66.0 | 28.8 | 3.1 | 5.8 |
| 2015 | 71.0 | 32.8 | 3.7 | 5.9 |
| 2016* | 74.0 | 36.4 | 4.2 | 5.95 |
| 2017* | 77.0 | 39.8 | 4.7 | 6 |
| % change | +4 | +9 | +12 | +6 |
Normal market size: 3,000 Matched bargain trading Beta: 0.10 *Peel Hunt forecasts | ||||
Rental income last year grew by 16.8 per cent boosted by new premises coming on stream. Rental growth at existing centres is more modest because increases are based on the cost of constructing new centres, and the pool of comparable premises remains limited. This will change as government funds become available to accelerate construction. Essentially, rents are negotiated between the landlord and the district valuer. And given that construction costs have risen 10 per cent and land prices by 20 per cent in the past three years, valuers will no doubt bear in mind that open market rents in that time have risen just 6 per cent.
There's plenty of room for expansion too, with all three listed medical-property companies owning just 7 per cent of UK surgeries. But MedicX is also pursuing opportunities in the Republic of Ireland, where the need for surgeries is similar but property yields are higher. This is important as competition for space in the south-east has driven yields down.
MedicX provides the best dividend yield in the sector, and, with income investors in mind, this is paid out quarterly. However, a dividend-cover shortfall means investors should take the yield with a pinch of salt as part of the payout represents shareholders simply being handed back the fund's capital. That said, the portion of this year's dividend that is forecast to be covered by earnings is still equivalent to a decent 4.9 per cent yield. According to broker Peel Hunt's forecasts, cover should rise from 63 per last year to 80 per cent by September 2018. With improving fundamentals, there should be an improvement in the rating relative to peers.
