Impact can cope with Covid-19 disruption

Impact acquires and operates care homes across the UK, renting properties on inflation-linked, 20-year-plus leases to private care operators. Its tenants' aggregate revenue sources are 64 per cent derived from the government and the remainder from privately-paid fees. Investors have become concerned that those tenants will come under increasing financial pressure as they try to manage the spread of Covid-19, with rising cost relating to things such as the provision of personal protective equipment, as well as tragic falls in occupancy in care homes hit by the outbreak. 

However, in the case of Impact, it looks like the increased risk this means for rental payments has been more than adequately reflected in the discount now being applied to the shares. In April, management told us that it was receiving weekly updates from tenants on occupancy levels and how many cases of the virus had been recorded in homes. The group collected 100 per cent of rent due from its care home tenants in respect of the second quarter.

Its tenants have a rent cover ratio of 1.8, above a market average multiple of 1.2, according to estimates by Berenberg. Analysts there estimate a 2-3 per cent reduction in occupancy would reduce rent cover to a multiple of 1.6, while a fall of between 10 and 20 per cent would reduce that coverage multiple to 1.0. However, Impact reported at the start of April that there had been no change to occupancy levels so far. The group has also been making efforts to diversify its tenant base – three new tenants were added last year, taking the total to nine with a further two likely to follow in 2020. 

Given the circumstances, discussions over potential acquisitions have been paused. An extra £50m borrowing facility has been arranged with HSBC, which meant that as of 6 April the group had cash plus borrowing headroom of £123m. Impact is committed to £62m of upcoming acquisition-related payments, which should take the loan-to-value ratio to 18 per cent. All in all, though, the group's financial position looks reassuring and, according to broker Numis, the portfolio value would need to drop 50 per cent to prompt a breach of loan covenants.

While the high level of uncertainty means dividend forecasts should be taken with a pinch of salt in the near term, we think long-term income prospects still look remain good. What's more, unlike several peers, Impact's dividend payments have been fully covered by underlying earnings over recent years.