Assura shares are trading at a discount

GP surgeries developer Assura (AGR) swung to a pre-tax loss in the year to 31 March as higher interest rates took their toll on the value of its portfolio. This was to be expected considering that the rest of the real estate investment trust (Reit) sector suffered the same fate, but the operational picture for Assura is much more reassuring. European Public Real Estate Association (EPRA) pre-tax profit – its rental revenue less the costs of running the company – was up 12.4 per cent. 

In other words, if investors ignore net asset value (NAV), Assura looks as though it is doing well. Of course, that is easier said than done when net debt to NAV has ticked up to a questionable level, due in part to its plummeting NAV. The number now stands at 71 per cent compared with 52 per cent in 2019.

Strong demand for Assura’s GP surgery development is evidenced by its rock-bottom vacancy rate of just 1 per cent, but to cater to that demand the company will need to build more. This potentially means making the debt position even worse at a time when refinancing is much more expensive than it has been for the previous 15 years.

The other question is where that growth will come from. Its main tenant by far is the NHS, which is a dependable counterparty, but that means that Assura’s growth is limited by the UK government’s ambitions. Not so, the company says, pointing out that there is the potential to expand further in Ireland and in the UK private healthcare sector, too. The NHS may be its biggest source of income, but the company insists that it is not a “one-trick pony” when it comes to sourcing tenants.

Assura's bullishness about growth is not just talk. It has put its money where its mouth is in the form of dividend payments, which have increased for the 10th consecutive year. Those payments are covered by cash and are covered by earnings before interest, tax, depreciation and amortisation 4.5 times. As such, investors can expect Assura’s high dividend yield to be well covered.

Added to all this, Assura is currently trading at a discount to NAV. We feel that this is unjustified and that the market has overcorrected following the wider interest rate hit that Reits took late last year. The discount is not huge, but for now, we see it as an opportunity and therefore upgrade our rating. Buy.

Last IC view: Hold, 56.8p, 22 Nov 2022