How to invest in GPs’ surgeries

Boosting spending on GP surgeries could save £447m a year

Doctors tend to be reliable payers of rent. Consider this Reit to tap into that steady income stream.

The vast majority (90%) of contact that patients have with the NHS occurs in primary-care facilities such as GP surgeries and pharmacies. Given that it is far cheaper to treat patients in this way, rather than waiting until they get to Accident & Emergency (A&E), it makes sense to expand primary care, particularly given the NHS’s constant need for funds.

In 2015 auditor Deloitte estimated that boosting spending on general practice across the UK could lead to short-term savings of up to £447m a year. This included savings of £133.9m a year made by diverting up to 1.7 million patients away from A&E.

In its response to last year’s Naylor Review of NHS property and estates, the government emphasised that local strategic estates planning should reflect “changing delivery models” for care – in particular the desire to shift more activity into primary care.

Over the past few years it has also announced several investment projects to fund development in the sector, including the Primary Care Transformation Fund, a £1bn fund for GP infrastructure and IT, with £250m to be invested in GP premises every year from 2015/2016 for four years.

A promising primary-care Reit

One way to profit from this expansion is to buy shares in Assura (LSE: AGR), a real-estate investment trust (Reit) that develops, buys and manages primary-care properties. In the 12 months to 31 March, Assura received £80.2m in net rental income, up 18% on 2017. The value of the trust’s investment portfolio also grew from £1,345m to £1,733m. The Epra cost ratio – which is a measure of costs as a percentage of rental income – has also fallen from 13.7% to 13%.

Yet alongside these positive results, the trust also saw its pre-tax profit fall by 25%, from £95.2m in 2017 to £71.8m. This reflected the early repayment costs of £56.4m incurred by the trust in paying off secured loans from insurer Aviva, partly offset by the rising value of its property portfolio, and the higher net rental income generated by the expanding portfolio.

A key driver of the trust’s property returns is the income generated from its long-term leases. One major appeal of letting property to the NHS is that it should at least be a reliable rent payer. GPs’ surgeries account for 68% of Assura’s total income from rent, with other NHS bodies contributing 16%, and pharmacies 8%. Finally, the trust’s debt reorganisation shouldn’t be overlooked, says Mark Robinson in Investors Chronicle.

By repaying debts early, Assura has reduced the average cost of its debt by 94 basis points (ie, 0.94 percentage points) to 3.12%, and shifted more of its mix of debt from secured to unsecured. The trust’s interest cover is 327% (up from 296% a year ago), relative to 225% for fellow healthcare investor Primary Health Properties, while its loan-to-value ratio has fallen from 37% to 26% in the same time.

For the year to 31 March 2018 Assura paid a dividend of 2.46p, up 9.1% from 2.25p. The trust is trading at a 12% premium to net asset value (NAV – the value of the underlying portfolio), but a 4.64% yield and scope for future growth makes it look attractive. That said, the premium could be vulnerable to any disappointments. Peer MedicX is trading at 2% below NAV, down from a premium of 6% last week, after saying it may cut its dividend from this year’s 6.04p to 3.5p so that it can be fully covered by earnings.

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