Commercial property stocks are a popular choice for income seekers. However, many are heavily exposed to boom and bust cycles in the economy. Major tenants can go bust or decide not to renew leases, cutting rental income at the same time as property values are falling.
Today I’m going to look at a property company which ought to be relatively safe from such risks. Assura (LSE: AGR) is a healthcare real estate investment trust (REIT) which specialises in building and letting GP clinics in the UK.
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The value of the group’s portfolio increased by 21.2% to £1.3bn last year. Its rent roll rose by 16.6% to £74.4m. Adjusted earnings rose by 20% to 2.4p, providing full cover for the dividend, which rose by 9.8% to 2.25p. That’s equivalent to a yield of 3.8% at the current share price.
You might think that this dividend is over-generous, given that it represents nearly all the group’s earnings. But Assura’s tax status as a REIT means that it’s obliged to pay out most of its profits in the form of dividends each year. These figures look OK to me.
What could go wrong?
Assura’s portfolio of GP surgeries should prove to be a very stable and reliable source of rental income. But I do have a couple of reservations. The first is that its shares currently trade at a 20% premium to their net asset value. If property values were to fall, the group’s share price could also slump.
A second risk is that it is targeting a relatively high level of gearing. The group’s loan-to-value ratio was 37% at the end of March, but its target range is 40%-50%. I’d prefer to see LTV remain below 40%, but I do recognise the stability and long-term visibility of the group’s income stream.
On balance, I think that Assura is an attractive business but that the valuation is relatively full. If I bought today, I’d look to average down on future dips.
This small-cap could be a bargain
Intellectual property protection and patent law are vital to many businesses. Asserting these rights requires specialised legal help.
That’s where patent attorney Murgitroyd Group (LSE: MUR) comes into play. This £37m AIM-listed firm provides intellectual property services across a range of business sectors in Europe. It is also working to build its business in the US, providing services to American companies filing patent applications in Europe.
It was forced to issue a profit warning in January, advising investors that interim earnings would be lower than expected. The group’s shares fell by 21% on the day and have yet to recover. But the group’s latest trading statement in April advised that “the underlying trading result for the third quarter was … ahead of revised internal forecasts for the period”.
January’s fall has left the stock trading on a forecast P/E of 13, with a prospective dividend yield of 4.1% for the current year. Murgitroyd had no debt at the end of November, and the group’s earnings are expected to rise by 10% in 2017/18.
A further trading update is expected in June, following the 31 May year end. But I believe the shares offer good value at current levels. I’ve bought some for my own portfolio.