One of the FTSE 250 shares I have eyed for my portfolio at various times in recent years is healthcare landlord Assura (LSE: AGR).
With its quarterly dividend now yielding 7.8% per year, owning the shares could be a welcome boost to my passive income streams.
Then again, a 36% decline in the share price over the past five years is not impressive.
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Still, it could mean I now have a good buying opportunity. Should I act on it?
Reasons why the share has declined
That sort of share price decline for a company with a growing dividend does not happen without reason.
In the case of Assura, I see a couple of key factors.
One is its balance sheet. Net debt stood at £1.2bn at the end of March, up from £0.7bn five years beforehand.
At a time of higher interest rates, servicing that level of debt is a risk to profitability. However, all of Assura’s drawn debt last year carried a weighted average interest rate of only 2.3%. Last year, Assura had net rental income of £143m and £29m of finance costs.
A second risk is the healthcare focus, as it is a sector where accusations of profiteering can mean there is pressure to lower investment rates of return. Personally I do not see that as a worrying risk. There is a clear need for healthcare infrastructure. That ought to support existing or higher rent levels for now at least, in a simple case of supply and demand.
Not for the faint-hearted
Still, while the FTSE 250 company’s facilities may be well-suited to the faint-hearted, I do not think its shares are.
The net debt concerns me a lot. Assura is a property developer and landlord, so it is understandable that it has borrowed to build. The average interest rate seems decent to me in the current environment. But the long-term growth in net debt means that not only are interest costs substantial, the capital amount to be repaid at some point is also sizeable.
Taking the past five years together, during which profitability has moved around substantially, the company has generated under than £200m overall in profits after tax. That is less than £40m per year on average. For a company with £1.2bn in net debt that does not impress me.
Partly that profit level reflects the cost of funding annual dividend growth in the past several years. So freezing or cutting the dividend is an obvious way to help fund a reduction of the debt load – and I fear it could happen at some point.
No plans to invest
The main appeal of Assura for me is its income, backed by a portfolio of properties likely to benefit from long-term demand and reliable tenants.
So any risk the balance sheet could ultimately pose to dividend sustainability is a red flag to me.
For that reason, I will not be adding the FTSE 250 share to my portfolio. It could turn out to be a bargain, but I do not like the risk profile.
