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An income share that I have been considering for a while as a possible addition to my portfolio has fallen 15% so far this year. That, combined with a dividend increase, means that FTSE 250 The stock now yields 8.2%.
Could now be the time to take a jump while the stock continues to trade at current levels (45% cheaper than five years ago)? Or could falling share prices and high yields be warning signs of a classic value trap?
Attractive but complicated business sector
The action in question is asura (LSE: AGR). Although the real estate company is not well known, its buildings are used at least occasionally by a considerable part of the population. It specializes in healthcare properties such as GP surgery buildings and ambulance depots.
I think this is a potentially attractive area of business, but not necessarily easy.
On the positive side, demand for healthcare services is resilient and I believe that, if anything, it will only grow over time. These services require buildings in many cases. A GP is exactly the type of tenant I would love to have if I were a commercial landlord. In many cases it will remain in situ for decades. Any tenant can fall behind on their rent, but this seems less likely with a GP surgery than with a rapidly growing new fashion retailer, for example.
But I also see some challenges here. Constructing buildings with a specific purpose in mind may mean that it is more expensive to convert them to other uses if that happens at some point in the future. Furthermore, healthcare is and will likely continue to be a politically contentious issue. Making big profits could be a double-edged sword when it comes to corporate reputation and also the possibility of future rent increases.
Assura, in debt, has a lot of work ahead of it
Still, with net rental income of £143m last year, Assura has shown it can operate a sizeable property portfolio focused on the healthcare sector and charge sizeable rents.
But doing that has involved borrowing a lot of money. Assura ended last year with net debt of £1.2bn. This is not far off its current market capitalization of £1.3bn.
In my opinion, the investment case here is closer to that of any real estate company.
To expand, Assura has taken on debt. Servicing that debt is onerous. Given the poor track record of income shares when it comes to price, increasing the dividend each year probably helps maintain some investor enthusiasm.
But dividends only increase the company's need for cash. In fact, last year Assura spent £86m paying dividends. That represented a sizeable chunk of the £102m it generated in net cash inflow from operating activities. With £98m of net cash outflow from investing activities, the company saw more cash leave than it came in last year.
In my opinion, financing its balance sheet and dividend (with or without an increase) will continue to be a challenge. Given the balance of risks and rewards, I won't be adding revenue sharing to my portfolio for now.
