Earlier this month, I sold my shares in FTSE 250 real estate investment trust (REIT) Primary Health Properties (LSE:PHP). And my timing arguably couldn’t have been worse.
My view on the company hasn’t changed, but the share price jumped 5% shortly after I sold the stock. So have I made a potentially costly mistake?
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Lots to like
Primary Health Properties owns and leases buildings like GP surgeries and healthcare centres. The majority of its rent comes from the NHS.
As a REIT, the firm distributes 90% of its income as dividends to shareholders and this makes it attractive from a passive income perspective. And there’s more to like about the business.
Depending on a single source for much of its rent is a risk. But the company has consistently maintained high occupancy rates and the threat of the NHS defaulting on its rent seems low.
Another potential concern is the balance sheet. Primary Health Properties has just over £1.3bn in total debt, which is a lot in the context of a company with a market value of £1.2bn.
Again though, I think it’s easy to overestimate this. The debt might have to be repaid at some point, but even if the firm doubles its share count to do it, things don’t look too bad to me.
Increasing the share count would halve the dividend per share, bringing the yield to around 3.75%. For a stock with a growing dividend, I don’t think that’s a terrible outcome.
So why sell?
Why have I been selling? The short answer is I found something else I wanted to own – but that only changes the question to why this stock, rather than a different one?
Like a lot of REITs, Primary Health Properties has limited capacity to reinvest for growth. So the investment return’s largely driven by the dividend – which has a current yield of 7.5%.
Compounding an investment at that rate of return’s quite attractive, but things aren’t quite so straightforward. Since 2019, the share count has increased by an average of 6% a year.
This means two things. The first is that shareholders need to reinvest 6% of their stake in the company each year in order to continue owning the same amount of the underlying business.
The second is that Primary Health Properties needs to increase the amount it distributes by 6% each year to keep the dividend per share the same. And this could be a challenge.
This is why I’ve decided there are better opportunities elsewhere at the moment. A 7.5% dividend yield’s attractive, but the equation looks less exciting when it’s offset by a 6% shareholder dilution.
Timing
It’s fair to say my timing could have been better. Just after I sold, Assura – a similar operation – reported news of a takeover bid sending shares in Primary Health Properties higher.
An extra 5% from the sale would have been nice, but I don’t think there was any obvious way for me to see this coming. So I’m happy enough with the decision.
I still view Primary Health Properties more favourably than other REITs and I think it’s worth considering for income investors. But the rising share count means it’s important to look past the high dividend yield.
