Arguably the greatest benefit of the Stocks and Shares ISA is that you don’t have to pay tax on returns. Anything generated in these accounts, including income, is protected from the clutches of the tax collector.
Here, I want to highlight a ultra-high-yield REIT that I think can help build wealth over time.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investing in GPs’ landlord
Primary Health Properties (LSE:PHP) is the UK’s largest listed healthcare real estate investment trust (REIT). Its £6bn portfolio contains 1,142 assets, primarily consisting of GP surgeries, medical centres, and private hospitals.
There are a number of things to like about this REIT from an investment perspective:
- Long lease terms (the weighted average unexpired lease term is 10.8 years)
- High 99% occupancy rate
- 76% of rent is government-backed income (with an 80%-90% target)
- 30 years of consecutive dividend growth
- Massive forward dividend yield of 7.9%
Last year, Primary Health generated 3% rental growth and a 4% increase in earnings per share. In the first quarter of this year, rent reviews delivered an extra £3m of income (3.4% on an annualised basis).
Meanwhile, management is confident of delivering £9m of annualised cost synergies following the acquisition of Assura last year. The enlarged portfolio is performing well, with private hospitals (+3.7%) and Ireland (+4.4%) the standout performers during the quarter.
Is there a catch?
Now, the biggest risk here is a high loan-to-value ratio (57% at the end of December). This elevated leverage is well above the company’s preferred 40%–50% target range.
Moreover, if interest rates stay higher for longer (or rise), the cost of refinancing existing debt becomes more expensive. This could put pressure on the REIT’s ability to grow dividends.
The share price is down 38% over five years, reflecting how higher rates have negatively impacted REIT valuations.
However, Primary Health has been working on establishing a new vehicle for its private hospital portfolio. In April, it said it was on track to “deliver a transaction that will reduce our gearing and act as an alternative source of capital and growth for the future“.
Today (24 June), it confirmed that it was in advanced discussions with an investor about using its private hospital portfolio to seed a new joint venture. The stock rose 4.1% to 95p on the back of this news.
A very attractive dividend yield
As mentioned, the prospective dividend yield currently stands at around 7.9%. Were someone to invest their entire £20,000 ISA allowance into the stock, they could expect to receive roughly £1,580 a year in passive income.
Of course, it wouldn’t be wise to own just one stock. But I do think Primary Health is well worth considering as a core holding in a diversified income portfolio.
Looking ahead, management is confident that targeted disposals and joint ventures will help reduce leverage and create growth opportunities. One is the government’s plan to roll out 250 Neighbourhood Health Centres by 2035.
A combination of high occupancy rates, low tenant risk, massive yield, and the prospect of a strengthened balance sheet moving forward make this a dividend stock worth considering.
Should you invest £5,000 in Primary Health Properties Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Primary Health Properties Plc made the list?
Ben McPoland has no position in any of the companies mentioned.
