After slipping below £1, is this FTSE 250 REIT an unmissable passive income opportunity?
Over the last six months, the FTSE 250 has enjoyed some strong performance, climbing by more than 14%. However, not all of its constituents have been so fortunate, such as Primary Health Properties (LSE:PHP).
Like many other businesses in the real estate sector, the healthcare-focused landlord has suffered from generally weak investor sentiment, resulting in the share price slipping back below £1. Yet despite this, dividends have continued to flow. And as a result, the REIT now offers a tasty-looking 8% dividend yield.
So is this secretly a lucrative opportunity to unlock some chunky passive income?
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Impressive dividends
As a quick crash course, Primary Health Properties is one of the biggest healthcare landlords in the UK. It owns and leases a diversified portfolio of GP surgeries, pharmacies, and dental clinics primarily to the NHS.
With a government entity being one of its largest tenants, the company has enjoyed fairly resilient and predictable cash flows over the years. And itâs one of the main reasons why, despite the challenges within the real estate sector, the group has continued to reward shareholders with ever-increasing dividends for more than 25 years in a row.
But if thatâs the case, why are investors seemingly not rushing to capitalise on the stockâs impressive yield?
Headwinds and challenges
Even with a resilient business model, the group has encountered several challenges both internally and externally. Itâs no secret that higher interest rates have created numerous headaches for property owners, especially REITs that often carry significant debt burdens.
In the case of Primary Health, the groupâs rental cash flows have continued to grow steadily, but rising debt costs have increased the pressure on net earnings.
At the same time, managementâs contending with some protracted rent increase negotiations with the NHS. Should these talks fail, its currently impressive 99.1% occupancy might start to slip alongside its net rental income. After all, finding new tenants in the healthcare niche can be a bit trickier compared to the residential sector.
With that in mind, itâs not surprising that investors arenât as keen to buy shares while the macro environment remains unfavourable.
Still worth considering?
The continued pressure of financing costs and delays in rent revaluations indicates that margins are at risk of being squeezed. This could also hinder rental income growth, squeezing the coverage of existing dividends and any potential future growth.
Nevertheless, the business continues to have an ace up its sleeve. Primary Health ultimately benefits from structural long-term demand for primary healthcare infrastructure. And thatâs an advantage that doesnât change even during economic downturns.
The balance sheet does carry a large chunk of debt. But it appears to remain manageable. And with interest rate cuts steadily emerging, the pressure from its outstanding loans should slowly alleviate over time while simultaneously helping boost the value of its property portfolio.
Thatâs why, despite the risks, I think this FTSE 250 REITâs worth a closer look. But itâs not the only income stock Iâve got my eye on right now.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
