Earlier this month, I bought my shares in FTSE 250 actual property funding belief (REIT) Major Well being Properties (LSE:PHP). And my timing arguably couldn’t have been worse.

My view on the corporate hasn’t modified, however the share price jumped 5% shortly after I bought the inventory. So have I made a doubtlessly expensive mistake? 

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Tons to love

Major Well being Properties owns and leases buildings like GP surgical procedures and healthcare centres. The vast majority of its lease comes from the NHS. 

As a REIT, the agency distributes 90% of its revenue as dividends to shareholders and this makes it engaging from a passive revenue perspective. And there’s extra to love concerning the enterprise.

Relying on a single supply for a lot of its lease is a danger. However the firm has constantly maintained excessive occupancy charges and the specter of the NHS defaulting on its lease appears low.

One other potential concern is the steadiness sheet. Major Well being Properties has simply over £1.3bn in complete debt, which is rather a lot within the context of an organization with a market worth of £1.2bn.

Once more although, I feel it’s straightforward to overestimate this. The debt may need to be repaid sooner or later, however even when the agency doubles its share rely to do it, issues don’t look too dangerous to me.

Growing the share rely would halve the dividend per share, bringing the yield to round 3.75%. For a inventory with a rising dividend, I don’t assume that’s a horrible end result.

So why promote?

Why have I been promoting? The quick reply is I discovered one thing else I wished to personal – however that solely modifications the query to why this inventory, fairly than a distinct one?

Like lots of REITs, Major Well being Properties has restricted capability to reinvest for progress. So the funding return’s largely pushed by the dividend – which has a present yield of seven.5%.

Compounding an funding at that fee of return’s fairly engaging, however issues aren’t fairly so simple. Since 2019, the share rely has elevated by a median of 6% a 12 months. 

This implies two issues. The primary is that shareholders must reinvest 6% of their stake within the firm every year as a way to proceed proudly owning the identical quantity of the underlying enterprise.

The second is that Major Well being Properties wants to extend the quantity it distributes by 6% every year to maintain the dividend per share the identical. And this could possibly be a problem. 

That is why I’ve determined there are higher alternatives elsewhere in the intervening time. A 7.5% dividend yield’s engaging, however the equation appears to be like much less thrilling when it’s offset by a 6% shareholder dilution.

Timing

It’s truthful to say my timing may have been higher. Simply after I bought, Assura – an analogous operation – reported information of a takeover bid sending shares in Major Well being Properties larger.

An additional 5% from the sale would have been good, however I don’t assume there was any apparent means for me to see this coming. So I’m blissful sufficient with the choice. 

I nonetheless view Major Well being Properties extra favourably than different REITs and I feel it’s price contemplating for revenue traders. However the rising share rely means it’s vital to look previous the excessive dividend yield.