With the Financial institution of England chopping charges, savers are more likely to get weaker returns on their money than they did earlier than. However there’s a FTSE 250 inventory that I feel seems fascinating proper now.

The inventory is Assura (LSE:AGR) – an actual property funding belief (REIT) that leases a portfolio of healthcare buildings. Its hire is 81% government-funded and there’s a 9% dividend on supply.

Please word that tax remedy is determined by the person circumstances of every consumer and could also be topic to alter in future. The content material on this article is supplied for info functions solely. It’s not meant to be, neither does it represent, any type of tax recommendation.

Dependable revenue

Assura owns 625 properties, together with GP surgical procedures, main care hubs, and outpatient clinics. Over 99% of the portfolio is at the moment occupied and the typical lease has over 10 years remaining.

With the overwhelming majority of its hire coming from both the NHS or HSE, the specter of a hire default is minimal. And the corporate stands to profit from a basic development in the direction of folks residing longer. 

Debt can usually be a difficulty for REITs, however Assura is in an affordable place. Its common value of debt is round 3% – which isn’t unhealthy in any respect with rates of interest at the moment at 4.25%. 

Whereas a few of its debt matures in lower than 5 years, the loans that mature first are those with the best charges. In different phrases, it has long-term debt at comparatively low prices.

In different phrases, Assura seems prefer it’s in first rate form. It operates in an business that ought to be pretty resilient, it has tenants which can be unlikely to default, and its steadiness sheet doesn’t appear to be a priority. 

A 9% dividend yield can usually be an indication to buyers there’s one thing to be involved about. It isn’t instantly apparent what that is likely to be on this case – however a better look is extra revealing.

Share rely

With any firm, buyers have to control the variety of shares excellent over time. Specifically, they want to concentrate as to whether that is going up or down. 

Different issues being equal, a rising share rely decreases the worth of every share. Because the enterprise is split between a better variety of shares, the quantity every shareholder owns goes down.

Assura’s share rely has been rising fairly significantly over the previous couple of years. Since 2019, the variety of shares excellent has grown by round 4.5% per 12 months. 

Meaning buyers have needed to enhance their funding by 4.5% annually with a view to preserve their possession within the general agency. And that basically cuts into the return from the dividend.

If this continues, buyers aren’t going to be ready to easily acquire a 9% passive revenue return. They’re going to reinvest round half of it to cease their stake within the enterprise decreasing.

That is truly a symptom of a wider threat with Assura. Its dividend coverage means it usually has to boost capital by means of debt or fairness, so there’s an actual threat of the share rely persevering with to rise.

An enormous passive revenue alternative?

A inventory with a 9% dividend yield usually comes with a catch. And I feel that is the case with Assura – whereas the agency distributes a number of money, quantity must be reinvested to forestall dilution.

That’s not essentially a devastating downside. However it’s one thing for buyers to be practical about when occupied with passive revenue alternatives.