Q1 NAV update shows strong valuation gains
The 7.0% prospective yield on Medicx Fund (LONDON:MXF) shares is supported by secure cash flows on a broad portfolio of modern primary care properties, on long leases, with quasi-government backing. Existing debt is fixed at c 4.5%, with similarly long duration, and the Fund is negotiating new debt on recently improved terms. Growth prospects for the primary care sector are strong and the spread over funding costs remains attractive despite some yield compression, making acquisitions more expensive, but also driving valuation gains (£9.1m in Q115 alone). Q1 asset and rent growth are consistent with our expectations and the pipeline of new investment opportunities remains strong.
Portfolio growth continuing
MedicX committed £11.8m to new investment in the three months to 31 December, and £5.5m since. Four new forward funding commitments have taken the current portfolio to 141 properties, including nine under construction. The pipeline of new investment opportunities remains strong at c £90m, little changed from the c £100m reported in September 2014. Ahead of the general election, new development approvals remain sluggish, but the NHS is centre stage, with both main parties agreed on the central role of the GP. The NHS five-year plan acknowledges the need for significant change and seeks to deliver additional and more integrated services in the community, with extended opening hours to improve access.
Yield compression deriving up valuations
Q115 valuation gains of £9.1m reflect yield compression from competition for attractively yielding assets, and some rental growth. While this is a positive indicator for NAV, it does make it more expensive to acquire assets. Fortunately funding conditions are similarly positive, and a healthy spread between income and funding costs has been maintained. Q1 open-market reviews (76% of the total portfolio) were up 1.79%, an apparent increase from 1.2% on average for FY14 as a whole, although still behind RPI-linked rent increases (2.82% on average).
Valuation: Attractive portfolio cash yield
The Fund indicates 5.9p in FY15 dividends, barring unforeseen circumstances, a prospective yield of 7.0%. With portfolio growth, we forecast cover to build further, to c 60% in FY15 and c 64% in FY16. The investment adviser’s Q115 DCF value per share of the Fund’s predictable cash flows remains at 93.4p, unchanged on FY14.
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