Strong valuation gains continue in Q2
Strong valuation gains, primarily the result of further yield contraction, have continued in Q2. Adjusted NAV has increased despite continuing dividend distributions. Asset growth appears consistent with our estimates and our underlying forecasts (excluding valuation gains) are unchanged. NHS planning suggests good growth prospects for the primary care property sector, and Medicx Fund (LONDON:MXF) offers a low-risk approach; it is neither developer nor operator but a long-term investor. A broad portfolio of modern primary care properties, long, quasi government-backed leases, and similar duration fixed-rate debt with modest (c 50%) gearing, provide secure cash flows to support the greater than 7% prospective yield.
Further yield compression driving up valuations
The quarterly (Q3) valuation of the portfolio by JLL as at 30 June reflects a net initial yield of 5.50%, down from 5.57% at the end of March and 5.68% at the end of September 2014. This continuing yield compression, resulting from competition for attractively-yielding assets, and some rental growth, generated a Q3 valuation gain of £6.7m. While positive for NAV, yield compression makes it more expensive to acquire assets, largely mitigated by supportive funding conditions. Q3 rent reviews covering rents of £1.7m generated an average 1.73% increase.
Portfolio growth continuing
During Q3, MedicX committed £10.1m to new investment. Of particular note is the first acquisition in Ireland, which followed a period of significant due diligence. The Investment Adviser believes that the market offers an attractive balance of yield and investment quality, and expects further investments. The pipeline of new investment opportunities remains strong at c £100m. A second (£25m) tranche of the £50m private placement of loan notes arranged in May is expected to be drawn in September, while the duration of an existing (£50m) loan note facility has recently been extended to more than 13 years at a slightly increased all-in cost. Across all facilities, the average unexpired term is 15 years at a fixed cost of 4.45%.
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