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I’ve had a mixed relationship with the artificial intelligence (AI) chatbot ChatGPT when it comes to investing. Sometimes it can provide some handy information I’ve missed when I’m researching a stock. Yet in some other cases, I think it can miss the mark. When considering FTSE 250 ideas, I asked for a second opinion from ChatGPT, but I disagree with the answer.
Doing my homework
I was researching the Target Healthcare REIT (LSE:THRL) as a potential income option. It owns and manages care home properties across the UK, with around 100 in its portfolio at present. The business generates revenue from rental income, as well as potentially achieving long-term capital appreciation.
Over the past year, the share price is up 12%, with a generous 5.99% dividend yield. It’s the sustainability of the yield that had me interested, as I think the UK base rate will be cut again in December. As a result, I’m looking for more dividend stocks to help my money work harder than it would in a savings account.
Although the business had to readjust the dividend per share payments last year, I feel this was ultimately a good move. The dividend cover now stands at 1.08, indicating that the current earnings per share can more than cover the amount being paid out to shareholders.
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Where I disagree with ChatGPT
When I asked my AI companion if I should stay away from the stock, it told me to avoid it. In terms of reasoning, it said it’s vulnerable to changes in interest rates, property sector dynamics, and regulatory risk. It added that in an environment where yields are rising and financing is more expensive, property income stocks tend to get hit. Finally, if occupancy rates or tenants’ financial strength weaken, the rent streams could be under threat.
Although the company is vulnerable to rising interest rates and yields, I don’t think that’s relevant right now. The Bank of England committee is in a cutting cycle, meaning that rates are expected to become lower over the next year. Regarding concern around tenants’ finances, I’d argue that care home operators have the strongest finances out of various property types. I’d much rather have retirees in a property than students!
Acknowledging risks
The REIT does indeed have risks associated with it. But I think ChatGPT focused on the wrong ones. In my opinion, the primary concern is potential markdowns in property value. The share price should be closely correlated to the net asset value of the portfolio. Given that the commercial market’s currently strong, any revaluations would likely lower the NAV and potentially the share price.
Despite this, I think the quarterly dividend looks attractive from a stock with a stable rent collection record. As a result, I think it’s worth considering for investors. A good lesson is always to incorporate a human element into any research.
