Careful investment paying dividends

Target Healthcare REIT 30 October 2017 Update
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Target Healthcare REIT

Careful investment paying dividends

Full year results and outlook

Real estate

30 October 2017

Price

116p

Market cap

£293m

Net debt (£m) at 30 June 2017

28.9

Net LTV at 30 June 2017

10.5%

Shares in issue

252.2m

Free float

90%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.5)

(0.6)

4.5

Rel (local)

(4.1)

(1.6)

(4.1)

52-week high/low

123.0p

107.2p

Business description

Target Healthcare REIT invests in modern, purpose-built residential care homes in the UK let on long leases to high-quality care providers. It selects assets according to local demographics and intends to pay increasing dividends underpinned by structural growth in demand for care.

Next events

Trading update

Exp. November 2017

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Target Healthcare REIT is a research client of Edison Investment Research Limited

Target recently released full year results for the year to 30 June 2017 and has published its annual report. The key figures showing strong growth in assets and rental income and increasing dividend cover had already been released. In this report we focus on the strategic progress made through the year and the medium-term outlook. Reflecting the manager’s identification of a number of acquisition opportunities, we have revised our estimates upwards for portfolio growth and assume that current debt facilities will be fully utilised by end-FY19, with net LTV increasing above the self-imposed 20% long-term target (to c 24%).

Year end

Revenue (£m)

EPRA net earnings* (£m)

EPRA EPS* (p)

EPRA NAV/
share (p)

DPS
(p)

Price/EPRA NAV/share (x)

Yield
(%)

06/16

16.9

8.1

4.7

100.6

6.18

1.15

5.3

06/17

23.6

12.2

4.8

101.9

6.28

1.14

5.4

06/18e

28.0

15.8

6.3

102.9

6.45

1.13

5.6

06/19e

30.5

17.5

6.9

105.4

6.58

1.10

5.7

Note: *EPRA earnings exclude revaluation movements, non-cash income arising from the accounting treatment of lease incentives and guaranteed rent review uplifts, and the costs of corporate acquisitions. 06/16 corrected from 4.6p previously published.

Increasing asset growth target and estimates

In FY17 the market value of property assets reached £282.0m (FY16: £210.7m) with gearing (LTV) approaching target levels. EPRA earnings grew 50% to £12.2m. Dividend cover rose to 77% and with a full year contribution from recent acquisitions and continuing investment we forecast close to full cover in the current year (97%) on an increased DPS (+2.7%). Our assumption for current year property acquisitions is increased with a positive impact on our FY19 EPRA earnings estimate (c 1% higher). Our estimated net LTV (10.5% at end-FY17) moves above the long-term target of 20%, reaching 24.0% by end-FY19.

Strong pipeline of growth opportunities

Target seeks further portfolio growth, capturing the positive spread between rental income and funding costs, generating operational efficiencies, and further diversifying the portfolio. In a competitive market for new investment it has continued to be selective, sticking to its quality criteria and financial return hurdles but nevertheless has a strong pipeline of near-term opportunities on which the investment manager continues to perform due diligence. While it is not certain that all of these will proceed, in aggregate they are higher than we have forecast, potentially requiring additional equity and debt capital support.

Valuation: Long-term income visibility

Target’s premium to EPRA NAV remains in the mid-teens, supported by the attractive 5.6% prospective dividend yield, with cover increasing to 97% this year and 106% next year on our revised estimates. The long-term need for care home provision is clear, providing a strong opportunity for investors in modern, purpose built facilities, such as Target, in combination with efficient, well managed, and financially sound operators.

Careful investment paying dividends

Company description: REIT to meet a growing need

Formed in January 2013 Target Healthcare REIT is a specialist investor in UK care homes and other healthcare assets. It has been listed on The Main Market of the London Stock Exchange since March 2013 and has raised £259m of equity to date, including initial IPO proceeds of £45.6m.

At the end of the FY17 financial year the portfolio had reached 45 assets with a total of c 3,100 beds, all modern and purpose built, mostly providing single occupancy and en-suite facilities. The market value of these assets at end-FY17 was £282m with a passing rent roll of £20.3m and net initial yield of 6.75%. The portfolio is externally managed by Target Advisors LLP (the investment manager) which is a specialist healthcare property fund manager.

The investment manager’s main focus when assessing assets is on the suitability of each property and the operator’s standard of care; if these are in place it provides considerable comfort as to the operator’s long-term financial strength. Investments are sought in areas with good demographics for the care home business, a shortage of modern, high-quality care homes and the availability of well-motivated and experienced senior staff. Assets are let on very long leases to generate predictable and rising income underpinned by demographic trends supporting demand for residential care. Target only invests in modern, high-quality assets and visits its care homes regularly to check the quality of care. The tenant list leans towards the high-end of the sector, where self-funded residents provide the majority of income and operators tend to be more profitable. These long-term leases, with rents subject to upwards only reviews, mostly capped-and-collared RPI-linked, provides the basis for Target’s investment objective to provide investors with an attractive level of income, with the potential for stable income and long-term capital growth.

A brief summary of the FY17 results

The main financial metrics relating to the financial year that ended 30 June 2017 had already been communicated to investors through Target’s quarterly investor report and corporate update, both published in late July. As well as providing the audited detail to the financial statements, the full year report provides additional information on the manager’s strategic thinking and market developments. We provide a brief summary of the key FY17 financial developments below:

Revenues grew by 40% to £23.6m and the IFRS net profit by 63% to £19.4m.

Excluding property revaluation and other items, EPRA net income grew by 50% to £12.2m or 4.8p per share (FY16: 4.7p) as the new shares issued in FY16 were included for a full year.

DPS rose by 1.6p to 6.28p with dividend cover increasing to 77% (FY16: 72%). For the current year Target expects to pay 6.45p, barring unforeseen circumstances.

The portfolio market value reached £282.0m (FY16: £210.7m) with a passing rent of £20.3m (FY16: £15.5m) and a weighted average unexpired lease term of 29.5 years.

Eight acquisitions were completed in the year, with an aggregate value of £63.3m including acquisition costs. The portfolio ended the year at 45 (FY16: 37) properties let to 16 (FY16: 13) different tenants. Two further properties have been acquired since year end at a cost of £16.6m.

Year-end borrowings were £40m with a gross loan to value ratio of 14.2% (10.5% net of cash, much of which committed to development funding). A new £40m five-year facility has been agreed since year-end.

EPRA NAV per share closed the year at 101.9p (FY16: 100.6p) and taken together with the aggregate dividend paid, we estimate the NAV total return per share in the year at 7.5% (FY16: 9.0%). Allowing for reinvestment of quarterly dividends, the manager calculates a slightly higher 7.8% return (FY16: 9.3%).

Demographic trends continue to suggest a growing medium-term need for modern, well-equipped, purpose built care facilities. While the sector as a whole continues to face a number of well-publicised challenges, the investment manager retains conviction that such homes, under the effective management of operators with a focus on staff training and retention, and care quality, will continue to perform well. Against this background the investment manager is performing due diligence on a number of potential investment opportunities.

Portfolio update

Target continues to aim for portfolio growth with a view to capturing the positive spread between rental income and funding costs as well as operational efficiencies, but also to continue to diversify the portfolio both by the number of assets and tenants. In a competitive market for new investment it has continued to be selective, sticking to its quality criteria and financial return hurdles, and seeking opportunities through its long-term relationships with experienced and successful operators.

In total, the acquisition of eight new assets, with a total committed value of £63.3m (including the costs of acquisition) were completed during FY17, taking the total number to 45. The properties are let to 16 tenants, up from 13 a year earlier. All of the acquired assets are modern (most under four years in age) with predominantly single occupancy rooms equipped with en suite facilities, including wet room showers. The spread of the portfolio, by tenant and geographically, is shown in Exhibits 1 and 2. Ideal Carehomes (16.9%) and the South East (16.4%) represent the largest share of tenant and geographical concentration respectively. The increase in tenant numbers is steady but not explosive, reflecting the strong emphasis that Target puts on tenant selection and building long-term relationships with operators. It favours operators with good local knowledge, robust operational management, and market presence, making them better equipped to provide sustainable high quality care and strong financial performance.

Exhibit 1: Split of income (passing rent) by operator with number of homes operated in brackets

Exhibit 2: Geographical spread of the portfolio assets by market value (numbers rounded to nearest percent)

Source: Target Healthcare REIT, as at 30 June 2017

Source: Target Healthcare REIT, as at 30 June 2017

Exhibit 1: Split of income (passing rent) by operator with number of homes operated in brackets

Source: Target Healthcare REIT, as at 30 June 2017

Exhibit 2: Geographical spread of the portfolio assets by market value (numbers rounded to nearest percent)

Source: Target Healthcare REIT, as at 30 June 2017

The portfolio annual passing rent roll increased by 31.3% to c £20.3m at end-FY17 compared with c £15.5m at end-FY16. The increase substantially reflects the properties acquired but also includes asset management initiatives and like-for-like rent increases of 1.8% (FY16: 2.0%). Target’s leases are subject to upwards-only rent reviews, mostly capped-and-collared RPI-linked, but with some on fixed uplifts. In addition to indexation of rents, the very long weighted average unexpired lease length (WAULT) of 29.5 years compared with 28.6 years at end-FY16, provides additional visibility to future contracted income in real terms. Reflecting the careful selection of operators and despite the challenges facing the broader industry, of which more below, 100% of contracted rents were collected over the year. This is also despite the property-specific challenges that are inevitable from time to time, including during FY17, one home that has closed temporarily to allow a registration change from nursing to residential in response to trained nurse staffing difficulties, and another where Target arranged the change of tenant in a home that had struggled with regulatory/quality reviews.

The externally provided market valuation of the investment assets increased from £210.7m at end-FY16 to £282.0m at end-FY17. The majority of the gain reflects the £63.3m committed to acquisitions during the year but also a net revaluation gain of £8.0m (net of £2.1m of acquisition costs written off). With 92% of the properties in the portfolio maintaining or increasing in value, the like-for-like revaluation gain of 5.0% (FY16: 5.3%) reflects continuing strong investor interest in high quality care home assets and the long duration contractual income that they provide. The valuation represents a net initial yield (NIY) of 6.75% compared with 7.0% a year earlier, although Target indicates that the yield secured on its selected acquisitions have on average remained a little higher than this. As a reminder, the lower carried value of the assets on the balance sheet includes an accounting adjustment in respect of fixed or guaranteed rent reviews and lease incentives. IFRS accounting requires that where future lease income, including uplifts, is known with certainty, it must be reported in income on a straight line basis. To avoid overstating the value of the portfolio an adjustment is made which gradually builds and then unwinds over the lease term.

Portfolio growth continuing in the current year

As has been previously reported, since the FY17 year end, two further assets have been acquired for a total commitment of £16.6m. These are the Amwell in Melton Mowbray, a modern 88 bed home that opened in March 2017 and acquired in early July for £8.4m, and an £8.2m forward funding agreement for land acquisition and the development of a 55-bed high-quality care home in Birkdale, which will be carried out with Athena Healthcare. Both were covered in our update note.

The manager is performing due diligence on a range of further acquisition opportunities which in aggregate have a value that is in excess of the capital that is currently available, although there is no certainty that all of these will reach the stage of potential completion. The manager is also assessing wider pipeline opportunities to access quality properties, and we believe this to include additional forward funding of development projects as well as the acquisition of portfolios of assets. We briefly review the medium-term market opportunity and recent developments in the section below and discuss our own assumptions on asset acquisition and financing in the financial section on page 5.

Investor interest in quality assets remains strong

For an in-depth review of the care market structure and trends please see our Target initiation note. The two well-known facts about the market are that demographic forecasts show the numbers of elderly in the overall population continuing to rise over coming years, and that parts of the care home sector are struggling to meet this growing need. In a fragmented provider market, what is often overlooked is the ability of well-managed operators with efficient, modern, purpose built homes to effectively meet this need. Investor interest in such homes remains strong.

The Office for National Statistics (ONS) expects the UK population to increase from 64.6m in 2014 to 74.3m in 2039, a rise of 15%. This will be accompanied by a shift in the national age profile as the large cohort of people born in the 1960s outlives its predecessors and outnumbers younger people: the population over the age of 60 is expected to increase by 58% from 20.1m in 2014 to 31.8m in 2039. The older part of the population tends to have greater healthcare needs and constitutes the majority of those in residential care homes. Despite this growing need, care home closures have seen the number of available beds decline over many years.

The majority of care homes (c 90%) are provided by the private sector through a mix of “for profit” and non-profit providers, although local authorities remain a significant “purchaser” of their service at around 50% of the market. The other 50% of the market is accounted for by privately funded residents who typically pay much higher fees than those offered by local authorities. A recent study by Age UK estimated that local authorities pay between £421 and £624 per week per resident compared with the £603 to £827 paid by self funders. Care home providers that rely heavily on local authority funded residents need to be highly efficient to cope with the continuing squeeze on available fees. Meanwhile all operators have had to cope with rising staff costs, the highest expense for most homes, driven by the introduction of the minimum wage and a general shortage of trained staff, and a steady tightening in regulatory standards in relation to the quality of care.

The provider market remains highly fragmented, with a handful of larger providers (some of whom with high levels of borrowing to be serviced) and a long tail of smaller providers. Home closures remain a well-publicised feature of the market, particularly among the small homes (often referred to as “mom and pop” operators) who are increasingly reaching the limits of their ability to manage the pressures facing the industry. Such smaller homes are often older, dated conversions that close permanently, having little or no attraction to another provider.

While longer-term funding for adult social care continues to be publicly debated, the problems facing the wider industry inevitably receive much media attention. But investor interest in modern, purpose-built care homes, efficiently managed, in prime locations with a focus on self-funded residents remains strong. Such homes seem likely to be able to sustainably meet the current and future needs of the growing population of elderly. Target reports that competition for these assets remains strong from traditional institutional investors and a growing number of new REIT investors (both specialist and generalist). The post-Brexit weakness of sterling has increased overseas investor interest in the UK property sector generally.

Financials and estimate changes

With £63.3m committed to acquisitions in FY17 and a further £16.6m since the period end, Target is nearing full investment of its existing equity capital resources, which it defines as being around the c 20% loan to value ratio (LTV) that the managers feel is appropriate as a long-term goal. The end-FY17 gross LTV (debt/investment property at market value) was 14.2% and although it was lower on a net basis, 10.5% adjusting for the £10.4m of cash held on the balance sheet at that time, the cash is substantially earmarked for existing development funding. As the £111.7m (net of expenses) of growth equity raised in FY16 has been deployed, the balance sheet has been able to support Target’s long-term objective of sustainable dividend growth. Dividends per share declared during the year increased by 1.6% and dividend cover (DPS/EPRA EPS) increased to 77% from 72% in FY16. As recently acquired assets contribute for a full period, dividend cover will rise further, and our revised estimates (see below) anticipate both DPS growth and an increase in dividend cover to c 97% in the current year. As noted above, the manager reports a continuing strong pipeline of attractive asset acquisition opportunities and so as to be in a position to take advantage of opportunities efficiently as they arise, it has continued to improve its debt funding by increasing its headroom and diversifying its funding sources while extending the maturity and lowering the cost of existing facilities.

Increased funding and interest rate protection

Since the end of FY17, Target has increased its debt funding facilities from £50m to £90m. The maturity of the £50m revolving credit facility with RBS was extended during FY17 to 2021, with an option of two further one year extensions thereafter. The variable margin over LIBOR was also reduced to 1.5% (from 2.0% previously) and the fee payable on un-utilised balances (£10m at end-FY17) was also reduced to 0.75% from 1.0%. The new facility, with First Commercial Bank Limited (FCB), that was announced at the end of August 2017 is a five-year, £40m term loan facility that can be flexibly drawn over the first two years at a margin of 1.75% over LIBOR. An initial £5m was drawn at inception.

During FY17, Target entered into a number of interest rate swaps to protect itself from any potential increase in the cost of its floating rate debt. At end-FY17 £30.0m of the group’s £40.0m of borrowing was fixed at an all-in rate of 2.36% until June 2019 and 2.25% thereafter until September 2021. Target intends to hedge a significant part of its FCB interest rate exposure once it has drawn sufficient funds.

Forecasts include upwardly revised asset growth

Taking account of the assets acquired in the current year to date, Target has remaining uncommitted debt funding facilities that it may deploy of c £39m. We estimate that making full use of the debt facilities now available would increase the gross LTV from 14.2% at end-FY17 to c 27%, ahead of the 20% that the board and manager target over the long-term. Although higher gearing has the potential to enhance portfolio returns it brings with it increased risk, particularly in relation to fluctuations in property values. That said, we would not expect Target to hold back from suitable and accretive acquisitions when it has the opportunity to do so. The year-end statement makes clear that significant near-term acquisitions, in excess of the currently available capital are possible, although there can be no certainty that these will actually reach the stage of completion.

Given these comments we have increased our assumption for acquisitions and our forecasts now allow for c £57m (including costs of acquisition) in the current year (of which £16.6m has so far been committed), equally split between direct property acquisitions and acquisitions of property via corporate transactions, where acquisition costs are lower. For FY19 we have allowed for £5m. The assumed slowdown in acquisition activity is based on the full utilisation of the current debt facilities. On this basis, forecast LTV moves above 20% through FY18 and FY19, reaching 24.0% by end-FY19. In reality, although not shown in our forecasts, and to support the group’s ongoing growth ambitions, we would expect Target to seek additional capital resources, both equity and debt, at some point in time and dependent on the scale of acquisition opportunities that present themselves. As noted above, the managers are already considering a pipeline of opportunities that are in excess of current capital resources. We note that equity was last issued in FY16 (c £114m) and in each of FY14-16 in an aggregate amount of c £208m before costs. Target indicates that matching acquisition opportunities with capital availability so as minimise cash drag without sacrificing the benefits of growth remains a key focus.

Modest, but positive forecast revisions

As indicated above, most of the main financial metrics have been released previously in Target’s quarterly investor report and corporate update and so there were no significant surprises with the full year results release.

Exhibit 3: FY17 performance versus estimate, and estimate revisions

Year end

Revenue (£m)

EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

June

Reported

Est

Diff. (%)

Reported

Est

Diff. (%)

Reported

Est

Diff. (%)

Reported

Est.

Diff. (%)

FY17

23.6

23.4

0.6

4.8

4.8

4.9

101.9

101.9

0.0

6.28

6.28

0.0

Revenue (£m)

EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

FY18e

28.1

28.0

-0.4

6.5

6.3

-3.1

103.5

102.9

(0.6)

6.34

6.45

1.7

FY19e

29.2

30.5

4.4

6.9

6.9

1.2

105.4

105.4

0.0

6.34

6.58

3.8

Source: Edison investment research

Although the increase in our investment assumption for the current year and FY19, discussed above, has a positive impact on revenue, particularly as FY18 portfolio additions contribute for a full year period in FY19, this does not flow through fully in our forecasts (FY18e revenue is actually very slightly lower). This is due to a revision in the way that we estimate future revenues. We have now grown the FY17 annualised rent roll of £20.3m with assumed rent growth (c 2% pa) and with an assumed yield on acquired assets of 6.75%. We had previously applied a yield assumption to the overall portfolio with a higher implied yield on acquired assets. In line with its progressive dividend policy, Target has already declared its intention, in the absence of unforeseen circumstances, to again increase the quarterly DPS in respect of the current financial year, by 2.71% to 1.6125p, or 6.45p for the FY18 year as a whole. This is reflected in our estimates and is the reason why higher earnings do not lead to an increase in forecast NAV per share.

The manager has indicated that dividend cover is expected at near 100% for this year, dependent upon the level of portfolio growth. At the level of growth that we have assumed, our forecast dividend cover is 97% and increases to 106% in FY19. As indicated above, our estimates for portfolio growth see the net LTV move above 20% through FY18 and FY19, reaching 24.0% by end-FY19. Although not shown in our forecasts, and to support the group’s ongoing growth ambitions, we would expect further capital-raising measures, both equity and debt, at some point in time. We note that equity was last issued in FY16 (c £114m) and in each of FY14-FY16 in an aggregate amount of c £208m.

Valuation

Target’s investment objective is to provide shareholders with an attractive level of income together with the potential for capital and income growth. In Exhibit 4 we show the history of declared dividends per share, including the 6.45p which the manager indicates will be paid in the current year, barring unforeseen circumstances. Recognising that dividends have not been fully covered during the period as a result of “cash drag”, or the delay between issuing new shares and being able to deploy the funds raised in income generating assets, we also show (Exhibit 5) the annual NAV total return history (NAV TR). We have defined NAV TR to include the change in NAV plus the aggregate annual dividend paid during the period, and it therefore captures the impact of uncovered dividends. The company published similar but slightly higher NAV TR, which additionally allows for reinvestment of quarterly dividends. Including our estimate for FY18, predominantly driven by forecast dividend payments, the average annual NAV TR for five years shown, on our annual basis, is 7.9%.

Exhibit 4: Progressive dividend per share

Exhibit 5: Annual NAV total return

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 4: Progressive dividend per share

Source: Edison Investment Research

Exhibit 5: Annual NAV total return

Source: Edison Investment Research

A feature of Target’s portfolio is the very long length of the leases that are subject to upwards-only rent reviews, mostly capped-and-collared RPI-linked, but with some on fixed uplifts. This provides a high degree of certainty and sustainability to future contracted rent income, which should also translate into future rental income received, and cash flow generated, provided that the managers are successful in choosing financially successful tenants and modern, well-equipped, high quality assets that should remain viable over the long term.

There are a number of other REITs which similarly target long lease assets, in a number of cases investing in healthcare properties. Primary Health properties (PHP), Assura (AGR), and MedicX Fund (MXF) are all investors in modern, purpose-built primary care assets, predominantly health centres and doctors surgeries in the UK. Average lease lengths are lower than is the case for Target although UK rents are typically backed by the UK government, either in the form of direct payments from the NHS or reimbursement of rents to the GP tenants.

This group of long-lease REITs universally trades at a premium to EPRA NAV per share which reflects the value attached by investors to the income that their portfolios are expected to generate over the long term, especially in this period of low interest rates. Exhibit 6 shows the current relationship between the prospective EPRA earnings yield on EPRA NAV (EPRA EPS/EPRA NAV) for the group, for which we use expected EPRA earnings on a calendar 2018 basis, and price paid for the last published NAV (P/NAV). Taking EPRA earnings as a reasonable guide to current dividend paying capacity, other things being equal it would be reasonable to expect a higher earnings yield/higher dividend paying capacity to be associated with a higher P/NAV. While noting that this is a fairly small sample group, Exhibit 6 appears consistent with this basic premise. Since we first published this analysis in March 2017, Target’s P/NAV has increased but so too has its prospective EPRA earnings yield as it has continued to invest available capital into yielding property assets. On this basis the relationship between dividend paying capacity and P/NAV still appears supportive, especially when taking into account the continuing opportunities that it has to grow its asset base, locking in a positive spread between asset yields and funding costs, and benefitting from scale efficiencies.

Exhibit 6: Peer group P/EPRA NAV ratios vs EPRA earnings yields

Source: Bloomberg, Edison Investment Research

Exhibit 7: Financial summary

Year to 30 June (£000s)

2014

2015

2016

2017

2018e

2019e

INCOME STATEMENT

Rent revenue

 

3,817

9,898

12,677

17,760

22,449

24,940

Movement in lease incentive or rent review

1,547

3,760

4,136

5,127

5,414

5,414

Rental income

 

5,364

13,658

16,813

22,887

27,863

30,354

Other income

0

66

61

671

100

100

Total revenue

 

5,364

13,724

16,874

23,558

27,963

30,454

Gains/(losses) on revaluation

(2,233)

(839)

425

2,211

(1,721)

(271)

Cost of corporate acquisitions

0

(174)

(998)

(626)

(688)

(63)

Total income

 

3,131

12,711

16,301

25,143

25,555

30,120

Management fee

(648)

(1,524)

(2,654)

(3,758)

(3,718)

(3,796)

Other expenses

(780)

(880)

(992)

(1,236)

(1,400)

(1,600)

Total expenditure

(1,428)

(2,404)

(3,646)

(4,994)

(5,118)

(5,396)

Profit before finance and tax

 

1,703

10,307

12,655

20,149

20,437

24,724

Net finance cost

190

(716)

(929)

(808)

(1,622)

(2,125)

Profit before taxation

 

1,893

9,591

11,726

19,341

18,815

22,599

Tax

(4)

(39)

(24)

(219)

0

0

Profit for the year

 

1,889

9,552

11,702

19,122

18,815

22,599

Average number of shares in issue (m)

105.2

119.2

171.7

252.2

252.2

252.2

IFRS earnings

1,889

9,552

11,702

19,122

18,815

22,599

Adjusted for rent arising from recognising
guaranteed rent review uplifts + lease incentives

(1,547)

(3,760)

(4,136)

(5,127)

(5,414)

(5,414)

Adjusted for valuation changes

2,233

839

(425)

(2,211)

1,721

271

Adjusted for corporate acquisitions

0

174

998

420

688

63

EPRA earnings

 

2,575

6,805

8,139

12,204

15,810

17,518

Adjustment for performance fee

150

466

871

997

929

949

Group adjusted EPRA earnings

 

2,725

7,271

9,010

13,201

16,739

18,467

IFRS EPS (p)

1.80

8.02

6.81

7.58

7.46

8.96

EPRA EPS (p)

 

2.45

5.71

4.74

4.84

6.27

6.95

Adjusted EPS (p)

2.59

6.10

5.25

5.23

6.64

7.32

Dividend per share (declared)

6.00

6.12

6.18

6.28

6.45

6.58

BALANCE SHEET

Investment properties

81,422

138,164

200,720

266,219

321,093

325,967

Trade and other receivables

0

2,530

3,742

3,988

4,495

4,753

Non-current assets

 

81,422

140,694

204,462

270,207

325,588

330,720

Trade and other receivables

6,524

6,457

13,222

25,629

24,261

29,675

Cash and equivalents

17,125

29,159

65,107

10,410

4,208

4,905

Current assets

 

23,649

35,616

78,329

36,039

28,469

34,580

Bank loan

(11,764)

(30,865)

(20,449)

(39,331)

(84,487)

(89,643)

Other non-current liabilities

0

(2,530)

(4,058)

(3,997)

(3,997)

(3,997)

Non-current liabilities

 

(11,764)

(33,395)

(24,507)

(43,328)

(88,484)

(93,640)

Trade and other payables

(3,089)

(3,623)

(5,002)

(5,981)

(5,981)

(5,981)

Current Liabilities

 

(3,089)

(3,623)

(5,002)

(5,981)

(5,981)

(5,981)

Net assets

 

90,218

139,292

253,282

256,937

259,592

265,679

Period end shares (m)

95.2

142.3

252.2

252.2

252.2

252.2

IFRS NAV per ordinary share

 

94.7

97.9

100.4

101.9

102.9

105.4

EPRA NAV per share

 

94.7

97.9

100.6

101.9

102.9

105.4

CASH FLOW

Profit before tax

 

1,893

9,591

11,726

19,341

18,815

22,599

Adjusted for

Net interest payable

(190)

716

929

808

1,622

2,125

Revaluation gains on property portfolio

686

(2,921)

(4,787)

(7,339)

(3,695)

(5,145)

Cost of corporate acquisitions

626

688

63

Change in receivables/payables

783

695

1,038

(9,042)

6,275

(258)

Net interest paid

161

(514)

(681)

(615)

(1,466)

(1,969)

Tax paid

0

(47)

(164)

(543)

0

0

Net cash flow from operating activities

 

3,333

7,520

8,061

3,236

22,239

17,414

Purchase of investment properties

(51,894)

(51,736)

(34,833)

(37,698)

(29,095)

(2,645)

Acquisition of subsidiaries

0

(5,845)

(27,091)

(25,552)

(28,188)

(2,563)

Net cash flow from investing activities

 

(51,894)

(57,581)

(61,924)

(63,250)

(57,283)

(5,208)

Issue of ordinary share capital (net of expenses)

44,520

46,644

97,501

0

0

0

Sale of shares from treasury

0

0

14,799

0

0

0

(Repayment)/drawdown of loans

8,646

22,525

(12,808)

20,906

45,000

5,000

Dividends paid

(4,364)

(7,074)

(9,681)

(15,589)

(16,158)

(16,510)

Net cash flow from financing activities

 

48,802

62,095

89,811

5,317

28,842

(11,510)

Net change in cash and equivalents

 

241

12,034

35,948

(54,697)

(6,202)

697

Opening cash and equivalents

16,884

17,125

29,159

65,107

10,410

4,208

Closing cash and equivalents

 

17,125

29,159

65,107

10,410

4,208

4,905

Debt

(11,764)

(30,865)

(20,449)

(39,331)

(84,487)

(89,643)

Net cash/(debt)

 

5,361

(1,706)

44,658

(28,921)

(80,279)

(84,738)

Net LTV

0.0%

0.0%

0.0%

10.5%

23.6%

24.0%

Source: Target Healthcare REIT, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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