Income growth and growing NAV

Target Healthcare REIT 9 November 2017 Update
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Target Healthcare REIT

Income growth and growing NAV

NAV & dividend update

Real estate

9 November 2017

Price

117.25p

Market cap

£296m

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

(3.9)

5.4

Rel (local)

1.3

(4.1)

(5.4)

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

Q2 NAV and portfolio update

Expected January 2018

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 has published its quarterly NAV and dividend update. NAV total return was 3.0% in the quarter including dividends paid of 1.570p. With investor interest in modern, purpose-built care homes remaining strong the portfolio valuation increased further. While this is positive for NAV, it also highlights the strong competition for quality assets in the market. Despite the competitive market conditions, as previously indicated the managers have identified a number of acquisition opportunities that meet its qualitative and financial hurdles on which due diligence is progressing.

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

1.17

5.3

06/17

23.6

12.2

4.8

101.9

6.28

1.15

5.4

06/18e

28.0

15.8

6.3

104.1

6.45

1.13

5.5

06/19e

30.5

17.5

6.9

106.5

6.58

1.10

5.6

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 acquisitions.

Income in line; lifting NAV forecast

In the three months to 30 September 2017, Target’s EPRA NAV per share increased by 1.4p to 103.3p per share after the payment of 1.570p per share in dividends during the period. A 1.6125p DPS has been declared for the quarter under review. Passing rent increased 3.7%: 3.1% from previously disclosed acquisitions and 0.6% from rent reviews. The external portfolio valuation saw the EPRA net initial yield (NIY) tighten to 6.69% from 6.75% in June, combining with rent increases to generate 1.8p per share in property revaluation gains. Our only forecast change is to increase our assumed revaluation gains for the year from £6.0m to £9.0m with the balance of the year benefitting from an assumed 2% pa increase in rents and no further change in NIY. This adds 1.2p to our EPRA NAV per share forecasts.

Strong pipeline of growth opportunities

As discussed at length in our recent update note, Target seeks further portfolio growth, capturing the positive spread between rental income and funding costs, generating operational efficiencies, and further diversifying the portfolio. The investment manager continues to perform due diligence on a strong pipeline of opportunities and while it is not certain that all of these will proceed in aggregate they are higher than we have forecast. The scale of the opportunities is such that additional equity and debt capital support, not in our forecasts, may be required.

Valuation: Long-term income visibility

The mid-teens premium to EPRA NAV is supported by an attractive 5.5% prospective dividend yield, with our estimated cover increasing to 97% in FY18 and 106% in FY19. 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.

Exhibit 1: 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

1,279

(271)

Cost of corporate acquisitions

0

(174)

(998)

(626)

(688)

(63)

Total income

 

3,131

12,711

16,301

25,143

28,555

30,120

Management fee

(648)

(1,524)

(2,654)

(3,758)

(3,739)

(3,796)

Other expenses

(780)

(880)

(992)

(1,236)

(1,400)

(1,600)

Total expenditure

(1,428)

(2,404)

(3,646)

(4,994)

(5,139)

(5,396)

Profit before finance and tax

 

1,703

10,307

12,655

20,149

23,416

24,724

Net finance cost

190

(716)

(929)

(808)

(1,622)

(2,125)

Profit before taxation

 

1,893

9,591

11,726

19,341

21,794

22,599

Tax

(4)

(39)

(24)

(219)

0

0

Profit for the year

 

1,889

9,552

11,702

19,122

21,794

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

21,794

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)

(1,279)

271

Adjusted for corporate acquisitions

0

174

998

420

688

63

EPRA earnings

 

2,575

6,805

8,139

12,204

15,788

17,518

Adjustment for performance fee

150

466

871

997

935

949

Group adjusted EPRA earnings

 

2,725

7,271

9,010

13,201

16,723

18,467

IFRS EPS (p)

1.80

8.02

6.81

7.58

8.64

8.96

EPRA EPS (p)

 

2.45

5.71

4.74

4.84

6.26

6.95

Adjusted EPS (p)

2.59

6.10

5.25

5.23

6.63

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

324,093

328,967

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

328,588

333,720

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

4,186

4,884

Current assets

 

23,649

35,616

78,329

36,039

28,447

34,559

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

262,570

268,657

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

104.1

106.5

EPRA NAV per share

 

94.7

97.9

100.6

101.9

104.1

106.5

CASH FLOW

Profit before tax

 

1,893

9,591

11,726

19,341

21,794

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)

(6,695)

(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

22,217

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)

(6,224)

697

Opening cash and equivalents

16,884

17,125

29,159

65,107

10,410

4,186

Closing cash and equivalents

 

17,125

29,159

65,107

10,410

4,186

4,884

Debt

(11,764)

(30,865)

(20,449)

(39,331)

(84,487)

(89,643)

Net cash/(debt)

 

5,361

(1,706)

44,658

(28,921)

(80,301)

(84,759)

Net LTV

0.0%

0.0%

0.0%

10.5%

23.4%

23.8%

Source: Company data, 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.

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

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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