Target Healthcare REIT |
Interims confirm portfolio growth and performance |
Interim results |
Real estate |
7 March 2019 |
Share price performance
Business description
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Analysts
Target Healthcare REIT is a research client of Edison Investment Research Limited |
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Target Healthcare REIT has published interim results for the six months ended 31 December 2018 (H119), providing the detail behind the Q4 NAV update published in January. This showed the portfolio performing well (H119 EPRA NAV total return 4.2%) and good progress being made with deployment of the November placing proceeds. The attractive dividend yield is backed by very long leases, mostly RPI linked, and supported by careful asset and operator selection. We continue to forecast a fully covered dividend in FY20.
Year end |
Revenue (£m) |
Adj. net earnings* (£m) |
Adjusted EPS* (p) |
EPRA NAV/ |
DPS |
P/NAV per share (x) |
Yield |
06/17 |
23.6 |
13.2 |
5.23 |
101.9 |
6.28 |
1.13 |
5.4 |
06/18 |
28.4 |
15.7 |
5.54 |
105.7 |
6.45 |
1.09 |
5.6 |
06/19e |
34.4 |
21.0 |
5.68 |
106.5 |
6.58 |
1.08 |
5.7 |
06/20e |
43.1 |
25.8 |
6.71 |
110.6 |
6.71 |
1.04 |
5.8 |
06/21e |
44.4 |
26.6 |
6.91 |
115.1 |
6.84 |
1.00 |
5.9 |
Note: *Adjusted earnings exclude revaluation movements, non-cash income arising from the accounting treatment of lease incentives and guaranteed rent review uplifts, acquisition costs and performance fees, and include development interest under forward fund agreements.
4.2% six-month EPRA NAV return
As discussed in detail in our recent update, the 4.2% H119 EPRA NAV total return comprised a 1.1% increase in NAV to 106.9p versus 105.7p in June 2018 (end-FY18) and dividends paid. Quarterly DPS has increased 2.0% to 1.64475p in H119, an annualised c 6.58p, or a current yield of 5.7%. The portfolio continues to grow strongly (£464m at end-H119 versus £386m at end-FY18) and is performing well, delivering 1.3% rental growth and 2.8% valuation growth on a like-for-like basis. With an end-H119 net LTV of 9.1% and borrowing facilities increased by £40m since period end, Target is well placed meet investment commitments and make further acquisitions from a strong pipeline of near-term opportunities.
Demographics support long-term growth
Demographics should support growing care-home demand for years to come, while there is an undersupply of the modern, well-designed homes, fully equipped with en-suite wet rooms and suitable communal spaces that differentiate Target’s investment strategy. Investors continue to be attracted by long lease lengths and upwards-only RPI-linked rental growth, with strong competition for assets. Although increasing asset prices have a positive impact on the NAV, they make Target’s disciplined approach to acquisitions, targeting ‘future-proof assets’, an essential ingredient in delivering attractive and sustainable long-term returns.
Visible income growth supports premium to NAV
Target offers a growing dividend, with visible inflation-linked potential for growth, which we expect to be fully covered by adjusted earnings in FY20. The dividend represents a highly attractive yield (5.7%) that supports the continuing c 8% premium to Q219 NAV.
Summary of the interim results
The H119 results show continuing strong portfolio growth and recurring income earnings. During the period, £81.8m (including costs) was committed to new investment, a mix of operational homes and forward-funded developments. Good progress has been made in deploying the £50m (gross) proceeds from the November share placement, although this is yet to fully contribute, dampening adjusted EPS in the period. With gearing remaining moderate and debt facilities increased by £40m since the H119 period end, Target is well placed for further acquisitions from a strong acquisition pipeline, including a number of well-advanced projects.
Exhibit 1: Summary of interim results
H119 |
H118 |
H119/H118 |
FY18 |
|||||||
£m unless stated otherwise |
IFRS |
Adjustments |
Adj. Earnings |
IFRS |
Adjustments |
Adj. Earnings |
Adj. Earnings |
IFRS |
Adjustments |
Adj. Earnings |
Rent revenue |
13.3 |
13.3 |
10.7 |
10.7 |
24% |
22.0 |
22.0 |
|||
Income from guaranteed rent reviews & lease incentives |
2.9 |
(2.9) |
0.0 |
3.2 |
(3.2) |
0.0 |
6.3 |
(6.3) |
0.0 |
|
Development interest* |
0.0 |
0.8 |
0.8 |
0.0 |
0.0 |
0.0 |
0.3 |
0.3 |
||
Total income |
16.2 |
(2.1) |
14.1 |
13.9 |
(3.2) |
10.7 |
32% |
28.4 |
(6.1) |
22.3 |
Base investment manager fee |
(2.4) |
(2.4) |
(1.4) |
(1.4) |
68% |
(3.2) |
(3.2) |
|||
Performance fee* |
0.0 |
0.0 |
(0.4) |
0.4 |
0.0 |
(0.6) |
0.6 |
0.0 |
||
Other expenses |
(0.8) |
(0.8) |
(0.7) |
(0.7) |
3% |
(1.5) |
(1.5) |
|||
Operating profit before property gains/(losses) |
13.0 |
(2.1) |
10.9 |
11.3 |
(2.8) |
8.5 |
28% |
23.2 |
(5.5) |
17.7 |
Revaluation of investment properties |
3.3 |
(3.3) |
0.0 |
4.3 |
(4.3) |
0.0 |
6.4 |
(6.4) |
0.0 |
|
Cost of corporate acquisitions |
0.0 |
0.0 |
0.0 |
(0.4) |
0.4 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Operating profit |
16.4 |
(5.5) |
10.9 |
15.1 |
(6.6) |
8.5 |
28% |
29.6 |
(12.0) |
17.7 |
Net finance cost |
(1.4) |
(1.4) |
(0.7) |
(0.7) |
(2.0) |
(2.0) |
||||
Tax |
0.0 |
0.0 |
(0.0) |
(0.0) |
0.0 |
0.0 |
||||
Net earnings |
14.9 |
(5.5) |
9.5 |
14.4 |
(6.6) |
7.8 |
22% |
27.6 |
(12.0) |
15.7 |
Other data: |
H119 |
H118 |
FY18/FY17 |
FY18 |
||||||
IFRS EPS (p) |
4.24 |
5.71 |
-26% |
9.77 |
||||||
Adjusted EPS (p) |
2.69 |
3.08 |
-12.7% |
5.54 |
||||||
EPRA EPS (p)* |
2.47 |
2.92 |
-16% |
5.25 |
||||||
DPS declared (p) |
3.29 |
3.23 |
2% |
6.45 |
||||||
Dividend cover |
0.80 |
0.95 |
0.82 |
|||||||
NAV per share, IFRS & EPRA (p) |
106.9 |
104.4 |
2% |
105.7 |
||||||
Investment properties |
438.4 |
315.4 |
362.9 |
|||||||
Gross LTV |
15.3% |
24.2% |
17.1% |
|||||||
Source: Company data, Edison Investment Research. Note: *EPRA earnings excludes development interest under forward fund agreements and includes investment manager performance fees. Performance fees discontinued from start of FY19.
The key financial and operational features of the interim results were:
■
The total portfolio value increased to £464m (FY18: £386m) comprising 61 assets (54 operational and seven under development). Alongside continuing investment, valuations increased by 2.8% on a like-for-like basis during the period, driven by rental growth and continued yield tightening. The portfolio valuation reflected an EPRA topped up net initial yield of 6.32% (end-FY18: 6.44%).
■
The contracted rent roll increased 7.9% to £28.0m including a 1.3% increase in like-for-like rents. The seven homes under development and the forward purchase asset will provide an additional £5.3m in rental income upon completion later in FY19. Target says the acquisition yields on the new investments are representative of assets of a similar standard and location within the existing portfolio.
■
Adjusted (underlying income) earnings increased by 22% but, reflecting share issuance, adjusted EPS was lower at 2.69p (H118: 3.08p).
■
Quarterly dividends have increased by 2.0%, amounting to c 3.29p during the period. Dividend cover was 80% but we continue to expect full cover as capital resources are deployed and developments complete.
■
EPRA NAV per share increased by 1.1% to 106.9p (end-FY18: 105.7p). Including DPS paid, the H119 EPRA NAV total return was 4.2%.
■
With £71m of drawn debt at period end and cash balances of £28.8m, gross loan to value (LTV) was 15.3% and net LTV was 9.1%. Since end-H119 Target has doubled the size of its revolving credit facility with HSBC, adding an additional £40m of flexible debt facilities, and increasing total debt facilities to £170m.
Little change to our forecasts
Much of the financial and operational progress made in H119 had previously been disclosed in outline and was reflected in the forecasts we published in our February update note, along with our expectations for future portfolio growth. We have updated our forecasts for this detail but adjusted earnings, NAV and DPS show little or no change.
Exhibit 2: Forecast update
Revenue (£m) |
Adjusted EPS (p) |
EPRA NAV/share (p) |
DPS (p) |
|||||||||
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
06/19e |
34.9 |
34.4 |
-1.6 |
5.71 |
5.68 |
-0.6 |
106.3 |
106.5 |
0.2 |
6.58 |
6.58 |
0.0 |
06/20e |
43.4 |
43.1 |
-0.8 |
6.72 |
6.71 |
-0.2 |
110.0 |
110.6 |
0.5 |
6.71 |
6.71 |
0.0 |
06/21e |
44.7 |
44.4 |
-0.7 |
6.92 |
6.91 |
-0.2 |
114.2 |
115.1 |
0.7 |
6.84 |
6.84 |
0.0 |
Source: Edison Investment Research
Our forecasts assume £55m of further investment commitment
With portfolio growth, Target should benefit from scale economies and further portfolio diversification by asset (currently 61) and tenant (currently 21 but increasing to 26 upon completion of developments and commitments to acquire properties). The revised management fee structure in place from the start of FY19 introduced a tiered base fee structure with reducing rates at higher NAV levels, allowing shareholders to benefit from the increasing economies of scale that a larger portfolio provides. Performance fees were discontinued.
Our forecasts include £55m of additional investment commitment by the end of FY19. We believe this level is consistent with re-gearing the balance sheet to a c 25% LTV, although given Target’s comments about the strength of its acquisition pipeline, we believe it may be exceeded. Full drawdown of the increased debt facilities, for deployment in investment properties, would take the LTV to c 28% and provide scope for perhaps £85m of future commitment, rather than the £55m we model. This increases our confidence in the dividend cover that we forecast in FY20, even if acquisition yields were to continue to tighten. Although higher than the c 25% medium term LTV of which Target has previously spoken, we believe this would still be a comfortable level of gearing given the security of the rental income.
Future-proof asset selection supports income visibility
The security of Target’s contractual income benefits from long leases (weighted average lease term of 28.5 years), mostly RPI rent uplifts, and an increasingly diversified portfolio and tenant base. Strong demand demographics and an undersupply of the modern, well-designed homes that are fully equipped with en-suite wet rooms and suitable communal spaces, of the type in which Target is invested, are also highly supportive. As well as a strong focus on the quality of the physical assets it acquires and their location, the operational capabilities and financial performance of the tenant are also carefully assessed before and after investment. In a challenging operational environment where regulation is high, government funding in short supply and labour costs rising, even strong operators can experience problems. As the portfolio grows so does the chance of potential trading challenges to operators, which is where pro-active asset management plays a role. During the first six months of the current year, the vast majority of assets in the portfolio have continued to perform well and each has seen its value maintained or increased. Target has been pro-actively involved and has:
■
re-tenanted a challenging home to a new, regional operator, with the lease length significantly extended and now supported by a parent company guarantee;
■
transferred the pre-agreed lease at one of the assets under development to a new, stronger tenant;
■
engaged with an existing tenant that had decided to close a home following compliance challenges while it considers how best to reposition the home, meanwhile continuing to collect the rent in full; and
■
extended the lease at a well-performing home by a further eight years.
Exhibit 3: Financial summary
INCOME STATEMENT |
2014 |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
|
Rent revenue |
|
3,817 |
9,898 |
12,677 |
17,760 |
22,029 |
28,450 |
37,060 |
38,362 |
Movement in lease incentive/fixed rent review adjustment |
1,547 |
3,760 |
4,136 |
5,127 |
6,334 |
5,903 |
6,000 |
6,000 |
|
Rental income |
|
5,364 |
13,658 |
16,813 |
22,887 |
28,363 |
34,353 |
43,060 |
44,362 |
Other income |
0 |
66 |
61 |
671 |
3 |
0 |
0 |
0 |
|
Total revenue |
|
5,364 |
13,724 |
16,874 |
23,558 |
28,366 |
34,353 |
43,060 |
44,362 |
Gains/(losses) on revaluation |
(2,233) |
(839) |
425 |
2,211 |
6,434 |
1,819 |
9,714 |
10,996 |
|
Cost of corporate acquisitions |
0 |
(174) |
(998) |
(626) |
0 |
0 |
0 |
0 |
|
Total income |
|
3,131 |
12,711 |
16,301 |
25,143 |
34,800 |
36,172 |
52,774 |
55,358 |
Management fee |
(648) |
(1,524) |
(2,654) |
(3,758) |
(3,734) |
(4,983) |
(5,255) |
(5,453) |
|
Other expenses |
(780) |
(880) |
(992) |
(1,236) |
(1,458) |
(1,520) |
(1,600) |
(1,600) |
|
Total expenditure |
(1,428) |
(2,404) |
(3,646) |
(4,994) |
(5,192) |
(6,503) |
(6,855) |
(7,053) |
|
Profit before finance and tax |
|
1,703 |
10,307 |
12,655 |
20,149 |
29,608 |
29,669 |
45,918 |
48,304 |
Net finance cost |
190 |
(716) |
(929) |
(808) |
(2,010) |
(3,179) |
(4,512) |
(4,576) |
|
Profit before taxation |
|
1,893 |
9,591 |
11,726 |
19,341 |
27,598 |
26,490 |
41,406 |
43,728 |
Tax |
(4) |
(39) |
(24) |
(219) |
11 |
0 |
0 |
0 |
|
Profit for the year |
|
1,889 |
9,552 |
11,702 |
19,122 |
27,609 |
26,490 |
41,406 |
43,728 |
Average number of shares in issue (m) |
105.2 |
119.2 |
171.7 |
252.2 |
282.5 |
369.8 |
385.1 |
385.1 |
|
IFRS earnings |
1,889 |
9,552 |
11,702 |
19,122 |
27,609 |
26,490 |
41,406 |
43,728 |
|
Adjust for rent arising from recognising |
(1,547) |
(3,760) |
(4,136) |
(5,127) |
(6,334) |
(5,903) |
(6,000) |
(6,000) |
|
Adjust for valuation changes |
2,233 |
839 |
(425) |
(2,211) |
(6,434) |
(1,819) |
(9,714) |
(10,996) |
|
Adjust for corporate acquisitions |
0 |
174 |
998 |
420 |
0 |
0 |
0 |
0 |
|
EPRA earnings |
|
2,575 |
6,805 |
8,139 |
12,204 |
14,841 |
18,768 |
25,692 |
26,733 |
Adjust for development interest under forward fund agreements |
261 |
2237 |
141 |
-138 |
|||||
Adjust for performance fee |
150 |
466 |
871 |
997 |
550 |
0 |
0 |
0 |
|
Group adjusted earnings |
|
2,725 |
7,271 |
9,010 |
13,201 |
15,652 |
21,005 |
25,833 |
26,595 |
IFRS EPS (p) |
1.80 |
8.02 |
6.81 |
7.58 |
9.77 |
7.16 |
10.75 |
11.36 |
|
Adjusted EPS (p) |
|
2.59 |
6.10 |
5.25 |
5.23 |
5.54 |
5.68 |
6.71 |
6.91 |
EPRA EPS (p) |
2.45 |
5.71 |
4.74 |
4.84 |
5.25 |
5.08 |
6.67 |
6.94 |
|
Dividend per share (declared) |
6.00 |
6.12 |
6.18 |
6.28 |
6.45 |
6.58 |
6.71 |
6.84 |
|
BALANCE SHEET |
|||||||||
Investment properties |
81,422 |
138,164 |
200,720 |
266,219 |
362,918 |
513,043 |
530,028 |
540,823 |
|
Other non-current assets |
0 |
2,530 |
3,742 |
3,988 |
27,139 |
34,544 |
42,004 |
48,233 |
|
Non-current assets |
|
81,422 |
140,694 |
204,462 |
270,207 |
390,057 |
547,587 |
572,032 |
589,056 |
Cash and equivalents |
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
7,738 |
|
Other current assets |
6,524 |
6,457 |
13,222 |
25,629 |
3,365 |
6,093 |
6,093 |
6,093 |
|
Current assets |
|
23,649 |
35,616 |
78,329 |
36,039 |
44,765 |
11,310 |
13,057 |
13,831 |
Bank loan |
(11,764) |
(30,865) |
(20,449) |
(39,331) |
(64,182) |
(134,716) |
(145,216) |
(145,716) |
|
Other non-current liabilities |
0 |
(2,530) |
(4,058) |
(3,997) |
(4,673) |
(5,131) |
(5,131) |
(5,131) |
|
Non-current liabilities |
|
(11,764) |
(33,395) |
(24,507) |
(43,328) |
(68,855) |
(139,847) |
(150,347) |
(150,847) |
Trade and other payables |
(3,089) |
(3,623) |
(5,002) |
(5,981) |
(7,360) |
(9,108) |
(9,108) |
(9,108) |
|
Current Liabilities |
|
(3,089) |
(3,623) |
(5,002) |
(5,981) |
(7,360) |
(9,108) |
(9,108) |
(9,108) |
Net assets |
|
90,218 |
139,292 |
253,282 |
256,937 |
358,607 |
409,943 |
425,634 |
442,933 |
Period end shares (m) |
95.2 |
142.3 |
252.2 |
252.2 |
339.2 |
385.1 |
385.1 |
385.1 |
|
IFRS NAV per ordinary share |
|
94.7 |
97.9 |
100.4 |
101.9 |
105.7 |
106.5 |
110.5 |
115.0 |
EPRA NAV per share |
|
94.7 |
97.9 |
100.6 |
101.9 |
105.7 |
106.5 |
110.6 |
115.1 |
CASH FLOW |
|||||||||
Cash flow from operations |
|
3,172 |
8,081 |
8,906 |
4,394 |
23,627 |
19,373 |
28,745 |
31,080 |
Net interest paid |
161 |
(514) |
(681) |
(615) |
(1,366) |
(2,531) |
(4,012) |
(4,076) |
|
Tax paid |
0 |
(47) |
(164) |
(543) |
(122) |
14 |
0 |
0 |
|
Net cash flow from operating activities |
|
3,333 |
7,520 |
8,061 |
3,236 |
22,139 |
16,856 |
24,733 |
27,004 |
Purchase of investment properties |
(51,894) |
(51,736) |
(34,833) |
(37,698) |
(89,981) |
(148,379) |
(7,271) |
0 |
|
Acquisition of subsidiaries |
0 |
(5,845) |
(27,091) |
(25,552) |
0 |
0 |
0 |
0 |
|
Net cash flow from investing activities |
|
(51,894) |
(57,581) |
(61,924) |
(63,250) |
(89,981) |
(148,379) |
(7,271) |
0 |
Issue of ordinary share capital (net of expenses) |
44,520 |
46,644 |
97,501 |
0 |
91,729 |
49,049 |
0 |
0 |
|
(Repayment)/drawdown of loans |
8,646 |
22,525 |
(12,808) |
20,906 |
24,456 |
70,000 |
10,000 |
0 |
|
Dividends paid |
(4,364) |
(7,074) |
(9,681) |
(15,589) |
(17,353) |
(23,709) |
(25,715) |
(26,229) |
|
Other |
0 |
0 |
14,799 |
0 |
0 |
0 |
0 |
0 |
|
Net cash flow from financing activities |
|
48,802 |
62,095 |
89,811 |
5,317 |
98,832 |
95,340 |
(15,715) |
(26,229) |
Net change in cash and equivalents |
|
241 |
12,034 |
35,948 |
(54,697) |
30,990 |
(36,183) |
1,747 |
774 |
Opening cash and equivalents |
16,884 |
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
|
Closing cash and equivalents |
|
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
7,738 |
Balance sheet debt |
(11,764) |
(30,865) |
(20,449) |
(39,331) |
(64,182) |
(134,716) |
(145,216) |
(145,716) |
|
Unamortised loan arrangement costs |
(497) |
(645) |
(551) |
(669) |
(1,818) |
(1,284) |
(784) |
(284) |
|
Net cash/(debt) |
|
4,864 |
(2,351) |
44,107 |
(29,590) |
(24,600) |
(130,783) |
(139,036) |
(138,262) |
Gross LTV |
15.1% |
22.8% |
10.5% |
14.2% |
17.1% |
25.1% |
25.8% |
25.1% |
|
Net LTV |
0.0% |
1.7% |
0.0% |
10.5% |
6.4% |
24.1% |
24.6% |
23.8% |
Source: Company data, Edison Investment Research
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