Target Healthcare REIT |
Nearing full investment |
NAV update |
Real estate |
1 August 2017 |
Share price performance
Business description
Next events
Analysts
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Target has provided a NAV and portfolio update as at 30 June. The previously announced acquisition of a newly-built home in Leicestershire and the forward funding of one in Merseyside bring the portfolio to a total of 47 properties and closer to management’s target of a 20% loan-to-value (LTV) ratio (14.2% at 30 June). We have adjusted our estimates for the NAV update and to account for the timing of the new investments. Target has the longest lease portfolio of any UK REIT, producing stable income streams from high-quality and purpose-built modern care homes. These support a prospective dividend yield of 5.2%.
Year end |
Revenue (£m) |
EPRA EPS (p) |
EPRA NAV/ |
Price/EPRA NAV/share (x) |
DPS |
Yield |
06/15 |
12.7 |
5.71 |
97.9 |
1.23 |
6.12 |
5.1 |
06/16 |
16.3 |
4.56 |
100.6 |
1.20 |
6.18 |
5.1 |
06/17e |
21.3 |
4.81 |
101.9 |
1.18 |
6.28 |
5.2 |
06/18e |
26.5 |
6.47 |
103.5 |
1.16 |
6.34 |
5.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
NAV and pipeline update
At 30 June 2017 EPRA NAV stood at £256.9m, or 101.9p per share, from 101.5p at 31 March. The Q3 dividend of 1.57p was covered by 2p of IFRS earnings, but not yet by EPRA EPS, which excludes 0.5p of revaluation. Passing rent was £20.3m, up 2.8% in the quarter, representing a 6.75% net initial yield. 70bp of the rental increase were due to rent reviews and the rest from acquisitions. The portfolio was valued at £282.0m at 30 June, after a like-for-like increase of c 0.5% (£1.3m), broadly in line with rental growth, and a £6.1m acquisition. Subsequent purchases have taken the portfolio to £298.6m. This steady performance shows the team’s success in delivering stable, predictable income from a growing portfolio of long leases (the weighted average unexpired lease term was 29.5 years at 30 June).
Two new properties
The Amwell in Melton Mowbray was acquired in early July for £8.4m and let for 35 years to Melton Care, a joint venture between Care Concern and local operator Magnum Care. The £8.2m forward funding agreement is for a land acquisition and the development of a high-quality care home in Birkdale, which will be carried out with Athena Healthcare. Athena will lease the completed property for 35 years from completion, expected by March 2019. The investments represent a yield in line with the rest of the portfolio (c 7%).
Valuation: Long leases support dividend
Target’s premium to EPRA NAV remains in the mid-teens, supported by the attractive 5.2% prospective dividend, paid from a growing portfolio of leases with the longest average unexpired term of any UK REIT. The company remains conservatively geared at 14.2% LTV, with a target of 20% at full investment. The care home market enjoys long-term secular demand, which is likely to provide further investment opportunities for Target to participate in this growth.
Summary of NAV update
The full year results will be published in September, but the NAV update gave a brief overview of the balance sheet, which we have used to update our model. The update contains no surprises and Target continues to execute management’s strategy of investing in purpose-built homes in areas with a supportive local economy and demographics. The main points are summarised below:
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At 30 June 2017 the portfolio of 45 assets was valued at £282.0m (31 March: 44 and £274.6m). Of the increase, £6.1m was from the acquisition of a care home in Dover and £1.3m from valuation increases. The latter were equivalent to c 0.5% of the existing portfolio value, broadly in line with the like-for-like rental growth.
■
The rent roll stood at £20.3m, up 2.8% from £19.8m at 31 March. Of the increase, c £0.14m, or 0.7%, was due to rent increases and the rest was from new leases on acquired properties. Portfolio net initial yield was up slightly at 6.75% (31 March: 6.7%) and WAULT rose to 29.5 years over the period due to the addition of new 35-year leases.
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Exhibit 1: Portfolio value and rent roll progression |
Exhibit 2: WAULT and yield progression |
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Source: Company data |
Source: Company data |
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Exhibit 1: Portfolio value and rent roll progression |
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Source: Company data |
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Exhibit 2: WAULT and yield progression |
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Source: Company data |
■
Total borrowings were £40.0m, for an LTV ratio of 14.2%, excluding a cash balance of £10.4m. At 30 June, Target had £10m of capital available from its revolving credit facility. The company is close to agreeing a new debt facility with a new lender, replenishing its debt resources following the post-year end acquisitions.
■
EPRA NAV increased to £256.9m at 30 June from £256.1m at 31 March, equivalent to 101.9p per share.
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Exhibit 3: EPRA NAV per share changes in the quarter |
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Source: Company data |
New investments
The two acquisitions were announced on 12 July 2017 and are outlined below. Both new assets are in relatively prosperous areas with populations of potential residents. Once the forward-funded asset is built, both will fulfil Target’s criteria of having a long useful life ahead of them with less refurbishment and alteration required than older stock.
The Amwell in Melton Mowbray has 88 beds and welcomed its first residents in March 2017. The development was carried out by Melton Care to its own design and has excellent public spaces, large bedrooms with wet rooms en suite, a cinema, coffee shop and gym as well as a good location near the town centre, next to a park on the River Eye. The joint venture partners in Melton Care are Care Concern, a national operator with which Target works at several other homes, and local operator Magnum Care, which runs two other homes in Leicestershire. The 35-year lease has capped and collared RPI uplifts and the total acquisition cost was £8.4m.
The site in Birkdale, Merseyside, received planning permission in February 2017 for a 55-bed home, again with excellent amenities. The site acquisition and forward funding agreement have a total capped cost of £8.2m, with completion scheduled for March 2019, when the home will be let to Athena Healthcare for 35 years, again with capped and collared RPI uplifts. Athena has three operational homes and several under development; the Birkdale development will be the third Athena home owned by Target. This home will target the premium market and is located in an affluent suburb of Southport, an area with high demand for care homes.
Changes to estimates
We had previously assumed that Target would invest £40m in H217 (to 30 June 2017) and £20m in H118. The timing of the acquisitions announced on 12 July means that we have trimmed our H217 assumption to £35m but leave our H118 assumption unchanged. We have assumed that the forward funding will be disbursed as follows: £2.5m each in H118, H218 and H119, with the remaining £0.7m in the last quarter before the Birkdale home is completed by March 2019. We also assume that the funding will attract interest at the same rate as our assumed property yield of 7%.
The publication of a summary balance sheet has enabled us to make some assumptions about cash flow movements, but the FY17 financials overleaf remain estimates, pending final results to be announced in September. The changes to our estimates are summarised below. The slight increase in revenue is a result of the resilient net initial yield. That flows through to higher EPS and contributes to the increased EPRA NAV forecasts. We have not increased our dividend assumption.
Exhibit 4: Estimate changes
Revenue |
EPRA EPS |
EPRA NAV/share |
DPS |
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Old (£m) |
New (£m) |
Change (%) |
Old (p) |
New (p) |
Change (%) |
Old (p) |
New (p) |
Change (%) |
Old (p) |
New (p) |
Change (%) |
|
2017e |
23.4 |
23.4 |
0% |
4.8 |
4.8 |
1% |
100.7 |
101.9 |
2% |
6.28 |
6.28 |
0% |
2018e |
27.9 |
28.1 |
1% |
6.3 |
6.5 |
2% |
102.3 |
103.5 |
2% |
6.34 |
6.34 |
0% |
2019e |
28.7 |
29.2 |
2% |
6.6 |
6.9 |
4% |
105.2 |
106.5 |
2% |
6.34 |
6.34 |
0% |
Source: Edison Investment Research
Valuation: Long-term income
The 5.2% prospective yield is supported by 47 leases with 17 different tenants that have the longest WAULT of any UK REIT. Earnings will increase as Target becomes fully invested and approaches its planned LTV ratio of 20%, which we expect in FY18 as management deploys more debt capital, and we continue to expect the dividend to be fully covered in FY18. The c 18% premium to EPRA NAV is below the level of other REITs investing in healthcare assets, which trade at more than 20% above EPRA NAV, and shows the attraction of Target’s long-term, stable income streams to investors. Target’s valuation may continue to converge with peers as its track record and scale increase.
Exhibit 5: Financial summary
Year end 30 June |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
|
£000s |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
Rent revenue |
|
2,291 |
3,817 |
9,898 |
12,677 |
18,084 |
22,625 |
23,721 |
Movement in lease incentive or rent review |
860 |
1,547 |
3,760 |
4,136 |
5,143 |
5,446 |
5,446 |
|
Rental income |
|
3,151 |
5,364 |
13,658 |
16,813 |
23,227 |
28,071 |
29,167 |
Other income |
0 |
0 |
66 |
61 |
195 |
0 |
0 |
|
Total revenue |
|
3,151 |
5,364 |
13,724 |
16,874 |
23,422 |
28,071 |
29,167 |
Gains/(losses) on revaluation |
(3,225) |
(2,233) |
(839) |
425 |
804 |
(200) |
971 |
|
Cost of corporate acquisitions |
0 |
0 |
(174) |
(998) |
(2,941) |
(1,363) |
(194) |
|
Total income |
|
(74) |
3,131 |
12,711 |
16,301 |
21,286 |
26,507 |
29,944 |
Management fee |
(808) |
(648) |
(1,524) |
(2,654) |
(3,447) |
(3,114) |
(3,150) |
|
Other expenses |
0 |
(780) |
(880) |
(992) |
(1,436) |
(1,937) |
(2,013) |
|
Total expenditure |
(808) |
(1,428) |
(2,404) |
(3,646) |
(4,883) |
(5,051) |
(5,163) |
|
Profit before finance and tax |
|
(882) |
1,703 |
10,307 |
12,655 |
16,403 |
21,456 |
24,780 |
Net finance cost |
93 |
190 |
(716) |
(929) |
(965) |
(1,254) |
(1,241) |
|
Profit before taxation |
|
(789) |
1,893 |
9,591 |
11,726 |
15,438 |
20,202 |
23,540 |
Tax |
(14) |
(4) |
(39) |
(24) |
(533) |
0 |
0 |
|
Profit for the year |
|
(803) |
1,889 |
9,552 |
11,702 |
14,905 |
20,202 |
23,540 |
Movement in valuation of interest rate swap |
0 |
0 |
0 |
(316) |
223 |
0 |
0 |
|
Total comprehensive income for the year |
|
(803) |
1,889 |
9,552 |
11,386 |
15,128 |
20,202 |
23,540 |
Average number of shares in issue |
58,618,032 |
105,231,661 |
119,160,560 |
171,734,587 |
252,180,851 |
252,180,851 |
252,180,851 |
|
IFRS earnings |
(803) |
1,889 |
9,552 |
11,386 |
15,128 |
20,202 |
23,540 |
|
Adjusted for rent arising from recognising |
(860) |
(1,547) |
(3,760) |
(4,136) |
(5,143) |
(5,446) |
(5,446) |
|
Adjusted for valuation changes |
3,225 |
2,233 |
839 |
(425) |
(804) |
200 |
(971) |
|
Adjusted for corporate acquisitions |
0 |
0 |
174 |
998 |
2,941 |
1,363 |
194 |
|
EPRA earnings |
|
1,562 |
2,575 |
6,805 |
7,823 |
12,122 |
16,320 |
17,317 |
Adjusted for performance fee |
0 |
150 |
466 |
871 |
745 |
800 |
800 |
|
Group adjusted EPRA earnings |
|
1,562 |
2,725 |
7,271 |
8,694 |
12,867 |
17,120 |
18,117 |
IFRS EPS (p) |
(1.37) |
1.80 |
8.02 |
6.63 |
6.00 |
8.01 |
9.33 |
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EPRA EPS (p) |
|
2.66 |
2.45 |
5.71 |
4.56 |
4.81 |
6.47 |
6.87 |
Adjusted EPS (p) |
2.66 |
2.59 |
6.10 |
5.06 |
5.10 |
6.79 |
7.18 |
|
Dividend per share (declared) |
0.00 |
6.12 |
6.12 |
6.18 |
6.28 |
6.34 |
6.34 |
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BALANCE SHEET |
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Investment properties |
46,004 |
81,422 |
138,164 |
200,720 |
281,952 |
305,152 |
309,451 |
|
Trade and other receivables |
0 |
0 |
2,530 |
3,742 |
3,763 |
3,763 |
3,763 |
|
Non-current assets |
|
46,004 |
81,422 |
140,694 |
204,462 |
285,715 |
308,915 |
313,214 |
Trade and other receivables |
1,300 |
6,524 |
6,457 |
13,222 |
11,000 |
11,000 |
11,000 |
|
Cash and equivalents |
45,354 |
17,125 |
29,159 |
65,107 |
10,400 |
8,452 |
11,704 |
|
Current assets |
|
46,654 |
23,649 |
35,616 |
78,329 |
21,400 |
19,452 |
22,704 |
Total assets |
|
92,658 |
105,071 |
176,310 |
282,791 |
307,115 |
328,366 |
335,918 |
Bank loan |
0 |
(11,764) |
(30,865) |
(20,449) |
(40,000) |
(57,000) |
(57,000) |
|
Interest rate swap |
0 |
0 |
0 |
(316) |
0 |
0 |
0 |
|
Trade and other payables |
0 |
0 |
(2,530) |
(3,742) |
(3,763) |
(3,763) |
(3,763) |
|
Non-current liabilities |
|
0 |
(11,764) |
(33,395) |
(24,507) |
(43,763) |
(60,763) |
(60,763) |
Trade and other payables |
(1,363) |
(3,089) |
(3,623) |
(5,002) |
(6,497) |
(6,497) |
(6,497) |
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Current Liabilities |
|
(1,363) |
(3,089) |
(3,623) |
(5,002) |
(6,497) |
(6,497) |
(6,497) |
Total liabilities |
|
(1,363) |
(14,853) |
(37,018) |
(29,509) |
(50,260) |
(67,260) |
(67,260) |
Net assets |
|
91,295 |
90,218 |
139,292 |
253,282 |
256,855 |
261,106 |
268,658 |
Period end shares |
95,221,629 |
95,221,629 |
142,298,226 |
252,180,851 |
252,180,851 |
252,180,851 |
252,180,851 |
|
NAV per ordinary share |
|
95.9 |
94.7 |
97.9 |
100.4 |
101.9 |
103.5 |
106.5 |
EPRA NAV per share |
|
95.9 |
94.7 |
97.9 |
100.6 |
101.9 |
103.5 |
106.5 |
Earnings yield on EPRA NAV |
2.8% |
2.6% |
5.8% |
4.5% |
4.7% |
6.3% |
6.4% |
|
Dividend yield on EPRA NAV |
0.0% |
6.5% |
6.3% |
6.1% |
6.2% |
6.1% |
6.0% |
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CASH FLOW |
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Profit before tax |
|
(789) |
1,893 |
9,591 |
11,726 |
15,438 |
20,202 |
23,540 |
Adjusted for |
||||||||
Interest receivable |
(93) |
(201) |
(99) |
(173) |
(138) |
(80) |
(80) |
|
Interest payable |
0 |
11 |
815 |
1,102 |
1,103 |
1,334 |
1,321 |
|
Revaluation gains on property portfolio |
2,365 |
686 |
(2,921) |
(4,787) |
(4,943) |
(700) |
(1,099) |
|
Cost of corporate acquisitions |
2,941 |
1,363 |
194 |
|||||
(Increase)/decrease in trade and other receivables |
(440) |
(558) |
(308) |
(233) |
4,543 |
0 |
0 |
|
Increase/(decrease) in trade and other payables |
1,300 |
1,341 |
1,003 |
1,271 |
19 |
0 |
0 |
|
Total working capital adjustments |
|
3,132 |
1,279 |
(1,510) |
(2,820) |
3,524 |
1,918 |
336 |
Interest paid |
0 |
0 |
(613) |
(854) |
(892) |
(1,334) |
(1,321) |
|
Interest received |
93 |
161 |
99 |
173 |
138 |
80 |
80 |
|
Tax paid |
0 |
0 |
(47) |
(164) |
(25) |
0 |
0 |
|
Total other adjustments |
|
93 |
161 |
(561) |
(845) |
(779) |
(1,254) |
(1,241) |
Net cash flow from operating activities |
|
2,436 |
3,333 |
7,520 |
8,061 |
18,184 |
20,866 |
22,635 |
Purchase of investment properties |
(49,229) |
(51,894) |
(51,736) |
(34,833) |
(49,069) |
(22,500) |
(3,200) |
|
Acquisition of subsidiaries |
0 |
0 |
(5,845) |
(27,091) |
(27,867) |
(1,363) |
(194) |
|
Net cash flow from investing activities |
|
(49,229) |
(51,894) |
(57,581) |
(61,924) |
(76,936) |
(23,863) |
(3,394) |
Issue of ordinary share capital |
95,740 |
45,450 |
47,802 |
100,279 |
0 |
0 |
0 |
|
Expenses of issue |
(1,882) |
(930) |
(1,158) |
(2,778) |
0 |
0 |
0 |
|
Sale of shares from treasury |
0 |
0 |
0 |
14,799 |
0 |
0 |
0 |
|
(Repayment)/drawdown of bank loan |
0 |
11,946 |
19,225 |
(10,638) |
19,744 |
17,000 |
0 |
|
(Grant)/repayment of development loan and cost of bank facility |
0 |
(3,300) |
3,300 |
(2,170) |
(185) |
0 |
0 |
|
Dividends paid |
(1,711) |
(4,364) |
(7,074) |
(9,681) |
(15,514) |
(15,950) |
(15,988) |
|
Net cash flow from financing activities |
|
92,147 |
48,802 |
62,095 |
89,811 |
4,045 |
1,050 |
(15,988) |
Net change in cash and equivalents |
|
45,354 |
241 |
12,034 |
35,948 |
(54,707) |
(1,948) |
3,253 |
Opening cash and equivalents |
0 |
16,884 |
17,125 |
29,159 |
65,107 |
10,400 |
8,452 |
|
Closing cash and equivalents |
|
45,354 |
17,125 |
29,159 |
65,107 |
10,400 |
8,452 |
11,704 |
Net debt (cash) |
0 |
(17,125) |
(17,395) |
(44,658) |
29,600 |
36,548 |
45,296 |
Source: Company data, Edison Investment Research
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