Portfolio growth

Target Healthcare REIT 28 April 2017 Update
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Target Healthcare REIT

Portfolio growth

NAV update

Real estate

28 April 2017

Price

115.75p

Market cap

£292m

Net cash (£m) at 31 December 2016

6.4

Shares in issue

252.2m

Free float

90%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

5.2

6.9

Rel (local)

4.6

3.1

(6.8)

52-week high/low

117.0p

105.9p

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

August 2017

Full year results

September 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

Mark Cartlich

+44 (0)20 3077 5700

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

Target Healthcare REIT (Target) continues to approach full investment, having completed the acquisitions of four care homes in the quarter to 31 March and one more in April. Portfolio value stood at £274.6m at the quarter-end (31 December: £253.1m). The Q217 dividend was the main cause of a slight decrease in EPRA NAV per share to 101.5p (31 December: 101.8p); we expect full dividend cover to be achieved in FY18 as the company becomes fully invested. The secular trends of an ageing population and a persistent lack of modern care homes create a significant opportunity for further investment to underpin the attractive dividend yield.

Year end

Revenue (£m)

EPRA EPS*
(p)

EPRA NAV/
share (p)

Price/EPRA NAVE/share (x)

DPS
(p)

Yield
(%)

06/15

12.7

5.71

97.9

1.18

6.12

5.3

06/16

16.3

4.56

100.6

1.15

6.18

5.3

06/17e

22.6

4.75

100.7

1.15

6.28

5.4

06/18e

26.6

6.34

102.3

1.13

6.34

5.5

Note: *EPRA EPS excludes revaluation gains and movements in the fair value of financial derivatives and debt swap contracts.

Asset and income growth

Of the 8.5% increase in portfolio value, 50bp was due to growth of the like-for-like portfolio, driven by rent uplifts and some yield compression. The remainder (c £20.2m) was attributable to the acquisitions of two care homes in Dorset let for 35 years to existing tenant Care Concern, and two others, in Nottinghamshire and Essex, let to the group’s 16th tenant, Oakdale, and Care Concern. Diversification of income continued in April with the acquisition for £6.1m of a home in Dover, let for 35 years to Athena Healthcare. Before that acquisition, the portfolio had passing rent of £19.8m (net initial yield of 6.75%) and an average term of 29.6 years.

Outlook

Target aims to have LTV of c 20% (31 March: 10.9%), it currently has £20m of debt available for investment and is in the late stages of discussions with a new provider to obtain further funding. Interest rate swaps mean that the cost of existing debt will be 2.36% to June 2019 and 2.25% from then until September 2021. Target reports that it has several investment opportunities under review and, as noted above, the structural drivers underlying its chosen market are likely to keep the pipeline full. We continue to expect that Target will achieve full investment in the current financial year (ending 30 June) and that the FY18 dividend will be 100% covered as a result.

Valuation: Attractive long-term income

Target has the longest leases in its sector, inexpensive debt, low LTV and a prospective yield of 5.4% (FTSE EPRA NAREIT index 3.4%). We expect its growing portfolio of income streams to cover the attractive dividend fully in FY18, and Target’s shares have performed well in recent weeks as it approaches full investment. The 14% premium to the last reported EPRA NAV may continue to converge with other long-lease healthcare property investors (averaging c 21%) as that process continues.

Exhibit 1: Financial summary

Year end 30 June

2014

2015

2016

2017e

2018e

2019e

INCOME STATEMENT

£000s

Rent revenue

3,817

9,898

12,677

18,054

22,456

23,267

Movement in lease incentive or rent review

1,547

3,760

4,136

5,143

5,446

5,446

Rental income

5,364

13,658

16,813

23,197

27,902

28,713

Other income

0

66

61

195

0

0

Total revenue

5,364

13,724

16,874

23,392

27,902

28,713

Gains/(losses) on revaluation

(2,233)

(839)

425

2,181

(134)

989

Cost of corporate acquisitions

0

(174)

(998)

(3,006)

(1,212)

0

Total income

3,131

12,711

16,301

22,566

26,556

29,701

Management fee

(648)

(1,524)

(2,654)

(3,447)

(3,093)

(3,122)

Other expenses

(780)

(880)

(992)

(1,434)

(1,925)

(1,981)

Total expenditure

(1,428)

(2,404)

(3,646)

(4,881)

(5,018)

(5,103)

Profit before finance and tax

1,703

10,307

12,655

17,685

21,538

24,598

Net finance cost

190

(716)

(929)

(1,075)

(1,461)

(1,460)

Profit before taxation

1,893

9,591

11,726

16,610

20,076

23,138

Tax

(4)

(39)

(24)

(533)

0

0

Profit for the year

1,889

9,552

11,702

16,077

20,076

23,138

Movement in valuation of interest rate swap

0

0

(316)

223

0

0

Total comprehensive income for the year

1,889

9,552

11,386

16,300

20,076

23,138

Average number of shares in issue

105,231,661

119,160,560

171,734,587

252,180,851

252,180,851

252,180,851

IFRS earnings

1,889

9,552

11,386

16,300

20,076

23,138

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

(1,547)

(3,760)

(4,136)

(5,143)

(5,446)

(5,446)

Adjusted for valuation changes

2,233

839

(425)

(2,181)

134

(989)

Adjusted for corporate acquisitions

0

174

998

3,006

1,212

0

EPRA earnings

2,575

6,805

7,823

11,983

15,977

16,703

Adjusted for performance fee

150

466

871

745

800

800

Group adjusted EPRA earnings

2,725

7,271

8,694

12,728

16,777

17,503

IFRS EPS (p)

1.80

8.02

6.63

6.46

7.96

9.18

EPRA EPS (p)

2.45

5.71

4.56

4.75

6.34

6.62

Adjusted EPS (p)

2.59

6.10

5.06

5.05

6.65

6.94

Dividend per share (declared)

6.12

6.12

6.18

6.28

6.34

6.34

BALANCE SHEET

Investment properties

81,422

138,164

200,720

280,240

300,905

301,894

Trade and other receivables

0

2,530

3,742

3,763

3,763

3,763

Non-current assets

81,422

140,694

204,462

284,003

304,668

305,657

Trade and other receivables

6,524

6,457

13,222

16,474

16,474

16,474

Cash and equivalents

17,125

29,159

65,107

11,941

401

6,562

Current assets

23,649

35,616

78,329

28,415

16,875

23,036

Total assets

105,071

176,310

282,791

312,418

321,544

328,694

Bank loan

(11,764)

(30,865)

(20,449)

(48,256)

(53,256)

(53,256)

Interest rate swap

0

0

(316)

(93)

(93)

(93)

Trade and other payables

0

(2,530)

(3,742)

(3,763)

(3,763)

(3,763)

Non-current liabilities

(11,764)

(33,395)

(24,507)

(52,112)

(57,112)

(57,112)

Trade and other payables

(3,089)

(3,623)

(5,002)

(6,497)

(6,497)

(6,497)

Current Liabilities

(3,089)

(3,623)

(5,002)

(6,497)

(6,497)

(6,497)

Total liabilities

(14,853)

(37,018)

(29,509)

(58,609)

(63,609)

(63,609)

Net assets

90,218

139,292

253,282

253,809

257,935

265,085

Period end shares

95,221,629

142,298,226

252,180,851

252,180,851

252,180,851

252,180,851

NAV per ordinary share

94.7

97.9

100.4

100.6

102.3

105.1

Adjusted for interest rate swap

0

0

0

0

0

0

EPRA NAV per share

94.7

97.9

100.6

100.7

102.3

105.2

CASH FLOW

Profit before tax

1,893

9,591

11,726

16,610

20,076

23,138

Adjusted for

Interest receivable

(201)

(99)

(173)

(138)

(80)

(80)

Interest payable

11

815

1,102

1,213

1,541

1,540

Revaluation gains on property portfolio

686

(2,921)

(4,787)

(6,201)

(666)

(989)

(Increase)/decrease in trade and other receivables

(558)

(308)

(233)

(931)

0

0

Increase/(decrease) in trade and other payables

1,341

1,003

1,271

19

0

0

Total working capital adjustments

1,279

(1,510)

(2,820)

(6,037)

796

471

Interest paid

0

(613)

(854)

(1,002)

(1,541)

(1,540)

Interest received

161

99

173

138

80

80

Tax paid

0

(47)

(164)

(25)

0

0

Total other adjustments

161

(561)

(845)

(889)

(1,461)

(1,460)

Net cash flow from operating activities

3,333

7,520

8,061

9,684

19,411

22,149

Purchase of investment properties

(51,894)

(51,736)

(34,833)

(50,149)

(20,000)

0

Acquisition of subsidiaries

0

(5,845)

(27,091)

(27,932)

(1,212)

0

Net cash flow from investing activities

(51,894)

(57,581)

(61,924)

(78,081)

(21,212)

0

Issue of ordinary share capital

45,450

47,802

100,279

0

0

0

Expenses of issue

(930)

(1,158)

(2,778)

0

0

0

Sale of shares from treasury

0

0

14,799

0

0

0

(Repayment)/drawdown of bank loan

11,946

19,225

(10,638)

28,000

5,000

0

(Grant)/repayment of development loan

(3,300)

3,300

(2,170)

0

0

0

Dividends paid

(4,364)

(7,074)

(9,681)

(15,514)

(15,950)

(15,988)

Net cash flow from financing activities

48,802

62,095

89,811

12,486

(10,950)

(15,988)

Net change in cash and equivalents

241

12,034

35,948

(55,912)

(12,752)

6,161

Opening cash and equivalents

16,884

17,125

29,159

65,107

9,195

(3,557)

Closing cash and equivalents

17,125

29,159

65,107

9,195

(3,557)

2,604

Net debt

(17,125)

(17,395)

(44,658)

36,315

52,855

46,694

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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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