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Q322 quarterly return of 2.5%

Target Healthcare REIT 23 May 2022 Update
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Target Healthcare REIT

Q322 quarterly return of 2.5%

Quarterly report

Real estate

23 May 2022

Price

115.6p

Market cap

£717m

Net debt (£m) at 31 March 2022

180.0

Net LTV at 31 March 2022

20.3%

Shares in issue

620.2m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

7.8

1.8

Rel (local)

4.3

10.8

(0.3)

52-week high/low

125.4p

105.6p

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

FY22 year end

30 June 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Strong accounting returns continued for Target Healthcare REIT during Q322, extending its record of consistent positive returns since IPO. Indexed rent uplifts, an extension of long-term fixed-rate debt and a historical ability of operators to match inflation pressures with fee growth offer good inflation protection. In combination with continuing investment, this supports Target’s well-charted path to full dividend cover.

Year end

Rental income (£m)

Adjusted net earnings* (£m)

Adjusted
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/21

49.9

26.0

5.46

110.4

6.72

1.05

5.8

06/22e

59.5

29.9

4.99

111.4

6.76

1.04

5.8

06/23e

73.2

40.4

6.52

115.7

6.86

1.00

5.9

06/24e

77.6

42.9

6.92

119.0

6.96

0.97

6.0

Note: *Adjusted earnings exclude revaluation movements, non-cash income arising from the accounting treatment of lease incentives and guaranteed rent review uplifts, and acquisition costs, and include development interest under forward fund agreements. **NAV is net tangible assets (NTA).

Continuing progress despite pandemic challenges

Q322 EPRA NTA per share increased 0.9% to 111.8p and, including DPS paid, the quarterly accounting total return was 2.5%. Target is well on track to meet its FY22 DPS target of 6.76p. Returns were driven by index-linked rent reviews, investment completions and modest yield tightening. The Q222 acquisition of an 18-home portfolio, adding £9.3m to annualised rents, contributed fully, and was the main driver of the 34% increase in adjusted EPRA earnings to £9.0m. Active asset management is also supporting returns with four homes successfully re-tenanted and generating a positive financial result. The cumulative impact of the pandemic requires further initiatives with two tenants, with rent collection falling to 92% versus 96% previously. Our FY22 forecasts include additional provisioning, but we expect this to be short-lived with increased DPS effectively covered by FY24.

Sustainably meeting a long-term need

A growing elderly population and the need to improve the existing estate point to continuing demand for new, purpose-built homes with flexible layouts and high-quality residential facilities. With its unwavering focus on asset and tenant quality, these are the homes in which Target invests. They are appealing to residents and support operators in providing better and more effective care. Target believes that best-in-class assets, in areas with strong demand/supply characteristics, and sustainable rent levels will always be attractive to tenants and are key to providing sustainable, long-duration, inflation-linked income. Rent collection has remained robust during the pandemic and, as the Omicron wave recedes, home occupancy is once more recovering, while tenant operators continue to report strong demand from potential new residents.

Valuation: Inflation-protected long income

The FY22e DPS represents an attractive 5.8% yield, with good prospects for DPS growth. Meanwhile, the shares trade at a small c 3% premium to Q322 NAV compared with an average c 7% since IPO and a peak of 11%.

Consistently positive returns

The 2.5% Q322 NAV1 total return2 takes the FY22 year to date total to 5.8%, despite significant property acquisition costs incurred in Q222. We estimate that adjusting for this, the year-to-date total return would be 7.0%. Consistently positive returns since IPO in January 2013, on both a quarterly and annual basis, reflect the resilience of the sector and of Target’s strategy. The average annual compound return over this period has been 6.1%, of which c 80% reflects dividends paid. A Q322 DPS of 1.69p per share was declared for payment on 27 May 2022 and total DPS declared year to date is 5.07p, with the company well on track to meet its 6.76p (+0.6%) FY22 target.

  Throughout this report, net asset value (NAV) represents EPRA net tangible assets (NTA) unless stated otherwise.

  Change in NAV plus dividends paid. Unlike the company’s measure of returns, we do not assume reinvestment of dividends. Consequently, the returns quoted by Target are higher.

Exhibit 1: NAV total return

Q122

Q222

Q322

Year to date

Sep-21

Dec-21

Mar-22

Mar-22

Opening NAV per share (p)

110.4

111.3

110.76

110.4

Closing NAV per share (p)

111.3

110.76

111.8

111.8

DPS paid (p)

1.68

1.69

1.69

5.06

NAV TR %

2.3%

1.0%

2.5%

5.8%

Source: Target Healthcare REIT data, Edison Investment Research

Unwavering focus on asset quality

Target’s unwavering focus on asset quality is core to its strategy for generating sustainable financial returns and social impact. Its investment thesis is that best-in-class properties in local areas with positive demand/supply characteristics and prevailing rental levels that are sustainable will always be attractive to existing or alternative tenants. The quality and appeal of Target’s assets contributes significantly to income security. This is best demonstrated by Target’s ability to successfully re-tenant properties where the need arises, although re-tenanting is also driven by opportunities to optimise the portfolio. The successful re-tenanting of a minority of Target’s assets and the continued modest tightening of valuation yields also provides tangible evidence of the continuing strong investment demand for care homes as an asset class and for high-quality assets.

High-quality homes are in a minority3

  We refer here to the physical real estate.

Across the sector, despite recent new building and the continued withdrawal of obsolete stock, there are still many older, often converted properties. Many of these may be unsuitable for upgrading and may increasingly be seen as unfit for purpose or economically unviable. While modern, purpose-built homes with flexible layouts and high-quality residential facilities do not guarantee good levels of care, in combination with careful tenant selection they confer clear advantages to operators and residents alike. Among a range of indicators that guide Target’s investment decisions is full ensuite wet room provision, the appeal of which to residents is obvious and the operational advantages have been highlighted by the pandemic through enhanced infection control capabilities. Data sourced by Target from LaingBuisson suggest that across the UK sector, rooms with full ensuite wet room facilities represent a minority (c 28%) of the care home stock, with the vast majority of ensuite facilities representing WC and handwash basins only. Target will only invest in homes with full ensuite wet room facilities in place (more than 95% of portfolio beds) or, on occasion, where there is an agreement with the tenant that a satisfactory upgrade will be undertaken. Most homes in its portfolio were built within the previous 10 years.

Successful track record of re-tenanting

Where performance problems arise with a tenant, as an engaged landlord, the investment manager leverages its extensive industry experience to work collaboratively with its partners to support and deliver the best long-term solution. In some cases, the optimal solution is to re-tenant the assets to a stronger operator and, as Target’s portfolio has increased in size and diversity, there have been several examples of this being successfully achieved, with no negative impacts on home residents or Target’s financial returns.

Most homes in the portfolio are mature with stabilised, high levels of occupancy under normal trading conditions. However, with its focus on asset quality, Target also invests in completed newly opened homes and commits to acquire pre-let developments at completion, often forward funding the development phase. Under normal trading conditions, newly opened homes typically require up to 36 months to establish occupancy levels and reach mature levels of financial performance. However, the pandemic has increased pressures on home operators across the sector and has lengthened the time required for new homes to reach maturity, especially for homes where private fee-paying occupancy has been slower to recover.

During Q322, in an example of portfolio optimisation, Target completed the re-tenanting of four homes that it had initiated, moving from a large national operator to an established regional operator, more focused on the local market, in line with strategy. Although the homes were performing satisfactorily, with a substantial remaining lease term, Target was able to negotiate a surrender premium from the outgoing tenant to cover short-term lease incentives for the incoming tenant and lease change impacts on valuation.4 Target says it benefits from a positive financial effect, following agreed capex to each of the homes.

  Arising from the external valuation impact from the change in tenant covenant, moving from a larger to smaller tenant group.

Currently, Target is in the process of undertaking comprehensive asset management initiatives involving two tenants whose resilience in managing multiple new homes has been stretched following restrictions during the most recent COVID-19 Omicron wave. As part of this process, we expect the company to actively pursue the re-tenanting of at least some of the assets operated by these tenants.

Further details on Q322 financial performance

The quarterly and year to date NAV movement reflects a positive revaluation movement net of acquisition costs, with dividends paid exceeding the movement in revenue reserves.

Exhibit 2: Reconciliation of NAV movement

Pence per share

Sep-21

Dec-21

Mar-21

Mar-21

Q122

Q222

Q322

9M22

Opening EPRA NAV

110.4

111.3

110.8

110.4

Revaluation gains/(losses) om investment properties

0.8

1.4

1.4

3.6

Net revaluation gains/(losses) on assets under construction*

0.1

0.0

(0.1)

0.0

Net impact of acquisition costs

(0.1)

(1.3)

0.0

(1.4)

Net gains/(losses) on investment property revaluation

0.8

0.1

1.3

2.2

Equity issuance

0.4

0.0

0.0

0.4

Movement in revenue reserve

1.1

1.1

1.4

3.6

Dividend paid

(1.4)

(1.7)

(1.7)

(4.8)

Closing EPRA NAV per share (p)

111.3

110.8

111.8

111.8

Source: Target Healthcare REIT data, Edison Investment Research. Note: *The carrying value of assets under development is calculated by the external valuer through application of a discount to the accumulated costs. The discount varies depending on factors such as the remaining development time. As the asset progresses towards completion, the discount is unwound.

The end-Q322 portfolio value was £886.8m, an increase of £16.3m or 1.9% in the period. Acquisitions added 0.8% and like-for-like uplifts, generated by index-linked rental uplifts and modest yield compression, added 1.1%. At the end of the period, the portfolio comprised 99 assets let to 33 different tenants. As previously announced, an operational home in greater Manchester was acquired for £7.2m, let to Harbour Healthcare, a new tenant to the group. Subsequently, Target has committed to the forward funding of a development asset in Dartford, Kent, its 100th asset.

Exhibit 3: Key portfolio statistics

September 2021

December 2021

March 2022

Q122

Q222

Q322

Like-for-like

0.7%

1.3%

1.1%

Acquisitions

1.5%

21.5%

0.8%

Asset management

0.4%

1.1%

0.0%

Total movement in portfolio value

2.6%

23.9%

1.9%

Closing portfolio value including held for sale assets (£m)

702.7

870.5

886.8

EPRA 'topped-up' net initial yield

5.82%

5.84%

5.82%

Source: Target Healthcare REIT

Contractual rent increased by £0.7m or 1.2% during the quarter, including a like-for-like increase of 0.8% from settled index-linked rent reviews. Target has a long WAULT of more than 27 years which, combined with upward-only annual RPI-linked (96% of income) and fixed (4%) contractual rent uplifts, provides significant income visibility and protection against inflation. Uplifts are typically capped at c 4% (with a floor of c 2%) and although this means that while Retail Price Index (RPI) inflation is above 4%, rental growth will lag in real terms, it contributes towards rents remaining affordable for tenant operators and enhances the security of Target’s income.

Exhibit 4: Key contractual rent statistics

September 2021

December 2021

March 2021

Q122

Q222

Q322

Like-for-like uplift

0.6%

1.0%

0.8%

Acquisitions

0.7%

21.5%

0.7%

Asset management/development completions

3.6%

1.1%

-0.3%

Total increase in contractual rent

4.9%

23.6%

1.2%

Contractual rent (£m)

43.2

53.4

54.1

Number of completed rent reviews

14.0%

17

20.0%

Average uplift on completed rent reviews

3.3%

4.0%

3.9%

Source: Target Healthcare REIT

While contractual rent continued to increase in Q322, passing rent declined slightly to £49.7m (Q222: £51.1m) as a result of short-term lease incentives provided as part of the re-tenanting of four homes in the period (see below).

Well-charted path to dividend cover

We expect the current dip in rent collection, to 92% in Q322 versus 96% in Q222, to be short-lived with no material impact on Target’s expected progression to full dividend cover on an adjusted (‘cash’) earnings basis,5 discussed in detail in our April update. We now assume that rent collection remains at 92% until end-June 2022 (end-FY22) and that uncollected rents for Q322 and Q422 are provided for in full (8% of passing rents). This takes the FY22 provisioning rate to 6.6% (c £3.3m) compared with 2.9% (c £1.4m) previously. We expect a sharp decline from FY23 as asset management actions take effect, continuing to expect a return to a background level, prudently assumed at 2.5% of rents receivable. Target’s expected path to full dividend cover includes the impact of continuing capital deployment, a full contribution from previous acquisitions, development completions, rent reviews and economies of scale. Including the April commitment to fund the development of a new home in Kent, Target says that it now has c £67m of capital available for further deployment, allowing for existing commitments, fully allocated to board-approved deals in due diligence. Including the deployment of this available capital and completion of the assets that are under development (including the Kent commitment), we estimate that the Q322 annualised contractual rent of £54.1m will increase to c £64m. We forecast FY24 dividend cover of 99%, based on continuing growth in dividends. We had previously forecast 100% but have increased our interest cost assumption in line with current market rates.

  Compared with EPRA earnings, adjusted earnings exclude non-cash IFRS rent smoothing adjustments but include licence fee income in respect of forward-funded developments.

H122 dividend cover was 85% on an EPRA earnings basis and 65% on an adjusted earnings basis. Excluding the £0.8m of non-recurring income in Q3, the net £8.2m of adjusted earnings compares with £10.5m of dividends, suggesting 78% cover. Like H122, including undisclosed adjustments, EPRA dividend cover will have been higher.

Well placed to manage risks in an inflationary environment

Also discussed in our April 2022 update, Target’s long WAULT of more than 27 years, combined with upward-only annual RPI-linked (96% of income) and fixed (4%) contractual rent uplifts, provides significant income visibility and protection against inflation. Rent uplifts are typically capped at c 4% with a floor of c 2% and, although rent growth will lag in real terms while RPI inflation is above 4%, this contributes towards rents remaining affordable for tenant operators and enhances the security of Target’s income. Across the sector the growth in average fees charged has tracked or exceeded inflation over the past c 20 years and we expect improving home occupancy to further assist tenant operators in meeting the inflationary challenge and providing an offset to the gradual withdrawal of government financial support that was put in place at the peak of the pandemic.

The new £100m fixed-rate funding facility that was agreed in November 2021 significantly increased Target’s protection against the prospect of further interest rate increases. Total debt facilities amounted to £320m, of which c £223m had been drawn at end-Q322. Including interest rate swaps, £180m of the drawn borrowings had been fixed at an all-in rate of 3.22% (including amortisation of arrangement costs) at least until November 2025 and mostly (£150m) until January 2032. On the drawn element of floating rate borrowing, priced at a margin over the SONIA benchmark rate, we have increased our debt cost assumption in line with the recent rise in market interest rates.

Forecasts and valuation

Our forecasts are updated for the increase in FY22 rent provisioning and, to a lesser extent, for the increase in the cost of floating rate debt due to higher market interest rates. FY22e adjusted earnings and adjusted EPS are both reduced by 10% to £29.9m and 5.0p respectively. Our FY23 and FY24 forecasts are unaffected by the increase in FY22 provisioning, which we expect to be short-lived, with adjusted earnings and adjusted EPS c 0.7% lower as a result of the increased borrowing cost assumption.

Exhibit 5: Forecast revisions

Rental income (£m)

Adjusted net earnings (£m)

Adjusted EPS (p)

EPRA NAV/share (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

06/22e

59.5

59.5

0.0

33.3

29.9

-10.1

5.6

5.0

-10.1

111.7

111.4

-0.3

6.76

6.76

0.0

06/23e

73.2

73.2

0.0

40.7

40.4

-0.7

6.6

6.5

-0.7

116.1

115.7

-0.3

6.86

6.86

0.0

06/24e

77.6

77.6

0.0

43.2

42.9

-0.7

7.0

6.9

-0.7

119.4

119.0

-0.3

6.96

6.96

0.0

Source: Edison Investment Research

The current year DPS target of 6.76p (up 0.6% versus FY21) represents an attractive yield of 5.8%, while the shares trade at a small c 3% premium to Q322 NAV per share of 111.8p. This compares with an average premium since IPO of 7% and a high of c 11%.

Exhibit 6: P/NAV history

Source: Refinitiv. Note: Prices as at 20 May 2022. Company NAV data.

In Exhibit 7, we show a summary of the performance and valuation of a group of REITs that we consider to be Target’s closest peers within the broad and diverse commercial property sector. The group is invested in the primary healthcare, supported housing and care home sectors, all targeting stable, long-term income growth derived from long lease exposures.

Exhibit 7: Peer valuation and performance summary

WAULT*
(years)

Price
(p)

Market cap (£m)

P/NAV**
(x)

Yield***
(%)

Share price performance

1 month

3 months

ytd

12 months

3 years

Assura

12

67

1990

1.15

4.3

1%

11%

-12%

-8%

19%

Civitas Social Housing

23

83

507

0.76

6.6

-5%

-4%

-21%

-27%

-19%

Home REIT

N/A

270

662

1.12

2.1

-7%

2%

12%

7%

N/A

Impact Healthcare

19

126

486

1.12

5.1

1%

14%

16%

13%

23%

Primary Health Properties

12

145

1930

1.24

4.3

-2%

9%

-5%

-5%

25%

Residential Secure Income

N/A

102

189

0.97

4.9

-6%

0%

14%

6%

9%

Triple Point Social Housing

26

89

356

0.82

5.9

1%

0%

-21%

-15%

-16%

Average

18

1.03

4.8

-3%

5%

-2%

-4%

7%

Target Healthcare

27

116

717

1.03

5.8

2%

7%

1%

2%

1%

UK property sector index

1,751

-9%

-4%

9%

1%

-4%

UK equity market index

4,084

-2%

-2%

11%

2%

-3%

Source: company data, Refinitiv pricing at 20 May 2022. Note: *Weighted average unexpired lease term. **Based on last reported NAV/NTA. ***Based on trailing 12-month DPS declared.

Target’s share price yield is clearly above the group average, while its P/NAV is in line with the average. There are several factors that suggest a continuing positive outlook for the shares including a combination of the WAULT with no break clauses and upward-only, triple net rents, mostly linked to RPI. These provide considerable visibility over a growing stream of contracted rental income, supported by the resilience of tenants through the pandemic and their long track record of being able to pass through inflationary cost pressures to fee increases.


Exhibit 8: Financial summary

Year to 30 June (£m)

2017

2018

2019

2020

2021

2022e

2023e

2024e

INCOME STATEMENT

Rent revenue

17.8

22.0

27.9

36.0

41.2

49.5

61.4

65.5

Movement in lease incentive/fixed rent review adjustment

5.1

6.3

6.4

8.2

8.7

10.0

11.9

12.1

Rental income

22.9

28.4

34.3

44.2

49.9

59.5

73.2

77.6

Other income

0.7

0.0

0.0

0.0

0.1

0.1

0.0

0.0

Total revenue

23.6

28.4

34.3

44.3

50.0

59.6

73.2

77.6

Gains/(losses) on revaluation

1.6

6.4

6.2

1.7

9.4

4.1

17.7

8.6

Realised gains/(losses) on disposal

0.0

0.0

0.0

0.6

1.3

0.0

0.0

0.0

Management fee

(3.8)

(3.7)

(4.7)

(5.3)

(5.8)

(7.4)

(7.8)

(8.1)

Other expenses

(1.2)

(1.5)

(2.7)

(4.3)

(5.3)

(6.4)

(4.0)

(4.2)

Operating profit

20.1

29.6

33.0

37.0

49.6

49.9

79.2

74.0

Net finance cost

(0.8)

(2.0)

(3.1)

(5.4)

(5.7)

(6.6)

(9.8)

(10.4)

Profit before taxation

19.3

27.6

29.9

31.6

43.9

43.3

69.4

63.6

Tax

(0.2)

0.0

0.0

0.0

0.0

(0.0)

0.0

0.0

IFRS net result

19.1

27.6

29.9

31.6

43.9

43.3

69.4

63.6

Adjust for:

Gains/(losses) on revaluation

(2.2)

(6.4)

(6.2)

(1.7)

(9.5)

(4.1)

(17.7)

(8.6)

Other EPRA adjustments

0.4

0.0

0.7

0.5

(0.3)

0.0

0.0

0.0

EPRA earnings

17.3

21.2

24.5

30.5

34.0

39.2

51.6

55.0

Adjust for fixed/guaranteed rent reviews

(5.1)

(6.3)

(6.4)

(8.2)

(8.7)

(10.0)

(11.9)

(12.1)

Adjust for development interest under forward fund agreements

0.0

0.3

2.0

1.0

0.6

0.7

0.6

0.0

Adjust for performance fee

1.0

0.6

0.0

0.0

0.0

0.0

0.0

0.0

Group adjusted earnings

13.2

15.7

20.1

23.2

26.0

29.9

40.4

42.9

Average number of shares in issue (m)

252.2

282.5

368.8

440.3

475.4

599.3

620.2

620.2

IFRS EPS (p)

7.58

9.77

8.10

7.18

9.23

7.22

11.19

10.25

EPRA EPS (p)

6.87

7.50

6.63

6.92

7.16

6.54

8.32

8.87

Adjusted EPS (p)

5.23

5.54

5.45

5.27

5.46

4.99

6.52

6.92

Dividend per share (declared)

6.28

6.45

6.58

6.68

6.72

6.76

6.86

6.96

Dividend cover (EPRA earnings)

1.09

1.11

1.00

1.00

1.05

0.93

1.21

1.27

Dividend cover (Adjusted earnings)

0.83

0.82

0.82

0.76

0.80

0.71

0.95

0.99

BALANCE SHEET

Investment properties

266.2

362.9

469.6

570.1

629.6

906.2

949.8

974.2

Other non-current assets

4.0

27.1

37.6

46.0

54.8

66.4

78.2

90.4

Non-current assets

270.2

390.1

507.2

616.1

684.4

972.6

1,028.1

1,064.6

Cash and equivalents

10.4

41.4

26.9

36.4

21.1

17.2

16.7

19.3

Other current assets

25.6

3.4

4.3

11.2

12.9

12.9

8.7

7.9

Current assets

36.0

44.8

31.2

47.6

34.0

30.1

25.4

27.2

Bank loan

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(279.4)

(300.0)

(315.6)

Other non-current liabilities

(4.0)

(4.7)

(7.1)

(6.4)

(6.8)

(9.6)

(10.6)

(11.3)

Non-current liabilities

(43.3)

(68.9)

(113.5)

(156.5)

(134.7)

(289.0)

(310.7)

(326.9)

Trade and other payables

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.1)

(24.2)

(25.6)

Current Liabilities

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.1)

(24.2)

(25.6)

Net assets

256.9

358.6

413.1

494.1

565.2

691.6

718.6

739.2

Adjust for derivative financial liability

0.0

0.1

0.7

0.2

(0.3)

(0.9)

(0.9)

(0.9)

EPRA net assets

256.9

358.7

413.8

494.3

564.9

690.7

717.7

738.2

Period end shares (m)

252.2

339.2

385.1

457.5

511.5

620.2

620.2

620.2

IFRS NAV per ordinary share

101.9

105.7

107.3

108.0

110.5

111.5

115.9

119.2

EPRA NAV per share

101.9

105.7

107.5

108.1

110.4

111.4

115.7

119.0

EPRA NAV total return

7.5%

10.1%

7.8%

6.8%

8.4%

6.9%

10.0%

8.9%

CASH FLOW

Cash flow from operations

4.4

23.6

20.5

25.6

29.2

41.7

51.9

54.9

Net interest paid

(0.6)

(1.4)

(2.3)

(4.1)

(4.2)

(6.0)

(9.2)

(9.8)

Tax paid

(0.5)

(0.1)

0.0

(0.1)

(0.0)

(0.0)

0.0

0.0

Net cash flow from operating activities

3.2

22.1

18.2

21.5

25.0

35.7

42.7

45.1

Purchase of investment properties

(63.3)

(90.0)

(99.6)

(117.5)

(51.4)

(274.6)

(25.9)

(15.8)

Disposal of investment properties

0.0

0.0

0.0

14.1

7.8

1.0

5.0

1.3

Net cash flow from investing activities

(63.3)

(90.0)

(99.6)

(103.4)

(43.6)

(273.6)

(20.9)

(14.5)

Issue of ordinary share capital (net of expenses)

0.0

91.7

48.9

78.2

58.3

122.5

0.0

0.0

(Repayment)/drawdown of loans

20.9

26.0

42.0

44.0

(22.0)

152.8

20.0

15.0

Dividends paid

(15.6)

(17.4)

(23.6)

(29.2)

(31.5)

(39.8)

(42.4)

(43.0)

Other

0.0

(1.5)

(0.3)

(1.6)

(1.5)

(1.5)

(0.0)

0.0

Net cash flow from financing activities

5.3

98.8

67.0

91.4

3.3

233.9

(22.4)

(28.0)

Net change in cash and equivalents

(54.7)

31.0

(14.5)

9.5

(15.3)

(3.9)

(0.6)

2.6

Opening cash and equivalents

65.1

10.4

41.4

26.9

36.4

21.1

17.2

16.7

Closing cash and equivalents

10.4

41.4

26.9

36.4

21.1

17.2

16.7

19.3

Balance sheet debt

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(279.4)

(300.0)

(315.6)

Unamortised loan arrangement costs

(0.7)

(1.8)

(1.6)

(1.9)

(2.1)

(3.3)

(2.7)

(2.1)

Net cash/(debt)

(29.6)

(24.6)

(81.1)

(115.6)

(108.9)

(265.5)

(286.1)

(298.5)

Gross LTV

14.2%

17.1%

21.6%

24.9%

19.2%

29.3%

29.7%

30.1%

Net LTV

10.5%

6.4%

16.2%

18.9%

16.1%

27.5%

28.0%

28.2%

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Target Healthcare REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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United Kingdom

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United States of America

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Target Healthcare REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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