Vaccine roll-out adds further confidence

Target Healthcare REIT 11 February 2021 Update
Download PDF

Target Healthcare REIT

Vaccine roll-out adds further confidence

Company update

Real estate

11 February 2021

Price

116p

Market cap

£531m

Net debt (£m) at 31 December 2020

143.7

Net LTV at 31 December 2020

22.2%

Shares in issue

457.5m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.2

0.9

(6.1)

Rel (local)

(7.6)

(5.1)

(42.9)

52-week high/low

123.5p

73.2p

Business description

Target Healthcare REIT invests in modern, purpose-built residential care homes in the UK let on long leases to high-quality care providers. It selects assets according to local demographics and intends to pay increasing dividends underpinned by structural growth in demand for care.

Next events

Q221 DPS paid

26 February 2021

H121 results

Expected March 2021

Analyst

Martyn King

+44 (0)20 3077 5745

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

In a recent virtual property tour for investors, Target Healthcare REIT provided a positive assessment of its tenants' performance with managing the pandemic and the contribution that its modern, purpose-built homes make in supporting them. Tenant performance and rent cover remains resilient and robust rent collection supports the increasing DPS. The rapid roll-out of the vaccinations across care homes should be a significant factor in home operators rebuilding occupancy in coming months.

Year end

Revenue (£m)

Adjusted net
earnings* (£m)

Adjusted
EPS*(p)

EPRA NAV/
share (p)

DPS
(p)

P/NAV/
share (x)

Yield
(%)

06/18

28.4

15.7

5.54

105.7

6.45

1.10

5.6

06/19

34.3

20.1

5.45

107.5

6.58

1.08

5.7

06/20

44.3

23.2

5.27

108.1

6.68

1.07

5.8

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.

Continuing growth in H121

COVID-19 cases within portfolio homes remain well below the April 2020 peak, representing just 2.1% of beds across 11 of the 73 operational homes at 1 February 2021. Average rent cover in mature homes has been stable at pre-COVID-19 levels (1.6x) and rent collection has continued to be robust in recent quarters, most recently 92%. The quarterly updates show continuing growth in NAV, recurring earnings and DPS, supported by inflation-indexed rental growth, acquisitions and development completions, and continuing strong investor demand for good-quality care homes. H121 NAV total return was a positive 3.2%. With a more certain sector outlook, c £35m was committed to new investments in H121, still moderate gearing (Q221 net LTV 22.2%) and increased debt headroom (with longer maturity), Target continues to evaluate acquisitions. We will review our forecasts with the interim results to include recent accretive portfolio growth as well as indications from the quarterly data of continuing rent provisioning in H121.

Sustainable long-term, inflation-linked income

The care home sector is driven by demographics rather than the economy, and a growing elderly population, combined with a shortage of quality homes, suggests a strong demand in years to come. Target puts a very strong focus on the quality and location of the assets as well as the operational capabilities and financial performance of tenants to generate stable, inflation-indexed, long-term income. It believes that modern, purpose-built homes with flexible layouts and high-quality residential facilities, including single-occupancy bedrooms complete with en-suite wet rooms, are more likely to provide sustainable returns, while also appealing to residents and allowing tenants to provide better and more effective care.

Valuation: Attractive indexed, long-term income

The 1.68p run rate of quarterly DPS (6.72p annualised) represents an attractive 5.8% yield with good prospects for DPS growth and supports a premium to NAV. At 1.07x (Q221 NAV) P/NAV is in line with the average since IPO but below the 1.19x peak.

Seeking sustainable levels of care and income

Target seeks to provide investors with stable and sustainable dividend income and to achieve this it invests in modern, purpose-built care homes, putting a strict focus on the quality of the physical assets and their location, and seeks good-quality tenants capable of providing strong levels of care, sustainably, over the long term. The COVID-19 (C-19) pandemic has put this strategy to the test and the evidence thus far shows a generally resilient operational and financial performance by tenant operators, with robust levels of rent collection maintained, and quarterly dividends uninterrupted and continuing to increase. In this note we briefly review C-19 related recent developments before providing a more detailed review of Target’s strategy, portfolio, financial performance and valuation.

Virtual property tour

On 20 January 2021 Target held a virtual property tour and updated on progress with C-19 vaccinations within the care homes it is invested in. The presentation may be viewed on the company’s website at www.targethealthcarereit.co.uk/investor-relations/reports-and-presentations/financial-reporting. The event was particularly timely given the recent rapid roll-out of the care home vaccination programme, a significant positive development for the sector, while widespread testing across homes now provides a detailed picture of the extent of C-19 infection, and it is now possible to look back and assess the performance of tenant care home operators in managing the operational and financial challenges that the pandemic represents. The presentation provided a positive assessment of its tenants’ performance with managing the pandemic and the contribution that Target’s modern, purpose-built homes make in supporting them. Modern home configuration and design, including en-suite wet room facilities and generous communal space, make it possible to comfortably isolate individual floors, parts of floors or even individual rooms, in order to control the spread of infection, safely support visiting and exercise, and provide good air quality.

Incidence of C-19 has recently remained below first wave

Data reported to Target by tenants, during bi-weekly calls, shows that while the incidence of C-19 within portfolio homes has followed the broader wave pattern observed within the wider community, the number of affected homes and the number of cases remain below the levels seen in the first wave of the pandemic. The most recent data as at 1 February 2021, updating on the presentation data, showed a further recent decline in confirmed C-19 cases to 2.1% of beds across 11 of the 73 operational homes in the portfolio, down from the April 2020 peak when suspected or confirmed cases represented 3.2% of beds across 32 homes. There is increased confidence in the current figures, which are derived from mass testing. Most of the operators have been cautious about admitting residents and were quick to implement lockdown procedures. The data indicate that by successfully minimising infection cases, the spread of infection through homes was well-controlled, and that the measures taken have been increasingly effective.

Exhibit 1: Infections have been well controlled within portfolio homes

Source: Target Healthcare REIT

Average rent cover has been sustained despite the challenges

‘Rent cover’ is a key metric used by Target in monitoring and assessing the ability of individual homes and operators to sustainably support the rents that it expects from its portfolio. The ratio tracks operational cash earnings at the home level (before rent) with the agreed rent. Across the entire portfolio the average rent cover for mature homes has remained at c 1.6x throughout the past year despite the operational pressures, including reduced occupancy, faced by operator tenants. Mature homes are defined as those that have had the same operator for a three-year period or more and therefore excludes newly developed homes. Newly constructed homes typically require 18–36 months to build occupancy and rent cover.

From Target’s perspective, homes are fully let to the operators. For the operators, although the reduction in average occupancy within the homes, from a ‘normal’ c 90% across the portfolio ahead of the pandemic to less than 85%, is a clear negative for financial performance and rent cover, this has been offset by fee growth, non-essential cost containment, and government support measures for sector. The 85% occupancy shown in Exhibit 2 is taken from the September 2020 quarterly management data and based on subsequent regular interactions with the care homes the investment manager anticipates a further near-term decline during the final quarter of the year. Annual local authority fee increases (c one-third of residents within the portfolio are fully funded by local authorities or the NHS) came through promptly (and Target describes them as ‘fair’) while fees for privately funded residents have continued to outstrip inflation. Counterintuitively, operators are generally reporting lower staff costs (typically c 60% of all operating costs) where the prime driver appears to be the exceptional effort of full-time staff during the pandemic that has intentionally mitigated the need for high-cost agency staff from outside the homes. Certain non-essential expenditures (eg day-trips/outing for residents) have been curtailed.

Exhibit 2: Rent cover has been maintained despite pressures on occupancy

Source: Target Healthcare REIT

Vaccine roll-out a key step in rebuilding occupancy

As at 1 February, vaccinations had been made available to all to residents and staff in all of the group-owned care homes, with substantial uptake across each group. In addition to the immediate benefit to residents, staff and their families, the vaccination programme should be a key step in the process to rebuild occupancy. The demand for residential care is primarily driven by need and while those in need and their families may have the flexibility to defer admission, this may not be possible over the longer term. Home managers have been reporting a good level of enquiries and when combined with an easing in visitor restrictions, the vaccine roll-out should support an increase in admissions, although Target’s investment manager, perhaps cautiously, suggested that it may be late in the year before occupancy within the homes returns to normal.

Rent collection has remained robust and DPS growth continues

Rent collection has continued to be robust in recent quarters, demonstrating the overall stable and secure nature of the portfolio's cashflows. As at 1 February 2021, 92% of the rent due and payable in respect of the quarter had been collected, with the collection pattern remaining consistent with recent quarters.

While the portfolio overall is continuing to perform resiliently, there are obviously variations across 73 operational homes (76 including developments) that are let to 27 different tenants. The majority of recent and ongoing rent arrears relate primarily to two tenants across four of the homes. Two of these homes are relatively new, immature homes, operated by one of the tenants. Performance improvement was punctuated by C-19 but occupancy and trading are again improving towards the levels anticipated by the investment decision. The other two homes are mature homes that were acquired at yields that reflected the increased level of risk posed by the operator performance and, although delayed by C-19, Target is making progress to replace the operator. Changing tenants when required is part of the investment manager’s role as an engaged landlord and the successful FY20 re-tenanting of six assets (c 8% of rent roll) leased to Orchard Homes, preserving shareholder value and continuity of resident care, demonstrates the resilience of good-quality assets that will appeal to a range of tenant operators. The FY20 results included £2.1m in provisions for doubtful rental income and although the H121 results have not yet been published, our analysis of the quarterly updates suggests a similar level of provisioning (see page 6).

Continuing to grow and diversify

As at 31 December 2020 (end-Q221), Target’s portfolio was valued at £647.7m, comprising 76 properties, of which 73 were operational and three were pre-let sites being developed under forward-funding agreements, let to 27 different tenants. With an annualised contracted passing rent of £40.6m (£39.4m of annualised cash passing rent after adjusting for short-term lease incentives), the portfolio valuation reflected an EPRA topped-up net initial yield of 5.97%. The weighted average unexpired lease term (WAULT) of 28.7 years remained very high, the product of 30- to 35-year leases at inception and the low average age of the portfolio. All leases are fully repairing and insuring, and upwards-only, with the majority RPI-linked, subject to caps and collars, although some have fixed annual uplifts. The long WAULT and inflation-linked leases provide considerable visibility of long-term income growth.

Exhibit 3: Portfolio summary

Dec-20

Jun-20

Jun-19

Jun-18

Jun-17

H121

FY20

FY19

FY18

FY17

Properties

76

73

63

55

45

Beds

5,277

5,073

4,094

3,552

3,096

Tenants

27

27

24

21

16

Contracted rent (£m)

40.6

39.0

32.2

26.0

20.3

Portfolio value (£m)

647.7

617.6

500.9

385.5

266.2

WAULT

28.7 years

29.0 years

29.1 years

28.5 years

29.5 years

EPRA Topped-up net initial yield

5.97%

6.04%

6.26%

6.44%

6.75%

Source: Target Healthcare REIT data

Investment activity paused for a while as the effects if the first wave the pandemic were assessed, but recommenced in July 2020 with the £15.0m (including costs) acquisition of a new-build care home in Bicester, Oxfordshire. The high-quality, 66-bed, purpose-built asset is let to Ideal Carehomes, the group's largest tenant, on a 35-year, fully repairing and insuring, occupational lease that includes annual, upwards-only RPI-linked increases, subject to a cap and collar.

Two pre-let development sites have also been acquired subject to forward funding agreements:

In September 2020, a 72-bed care home in Chesterfield, Derbyshire, for a maximum commitment of £7.0m. The development commenced in November 2020 and is scheduled to take approximately 16 months to complete.

In November 2020, a 66-bed care home in Droitwich Spa, Worcestershire, for a maximum commitment of £14.4m. The home is expected to complete in the second half of 2021.

Both are pre-let to existing tenants of the group on 35-year, fully repairing and insuring, occupational leases that include annual, upwards-only RPI-linked increases, subject to caps and collars.

Also during H121, practical completion was reached on the £10m forward-funded development of an 80-bed care home in Burscough, Lancashire, let to Athena Healthcare, an existing tenant, on a 35-year lease with RPI-linked increases, subject to a cap and collar. Construction work continues on the c £10m forward-funded development at Rudheath in Cheshire, pre-let to L&M Healthcare, an existing tenant.

The investment market for high-quality, modern, fit-for-purpose assets that meet Target’s strict investment criteria remains very competitive. Strong investor appetite continues, with the best properties and sites attracting offers and transacting at pre-C-19 pandemic pricing. The investment manager is analysing and undertaking diligence on a number of potential acquisitions, with a combination of imminent, near-term and earlier-stage opportunities, but says that commitments to future acquisitions will continue to be considered carefully, taking into account both the market outlook and available capital. We discuss the recently increased, current debt funding headroom in the financial section below.

Continuing positive returns

Exhibit 4 summarises Target’s consistent growth in balance sheet, earnings and dividends since IPO. Despite the first impacts from COVID-19, this growth continued in the year to 30 June 2020 (FY20), with further progress in H121 (see quarterly commentary below).

Exhibit 4: Historical financial summary

£m unless stated otherwise

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

EARNINGS

FY14

FY15

FY16

FY17

FY18

FY19

FY20

Rental income

5.4

13.7

16.8

22.9

28.4

34.3

44.2

EPRA earnings

4.1

10.6

12.3

17.3

21.2

24.5

30.5

Adjusted earnings

2.7

7.3

9.0

13.2

15.7

20.1

23.2

EPRA earnings per share (p)

3.92

8.87

7.15

6.87

7.50

6.63

6.92

Adjusted earnings per share (p)

2.59

6.10

5.25

5.23

5.54

5.45

5.27

DPS (p)

6.00

6.12

6.18

6.28

6.45

6.58

6.68

Ongoing charge ratio

1.95%

1.58%

1.42%

1.48%

1.48%

1.52%

1.51%

BALANCE SHEET

Total assets

105.1

176.3

282.8

306.2

434.8

538.4

663.8

Portfolio at market value

83.2

143.7

210.7

282.0

385.5

500.9

617.6

Shareholders' equity

90.2

139.3

253.3

256.9

358.6

413.1

494.1

EPRA NAV per share (p)

94.7

97.9

100.6

101.9

105.7

107.5

108.1

Source: Target Healthcare REIT

During FY20 the equity base was increased by the £80m (gross) equity raise in September 2019 (Q120) with the proceeds directed towards further strong growth in the portfolio, although investment paused during the first wave of the pandemic. A total of £117m was invested in the acquisition of 12 care homes/sites. Rental income increased by c 29%, EPRA earnings by c 25% and adjusted earnings by c 15%. As noted above, rent collection both in FY20 and during H121 has remained robust but earnings were affected by £2.2m (FY19: £0.3m) of provisions taken against rent receivables. Despite this, DPS was well covered by EPRA earnings although on an adjusted earnings basis, Target’s preferred measure of ‘cash earnings’, it reduced to 76% compared with 82% in FY19. Adjusted earnings exclude the non-cash IFRS rent smoothing adjustments that are included within EPRA earnings and includes licence fee income earned on forward funding advances in respect of development properties that remain under construction.

Like-for-like rent growth was 1.5% during the year and was a key driver of the 2.8% increase in like-for-like property valuations, along with continuing yield compression. EPRA net asset value (NAV) per share increased to 108.1p from 107.5p and including dividends paid, NAV total return (change in NAV plus dividends paid but not reinvested) was 6.8%.

Exhibit 5: Quarterly performance analysis

£m unless stated otherwise

Sep-19

Dec-19

Mar-20

Jun-20

Full year

Sep-20

Dec-20

Half year

Q120

Q220

Q320

Q420

FY20

Q121

Q221

H121

Opening EPRA NAV

413.8

496.0

500.1

502.4

413.8

505.3

506.3

505.3

Property revaluation

2.7

5.9

3.2

2.7

14.6

2.3

4.1

6.4

Property acquisition costs & other capital items

(0.5)

(2.7)

(0.5)

0.0

(3.7)

(0.9)

(0.5)

(1.4)

Net gains/(losses) on investment property revaluation

2.3

3.2

2.7

2.7

11.0

1.4

3.7

5.0

Equity issuance

78.5

0.0

0.0

0.0

78.5

0.0

0.0

0.0

Movement in revenue reserve

5.5

5.5

5.9

5.5

22.4

5.9

5.9

11.9

Performance fee accrual

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Dividend paid

(6.3)

(7.6)

(7.6)

(7.6)

(29.3)

(7.6)

(7.7)

(15.3)

Cost of corporate restructure

0.0

0.0

(1.4)

0.0

(1.4)

0.0

(0.9)

(0.9)

Other

(0.0)

(0.2)

(0.1)

(0.5)

(0.8)

(0.1)

(0.1)

(0.2)

Closing EPRA NAV

493.7

494.6

494.2

494.3

494.3

493.9

494.8

494.8

Closing EPRA NAV per share (p)

107.9

108.1

108

108.1

108.0

108.2

Source: Target Healthcare REIT data, Edison Investment Research

Although Target is yet to report detailed financial results for H121, the unaudited quarterly reporting shows continuing growth in NAV, recurring earnings and dividends in the period. EPRA NAV has increased slightly from £494.3m at end-FY20 (the small difference from shareholders’ equity in Exhibit 4 relates to the EPRA add-back of swap liabilities) or 108.1p to £494.8m/108.2p. The aggregate quarterly movement in the revenue reserve during H121 is c £11.9m, an increase on both H120 and H220. The movement in the revenue reserve is broadly equivalent to adjusted earnings, except that adjusted earnings also includes licence fees earned on forward-funding extended in respect of development assets under construction. EPRA earnings includes the IFRS rent smoothing adjustments that are yet to be reported.

Based on our analysis of rent roll, disclosure on rent collection and management’s commentary in respect of tenant performance, we assume that the H121 movement in the revenue reserve includes further provisions in respect of rent receivables, which we estimate at c £2m. The reported movement in H121 revenue reserve represents just under 80% of dividends paid in the period but adjusted for our estimate of H121 rent provisions would increase to more than 90%. Although the provisions are a near-term drag, recent commentary from the investment manager suggests that progress is being made with resolving the operational issues at the small number of homes that are the main contributors. The positive movement in H121 NAV is driven by continuing rent indexation and a further slight tightening in valuation yields driven by continuing strong investment interest in good-quality care home assets. Including DPS paid the H121 NAV total return was 3.2%. The quarterly run rate of dividends was again increased for the current year to 1.68p or an annualised 6.72p (FY20: 6.68p).

We will update forecasts with the interim results

We will update our forecasts with the interim results, which last year were published in March. Our last published forecasts, shown in detail in the financial summary in Exhibit 12 at the back of this note (and explained in our last published note), are yet to reflect the H121 investment activity detailed above (the acquired home at Bicester and the Chesterfield and Droitwich Spa developments) and have not been updated to reflect the H121 performance implied in the quarterly reports. Compared with our last published forecasts, H121 investments increase annualised rental income on a fully developed basis, while rent provisioning will act as a drag on income. By way of illustration, if one were to apply the current portfolio EPRA topped-up net initial yield of c 6% to the c £36m of disclosed H121 investment commitment, this would represent additional annualised rental income of more than £2m. This is broadly equivalent to our estimate of H121 rent provisioning. More provisions are possible in H221, although the vaccine roll-out represents a positive indicator for future tenant financial performance, and Target’s rent collection, across the portfolio.

Funding available for further growth

To fund portfolio growth since IPO, Target has steadily increased its capital resources, both equity and debt capital, sufficient to take advantage of opportunities in the market while avoiding excessive gearing and mitigating any drag on returns. The company targets moderate gearing with a medium-term target of around 25% (borrowings to gross assets) with a maximum permitted level of 35%.

The last equity fund-raising was in September 2019 (Q120) when £80m (gross) was raised in an oversubscribed issue of 72.4m shares. The equity proceeds were quickly deployed but there remained considerable scope to re-gear the balance sheet with additional debt funding. The COVID-19 pandemic then slowed investment activity, leaving the balance sheet conservatively liquid and modestly geared. Recent investment activity has put additional capital to work and although the end-H121 gross loan to value ratio (LTV) of 25.0% is little different to end-FY20 (24.6%), the deployment of cash resources has seen the net LTV increase from 18.7% to 22.2% over the same period. As further debt is drawn to complete the existing forward funding commitments, we expect gross LTV to increase to c 25%. Additional debt facilities are in place to support further acquisition-led portfolio growth, but we would expect Target to seek additional equity funding in the medium term.

Exhibit 6: Balance sheet summary

Dec-20

Sep-20

Jun-20

(£m)

Q221

Q121

Q420

Investment properties at market value

647.7

637.5

617.6

Cash

18.3

17.5

36.4

Net current assets/(liabilities)

(9.2)

(9.1)

(7.7)

Bank loan

(162.0)

(152.0)

(152.0)

Net assets

494.8

493.9

494.3

Net debt

(143.7)

(134.5)

(115.6)

Gross LTV

25.0%

23.8%

24.6%

Net LTV

22.2%

21.1%

18.7%

Source: Target Healthcare REIT

During H121, drawn debt has increased from £152m to £162m and available debt facilities increased from £180m to £220m. The committed debt facilities comprise £80m of fully drawn fixed-rate term loan facilities and £140m of more flexible variable rate revolving credit facilities (£82m drawn at end-Q221), diversified across three lenders. The extension both in the quantum and tenor of the group's borrowings during Q221 was completed with a minimal increase in the ongoing interest costs in return for a significant lengthening of the weighted average term to expiry to 5.3 years (Q121: 4.0 years). The weighted average cost of drawn debt, including amortisation of loan arrangement fees, was 2.81% at end-Q221 versus 2.72% at end-Q121.

Exhibit 7: Summary of debt portfolio

Lender

Facility type

Facility

Term

Margin

RBC

Term loan & revolving credit facility

£70m*

Nov-25

SONIA + X%

HSBC

Revolving credit facility

£100m

Nov-23**

SONIA + X%

ReAssure

Term loan & revolving credit facility

£50m

Jan-32

Fixed 3.28%

Source: Target Healthcare REIT data. Note: *RBS facility comprises a £30m term loan and £40m revolving credit facility. **HSBC facility includes two one-year extension options subject to HSBC approval.

The changes to the HSBC and RBS facilities also address the required transition, by the end of 2021, away from Libor based loan rates towards the new Sterling Overnight Index Average (SONIA) benchmark. An existing hedge on the £30m term loan element of the RBS facility was closed out and replaced with a new SONIA-based interest rate swap, aligned with the new term loan. The one-off costs of the refinance reduced Q221 NAV growth by 0.2%. Post the refinancing, £80m of the debt facilities are fixed rate/hedged and £140m floating rate. All loans are secured against investment properties owned by the group with maximum LTV requirements of 50–60% and interest cover ratios of a minimum 300%. All of the covenants have been complied with during the past year.

Valuation: Growing DPS and scope for yield compression

Annualised DPS has increased in each year since IPO in 2013. The current quarterly run rate of DPS (1.68p) leaves the company on target for aggregate annual DPS of 6.72p in the current (FY21) financial year, representing a prospective yield of 5.8% and taking annual compound growth in DPS since 2014 to 1.63%. Based on the end-Q221 EPRA NAV per share of 108.2p, the P/NAV is 1.07x, broadly in line with the average since IPO of c 1.08x and below the peak of 1.19x. The only period of notable relative weakness in the P/NAV was at the start of the C-19 pandemic, although this has now retraced as tenant operators have generally shown themselves to have been both operationally and financially resilient in the face of the challenges that they have faced.

Exhibit 8: Consistent DPS growth since IPO, supported by inflation-indexed rent uplifts

Exhibit 9: Income returns have generally supported a premium to NAV

Source: Target Healthcare REIT data. Note: FY21e based on current quarterly run rate of DPS.

Source: Refinitiv price data and Target Healthcare REIT quarterly NAV per share data.

Exhibit 8: Consistent DPS growth since IPO, supported by inflation-indexed rent uplifts

Source: Target Healthcare REIT data. Note: FY21e based on current quarterly run rate of DPS.

Exhibit 9: Income returns have generally supported a premium to NAV

Source: Refinitiv price data and Target Healthcare REIT quarterly NAV per share data.

Exhibit 10 shows the consistently positive NAV total return history since IPO. The cumulative total return (adjusted for dividends paid but not assuming reinvestment of dividends) from IPO in March 2013 to 31 December 2020 (end-Q221) was 59.2% or an average annualised rate of 6.0%. Dividends accounted for c 80% of the total.

Exhibit 10: NAV total return history (no reinvestment of dividends paid)

FY14*

FY15

FY16

FY17

FY18

FY19

FY20

H121

Cumulative

Opening NAV per share (p)

98.0

94.7

97.9

100.6

101.9

105.7

107.5

108.1

98.0

Closing NAV per share (p)

94.7

97.9

100.6

101.9

105.7

107.5

108.1

108.2

108.1

DPS paid (p)

6.5

6.1

6.2

6.3

6.4

6.5

6.7

3.4

48.0

NAV total return in period

3.3%

9.7%

9.0%

7.5%

10.1%

7.8%

6.8%

3.2%

59.2%

Compound annual average return

6.0%

Source: Target Healthcare REIT data, Edison Investment Research. Note: Company published total returns are on a dividend reinvested basis and are higher. *22 January 2013 to 30 June 2014. **Adjusted for IPO costs.

In Exhibit 11 we show a comparison of Target with its nearest competitors. With investors attracted by secure, long-term yield, the group has performed relatively well over the past 12 months, outperforming the FTSE All Share Index and the broader UK property index. Long-term income, especially indexed to inflation, is attractive to investors provided the tenants are secure. The impact of tenant covenant strength can be seen in the valuations of the primary healthcare investors (Assura and PHP), which trade with below average dividends yields, resulting in above-average P/NAV ratings. In our view this is substantially a reflection that rents are c 90% funded by government, either directly or indirectly through GP rent reimbursement.

The Target dividend yield is well above the peer group average and its P/NAV broadly in line. The care home sector in which it invests should benefit from long-term, demographic-driven demand for care home places and a requirement for private capital investment to meet this need. In the near term, while care home operators have inevitably been challenged by the C-19 pandemic, the overall resilient operational and financial performance to date of Target’s tenant operators is highly reassuring, with rent collection to support dividends remaining robust. Looking forward, the rapid roll-out of the C-19 vaccination programme should provide significant support to operators as they seek to rebuild levels of occupancy. A successful test of the strength of tenant covenants during the exceptional challenge of the pandemic suggests good potential for Target’s yield differential to narrow versus the peer group average.

Exhibit 11: Peer performance and valuation comparison

WAULT
(years)

Price
(p)

Market cap
(£m)

P/NAV*
(x)

Annualised
yield (%)**

Share price performance

1 month

3 months

12 months

From 12M high

Assura

12

73

1762

1.30

3.9

-6%

-3%

-10%

-17%

Civitas Social Housing REIT

23

110

687

1.02

4.9

5%

1%

15%

-4%

Impact Healthcare

20

117

373

1.07

5.4

8%

11%

7%

0%

Primary Health Properties

13

147

1790

1.35

4.2

-5%

-3%

-9%

-12%

Residential Secure Income

23

91

156

0.87

5.5

0%

1%

-9%

-10%

Triple Point Social Housing REIT

25

108

380

1.02

4.8

0%

-2%

12%

-5%

Average

1.10

4.8

0%

1%

1%

-8%

Target Healthcare

29

116

531

1.07

5.8

1%

2%

-5%

-7%

FTSE EPRA REIT Index

1,588

1%

-1%

-18%

-20%

FTSE All-Share Index

3,724

-3%

4%

-11%

-11%

Source: Company data, Refinitiv prices as at 11 February 2021. Note: *Based on last published EPRA NAV per share. **Based on last declared quarterly DPS and annualised. Impact healthcare REIT has said that it will target an increase in FY21 DPS from 6.29p to 6.41p but has yet to declare a Q121 DPS.

Exhibit 12: Financial summary

Year to 30 June (£m)

2017

2018

2019

2020

INCOME STATEMENT

Rent revenue

17.8

22.0

27.9

36.0

Movement in lease incentive/fixed rent review adjustment

5.1

6.3

6.4

8.2

Rental income

22.9

28.4

34.3

44.2

Other income

0.7

0.0

0.0

0.0

Total revenue

23.6

28.4

34.3

44.3

Gains/(losses) on revaluation

1.6

6.4

6.2

1.7

Realised gains/(losses) on disposal

0.0

0.0

0.0

0.6

Total income

25.1

34.8

40.4

46.6

Management fee

(3.8)

(3.7)

(4.7)

(5.3)

Other expenses

(1.2)

(1.5)

(2.7)

(4.3)

Total expenditure

(5.0)

(5.2)

(7.4)

(9.6)

Profit before finance and tax

20.1

29.6

33.0

37.0

Net finance cost

(0.8)

(2.0)

(3.1)

(5.4)

Profit before taxation

19.3

27.6

29.9

31.6

Tax

(0.2)

0.0

0.0

0.0

Profit for the year

19.1

27.6

29.9

31.6

Average number of shares in issue (m)

252.2

282.5

368.8

440.3

IFRS earnings

19.1

27.6

29.9

31.6

Adjust for valuation changes

(2.2)

(6.4)

(6.2)

(1.7)

Other EPRA adjustments

0.4

0.0

0.7

0.5

EPRA earnings

17.3

21.2

24.5

30.5

Adjust for fixed/guaranteed rent reviews

(5.1)

(6.3)

(6.4)

(8.2)

Adjust for development interest under forward fund agreements

0.0

0.3

2.0

1.0

Adjust for performance fee

1.0

0.6

0.0

0.0

Group adjusted earnings

13.2

15.7

20.1

23.2

IFRS EPS (p)

7.58

9.77

8.10

7.18

EPRA EPS (p)

6.87

7.50

6.63

6.92

Adjusted EPS (p)

5.23

5.54

5.45

5.27

Dividend per share (declared) (p)

6.28

6.45

6.58

6.68

Dividend cover

0.83

0.82

0.82

0.76

BALANCE SHEET

Investment properties

266.2

362.9

469.6

570.1

Other non-current assets

4.0

27.1

37.6

46.0

Non-current assets

270.2

390.1

507.2

616.1

Cash and equivalents

10.4

41.4

26.9

36.4

Other current assets

25.6

3.4

4.3

11.2

Current assets

36.0

44.8

31.2

47.6

Bank loan

(39.3)

(64.2)

(106.4)

(150.1)

Other non-current liabilities

(4.0)

(4.7)

(7.1)

(6.4)

Non-current liabilities

(43.3)

(68.9)

(113.5)

(156.5)

Trade and other payables

(6.0)

(7.4)

(11.8)

(13.1)

Current Liabilities

(6.0)

(7.4)

(11.8)

(13.1)

Net assets

256.9

358.6

413.1

494.1

Adjust for derivative financial liability

0.0

0.1

0.7

0.2

EPRA net assets

256.9

358.7

413.8

494.3

Period end shares (m)

252.2

339.2

385.1

457.5

IFRS NAV per ordinary share

101.9

105.7

107.3

108.0

EPRA NAV per share

101.9

105.7

107.5

108.1

CASH FLOW

Cash flow from operations

4.4

23.6

20.5

25.6

Net interest paid

(0.6)

(1.4)

(2.3)

(4.1)

Tax paid

(0.5)

(0.1)

0.0

(0.1)

Net cash flow from operating activities

3.2

22.1

18.2

21.5

Purchase of investment properties

(63.3)

(90.0)

(99.6)

(117.5)

Disposal of investment properties

0.0

0.0

0.0

14.1

Net cash flow from investing activities

(63.3)

(90.0)

(99.6)

(103.4)

Issue of ordinary share capital (net of expenses)

0.0

91.7

48.9

78.2

(Repayment)/drawdown of loans

20.9

26.0

42.0

44.0

Dividends paid

(15.6)

(17.4)

(23.6)

(29.2)

Other

0.0

(1.5)

(0.3)

(1.6)

Net cash flow from financing activities

5.3

98.8

67.0

91.4

Net change in cash and equivalents

(54.7)

31.0

(14.5)

9.5

Opening cash and equivalents

65.1

10.4

41.4

26.9

Closing cash and equivalents

10.4

41.4

26.9

36.4

Balance sheet debt

(39.3)

(64.2)

(106.4)

(150.1)

Unamortised loan arrangement costs

(0.7)

(1.8)

(1.6)

(1.9)

Net cash/(debt)

(29.6)

(24.6)

(81.1)

(115.6)

Gross LTV

14.2%

17.1%

21.6%

24.9%

Net LTV

10.5%

6.4%

16.2%

18.9%

Source: Target Healthcare REIT historical data, Edison Investment Research forecasts

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 £49,500 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 2021 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

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 £49,500 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 2021 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

Share this with friends and colleagues