Target Healthcare REIT — Capital deployment and positive returns

Target Healthcare REIT (LSE: THRL)

Last close As at 27/03/2024

GBP0.82

−1.50 (−1.81%)

Market capitalisation

GBP515m

More on this equity

Research: Real Estate

Target Healthcare REIT — Capital deployment and positive returns

Target healthcare REIT has fully deployed the proceeds of the September equity raise, including the acquisition of a significant portfolio of modern, purpose-built homes with a well-established trading record. Enhanced by the recent £100m long-term fixed rate institutional debt facility, remaining capital resources are fully allocated to an identified pipeline of further opportunities. Meanwhile, the Q222 report shows continuing positive accounting returns, driven by inflation-linked rental uplifts.

Martyn King

Written by

Martyn King

Director, Financials

Elderly care image

Real Estate

Target Healthcare REIT

Capital deployment and positive returns

Q222 trading update

Real estate

3 February 2022

Price

115p

Market cap

£713m

Net debt (£m) as at 31 December 2021

173.8

Net LTV as at 31 December 2021

20.7%

Shares in issue

620.2m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.5)

(2.5)

(0.7)

Rel (local)

(3.7)

(5.0)

(13.5)

52-week high/low

125p

109p

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

Q222 DPS paid

25 Feb 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Target Healthcare REIT has fully deployed the proceeds of the September equity raise, including the acquisition of a significant portfolio of modern, purpose-built homes with a well-established trading record. Enhanced by the recent £100m long-term fixed rate institutional debt facility, remaining capital resources are fully allocated to an identified pipeline of further opportunities. Meanwhile, the Q222 report shows continuing positive accounting returns, driven by inflation-linked rental uplifts.

Year end

Rental income (£m)

Adj. net
earnings* (£m)

Adjusted
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV (x)

Yield
(%)

06/21

50.0

26.0

5.46

110.4

6.72

1.04

5.8

06/22e

58.4

33.4

5.63

111.2

6.76

1.03

5.9

06/23e

71.9

41.0

6.61

115.1

6.86

1.00

6.0

06/24e

76.5

42.2

6.81

119.6

6.96

0.96

6.1

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.

Q222 returns driven by dividends

Including the 18-home portfolio, Target deployed £173m to 19 assets during Q222 and has since acquired an additional home for £7.2m. The remaining available capital of £82m is all allocated to an identified pipeline in late-stage due diligence. Q222 acquisitions have already added more than 20% to the portfolio value and annualised rent roll, with the newly acquired portfolio alone generating £9.3m pa, and have further diversified the tenant base. Q222 NAV per share fell slightly to 110.8p (Q122: 111.3p) due to property acquisition costs but RPI-linked rental growth continues to drive underlying income and capital growth. Including the 1.69p dividend paid, the NAV total return in the period was a positive 1.0%, taking the H122 total to 3.4%.

Sustainably meeting a long-term need

The care home sector is driven by demographics rather than the economy and a growing elderly population and shortage of quality homes suggest strong demand in years to come. Rent collection remained robust during the pandemic and operators have experienced recovering occupancy over several months, albeit recently slowed by the spread of the Omicron variant. Target is unwavering in its focus on asset quality (along with location and the operational and financial performance of tenants). It believes modern, purpose-built homes with flexible layouts and high-quality residential facilities are key to providing sustainable, long-duration inflation-linked income; appealing to residents and allowing tenants to provide better and more effective care.

Valuation: Attractive indexed, long-term income

The FY22e DPS represents an attractive 5.9% yield, with good prospects for continuing DPS growth, and supports the c 3% premium to Q222 NAV. Consistently positive accounting returns, and a robust performance of tenant operators and rent collections through the COVID-19 pandemic, are positive indicators for a re-rating.

Capital deployment to drive growth while consistent returns continuing

Capital deployment to drive growth

In September 2021 Target completed an upsized £125m (gross) equity raise, the proceeds of which have already been more than deployed. Including available debt capital, enhanced by the recent £100m fixed rate long-term debt facility, and allowing for all capital commitments, Target estimates that £82m of capital remains available. This is all allocated to identified investments in late-stage due diligence. Completed and future capital deployment will be a significant driver of earnings growth and dividend cover, and we forecast that by FY24 DPS will have increased further and will be effectively fully covered1, as acquisitions and development projects fully contribute to income and earnings.

We forecast FY24 dividends to be covered 127% by EPRA earnings and 98% by Adjusted earnings.

The £173m deployed during Q222 comprised the 18-home portfolio and the acquisition of a pre-let development site in Weymouth for a maximum commitment of £14.3m. It has since completed the acquisition of an operational home in greater Manchester for £7.2m. In aggregate, these acquisitions bring five new tenants to the group (now 33) and increase the number of homes to 99, of which four are under development.

The portfolio of 18 operational care homes adds more than 1,200 beds and generates annual contracted rent of £9.3m, 100% of which has been collected throughout the pandemic. All the properties are purpose-built care homes with an average age of c 11 years providing high-quality modern facilities including full ensuite provision, the vast majority of which (96%) benefit from wet rooms. The portfolio is spread across eight tenants, three of which are new to Target, including national operator Barchester Healthcare, as well as two regional operators.

Target Fund Managers, the investment manager for the group, has unparalleled knowledge of the individual assets within the portfolio, having sourced 17 out of the 18 care homes on behalf of the vendor and provided asset management services over the past 11 years. The properties each benefit from long-term occupational leases with RPI-linked caps and collars, with a weighted average unexpired lease term of approximately 22 years. The commercial terms of each of the occupational leases are consistent with equivalent leases in place across the group.

It is expected that the development site in Weymouth will reach practical completion in June 2022, providing 66 beds. Upon completion it will be leased to experienced, regional operator Chanctonbury Healthcare, a new tenant to the group, on a 35-year, full repairing and insuring lease.

The modern, purpose-built care home acquired in Westhoughton, greater Manchester has been trading for seven years and Target notes an attractive track record of care/service, occupancy and profitability. It will be operated by Harbour Healthcare, new to the home and a new tenant to the group, and comprises 55 bedrooms with full ensuite facilities. The property is leased on a 35-year term with RPI-linked increases, subject to a cap and collar.

Further details on the Q222 report

The 1.0% Q222 NAV2 total return3 takes the H122 total to 3.4%. Adjusting for the Q222 property acquisition costs incurred, we estimate the Q222 total return would have been 2.2%. 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 6.0%, of which c 80% reflects dividends paid.

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

Change in net asset value 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

H122

Sep-21

Dec-21

Opening NAV (p)

110.4

111.3

110.4

Closing NAV

111.3

110.8

110.8

Dividends paid (p)

1.68

1.69

3.37

NAV total return

2.3%

1.0%

3.4%

Source: Target Healthcare REIT data, Edison Investment Research

The Q222 NAV movement reflects a positive revaluation movement slightly ahead of acquisition costs, with dividends paid exceeding the movement in revenue reserves. The difference between the movement in revenue reserves and dividends paid is not equivalent to the dividend cover ratio, which may be based on EPRA earnings or adjusted earnings. EPRA earnings includes non-cash IFRS smoothing adjustments while adjusted earnings excludes this but includes licence fee income earned in respect of development assets4. FY21 dividend cover was 80% on an EPRA earnings basis and 81% on an adjusted earnings basis. Our forecasts indicate 83% and 86% respectively in FY22, increasing steadily to full cover in FY24 as acquisitions and completed developments fully contribute to earnings. Target itself remains confident of achieving this despite near-term dividend cover having been depressed by the September 2021 equity issuance in advance of acquisitions.

Licence fee income is earned in respect of funds advanced to developers. It is non-cash but the economic benefit to Target is reflected in a discount, relating to the licence fee earned, to the acquisition price of the asset at completion.

Exhibit 2: Reconciliation of NAV movement

Q122

Q222

H122

Pence per share unless stated otherwise

Sep-21

Dec-21

Opening NAV

110.4

111.3

110.4

Revaluation gains on investment properties

0.8

1.4

2.2

Revaluation gains on properties under construction*

0.1

0.0

0.1

Net impact of acquisition costs

(0.1)

(1.3)

(1.4)

Net impact of equity issuance

0.4

0.0

0.4

Movement in revenue reserve

1.1

1.1

2.2

EPRA earnings excluding IFRS rent smoothing

Dividends paid

(1.4)

(1.7)

(3.1)

Closing NAV

111.3

110.8

110.8

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 portfolio value increased by 23.9% during Q222 (not including the Q322 greater Manchester acquisition) to £870.5m, mostly due to acquisitions (23.9%) but also a 1.3% like-for-like uplift driven by inflation-linked rental uplifts and 1.1% from investment into the development portfolio and capex.

The 23.6% increase in contracted rent to £53.4m (passing rent after lease incentives £51.1m) was also driven by acquisitions (21.5%) but also included inflation-linked rental uplifts (1.0%) and asset management initiatives (1.1%). The 17 rent reviews completed in the period were at an average 4.0% uplift, similar to the average rent cap across the portfolio.

Forecasts and valuation

We have made no changes to our forecasts, which include the full deployment of the remaining capital (comprising cash and undrawn debt) by the end of FY22, as detailed in our November update. The first full year rent contribution from all assumed investments and development completions is thus FY24.

Target estimates this available capital at £82m, all of which is allocated to late-stage pipeline opportunities. It says that all else being equal, on completion of these acquisitions and the developments currently in progress, the pro forma loan to value (LTV) would be 32%, up from 20.7% at end-Q222. Debt facilities of £320m include the new £100m long-term fixed rate facility put in place in November 2021 at an attractive blended rate of 3.14%. The new facility complements the group’s long-term leases, locking in a positive spread versus the asset yield, which should increase over time with inflation-linked rent increases. Fixed rate debt now represents more than 80% of drawn debt (£223m) and 56% of total debt facilities, including the flexible variable rate revolving credit facilities. The weighted average term of the drawn debt has increased to 7.4 years at end-Q222 versus 4.6 years at end-Q122, with a slight decrease in the average cost, to 3.09% from 3.16%.

The current year DPS target of 6.76p (up 0.6% vs FY21) represents an attractive yield of 5.9%. The shares trade at a modest c 3% premium to Q222 NAV per share of 110.8p, similar to the average since IPO but below the high of c 11%.

In Exhibit 3 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 3: 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

1961

1.14

4.4

-5%

-8%

-13%

-10%

17%

Civitas Social Housing

23

96

590

0.88

5.7

-1%

4%

-9%

-12%

-7%

Home REIT

24

119

666

1.13

2.1

-9%

3%

13%

12%

10%

Impact Healthcare

19

116

456

1.03

5.5

-3%

-2%

6%

4%

13%

Primary Health Properties

12

144

1913

1.24

4.3

-5%

-6%

-6%

-2%

23%

Residential secure Income

N/A

110

187

1.04

4.6

1%

11%

22%

22%

16%

Triple Point Social Housing

26

93

373

0.87

5.6

-4%

-4%

-17%

-16%

-12%

Average

19

1.05

4.6

-4%

0%

-1%

0%

9%

Target Healthcare

29

115

713

1.03

5.9

-3%

-2%

1%

-1%

0%

UK property sector index

1,943

-3%

4%

22%

24%

7%

UK equity market index

4,257

1%

3%

16%

15%

1%

Source: Company data, Refinitiv pricing at 2 February 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 slightly below 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 upwards-only, triple net rents, mostly linked to RPI, which provides considerable visibility over a growing stream of contracted rental income. Rent indexation also offers considerable protection against inflation at a time when inflation expectations are increasing.5 The resilience of Target’s business model during the pandemic, with no interruption to quarterly dividends, is a further positive indicator for the rating of the shares.

Most rents are capped and collared. Our expectation is that the average cap is c 4%, providing full inflation protection up to this level.

Exhibit 4: 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

48.7

59.9

63.8

Movement in lease incentive/fixed rent review adjustment

5.1

6.3

6.4

8.2

8.7

9.7

12.0

12.8

Rental income

22.9

28.4

34.3

44.2

49.9

58.4

71.9

76.5

Other income

0.7

0.0

0.0

0.0

0.1

0.0

0.0

0.0

Total revenue

23.6

28.4

34.3

44.3

50.0

58.4

71.9

76.5

Gains/(losses) on revaluation

1.6

6.4

6.2

1.7

9.4

1.6

15.9

16.2

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)

(7.7)

(7.9)

Other expenses

(1.2)

(1.5)

(2.7)

(4.3)

(5.3)

(3.2)

(3.6)

(3.7)

Operating profit

20.1

29.6

33.0

37.0

49.6

49.3

76.5

81.1

Net finance cost

(0.8)

(2.0)

(3.1)

(5.4)

(5.7)

(7.1)

(10.0)

(10.2)

Profit before taxation

19.3

27.6

29.9

31.6

43.9

42.3

66.5

70.9

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

42.3

66.5

70.9

Adjust for:

Gains/(losses) on revaluation

(2.2)

(6.4)

(6.2)

(1.7)

(9.5)

(1.6)

(15.9)

(16.2)

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

40.7

50.6

54.7

Adjust for fixed/guaranteed rent reviews

(5.1)

(6.3)

(6.4)

(8.2)

(8.7)

(9.7)

(12.0)

(12.8)

Adjust for development interest under forward fund agreements

0.0

0.3

2.0

1.0

0.6

2.4

2.3

0.3

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

33.4

41.0

42.2

Average number of shares in issue (m)

252.2

282.5

368.8

440.3

475.4

593.1

620.2

620.2

IFRS EPS (p)

7.58

9.77

8.10

7.18

9.23

7.13

10.73

11.43

EPRA EPS (p)

6.87

7.50

6.63

6.92

7.16

6.86

8.17

8.82

Adjusted EPS (p)

5.23

5.54

5.45

5.27

5.46

5.63

6.61

6.81

Dividend per share (declared)

6.28

6.45

6.58

6.68

6.72

6.76

6.86

6.96

Dividend cover

0.83

0.82

0.82

0.76

0.80

0.80

0.96

0.98

BALANCE SHEET

Investment properties

266.2

362.9

469.6

570.1

629.6

914.7

954.4

970.6

Other non-current assets

4.0

27.1

37.6

46.0

54.8

64.6

76.5

89.3

Non-current assets

270.2

390.1

507.2

616.1

684.4

979.3

1,030.9

1,059.9

Cash and equivalents

10.4

41.4

26.9

36.4

21.1

16.9

12.6

13.2

Other current assets

25.6

3.4

4.3

11.2

12.9

4.2

4.5

4.6

Current assets

36.0

44.8

31.2

47.6

34.0

21.1

17.1

17.8

Bank loan

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(278.2)

(299.0)

(299.8)

Other non-current liabilities

(4.0)

(4.7)

(7.1)

(6.4)

(6.8)

(9.8)

(10.6)

(11.0)

Non-current liabilities

(43.3)

(68.9)

(113.5)

(156.5)

(134.7)

(288.0)

(309.6)

(310.8)

Trade and other payables

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.5)

(24.4)

(25.2)

Current Liabilities

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.5)

(24.4)

(25.2)

Net assets

256.9

358.6

413.1

494.1

565.2

689.8

713.9

741.8

Adjust for derivative financial liability

0.0

0.1

0.7

0.2

(0.3)

(0.3)

(0.3)

(0.3)

EPRA net assets

256.9

358.7

413.8

494.3

564.9

689.6

713.7

741.6

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

111.2

115.1

119.6

EPRA NAV per share

101.9

105.7

107.5

108.1

110.4

111.2

115.1

119.6

EPRA NAV total return

7.5%

10.1%

7.8%

6.8%

8.4%

6.8%

9.6%

9.9%

CASH FLOW

Cash flow from operations

4.4

23.6

20.5

25.6

29.2

46.4

51.0

53.0

Net interest paid

(0.6)

(1.4)

(2.3)

(4.1)

(4.2)

(6.3)

(9.2)

(9.4)

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

40.2

41.8

43.6

Purchase of investment properties

(63.3)

(90.0)

(99.6)

(117.5)

(51.4)

(283.5)

(23.8)

0.0

Disposal of investment properties

0.0

0.0

0.0

14.1

7.8

7.3

0.0

0.0

Net cash flow from investing activities

(63.3)

(90.0)

(99.6)

(103.4)

(43.6)

(276.2)

(23.8)

0.0

Issue of ordinary share capital (net of expenses)

0.0

91.7

48.9

78.2

58.3

121.9

0.0

0.0

(Repayment)/drawdown of loans

20.9

26.0

42.0

44.0

(22.0)

150.0

20.0

0.0

Dividends paid

(15.6)

(17.4)

(23.6)

(29.2)

(31.5)

(40.0)

(42.4)

(43.0)

Other

0.0

(1.5)

(0.3)

(1.6)

(1.5)

0.0

(0.0)

0.0

Net cash flow from financing activities

5.3

98.8

67.0

91.4

3.3

231.8

(22.4)

(43.0)

Net change in cash and equivalents

(54.7)

31.0

(14.5)

9.5

(15.3)

(4.2)

(4.4)

0.6

Opening cash and equivalents

65.1

10.4

41.4

26.9

36.4

21.1

16.9

12.6

Closing cash and equivalents

10.4

41.4

26.9

36.4

21.1

16.9

12.6

13.2

Balance sheet debt

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(278.2)

(299.0)

(299.8)

Unamortised loan arrangement costs

(0.7)

(1.8)

(1.6)

(1.9)

(2.1)

(1.8)

(1.0)

(0.2)

Net cash/(debt)

(29.6)

(24.6)

(81.1)

(115.6)

(108.9)

(263.1)

(287.4)

(286.8)

Gross LTV

14.2%

17.1%

21.6%

24.9%

19.2%

28.8%

29.3%

28.5%

Net LTV

10.5%

6.4%

16.2%

18.9%

16.1%

27.1%

28.1%

27.2%

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

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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

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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Molten Ventures — A technology investment for all seasons

Driven by the marked rotation out of tech seen in January and in line with the sector, Molten’s share price has dropped over 30% since its peak of 1,180p in September 2021 and over 20% since the start of the year. However, in its trading update, management reiterated its target of 35% expected fair value growth in FY22, which we estimate implies c 25% NAV per share growth year-on-year, or FY22 NAV per share of c 929p per share (FY21 743p, H122 887p). At yesterday’s close, Molten traded at 0.84x our estimated FY22 NAV per share. It sees continued deal flow, with £259m invested YTD (10 months) including c £106m committed to 12 primary deals and c £153m committed to follow-ons. Management still sees a healthy pipeline of investment opportunities ahead. Cash proceeds from realisations reached £110m. Molten’s portfolio companies saw strong revenue growth in 2021, which is forecast to continue for 2022. Management is confident that, whatever the weather, Molten Ventures remains a technology investment for all seasons. The material discount to NAV should make Molten Ventures particularly attractive to potential investors.

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