Target Healthcare REIT — DPS growth from a sustainable base

Target Healthcare REIT (LSE: THRL)

Last close As at 19/04/2024

GBP0.77

1.00 (1.32%)

Market capitalisation

GBP475m

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Research: Real Estate

Target Healthcare REIT — DPS growth from a sustainable base

Target Healthcare REIT’s mid-year rebasing of DPS sought to establish a base for growth on a fully covered basis. With FY23 results in line with previous indications, and progress continuing, the company has increased the quarterly rate of DPS by 2% from Q124. With rent collection restored, we expect rental growth, development completions and fixed debt costs to support continued, progressive, fully covered dividend growth.

Martyn King

Written by

Martyn King

Director, Financials

Target Healthcare REIT_resized

Real Estate

Target Healthcare REIT

DPS growth from a sustainable base

FY23 results and outlook

Real estate

7 November 2023

Price

80.5p

Market cap

£499m

Net debt (£m) at 30 June 2023

214.6

Net LTV at 30 June 2023

24.7%

Shares in issue

620.2m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

10.0

(7.9)

Rel (local)

5.7

12.9

(8.3)

52-week high/low

87.4p

66.5p

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

AGM

29 November 2023

Analyst

Martyn King

+44 (0)20 3077 5700

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

Target Healthcare REIT’s mid-year rebasing of DPS sought to establish a base for growth on a fully covered basis. With FY23 results in line with previous indications, and progress continuing, the company has increased the quarterly rate of DPS by 2% from Q124. With rent collection restored, we expect rental growth, development completions and fixed debt costs to support continued, progressive, fully covered dividend growth.

Year end

Rental
income (£m)

Adjusted earnings* (£m)

Adjusted
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/22

63.9

30.2

5.0

112.3

6.76

0.72

8.4

06/23

67.7

37.2

6.0

104.5

6.18

0.77

7.7

06/24e

69.0

37.2

6.0

107.9

5.71

0.75

7.1

06/25e

73.8

39.3

6.3

111.5

5.84

0.72

7.3

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) throughout this report.

Operational improvement driving confidence

As presaged by Q4 data, FY23 adjusted earnings per share grew strongly and NAV was robust, increasing through H2 as rents continued to increase and property yields stabilised. FY23 DPS of 6.18 was 97% covered, with the rebased H2 DPS of 2.8p (annualised 5.6p) covered 1.07x compared with H1 DPS of 3.38p, covered 0.89x. For Q124, DPS is increased 2% to 1.428p and the company targets similar quarterly payments through the year. This confidence reflects the improvement in rent collection (above 99% in Q124 vs the FY23 average of 97%), the result of active asset management and improved trading conditions for tenants. Fee growth and rising occupancy have offset inflationary cost pressures on tenants and rent cover has reached a new high level. FY24e adjusted earnings is slightly reduced but covers DPS 1.05x. For FY25, we expect further fully covered DPS growth. Debt costs are fixed at 3.7% until November 2025 and, based on current market interest rates, we expect DPS to be fully covered post refinancing.

Profitably meeting a social need

A growing elderly population and the need to improve the existing estate point to continuing demand for modern, high-quality, ESG-compliant residential facilities. With its unwavering focus on asset quality, these are the homes in which Target invests. Not only are they appealing to residents (two-thirds private pay), but they also support operators in providing better, more efficient and more effective care. When let at sustainable rent levels in well-located areas, with strong supply/demand characteristics, they will always be attractive to existing or alternative tenants and are key to providing sustainable, long-duration, inflation-linked income.

Valuation: Attractive yield with DPS growing again

The 5.71p FY24 DPS target represents an attractive yield of 7.1% and we expect further growth on a fully covered basis. Property values have recently stabilised, yet the discount to the Q124 NAV per share of 105.6p is 24%.

Report summary

FY23 results were in line with the indications reported with the Q423 report published in August and covered in our update note and progress has continued in Q124. This report begins with a detailed commentary on our expectations for further earnings and dividend growth and attractive total returns. For those less familiar with the company, later in this report we discuss Target’s strategy and portfolio and its investment focus on high-quality, modern, purpose-built properties. Of particular note:

Structural and demographic support underpins Target’s core proposition of generating long-term, sustainable, income-driven returns. Its focus on asset quality is central to this and strongly enhances the social impact that the company generates.

Effectively, all rents are inflation-linked (typically capped and collared between 2% and 4%) with a weighted average unexpired lease term (WAULT) of 26 years.

The resilience of tenant operators has been demonstrated through the pandemic and the subsequent spike in inflation. The demand for care home places is effectively non-discretionary and largely uncorrelated with the economy.

Where tenant issues arise, high-quality assets remain attractive to a wide range of alternative operators.

Healthcare property has traditionally generated superior risk-adjusted returns relative to the broad sector. The long-duration, visible inflation-linked income prospects for high-quality care home assets remain attractive to investors and are supporting property values.

With the dividend re-based to a level that better reflects an environment of higher interest rates and capital costs and interest costs fixed, we expect organic rental growth (and development completions) to drive growth in earnings and fully covered dividends.

We start the report by reviewing our updated forecasts.

Development completions and rent growth to drive earnings acceleration in FY25

With many of the key financial data previously disclosed in the unaudited Q423 update and reflected in our previous note, the FY23 financial performance provided no surprises. The changes to our FY24 adjusted earnings forecasts are modest and primarily related to an increased assumption for loan arrangement fee amortisation and debt facility non-utilisation fees. Our dividend forecast is in line with the company’s target, slightly below our previous assumption, and is 1.05x covered (1.33x on an EPRA basis). We have also introduced a new FY25 forecast, with earnings growth driven by rent reviews and development completions. We forecast further growth in FY25 DPS of a little over 2%, with cover increasing to 1.09x.

Exhibit 1: Forecast summary

New forecast

Previous forecast

Forecast change

Forecast change

£m unless stated otherwise

FY24

FY25

FY24

FY25

FY24

FY25

FY24

FY25

Cash rental income

58.1

62.6

58.8

N/A

(0.6)

N/A

-1.1%

58.1

Credit loss allowance

(0.6)

(0.6)

(0.6)

N/A

0.0

N/A

(0.6)

Expenses

(10.6)

(10.9)

(10.5)

N/A

(0.0)

N/A

0.2%

(10.6)

Net finance costs

(10.6)

(11.7)

(10.0)

N/A

(0.7)

N/A

6.7%

(10.6)

Adjust for development interest under forward fund agreements

0.8

0.0

0.7

N/A

0.1

N/A

17.7%

0.8

Adjusted earnings

37.2

39.3

38.4

N/A

(1.2)

N/A

-3.2%

37.2

Adjust for development interest under forward fund agreements

(0.8)

(0.0)

(0.7)

N/A

(0.1)

N/A

(0.8)

Non-cash IFRS adjustments

10.8

11.2

10.9

N/A

(0.1)

N/A

10.8

EPRA earnings

47.2

50.5

48.6

N/A

(1.4)

N/A

-2.9%

47.2

EPRA EPS (p)

7.6

8.1

7.8

N/A

(0.2)

N/A

-2.9%

7.6

Adjusted EPS (p)

6.0

6.3

6.2

N/A

(0.2)

N/A

-3.2%

6.0

DPS declared (p)

5.712

5.840

5.800

N/A

(0.088)

N/A

-1.5%

5.712

EPRA DPS cover (x)

1.33

1.39

1.35

N/A

N/A

1.33

Adjusted DPS cover (x)

1.05

1.09

1.07

N/A

N/A

1.05

EPRA NTA per share (NAV) (p)

108

112

110.0

N/A

(2.0)

N/A

-1.8%

108

NAV total return

8.8%

8.7%

10.8%

N/A

N/A

8.8%

Source: Target Healthcare REIT FY23 data, Edison Investment Research forecasts

Rental growth is the key to our forecasts, offsetting higher financing costs and expenses in FY24 to maintain earnings, and driving earnings growth in FY25.

Like-for-like rental growth should continue to benefit from annual, inflation-indexed rent reviews2, mostly collared and capped at 2% and 4% respectively.3 Annual fixed uplifts apply to 1% of rental income. Rent reviews added 3.8% pa to contractual rental income in both FY23 and FY22 and we forecast a similar rate of increase in FY24 and FY25. Independent forecasts provided to the UK treasury4 indicate that annual RPI inflation is unlikely to fall below 4% before the end of 2024 and the average rate of annualised inflation through the 12 months to 30 June 2025 (FY25) should remain above 4%. We expect this to add somewhat more than £2m pa to annualised contracted rents in each of FY25 and FY25.

  1 Approximately 99% linked to the Retail Price Index (RPI) with the balance subject to fixed uplifts.

  2 Collars represent the minimum level of annual rent uplift and caps the maximum, irrespective of the actual level of inflation.

  3 HM Treasury – Forecasts for the UK economy: a comparison of independent forecasts, October 2023.

We forecast that the completion of forward-funded development projects (there are currently five under construction) will add an additional £4.0m to annual contracted rental income by end-FY25, well ahead of our estimate of the interest earned by Target in respect of the average funding extended for the construction costs during the build period.

Our forecasts for annualised contracted rent roll are shown in Exhibit 2 and, on a weighted basis, these are reflected in our rental income forecasts for FY24 and FY25. The contribution of the FY25 rent roll growth will not be fully reflected in the income statement until FY26.

Exhibit 2: Edison forecast development of annualised contracted rent roll

£m

FY24

FY25

Start-year annualised contracted rent roll

56.6

61.0

Rent reviews

2.1

2.3

Acquisitions

0.0

0.0

Disposals

0.0

0.0

Development completions

2.3

1.7

End-year annualised contracted rent roll

61.0

65.0

Source: Edison Investment Research

We have estimated the rent roll contribution from development completions based on an assumed initial yield of 6% on the development cost including land, although actual yields are likely to differ from project to project according to factors such as the property specification and locality, as well as market pricing at the time of commitment. The assumed yield is similar to the current portfolio EPRA topped-up net initial yield of 6.22%.

Our forecasts for expenses are very much driven by investment management fees, lined directly to average net asset value. Other expenses increase with inflation. Credit loss provisions at a rate of 1% of rents are included in our forecasts, in line with current rent collection and acknowledging that a minority of tenants will inevitably encounter challenges from time to time.

Stabilising property yields

With underlying earnings substantially distributed, our NAV forecasts are driven by our property valuation assumptions.

Strong care sector fundamentals and non-cyclical, long-term, inflation-protected income prospects have mitigated the impact of rising bond yields and economic uncertainty on property values. In contrast to the broader sector, investment demand for good-quality care home properties, especially modern, purpose-built properties with strong environmental credentials, has remained robust. In the year to June 2023, Target’s property values fell 4.1% on a like-for-like basis compared with c 19% across the broad UK property sector. The FY23 valuation movement reflected c 40bp (0.4%) of yield widening (£73m valuation reduction), partly offset by rental growth (£36m valuation increase).5 All of the net decline came in H1, with rental growth yield stabilisation in H2 reflected in 1.5% like-for-like valuation growth. Despite continued volatility in the bond market, the portfolio yield was unchanged in Q124, with rental growth driving a 0.8% like-for-like portfolio gain. Nonetheless, our forecasts imply only a modest (c 15bp or 0.15%) widening over the forecast period. Each 10bp (0.1%) increase in this implied yield is equivalent to a 2.3p reduction in forecast NAV per share, with a broadly equivalent increase in NAV from a lower yield.

  4 In aggregate, including the impact of acquisitions, disposals and development funding, the value of the investment portfolio declined by £43m.

Fee growth and occupancy improvements offset inflationary pressure on tenants

The operator sector, in general, is benefiting from increased occupancy, recovering from the pandemic, and strong fee growth, while a temporary relaxation of immigration rules for care workers is relieving some of the pressure on staffing, supporting the provision of care and reducing the cost of agency provision. In combination this has provided an effective offset to inflationary cost pressures.

Based on data gathered from its tenants, underlying resident occupancy in Target’s mature homes6 remains on a slow but consistently upward trajectory, to 85% at end-FY23 and 86% in Q124. During the pandemic, occupancy reached a low of c 74% in April 2021 and there is further room for growth until it reaches the c 90% level that was typical before the pandemic. Target says that many operators have been focused on admitting new residents at fee levels appropriate to the care package required, as opposed to prioritising occupancy in itself.

  5 Homes that have had the same operator for a three-year period or more, and therefore excluding newly developed homes not yet stabilised.

Privately funded weekly fees have continued to outstrip inflation, as has been the case over the past 25 years, and data collected from the company’s tenants show 13% growth in average weekly fees charged to residents in the year to June 2023. Target says that in this inflationary environment, increased fees have generally been recognised as inevitable to support critical care needs. Over the longer term, average weekly fee growth has more than matched inflation The company has observed that recent local authority fee awards have been mixed and that there are pockets of poor fee awards where authorities lack the ability or willingness to match inflationary cost pressures. 68% of residents within Target-owned homes are funded privately, wholly or through fee top-ups, ahead of the market as a whole (we estimate c 50%, with the balance of fee growth publicly sourced).

From its tenant data, Target estimates that staff costs have increased c 6% in FY23, with wage growth mitigated by lower use of expensive agency staff. Not surprisingly, staffing is the largest single cost item for the sector, typically accounting for c 60% of revenues. Energy costs and other operational expenses, an aggregate 16% of costs within Target’s homes, remained stable. With rent increases typically capped at c 4%, it is easy to understand why rent cover7 is improving so strongly.

  6 Rent cover is a key measure of the underlying profitability of tenants and the sustainability of rents. The ratio tracks operational cash earnings at the home level (before rent), or EBITDARM, with the agreed rent and is presented on a rolling 12-month basis.

Rent cover has continued to increase

Rent cover for mature homes,8 now 90% of the total, has continued to increase and was 1.75x in the June 2023 quarter compared with 1.47x in the prior year period. On a rolling 12-month basis, yet to fully reflect the continuing improvement, rent cover to end-June 2023 was 1.6x (12 months to June 2022: 1.3x).

  7 A mature home is one that has been in operation for more than three years.

On a quarterly (or spot basis) basis, cover is now above its pre-pandemic level, when resident occupancy was higher, and is also above the 1.6x that Target has previously indicated to be a realistic medium-term target for a typical home. Nonetheless, with room for resident occupancy to increase further, there seems every prospect of rent cover continuing to build.

Exhibit 3: Rent cover turning upwards

Exhibit 4: Increasing share of homes at maturity

Source: Target Healthcare REIT

Source: Target Healthcare REIT

Exhibit 3: Rent cover turning upwards

Source: Target Healthcare REIT

Exhibit 4: Increasing share of homes at maturity

Source: Target Healthcare REIT

Rent collection back above 99%

Asset management initiatives and improved trading conditions have restored rent collection to in excess of 99% as of Q124, slightly above the end-FY23 level, having previously dipped to around 90% during FY22, with a small number of tenants slow to recover from the pandemic. Average rent collection throughout FY23 was 97%.

During Q123, Target reached a settlement with the operator of seven homes (c 6% of rent roll), which was only partly meeting its rent commitments. With the trading environment improving, the tenant renewed its long-term commitment to the homes and settled all rent in arrears, providing an immediate improvement in rent collection and generating a recovery in rent provisioning of £1.1m. As a result of this settlement alone, the run-rate of rent collection increased immediately to c 95% and in 2023 rents have been received in full.

Further progress on rent cover was achieved with the re-tenanting of one of the four Target homes it operated was completed in Q323 with the effect of alleviating cash flow pressures and allowing it to return to a fully rent-paying position on its three remaining homes. Existing lease terms, including rent levels, were maintained with the incoming tenant being granted a short-term rent-free period to manage the rebuild in occupancy.

While the improvement in trading conditions has benefited tenants across the portfolio, one tenant in particular, the operator of two Target homes, responsible for a significant proportion of the rent arrears, moved to full payment of rents in 2023 on the back of improved rent cover. To further support the tenant’s plans for its business and grow the returns on its assets, Target is investing £2.5m in one of the homes, creating an additional 18 rooms, soon to complete. During Q124, £1.7m of the costs were incurred and 10 of the rooms were completed. A portion of these will be immediately sub-let for three years by the operator to a local charitable organisation, at which point it is anticipated that the tenant will be able to take back the space for its own operation. Target’s rental income on the property will increase at a net initial yield consistent with the current property valuation and rent cover for the tenant is expected to improve. Post-completion, the tenant (including the sub-let) will represent 4.6% of the portfolio’s contracted rent. Previously provided for historical rent arrears will be partly written off, while rent deposits covering both properties operated by this tenant have been established to further strengthen the surety of rent receipts.

The acquisition of newly built homes has been an important element in building a high-quality portfolio and continues to be so (there are currently five properties under development). However, new homes take time to build occupancy and reach a ‘stabilised’ level of profitability, especially when targeting privately funded residents, a process that may take three years or more. As the pandemic hit, around 30% of Target’s portfolio was categorised as immature (compared with 10% now). The immature homes are a combination of the recently opened homes as well as a limited number of tenants which were also maturing as businesses and were not at a stage where they had built sufficient reserves to absorb a materially slower rate of occupancy growth.

Target’s ability to re-tenant properties, and in some cases sell them, is key to maintaining occupancy and income and this has been greatly facilitated by a focus on high-quality, modern and ESG-compliant assets that are attractive to residents, operators and investors. 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.

Debt financing at fixed cost

Of Target’s £320m of debt facilities, £243m was drawn at end-Q124 (end-FY23: £230.0m), with an average term to maturity of 6.0 years. The drawn borrowing comprised £150m of long-term fixed rate debt at a low average cost of 3.2%, with a first maturity in 2032, and £93m of shorter-term debt. The shorter-term debt is floating rate but the interest costs on £80m of this have been capped at least until November 2025. In aggregate, 95% of the Q124 drawn debt was fixed/hedged at an all-in rate, including the amortisation of loan arrangement costs, of 3.91% (end-FY23: 3.70%).

The £77m of undrawn borrowing would, if fully drawn, be at a variable cost, including amortisation of loan arrangement fees, of 2.46% plus SONIA (or an interest cost before fees of 2.21%).

Allowing for capital commitments of c £35m, primarily in respect of funding for the five development assets, the company had available capital of £42m at end-Q124. Including the utilisation of cash balances, our forecasts assume an additional £25m of debt drawing, taking outstanding borrowings to £268m. Based on the hedging arrangements currently in place, this limits exposure to any further increase in interest rates before November 2025 to £38m of c 15% of projected borrowings. Meanwhile, the company has the flexibility to react to any decline in interest rates during this period.

Exhibit 5: Summary of debt financing (as at end-Q124)

Lender

Facility type

Facility

Drawn

Term

Margin

Hedging

Phoenix/Reassure

Term loan

£50m

£50m

Jan-32

Fixed 3.28%

N/A

Phoenix/Reassure

Term loan

£37m

£37m

Jan-32

Fixed 3.13%

N/A

Phoenix/Reassure

Term loan

£63m

£63m

Jan-37

Fixed 3.14%

N/A

RBS

Term loan

£50m

£30m

Nov-25

SONIA + 2.18%

£30m swapped at 0.3%

Revolving credit facility

£20m

Nov-25

SONIA + 2.33%

HSBC

Revolving credit facility

£100m

£63m

Nov-25

SONIA + 2.17%

£50m capped at 3.0%

Source: Target Healthcare REIT

Market interest rate expectations remain volatile but, at the time of this report, do not indicate any further increase in the Bank of England base rate, closely tracked by the SONIA market rate, and currently 5.25% with a decline to c 4% by November 2025. This indicates an increase in borrowing costs, of shorter-term floating rate borrowings no later than the maturity in November 2025, corresponding with the expiry of the hedges. However, based on current market interest rates, we estimate that a good level of dividend cover would remain.

Assuming the shorter-term borrowing were to be refinanced at a SONIA rate of 4.0% plus a lending margin of 2.5% (6.5% in aggregate), the impact would be to increase the overall blended all-in cost of borrowing to 4.9%, or an annualised £13.0m. This represents an increase of c £2.5m9 compared with our existing forecast for the 12 months to 30 June 2025 (FY25). If applied to that FY25 forecast on an annualised basis, dividend cover would be c 1.02x, before the further contracted rent growth in FY26.

  8 The £12.5m FY25 net finance cost shown in the financial summary table at the back of this report includes £10.5m of interest on loans, £1.2m of loan fee amortisation and facility non-utilisation fees. It also includes c £0.8m amortisation of the interest rate derivatives, excluded from adjusted earnings.

Exhibit 6: Illustrated impact on debt cost of refinancing shorter-term debt at 6.5%

Borrowings (£m)

Cost (%)

Cost (£m)

Long-term fixed rate debt

150

3.2%

4.8

Other debt

118

6.5%

7.7

Total debt

268

4.6%

12.4

Amortisation of loan fees

0.6

All-in cost

268

4.9%

13.0

Source: Edison Investment Research

Allowing for cash, the end-Q124 loan to value ratio was 25.0% (end-FY23: 24.7%). On a pro forma basis, adjusting for outstanding capital commitments, the Q124 LTV was c 28%.

Each loan facility is secured against a discrete pool of assets with specific loan covenants. These include maximum loan to value ratios of at 40–50% and minimum interest cover ratios of 200–225%. Target is well within these requirements and at end-FY23 had unencumbered assets with a value of c £107m.

Income-driven returns

Target is primarily focused on income returns, and progressively increased DPS in the period from listing to H123. The re-basing in mid-FY23 (from a quarterly rate of 1.690p to 1.400p) was in recognition of the change in market conditions, to a level from which it could continue to grow on a sustainable basis. The increase in the Q124 DPS to 1.42p (+2%), which the company intends to maintain throughout FY24, suggests this is the case. We forecast aggregate FY24 DPS of 5.71p, 1.05x covered by adjusted earnings, with further 2.2% growth in FY25, 1.09x covered. This would leave Target in a strong position to maintain dividend progression through FY26 despite the maturity of interest rate hedging.

Exhibit 7: Quarterly dividend development

Pence/share

FY22

FY23

FY23/FY22

FY24e

FY24e/FY23

FY25e

FY25e/FY24e

Q1

1.690

1.690

0.0%

1.428

-15.5%

1.460

2.2%

Q2

1.690

1.690

0.0%

1.428

-15.5%

1.460

2.2%

Q3

1.690

1.400

-17.2%

1.428

2.0%

1.460

2.2%

Q4

1.690

1.400

-17.2%

1.428

2.0%

1.460

2.2%

Full year

6.760

6.180

-8.6%

5.712

-7.6%

5.840

2.2%

Source: Target Healthcare REIT historical data, Edison Investment Research FY24 and FY25 forecasts

Historically, the company has aimed for DPS to be fully covered by adjusted earnings, assuming full deployment of available capital. Adjusted earnings provide a better indication of dividend capacity than EPRA earnings, which include significant non-cash IFRS rent smoothing adjustments.10 However, with consistent growth in both the capital base and the portfolio, the earnings reported in any period have historically always been in a process of catch-up to the fully invested potential, with dividends less than fully covered. However, the sharp rise in interest rates, well in excess of the widening in acquisition yields, has significantly removed the opportunity for accretive acquisitions, delaying the expected path to full dividend cover. Uncovered dividends also require additional borrowing, which is unattractive at higher borrowing rates. It was against this background that the board decided it was appropriate to rebase dividends, despite the improvement in tenant performance and rent collection.

  9 The recognition of future contractual rent uplifts, which IFRS requires to be recognised on a straight-line basis.

Looking beyond our forecast period, we expect the company to align dividends more closely with immediate earnings.

Exhibit 8: Dividend growth and cover

Source: Target Healthcare REIT data, Edison Investment Research. Note: We have taken the data from the first 12-month period following listing. Dividends of 6.5p were declared and paid for the c 15-month period from listing in March 2013 to 30 June 2014.

Dividends have generated 90% of total return since listing

Since listing in March 2013, up to end-Q124, the aggregate NAV/accounting total return (not including reinvestment of dividends paid)11 is 75% or an average 5.4% pa. Dividends paid have accounted for 90% of returns. Capital returns have mostly been positive until H123 (June to December 2022) when property values declined in common with the broad commercial property sector. With its property values beginning to recover in H223, the total return of 4.5% substantially offset the H123 negative return of 5.2%, Overall, FY23 total return was overall negative (1.2%), the only year since listing. This positive trend continued in Q124, with a total return of 2.4%.

  10 The average annual return to end-FY23 was also 5.4% pa excluding reinvestment of dividends. Target calculates that including reinvestment, the average annual return over the same period was 6.9%.

Exhibit 9: NAV total return history and Edison forecast

Pence/share unless stated otherwise

FY14*

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Q124

FY14-Q124

FY24e

FY25e

Opening NAV

98.0

94.7

97.9

100.6

101.9

105.7

107.5

108.1

110.4

112.3

104.5

98.0

104.5

107.9

Closing NAV

94.7

97.9

100.6

101.9

105.7

107.5

108.1

110.4

112.3

104.5

105.6

105.6

107.9

111.5

DPS paid

6.5

6.1

6.2

6.3

6.4

6.5

6.7

6.7

6.8

6.5

1.4

65.9

5.7

5.8

Dividend return

6.6%

6.4%

6.3%

6.2%

6.3%

6.2%

6.2%

6.2%

6.1%

5.8%

1.3%

67.3%

5.4%

5.4%

Capital return

-3.3%

3.3%

2.7%

1.3%

3.8%

1.6%

0.6%

2.2%

1.7%

-7.0%

1.1%

7.8%

3.3%

3.3%

NAV total return

3.3%

9.7%

9.0%

7.5%

10.1%

7.8%

6.8%

8.4%

7.8%

-1.2%

2.4%

75.0%

8.8%

8.7%

Average total return pa

5.4%

Source: Target Healthcare data, Edison Investment Research. Note: *22 January 2013 to 30 June 2014. Opening NAV adjusted for IPO costs.

FY23 financial results

The table below provides a summary of FY23 financial performance, starting with adjusted earnings before reconciling these to both EPRA earnings and the statutory reported IFRS earnings.

Exhibit 10: Summary of FY23 financial performance

£m unless stated otherwise

FY23

FY22

FY23/FY22

H123

H1223

Rental income excluding guaranteed uplifts

56.4

48.8

15%

28.1

28.3

Other income

0.1

1.0

0.1

0.0

Credit loss allowance

(0.3)

(3.2)

-92%

0.0

(0.3)

Investment management fees

(7.4)

(7.3)

2%

(3.8)

(3.6)

Other expenses

(3.0)

(3.2)

-4%

(1.6)

(1.5)

Finance expense

(9.4)

(6.6)

43%

(4.6)

(4.9)

Development interest under forward fund agreements

1.0

0.8

22%

0.5

0.5

Adjusted earnings

37.2

30.2

23%

18.7

18.5

Development interest under forward fund agreements

(1.0)

(0.8)

(0.5)

(0.5)

Income from guaranteed rent reviews & lease incentives

11.3

10.2

5.9

5.4

EPRA earnings

47.6

39.7

20%

24.1

23.4

Realised/unrealised gains/(losses) on properties

(53.4)

5.5

(58.0)

4.6

Interest rate cap

(0.7)

0.0

(0.3)

(0.4)

Other income

3.9

0.0

1.0

IFRS earnings

(6.6)

49.1

-113%

(34.2)

27.6

IFRS EPS (p)

(1.06)

8.20

-113%

(5.51)

4.45

EPRA EPS (p)

7.67

6.62

16%

3.89

3.78

Adjusted EPS (p)

6.00

5.05

19%

3.01

2.99

DPS declared (p)

6.18

6.76

-9%

3.38

2.80

Dividend cover - EPRA earnings (x)

1.24

0.95

0.00

0.00

Dividend cover - Adjusted earnings (x)

0.97

0.72

0.89

1.07

EPRA NTA per share (p)

104.5

112.3

103.0

104.5

EPRA NTA total return/accounting total return

-1.2%

7.8%

-5.2%

4.4%

Investment properties including investment via loans

868.7

911.6

867.7

868.7

Borrowings

230.0

234.8

240.0

230.0

Cash

15.4

34.5

21.8

15.4

Gross LTV

26.5%

25.8%

27.7%

26.5%

Net LTV

24.7%

22.0%

25.1%

24.7%

Source: Target Healthcare REIT data

In respect of adjusted earnings, in particular we highlight:

Strong growth in rental income excluding non-cash IFRS adjustments for guaranteed rental uplifts. The impact of the five properties disposed of during the year was more than offset by a full year contribution from significant portfolio of properties acquired id-way through the prior year as well as indexed rent uplifts.

A much-reduced credit loss allowance, reflecting the underlying recovery in rent collection through the year.

Investment management fees, linked to average net assets, increased only modestly while other costs were tightly controlled and declined modestly. The adjusted EPRA cost ratio (excluding the impact of guaranteed rental uplifts) was reduced to 18.7% from 27.1% in FY22. Excluding credit loss provisions, it was also lower, at 15.5% versus 16.4%.

Adjusted finance expenses, which excludes amortisation of interest rate derivatives, increased to £9.4m from £6.6m in FY22, driven by an increase in the average value of drawn debt in FY23 (drawn debt increased by c £100m during FY22) as well as higher interest rates.

Including £1.0m of development interest accrued on forward fund agreements, adjusted earnings increased 23% or £7.0m to £37.2m and adjusted EPS by 19% to 6.0p.

DPS declared in the year was 6.18p, 0.97x covered by adjusted earnings. This comprised a H1 DPS of 3.38p, 0.89x covered, and a rebased 2.80p in H2, 1.07x covered.

EPRA earnings includes the non-cash IFRS adjustment for guaranteed rental uplifts but excludes development interest. EPRA earnings increased 20% to £47.6m with EPRA EPS per share of 7.67p. EPRA dividend cover was 1.24x.

IFRS earnings further included £53.4m of realised (£0.6m) and unrealised revaluation movements and the £0.7m amortisation of interest rate derivatives.

Not shown in the table above, IFRS net asset value per share was 105.6p and, adjusted for the fair value of interest rate derivatives, EPRA NTA per share was 104.5p.

Dividend yield remains attractive despite the rebasing

The targeted FY24 DPS of 5.712p represents a prospective yield of 7.1%, while the shares continue to trade at a discount to NAV of more than 20% despite property values recently increasing.

Exhibit 11: Dividend yield remains attractively high despite dividend rebasing

Exhibit 12: P/NAV appears to discount material further property yield widening (valuation decline)

Source: Target Healthcare REIT DPS data, Refinitiv prices

Source: Target Healthcare REIT NAV per share data, Refinitiv prices

Exhibit 11: Dividend yield remains attractively high despite dividend rebasing

Source: Target Healthcare REIT DPS data, Refinitiv prices

Exhibit 12: P/NAV appears to discount material further property yield widening (valuation decline)

Source: Target Healthcare REIT NAV per share data, Refinitiv prices

In Exhibit 13, we summarise the performance and valuation of a group of real estate investment trusts that we consider to be Target’s closest peers in the broad and diverse commercial property sector. The peer 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. For consistency, the data are presented on a trailing basis.

Target’s yield is below the average, although this is slightly inflated by Triple Point Social Housing’s (SOHO) high yield. Target’s P/NAV is broadly in line with the group, excluding SOHO.

Exhibit 13: Peer valuation and performance summary

WAULT*
(years)

Price
(p)

Market cap (£m)

P/NAV**
(x)

Yield***
(%)

Share price performance

One month

Three months

One year

Three years

Assura

11

43

1291

0.81

7.3

4%

-7%

-23%

-43%

Impact Healthcare

20

88

363

0.76

7.7

8%

-3%

-17%

-15%

Primary Health Properties

11

96

1284

0.86

6.9

5%

1%

-16%

-36%

Residential Secure Income

N/A

60

111

0.68

8.6

0%

-3%

-33%

-33%

Triple Point Social Housing

25

57

224

0.51

7.2

18%

-10%

-16%

-49%

Average

17

0.73

7.5

7%

-4%

-21%

-35%

Target Healthcare

26

81

499

0.76

7.1

5%

11%

-8%

-28%

UK property sector index

1,210

4%

-3%

-9%

-17%

UK equity market index

4,021

-1%

-2%

1%

21%

Source: company data, Refinitiv pricing at 3 November 2023. Note: *Weighted average unexpired lease term. **Based on last reported NAV/NTA. ***Based on trailing 12-month DPS declared.

Portfolio and strategy

Target operates in a structurally supported sector

The demand for care home spaces in the UK is expected to grow strongly. The number of people aged 85 or over is forecast to almost double over the next 25 years,12 with increasingly complex care needs. The numbers living with dementia are forecast to grow from an expected 1.0 million in 2024 to 1.6 million by 2040. The sector provides a substantially non-discretionary, essential service largely independent of the wider economy.

11 Office of National Statistics (ONS)

The number of care and nursing beds available has shown no material growth over the past 10 years, with newly developed and refurbished stock offset by the withdrawal of older, obsolete homes. Significant investment in the care home estate is required to meet existing and future needs and satisfy the expectations of residents and their families, as well as regulatory demands for better quality care.

Healthcare real estate has historically provided attractive risk-adjusted returns compared with the broader commercial real estate sector. Target’s portfolio has also continued to outperform the MSCI UK Annual Healthcare Property Index. In the year to December 2022, Target’s portfolio delivered a total return of 2.5% versus 1.7% for the index. Since Target was launched, its portfolio has returned 10.2% pa versus 6.9% for the index (and over five years, 8.6% versus 8.1

Sustainable assets

At the core of its strategy, Target has an unwavering focus on high-quality, modern and sustainable assets, attractive to residents, operators and investors. 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.

Key portfolio metrics include:

80% of its homes have been purpose-built from 2010 onwards.

98% of Target’s rooms benefit from full ensuite wet room provision compared with 31% of total care home places in the UK, up from 14% in 2014. Capital expenditure projects are under way to increase portfolio wet room provision to 100%.

On average, homes provide 47sqm per resident including generous communal areas.

94% of the portfolio is EPC rated A or B and is compliant with the minimum energy efficiency standards anticipated to apply from 2030. 100% are rated C or better, already compliant with the minimum guidelines anticipated for 2027.

Further portfolio detail

At end-Q124, including the Weston-super-Mare development acquired in the period, Target’s portfolio comprised 98 homes, of which 93 were operational and five were development properties under construction. It was externally valued at £890.3m with annualised contracted rents of £57.1m, reflected in an EPRA topped-up net initial yield of 6.22%. Allowing for short-term lease incentives, annualised passing rent was £55.6m and the EPRA net initial yield was 6.05%. Contracted rents on the development properties are not included in these figures until completion. The WAULT was 26.3 years.

The homes are well diversified by geography and by tenant. Of the 32 tenants, the 10 largest account for 63% of contracted rent, with the largest individual tenant 16%. Of the 22 remaining tenants, each account for less than 3.3%.

Exhibit 14: Portfolio summary

Sep-23

Jun-23

Jun-22

Q124

FY23

FY22

Properties

98

97

101

– of which completed

3

93

97

– of which under development

5

4

4

Beds

6,508

6,442

6,703

Tenants

32

32

34

Contracted rent (£m)

57.1

56.6

55.5

Portfolio value (£m)

890.3

868.7

911.6

WAULT

26.3 years

26.5 years

27.2 years

EPRA topped-up net initial yield

6.22%

6.22%

5.82%

Source: Target Healthcare REIT data

Completed forward-funded developments and the five that were under construction account for 21 of the portfolio assets. They provide access to attractive new homes that satisfy Target’s strict investment criteria that may be otherwise unavailable. They also bring much needed new capacity to the market. Target is itself not a developer and we believe that forward-funding developments is relatively low risk. Target acquires land plots, with planning consent, from developers and funds the construction, on fixed-price contracts, of pre-let homes. During the construction phase, Target accrues interest on the funding that has been extended and this is reflected as a deduction in the acquisition price. The interest is included in adjusted earnings.

During FY23, five properties were sold for an aggregate £25.8m after costs, all at above book value, realising a gain of £0.5m, and reducing annualised contracted rents by £2.1m. One of the properties had been acquired as part of the 18-home portfolio acquisition in December 2021 (H122), which added £9.3m to contracted rents at that time. Target says this property was below the average standard of the portfolio as a whole. Target also exited the Northern Irish market, where it says that the fee and resident funding dynamic is less favourable. The four homes sold in Northern Ireland represented c 2.5% of the overall portfolio value at the time (or c £22m).

The proceeds can be recycled into the new (and existing) developments on a gradual basis as construction proceeds over the next year or so. At the start of FY23, there were four homes under development of which one reached practical completion13 during the year. An additional home was acquired during FY23 and a further one in Q124.

  12 The point at which construction is effectively complete and capable of occupation resuming.

In November 2022, practical completion was reached on a 66-bed home in Weymouth, leased to a new tenant to the group on a 35-year lease incorporating green provisions and annual rent reviews (subject to caps and collars).

In Q323, the acquisition of a development site near Malvern, Worcestershire, for the construction of a 60-bed home, pre-let to an existing tenant of the group on a 35-year lease incorporating green provisions and annual rent reviews (subject to caps and collars). Construction has commenced and is expected to reach practical completion in summer 2024.

In Q124, the acquisition of a development site in Weston-super-Mare, for the construction of a 66-bed home, pre-let to a new tenant on a 35-year lease incorporating green provisions and annual rent reviews (subject to caps and collars). The maximum commitment is £16.0m. Construction has commenced and is expected to reach practical completion in the summer of 2024.

The other three developments that are under construction are:

A 66-bed home at Olney, Buckinghamshire, acquired in June 2021. We assume practical completion by end-Q324.

A 66-bed home at Holt, Norfolk, acquired in August 2021. We assume practical completion by end-H124.

A 71-bed home at Dartford, Kent, acquired in April 2022. We assume practical completion by end-Q324

At end-FY23, there was £31.1m of capital committed to the completion of forward funding projects. Including the commitment to Weston-super-Mare and subsequent development funding we estimate this was little changed at end-Q124.

Target also invested £6.1m in FY23 in portfolio improvements, converting 128 beds into full wet rooms at four homes, increasing the proportion of portfolio beds to 98% from 96%, and commenced work on the addition of 18 rooms to another, discussed above. Ten of these homes were completed in Q124. A further £3.7m had been committed towards increasing the proportion of beds with wet rooms to 100%, with 15 upgrades completed in Q124. A portion of capital has also been allocated to direct carbon reduction initiatives, most notably the installation of photovoltaic panels, in partnership with tenants.

These organic investment projects are reflected in uplifts to contracted rents, reflecting net initial yields in line with market levels. This added 0.3% to the 1.0% increase in Q124 contracted rents, including rentalisation of the £1.7m cost of the 10-room addition to one home and £0.5m of wet room installation at another.

Management and governance

Independent board and specialist external manager

There have been several recent changes to Target’s independent non-executive board as part of its now completed succession planning. Alison Fyfe became chair in December 2022, having joined the board in May 2020 on the retirement of Malcolm Naish, who had held the position since the company listed in 2013. Ms Fyfe is an experienced property professional with 35 years’ experience in surveying, banking and property finance. She also has board experience, having acted as a director of a number of companies in the property and debt finance sector. The other directors of the company bring broad financial, commercial, property, fund management and healthcare experience. They are Dr Amanda Thompsell (appointed in February 2022), Richard Cotton (senior independent director, appointed in November 2022), Michael Brodtman (appointed in January 2023) and Vince Niblett (chair of the audit committee, appointed in August 2021).

Full details of board members can be found on the company’s website.

Externally managed by Target Fund Managers

Target Fund Managers (the investment manager) is a family-owned sector specialist manager investing exclusively in the elderly healthcare property sector. It is led by Kenneth MacKenzie, its chief executive, supported by a growing team of professionals, the core of which, including original co-founders John Flannelly and Andrew Brown, has worked closely together since 2010, providing continuity as well experience. This experience spans all aspects of the healthcare property sector, including operating, owning, investing in, developing and building healthcare businesses and healthcare property assets. We provide biographies of the key members involved in the management of Target Healthcare REIT on page 17.

The investment management fee schedule has a tiered fee structure with reducing rates at higher NAV levels, allowing shareholders to benefit from the increasing economies of scale that a larger portfolio provides. With end-FY23 net assets of £655m, the marginal investment management fee is 0.95%.

Exhibit 15: Management fee structure

Average net assets

Fee margin

First £500m

1.05%

£500m to £750m

0.95%

£750m to £1,000m

0.85%

£1,000m to £1,500m

0.75%

£1,500m+

0.65%

Source: Target Healthcare REIT. Note: Rates effective 1 July 2018.

Sensitivities

The visibility of Target’s contractual income and dividend-paying capacity is provided by long leases and RPI-linked rent increases. We see the key sensitivities as relating to the following:

Regulatory changes or changes to government care policy have the potential to materially affect the sector, both positively and negatively, in ways that are difficult to predict. Significant reform of care sector funding has again been deferred.

While Target has no direct exposure to the operational and financial performance of the homes operated by its tenants, underperformance from time to time has a negative effect on the collection of contractual income. Active asset management and the appeal of its high-quality homes to alternative tenants provides protection.

Key operational and financial risks to the tenant operators include their ability to maintain high standards of care and compliance with stringent and evolving regulatory oversight, manage staff shortages, maintain good levels of occupancy and mitigate cost inflation with fee increases.

Average care home fees have risen at a faster rate than RPI in recent years, particularly fees for self-funded residents. In many cases, these fees will be met by a draw-down of home equity and/or other savings. Any sustained reduction in personal wealth could have a negative impact on the growth of privately funded fees.

Property values may be affected by further change in the cost of capital, investment demand for care home properties of the specification that Target focuses on, or tenant performance.

Of Target’s £320m of committed borrowing facilities, £170m (of which £83m is drawn) matures in November 2025 and must be refinanced. We fully expect Target to have ample access to new borrowings, although for now the cost of the refinanced debt is uncertain as the existing hedges expire.

As an externally managed REIT, Target is dependent on the investment manager’s ability, the retention of key staff and the ability to deliver business continuity.

Exhibit 16: Financial summary

Year to 30 June (£m)

2021

2022

2023

2024e

2025e

INCOME STATEMENT

Rental income excluding guaranteed uplift

41.2

48.8

56.4

58.1

62.6

IFRS adjustment for guaranteed uplifts

8.7

10.2

11.3

10.8

11.2

Other income

0.1

4.8

0.1

0.0

0.0

Total revenue

50.0

63.9

67.7

69.0

73.8

Gains/(losses) on revaluation

9.4

5.5

(53.4)

9.7

7.7

Realised gains/(losses) on disposal

1.3

0.0

0.0

0.0

0.0

Management fee

(5.8)

(7.3)

(7.4)

(7.4)

(7.6)

Credit loss allowance & bad debts

(2.7)

(3.2)

(0.3)

(0.6)

(0.6)

Other expenses

(2.6)

(3.2)

(3.0)

(3.2)

(3.4)

Operating profit

49.6

55.7

3.6

67.5

69.9

Net finance cost

(5.7)

(6.6)

(10.1)

(11.4)

(12.5)

IFRS net result

43.9

49.1

(6.6)

56.1

57.4

Adjust for:

Gains/(losses) on revaluation

(9.5)

(5.6)

54.0

(9.7)

(7.7)

Other EPRA adjustments

(0.3)

(3.9)

0.1

0.8

0.8

EPRA earnings

34.0

39.7

47.6

47.2

50.5

Adjust for fixed/guaranteed rent reviews

(8.7)

(10.2)

(11.3)

(10.8)

(11.2)

Adjust for development interest under forward fund agreements

0.6

0.8

1.0

0.8

0.0

Group adjusted earnings

26.0

30.2

37.2

37.2

39.3

Average number of shares in issue (m)

475.4

599.1

620.2

620.2

620.2

IFRS EPS (p)

9.23

8.20

(1.06)

9.04

9.25

EPRA EPS (p)

7.2

6.6

7.7

7.6

8.1

Adjusted EPS (p)

5.5

5.0

6.0

6.0

6.3

Dividend per share (declared)

6.72

6.76

6.18

5.71

5.84

Dividend cover (EPRA earnings)

1.05

0.95

1.24

1.33

1.39

Dividend cover (adjusted earnings)

0.80

0.72

0.97

1.05

1.09

BALANCE SHEET

Investment properties

631.2

857.7

800.2

852.0

867.4

Other non-current assets

54.8

65.9

83.3

93.3

103.7

Non-current assets

686.0

923.6

883.4

945.3

971.1

Cash and equivalents

21.1

34.5

15.4

12.7

14.9

Other current assets

11.3

5.5

9.5

5.3

5.6

Current assets

32.4

40.0

24.8

18.0

20.6

Bank loan

(127.9)

(231.4)

(227.1)

(260.7)

(266.3)

Other non-current liabilities

(6.8)

(7.1)

(8.1)

(8.1)

(8.1)

Non-current liabilities

(134.7)

(238.5)

(235.1)

(268.8)

(274.4)

Trade and other payables

(18.5)

(26.4)

(18.3)

(18.9)

(20.3)

Current Liabilities

(18.5)

(26.4)

(18.3)

(18.9)

(20.3)

Net assets

565.2

698.8

654.8

675.6

697.0

Adjust for derivative financial liability

(0.3)

(2.3)

(6.9)

(6.1)

(5.3)

EPRA net assets

564.9

696.5

647.9

669.5

691.7

Period end shares (m)

511.5

620.2

620.2

620.2

620.2

IFRS NAV per share (p)

110.5

112.7

105.6

108.9

112.4

EPRA NTA per share (p)

110.4

112.3

104.5

107.9

111.5

EPRA NTA total return

8.4%

7.8%

-1.2%

8.8%

8.7%

CASH FLOW

Cash flow from operations

29.2

35.6

40.8

51.8

52.0

Premium paid for interest rate cap

(2.6)

0.0

0.0

Net interest paid

(4.2)

(5.2)

(8.6)

(10.0)

(11.1)

Tax paid

(0.0)

(0.0)

0.0

0.0

0.0

Net cash flow from operating activities

25.0

30.4

29.7

41.8

40.9

Purchase of investment properties

(51.4)

(207.0)

(29.3)

(42.2)

(7.7)

Disposal of investment properties

7.8

4.4

25.8

0.0

0.0

Net cash flow from investing activities

(43.6)

(202.6)

(3.6)

(42.2)

(7.7)

Issue of ordinary share capital (net of expenses)

58.3

122.5

0.0

0.0

0.0

(Repayment)/drawdown of loans

(22.0)

104.8

(4.8)

33.0

5.0

Dividends paid

(31.5)

(39.8)

(40.3)

(35.3)

(36.0)

Other

(1.5)

(1.8)

(0.2)

0.0

0.0

Net cash flow from financing activities

3.3

185.6

(45.2)

(2.3)

(31.0)

Net change in cash and equivalents

(15.3)

13.4

(19.1)

(2.6)

2.2

Opening cash and equivalents

36.4

21.1

34.5

15.4

12.7

Closing cash and equivalents

21.1

34.5

15.4

12.7

14.9

Balance sheet debt

(127.9)

(231.4)

(227.1)

(260.7)

(266.3)

Unamortised loan arrangement costs

(2.1)

(3.4)

(2.9)

(2.3)

(1.7)

Drawn debt

(130.0)

(234.8)

(230.0)

(263.0)

(268.0)

Net cash/(debt)

(108.9)

(200.3)

(214.6)

(250.3)

(253.1)

Gross LTV

19.2%

25.8%

26.5%

28.2%

28.0%

Net LTV

16.1%

22.0%

24.7%

26.9%

26.4%

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

Contact details

Revenue by geography

Target Fund Managers
1st Floor
Glendevon House
Castle Business Park
Stirling
FK9 4TZ
+44 (0)1786 845 912
info@targetfundmanagers.com

Contact details

Target Fund Managers
1st Floor
Glendevon House
Castle Business Park
Stirling
FK9 4TZ
+44 (0)1786 845 912
info@targetfundmanagers.com

Revenue by geography

Management team

Non-executive chairman, Target Healthcare REIT: Alison Fyfe

Chief executive, Target Fund Managers: Kenneth MacKenzie

Ms Fyfe is a highly experienced property professional with 35 years of experience in surveying, banking and property finance. Having trained and worked as a commercial surveyor with Knight Frank in both London and Edinburgh, she joined the Royal Bank of Scotland in 1996 to specialise in property finance. Over a period of 19 years with the bank, she fulfilled several senior property finance roles, ultimately serving for five years as head of real estate restructuring in Scotland before leaving the bank in 2015. She has subsequently acted as a director of a number of companies in the property and debt finance sectors while continuing to undertake property finance consultancy work. In August 2021, she was elected as a governing board member of Hillcrest Homes (Scotland). Ms Fyfe is a member of the Royal Institution of Chartered Surveyors, a member of the Investment Property Forum and a former policy board member of the Scottish Property Federation.

Kenneth MacKenzie is the founder and chief executive of Target Fund Managers (TFM), the company’s investment manager. He is a chartered accountant with more than 40 years of business leadership experience, with the last 15 in healthcare. In addition to his responsibilities as TFM’s chief executive, Kenneth leads the creation and management of its client funds and oversees fund-raising and investor liaison. In 2005, he led the acquisition of Independent Living Services, Scotland’s largest domiciliary care provider, growing and developing the business before exiting via a disposal to a private equity house. He had previously negotiated the proposed acquisition of a large UK independent living business in a joint venture with the US care home operator, Sunrise Senior Living. Before becoming involved in the healthcare sector, he owned businesses in fields as diverse as publishing, IT, shipping and accountancy.

Finance director, Target Fund Managers: Gordon Bland

Head of investment, Target Fund Managers: John Flannelly

Gordon Bland is finance director of Target Fund Managers (TFM), the company’s investment manager. He is a chartered accountant with extensive experience of financial reporting within the asset management industry. He provides financial input to the strategic and commercial activities of the senior team and leads the finance function where his key responsibilities include financial planning and analysis, risk management, ownership of relationships with debt providers, treasury services and financial reporting to shareholders. Gordon previously worked at PricewaterhouseCoopers for almost 10 years, serving asset management and financial services clients in the UK, Canada and Australia.

John Flannelly is head of investment at Target. He is a chartered accountant with more than 20 years’ experience, the last 15 of which have been in real estate investment management. He has primary responsibility for investment activity across Target’s business. John has been involved in the appraisal of several hundred care home opportunities, resulting in the acquisition of approximately 100 properties for those client funds. Prior to joining Target, during his time as investment director for an institutional investor, John held board positions at a UK top 10 care home operator and a care home development business. He started his career at Arthur Andersen where he worked on audits, financial due diligence and corporate finance projects, before moving to the Bank of Scotland initially to structure finance packages for management buyouts and latterly to a role in real estate investment management.

Management team

Non-executive chairman, Target Healthcare REIT: Alison Fyfe

Ms Fyfe is a highly experienced property professional with 35 years of experience in surveying, banking and property finance. Having trained and worked as a commercial surveyor with Knight Frank in both London and Edinburgh, she joined the Royal Bank of Scotland in 1996 to specialise in property finance. Over a period of 19 years with the bank, she fulfilled several senior property finance roles, ultimately serving for five years as head of real estate restructuring in Scotland before leaving the bank in 2015. She has subsequently acted as a director of a number of companies in the property and debt finance sectors while continuing to undertake property finance consultancy work. In August 2021, she was elected as a governing board member of Hillcrest Homes (Scotland). Ms Fyfe is a member of the Royal Institution of Chartered Surveyors, a member of the Investment Property Forum and a former policy board member of the Scottish Property Federation.

Chief executive, Target Fund Managers: Kenneth MacKenzie

Kenneth MacKenzie is the founder and chief executive of Target Fund Managers (TFM), the company’s investment manager. He is a chartered accountant with more than 40 years of business leadership experience, with the last 15 in healthcare. In addition to his responsibilities as TFM’s chief executive, Kenneth leads the creation and management of its client funds and oversees fund-raising and investor liaison. In 2005, he led the acquisition of Independent Living Services, Scotland’s largest domiciliary care provider, growing and developing the business before exiting via a disposal to a private equity house. He had previously negotiated the proposed acquisition of a large UK independent living business in a joint venture with the US care home operator, Sunrise Senior Living. Before becoming involved in the healthcare sector, he owned businesses in fields as diverse as publishing, IT, shipping and accountancy.

Finance director, Target Fund Managers: Gordon Bland

Gordon Bland is finance director of Target Fund Managers (TFM), the company’s investment manager. He is a chartered accountant with extensive experience of financial reporting within the asset management industry. He provides financial input to the strategic and commercial activities of the senior team and leads the finance function where his key responsibilities include financial planning and analysis, risk management, ownership of relationships with debt providers, treasury services and financial reporting to shareholders. Gordon previously worked at PricewaterhouseCoopers for almost 10 years, serving asset management and financial services clients in the UK, Canada and Australia.

Head of investment, Target Fund Managers: John Flannelly

John Flannelly is head of investment at Target. He is a chartered accountant with more than 20 years’ experience, the last 15 of which have been in real estate investment management. He has primary responsibility for investment activity across Target’s business. John has been involved in the appraisal of several hundred care home opportunities, resulting in the acquisition of approximately 100 properties for those client funds. Prior to joining Target, during his time as investment director for an institutional investor, John held board positions at a UK top 10 care home operator and a care home development business. He started his career at Arthur Andersen where he worked on audits, financial due diligence and corporate finance projects, before moving to the Bank of Scotland initially to structure finance packages for management buyouts and latterly to a role in real estate investment management.

Principal shareholders (source: Target Healthcare REIT FY23 annual report)

(%)

BlackRock

10.0

Baillie Gifford

4.1

Premier Miton

3.9

Alder Investment Management

3.8

Investec Wealth & Investment

3.8

CCLA Investment Management

2.9

Rathbone Investment Management

2.8


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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.

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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 2023 Edison Investment Research Limited (Edison).

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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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