Target Healthcare REIT — Positive momentum continued in Q3

Target Healthcare REIT (LSE: THRL)

Last close As at 18/06/2024

GBP0.82

2.00 (2.52%)

Market capitalisation

GBP506m

More on this equity

Research: Real Estate

Target Healthcare REIT — Positive momentum continued in Q3

Target Healthcare REIT’s Q324 update shows a fifth successive quarter of positive NAV total return, with indexed rent reviews driving increased earnings and property values. Tenant profitability continues to strengthen, reflected in a high level of rent cover and rent collection. Dividends are well covered by adjusted earnings and we expect further DPS growth.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Target Healthcare REIT

Positive momentum continued in Q3

Q324 update

Real estate

20 May 2024

Price

82p

Market cap

£523m

Net debt (£m) at 31 March 2024

241.1

Net LTV at 31 March 2024

25.8%

Shares in issue

620.2m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.5

5.5

(1.7)

Rel (local)

1.1

(3.2)

(9.7)

52-week high/low

88p

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

Q424 update

Expected July/August 2024

Analyst

Martyn King

+44 (0)20 3077 5700

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

Target Healthcare REIT’s Q324 update shows a fifth successive quarter of positive NAV total return, with indexed rent reviews driving increased earnings and property values. Tenant profitability continues to strengthen, reflected in a high level of rent cover and rent collection. Dividends are well covered by adjusted earnings and we expect further DPS growth.

Year end

Rental
income (£m)

Adjusted earnings* (£m)

Adjusted
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/23

67.7

37.2

6.0

104.5

6.18

0.78

7.5

06/24e

69.1

37.8

6.1

109.4

5.71

0.75

7.0

06/25e

73.3

38.7

6.2

113.7

5.84

0.72

7.1

06/26e

75.7

39.0

6.3

118.0

5.96

0.69

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.

Gains in earnings and asset values

With the portfolio yield stabilising, organic rental growth is generating valuation gains as well as higher earnings and dividend cover. Q324 NAV per share increased 2.2% to 109.0p and NAV total return was 3.6% (8.3% year-to-date). Dividend cover was 1.1x in Q3 and is 1.08x year-to-date. Rent cover on mature homes remains stable, at 1.9x, the highest level since IPO in 2013, and rent collection of more than 98% is robust. Strong fee growth, increased occupancy and the easing of staff shortages continue to support tenant profitability. There are no material changes to our earnings forecasts. We expect continuing organic revenue growth from rent reviews and development completions to drive earnings growth and fully covered DPS growth through FY26. This is despite a likely increase in borrowing costs at or ahead of the November 2025 expiry of interest rate hedges.

Profitably enhancing the UK care home estate

Target operates in a structurally supported market, driven by demographics, and largely insulated from wider economic conditions. There is a strong need to expand and improve the existing care estate and in addressing this, Target has an unwavering focus on asset quality. It invests in modern, purpose-built, high-quality residential facilities, often new to market. Its homes are energy efficient and already compliant with the minimum energy efficiency standards anticipated to apply from 2030. High-quality homes appeal to residents (71% private pay across Target’s homes), and 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, such properties have proven to be attractive to tenants, existing and alternative, which is key to providing sustainable, long-duration, inflation-linked income.

Valuation: Attractive yield and discount to NAV

The 5.71p FY24 DPS target represents an attractive yield of 7% and we expect further growth on a fully covered basis. Meanwhile, the shares trade at a 25% discount to the March 2024 EPRA NTA per share.

Positive trends continuing

Organic rental growth is driving increased earnings, fully covered dividend growth and property valuation gains, reflected in an uplift in NAV per share. For now, Target is focused on optimising its existing portfolio and we have not assumed any acquisitions in our forecasts. If interest rates begin to decline as is expected, opportunities for accretive capital deployment may begin to emerge. Allowing for existing investment commitments, £41m of free capital was available at end-Q324.

With the H124 financial performance in line with the previously released quarterly data, and our forecasts, Q324 continued the positive trends. There is no material change to our last published forecast for FY24 and FY25 and we expect further progress in FY26.

Exhibit 1: Summary of forecasts

New forecast

Previous forecast

Forecast change

£m unless stated otherwise

FY24e

FY25e

FY26e

FY24e

FY25e

FY24e

FY25e

FY24e

FY25e

Cash rental income

58.2

62.2

64.6

58.2

62.6

0.0

(0.4)

0%

-1%

Credit loss allowance

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

(0.0)

0.0

Expenses

(10.5)

(10.8)

(11.2)

(10.6)

(10.9)

0.1

0.1

-1%

-1%

Net finance costs

(11.0)

(12.2)

(13.8)

(10.6)

(11.7)

(0.3)

(0.5)

3%

4%

Development interest under forward fund agreements

1.6

0.3

0.0

0.8

0.0

0.9

0.2

108%

651%

Adjusted earnings

37.8

38.7

39.0

37.2

39.3

0.6

(0.6)

2%

-1%

Development interest under forward fund agreements

(1.6)

(0.3)

0.0

(0.8)

(0.0)

(0.9)

(0.2)

Non-cash IFRS adjustments

10.9

11.1

11.1

10.8

11.2

0.1

(0.1)

EPRA earnings

47.1

49.6

50.1

47.2

50.5

(0.2)

(0.9)

0%

-2%

EPRA EPS (p)

7.6

8.0

8.1

7.6

8.1

(0.0)

(0.1)

0%

-2%

Adjusted EPS (p)

6.1

6.2

6.3

6.0

6.3

0.1

(0.1)

2%

-1%

DPS declared (p)

5.712

5.840

5.960

5.712

5.8

0.0

0.0

0%

0%

EPRA DPS cover (x)

1.33

1.37

1.36

1.33

1.4

(0.0)

(0.0)

Adjusted DPS cover (x)

1.07

1.07

1.05

1.05

1.1

0.0

(0.0)

EPRA NTA per share ("NAV") (p)

109

114

118

108

111.5

1.5

2.2

1%

2%

NAV total return

10.2%

9.2%

9.0%

8.8%

0.1

0.0

0.0

Source: Edison Investment Research forecasts. 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.

Financial performance has continued to strengthen

The past five quarters have now seen a positive development in property valuations, reflecting rental uplifts as property yields have stabilised, generating capital growth alongside consistently positive dividend returns.

Q324 NAV per share increased 2.2% to 109p and including DPS paid, the NAV total return was 3.6%, taking the total return in the first nine months of FY24 to 8.3%.

Exhibit 2: NAV return has steadily increased in recent quarters

Pence per share

Sep-22

Dec-22

Mar-23

Jun-23

Sep-23

Dec-23

Mar-24

Q123

Q223

Q323

Q423

Q124

Q224

Q324

9M23

9M24

Opening NAV per share

112.3

112.1

103.0

103.4

104.5

105.6

106.7

112.3

104.5

Unrealised property revaluation gains/(losses)

(0.1)

(8.4)

0.5

1.0

1.0

1.1

2.2

(8.0)

4.3

Gain/(loss) on disposal

0.0

0.0

0.1

0.0

0.0

0.0

0.0

0.1

0.0

Premium paid on interest rate swap

0.0

(0.4)

0.0

0.0

0.0

0.0

0.0

(0.4)

0.0

Movement in revenue reserve

1.6

1.4

1.5

1.5

1.5

1.4

1.5

4.5

4.4

Dividend paid

(1.7)

(1.7)

(1.7)

(1.4)

(1.4)

(1.4)

(1.4)

(5.1)

(4.2)

Closing NAV per share

112.1

103.0

103.4

104.5

105.6

106.7

109.0

103.4

109.0

Dividend return

1.5%

1.5%

1.7%

1.4%

1.3%

1.3%

1.3%

4.5%

4.0%

Capital return

-0.2%

-8.1%

0.4%

1.1%

1.1%

1.0%

2.2%

-7.9%

4.3%

NAV total return

1.3%

-6.6%

2.0%

2.4%

2.4%

2.4%

3.6%

-3.4%

8.3%

Source: Target Healthcare REIT data, Edison Investment Research

Organic rental growth should continue to drive earnings

In Q324, contractual rental income increased by £2.2m, or 3.7%, to £60.1m. The increase reflected annual, inflation-indexed rent reviews,1 mostly collared and capped at 2% and 4% respectively,2 and an additional £1.7m from the completion of two pre-let development properties at Dartford in Kent and Holt in Norfolk. During the current year, organic revenue growth (including interest earned on the funding extended to developments during the construction phase) is offsetting increased net finance costs. With borrowing costs now fixed on 89% of drawn debt, we expect organic revenue growth to drive earnings and dividend uplifts over the next two years. Revenues will benefit from the completion of three further development properties, currently under construction, which will add £2.3m to contracted rents.

  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.

Exhibit 3: Edison forecast growth in annualised contracted rent

£m

FY24e

FY25e

FY26e

Start-year annualised contracted rent roll

56.6

60.4

64.4

Rent reviews

2.1

1.8

1.6

Average uplift

3.8%

3.0%

2.5%

Acquisitions

0.0

0.0

0.0

Disposals

0.0

0.0

0.0

Development completions

1.7

2.3

0.0

End-year annualised contracted rent roll

60.4

64.4

66.0

Source: Edison Investment Research

We forecast continuing DPS growth

The dividend rebasing in mid-FY23 successfully established a level from which DPS could sustainably grow on a fully covered basis. We expect this to continue. Commencing in Q124, the quarterly rate of DPS was increased from 1.40p (the rebased level during H223) to 1.42p, although the total DPS for FY24, targeted by the company to be 5.712p, will be lower than the 6.180p declared for the whole of FY23. We forecast 2.2% growth in FY25 DPS and a further 2.0% in FY26, covered 1.07x and 1.05x by adjusted earnings, respectively. On an EPRA basis, dividend cover is much higher (1.32x in H124) due to the inclusion of non-cash IFRS rent smoothing adjustments.

Exhibit 4: Dividends paid/declared (reported to Q324 and Edison forecast thereafter)

DPS declared

DPS paid

Pence per share

FY23

FY24e

FY25e

FY26e

FY23

FY24e

FY25e

FY26e

Q1

1.690

1.428

1.46

1.49

1.690

1.400

1.428

1.46

Q2

1.690

1.428

1.46

1.49

1.690

1.428

1.46

1.49

Q3

1.400

1.428

1.46

1.49

1.690

1.428

1.46

1.49

Q4

1.400

1.428

1.46

1.49

1.400

1.428

1.46

1.49

Total

6.180

5.712

5.840

5.960

6.470

5.684

5.808

5.930

Source: Target Healthcare REIT DPS data to Q324, Edison Investment Research forecasts for Q424 onwards.

Debt funding costs are substantially fixed

Of Target’s £320m of debt facilities, £259m was drawn at end-Q324, with an average term to maturity of 5.5 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 £109m 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, and the blended interest cost is 4.4%. In aggregate, 89% of the Q324 drawn debt was fixed/hedged at an all-in rate, including the amortisation of loan arrangement costs, of 4.14%, with an average 5.5 years’ maturity. The £61m of undrawn borrowing would, if fully drawn, be at a variable interest cost of 2.22% plus SONIA. Allowing for undrawn debt, cash resources and £21m of investment commitments in respect of development funding, Target had £41m of available capital at end-Q324.

Exhibit 5: Summary of debt financing (as at end-Q324)

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

£79m

Nov-25

SONIA + 2.17%

£50m capped at 3.0%

Source: Target Healthcare REIT

Market interest rate expectations remain volatile, but currently anticipate a decline in the SONIA rate from c 5% currently 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.

Our forecasts assume a refinancing with effect from July 2025 (the start of FY26), ahead of the November 2025 maturity, and we assume a debt margin of 2.5% over SONIA (forecast at 4.0% in FY26), or 6.5% in aggregate. On this basis, the increased DPS remains well-covered at 1.05x.

Portfolio yields have stabilised, supporting capital growth

Strong care sector fundamentals and non-cyclical, long-term, inflation-protected income prospects have mitigated the impact that rising bond yields and economic uncertainty have had on property valuations across the broad UK commercial property sector. Also, in contrast to that wider sector, investment demand for good-quality care home properties, especially modern, purpose-built properties with strong environmental credentials, has remained robust.

As a result, while the EPRA topped-up net initial yield (‘the valuation yield’) of Target’s portfolio rose in late 2022, directionally in line with the broader UK commercial property sector, the widening was significantly less, and valuations were more robust.

Over the past year, the yield on Target’s portfolio has stabilised, with a small tightening in Q324 to 6.19%. For the broad UK commercial property sector, yields have continued to widen. Driven by rental uplifts, during the first nine months of FY24, Target’s property valuation gains amount to c £4.4m compared with a loss of c £8.0m in the equivalent period of FY23. Our forecasts assume no change in yield, with rental growth continuing to generate valuation gains, supporting NAV growth. Our forecasts may prove to be conservative, given strong care home property sector fundamentals, the quality of Target’s assets and the market expectation of interest rate reductions. Target expects the valuation premium attached to better-quality care home real estate to increase further.

Exhibit 6: EPRA topped-up net initial yield

Source: Target Healthcare REIT data

Healthcare property is relatively defensive and characterised by lower volatility of returns compared with the broader commercial property sector, and Target’s portfolio has performed strongly versus the MSCI UK Annual Healthcare Property Index. In 2023 it was ranked first out of the 37 constituents, with an ungeared total property return of 9.7% versus 4.2% for the index. Target’s annualised total return since launch is 10.1% pa and over the more challenging past five years it is 8.0% pa (index: 5.9%).

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.

99% of Target’s rooms benefit from full ensuite wet room provision, compared with 32% 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.

99% 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.

Tenants are performing well

The operator sector, in general, continues to benefit from the post-pandemic recovery in home occupancy, strong fee growth and an easing in staffing pressures. In combination this has provided an offset to inflationary cost pressures.

Based on the latest available data3 gathered from its tenants, underlying resident occupancy in Target’s mature homes4 remains on a slow but consistently upward trajectory, to around 87% currently. For the whole portfolio, end-December occupancy was 85%, prior to the two development completions in Q3. 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 more recently been focused on admitting new residents at fee levels appropriate to the care package required, as opposed to prioritising occupancy in itself.

  3 Data as of 31 December 2023

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

Average weekly resident fees have continued to outstrip inflation and Target notes that fees for privately funded residents (two-thirds of the total across its tenants) have exceeded inflation over the past 25 years.

In addition to higher occupancy and strong fee growth, the caps on rent increases have also protected tenants against the pressures of elevated inflation, just as they are designed to do. Similarly, over previous periods of low inflation, the floors on rent increases (typically c 2%) have worked to the company’s advantage.

Rent cover5 for mature homes, now c 90%6 of the total, has continued to increase and was 1.90x in the December 2023 quarter compared with 1.5x in the prior year period. On a rolling 12-month basis, yet to fully reflect the continuing improvement, rent cover to end-December 2023 was 1.8x (12 months to December 2022: 1.4x).

  5 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.

  6 Mature homes were 92% of the portfolio at end-H124 prior to the Q3 completion of the homes at Dartford and Holt.

On a quarterly (or spot) basis, rent 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 7: Rent cover turning upwards

Exhibit 8: Increasing share of homes at maturity

Source: Target Healthcare REIT

Source: Target Healthcare REIT

Exhibit 7: Rent cover turning upwards

Source: Target Healthcare REIT

Exhibit 8: Increasing share of homes at maturity

Source: Target Healthcare REIT

Asset management initiatives and improved trading conditions restored rent collection to around 99% by end-FY23 (an average 97% for the year) and it has continued to be robust during the current year. During FY22, collection had dipped to around 95%, with a small number of tenants slow to recover from the pandemic.

In our forecasts we allow for 1% pa non-collection of rent, recognising that within a large portfolio of almost 100 homes spread across 32, mostly mid-sized, tenants, it is not unreasonable to expect some of these to face challenges from time to time.

Attractive dividend yield and discount to NAV

The targeted FY24 DPS of 5.712p represents a prospective yield of 7.0%, while the shares continue to trade at a discount of c 25% to Q324 NAV. Asset yields are above the property sector average, valuations appear well-supported, there is no material requirement for repair and maintenance capex, gearing is moderate and there is no ‘re-financing cliff’.

Exhibit 9: Dividend yield remains attractively high despite dividend rebasing

Exhibit 10: P/NAV appears to discount material further property yield widening (valuation decline)

Source: Target Healthcare REIT DPS data, LSEG prices

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

Exhibit 9: Dividend yield remains attractively high despite dividend rebasing

Source: Target Healthcare REIT DPS data, LSEG prices

Exhibit 10: P/NAV appears to discount material further property yield widening (valuation decline)

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

In Exhibit 11, 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.

Exhibit 11: 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

1279

0.83

7.7

1%

-4%

-18%

-43%

Impact Healthcare

21

89

367

0.77

7.7

1%

4%

-14%

-24%

Primary Health Properties

11

96

1280

0.89

7.0

5%

2%

-11%

-37%

Residential Secure Income

N/A

47

87

0.59

11.0

-8%

-3%

-26%

-50%

Triple Point Social Housing

25

61

240

0.54

9.0

2%

3%

33%

-42%

Average

17

0.72

8.5

0%

0%

-7%

-39%

Target Healthcare

26

82

508

0.75

6.9

0%

-4%

4%

-32%

UK property sector index

1,370

3%

2%

-1%

-24%

UK equity market index

4,584

4%

7%

5%

10%

Source: company data, LSEG pricing at 18 May 2024. Note: *Weighted average unexpired lease term. **Based on last reported NAV/NTA. ***Based on trailing 12-month DPS declared.


Appendix: Details of H124 financial performance

The H124 financial results were published on 12 March 2024. The earnings performance was robust, with increased rental income offsetting the impact of higher average borrowing costs in the period, mostly now fixed or hedged until November 2025. EPRA earnings and adjusted EPRA earnings were both at similar levels to H123 and H223. Property valuation gains versus losses in H123 generated a swing in IFRS earnings to a profit of £30.8m versus an H123 loss of £34.2m. NAV per share increased 2.1% in the six-month period to 106.7p, and including dividends paid the NAV total return was 4.8%. Borrowings increased modestly as debt was drawn to fund capex, but the net loan to value ratio of 25.8% remained conservative.

Exhibit 12: Summary of results for the six months to 31 December 2023 (H124)

£m unless stated otherwise

H124

H123

H124/H123

H223

Cash rental income

28.6

28.1

2%

28.3

Other income

0.0

0.1

0.0

Credit loss allowance

(0.3)

0.0

(0.3)

Investment management fees

(3.7)

(3.8)

-3%

(3.6)

Other expenses

(1.5)

(1.6)

-6%

(1.5)

Finance expense

(5.2)

(4.6)

14%

(4.9)

Development interest under forward fund agreements

1.0

0.5

110%

0.5

Adjusted earnings

18.9

18.7

1%

18.5

Development interest under forward fund agreements

(1.0)

(0.5)

(0.5)

Income from guaranteed rent reviews & lease incentives

5.5

5.9

5.4

EPRA earnings

23.4

24.1

-3%

23.4

Realised/unrealised gains/(losses) on properties

7.7

(58.0)

4.6

Interest rate cap

(0.4)

(0.3)

(0.4)

Other income

2.0

0.0

1.0

IFRS earnings

30.8

(34.2)

-190%

27.6

IFRS EPS (p)

4.96

-5.51

-190%

4.45

EPRA EPS (p)

3.78

3.89

-3%

3.78

Adjusted EPS (p)

3.05

3.01

1%

2.99

DPS declared (p)

2.86

3.38

-16%

2.80

Dividend cover - EPRA earnings (x)

0.00

0.00

0.00

Dividend cover - Adjusted earnings (x)

1.07

0.89

1.07

EPRA NTA per share (‘NAV’ (p)

106.7

103.0

104.5

EPRA NTA total return/accounting total return

4.8%

-5.2%

4.4%

Investment properties including investment via loans

911.1

867.7

868.7

Borrowings

252.5

240.0

230.0

Cash

17.6

21.8

15.4

Gross LTV

27.7%

27.7%

26.5%

Net LTV

25.8%

25.1%

24.7%

Source: Target Healthcare REIT data, Edison Investment Research

Exhibit 13: Financial summary

Year to 30 June (£m)

2022

2023

2024e

2025e

2026e

INCOME STATEMENT

Rental income excluding guaranteed uplift

48.8

56.4

58.2

62.2

64.6

IFRS adjustment for guaranteed uplifts

10.2

11.3

10.9

11.1

11.1

Other income

4.8

0.1

0.0

0.0

0.0

Total revenue

63.9

67.7

69.1

73.3

75.7

Gains/(losses) on revaluation

5.5

(53.4)

19.1

13.0

13.3

Realised gains/(losses) on disposal

0.0

0.0

0.0

0.0

0.0

Management fee

(7.3)

(7.4)

(7.4)

(7.6)

(7.9)

Credit loss allowance & bad debts

(3.2)

(0.3)

(0.6)

(0.6)

(0.6)

Other expenses

(3.2)

(3.0)

(3.1)

(3.2)

(3.3)

Operating profit

55.7

3.6

77.1

74.8

77.2

Net finance cost

(6.6)

(10.1)

(11.8)

(13.0)

(14.2)

IFRS net result

49.1

(6.6)

65.3

61.8

63.0

Adjust for:

Gains/(losses) on revaluation

(5.6)

54.0

(19.1)

(13.0)

(13.3)

Other EPRA adjustments

(3.9)

0.1

0.8

0.8

0.4

EPRA earnings

39.7

47.6

47.1

49.6

50.1

Adjust for fixed/guaranteed rent reviews

(10.2)

(11.3)

(10.9)

(11.1)

(11.1)

Adjust for development interest under forward fund agreements

0.8

1.0

1.6

0.3

0.0

Group adjusted earnings

30.2

37.2

37.8

38.7

39.0

Average number of shares in issue (m)

599.1

620.2

620.2

620.2

620.2

IFRS EPS (p)

8.20

(1.06)

10.53

9.97

10.15

EPRA EPS (p)

6.6

7.7

7.6

8.0

8.1

Adjusted EPS (p)

5.0

6.0

6.1

6.2

6.3

Dividend per share (declared) (p)

6.76

6.18

5.71

5.84

5.96

Dividend cover (EPRA earnings) (x)

0.95

1.24

1.33

1.37

1.36

Dividend cover (adjusted earnings) (x)

0.72

0.97

1.07

1.07

1.05

BALANCE SHEET

Investment properties

857.7

800.2

863.9

885.3

898.6

Other non-current assets

65.9

83.3

90.7

99.7

110.0

Non-current assets

923.6

883.4

954.6

985.0

1,008.6

Cash and equivalents

34.5

15.4

16.8

17.7

20.9

Other current assets

5.5

9.5

5.6

5.9

6.0

Current assets

40.0

24.8

22.4

23.6

26.9

Bank loan

(231.4)

(227.1)

(268.2)

(273.8)

(274.4)

Other non-current liabilities

(7.1)

(8.1)

(8.5)

(8.5)

(8.5)

Non-current liabilities

(238.5)

(235.1)

(276.7)

(282.3)

(282.9)

Trade and other payables

(26.4)

(18.3)

(18.9)

(20.1)

(20.5)

Current Liabilities

(26.4)

(18.3)

(18.9)

(20.1)

(20.5)

Net assets

698.8

654.8

681.4

706.2

732.0

Adjust for derivative financial liability

(2.3)

(6.9)

(2.6)

(0.8)

0.0

EPRA net tangible assets (NTA)

696.5

647.9

678.8

705.4

732.0

Period end shares (m)

620.2

620.2

620.2

620.2

620.2

IFRS NAV per share (p)

112.7

105.6

109.9

113.9

118.0

EPRA NTA per share (p)

112.3

104.5

109.4

113.7

118.0

EPRA NTA total return

7.8%

-1.2%

10.2%

9.2%

9.0%

CASH FLOW

Cash flow from operations

35.6

40.8

47.6

51.6

53.1

Premium paid for interest rate cap

(2.6)

0.0

0.0

0.0

Net interest paid

(5.2)

(8.6)

(10.0)

(11.6)

(13.2)

Tax paid

(0.0)

0.0

0.0

0.0

0.0

Net cash flow from operating activities

30.4

29.7

37.6

40.0

39.9

Purchase of investment properties

(207.0)

(29.3)

(41.4)

(8.1)

0.0

Disposal of investment properties

4.4

25.8

0.0

0.0

0.0

Net cash flow from investing activities

(202.6)

(3.6)

(41.4)

(8.1)

0.0

Issue of ordinary share capital (net of expenses)

122.5

0.0

0.0

0.0

0.0

(Repayment)/drawdown of loans

104.8

(4.8)

40.5

5.0

0.0

Dividends paid

(39.8)

(40.3)

(35.2)

(36.0)

(36.8)

Other

(1.8)

(0.2)

0.0

0.0

0.0

Net cash flow from financing activities

185.6

(45.2)

5.3

(31.0)

(36.8)

Net change in cash and equivalents

13.4

(19.1)

1.5

0.9

3.1

Opening cash and equivalents

21.1

34.5

15.4

16.8

17.7

Closing cash and equivalents

34.5

15.4

16.8

17.7

20.9

Balance sheet debt

(231.4)

(227.1)

(268.2)

(273.8)

(274.4)

Unamortised loan arrangement costs

(3.4)

(2.9)

(2.3)

(1.7)

(1.1)

Drawn debt

(234.8)

(230.0)

(270.5)

(275.5)

(275.5)

Net cash/(debt)

(200.3)

(214.6)

(253.7)

(257.8)

(254.6)

Gross LTV

25.8%

26.5%

28.7%

28.2%

27.5%

Net LTV

22.0%

24.7%

26.9%

26.4%

25.5%

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

General disclaimer and copyright

This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Target Healthcare REIT. Edison Investment Research standard fees are £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 2024 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

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 2024 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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