Last close As at 05/08/2026
GBP1.12
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GBP698m
Research: Real Estate
Target Healthcare REIT’s Q125 update shows indexed rent reviews driving increased earnings and property values. Tenant profitability remains strong, reflected in high levels of rent cover and rent collection. The rate of quarterly dividends has increased 3% from the start of FY25 and is well covered by adjusted earnings.
Target Healthcare REIT |
Rental income continuing to drive returns |
Q125 update |
Real estate |
30 October 2024 |
Share price performance
Business description
Next events
Analyst
Target Healthcare REIT is a research client of Edison Investment Research Limited |
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Target Healthcare REIT’s Q125 update shows indexed rent reviews driving increased earnings and property values. Tenant profitability remains strong, reflected in high levels of rent cover and rent collection. The rate of quarterly dividends has increased 3% from the start of FY25 and is well covered by adjusted earnings.
Year end |
Rental |
Adjusted earnings* (£m) |
Adjusted |
NAV**/ |
DPS |
P/NAV |
Yield |
06/23 |
67.7 |
37.2 |
6.0 |
104.5 |
6.18 |
0.86 |
6.9 |
06/24 |
69.6 |
38.0 |
6.1 |
110.7 |
5.71 |
0.81 |
6.4 |
06/25e |
70.1 |
38.7 |
6.2 |
113.8 |
5.88 |
0.79 |
6.6 |
06/26e |
72.8 |
39.0 |
6.3 |
119.4 |
6.00 |
0.75 |
6.7 |
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 throughout this report.
Gains in earnings and asset values
In the three months to 30 September (Q125), EPRA net tangible assets (NTA) per share increased by 0.9% to 111.7p, with adjusted EPRA EPS of 1.55p and a fully covered DPS of 1.471p. The 3% increase in Q125 DPS versus Q424 reflects the increased guidance provided with the FY24 results and is reflected in our forecasts. We expect further fully covered DPS growth in FY26 and now forecast 6.0p, an unchanged 2% uplift. Adjusting for the Q424 DPS paid (but not reinvested), the three-month EPRA NTA return was 2.2% (FY24: 11.4%). Tenants continue to perform well and rent cover for mature homes (90% of the total) for the June quarter (the most recent quarter of tenant data) was 2.0x (March quarter: 1.9x).
Sustainable earnings and social benefits
Within a structurally supported sector, Target’s investment case is differentiated by its unwavering focus on asset quality. It invests in modern, purpose-built properties that are appealing to residents (two-thirds private pay), support operators in providing better, more efficient and more effective care, and provide sustainable, long-term investment income. 99% of its homes are EPC rated A or B (100% EPC C and above) and compliant with the minimum energy efficiency standards anticipated to apply from 2030. More than 99% of its rooms have full en-suite wet-room facilities (compared with little more than 30% for the sector). For 2023, Target’s GRESB sustainability benchmark score increased to 71 versus a peer average of 65, placing it second among its peer group and seventh in the listed healthcare segment.
Valuation: Attractive yield with NAV upside
The FY25 DPS target represents an attractive yield of 6.6%. In addition to continuing DPS uplifts we expect NAV to increase, driven by rent indexation, with a potential additional benefit from any property yield tightening. Meanwhile the shares trade at an almost 24% discount to the September EPRA NTA per share.
Additional details on the NAV update and forecast changes
The portfolio EPRA topped-up net initial yield has been stable throughout the past year at c 6.2%, allowing annually indexed rental growth to be reflected in property revaluation gains and NAV growth as well as income. Strong sector fundamentals and declining interest rates indicate scope for yields to tighten, particularly for good quality assets. Rents are reviewed annually and are mostly Retail Price Index linked, capped and collared at between 2% and 4% and in Q125, contracted rent roll and property values each increased by 0.6% on a like-for-like basis. Rent reviews settled in the period were at an average 3.0% uplift, reflecting the moderation in inflation. Looking ahead, in addition to indexation, rent roll will get a £1.4m pa uplift as the two properties under development reach completion in coming weeks.
Exhibit 1: Quarterly NAV total return performance
Q124 |
Q224 |
Q324 |
Q424 |
FY24 |
Q125 |
|
Pence per share unless stated otherwise |
Sep-23 |
Dec-23 |
Mar-24 |
Jun-24 |
Jun-24 |
Sep-24 |
Opening NAV |
104.50 |
105.60 |
106.70 |
109.00 |
104.50 |
110.70 |
Closing NAV |
105.6 |
106.7 |
109 |
110.7 |
110.7 |
111.7 |
DPS paid |
1.4 |
1.428 |
1.428 |
1.428 |
5.684 |
1.428 |
Dividend return |
1.3% |
1.4% |
1.3% |
1.3% |
5.4% |
1.3% |
Capital return |
1.1% |
1.0% |
2.2% |
1.6% |
5.9% |
0.9% |
NAV total return |
2.4% |
2.4% |
3.5% |
2.9% |
11.4% |
2.2% |
Source: Target Healthcare REIT, Edison Investment Research
With the FY24 results, the company lifted its targeted growth in FY25 to 3% or an annualised 5.88p per share. We have adjusted our forecasts accordingly and continue to expect DPS to grow a further 2% in FY26.
The other key adjustment to our forecasts relates to the end-June disposal of four care homes for £44.5m at a premium to book value, generating an FY24 net disposal gain of £1.9m. While the homes had performed well since being acquired by Target as part of the significant portfolio transaction in late 2021, their sale enhanced key portfolio average metrics such as age, floor space and unexpired lease term. With the proceeds being used to reduce its use of more expensive debt, the sale has no impact on our revised forecasts.
Exhibit 2: Forecast revisions
New forecast |
Previous forecasts |
Forecast change |
||||
£m unless stated otherwise |
FY25e |
FY26e |
FY25e |
FY26e |
FY25e |
FY26e |
Cash rental income |
59.5 |
62.1 |
62.2 |
64.6 |
(2.7) |
(2.5) |
Credit loss allowance |
(0.6) |
(0.6) |
(0.6) |
(0.6) |
0.0 |
0.0 |
Expenses |
(10.9) |
(11.2) |
(10.8) |
(11.2) |
(0.0) |
0.0 |
Net finance costs |
(9.4) |
(11.3) |
(12.2) |
(13.8) |
2.8 |
2.5 |
Gain on disposal |
0.0 |
|||||
Development interest under forward fund agreements |
0.1 |
0.0 |
0.3 |
0.0 |
(0.2) |
0.0 |
Adjusted earnings |
38.7 |
39.0 |
38.7 |
39.0 |
(0.0) |
0.0 |
Development interest under forward fund agreements |
(0.1) |
0.0 |
(0.3) |
0.0 |
0.2 |
0.0 |
Non-cash IFRS adjustments |
10.7 |
10.7 |
11.1 |
11.1 |
(0.5) |
(0.4) |
EPRA earnings |
49.3 |
49.7 |
49.6 |
50.1 |
(0.3) |
(0.4) |
EPRA EPS (p) |
7.9 |
8.0 |
8.0 |
8.1 |
(0.1) |
(0.1) |
Adjusted EPS (p) |
6.2 |
6.3 |
6.2 |
6.3 |
(0.0) |
0.0 |
DPS declared (p) |
5.88 |
6.00 |
5.84 |
5.96 |
0.0 |
0.0 |
EPRA DPS cover (x) |
1.35 |
1.34 |
1.37 |
1.36 |
(0.0) |
(0.0) |
Adjusted DPS cover (x) |
1.06 |
1.05 |
1.07 |
1.05 |
(0.0) |
(0.0) |
EPRA NTA per share (‘NAV’) (p) |
113.8 |
119.4 |
113.7 |
118.0 |
0.0 |
1.4 |
NAV total return |
8.1% |
10.2% |
9.2% |
9.0% |
(0.0) |
0.0 |
Source: Edison Investment Research
Exhibit 3: Financial summary
Year to 30 June (£m) |
2022 |
2023 |
2024 |
2025e |
2026e |
INCOME STATEMENT |
|||||
Rental income excluding guaranteed uplift |
48.8 |
56.4 |
58.6 |
59.5 |
62.1 |
IFRS adjustment for guaranteed uplifts |
10.2 |
11.3 |
10.9 |
10.7 |
10.7 |
Other income |
4.8 |
0.1 |
0.0 |
0.0 |
0.0 |
Total revenue |
63.9 |
67.7 |
69.6 |
70.1 |
72.8 |
Gains/(losses) on revaluation |
5.5 |
(53.4) |
24.7 |
8.1 |
22.0 |
Realised gains/(losses) on disposal |
0.0 |
0.0 |
1.9 |
0.0 |
0.0 |
Management fee |
(7.3) |
(7.4) |
(7.5) |
(7.7) |
(7.9) |
Credit loss allowance & bad debts |
(3.2) |
(0.3) |
(1.0) |
(0.6) |
(0.6) |
Other expenses |
(3.2) |
(3.0) |
(3.1) |
(3.2) |
(3.3) |
Operating profit |
55.7 |
3.6 |
84.6 |
66.7 |
83.0 |
Net finance cost |
(6.6) |
(10.1) |
(11.6) |
(10.2) |
(11.7) |
IFRS net result |
49.1 |
(6.6) |
73.0 |
56.5 |
71.3 |
Adjust for: |
|||||
Gains/(losses) on revaluation |
(5.6) |
54.0 |
(24.7) |
(8.1) |
(22.0) |
Other EPRA adjustments |
(3.9) |
0.1 |
(1.1) |
0.8 |
0.4 |
EPRA earnings |
39.7 |
47.6 |
47.2 |
49.3 |
49.7 |
Adjust for fixed/guaranteed rent reviews |
(10.2) |
(11.3) |
(10.9) |
(10.7) |
(10.7) |
Adjust for development interest under forward fund agreements |
0.8 |
1.0 |
1.8 |
0.1 |
0.0 |
Group adjusted earnings |
30.2 |
37.2 |
38.0 |
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) |
11.77 |
9.12 |
11.50 |
EPRA EPS (p) |
6.6 |
7.7 |
7.6 |
7.9 |
8.0 |
Adjusted EPS (p) |
5.0 |
6.0 |
6.1 |
6.2 |
6.3 |
Dividend per share (declared) (p) |
6.76 |
6.18 |
5.71 |
5.88 |
6.00 |
Dividend cover (EPRA earnings) (x) |
0.95 |
1.24 |
5.33 |
1.35 |
1.34 |
Dividend cover (adjusted earnings) (x) |
0.72 |
0.97 |
4.29 |
1.06 |
1.05 |
BALANCE SHEET |
|||||
Investment properties |
857.7 |
800.2 |
831.6 |
847.0 |
869.1 |
Other non-current assets |
65.9 |
83.3 |
91.2 |
99.8 |
109.7 |
Non-current assets |
923.6 |
883.4 |
922.8 |
946.8 |
978.7 |
Cash and equivalents |
34.5 |
15.4 |
38.9 |
28.3 |
31.2 |
Other current assets |
5.5 |
9.5 |
5.7 |
5.7 |
5.8 |
Current assets |
40.0 |
24.8 |
44.6 |
34.0 |
37.0 |
Bank loan |
(231.4) |
(227.1) |
(240.7) |
(246.3) |
(246.9) |
Other non-current liabilities |
(7.1) |
(8.1) |
(9.9) |
(8.5) |
(8.5) |
Non-current liabilities |
(238.5) |
(235.1) |
(250.6) |
(254.8) |
(255.4) |
Trade and other payables |
(26.4) |
(18.3) |
(27.5) |
(19.4) |
(19.8) |
Current Liabilities |
(26.4) |
(18.3) |
(27.5) |
(19.4) |
(19.8) |
Net assets |
698.8 |
654.8 |
689.3 |
706.7 |
740.6 |
Adjust for derivative financial liability |
(2.3) |
(6.9) |
(2.8) |
(1.0) |
(0.2) |
EPRA net tangible assets (NTA) |
696.5 |
647.9 |
686.5 |
705.7 |
740.4 |
Period end shares (m) |
620.2 |
620.2 |
620.2 |
620.2 |
620.2 |
IFRS NAV per share (p) |
112.7 |
105.6 |
111.1 |
113.9 |
119.4 |
EPRA NTA per share (p) |
112.3 |
104.5 |
110.7 |
113.8 |
119.4 |
EPRA NTA total return |
7.8% |
-1.2% |
11.4% |
8.1% |
10.2% |
CASH FLOW |
|||||
Cash flow from operations |
35.6 |
40.8 |
52.2 |
38.4 |
50.6 |
Premium paid for interest rate cap |
(2.6) |
0.0 |
0.0 |
0.0 |
|
Net interest paid |
(5.2) |
(8.6) |
(9.9) |
(8.8) |
(10.7) |
Tax paid |
(0.0) |
0.0 |
0.0 |
0.0 |
0.0 |
Net cash flow from operating activities |
30.4 |
29.7 |
42.3 |
29.7 |
39.9 |
Purchase of investment properties |
(207.0) |
(29.3) |
(40.9) |
(9.0) |
0.0 |
Disposal of investment properties |
4.4 |
25.8 |
44.3 |
0.0 |
0.0 |
Net cash flow from investing activities |
(202.6) |
(3.6) |
3.4 |
(9.0) |
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) |
13.0 |
5.0 |
0.0 |
Dividends paid |
(39.8) |
(40.3) |
(35.2) |
(36.2) |
(37.0) |
Other |
(1.8) |
(0.2) |
0.0 |
0.0 |
0.0 |
Net cash flow from financing activities |
185.6 |
(45.2) |
(22.2) |
(31.2) |
(37.0) |
Net change in cash and equivalents |
13.4 |
(19.1) |
23.5 |
(10.6) |
2.9 |
Opening cash and equivalents |
21.1 |
34.5 |
15.4 |
38.9 |
28.3 |
Closing cash and equivalents |
34.5 |
15.4 |
38.9 |
28.3 |
31.2 |
Balance sheet debt |
(231.4) |
(227.1) |
(240.7) |
(246.3) |
(246.9) |
Unamortised loan arrangement costs |
(3.4) |
(2.9) |
(2.3) |
(1.7) |
(1.1) |
Drawn debt |
(234.8) |
(230.0) |
(243.0) |
(248.0) |
(248.0) |
Net cash/(debt) |
(200.3) |
(214.6) |
(204.1) |
(219.7) |
(216.8) |
Gross LTV |
25.8% |
26.5% |
26.7% |
26.5% |
25.6% |
Net LTV |
22.0% |
24.7% |
22.5% |
23.5% |
22.4% |
Source: Target Healthcare REIT historical data, Edison Investment Research forecasts
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