Target Healthcare REIT — Resilient H122 and continuing growth

Target Healthcare REIT (LSE: THRL)

Currency in GBP

Last close As at 02/02/2023

GBP0.87

7.00 (8.74%)

Market capitalisation

GBP497m

Research: Real Estate

Target Healthcare REIT — Resilient H122 and continuing growth

Target Healthcare REIT’s H122 results demonstrate a resilient performance, and completed and prospective capital deployment chart a path to further strong earnings growth and full dividend cover. Indexed rent uplifts, an extension of long-term fixed-rate debt, and an historical ability of operators to match inflation pressures with fee growth offer good inflation protection.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Target Healthcare REIT

Resilient H122 and continuing growth

Interim results

Real estate

4 April 2022

Price

112.8p

Market cap

£700m

Net debt (£m) at 31 December 2021

180.5

Net LTV at 31 December 2021

20.7%

Shares in issue

620.2m

Free float

100%

Code

THRL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.6

(4.4)

(0.2)

Rel (local)

1.7

(4.2)

(8.5)

52-week high/low

125.4p

105.6p

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

FY21 year-end

30 June 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Target Healthcare REIT’s H122 results demonstrate a resilient performance, and completed and prospective capital deployment chart a path to further strong earnings growth and full dividend cover. Indexed rent uplifts, an extension of long-term fixed-rate debt, and an historical ability of operators to match inflation pressures with fee growth offer good inflation protection.

Year end

Rental income (£m)

Adjusted net
earnings* (£m)

Adjusted
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/21

50.0

26.0

5.46

110.4

6.72

1.02

6.0

06/22e

59.6

33.3

5.55

111.7

6.76

1.01

6.0

06/23e

73.2

40.7

6.56

116.1

6.86

0.97

6.1

06/24e

77.6

43.2

6.97

119.4

6.96

0.94

6.2

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.

Clear path to further growth and dividend cover

Including the £159m acquisition of an 18-home portfolio, Target committed £191m to new investment and developments during H122 and has since acquired an additional home for £7.2m. The remaining available capital of c £80m is all allocated to an identified pipeline in late-stage due diligence. Annualised contracted rent increased by 30% to £51.4m in H122 and Target anticipates c £64m on a fully deployed basis, sufficient to fully cover DPS on a ‘cash’ adjusted earnings basis. The portfolio acquisition added £9.3m to contracted rents, but contributed for just 12 days and the temporary cash drag drove an 11% y-o-y reduction in adjusted EPS to decline to 2.36p with cash dividend cover of 0.65x. Like for like growth in rents and valuations of 2.8% and 2.2% respectively better indicate underlying performance with a 3.4% NAV total return. Our forecasts are little changed.

Sustainably meeting a long-term need

The care home sector is driven by demographics rather than the economy. A growing elderly population and the need to improve the existing estate point to continuing demand for new, purpose-built homes with flexible layouts and high-quality residential facilities. With its unwavering focus on asset and tenant quality, these are the homes in which Target invests. They are appealing to residents and support operators in providing better and more effective care. Financially, Target believes these factors are key to providing sustainable, long-duration, inflation-linked income. Rent collection has remained robust during the pandemic with operators experiencing a recovery in occupancy over the past year. Omicron slowed performance improvement recently, but is now waning and, with resident enquiries strong and staff shortages improving, the outlook appears positive.

Valuation: Inflation protected long income

The FY22e DPS represents an attractive 6.1% yield, with good prospects for continuing DPS growth. Meanwhile, the shares trade at around NAV versus an average c 6% premium since IPO and a peak of 11%.

Interim results summary

Several of the key financial performance metrics had already been disclosed in the quarterly reporting and covered in our update note published on 3 February, but the H122 results provide more detail. Although earnings and dividend cover were deferred by some delays in the deployment of £125m (gross) equity raise in the September 2022, the underlying performance can be seen in like-for-like rent and valuation growth and a six-month NAV total return of 3.4%.

Of the £191m of new investment and development commitments during H122, the most significant transaction by far was the £159m acquisition of a portfolio of 18 homes, adding £9.3m to contracted annualised rents. All the properties are purpose-built care homes with an average age of c 11 years providing high-quality modern facilities including full ensuite provision, the vast majority of which (96%) benefit from wet rooms. The portfolio is spread across eight tenants, three of which are new to Target, including national operator Barchester Healthcare, as well as two regional operators. In an arm’s length transaction, the portfolio was acquired from the maturing Kames Capital Healthcare Fund, the first fund advised by Target when it was founded in 2010, on behalf of Kames Capital. Target selected 17 of the 18 homes in the portfolio, providing it with an informational advantage in the portfolio acquisition in respect of both the assets and the tenants.

The end-H122 portfolio comprised 98 homes (of which four were under development) valued at £870.5m with contracted rents of £53.4m and let to 31 tenants. The long weighted average unexpired lease term (WAULT) was a long 27.5 years with 96% of rents subject to annual upward-only RPI-linked reviews and 4% fixed uplifts.

Performance during the period continued Target’s track record since IPO in January 2013 of consistent annual DPS growth and consistently positive NAV total returns on both a quarterly and annual basis, reflecting the resilience of the sector and of Target’s strategy. The average annual compound return over this period has been 6.0%, of which c 80% reflects dividends paid.

Exhibit 1: NAV total return history (no reinvestment of dividends paid)

FY14*

FY15

FY16

FY17

FY18

FY19

FY20

FY21

H122

Cumulative

Opening EPRA NAV/NTA (p)

98.0**

94.7

97.9

100.6

101.9

105.7

107.5

108.1

110.4

98.0

Closing EPRA NAV/NTA (p)

94.7

97.9

100.6

101.9

105.7

107.5

108.1

110.4

110.8

110.8

DPS paid

6.5

6.1

6.2

6.3

6.4

6.5

6.7

6.7

3.4

54.7

EPRA NAV/NTA total return

3.3%

9.7%

9.0%

7.5%

10.1%

7.8%

6.8%

8.4%

3.4%

68.8%

Compound annual average return

^%

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


Exhibit 2 provides a summary of H122 financial performance.

Exhibit 2: Summary of H122 financial performance

H122

H121

H122/H121

H222

£m unless stated otherwise

IFRS

Adjustments

Adjusted earnings*

IFRS

Adjustments

Adjusted earnings*

Adjusted earnings*

Adjusted earnings*

Rent revenue

22.0

22.0

20.3

20.3

8.2%

20.9

Income from guaranteed rent reviews & lease incentives

4.5

(4.5)

0.0

4.6

(4.6)

0.0

0.0

Total revenue

26.5

(4.5)

22.0

24.9

(4.6)

20.3

8.2%

20.9

Investment management fee

(3.6)

(3.6)

(2.8)

(2.8)

25.9%

(3.0)

Credit loss allowance & bad debts

(1.1)

(1.1)

(1.9)

(1.9)

(0.8)

Other expenses

(1.6)

(1.6)

(1.2)

(1.2)

26.7%

(1.4)

Operating profit before property gains/(losses)

20.3

(4.5)

15.8

18.9

(4.6)

14.3

10.3%

15.8

Realised/unrealised gains/(losses) on properties

0.9

(0.9)

0.0

0.2

(0.2)

0.0

0.0

Operating profit

21.2

(5.4)

15.8

19.1

(4.8)

14.3

10.3%

15.8

Net finance cost

(2.5)

0.0

(2.5)

(3.3)

0.9

(2.4)

4.7%

(2.4)

Development interest under forward fund agreements

0.0

0.3

0.3

0.0

0.2

0.2

58.0%

0.4

Net earnings

18.7

(5.1)

13.7

15.8

(3.6)

12.2

12.2%

13.8

Other data:

H122

H121

H122/H121

H221

Number of shares outstanding (m)

620.2

457.5

35.6%

511.5

Average number of shares outstanding

578.3

457.5

26.4%

493.3

IFRS EPS (p)

3.24

3.46

-6.4%

5.77

EPRA EPS (p)

3.08

3.61

-14.6%

3.55

Adjusted EPS (p)

2.36

2.66

-11.3%

2.66

DPS declared (p)

3.38

3.36

0.6%

3.36

Dividend cover - EPRA earnings

0.85

1.07

1.02

Dividend cover - Adjusted earnings

0.65

0.79

0.80

IFRS NAV per share (p)

110.9

108.1

110.5

EPRA NTA per share (p)

110.8

108.2

110.4

EPRA NTA total return/accounting total return)

3.4%

3.2%

5.2%

Investment properties

870.5

647.7

684.8

Borrowings

222.8

162.0

130.0

Cash

34.6

18.3

21.1

Gross LTV

25.6%

25.0%

19.0%

Net LTV

20.7%*

22.2%

15.9%

Source: Target Healthcare REIT data, Edison Investment Research. Note: *Net debt adjusted for £7.6m development loan receivable.

Focusing on adjusted earnings, we note:

Excluding non-cash IFRS rent smoothing adjustments rental income increased c 8% versus H121 to £22.0m. The increase included the impact of acquisitions, development completions and like-for-like rental growth of 2.8%. We expect the latter to increase in line with recent inflation trends.

The completion of the portfolio acquisition was delayed by around three months, primarily due to the impact of the pandemic on the process, and contributed to H122 income for just 12 days.

Rent collection was a resilient 96% in the period and the rent provisions recorded in the income statement of £1.1m were well down on H121 (£1.9m). Growth in investment management fees followed the increase in net asset value, while other operating expenses increased with the size of the business and inflation.

Net finance expense rose only modestly.

Including a £0.3m adjustment for development interest under forward funding agreements, net adjusted earnings increases by c 12% to £13.7m. Reflecting the increased number of shares and the time taken to deploy the equity raise proceeds, adjusted EPS was c 11% lower at 2.36p. With DPS up 0.6% to 3.34p, dividend cover was temporarily reduced to 0.65x (0.85x on an EPRA earnings basis, including IFRS smoothing but excluding development interest). In the following section we discuss the path to full dividend cover.

Earnings on an IFRS basis further included £0.9m of revaluation gains, with acquisition costs in the period masking a 2.2% like-for-like increase.

Well-charted path to dividend cover

Target says that it has c £80m of capital available for further deployment, allowing for existing commitments, and that is all earmarked for identified acquisitions that have been approved by the board. Including the impact of this future deployment, a full contribution from previous acquisitions, development completions, rent reviews and economies of scale, Target estimates that dividend cover (on an adjusted earnings basis) will increase to a little more than 100%.

Exhibit 3: Pro forma income statement*

Source: Target Healthcare REIT. Note: *Based on the company’s current estimates and expectations and subject to change.

The rental income and results reported for H122 were mainly driven by the level of annualised contracted rents in place during Q421 (to end-June 2021) and Q122 (to 30 September 2021). Although Q222 annualised contracted rental income increased by £10.2m or c 24% to £53.8m, this largely reflected the portfolio acquisition1 that came in late December 2021 and contributed to H122 income for just 12 days. Current annualised contracted rents are now £53.8m (including the acquisition of a standing asset in Manchester announced on 7 January 2021), while completion of the four pre-let developments will add an additional £2.7m,2 taking annualised contracted rents to £56.5m.

The portfolio acquisition added £9.3m to annualised contracted rents at acquisition and the Q222 uplift also included rent reviews in the period.

We expect developments at Chesterfield in Derbyshire, Olney in Buckinghamshire and Holt in Norfolk to complete by the end of calendar 2022 and the development at Weymouth in Dorset to complete by the middle of calendar 2023.

Target expects the additional £80m capital deployment plus contractual rent increases to further increase annualised contracted rent roll to £63.7m. Given the advanced stage of the targeted investments, we expect most of this increase to be achieved by the end of FY22 with the exclusion of the developments yet to complete. We anticipate that three of the existing developments will remain on site with aggregate estimated annualised contracted rent of c £2.2m, while the £80m capital deployment is likely to include additional development assets (we assume £20m of commitment with aggregate rents of c £1.1m).

Our forecasts are consistent with Target’s analysis above, although the slightly lower dividend cover ratios shown in the financial summary (Exhibit 11) reflect ongoing increases in DPS.

Well placed to manage risks in an inflationary environment

Income visibility and inflation protection

Target has a long WAULT of more than 27 years which, combined with upward-only annual RPI-linked (96% of income) and fixed (4%) contractual rent uplifts, provides significant income visibility and protection against inflation. Uplifts are typically capped at c 4% with a floor of c 2% and although this means that while Retail Price Index (RPI) inflation is above 4%, rental growth will lag in real terms, it contributes towards rents remaining affordable for tenant operators and enhances the security of Target’s income. The company estimates that rent costs represent c 20% of gross revenues for its typical established home.

The 12-month increase in the RPI was 8.2% in February 2022, the highest rate of increase since March 1991, while the 12-month increase in the Consumer Price Index (CPI) was 6.2%, the highest rate of increase since March 1992. The Bank of England continues to expect a moderation in inflation as commodity prices stabilise, supply shortages ease and global demand rebalances, but this is far from assured. War in Ukraine and rising international tensions have seen oil and commodity prices increase further.

Exhibit 4: Inflation at multi-year highs

Source: Office of National Statistics (ONS) data

Although inflation has recently spiked upwards, across the sector the growth in average fees charged to privately funded care home residents has tracked or exceeded inflation over the past c 20 years, subsidising typically lower fees for local authority-funded residents. Using data provided by its operator tenants, Target estimates that c 62% of the residents in its homes are wholly or partly privately funded and 38% are purely publicly funded (predominantly local authority but also NHS).3

This is based on data collected over the past 12 months and, as the composition of care home residency is constantly changing, may not reflect the position at any particular point in time.

Energy cost pressures are acute for care homes, as elsewhere, but Target estimates that these typically account for c 2% of revenues across its homes, much less important than staff costs, typically within a range of 50–60%, and rents. We do not expect staff costs to increase as a percentage of revenues provided operators can maintain their historical pricing power and ability to pass through inflationary pressures.

Meanwhile, tenant performance has remained resilient despite the continuing impacts of the pandemic. Rent collection was 96% in H122 and although the rapid spread of the Omicron variant punctuated the trend of recovering occupancy in portfolio homes,4 the rent cover ratio has remained at c 1.4x5 for mature homes (those that have had the same operator for a three-year period or more, therefore excluding newly developed homes not yet stabilised). This comes despite the gradual withdrawal of government financial support during the peak of the crisis.

Target’s homes are fully let to care home operators and home occupancy no direct impact on it. However, it is a key performance indicator of the ability of operators to sustainably meet their rental commitments and maintain high standards of care.

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) with the agreed rent and is presented on a rolling 12-month basis.

Exhibit 5: Trading performance of Target homes on a rolling 12-month basis

Source: Target Healthcare REIT. Note: (1) As reported to Target through tenant management accounts.

The improvement in home occupancy that began during the second half of 2021 is not obvious from the 12-month rolling data shown in Exhibit 5. However, having dipped by more than 10pp on a ‘spot’ basis to less than 70% at the low point earlier in 2021, occupancy for mature homes has since improved to c 80% currently. Where homes were affected by the winter pick-up in COVID cases, predominantly Omicron, admissions at affected homes had to be put on hold, although none of the tenants has reported significant excess deaths. With cases receding again (19 cases across five homes), enquiry levels remaining strong, and staff shortages beginning to improve the prospects for a resumption of occupancy growth and increase in rent cover towards a normal level of 1.6x, appear positive.6

Setting rents at the right level is key to the sustainability of income and Target believes rent cover of 1.6x provides sufficient flexibility to allow for variances in occupancy and operational performance and is consistent with rent costs at c 20% of revenues for the typical home.

H122 included c £1.1m of provisions against rent receivables, which Target describes as prudent (c 5% of rental income in the period versus the 96% collection rate). Most of the recent rent arrears have primarily related to two tenants across four of the homes and, although not helped by the pandemic, reflect more fundamental performance issues. Asset management initiatives aimed at addressing these were delayed by the physical restrictions in place during the lockdowns but have recently completed. For one tenant, a new operator of two immature homes, trading performance has improved. The position with the other tenant has been resolved with outstanding rents partially settled and the homes re-tenanted. On a much more modest scale, Target says it prudently budgets for a certain recurring level of provisioning to reflect the challenges that continue to face the sector. It is currently negotiating the re-tenanting of four homes managed by a national operator which it believes would be better suited to a smaller regional operator, despite current performance being satisfactory.

Increased long-term fixed-rate debt funding

Financing during H122 increased available debt, increased the share of long-term fixed-rate debt, and extended average duration with a better spread of maturities. In an increasingly inflationary period, this provides significantly enhanced protection against further increases in market interest rates. The long-term, fixed-rate borrowing locks in a positive margin between rental income and borrowing costs and this will increase with inflation-indexed rental growth. More flexible, low-cost variable rate debt remains undrawn to support further portfolio growth and may be replaced with equity or refinanced at some later date.

At the end of November 2021, Target agreed £100m of new fixed-rate funding in two tranches, at a cost of 3.14%, with a weighted average maturity of c 13 years. Including this, end-FY22 total debt facilities amounted to £320m, of which c £223m had been drawn. Including interest rate swaps, £180m of the drawn borrowings had been fixed at an all-in rate of 3.22% (including amortisation of arrangement costs) at least until November 2025 and mostly (£150m) until January 2032.

The remaining £140m of total debt facilities, of which c £43m had been drawn at end-H122, carry interest at a variable rate based on an agreed margin over the SONIA7 benchmark rate. Including amortisation of arrangement fees, the average cost of this variable rate borrowing at end-H122 was 2.44%.

Sterling Overnight Index Average, a benchmark replacement for the RPI.

The end-H122 net loan to value ratio (LTV) was 20.7% and, when fully invested, Target expects this to increase to c 28%, a level with which it is comfortable.

Exhibit 6: Summary of debt portfolio

Lender

Facility type

Facility

Term

Margin

RBS

Term loan

£30m

Nov-25

SONIA + 2.18%

Revolving credit facility

£40m

Nov-25

SONIA + 2.33%

HSBC

Revolving credit facility

£100m

Nov-24

SONIA + 2.17%

Phoenix/Reassure

Term loan

£50m

Jan-32

Fixed 3.28%

Phoenix/Reassure

Term loan

£37m

Jan-32

Fixed 3.13%

Phoenix/Reassure

Term loan

£63m

Jan-37

Fixed 3.14%

Source: Target Healthcare REIT data

Forecasts and valuation

Summary of forecast changes

The changes to our forecasts are relatively modest. Despite the acquisition timing delays, based on H122 performance, our forecast for cash rental income is increased, but offset by higher H122 rent income provisions. The slight reduction to FY23 adjusted earnings is primarily driven by a correction to our estimation of licence fee income8 in respect of the balance sheet value of properties under development.

Income accrued on development funding extended and recognised as a reduction in the purchase cost of the asset at completion.

Exhibit 7: Forecast revisions

Rental income (£m)

Adj. net earnings (£m)

Adjusted EPS (p)

EPRA NAV/share (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

06/22e

58.4

59.6

2.0

33.4

33.3

-0.3

5.6

5.6

-1.4

111.2

111.7

0.4

6.76

6.76

0.0

06/23e

71.9

73.2

1.9

41.0

40.7

-0.7

6.6

6.6

-0.7

115.1

116.1

0.9

6.86

6.86

0.0

06/24e

76.5

77.6

1.4

42.2

43.2

2.3

6.8

7.0

2.3

119.6

119.4

-0.1

6.96

6.96

0.0

Source: Edison Investment Research

There is no change to our DPS growth forecasts, and we expect dividends to be well covered by EPRA earnings (including non-cash IFRS rent smoothing adjustments) as capital deployment takes a full effect, with full cover on a ‘cash’ adjusted earnings basis (excluding IFRS adjustments but including licence fee income on development) by FY24.

Exhibit 8: Dividend cover projections

New forecast

Previous forecast

FY22e

FY23e

FY24e

FY22e

FY23e

FY24e

Dividend cover by EPRA earnings

101%

122%

128%

97%

119%

127%

Dividend cover by adjusted (‘cash’) earnings

79%

96%

100%

80%

96%

98%

Source: Edison Investment Research

Key forecasting assumptions

In line with Target’s guidance of available capital, we assume £80m of new investment commitment by end-FY22. This includes £60m of completed assets and £20m of forward-funded developments, all at a net initial yield of 5.6%. Our other forecasting assumptions include:

Rent indexation of 4% pa (in line with average capped RPI-linked increases) through to end-FY23 and 3% in FY24.

Expenses substantially driven by investment manager fees with a marginal rate of 0.95% on average net assets of more than £500m. Other expenses, excluding rent impairment, increase broadly in line with inflation, while rent impairment in FY22e (c £1.4m or c 5% rents receivable) is well down on FY21 (£2.7m) with a return to a background level, prudently assumed at 2.5% of rents receivable, in FY23e and FY24e.

Gross revaluation movements broadly in line with rent indexation, effectively assuming no change in valuation yields. As reported under IFRS in the income statement, in FY22e this is substantially offset by acquisition costs and IFRS smoothing rent effects.

Exhibit 9: Revaluation movements

£m

FY21 actual

FY22e

FY23e

FY24e

Gross unrealised revaluation movement (including held for sale)

21.4

27.8

29.6

20.7

Acquisition costs written off

(2.3)

(13.3)

0.0

0.0

Movement in lease incentives

(0.9)

(0.4)

0.0

0.0

Net realised and unrealised valuation movement

18.2

14.1

29.6

20.7

Movement in fixed or guaranteed rent reviews

(8.7)

(10.0)

(11.9)

(12.1)

Gains/(losses) on revaluation of investment properties as per income statement

9.4

4.1

17.7

8.6

Acquisition costs as % purchase value

4.3%

5.1%

N/A

N/A

Gross revaluation as % opening portfolio value

3.5%

4.1%

3.1%

2.0%

Gross revaluation gain per share (p)

4.2

4.5

4.8

3.3

Source: Target Healthcare REIT FY21 data, Edison Investment Research forecasts

Valuation

The current year DPS target of 6.76p (+0.6% versus FY21) represents an attractive yield of 6.1%. The shares trade at a small 1% premium to the H122 EPRA NTA per share of 110.8p, below the average c 6% since IPO and the high of c 11%.

In Exhibit 10, we show a summary of the performance and valuation of a group of REITs that we consider to be Target’s closest peers in the broad and diverse commercial property sector. The group is invested in the primary healthcare, supported housing and care home sectors, all targeting stable, long-term income growth derived from long lease exposures. Compared with the average, Target has a clearly longer WAULT and trailing dividend yield with a similar P/NAV.

Exhibit 10: Peer valuation and performance summary

WAULT
(years)

Price
(p)

Market
cap (£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

1 month

3 months

YTD

12 months

3 years

Assura

12

68

2005

1.16

4.3

11%

-3%

-11%

-6%

20%

Civitas Social Housing

23

87

535

0.80

6.3

3%

-10%

-17%

-19%

-15%

Impact Healthcare

19

119

459

1.06

5.4

9%

0%

10%

4%

16%

Primary Health Properties

12

149

1985

1.28

4.2

10%

-2%

-3%

1%

28%

Residential secure Income

N/A

111

205

1.05

4.5

12%

2%

24%

21%

18%

Triple Point Social Housing

26

94

380

0.87

5.5

10%

-2%

-15%

-7%

-11%

Average

18

1.04

5.0

9%

-2%

-2%

-1%

9%

Target Healthcare

28

113

700

1.01

6.0

5%

-4%

-1%

0%

-1%

UK property sector index

1,938

7%

-3%

21%

17%

7%

UK equity market index

4,199

4%

0%

14%

9%

0%

Source: Company data, Refinitiv pricing at 1 April 2021. Note: *Based on last reported NAV. **Based on trailing 12-month DPS declared.

In terms of average share price performance, the peer group has trailed the overall UK property sector and FTSE All-Share Index over the past year, as less defensive, more cyclical areas of the sector rebounded from the impact of pandemic lockdowns. Over the same period, Target’s share price performance has been in line with the average for the group.

Exhibit 11: Financial summary

Year to 30 June (£m)

2017

2018

2019

2020

2021

2022e

2023e

2024e

INCOME STATEMENT

Rent revenue

17.8

22.0

27.9

36.0

41.2

49.5

61.4

65.5

Movement in lease incentive/fixed rent review adjustment

5.1

6.3

6.4

8.2

8.7

10.0

11.9

12.1

Rental income

22.9

28.4

34.3

44.2

49.9

59.5

73.2

77.6

Other income

0.7

0.0

0.0

0.0

0.1

0.1

0.0

0.0

Total revenue

23.6

28.4

34.3

44.3

50.0

59.6

73.2

77.6

Gains/(losses) on revaluation

1.6

6.4

6.2

1.7

9.4

4.1

17.7

8.6

Realised gains/(losses) on disposal

0.0

0.0

0.0

0.6

1.3

0.0

0.0

0.0

Management fee

(3.8)

(3.7)

(4.7)

(5.3)

(5.8)

(7.4)

(7.8)

(8.1)

Other expenses

(1.2)

(1.5)

(2.7)

(4.3)

(5.3)

(4.6)

(4.0)

(4.2)

Operating profit

20.1

29.6

33.0

37.0

49.6

51.7

79.2

74.0

Net finance cost

(0.8)

(2.0)

(3.1)

(5.4)

(5.7)

(6.5)

(9.5)

(10.0)

Profit before taxation

19.3

27.6

29.9

31.6

43.9

45.2

69.7

63.9

Tax

(0.2)

0.0

0.0

0.0

0.0

(0.0)

0.0

0.0

IFRS net result

19.1

27.6

29.9

31.6

43.9

45.2

69.7

63.9

Adjust for:

Gains/(losses) on revaluation

(2.2)

(6.4)

(6.2)

(1.7)

(9.5)

(4.1)

(17.7)

(8.6)

Other EPRA adjustments

0.4

0.0

0.7

0.5

(0.3)

1.4

0.0

0.0

EPRA earnings

17.3

21.2

24.5

30.5

34.0

42.5

51.9

55.3

Adjust for fixed/guaranteed rent reviews

(5.1)

(6.3)

(6.4)

(8.2)

(8.7)

(10.0)

(11.9)

(12.1)

Adjust for development interest under forward fund agreements

0.0

0.3

2.0

1.0

0.6

0.7

0.6

0.0

Adjust for performance fee

1.0

0.6

0.0

0.0

0.0

0.0

0.0

0.0

Group adjusted earnings

13.2

15.7

20.1

23.2

26.0

33.3

40.7

43.2

Average number of shares in issue (m)

252.2

282.5

368.8

440.3

475.4

599.3

620.2

620.2

IFRS EPS (p)

7.58

9.77

8.10

7.18

9.23

7.78

11.23

10.31

EPRA EPS (p)

6.87

7.50

6.63

6.92

7.16

7.10

8.37

8.92

Adjusted EPS (p)

5.23

5.54

5.45

5.27

5.46

5.55

6.56

6.97

Dividend per share (declared)

6.28

6.45

6.58

6.68

6.72

6.76

6.86

6.96

Dividend cover (Adjusted earnings)

0.83

0.82

0.82

0.76

0.80

0.79

0.96

1.00

BALANCE SHEET

Investment properties

266.2

362.9

469.6

570.1

629.6

906.2

949.8

974.2

Other non-current assets

4.0

27.1

37.6

46.0

54.8

66.4

78.2

90.4

Non-current assets

270.2

390.1

507.2

616.1

684.4

972.6

1,028.1

1,064.6

Cash and equivalents

10.4

41.4

26.9

36.4

21.1

19.1

18.9

21.8

Other current assets

25.6

3.4

4.3

11.2

12.9

12.9

8.7

7.9

Current assets

36.0

44.8

31.2

47.6

34.0

32.1

27.6

29.7

Bank loan

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(279.4)

(300.0)

(315.6)

Other non-current liabilities

(4.0)

(4.7)

(7.1)

(6.4)

(6.8)

(9.6)

(10.6)

(11.3)

Non-current liabilities

(43.3)

(68.9)

(113.5)

(156.5)

(134.7)

(289.0)

(310.7)

(326.9)

Trade and other payables

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.1)

(24.2)

(25.6)

Current Liabilities

(6.0)

(7.4)

(11.8)

(13.1)

(18.5)

(22.1)

(24.2)

(25.6)

Net assets

256.9

358.6

413.1

494.1

565.2

693.5

720.8

741.7

Adjust for derivative financial liability

0.0

0.1

0.7

0.2

(0.3)

(0.9)

(0.9)

(0.9)

EPRA net assets

256.9

358.7

413.8

494.3

564.9

692.6

719.9

740.8

Period end shares (m)

252.2

339.2

385.1

457.5

511.5

620.2

620.2

620.2

IFRS NAV per ordinary share

101.9

105.7

107.3

108.0

110.5

111.8

116.2

119.6

EPRA NAV per share

101.9

105.7

107.5

108.1

110.4

111.7

116.1

119.4

EPRA NAV total return

7.5%

10.1%

7.8%

6.8%

8.4%

7.2%

10.1%

8.9%

CASH FLOW

Cash flow from operations

4.4

23.6

20.5

25.6

29.2

43.6

51.9

54.9

Net interest paid

(0.6)

(1.4)

(2.3)

(4.1)

(4.2)

(5.9)

(8.9)

(9.4)

Tax paid

(0.5)

(0.1)

0.0

(0.1)

(0.0)

(0.0)

0.0

0.0

Net cash flow from operating activities

3.2

22.1

18.2

21.5

25.0

37.7

43.0

45.4

Purchase of investment properties

(63.3)

(90.0)

(99.6)

(117.5)

(51.4)

(274.6)

(25.9)

(15.8)

Disposal of investment properties

0.0

0.0

0.0

14.1

7.8

1.0

5.0

1.3

Net cash flow from investing activities

(63.3)

(90.0)

(99.6)

(103.4)

(43.6)

(273.6)

(20.9)

(14.5)

Issue of ordinary share capital (net of expenses)

0.0

91.7

48.9

78.2

58.3

122.5

0.0

0.0

(Repayment)/drawdown of loans

20.9

26.0

42.0

44.0

(22.0)

152.8

20.0

15.0

Dividends paid

(15.6)

(17.4)

(23.6)

(29.2)

(31.5)

(39.8)

(42.4)

(43.0)

Other

0.0

(1.5)

(0.3)

(1.6)

(1.5)

(1.5)

(0.0)

0.0

Net cash flow from financing activities

5.3

98.8

67.0

91.4

3.3

233.9

(22.4)

(28.0)

Net change in cash and equivalents

(54.7)

31.0

(14.5)

9.5

(15.3)

(2.0)

(0.3)

3.0

Opening cash and equivalents

65.1

10.4

41.4

26.9

36.4

21.1

19.1

18.9

Closing cash and equivalents

10.4

41.4

26.9

36.4

21.1

19.1

18.9

21.8

Balance sheet debt

(39.3)

(64.2)

(106.4)

(150.1)

(127.9)

(279.4)

(300.0)

(315.6)

Unamortised loan arrangement costs

(0.7)

(1.8)

(1.6)

(1.9)

(2.1)

(3.3)

(2.7)

(2.1)

Net cash/(debt)

(29.6)

(24.6)

(81.1)

(115.6)

(108.9)

(263.6)

(283.9)

(295.9)

Gross LTV

14.2%

17.1%

21.6%

24.9%

19.2%

29.3%

29.7%

30.1%

Net LTV

10.5%

6.4%

16.2%

18.9%

16.1%

27.3%

27.8%

28.0%

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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Target Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Target Healthcare REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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