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Research: Real Estate
Target’s portfolio continued to perform well during the three months ended 31 March (Q319), with RPI-driven rental growth, increased property valuations and progress with the forward-funded development of pre-let, high-quality, purpose-built homes. Due diligence on potential further acquisition opportunities continues, in aggregate sufficient to fully deploy remaining debt capital resources.
Target Healthcare REIT |
Rental growth and development progress |
Quarterly NAV update |
Real estate |
30 April 2019 |
Share price performance
Business description
Next events
Analysts
Target Healthcare REIT is a research client of Edison Investment Research Limited |
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Target’s portfolio continued to perform well during the three months ended 31 March (Q319), with RPI-driven rental growth, increased property valuations and progress with the forward-funded development of pre-let, high-quality, purpose-built homes. Due diligence on potential further acquisition opportunities continues, in aggregate sufficient to fully deploy remaining debt capital resources.
Year end |
Revenue (£m) |
Adj. net earnings* (£m) |
Adjusted EPS* (p) |
EPRA NAV/ |
DPS |
P/NAV per share (x) |
Yield |
06/17 |
23.6 |
13.2 |
5.23 |
101.9 |
6.28 |
1.14 |
5.4 |
06/18 |
28.4 |
15.7 |
5.54 |
105.7 |
6.45 |
1.10 |
5.5 |
06/19e |
34.4 |
21.0 |
5.68 |
106.5 |
6.58 |
1.10 |
5.6 |
06/20e |
43.1 |
25.8 |
6.71 |
110.6 |
6.71 |
1.05 |
5.8 |
06/21e |
44.4 |
26.6 |
6.91 |
115.1 |
6.84 |
1.01 |
5.9 |
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.
2.0% quarterly EPRA NAV total return
EPRA NAV per share increased c 0.4% during Q319 to 107.3p versus 106.9p at end-Q219. Including dividends paid during the quarter, the EPRA NAV total return was 2.0%, taking the cumulative return in the first nine months of the year to 6.1%. A third quarterly DPS of 1.64475p per share has been declared and will be paid 31 May 2019. The portfolio value increased to £477.1m during the period, with growth driven by continuing investment in the forward-funded developments (two completed in the period and five under construction) and underlying valuation gains. The latter were supported by rental growth on the mainly RPI-linked leases, with modest yield tightening in the period. Although there were no acquisitions completed in Q319, £6.9m has since been deployed and the pipeline remains strong. Our forecasts, including a fully covered FY20 DPS, are unchanged.
Demographics support long-term growth
Demographics should support growing care-home demand for years to come, while there is an undersupply of the modern, well-designed homes, fully equipped with en-suite wet rooms and suitable communal spaces that differentiate Target’s investment strategy. Investors continue to be attracted by long lease lengths and upwards-only RPI-linked rental growth, with strong competition for assets. Although increasing asset prices have a positive impact on the NAV, they make Target’s disciplined approach to acquisitions, targeting ‘future-proof assets’, an essential ingredient in delivering attractive and sustainable long-term returns.
Visible income growth supports premium to NAV
Target offers a growing dividend with visible inflation-linked potential for growth, which we expect to be fully covered by adjusted earnings in FY20. The dividend represents a highly attractive yield (FY19e: 5.6%) that supports the continuing c 10% premium to Q219 NAV.
Further details
We provide more details on the quarterly progress below. Despite Q319 EPRA NAV of 107.3p being slightly ahead of our full-year forecast of 106.5p, we have left our estimates unchanged for now. We anticipate an acceleration in acquisition activity, which is likely to generate future additional acquisition costs that will act as a drag on NAV, while the Q3 development completions occurred faster than we had allowed for, positively releasing the discount applied to funds invested during the construction phase. The quarterly movement in the revenue reserve (effectively EPRA earnings), appears consistent with our full-year forecast, that will benefit from a larger rent-generating asset base during Q419.
Exhibit 1: Composition of NAV changes
Sep-18 |
Dec-18 |
Mar-19 |
|
Q119 |
Q219 |
Q319 |
|
Opening EPRA NAV per share (p) |
105.7 |
106.1 |
106.9 |
Net gains/(losses) on investment property revaluation, acquisition costs, construction cost discounting |
0.7 |
1.0 |
0.9 |
Net effect of equity issuance |
0.0 |
0.1 |
0.0 |
Movement in revenue reserve (excluding performance fee accruals) |
1.3 |
1.1 |
1.1 |
Dividend paid |
(1.6) |
(1.4) |
(1.6) |
Closing EPRA NAV per share (p) |
106.1 |
106.9 |
107.3 |
Source: Target Healthcare REIT
■
The portfolio value increased by 2.8% during the quarter, to £477.1m. The number of assets was unchanged at 61 but the number of operational assets increased to 56 as two forward-funded developments completed. Continuing investment into the forward-funded developments accounted for most of the portfolio growth, but like-for-like valuation movements also added 0.5%, driven mostly by rental growth and modest yield tightening. The end-Q319 EPRA topped-up net initial yield was 6.29% compared with 6.32% at end-Q219.
■
The two completed pre-let developments contributed 5.5pp of the overall 6.0% increase in contracted rents, to £29.7m, while like-for-like rent increases on the mostly RPI-linked leases added 0.5pp. The completed developments, at Earl Shilton in Leicestershire and Cumnor Hill in Oxfordshire, provide 140 bedrooms with full en-suite wet-room facilities and are let to operators with an established record of managing high-quality homes. Both are new to the group and contribute to an increasingly diverse tenant base that now numbers 23.
■
Development work continues on five additional pre-let forward-funded assets, all expected to complete in late FY19/early FY20. Completion of these assets, as well as the further forward purchase home that Target has contracted to acquire on completion, is expected to add an additional £3.7m to annual contracted rent and further diversify the tenant base to 26.
■
Since the end of the quarter, Target has acquired a 40-bedroom home in Formby, Merseyside, for £6.9m including acquisition costs. In line with Target’s strict investment criteria, the home, which opened in late 2017, provides high-quality facilities including full en-suite wet rooms. It is let on a 35-year RPI-linked lease, with cap and collar, to Athena Healthcare, a long-standing tenant of the group.
■
At the end of Q319 Target had drawn £84.0m of its £170m debt facilities, giving a gross loan to value ratio (LTV) of 17.6% or a net LTV 13.2% after adjusting for cash.
■
A number of near-term acquisition opportunities are in due diligence and the group says that if they all complete as anticipated, it would be able to fully deploy all available debt capital in the 2019 summer months. This suggests that although the current run-rate of acquisitions in H219 is a little below that reflected in our forecasts, there are good prospects for acquisitions to accelerate and even exceed our expectations.
■
Our forecasts, unchanged from our last update note, include £55m of additional investment commitment by the end of FY19, a level that we believe is consistent with re-gearing the balance sheet to a c 25% LTV, generating full dividend cover in FY20. We estimate that full-deployment of existing debt facilities would provide room for an additional c £24m of acquisitions, temporarily lifting LTV to c 28%, but increasing EPRA earnings.
Exhibit 2: Continuing positive EPRA NAV total return
Q319 |
FY19 YTD |
|
Opening EPRA NAV per share (p) |
106.9 |
105.7 |
Closing EPRA NAV per share (p) |
107.3 |
107.3 |
Dividends paid (p) |
1.6 |
4.9 |
NAV total return |
2.0% |
6.1% |
Source: Target Healthcare REIT, Edison Investment Research
Exhibit 3: Financial summary
Year to 30 June (£000s) |
2014 |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
|
INCOME STATEMENT |
|||||||||
Rent revenue |
|
3,817 |
9,898 |
12,677 |
17,760 |
22,029 |
28,450 |
37,060 |
38,362 |
Movement in lease incentive/fixed rent review adjustment |
1,547 |
3,760 |
4,136 |
5,127 |
6,334 |
5,903 |
6,000 |
6,000 |
|
Rental income |
|
5,364 |
13,658 |
16,813 |
22,887 |
28,363 |
34,353 |
43,060 |
44,362 |
Other income |
0 |
66 |
61 |
671 |
3 |
0 |
0 |
0 |
|
Total revenue |
|
5,364 |
13,724 |
16,874 |
23,558 |
28,366 |
34,353 |
43,060 |
44,362 |
Gains/(losses) on revaluation |
(2,233) |
(839) |
425 |
2,211 |
6,434 |
1,819 |
9,714 |
10,996 |
|
Cost of corporate acquisitions |
0 |
(174) |
(998) |
(626) |
0 |
0 |
0 |
0 |
|
Total income |
|
3,131 |
12,711 |
16,301 |
25,143 |
34,800 |
36,172 |
52,774 |
55,358 |
Management fee |
(648) |
(1,524) |
(2,654) |
(3,758) |
(3,734) |
(4,983) |
(5,255) |
(5,453) |
|
Other expenses |
(780) |
(880) |
(992) |
(1,236) |
(1,458) |
(1,520) |
(1,600) |
(1,600) |
|
Total expenditure |
(1,428) |
(2,404) |
(3,646) |
(4,994) |
(5,192) |
(6,503) |
(6,855) |
(7,053) |
|
Profit before finance and tax |
|
1,703 |
10,307 |
12,655 |
20,149 |
29,608 |
29,669 |
45,918 |
48,304 |
Net finance cost |
190 |
(716) |
(929) |
(808) |
(2,010) |
(3,179) |
(4,512) |
(4,576) |
|
Profit before taxation |
|
1,893 |
9,591 |
11,726 |
19,341 |
27,598 |
26,490 |
41,406 |
43,728 |
Tax |
(4) |
(39) |
(24) |
(219) |
11 |
0 |
0 |
0 |
|
Profit for the year |
|
1,889 |
9,552 |
11,702 |
19,122 |
27,609 |
26,490 |
41,406 |
43,728 |
Average number of shares in issue (m) |
105.2 |
119.2 |
171.7 |
252.2 |
282.5 |
369.8 |
385.1 |
385.1 |
|
IFRS earnings |
1,889 |
9,552 |
11,702 |
19,122 |
27,609 |
26,490 |
41,406 |
43,728 |
|
Adjust for rent arising from recognising |
(1,547) |
(3,760) |
(4,136) |
(5,127) |
(6,334) |
(5,903) |
(6,000) |
(6,000) |
|
Adjust for valuation changes |
2,233 |
839 |
(425) |
(2,211) |
(6,434) |
(1,819) |
(9,714) |
(10,996) |
|
Adjust for corporate acquisitions |
0 |
174 |
998 |
420 |
0 |
0 |
0 |
0 |
|
EPRA earnings |
|
2,575 |
6,805 |
8,139 |
12,204 |
14,841 |
18,768 |
25,692 |
26,733 |
Adjust for development interest under forward fund agreements |
261 |
2237 |
141 |
-138 |
|||||
Adjust for performance fee |
150 |
466 |
871 |
997 |
550 |
0 |
0 |
0 |
|
Group adjusted earnings |
|
2,725 |
7,271 |
9,010 |
13,201 |
15,652 |
21,005 |
25,833 |
26,595 |
IFRS EPS (p) |
1.80 |
8.02 |
6.81 |
7.58 |
9.77 |
7.16 |
10.75 |
11.36 |
|
Adjusted EPS (p) |
|
2.59 |
6.10 |
5.25 |
5.23 |
5.54 |
5.68 |
6.71 |
6.91 |
EPRA EPS (p) |
2.45 |
5.71 |
4.74 |
4.84 |
5.25 |
5.08 |
6.67 |
6.94 |
|
Dividend per share (declared) |
6.00 |
6.12 |
6.18 |
6.28 |
6.45 |
6.58 |
6.71 |
6.84 |
|
BALANCE SHEET |
|||||||||
Investment properties |
81,422 |
138,164 |
200,720 |
266,219 |
362,918 |
513,043 |
530,028 |
540,823 |
|
Other non-current assets |
0 |
2,530 |
3,742 |
3,988 |
27,139 |
34,544 |
42,004 |
48,233 |
|
Non-current assets |
|
81,422 |
140,694 |
204,462 |
270,207 |
390,057 |
547,587 |
572,032 |
589,056 |
Cash and equivalents |
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
7,738 |
|
Other current assets |
6,524 |
6,457 |
13,222 |
25,629 |
3,365 |
6,093 |
6,093 |
6,093 |
|
Current assets |
|
23,649 |
35,616 |
78,329 |
36,039 |
44,765 |
11,310 |
13,057 |
13,831 |
Bank loan |
(11,764) |
(30,865) |
(20,449) |
(39,331) |
(64,182) |
(134,716) |
(145,216) |
(145,716) |
|
Other non-current liabilities |
0 |
(2,530) |
(4,058) |
(3,997) |
(4,673) |
(5,131) |
(5,131) |
(5,131) |
|
Non-current liabilities |
|
(11,764) |
(33,395) |
(24,507) |
(43,328) |
(68,855) |
(139,847) |
(150,347) |
(150,847) |
Trade and other payables |
(3,089) |
(3,623) |
(5,002) |
(5,981) |
(7,360) |
(9,108) |
(9,108) |
(9,108) |
|
Current Liabilities |
|
(3,089) |
(3,623) |
(5,002) |
(5,981) |
(7,360) |
(9,108) |
(9,108) |
(9,108) |
Net assets |
|
90,218 |
139,292 |
253,282 |
256,937 |
358,607 |
409,943 |
425,634 |
442,933 |
Period end shares (m) |
95.2 |
142.3 |
252.2 |
252.2 |
339.2 |
385.1 |
385.1 |
385.1 |
|
IFRS NAV per ordinary share |
|
94.7 |
97.9 |
100.4 |
101.9 |
105.7 |
106.5 |
110.5 |
115.0 |
EPRA NAV per share |
|
94.7 |
97.9 |
100.6 |
101.9 |
105.7 |
106.5 |
110.6 |
115.1 |
CASH FLOW |
|||||||||
Cash flow from operations |
|
3,172 |
8,081 |
8,906 |
4,394 |
23,627 |
19,373 |
28,745 |
31,080 |
Net interest paid |
161 |
(514) |
(681) |
(615) |
(1,366) |
(2,531) |
(4,012) |
(4,076) |
|
Tax paid |
0 |
(47) |
(164) |
(543) |
(122) |
14 |
0 |
0 |
|
Net cash flow from operating activities |
|
3,333 |
7,520 |
8,061 |
3,236 |
22,139 |
16,856 |
24,733 |
27,004 |
Purchase of investment properties |
(51,894) |
(51,736) |
(34,833) |
(37,698) |
(89,981) |
(148,379) |
(7,271) |
0 |
|
Acquisition of subsidiaries |
0 |
(5,845) |
(27,091) |
(25,552) |
0 |
0 |
0 |
0 |
|
Net cash flow from investing activities |
|
(51,894) |
(57,581) |
(61,924) |
(63,250) |
(89,981) |
(148,379) |
(7,271) |
0 |
Issue of ordinary share capital (net of expenses) |
44,520 |
46,644 |
97,501 |
0 |
91,729 |
49,049 |
0 |
0 |
|
(Repayment)/drawdown of loans |
8,646 |
22,525 |
(12,808) |
20,906 |
24,456 |
70,000 |
10,000 |
0 |
|
Dividends paid |
(4,364) |
(7,074) |
(9,681) |
(15,589) |
(17,353) |
(23,709) |
(25,715) |
(26,229) |
|
Other |
0 |
0 |
14,799 |
0 |
0 |
0 |
0 |
0 |
|
Net cash flow from financing activities |
|
48,802 |
62,095 |
89,811 |
5,317 |
98,832 |
95,340 |
(15,715) |
(26,229) |
Net change in cash and equivalents |
|
241 |
12,034 |
35,948 |
(54,697) |
30,990 |
(36,183) |
1,747 |
774 |
Opening cash and equivalents |
16,884 |
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
|
Closing cash and equivalents |
|
17,125 |
29,159 |
65,107 |
10,410 |
41,400 |
5,217 |
6,964 |
7,738 |
Balance sheet debt |
(11,764) |
(30,865) |
(20,449) |
(39,331) |
(64,182) |
(134,716) |
(145,216) |
(145,716) |
|
Unamortised loan arrangement costs |
(497) |
(645) |
(551) |
(669) |
(1,818) |
(1,284) |
(784) |
(284) |
|
Net cash/(debt) |
|
4,864 |
(2,351) |
44,107 |
(29,590) |
(24,600) |
(130,783) |
(139,036) |
(138,262) |
Gross LTV |
15.1% |
22.8% |
10.5% |
14.2% |
17.1% |
25.1% |
25.8% |
25.1% |
|
Net LTV |
0.0% |
1.7% |
0.0% |
10.5% |
6.4% |
24.1% |
24.6% |
23.8% |
Source: Company data, Edison Investment Research
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