Target a healthy and sustainable income stream

The care home sector is appealing, with low volatility, sustainable income and low correlation to the bond and equity markets all counting in its favour. Young real estate investment trust (Reit) THRL, launched in 2013, owns high-quality care homes, with leases often running up to 30 years and offering annual uplifts. The sector is both solid in terms of low-risk long-term income linked to inflation and an area of surging UK demand - the number of over 85s is expected to double in the next 20 years, according to Age UK, making care homes a key investment area.

The care home industry has been connected with controversy in recent years, with closures and complaints dogging some providers. However, THRL managers Target Advisers have a good track record in the UK and focus on operators with a variety of income from local authorities, private sources and the NHS.

The trust offers an attractive prospective yield of 6 per cent based on a planned dividend payout of 6.12p during this financial year. It increased its two quarterly dividends for the six months to December 2014 from 1.50 to 1.53p and, according to its half-year report, its £135m portfolio yielded 7.1 per cent at the end of last year before acquiring new assets. Its current yield stands at 4.34 per cent.

The relatively high yield is due to the stability and lengths of the leases in the portfolios, which pay out over long periods. The trust invests only in modern care home stock with strong rental cover and the portfolio has a low loan-to-value ratio of 19.9 per cent. The trust has been steadily increasing its portfolio and generating increasing rental income as a result. At the end of last year, THRL had generated rental income of £4.5m across the portfolio, almost three times its income at the same point last year.

Because of that the fund is not cheap. It comes with an ongoing charge of 1.82 per cent and is trading at a premium of 8.77 per cent. In the past 12 months it has traded at an average premium of 7.79 per cent, although that is lower than other funds within comparable income sectors such as infrastructure, where closed-ended funds trade at double-digit premiums regularly.

It has also been adding significantly to its portfolio since launch. During the six months to December the group acquired 10 care homes for a total of £52.7m, bringing the total portfolio value to £135.6m. It has a diverse portfolio of 28 homes after purchasing a property in Swaffham, Norfolk, for £4.5m in January, leased to Norfolk Care Homes.

The fund does charge a performance fee of 10 per cent of the amount by which the company's total return exceeds the total return of the IPD Healthcare Index, taking its total ongoing charge to 1.82 per cent compared with 1.66 per cent without charges. However this is far lower than peer MedicX (MXF), another healthcare-focused Reit which charges 3.34 per cent in total and has much higher gearing, at 63 per cent. THRL has no off-balance sheet liabilities and is only leveraged up to 19 per cent on its portfolio of assets.

Since launch it has performed well, beating the property specialist sector average on a one- and three-month basis and matching it over a year. THRL returned 8 per cent over one year and in the past three months has returned 3.77 per cent.

Source: Morningstar & AIC, as at 17 March 2015

Geographic split by property valuation (%)

Source: Targethealthreit.co.uk

Top 10 assets by market value

Source: Company prospectus

Fund share price total return (%) against AIC property specialist sector

Source: FE Analytics