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Target Healthcare on target for more growth

Demand for quality care homes and an ageing population bode well for Target Healthcare
October 11, 2018

Target Healthcare REIT (THRL) has a portfolio of high-quality care homes that it leases to carefully selected tenants, and in the five years since it was launched the annualised net asset value (NAV) total return has been 7.8 per cent. Portfolio rent in the year to June 2018 jumped from £20.3m to £26m.

IC TIP: Buy at 112.5p
Tip style
Income
Risk rating
Medium
Timescale
Long Term
Bull points

Attractive dividend

Short supply of quality care homes

Long leases and upward-only rent reviews

Modest levels of debt

Bear points

Dividend remains uncovered

Local authority funding squeeze

Running a string of care homes is nothing new, but Target is very picky about where and what it buys, and who it rents to. Not only is there great emphasis placed on the physical asset, there is also a comprehensive assessment on tenant capabilities before and after investment. This is crucial, and while 96 per cent of the portfolio has maintained or increased in value, two assets are currently the subject of more focussed asset management. Apart from poor management, there is always the risk of not being able to attract the right staff or too much exposure to local authority funding.

So great care is also taken on picking the right location. By and large new homes are located in more affluent parts of the country in a bid to attract private clients rather than those who are subsidised by cash-strapped local authorities.

Let’s take a look at the care home picture. Target currently has 4,000 beds. These come with en-suite facilities including a shower or wet room. In the entire sector, there are 100,000 rooms boasting such facilities. A further 100,000 come with no en-suite and another 250,000 only have a toilet and washbasin. This is relevant because around three-quarters of clients suffer from incontinence, and with many homes built in the previous century, around 80 per cent are not fit for purpose and renovation is often not financially viable.

TARGET HEALTHCARE REIT (THRL)  
ORD PRICE:112.5pMARKET VALUE:£382m
TOUCH:112-114p12-MONTH HIGH:119pLOW: 101p
FORWARD DIVIDEND YIELD:6%DEVELOPMENT PROPERTIES:nil
DISCOUNT TO FORWARD NAV:2%NET DEBT:6% 
INVESTMENT PROPERTIES:£363m  
Year to 30 JunNet asset value (p)* Earnings per share (p)*Dividend per share (p)
2016101 4.76.18
2017102 4.86.3
2018106 5.36.45
2019*109 5.96.6
2020*115 6.76.7
% change+6 +14+2
Normal market size:3,000   
     
Beta:0.54   
*Stifel forecasts, adjusted NAV and EPS figures

Target currently has 21 tenants, with another two lined up. The breadth of the tenant base helps to diversify risk, so that the loss of its biggest tenant would still leave more than 85 per cent of its rental income intact. As of the end of June, the group had a relatively low loan-to-value ratio of 17 per cent. There's £21.2m cash on the balance sheet and £64m of undrawn debt, of which £35.8m is allocated to upcoming commitments, which will support the construction of seven brand-new (pre-let) homes, adding £3.8m to rental income. A further five assets are in advanced negotiations, which would cost £79.1m if acquired, and there could be a share placing to bridge any financing gap.

While there is an attractive yield, the dividend is not covered by earnings, but this should be achieved when the company is fully invested, which broker Stifel expects to happen in 2020.

The company has an investment manager and a new agreement has been reached whereby fees are to be paid on a tiered basis. Up to a NAV of £500m the rate will be 1.05 per cent, but this falls in stages to 0.65 per cent if the NAV reaches £1.5bn.