Target Healthcare REIT — Income and capital growth continuing

Target Healthcare REIT (LSE: THRL)

Last close As at 07/03/2025

GBP0.83

−2.20 (−2.59%)

Market capitalisation

GBP525m

More on this equity

Research: Real Estate

Target Healthcare REIT — Income and capital growth continuing

Indexed rent reviews continue to drive earnings growth and property valuation uplifts at Target Healthcare REIT. Meanwhile, tenant profitability remains strong, reflected in a continuing high level of rent cover and rent collection. Quarterly dividends are 3% above the prior year with a good level of cover by adjusted ‘cash’ earnings and the discount to NAV provides investors with the opportunity to benefit from any narrowing, for which further interest rate reductions should be supportive.

Martyn King

Written by

Martyn King

Director, Financials

Real estate

Q225 trading update

6 February 2025

Price 85.80p
Market cap £532m

Net cash/(debt) at 31 Dec 2024

£(210.1)m

Shares in issue

620.2m
Code THRL
Primary exchange LSE
Secondary exchange N/A
Price Performance

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.

Analyst

Martyn King
+44 (0)20 3077 5700

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

Note: EPRA earnings exclude revaluation movements and non-recurring items. NAV defined as EPRA net tangible assets (NTA) throughout this report.

Year end Net rental income (£m) EPRA earnings (£m) EPRA EPS (p) NAV/share (p) DPS (p) Yield (%) P/NAV (x)
6/23 67.7 37.2 6.2 104.5 6.18 7.2 0.82
6/24 69.6 38.0 5.7 110.7 5.71 6.7 0.78
6/25e 70.1 38.7 6.2 113.8 5.88 6.9 0.75
6/26e 72.8 39.0 6.3 119.4 6.00 7.0 0.72

EPRA NTA/share increased by 0.9% to 112.7p and including DPS paid, the NAV total return was 2.2%. Based on the unaudited quarterly data, the H125 total return was 4.4%, building on the 11.4% return in FY24. We expect the H125 results to be published in detail in March. H125 DPS of 2.94p is in line with the FY25 target of 5.9p, and based on the quarterly data, was 1.07x covered by adjusted ‘cash’ EPS of 3.14p. Adjusted earnings is lower than EPRA earnings as it excludes non-cash IFRS rent smoothing but does include interest earned under forward-funding agreements. H125 adjusted earnings are slightly ahead of what is implied by our full year forecast, which we will review with the results.

Underpinning earnings, tenants continue to perform well, with resident occupancy at a good level and inflationary cost pressures mitigated by strong fee growth. Two-thirds of the fees earned by tenants are privately funded, which the company expects to be beneficial in managing the additional cost pressures arising from the budget. Rent cover for mature homes remains robust at 2.0x. Earnings are also protected from interest volatility, with the costs of 93% of drawn debt fixed or hedged to maturity. The end-Q225 weighted average term was 4.7 years with a weighted average cost of 3.95%. The £248m of drawn borrowing comprises £150m of long-term fixed-rate debt at a low average cost of 3.2%, with a first maturity in 2032, and £98m of mostly capped shorter-term floating-rate debt maturing in November 2025. Ahead of this, indicative refinance terms have been obtained from a number of lenders, including each of the incumbent lenders, for a range of facility types and durations.

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, 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).

The FY25 DPS target represents an attractive yield of 6.9% while the shares trade at a 25% discount to NAV.



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