Target Healthcare (LSE: THRL), the UK listed specialist investor in modern, purpose-built care homes, announces its unaudited quarterly Net Asset Value (‘NAV’) as at 31 March 2023, together with an update on corporate activity, and declares its third interim dividend for the year ending 30 June 2023.

Corporate activity highlights

NTA and earnings growth, the latter fully covering rebased dividend level; stable balance sheet with conservative LTV and hedged interest costs:

  • EPRA Net Tangible Assets (‘NTA’) per share increased to 103.4 pence (31 December 2022: 103.0 pence), primarily driven by like-for-like valuation uplift from inflation-linked rent reviews and reflecting minimal yield shift
  • Adjusted EPRA EPS for the quarter of 1.5 pence per share, fully covering dividend to be paid in respect of the quarter of 1.4 pence per share
  • Portfolio EPRA “topped-up” net initial yield of 6.21% (31 December 2022: 6.22%)
  • NAV total return of 2.1% for the quarter (based on EPRA NTA and including payment of dividend)
  • Net Loan to Value of 23.8% (31 December 2022: 25.1%)
  • Weighted average term to expiry on the Group’s total committed loan facilities of 6.5 years (31 December 2022: 6.7 years) with an earliest maturity of November 2025. Interest costs hedged on 100% of drawn debt to the relevant facility maturity date
  • Overall capital available currently £62 million, net of the Group’s commitments on the four development assets

Disposals and re-tenanting activities optimising portfolio to benefit from demand tailwinds and positive outlook for private-pay market; portfolio valuation evidenced by £22m of disposals ahead of carry value; further rental growth and rent collection improvement:

  • Diversified portfolio of 97 assets let to 32 tenants and valued at £855.7 million (31 December 2022: £867.7 million); on a like-for-like basis the portfolio valuation increased by 0.5%
  • Disposal of four properties in Northern Ireland for a net price above their blended book value as at 30 June 2022, crystallising an annualised ungeared IRR in excess of 10% over the period of ownership
  • Excluding recent disposals (2.8% decrease), the contracted rent roll increased 0.8%, from 22 inflation-linked upwards-only rent reviews, at an average uplift of 3.9%
  • Weighted average unexpired lease term of 26.8 years remains one of the longest in the listed real estate sector (31 December 2022: 26.8 years), with the disposal of four shorter-duration leases offsetting the effect of the passage of time on the remaining portfolio
  • High quality, modern and sustainable real estate portfolio:
    • 94% of the portfolio is A or B EPC rated, and currently compliant with the minimum energy efficiency standards anticipated to apply from 2030
    • Leading Positive social impact from sector-leading real estate standards: 97% wet-rooms; generous 47 sqm space per resident; sustainable rent of £184 per sqm
  • Rent collection of 97% (31 December 2022: 96%; 30 September 2022: 96%; 30 June 2022: 94%) as overall tenant profitability responds to the improved trading conditions across prime care homes, and in response to the completion of portfolio management initiatives

Kenneth MacKenzie, CEO of Target Fund Managers, commented: “The long-term stability of prime UK care homes as an investment class continues to be demonstrated. Unlike many other parts of the sector, not only are valuation levels being underpinned by both occupier and investor demand, but we are also seeing rental quality backed by improving profitability trends. Rent cover, a key profitability metric, has improved to 1.5x for the most recent quarter we have data for. This compares well to pre-pandemic norms despite being achieved at lower levels of underlying resident occupancy, currently 84%. We anticipate further tenant profitability growth as occupancy closes in on the 90% generally experienced prior to the pandemic, which will further support valuations. The real estate standards fundamental to our strategy enable our tenants to attract private-fee paying residents at fee levels where they can increase staff pay and reinvest in their business.

“The recent announcement to rebase our dividend in line with current earnings was recognition of the higher interest rate environment limiting our ability to grow earnings through acquisitions at this time, as investment yields have remained relatively low for the prime UK care homes we invest in. We retain a strong conviction that improving portfolio performance, strong demographic tailwinds and our embedded inflation-linked rental growth will drive long-term sustainable returns.”