Target recently released full year results for the year to 30 June 2017 and has published its annual report. The key figures showing strong growth in assets and rental income and increasing dividend cover had already been released. In this report we focus on the strategic progress made through the year and the medium-term outlook. Reflecting the manager’s identification of a number of acquisition opportunities, we have revised our estimates upwards for portfolio growth and assume that current debt facilities will be fully utilised by end-FY19, with net LTV increasing above the self-imposed 20% long-term target (to c 24%).
n FY17 the market value of property assets reached £282.0m (FY16: £210.7m) with gearing (LTV) approaching target levels. EPRA earnings grew 50% to £12.2m. Dividend cover rose to 77% and with a full year contribution from recent acquisitions and continuing investment we forecast close to full cover in the current year (97%) on an increased DPS (+2.7%). Our assumption for current year property acquisitions is increased with a positive impact on our FY19 EPRA earnings estimate (c 1% higher). Our estimated net LTV (10.5% at end-FY17) moves above the long-term target of 20%, reaching 24.0% by end-FY19.
Target seeks further portfolio growth, capturing the positive spread between rental income and funding costs, generating operational efficiencies, and further diversifying the portfolio. In a competitive market for new investment it has continued to be selective, sticking to its quality criteria and financial return hurdles but nevertheless has a strong pipeline of near-term opportunities on which the investment manager continues to perform due diligence. While it is not certain that all of these will proceed, in aggregate they are higher than we have forecast, potentially requiring additional equity and debt capital support.
Target’s premium to EPRA NAV remains in the mid-teens, supported by the attractive 5.6% prospective dividend yield, with cover increasing to 97% this year and 106% next year on our revised estimates. The long-term need for care home provision is clear, providing a strong opportunity for investors in modern, purpose built facilities, such as Target, in combination with efficient, well managed, and financially sound operators.