Target has published its quarterly NAV and dividend update. NAV total return was 3.0% in the quarter including dividends paid of 1.570p. With investor interest in modern, purpose-built care homes remaining strong the portfolio valuation increased further. While this is positive for NAV, it also highlights the strong competition for quality assets in the market. Despite the competitive market conditions, as previously indicated the managers have identified a number of acquisition opportunities that meet its qualitative and financial hurdles on which due diligence is progressing.
In the three months to 30 September 2017, Target’s EPRA NAV per share increased by 1.4p to 103.3p per share after the payment of 1.570p per share in dividends during the period. A 1.6125p DPS has been declared for the quarter under review. Passing rent increased 3.7%: 3.1% from previously disclosed acquisitions and 0.6% from rent reviews. The external portfolio valuation saw the EPRA net initial yield (NIY) tighten to 6.69% from 6.75% in June, combining with rent increases to generate 1.8p per share in property revaluation gains. Our only forecast change is to increase our assumed revaluation gains for the year from £6.0m to £9.0m with the balance of the year benefitting from an assumed 2% pa increase in rents and no further change in NIY. This adds 1.2p to our EPRA NAV per share forecasts.
As discussed at length in our recent update note, Target seeks further portfolio growth, capturing the positive spread between rental income and funding costs, generating operational efficiencies, and further diversifying the portfolio. The investment manager continues to perform due diligence on a strong pipeline of opportunities and while it is not certain that all of these will proceed in aggregate they are higher than we have forecast. The scale of the opportunities is such that additional equity and debt capital support, not in our forecasts, may be required.
The mid-teens premium to EPRA NAV is supported by an attractive 5.5% prospective dividend yield, with our estimated cover increasing to 97% in FY18 and 106% in FY19. 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.