Target Healthcare REIT has published interim results for the six months ended 31 December 2018 (H119), providing the detail behind the Q4 NAV update published in January. This showed the portfolio performing well (H119 EPRA NAV total return 4.2%) and good progress being made with deployment of the November placing proceeds. The attractive dividend yield is backed by very long leases, mostly RPI linked, and supported by careful asset and operator selection. We continue to forecast a fully covered dividend in FY20.
As discussed in detail in our recent update, the 4.2% H119 EPRA NAV total return comprised a 1.1% increase in NAV to 106.9p versus 105.7p in June 2018 (endFY18) and dividends paid. Quarterly DPS has increased 2.0% to 1.64475p in H119, an annualised c 6.58p, or a current yield of 5.7%. The portfolio continues to grow strongly (£464m at end-H119 versus £386m at end-FY18) and is performing well, delivering 1.3% rental growth and 2.8% valuation growth on a like-for-like basis. With an end-H119 net LTV of 9.1% and borrowing facilities increased by £40m since period end, Target is well placed meet investment commitments and make further acquisitions from a strong pipeline of near-term opportunities.
Demographics should support growing care-home demand for years to come, while there is an undersupply of the modern, well-designed homes, fully equipped with en-suite wet rooms and suitable communal spaces that differentiate Target’s investment strategy. Investors continue to be attracted by long lease lengths and upwards-only RPI-linked rental growth, with strong competition for assets. Although increasing asset prices have a positive impact on the NAV, they make Target’s disciplined approach to acquisitions, targeting ‘future-proof assets’, an essential ingredient in delivering attractive and sustainable long-term returns.
Target offers a growing dividend, with visible inflation-linked potential for growth, which we expect to be fully covered by adjusted earnings in FY20. The dividend represents a highly attractive yield (5.7%) that supports the continuing c 8% premium to Q219 NAV.