Target’s portfolio continued to perform well during the three months ended 31 March (Q319), with RPI-driven rental growth, increased property valuations and progress with the forward-funded development of pre-let, high-quality, purpose-built homes. Due diligence on potential further acquisition opportunities continues, in aggregate sufficient to fully deploy remaining debt capital resources.
EPRA NAV per share increased c 0.4% during Q319 to 107.3p versus 106.9p at end-Q219. Including dividends paid during the quarter, the EPRA NAV total return was 2.0%, taking the cumulative return in the first nine months of the year to 6.1%. A third quarterly DPS of 1.64475p per share has been declared and will be paid 31 May 2019. The portfolio value increased to £477.1m during the period, with growth driven by continuing investment in the forward-funded developments (two completed in the period and five under construction) and underlying valuation gains. The latter were supported by rental growth on the mainly RPI-linked leases, with modest yield tightening in the period. Although there were no acquisitions completed in Q319, £6.9m has since been deployed and the pipeline remains strong. Our forecasts, including a fully covered FY20 DPS, are unchanged.
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 (FY19e: 5.6%) that supports the continuing c 10% premium to Q219 NAV.