Target Healthcare

Target Healthcare REIT plc and its subsidiaries

Net Asset Value, update on corporate activity and dividend declaration

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 December 2023, an update on corporate activity and its second interim dividend for the year ending 30 June 2024.

Corporate activity highlights

Fourth consecutive quarter of EPRA NTA growth demonstrates resilience of business model and structural tailwinds underpinning modern, purpose built care home sector:

·    EPRA Net Tangible Assets (‘NTA’) per share increased 1.0% to 106.7 pence (30 September 2023: 105.6 pence), primarily reflecting a like-for-like valuation uplift driven by inflation-linked rent reviews. The twelve-month increase in EPRA NTA is 3.6%

·      EPRA “topped-up” net initial yield remained stable at 6.25% (30 September 2023: 6.22%)

·    Adjusted EPRA EPS for the quarter of 1.51 pence per share, fully covering the dividend of 1.428 pence per share, which is to be paid in respect of the quarter

·      NAV total return of 2.4% for the quarter (based on EPRA NTA and including payment of dividend)

·      Net LTV of 25.8% (30 September 2023: 25.0%)

·      Weighted average debt term of 5.7 years (30 September 2023: 6.0 years) with the earliest maturity in November 2025. Interest costs hedged on 91% of drawn debt to the relevant facility maturity date

·      Total capital available of £41 million, net of the Group’s capital commitments including five development assets, one of which is an operationally net zero carbon home

Inflation-linked rental growth, resilient capital values and underlying portfolio trading providing high portfolio rent covers:

·    Diversified portfolio of 98 assets let to 32 tenants and valued at £911.1 million (30 September 2023: £890.3 million) reflecting an increase of 2.3%, of which the like-for-like increase was 0.6%

·    Like-for-like increase in contracted rent roll of 1.1%, primarily driven by inflation-linked upwards-only annual rent reviews

·     WAULT of 26.0 years which remains one of the longest in the listed UK real estate sector (30 September 2023: 26.3 years)

·      High quality, modern and sustainable real estate portfolio:

o  98% of the portfolio is A or B EPC rated, (100% A to C ratings) and therefore compliant with the minimum energy efficiency standards anticipated to apply from 2030

o  Positive social impact from sector-leading real estate standards: 99% wet-rooms; generous 47 sqm space per resident; sustainable rent of £190 per sqm

·      99% rent collection, as overall tenant profitability continues to benefit from improved trading performance across our fit-for-purpose real estate with mature rent cover of 1.9x for the September 2023 quarter (most recent quarter of data from tenants)

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

“Rental growth continues and is well-supported by tenant profitability, with the core positive drivers of portfolio value, demographic trends and increasing demand for modern, purpose-built, real estate being clearly demonstrated. Rent covers have continued to improve, with the September quarter result of 1.9x continuing the upward trend seen over the last five quarters and representing the highest level since IPO. Underlying resident spot occupancy for mature homes increased to 87% as at 31 December 2023 (87% today).

“Valuations are still seeing some limited outward NIY movement as a response to higher risk-free rates, though we note we are seeing significant bifurcation in market pricing between our prime UK care home real estate and poorer-quality, non-purpose built homes, as institutional investors recognise the benefits of the former such as social acceptability, energy efficiency and future demand for places.

“Our long-standing dedicated management team remain ever focused on our core investment strategy to deliver strong investment returns from our modern, purpose-built portfolio.”

EPRA NTA

The Group’s unaudited EPRA NTA per share as at 31 December 2023 was 106.7 pence and NAV total return for the quarter was 2.4%.

A balance sheet summary and an analysis of the movement in the EPRA NTA over the quarter is shown in the Appendix of this announcement.

Corporate Update

Portfolio performance

As at 31 December 2023, the Group’s portfolio was valued at £911.1 million and comprised 98 properties, consisting of 93 operational care homes and five pre-let sites, which are being developed through capped forward funding commitments with established development partners.

Portfolio value increased by 2.3% over the quarter, comprising:

·     a 0.6% like-for-like increase in the operational portfolio, reflecting an increase of 1.2% from inflation-linked rent reviews and rent-free unwinds alongside a 0.6% decrease from outward movement in net initial yields

·      a 1.7% increase from capital expenditure, primarily associated with the five development properties

Contractual rental income increased by 1.3% over the quarter, comprising a 1.1% like-for-like increase from 25 inflation-linked upwards-only rent reviews, with an average uplift of 4.0%. The remaining 0.2% increase was from the rentalisation of capital expenditure following an asset management initiative at one of the Company’s existing properties (as detailed below) and the rentalisation of a contingent performance payment which crystalised at another property.

The portfolio’s WAULT was 26.0 years (30 September 2023: 26.3 years).

The EPRA “topped-up” net initial yield was 6.25% based on an annualised contractual rent of £57.9 million and the EPRA net initial yield was 6.17% with one asset in a rent-free period.

Portfolio update

During the quarter, the following asset management initiatives were undertaken:

·     As previously announced, the Group’s largest tenant, Ideal CareHomes (“Ideal”) was acquired by HC-One, the UK’s largest care home operator, which runs 275 homes. Ideal runs 36 homes, 18 of which are owned by the Group, representing 16% of the Group’s contractual rent roll and 18% of the portfolio’s capital value as at 31 December 2023. The 18 homes are trading well and no material valuation change has occurred as a result of the transaction. In consenting to the change in control, the Group’s rent deposit position has been strengthened, “green lease” provisions have been added and landlord lease extension options have been obtained.

·      The conversion of a further eight rooms to provide full en suite wet-room facilities were completed as part of ongoing asset enhancements, progressing plans to move the portfolio to 100% wet-rooms, currently 99% following these works.

·      As reported previously, the Group had committed to £2.35 million of capital expenditure to add 18 new bedrooms at an existing property. During the quarter to 31 December 2023, the remaining eight of these were completed and the additional costs incurred to complete of £0.7 million were rentalised.

Debt facilities and swap arrangements

As at 31 December 2023, the Group’s total borrowings were £252.5 million, representing a net LTV of 25.8% (total gross debt less cash, as a proportion of gross property value). The Group’s weighted average cost on its drawn debt, inclusive of amortisation of loan arrangement costs, was 4.05% (30 September 2023: 3.91%).

91% of drawn debt is fully hedged:

·    £150 million is fixed with a weighted average term of 10.1 years and a weighted average interest rate of 3.18% (excluding the amortisation of arrangement fees)

·      £30 million of the Group’s bank facilities is fixed at 2.48% for 1.8 years through an interest rate swap

·      £50 million of the Group’s drawn revolving credit facilities have interest rates capped at 5.17% via a 3% SONIA cap for 1.8 years

·     The remaining £22.5 million of the Group’s drawn revolving credit facilities carries a variable interest rate of SONIA plus a margin of 2.18%

The Group has access to a further £67.5 million of committed, but undrawn, revolving credit facilities which, if drawn, would carry an interest rate of SONIA plus 2.22%. The £9.5 million drawn in the quarter is being used to fund construction of the Group’s development assets, and the other capex initiatives noted above, with £29 million of such commitments remaining on a cash basis.

At 31 December 2023, the weighted average term to expiry on the Group’s total committed loan facilities was 5.7 years (30 September 2023: 6.0 years) with the earliest maturity in November 2025.

Dividends

The Group paid its first interim dividend for the year ending 30 June 2024, in respect of the period from 1 July 2023 to 30 September 2023, of 1.428 pence per share, on 24 November 2023 to shareholders on the register on 10 November 2023. This distribution was comprised wholly of a property income distribution (PID).

Announcement of second interim dividend

The Company today declares its second interim dividend for the year ending 30 June 2024, in respect of the period from 1 October 2023 to 31 December 2023, of 1.428 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID):     1.428 pence per share

Interim ordinary dividend:                                  nil

Ex-Dividend Date:	8 February 2024
Record Date:	9 February 2024
Payment Date:	23 February 2024

The quarterly dividend reflects an annualised dividend of 5.712 pence per share and a dividend yield of 6.8% based on the 31 January 2024 closing share price of 83.8 pence.