November 8, 2019 Finance, Property

Target Healthcare acquire eight care homes and 31 retirement apartments for £81.3m


Target Healthcare, a UK listed specialist investor in modern, purpose-built care homes, announces its unaudited quarterly Net Asset Value (NAV) as at 30 September 2019 and provides an update on its corporate activity.


• EPRA NAV per share of 107.9 pence (30 June 2019: 107.5 pence), resulting in a NAV total return (including dividend) for the quarter of 2.0%
• 0.7% increase in like-for-like value of the operational portfolio; total portfolio value of £511.4 million, made up of 63 assets comprising 61 operational homes and two pre-let forward funded developments
• 11 rent reviews completed at an average uplift of 2.9% per annum; contractual rent roll now stands at £32.9 million per annum from 61 operational properties
• Portfolio EPRA Topped-up Net Initial Yield of 6.19%
• Three new operating homes added to the portfolio through acquisitions and the Group’s development programme, complemented by the strategic disposal of two homes
• Net increase in annualised contractual rent of £0.7 million during the quarter, with the number of tenants increasing by two to 26
• On track to add a further tenant and a further £1.7 million of annual contractual rent during 2019 from the Group’s two forward funded pre-let developments and commitment to acquire an additional home upon construction completion
• Subsequent to the quarter-end, the first interim dividend of 1.67 pence per share was declared for the year ending 30 June 2020, an increase of 1.5% on the 2019 quarterly dividends. On an annualised basis, this reflects a payment of 6.68 pence per share and a dividend yield of 5.8% based on the closing share price of 114.8 pence on 7 November 2019
• Substantially oversubscribed placing raised gross proceeds of £80 million, with strong support from existing and new shareholders. The targeted size of the placing was increased from £50 million during the marketing period due to investor support combined with an improved level of dealflow of suitable investment properties sourced by the Investment Manager.
• Post-period end acquisitions for a total consideration of £81.3 million inclusive of transaction costs, comprising eight care homes and a block of retirement apartments, in four separate transactions, which substantially deploys the placing proceeds.

Kenneth MacKenzie, CEO of Target Fund Managers Limited, commented:

“The successful capital raise in September has allowed us to continue the disciplined growth of the portfolio, which is increasingly well-positioned in terms of both scale and diversity and thereby enables our delivery of sustainable, long-term income returns to shareholders. The support and participation of both new and existing shareholders is a strong endorsement of our growth strategy, which continues to be underpinned by the chronic shortage of high quality UK care home rooms, with full en suite wetroom facilities, coupled with an increasingly discerning resident profile and an ageing population.

“The most recent acquisitions are the latest demonstration of our ability to originate opportunities that meet our strict investment criteria, starting with the underlying quality of the real estate and the local market fundamentals. This approach provides us with conviction that the defensive qualities of the overall portfolio will support any short term challenges, further enhanced by the ongoing diversification by operator, location and end-user payment profile. With our deep sector knowledge and strong tenant relationships we remain well placed to deploy the balance of capital we have available over the coming months.”

Net Asset Value

The Group’s unaudited EPRA NAV per share as at 30 September 2019 was 107.9 pence. The total return for the quarter based on EPRA NAV was 2.0%.

A balance sheet summary and an analysis of the movement in the EPRA NAV over the quarter is presented at the end of this announcement in the Appendix.

Corporate Update

Portfolio performance

As at 30 September 2019, the Group’s portfolio was valued at £511.4 million and comprised 63 assets, a combination of 61 operational care homes and two pre-let sites, which are being developed through capped forward funding commitments with established development partners.

The portfolio value has increased by 2.1% over the quarter. Of this, 1.4% is derived from acquisitions and further investment into developments, net of portfolio disposals, with a positive like-for-like movement in the operational portfolio value of 0.7%, reflecting the impact of the annual inflation-linked rental reviews as well as yield shift to reflect the quality and performance of individual assets.

Portfolio contractual rent has increased by 2.2% over the quarter, of which 1.7% is the net impact of acquisitions, disposals and completion of developments. Where rent reviews were completed during the quarter, the average increase was 2.9%, resulting in a 0.5% like-for-like increase to the contractual rent roll.

The portfolio’s weighted average unexpired lease term has shortened slightly to 28.91 years.

The portfolio had an EPRA topped-up net initial yield of 6.19% based on an annualised contractual rent upon expiry of lease incentives of £32.9 million. The EPRA net initial yield was 6.02% based on passing rent of £32.0 million. A schedule showing the respective NIY profiles from the unwind of portfolio assets in rent-free periods is shown in the Appendix.

Investment and asset management activity

As announced in August, the Group acquired two modern, purpose-built care homes for £18.6 million during the period: a 70-bedroom home with full en suite wet-room facilities in Ripon, Yorkshire; and a 67-bedroom home with full en suite wet-room facilities in Stourport, West Midlands. The homes opened to residents in 2015 and 2018 respectively and are let to a subsidiary of Maria Mallaband Care Group, the national care home operator and a new tenant to the Group, on 35-year leases with RPI-linked cap and collar.

As announced in July, the Group completed the disposal of two care homes, in Surrey and Essex, for a price which was ahead of book value.

Construction has completed on the Group’s development project in Preston, Lancashire, which has now opened to residents and provides 74 bedrooms with full en suite wet-room facilities.

The Group has today announced the acquisition of eight care homes and 31 retirement apartments, in four separate transactions, for a total consideration of £81.3 million including transaction costs. The acquisitions, which had been identified in advance of the aforementioned £80 million equity placing, deploy the majority of shareholders’ funds in a timely manner, reducing the cash drag effect of uninvested capital.

Details of the individual transactions are as follows:

• Completed the acquisition of a portfolio of five care homes, totalling 362 rooms, in Yorkshire;
• Exchanged contracts to acquire a further two care homes in Yorkshire. This transaction will complete once the second home has received CQC registration, which is expected before the end of the calendar year;
• Completed the acquisition of the freehold of 31 retirement living apartments in Gloucestershire, operated by an existing Group tenant; and
• Completed the acquisition of an operational care home in Dorset which adds a new tenant to the Group.

The acquisition yield on the care home transactions is representative of assets of a similar standard and location within the Group’s portfolio, with all having the benefit of long-term occupational leases with RPI-linked cap and collars.

In September the Group announced that it had received notice from one of its tenants which operates six homes in the portfolio, Orchard Care Homes, of its intention to exit these six leasehold homes as part of a wider business restructuring of the tenant’s business. The Investment Manager is in productive discussions with alternative care home operators to ensure an orderly handover of these homes with minimal disruption to residents, and reiterates its expectation that, following the re-tenanting, operational and financial performance can reasonably be expected to improve and that this event will not have a material impact on value.

Pipeline and Investment Market

The investment market for the high quality, modern, fit-for-purpose assets which meet the Group’s investment criteria remains competitive. As can be seen from the acquisitions announced today, the Group continues, through its Investment Manager, to use its specialist knowledge, in-house research capabilities and relationships with vendors and operators to identify and acquire assets with a compelling investment case. Following these acquisitions, the Investment Manager is assessing a number of opportunities to deploy the Group’s remaining investible capital.

Debt facilities & swap arrangements

As at 30 September 2019, the Group’s total borrowings were £130.0 million. Taking account of the equity issuance proceeds received on the final day of the quarter, this gives a loan-to-value (LTV) of 2.7% using net debt (total gross debt less cash, as a proportion of gross property value). Gross LTV (total gross debt as a proportion of gross property value) was 25.4%.

Through RBS, HSBC and FCB, the Group has £70 million of fixed term debt facilities and £100 million of revolving facilities. As at 30 September 2019 the Group had drawn £70 million of fixed term debt and £60 million under the revolving facilities, with the interest on £66 million being fixed through interest rate swaps and the remainder carrying a variable interest rate linked to 3-month LIBOR.

On 1 October 2019 proceeds from the equity issuance become available and were used to temporarily repay £60 million drawn from the revolving facilities.

As at 30 September 2019 the Group’s weighted average cost on its drawn debt, inclusive of amortisation of arrangement costs, was 3.0% with a weighted average term to expiry of 1.9 years. The Group is currently assessing options available from lenders which would extend the term of its facilities.

Dividends in the period

The Group paid its fourth interim dividend for the year to 30 June 2019, in respect of the period from 1 April 2019 to 30 June 2019, of 1.64475 pence per share on 2 August 2019 to shareholders on the register on 19 July 2019.

Subsequent to the quarter-end, the Company announced its first interim dividend for the year to 30 June 2020, in respect of the period from 1 July 2019 to 30 September 2019, of 1.67 pence per share, payable on 29 November 2019 to shareholders on the register on 15 November 2019. This distribution will be paid wholly as a property income distribution (PID).

The dividend reflects an annualised payment of 6.68 pence per share and a dividend yield of 5.8% based on the 7 November 2019 closing share price of 114.8 pence.

The Company had 457,487,640 ordinary shares in issue at 30 September 2019 and has not issued or bought back any shares since that date.



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