The £448 million recommended cash offer for care home landlord Care REIT (CRT) has shone a light on the value in this sector. We think this makes a compelling case for Care REIT’s main lookalike Target Healthcare REIT (THRL).
While the Care REIT deal has been struck at a 10% discount to net asset value (NAV), Target has a higher-quality portfolio of assets.
Real estate investment trusts (and investment trusts more generally) have suffered in an elevated interest rate environment, which has increased the return people can get on their money without taking on additional risk.
Target shares currently trade a 20%-plus discount to NAV, when prior to the pandemic care home REITs typically traded at a premium, and they offer an attractive dividend yield of 6.3%.
Target operates in a market with some compelling drivers which arguably are not linked to recent sources of market volatility. The resilience of valuations is reflected in on- and off-market transactions and recent growth in the trust’s own NAV.
Manager Kenneth MacKenzie flagged to Shares that the trust has been actively recycling capital when it sees the opportunity, selling less-attractive properties comprising 8% of the portfolio either at or above the prevailing net asset value over the last 18 months.
LONG-TERM DRIVERS
Care home demand is driven by long-term demographic changes as the UK’s population gets older and this helps underpin long leases with upwards-only, inflation-linked rental growth. Target’s average lease length is more than 25 years.
Target Healthcare is further differentiated in this attractive niche by its focus on modern purpose-built facilities (84% constructed since 2010), with single-occupancy units and full en-suite wet rooms (99% of the portfolio).
This an example of where doing the right thing also makes for a good investment strategy, both affording people dignity in later life but also meaning the portfolio is fit for the future.
Panmure Liberum analysts observe: ‘The care home sector is fundamentally strong, driven by the aging population and increasing healthcare needs.
‘The requirement for purpose-built, future-proof homes highlights the importance of maintaining a modern asset base. Older facilities might generate immediate cash flow, but they carry higher long-term risks. Target benefits from a modern and future-proof portfolio.
‘Purpose-built homes that comply with modern regulatory and environmental standards are critical for long-term viability. Older properties risk obsolescence and could face declining demand or require costly upgrades.’
A COMPETITIVE ADVANTAGE
This then is a real competitive advantage for the trust. In the six-month period to 31 December 2024, contractual rent was up 3% to £60.6 million and like-for-like rental growth was 1.3%. Rent collection was 98%, and the trust is protected by a diversified portfolio and tenant base with 34 tenants across 94 properties.
The trust has also demonstrated its ability to manage what little disruption it has seen across its portfolio. In the most recent six-month period to the end of 2024, one home was re-let after a tenant had taken the decision to exit the sector.
The managers found a replacement tenant backed by an experienced team and the contracted rent from the property remained unchanged, with the rent-free period granted to the new tenant being partially funded by the previous tenant, an increase in the minimum annual rental uplift and an improvement in the property’s valuation yield.
Elsewhere, action was taken in relation to a non-paying tenant of a single home in the South West amounting to 1.5% of rent roll. Target is already in discussions with robust alternative tenants and expects a minimal impact on returns.
DIVIDENDS UNDERPINNED
Locked-in rental growth and a tight rein on the purse strings should help underpin the company’s quarterly dividend.
A loan-to-value based on net debt of 22.7% looks manageable and while ongoing charges are higher than they would be on an equity-focused vehicle at 1.51%, this is relatively competitive when set against other REITs.
Summed up, Target Healthcare offers investors responsible exposure to income from a sector with extremely healthy fundamentals and that is not reflected in the current discounted valuation.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
