Long Term Care Demand And Inflation Linked Leases Will Support This REIT

Catalysts

About Target Healthcare REIT

Target Healthcare REIT owns and actively manages a UK portfolio of modern, needs based residential care homes with long, inflation linked leases.

What are the underlying business or industry changes driving this perspective?

• Structural growth in the over 85 population and a rising proportion requiring residential care is set to underpin high occupancy and support continued inflation linked rental uplifts, which should sustain revenue growth and earnings resilience.
• Chronic undersupply of modern, wet room equipped care beds versus needs based demand allows disciplined rent setting and favors premium assets, which can translate into stronger like for like rental growth and wider net margins over time.
• Ongoing shift toward privately funded and top up fee payers, where Target already has a higher exposure than the market, should support above inflation fee growth for operators and keep portfolio rent cover high, reinforcing dividend cover and earnings visibility.
• Recycling capital from disposals at premiums to book into a pipeline of higher yielding, prime care homes is expected to lift portfolio net initial yields, enhancing EPRA earnings and supporting further growth in fully covered, progressive dividends.
• Recent debt refinancing with longer maturities, reduced margins and additional accordion capacity positions the company to fund accretive acquisitions through the cycle, which should support net asset value accretion and medium term earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Target Healthcare REIT's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 83.4% today to 98.2% in 3 years time.
• Analysts expect earnings to reach £75.1 million (and earnings per share of £0.12) by about December 2028, up from £60.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from 9.9x today. This future PE is lower than the current PE for the GB Health Care REITs industry at 17.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Tenant financial stress and further administrations could recur, as shown by the first tenant insolvency and arrears at another operator. This could lead to higher credit loss allowances, elevated operating expenses and weaker EPRA earnings growth.
• Rising staffing costs and tighter immigration rules may at some point outpace operators’ ability to push through higher private pay fees. This could erode rent cover levels and ultimately pressure rental income and net margins.
• Regulatory changes around upward-only rent reviews in a sector already described by the regulator as not fit for purpose could cap inflation-linked uplifts. This may reduce like for like rental growth and constrain long-term revenue and dividend progression.
• Dependence on affluent, privately funded residents and top up payments assumes continued access to the GBP 6 trillion of over 65s’ wealth. Any prolonged house price weakness or policy changes on social care funding could dampen fee growth and slow revenue and earnings expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.09 for Target Healthcare REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £76.5 million, earnings will come to £75.1 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £0.97, the analyst price target of £1.09 is 10.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.