Yield-starved investors seeking an attractive level of income while looking to put money to work in a socially useful way might investigate the Target Healthcare REIT (THRL), a fund bringing much-needed investment into the elderly care sector. Launched onto the stock exchange in March 2013, the company is the sole Real Estate Investment Trust (Reit) focussed on care homes.
Its objective is to provide an attractive level of income combined with potential for capital and income growth by investing in modern, purpose-built freehold and long-leasehold UK care homes. These homes are let to quality care tenants and the company claims a healthy pipeline of opportunities.
The vehicle is run by Target Advisers, the Stirling-based healthcare asset specialist which also manages the Kames Target Healthcare Fund. It seeks to deliver a 6% gross dividend yield and capital growth with downside protection provided in the form of annual rental uplifts on leases that run for 30 years or more.
‘Generally the healthcare listed vehicles in the UK have paid uncovered dividends, whereas the intention from the start of the Target Healthcare REIT has been to pay a fully covered dividend quarterly on our fully invested assets of 6%’, says Target Adviser’s managing partner Kenneth MacKenzie.
Ticking time-bomb
The sector specialist income-focused Reit has consistently traded at a premium to net asset value since launch, reflecting a combination of investor appetite for tax-efficient dividend payouts as well as the unarguably favourable supply and demand fundamentals that underpin its acquisitive growth story.
Changing UK demographics are resulting in higher numbers of elderly citizens and driving burgeoning demand for quality care homes. MacKenzie explains that besides the increase in the retired population, the UK is seeing a dramatic rise in the over 85 year-olds, not to mention in the acute, chronic illnesses and dementia that inevitably accompany old age.
‘The reality is the number of over 85s doubles in the next 15 to 20 years and there is a need for more care home beds’, he explains.
Furthermore, patient expectations regarding care home quality are helping to drive the private pay market, while the UK’s existing care home stock is ageing and there is a lack of availability of funding for care home operators. The sector expert also notes that ‘more than 85% of the stock is greater than 10 years old and there are less geriatric wards and cottage hospitals in the NHS’.
Quality focus
Target Healthcare REIT’s focus is on the high quality end of the market. The company invests in modern, purpose-built homes offering facilities which are well ahead of minimum standards, with generously-proportioned bedrooms, en-suite facilities and public spaces. ‘We buy entirely new build assets,’ says MacKenzie, ‘what we call “future-proof”. These are holistic buildings which aren’t just a box of beds but a home.’
Target has access to a broad network of care operators, agents and developers, ensuring full market coverage, while the due diligence process is exceptionally thorough. Local supply and demand factors, the competitive landscape and the care culture of the proposed tenant are all investigated with rigour. In addition, the Target Advisers team conducts on-going asset management including regular visits to tenanted care homes, monitoring of occupancy levels and draws up strategic plans for each asset.
Besides looking out for the quality of life for the burgeoning band of vulnerable elderly members of society at a highly stressful time in their lives, the focus on the care culture of tenants has financial merit. This is because care homes with excellent standards tend to perform more profitably than those that don’t have such high standards.
Portfolio builder
‘We speak about bringing stable, long-term money to the sector with moderate returns,’ enthuses MacKenzie, whose fund’s latest acquisition (15 May) is that of three modern, purpose-built residential care properties for £13.9 million.
Located in Wigan, Stockport and Coventry and leased to established operator Ideal Carehomes for 35 years, these deals have taken the total portfolio to sixteen properties and mean Target has now invested £72.7 million of the £95.7 million raised to date from wealth managers, institutional and private investors. Risk mitigation factors include the portfolio’s broad geographical spread across Scotland, the North of England and the Midlands, as well as the fact tenants are backed by several sources of income including private pay, local authorities and the NHS.
MacKenzie is bullish about the ability to grow the fund given a healthy pipeline, though this no land grab. Prospective acquisitions are carefully considered and predicated upon sustainable rent levels and attractive rental yields. MacKenzie expects to announce further acquisitions in the near-term, highlighting around £35.5 million of deals currently in advanced negotiations. Shares anticipates further equity issuance once existing funds are expended too.
90% - the percentage of earnings a Reit needs to distribute as dividends in order to avoid corporation tax
Acquisition timeline
15 May ’14 - Acquires three homes in Wigan, Stockport and Coventry for approximately £13.9 million
17 Apr ’14 -Acquires care homes in Greater Manchester and York for £8.9 million
9 Oct ’13 - Acquires two purpose-built care homes in the North West of England, for approximately £11.5 million
28 Mar ’13 - Acquires four Midlands care homes for around £18 million
1 Mar ’13 - Acquires three care homes in Scotland for £14. 2 million
Target Healthcare REIT (THRL) 102.5p
One-year share price performance: +3.18%
Fund Facts
Launch date: 07/03/2013
Market Cap: £97.6 million
Dividend yield: 6.34%
Sector: AIC Property Specialist
NAV per share: 94.5p
Premium: +8.47%
All data as of 14/05/2014 Source: Company, Trustnet