A focus on quality assets with single occupancy rooms and en-suite facilities should serve it well
Thursday 16 Jul 2020 Author: Tom Sieber

The care home sector has clearly suffered a devastating impact from coronavirus but the need for quality accommodation for older, vulnerable people has arguably never been greater.

We think investors should buy Target Healthcare REIT (THRL) which is growing its portfolio of purpose-built assets and offers a highly attractive yield of 6.2%.

While not quite as secure as the income on offer from the GP surgery and primary healthcare facility space, occupied by the likes of Assura (AGR) and Primary Health Properties (PHP), this situation is reflected in dividend yields from the investment-related care home sector being slightly higher to compensate for the extra risks.

For way of comparison, the effectively government-backed income stream from Assura and Primary Health is available at a significantly lower yield of around 3.5%.

Unlike sector peer Impact Healthcare (IHR), which trades at an 8.6% discount to net asset value (NAV), Target trades a smidge above its NAV of 106.3p. However, we think this premium is justified by its longer track record and bias towards assets which are particularly well-positioned in a post-coronavirus future when there is likely to be significant emphasis on infection control.

Its facilities are focused on single occupancy units with full en-suite wet rooms. Stockbroker Numis says by design these promote enhanced infection control and allow for effective isolation.

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.

A recent rent collection update from Target suggests its income stream remains relatively secure. On 6 July it reaffirmed its dividend having collected 96% of rent due. The 4% outstanding is subject to what are described as ‘active asset management initiatives’ which in effect is likely to mean bringing in new tenants.

Tenants running into financial problems is clearly a risk, particularly in the short term as they are forced to adjust to increased costs and disruption associated with Covid-19. However, Target has a good track record of dealing with issues when they arise.

For example, in September 2019 Orchard Care Homes announced its intention to exit six homes leased to the group and Target managed to re-tenant the properties with no interruption to residents, limited impact on rental income and a modest increase in property value.

The trust recently demonstrated its confidence in the outlook by resuming acquisitions, agreeing the purchase of a new-build 66 bed care home in Oxfordshire for £15 million. This will be let to its largest existing tenant, Ideal Care Homes.

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