London, UK, 20 March 2017

Edison issues initiation on Target Healthcare REIT (THRL)

Target Healthcare REIT is a specialist investor in modern, purpose built residential care homes, the demand for which is rising, driven by structural demographic changes throughout the UK. The manager selects modern, purpose-built assets suited to their local area and population. The assets are acquired at yields of c 7% and let on long leases (c 30 years) to high quality operators, with regular contact to ensure they are well-run. These long and secure income streams underpin a growing dividend yielding c 6% which, on our estimates, will be 100% covered once the group is fully invested, expected by the end of FY18.

Target pays a dividend yield approaching 6% and currently 72% covered by EPRA earnings, which we see rising to 100% in FY18 once the group is fully invested. Capital values are typically stable relative to other real estate subsectors and the long leases and diversified tenant base provide security of income. Although it has the longest average lease term in the sector, inexpensive debt and a low LTV ratio, Target trades at a lower premium to EPRA NAV than its peers of c 11% vs 18% on average in the wider group. This may fall as dividend cover rises.

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