SIF Folio: Can Target Healthcare REIT Provide A Safe 6% Yield?

21st Jun '22 by Roland Head

7 comments 1564 reads

UK markets delivered a bumpy ride last week. While the FTSE 100 has been propped up by exceptional gains for Big Oil and a few other heavyweights, the FTSE 250 is down by 20% so far this year:

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While I want to protect the SIF folio’s capital in this uncertain period, I’m conscious that the portfolio is 39% in cash.

Being out of the market carries both an opportunity and an opportunity cost. I’m not sure that having this much cash in the portfolio is the right balance between the two:

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Fortunately, a new opportunity has arisen which I think has the potential to provide SIF with a stable capital value and a useful 6% income. The company in question is FTSE 250 member Target Healthcare Reit (LON:THRL) which owns 99 care home properties around the UK.

Target Healthcare has been drawn from the relaxed version of my stock-buying screen. I’m now able to use this to look for new buys, as I haven’t added a stock to SIF for over four weeks.

The only differences between the relaxed screen and my standard screen are that the valuation and growth criteria are relaxed slightly, in order to widen the choice of stocks on offer.

Target Healthcare Reit (LON:THRL)

Target Healthcare REIT floated on the London market in 2013. It was promoted to the FTSE 250 in the latest quarterly reshuffle. This REIT has outperformed the FTSE 250 so far this year, aiding its promotion:

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Portfolio: Target Healthcare has a portfolio of 99 care home properties that are rented to 33 tenants. They are described as modern, with 96% having en-suite wet rooms. According to management, this contrasts with a UK national average of 29%.

Long leases are another attraction. The portfolio had a weighted average unexpired lease term (WAULT) of 27.3 years at the end of March.

Such long leases are typical of healthcare properties and should provide excellent visibility on cash flow. However, there is some tenant solvency risk. The recent quarterly update mentions re-tenanting homes operated by two tenants “whose resilience has been stretched” during the pandemic.

Rental collection for the quarter to 31 March was 92% on 5 May, while the previous half-year results cited…

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Brilliant Leader

21st Jun '22

Out of interest Roland did you also look at Impact Healthcare REIT (LON:IHR) as part of your process? They are in the same space and I found them to slightly have the edge over Target Healthcare when I was buying last year - for example 100% rent collection and 100% inflation linked rent reviews. They have become slightly more expensive during my holding period (~5.5% yield and ~5% premium), so perhaps Target Healthcare Reit (LON:THRL) is the better option now?

Cheers
Simon

Grippie

Thank you Roland for this thorough analysis; it has clarified my thinking on this REIT (I bought Target Healthcare Reit (LON:THRL) this month).

Petresy

Interesting. I’d been looking at REITs more broadly as a means of diversifying my portfolio so this is very timely, thank you.

Bronstein

I find your comments on REIT valuation interesting. I have seen a couple of REIT recommendations recently where Stocko gives a distinctly average assessment e.g. institutional investors are piling into LXi at the moment yet Stocko scores 68 Neutral. What is it these guys see that the Stocko algorithms don't?

redsf

22nd Jun '22

Impact Healthcare REIT (LON:IHR) equity placing at a discount to yesterday's closing announced... Better value note to consider alongside Target.

Nothingventured

I recently bought Alternative Income REIT recently which has a more diverse portfolio - the nice thing is most rents are indexed-linked. However, if we have a recession there are always concerns about a tenant's ability to pay the rent!

Roland Head

Hi Simon,

Thanks for your comments. I agree that a 100% rent collection rate does seem reassuring.

I selected Target Healthcare Reit (LON:THRL) as it had qualified for my screen. Impact Healthcare REIT (LON:IHR) is not currently in my screening results, but the difference between qualifying and not qualifying can sometimes be small and somewhat arbitrary.

As my process is to select stocks from the screen, I haven't done a detailed comparison between Target and Impact. However, I'd say this would probably be worthwhile for potential investors.

As always, my choices only reflect my actions with the SIF model portfolio; they aren't stock tips or recommendations.

Regards,

Roland

SIF Folio: Can Target Healthcare REIT provide a safe 6% yield?

Target Healthcare Reit (LON:THRL)

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Roland Head

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