Target Healthcare (LSE: THRL), has completed the acquisition of a major portfolio of 18 operational modern care homes. Combined with the previously noted acquisition of a pre-let development site in Weymouth, the Group’s total investment during the quarter has been £173 million including costs. The acquisition yields are representative of assets of a similar standard and location within the Group’s portfolio, and the properties benefit from long-term occupational leases with RPI-linked caps and collars.
These acquisitions, which formed part of the pipeline of acquisitions announced as part of the Company’s recent £125 million equity fund raise, take the Group’s portfolio to 98 assets and to 32 tenants once the development site becomes operational in June 2022.
Portfolio of 18 operational care homes
Target Healthcare has completed the acquisition of a major portfolio of 18 operational care homes, representing in excess of 1,200 beds. The Investment Manager has unparalleled knowledge of the individual assets within the portfolio, having sourced 17 out of the 18 care homes on behalf of the vendor, as well as having provided asset management services over the past 11 years.
The portfolio generates annual contracted rent of £9.2 million and has collected 100 per cent. of rent throughout the pandemic. This is a high-quality real estate portfolio, with an average age of approximately eleven years. All of the properties are purpose-built care homes with modern facilities including 100 per cent. en suite provision, the vast majority of which (96 per cent.) benefit from full wet-rooms. The portfolio is spread across eight tenants, three of which are new to the Group, including national operator, Barchester Healthcare, as well as two regional operators.
The properties each benefit from long-term occupational leases with RPI-linked caps and collars, with a weighted average unexpired lease term of approximately 22 years. The commercial terms of each of the occupational leases are consistent with equivalent leases in place across the Group.
Development site in Weymouth
The development is being undertaken by one of the UK’s leading care home developers, LNT Group, and upon reaching practical completion the care home will be leased to experienced, regional operator, Chanctonbury Healthcare, on a 35-year, full repairing and insuring lease. Chanctonbury Healthcare will represent a new tenant to the Group.
Work on site has already commenced and practical completion is expected to be reached in June 2022. The development is being undertaken on a fixed price contract with the developer and, in line with previous forward funding agreements, the Group will earn interest on capital deployed through the construction phase.
Long-term institutional debt facility
The Company has completed a £63 million committed term loan facility (the “Facility”) with Phoenix Group (“Phoenix”), an existing lending partner, utilising the full £100 million of new facilities which had been allocated and in diligence. The Facility carries an aggregate fixed rate of interest of 3.138% per annum on a 15-year term, maturing in January 2037.
Following the drawdown of the Facility, which is being used to finance the acquisitions and temporarily repay a portion of the Group’s revolving credit facilities, the Group will have a net LTV of 21%; a weighted average term to maturity of its debt facilities of 7.5 years; and a weighted average cost of drawn debt, inclusive of amortisation of arrangement costs, of 3.08%.
The Group has undrawn flexible debt facilities of £97 million which will be used to fund portfolio commitments and the acquisition pipeline, to which the Group’s investible capital is allocated.
The Group’s total borrowing capacity now stands at £320 million comprising the Facility, the existing £87 million Phoenix facilities repayable in 2032 and existing facilities with The Royal Bank of Scotland plc (£70 million committed term loan and revolving credit facility repayable in 2025) and HSBC plc (£100 million revolving credit facility repayable towards the end of 2024).
John Flannelly, Head of Investment at Target Fund Managers, commented:
“We are pleased to have deployed the proceeds of the recent equity issuance so quickly, whilst agreement of the new 15-year term facility, the longest duration yet, will support us in our objective to provide stable returns to shareholders with long-term fixed interest costs matched against the inflation-linked long income that is generated from our portfolio.
“The acquisition of the 18-care home portfolio increases the size of the Group’s existing portfolio by approximately 20 per cent and demonstrates the Group’s ability to undertake transactions of scale. The quality of the real estate, combined with the diversified nature of the tenant base and the attractive pricing, underpins our investment thesis for this acquisition.
“On completion next year, the Weymouth asset will be a best-in-class care home in a location which demonstrates favourable demographics, whilst we are also pleased to be further diversifying our tenant base by partnering with a new, experienced operator in Chanctonbury Healthcare.
“These two transactions are strongly aligned with the Group’s strict investment criteria as we continue our highly disciplined approach to the deployment of capital. We have a number of other transactions at advanced stages of due diligence and expect to be in a position to make further announcements in due course.”