Rising gilt yields are hammering property fund shares but a recent quarterly update from Target Healthcare (THRL ) underlined the strong fundamentals supporting the care home investor.

A 14% fall in the share price over one month amid fears that sticky inflation will lead to higher interest rates for longer, has widened the specialist real estate investment trust’s discount from 29% to 36%, according to Numis Securities data, and left it yielding a high 9%. 

Like the rest of its sector, THRL has suffered a sharp derating in the past year with the shares off 38% on top-down macroeconomic concerns and fears of rising finance costs weakening dividend cover.

Nevertheless, after a difficult period the update showed the Reit return to growth in the three months to 30 June. 

Net tangible assets (NTA), which remained static in the first three months of the year, rose from 103.4p to 104.5p per share, reflecting a like-for-like valuation uplift driven by inflation-linked rent reviews.

Including a fully covered dividend of 1.4p per share, the £869m portfolio of 97 properties achieved a total investment return of 2.4%.

Under fund manager Kenneth Mackenzie, THRL owns 93 operational care homes and four pre-let sites it is developing. It saw contractual rental income increase 1.1% thanks to 25 inflation-linked, upwards-only rent reviews, that garnered an average uplift of 3.8% with 99% of rent collected from its 32 tenants.

Mackenzie said the return to ‘near-full rent collection and the stability of our portfolio valuation’ proves the investment thesis that ‘modern, purpose-built care homes will provide compelling long-term returns’.

Analysts noted THRL’s strong balance sheet with debts at a comfortable 24.7% loan to value with an average interest rate of 3.7% that was fully hedged over the 6.2 years average terms of the loans.

‘In our view, demand for purpose-built care homes will only increase with trend projections expecting the number of people ages over 85 expected to double by 2046,’ commented Liberum analyst Bjorn Zietsman.

One of the key criteria properties have to fulfil before being added to the THRL portfolio is that care home bedrooms have their own ensuite wet rooms. He said demand for modern care home places remains ‘encouraging’, demonstrated by ‘growing weekly fee rates and improving rent covers and profitability’.

‘Resident occupancy across our portfolio continues to recover towards pre-pandemic levels,’ he said.

The Reit continues to invest in the assets it has to ‘unlock further value’ but Mackenzie also added a new property to the portfolio following a slowing in purchases last year that has seen just two new buys since June 2022.

The new site, which was purchased at the beginning of July, is a pre-let development in Weston Super Mare housing 66 beds. THRL paid £16m for the care home which is currently under construction and will be completed next summer.

‘We continue to invest in the future of the sector with construction underway on a best-in-class care home offering carbon net-zero operational ability at our most recently acquired development site,’ he said.

‘In addition, we have four further sites where pre-let care homes are being built subject to capped development contracts, which will deliver to the sector a pipeline of much-needed fit-for-purpose modern real estate.’