Target Healthcare REIT PLC

Good morning from a beautifully sunny and a bit frosty Scotland, where we're delighted to present to you the results for the six months ended December 24 for Target Healthcare REIT. We have an additional member of the team with us today. As we move slides, James McKenzie joined us at the beginning of the year in the role of Head of Investor Relations and we're delighted to have him with us. So James is joining Gordon and I to present the results and you'll probably see more of him in the future. Let's get into some of the detail of Target Healthcare REIT. Many of you will remember quite a bit of this, but I think it's well worth the reminder. This is a portfolio of scale with really robust long rental income stream. 94 care homes in the portfolio today, just under six and a half thousand beds, over 60 million of rent, And the portfolio currently valued at the end of last year at 925 million, based on a NEPRA topped up net initial yield of 6.2. And when we started Targa Healthcare REIT, we said that we thought it was entirely appropriate that we have a very diverse source of income. In terms of the sector, and as you'll see, we continue to be indeed very diverse with 34 different sources of income. It's a remarkable portfolio, we believe. It's remarkable in that it is differentiated by its quality and its modernity and its ESG compliance. It's remarkable in that effectively we're at almost 100% of en suite bedrooms. I was speaking recently to an American investor in this sector and an operator in America, and he was observing that Our portfolio is matching much of what is done in America today with superb facilities for seniors, and we're delighted to have this prime portfolio as part of who we are. It's also remarkable in that I don't believe that there is any other real estate portfolio in the listed space which has got 100% EPC ratings. there's no issue here with 20 30 costs to bring things up to what is spoken about as being desired and it's um remarkably stable really in terms of what happens to the income levels because 99 of the underlying leases inflation links, RPI links for rental uplifts. And you'll see as we go through the report that we have really good stable rental uplifts tied to RPI. And it's remarkable in that this with 26 years of income looking forward. And I think I'll probably continue with the remarkable comment because look what's happened over the last five years in this portfolio. We've increased the number of assets by 32. We've increased the number of wet rooms by 3%. We have got five years older and yet the building age is younger. Now that's fairly unusual, isn't it? We've spoken already about the APC A and B ratings and how superb they are. And it's a portfolio which gives real good quality of space for our beloved seniors with excellent square meters per resident. And of course, the portfolio is maturing, even although it's younger, as we see greater growth. and really stable rent cover compared to five years ago, 27% increase in the rent cover at 1.9 times. And then that remarkability, if that is a word, flows through to what is long-term performance. I remember when I first started investing in senior living, a pretty senior property person When I was trying to convince him after one or two years that what we were doing was good, I said, Kenneth, this really matters over the 5, 10, 15 year period. How will you perform over that much longer period? And here you can see the outperformance of the MSCI UK Annual Healthcare Property Index 76% outperformance over the last 10 years and there's about eight and a half or nine billion of assets in this index. So we have a top performer number two over that 10-year period and you'll see over the last couple of years That, by any stretch of the imagination, is good outperformance at 5.5% in 2023 and 5.4% outperformance in 2024. I'll hand over to Gordon now to take you through the financial implications of Remarkability.

Thanks, yes. So just a few short slides on the financial performance for the six-month period. to December. So we have a highlight slide here. I'll talk to four of these. Again, I think most of you are very familiar with what we do and what we deliver. The net rental income for the six months was a 4% increase on the comparative period. I think the interesting thing here is that despite our disposals programme across the portfolio, so obviously clearly we've lost a bit of income from disposing of some of the poorer assets and replacing them with better assets, the disposals rent has largely been replaced by bringing our development programme to practical completion and growing the rent roll there. And then the like-for-like rent reviews, which we have embedded across the portfolio, have really driven the rest of the growth in that net rental income, as well as some income increases from a little bit of CapEx across the portfolio to, again, further improve the quality of the real estate. The effort cost ratio is clearly a key metric in terms of the running cost of the business. That's remained very stable at 16%. um of course this is a ratio which is based on on income but it does compare well to the wider sector it compares well to other uh properties of similar scale to ours another other property company sorry with a similar returns profile so uh good that that's stable um and i would also flag that our nav based uh cost ratios which we usually do for the full financial year and also compare very favorably so running running the business efficiently What does that do then to the adjusted EPRA EPS and the dividends per share? We've passed through that rental growth and that tight cost control and effective interest costs onto growing earnings, so that the adjusted EPRA EPS is up just shy of 3%, and that has flown through to the dividends, which we're paying out as well, which has grown 3% relative to the comparative period. So that's what we're here to do, and that's what we intend to do going forward. And a side note, again, it's not just income. Kenneth slides there on MSCI and the portfolio performance clearly showing great outperformance. That comes from capital as well. So we are able to provide a great total accounting return. We're all bright on this call, but that 4.5% for the six years, clearly that translates to roughly 9% for the year. Very pleased to deliver that. And I think, again, that compares very well to the wider sector at this point in time. The earnings summary, this is a larger one for those of you to take away and look at in a bit more detail. I think I've got two key takeaways to talk about here. One, I always need to flag it, but adjusted after earnings is our key metric. That's the cash, the recurring earnings that this company and this portfolio generates. I like to use the word triggered, but adjusted, I know it does trigger some people just to remember we are adjusting down. from our EFRA earnings number by about 20% just based on the IFRS and our lease structure. We have to do that to show the true measure of how this company is performing on a recurring cash basis. And then secondarily, the box at the bottom there that this is an efficient property model. Our gross to net is 100%. There are no voids, there are no hidden fees, there's no transaction fees, there's no separate property management fees or rent collection fees, there's none of that. So our gross rental income effectively is our net rental income and very efficient, which allows us to obviously pass on as much as we can back to shareholders from that rental income coming in. And on that rent itself, the contracted rent at the end of the period has grown by 3%. I touched upon that earlier. It's growing with the rent reviews which are embedded in the portfolio. So they are 1.3% on a like-for-like basis for the six months. the contractual rent is growing as we replace some of those older assets which we've disposed of with brand new assets coming online. So one particular asset came to a practical completion during the period, added 900,000 of rent onto the rent roll there, that's a brand new asset, paying rent from day one, and it's clearly enhancing the portfolio, it's best in class, it's modern, it's EPC ratings, all that stuff is good. So it's good to replace some of the older assets in the portfolio with that and growing the rent roll in return. Onto the balance sheet, which is straightforward. We have our assets, just over 900 million, we have our cash and our working capital, and we have our debt on there. That leaves us with plenty of headroom. We've got greater than 70 million headroom there to do as we think is appropriate with. Given where we are, low LTV, plenty of headroom, good long debt ahead of us mostly. And given the results we've just seen on the previous slide, we have grown the EFRA NTA per share over the period by just under 2%, 1.8% exactly. So that's what the balance sheet is showing at the bottom there. Breaking that down a little, you can see on the left-hand side, moving on from the June position, revaluations have grown that NAV per share by 2.1 pence. That's really based on the stability of the valuations of the asset class and the demand for that asset class and the performance of the asset class means that the valuers are seeing stable values and they're passing it on the rent reviews and the rental growth as it's coming through onto valuations. and then the um that's the red box there and then the next box is just showing the effect of our recurring earnings are well covering the dividend so that is growing the nav as well so we end up the the nav for share growing by 1.8 percent over the year so largely driven by that valuation growth coming from the rental growth across the portfolio and on the debt um Two key aspects to cover here. The first is that the Phoenix debt that we've got, it's 150 million of our drawn debt. It's about 60% of our drawn debt. It's obviously fairly significant. It goes out to 2032 and 2037. We struck that a little while ago, recognising that we wanted to be long-term fixed in that environment, given that costs were only likely to go one way. And we're very pleased with that 150 million of debt. The cash cost on that annually is 3.2%. 3.3% you see there is with the amortization of the costs on it. So great to have that really important going forward. And then I'm sure you're all aware that the RBS and the HSBC, the shorter, more flexible bank debt is up for refinance this year. We are very focused on that. We've been through a couple of exercises now in terms of speaking to lenders, the incumbents and a range of other lenders to get some optionality there. We've got great demand, good offers on the table. And if we did refinance that now based on those offers and based on current market pricing on a like-for-like basis, it would move the overall group's weighted average cost of debt from 4% to 4.4%. So only a 40 basis point increase there. And as we've been saying for a number of periods now, we've been factoring that into all of our decision making over the last two, two and a half years in terms of dividend, capital structure, capital allocation. The dividend is well covered. There's plenty of headroom to reflect that increase in the overall cost of debt. So we're very well placed on the refinance going forward. and just the final point the the debt is still working for us this is a um a chart mapping the peer group with um ltd and with the earnings yield i think we'd all recognize you probably want to be towards the left-hand side of that chart with lower ltd and a higher earnings yield and ideally you're at the top of the top left of that chart and target is sitting comfortably right in the top left quadrant of that chart. The debt is still working for us, the gearing is still working for us and of course we will continue to closely review that and monitor the capital structure and allocation with the board and make some appropriate decisions for shareholders going forward. We'll move on to James to cover some of the portfolio performance in the last six months.

Thanks Gordon. So how are our operators performing? In terms of resident occupancy, The chart shows the maturity of the portfolio improving over time. As you can see, resident occupancy has recovered post COVID to mature occupancy levels of almost 86% at the end of December. And as we can see at the very end of the chart, operators have seen what we expect to be a seasonal drop in occupancy in Q4 consistent with the sector. What's also very important for the portfolio is rent cover. And as I'll explain in more detail in future slides, this, as you can see, has improved over the last five years to 1.9 times in terms of rolling last 12 months rent cover. How are our operator business models performing? And as this slide shows, a very detailed slide, but in terms of mature homes, being homes that have traded for over three years, there's been five years of fee increases amounting to 45% over the whole period. And this compares to total RPI inflation of 34% over the period. At the same time, private pay has moved from 66% to 78%, evidencing the quality of the assets that you own. Staff costs as a percentage of total fees has fallen over the period from 57% to 54%. But agency costs, we've also seen falls slightly after the COVID spike. Result of these operational factors is that rent cover has grown to 1.9 times as we've spoken to earlier. We're not just gathering assets, we're refreshing your portfolio, investing in it and generating returns. And for long income, you want your portfolio to be modern and fit for purpose. So how has your portfolio changed over the last five years? Well, modernity has improved with now 84% being purpose-built from 2010 onwards. Older homes have been sold increasing the overall weighted average unexpired lease terms such that over the five years, it's only reduced by three years in total. 91% of the portfolio are now mature homes, being homes that have traded for over three years. And this has increased from 73% in 2020. as a result of our approach to often buying brand new homes that take three years or so to get to maturity. And we now have 99% of the portfolio with en-suite wet rooms. In summary, you've got a great quality portfolio as a result of us refreshing and improving the athletes. Now to speak to the physical property, how does your portfolio compare to peers and the market? Well, as you can see, you have a significantly more modern portfolio with no homes built pre the 1990s and no conversions or conversions plus extensions. This is a premium portfolio. And we have got a premium portfolio too in terms of social impact. with 99% wet rooms, enabling our seniors to be cared for in their homes with the dignity and respect that we would want for ourselves. In terms of some financial metrics and the comparison of your portfolio against listed peers, your portfolio has a similar net initial yield, average value per square metre and average rent per square metre, However, we would submit that there is significant work to be done on pure, poorer quality stock in the UK and significant capital expenditure needed to bring ESG standards to appropriate levels. And I'll now pass back to Kenneth to talk about the sector.