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.

And you all know that I love talking about the sector. because we've got fabulous tailwinds in this sector and some of the wider discussions and things that are going on in the sector are strong drivers for the level of investment that I think we'll see in this sector in the years to come. i was at a a meeting on i think it was tuesday night this this week in the mansion house in the city and i was asked to speak on this subject uh for this uh private meeting that was going on the impact of demographics and for us they are hugely positive because the number of over 85s doubles Many of you have heard me say this often, but it truly does double. And many people in the senior living sector believe that some of the impact of that is really going to be seen in the coming years because there has been some squeezing of availability of beds with government austerity, but that squeezing of social care provision is going to kind of pop a bit. So there will be increasing levels of demand. And as I said earlier, it's really clear that the the sector needs more beds and the number of beds actually at long last are likely to increase rather than and the older beds start to slip away from the market. And in relation to that, in previous meetings, I've spoken about the net worth of the over 65s and we've been, we're actually about to issue a white paper on all this subject. But the net worth of the over 65s is now six trillion. So there is vast capacity from private pay. And you'll have noticed from what we've said that our portfolio is now up to 78% private pay. So we're absolutely in the right place as we anticipate further government challenges in terms of their overall budget. So within that, we firmly believe that to stay in the strong tailwind of the trend to homes that pay due regard to our seniors by way of giving them appropriate real estate, And we mean by that particularly a wet room provision. You'll see way back in 2014, 14% of the beds had wet rooms and it's now up to 34%. And that compares remarkably, as I've said before, to Target's wholly new facilities. So we're absolutely where this market needs to be and will be in the next 10 or 15 years. And this is, I think, quite a useful slide that we haven't looked at in quite this format before, where you can see that whereas just at the end of the pandemic, private pay was for our portfolio down at 62%, a private fee since then has risen by another 15% to up to 78% 16% it is isn't it up to 78% which is absolutely where we think long stable profitable homes will be based and where rent covers will remain robust for the medium to long term and we're really delighted that that's what our tenants are finding so I thought it would be useful as we come to the end of this presentation for me to reflect a little on what we see in the sector this is structurally supported sector because of demographics and because of So very significant net worth. I remember saying, I think in the June presentation last year, that when I launched this fund 11 or 12 years ago, I remember speaking about 1.6 trillion of net worth in the over 65s. As I say, we've been doing some work on that. It's actually only yesterday we got some of the final numbers from it. And it is quite amazing to see that the net worth has risen so much. I think last year I spoke about it at 2.6 trillion. And in fact, Alistair, who's sitting here in the room and has put all of his stuff together, changed the 2.6 trillion number that he had to the 6 trillion that it is. That is very significant net worth for private pay. We think that's what will happen both for NHS pay and also for social pay. The wealthy, quite appropriately, will have to pay for their own care. So within that model, we believe it's appropriate to be in best in class assets with the flight to quality that we will see with the demands of the private payer, with the continued need for good ESG governance. We love being in assets that are future proofed. We love that we have no remedial capex concerns to speak about. They don't exist. We're already 100% A and B. And from all of that, we believe there will be robust income growth, which is inflation linked and contractual. and that growth is supported by the underlying tailwinds of the sector and the underlying wealth of our seniors so within all of that we need to be wise on capital allocation We have demonstrated ability to effectively recycle capital in the past and improve the portfolio. You'll all be aware that we have already sold 8% of the portfolio over the last 24 months, and we believe there may be opportunities for further disposals to our advantage. and with all of that we continue to actively consider with our helpful board further opportunities to enhance shareholder returns and with that we can move to q a thank you very much thank you i've got a few questions coming through and i think i'll hand a couple of the more straightforward ones first and then as a team we will share the other ones um

Someone was asking about the resident occupancy at the homes and what are the factors moving that down, appreciating it's only 1% lower. I think I came in before James got to that slide, but I think we were saying that's a seasonal effect, just given the time of year occupancy usually declines. And we do benchmark our own portfolio relative to the sector overall, and it is consistent with what's happened across the wider sector. Obviously no immediate concerns there, seasonal and we expect that to recover during the spring. At what level, sorry, the average length of stay per resident, I think we've covered before. Clearly it depends on the acuity of the resident, whether it's a nursing resident or dementia, et cetera, et cetera. The consensus, or sorry, census information from our tenants indicates it's usually about 18 months as an average stay for each resident across the portfolio. I'm probably going to pass to Kenneth to discuss, can we cover construction costs of new build homes? How this has evolved and are rents keeping up? Because I think he'll have the latest numbers to hand on that.

Yeah, construction costs grew significantly up to a couple of years ago and have steadied over the last couple of years. And sustainable rent levels is probably the most important thing in relation to construction costs. And we believe that in terms of us ensuring good rent covers, tying and achieving sustainable rent is the most important thing for us. And we are in a really good position for that with our rents, with our average rental level.

At what level do we expect rent covers to stabilise that?

Yeah, so when we underwrite modern purpose-built homes 10 years ago, we were looking to achieve rent covers around about the 1.6 times over the long term and possibly to the upside. We're comfortably ahead of that. And the portfolio, we think over the next six months, we'll see occupancy grow a bit more compared to previous years. And we believe that that will flow through to further rent cover currently being at 1.9 times. Do we think that rent cover at 1.9 times is the appropriate level over the long term? Well, it certainly surprised more security of income for us in terms of our tenants being successful. But it's a really interesting question how much further it will grow. And we're not going to pretend to be profits in relation to that other than to say our tenants are making good money currently.

Thank you. I've got a couple of questions on developments and refinancing, which I think we will cover. And then we've got, I guess, a theme of questions on some of what's happening in the market at the moment, which I think will probably combine into one response. I think a couple of questions about current development yields and whether we should be using our debt capacity to invest in that um you know what what's uh how attractive does that look i think it's it's probably worthwhile just explaining as we usually do that the nature of our development activity is is very low risk and we don't take planning risk and and you know at that level we will usually fund developments on a pre-let basis and to make sure we have access to the property and then the long lease terms with a good tenant. So there isn't generally any particular development premium and we'd usually be buying that at similar acquisition yields of what we could buy existing assets for. So there isn't a huge premium and therefore obviously we need to do the the the calculation as to do the investment returns uh are they accretive relative to the cost of capital so effectively the the development assets are pretty consistent with the wider investment market at this point in time and there are some opportunities out there but there isn't a huge spread between the cost of capital and the returns so obviously we're being very very selective and and whatever development activity we are choosing to support right now um I've got a question on just someone asking me to expand on the refinancing and what we have available. So what we've done is we've looked at refinancing the bank debt on a like-for-like basis with similar facilities, with shorter facilities, just to give a bit more flexibility given the, I guess, not the volatility in interest rates, but the uncertain outlook. And clearly we've also been looking at longer term fixes as well. So we're taking all of those into the mix. As I said during the presentation, we've got good demand from across the duration parameters there, which we could have, and good demand to drive pricing down a bit. so we're naturally looking with the board as to what the best mix is for the company going forward so so lots of demand and lots of things we may do there and you know having lots of choices good but also gives us a little bit more analysis to do just to make sure we make the right decision and get the right balance there um and then that kind of i think we just double checking we don't have anything else discrete here yeah probably a helpful one on our tenants and what they're expecting and what operations will be. So the question is, do tenants expect to achieve the level of fee increases to cover cost inflation? And if not, how might they react to that? So I think Kenneth or James would be best placed to answer.

Yeah, well, that's the whole reason why we love to have tenants with 78% of private pay. We think there will be challenges for the public pay market. um and as all of us know what our dear government is going through we can understand that there could be um but for private pay as we have pointed out very significant net worth there and a some of that housing equity and net worth is will be used for these people to pay for private pay So our tenants are anticipating. We see reports of fee increases in the range of 8 to 12% as we go around our homes. And these are the numbers that have been quoted to us in recent weeks as the increase that's anticipated next month, which more than compensates for the extra national insurance costs that we're all aware of.

we don't have a concern in relation to that yeah and then i think the two kind of wider theme questions um i think some somebody's asked about i'd refer to the the cost ratios uh comparing well and clearly the follow-up question there is well there are other companies out there with cheaper cost ratios and some have moved fee basis recently. There's two or three questions around that and basically asking what we're thinking about that and what discussions we've had with the board to try and, you know, to look to see if we can enhance earnings. I think Kenneth is probably best placed to answer that.

Yeah, so we have a full cost provision here And we have always set out to the market what we believe is the appropriate way to invest in care homes. And we know that the way we do this is different to everyone else. And what I mean by that is that there are four people who physically inspect the homes and represent your interest in the homes. There are costs related to that. But investment in senior living has been a painful thing if you have a 10, 15 year view, 20 year view of it. And we set out from the beginning to do this differently. And we would submit that with the 10 year record and the last two year record on the MSCI index, it's evident that total returns have been quite satisfactory. We recognise in the midst of that the pain that we all suffer in terms of the share price. And there are larger macro issues that we do need to address in relation to that. And that is something that has ongoing consideration from both the manager and the board.

Okay, there are quite a number of questions coming in there. I was trying to keep track of them all. Hopefully, I think we've got through all of those or one or two others I can quickly pick up with other people directly. So we don't need to do it on here. So unless anything else comes through as I'm speaking, I think it's probably a good spot to wrap this up.

Well, it's always a privilege for us to be able to provide fabulous facilities for our seniors. to do it in the manner that we do do, which provides stability for the tenants, which provides stability for the residents, and which provides robust income and returns for our shareholders. all in the context of also recognizing that the share price is nothing like where we would like it to be. But you can be sure that we are focused on all of that too, and we know all that's going on in the market. And we would thank you for your support.