Target Healthcare REIT PLC

Good morning, everyone. We're delighted to speak with you this morning about the results for the six months ended December 25 for Target Healthcare REIT. And I'm really happy to be joined again today by our CFO, Alistair Murray. Alistair is actually up in Edinburgh today because he's got a pinched nerve in his back, poor chap. But he is doing valiantly through it. And I know he'll be able to present well. And also James McKenzie, head of investor relations. And our plan for the morning is that... After a little bit of an introduction from me, I'll take you through the portfolio highlights. Alistair will cover the financial performance and James will go through the portfolio performance and I'll have some closing remarks and reflect on the underlying fundamentals. And when we look at these results... I think it all flows from some of the fundamentals that are core to who Target Healthcare REIT is. So if we go forward to portfolio highlight section, an example of one of our homes, here's the core investment case. You'll see these four boxes. But before I even speak about them, I think you'll hear that these are quite positive results. And I use the word quite in an American term. In other words, that they're excellent results. They're also not just the results of what we've done in the six months, though our team have been very diligent in the six months as usual, but I would say they're the fruit of 13 years of trying to do this really well. This is no kind of fashion short-term investment that we're doing here in Target Healthcare REIT. We are... riding on the backs of some long-term trends, both in terms of the demographics and also in terms of the ultimate user of our facilities. So the users aren't debt funding their payments for the weekly fees, as sadly those in the student world are having to do. and then, of course, in the student world with questionable job prospects at the end of it. Rather, this demographic have very significant long-term wealth, and the users of our care homes... need to be there, the families can no longer safely look after them. So this is needs-based demand and funded by significant net worth. And that's with the doubling of the elderly population in the next 25 years. That really speaks really well to how our prospects are. We have a robust defensive portfolio, modern. We have, as you will see, effective and proven asset management. We have the great tailwinds that we've spoken about. And all of that has resulted in these six months in 7.8% total accounting return since 2013. So really encouraging. Let's go on to the next slide, which compares us to the MSCI annual healthcare property index. And you'll see over these 11 years how we have really consistently beaten the index. And indeed, the cumulative outperformance is 93% by the end of 2025. You'll see down in the right-hand side various items of outperformance or where we are in different periods. And we're humbled and thankful for all of that. So this performance on the next slide is built on the creation of the portfolio, which has some scale. which has robust rental income, 86 homes and just under 60 million of rental income, even after the sales that we hear about later. Portfolio value around about 900 million from a diversity of tenants, 32 of them. And as you think of KPIs for the sector, there can be very few portfolios with this highly consistent level of 100% achievement of KPIs. Wet rooms, 100% of the beds. EPC ratings, A and B, 100%. Where is our future income? 100% linked to inflation. And it's really long-term income. We have 26 years of these inflating income numbers, which we are delighted to look forward to. And then on the next slide, we speak a bit more about how it has been a good half year, both in terms of corporate activity... where in the six months we made 10 disposals, and as a number of you I'm sure will remember, these were at a significant premium. But we were also busy on the other side, the buying side, with three acquisitions of modern fit-for-purpose care homes. And also with one forward to commit to buy a brand new home, care home, which will complete in the next few months. And one of the developments that we have been funding reached practical completion during the six months. And all of that activity came to 150 million of action for the team. So the guys and girls have been busy. And we are thankful for the stability of our team and the very long-term nature of the people who work with us. I'm sure that is absolutely core to how we are delivering these consistent results. And the finance team also refinanced the bank debt. I should probably say the asset management team were a bit involved in that too. But it's been good to have the bank debt also refinanced. And then on the asset management side, we said that we would hope to recover some of the rent arrears. And we're delighted that in this period we did indeed recover 1.9 million of rent arrears. Alistair will probably speak a little bit more about that in his section. We also did five re-tenantings with no tenant incentives. That must be pretty unusual within property world, no tenant incentives, not having to give rent freeze or something. So that's been encouraging. And that is all related to having best-in-class assets in local markets with the background of the demographics and the demand of lots of elderly people. And in addition to the five re-tenantings, we also, as part of one of the re-tenantings, got 1.4 million of a surrender premium as one tenant gave up a home, which again may be a little unusual. And then finally, I made reference to KPIs a couple of slides ago. Here's another KPI. We're on our way back to a 100% rent collection by the end of the year. And we're delighted with that. And indeed, that's what we expect for the longer term. And in all of that asset management activity, and my thanks to the asset management team for all they've been doing in that through the period, we've also been very pleased that there has been continuity of care across all of the re-tenanted homes. So with that, a good introduction to a good half year. Let me pass on to Alistair to speak about the financial performance.

Thank you, Kenneth. I'm very pleased to be here today to talk through the financial performance for the six months to December 2025. When I was presenting the full year results last October, much of my focus was on the one-off increase in operating expenses and credit loss allowance from the administration of one home and another operator not paying their rent in full. We did know our expectation that we would quickly turn this around and it's therefore nice to be back six months later to talk you through the highest half year returns since the group launched in 2013 and to be able to demonstrate that our portfolio management activities have had the desired effect. So next slide. I start with the highlights of the year. The like for like increase in our rental income was 1.8%, predominantly driven by the long duration inflation linked contractual rental growth. And as usual, we had no voids during the period. Our EPRA earnings per share increased by 8.5% to 3.4p. While 0.18p of this was due to the non-recurring recovery of historic arrears, this still represents a robust performance from an underlying portfolio at a time when the group is focused on redeployment of the disposal proceeds from the sale of 10 care homes in the period. The EPS comfortably covered our dividend per share of 3.02p, this dividend being a 2.5% increase compared to the prior year. Our EPRA NTA increased by 4% to 119.4p, driven by the uplift in property values from both rental growth and from the disposals at premium and from the healthy dividend cover. This enabled the group to deliver a robust total accounting return of 6.8% for the six month period. So moving on to the next slide. Moving on to the P&L, I'll walk you through the key lines. The rental income in the period increased by 2%. There are several drivers of this movement. We disposed of a total of 10 homes in the period, all of which happened in the second quarter, so we only received four months income from these homes. However, this reduction in rent was more than set off by the increases in rent in existing homes where all of our leases have inflation-linked annual rent increases. In the period, there were 38 rent increases at an average of 3.8%. We also benefited from one development home opening in the current year and from the acquisition of the three new homes, albeit this occurred at the end of November. Given the movements through the period, it is clear to demonstrate this through an annualised contracted rent bridge. So next slide. This slide will be of interest to those of you who are updating their financial model for the changes in the rent, with the bridge demonstrating how our contracted rent has moved in the six months period to December 25. You can see the impact of the contractual rent reviews as a consistent ever-present driver of rental growth, adding 1.1 million. This is a like-for-like increase of 1.8% in six months. We then see the impact of the development home opening. This was the final forward-funded development on our books at present. The impact to the disposals in the period was to decrease our annualised contracted rent by 5.4 million, with the subsequent redeployment of around half of the proceeds in three standing assets, adding 2 million rent. Part of the total redeployment is in a forward commit scheduled to complete in the summer, and therefore this bridge does not include the additional rent, which will subsequently add another £800,000 when the home opens. So in December 2025, our annualised contracted rent was £59.5 million, and we are confident this will grow as we redeploy the remaining proceeds and utilise our debt facilities to invest in our existing pipeline. James will have more on pipeline later in the presentation. So next slide. So if we now look at costs, as I mentioned, we reported one-off increases in our operating costs and our credit loss allowance in the second half of last year, which impacted both our earnings per share and our EPRA cost ratio for the full year. These costs, however, did not impact the December 2024 comparables. Our operating expenses are now back at historical levels in line with the comparable six months to December. And as we expected, we did successfully recover the historical rent from the operator that don't be paying in full. And you can see this comes through in the right back on the credit loss allowance in the current period. And just for clarity, this is the right back of the provision. The cash amount recovered, as mentioned earlier, was 1.9 million. So next. So this resulted in adjusted EPRA cost ratio of 15.4. And if you remove the non-recurring arrears recovery, this is back in line with historical levels. And just for the avoidance of doubt, our adjusted EPRA cost ratio is higher than our unadjusted cost ratio, which is 12.7%. So next. As would be expected given the disposal proceeds in the period, our financing costs reduced. When we refinanced the banking debt in September, we structured the split between term loan and revolving credit facility to accommodate disposal proceeds, enabling us to minimise drawn facilities, thus reducing interest costs, and to provide us with maximum flexibility when redeploying proceeds. And finally, next slide on this. This return to normalised costs and reduced interest costs resulted in an adjusted EPRA EPS of 3.4p. And even excluding the 0.18p of non-recurring arrears recovery, this is a robust 3% increase on six months to December 24 during a period of capital redeployment. The dividend cover is very comfortable at 113% and stripping out the non-recurring arrears, it sits at 107 in line with the previous period. So if we now go to the next slide. Moving on to the balance sheet. It remains a fairly simple balance sheet with the key areas being portfolio market value and debt, both of which I will cover. So looking at the portfolio market value first on the next slide. This is a like-for-like increase of 3.1% in the portfolio valuation, with the main driver of this increase again being the contractual inflation-linked rent reviews embedded in our business model. The next largest contributor is the increase in values arising from the disposal set of premium, and there were further smaller increases coming from both portfolio management activities and small movements in individual homes' net initial yields. The disposal of the 10K homes across two transactions reduced the portfolio by 95 million. And the three standing assets increased the portfolio by 31 million. Again, the forward commit is not included in the figures. Overall, the portfolio valuation decreased by 3.8%, but we'd expect the portfolio to grow going forward as we redeploy capital into the current pipeline. So next slide. Moving on to debt, you will see that our debt levels have reduced by almost 40 million since the year end, driven by the successful disposals netted against redeployment of proceeds into the three home acquisition. At an LTV of around 15% against almost 22% at June year end, we are below our long-term target and we expect to increase LTV towards 25% as we acquire standing assets or forward fund new homes. Next slide. So if you look at the details, this slide sets out the debt book following the refinance in September. We have the attractive Phoenix debt fixed to maturity at 3.2% and the bank term debt of 50 million fixed through swaps at a rate of 5.3%. We have 3.5 million drawn in the revolving credit facility and we intend to cap core drawings under the RCF in advance of any significant acquisition. And finally, for me, next slide. I'll cover the growth in NTA in the period. This is increased by a healthy 4%. If we're looking at the next, sorry, if we look at the next slide, you'll see the drivers of this increase. The valuation uplifts in our property are the main driver of this growth. Again, driven by inflation-linked contractual rental increases. The disposals and surrender premium uplift of 1.8p demonstrates the strong benefit in the period from our investment management activities. Finally, there's a small increase from our earnings, more than fully covering the dividends. So I'll now hand you over to James, who'll take you through portfolio performance.

Thanks, Alistair. I'll now talk about how the portfolio is performing and our pipeline. Firstly, let me share some insights into the portfolio and how the operators are performing. Here's a busy slide of portfolio metrics. I'll discuss the position regarding average weekly fee increases and rent cover in more detail in the following slides. But overall, the group's property portfolio continues to perform well, driven by the strong levels of inflation-linked rental income growth. Focusing on the average weekly fee increases first, over the last five and a half years, average weekly fees in the homes have increased, reflecting the recent levels of inflation. Digging into this in a bit more detail, as you can see, over the last five and a half years, the cumulative increase in average weekly fees is 54%, compared to the cumulative increase of RPI of 44%, showing that operators have been able to pass on the increase in their costs to residents, a significant proportion of which are staff or agency costs. Remember, our operators are providing needs-based care, as Kenneth said. And there's £6 trillion of net wealth in the over-65s to fund these weekly fees. The group's average rent cover over the last 12 months at 1.9 times represents the highest achieved since IPO and provides a strong foundation for the group. This high level of rent cover is the result of increases in the average weekly fees operators have been able to make and good levels of resident occupancy. which, as you can see from this slide, has remained stable over the last couple of years at around 85% for our mature homes. That's homes which have been trading for three or more years. Of course, the group's portfolio has always been fully let since IPO. This is just resident occupancy that we're talking about here. How does your portfolio compare to the market in terms of underlying real estate? Well, for a stable long income, you want your portfolio to be modern and fit for purpose. And you have a significantly more modern portfolio than the market. This is a premium portfolio. The average group home has significantly more space per resident than the market at 48 square metres. 100% have en suite wet rooms, enabling our seniors to be cared for in their room with the dignity and respect that we would want for ourselves. 100% have EPC ratings of A or B. And in terms of the performance of our operators, the average TripAdvisor-style rating on carehome.co.uk is 9.5 out of 10, compared to 9.2 for the market. In summary, you have a great quality portfolio as a result of our active management, buying and funding prime real estate and improving the assets that you hold. And your income comes from 32 different sources. And the diversification amongst our tenants has improved since 30 June, with our exposure to our previous largest tenant reducing from 16% to 8.7%, and the top three tenants' total contribution to income reducing from 30% to 25%. This pie chart shows that the exposure we have to the top 10 tenants and that the other 22 tenants make up 36% of your income. Turning to the pipeline for the use of proceeds of the sale of homes that we completed in the first half of the year and the new bank facilities that we now have in place, the group has a strong and growing pipeline. The pipeline, which has increased since the full-year results presentation, is significantly in excess of available capital and is made up of accretive investment opportunities at a net initial yield in excess of 6%, including high-quality, strongly performing existing UK care homes, all with en-suite wet rooms, and forward fundings in attractive locations. The pipeline assets are spread across diverse UK geographies with a balanced mix of both existing and new operators. As a result of our close relationships with tenants, there's always several that would like to add a new home to their operating group. And given our strong reputation in the sector as the longest-serving investment team in the UK market, we expect to see every relevant care home transaction in the market. The acquisitions will follow our measured approach of identifying best-in-class properties in the right geographical locations, which are leased at sustainable rental levels and acquired at appropriate yields. As Alistair mentioned, the group currently has an LTV of around 15%, which is below our long-term target. We expect this to increase towards 25% as we acquire assets in the pipeline. And I'll now pass back to Kenneth to address the positive market trends of our sector.

Thanks, guys. It's a pleasure to be able to do this with you and to see these encouraging results. If we go to the next slide, as James was speaking there about some of the key characteristics of the portfolio, I was reflecting that When I stay in London, I stay in one of these clubs around London, and the size of my bedroom, I think, which is perfectly adequate for my needs here, is probably 12 square metres. And the size of the average bedroom, which are the homes for our residents, is much more like 20 square metres. And there was a reference in there that the number of square metres per resident in our homes is 48. And actually, when I think about it, you can almost get a studio flat in London, which is about 55 square metres, I think. About 600 square feet would be. So, you know, these are fabulous facilities that we have. And honestly, we love to think of our seniors being respected. Some of us might think that that was an appropriate thing for our nation as well. And I'm sure you, as our listeners, agree with that. And all of this is predicated on these powerful demographics. You've heard me say it many times, the number of over-85s doubles in the next 25 years. which is incredibly positive in terms of future demand. And you'll remember in terms of another of the stats that James showed that there is a very significant element of private pay in the portfolio. And on this slide here, you'll see that for the whole market, it's about 57% have some element of private fee, but this portfolio is some 40% higher at 77%. a lot of the income that our tenants get comes from private fee sources. We're not subject to the vagaries or the perplexities or whatever term you want to describe our current government and the challenges our government had, frankly, in relation to the NHS and social care. And there's also a significant undersupply of suitable beds. You'll see that on this 440,000 beds and only 160,000 of them suitable. Who of us would want to be in a bedroom where we can't have a wash when we have continence issues in the privacy of our own room compared to elsewhere? So we've been doing this for 13 years now. And these results that we're presenting to you today are the fruit of 13 years of diligence. 13 years where rent covers have improved. 13 years where... we have fees rising above the 13 years of RPI. And a lot of the measures nowadays are related to CPI, aren't they? I'm regretting a little that we haven't got in this presentation what the cumulative CPI numbers are, but you can be sure they're even lower. So strong market trends. But on the next slide... We always speak about there are operational issues within the sector. We humbly submit that if you want to be in this sector, you better be actively involved. And as your external manager, we are, I can assure you, actively involved in the underlying sector. Staffing will always be an issue within a care home. Apart from whatever the government does, about minimum wages, about overseas staff, about employment rights legislation. And we actively work with our tenants, focusing and helping them on the private pay so there'll be extra money and on finding the right people for staffing. There will always be operational issues within tenants. Each care home is a 100-person business approximately. So the need for active asset management, if need be for re-tenanting, is part of de rigueur. It's part of what happens within the sector. And as you know, over these six months, we have done five of these re-tenantings. And the sector continues to have challenges from its regulator. Sadly, the CEO of the regulator and the chairman of the regulator, having been just appointed within about the last year, have both moved on again. We would love to see the regulator more stable. But again, from the very beginning of when we launched the street and indeed before it, We decided that we would do our own inspections and we can confirm that we have done in excess of 260 home visits in 2005. We have a bunch of people on the go all the time looking at our homes and helping and encouraging and observing. And the government may also bring some legislative challenges. We've spoken before about the upward only rent reviews. We haven't seen much movement on that. But we engage with industry to inform government on it. And we're aware in relation to that that the existing leases will not be affected. So some closing observations from me. Well, as I reflect on 13 years, I think my profound feeling is one of thankfulness and humility. We created a robust defensive portfolio. We have a team that is effective and deeply engaged in the sector and with a strong focus on asset management. We're blessed with great sector tailwinds, and the result of that have been these stellar returns. And as we look forward, we continue to have an unwavering commitment to the mission that we set out on to continue to improve the quality of care for our seniors, our desire to scale, our ability to deploy capital is, we believe, self-evident, and we have a desire for a progressive dividend. And all of that is predicated on your support, and we thank you for that. And with these closing observations, we'll be happy to take some questions and provide answers as best we can.

Great. Thank you, Kenneth. So we have a few questions coming through the portal. Let me ask the first one here. You have previously mentioned that the pipeline of opportunities is in excess of available capital. Should we expect further targeted disposals?

The reality of the sector is that from time to time there's always a disposal or two. I think probably over the last four years we have sold 15 or 16 homes. I'm trying to do some mental arithmetic. In terms of the further targeted acquisitions, we have significant headroom with our current facilities, and that's our initial focus.

Great. Thank you. Next question. Great to see the success of asset management and return to 100% rent collection. However, should we still anticipate tenant issues from time to time? And do you see anything on the horizon? Perhaps if I take that one. Yes, I think as Kenneth mentioned, this is a very operational portfolio and therefore from time to time there will be issues. But at the moment, we're very pleased to have sight of returning to 100% rent collection by the end of the fiscal year. And the asset management team have been very busy over the last few months addressing the issues that we have had in the portfolio. So, yeah, we expect there to be some things from time to time, but we're pleased to be back up to 100% rent collection.

Yeah, you're absolutely right. It's an operational portfolio. There will be issues, but we're in a pretty cool place. Yeah.

Great. The next question is, it looks like energy costs are going to rise significantly and probably food costs too. Can you talk about their significance to tenant costs? And is there any reason to think that this will be difficult to pass through to fees?

Energy costs for a care home are either 2% or 3% of revenue. So if they double, it goes to 3% or 3% to 4.5% of revenue. So we're in a good place. We had some concerns about that, I remember, three or four years ago. That's the bottom line on that one.

Great, thanks. Next question, on the homes that were re-tenanted, how do the new rents compare to the old and are the lease terms and rent reviews also the same?

Lease terms and rent reviews are the same, albeit some of the leases are extended out again to 35 years. Most of them will be like that. And the new rents are either at the same level or in one case in particular, some 25,000 ahead of the old rent. And that partly refers to our comments about not having to give incentives. And that's all predicated on have the best in class home and the 10 minute drive to them and people actually want to get it because there's endless demand. So have the right facility that you can be there making good money for yourself in the long term and you're interested in paying that kind of rents.

Great, thank you. Next question. Valuation yields range from 5.6% to 8.9%. What accounts for this widespread in valuation yields?

Covenant strength and operational profitability at the home are the variables that are involved in that spread, Matthew.

Thank you. And then one more question, I think. Do you have an attribution analysis of the consistent property outperformance versus the sector? Is it as simple as just risk adjusted rental income being above average and driving above sector average capital growth?

I suppose you're asking the question, Martin, in relation to the MSCI index. We don't have strong visibility on what... We know there's about 10 billion of assets within the index, and there's... Within the index, GP surgeries, hospitals and care homes. But beyond that, we don't have a lot of visibility. I guess the outperformances in terms of the underlying robustness of our assets compared to the others.

Thank you. Next question on capital recycling. You describe a high quality portfolio, yet the REIT sells assets. What is the capital recycling strategy? What are you seeking to achieve? And what value or amount should we expect on an annual basis?

I think we have been somewhat opportunistic in relation to that, but the general strategy would be if we're going to be a modern purpose-built home, tend to sell some of the older stuff and keep buying the newer stuff so that you keep the... the aspects of performance of the portfolio fresh and young. So that's the general purpose of what we're trying to do. We're not craving that... It's purely about scale. We are diligent that it is very much about making the right returns for our shareholders and a bit of pragmatism through all of that, all within the... the absolutes of 100% wet rooms, great APC ratings, and tenants who genuinely care for their residents. Because if you get the care right for the residents, we believe you will get the operational performance in the medium term, which will get the long-term results, which we're thankful to have over the 13 years.

Great. Thank you. And there are no more questions in the portal. Thank you.

Thank you very much. We are always aware that we would only be able to do this if we were supported by our shareholders. So we want to thank you for your support and we pray that we will continue to go on to everyone's benefit. Thank you.