Target Healthcare REIT PLC ($THRL)

Good morning, ladies and gentlemen, and welcome to the Target Healthcare REIT plc Investor presentation. [Operator Instructions] And I would now like to hand you over to the executive management team from Target Healthcare REIT plc, Kenneth. Good morning, sir.

Good morning, and good morning to all of you who are watching this today. I'm delighted to be joined by Alastair Murray. I was speaking to a [ phone ] earlier on, so I got confused there. Alastair Murray; and also James Mackenzie, Alastair is CFO; and James is Head of Investor Relations. And what we're planning to do this morning is that I will do a brief introduction to the company. It gives you some portfolio highlights, and then Alastair will take you through the financial performance and James take through the portfolio performance. I'll come back and speak about the positive market trends that we are seeing in these challenging days and the robustness of the model and the business that we have here and make some closing observations, and then we'll go on to Q&A. So if we go to a couple of slides forward, who are we and what's the investment case? Well, we are today a robust defensive portfolio. And over these first 6 months of this year, with effective proven asset management and the excellent sector tailwinds that we have, we have -- we would say, delivered market-leading returns, both over the long term, just under 8% total accounting return since launch in 2013 and in the 6 months that we're reviewing today is 6.8%, which has been pretty encouraging. But as I reflect on these 6 months, I want to say that while these are clearly excellent returns for the 6 months, they're not just the work that we have done in the 6 months, rather, they are the fruit of the 13 years that we have spent putting together this portfolio and the position that we have within the market. This is no, kind of, short-term fashion investment. This is an investment which is very much long term that has backed by excellent demographics and the residents have significant wealth in our care homes. We'll speak a little later about the amount of net worth in the over 65s. So contrary to what happens with, for example, student housing, where the student may spend a period of time in accommodation and ends up with very significant amounts of debt. And of course, sadly for them currently not even earning a lot more salary, a lot higher salary than if they've just done an apprenticeship. Our situation is residents with significant net worth but needing care for the latter days, the end-of-life care really. And that provides really great stability for us and a very different kind of story to the rest of -- to other living sectors. So this is robust needs-based results that we are presenting to you, and they were created by what we have done over the last 13 years. You'll see on the next slide, the very consistent long-term performance that I'm delighted that we have when compared to the MSCI UK Annual Healthcare Property Index. We have outperformed the index every single year since the very beginning and that is clearly pleasing. A 93% outperformance is the cumulative number. And you'll see down the right-hand side, there's various areas in which we've done that over different time periods. So it's been very pleasing. And a snapshot here of what Target Healthcare REIT actually looks like today, 86 care homes, just under 6,000 beds, GBP 60 million of income. The portfolio value at about GBP 900 million, valued at 6.23%, highly diversified with 32 different tenants. And then several KPIs that you're going to hear me speak about. We think it's really important for our residents that they have an en suite wet room. EPC ratings, we like them to be in the A and B, so there's no further investment required to raise these standards up to that level. And we love inflation-linked rental uplifts. For all of these, we are at 100%, which is quite remarkable. And we have this looking forward for a further 26 years. So 3 pretty powerful numbers there as well as the scale on the top line. Let's go on to the next slide because I did say we thought it was a good half year. And it's a good half year, I submit both in terms of our own corporate activity as your investment manager. We did 10 disposals at a significant premium. We did 3 acquisitions of modern fit-for-purpose care homes and performing really well with many private residents. We did one forward commit to buy a brand-new Care Home, which we will conclude on in the summer this year. And we also completed one development that reached practical completion in this 6-month period. And that in total comes to GBP 150 million of activity. As I say, the team has been busy. And in addition to all that, we also refinanced the bank debt so that we have great visibility looking forward on the capital structure of the business at this stage. So busy time, but also busy on the asset management side. We said before that we thought we would recover some of our rent arrears. We said that at the October -- September, October time when we were reviewing the 2025 annual results, and we have indeed recovered 1.9 million. We've also done some re-tenantings. Now 5 of them. So 5 homes retenanted with no tenant incentives given. And it's quite interesting. We've been reflecting a little about that. Over the life of this fund, we've done 23 retenantings. But actually, when you compare it with the number of stable tenant years of income that we have created at well in excess of 800 tenant years. It's important to do them right, but it's not a major issue for us other than the work that it causes us as a manager, which is our delight to be working with the tenants that we believe will be good for the long term. We also received from one of the tenants as they left a home, a surrender premium of GBP 1.4 million. And these numbers have all helped to build the excellent results we've had for the 6 months. And the result of the work that we've been doing on the asset management side means that we feel that the last KPI I was going to mention just now was that we are heading back very rapidly to 100% rent collection, which is, of course, what we should be achieving, but we believe that will be in reach by the fiscal year-end. And while we were doing all of that asset management activity, importantly, there has been good continuity of care across all the retenanted homes for all our residents. With that introduction, I'd like to pass you on to Alastair, who will take you through the financial performance.

Thanks, Kenneth. I will take you through the results to December 2025. But before that, I'd like to remember that the June 2025 full year results were affected by one-off increases in operating expenses and credit loss allowance driven by the administration of a home and another operator not paying the rent in full. Well, you'll see from our half year results that these were successfully resolved through our asset management activities and our 6 months results are the highest half year returns since the group launched in 2023 -- 2013, sorry. Next slide, please. So I'll start with the highlights of the year. The like-for-like increase in our rental income was 1.8% in the 6-month period, predominantly driven by our long-duration inflation-linked contractual rental growth. And as usual, we had no voice during the period. Our EPRA earnings per share increased by 8.5% to 3.4p. Now whilst 0.18p of this related to the nonrecurring recovery of historic arrears, this still represents a robust performance when we were focused on redeploying the disposal proceeds from the sale of our 10 care homes in the period. This 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, both from rental growth and the disposals at premium and from the healthy dividend cover. This enabled the group to deliver a robust total accounting return of 6.8%. So if we move on to the next slide. Moving on to the P&L, I'll talk you through the key lines. Rental income increased by 2% in the 6 months period where we disposed 10 homes, losing over 2 months income from each of these homes. These disposals were therefore set off by an increase in rent from our existing homes with there being 38 rent increases at an average of 3.8%. We also opened our final development home and acquired 3 new homes, albeit this occurred at the end of November. These movements are better demonstrated through an annualized contracted rent bridge. So if we move on to the next slide, you can see the impact of the contractual rent reviews as a consistent driver of rental growth adding GBP 1.1 million. This is a like-for-like increase of 1.8% in the 6 months. We then see the impact of the development home opening. Set against this is the impact of the disposals in the period, decreasing our annualized rent by GBP 5.4 million, with the subsequent redeployment of around half of the proceeds in freestanding assets adding GBP 2 million to the rent. Part of the total redeployment is in forward commit scheduled to complete in the summer, and therefore, this is excluded from the bridge. It will add around GBP 800,000 rent when opened. This leaves us with an annualized contracted rent of GBP 59.5 million, down overall by 2.7%. We are confident that our contracted rent will grow as we redeploy the remaining proceeds and utilize our debt facilities to invest in our existing pipeline. And James will have a slide on this later in the presentation. So if we go on to the next slide, we'll now have a look at the costs. We reported a one-off increase in our operating costs and our credit loss allowance in the second half of last year. These costs did not impact the December '24 comparables on this slide. So our operating expenses are now back at historical levels and in line with the comparable 6 months to December '24. And as expected, we did successfully recover the historical rent from the operator that had not been paying rent in full, which comes through as a write-back of the credit loss allowance in the current period. This is write-back in the provision and the cash amount recovered, as mentioned earlier, was GBP 1.9 million. So the next slide shows you the impact of this on adjusted EPRA cost ratio, which came in at 15.4%. And if you remove the nonrecurring arrears recovery, this is back in line with historical levels. And just to the avoidance of doubt, our adjusted EPRA cost ratio is higher than our unadjusted ratio, which is 12.7%. So if we do the next bit, look at the finance costs. So given the disposal proceeds, the finance costs reduced. When we refinanced the bank debt in September, we structured the split between term loan and RCF to accommodate the disposal proceeds. This enabled us to minimize drawn facilities, reducing interest costs and provides us with maximum flexibility when redeploying the proceeds. And finally, on this slide, overall, this resulted in an adjusted EPRA EPS of 3.4p. And even excluding 0.18p of nonrecurring arrears, this is a robust 3% increase on the 6 months to December '24 during a period of capital redeployment. The dividend cover is 113% and removing the nonrecurring arrears recovery, it still sits at 107%, in line with the previous period. So next slide, we'll move on to the balance sheet, where I'll cover portfolio market value, debt and NTA. So if we look at the next slide, the like-for-like increase of 3.4 -- sorry, 3.1% of the portfolio valuation, with the main driver of this increase again being contractual inflation-linked rent reviews embedded in our business model. The next largest contributor is the increase in values arising from the disposals at a premium. And there were further smaller increases coming from both portfolio management activities and small movement in individual homes net initial yields. The disposal of 10 care homes across 2 transactions reduced this portfolio by GBP 95 million. And the 3 standing assets increased the portfolio by GBP 31 million. Again, the forward commit is not included in these figures. Overall, portfolio valuation decreased by 3.8%, but we'd expect the portfolio to grow going forward as we redeploy capital into our current pipeline. So if we look at the next slide. Moving on to debt. Drawn debt has reduced by almost GBP 40 million since year-end, driven by the disposals netted against the redeployment of the proceeds in the [ Care Home ] acquisition. At LTV of around 15% against almost 22% at the June year-end, this is below our long-term target, and we expect to increase LTV towards 25% as we acquire standing assets or forward fund new homes. So the next slide provides us details of the debt book. We have the attractive Phoenix debt fixed to maturity at 3.2% and the bank term debt of GBP 50 million, fixed through swaps at a rate of 5.3% and we have GBP 3.5 million drawn in the RCF, and we intend to cap core drawings under the RCF in advance of any significant acquisitions. So if we go to the next slide. So finally for me, I'd like to cover the NTA growth in the period. This has been a healthy 4%. And if we look at the next slide, we'll see the drivers of this increase. The valuation uplifts in our property are the main drivers of this growth, again, driven by inflation-linked contractual rental increases. The disposals and surrender premium uplift of 1.8p demonstrates a strong benefit in the period from our investment management activities. And finally, there's a small increase from our earnings more than fully covering the dividends. I'll now hand you over to James, who will take you through the portfolio performance.

Thanks, Alastair. I'll now talk about how the portfolio is performing and our pipeline. Here's a busy table of portfolio metrics, and I'll discuss the position about rent cover and average weekly fees in more detail on the following slides. Focusing on the average weekly fees increases first. Over the last 5.5 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 5.5 years, the cumulative increase in average weekly fees is 54% compared to the cumulative increase in 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 is GBP 6 trillion of net wealth in the over 65s to fund these weekly fees. The group's rent cover for the last 12 months at 1.9x represents the highest achieved since IPO and provides a strong foundation for the group. This high level of rent cover is the result of the increase in the average weekly fees that operators have been able to make and the 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 that have been trading for 3 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 this portfolio compare to the market in terms of the 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 meters. 100% of the rooms are en suite wet rooms, enabling our seniors to be cared for in their room with the dignity and respect 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've got a great quality portfolio as a result of our active management, buying and funding prime real estate and improving the assets you hold. And your income comes from 32 different sources and the diversification amongst our tenants has improved since the 30th of June with our exposure to our previous largest tenants reducing from 16% to 8.6% and the top 3 tenants total contribution to income reducing from 30% to 25%. This pie chart shows the exposure we have now to the top 10 tenants and that the other 22 tenants make up 36.4% of your income. Turning to our 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 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. It's made up of accretive investment opportunities at a net initial yield in excess of 6%, including high-quality existing U.K. care homes, all with en suite wet rooms and forward fundings in attractive locations. The pipeline assets are spread across diverse U.K. 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 or 2 to their operating group. And given our strong reputation in the sector as the longest serving investment team in the U.K. market, we expect to see every relevant Care Home transaction in the market. The acquisitions will follow our disciplined 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 Alastair mentioned, the group LTV is currently around 15%, which is below our long-term target, and we expect to increase this towards 25% as we acquire assets in the pipeline. And I'll now pass back to Kenneth to talk about the positive market trends of our sector.

Yes, we have these excellent market trends, and that in truth is why I thought it would be a good idea some 15 or 16 years ago to create funds that would invest in this space and to have had the privilege for the last 13 years of creating this along with the team here has been an absolute delight. But it's been founded on these core foundations of really modern purpose-built product, deeply engaged with the tenants, so we understand what's going on. We see P&L accounts from them all on a regular basis, understanding occupancy levels week by week. And the background of it all is the demographic story. You all know it. Maybe some of you are part of it. We all are part of it at some level. And the most important thing for us is that the number of over 85s will double in the next 25 years. So we're not at the end of the journey of demand for Care Homes. We're 1/3 into it, I would say, with a lot more growth to go. So strong growth. The number of over 85s increases from 1.8 million last year to 3.6 million by 2050. And 1 in 8 of them require long-term residential care. So over on the next slide, we look at how that is going to be provided. Part of it is -- an important part of it is these beds that we produce for the sector. Currently, in the United Kingdom, there's about just under 450,000 beds, of which just around 160,000 are fit-for-purpose. And when we say fit-for-purpose, we speak about the bedroom requiring a wet room because of the whole continence issue that is core to caring for people well in their latter years. So there will be further bed growth. That will give us great opportunity. And also, you better be in private pay. And our portfolio here has 77% of the residents have a private pay element compared to some 57% for the whole market. So we're some 40% ahead. But with that great background, you also need to face the reality of running Care Homes. And we've been really realistic about that from the very beginning, too. Our Head of Healthcare here, Andrew, has actually been involved in care homes for 45 years. His mother got them involved in it as a teenager. And I remember Andrew 25 years ago speaking to me about the challenge of staffing a Care Home and how you need to look after your people well. Some of the challenges that come into the sector, of course, are also further complicated by government policy or by minimum wage increase and increasing employment rights legislation. But with excellent fee inflation due to the focus on private pay and the demand for quality that there is in the sector, our tenants are well able to manage the challenges of staffing. But tenants will always have operational issues in their care homes, which occasionally, as we've told you before, have resulted in some rent arrears, and it's been very pleasing this year to see a recovery of all of that. And we are in a good position in relation to the portfolio today. We are actively involved in the management of our portfolio. And as you have seen, the portfolio rent covers are robust. The sector has a regulator, the Care Quality Commission. Sadly, the Care Quality Commission has had a challenging number of years with they themselves saying that they were not fit-for-purpose. And while we're seeing some improvement, it's always been our policy to have our own inspection regime, and we have 4 people in the investment manager that does about 260-plus home visits on an annual basis. There's a lot of driving around the country. And there's also some challenges about upward-only rent reviews. The government is considering making some changes in that Actually, over the last few months, we haven't heard a lot more about that, but we are engaging with the industry to inform the government and our existing leases would not be affected in any case. So with these comments, let me make some closing observations. This is a robust defensive portfolio. It's a modern purpose-built fit-for-purpose care homes. We've been doing this a long time as an investment manager, and this is all that we do. This is what we know really well. And I could take you to 15 or 20 people next door to where I'm speaking here who really understand care homes in great detail. We have great sector tailwinds and we've been able to do market-leading long-term returns. So our strategic outlook continues with this unwavering commitment to the mission to care for seniors really well with great real estate, with the desire to scale with our ability to deploy capital and to continue to pay a progressive dividend. We're really conscious that we can only do this with your help, and we want to thank you for your support over these years.

Perfect, guys. If I may just jump back in there. Thank you very much indeed for this morning. [Operator Instructions] But James, at this point, so if I may hand over to you to chair the Q&A with the team. And if I pick up from you at the end, that would be great. Thank you.

Great. Thanks very much. Let's start with the first question here about wet rooms. Kenneth, what is your definition of a wet room? And how are they different from an en suite bathroom? Do they have no screens, for example? Talk about wet rooms.

Well, if you know your granny or grandpa, you'll know that loose rugs on the floor are trip hazards for them and that you need to be careful. The same in the bathroom, you want a completely flat surface. So that's part of it. You also want -- as people age, their ability to get into a bath is very difficult. So a wet room is an area where they can walk without any trip hazards into an area where they can have a shower, perhaps sitting on a seat. And why do we want wet rooms? About 80% -- 70% to 80% of the residents of a care home are singly or doubly incontinent. And no wet wipes aren't good enough for elderly skin. We all get a little fragile as we get older. So that's what a wet room is. They absolutely would have privacy as required within it, but often residents need support. And their option is going to a common bathroom. Now let me make one more definition because much of the sector says that they have an en suite bathroom. And the stats are about -- there are 80,000 bedrooms that have no facilities, and there are still 150,000 bedrooms that are en suite. But the en suite is only a WC and a wash and basin. When we speak about wet rooms, we mean that they also have a shower and a shower is absolutely essential for the ongoing good care of the residents. So I hope that's a helpful explanation.

Great. Thank you. Next question is, what was the rationale behind the disposals that we completed? Perhaps if I take that one and then feel free to add anything to it. But yes, so I guess the rationale for the disposals, we -- our exposure to our largest tenant was about 16%. And we were beginning at that level based on the nature of the operations of that tenant to look for an opportunity to reduce that exposure. So it really was a desire to reduce the exposure to that particular largest tenant and bring it down a little -- and then when they approached us and asked if they could acquire some of the homes that we had leased to them, we negotiated with them over the course of many months and at the end of that, managed to negotiate a significant premium to book value and then agreed to the sale. So it was really diversification of income and then an opportunity to improve book value and indeed to achieve a significant premium. Next question, with the top 5 tenants accounting for 40% of rent, how comfortable are you with the residual concentration risk? Al, did you want to take that one?

Yes. I think we're very comfortable. As you just alluded to there, we've reduced a tenant from 16% down to 8%. And then having a good spread across 32 tenants is a good spread of the risk, meaning that we're not relying on one tenant.

Yes. We have a limit of not more than 30% of our income from any one tenant. And we're 60% lower than that, 65% lower than that or so. So we have a good spread on that.

Great. Thank you. Next question, what are the biggest risks to the ongoing success of the company? Kenneth, do you want to take that?

Yes. If I was speaking to you last week, I would have been a bit agitated about assisted dying because if you decide to just kill off of the elderly people, that obviously is a huge negative. We're thankful in Scotland at least that, that didn't happen. though I think it's probably still going on in the U.K. The kind of month-by-month risks within the sector is that some home won't work properly somewhere, that there'll be an incident. And we've been aware of that from the very beginning, and we physically visit all the homes to be personally satisfied with people that we know that week by week, the homes are being well looked after and our residents especially being well looked after. we're in a wonderfully good position in terms of the sheer need to care for the elderly. And we saw that in the middle of a pandemic, of course, where even in the middle of the pandemic, we still had 94% of our income coming in. So we're in a wonderful position. Next question.

Thank you. How confident are you that operators can continue to pass through fee increases to residents? How do operators balance wage inflation versus fee increases, especially in mixed funded homes?

Well, I would say the answer to that is that we have 16 years of confidence. We started this way back in 2010, and this fund actually only started, as you know, in '13. But we have long pondered that question, and we have really consistently seen that private fees do go ahead higher than inflation, and James showed you that excellent site, which gives you some evidence of that. How do operators balance wage inflation against fee increases? The interesting thing about the sector is it's all down to 10-minute drive time. So we are giving you a report here of the conglomeration of 10,000 homes, of which we have about 100. And we're giving you how that has worked when you add it all up together. But actually, how this happens is that in the 10-minute drive time of Sterling or of York or of Harrogate or of Hastings, the operator looks at his costs and understands where inflation is and takes a view, and that is happening right now because most of the fee increases happen March, April time and takes a view as to what extra money they need to provide for care for seniors really well and then always make sure that they have sufficient left. And that has worked consistently for a long number of years, and we are confident that, that will continue. The total cost typically for a resident in the care home comes out of pension wealth, cash and housing equity. And the bill can typically, if it's 17 months of stay, be something like a GBP 75,000 to GBP 100,000 bill.

Great. Thank you. A question here about the share price, noting the share price has fallen back over recent weeks. Is this due primarily to concern over where interest rates might be heading?

Yes, I think that's right. And the whole market is a bit anemic with all that's going on in the Middle East. And that is causing concern about inflation, though remember that we were good for inflation up to 4%. But yes, I think that's -- these are all part of the same concern.

Thank you. Next question. The GBP 6 trillion, it was, we mentioned for aggregate wealth of the over 65s. Please could you elaborate on where this figure comes from?

It's government data. Yes. that is pension wealth. I haven't got the split of it to hand, housing equity, pension wealth and investments.

Investments, yes.

And it covers...

ONS was it?

ONS. Yes, that's right.

Okay. Yes. Great. Thanks very much. I think that's all of our questions.

Perfect, guys, if I may just jump back in there. Thank you very much indeed for being so generous of your time then addressing all of those questions that came in from investors this morning. And of course, if there are any further questions that do come through, we'll make these available to you after the presentation has ended. But Kenneth, perhaps before really now just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

Yes. I can remember back to 2012 and doing test marketing for Target Healthcare REIT and going around many investors. It was an absolute privilege to realize how committed they were to providing a vehicle which would enhance the care of our seniors. And it was a great credit to the city, I think, that they supported us to create this vehicle to invest in care homes. In years previously, there had been real complexity and problems in care home investment. And we were launching this in the light of the problems that there had been. So it's been a complete joy for us to enjoy these years of working with the city and with the retail investors looking at improving the quality of care for our seniors. If you're part of that journey, thank you, and we look forward to many more years with you going forward. Thank you very much.

Perfect. Kenneth that's great. Thank you once again for updating investors this morning. Could I please ask investors not to close this session, you'll now be automatically redirected to provide your feedback. On behalf of the management team of Target Healthcare REIT plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.