Target Healthcare REIT PLC (THRL) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for coming to this morning call, and welcome to our presentation of our results for the year ended 30th June 2026. My name is Kenneth MacKenzie, I'm the Founder and Chief Executive of Target I'm delighted to be making this presentation with some colleagues. There's actually been a little bit of a change in our presentation team compared to this time last year. James fortunately, is still here with us. But he's now in the role of Managing Director, which we announced over the last few days. And we also have with us though he's not going to be speaking so much today. Calam Bruce, who's come into the role of being Head of Investor Relations. It's actually quite interesting having Callum here with me because way back in 2008 when I was coming up with the idea of creating funds to invest in modern purpose-built care homes. The first person I met was Calin Bruce, who introduced me to the Head of Scottish Widows. So it's quite interesting to see that long connection. As you know, our CFO resigned a few months ago, Alastair, but I'm glad to see that we are making good progress, and we expect to have an announcement soon in terms of our new CFO. So today, you're having Kenneth presenting the numbers to you, I'm glad I'm still a chartered accountant. And these are a good set of results for us to present to you all. So I look forward to taking you through them today. It's all based on the compelling investment case, which you can see on the next slide. We have a robust defensive portfolio. As you know, it's made up of modern purpose-built Care Homes that are underlying inflation-linked rental increases. It's also based on a team creating these results -- we have proven asset management that we are a specialist team. We are a pretty unique team. And when I speak about team, I'm going to say everything from the investors, the investment team, the asset management team, the finance team, and all of you guys, yourselves, investors in us who enable us to do this together without advisers. And the sector tailwinds that we anticipated back in 2008, the tailwinds that we're reaping the fruit of today. And we have another 25 years of growth to go. So we have a wonderful opportunity. And with all of that, we have a market-leading long-term returns. Since launch in 2003 as you'll see in that box on the right-hand side, this is the highest total accounting return of 12% in this year under review and in the 13 or 14 years, we've been doing this, I remember saying that I thought we could do 7.5% when I did the IPO back in 2013. And if this wouldn't humble you here's 7.8% annualized over the whole period. So what are the -- next slide, financial highlights for the year to 30th June 2026. Well, the annualized contractual rent went up by 3.7% like-for-like growth, and that resulted in adjusted EPRA earnings per share increasing by 7.6% and to 6.54p and the dividend per share that we paid, which had risen by 2.5% to 6.03%. And the EPRA NTA per share rose 6.5% also to GBP 122.1 and all of that created this quite remarkable total accounting return of 12%. Next slide, it's all predicated on the results -- no, not the results, the assets, the care homes that we buy performing well and how they create income and how the value increases. And you'll see on this slide that for the MSCI U.K. Annual Healthcare Property Index, we have outperformed it every 1 of the last 10 years. In fact, we're first out of 33 over 3 years, second out of 12 over 10 years, and the annualized return on standing assets of just over 10 -- just around about 10.5% and versus 7.6% from the index. I'm sure you'll agree that these are quite compelling. And I think it's really important for us as we consider the company to stay focused on the simple and important things and the fundamentals of this business, and that is what your management team is doing. I'll now hand over to James, who's going to take you through some of the results highlights.

Thanks, Kenneth. I will update you regarding the composition of the portfolio at the year-end and then talk through some of the highlights of the year. You have a portfolio of scale with robust rental income stream differentiated by quality, modernity and stability. As at the year-end, the portfolio has 87 homes and contracted rental income of GBP 61.1 million with a total value of GBP 924 million and 6.21% EPRA topped-up net initial yield. It's led to 31 tenants, giving you a diversified income stream. And as I'll talk about more in the presentation, your portfolio is differentiated by its quality. 100% have on-suite wet rooms, 100% have EPC ratings of A or B, and 100% have an annual inflation-linked rental increases. And your income stream is long term. The weighted average unexpired lease term is 26 years for this portfolio. 2026 has been a strong year. And as manager, we've been very busy. We disposed of 11 assets over the year for in total GBP 97 million representing an average premium of 11% and an implied net initial yield of 5.5%. These disposals, which facilitated a reduction in the group's exposure to its largest tenant, whilst adding 1.6p per share to the EPRA NTA primarily resulted from the sale of 9 assets in late October last year. We also acquired 4 standing assets for GBP 45 million, a forward commitment to acquire a fifth home for GBP 13 million once built, which we expect to complete in the next few days. and a forward funded development, which will total GBP 15 million over the build period. And 1 of our assets in development reached practical completion during the year. This deployment has improved the overall diversification of the portfolio. And additionally, the funding of new developments provides the group with access to new, high-quality assets and maintains the average lease length. This also has the benefit of increasing the quantum of quality real estate available to this important sector. And we've also been busy in the day-to-day asset management side, too. We secured the recovery of agreed rent arrears of $1.9 million, contributing a nonrecurring 0.18 per share to the group's adjusted EPS. We completed the retenanting of a total of 6 assets in the year, all at unchanged or improved rental levels and received a GBP 1.4 million surrender premium from 1 of these retenantings. This activity, during which there was 100% tenancy continuity plus the crystallization of a performance-linked rental uplift incorporated in the lease as part of a retenanting in a prior year has resulted in an increase in capital values of 6.5% for the retenanted homes with the potential for further yield tightening should the relevant homes evidence the expected operational improvement. And the portfolio has returned to 100% rent collection by the year-end. And I'll now hand back to Kenneth to talk through the financial performance of the group.

Okay. So let's go to the slide with the profit and loss accounts, which, as you can see, show some strong results. The rental income for the year is GBP 400,000 less than the prior year. As James made reference just now that we made some significant disposals, which actually took plus took place in the first half of the year. So there's a small fall in the total rental income and indeed, a little fall from the development funding. But the costs have been reduced a little bit. As you can see, the operating costs are slightly lower, and it's pleasing to see that in terms of what's called your credit loss allowance, I was actually suggesting the guys, we should be seeing its loss credits or some kind of thing because with the recovery of the provision the previous year, we're in credit on that. So that the total expenditure, as you can see, has a pleasing reduction down from GBP 13.3 million in the prior year to GBP 11.1 million. And the net financing costs have also reduced as we have had lower gearing levels. All of that has resulted in adjusted EPRA earnings improving from GBP 37.7 million to GBP 40.6 million and adjusted earnings EPRA earnings per share have increased from 6.08p to 6.54p, a 7% increase and with all of that, the EPRA cost ratio has also dropped a little returning to historic levels if nonrecurring rent are recovery is excluded. The dividend declared for the period was, as you know, 6.03p and the dividend cover for the year under review 109% compared to 103% last year. So I'm sure you'll agree that these are encouraging figures. On the next slide, we take you through a bridge to see the movement in annualized contracted rent, opening rent at GBP 61.2 million like-for-like increases of 2.3% development added a little bit rent with the disposals. Of course, we lost some rent, but we made some acquisitions. So at the end of the year, the rental level is almost the same. you'll note that there was a 3.7% increase in the rent like-for-like for the assets that we held. Over on the next slide, we can speak to the balance sheet. The I remember my previous CFO is all saying that it's a pretty simple balance sheet. So this Highland accountant will also tell you that. It is indeed a pretty simple balance sheet. There's the valuation of the portfolio. It's valued quarterly. And you'll see that at the end of June, it's valued at GBP 924.1 million. like-for-like movement of 4.9%. We have some cash in the balance sheet. We have some net current liabilities. Of course, the rent is paid in advance. And with the debt level, EPRA net tangible assets of GBP 757 million and EPRA NTA per share GBP 122.1 million being a 6.4% increase in the EPRA NTA per share compared to this time last year. And all of this with a net loan to value at the end of June 2026 down 5.7% from 21.8% in June 2025 to 16.1%. The next slide gives you a portfolio valuation bridge it follows very similar to what I said in previously, opening value of just under GBP 930 million like-for-like increase from rent reviews, from a tiny bit of market yield shift and from disposals and asset management gains, that's quite a significant figure. You can see this year, GBP 12 million. And then we made some disposals and had some surrender premium proceeds and the acquisitions and developments resulting in a year-end figure of 924.1%. Now on the next slide to the debt summary. We have a very good debt book. We have a long-term debt provider with Phoenix, 2 facilities for a total of GBP 150 million maturity 2032 for GBP 87 million of it and 2037 for GBP 63 million of it interest rate of GBP 3.2 million. And then facilities with both Royal Bank of Scotland, and HSBC. Term loans with each of them of GBP 20 million and GBP 30 million. These are hedged for 5 years, and they're currently out to 2029 with 1 year to go. So the weighted average term to maturity of our drawn debt. At June 2026 were 51 years. Actually, since then, we've extended the term of the 2 bank facilities and it's now 5.6 years after extending. And the total weighted average cost of drawn debt at June 2026, 3.89%. Let me take you through a bridge on the next slide for the growing net tangible assets per share. You'll see, as we started the year, that we were at 114.8p revaluations of property added 4.9p, tiny bit added for market yield shift. Disposals and lease surrender premium added 1.7p. Then, of course, whenever we buy things, we write off the acquisition costs, some property revaluation coming and the earnings of the business created 6.5p, and we paid out 6p to investors, resulting in end of year NTA per share of 122.1p. And with that presentation of the financial results from an old Highland accountant, I'll pass back over to James to take you through the portfolio performance.

Great. Thanks, Kenneth. Firstly, let me share some insights into the portfolio and how the operators are performing. Here's a busy table of portfolio metrics. I'll discuss the position regarding rent cover and average weekly fee increases in more detail in the following slides. Overall, the group's property portfolio continues to perform well. Our operators are delivering great care for residents at appropriate fees. The private pay proportion has remained high at 78% or 79% in the last 2 years. Staff costs as a percentage of total fees remained stable and agency costs have reduced further again this year. But the key measure of the performance of operators over the portfolio is rent cover. The group's average rent cover for the last 12 months for the mature homes in the portfolio, that's homes, which have been trading for greater than 3 years, has remained stable at a high of 1.9x, the level it's been at now since the start of 2024. This level of rent cover is driven by the increases in average weekly fees that operators have been able to make, which covers the impact of inflation on their costs, a significant proportion of which are staff costs. It's also driven by good levels of resident occupancy and by the sustainable rental levels. And this level of rent cover enables operators to invest in the home and to keep it up to standard and invest in the care that they provide, and it maintains stability in the portfolio. Turning to consider average weekly fees, which operators charge their residents, average weekly fees have continued to increase. As you can see on this slide, over the last 6 years, the cumulative increase in average weekly fees is 60% compared to the cumulative increase in RPI of 42%, showing that operators have been able to provide -- able to pass on the increase in their costs to residents. Remember, our operators are providing needs-based care, and there's GBP 6 trillion of net wealth in the over 65s to fund these weekly fees. And whilst these average weekly fees have been increasing, resident occupancy has remained stable over the last couple of years at around 86% for our mature homes. This aligns with the NHS capacity tracker occupancy data for England based on total beds in the market, which is currently at 86.8%. 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 compared to the total market of 470,000 beds in terms of the underlying real estate. While 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 49 square meters. 100% have on-suite wet rooms, enabling our seniors to be cared for with the dignity and respect we would want for them for ourselves. 100% have EPC ratings of A or B. And in terms of the performance of our operators, the average TripAdvisor style rating oncarehome.co.uK is 9.5 out of 10 compared to 9.2% for the market. In summary, you have a great portfolio as a result of our active management. buying and funding prime real estate and improving the assets you hold. Annual income comes from 31 different sources and the diversification amongst our tenants has improved since 30 June last year, with our exposure to our previous largest tenant reducing from 16% to 8.7%. This pie chart shows the exposure we have to the top 10 tenants and that the other 21 tenants make up 36% of your income. Turning now to the group's opportunity ambition pipeline and platform. Firstly, let me talk about the opportunity. There is a significant supply shortage of fit-for-purpose beds. That is beds with on-suite wet rooms. Overall, bed numbers in the U.K. have been around about 470,000 for many years. Each year, approximately 6,000 beds leave the market typically about 200 old homes with 30 beds each which are not fit for purpose and can't be upgraded. Homes with facilities like those shown in the pictures on this slide. And these ones are replaced by circa 6,000 new beds each with on-suite wet rooms, and that's about 100 homes with 60 beds each. Given the demographic tailwinds, and there's a need for many more fit-for-purpose beds to enter the market. Of the circa 470,000 available beds, only 36% are fit for purpose with an on-site wet room and the company owns 3.5% of the market of these beds. Therefore, there is plenty of scope for growth. As you'll all be aware, the demographic tailwinds for the company are strong. The number of over 85 is forecast to increase from GBP 1.8 million in 2025 to GBP 3.6 million by 2050. The and 1 in 8 over 85 typically requires long-term residential care. Multiple needs necessitate residential care rather than domiciliary care. This is needs-based care that our operators are providing. The sector's supply and demand dynamics further reinforce our investment strategy. Turning to our growth ambition. The Board aims to pursue growth in the property portfolio. Its desire is to scale accretively. The company has a specialist platform. It's the sole U.K. listed specialist in Care Homes. It's supported by a specialist investment manager with a proven track record and in-depth experience of operating homes delivering an annualized total accounting return of 7.8% since IPO. The company has a strong and growing pipeline, and I'll talk through this in more detail on the next slide. And the company has $75 million of committed capital available for further investment. The group also has a variety of other capital sources available to support its growth ambitions. Debt where the lower cost of financing would enhance returns without exceeding a loan-to-value ratio of circa 30%. Equity where issuance and deployment in identified opportunities would be enhancing to earnings and support dividend growth and capital recycling. Similar to the activity demonstrated in the current year, where disposal proceeds can be redeployed into earnings-enhancing opportunities whilst maintaining or enhancing the quality of the property portfolio. The Board will also continue to consider alternative financing and investing options that offer earnings-enhancing opportunities. The group has a strong and growing pipeline of high-quality purpose-built care homes. The pipeline, which has increased since the half 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%. And spread across diverse U.K. geographies, with a balanced mix of both existing and new operators. It includes high-quality strongly performing existing U.K. care homes all with on-suite wet rooms, forward fundings in attractive locations, forward commits and 1 or 2 development opportunities earning an additional yield of circa 100 basis points. As a result of our close relationships with tenants, there is always several that would like to add a new home to the 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 measured approach of identifying best-in-class properties in the right geographical locations, which are leased at sustainable rental levels and acquired appropriate yields. As Kenneth mentioned, the group currently has an LTV of around 16%, which is below our long-term target, and we expect this to increase to 25% to 30% as we acquire assets in the pipeline. And in Target, you have a manager with a lot of experience and specialist expertise in U.K. care homes. We have a multidisciplinary team combining operator, clinical, property and finance experience with over 16 years track record and 16 years of U.K. care home data collection. We have 40 members who have experience of being directors of care operators, 3 who have been home managers either at an individual home or a regional level, 2 nurses, 3 who are severes or have construction expertise, 3 corporate finance and 15 chartered accountants. And your manager is highly engaged in actively managing the portfolio. We carried out about 250 home visits in the year and have got rent collection back to 100% for the portfolio. 100% of respondents to our annual tenant survey said that they would recommend the manager to others, and we are continually considering how the portfolio can be improved and have taken forward in the year a 4-bedroom extension at 1 home and the installation of PV panels at 4 homes. And we have built a strong and growing pipeline of assets in excess of available capital from our extensive networks. Our expertise means that we are well placed to navigate the operational issues within the sector some of which we have set out in a slide in the appendix to this presentation. This is particularly important in light of the potential for social care reform under Prime Minister Burnham's leadership. As we've said before, we would welcome new solutions to the issues in social care, and we agree it's sensible to bring forward the KC report to 2027. We believe that responsible private operators and long-term investors will continue to play a key role in ensuring that everyone can access high-quality care, providing dignity and security in later life, benefiting residents and society. And I'll now pass back to Kenneth to wrap up the presentation.

Thanks, James, and it's been a real privilege to talk you through all that has been going on in the year under review. I think you can see that we're well positioned to grow. As I think about the strategic outlook and indeed, as I was reflecting back over the last 20 years of thinking about this kind of vehicle, we continue with an unwavering commitment to the mission of investing in care and delivering returns. That is absolutely what we've done. We've been in the forefront of bringing appropriate real estate for our seniors. And by investing in these modern purpose-built homes with wet rooms, the kind of product that we would all want to be in if we were at that stage of our life we have delivered long, stable returns. And you can see that these -- the returns that we have delivered even in the difficulties of the current corporate climate. We have a desire to continue to scale, albeit we wish to do that accretively. We have loads of ability to deploy capital. We have a highly competent investment team and asset management team to run it. We have a fabulous group of our Houghton. It was interesting to see that slide a couple of slides ago, that we have 15 chartered accountants. I wish 1 of them could have come and done the presentation on the numbers rather than me actually, I really enjoy doing it. And we are delivering growing earnings and a progressive dividend, a 3% increase announced for the coming year. And all of that is predicated on having a robust defensive portfolio with great asset management with fabulous sector tailwinds and we are very thankful that we have delivered these good returns. And with all of that, we want to thank you for your interest, and we'll be delighted to take your questions.

Great. We have a few questions that have come in during the presentation. So let me just take these in the order they've appeared. First question, you have spoken about competition in the investment market and the impact of bank lending, meanwhile, interest rates have been rising. Can you talk about what changes you've seen in the composition or mix of the investment pipeline in terms of vendors, the mix of operational or development assets? How quickly do you think you can commit to the available capital?

Yes. It's always danger for us to give timing on the commitment of the capital. because we're always trying to take a long-term view and get the right assets in the right tenant drive times. I would say there has been some more bank debt available, and we are aware of that. but we continue to see good opportunities to deploy the capital that we have.

Great. Thanks. Next question. You've outlined a clear need for further investment in this area given the growing demographics and lack of supply. Under what circumstances, if any, would you consider increasing the LTV limits -- we're carrying out a placing for funds from new and existing shareholders to accelerate opportunities in the pipeline?

Yes. We have always been a lot -- I remember 5, 10 years ago speaking about wanting to be a long-term bowling income fund and that we are conservative by nature. And that means that we will be very cautious about taking our debt levels much beyond the 30% level. If the market enables us to place equity, then of course, we will be delighted to do that. And we will keep monitoring that opportunity.

Great. Next question. Thanks for the thorough presentation. In terms of the care home operators have some of the difficult cost headwinds, national insurance increases, et cetera, now gone into the rearview mirror, our operators feeling a bit more confident in the respective futures than a year or so ago.

Yes. You will remember a slide in the presentation, which gives you a kind of 6-year view of the income level and the percentages of that income level. It's Slide 16, I think, which highlights that the operators have coped well with cost increases. So we do anticipate that the operators are in a good place. But I think the other thing, and I think it's in the appendix to the slides. And we have said this from the very beginning. Care Homes are operational businesses. The residents are in some degree of distress because they're confused and they can no longer live in their own homes. The families have in some degree of stress because they loved Granier Grampa when they could play with them and be good fun. And the employees are all on a bit above minimum wage, but they have to deal with the residents who are in some difficulty. So it's very much an operational business. And we are strongly of the view and it's why we have so many extra people within our business going around the care homes and speaking about the operational issues that you'll never have perfection in operating a care home portfolio. There will always be a couple of homes where there's something going on. But in the main, are they in a good place? Are the prospects in front of them good, absolutely. They benefit from the same tailwinds as we see the kind of portfolio level.