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

Good morning, and welcome to the Target Healthcare REIT plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Kenneth MacKenzie, CEO. Good morning, sir.

Good morning, and good morning to all who are watching this presentation. Welcome to our annual results for the year ended June 2026. My name is Kenneth MacKenzie. And I have been -- I am the founder of this business and the Chief Executive, and it's my privilege to present along with 2 colleagues today. There's a little bit of a change in the presentation team. Sitting immediately beside me is James MacKenzie, who as of 10 days ago or so has been appointed Managing Director of the Fund Manager. And also alongside him is Calum Bruce, who's Head of Investor Relations, the role that James had up to a few weeks ago. Actually, Calum sitting here beside us is quite interesting because way back in 2008 when this was an idea in my head to create a fund like this, I first went to Calum, actually even through James, to speak about the potential of creating a fund, and he introduced me to Scottish Widows, and that was the start of us investing in modern purpose-built care homes. So I hope you get a sense from that of the longevity of what we're doing. We have no CFO with us today. As a number of you will remember, Alastair Murray resigned earlier in the year for health reasons. But with no CFO being present, you're going to have me presenting on the numbers. And I'm thankful to say that with it being a very good set of results, I'm pretty confident that I can answer questions on the numbers as well as the fact that in my distant past, I am a Scottish chartered accountant. So with that introduction, let's get into the compelling investment case that we believe we present. This is a robust and defensive portfolio. It's modern fit-for-purpose care homes. And all of the care homes have what were originally probably 35-year leases and inflation-linked rent increases on each of these leases. We also have an effective and proven management team and asset management team. We are a specialist externally managed REIT with a highly experienced team. And the team incorporates a bunch of guys and ladies in the investment team and in the asset team, about a dozen people there and about a dozen sit in the finance team. And of course, an important part of the team are also the advisers and the investors who have helped us along these last 13 years. We also have superb sector tailwinds. There's growing needs-based demand for care for our seniors and that continues for a further 25 years at least. And with all of that background, I'm delighted today to be able to speak about market-leading long-term returns since the launch in 2013. This last year has been the highest total accounting return of 12% and in fact, over the 13 years, 7.8% annualized total accounting return, which is very much in line, which we -- which I spoke about to investors some 13, 14 years ago. What are the financial highlights with all of that? Well, the annualized contracted rent rose 3.7% for the leases that were there at the start of the year, resulting in adjusted EPRA earnings per share of 6.54p, an increase, in fact, with 1 or 2 one-offs of 7.6%. And the dividend per share came in at 6.03p, which was a 2.5% increase. It's always nice to be able to increase the dividend. And the EPRA NTA per share rose 6% up to 122.1p with a total accounting return at the end of all of that of 12%. And all of that is predicated on these consistent long-term performance, actually outperforming the MSCI UK Annual Healthcare Property Index over this whole period from 2014 onwards by 93% cumulatively. And this index measures the performance of health care funds in the U.K. and we are first out of 33 over 3 years. We are second out of 12 over 10 years. And you'll see the bottom right-hand box there speaking about annualized return on the standing assets of 10.4% versus 7.6% from the index. I remember speaking at the beginning of all of this about the long-term nature of health care property, and it's pleasing for us to see how that has worked out in reality. Let me now hand over to James, your new Managing Director, to speak about the results highlights.

Thanks, Kenneth. So I will speak to the composition of the portfolio at the end of the year and then talk about some of the highlights of the year. You have a portfolio of scale with a robust rental income stream differentiated by quality, modernity and sustainability. 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 later in the presentation, your portfolio is differentiated by its quality. 100% have en suite wet rooms, 100% have EPC ratings of A or B and 100% have annual inflation-linked rental increases. And your income sources are long term. The weighted average unexpired lease term is 26 years. 2026 has been a strong year. And as manager, we've been 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 group, whilst adding 1.6p per share to the EPRA NTA primarily related to the sale of 9 assets in October 2025. We also acquired 4 standing assets for GBP 45 million, a forward commitment to acquire a fifth home for GBP 13 million once completed, which we expect to complete in the next few days. Our forward funded development, which will total GBP 15 million over the build period. And one of our assets also reached development -- reached practical completion over the year. This redeployment 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 in this important sector. And we've been busy on the day-to-day asset management side, too. We secured the recovery of agreed rent arrears of GBP 1.9 million, contributing a nonrecurring 0.18p 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 we received GBP 1.4 million of surrender premium from one of the re-tenantings. 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 re-tenanting 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. Let's get to the profit and loss account on Slide 9 of the presentation. And you'll see here that the rental income has not risen much. In fact, it's slightly lower because, of course, we sold a significant number of homes in the first half of the year, but it's only very slightly lower. The interest from development funding is also a little lower because we did some less development, but if you look at the credit loss allowance, when we look at the costs, you'll see that, that is a positive, which is a kind of strange thing. As James said earlier, we had provided in the year to June '25 for a potential bad debt, a lack of recovery of rent. And in this year under review, in fact, we recovered GBP 1.8 million or GBP 1.9 million, let me get GBP 1.9 million, let me get the number right for you so that we have a net positive there. So with all of that, the total expenditure has had a pleasing reduction from GBP 13.3 million to GBP 11.1 million. And with net financing costs being lower because of lower debt, the adjusted EPRA earnings came in at GBP 40.6 million compared to GBP 37.7 million and the earnings per share on an EPRA basis came in at 6.54p compared to 6.0p, a 7% increase. And noting that, in fact, that would be a 3% increase if you exclude the nonrecurring arrears recovery that I spoke about earlier. And with all of that, the EPRA cost ratio dropping from 21.8% to 18.5%. And -- with that also, the dividend declared is 6.03p compared to 5.88p in the last year. And dividend cover for the year that's under review was 109% and 108% for the year in total. Let's go on to the next slide, the movement in annualized contracted rent. You'll see that it rose -- from the start of the year at GBP 61.2 million, like-for-like increased by GBP 2.3 million. The addition of the development that James referred to being completed added GBP 600,000 of rent. The disposals removed GBP 5.8 million of rent. Acquisitions added GBP 2.8 million. So that at the end of the year, the annualized contracted rent is that GBP 100,000 less than the year before, GBP 61.1 million. But on a like-for-like basis, the rental has risen by 3.7%. Let's go on to the balance sheet next. Simple balance sheet. The portfolio is valued at GBP 924 million. We have some cash. We have some net current liabilities because, of course, the rent is paid in advance. And with the debt that we have, we have EPRA net tangible assets of GBP 757.6 million working out to 122.1p per share, which is a very credible increase compared to the previous year at 114.8p, a 6.5% increase. And the net loan to value at 16.1% compared to 21.8%. I'm realizing, I said, credible and credit is what I meant to say in terms of the increase in the NTA. The next slide speaks about the valuation bridge. How did that move. At the beginning of the year, GBP 930 million of assets, the valuation of these assets rose by GBP 32.4 million, and we sold assets. You'll see that in the blue color, the turquoise color perhaps. And we also did some acquisitions and developments so at the end of the year, GBP 924.1 million of assets in the portfolio. And then a quick summary for the debt, the state of the debt book at the end of June 2026. We have 3 debt providers. With Phoenix, we have very long-term loans, 2 facilities, 1 to June -- to January 2032, some 6 years hence for GBP 87 million and 1 to January 2037, some 11 years hence for 63 million interest rate there for 3.2% fixed to maturity. And then 2 bank providers, Royal Bank and HSBC, both of them are term loans and the term loans are hedged for 5 years with the maturity at the moment to September 29 and a likely further extension. And we have 2 RCFs, which are available to us in the total amount of GBP 80 million, which is priced at SONIA plus 1.5%. And the weighted average term to maturity of the drawn debt the balance sheet date was 5.1 years and with some action on our part since then, now 5.6 years after extending the 2 bank term loans. So a quick analysis of the growing NTA per share. You'll see it started the year at just under 115p, property revaluations, a little bit of yield shift. We've got a nice 1.7p lease surrender premium, some acquisition costs to the downside, a bit of property revaluation. And then with the addition of the EPRA earnings and the dividend paid being a reduction, we ended up with a very pleasing 6.4% increase in NTA, which is that together with the dividend is the pleasing reason for a 12% total accounting return, ending the year with NTA of 122.1p. And with that review of the numbers, let me hand back to James to take you into more detail on the portfolio.

Great. Thanks, Kenneth. Firstly, let me talk about 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 then 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 have remained stable and agency costs have reduced further again this year. But the key measure of the performance of operators for us is the 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 over 3 years, has remained stable at a high of 1.9x, the level it's been at since the start of 2024. This level of rent cover is driven by 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 sustainable rental levels. And this level of rent cover enables operators to invest in the home to keep it up to standard and to invest in the care that they provide, and that maintains the 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, 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 pass on the increase in their costs to residents. Remember, our operators are providing needs-based care, and there is 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 sitting 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? 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 home in the group has significantly more space per resident than the market at 49 square meters. 100% have en suite wet rooms, enabling our seniors to be careful 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 providing and improving the assets that you hold. And your 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 in the U.K. That is beds with an en suite wet room. Overall bed numbers have been circa 470,000 for the last 20 years. Each year, approximately 6,000 beds leave the market, represented typically by 200 or so old homes with about 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 older homes are replaced by new homes with en suite wet room facilities, circa 100 homes with 60 beds each enter the market each year at the moment. Given the demographic tailwinds, there is a need for more fit for purpose to enter the market each year. Of the 470,000 available beds, only 36% are currently fit for purpose. And the company owns 3.5% of the market of these beds, and therefore, there's plenty of scope for growth. As you'll all be aware, the demographic tailwinds for the company are strong. The number of over 85s is forecast to increase from 1.8 million in 2025 to 3.6 million by 2050, and 1 in 8 over 85s requires long-term residential care. Multiple needs necessitate residential care rather than domiciliary care. And 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 is 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 on the next slide. And the company has GBP 75 million of committed capital available for further investment. The group has a variety of capital sources available to support its growth ambitions. Debt, where the lower cost of financing would enhance returns without exceeding a loan-to-value of 30%; equity, where issuance and deployment in identified opportunities would be enhancing to earnings and support dividend growth; 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 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 and is made up of accretive investment opportunities at a net initial yield in excess of 6%, 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 en suite wet rooms, forward fundings in attractive locations, forward commits and 1 or 2 development opportunities earning an additional yield of approximately 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 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 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 U.K. care home data collection. We have 4 team members who have experience being directors of care operators, 3 who have been home managers either at an individual home or regional level, 2 nurses, 3 who are surveyors or have construction expertise, 3 corporate financiers 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 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 home and the installation of PV panels at 4 homes. And we've 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 set out in an appendix to the slide 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 Casey 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. Every time I present on this, and if you'll forgive me, I've been presenting on this for the last 13 years, I just reflect as the years go by on the depth of the quality of the team here, the nature of the fabulous homes that we own and the resulting implications of that for long, stable growth of income. So as you'll see here on this slide, as I think about the strategic outlook, we have this unwavering commitment actually right from the beginning to the mission of investing in care and delivering returns. And we note the desire to continue to scale. We have the ability to deploy capital and to deliver growing earnings and a progressive dividend. It's a defensive portfolio. I referred to that right at the beginning. It's a team that have been together consistently for a long time. All of us, I include you, investors. It has excellent sector tailwinds, and we're delighted that at this time, we are announcing the highest total accounting return of 12% in 2026 since the start of the REIT with a 13-year track record, which is exemplary. And so with that, I want to hand over to James to take the Q&A that you have submitted, and we look forward to answering these as best we can.

Great. Thanks, Kenneth. So we have a few questions which have arrived already. And let's just work through these. So there's a couple about the dividend growth. Is dividend growth still intact and...

Yes.

Yes?

Full stop. Yes. We've announced a further 3% growth in the dividend. So yes, absolutely. And it's all predicated on the underlying like-for-like increases in rental levels of the underlying leases.

And then there's a longer question here. Given Target Healthcare REIT's otherwise high-quality portfolio and defensive characteristics, do you consider the long-term stagnation of the dividend to be a potential weakness, particularly in an inflationary environment? How do you intend to protect and grow the dividend in real terms over the coming years? And what would need to change for Target Healthcare REIT to return to meaningful dividend growth?

We set out with Target Healthcare REIT to be a long stable income source. And we have, over the 13 years, done exactly that with the dividend reset noted in 2023 as a result of the times of trough and when interest rates meaningfully changed. The original model was based on the cost of capital at the time. But since that reset of the dividend of '23, we've been back to a year-on-year growth in the dividend, and we were pleased to announce again a further dividend growth. So we continue to expect dividend growth in line with the rental increases. They are RPI rental increases. They're tied with a collar and cap. So they will be capped at up to 4%, but there will be, we trust further growth.

Thank you. And there's a question here about the team. Let me perhaps answer this one. The question is, is there a plan to fill the CFO vacancy? And the easy answer to that is yes, absolutely. Since Alastair resigned, we have been undertaking a full market search for a new CFO, and we're pleased to be able to say that good progress is being made and we hope in the coming weeks to be able to communicate the outcome of that search. So yes, very much so, and we're looking forward to recruiting a new CFO to join the team. And there's another personnel-related one on the finance team. Why so many chartered accounts?

I have to answer that. I am a chartered accountant. When we started is another chartered accountant. The core reason is actually that we are very numbers based in our analysis because we're continually assessing the underlying financial performance of all of our tenants in addition to their ability to care for people. So within the investment team, there's 3 or 4 chartered accountants. And then the tenants when they become a tenant have to send us monthly and quarterly P&L accounts. So we want to analyze them to make sure that they all make sense and they tie into the annual accounts. So there's more chartered accountants in there. And then there are more than 60 companies within the group, believe it or not. So can you imagine them to do 60 sets of annual accounts. There's a couple sitting in this room listening to us, Alan and Vicki, and they're more of the chartered accountants doing the annual results. So we're just -- there's a lot of numbers in here, and we need to keep on top of it to be good stewards of your money. Thank you.

Great. Thank you. How do you expect acquisition yields to evolve as competition for care home assets increases and more capital enters the sector?

I think what's even more important question related to that is where the bond yields go. Bond yields have continued to grow, as everybody knows. Sure. The capital entering the sector, Welltower are a very big buyer of very large groups of homes in the one-by-one type purchases that we make, they're much less active in our part of the sector. It's not so much new capital coming in as some of the old capital continuing to invest. So bond rates, I think, the biggest question in relation to what net initial yields we'll be able to acquire.

Great. And there's a question here about occupancy, which I'm happy to answer. So do you expect the occupancy rate at the care home level to increase above the U.K. average given the far above average quality of your care homes? So yes, we've seen occupancy levels stabilize post-COVID at about 86%, which is, as you say, in line with the average or the occupancy data for England that I referenced in the presentation. That may increase a little. But what we are seeing with the rent cover levels being as strong as they are at 1.9x, we are seeing operators be more selective in terms of the admissions to their homes and the additional residents that they welcome into their homes to ensure that the culture of their own home and the balance of residents and staff is all maintained optimally. So it may increase a little. And indeed, if we remove some of the beds that aren't available for occupancy at some of the homes from our data that the number, the 86% would slightly increase to perhaps by 1 percentage point or 2. But we don't -- there will always be some beds that aren't occupied at the homes as the turnover in the homes dictates that, that will always be the case. Anything you would add to that, Kenneth?

No, I think that's right. The rent cover is the all important things there.