Target Healthcare REIT H2 2025 Earnings Report

Target Healthcare REIT EPS Results

• Actual EPS: GBX 5.97
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Target Healthcare REIT Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Target Healthcare REIT Announcement Details

• Quarter: H2 2025
• Date: 10/14/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, October 14, 2025
• Conference Call Time: 4:00AM ET

Our investment objective is to provide shareholders with an attractive level of income together with the potential for capital and income growth, from a portfolio of UK care homes, diversified by tenant, geography, and resident payment profile. We only invest in modern, purpose-built homes.

Target Healthcare REIT H2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Delivered 9.3% total accounting return for the year and 7.5% annualised since launch, outperforming the MSCI healthcare property index by 77% over 11 years.
• Positive Sentiment: Maintains a defensive portfolio of 93 modern, en suite care homes with inflation-linked rents, a 26-year weighted average lease term and average rent cover of 1.9×.
• Negative Sentiment: Recorded the fund’s first tenant administration, driving an £800k uplift in operating costs and higher credit loss allowances, though the property was re-tenanted at a premium and arrears are expected to be recovered.
• Positive Sentiment: Refinanced £170m of bank debt in September to extend maturities from 4.2 to 5.9 years, reduce margins and secure a £70m accordion facility, keeping the weighted average cost of drawn debt at 4.3%.
• Positive Sentiment: Executed an £86m sale of nine homes at an 11.6% premium to book value and is set to reinvest into a £150m pipeline of accretive opportunities targeting >6% net initial yields.

Presentation

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Good morning. Thank you for coming to the annual results presentation for Target Healthcare REIT. My name is Kenneth MacKenzie, and I'm delighted to be joined this morning by my colleague Alastair Murray, who was appointed CFO for the fund management business a couple of months ago. Alastair's actually been with us for two and a half years. He's the guy who was director of listed funds. He did this work, and now he's having the joy of presenting the work that he's done over the last two and a half years, and we're also joined by James MacKenzie. James joined us at the beginning of the year, so it's a bit of a fresh team, though we continue to do what we've always done. James was general counsel at Aegon for a dozen years, and we're delighted to have him with us.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

What we're going to do in the presentation is I will do some highlights, what's going on within the sector and within Target Healthcare REIT in particular. Then Alastair will take us through the financial performance, James through the portfolio performance, and I'll close it out with some positive market trends, our views on the sector, that it has a great long-term future, and some closing observations. So what are the highlights of Target Healthcare REIT and the sector? We have a robust defensive portfolio. You've heard me speak many times about how we have modern fit-for-purpose care homes. We really believe that's really important for holistic care. We have great sector tailwinds with needs-based demand. This isn't just optional ways of living at the end of life. This is needs-based demand as families need support for their loved ones.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

You have a manager who is very actively involved in the underlying assets. With all of that, we're thankful that we have market-leading long-term returns records over the 12 or 13 years of the life of the fund, 7.5% annualized total accounting returns since launch. I'm going to do a quick run-through on how we compare to the MSCI Annual Healthcare Property Index. There's about GBP 9 billion assets in this, about 34 different funds. You'll see the two bars for each year, the light blue being the index and the dark blue being our own returns over the period. You'll see that for all of these years, the 11 years here, we have beaten the index, and we're thankful for that. You'll see over the last couple of years, we've actually been double the index, and we're very thankful for that also.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And the cumulative effect of that is that we're 77% outperformance over these 11 years. And just last week, I think it was, there were some annual property investment awards. And within listed funds, we have done quite attractive returns. We're the highest relative total return annualized over three years for listed funds and the highest 10-year risk-adjusted total return. So we're thankful that that has how it has all worked out. So a little more detail to remind you of who Target Healthcare REIT is. 93 care homes at the end of June, just under 6,500 beds, GBP 61 million of contracted rent. The rent is inflation-linked. There are 34 different sources of income. The portfolio value just around GBP 930 million. And you've heard me speak many times about the need for wet rooms.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

We believe that is evidenced in terms of how the portfolio has worked out with great EPC ratings and lots of longevity, just under 26 years of income. So that's the portfolio at the end of June. And then since the end of June, we have exercised our largest disposal since the IPO in 2013, just GBP 86 million at an 11.6% premium to book value. Now, we're not saying that the whole thing could be sold at a premium to book value, but we do believe that it gives good evidence that our NAV is a fair reflection of value. The debt has also been refinanced since the year-end at improved margins. And with all of that, we have an attractive acquisition pipeline of accretive opportunities. So as we reflect on Target Healthcare REIT, we consider it to be a good year with some challenges navigated.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

I think I've said from the very beginning that if you're running care homes or if you're a landlord overseeing the running of care homes via your tenants, there will always be a challenge. Sadly, in this year, for the first time, we had to put one tenant into administration. He was unable to meet their rental obligations. But it's so interesting. We looked after the residents well. There was continuity of care. And when we went out to the market to find some new tenants, we had strong operator demand such that there has been a modest increase in the passing rent. It was expensive. Alastair will speak about that later. But the majority of all of that has been written off in the year, though that slightly impacts our EPRA cost ratio.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And then tenant arrears were also happened with one other tenant, an operator of three homes, but we're delighted to say that we expect that all of these arrears will be recovered in short order. I'll now pass on to Alastair to speak about the financial performance for the year.

[Alastair Murray, CFO at Target Fund Managers]

Thank you, Kenneth. I'm Alastair Murray, the new CFO of Target Fund Managers, and I'm very pleased to be here today to talk you through the financial performance for the year to June 25 and the recent debt refinancing. I will start with the highlights of the year. We delivered a healthy total accounting return of 9.3%. This was driven by the EPRA NTA increase of 3.7% and the dividends paid in the year of 5.884p, which represents an increase of 3% on the prior year dividend. Given the challenging backdrop for listed property companies, this 9.3% total accounting return demonstrates the resilience of our operating model. Our EPRA earnings per share decreased marginally by 0.8% to 6.08 pence. This was driven by the exceptional costs incurred in the second half of the year.

[Alastair Murray, CFO at Target Fund Managers]

Kenneth has covered the two key tenant issues that drove this, and I will cover the impact on the numbers in more detail later in this section. The annualized increase in our rental income was 4%, predominantly driven by our inflation-linked contractual rental growth, and in line with every year since launch, we have no voids. Moving on to the P&L, I will highlight the key lines. Rental income in the period increased by 3%. The main driver of this is our contracted inflation-linked rental growth. In addition, we benefited from the full-year effect of three development homes that opened in the previous year and one development home that opened in the current year. These new developments offset the rental impact of the four homes disposed of at the end of the prior year.

[Alastair Murray, CFO at Target Fund Managers]

If we examine the annualized contracted rent in more detail, this next slide demonstrates the rent increase on a point-in-time basis and shows the drivers of annualized contracted rent increase between June 2024 and June 2025. As we can clearly see, the rent reviews are the main driver of growth, adding GBP 1.9 million. This is a like-for-like increase of 3.3%. The group also opened a new development, which more than offset the disposal of one home at the end of the current year. There was a small increase from rentalisation of various CapEx and deferred payments in the year. If we now look at the costs, there were material movements in both operating expenses and credit loss allowance, which combined have driven an increase in the adjusted EPRA cost ratio. I will expand on this in the next slide. Operating expenses increased 27% over the prior year.

[Alastair Murray, CFO at Target Fund Managers]

This was due primarily to the non-recurring costs associated with administration and re-tenanting of our Weymouth property. Kenneth has already covered this at a strategic level, and I'll draw out the impact on the numbers. The administration of the Weymouth home increased our costs in the second half of the year by GBP 800,000, which covered the administration and running costs, the legals, and the marketing of the property. Excluding these costs, total operating costs increased by about 3% in the year, with this increase primarily due to the portfolio management activities undertaken in the period. Our ongoing charges figure, which provides a measure of recurring operating expenses and excludes non-recurring property expenses, was stable at 1.51%. Our credit loss allowance figure also increased from GBP 1 million in the prior year to GBP 1.6 million, but we would expect movements on this year-on-year.

[Alastair Murray, CFO at Target Fund Managers]

Again, we see the impact of the Weymouth home, which accounts for circa 1.4% of our annual rent roll, driving GBP 900,000 of our credit loss allowance in the year. In addition, one other operator with three homes accounting for about 3.2% of our annual rent roll did not pay their rent in full in the final quarter of the financial year. This resulted in an additional GBP 500,000 of credit loss allowance for this tenant. These homes have now been re-tenanted in September and we're confident of significant recovery in the provision in the final quarter of this calendar year based on securing a parent guarantee from the exited tenant. Given that Weymouth is our first administration in the group's history, we do not expect to incur costs and credit loss allowances of this magnitude in managing a property in the current year.

[Alastair Murray, CFO at Target Fund Managers]

So if we return to the P&L for one last time. Overall, the impact of these administration costs and credit loss allowances resulted in adjusted EPRA earnings per share decreasing by 0.8% to 6.08p. The dividend increased by 3% in the year and was covered at 103%, but this was a reduction from the 107% in the prior year. 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'll come on to. But first, if we look at the EPRA NTA per share, this increased 3.7% to 114.8p. This was driven by both growth in the portfolio valuation and the fully covered dividend, as you can see from this graph.

[Alastair Murray, CFO at Target Fund Managers]

The portfolio valuation uplift is the key driver of the increase, with rent reviews net a yield shift accounting for GBP 0.036 of this uplift. The portfolio valuation increased by 2.4%, and the like-for-like increase of 2.6% is again driven by the contractual inflation-linked rental growth set against yield shift. Disposals net of developments and CapEx reduced the value by 0.2% to the 2.4% total increase. The group has a strong track record of disposals at above valuation, as you'll hear from James later. Finally, I'd like to cover the refinancing of our bank debt post-year-end. At the junior end, we had GBP 170 million of committed facilities set to expire in November 2025. This was refinanced in September, improving the maturity profile, increasing the weighted average term to expiry from 4.2 years in June 2025 to 5.9 years at September 25.

[Alastair Murray, CFO at Target Fund Managers]

In addition, there are two one-year extension options at the end of year one and year two, subject to lender approval. The refinance has moved the next debt expiry date from three months at the year-end to three years or five years if both extension options are exercised. And finally, for me, the group now has an attractive debt book, and this slide provides a summary of these facilities following the refinance. We replaced the existing bank debt of GBP 170 million with GBP 130 million of committed facilities from our incumbent lenders. 50 million of this are through term loans, and the interest on these has been fixed through interest rate swaps. There's GBP 80 million of RCF, and that's currently GBP 48 million drawn. Overall, the weighted average cost of drawn debt, including amortization of loan arrangement fees, increased to 4.3% from 3.9%.

[Alastair Murray, CFO at Target Fund Managers]

This reflects the expiry of an attractive hedging put in place in the lower interest rate environment in 2020. The committed debt is GBP 40 million lower than the facilities they replaced. This is to accommodate the reinvestment of the proceeds from the nine-home asset disposal. Following the reinvestment of the proceeds, the group may fund further growth through the GBP 70 million of uncommitted accordion facilities also agreed as part of the refinancing. I'll now hand over to James to take you through the portfolio performance.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Thanks, Alastair. I'll now talk about how the portfolio is performing and then discuss the post-year-end transaction that we've executed to sell nine homes and its impact on the portfolio and our plan for the use of proceeds. Firstly, let me share some insights into the portfolio and how the operators are performing. Here's a busy slide of portfolio metrics. Let me highlight a few particularly interesting points for your attention. Overall, the group's property portfolio continues to perform very well, driven by strong levels of inflation-linked rental income growth. Over the last six years, average weekly fees in the homes have increased 49%, whilst inflation has increased 38%, showing that operators have been able to pass on the increase in their costs to residents, of which about 60% are staff or agency costs.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Remember, our operators are providing needs-based care, and there is six trillion of net wealth of the over 65s to fund these weekly fees. The group's average rent cover for the last 12 months, at over 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 the increases in average weekly fees operators have been able to make and the high levels of resident occupancy, which, as you can see from this slide, has recovered post-COVID for our mature homes, being homes which have traded for over three years, to 86.2%. Of course, the group's portfolio has always been fully let since IPO, and this is just resident occupancy that we're talking about here. But how does your portfolio compare to the market in terms of the underlying real estate?

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

For a stable, long income, you want your portfolio to be modern and fit-for-purpose, and as you can see from this slide, you have a significantly more modern portfolio than the market. This is a premium portfolio. 84% of the homes have been built since 2010. This percentage has stayed high for the group over the last few years as a result of our capital recycling strategy and focusing on improving the modernity of the portfolio. 100% of the homes have EPC ratings of A or B. 100% now have ensuite wet rooms, enabling our seniors to be cared for in their home with the dignity and respect we would want for ourselves, and the average group home has significantly more space per resident than the market at 48 square meters.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

In terms of the performance of our operators, the average TripAdvisor style rating on carehome.co.uk is 9.6 compared to 9.3 for the market. So 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 I want to spend a few minutes talking about our disposal track record. This slide summarizes all material disposals over the last three years. All of the sales have been above book value. Let me now take you through the detail. Our first significant disposal was in Q1 2023 and was of four homes that we owned in Northern Ireland. This represented a strategic decision to exit Northern Ireland as a result of the local authorities there having what we consider to be too much control over private fees.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

These four homes were sold at a premium to the prevailing book value and 12 months prior. In Q2 2024, we sold four homes to an incumbent tenant who wanted to own the whole pool. These were four of our older and smaller homes, and so we agreed to sell them. Again, they were sold at a premium to the prevailing book value and 12 months prior. And then in September, we agreed to sell nine homes to reduce our exposure to our largest tenant. By way of background to this transaction, we had 18 homes with Ideal Carehomes. Ideal was then acquired by HC-One, and as part of our active management approach, we reviewed the position as they were our biggest tenant with 16% of the portfolio, and we concluded that we would rather diversify our position and were therefore considering selling some of the homes.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Earlier this year, an institutional purchaser indicated that they were willing to buy half of the HC-One homes. We created two near identical pots in terms of spread and quality, one of which they have agreed to acquire. The nine homes we are selling are representative of the whole portfolio and represent at GBP 4.8 million, 7.9% of the total contracted rent, and at GBP 77 million, 8.3% of the total portfolio value. The rent cover of the homes sold is above our average for the portfolio but is declining, and as they were slightly older homes than the portfolio average, we were happy to sell them. The net effect of the disposal on key portfolio indicators is negligible.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

And as you can see from the bar charts on the right-hand side of this slide, our tenant diversification has greatly improved post this disposal, with our exposure to our current largest tenant, HC-One, reducing from 16% to 8.8%. This represents the most significant disposal undertaken by the group since IPO and further demonstrates the demand for our assets and the reliability of our valuations. As a result of the disposal, we have a fantastic opportunity to recycle capital to further improve the portfolio. The group has a strong and growing pipeline of over GBP 150 million of accretive investment opportunities at a net initial yield in excess of 6%, including high-quality, strongly performing existing U.K. care homes, all with ensuite wet rooms, near-term forward commits, 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.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

As a result of our close relationships with tenants, there is always one or two that would like to add a new home to their existing portfolio. 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. 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. The acquisition of the first homes in our pipeline standing assets is expected to take place in November. And I'll now pass back to Kenneth to address the positive market trends of our sector.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Thanks, James. There are indeed really positive market trends, and the first one that you've heard many times, everybody knows about it, is the demographics of the United Kingdom. In particular, the bit that matters for us as people about coming up to retire, if any of you on this call are in your 60s, in 20, 25 years' time, you're over 85, and there will be a doubling of the number of people over 85, and typically one in eight of the over 85s require residential care, so what are the demands for beds, so currently in England and Scotland, about just over 400,000 residents. The supply is about 440,000 beds, and fit-for-purpose supply, and what do we mean by fit-for-purpose, well, if you've listened to me for the last 11 or 12 years, you know I think that fit-for-purpose is wet rooms.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

It's what we would want for ourselves. And you'll see there's a significant shortage of about 250,000 beds, a shortage of rooms with wet rooms. And if you look at this graph on the right-hand side, you'll see the long-term market trend is to ensuite wet rooms. You'll see the total number of beds actually over the last five or six years is pretty stable, but the number of beds without no facilities or the number of beds with these things, they call them ensuite, but they are no wet rooms, they are both decreasing, and this kind of stark blue line shows that the number of beds with wet rooms is increasing. So definite market trend to ensuite wet rooms. And the other market trend is private pay.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

I don't think any of us on this call think that the government has loads of money to continue to reduce their deficit, quite the opposite. So who's going to pay for social care? Well, we think that residents of care homes will end up paying a lot of their own costs. And in some cases, if it's going to be paid by the government, it's also quite common for public fees to be topped up by families wishing their loved ones to accept a better home. So private pay will come out of six trillion of net worth that the over 65s currently have, and there's also some families helping to pay. And we thought it would be useful for you to kind of get a better understanding of some of that. So see the whole market situation.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Private pay is about 46%, and topped-up private pay a further 11%, so a total of 57% in the market. How does that compare with us? 79% compared to 57%. Significantly larger amounts of private pay elements in what our tenants receive, and we believe that provides real long-term stability. And this slide looks at how that has developed over the last six years, where our portfolio has ever larger amounts of private pay. Strong market trends for us. This slide we thought would be useful for you all to understand the operational issues within the sector. Staffing is always an issue, as James made reference. 55-60% of the costs of a care home are staffing costs. And in the periods under review, National Insurance increase, minimum wage increase, Employment Rights bill, government policy in relation to visas are all issues that have come up.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

How have our tenants handled that? Well, strong private pay fee inflation, this focus on private pay, and the demand for quality by the residents and their families have resulted in strong rent covers. Tenants will always have operational issues, which can result exceptionally in rent arrears. We've had a couple of these examples this last year, but with this quality of portfolio and our active asset management, we are in a good place, and generally, across the portfolio, as you've seen, rent covers are robust. This is a regulated sector. Sadly, the regulator has said itself that it's not fit-for-purpose, and so we have, from the beginning of our existence, done our own inspections, and we continue with that with well over 200 home visits in each year. Another thing that's arisen more recently is some potential legislative challenge about upward-only rent reviews.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Our existing leases will be unaffected. We're engaging with the industry to inform government on it. And actually, very recently, just yesterday, we heard the potential that if there's a collar and a cap, that may continue to be allowed. So some closing observations on the portfolio. We believe we have a robust defensive portfolio of modern fit-for-purpose homes. Well, we don't believe it. We know it. We physically visit it. We see it all the time. We just get what we're trying to do. We have great sector tailwinds. We're a very involved, active, unusual fund manager. We are externally managed. We have taken a conscious decision as an external manager to be very actively involved. We have, with all of that activity, market-leading long-term returns.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And with all of that, we have a deep commitment to the mission to provide better physical assets for our carers to work in, for our residents to be loved and cared for to the end of their lives. We have a deep desire to scale. We have an ability to deploy. The investment team are the same for a long number of years. We have an asset management team that are deeply engaged with our tenants for a long number of years. And in terms of returns for our shareholders, we're glad to be able to announce today also a progressive dividend with a further 2.5% increase. So that's the end of our presentation, and we thank you for your interest in our business, and we desire and pray indeed that we will go forward to make good returns for all our stakeholders who are invested with us.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Thank you.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thank you very much. We have a few questions coming in, so please do use the Q&A facility if you'd like to enter a question. Our first question is, at the last presentation, you advised you were looking at ways in which you could strengthen the share price. Could you comment on future efforts?

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah. I think relatively, our share price has done well compared to the rest of the listed markets. All things are relative. We would love the share price to be better, but at something like an 18% discount compared to the market average, around about 25%-30%, it has relatively outperformed, but we'd love it to further improve.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thank you. And another question, I think, for you, Kenneth. The tenant that went into administration in June, did we have any visibility of this in advance of the failure to pay rent? To what extent are we able to monitor the financial health of tenants through their disclosures, and what measures are we able to take? And then there's a separate question about rent covers.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah. We were completely aware of the situation in that tenant. We get quarterly P&L accounts from everybody. We had an in-depth discussion with them, and as it became more and more evident to us that they were not taking the key steps to improve the profitability of the tenant, ultimately, we took the difficult decision to put them into administration, and to ensure that the residents were well cared for, we put in a contractor to oversee the running of the home also, and through that, as the administration progressed, we marketed the home, well, the administrator, of course, had responsibility for doing that, and the tenants that we were already speaking to as options, there were a whole bunch of people keen to take on the home, and so we were able to re-let it fairly efficiently.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thank you. And the second part of this question relates to the range of rent covers that make up the portfolio average of 1.9 times.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah, the range. An immature home will clearly be not rent covered. We have only 7% of the portfolio that is immature, and so within the mature homes, we range from two or three homes around about one times rent covered to one home, I think, at about three or four times rent covered, if I remember. Slightly over four, I think, one home, and a whole bunch of them between 1.6-2.5 times rent covered. That's part of the idea of being highly diversified, that we're able to see the whole scene of profitability within the sector and within region and within specialism within the sector, and what I mean by that is some of our homes are, and no disrespect to the operators who do this, they're more simple residential care. Some of them do nursing care, and some of them do heavier dementia care.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And so there's a kind of a range of care that's provided by our operators, and we're deeply engaged with them all in that.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thank you. The next question is, the equity market has clearly liked your capital recycling initiative, hence the share price performing so well. Could you please give an indication of the yield levels needed on acquisitions or forward fund developments such that they would be EPS accretive? Would 6.5% plus be about the right level? Thank you. This is perhaps one for you Alastair.

[Alastair Murray, CFO at Target Fund Managers]

Yeah. So obviously, we disposed at 5.24% to give us the capital, the GBP 86 million to invest, and our debt has been refinanced at attractive levels and reduced margins, so I would say that the yield levels are slightly probably below the 6.5 that we were looking to be accretive at 6%, 6.1%. We're still modeling that as accretive in the short and long term.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thanks, Alastair. There's a question here about the use of proceeds. Following the post-year-end disposals, how quickly do you expect to reinvest the proceeds? And then secondly, are there alternative lease structures that could be considered to increase the rents' participation in operator performance in select cases? Kenneth, do you want to?

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah. They're sending them all to me, aren't they? I thought James might have taken that first one, but reinvesting the proceeds, it's never an exact science, but James has said already that the first transaction will be done next month, and we have a significant pipeline that will enable us to reinvest the proceeds in the following months fairly efficiently. We've modeled a fairly conservative view of all of that, and we maintain dividend cover on the basis of that modeling, and the second part of the question, remind me, James?

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

The second part of the question was lease structures.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah. That's a really interesting question. In the earlier years of the REIT, we did try different lease structures, and in truth, they didn't really work out well, so we see ourselves as a long income fund with stable contractual rents. I've said to many shareholders, "You won't make a lot of money out of us, but you will make long, stable returns from us," and that's the kind of more conservative, downside-protected approach that we have developed for this vehicle.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Thank you. Perhaps I'll take the next one, which is, How will tenants adapt to the new constraints on overseas recruitment? Staffing in our homes is stable, really, is what I would say, with a varied mix of primarily U.K. carers and some team members that do come in under the visa scheme, dependent on local employment conditions, but as owners of prime real estate, we've always been focused on providing great facilities for residents and carers, and our operators, with a focus on private residents, have been able to increase their average weekly fees to cope with the increasing costs, if that's ever been a challenge, so yeah, not a problem at the moment in the portfolio. Thank you.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And if I remember rightly, the stats are something like 60% or 70% of our homes don't have overseas people in them at all. There are six homes that have quite a few, but I wouldn't want you to think that for our premium-quality homes, that that is a massive issue for us.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. Another question here. As you redeploy capital, how do you expect the share of mature homes to develop?

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

What was your question?

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

As we redeploy capital, how do we expect the share of mature homes to develop? So I guess if I take that one to start with.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yeah.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

As we redeploy the capital from the recent disposal, we have already lined up standing assets, which we hope to execute on in the course of the next month. But the pipeline does include a mix of both standing assets and forward commits and forward developments. So in terms of the shape of the overall portfolio, it will continue to be by far and away a majority mature homes, but there will always be one or two forward commits forward developments that we're seeking to do to bring prime real estate into the market.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And if I can add to that, buying homes is a bit of a dynamic situation. So our pipeline exceeds our capacity, and we want to remain flexible in that to make sure that we do the best deals that we can at the time in the coming months.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Yeah.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

I'm seeing one on the rent at Weymouth. The rent is a bit ahead. I'll put it like that. I don't think I should mention the actual number. We provided no rent-free at all, and the costs of the temporary contractor and who paid for that, we paid for all of that. That's within all of the costs of the administration that we highlighted in the presentation. It was expensive. We always try and avoid administrations. This is the first time in 12 years that we've done an administration, but it was necessary in this situation.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. And we've got one other question here about the investment market. Who is buying and who is selling, and how that provides the opportunity to both buy and sell high-quality assets with such an attractive yield spread?

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

U.S. REITs are quite active again. Some of you will remember that they were active years ago. And the unlisted funds that are active in the sector are also doing a bit. So U.S. REITs and unlisted funds are the primary buyers alongside ourselves.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. And we have a question here about resident occupancy. Over what timeframe do you see the current underlying resident occupancy of 86% returning towards the optimum level of the low 90s? Is negative sector press, such as the recent BBC Panorama undercover filming at a care home in Scotland, a headwind for occupancy? Or are situations like this actually a net positive for occupier interest in high-quality homes?

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

That's a really interesting question. That home is actually in my hometown, or my original hometown when I was born and brought up. And we knew the operator and consciously turned down that operator as somebody that we wanted to work with. So I think there will sadly always be issues like that. It's why we are the fund manager that we are, that we try to really understand in depth the underlying performance and the values and the purpose of the operator. So there will always be a bit of that. Does that have any impact on the occupancy levels across the sector? No. No. This is a needs-based place, sector. And we have homes that are primarily focused on providing great care and doing great rent covers.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

And whether the occupancy is 2% or 3% either way, when you're almost two times rent covered, do it right within the capacity of what you have rather than try and squeeze occupancy up forever. We think occupancy will continue to rise a little bit, while recognizing that it hasn't yet got to the 90%. But more importantly, is the portfolio well rent covered? Absolutely.

[James MacKenzie, Head of Investor Relations at Target Healthcare REIT]

Great. And then one last question that we've touched on briefly before. How worried should we be about changes to immigration policy given the high number of overseas workers currently in the sector under the visa program? I think our answer to that would be you don't need to be overly worried with high-quality homes in the right locations with high demand for what the operators are providing. So not a major concern for our portfolio. And our operators are confident that they'll be able to recruit for the needs that they have. I don't see any more questions. So thank you very much for joining.

[Kenneth MacKenzie, CEO at Target Healthcare REIT]

Yes. We couldn't do the job we do to provide great places for our seniors unless we had your support. We're conscious that the listed markets for real estate are in difficult waters, and we are as perplexed as anybody else about the significant discounts. However, you can be sure your capital is being well deployed and taken care of to the best of our ability, and we thank you for your support and your interest in our business.

Participants

Executives

• James MacKenzie, Head of Investor Relations
• Kenneth MacKenzie, CEO

Analysts

• Alastair Murray, CFO at Target Fund Managers