Target Healthcare REIT H1 2025 Earnings Call Transcript

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March 14, 2025

There are 3 speakers on the call.

Operator

Good morning, from a beautifully sunny and a bit frosty Scotland, where we're delighted to present to you the results for the six months ended December 24 for Target Healthcare REIT. We have an additional member of the team with us today as we move slides. James Mackenzie joined us at the beginning of the year in the role of head of investor relations, and we're delighted to have him with us. So James is joining Gordon and I to present the results, and you'll probably see more of him in the future. Let's get into some of the detail of Target Healthcare REIT.

Operator

Many of you will remember quite a bit of this, but I think it's well worth the reminder. This is a portfolio of scale with really robust, long rental income stream. 94 care homes in the portfolio today, just under six and a half thousand beds, over 60,000,000 of rent, and the portfolio currently valued at the end of last year at 925,000,000 based on an EPRA topped up net initial yield of 6.2. And when we started Target Healthcare REIT, we said that we thought it was entirely appropriate that we have a very diverse source of income in terms of the sector, and as you'll see, the we continue to be indeed very diverse with 34 different sources of income. It's a remarkable portfolio, we believe.

Operator

It's remarkable in that it is differentiated by its quality and its modernity and its ESG compliance. It's remarkable in that effectively we're at almost a % of en suite wet rooms. I was speaking recently to an American investor in this sector and an operator in America, and he was observing that our portfolio is matching much of what is done in America today with superb facilities for seniors, and we're delighted to to have this prime portfolio as part of who we are. It's also remarkable in that I don't believe that there is any other real estate portfolio in the listed space which has got a % EPC ratings. There's no issue here with twenty thirty costs to bring things up to, what is spoken about as being desired.

Operator

And it's remarkably stable really in terms of what happens to the income levels because 99% of the underlying leases, inflation links, RPI links for rental uplifts. So, and you'll see as we go through the report that we have a really good stable rental uplifts tied to RPI, and it's remarkable in that this with a twenty one twenty six years of income looking forward. And I think I'll probably continue with a remarkable comment because look what's happened over the last five years in this portfolio. We've increased the number of assets by 32, we've increased the number of wet rooms by 3%, we have got five years older and yet the building age is younger, now that's fairly unusual isn't it? We've spoken already about the APC A and B ratings and how superb they are and it's a portfolio which gives real good quality of space for our beloved seniors, with excellent square meters per resident.

Operator

And of course, the portfolio is maturing even although it's younger as we see greater growth and really stable rent cover compared to five years ago, 7% increase in the rent cover at 1.9 times. And then that remarkability, if that is a word, flows through to what is long term performance. I remember when I first started investing in senior living, a pretty senior property person, when I was trying to convince him after one or two years that what we were doing was good, said, Kenneth, this really matters over the five, ten, fifteen year period. How will you perform over that much longer period? And here you can see the outperformance of the MSCI UK annual healthcare property index, 76% outperformance over the last ten years, and there's about 8.5 or 9,000,000,000 of assets in this index.

Operator

So we're a top performer, number two over that ten year period, and you'll see over the last couple of years that by any stretch, the imagination is good outperformance at five and a half percent in '23 and five point four percent outperformance in 2024. I'll hand over to Gordon now to take you through the financial implications of Remarkability.

Speaker 1

Thanks. Yes. So just a few short slides on the financial performance for the six months period to December. So we have highlights slide here. I've talked to four of these.

Speaker 1

Again, think most of you are very familiar with what we do and what we deliver. The net rental income for the six months was a 4% increase on the comparative period. I think the interesting thing here is that despite our disposals program across the portfolio, so obviously clearly we've lost a bit of income from disposing of some of the poorer assets and replacing them with better assets. Disposals rent is largely being replaced by bringing our development program to practical completion and going to rent roll there. And then the like for like rent reviews, which we have embedded across the portfolio, have really driven the rest of the growth in that net rental income as well as some income increases from a little bit of CapEx across the portfolio to again further improve the quality of the real estate.

Speaker 1

The effort cost ratio is clearly a key metric in terms of the running cost of the business, that's remained very stable at 16%. Of course, this is a ratio which is based on income, but it does compare well to the wider sector, it compares well to other properties of similar scale to us and other other property companies, sorry, with a similar returns profile. So it's good that that's stable, and I would also find that our NAV based cost ratios, which we usually do for the full financial year, also compare very favorably, so running the business efficiently. What does that do then to the adjusted EPRA EPS and the dividends per share? We've passed through that rental growth and that tight cost control and effective interest costs onto growing earnings.

Speaker 1

The adjusted EPS is up just shy of 3%, and that has fallen through to the dividends, which we're paying out as well, which has grown 3% relative to the comparative period. That's what we're here to do, and that's what we intend to do going forward. And a side note, again, it's not just income. Kind of slides there on MSCI and the portfolio performance clearly showing great outperformance that comes from capital as well. So we are able to provide a great total accounting return.

Speaker 1

We're all right on this call, but that 4.5% for the six years clearly, that translates to roughly 9% for the year. Very pleased to deliver that, and I think, again, that compares very well to to the wider sector at this point in time. The early summary, this is a larger one for for those of you to take away and look at in a bit more detail. I think I've got two two key takeaways to talk about here. One, I always I always need to flag it, but adjusted after earnings is our key metric.

Speaker 1

That's the cash, the recurring earnings of this company and this portfolio generates. I like to use the word triggered, but adjusted, I know it does trigger some people. Just to remember, we are adjusting down from our ETRAS earnings number by about 20% just based on the the the IFRS on on our lease structure. We have to do that to to to show the true measure of of how this company is performing on a recurring cash basis. And then secondarily, the the the the box at the bottom there that this isn't this is, sorry, an efficient property model.

Speaker 1

Our gross to net is is a %. There are there are no voids. There are no hidden fees. There's no transaction fees. There's no separate property management fees or rent collection fees, there's none of that.

Speaker 1

So our gross rental income effectively is our net rental income and very efficient, which allows us to obviously pass on as much as we can back to shareholders from that rental income coming in. And on that rent itself, the contracted rent at the end of the period has grown by 3%. I touched upon that earlier. It's growing with the rent reviews which are embedded in the portfolio. So the they are 1.3% on a like for like basis for the six months.

Speaker 1

It the contractual rent is growing as we replace some of those older assets which we've disposed off with brand new assets coming online. One particular asset came to practical completion during the period, added 900,000 of rent of rent onto the rent roll there. That's a brand new asset, paying rent from day one, and it's clearly enhancing the portfolio, it's best in class, it's modern, it's CPC ratings, all that stuff is good. So it's good to replace some of the older assets in the portfolio with that and growing the rent roll in return. Onto the balance sheet, which is straightforward.

Speaker 1

We have our assets just over 900,000,000. We have our cash and our working capital and we have our debt on there. That leaves us with plenty of headroom. We've got greater than 70,000,000 headroom there to do as we think is appropriate with. And given where we are, low LTV, plenty of headroom, good long debt ahead of us mostly.

Speaker 1

And given the results we've just seen on the previous slides, we have drawn the EFA NTA per share over the period by just under 2%, one point eight % exactly. So that's what the balance sheet is showing at the bottom there. Breaking that down a little, you can see on the left hand side moving on from the June position, revaluations have grown that now per share by 2.1p. That's really based on the stability of the valuations of the asset class and the demand for that asset class and the performance of the asset class means that the valuers are seeing stable values and they're passing it on the rent reviews and the rental growth as it's coming through onto valuations. And then that's the the red box there.

Speaker 1

And then the next box, it's just showing the effect of our recurring earnings are well covering the dividend, so that is growing the NAV as well. So we end up the the NAV per share growing by 1.8% over the year. So largely driven by that valuation growth coming from the rental growth across the portfolio. And on the debt, two key aspects to cover here. The first is that the Phoenix debt that we've got is GBP 150,000,000 of our drawn debt.

Speaker 1

It's about 60% of our drawn debt. It's obviously fairly significant. It goes out to 2032 and 2037. We we we struck that a while ago, recognizing that we wanted to be a long term fixed in that environment given the cost would only likely to go one way, and we're very pleased with with that hundred and 50,000,000 of debt. The the cash cost on that annually is 3.2%, three point three %.

Speaker 1

You see that there is with the amortization of the costs on it. So great to have that really important going forward. And then I'm sure you're all aware that the RBS and the HSBC, the shorter, more flexible bank debt is up for refinance this year. We are very focused on that. We've we've been through a number of a couple of exercises now in terms of speaking to lenders, the incumbents, and a range of other lenders to get some optionality there.

Speaker 1

We've got so great demand, good offers on the table. And if we did refinance that now based on those offers and based on current market pricing on a like for like basis, it would move the overall group's weighted average cost of debt from 4% to 4.4%. So you're only a 40 basis point increase there. And as we've been saying for a number of a number of periods now, we've been factoring that into all of our decision making over the last two, two point five years in terms of dividend, capital structure, capital allocation. The dividend as well covered, there's plenty of headroom to reflect that increase in the overall cost of debt.

Speaker 1

So we're very well placed on the refinance study going forward. And just a final point, the debt is still working for us. This is a chart mapping the peer group with LTD and with the earnings yield. I think we'd all recognize you probably want to be towards the left hand side of that chart with lower LTD and a higher earnings yield. And, ideally, you're at the top of the top left of that chart, and and Target is sitting comfortably right in the top left quadrant of that chart.

Speaker 1

But the debt is still working for us. The gearing is still working for us. And of course, we will continue to closely review that and monitor the capital structure and allocation with the Board and make some appropriate decisions for shareholders going forward. We'll move on to James to cover some of the portfolio performance in the last six months.

Speaker 2

Thanks Gordon, so how are our operators performing? In terms of resident occupancy, the chart shows a maturing, the maturity of the portfolio improving over time. As you can see, resident occupancy has recovered post COVID to mature occupancy levels of almost 86% at the December, and as we can see at the very end of the chart, operators have seen what we expect to be a seasonal drop in occupancy in Q4 consistent with the sector. What's also very important for the portfolio is rent cover, and as I'll explain in more detail in future slides, this as you can see has improved over the last five years to 1.9 times in terms of rolling last twelve months rent cover. How are our operator business models performing?

Speaker 2

And as this slide shows, a very detailed slide, but in terms of mature homes, being homes that have traded for over three years, there's been five years of fee increases amounting to 45% over the whole period, and this compares to total RPI inflation of 34% over the period. At the same time private pay has moved from 66% to 78%, evidencing the quality of the assets that you own. Staff costs as a percentage of total fees has fallen over the period from 57% to 54%, but agency costs, we've also seen, fall slightly after the COVID spike. Result of these operational factors is that rent cover has grown to 1.9 times, as we've spoken to earlier. We're not just gathering assets, we're refreshing your portfolio, investing in it and generating returns.

Speaker 2

And for long income, you want your portfolio to be modern and fit for purpose. So how has your portfolio changed over the last five years? Well, modernity has improved with now 84 being purpose built from 2010 onwards. Older homes have been sold, increasing the overall weighted average unexpired lease terms such that over the five years, it's only reduced by three years in total. 91% of the portfolio are now mature homes, being homes that have traded for over three years, and this has increased from 73% in 2020, as a result of our approach to often buying brand new homes that take three years or so to get to maturity.

Speaker 2

And we now have 99% of the portfolio with en suite wet rooms. In summary, you've got a great quality portfolio as a result of us refreshing and improving the assets. Now to speak to the physical property, how does your portfolio compare to peers and the market? Well, as you can see, you have a significantly more modern portfolio with no homes built pre the nineteen nineties and no conversions or conversions plus extensions. This is a premium portfolio, and we have got a premium portfolio too in terms of social impact with 99% wet rooms enabling our seniors to be cared for in their homes with the dignity and respect that we would want for ourselves.

Speaker 2

In terms of some financial metrics and the comparison of your portfolio against listed peers, your portfolio has a similar net initial yield, average value per square meter, and average rent per square meter. However, we would submit that there is significant work to be done on poorer quality stock in The UK and significant capital expenditure needed to bring ESG standards to appropriate levels. And I'll now pass back to Kenneth to talk about the sector. And you all know that I love talking about the

Operator

sector because we've got fabulous tailwinds in this sector and some of the wider discussions and things that are going on in the sector are strong drivers for the level of investment that I think we'll see in this sector in the years to come. I was at a meeting on I think it was Tuesday night this this week in the mansion house in the city, and I was asked to speak on this subject for this private meeting that was going on, the impact of demographics. And for us, they are hugely positive because the number of 80 doubles. You many of you have heard me say this often, but it truly does double and many people in the senior living sector believe that some of the impact of that is really going to be seen in the coming years because there has been some squeezing of availability of beds with government austerity, but that squeezing of social care provision is going to kind of pop a bit. So there will be increasing levels of demand, and as I said earlier, it's really clear that the sector needs more beds and the number of beds actually at long last are likely to increase rather than a and the older beds start to slip away from the market.

Operator

And in relation to that, in previous meetings, I've spoken about the net worth of the 60 and we've been we're actually about to issue a white paper on all this subject, but it is the the net worth of the 60 is now 6,000,000,000,000. So there is vast capacity from private pay, and you'll have noticed from what we've said that our portfolio is now up to 78% private pay, so we are absolutely in the right place as we anticipate further government challenges in terms of their overall budget. So within that, we firmly believe that to stay in the strong tailwind of the trend to homes that pay due regard to our seniors by way of giving them appropriate real estate, and we mean by that particularly a wet room provision. You'll see way back in 02/2014, '14 percent of the beds had wet rooms and it's now up to 34%, and that compares remarkably as I've said before to Target's wholly new facilities. So we're absolutely where this market needs to be and will be in the next ten or fifteen years.

Operator

And I've this is I think quite a useful slide that we haven't looked at in quite this format before where you can see that whereas just at the end of the pandemic, private pay was for our portfolio down at 62%. Private pay since then has risen by another 15% to up to 78%, sixteen % it is, isn't it? Up to 78%, which is absolutely where we think long stable profitable homes will be based and where rent covers will remain robust for the medium to long term, and we're really delighted that that's what our tenants are finding. So I thought it would be useful as we come to the end of this presentation for me to reflect a little on what we see in the sector. This is a structurally supported sector because of demographics and because of so very significant net worth.

Operator

I remember saying, I think in the June presentation last year, that when I launched this fund eleven or twelve years ago, I remember speaking about 1,600,000,000,000.0 of net worth in the 60. As I say, we've been doing some work on that. It's actually only yesterday we got some of the final numbers from it, and it is quite amazing to see that the net worth has risen so much. I think last year, I spoke about it at 2,600,000,000,000.0, and in fact, Alastair, who's sitting here in the room and has put all of his stuff together, changed the the 2,600,000,000,000.0 number that he had to the the the 6,000,000,000,000 that it is. That is very significant net worth for private pay.

Operator

We think that's what will happen both for NHS pay and also for social pay. The wealthy quite appropriately will have to pay for their own care. So within that model, we believe it's appropriate to be in best in class assets with the flight to quality that we will see with the demands of the private payer with the continued need for good ESG governance. We love being in assets that are future proofed. We love that we have no remedial CapEx concerns to speak about.

Operator

They don't exist. We're already a % a and b. And from all of that, we believe there will be robust income growth, which is inflation linked and contractual, and that growth is supported by the underlying tailwinds of the sector and the underlying wealth of our seniors. So within all of that, we need to be wise on capital allocation. We have demonstrated ability to effectively recycle capital in the past and improve the portfolio.

Operator

You'll all be aware that we have already sold 8% of the portfolio over the last twenty four months, and we believe there may be opportunities for further disposals to our advantage. And with all of that, we continue to actively consider with our helpful board further opportunities to enhance shareholder returns. And with that, we can move to Q and A. Thank you very much.

Speaker 1

Thank you. I've got a few questions coming through, and I think I'll I'll hand a couple of the more straightforward ones first, and then as a team, we will share the other ones. Someone was asking about the resident occupancy at the homes and and what are the factors moving that down, appreciating it's only 1% lower. I I think James I think I commend before James got to that slide, but I think we we we were saying that's that's a seasonal effect just given the time of year. Occupancy usually declines, and we do benchmark our own portfolio relative to the sector overall, and it is consistent with what's happened across the wider sector.

Speaker 1

So obviously, no no immediate concerns there, seasonal, and we respect that to recover during the spring. At what level oh, sorry. The average length of stay per resident, I think we've covered before. Clearly, it depends on the the acuity of the resident, whether it's a nursing resident or dementia, etcetera, etcetera. The consensus sorry, census information from our tenants indicates it's usually about eighteen months as an average stay for each resident across the portfolio.

Speaker 1

I'm probably going to pass to Kenneth to discuss can we cover construction costs of new build homes, how this has evolved, our rents keeping up because I think he's he'll he'll have the latest numbers to hand on on that.

Operator

Yeah. Construction costs grew significantly up to a couple of years ago and have steadied over the last couple of years, and sustainable rent levels is probably the most important thing in relation to a construction costs, and and we believe that is is in terms of us ensuring good rent covers, tying and achieving sustainable rent is the most important thing for us, and we're in a really good position for that with our rents, with our average rental level.

Speaker 1

Sure, at what level do we expect rent covers to stabilize at?

Operator

Yeah, when we underwrite modern purpose built homes ten years ago, we were looking to achieve rent covers around about the 1.6 times over the long term and possibly to the upside. We're comfortably ahead of that, and the portfolio, we think over the next six months, we'll see occupancy grow a bit more compared to previous years, and we believe that that will flow through to further rent cover, currently being at 1.9 times. Do we think that rent cover at 1.9 times is the appropriate level over the long term? Well, it certainly surprised more security of income for us in terms of our tenants being successful, but we it it's a really interesting question how much further it will grow and we're not going to pretend to be profits in relation to that other than to say our tenants are are making good money currently.

Speaker 1

Thank you. I've got a couple of questions on developments and refinancing, which I think we will cover, then we've got, I guess, a theme of questions on some of what's happening in the market at the moment, which I think will probably combine into one response. I think a couple of questions about current development yields and whether we should be using our debt capacity to invest in that, you know, what what what's how attractive does that work? I think it's it's probably worthwhile just explaining as we usually do that the the nature of our development activity is is very low risk, and we don't take planning risk and and, you know, at that level, we we will usually fund developments on a p like basis and to make sure we have access to to the property and then the long lease terms with a good tenant. So there isn't generally any particular development premium, and we'd usually be buying that at similar acquisition yields of what we could buy, you know, existing assets for.

Speaker 1

So not but isn't a huge premium, and therefore, you know, so we need to do the the the calculation as to do the investment returns. Are they accretive relative to the cost of capital? So effectively, the the the development assets are pretty consistent with the wider investment market at this point in time, and and there are some opportunities out there, but there isn't a huge spread between the cost of capital and the returns. Obviously, we're being very selective in whatever development activity we are choosing to support right now. Got a question on just someone asking me to expand on the refinancing and what what we have available.

Speaker 1

So what we've done is we've looked at refinancing the bank debt on you like for like basis with similar facilities, with shorter facilities just to give a bit more flexibility given the the, I guess, the volatility in interest rates, but the uncertain outlook. And clearly, we've also been looking at longer term fixes as well. So we're taking all of those into the mix. As as I said during the the presentation, we've got good demand from across the the duration parameters there, we could have and and and good demand to drive pricing down a bit. So we're naturally looking with the board as to what the best mix is for the company going forward.

Speaker 1

So lots of demand and lots of things we may do there, you know, having lots of choices good, but it also gives us a little bit more analysis to do just to make sure we make the right decision and get the right balance there. And then that kind of I think we just double checking if don't have anything else. Discrete here. Yeah. Probably a helpful one on our tenants and what they're expecting and what operations will be.

Speaker 1

So the question is, do tenants expect to achieve the level of fee increases to cover cost inflation? And if not, how you might react to that? So I think Kenneth or James would best place to answer.

Operator

Well, that's the whole reason why we love to have tenants with 78% of private pay. We think there will be challenges for the public pay market, And as all of us know what our dear government is going through, we can understand that there could be, but for private pay, as we have pointed out, very significant net worth there and some of that housing equity and net worth is will be used for these people to pay for private pay. So our tenants are anticipating we see reports of fee increases in the range of eight to 12% as we go around our homes, and these are the numbers that have been quoted to us in recent weeks as the increase that's anticipated next month, which more than compensates for the extra national insurance costs that we're all aware of. We don't have a concern in relation to that.

Speaker 1

Yeah. And then I think the two, they're gonna weigh the theme questions. I think some some somebody's asked about I'd refer to the the cost ratios competing well, clearly, the follow-up question there as well. There are other companies out there with with with cheaper cost ratios and some have moved fee basis recently. There was two or three questions around that and basically asking what what we're thinking about that and what discussions we've had with the boards to try and, you know, to to look to see if we can enhance earnings.

Speaker 1

I think Kenneth is probably best placed to answer that, but

Operator

Yeah. So we we have a a full cost provision here, and we have always set out to the market what we believe is the appropriate way to invest in care homes, and we know that the way we do this is different to everyone else. And what I mean by that is that there are four people who physically inspect the homes and represent your interest in the homes. There are costs related to that, but investment in senior living has been a painful thing if you have a ten, fifteen year view, twenty year view of it. And we set out from the beginning to do this differently, and we would submit that with the the ten year record and the last two year record on the MSCI index, it's evident that total returns have been quite satisfactory.

Operator

We recognize in the midst of that the pain that we all suffer in terms of the share price, and there are larger macro issues that we do need to address in relation to that, and that is something that has ongoing consideration from both the manager and the board.

Speaker 1

Okay. There are quite another questions coming in there. I was trying to keep track of them all. Hopefully, we've I think we've got through all of those or one or two others I can I can quickly pick up with other people directly, so we don't need to do it on here? So unless anything else come through as I'm speaking, I think it's probably a good good spot to wrap this up.

Operator

Well, it's always a privilege for us to be able to provide fabulous facilities for our seniors, to do it in the manner that we do do which provides stability for the tenants, which provides stability for the residents, and which provides robust income and returns for our shareholders, all in the context of also recognizing that the share price is nothing like where we would like it to be, but you can be sure that we are focused on all of that too and we note all that's going on in the market, and we will thank you for your support.

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Key Takeaways

  • Net rental income rose 4% year-on-year, driving adjusted EPRA EPS up ~3% and enabling a 3% dividend increase.
  • The portfolio outperformed the MSCI UK annual healthcare property index by 76% over 10 years, ranking second among £9 billion of assets.
  • High-quality assets: 99% of beds have en suite wet rooms, 34% of properties hold EPC A/B ratings, and there are minimal remedial CapEx requirements.
  • Operators’ performance remains robust with resident occupancy recovering to ~86% and rent cover improving to 1.9x.
  • Balance sheet remains conservative with low LTV, £70 million of headroom, 60% of debt fixed at ~3.3%, and upcoming refinancing expected to raise average cost to ~4.4%.
AI Generated. May Contain Errors.
Earnings Conference Call
Target Healthcare REIT H1 2025
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