Good morning. Welcome to this presentation on the results for Target Healthcare REIT for the year ended June 2023. Gordon and myself are going to present to us. We've been doing this together for about 10 years. We're 10 years into the life of the REIT, and it's been a great journey of providing fabulous real estate to our seniors, which is a delightfully holistic and very ESG-sensitive thing to do because some of what we do is all about improving human dignity. I'm gonna spend the first 10 minutes or so going through the performance of the portfolio, and Gordon will then take you through the results. If we can have a look, first of all, at the portfolio itself and what Target Healthcare REIT looks like today.
We're in 97 care homes, about 6,500 beds. Lots of wet rooms. That's all about human dignity. We had a passionate discussion in the business again last week with one or two new nurses and medical people, and they have been really, They're really passionate about the role of the wet room and human dignity. If we speak about ESG and the S of that, be sure that that is really important. We have GBP 57 million of contracted rent with great EPC ratings, another ESG strong point, and we are highly diversified. 32 different sources of income, just under GBP 900 million of assets, long income in front of us, 26.5 years, and lots of inflation connection. The rents rise by the rate of inflation, capped at 4%.
So this is the results part that I'm gonna do. I'm gonna do a few slides on the results of the business, looking at what's happened on dividend, on the performance of the portfolio, and where we are at the end of the year for the portfolio, and also set that in the context of what's happening in real estate. As you know, dividend was reduced during the year. Our model has always been to have a fully covered dividend from the start of setting out with Target Healthcare REIT, with the. that was based on us allocating all of our debt to new real estate.
With the change in the cost of debt, that has had an impact on the model, and so we had to reset the dividend through the year and align the dividend payment with our earnings. You'll see that we have done that very successfully in terms of dividend cover for the second half of the year since the dividend change. What's happened within the portfolio? Well, this slide shows you a occupancy level. We've been through COVID, obviously. Occupancy dropped due to lack of people coming in, more than due to excess deaths. Occupancy has significantly recovered, as you can see, through the last nine months or so, and in fact, today, occupancy is slightly over 86%. You know, that is. That's an interesting stat for us.
Though occupancy at that level is still below what occupancy was at pre-COVID, the fundamental of our underwriting actually was always that occupancy got to around the 90% level. But what's really interesting in what's happening in our portfolio just now is this next slide, in fact rent cover is at an all-time high for us, and you can see the angle that the graph is going at. So based on occupancy 5% lower than it was pre-COVID, occupancy is 10% higher than pre-COVID, and that is a really interesting stat. It reflects the fact that the underlying homes have, with this modern, purpose-built real estate, they have some real confidence in the ability to earn good fee rates, and have their costs under control, and they see excellent prospects in front of them.
Rent cover now up to 1.75%. That is, as you might expect, reflected in rent collection. Actually, pre-COVID, we had 100% rent collection, and I would submit that if you're operating a mature portfolio of good assets, you should have 100% rent collection in our sector. This is a sector with loads of demand. If you have the right real estate, you really shouldn't have a problem with these homes, not of any substance. We entered, as you'll see in the next slide, COVID with only 70% mature homes because, of course, we're a business that buys modern, purpose-built real estate that have just opened, and there's always a fill-up risk.
In fact, as we went into COVID, the inevitable effect of that was that we did have less mature homes than any mature portfolios. But time heals many things if you have the right real estate. If you have the wrong real estate, time will cause problems over time, as there is some history of that in this sector. But if you have the modern, purpose-built real estate, well-operated, all improves. And that's our situation. Our quarterly rent collection up to over 99%, at the most recent quarter. And that, as I say, is predicated on the mature homes, the increasing numbers of mature homes.
From that profitable home, with ever higher rent cover, comes regular rent uplifts also, because 99% of our underlying leases are tied to RPI with collars and caps, typically at 2% and 4%. You'll see on this slide that rent levels have continued to grow consistently since inflation has come back to bite us all. What's the situation that we got to by the end of the year? Well, there we go. A covered dividend, 107% covered over the last two quarters. Current dividend yield of 7.6%. Conservative levels of debt. Of course, we've been pleased to be able to announce, as we would expect to continue to do, back onto dividend increases with a 2% dividend increase.
And all that's is predicated on this annual rental growth that we have embedded in the portfolio. Stable valuations, because there's lots of demand from investors for the modern purpose-built stock. And really, very little spend for ESG CapEx, because we're just in such a good position on ESG. If you have a modern purpose-built building, you will naturally have LED lights. You will naturally have great windows and doors. You will naturally have great insulation. If you have a modern purpose-built building with wet rooms, you will naturally have very high on the social side of things.
Because living in care homes as a resident is partly about helping people, seniors, to live well and to be cared for well, and there are some private things that you and I would not like to speak about at 8:30 in the morning, but that most of us do sometime early in the morning, that we'd prefer to do in the privacy of our own bedroom, and that is the blessing of wet rooms. We also wanted to speak a little bit about the sector itself against the rest of the real estate world. No vacancy rates in care homes. All of our properties have long-term leases in place, are income generating. Very different to retail, office, industrial. Actually, rental growth compared to these other sectors is quite healthy. You'll see the dotted line here.
Quite a healthy level of rental growth compared to the rest of the real estate sector. We thought it was also worth speaking briefly about what happened to net initial yields and valuations. A small change in net initial yield for the prime part of the care home sector, which has a small change, as you would expect, on the capital value of the assets, but again, very different to the other parts of the sector. With that, I will hand on to Gordon, who will take you through the results.
Thank you, Kenneth. Like Kenneth, I, I've got about 10 minutes to spend on the results for the group for the year. I'll talk more about valuations. I think the valuation aspect is important, given the data you've just seen from Kenneth, with the relatively stable valuations we have, particularly given the many headwinds facing the real estate sector more generally. I'll go on to the financials themselves. Our valuation result for the year on the portfolio is just over 4% like-for-like decrease in the portfolio value, which equates to about 40 basis points of yield shift. Why are those valuations so stable? I think the first reason is, as Kenneth just described, the portfolio performance. The portfolio is trading well, profitability is improving. That helps support valuations. Secondary is what you see on this side here.
There are buyers for our real estate, that has continued. You can see, and these buyers are institutional investors. You can see the dark blue bars. There has been consistent transactions occurred and completed over the last four quarters. And also note the drop-off in the lack of activity, being the lighter blue bars, in the poorer quality, non-wet room real estate over the last two quarters. But there has been consistent, stable demand for the prime real estate, which we hold in our portfolio, and that does evidence and support value. So you can see that, on the bar charts there, and anecdotally from some participants, participants in the market.
Secondly, I won't labour this point because we've previously announced it, but as well as institutional investor demand, there is also operator demand for buying assets and holding assets. We applied that to our own portfolio. There were some assets we were interested in disposing of during the year because the outlook in that particular geography from a fee, from a resident funding outlook, wasn't that great. We were able to dispose of those assets ahead of carrying value at attractive IRRs to an operator buyer. Just another piece of evidence about who is buying in the market for our quality of real estate. Then the fourth reason for that valuation stability, as we see it, is our real estate quality. We see a real bifurcation in the care home market.
There is a modern purpose-built with wet rooms, and then 70% roughly of the market doesn't have that quality. You can see that in some of the metrics. We've shown you these before. The top three charts across the top there are our real estate quality metrics against the listed peer composite that we put together. We analyzed the market. You can see there our dark blue bar is miles ahead. Our purpose-built since 2000 is practically 100%. We've got a modern portfolio. Our wet rooms, which Kenneth has spoken so eloquently about, were practically 100% wet rooms, and the space that we offer to residents is well ahead of the listed peer average as well.
So you might expect to see a bit of a differential in the financial metrics, which are the bottom three charts, in terms of the portfolio's respective valuations, their respective rent per square meters, and their value per square meter. But the difference on the bottom charts is not anywhere near as stark as on the top charts. So we think this shows good value and projects well for our portfolio going forward from a demand and from a valuation perspective. And then this is four B, if you like, EPCs. Kenneth touched on it earlier, but it's another area where our portfolio benchmarks tremendously well. We're at 94% A or B already, well ahead of the expected legislation coming in, legislated by 2025 for 2030.
As I think, backed up by the Skidmore Review earlier in this year. I think regardless of the political wind and when that is actually legislated, I think property companies are expected to continue on their green pathways, their net zero pathways. And that's certainly something we feel a responsibility to do. So this will come at a cost. There's obviously a physical cost to improve the real estate, and there's a cost of work and disruption, which will have to happen as well for the real estate to be upgraded. Our modern portfolio is very well placed in that regard. So that was valuations. I'll take you through the income statement. Lots of numbers there.
I think the key thing on this slide, the key takeaway, is the valuation movement was a significant item on our income statement during the year. You can see the second bottom row there, the net property loss of GBP 44 million, pushed us into an IFRS loss of GBP 6.5 million for the year. Just to flag that. We'll come back to earnings shortly. I'll take you through that in a bit more detail, but first of all, just showing that valuation bridge. You can see it's dominated by the market yield shift, and then the impact of the rent reviews, the GBP 73 million bar there, and then the GBP 36 million positive on rent reviews.
Note the bottom chart, which shows the split between half one and half two of our financial year. Half one being to December 2022, and then half two being to June 2023. We took that valuation correction in December. In the second half of the year, we've seen a recovery to valuation growth in the portfolio as the profitability increases. The demand is there, the valuers have evidence, and the rent reviews are coming through. Earnings again. The adjusted EPRA earnings number is our key metric internally. That's really the cash generation in the portfolio. We always like to flag, in the bottom half of the chart, shows this here, that our adjusted EPRA earnings number is lower than our EPRA earnings number. We're adjusting down to that key operational metric.
Just to remind you, and you can have that takeaway from the side there as to how that comes about in a simplified manner. More time on earnings, finally. We have grown earnings in the year by 23% on a pound basis and 19% on a per share basis. Why is that? Our rental income is up. Despite the disposals, rental income is up GBP 6.6 million, with about two-thirds of that being the full year impact of the significant portfolio acquisition in the prior year coming through this year. The rest obviously being rental growth and other items going through the P&L. Secondarily, operating expenses have been stable, so that's been great.
With the improved performance, with the improved rent collection, we have a GBP 3 million less provisioning this year, which has been a great positive, addition to earnings, and really, really helping us growing that, as we would expect from the portfolio. Third, financing costs are up to GBP 9.4 million for the year on a net basis. Again, that is really the full year effect of the portfolio acquisition and the debt associated with that. Last year, coming through in full this year, we are fixed and hedged on our debt, as I'll tell you a little bit more about in the coming slides. Good increase in earnings in the year, helping support and cover that dividend from January. The rent roll bridge here, I just include for completeness, really.
The rent roll has moved up just over GBP 1 million in the year. Take away for those that are interested, I won't dwell on that. Key takeaways on earnings. As I say, earnings per share up 19% to 6 pence for the year. Note our EPRA cost ratio is significantly down in the year, with that improvement in rent collection and the operational stability of the expenses, and really coming from that rent collection run rate being up at 99% and ahead of that. We expect that to continue. As I think you know, we have a straightforward balance sheet. There's nothing complex there.
We have a conservative balance sheet in terms of gearing, and we have headroom available in terms of our available committed facilities to use towards our working capital and investment needs. The EPRA NTA bridge shows the movement in the year fairly well. Like, again, you can see it is dominated by the property revaluations number, 6.9 pence per year. And the two charts, the two bars next to that are the EPRA earnings and the dividends being covered by those EPRA earnings. So it's really the valuations which have dragged EPRA NTA per share down in the year. But again, note the bottom half of that slide, that was taken in the first half of the year, and the second half of the year, we've returned to two consecutive quarters of EPRA NAV growth.
In the debt summary, again, we have a conservative debt position. I think the important thing to point out here is our fixed hedge positions, the GBP 150 million of long-term institutional debt. The bottom left, box there, we come into the start of the year with that. The GBP 30 million of RBS debt swapped to just under two and a half percent. We came into the year with that. And then in response to the changing interest rate environment, we did take out a SONIA cap on GBP 50 million of our debt. So that's GBP 250 million debt, which equates to all of our drawn debt, is fixed or otherwise hedged. And those...
Yeah, whilst the long-term institutional debt has a weighted average term to maturity of over 10.5 years as at the year-end, the swapped bank debt is out to November 2025. So we've got two clear years before our earliest refinancing point. And those lenders are supportive, and we've got good terms on that debt. And I'll pass back to Kenneth for some discussion on the sector.
Yeah, and Gordon has done that slide for me. That's helpful. So, the top bar, what's going on within the sector? And even before I get into this slide at all, I was reminded as I was coming here about some. a comment from AIC, that we are the first social impact fund. We have confessed to everyone previously that we did not know when we set up ten years ago that we were the first social impact fund in the United Kingdom. But we are delighted to so be. And that is because of the three things I mentioned before. In terms of the governance, it's all about independence. We don't operate any of our homes. We're a separate investment manager. In terms of social, I, I've spoken about the aspect of human dignity.
Would you like to get cleaned up in your personal affairs if you were a baby in the privacy of your own room? And do you like to live in a leaky, cold building or a warm, modern building? So first social impact fund, but what's going on in the general sector beyond that? Well, favorable sector dynamics, demographics entirely on our side. This is not about to be people moving out of this. A needs-based care, there will be a need for ever more people to enter care homes, and they'll want to enter a home similar to what we went to Spain in 30, 40 years ago, where you do have the ability to have a wash in your own private facility. Private pay fees.
Whichever government comes, I somehow doubt that they're gonna have lots of cash to pay for all of this, so have a preponderance of private pay. We are at 68%. It's always needs-based, and the sector will absolutely help the NHS as the time goes on. There will be more of that, and that's a great prospect for us. Many of our homes are already doing that. We have significantly improving performance in these times of inflation, interestingly, other than for our share price. But we've explained how rent cover has gone up to 1.75 times, and that's because our private fees are up 13%-14%, but labor costs are only up 7%-8% because there's been less agency costs with better use of sponsorship and visas, and energy costs have been managed.
There's been, with the sponsorship visas stuff, more availability of staff, the visa scheme widely used. A good situation. That compares to all the real estate itself, where we're delighted to see the sector moving in our direction with much better real estate, the older homes being replaced. We've spoken about the demand for places and the latent demand of aging, and the funding for care coming from significant housing equity. It's a great sector for us to work in. It's a great sector from the holistic aspect of caring for people and being passionate, as I hope you can see, about the whole aspect of care with the profits and dividends flowing from that. In summary, where are we as Target Healthcare REIT?
Great real estate quality, a portfolio that's performing with a conservative balance sheet, with great demographics. Thank you for listening to our presentation. And, I think now it's for Q&A. So ask away.
Morning, it's Sam King from Stifel. Thanks for the presentation, guys. Just one question, please. I'm picking up on the very positive update in terms of tenant trading, and profitability and the improvements that you've had in both occupancy and rent cover. Where do you see those levels going from here, in terms of where do you think occupancy might stabilize? And given the fee increases that you've been successful or your tenants have been successful passing through, particularly on the private side, do you see that rent cover number from 1.75 improving more from where it is now?
It's a really interesting question. Every week on a Friday, about 5:00 P.M., I get the occupancy from the portfolio, and it's been really interesting to see this continued growth. It's only quarterly as we summarize the whole of the data that we see what's happening on rent cover. As we've disclosed, occupancy currently at 86 rather than 85. For sure, that will improve rent cover. As that comes back to around the 90% level somewhere, and we have homes operating above 90% already, we think that rent cover will indeed continue to grow. We are not prophets, so we can't say for sure, but we're already ahead of our kind of core underwriting that we originally set out. We've always tried to be conservative with this.
And with the quality of the homes, I think we could see rent cover continue to grow quite nicely.
Great, thanks. And then, just one follow-up question as well. Just in terms of your underwriting assumptions for new acquisitions, have they changed at all in terms of the levels of occupancy that you assume?
The reality is that we're not in depth underwriting a lot of new product for this. We are looking at some new opportunities, and we continue. you to expect to see brand-new homes get to around the 90% level. That's why we're quietly confident about what will happen to rent cover as well.
Great, thanks.
Thank you, Martyn King at Edison. In terms of looking at those new opportunities, do you see any further opportunities for capital recycling to fund those?
We're always looking at the portfolio and saying to ourselves, which one or two assets is it time to think of moving on? So that's something that's under kinda continual review, Martyn. And with that, we're also looking at, we have some headroom in our capital. We wanted to see where the market stabilized in terms of net initial yields. We've seen some extension of them, and we want to invest that capital widely. There'll be little bits of capital improvements in terms of adding solar panels and so on, where we'll earn quite nice levels of income from that. So there's a mix of one or two new assets, and also adding some solar panels and heat pumps and things.
Yeah, but we've clearly made some disposals during the year, and we are open to, you know, we're continually assessing the portfolio and making sure that if there are opportunities or assets we would like to move on, then, you know, as we've seen, we think there is demand to allow us to do that ahead of book value and use that capital sensibly to fund the new assets we've got coming through in our development pipeline, which we're building out just now. So one example of that was the.
Yeah
T he asset we've committed to just after the year end, which is the operational net zero care home, in the southwest, isn't it? So we're really excited about that one and being able to recycle capital from some of the older homes, which, you know, were slightly poorer than the overall quality of the portfolio into those types of assets, we think is a great move for the portfolio.
The challenge we have on that, Martyn, actually, is essentially all our homes are built in the last two decades, and 70% of the homes were built 30, 40, 50 years ago. So, you know, if we sell anything, it's like relatively really good home. So it's only about keeping an excellent portfolio excellent, at the excellence level. It's, it's like really different to investing in stuff from the 1980s. I don't know if any of you have lived in homes that were built in the 1970s or 1980s, compared to a home that's built in the last 10 years. It's just really different. Even the bathrooms that you and I were brought up in, or lack of them, Martyn.
I'll move Kenneth on from bathrooms. We've got a question coming online about can you talk us through the re-tenanting program in the period, what this meant for rent on the underlying property, and any more re-tenanting to be considered? So I think I'll maybe take the first half of that and then move on to Kenneth. So that particular re-tenanting in the period was... One particular tenant who had a bunch of new homes struggled. They were immature through COVID, and we were helping that tenant. He had five homes. We took two off him to help him concentrate on a really local geographic basis for the rest of his portfolio. We completed one of those in the period, that was at the prevailing rent with minimal incentives.
You know, we're always keen that the rent levels are sustainable and at market, and our properties aren't overrented, and that was evidenced through that re-tenanting transaction during the year. And then, any more re-tenanting to be considered, I will, you know, there's always assets in the portfolio.
You know, the really interesting aspect about re-tenanting when you've got great real estate is you have people wanting the home. You don't have to create some kind of new structure with the landlord funding it all. So that's been a really aspect. The home that Gordon is referring to, the new tenant has got to... I wouldn't want to. I won't publish.
Yeah
The rent cover they've got to, as they have sorted out the home and focused on it and done it well, because it was great real estate. It was an operator issue, that the home was physically remote from the core strategy of that business. So yeah, there's always one or two things like that going on because we have 32 tenants, but is there demand for the homes, or do we have to set up some special structure to make it work? There's always demand. We have people who want our homes. If you have the best home where you own, you live physically, and you had a little bit of an opportunity to get it, you probably would like to move to it, and it's very similar to this.
There's just the fabulous real estate that I would love to go and run that compared to this home that doesn't have wet rooms and doesn't have all the stuff that is part of the future. So that's been a real positive for us through the whole life from when we've done the re-tenanting.
Just on dividend cover. You've got the financing in a couple of years. Do you think you might build a little bit of additional dividend cover in over that period, ahead of that-
Yeah
... or look to?
Yeah. So the modeling is going out beyond that, and all the modeling, I think, is fairly prudent. That assumes refinancing at current, you know, current interest levels. And clearly, we've announced a dividend increase today, and that is very much taken into consideration. So, you know, we're being sensible, we think, and prudent in what we're doing at the moment. Using that, you know, more prudent set of assumptions as to the refinancing point in two years' time, rather than assuming that interest rates will start to come back down by then. You know, we're conservative and trying to be very prudent in that regard.
Well, thank you very much, and that was the end of the questions. Thank you for coming.
Yeah.
I'm sure FTI will probably give us a coffee now.
Thank you all.