Transcript
Speaker: I'm Martin King, Property Analyst at Edison Investment Research, and I'm joined today by Kenneth McKenzie, Chief Executive of Target Healthcare care REIT, which has just published its full year results for the year to the 30th of June, 2026. Good morning, Good morning. it was another very good year, and i you know I'll get you to talk about that. But I think also the interesting thing is how sustainable the performance of the company is.
Speaker: So perhaps you can talk to that and and how you manage it. Yeah, you know, it it really goes back to the foundation of the business because we set out 13 years ago to create this long-term stable fund. And in fact, I can remember very clearly some people who knew more about property than I did saying, you know, Kenneth, this it really will be interesting in 10 years to time to see if you actually deliver all that you're promising.
Speaker: So for us, sure, this year is the best of the 13 years. and But if you look over the 13 years, in fact, ah we have a total accounting return of 7.8% over that longer period, bit higher this year.
Speaker: And that's obviously very pleasing. But it's all predicated on really long leases with assets which are in demand which we expect to be in demand for a very long time to come. So I don't think we're halfway into the life of what we're doing. We're maybe a third of the way into the life of what we're doing. Maybe only 25% into the life of what we do. We have really long legs here and a real longevity.
Speaker: And it's all based on these 35 year leases. with assets that are in demand from the operators, ay with ah the demography behind it all?
Speaker: I don't know how much you will want me to continue to answer question. Well, i think we all know where we're getting older. and Apart from you and I. yes But those tenants of yours, they want those properties for that long period of time because they are very good properties and residents want to live in them because they're very good properties. And that is a very important of it. That's fundamental. So the real estate stock in care homes when we started in this was generally substandard. and not best in class. About 10% of the assets across the UK were fit for purpose. Today that number has increased quite a bit and we have been in the forefront of that and we're a quite unique portfolio
Speaker: exclusively a modern purpose-built fit for purpose. And when I say fit for purpose, even the assets that we sold, because in the last two or three years we've been refreshing some of what we had, but even the ones we sold were fit for purpose for the longer term.
Speaker: It's just that they were a little smaller a per square per resident, per square metres per resident. So that's exclusively what we've been doing.
Speaker: You can be sure we've had endless arguments internally. Do we buy and get some more yield in the poorer quality stuff or do we stay in this prime premium? And that's who we are. And here we are with the results for the year to June 26. And the evidence of that being wise is increasingly evident.
Speaker: And you say you you've you've been doing some refreshing refreshing of the portfolio. You sold a portfolio of nine assets and a couple of other assets in the last year, and you're looking to to reinvest that. can you And it's both about keeping the the quality of the portfolio high, but also enhancing returns on the way. Can you just talk about what you're doing and and how much progress you're making with redeployment?
Speaker: Yes, so we sell assets if we can at the price above NAV because obviously that's beneficial to our shareholders and it also evidences when we've been trading at a discount that in our case NAV is real.
Speaker: Remember what I said earlier, when we've been selling assets, we are not selling the best of our assets, we're selling ah the poorer of our assets, and if anything.
Speaker: So that has been part of the strategy. If you're going modern purpose-built portfolio, it can't all be 30 years old, 20 years old or whatever. And then over to the question of are you redeploying?
Speaker: At the time of these results, 85% of what we had sold, we have redeployed. We'll be announcing in a very few days a further acquisition so that we will be well deployed against what we have sold. And With all of that, we still have significant space in our debt facilities, but we've been telling the market this week that our pipeline is in excess of our debt facilities, including the accordion element of our debt facilities. So we have an RCF that we need to draw down and we'll draw down, and beyond that, we an accordion that we will get into later in the year.
Speaker: but But would it be fair to say that it's taking a little bit longer for you to deploy that that spare capital you've got? and and And if so, why is that? I know you want to maintain the quality and do the right transactions. We've done that for 13 years.
Speaker: we We've taken just a little longer. a And here we are 13 years later with 7.8% return over years. So there are some additional reasons currently. Re-registering a care home will take quite a bit longer than it used to with the regulator.
Speaker: um And we are just naturally cautious. We have an incredibly stable investment team who a do get into the weeds of every care home and we would rather be slow but right.
Speaker: rather than be hasty and get into some complexities with situations. So we're kind of unapologetic about taking our time and doing this right. And we realize that may be slightly countercultural in the age that we are in, but take your time and do it right.
Speaker: It's also true to say that 10 years ago, we could have typically bought a one-off asset in perhaps eight to 10 weeks, and that same transaction today will take four to five or six months. But is competition for the assets that you... There's also a bit of competition. yeah and m There's nothing like doing something well and then people think they can perhaps try and copy a little. So there are some unlisted funds that are also competing with us.
Speaker: and a So that's okay. We're fine with that. the the The market overall needs more purpose-built care homes.
Speaker: We're only at 36% of the beds in fit-for-purpose care homes. So there's a long way to go as well as the demographic bulge that's coming. But also the the share price has done very, very well in the last year or two. And you're not, it's trading, the share price is not far away from NAV. There's been some equity raising across the sector for the first time in in a long while.
Speaker: If you had that opportunity, and I know you've got debt capital to deploy as well, but if you had that opportunity to to raise additional equity, are there the opportunities out there for you to be able to deploy that? Yes, as I said earlier, we have a pipeline beyond our debt book, so that opens up that potential.
Speaker: We don't want to get ahead of ourselves, however, because the first thing is to fill the debt book up. So we think filling the debt book up will keep us busy through the end of this year into the first quarter of next year, and let's see the state of the markets in the first quarter of next year. But getting back to the basics, Kenneth, we yeah we're talking a lot about acquisitions and that extra growth, but it's a sector with very solid organic growth opportunities.
Speaker: And so how do you see the the next year? oh We see significant opportunity to continue to build this business um it following the strategy that we started 13 years ago. We set out, Martin, as you know, because you and I have you have interviewed me many times. to create this long, stable, boring, and we use the word boring because we just want it to be repetitive over the long term. One of my mentors from the past used to speak about downside protection, downside protection. We're trying to create that long, stable, downside protected income fund.
Speaker: which m inflation actually helps us a little bit. Some of the stats in our reporting show that our underlying tenants' income is rising ahead of inflation, their major costs are wages, so an income is rising ahead of wage costs. And so with that, we get stable rents.
Speaker: Rent covers are very good and that feeds through to dividends and that feeds through also to a little bit of capital uplift, which is a key part of of the total annual accounting returns that we have this year. But long, stable income, long, stable income. And don't be exciting about this and take your time.
Speaker: Well, I think in in the current environment, the the prospect of long, stable income with not too many surprises will be attractive to many investors. So thank you very much for coming in and talking to us. Well, I appreciate your interest interest and your long-term and interest yourself in what we do. Thank you very much.
