Delivering growth in both earnings and asset values

Utilising the proceeds of the £86m portfolio sale, reinvestment, in combination with debt repayment, has already substantially offset the near-term income loss from the portfolio sale. With the refinancing of shorter-term debt completed at a reduced margin, Target is well-placed for further accretive investment from a strong pipeline of opportunities, including both operational homes and the forward funding of developments. With some cash drag as reinvestment income feeds through, particularly for developments, our FY26e and FY27e adjusted earnings are reduced slightly, but fully covered DPS growth is not dented. The financial benefits are more fully reflected in FY28e.

Sustainable earnings and social benefits

In a cyclical commercial property market, healthcare property has provided attractive risk-adjusted returns. The demand for care home places is effectively non-discretionary, driven by a growing elderly population and the need to improve the existing estate, and largely uncorrelated with the economy. Target’s uncompromising focus on modern, purpose-built properties underpins its core proposition of generating long-term, sustainable, income-driven returns. All its homes provide full en-suite wet-room facilities (34% for the market) and meet current and expected minimum energy efficiency standards. Such homes are appealing to residents, especially important in maintaining high levels of self-funded occupancy, support operators in providing better, more efficient and more effective care, and provide sustainable, long-term investment income.

Valuation: Attractive yield with NAV upside

The company’s FY26 DPS target of 6.03p (+2.5%) represents a yield of more than 6%. We forecast continuing DPS growth and expect NAV to increase, driven by rent indexation, with a potential additional benefit from any property yield tightening. Meanwhile, the shares trade at a c 18% discount to the Q126 NAV/share of 117.7p.

Investment case

While indexed rent reviews and active asset management continue to drive earnings, dividends and capital growth, we expect a growing contribution from accretive capital recycling over the next three years. This was again apparent in the recent Q126 update, which showed an NAV total return of 4.4p or 3.8%,^[1] building on the 9.1%^[2] delivered in FY25. Within this, the £86m portfolio sale, at an 11.6% premium to book value, contributed 1.4p to the total return.

In this report we focus on recent developments with respect to capital recycling, asset management and refinancing. In our June report we discussed in detail how Target’s investment strategy addresses the growing demand for premium care facilities for elderly residents, including those with complex needs such as dementia, while providing shareholders with long-term, stable, inflation-protected income and the potential for capital growth. In brief, we highlight the following key points of the investment case:

• Structural and demographic support underpins Target’s core proposition of generating long-term, sustainable, income-driven returns. Its focus on asset quality is central to this and strongly enhances the social impact that the company generates. The portfolio is modern and sustainable, with 100% of the portfolio rated EPC A or B, already compliant with the minimum energy efficiency standards anticipated to apply from 2030; 100% of the rooms have full en-suite wet-rooms; there is a generous 48sqm space per resident; and average rents are an affordable £203 per sqm.
• Not surprisingly, Target scores highly on sustainability metrics, with a GRESB^[3] benchmark score of 80, placing it second in its peer group.
• Rents are annually indexed to retail price inflation (RPI) (typically capped and collared between 2% and 4% per year) with a weighted average unexpired lease term (WAULT) of 26 years. The resilience of tenant operators was demonstrated through the COVID-19 pandemic and the subsequent spike in inflation, and average rent cover of 1.9 times is the highest level since Target launched.
• The demand for care home places is effectively non-discretionary and largely uncorrelated with the economy.
• Where tenant issues arise, high-quality assets remain attractive to a wide range of alternative operators.
• Healthcare property has traditionally generated superior risk-adjusted returns relative to the broad sector. The long duration, visible, inflation-linked income prospects for high-quality care home assets remain attractive to investors and are supporting property values.

Set against this strong, long-term investment case, our near-term forecasts are very much driven by the outlook for rental income, given that the refinancing has provided visibility over borrowing costs, and costs are substantially linked to the development of NAV. The key drivers of our rental income forecasts are the outlook for continuing indexed rental uplifts, the mix and timing of acquisitions, and rent collection performance. We explore each of these in the following section.

The drivers of rental growth

Rent indexation

In FY25, the average uplift on reviews was 3.3% and in Q126, the average uplift on the 17 completed reviews^[4] was 3.8%. In September 2025, the 12-month increase in RPI was 4.5% and in October the UK Treasury consensus forecast for the Q4 CY25 rate was 4.8%, falling to 3.3% in Q4 CY26. For Target, we have assumed average uplifts for the year to June 2026 (FY26) of 3.5%, 3.0% for FY27 and 2.5% for FY28.

Capital recycling

The sale of nine care homes for £85.9m, the company’s largest ever disposal, was announced in late September (Q126) and completed in October (Q226). The disposal, to an institutional investor, was at a substantial premium of 11.6% to the end-FY25 book value of £77.0m, reflecting a net initial yield of 5.24% including notional buyers’ costs, below the portfolio average of 6.2%. The £4.8m annualised rent on the sale assets represents a 5.6% yield on the disposal value, which is also well below the minimum average of 6% that Target expects on reinvestment, and reflects the £45m reinvestment just announced. In August, Target had agreed the sale of another property for £8.0m, a premium of c 13% to its end-FY25 book value, expecting completion before the end of 2025.

Although the nine-home portfolio sale is the largest of Target’s asset sales, it is not the only one, and opportunistic capital recycling has enhanced the return on capital and portfolio quality, and provided evidence of the robustness of valuations and NAV. In Q123, Target made a decision to withdraw from the Northern Ireland market, citing less attractive market dynamics and a weaker private pay market compared with the UK, selling four homes for an aggregate £22m, a small premium to book value. In Q224, a further four homes were sold to the incumbent tenant for an aggregate £45m, which was modestly ahead of the carried value, reflecting a net initial yield below the portfolio average. The homes had performed well since being acquired as part of the significant portfolio transaction in late 2021, but their sale enhanced key portfolio average metrics such as age, floor space and unexpired lease term.

As well as providing an accretive reinvestment opportunity, the most recent portfolio disposal created a more balanced spread of tenant exposure across the portfolio. The homes are all let to HC‑One, which acquired Ideal Carehomes, an existing Target tenant, in late 2023. Following the sale, HC-One’s share of rent roll reduced from c 16% to c 9% (prior to any small impact from reinvestment), although it remains Target’s single largest tenant, and the aggregate share of the top 10 tenants has reduced to 61% from 64%. Following the acquisitions just announced, the total number of tenants has increased to 33 from 32.

Key portfolio metrics, such as rent cover, WAULT and average asset age, are not materially changed, indicating that the homes sold were a reasonable reflection of the overall portfolio.

The first redeployment is in high quality assets to an established tenant

The three operational care homes included in the £45m reinvestment have been acquired via sale and leaseback from an experienced operator, which, according to Target, has a very strong knowledge of its local market. As with the existing portfolio and in keeping with the company’s strict focus on quality, they provide full en suite wet-room facilities, most suitable for their private-pay resident base. The homes have a history of strong trading, delivering consistently strong rent cover generation of more than two times, underpinned by attractive local demographics. The properties have been acquired on long 35-year, fully repairing and insuring occupational leases with RPI-linked caps and collars, with commercial terms in line with the existing portfolio, including green provisions such as energy-usage data collection.

The development of the fourth property, a forward commitment pre-let to the same operator, is already well advanced and is expected to reach practical completion in summer 2026. It is being built to a high standard and is expected to deliver net-zero carbon operational capability.

Strong and growing pipeline

The end-Q126, and prior to the completion of the portfolio sale, net loan-to-value ratio (LTV) was a low 21.4%. Allowing for the completion of the portfolio sale (completed just after the period-end) we estimate the Q126 LTV would have been c 14%, but has already begun to rebuild as capital is deployed. In the Q126 update, including the disposal proceeds, Target said that it had available capital resources of up to £138m, net of all capital and other commitments, and that it would be comfortable with an LTV of c 24%. Following the £45m of reinvestment to date, we estimate a pro forma LTV of c 17%,^[5] with more than £90m of available capital remaining.

Including the newly announced acquisitions, our forecasts assume deployment of c £115m, somewhat less than the available capital, representing a source of additional growth. The impact of this deployment on our forecast LTV is partly offset by the increase in portfolio valuation that we expect, driven by rental growth.

Target has identified a strong pipeline of acquisition opportunities that meet its strict quality requirements, across diverse geographies, both operational homes and forward funded developments,^[6] let to a mix of new and existing tenant operators. It expects a blended net initial yield in excess of 6%, which is underpinned by the three homes already acquired.

We have necessarily had to make assumptions about the speed with which Target can appropriately commit capital and about the split between fully income-generating operational/standing assets and developments. On development funding, Target earns interest on the balance of funds extended, increasing as completion approaches, before switching to rental income as the assets become operational. From a yield perspective, our assumptions are indifferent whether investments are made into standing assets or developments. The importance is the speed with which capital is deployed.

Of the £115m of capital deployment assumed in our forecasts, £45m (c 40%) is to operational assets, including the three completed homes newly acquired, which we estimate to represent roughly three-quarters of the total £45m investment. We assume £75m of development funding commitments, including the newly acquired development asset. The operational assets contribute directly to rental income whereas the development assets are not included in contracted rent roll until completion, meanwhile generating interest earnings as the funding is extended. The interest is included in adjusted earnings but not in IFRS or EPRA earnings.

We have assumed the operational asset investment is complete by end-FY26, and makes a full contribution to FY27 rental income. The assumed aggregate £75m of development commitments, spread across six assets in total, completes in stages up to end-FY28, with the first full year rental income contribution in FY29.

Rent collection supported by asset quality and sustainable rents

Since the pandemic, most tenants have experienced a good recovery in resident occupancy within the homes they operate, and have been able to successfully pass through inflationary cost pressures in higher weekly fees. This improving performance has been reflected in a strong average rent cover ratio^[7] of 1.9 times, which is the highest level achieved since Target launched.

Although the average rent cover ratio was strong, FY25 rent collection fell marginally to 97% (FY24: 99%), driven primarily by issues with two tenants that have since been resolved. Given the number of tenants with which Target operates, occasional issues with some tenants are almost inevitable. New homes are an important element in the building of a high-quality portfolio, but once completed and handed over to the tenant, they do take time to build occupancy and reach a ‘stabilised’ level of profitability. Especially when targeting privately funded residents, this is a process that may take three years or more.

Positively, when issues do arise, high-quality assets in the right locations, with favourable demand/supply characteristics and prevailing rental levels that are sustainable, will always be attractive to existing or alternative tenants.

Early in July, the company completed the re-tenanting of one asset in Weymouth, representing 1.4% of the total rent roll, where the tenant had not been paying the rent due to poor trading at other homes that it operated, not owned by Target. Issues have been previously settled co-operatively but in this particular case Target decided that its interests and those of the home residents would be better served by placing the outgoing tenant into administration, resulting in administration costs of c £0.8m in addition to a £0.9m credit loss provision. Given strong demand from alternative operators, the re-tenanting was achieved without granting lease incentives at an improved rental level, resulting in a valuation uplift of c £0.3m.

In late September, three homes leased to a single operator (representing 3.2% of the total rent roll), where for two quarters the rent had not been paid in full, were re-tenanted. This was undertaken at a modestly higher rent, without lease incentives, to two existing tenants. As part of the terms of the re-tenanting, Target secured a parent company guarantee from the outgoing tenant, which is expected to support the collection of the outstanding rent arrears. In Q126, a partial reduction in the previously recognised credit loss allowance relating to this tenant added c £0.4m to earnings.

Interest and borrowing

Late in Q126, Target completed the refinancing of its near-term borrowing debt maturities with The Royal Bank of Scotland (RBS) and HSBC, replacing an aggregate £170m of existing facilities that were due to mature in November with £130m of new facilities and an improved margin.

The new facilities are at a margin of 1.5% (compared with 2.2% previously) with an initial term of three years, with two one-year extension options, subject to lender consent. An accordion option allows the company to increase the size of the facilities by an aggregate £70m, also subject to lender consent. The facilities comprise £50m of term loans, with the interest cost capped at 5.3% for five years. Aggregate revolving credit facilities (RCF) of £80m are for now floating rate, at the 1.5% lending margin plus the SONIA benchmark rate, currently c 4%, but it is Target’s intention to cap the cost ahead of draw-down to fund future acquisitions. There is no change to the £150m of existing long-term debt facilities, at a low average cost of 3.2%, and with a first maturity not until 2032.

At end-Q126, £248m of the aggregate £280m of debt facilities had been drawn. This temporarily included £48m of RCF drawings, since repaid from the disposal proceeds. The remaining £200m of borrowing, with a weighted average maturity of just under six years, is fixed at an average interest cost of 3.7% (3.9% inclusive of loan arrangement fee amortisation), at least until September 2030.

Estimate revisions: Continuing fully covered dividend growth

The company targets aggregate FY26 DPS of 6.03p (+2.5%) and we assume a similar rate of growth in FY27 and FY28, while maintaining a good level of cover by adjusted ‘cash’ earnings.

Capital recycling has a relatively small drag on earnings in FY26e but the negative impact on rental income from the time lag between sales and reinvestment is mostly offset by a reduction in the interest expense on a lower level of debt.

Valuation

Target shares have increased by 15% over the past 12 months, generating a total shareholder return of 22%, although with both DPS and NAV increasing, this represents only a partial re-rating. The targeted FY26 DPS of 6.032p (+2.5%) represents a prospective yield of 6.2%, while the shares trade at a discount of 18% to the 30 September 2025 (Q126) NAV per share of 117.7p.

In the table below we summarise the performance and valuation of Target and a selected group of other longer lease peers. Sector consolidation has reduced the REIT sector, and the peer group has narrowed over the past three years, due to corporate activity. The acquisition by PHP of Assura and the acquisition of Care REIT by US-based healthcare real estate investment trust Caretrust REIT have highlighted the undervaluation of the sector.

Target shares have risen by more than 40% from their March 2023 low and have strongly outperformed the peer group and the broader UK property sector over one and three years. On a trailing basis, the company’s P/NAV is broadly in line with the peer group, and its dividend yield is lower.

Recent financial performance

Target reports quarterly updates and key FY25 data were published in early August. The FY25 results were published in detail during October, and earlier in November Target reported on the quarter to 30 September 2025 (Q126).

On an adjusted ‘cash’ basis, in FY25, growth in rental income and interest income on cash deposits was offset by increased expenses and credit loss provisions, and lower interest earned on development funding. Compared with EPRA earnings, which excludes valuation movements and non-recurring items, adjusted earnings excludes significant non-cash IFRS rent smoothing adjustments and includes the development interest. Adjusted earnings is therefore considerably lower than EPRA earnings and gives a better indication of dividend paying capacity.

We highlight the following key points:

• Rental income increased by £2.0m or 3%.
• The credit loss allowance increased by £0.6m to £1.6m. It included £0.9m in respect of the Weymouth home and £0.5m in respect of the three homes that were re-tenanted.
• Whereas management fees (+4% or £0.3m) tracked the growth in NAV, to which they are linked, other expenses were affected by the administration and re-tenanting costs of the Weymouth home. On a reported basis, other expenses increased c £0.8m, or 27%, to £3.9m. Excluding the costs relating to the Weymouth home, the increase was 3%. The ongoing charge ratio (OCR), comparing expenses with net assets, was stable at 1.51%. The EPRA cost ratio, comparing expenses with rental income, increased to 21.8% from 19.1%.
• Net finance expense was c £0.6m lower at £10.2m, primarily relating to increased interest income on bank deposits.
• Development interest earned under forward funded development agreements was £1.0m lower at £0.6m, reflecting the completion of three projects in FY24 and a further project in FY25. On completion, the homes begin to earn rental income rather than interest.
• Adjusted earnings was £0.3m or 1% lower at £37.7m or 6.1p per share, covering DPS of 5.884p (+3%) 1.03x. EPRA EPS of 7.7p covered DPS 1.31x.
• Portfolio values increased by 2.6% on a like-for-like basis, with the positive impact of rental uplifts (3.3% like-for-like) partly offset by a slight widening of the property valuation yield. The end-FY25 EPRA topped up net initial yield was 6.22% compared with 6.20% at end-FY24.
• EPRA net tangible assets (NTA) per share increased by 4% to 114.8p and including DPS paid (but not reinvested) the NAV total return was 9.1%.

In Q126, Target delivered a three-month accounting total return (excluding reinvestment of dividends) of 4.4p or 3.8%, comprising DPS paid of c 1.5p and NAV growth of 2.9p. Around half the NAV increase reflected the gain on the nine-home sale; contracts were exchanged during Q126, and the transaction completed post the period-end. Rent reviews in the period were at an average 3.8%, adding 0.7% to annualised contracted rent, and reflected in like-for-like portfolio valuation growth. Adjusted EPS of 1.71p covered DPS 1.13x but included some credit loss recoveries related to the re-tenanting of homes. Excluding this, EPS of 1.64p covered DPS 1.09x.