Rent growth, asset management and redeployment

Q226 saw the completion of previously announced disposals amounting to c £94m (including a nine-home portfolio) and reinvestment of £45m into three strong operational homes and one new development, described in detail in our previous note. Underpinned by rental growth, NAV per share increased 1.4% and, including DPS paid, the NAV total return was 2.8% (H126: 6.6%). Successful re-tenanting activity has delivered improved rent collection (99%) and the recovery of c £1.9m of historical rent arrears. Excluding c 0.2p of non-recurring recoveries, H126 adjusted EPS was c 3.2p, fully covering DPS of 3.02p. Acquisitions and debt repayment have substantially offset the income loss from asset sales and the company is well-placed for further accretive investment from a strong pipeline of opportunities.

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 5.7%. 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 11% discount to the Q226 NAV/share of 119.4p.

Additional details on the NAV and trading update

While Target is primarily focused on income returns, this also has a positive impact on property valuations and NAV. With the EPRA topped-up net initial yield broadly stable since the end of 2022 (6.23% at end-December 2025), like-for-like rental growth has driven consistent capital returns. In Q226, NAV per share increased by 1.4%, primarily reflecting 1.2% like-for-like property valuation uplift, in turn supported by a 0.9% like-for-like increase in contracted rent and 0.2% from asset management activity. Including dividends paid, the NAV total return was 2.7% (2.8% assuming reinvestment of dividends). During Q2, the positive impact of lease surrender income (see below) substantially offset acquisition costs. Q1 benefited from realised property gains on the portfolio sale.

Based on the unaudited quarterly data, we estimate a 6.6% NAV total return during the first half of FY26.

Taking a longer-term perspective, the consistency of returns stands out. Dividend return has been positive in every year since listing in 2014, contributing around three-quarters of the total return. Capital returns have also been positive in each year with the exception of 2023 when property values across the broader property sector negatively adjusted to higher bond yields. Even in 2023, backed by strong fundamentals, including very long-term indexed rental income, care home properties were nonetheless relatively robust, with Target’s portfolio further benefiting from the quality of its assets.

0.9% like-for-like rental growth

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. In Q226, 21 reviews were at an average 3.9%, adding 0.9% to rent roll. The 17 reviews in Q126 were at an average 3.8%.

In December 2025, the 12-month increase in RPI was 4.2% and in January 2026 the UK Treasury consensus forecast for the Q4 CY26 rate was 3.0%. In our forecasts we have assumed average uplifts for the year to June 2026 (FY26) of 3.5%, 3.0% for FY27 and 2.5% for FY28.

A long-term rate of RPI inflation of 3% and stable property yields is consistent with annual NAV total return of 8–9% pa.

Reflecting the timing of accretive capital recycling activity (see below), overall contracted rent roll of £59.5m was 4.5% lower during the quarter.

Capital recycling

Q2 saw the completion of significant, previously announced transactions activity, covered in detail in our previous note, comprising:

• The sale of nine care homes for £85.9m, in line with the exchange announced in Q126. This represented a premium of 11.6% to the carrying value at end-FY25.
• The disposal of an additional property for £8.0m, which had been contractually agreed in August 2025, representing a premium of c 13% to its carrying value at end-FY25 and c 4% to its carrying value at Q126.
• The acquisition of a portfolio of three strongly performing modern operational care homes, and contracted on a forward commitment to acquire a fourth, all in prime Central Scotland locations and all let to an experienced operator, new to Target. The total investment of £45m (including costs) across the two transactions reflected a blended acquisition net initial yield in excess of 6%.

Strong pipeline of further opportunities

With around half of the portfolio sales proceeds deployed, the end-Q226 net loan-to-value ratio was a low 15.2%, well below the c 25% level that Target expects to reach.

End-Q226 drawn borrowings of £204m comprised £200m of fixed rate debt, at an average cost of 3.7%, with a weighted average maturity of almost six years, and a small drawdown on the available £80m revolving credit facilities. Allowing for cash balances, net debt was £136m. Target says that net of all existing commitments, £100m of cash and undrawn debt facilities remain available for deployment, and that the investment manager has an identified pipeline well in excess of this.

The identified assets are evenly distributed between standing assets and forward funds/forward commitments, are at various stages of evaluation and completion and have an indicative blended net initial yield in excess of 6%.

Our forecasts for further deployment, including our assumptions about the timing and mix of assets acquired, are set out in our last published note. In aggregate we allow for a further c £75m of deployment, which is less than the capital available to the company, at a blended net initial yield of 6%, providing upside potential in respect of both the quantum of lending and rental yield achieved.

Rent collection

Although the average rent cover ratio was at a record level of 1.9x in FY25, rent collection fell marginally to 97% (98% in Q126), driven primarily by issues with two tenants that have since been resolved. Positively, when issues do arise, Target’s high-quality assets, in strong locations, let at sustainable rents have proven to be attractive to existing or alternative tenants. Rent collection is 99% to date for Q226, and an additional £1.9m of historical rent arrears have been collected (of which £0.7m had been provided for in Q126).

The re-tenanting of one asset, representing 1.0% of the total rent roll, was undertaken at an unchanged rental level and without lease incentives. The remaining lease term was extended to 35 years and the completion of the re-tenanting crystalised the payment of a surrender premium of £1.4m from the outgoing tenant, with no negative impact on the property valuation over the quarter.

In late September, three homes leased to a single operator were re-tenanted at an unchanged rental level to two existing tenants. Target secured a parent company guarantee from the previous tenant which has supported the collection of the outstanding rent arrears during Q226. All agreed rent arrears were received during the quarter, adding a non-recurring contribution of c 0.11p per share to adjusted EPRA EPS on top of the c.0.07p per share recognised in Q126.

Valuation and returns

Target shares have increased by 15% over the past 12 months, generating a total shareholder return of more than 30%, reflecting growth in NAV and DPS, and continued re-rating towards historical norms. The targeted FY26 DPS of 6.03p (+2.5%) represents a prospective yield of 5.7%, while the shares trade at a discount of 11% to the Q226 NAV per share of 119.4p.

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 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.