Delivering growth in both earnings and asset values

The Q325 results show continued NAV growth and operational resilience, with the portfolio benefiting from inflation-linked rental uplifts and active asset management. Q325 rent collection remained strong at 97%, reflecting active asset management and improved trading conditions for tenants, with fee growth and rising occupancy offsetting inflationary cost pressures. Inflation-linked rent reviews continue to deliver income growth and, with property valuations stable (Q3 EPRA topped-up net initial yield of 6.23% vs 6.20% in Q2), valuation uplifts. The Q325 declared DPS of 1.471p takes the total year to 4.413p, covered 1.06x by aggregate adjusted EPRA earnings.

Outperforming the sector

The long-duration, visible inflation-linked income prospects for high-quality care home assets remain attractive to investors and support property values. The resilience of tenant operators has been demonstrated through the pandemic and the subsequent spike in inflation. 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 operators.

Growing dividends with attractive yield potential

Dividends are set at what we expect is a sustainable from which to grow further. We expect organic rental growth and a full impact from recently completed and soon to be completed developments to drive growth in earnings and fully covered dividends. The 5.88p FY25 DPS target gives a yield of 5.8% and we expect further growth on a fully covered basis. Meanwhile, the shares trade at a c 10% discount to the March 2025 EPRA NTA/share.

Investment summary

Target Healthcare REIT’s Q325 results show continued NAV growth and operational resilience, with the portfolio benefiting from inflation-linked rental uplifts and active asset management. This report begins with a detailed commentary on our expectations for further earnings and dividend growth and attractive total returns. We discuss Target’s strategy and its investment focus on high-quality, modern, purpose-built care homes. Of particular note:

• 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.
• Effectively, all rents are inflation-linked (typically capped and collared between 2% and 4% pa) with a WAULT of 26 years.
• The resilience of tenant operators has been demonstrated through the pandemic and the subsequent spike in inflation. 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.
• With the dividend rebased in FY24 to a level that better reflects an environment of higher interest rates, and capital costs and interest costs fixed, we expect organic rental growth (and development completions) to drive growth in earnings and fully covered dividends.

Sensitivities

The visibility of Target’s contractual income and dividend-paying capacity is provided by long leases and Retail Price Index (RPI) linked rent increases. We see the key sensitivities as relating to the following:

• Regulatory changes or changes to government care policy have the potential to materially affect the sector, both positively and negatively, in ways that are difficult to predict. Significant reform of care sector funding has again been deferred.
• While Target has no direct exposure to the operational and financial performance of the homes operated by its tenants, underperformance from time to time has a negative effect on the collection of contractual income. Active asset management and the appeal of its high-quality homes to alternative tenants provides protection.
• Key operational and financial risks to the tenant operators include their ability to maintain high standards of care and compliance with stringent and evolving regulatory oversight, manage staff shortages, maintain good levels of occupancy and mitigate cost inflation with fee increases.
• Average care home fees have risen at a faster rate than RPI in recent years, particularly fees for self-funded residents. In many cases, these fees will be met by a draw-down of home equity and/or other savings. Any sustained reduction in personal wealth could have a negative impact on the ability to demand such price increases.
• Property values may be affected by further change in the cost of capital, investment demand for care home properties of the specification that Target focuses on, or tenant performance.
• Availability of finance on suitable terms. Of Target’s £320m of committed borrowing facilities, £150m is long-term and fixed rate. Target has reported that it is making significant progress with refinancing £170m (of which £99m was drawn as of Q325) of shorter-term debt, maturing in November 2025, on attractive terms.
• As an externally managed REIT, Target is dependent on the investment manager’s ability, the retention of key staff and its ability to deliver business continuity.

Financials

Post the publication of H125 interims and the Q325 trading update we are updating our forecasts; the key changes are summarised in the table below. Key drivers of the changes include:

• During Q325, annualised contracted rental income increased by 1.1% to £61.3m. Inflation-linked rent reviews added 0.8% and rentalised capex 0.3%. In H125, contracted rent increased £1.8m, or 3.0%, to £60.6m, comprising 1.3% from rent reviews and 1.7% from development completions and rentalised capex.
• The cash rental income for H125 of £29.8m was up 4% versus H124 but very slightly down on H224, with the Q424 disposals having a larger impact.
• The credit loss allowance for H125 was a modest £0.2m, reflecting the progress made with asset management, providing a positive £0.5m swing versus H224.
• There was little movement in investment management fees, linked directly to average NAV, and other expenses remained well-controlled.
• The development interest earned on the development funding advanced has been on a downward trend over the past year as projects complete and become rental income-generating.

Target Healthcare REIT: Investing in modern care homes for an ageing population

A specialist investor meeting critical social needs

Target Healthcare REIT (THRL) is a UK-focused real estate investment trust specialising in high-quality, purpose-built care homes. Established in 2013, the company acquires, owns and leases modern elderly care facilities to carefully selected operators under long-term, inflation-linked leases. 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 stable, inflation-protected income and the potential for capital growth.

Unlike many traditional property investors, Target has developed deep sector expertise, allowing it to understand the specific operational requirements of successful care homes and to form strong, collaborative relationships with care providers. This specialist approach enables the company to generate sustainable returns while making a tangible positive social impact by improving the standard of elderly care accommodation in the UK.

Portfolio quality sets the standard in the UK care home sector

Target Healthcare REIT's portfolio currently comprises 94 assets let to 34 tenants, valued at £930.0m as of March 2025, reflecting continued stability in property yields. The portfolio boasts an impressive WAULT of 25.8 years, one of the longest in the REIT sector, providing exceptional income visibility for investors.

What truly differentiates Target's portfolio is its emphasis on premium, modern facilities. Approximately 84% of its homes have been purpose-built since 2010, compared to less than 20% across the broader sector. This focus on quality extends to environmental credentials, with 100% of the portfolio rated EPC A or B, ensuring compliance with energy efficiency standards well ahead of the 2030 regulatory timeline.

Perhaps most striking is that 99.8% of the portfolio's beds now feature en-suite wet rooms, compared to just 31% in the broader care sector (36% for listed peers). This crucial amenity provides dignity and independence for residents while significantly enhancing operational efficiency for operators. Each home offers generous living space, with an average of 48 square metres per resident, creating more comfortable environments that support better care outcomes.

Tenant profitability strengthens investment case

Target's focus on high-quality, purpose-built homes enables its tenants to operate more profitably. The company's investment thesis holds that best-in-class properties in areas with positive demand/supply characteristics and sustainable rental levels will always be attractive to existing or alternative tenants, supporting high occupancy rates and strong rent cover.

As evidence of this approach, the portfolio continues to outperform the MSCI UK Annual Healthcare Property Index, with a 2024 calendar year total return at the property level of 10.8% compared to the index's 5.4%. Even more impressive, the group's portfolio has ranked second out of the 12 index participants over the last 10 years, reflecting the attractive long-term returns available from disciplined investment in this high-grade care home real estate asset class.

Active management driving portfolio enhancements

During Q325, Target continued its active management approach with several value-enhancing initiatives. In addition to the wet room improvements mentioned earlier, the company made a capital payment of £1.5m to a tenant in exchange for an increase in contracted rent, where the performance of the home justified an increase in rental levels. This payment was rentalised at a yield consistent with the initial investment proposition.

Similarly, a performance payment of £0.9m was made to a tenant where contracted performance conditions set at the time of entering the initial lease had been met. This payment was also rentalised at a yield greater than the portfolio EPRA ‘topped-up’ net initial yield.

The company is also nearing resolution in a process to re-tenant an asset where rent was not being paid. Management reports strong interest from multiple operators and expects the asset to be re-tenanted at a similar, or improved, rental level following resolution. This has led to a short-term negative impact on rental income for Q325 and resulted in additional associated costs, which has fed through to EPRA earnings for the quarter. The company anticipates that this will be recovered in the next quarter once the matter is resolved.

Positioned for long-term growth

Target Healthcare REIT remains well-positioned to capitalise on the structural growth trends in the UK care home sector. The company's unwavering focus on modern, purpose-built homes with strong environmental credentials and premium amenities creates a compelling investment proposition that addresses both the growing demand for quality elderly care and the expectations of income-focused investors.

With property yields stabilising, consistent rental growth from inflation-linked leases and a supportive demographic backdrop, Target offers investors exposure to a defensive sector with strong long-term growth potential and an attractive income profile. The essential nature of the services provided in Target's properties, combined with their best-in-class specifications, underpins the sustainability of returns regardless of wider economic conditions.

Management remains focused on enhancing revenues, evaluating potential tenancy changes and improving overall portfolio quality, while maintaining awareness of upcoming debt facility renewals. The company has an established track record in achieving this, as the number of homes has grown 32% between 2019 and 2024 and the percentage within EPC bands A and B has increased from 80% to 100% during the same period. With its Q325 results demonstrating continued NAV growth, full dividend coverage and strong operational performance (see below for further details), Target Healthcare REIT continues to deliver on its promise of sustainable, inflation-protected income backed by essential social infrastructure.

A diversified portfolio with long-term income security

Of Target's 94 homes, 93 are operational, with one remaining development property nearing completion. The portfolio is externally valued at £930.0m with annualised contracted rents of £61.3m, reflecting an EPRA topped-up net initial yield of 6.23% as of March 2025. This yield has remained broadly stable since December 2024 (6.20%).

The company's Q325 results (for the quarter ending 31 March 2025) demonstrate the resilience of its business model, with EPRA NTA increasing 0.3% q-o-q to 113.0p per share, marking the ninth consecutive quarter of growth. This performance was driven primarily by inflation-linked rent reviews, with a like-for-like valuation increase of 0.3% across the portfolio.

The development property, which should soon reach practical completion, will add approximately £0.6m to contracted rent. Importantly, this future income is not yet included in the current figures, providing a clear pipeline for growth.

Target's tenant base remains well-diversified both geographically and operationally, reducing concentration risk. The company reported a strong rent collection rate of 97% for the quarter, while average rent cover on mature homes remained high at 1.9x for December 2024 (the most recent quarter for tenant data).

Inflation-linked income underpins dividend growth

The REIT's income stream benefits from inflation-linked rent reviews, with 99% of leases linked to the RPI, typically collared at 2% and capped at 4% pa. This structure has provided resilient income progression, with adjusted EPRA EPS for Q325 reaching 1.472p per share, fully covering the quarterly dividend of 1.471p.

The third interim dividend for the year ending 30 June 2025 has been declared at 1.471p. With an NAV total return of 1.6% for the quarter, the company continues to deliver on its promise of stable income combined with modest capital appreciation.

Market dynamics: Acute undersupply meets growing demand

The UK care home sector faces an acute and worsening supply-demand imbalance. The sector provides a substantially non-discretionary, essential service that is largely independent of the wider economy and driven by powerful demographic trends.

The number of people aged 85 or over is forecast (according to LaingBuisson’s Care Homes for Older People UK Market Report, 35th Edition) to double over the next 25 years to 3.4 million, with many having increasingly complex care needs that make it difficult for them to live at home. The Alzheimer's Society projects that the number of people in the UK living with some form of dementia will rise from approximately 1.1 million currently to 1.6 million by 2040.

Meanwhile, the number of care and nursing beds available has shown no material growth over the past 10 years, with newly developed and refurbished stock offset by the withdrawal of older, obsolete homes. Significant investment in the care home estate is required to meet existing and future needs and satisfy the expectations of residents and their families, as well as regulatory demands for better quality care.

Q325 results summary and capital management

Target Healthcare REIT's Q3 results (the quarter to 31 March 2025) demonstrated continued operational resilience and robust income growth, primarily driven by inflation-linked rent reviews and active asset management rather than yield compression. This consistent NAV progression reflects the portfolio's quality and the company's disciplined approach to property selection.

Adjusted EPRA EPS for the quarter was 1.472p, fully covering the quarterly dividend of 1.471p. The NAV total return for the quarter was 1.6%, comprising the 0.3% increase in EPRA NTA plus the dividend. The company continues to make progress with its remaining development site, which is forecast to reach practical completion in June 2025, adding a further £0.6m to contracted rents.

Balance sheet metrics remained conservative with the net loan-to-value ratio (LTV) at 22.9% (31 December 2024: 22.7%). The company had £84m of available capital at 31 March 2025, providing flexibility for selective acquisitions and organic growth opportunities. Interest costs remain well protected with 92% of drawn debt hedged to maturity and a weighted average cost of 3.94%, although management is proactively addressing the £99m of debt facilities maturing in November 2025, with positive engagement from lenders reported.

Capital management

At end-Q325, Target had committed debt facilities of £320m, of which £249m was drawn. Of the drawn debt, £150m is long-term (first maturity in 2032) and fixed rate. The all-in cost (as reported in the H125 results) is a low 3.32%, including amortisation of loan arrangement fees (3.18% interest only), well below current market borrowing rates. There are two shorter-term, floating rate facilities (£170m in aggregate) from which £99m was drawn at end-Q325, with the costs mostly (£80m) hedged until maturity.

Driven mostly by the long-term debt, and highlighting its attractiveness, the fair value of the debt significantly differs from the nominal value carried on the balance sheet. At the end of H125 the nominal value of debt was £248m while the fair value was £216m. In aggregate, the blended average cost of all drawn debt, including the amortisation of loan arrangement costs, was 3.94% at end-Q325, of which 92% was fixed/hedged. The average term to maturity for the drawn borrowing was 4.5 years at end-Q325.

The shorter-term facilities (as shown in Exhibit 6) both mature in November 2025, for which the refinancing process is well advanced. Indicative terms have been obtained from multiple lenders, including each of the incumbent lenders, for a range of facility types and durations. Based on the likely refinancing terms and current market and hedging rates, Target indicates that replacing the existing facilities and hedging on a like-for-like five-year basis would take the weighted average all-in cost of debt to approximately 4.4%. This implies an increase in the cost of the November maturities to around 6.1% from the existing 4.9%, indicative of Target benefitting from a more favourable lending margin compared with the existing facilities. Based on the debt facilities, the weighted average term to maturity would increase to almost seven years.

The indicative refinancing terms are consistent with previous expectations, and the relatively modest impact on annual earnings (approximately £1.1m or 0.18p per share) should not prevent Target from continuing to grow the dividend on a fully covered basis.

Each of the current loan facilities is secured against a discrete pool of assets with specific loan covenants. These include maximum loan-to-value ratios of 50–60% and minimum interest cover ratios of 200–225%. Target remains well within these requirements with high-quality assets providing significant headroom. The H125 net debt to EBITDA ratio remains very comfortable at 4.6x (compared to 4.8x in FY23 and 4.6x in FY24).

Adjusted for cash of £36.3m, net debt was approximately £213m at end-Q325 and the LTV was 22.9%.^[1] The group maintains access to a further £71m of committed, but undrawn, revolving credit facilities, which, if drawn, would carry an interest rate of SONIA plus 2.22%. Total capital available of £84m as at 31 March 2025, net of the group's capital commitments, including the group's remaining development asset, provides significant flexibility for opportunistic investments.

Valuation

Target shares have increased by 32% over the last 12 months, although with both DPS and NAV increasing, this represents only a partial re-rating. The targeted FY25 DPS of 5.884p represents a prospective yield of 5.8%, while the shares trade at a discount to NAV of 10%.

In the table below we summarise the performance and valuation of a group of real estate investment trusts that we consider to be Target’s closest peers from within the broad and diverse commercial property sector. The peer group is invested in the primary healthcare, supported housing and care home sectors.

Most recently, cash bids for Assura and for Care REIT have highlighted the undervaluation of the sector, although even adjusting for this, the group has outperformed the broad UK property sector over the past year. Over the same one-year period, the group has performed broadly in line with the broad UK equity market while the REIT sector has continued to underperform.

Adjusting for the recent takeover activity, Target has outperformed the peer group over one and three years.

In FY24, it successfully rebased its dividend to a level from which it is sustainably growing, and through active asset management has successfully resolved the issues that arose with a small number of tenants during and emerging from the pandemic. This has allowed investors to again focus on positive sector fundamentals and the quality of Target’s portfolio.

For consistency, the data below are presented on a trailing basis.

Target’s P/NAV is in line with the group, excluding SOHO, which is currently dealing with tenant issues, and its yield slightly below.

Governance and management

Independent board and specialist external manager

Target’s independent board of directors has been chaired by Alison Fyfe since December 2022, having joined the board in May 2020. She is an experienced property professional with more than 35 years’ experience in surveying, banking and property finance. She has also served on the boards of several companies in the property and debt finance sectors. The other directors of the company bring broad financial, commercial, property, fund management and healthcare experience. They are Dr Amanda Thompsell (appointed in February 2022), Richard Cotton (senior independent director, appointed in November 2022), Michael Brodtman (appointed January 2023) and Vince Niblett (chair of the audit committee, appointed in August 2021).

Full details of the board can be found on the company’s website.

Externally managed by Target Fund Managers

Target Fund Managers, the company’s investment manager, is a family-owned specialist manager investing exclusively in the elderly healthcare property sector, founded in 2010 by Chief Executive Kenneth MacKenzie. Target Fund Managers provides a growing team of professionals, the core of which includes co-founders John Flannelly (head of investment) and Andrew Brown (head of healthcare).

Collectively, the team has extensive experience spanning all aspects of the healthcare property sector, including operating, owning, investing in, developing and building healthcare businesses and healthcare property assets.

In January 2025, James MacKenzie joined Target Fund Managers as head of investor relations.

Gordon Bland, finance director of Target Fund managers for 12 years, left the company at the end of May. An interim finance director is in place and a search for a permanent replacement is well advanced.

Management fee structure

The investment management fee schedule has a tiered structure, with reduced rates at higher levels of NAV, allowing shareholders to benefit from the economies of scale that a larger portfolio provides. With end-Q325 net assets of £701m, the marginal investment management fee is 0.95%.