Impact Healthcare - Annual Results for the year ended 31 December 2022
28/03/2023 07:00
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RNS Number : 3827U Impact Healthcare REIT PLC 28 March 2023
28 March
2023
The information contained in this announcement is restricted and is not for
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member state of the European Economic Area (other than the Republic of Ireland
or the Netherlands and then only to professional investors in such
jurisdictions), Canada, Australia, Japan or the Republic of South Africa.
Impact Healthcare REIT plc
("Impact" or the "Company" or, together with its subsidiaries, the "Group")
FULL YEAR RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2022
Continuing to deliver a strong financial and operational performance,
benefiting from the resilience and growth of our portfolio and the annual
inflation-linked rental increases in 100% of our leases, underpinning our
fully covered dividend
Impact Healthcare REIT plc (ticker: IHR), the real estate investment trust
which gives investors exposure to a diversified portfolio of UK healthcare
real estate assets, in particular care homes, is pleased to announce its full
year results for the 12 months ended 31 December 2022.
Rupert Barclay, Chairman of Impact Healthcare REIT PLC, commented:
"We are continuing to deliver a strong financial and operational performance,
benefitting from our robust, long term and responsible business model and
resilient and defensive portfolio, with annual inflation-linked upward-only
rent reviews in 100% of our leases. This underpinned the delivery of our
dividend target of 6.54 pence per share, which was fully covered by our
earnings. We remain disciplined in investing capital, while managing the
business efficiently and maintaining a conservative balance sheet, helping to
ensure we continue to focus on growing the portfolio responsibly and
accretively and creating further value through asset management and by funding
development.
2023 has started with continued high levels of volatility in financial
markets. While healthcare is not immune, the essential nature of our tenants'
services - which translated into zero voids and 100% rent collection for 2022
as well as further rental growth - are expected to continue to help our asset
values to hold up much better than most other real estate sub-sectors. At the
same time, the returns available to us on acquisitions and asset management
projects remain above our cost of capital, and rising rents over the life of
our leases, all of which are long duration with inflation-linked rent reviews,
should support capital growth.
What we can be certain about is that care homes are critical social
infrastructure, which provides an essential service for vulnerable elderly
people. Demand for that service is driven by demography and acuity, and is not
directly related to developments in the wider economy or financial markets.
This gives care home operators a higher level of in-built resilience than
tenants in many other real estate sectors, demonstrated in part by their
ability to pass through inflation in the fees they charge for care. The
investments and acquisitions we've made and the inflation-linked rental growth
in 100% of our leases leave us well-positioned for future earnings growth and
a progressive dividend."
Financial highlights
Year ended 31 December 2022 Year ended 31 December 2021 Change
Dividends declared per share 6.54p 6.41p 2.0%
Profit before tax £16.89m £31.97m (47.2)%
Earnings per share ("EPS") 4.33p 9.41p (54.0)%
EPRA EPS* 8.37p 8.05p 4.0%
Adjusted EPS(7)* 7.11p 6.68p 6.4%
Adjusted earnings dividend cover 109% 104% 4.5% pts
Contracted rent roll(3) £43.1m £38.0m 13.6%
Property investments(4) £568.8m £496.9m 14.5%
Net asset values ("NAV") per share 110.17p 112.43p (2.0)%
Total accounting return* 3.78% 8.42% (4.6)% pts
Loan to value ("LTV") 23.9% 22.3% 1.6% pts
Cash £22.5m £13.3m 69.9%
Strong and resilient financial performance
· NAV at 31 December 2022 was £445.9 million (+13.1%) or 110.17
pence per share (-2.0%), (31 December 2021: £394.2 million; 112.43 pence per
share), reflecting change in market value of property portfolio, partially
offset by the benefit of inflation-linked rent reviews and stable operator
performance.
· Total accounting return for the year was 3.78%, comprising
dividends paid of 6.51 pence and NAV reduction of 2.26 pence per share (-2.0%)
in the period, compared with 9% per annum medium-term total accounting return
target(1).
· Property investments independently valued at £568.8 million(4)
as at 31 December 2022, up 14.3% (31 December 2021: £496.9 million), largely
reflecting acquisitions in the year, offset by the downward valuation
movements described below.
· Change in fair value of investment properties was £(14.5)
million (2021: £4.2 million gain), contributing to profit before tax of
£16.9 million (2021: £32.0 million).
Generating secure, attractive and progressive income
· Declared four quarterly dividends of 1.635 pence for the year,
meeting our dividend target of 6.54 pence per share, an increase of 2.0%
(2021: 6.41 pence per share).
· Dividends declared for the year were 128% covered by EPRA
earnings per share and 109% by adjusted earnings per share.
· EPS of 4.33 pence per share (2021: 9.41 pence per share) (basic
and diluted), reflecting increase in rental income and £14.5 million fair
value loss on the investment portfolio's value.
· Adjusted EPS up 6.4% to 7.11 pence per share (2021: 6.68 pence
per share), a result of increased revenue from rent reviews and use of
moderate leverage to further scale property investments.
· Targeting a dividend for the year to 31 December 2023 to increase
by 3.5% to 6.77 pence per share(1).
o The Company has a progressive dividend policy with a target to grow its
annual aggregate dividend in line with the inflation-linked rental uplifts
received by the Group under the terms of the rent review provisions contained
in the Group's leases in the prior financial year.
Driving the growth of our annual contracted rental income
· Annual contracted rent roll(3) grew by 13.6% to £43.1 million
(31 December 2021: £38.0 million), as a result of:
o Acquisition of 12 properties, contributing £4.0 million to contracted
annual rent.
o Rent reviews on 107 properties, adding £1.3 million to contracted annual
rent, representing a 3.5% increase on the associated portfolio.
o New capex commitments added a further £0.1 million to contracted annual
rent.
o Disposals as part of the Group's active portfolio management reduced
contracted rent by £0.3 million.
Strong, resilient and conservative balance sheet
· Drawn debt at year end was £142.3 million, with gross LTV of
23.9%.
· Significant headroom within £241.0 million of committed debt
facilities and our borrowing policy cap of 35%.
· As at 31 December 2022, weighted average term of debt facilities
(excluding options to extend) was 6.3 years.
· At the year end, 70% (£100 million) of drawn debt facilities
were hedged against rising interest rate costs, £75 million through long-term
fixed-rate facilities and £25 million through an interest rate cap at 1%
which expires in June 2023. An additional £50 million two-year interest rate
cap at 3% was taken out after the year end.
· Drawn debt at the date of this report is £187.3 million, of
which 80% is hedged against rising interest rates.
· Raised gross proceeds of £62.3 million from placing new ordinary
shares in February and July 2022.
Operational highlights
Year ended 31 December 2022 Year ended 31 December 2021 Change
Topped-up net initial yield ("NIY") 6.98% 6.71% 27 bps
Average NIY on acquisitions to date 7.4% 7.4% (8) bps
Rent containing inflation-linked uplifts 100% 100% -
Weighted average unexpired lease term ("WAULT") to first break 19.7 years 19.2 years +0.5 years
Portfolio let 100% 100% -
Rent cover(2) 1.80 1.91 (5.8)%
Rent collection 100% 100% -
Properties(4) 135 124 8.9%
Completed beds 6,842 6,141 11.4%
Tenants(5) 14 13 +1
Continuing to demonstrate the resilience of our robust and defensive business
model and portfolio
· Portfolio continues to have zero voids.
· Overall, tenants continue to perform well with average rent cover
for 2022 at 1.80 (2021: 1.91) (2).
· Occupancy continued to improve to 86.6%(6) by the year end, up
3.5 percentage points (31 December 2021: 83.1%), the highest it has been since
early 2020.
· All leases inflation-linked with upward-only rent reviews and
rental uplifts capped to avoid putting undue strain on tenants, helping to
ensure sustainable long-term income.
· Collected 100% of rent due for the year, with no changes to any
lease terms or payment schedules. Subsequent to the year end, rent collection
for Q1 2023 was 97% including 1% from rent deposits. The overdue rent (£0.4
million) is owed by a single tenant, with whom the Investment Manager is in
active discussions regarding rental payments.
· Acquired 12 properties, adding 764 beds for a total consideration
of £69.2 million.
· Welcomed a new tenant, Belmont, to the Group's operators, giving
us 14 tenants(5) at the year end.
· WAULT of 19.7 years at 31 December 2022 (31 December 2021: 19.2
years).
· EPRA 'topped up' net initial yield of 6.98% as at 31 December
2022 (31 December 2021: 6.71%), compared with average net initial yield of
acquisitions to date of 7.4%.
· Asset management remains a key focus. During the year we
completed:
o Internal refurbishment of Belmont House in Harrogate and upgrade of three
care homes in Northern Ireland.
o Comprehensive refurbishment and extension of Riverwell Beck in Carlisle
(formerly Blackwell Vale).
o Forward-funded development of 94-bed home in Hartlepool, with initial
yield on development costs of 7.8%.
o Phase one of the new link building at Fairview House and Fairview Court.
Phase two has started which encompasses an extensive refurbishment of Fairview
House and further improves its sustainability. This is due to be completed in
late 2023.
o In addition, we continue to grow a pipeline of future asset management
projects, with expected average yield on cost of 8%.
· Portfolio represents approximately 1.5% of a highly fragmented UK
market (with an estimated 465,000 beds for elderly care in total), adding
confidence to our ability to continuing to grow through very selective
accretive acquisitions, which will also further increase diversification.
Further enhancing our ESG agenda
· Developing our ESG strategy and accompanying targets;
· Produced a net zero strategy and delivery plan with a target date
of 2045 and interim milestones;
· Funded environmental improvements to four homes through asset
management projects and completed update of EPCs;
· Commissioned our first independent social impact report; and
· Voluntarily published our first report against the TCFD
framework.
Post-year end
· Targeting a dividend for the year to 31 December 2023 to increase
by 3.5% to 6.77 pence per share(1).
· Invested in a portfolio of six homes with 438 beds for
consideration of £56 million, 20% of which was paid in new shares issued at
116.62 pence per share.
· Purchased an interest rate option for £1.5 million, which caps
SONIA at 3% for two years on £50 million of our RCF debt.
· Sold one non-core asset for £1.25 million, in line with its
latest valuation.
· As announced on 7 December 2022, Rupert Barclay (Non-Executive
Chairman of the Company) will step down from the Board and resign as a
Director of the Company on 31 March 2023, when Simon Laffin (currently
Non-Executive Director and Chairman Designate of the Company) will become
Chairman.
· As part of our succession planning, Paul Craig will be stepping
down as a director at the forthcoming Annual General Meeting.
Notes
1 This is a target only and not a profit forecast. There can be no
assurance that the target will be met and it should not be taken as an
indicator of the Company's expected or actual results.
2 Includes the benefit of grant income, which largely ended in March
2022.
3 Contracted rent includes all post-tax income from investment in
properties, whether generated from rental income or post-tax interest income.
4 This relates to the property portfolio along with property portfolios
that have been invested in via loans to operators with an option for the Group
to acquire.
5 Including Croftwood and Minster, which are both part of the Minster
Care Group.
6 Excludes three turn-around assets that have not reached maturity.
7 Adjusted earnings per share reflects underlying cash earnings per
share in the period. The adjustments made to EPS in arriving at EPRA and
Adjusted EPS are set out in note 11 to the Financial Statements.
* EPRA EPS and all other EPRA alternative performance measures have
been calculated in line with EPRA best practices recommendation.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Impact Health Partners LLP Via H/Advisors Maitland
Mahesh Patel
Andrew Cowley
David Yaldron
Jefferies International Limited +44 20 7029 8000
Tom Yeadon tyeadon@jefferies.com
Ollie Nott onott@jefferies.com
Winterflood Securities Limited +44 20 3100 0000
Neil Langford neil.langford@winterflood.com
Joe Winkley joe.winkley@winterflood.com
H/Advisors Maitland (Communications advisor) +44 7747 113 930
James Benjamin impacthealth-maitland@h-advisors.global
Rachel Cohen
The Company's LEI is 213800AX3FHPMJL4IJ53.
Further information on Impact Healthcare REIT is available at
www.impactreit.uk (http://www.impactreit.uk/) *.
NOTES:
Impact Healthcare REIT plc acquires, renovates, extends and redevelops high
quality healthcare real estate assets in the UK and lets these assets on
long-term full repairing and insuring leases to high-quality established
healthcare operators which offer high-quality care, under leases which provide
the Company with attractive levels of rent cover.
The Company aims to provide shareholders with an attractive sustainable
return, principally in the form of quarterly income distributions and with the
potential for capital and income growth, through exposure to a diversified and
resilient portfolio of UK healthcare real estate assets, in particular care
homes for the elderly.
The Company has a progressive dividend policy with a target to grow its annual
aggregate dividend in line with the inflation-linked rental uplifts received
by the Group under the terms of the rent review provisions contained in the
Group's leases in the prior financial year.
On this basis, the Company is targeting a dividend for the year to 31 December
2023 to increase by 3.5% to 6.77 pence per share(1).
The Group's Ordinary Shares were admitted to trading on the main market of the
London Stock Exchange, premium segment, on 8 February 2019. The Company is a
constituent of the FTSE EPRA/NAREIT index.
Neither the content of the Company's website, nor the content on any website
accessible from hyperlinks on its website for any other website, is
incorporated into, or forms part of, this announcement nor, unless previously
published by means of a recognised information service, should any such
content be relied upon in reaching a decision as to whether or not to acquire,
continue to hold, or dispose of, securities in the Company.
* Neither the content of the Company's website, nor the content on any
website accessible from hyperlinks on its website or any other website, is
incorporated into, or forms part of, this announcement nor, unless previously
published by means of a Regulatory Information Service, should any such
content be relied upon in reaching a decision as to whether or not to acquire,
continue to hold, or dispose of, securities in the Company.
RESULTS PRESENTATION
A Company presentation for investors and analysts will take place at 08:00am
(GMT) today via a live webcast and conference call.
To access the live webcast, please register in advance here:
https://www.lsegissuerservices.com/spark/ImpactHealthcareREIT/events/87ad1a74-f3be-4e52-b7d0-244e7ea9a5f8
(https://www.lsegissuerservices.com/spark/ImpactHealthcareREIT/events/87ad1a74-f3be-4e52-b7d0-244e7ea9a5f8)
To access the live conference call, please register to receive unique dial-in
details here:
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The recording of the webcast results presentation will be available later in
the day via the Company's website:
https://www.impactreit.uk/investors/reporting-centre/presentations/
(https://www.impactreit.uk/investors/reporting-centre/presentations/)
WHO WE ARE
We're a specialist and responsible owner of care homes and other healthcare
properties across the UK. Elderly care is an essential service and demand for
it is high and continues to grow, as the UK's population gets older. We work
with our tenants so we can grow together and help them care for more people,
while continuing to improve our homes for their residents.
We take a long-term view and look to generate secure and growing income. This
has allowed us to provide our shareholders with attractive and rising
dividends and the potential for capital growth.
Our purpose
We invest in care homes, which are essential social infrastructure.
Our purpose is to form long-term partnerships with our tenants, through which
we own and invest in the buildings they lease from us in return for a
predictable and sustainable rent, enabling our tenants to concentrate on
providing high-quality care to their residents.
Our values
Our core values are to:
· focus on the long-term sustainability of our business;
· invest for lasting positive social impact;
· act openly and transparently with all our stakeholders;
· be a dependable partner who's trusted to deliver; and
· combine the strengths of a listed company with entrepreneurship.
Our business model
Our business model is to own and invest in a high-quality, resilient and
diversified portfolio of care homes. We choose tenants who seek to provide
high-quality care and work in long-term partnership with them to grow, create
value and deliver lasting social impact. In return, we receive predictable,
sustainable and inflation-linked rental income, which enables us to target a
progressive and covered dividend.
Our portfolio as at 31 December 2022
The care homes we own are primarily in the mid-market and have a good balance
of residents funded by local authorities, the NHS and private pay.
At 31 December 2022, the portfolio's key characteristics were as follows:
· 14 tenants(1)
· £568.8 million property investments
· 100% inflation-linked leases
· 135 properties
· 6,842 completed beds
· 19.7 years WAULT
· £43.1 million contracted rent roll
· £1.3 million per annum uplift in rent from 107 rent reviews
1 Includes Minster and Croftwood, which are both part of the Minster Care
Group.
Note: The information on this page includes forward-funded assets and
portfolios invested in via a loan to the operator where the Group has an
option to acquire.
CHAIRMAN'S STATEMENT
This year, the Group once again showed its resilience. We delivered good
progress on a wide range of fronts, as we continued to grow the portfolio and
created further value through asset management and by funding development.
We've also developed our ESG strategy and set goals that will focus our
efforts where we can make the most difference. As part of this, we've
increased our understanding of the social value that we enable and how we can
measure it.
We achieved all of this as we were buffeted by strengthening economic
headwinds during 2022, caused mainly by the spike in inflation. Our tenants
are in good shape overall, with one exception, which is discussed further in
the Investment Manager's report. Their occupancy and fees are rising and their
rent cover is above pre-pandemic levels. Demand for their services is strong
and based on needs, not wants, which means it isn't directly linked to the
broader economy. The urgent need for care beds to unblock space in the NHS
also shows our tenants' services are crucial to society. Our tenants'
performance during the year is discussed in more detail in the Investment
Manager's report.
Economic uncertainty peaked at the end of the third quarter, at the time of
the mini-budget, and led to a sharp rise in interest rates. This contributed
to falls in asset values in many real estate sectors in the second half of
2022. While healthcare was not immune, the essential nature of our tenants'
services - which translated into zero voids, 100% rent collection for 2022 and
further rental growth - helped our asset values to hold up much better than
most other real estate sub-sectors. At the same time, the returns available to
us on acquisitions remain above our cost of capital and rising rents over the
life of our leases, all of which are long duration with inflation-linked rent
reviews, should support capital growth.
This is my last report to you as Chairman, as I'll be stepping down on 31
March after six years on the board. We've made great progress during these six
years, growing from an initial portfolio of 56 assets and nearly 2,500 beds to
135(1) properties and 6,842 completed beds at the date of this report. We've
paid a highly attractive dividend from the outset, which we've grown
progressively while fully covering our payout by adjusted earnings since 2021.
This has contributed to a total shareholder return of 44.1%(2) since
inception. I'm confident that I'm handing on a business with good prospects
for delivering further growth and value creation for our shareholders and all
our wider stakeholders.
Successfully implementing the strategy
We continued to implement our growth strategy in 2022, investing £69.2
million in 12 care homes with 764 beds. We have since deployed a further £56
million, acquiring a further portfolio in January 2023. This transaction would
have completed in 2022 had we not decided to pause the process and review its
terms, following the UK's mini-Budget.
These acquisitions have further diversified the portfolio across the UK and
allowed some of our existing tenants to increase the number of homes they run
for us, providing the Group with a stronger covenant given the framework
agreement we have in place across all homes leased to each tenant. We were
also pleased to welcome our 14th tenant(3). We choose tenants who prioritise
high-quality care and share our vision of continuing to improve the assets.
We made good progress with asset management and committed £11.8 million to
projects in 2022. These projects increase rents and asset values for us, make
the homes a better business for our tenants, and a better place to live and
work for residents and staff. They also enhance their environmental
performance. We have a growing pipeline and expect to earn an average return
of 8% on capital projects through increased rents, with the potential for
capital growth in addition to this. Along with the Investment Manager, we're
also very focused on maintaining our properties to a high standard and pay
close attention to our tenants' repair and maintenance spend. The developments
we're funding also progressed, with Merlin Manor in Hartlepool now in
operation and increasing occupancy in line with our tenant's plan.
Robust and resilient financial performance
The net asset value ("NAV") at 31 December 2022 was £445.9 million or 110.17
pence per share (31 December 2021: NAV: £394.2 million; 112.43 pence per
share). This small decline in NAV per share was mainly the result of the
change in market value of the property portfolio, caused largely by the rise
in investment yields in response to the tripling of interest rates during the
year. This was partially offset by the benefits of rising rents and our asset
management and development projects.
Basic and diluted earnings per share ("EPS") was 4.33 pence (2021: 9.41
pence). EPRA EPS was 8.37 pence (2021: 8.05 pence per share) and Adjusted EPS
was 7.11 pence (2021: 6.68 pence).
More information on our financial performance can be found in the Investment
Manager's report.
Secure, attractive and inflation-linked dividends
We aim to grow our target dividend in line with rental growth in the year
before. All of our leases include inflation-linked rental growth, with floors
and caps typically between 2% and 4%. We want to ensure our assets are not
over-rented with leases that are sustainable and put these caps in place to
ensure the rent does not become onerous for our tenants, as a result of spikes
in inflation of the kind we're currently experiencing.
For 2022, we set a target total dividend of 6.54 pence per share, a 2.0%
increase over 2021. We achieved this by paying four quarterly dividends of
1.635 pence each. The total dividend was 128% covered by EPRA EPS and 109% by
Adjusted EPS. For 2023, our target dividend is 6.77 pence per share(4), an
increase of 3.53%.
Our total accounting return for the year was 3.78%, compared with our
medium-term total accounting return target, which is an average of 9.0% a
year(4). This reflects the reduction in market value of the assets, as
discussed above.
Strong and conservative balance sheet
We've always taken a prudent approach to managing our balance sheet, using
debt to improve returns while keeping our leverage modest to help manage risk.
We completed several significant funding activities in the year. We raised
£62.3 million of new equity through share placings; issued the remaining £38
million of our long-term institutional loan notes at a fixed rate of 3.0%;
extended our revolving credit facility ("RCF") with HSBC by £25 million to
£75 million; cancelled the £15 million RCF with Metro Bank; and renegotiated
our RCF with Virgin Money, which increased the facility from £25 million to
£50 million, extended its term to 2029 and reduced its cost. Since the year
end, we've also purchased an interest rate option at a cost of £1.5 million,
which caps SONIA at 3.0% for two years on £50 million of our RCF debt.
We now have £241 million of committed debt facilities. Our drawn debt at the
year end was £142.3 million, giving us a gross LTV of 23.9%, and we had cash
of £22.5 million. Drawn debt at the date of this report is £187.3 million,
of which 80% is hedged against rising interest rates.
Enhancing sustainability
This year the Investment Manager has done considerable work on developing our
ESG strategy, which the board approved after the year end. As part of this, we
have improved our understanding of the social value we add and how to measure
it, as well as determining the actions we can take on our pathway to net zero.
Strong governance
We're delighted that Simon Laffin joined the board as a non-executive director
on 1 January 2023 and will become Chairman when I step down. He has more than
30 years' experience as a director, including in real estate, with his past
roles including chairing Assura plc. As part of our succession planning, Paul
Craig will be stepping down as a director at the forthcoming Annual General
Meeting. On behalf of the board, I want to thank him for his important
contribution to our work over nearly six years.
We ran an internal evaluation of the board and its committees during the year,
which produced positive results and identified some areas where we can further
improve.
Specialist, experienced and disciplined Investment Manager
We continue to benefit from the diligence and expertise of our Investment
Manager, Impact Health Partners LLP. The Investment Manager effectively
implements our strategy, and its close relationship with and oversight of our
tenants, alongside its knowledge of the sector, has helped us to navigate the
challenges of the past few years. We're pleased to see that the Investment
Manager has continued to grow its team and capability, to support our goals.
Post-balance sheet events
In addition to taking out the interest rate cap discussed above, since the end
of the year we've invested £56 million in a portfolio of six care homes with
438 beds to be operated by our tenant, Welford Healthcare. We paid 80% of the
consideration in cash and the remainder through issuing 9.6 million new
shares.
Well positioned to deliver sustainable value
We're a long-term responsible business and our resilient and defensive
portfolio provides essential homes for the care of vulnerable older people
across the UK. Our business model remains robust and we'll continue to be
disciplined in investing capital, while managing the business efficiently. The
acquisitions we've made and the indexation in our leases should support
further earnings growth in 2023 and a rising dividend.
Rupert Barclay Chairman
27 March 2023
1 This relates to the property portfolio along with property portfolios
that have been invested in via loans to operators with an option for the Group
to acquire.
2 From inception to 31 December 2022.
3 Including Croftwood and Minster, which are both part of the Minster
Care Group.
4 This is a target only and not a profit forecast. There can be no
assurance that the target will be met and it should not be taken as an
indicator of the Company's expected or actual results.
WHY INVEST?
We've created a compelling business, which is resilient and has real
opportunities for growth, creating sustainable value for our shareholders and
wider stakeholders.
Over the following pages, we set out how:
· We're in a large and growing market. The population is getting
older and as people live longer, their care needs become more complex. The
need for care isn't affected by the wider economy and demand for care home
beds exceeds supply.
· We designed our business model to produce attractive and
sustainable returns, while we carefully manage risk. These returns are
underpinned by our income from long-term inflation-linked leases that have
helped deliver covered dividends for investors.
· The Investment Manager has an experienced and strategic
management team, which gives us a competitive advantage in our market.
· We generate strong cash flows, we're well financed and we're
growing our dividend. The Company also carefully considers dividend cover and
its REIT requirements when deciding the dividend quantum.
· We're adding value and improving environmental and social
performance through active management. We balance our portfolio between core
assets and value-add, and invest in our assets to increase returns, enhance
environmental performance and make our homes even more appealing to residents
and their carers.
Together, these strengths mean we're well positioned for further growth and
value creation. We have around 1.5% of the market by number of beds, so we can
continue to grow by taking market share. We've got a multi-year pipeline of
asset management and development opportunities, and we'll continue our
disciplined approach to adding homes to the portfolio.
For more information on our prospects, see the Chairman's statement.
A LARGE AND GROWING MARKET
Growing demand for elderly care
There were just over six million people aged over 75 living in the United
Kingdom in 2022. That number is forecast almost to double over the next 50
years, to just under 12 million. The over-85s are the fastest growing segment
of the UK population.
To put these numbers into context, when the NHS was founded in 1948 one in two
people died before the age of 65. This figure is now one in eight. By the time
they reach 65, women can expect to live on average for another 20 years, and
men for another 18 years.
That's the good news. The less good news is that the majority of people will
spend the last 15 years of their life with some ill health. Around 10% of
people over 80 have a level of care needs which make it difficult for them to
continue to live at home.
Falling supply
As the population has aged, the number of available care beds has been
stagnant. This means that the total number of beds in both nursing and
residential care homes for older people declined from 11.3 per 100 people aged
over 75 in 2012, to 9.4 in 2021 - a 17% decrease.
This reduction in supply accelerated during the pandemic. Data from the CQC
show that between March 2021 and August 2022, the number of registered care
homes in England fell by 2.4%.
The failure of supply to match rising demand reflects several factors
including a shift in social care policy towards home care. However, it might
also reflect an element of rationing in the care system, as many elderly
people struggle to access the care they need. Looking at longer-term trends,
an estimated 25% of over-85s lived in elderly residential accommodation in
1996. By 2017, this had fallen to 15%.
More people are living with dementia
Alzheimer's Research UK estimates that the number of people in the UK living
with dementia will increase from more than 900,000 today to 1.5 million by
2050.
Dementia is a complex condition and treatment isn't always available from the
NHS. Today, just under 40% of people who've been diagnosed with the condition
are living in care homes, which now have 378,000 beds registered to provide
care for people with some form of dementia. There could be a substantial rise
in demand for such specialist capacity over the coming decades.
Investor interest in healthcare
CBRE estimates that £25 billion has been invested in UK healthcare real
estate over the past decade, of which 40% has been invested in care homes.
Annual investment volumes have been volatile, with sharp contractions in 2016,
the year of the Brexit referendum, and 2020, the first year of the pandemic.
In 2022, investment in the sector was £1.7 billion, a relatively high number
in a year of great economic uncertainty.
The nature of the healthcare sector tends to attract long-term, index-linked
investment. Turnover of asset ownership in the sector is therefore low, as
investors generally have a buy-and-hold strategy. However, there has been a
change over time in who the investors are. In 2019, over half the investment
came from non-UK REITs. In 2022, over half the investment was from UK-based
specialist healthcare investors, who are best placed to find value in a very
fragmented market. Private equity has been very active in the healthcare space
in the past but has pulled back as interest rates have risen.
Government policy
To put it mildly, government policy for adult social care is a complicated
field. There is no national government budget for adult social care in
England. Instead, publicly funded social care is mostly financed through local
government revenue. This is made up of central government funding from the
local government finance settlement, combined with locally raised revenue from
business rates, council tax and income from fees.
This complex funding picture was further complicated by several policy changes
during 2022. At the end of 2021, the then government announced ambitious
reforms to adult social care, with a series of White Papers. They set out
reforms aimed at increasing government funding for the sector, while capping
the costs individuals would have to pay before government funding became
available. The additional costs were to be funded by a 1.25% levy on National
Insurance, which came into effect in April 2022.
In the mini-budget in September 2022, the Truss government announced that this
levy would be scrapped in November and that the reforms would be funded from
general taxation. Then, in the Autumn Statement in November 2022, Jeremy Hunt,
the new Chancellor, announced he was pushing back the start date for
implementing the structural reforms from October 2023 to October 2025.
While this delay was disappointing, the reason Mr Hunt gave for delaying the
reforms was to avoid imposing additional costs on the government and care
providers at a time when the government's priority is to create more capacity.
In his Autumn Statement he said that the government would make available up to
an extra £2.8 billion in 2023/24, and £4.7 billion in 2024/25 to help
support adult social care and hospital discharge.
There were two government initiatives that gained less attention during 2022,
but may have important longer-term consequences for the sector. First, in
England the government carried out a major data collection exercise from care
providers to assess the Fair Cost of Care (FCOC). The aim was to ensure that
care providers can meet local authority demand at a price that covers their
costs and is sustainable for the future. The data was collected by the end of
October 2022 and has been a significant input into large fee increases
announced by some local authorities since then, as it showed they've been
paying less than the FCOC.
Second, new integrated care systems (ICSs) in England formally took up their
responsibilities in July 2022. ICSs are partnerships that bring together NHS
organisations and local authorities, to take collective responsibility for
planning services and improving health across geographical areas. There are 42
ICSs, each covering between 500,000 and three million people. The changes have
been described as the biggest legislative overhaul of the NHS in a decade.
If successful, these reforms will help to break down the silos between care
for the elderly provided by the NHS, and care funded by local authorities.
This should improve outcomes for the vulnerable people who need care and will
make the NHS an increasingly important counterparty for elderly care providers
who can deliver what the NHS needs - complex, higher acuity care.
The impact of inflation on care providers
After two years at the frontline of managing the impact of the COVID-19
pandemic on the people most at risk from the virus, care providers had been
hoping for a calmer, more normal 2022. Instead they found themselves in a
perfect inflationary storm, with utility, food and, above all, staff costs
rising very rapidly, as general inflation peaked in double digits in October
2022.
The one cost which our tenants had capped was their rent: 90% of our rent
increases are capped at 4% per annum, and 8% are capped at 5% (the remaining
2% are uncapped). We put these caps in place to make sure that our rents
continue to be affordable over the long term if inflation did spike, as it now
sadly has.
Two other things have helped to shelter care providers against these
inflationary headwinds. First, their occupancy has been steadily rebuilding
from the lows caused by the pandemic. Second, they provide an essential social
service, demand for which is non-discretionary. This means they can increase
their prices when they're forced to do so.
Different firms do annual surveys of fees charged by care providers. In 2022,
all pointed in the same direction - substantial increases on 2021. The survey
by Carterwood, for example, found that private fees for the year beginning
April 2022 were up 9.6% for nursing care and 7.3% for residential care
(compared to 6.1% and 6.6% in 2021), while local authority fees were up 7.4%
and 6.9% (2021: 2.8% and 3.0% respectively). Our tenants performed slightly
more strongly than these benchmark numbers (see the Investment Manager's
report).
As ever, a note of caution is worthwhile. An increase to baseline fee rates
does not necessarily translate into an increase in the fees received by
operators, if they've already negotiated an uplift to those floor fees, as you
would expect a successful operator to have done. And, paradoxically, a cut in
baseline fees can be good news for successful operators with strong local
reputations. Some local authorities - for example, Hampshire and Oxfordshire -
announced cuts in their baseline fees in 2022 as they moved away from a
standard model of a set fee, to reviewing fees on a case-by-case basis,
greatly expanding the range of fees offered.
With that proviso, we expect the fee increases that come into effect in April
2023 to be in line with 2022, or slightly higher, which will be helpful to our
tenants as inflation comes down.
This confirms a long-term pattern, that care providers can increase their fees
in line with inflation. Over the 24 years ending in April 2022, fees for
nursing care have risen by an average of 3.6% per annum, and for residential
care by an average of 3.5% per annum. RPI over that time averaged 2.8% per
annum.
GENERATING ATTRACTIVE RETURNS
Our business model
Our business model allows us to generate attractive returns with managed risk.
We consider risk from many different angles, from ensuring our balance sheet
stays strong, to the way we carefully pick tenants and make sure they're
performing well, to our focus on sustainability and creating a positive social
impact. Our external Investment Manager is essential to our success and its
strengths give us an edge in our market.
How our business model supports our purpose
Each stage of our process links to one or more aspects of our purpose:
1. Build relationships
We build strong relationships with tenants who seek to provide high-quality
care and who we can work with long term. We look to add new tenants over time,
which reduces risk by diversifying our business and making us more resilient,
and gives us more scope to grow our business responsibly.
Link to purpose:
· Long-term partnerships with tenants
2. Identify assets
We identify attractive assets to invest in, often in partnership with existing
tenants, and frequently acquired from owner-operators who are exiting the
market. Our disciplined approach results in attractive net initial yields and
we often buy at less than the cost of replacing the asset, which helps create
a barrier to entry for new competitors. See our investment strategy for more
information.
Link to purpose:
· Long-term partnerships with tenants
· Owning buildings
3. Appraise purchases
We're very selective in what we buy and rigorously check every aspect of the
homes, including their environmental sustainability and the market within
which it operates. This allows us to develop a plan for the improvements we'll
make, once we own them.
Link to purpose:
· Owning and investing in buildings
4. Agree leases
Our leases are typically 25 years or more, so we're careful that they protect
everyone's long-term interests. That means setting rents so they're well
covered by tenants' profits from day one, linking rents to inflation so they
rise over time but stay affordable, and requiring tenants to spend a minimum
amount every year on repairs and maintenance. All our new leases also include
"green" clauses, to help us work with tenants on our ESG objectives.
Link to purpose:
· Long-term partnerships with tenants
· Owning and investing in buildings
· Predictable and sustainable rent
5. Work with tenants to improve our assets
Our asset management projects include upgrading and extending our homes, so
they're even better places to live and can provide care for more people,
including those living with dementia. We also look to work with tenants to
develop new homes in areas with strong demand. These activities require tenant
consent in accordance with the long leases and will increase our rent, our
tenants' revenues and the value of our homes, and make them more sustainable.
Link to purpose:
· Long-term partnerships with tenants
· Owning and investing in buildings
6. Optimise portfolio
We regularly review our assets to look for those where it makes sense to sell,
so we can reinvest the proceeds and create more value. We also put in place
appropriate levels of debt to enhance shareholder returns in line with our
leverage policy.
Link to purpose:
· Owning and investing in buildings
· Our focus on quality
Our focus on quality
Quality is at the heart of our business model. By following the process set
out above, we maintain the:
· Quality of our buildings, ensuring they're well maintained, that
we've identified ways to improve them through asset management, and that
they're fit for purpose for our tenants and their residents for years to come.
· Quality of care, since our income depends on our tenants
providing care that meets residents' needs and attracts new residents. The
Investment Manager regularly meets our tenants as well as visiting the homes,
reviewing what customers are saying and considering reports from regulators.
If they see any ongoing issues with care, they'll seek independent support to
help resolve them, where appropriate.
· Quality of cash flows, which together with our prudent approach
to investment ensures we maintain a healthy balance sheet.
The value we create
Our high-quality business generates attractive and sustainable value for our
stakeholders.
· Tenants: Tenants can grow their business alongside ours, in a
long-term relationship with affordable rents which benefits both of us.
· Residents: Residents benefit from security, stability and
high-quality care, with a landlord who's willing to invest in their home.
· Lenders: Our lenders can provide long-term finance to us on
attractive terms, knowing we have a secure and resilient business, with strong
cash flows.
· Shareholders: Our model is to deliver predictable and rising
revenue, so that we can pay a progressive, fully covered dividend. There is
also the potential for capital growth, which supports an attractive total
return.
AN EXPERIENCED AND STRATEGIC MANAGEMENT TEAM
Impact Health Partners LLP is our Investment Manager. Its role includes
sourcing investments for us, closely monitoring the progress of our homes and
asset management.
Our portfolio and Investment Manager are our main sources of advantage in our
market. We benefit significantly from the team's skills and experience, in
particular their:
1. Deep knowledge of the sector, which allows us to buy the right
assets, choose the right tenants and add value by actively managing our
assets.
2. Positive relationships with care home owners who might want to sell
their assets, the agents they work with and with potential new tenants, all of
which help our business to grow and diversify. Great relationships can help us
to buy assets off-market or beat the competition even when we're not the
highest bidder.
3. Asset management and development skills, so we can identify how to
improve a care home before we buy it, successfully complete each project and
work with our tenants to develop new homes.
4. Understanding of how care businesses work, which allows us to form
supportive partnerships with our tenants.
Mahesh Patel ACA
Managing Partner
Mahesh is a qualified accountant who has over 35 years' experience in
healthcare-related industries and assets, including positions in finance.
Prior to 2006, he built up and then sold three healthcare-related businesses.
Andrew Cowley MA (Oxon)
Managing Partner
Andrew is an experienced fund manager, working in infrastructure and private
equity investment since 2000. He was previously a senior managing director at
Macquarie and deputy chief executive of the listed Macquarie Airports.
David Yaldron FCA
Finance Director
David is a chartered accountant with more than 25 years' experience, having
held senior financial roles in real estate and investment companies. He was
previously a senior director at Grosvenor, Britain & Ireland.
Martin Robb MRICS
Managing Director
Killian Currey-Lewis CA
Investment Director
Simon Gould MRICS
Development Director
Sam Josland CFA, ACA
Investment Manager
Charlotte Finch
Investment Manager
Sophie Shrestha ACCA
Finance Manager
Alison Hayward
Office Manager
OUR FOCUS ON QUALITY
Quality is at the heart of our business model. Our board and Investment
Manager ensure we maintain this focus, as outlined below:
Delivering quality in practice
Quality of our buildings Ensuring our buildings are well maintained is the responsibility of our
tenants.
We are constantly reviewing the quality and performance of our homes in
partnership with our tenants. Our asset management strategy for each home To ensure this is properly executed we will seek to visit our homes both
identifies opportunities to invest further to improve the quality of directly and indirectly. In addition, we review and discuss with our tenants
environment for residents and staff, for example the addition of specialist their spend on repairs and maintenance across our portfolio.
beds for dementia and increasing the proportion of ensuite bedrooms. We also
identify opportunities for improving the environmental performance of the Directly via the Investment Manager, who will routinely visit our properties
building. to inspect and understand the operations with our tenants, to check the
maintenance and progress on asset management projects at the homes and discuss
opportunities for improvements. In 2022, the Investment Manager undertook 63
visits to both individual and portfolios of our homes.
Directly via the board. A selection of board members look to engage directly
with our tenants and visit some of the homes across the portfolio to
understand the operations, how the tenant is performing and to help understand
the challenges and opportunities across the portfolio. In 2022, our board
members visited three homes.
Indirectly through our valuer, surveyors, environmental specialists and
independent social value reviewers, who support the Investment Manager in
understanding the quality of our buildings and collectively undertook 197 home
inspections in the year.
Quality of care Delivering the service of care is undertaken by our tenants; the Investment
Manager monitors occupancy across our homes weekly, receive notifications on
The security of our rental income depends on tenants maintaining a high care inspections as they are produced and reviews each tenant's financial
standard of care, so the homes remain relevant and meet the needs of performance quarterly either via conference calls or meetings in our tenants'
residents. The Investment Manager works closely with our tenant partners to offices.
identify any areas of improvement and regularly reviews customer feedback and
reports from regulators. Regular meetings and visits to homes help If a home is rated inadequate or requires improvement, the Investment Manager
collaborative and proactive work with tenants to ensure quality of care is will review the reports in detail, have a conversation with the tenant's
maintained. Where appropriate, we will seek independent support to resolve any operations director to understand the issues identified, the remedial actions
ongoing issues. being undertaken and whether there are any broader concerns with the
operations that the tenant is looking to resolve.
During 2022, 28 of our homes were inspected by the regulator. Our Investment
Manager also undertook 44 meetings with our tenants, reviewing their overall
financial and operational performance. Outside of these meetings, our
Investment Management team speaks regularly with our tenants on a variety of
topics including occupancy, agency usage, asset management, environmental
performance and quality assurance.
Quality of cash flows The quality of our cash flows starts with our tenants as outlined above. We
have a disciplined approach to ensuring we are able to target delivery of a
We regularly review our tenants' operational and financial performance. This cash covered dividend and the headroom to manage downside scenarios as
helps us understand the overall performance of each home and help optimise detailed in our going concern and viability statements.
performance, enabling tenants to maintain a sustainable EBTIDA margin and
achieve resilient rent cover. Disciplined capital allocation has led to Our Investment Manager also regularly engages with our debt providers,
attractive net initial yields on acquisitions. Careful cost control enables us providing quarterly financial information on covenant compliance and reporting
to benefit from economies of scale as we grow, as many of our costs are fixed on the performance of the tenants and homes within their security pool. In
and some variable costs step down as our asset value rises. This control, and 2022, we successfully enlarged our debt facility with HSBC and enlarged and
our conservative financial approach, helps to maximise cash we can distribute extended our debt facility with Virgin Money. The Group's Investment Manager
to shareholders. undertook site visits with both banks as part of this process, enabling them
to better understand the homes and activities of our tenants.
Shortly after the year end, we put in place an additional £50 million
interest rate cap to help manage our cash flows and cash security across the
Group.
STRONG CASH GENERATION SUPPORTING OUR PROGRESSIVE DIVIDEND POLICY
Dividends fully covered by adjusted earnings since 2021, supporting attractive
total accounting returns
We've designed our business to produce growing, long-term income. All of our
leases include rent increases linked to inflation, typically with a minimum
increase of 1% or 2% and a maximum of 4% or 5%, so rents stay affordable for
our tenants.
This allows us to have a progressive dividend policy, which has grown our
dividend by 9% since 2018 to 6.54 pence per share in 2022. This has been fully
covered by EPRA earnings since 2018 and by adjusted earnings, which is the
Group's benchmark for cash earnings, since 2021.
The Company has announced its target dividend for 2023 of 6.77 pence per
share(1), an increase of 3.53%. As a REIT, we're required to pay out at least
90% of our profits as dividends each year.
The dividend is a key part of our total accounting return, which includes the
movement in our net asset value each year. Our target is to achieve an average
return of 9% a year over the medium term(1).
High-quality cash generation
As outlined in our business model, we're always focused on the quality of our
cash flows.
Our cash flows rely on having tenants who perform well and pay their rent on
time. We regularly review the performance of our tenants and each home, so we
understand how they're doing and can offer practical support if needed. This
helps our tenants to maintain their profit margins, so their rent payments are
well covered. We also carefully control our own costs and benefit from
economies of scale as we grow, as many of our costs are fixed and some step
down as our asset value rises.
The result has been a rapid increase in our operating cash flows, as we've
grown the portfolio.
A prudently financed business
As a property business, prudently using a modest level of debt is a key part
of our business model. It gives us additional money to invest in assets, which
increases returns and reduces risk by diversifying our portfolio. At the same
time, we have to balance these upsides with the need to ensure we're prudently
and sustainably financed, so we're flexible and resilient. We have limited our
leverage to 35% and are seeking to ensure that 75% of our drawn debt is fixed
or hedged. Since the year end we have put in place a further £50 million of
hedging to align with our hedging policy and 80% of our current drawn debt of
£150 million is now hedged.
We carefully manage the maturity of our debt, with the capital structure
including a long-term private placement that runs to 2035, and protect the
business from rising interest rates through a suitable amount of fixed-rate
and capped debt.
See our financing strategy for more information.
ADDING VALUE THROUGH ASSET MANAGEMENT AND DEVELOPMENT
Capital investment is a key part of our value-creation strategy and we have
numerous projects at different stages across the portfolio. Many of the
projects add new beds while making the homes even better places to live,
improving environmental performance and helping the homes to compete better in
their markets.
Investing in asset management is a great way to improve our properties,
provide better facilities to our residents, whilst increasing returns. We
typically target an 8% return on each project through increased rents, with
the potential for capital growth in addition to this. In 2022, we invested
£11.8 million in asset management projects and over the next two years, we've
identified a further £16 million of projects. The main initiatives are shown
below:
Asset Project description Capital investment Expected completion
Mavern House Extension and additional ensuites £2.0m Q4 23
Yew Tree Care Centre New 25 beds £1.5m Q4 23
Wombwell Hall Reconfiguration and upgrading £4.0m Q4 24
Amberley Extension and internal reconfiguration £2.5m Q2 24
Craigend Extension and internal reconfiguration £1.2m Q2 24
Elm House Extension and internal reconfiguration £1.8m Q1 24
Barham Extension and internal reconfiguration £3.0m Q3 24
For more information, see our portfolio management, asset management and
development strategies and the Investment Manager's report.
The graphic on the right shows a selection of the many ways that we can
improve a home through asset management, making the building a better place to
live and work and improving its environmental performance.
PORTFOLIO
For the year ended 31 December 2022
Since our IPO in 2017, we've deliberately constructed a portfolio that's
diversified by location, tenant and funding of our tenants' residents, which
is well diversified across local authorities, the NHS and private pay. This
helps to make us more resilient and means we earn a predictable income from
our assets.
Our tenants
Our tenants are established healthcare providers. They seek to provide great
care and have the ambition to grow their businesses alongside ours.
Region Number of properties Beds % of portfolio market value
East Midlands 8 405 6.7%
East of England 9 627 11.1%
North East 12 767 9.4%
North West 33 1,348 15.6%
Northern Ireland 5 340 3.8%
Scotland 32 1,805 22.8%
South East 4 318 6.6%
South West 10 537 10.4%
Wales 2 105 0.8%
West Midlands 8 422 5.5%
Yorkshire & The Humber 12 742 7.3%
Note: The information on this page includes forward-funded assets and
portfolios invested in via a loan to operator where the Group has an option to
acquire.
Building strong partnerships - Welford Healthcare
· During the year we continued to build on and strengthen our
partnerships with our tenants.
· Growth with existing tenants helps to de-risk the portfolio, by
enabling them to develop larger and more resilient businesses, diversified by
the number of homes.
· In H1 2022 we completed the purchase of three homes in south-west
England and two homes in the East Midlands in partnership with Welford
Healthcare. In both cases, the existing owner operator was exiting the
business. Working with Welford, we acquired the freehold interests and
assigned the operations to Welford with new long-term leases that reflected
attractive value for both of us.
· These acquisitions took our total number of homes with them to
12. This equates to 12.6% of our annual rental income.
· All five homes are well established, with excellent local
reputations, and have CQC ratings of either Good or Outstanding and benefit
from favourable underlying demographics in the local catchment areas with
attractive demand/supply fundamentals.
· EPC ratings are B on two homes and C on three, with a clear
pathway to convert them to EPC B, in line with our ESG strategy.
· Building scale with operators provides more secure returns with
enhanced diversity and a stable platform for undertaking asset management
opportunities. We are on-site with Welford at Fairview House in Bristol and
have a further two asset management projects in our immediate pipeline.
"We welcome the opportunity to grow our partnership with Impact, who have
shown themselves to be a supportive and pro-active partner to us since our
first transaction in 2018." Peter Madden, Welford Healthcare
2022 acquisition highlights
Capital committed
£36.1m
Number of registered beds
294
Additional rent
£2.4m
Total number of beds with Welford
649
Post-year end
In January 2023, the Group invested a further £56 million, in partnership
with Welford, in six care homes across Shropshire and Cheshire, adding an
additional 438 predominantly ensuite beds to the Group's portfolio. Following
this, Welford now comprises c.20% of our income. This acquisition was funded
80% by cash, with the remainder in shares priced at 116.62 pence per share.
OBJECTIVES AND STRATEGY
Our objectives
Our targets are to deliver:
· a progressive dividend, with a target for 2023 of 6.77 pence per
share(1); and
· an average total accounting return of 9.0% per annum(1), with the
capital growth element mainly coming from rising rents and our asset
management projects, rather than relying on increases in market values.
1 This is a target only and not a profit forecast. There can be no
assurance that the target will be met and it should not be taken as an
indicator of the Company's expected or actual results.
Our strategy
To achieve our objectives, we:
· buy the right assets that enhance our portfolio through improved
geographic and tenant diversity and are accretive to shareholder returns, by
implementing our investment strategy;
· effectively manage the portfolio and individual assets, by
implementing our portfolio management and asset management strategies; and
· ensure we're appropriately financed, by implementing our
financing strategy.
Our progress in 2022
Investment strategy During 2022, we:
· Our investment policy allows us to invest in different types of · invested in 12 care homes with 764 beds, for a total of £69.2
healthcare properties. The market conditions mean care homes currently offer million;
us the best opportunities.
· further diversified the portfolio geographically and strengthened
· We manage risk by having a portfolio that's well diversified by existing tenants by increasing the number of homes they run; and
location and tenant, by adding new tenants over time and by increasing the
number of homes our tenants run. · added one new tenant, to give us 14 tenants(1) at the year end.
· We mainly buy portfolios, which can include other types of Since the end of the year, we've invested £56 million in a portfolio of six
healthcare properties where this gives us a strategic opportunity to add value care homes with 438 beds, leased to an existing tenant.
or we intend to sell them on when the time is right.
Portfolio management strategy In October 2022, we sold a non-core care home with 68 beds for £2.65 million,
4% above its valuation at 30 June 2022.
· We class each of our assets as core, value-add or non-core.
Since the year end, we sold a further non-core home with 49 beds for £1.25
· We make sure we have the right balance between these categories million, in line with its valuation at 31 December 2022.
and that we identify the assets where we can add value through asset
management, or which are candidates for sale.
Asset management and development strategy During 2022, we committed £11.8 million to asset management projects, which
will earn an average return of 8% through higher rents.
· Investing to add value to our assets and to enhance their social
impact and sustainability is a priority for us. Notable projects we completed, in partnership with our tenants, were:
· We also provide funding to develop new homes, once we've agreed a · completing our project at Riverwell Beck (previously called
lease with the tenant who'll run it. This gives us better returns than buying Blackwell Vale);
existing homes and adds new and highly sustainable assets to the portfolio.
· completing phase one of our project at Fairview and starting
phase two; and
· refurbishments of Belmont House, Harrogate, and three homes in
Northern Ireland.
We also reached practical completion on the 94-bed care home development we
funded in Hartlepool, which is being run by Prestige.
Financing strategy We completed several significant funding initiatives in 2022. These were:
· We fund the business through equity and debt. When we issue new · raising £62.3 million of new equity, through share placings in
shares, we aim to invest the cash as quickly as possible in assets that February and July;
generate income for us, to minimise the impact on our earnings per share of
holding cash. · issuing the remaining £38 million of the long-term institutional
notes we arranged in 2021;
· Our policy is to have a maximum Group LTV of 35% at the time we
draw down the debt. · extending our RCF with HSBC by £25 million and cancelling the
£15 million RCF with Metro Bank; and
· We aim to hedge at least 75% of our drawn debt against rising
interest rates. · renegotiating our RCF with Virgin Money, increasing it from £25
million to £50 million, extending the term to 2029 and reducing its cost.
Since the year end, we have taken out a £50 million cap at a cost of £1.5
million, which caps SONIA at 3.0% for two years.
1 Including Croftwood and Minster, which are both part of the
Minster Care Group.
KEY PERFORMANCE INDICATORS
We use the following measures to assess the progress we're making with our
strategy.
1. Total accounting return*
3.78% for the year ended 31 December 2022(2021: 8.42%)
Definition
The change in the NAV over the period, plus dividends paid, as a percentage of
NAV at the start of the period.
Relevance to strategy
Shows the returns we're creating for our shareholders, by paying out our
earnings and growing our portfolio value.
Commentary
NAV total return comprised dividend paid in the year of 6.51p per share and
the change in NAV of (2.26)p per share, and totalled 3.78%, against our target
of 9.0% per annum(1).
2. Dividends
6.54p per share for the year ended 31 December 2022 (2021: 6.41p per share)
Definition
Dividends declared in relation to the period.
Relevance to strategy
Shows the quality of our buildings and tenants, which allow us to earn a
predictable income and pay a growing dividend.
Commentary
We met our dividend target for 2022. Our dividend target for 2023 is 6.77p(1),
representing 3.53% growth.
3. EPRA earnings per share*
8.37p per share for the year ended 31 December 2022 (2021: 8.05p per share)
Definition
Earnings from operational activities. The EPRA calculation removes revaluation
movements in the investment portfolio and interest rate derivatives, but
includes rent smoothing.
Relevance to strategy
This is a key measure of our operational performance and the extent to which
earnings support our dividend.
Commentary
EPRA EPS increased by 4.0%, giving 128% dividend cover.
4. EPRA "topped up" net initial yield ("NIY")*
6.98% as at 31 December 2022 (31 December 2021: 6.71%)
Definition
Annualised rental income based on the cash rents passing on the balance sheet
date, less non-recoverable property operating expenses, divided by the market
value of the property portfolio, increased by 6.3% to reflect a buyer's costs
and adjusted for the expiration of rent-free periods or other unexpired. lease
incentives.
Relevance to strategy
NIY indicates the portfolio's ability to generate income, in comparison to its
market value.
Commentary
The NIY at 31 December 2022 was 6.98%. The average NIY of our acquisitions in
the year was 6.50%.
5. NAV per share
110.17p per share as at 31 December 2022 (31 December 2021:112.43p per share)
Definition
Net asset value based on the properties and other investment interests at fair
value.
Relevance to strategy
We believe this is the most relevant measure of the fair value of our assets
and liabilities.
Commentary
NAV at 31 December 2022 was 110.17 pence per share (-2.0%), (2021: 112.43p per
share), reflecting the change in market value of the property portfolio,
partially offset by the benefit of inflation-linked rent reviews and stable
operator performance.
6. Gross loan to value ("LTV")*
23.85% as at 31 December 2022 (31 December 2021: 22.26%)
Definition
Our gross debt as a percentage of our gross asset value.
Relevance to strategy
This is an important indicator of the amount of debt we've used in
implementing our strategy. A higher LTV can lead to higher returns but also
increases downside risk.
Commentary
We have total facilities of £241 million and had drawn £142.3 million at the
year end, giving an LTV of 23.85%. If the facilities were fully drawn, with no
changes to the Group's current equity base, the LTV would be approximately
34.7%.
7. Weighted average unexpired lease term ("WAULT")
19.7yrs as at 31 December 2022 (31 December 2021:19.2 years)
Definition
The average unexpired lease term of the property portfolio, weighted by annual
passing rents.
Relevance to strategy
The WAULT is a key measure of the long-term security of our income. Long
leases support the quality of our income stream and our dividends.
Commentary
We continued to agree new leases of 25 years or longer during 2022, offsetting
some of the natural reduction in the portfolio WAULT over time.
8. Total expense ratio ("TER")*
1.67% for the year ended 31 December 2022 (2021: 1.55%)
Definition
Total recurring administration costs as a percentage of average NAV throughout
the period.
Relevance to strategy
The TER is a key measure of how efficiently we're running the business.
Commentary
The TER increased 12bps in the year. The EPRA cost ratio increased to 16.59%
(2021: 15.84%). Adding the interest received on loans to tenants to our rental
income reduces the EPRA cost ratio to 15.4%.
1 This is a target only and not a profit forecast. There can be no assurance
that the target will be met and it should not be taken as an indicator of the
Company's expected or actual results.
RESPONSIBLE INVESTMENT
Our homes are part of the UK's essential social infrastructure, allowing our
tenants to care for and support some of the country's most-vulnerable people.
Quality homes and strong partnerships with our tenants help us to achieve
positive outcomes for society, while generating sustainable cash flows for our
shareholders. We're also focused on making sure our assets are environmentally
sustainable, so our portfolio remains resilient to the physical and
transitional risks of climate change, and we can reduce fossil fuel use and
carbon emissions from our portfolio and our tenants' operations.
The Investment Manager is a signatory to the UN Principles of Responsible
Investment (UN PRI) and has embedded those principles in its risk management
and investment decision-making processes.
Assessing our material issues
In 2022, we updated the materiality assessment we originally carried out in
2019 and used the results to help inform our sustainability strategy. We based
the areas of questioning on the UN PRI's Real Estate and Healthcare guidelines
and the relevant industry metrics defined by the Sustainability Accounting
Standards Board (SASB).
The materiality assessment included input from board members, representatives
of the Investment Manager, care home operators and two financial institutions,
representing equity and debt. We had strong engagement with our stakeholders
and they recognised that we've taken steps to further embed ESG considerations
in the business.
We rated the issues we identified on their importance to our stakeholders and
the potential impact on our business. The table below categorises the most
important items into environmental, social and governance issues, and between
those we can influence directly and those where we have indirect influence, as
the ultimate responsibility lies with our tenants.
Environmental Social Governance
Direct Influence · Energy efficiency management · Close collaboration with care home operators · Governance and policies for our operations, acquisitions and
disposals
· Carbon reduction and net zero strategy · Refurbishment of care homes
· Stakeholder engagement
· Provision of affordable care
· Transparent reporting
Indirect Influence · Physical impacts of climate change · Residential care and wellbeing · Responsible management of care homes
· Water and waste management · Employee wellbeing, training and retention
Key impact pillars
Having identified the material issues, we distilled the overarching themes and
used them to define the three pillars of our ESG strategy. Improving the UK's
social healthcare infrastructure is at the heart of our investment strategy
and is therefore a central pillar of our ESG strategy. We will combine this
with a robust focus on the environmental impact of our portfolio and making
sure we have a comprehensive governance framework.
Environment
Strategic investment in our portfolio, to improve environmental impact
Social
Having a positive impact on the people living and working in our homes
Governance
Robust governance and transparent reporting to all stakeholders
Environment
The UK needs more care beds in the right locations and of the right standard
and we help this need through our asset management projects and carefully
selected new developments. At the same time, we're aware of the carbon
emissions resulting from building work - known as embodied carbon - which
includes the carbon footprint of the materials we use, transporting them to
the site and the construction process itself. In the future, we intend to
measure embodied carbon and reduce it where we can.
Investing to improve a building and extend its life has significantly less
impact on the environment than building new assets. We use refurbishment and
extension projects as opportunities to improve the sustainability of a home,
including fitting LED lighting, better insulation and renewable energy sources
such as solar PV and air source heat pumps. We target a minimum EPC band B for
all significant asset management projects. For new build projects, we will
target an EPC rating of A and, where possible, we will seek a BREEAM rating of
Very Good or Excellent.
When we're considering buying a home, we screen its environmental performance,
including its current and expected EPC rating and energy use intensity.
Specialist consultants create a full energy model for the building to identify
ways to improve the EPC rating and move along the net zero pathway (see
opposite). We assess any capex required for environment improvements as part
of the acquisition decision process. We undertake due diligence on potential
climate related risk, for example fluvial and surface water flooding.
Net zero
To help to futureproof our portfolio and preserve its value, we've developed a
net zero strategy and delivery plan. To do this, we used the industry-leading
CRREM (Carbon Risk Real Estate Monitor) toolkit. This shows the
decarbonisation trajectory required for us to comply with the 2015 Paris
Climate Agreement target to limit the global temperature increase to
1.5 (o)C. The CRREM toolkit is the major global standard for operational
decarbonisation of buildings and its pathways are aligned with science-based
targets.
We've developed our net zero strategy with the assistance of a leading
sustainability consultancy. We have applied the principles of the energy
reduction hierarchy (see the diagram below) to the stages of the real estate
lifecycle, to ensure our decarbonisation pathway is as efficient and cost
effective as possible. Initially, we're focusing on reducing energy demand by
engaging with our tenants and through measures such as installing LED lighting
and insulation upgrades. The next stage will be more substantive retrofits and
moving from fossil fuel heating systems to low-carbon electrical systems,
alongside a roll out of on-site renewable energy sources such as solar PV
cells. We'll offset any residual carbon emissions using recognised offsetting
programmes, in accordance with the UK Green Building Council guidelines.
Importantly, we have included all tenant energy and refrigerant carbon
emissions in our decarbonisation strategy, which are classed as "Scope 3"
under the Greenhouse Gas Protocol. We consider this to be a responsible and
transparent approach to the environmental impact of our portfolio.
We have set interim targets for our net zero strategy and delivery plan, which
we will continue to monitor and review as we progress.
Year Reduction in absolute carbon emissions on a like-for-like basis **Percentage of assets with an EPC of B or above
2025 15% 50%
2030 50% 100%
2045 90%* 100%
* At present we estimate that there will be some residual carbon
emissions which we will offset. This will be kept under review as low carbon
options become more widely available and effective.
** There may be cases where exemptions apply under MEES regulations in
which case we will provide all viable energy efficiency measures. EPC B is for
England & Wales only but an equivalent rating will be sought for assets in
Scotland.
Our approach is to deliver a methodical, planned and considered
decarbonisation plan working in partnership with our tenants. Based on current
assumptions on available technology we estimate that we will be fully net zero
in 2045, well ahead of legislative targets. We will continually review this
pathway to assess whether we can accelerate this process as new low carbon
options become more widely available and effective. The pathway has also been
developed on the basis that the government preferred approach to the Minimum
Energy Efficiency Standards (MEES), which will require all buildings to be an
EPC B rating or above by 2030, comes into effect.
Creating a brighter, more energy efficient home
Riverwell Beck Care Home, Durdar Road, Blackwell, Carlisle CA2 4SE
Before
· Purpose-built two-storey care home, three miles south of
Carlisle town centre. Well located on a main bus route and close to local
amenities.
· 51 bedrooms with eight ensuite rooms.
· Home was well regarded locally but needed upgrading to meet
modern standards.
· EPC rating of C.
What we did
· Refurbished existing home, including floor finishes, furniture,
decoration and upgraded lighting.
· Added two extensions, to create six additional ensuite wet room
bedrooms and a new laundry.
· New cinema room, hairdressing salon and welcoming entrance
café area.
· Upgraded garden.
Outcomes
· Additional facilities and new and refurbished bedrooms and day
spaces improve the resident experience and comfort.
· Additional capacity helps to meet increasing demand from the
local hospital to discharge people into an appropriate community setting.
· Upgraded garden provides calm and sheltered areas for residents
and their families to enjoy fresh air.
· New and larger laundry makes daily routines more efficient for
staff and adds much-needed storage space.
· New high efficiency boiler, improved insulation and LED
lighting throughout improves energy efficiency and reduces carbon emissions
and costs for the operator.
· EPC rating improved from C to B.
"We are delighted with the outcome of the project and feedback from residents
and staff has been very positive." Wendy Carruthurs, Home Manager
Operator
Careport
Bedrooms
57 (+6)
Capex investment
£1.825 million
Incremental rent
£146,740
Commencement
Feb 2022
Completion
Sep 2022
Sustainability
New high efficiency boiler, increased insulation, LED lighting and lighting
controls
EPC
B (previously C)
CQC Rating
Good
Partnerships with tenants
We've leased all of our portfolio to tenants on a full repairing basis, which
means upgrading the building's environmental performance and buying utilities
are outside our direct control. The carbon emissions are therefore classed as
Scope 3 under the UN Greenhouse Gas Protocol.
However, we have a responsibility to use our influence and partnership working
to improve the energy performance of the buildings, and this is key to our net
zero strategy. Since 2020, we've used "Green" leases, which require tenants to
plan for expected changes in environmental legislation and to share energy
performance data with us. Making our buildings more energy efficient will
reduce costs for our tenants and make the homes better places to live and
work. It will also help to future-proof the buildings against rising
expectations from customers and commissioners of care. We increasingly see our
tenants working on their own energy efficiency plans and we will continue to
support them so that they can comply with environmental regulations.
A vital social role
The majority of residents in our homes are funded by their local authority or
the NHS. Homes for publicly funded residents have traditionally had less
investment than those for private payers. This gives us an important role as a
capital partner for operators who deliver vital care to residents who may have
less choice. These homes can also free up much-needed bed space for the NHS,
improving people's lives by reducing the time they spend in hospital and
providing them with appropriate community-based care. Our homes also benefit
the wider community and sustain and create local employment. We believe
therefore that our long-term investment in these homes delivers positive
social outcomes for residents and their families and for the staff providing
care in a community setting.
We aim to have a portfolio that continues to serve both the publicly-funded
and private-pay markets, with appropriate rents that allow our tenants to
provide a sustainable and commercially viable care service for people,
irrespective of their background. This balanced approach gives us a prudent
and resilient commercial strategy, enables our tenants to grow their
businesses and helps us deliver substantial positive social impact.
Positive social impact
· Majority of residents from the publicly funded sector - we
provide long-term institutional investment in a sector traditionally
overlooked by investors
· We set rents at appropriate levels, enabling tenants to grow and
invest in quality of care and provide value for money care publicly-funded and
private-pay residents
· We form long-term partnerships with tenants, with high
satisfaction survey results
Our ESG framework
The tables below show our objectives against each of our three pillars, how we
intend to reach those objectives and the metrics we'll use to measure our
progress.
Pillar 1: Strategic investment in our portfolio to improve our environmental Aligns with the following UN Sustainable Development Goals:
impact
Our objectives How we do it Metrics
Ensure all assets achieve a minimum of EPC Grade C by 2026 and a minimum of Investing in assets that are highly energy efficient or have the potential Percentage of assets with EPC of C or higher 13 Climate action
B by 2030 to be with further capex
Number of assets with improved EPC
Ensure our portfolio is net zero by 2045 Modelling the carbon footprint of the portfolio and implementing our net
zero strategy and plan Carbon intensity of portfolio in Kg CO(2)e/m2/year
Ensure our portfolio is resilient to climate change
Investing in asset management projects to improve energy efficiency Embodied carbon associated with developments and extensions
Climate change scenario planning Percentage of assets with green leases
Absolute carbon emissions
11 Sustainable cities and communities
Pillar 2: Having a positive impact on the people living and working in our Aligns with the following UN Sustainable Development Goals:
homes
Our objectives How we do it Metrics
Support health and well-being of vulnerable people Investing in quality buildings and actively monitor care provider Tenant satisfaction survey 3 Good health and wellbeing
performance
Ensure access to quality and value for money care for both the
Affordability of rental payments to tenants
publicly-funded and private-pay sectors Developing close partnerships with operators through formal and informal
engagement Proportion of publicly funded and private-pay residents
Conducting detailed due diligence on long-term need for care Independent impact report
Maintaining balance of private and publicly funded residents CQC ratings
10 Reduced inequalities
11 Sustainable cities and communities
Pillar 3: Robust governance and transparent reporting to all stakeholders Aligns with
the following UN Sustainable Development Goal:
Our objectives How we do it Metrics
Be transparent with all stakeholders Maintain clear disclosures on operational performance Investment Manager's UN PRI submission 8 Decent work and economic growth
Maintain robust corporate governance Maintain policies on supplier code of conduct, anti-money laundering and EPRA sustainability rating
bribery
Proactively listen and engage with public and private stakeholders
Manage the business in accordance with our responsible investment policy
Engage with tenants on good governance practices
REPORT AGAINST THE TASK-FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES
("TCFD") FRAMEWORK
Overview
Through the 2015 Paris Climate Agreement, world governments have committed to
keeping the global temperature rise to well below 2°C above pre-industrial
levels and are working to limit warming to 1.5°C. In the UK, the government
aims to reduce emissions by 78% by 2035 and achieve net zero by 2050. It has
made net zero by 2050 part of UK law, providing opportunities to introduce
further legislation and regulations to promote change.
Climate change and the laws and regulations needed to mitigate it create both
risks and opportunities for our business. During 2022, the board oversaw the
Investment Manager's work in this area. This included developing an initial
analysis of our portfolio, defining the actions we need to take to decarbonise
the portfolio over time and increasing our focus on physical risks during
acquisitions and portfolio management.
Being accountable for and transparent about how we assess and manage
climate-related risks and opportunities is important for maintaining our
stakeholder relationships. We're therefore reporting against the Taskforce on
Climate-Related Financial Disclosures (TCFD) recommendations for the first
time this year. As an investment company, we're not currently required to
report against TCFD, but we believe starting to do so helps our stakeholders
to understand the possible effect of climate change on our business and the
actions we are taking.
This is our first year of voluntary reporting against the TCFD framework and
we are making progress towards full compliance with the TCFD requirements. We
expect to improve our compliance in future years as we continue to refine our
assessment of climate change risks and opportunities and embed climate change
risk management in our day-to-day operations and acquisitions. The
implementation of our net zero strategy, targets and delivery plan will also
be kept under close review.
Our consideration of climate change
The Investment Manager set up an ESG working group, with members from its
asset management and finance functions. The working group met regularly with
external advisers during 2022, to:
· understand the potential consequences of climate change;
· review and discuss the portfolio analysis and the options for
decarbonising the business;
· work through scenarios; and
· consider the associated risks and opportunities.
The working group also analysed how this work would match the expectations of
the TCFD framework.
Climate change scenario planning
To improve our understanding of climate change risks and opportunities, we've
considered the recommended 1.5-2 degrees warming scenario, based on the
Intergovernmental Panel on Climate Change's (IPCC) defined Representative
Concentration Pathway ("RCP") 2.6 (1.5-2 degrees), as well as the IPCC's RCP
4.5 (2-3.5 degrees) and RCP 8.5 (4 degrees). RCP 2.6 takes into account
actions to keep warming to 1.5-2 degrees, while RCP 8.5 sets out the
worst-case warming scenario. We also included IPCC's 4.5 pathway, as this is
generally considered the middle-of-the-road option.
To align with our business strategy, we've defined a short-term timeframe as
one to three years, medium term as five to ten years (aligned to our business
plan), and a long-term timeframe as up to 25 years.
Governance
Our board is made up of non-executive directors, who set our risk appetite and
oversee the Investment Manager, which is responsible for the day-to-day
management of the business, risk management and strategy. The board and the
Investment Manager both recognise the importance of climate action and what it
means for our ongoing sustainability and success. Through the Investment
Management Agreement, the Investment Manager is accountable to the board and
reports regularly to the board and committees. The Investment Manager's
Finance Director is responsible for reporting to the board on sustainability,
including how we're mitigating climate change and the actions we're taking to
adapt to it, and the progress we have been making with our revised
sustainability strategy.
To supplement the ESG working group, the Investment Manager intends to set up
its own formal ESG Committee, with appropriate terms of reference. This
committee will be chaired by the Investment Manager's Finance Director and
will meet quarterly.
Strategy
Our strategy is to invest in existing care homes through refurbishments and
asset management projects, with selective new build developments. All our
investment decisions take into account environmental matters and the longer
term impacts of climate change.
Our net zero strategy and delivery plan will enable us to mitigate the impact
of transitional climate-related risks.
Risk management
The Investment Manager has a Risk Committee which assesses and reviews our
risk register every quarter and reports to the Audit Committee. The board and
Audit Committee discuss and consider the principal risks twice a year.
Environmental regulation has been a principal risk for us since 2019 and we
changed our assessment of environmental regulation and the impact of climate
change in September 2022 from Probability: Medium, Impact: Low to Probability:
High, Impact: Medium. The board pushed for this decision, reflecting our need
to start acting now to reduce our risks over the longer term.
As part of our acquisition due diligence, we've used specialist consultants to
assess environmental performance on all acquisitions since 2020. We'll
continue to factor in climate change risks and opportunities, including a
broader consideration of physical risks and the decarbonisation pathway, in
line with our net zero strategy.
Metrics
We've disclosed our energy consumption data since 2019, in line with the EPRA
Best Practice Sustainability Requirements. Our Scope 1 and 2 emissions are
minimal, and our reported emissions relate to energy that our tenants buy and
use, which fall under Scope 3.
We've been modelling our portfolio as part of our net zero strategy planning
and have discussed our progress in this report. Our net zero strategy takes
into account projections of our future carbon emissions and decarbonisation
pathways, based on the size of our current portfolio and assumptions about how
it will grow. We have adopted a zero carbon target of 2045 with interim
milestones for 2025 and 2030.
TCFD's recommended disclosures
1. Describe the board's oversight of climate-related risks and
opportunities.
The board sets our risk appetite and oversees our risk management, which the
Investment Manager carries out on our behalf, as our Alternative Investment
Fund Manager (AIFM) registered with the FCA. This risk framework includes
climate change and sustainability related matters. Twice a year, the board and
the Investment Manager review our principal risks and consider emerging risks.
Climate change has been a principal risk for us since 2019. Following the
board strategy day in October 2021, the board asked the Investment Manager to
develop a sustainability strategy and carry out the analysis needed to propose
a net zero strategy in 2022. These were considered and approved by the board
in February 2023. The strategy and its implementation will be reviewed by the
board on an annual basis.
The board has delegated responsibility to the Audit Committee for monitoring
compliance with our internal financial controls, reviewing our risk management
framework, reviewing external reporting related to risks and internal
controls, and reviewing our processes and controls to ensure our ESG
disclosures are accurate, comparable and consistent.
This is the first year that we've voluntarily reported our climate risks and
opportunities using the TCFD framework. The AIFM's ESG working group,
established in 2021 and responsible for leading the process, presented to the
board on progress and options in August and December 2022. The board approved
the strategy in February 2023.
2. Describe the management's role in assessing and managing
climate-related risks and opportunities.
As an externally managed REIT, the Investment Manager performs portfolio and
risk management functions on our behalf. This includes monitoring our systems
and controls to manage risk, due diligence, screening potential acquisitions
and ongoing management of our assets. The AIFM's ESG working group assessed
our climate-related risks and opportunities during the year and these are now
being embedded in our day-to-day operations. These include:
· assessing transitional and physical climate-related risks for
potential acquisitions;
· developing a net zero strategy and delivery plan that sets a
framework, methodology and metrics and targets for the reduction in
operational carbon to net zero status by 2045 with interim milestones. The
plan has been developed using the globally recognised CRREM toolkit;
· updating and reviewing the EPC ratings of our assets;
· identifying opportunities to improve energy efficiency through
asset management;
· obtaining energy consumption data and reporting on GHG emissions;
and
· engaging with our tenants to raise the profile of environmental
issues and objectives, and identify areas of mutual benefit.
Scenario planning
To improve our understanding of physical and transitional climate risks, we've
mapped 20 of our properties against the IPCC's 2.6, 4.5 and 8.5 emissions
pathways. We selected these properties to provide a representative cross
section of the portfolio, ensuring we had a good spread:
· across different tenants;
· across Northern Ireland, Scotland, England and Wales; and
· of different ages of properties.
3. Describe the climate-related risks and opportunities the organisation
has identified over the short, medium, and long term.
We've assessed our climate-related risks and opportunities, and identified and
reviewed a range of physical and transitional risks which could affect our
strategy. The assessment also covered potential opportunities arising from
climate change.
We grouped the risks and opportunities as follows:
· Transition risks arise from the shift to a lower-carbon economy
and may involve policy, legal, fiscal, market and regulatory compliance.
· Physical risks arise from climate-related events or longer-term
changes in weather patterns, which could damage our assets or affect our
tenants' ability to use them.
In line with the TCFD methodology, we grouped the risks and opportunities into
five subcategories: Market, Reputation, Policy & Legal, Chronic and Acute.
We then recorded the risks and opportunities on a register and ranked them by
how likely they were to occur and their potential impact on our strategy. We
assessed the risks and opportunities over short (one to three years), medium
(five to ten years) and long-term (up to 25 years) timeframes.
4. Describe the impact of climate-related risks and opportunities on the
organisation's businesses, strategy and financial planning.
As a real estate investor rather than a care home operator, many of the
effects of climate change are outside our direct control. At the same time, we
recognise that we and our tenants can only mitigate climate change risks and
maximise any opportunities through close collaboration. We're therefore
developing an ongoing stakeholder engagement plan, so we can better understand
the challenges and find appropriate solutions working together.
Our net zero plan includes a granular assessment of the energy performance of
each home in our portfolio. Through a combination of analysing the EPC ratings
across our portfolio and our net zero planning, we're now prioritising
properties that require action to reduce their carbon emissions and improve
their energy efficiency. When we're looking to acquire assets, we commission
specialist reports on their environmental performance and climate change
considerations. We also inform our decision-making by modelling the capex
required to improve their energy efficiency, in line with our net zero
strategy.
5. Describe the resilience of the organisation's strategy, taking into
consideration different climate-related scenarios, including a 2°C or lower
scenario.
Having mapped our risks and opportunities under the IPCC's 2.6, 4.5 and 8.5
warming scenarios, and considered their likelihood, the mitigations we can put
in place and the potential outcomes, we consider that our strategy is
resilient to physical risk. We're incorporating short-term considerations into
our planning and we'll continue to assess the longer-term physical risks
linked to the locations of our care homes.
Environmental regulation and the impact of climate change is already a
principal risk for the Group. Following a board review in September 2022 and
in line with our net zero planning, we changed our assessment from
Probability: Medium, Impact: Low to Probability: High, Impact: Medium.
6. Describe the organisation's processes for identifying and assessing and
managing climate-related risks.
As part of the scenarios we modelled for our portfolio, we considered
potential physical risks including heatwaves, water stress/drought, rainfall,
flooding, wildfires and sea level rises, for a representative sample size of
20 care homes.
In terms of transition risks, we've reviewed legislative and policy changes
(such as MEES and carbon taxation), as well as reporting requirements (TCFD,
net zero) and other related risks, such as permanently higher utility costs,
higher insurance costs and protracted planning processes. We also considered
climate-related reputational risks.
We continue to monitor transition risks, including potential environmental
taxes, anticipated legislation (MEES) and reputational risk, and plan to
mitigate these risks by implementing our net zero strategy.
7. Describe the organisation's processes for managing climate-related
risks.
Our processes for managing climate-related risks are embedded in our
operations and procedures. In particular:
· we communicate regularly with our tenants on their energy use and
costs, and actions to reduce them;
· climate-related considerations are core to our new acquisition
and asset management due diligence process;
· we've put green leases in place, to ensure we and our tenants
have common goals for energy efficiency and that we're capturing data to
improve energy performance;
· we have a targeted capex programme to improve energy efficiency,
add renewable energy generation where possible and reduce operating costs, to
mitigate transitional and regulatory risk;
· regularly reviewing our physical risk climate scenarios to
understand if risks have materially changed;
· for any assets considered at greater risk developing a resilience
plan, for example flood risk management plan; and
· we've developed a well-considered net zero strategy, underpinned
by our medium to long-term decarbonisation strategy.
8. Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation's overall risk
management.
We will continue to update and review our climate physical risk scenario
planning to understand if any risks have materially changed. We will continue
to assess the regulatory landscape and potential new regulations, taxes or
other requirements. The Investment Manager's Development Director sits on the
British Property Federation Sustainability Committee and therefore has access
and insight to current industry thinking and lobbying on climate-related
matters.
The AIFM's ESG working group's findings feed into the Investment Manager's
risk assurance process via the Investment Manager's proposed ESG Committee.
The Investment Manager's Risk Committee assesses and reviews our risk register
every quarter and reports to the Audit Committee. The board considers our
principal risks twice a year.
We've already identified climate change as a principal risk in our risk
register. It's therefore subject to annual review and we assess and manage
risk at the Investment Manager's ESG and Risk Committees and agree risk
ratings before and after taking account of our mitigation strategies. The
Audit Committee considers the findings of this process and the board discusses
and approves the conclusions.
9. Disclose the metrics used by the organisation to assess climate-related
risks and opportunities in line with its strategy and risk management
processes.
We disclose our GHG emissions and energy consumption each year through our
EPRA Sustainability Best Practice reporting. The emissions we report are
mainly Scope 3 and are aligned to the Greenhouse Gas Protocol Corporate
Standard and DEFRA Environmental Reporting Guidelines.
We report Scope 3 emissions in our annual report.
See the Group's EPC ratings in our annual report.
10. Describe Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas
(GHG) emissions, and the related risks.
We report our Scope 1 and 2 emissions in our EPRA Sustainable Best Practice
Report www.impactreit.uk/about/sustainability/
The majority of our Scope 3 emissions come from energy that our tenants buy
and use.
The related risk is that these Scope 3 emissions are beyond our direct
control. However, we're mitigating this risk through the actions described in
the section above: processes for managing climate-related risks.
See emissions data below.
11. Describe the targets used by the organisation to manage climate-related
risks and opportunities and performance against targets.
We use several measures to understand and manage climate-related risks. We
assess these when considering acquisitions or asset management projects and as
part of our ongoing portfolio management, in particular in relation to our net
zero strategy.
· EPC ratings
· Energy intensity per bed (kWh per bed)
· Absolute carbon emissions (tCO2e)
· GHG emissions intensity (CO2e per bed)
· Capex deployed on sustainability improvements (£pa)
· Net zero target of 2045 and interim targets/milestones and
delivery plan
· Proportion of leases with "Green" obligations
Energy and carbon disclosures
Environmental performance measures - Impact Healthcare REIT plc(1,2,3,6)
Performance measure Unit Scope 2022 2021 Change
Electricity absolute mWh 3 18,077 16,732 8.0%
Gas absolute mWh 3 52,592 44,769 17.5%
Biomass/LPG/heating oil/propane absolute mWh 3 2,758 n/a n/a
Total indirect greenhouse gas (GHG) emissions from tenant obtained energy use tCO(2)e 3 13,521 11,609 16.5%
Building energy intensity kWh/bed/year 3 10,615 10,666 -0.5%
Greenhouse gas (GHG) emissions intensity from building energy consumption tCO(2)e/bed/year 3 1.95 2.01 -2.8%
Environmental performance measures - Investment Manager
Performance measure Unit Scope 2022 2021 Change
Total electricity consumption kWh Total Investment Manager electricity (office) - Scope 2 5,470 5,623 -2.7%
Investment Manager energy intensity kWh/FTE Average kWh electricity consumption per FTE in year 521 655 -20.5%
Total indirect greenhouse gas (GHG) emissions tCO(2)e Indirect - Scope 2 1.1 1.2 -11.9%
(location-based)
Business travel - land - car tCO(2)e Scope 3 - private vehicles 3.7 1.0 275.2%
(incl. WTT(4))
Business travel - land - air tCO(2)e Scope 3 - flights 1.6 3.0 -46.8%
(with RF incl. WTT(5))
Business travel - land - rail tCO(2)e Scope 3 - rail 1.2 0.2 493.6%
(incl. WTT(5))
Total emissions tCO(2)e 7.6 5.4 40.6%
1 Biomass energy estimated based on 2021 data.
2 Data for three Electus homes estimated for three months.
3 Data for three Silverline homes estimated for three months.
4 Well-to-tank (WTT) business travel - air conversion factors are
used to account for the upstream Scope 3 emissions associated with extraction,
refining and transportation of the aviation fuel to the plane before take-off.
5 Well-to-tank (WTT) conversion factors for passenger vehicles and
business travel on land are used to report the upstream Scope 3 emissions
associated with extraction, refining and transportation of the raw fuels
before they are used to power the transport mode.
6 Includes additional LPG, biomass and heading oil data excluded in
2021.
Risks and opportunities associated with climate change
Risk type Description Timescale Impact Mitigation
Transitional
Legal Higher regulatory standards for energy performance (MEES) Short to medium term Potential loss of value for assets not meeting expected future standards. We've assessed our assets for their current and expected regulatory
Assets may become "stranded" by evolving environmental legislation compliance.
Our leases require our tenants to ensure the buildings comply with legislation
Policy Carbon taxation Medium term Additional taxation liability for the Group Our net zero strategy has identified the current emissions and the pathway to
reduce them over time. We continue to review potential future environmental
taxation policy.
Market Investors and markets increasing awareness of environmental performance Medium term Reduced pool of capital available and impact on portfolio valuation Our net zero strategy has identified the current emissions and the pathway to
reduce them over time. Investing in existing assets is far more sustainable
than new build
Reputation Investors, tenants and commissioners may have increasing expectations of real Medium term Reduced number of potential partners for the Group to We disclose our net zero targets and ESG strategy and targets to give comfort
estate owners for environmental issues
work with that we're committed to improving environmental standards
Physical
Extreme weather Weather events cause disruption (e.g. flooding) Short to long term Risk to life of our tenants' residents We've enhanced our due diligence on flood risk for acquisitions, carried out
scenario planning for the existing portfolio, and have
Loss of revenue and disruption to operations
a capital investment strategy to improve resilience
Extreme weather Water stress and heatwaves Medium to long term Environment within assets is detrimental for wellbeing of residents and staff. Our net zero strategy includes assumptions on additional cooling requirements
Additional capex required to retrofit cooling for existing assets
Opportunities
Capital New sources of capital Short to medium term Having a credible net zero strategy and investing in existing assets (as
opposed to carbon-intensive new builds) may give us access to new capital and
improved terms (sustainability linked finance)
Technological New and more environmentally efficiency technology comes on stream Medium to long term Technological advances may enable more efficient heating and cooling systems
and renewable energy, resulting in lower running costs for our tenants
Market Commissioners and customer demand for more energy efficient homes Medium Technological advances may enable more efficient heating and cooling systems As awareness of sustainability grows homes that are low carbon may become in
and renewable energy, resulting in lower running costs for our tenants greater demand
SOCIAL VALUE IMPACT
6,842
beds in the portfolio with diversified geographical spread
Investing in homes meeting local need
64%
of beds are in the 40% most deprived areas of the UK
Investing in communities where care homes provide an important community
resource and source of employment
75%
of beds are commissioned by local authorities or the NHS
Our approach enables operators to deliver care to a range of sectors at
affordable rents
£29.9m
invested since inception on asset management and development initiatives
Increasing quality of building for staff and residents
87%
of tenants describe relationship with Impact as "very good" from tenant
survey( 1)
Proactive partner with deep sector understanding
75%
of tenants rate Impact as "very good" as a long-term partner( 1)
We create lasting relationships with tenants and stability for residents and
families
14
different operators(2)
Diversified and growing range of partners
78%
of homes have CQC ratings of Good or Outstanding
Tenant selection and active management
1 Based off responses from eight tenants
2 Includes Minster and Croftwood which are both part
of Minster Care Group
INVESTMENT MANAGER'S REPORT
We were pleased with the Group's progress during 2022, as we successfully
implemented its strategy for the sixth year. The strategy is designed to
ensure the Group remains highly resilient during challenging times and at its
heart is our aim to work closely with the Group's tenants to support their
objectives and the high-quality care they deliver to residents.
Strong and resilient tenants
The Group signs long-term leases of 20 years or more with its tenants. That
means we're very selective about new tenants and it's extremely important to
us that their businesses are strong and resilient, so they can successfully
weather challenges such as COVID-19 and the current high levels of inflation.
Inflation rose significantly in the second half of 2022, reaching levels not
seen in several decades. While inflation isn't expected to persist at this
level and the government and Bank of England are committed to bringing it
down, the level it will settle at is unclear and further periods of volatility
seem likely. In the current environment both tenants and the Group have
benefited from the principles we've consistently applied since the business
was founded. Specifically:
· we set rents at prudent and sustainable levels when the Group
first partners with a tenant;
· we've ensured that 100% of the leases have inflation-linked
rents; and
· we've focused on keeping rents affordable for tenants over the
life of the lease, by putting caps and floors in place on our rent increases.
The link to inflation means the Group benefits from the certainty of rising
rents each year. In 98% of the leases these uplifts are capped, at 4% in 90%
of the leases and 5% in 8% of them. Two NHS leases have no floor or caps. Caps
give the Group's tenants some protection when inflation spikes, and the
floors, which kicked in in 2019, mean the Group gets progressive rental growth
when inflation is low.
The success of our approach is shown by the tenants' overall rent cover, which
was 1.8 times in 2022, which is higher than before the pandemic. The Group
received 100% of rent due for 2022 and has no voids.
Since the year end one tenant, who manages seven of the Group's homes and
accounts for less than 4% of the Group's contracted rent, has not paid its
rent for the first quarter of 2023 and we've drawn down on rent deposits
relating to four of the homes for the first quarter. This portfolio includes
three homes acquired in the first quarter of 2020 as a turnaround project, but
the turnaround was made significantly more challenging by the COVID pandemic.
We're in active discussions with this tenant to resolve the situation in a way
which shouldn't affect the residents and staff in these homes.
Tenants generally benefited from rising occupancy and fees, and this is
reflected in the rent cover across our tenant group. Across the portfolio,
occupancy averaged 81% during 2021. In January 2022, it was 83%, and had
recovered to 87% by the end of the year. In the fourth quarter of 2021,
tenants' average weekly fee (AWF) was £822, excluding any COVID-19 infection
control grants from the government. By the fourth quarter of 2022, the AWF had
increased to £926, a 13% increase that matched inflation. The Group's tenants
provide an essential service and the sector has shown over long periods that
it can increase fees ahead of inflation. Over the past two decades, nursing
and residential care fees rose by 3.8% and 3.6% a year respectively, while RPI
averaged 2.8% a year.
The growth in tenants' revenues as they rebuilt occupancy and benefited from
AWF increases, helped to offset the very sharp rises in some of their costs.
During 2022, they spent an average of 2.8% of their revenues on gas and
electricity, up from 2.0% in 2021. Their spending on food as a percentage of
revenues rose from 3.6% to 3.8%.
Tenants' top line growth also enabled them to give their staff substantial pay
increases: staff pay per resident rose by an average of 10% in 2022. The most
common problem tenants reported during the year was their greater need for
temporary agency staff. This appears to have been caused by many staff being
forced to self-isolate during the Omicron wave of the pandemic in early 2022,
and staff who had gone on furlough deciding not to return to work. Tenants
spent an average of 5.9% of their revenues on agency staff during 2021. This
increased to an average of 8.7% in 2022. The Group's tenants are working hard
to reduce their usage of agency staff, for example by putting in place
strategies for overseas recruitment of nurses and senior carers.
We closely monitor the financial and operational performance of each of
tenant. If we're not satisfied with a tenant's performance and its attempts to
address the problem, we can, if necessary, give notice to the tenant and bring
in a replacement to run the homes.
Operational highlights
Year ended 31 December 2022 2021 Change
Topped-up net initial yield ("NIY") 6.98% 6.71% 27 bps
Average NIY on acquisitions to date 7.4% 7.4% (8) bps
Rents containing inflation-linked uplifts 100% 100% -
Weighted average unexpired lease term ("WAULT") to first break 19.7 years 19.2 years +0.5 years
Portfolio let 100% 100% -
Rent cover(4) 1.80 1.91 (5.8)%
Rent collection 100% 100% -
Properties(5) 135 124 8.9%
Completed beds 6,842 6,141 11.4%
Tenants(6) 14 13 +1
Managing the portfolio
We've carefully constructed the portfolio to give the Group a good balance of
core and value-add assets. We classify the assets as follows:
· Core: These are the main contributors to the Group's long-term,
stable income. These are good-quality, well-invested homes that are trading
well and have sustainable rent cover.
· Value-add: These are candidates for asset management, where we
can invest capital to improve the asset and its performance. This can also
allow tenants to offer new services, such as dementia care.
· Non-core: These are candidates for sale, for example because they
have more value for an alternative use, and it's likely we bought them as part
of larger portfolios.
We actively manage the portfolio, disposing of non-core assets and turning
value-add assets into core assets through asset management (see below).
Investing for growth
During the year, the Group invested £69.2 million in 12 care homes with 764
beds. At the year end, the Group had a portfolio of 135 properties with 7,416
beds (31 December 2021: 124 properties and 6,720 beds)(1). These figures
include homes the Group owns directly and 12 homes it has invested in through
loans to tenants, where the Group has options to buy the assets.
In making these investments, we followed our policy of managing risk by
diversifying the portfolio. The homes the Group invested in are spread around
the UK, including Scotland, Kent, Nottinghamshire, Devon and Somerset, and we
increased the number of homes existing tenants run, helping to diversify their
businesses and add to their resilience. We also welcomed the Group's 14th
tenant(2), Belmont Healthcare. When the Group buys assets, we ensure they're
either already at an EPC B or there's a clear plan to achieve that rating, and
we take account of any additional capital needed in the investment decision.
The homes the Group invested in during the year and the rent increases
received due to the index-linking in the leases grew the contracted rent
roll(3) by 13.6%, from £38.0 million on 31 December 2021 to £43.1 million at
the year end. This has since risen to £47.9 million at 27 March 2023,
including rent reviews and the portfolio of six care homes invested in since
the year end.
1 Based on the ratings across all of the portfolio, using the England
& Wales methodology.
2 Including Croftwood and Minster, which are both part of the Minster
Care Group.
3 Contracted rent is an annualised number that includes all income from
investments in properties, whether generated from rental income or post-tax
interest income.
4 Includes the benefit of grant income, which largely ended in March
2022.
5 This relates to the property portfolio along with property portfolios
that have been invested in via loans to operators with an option for the Group
to acquire.
6 Including Croftwood and Minster, which are both part of the Minster
Care Group
Value-enhancing asset management
Asset management is an increasingly important part of our strategy, as it
benefits many of our stakeholders. In particular:
· shareholders gain because we earn an average return on our
investment of 8% through increased rents, and we also increase the value of
the buildings;
· we improve the environmental efficiency of the home through
increased energy efficiency and, where possible, we will add renewable energy
sources such as solar panels or air source heat pumps;
· by extending homes and increasing the number of bedrooms, we
increase capacity for the local social care market and make them more
efficient for tenants to operate;
· residents benefit from having an even better place to live, in
line with our social objectives;
· tenants' staff have a better working environment, with improved
facilities such as kitchens, laundries and staff rooms; and
· tenants will benefit from our appraisal process, which tests the
business case for the investment and the affordability of the proposed
increased rent.
During 2022, the Group deployed £7.8 million to asset management projects
that have a projected return of 8%. We work in partnership with tenants to
implement these schemes and completed the following notable projects in 2022:
· refurbishments at Belmont House, Harrogate and three homes in
Northern Ireland;
· the project at Riverwell Beck, which was previously called
Blackwell Vale and
· the new link building that connects Fairview House and Fairview
Court in Bristol, with phase two now under way, which involves a comprehensive
upgrade of Fairview House, adding ensuites to bedrooms, improving the
residents' day spaces and increasing energy efficiency, so the new combined
building will have an EPC rating of A.
Asset management is an important part of the Group's strategy and we
continually review the portfolio and engage with tenants to identify
opportunities. We've identified a further pipeline of projects, which we
intend to start over the next 12 months.
Improving EPC ratings is an important part of the asset management programme
and the Group's environmental objectives. From 1 April 2023, under the Minimum
Energy Efficiency Standards ("MEES") a lease on a commercial property in
England and Wales cannot continue if the EPC rating is below E. No properties
in the portfolio will be caught by this. The minimum EPC requirement is
expected to increase to C by 2027 and B by 2030. The average rating across the
portfolio is C and, in line with the Group's ESG objectives, we have a
strategy in place to ensure compliance.
Keeping our properties in good repair
Making sure the properties are consistently well-maintained is just as
important as investing in major asset management projects. The leases require
tenants to keep the buildings in good condition, through ongoing repairs and
maintenance. We monitor the amount they spend on this, regularly inspect the
assets and hold progress meetings at homes with the tenants.
All the leases also require tenants to ensure the home complies with
legislation, including on environmental performance. Since October 2020, new
leases ensure tenants provide us with data such as their energy use, so we can
track environmental performance and support improvements. The new leases also
aim for tenants to use 25% of the maintenance spend on environmental
improvements.
Value-enhancing forward-funded development
During 2022, the Group deployed £4.0 million to forward-funded development
and Merlin Manor, the care home development the Group funded in Hartlepool,
reached practical completion during the first half of 2022. It's now in the
occupancy build-up phase and we're pleased that it's attracting residents in
line with the tenant's plan. The Group provided £6.1 million to fund the
development, achieving a yield on these costs of 7.8%. The completion value of
the asset included a £1.9 million increase in value in the period or a 30%
profit on cost.
In Norwich, the Group has committed to fund a new care home development, which
we believe will be the best of its type in the area. Planning permission for
the project has been delayed while issues relating to nutrient neutrality in
the River Wensum basin are resolved. We now expect planning permission to be
granted in H1 2023.
Funding new builds remains a small but important part of the Group's strategy.
We also recognise the environmental benefits of repurposing and
future-proofing existing buildings, and we're actively considering this as we
recognise the complexities of achieving net zero.
We require all new development and asset management projects to achieve a
minimum EPC B, or an EPC A where possible.
Portfolio valuation
Each quarter, Cushman & Wakefield independently values the portfolio in
accordance with the RICS Valuation - Professional Standard (the "Red Book").
As at 31 December 2022, the portfolio was valued at £532.5 million, a 15.9%
or £73.0 million increase from the valuation of £459.4 million at 31
December 2021. The increase was made up as follows:
Contribution to
valuation increase
£m %
Acquisitions completed 69.2 15.1
Acquisition costs capitalised 2.6 0.6
Capital improvements 11.8 2.6
Disposals (2.5) (0.5)
Less: Like-for-like valuation movement (8.1) (1.7)
Total 73.0 15.9
Interest rates rose sharply in the year, leading to valuation yields shifting
upwards in the fourth quarter of 2022, including in healthcare. As a result,
the portfolio EPRA "topped up" initial yield increased 27 basis points to
6.98% as at 31 December 2022. Investment activity is continuing in the market,
including the Group's investment in a portfolio for £56 million in January
2023, for an equivalent EPRA "topped-up" initial yield of 6.55%. This activity
reflects confidence in the market sector and its ability to continue to
generate accretive returns to stakeholders in a higher interest rate
environment.
In addition to the portfolio above, the Group invested in 12 care homes, in
December 2021, by way of a loan for £37.5 million. This loan is subject to an
option for the freehold property interests, which are therefore also
independently valued by Cushman & Wakefield. The value of this portfolio
is £36.4 million with the reduction in value and associated costs reflected
in the £1.8 million "Put option" liability.
Strong financial results against a challenging backdrop
Total net rental income for the year increased by 16.1% to £42.2 million
(2021: £36.4 million). This reflected growth in the portfolio and the rental
uplifts generated by the leases. Under IFRS, the Group is required to
recognise some rent as income before it receives it, reflecting the minimum
uplifts in rents over the lease terms, on a straight-line basis. The cash
rental income for the year increased by 17.8% to £35.9 million (2021: £30.5
million).
Administrative and other expenses totalled £7.0 million (2021: £5.8
million), which led to a total expense ratio of 1.67% for the year (2021:
1.55%). The EPRA cost ratio was 16.6%, up from 15.8% in 2021, as revenue
doesn't include income the Group receives on loans to tenants to buy property
portfolios, where it has an option to acquire. Including this income in
revenue gives an adjusted cost ratio of 15.4%.
Finance costs were £5.4 million (2021: £3.3 million). Interest income was
£3.2 million (2021: £0.1 million), reflecting property investments made via
a loan to tenants.
The change in the fair value of investment properties, driven by upwards
movements in investment yields in the second half as interest rates rose
sharply, causing profit before tax to fall to £16.9 million in 2022 from
£32.0 million in 2021.
Earnings per share ("EPS") for the year was 4.33 pence (2021: 9.41 pence). The
Group's EPRA EPS and Adjusted EPS were both up on the previous year. EPRA EPS
was 8.37 pence (2021: 8.05 pence per share). Adjusted EPS, which strips out
non-cash and one-off items, was 7.11 pence (2021: 6.68 pence).
These EPS figures are all on both a basic and diluted basis. More information
on the calculation of EPS can be found in note 11 to the financial statements.
Attractive and fully covered dividends
As a REIT, the Company must distribute at least 90% of its qualifying profits
each year. The Company has therefore declared four quarterly dividends of
1.635 pence each in respect of 2022, meeting the total dividend target of 6.54
pence per share, up 2.0% on the 6.41 pence paid in respect of 2021. All four
dividends were Property Income Distributions.
The details of these dividends were as follows:
Quarter to Declared Paid Cash cost
£m
31 Mar 2022 25 Apr 2022 20 May 2022 6.3
30 Jun 2022 16 Aug 2022 9 Sep 2022 6.6
30 Sep 2022 21 Oct 2022 25 Nov 2022 6.6
31 Dec 2022 31 Jan 2023 24 Feb 2023 6.6
Total 25.7
The total dividend for 2022 was 128% covered by EPRA EPS and 109% covered by
Adjusted EPS.
Strong and prudent balance sheet
During the year, we continued to successfully raise financing to support the
Group's growth strategy. On 21 February 2022, the Company completed a placing
of 35.1 million new ordinary shares at 114.0 pence per share, which raised
gross proceeds of £40.0 million. On 8 July 2022, the Company raised a further
£22.3 million by placing 19.0 million new ordinary shares at 117.0 pence per
share. After the year end the Company also issued a further 9.6 million new
ordinary shares at 116.6 pence per share, as part of the acquisition of six
care homes discussed later.
Our approach to using debt to grow the business has always been conservative.
At 31 December 2022, the Group had five facilities totalling £241.0 million,
of which we'd drawn £142.3 million (31 December 2021: £114.5 million),
giving headroom of £98.7 million and a gross LTV of 23.9% (31 December 2021:
22.3%). The Group also had £22.5 million of cash.
In November 2022, we extended the Group's RCF with HSBC by £25 million to
£75 million, which allowed us to cancel the £15 million RCF with Metro Bank.
This increased the Group's facilities by £10 million, while improving the
covenants and reducing the cost of debt, with the HSBC margin being 65 bps
lower than on the Metro facility.
In December 2022, we renegotiated the £50 million RCF with Clydesdale Bank,
trading as Virgin Money. This increased the facility from the previous £25
million, extended its maturity from March 2024 to December 2029 and reduced
the margin over SONIA by 25 bps to 200 bps.
As a result, the Group's facilities at the year end were as follows:
Expiry Facility size Drawn Propco Propco
(£m) at 31 Dec 2022 interest cover covenant LTV
(£m) covenant
Metro Bank
Term loan Jun 2023 15.0 15.0 200% 35%
Virgin Money
RCF Dec 2029 50.0 17.0 200% 50%
HSBC
RCF Apr 2025(4) 75.0 10.0 250% 55%
NatWest
RCF Jun 2024(5) 26.0(6) 25.3 250% 50%
Private placement
Senior secured notes Dec 2035 37.0 37.0 250% 55%
Senior secured notes Jun 2035 38.0 38.0 250% 55%
Total 241.0 142.3
4 With the option to extend for one year to April
2026, subject to HSBC's agreement.
5 With the option to extend for up to two years to
June 2026, subject to NatWest's agreement.
6 An accordion agreement is in place to increase this
to £50 million, subject to NatWest's agreement.
At the year end, the Group had substantial headroom within the covenants on
these facilities.
The renegotiated Virgin Money facility increased the weighted average term of
the Group's debt facilities to 6.3 years at 31 December 2022, excluding any
options to extend. The only facility that matures in 2023 is the £15 million
term loan with Metro Bank, which we can repay from the Group's existing
facilities.
The Group's policy is to hedge at least 75% of its drawn debt against interest
rate increases. At the year end, the Group had fixed or capped 70% of its
drawn debt or 41% of its total facilities (31% fixed and 10% from a 1%
interest rate cap which expires in June 2023).
Since the end of the year, we have put a further £50 million interest cap in
place, which caps SONIA at 3.0% for two years. The cap's cost was £1.5
million. As a result, we'd hedged 80% of the Group's drawn debt at 27 March
2023.
Post-year end activities
On 10 January 2023, the Group announced an investment of £56 million in six
care homes (438 beds) in Shropshire and Cheshire.
Outlook
2023 has started with continued high levels of volatility in financial
markets. Fixed income markets started the year with severe whiplash as global
bonds followed their best ever January performance with their worst February
performance since 1990. These sharp moves in the cost of capital contributed
to the second largest bank failure ever in the United States in March, which
in turn has led investors to question if Central Banks can increase interest
rates as much as was assumed in February, causing the bond markets to rally
again.
We expect the uncertainty caused by this volatility to continue for some time.
However, what we can be certain about is that care homes are crucial social
infrastructure that provide an essential service for vulnerable elderly
people. Demand for that service is driven by demography and acuity, and is not
directly related to developments in the wider economy or financial markets.
This gives care home operators a higher level of in-built resilience than
tenants in many other real estate sectors, demonstrated in part by their
ability to pass through inflation in the fees they charge for care, as
discussed above.
There was a pause in most investment activity after the mini-budget in
September 2022. That hiatus ended in late 2022 and there is once again a
functioning market of buyers and sellers for care home assets, at price levels
that reflect the new, higher cost of capital, which is also reflected in the
year-end valuation for the Group's investment portfolio. We expect the
relatively high level of resilience and attractive yields available in the
sector to attract more investor interest, rather than less, during an
uncertain time.
Impact Health Partners LLP
Investment Manager
27 March 2023
STAKEHOLDERS
Our key stakeholders are our tenants, their residents, our shareholders and
our lenders. The ways we typically engage with them are set out in the table
below.
The Investment Manager is the main point of contact with our stakeholders and
is one of our two main service providers, along with the Administrator. The
board regularly interacts with the Investment Manager and the Administrator
and the Management Engagement Committee ("MEC") meets at least once a year to
review their performance and our other key service providers.
The Group also has other stakeholders, including central and local government,
NHS and regulators, who set and oversee the policies and rules that govern the
care home sector. However, we don't have direct relationships with local
government, the NHS or the regulators, as our tenants manage these
relationships as operators of the care homes.
Employees and directors
As an externally managed business, we don't have any employees and therefore
don't have any employee-related policies or disclosures.
At the year end, the board comprised six non-executive directors including the
Chairman, of which four were male and two were female. Simon Laffin joined as
Chairman designate in January 2023; two male directors are stepping down by
the Annual General Meeting, meaning the board will be five, of which two are
female.
Stakeholder Stakeholder interests How we engage Stakeholder engagement in practice
Tenants Our tenants' interests include: The Investment Manager engages with tenants on a weekly and monthly basis and The engagement during the year has continued to help us formulate our asset
in more depth each quarter, when it receives reports from them setting out management plans, which will benefit:
We have a steadily growing tenant base, with a mix of strong national and our ability to support their businesses through acquisitions and asset their performance. The Investment Manager holds meetings and visits homes and
local operators. We work in long-term partnership with our tenants, to grow management; sites, works with tenants on acquisition and asset management opportunities, tenants, by adding new beds, making the homes more attractive to potential
our business while managing risk.
and shares best practices. residents and improving their energy efficiency; and
our financial strength;
See our business model for more information. residents, by making the homes better places to live and able to
our knowledge and understanding of their operations; and
accommodate more residents.
The board looks to meet new tenants within six months of acquisition if not
our ability to share best practice with them. before. During the year, the board held calls with the majority of tenants, to We've currently identified £16 million of further asset management
hear their experience of working with the Investment Manager and learn more opportunities. For example, we're investing around £2 million in Mavern House
about their opportunities and challenges in Wiltshire, which will see us add a net seven new bedrooms and create six
new ensuites. We're also planning to invest around £4 million in Wombwell
Hall, Kent, which will see the home reconfigured to enable an innovative
dementia focused care facility, along with upgrades to residents, communal
spaces and energy efficiency.
The board's direct engagement with tenants has also given the directors
first-hand knowledge of our tenants' growth ambitions, the challenges they are
facing and the role we can play in supporting them, which will underpin the
board's oversight of tenant performance in the coming year.
In addition, we engaged with tenants when developing the materiality
assessment for our ESG strategy
Tenants' residents Tenants' residents' interests include: Our tenants are responsible for looking after residents and we don't directly
engage with them, except when we meet them during home visits.
The quality of care our tenants provide is very important to us. It's central the quality of their care;
to residents' quality of life and directly influences demand for our tenants'
The Investment Manager monitors the CQC rating for every home and the outcomes
services, which in turn affects their ability to pay rent to us. the quality of their home and how well it's maintained; of inspections, and engages with tenants on the findings. It also pays close
attention to tenants' repairs and maintenance, to ensure the homes remain good
the security and stability of their home and the tenant that runs it; and places to live.
our ability to invest in the home, to make it a better place to live and to The board also carefully monitors CQC ratings, to ensure tenants are managing
support additional needs such as dementia. their homes properly.
Shareholders Shareholders' interests include: The Investment Manager regularly meets institutional investors, analysts and The Investment Manager engaged with our shareholders on a wide range of topics
the financial press. We provide timely news flow and also communicate through during the year. In particular, this has continued to highlight the importance
To grow our business, we need well-informed and supportive shareholders. We the security and growth of our dividend; our interim and annual reports and the annual general meeting. of a well-considered and long-term approach to ESG issues, including the
look to communicate regularly and openly and provide high-quality corporate
impact of climate change and reaching net zero. The Investment Manager
reporting. our ability to add value through acquisitions and asset management; The Chairman and Senior Independent Director offer meetings to major specifically engaged with an important institutional shareholder when
shareholders each year. The board receives regular investor relations reports. developing the materiality assessment for our refined ESG strategy. In
our financial and operational performance;
addition, although we're not yet required to report under TCFD, we've
See relations with shareholders for more information. voluntarily published our first report against the TCFD framework, recognising
our ESG strategy and performance; the importance of this information to shareholders and other stakeholders.
conditions in the care home market; and
the quality of our corporate governance.
Lenders Lenders' interests include: The Investment Manager engages with our lenders through quarterly compliance Our strong relationships with our lenders enabled us to agree new or extended
reporting. facilities with HSBC and Virgin Money during the year.
We use an appropriate amount of debt to generate higher returns. We therefore the quality of the security we provide for our loans;
build strong relationships with lenders, who provide the debt facilities we
The board receives information about debt funding as part The board also welcomed a representative from Virgin Money to its board
need to grow our business. our ability to meet our interest payments;
of its regular meeting papers and at other times when needed. meeting in August to better understand their view of the market and help the
board consider additional risks and opportunities, particularly with Virgin
the resilience of our revenue; and Money's significant experience in development funding.
ESG.
PRINCIPAL RISKS AND UNCERTAINTIES
Our risk assessment
The table below shows the Group's post-mitigation principal risks and
uncertainties.
1. Changes to government social care policy
2. Infectious diseases
3. General economic conditions
4. Weakening care market
5. Significant tenant default
6. Underinvestment in care homes by tenants
7. Environmental regulation and impact of climate change
8. Ability to meet our debt financing obligations
9. Reliance on the Investment Manager
10. Reputation (new)
Political
1. Changes to government social care policy
Probability: Medium
Impact: Moderate
Change in the year: No change
Our business provides premises in which our tenant operators provide care for
vulnerable people. Government has a responsibility to ensure the delivery of
affordable care for all that need it. Changes in government legislation and
funding affect the market in which we operate, by changing requirements that
may affect revenue or costs. This could reduce our tenants' ability to pay
their rent and result in changes to valuations of our properties.
The government published a White Paper in December 2021 that set out measures
for reforming adult social care, including £5.4 billion of incremental
funding between 2022 and 2025. This was followed by a further White Paper in
February 2022 outlining how the NHS and local government can come together to
deliver care for their communities. However, in November 2022 the government
cancelled its planned health and social care levy and announced a two-year
delay to funding due to the current economic challenges. Timeframe and funding
for implementation of the planned changes continue to be uncertain.
Mitigation
It is not in the interests of any political party to undermine the viability
of the care home sector. If operators were to fail and premises be repurposed
to other uses, the government and local authorities would have to step in to
provide alternatives. Such an outcome would undoubtedly increase public sector
funding of the sector.
We have little sway over government policy, although we seek to educate and
influence decision-makers to see the need for a successful elderly care
sector.
The Investment Manager closely monitors policy developments and engages with
representative organisations and care home operators to ensure it is fully
informed on proposals and their likely effect.
Opportunity
Increased funding by the government on elderly care may provide increased
growth opportunities.
Market conditions
2. Infectious diseases
Probability: Moderate
Impact: Moderate
Change in the year: Decrease
Significant outbreaks of infectious diseases, in particular pandemics such as
COVID-19, can have long-lasting and far-reaching effects across all
businesses. Care for older people is a particular area of heightened concern.
The risks from an outbreak include reduced occupancy at care homes and the
lack of availability of key workers at the care homes as a result of infection
or a requirement to self-isolate. Restoring occupancy to normal levels could
take time to achieve with increased availability of beds across the sector and
increased price competition, adding to the long-term challenge of financial
stability for tenants.
Should a pandemic take hold and not be capable of being contained, it could
compound and enhance a number of principal risks, including general economic
conditions, significant tenant default and the ability to meet our financing
obligations.
While Covid-19 remains a risk to health, vaccinations have reduced the level
of hospitalisations and those falling seriously ill from COVID-19 in care
homes. There remains a risk of further variants that could result in increased
restrictions and health concerns for the residents and carers in our care
homes.
Mitigation
The healthcare sector, including care home operators and staff, is experienced
in preparing for and implementing procedures to deal with infections as
evidenced by their response to other infectious diseases, that were prevalent
before COVID-19, which are now returning.
Central government and local authorities provided support to operators to help
deal with the infection control measures, staff sick pay and the immediate
effects of a potential reduction in occupancy. This was evidenced during the
height of the COVID-19 pandemic and would be sought in any future infectious
disease outbreaks.
Ensuring our tenants maintain strong rent cover enables them to better react
to any immediate and unforeseen changes.
3. General economic conditions
Probability: High
Impact: Moderate
Change in the year: No change
The economy is in a period of high inflation as a result of several factors
including staffing shortages, supply chain issues and heightened gas and
electricity prices. Interest rates have risen sharply and are not expected to
return to the levels experienced for the past 15 years. This combination of
factors is having a continued effect on global economies and supply chains.
Higher interest rates have hit property valuations across all sectors in the
UK including healthcare. If they continue to rise, they could put further
pressure on valuations and bank funding financial covenants.
Local authorities may not have adequate funding, putting pressure on care
operator's fee levels. Should this result in weakening tenants' profitability,
this would put pressure on rental levels and valuations, possibly leading to
tenant default or covenant breaches.
Mitigation
We believe that tenant profitability with long-term affordable rents is key to
sustainable profitability and risk management. Our homes are let on leases of
at least 20 years, with annual rental increases linked to the Retail Price
Index, the majority with floors and caps of between 2% and 4%. We regularly
assess and monitor the financial robustness of our tenants and, in particular,
the rent cover. We generally acquire homes with a proven track record that
should ensure rent cover towards 2.0x can be achieved. The caps on our rental
increases help protect our tenants particularly in times of high inflation.
Our strategy is to keep average leverage below the cap of 35% adding
additional resilience to our financing structure.
Opportunity
The Group has a growth strategy with a view of the long-term opportunity in
healthcare property. In a downward trending market, it enables us to make
acquisitions at more attractive yields and in an upward trending market, to
enhance value and improve rent cover.
4. Weakening care market
Probability: Medium
Impact: Moderate
Change in the year: No change
Several factors may affect the market for care for older people, including:
· adverse conditions in the healthcare sector;
· local authority funders amending their payment terms, affecting
our tenants' revenues;
· increased regulatory responsibility and associated costs for our
tenants that are not offset by an increase in fees; and
· competition or alternative forms of care provision.
These could all materially affect our tenants' covenant strength and their
ability to pay rent, resulting in a reduction in the value of the care home
and a higher risk of default.
Mitigation
We monitor every care home that we own to understand its underlying
performance, so that we can identify any concerns early and can explore
mitigating actions such as additional investment, or discussing with our
tenants staffing levels and the acuity of the care provided.
Opportunity
Our investment criteria seek to identify assets that can be acquired at or
below their replacement cost, with strong rent cover to ensure our tenants
have resilient operating cash flows. This provides us and our tenants the
headroom to invest in our assets and their services to ensure our tenants are
the providers of choice in a changing market.
Underperformance of assets
5. Significant tenant default
Probability: Medium
Impact: Moderate
Change in the year: No change
As a result of the tenant diversification, we have clarified this risk to
reflect a risk of a significant tenant default which may arise as a result of
a default of a single large tenant (typically above 10% of rent roll) or a
combination of defaults of our smaller tenants.
The default of tenants, or failing to act quickly and decisively when
confronted with a failing tenant, would affect the value of our homes and, if
significant, our ability to pay dividends to our shareholders and to meet our
financing obligations.
A default, or a risk of default, can arise due to rising costs, reduced
occupancy and changing fee rates. These can arise from a variety of issues,
which can include but are not restricted to:
· internal pressures such as poor cost control, poor management or
quality of care resulting in a home closure; or
· transitional issues when taking on a new home; or
· external pressures such as increased competition, inflationary
pressures or infectious diseases
The availability of staff continues to be a challenge across the healthcare
sector and rising food and utility costs are challenging.
Mitigation
Our tenants have shown themselves to be resilient and have displayed an
ability to pass on most inflationary pressure in higher fees and have been
helped by our rent caps. Apart from our close monitoring of individual
operator and home performance, we also ensure a diversified and high-quality
tenant base. In general, our low levels of leverage and fully covered dividend
limit the effect on the performance of the Group. We are able to re-tenant
homes with a new operator or one of our existing tenants. Recently one tenant
has defaulted and we are actively engaging with this tenant while exploring
all options.
Opportunity
We have the opportunity to explore different service provisions at our homes
to ensure they are successful and meeting the demands of the current market.
6. Underinvestment in care homes by tenants
Probability: Moderate
Impact Medium
Change in the year: No change
The attractiveness of our portfolio is based on the quality of the operators,
measured by their regulatory and financial performance, and our properties'
ability to provide effective space from which our tenants can operate. The
most important point is to have homes that are well suited to residents' needs
and their ability to pay. They do not have to be newly built, but they need to
be comfortable, fit for purpose and affordable.
There is a risk that increased investment is required to ensure the homes are
compliant with environmental regulations. This includes the expectation that
regulation will be put in place for all leased properties to be English EPC C
by 2027 and EPC B by 2030.
There is also a risk that insufficient investment is made and homes become
unattractive to residents.
Mitigation
All of our leases have full repair and maintenance obligations on tenants
including a minimum spend per annum per bed (based on a three-year average
spend), which tenants are required to report against and we actively monitor.
In addition, all our leases require our tenants to meet all legal requirements
to enable them to continue to operate as a care home.
Failure to comply with the terms of the lease results in a default, enabling
us to replace the tenant in extreme circumstances.
As part of our acquisition due diligence, we undertake further assessment of
improvements that will enhance the quality of service and environmental
sustainability of the homes. Where appropriate we jointly commit with our
tenants to ensure appropriate works are undertaken within the first 12 to 18
months of the home's operation under the lease.
Opportunity
We work very closely with our tenants to identify opportunities to maintain
and enhance the portfolio and, where appropriate, agree to fund these
improvements, in return for an increase in rent. The benefit of operating a
portfolio reduces our exposure to changes in individual properties.
7. Environmental regulation and impact of climate change
Probability: High
Impact: Medium
Change in the year(1): Increase
Tightening environmental regulations increase the need for investment or
redevelopment of our portfolio and could restrict our tenants' ability to
provide care and earn revenue.
Failure to consider the effects of climate change could accelerate the
obsolescence of our care homes (both physical and low carbon transition risks)
with corresponding implications to value and long-term income generation.
Mitigation
Our leases require that our tenants maintain our buildings in line with
regulatory requirements.
We have undertaken a review of our portfolio, analysing its carbon footprint
and current and potential EPC ratings to ensure our investment strategy
supports carbon reduction and improved EPC ratings across our portfolio and
preparedness for future legislation. Our current estimates is that an
investment of, on average, £2.4 million per year is required on the current
portfolio to deliver this strategy and we will work with our tenants to
implement these measures. We have undertaken additional analysis on the
further actions required to reduce the carbon footprint of our care homes and
we have developed a delivery plan with interim milestones, reaching our net
zero target in 2045. This will enable our actions now to help mitigate the
longer-term risks to our portfolio and society as a whole.
As part of our acquisition due diligence, we also undertake an environmental
assessment of the homes to ensure they are EPC compliant and we identify
improvements that can be made to the homes and, where appropriate, commit to
these with our tenants from the outset. Our valuers also include commentary
around the risk of flooding for the asset within their valuation report, which
forms part of the building's environmental assessment.
Opportunity
There is an opportunity for us to invest in our homes to ensure they remain
fit for purpose with the potential for this investment to be value-enhancing.
Financing
8. Ability to meet our debt financing obligations
Probability: Medium
Impact: Moderate
Change in the year: No change
If we are unable to operate within our debt covenants (primarily interest
cover and LTV covenants), this could lead to a default and our debt funding
being recalled.
Interest on our variable rate debt facilities is payable based on a margin
over SONIA and bank base rates. Any adverse movements in these rates could
significantly impair our profitability and ability to pay dividends to
shareholders.
Mitigation
We seek to ensure appropriate levels of leverage are put in place with
mitigating measures that enable us to manage our debt financing in downside
scenarios. These measures include but are not limited to leverage and hedging
policies and ring fenced security pools with no cross-default provisions. See
the going concern section, where risks and mitigations are reviewed in detail.
Opportunity
As we grow, we have the opportunity to implement more attractive financial
structures including long-term funding and sustainability-linked loans that
can enhance the financial returns for our stakeholders and reduce the risks of
default.
Corporate risk
9. Reliance on the Investment Manager
Probability: Low
Impact: Major
Change in the year: No change
As an externally managed company, we rely on the Investment Manager's services
and reputation to execute our strategy and support our day-to-day
relationships.
Our performance depends on the Investment Manager's capabilities, the
retention of its key staff and its ability to deliver business continuity.
There is a risk of potential conflict of interest with the Investment Manager
and its initial tenant for the Seed Portfolio.
Mitigation
We have an Investment Management Agreement, which sets out the basis on which
the Investment Manager provides services to us, the restrictions it must
operate within and certain additional rights we have, such as a right of
pre-emption for investment opportunities. The Agreement may be terminated on
12 months' notice.
The Management Engagement Committee's role and responsibilities include
reviewing the Investment Manager's performance. The board as a whole remains
actively engaged with the Investment Manager to ensure a positive and
collaborative working relationship.
The board has put in a number of controls and procedures to mitigate the risk
of conflicts. For example, all investment decisions with related parties
require board approval.
10. Reputational risk
Probability: Medium
Impact: Moderate
Change in the year: NEW
There are a variety of circumstances that could damage our reputation and have
a corresponding impact on value for all stakeholders. Some examples include:
Our tenants operate in a challenging market caring for people with significant
needs and they need to ensure there is adequate training of their carers to
provide high-quality care. There is a risk that the training is not properly
administered or adhered to, resulting in a poor quality of care. The care home
could be embargoed and its reputation damaged. Our tenant could be fined, and
occupancy could fall and may struggle to recover leading to weaker trading,
putting at risk the tenant's ability to pay rent and affect the valuation of
the property.
Our tenants employ a large workforce of carers and support staff and they need
to ensure they are properly supporting these staff and not breaching minimum
wage and modern slavery standards. This could result in fines and operational
difficulties for the tenants putting at risk the tenant's ability to pay rent.
A combination of the above risks could result in negative publicity for the
REIT and reduced investor confidence.
There are related party activities, which we disclose, between the Investment
Manager and the Minster Group. If there is a breakdown in trust on related
party disclosures this could damage both tenant and the Group's reputation and
ability to raise further equity financing or renew its debt facilities.
Mitigation
We monitor and work closely with our tenants to understand when and where
standards may have fallen below those expected by their residents, residents'
families, staff and the regulators. We support and challenge our tenants where
these standards are not upheld.
The board ensures that related party activities are transparently disclosed
and decisions taken are in the best interest of stakeholders. Legal advice is
sought where necessary to ensure disclosures are properly and promptly
disclosed.
Other risks that we monitor closely
Adverse change in investment opportunities
A change in the market conditions and availability of investments may provide
opportunities as well as risks.
Taxation risk
We are a UK REIT and subject to rules to maintain that status. Any change to
our tax status or in UK tax legislation could affect our ability to achieve
our investment objectives and our ability to provide favourable returns to
shareholders.
Cyber security
Inappropriate access to customer or company data may lead to loss of sensitive
information and result in a material adverse effect on the Company's financial
condition, reputation and investor confidence. The Group has relatively few IT
systems as the Investment Manager operates the business trading and the
Administrator runs the accounting and banking systems.
Financial management
Budgets and plans may be inaccurate, based on unrealistic assumptions or
inappropriately applied, leading to material adverse financial conditions,
performance, results and investor concerns. The board review financial
results, forecasts and variances on at least a quarterly basis.
Development activity
Development contracts have inherent risks in relation to cost and quality
management that can result in cost overruns and delays. The pandemic and
subsequent high inflationary environment have produced a challenge to
developments due to a slowdown in construction activity and rising costs; we
continue to monitor this risk as the situation evolves.
The Company has a robust risk management framework in place to monitor and
mitigate all of the above risks.
SECTION 172(1) STATEMENT
The directors have considered the matters set out in section 172(1)(a)-(f) of
the Companies Act 2006 when performing their duty under section 172. They
consider that they have acted in good faith in the way that would be most
likely to promote the success of the Company for the benefit of its members as
a whole, while also considering the broad range of stakeholders who interact
with our business.
Taking account of our stakeholder views
Information on our stakeholder engagement, including how the board keeps
itself informed about stakeholder views and how we take their views into
account in decision-making, can be found in this report.
Key board decisions
The board's principal decisions each year typically include approving
acquisitions, capital expenditure, raising equity and debt, and dividend
payments.
Other key decision in the year included the equity raises and refinancing.
Matter Response
a) The likely consequence of any decision in the long term. The nature of our business means that the directors have to consider the
long-term impact of their decisions, given that we expect our tenant
relationships to last for at least 20 years.
During the year, the board considered and approved our investments in 12 care
homes on leases of up to 35 years.
b) The interests of the Company's employees. This is not applicable, as we do not have any employees.
c) The need to foster the Company's business relationships with suppliers, Our tenants are our customers. Developing long-term relationships with them is
customers and others. central to our business model. During the year, all the directors took part in
calls with our tenants, to understand their views on a range of issues. The
board also reviews reports of tenant performance at each scheduled meetings.
Our main suppliers are our service providers, in particular the Investment
Manager and Administrator. The board engages frequently with both, including
at its regular board meetings. Information on our service provider
relationships can be found in the Management Engagement Committee report.
d) The impact of the Company's operations on the community and environment. As our tenants operate our care homes, they're responsible for relationships
with their local communities and for the environmental impact of running the
homes. However, we work closely with our tenants to improve the sustainability
of our assets. The board has a strong focus on ESG matters and considers them
at every regular meeting. The board also held a separate sessions on our ESG
strategy in August and December 2022 and a further meeting was held in
February 2023. The board has developed its ESG strategy and net zero pathway
and milestones.
e) The desirability of the Company maintaining a reputation for high standards The directors understand that tenants will only sign long-term leases with
of business conduct. landlords they can trust and want to work with. The Group therefore relies on
a reputation for high standards of business conduct. This is reflected in our
core values, which include acting openly and transparently with all of our
stakeholders, as well as in our ESG strategy.
The directors continue to directly engage with our stakeholders, such as the
tenant call noted above, contributing to open and transparent relationships.
f) The need to act fairly between members of the Company. As at the date of this report all directors are independent. This ensures that
all decisions taken by the board or committees reflect the interests of
shareholders as a whole.
Case study: considering our stakeholders' interests
During the year, the board spent time considering a potential investment in
six care homes in Shropshire and Cheshire, which we announced shortly after
the year end.
Background
We invested £56 million in the homes, funding 80% in cash and the remainder
through issuing 9.6 million shares at 116.62 pence per share. The homes have
438 beds, including 400 ensuites. Four homes have EPC B ratings and two have C
ratings, and we've developed outline strategies to increase the C ratings to
B.
We've initially invested through a loan to Welford Healthcare, an existing
tenant who'll operate the homes. This allowed Welford to buy the legal
entities that own the assets, so it could immediately take over running the
homes. Once the CQC has approved the transfer, we have the option to acquire
the homes and Welford has the option to sell them to us to repay the loan.
While the loan is in place, we'll receive interest payments at 8.4% per annum
and, when either option is exercised, new 35-year leases come into effect,
which we've pre-agreed with Welford. These specify initial rent of £3.9
million a year, which is a gross initial yield of 7.0%.
The homes were owned and run by Morris Care Limited, which has a strong
reputation and good working relationships with its local authorities and NHS.
The homes will continue to trade under the Morris brand for the next three
years.
We funded the cash element of the investment by drawing down existing debt
facilities. To provide certainty about the cost, we also took out a £50
million interest rate cap, which caps the SONIA rate at 3.0% for two years.
The stakeholder interests we considered
Tenants
One of our objectives is to grow with our tenants, which helps to diversify
their businesses and improve their resilience. With this transaction, our
relationship with Welford has increased to 18 homes with 1,087 beds. Welford
also benefited from Morris Care's operational management transferring across
to it, ensuring it has the capacity to successfully take on the increased
business.
Residents
By structuring the deal as a "loan to buy" transaction, we avoided a
potentially long transition period while waiting for the CQC to approve the
homes' transfer to new legal entities. Allowing Welford to take over
immediately means it can ensure residents receive a consistently high standard
of care.
Shareholders
The transaction benefits shareholders, adding six high-quality assets to the
portfolio, generating an attractive income and strengthening an important
tenant. Shareholders are also protected while the loan remains in force, as
the structure includes security over the care homes and several operational
covenants.
Long-term effect of the decision
The new leases we've pre-agreed with Welford run for 35 years, on our standard
terms. The transaction will deliver long-term benefits, as the rents in the
new leases are index linked, which will grow our revenues over time and help
to increase the capital values of the assets.
GOING CONCERN AND VIABILITY
The board regularly monitors both the Company's and the Group's ability to
continue as a going concern and its longer-term viability. The going concern
assessment covers the 12-month period to 31 March 2024. Summaries of the
Group's liquidity position, actual and prospective compliance with loan
covenants and the financial strength of its tenants are considered at the
scheduled quarterly board meetings and more often as required. As part of the
Group's assessment the modelling includes (but is not limited to), the
identification of uncertainties facing the Group, including:
· The risks of default of the Group's tenants taking into
consideration current rent cover. We review the occupancy performance of each
tenant over the preceding 12 months and then run sensitivities by tenant
including a drop in occupancy of 5%, an increase in staff costs by 5% and
other costs by 10% and the effect these sensitivities have on rent cover and
appraise the risk of a tenant default as low, medium or high;
· The risk of a fall in investment property values. This may be
because of a multitude of risks (as outlined in the Principal Risks and
Uncertainties section). We review the resulting impact on the Group's debt
covenants and the remedial action that may be taken, including the extent of
the resources available to the Company to cure covenant breaches; and
· The board also considered the expiry of the £15 million Metro
facility in June 2023. In the second half of 2022, the Group secured two
increases to debt facilities, one on improved terms and with an extended
maturity. Following this, there is sufficient headroom available to repay the
Metro term loan as it falls due.
The Group's forecasting model includes a variety of stress tests including
reduction in investment property valuations, restriction of income from
tenants (i.e. non-payment of rent), the inclusion of increases in underlying
costs and increases in interest rates. Reverse stress tests have been prepared
to evaluate how much valuations or net income would need to fall to trigger
defaults in each of the security pools. Mitigating actions including stopping
dividend payments, corresponding reductions in costs as valuations fall and
the use of unsecured properties to prevent covenant breaches were also
considered. The sensitivity scenarios reviewed by the Audit Committee and the
board include:
· Non-payment of rent for all medium and high-risk tenants for six
months while increasing SONIA and bank base rates to 4.5% on variable interest
rate loans;
· assessing the level of loss of rents that could be sustained
within a security group before each covenant or default level is triggered;
and
· assessing the loss of rents or valuation that could be sustained
before the Group's unsecured assets would be fully utilised in application to
cure rights within debt facilities.
The detailed scenario modelling is performed by the Investment Manager and
presented to the Audit Committee for its review, challenge and debate. The
projections and scenarios considered in connection with the approval of this
financial information had particular regard to stresses arising from rising
inflation and interest rates and, in particular, the impact on the trading and
financial strength of the Group's tenants as highlighted above.
Property values would need to fall by more than 33% before loan to value
covenant breaches would arise with all facilities being fully drawn. Rental
income would need to fall by 37% before interest cover covenant breaches would
arise with all facilities being fully drawn.
Going concern statement
The board has weighed up the risks to going concern set out above, together
with the ability of the Company to take mitigating action in response to those
risks. The board considers that the combination of their conclusions as to the
tenants' prospects, the headroom available on debt covenants and the liquidity
available to the Group to deal with stressed scenarios on income and valuation
outlook, leads to a conclusion that the Company and the Group are each able to
continue in business for the foreseeable future. The board therefore consider
it appropriate to adopt the going concern basis in the preparation of this
financial information.
Viability statement
The period over which the directors consider it feasible and appropriate to
report on the Group's viability is the five-year period to 31 March 2028. This
period has been selected because it is the period that is used for the Group's
medium-term business plans. The Board considers the resilience of projected
liquidity, as well as compliance with debt covenants, under a range of
inflation and property valuation assumptions. These scenarios include stress
tests and reverse stress tests consistent with those described in the
paragraphs preceding the going concern statement and include a consideration
of mitigating actions that may be taken to avert or mitigate potential threats
to viability.
Given the longer period of assessment covered by the viability review, further
analysis is conducted in order to test the reasonableness of the key
assumptions made and to examine potential alternative outcomes and mitigating
actions relating to those risks and assumptions. These included:
· Debt refinancings during the forecast period, beyond the £15
million Metro facility. In relation to additional refinancing obligations
within the period of the viability assessment, the directors have reasonable
confidence that extensions or replacement debt facilities will be put in
place.
· Furthermore, the Group has the ability to make disposals of
investment properties to meet its future financing requirements; however, this
assessment did not assume any disposals took place.
· In 2024, the Company's articles of association require the board
to propose an ordinary resolution at the Annual General Meeting for the
Company to continue in its current form. This will be the first continuation
vote since the Company's inception, if the vote is passed the Company will
continue its business as presently constituted and the continuation vote will
be held at every fifth annual general meeting thereafter. If the vote is not
passed the directors shall within three months after the date of the
resolution, put forward proposals to members to the effect that the Company be
reconstructed, reorganised or wound up. The board are not aware of any
significant or material issues raised by shareholders in relation to this
Continuation Vote, but will continue to engage with shareholders as the 2024
Annual General Meeting approaches.
Having considered the forecast cash flows and the impact of the sensitivities
in combination, the directors confirm that they have a reasonable expectation
that the Group will be able to continue in operation and meet its liabilities
as they fall due over the five-year period ending 31 March 2028.
STATEMENTS OF RESPONSIBILITIES
Directors' statement of responsibilities
The directors are responsible for preparing the annual report and the Group
and parent company financial statements in accordance with applicable law and
regulations. Company law requires the directors to prepare the Group and
Company financial statements for each financial year. The Group financial
statements have been prepared in accordance with UK adopted international
accounting standards. The Company financial statements have been prepared in
accordance with United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law). Under company law, the
directors must not approve the financial statements unless they are satisfied
they give a true and fair view of the state of affairs of the Group and
Company and of the profit or loss for the Group and Company for that year.
In preparing the financial statements, the directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· for the Group financial statements, state whether they have been
prepared in accordance with UK adopted international accounting standards,
subject to any material departures disclosed and explained in the Group
financial statements;
· for the Company financial statements, state whether they have been
prepared in accordance with Financial Reporting Standard 102 (FRS 102),
subject to any material departures disclosed and explained in the Company
financial statements; and
· prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Group and the Company will continue in
business.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's and Company's transactions and
disclose with reasonable accuracy at any time the financial position of the
Group and Company and enable them to ensure that its financial statements
comply with the Companies Act 2006.
They have general responsibility for taking such steps as are reasonably open
to them to safeguard the assets of the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for
preparing a directors' report, a strategic report, a directors' remuneration
report and a corporate governance statement that comply with that law and
those regulations.
Website publication
The directors are responsible for ensuring the annual report, including the
financial statements, is made available on a website. Financial statements are
published on the Company's website in accordance with legislation in the
United Kingdom governing the preparation and dissemination of financial
statements, which may vary from legislation in other jurisdictions. The
maintenance and integrity of the Company's website (at
http://www.impactreit.uk) is the responsibility of the directors. The
directors' responsibility also extends to the ongoing integrity of the
financial statements contained therein.
Directors' responsibility statement, pursuant to DTR4
We confirm that to the best of our knowledge:
· the financial statements have been prepared in accordance with UK
adopted international accounting standards and, give a true and fair view of
the assets, liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation as a whole; and
· the Management Report includes a fair review of the development and
performance of the business and the financial position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.
Signed on behalf of the board by:
Rupert Barclay Chairman
27 March 2023
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
Notes 31 December 2022 31 December 2021
Total Total
£'000 £'000
Gross rental income 5 42,242 36,398
Insurance/service charge income 5 704 496
Insurance/service charge expense 5 (704) (496)
Net rental income 42,242 36,398
Administrative and other expenses 6 (7,009) (5,766)
Profit on disposal of investment properties 13 130 308
Operating profit before changes in fair value 35,363 30,940
Changes in fair value of put option 16 (1,811) -
Changes in fair value of investment properties 13 (14,456) 4,220
Operating profit 19,096 35,160
Finance income 8 3,200 72
Finance expense 9 (5,408) (3,264)
Profit before tax 16,888 31,968
Tax charge on profit for the year 10 - -
Profit and total comprehensive income (attributable to shareholders) 16,888 31,968
Earnings per share - basic and diluted (pence) 11 4.33p 9.41p
The results are derived from continuing operations during the year, the Group
had no other comprehensive income in the current or prior year.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
Notes 31 December 2022 31 December 2021
£'000 £'000
Non‑current assets
Investment property 13 504,318 437,635
Interest rate derivatives 18, 25 - 94
Trade and other receivables 14 68,131 61,948
Total non‑current assets 572,449 499,677
Current assets
Trade and other receivables 14 1,181 1,557
Interest rate derivatives 18, 25 363 -
Cash and cash equivalents 15 22,531 13,261
Total current assets 24,075 14,818
Total assets 596,524 514,495
Current liabilities
Borrowings 17, 25 (14,814) -
Trade and other payables 16 (9,126) (6,703)
Total current liabilities (23,940) (6,703)
Non‑current liabilities
Borrowings 17, 25 (122,382) (110,907)
Put option 16 (1,811) -
Trade and other payables 16 (2,471) (2,641)
Total non‑current liabilities (126,664) (113,548)
Total liabilities (150,604) (120,251)
Total net assets 445,920 394,244
Equity
Share capital 21 4,048 3,506
Share premium reserve 21 365,642 305,672
Capital reduction reserve 21 24,077 24,077
Retained earnings 52,153 60,989
Total equity 445,920 394,244
Net Asset Value per ordinary share (pence) 23 110.17p 112.43p
The consolidated financial statements for Impact Healthcare REIT plc
(registered number: 10464966) were approved and authorised for issue by the
board of directors on 27 March 2022 and are signed on its behalf by:
Rupert Barclay Chairman
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2022
Notes 31 December 2021
31 December 2022 £'000
£'000
Cash flows from operating activities
Profit for the year (attributable to equity shareholders) 16,888 31,968
Finance income 8 (3,200) (72)
Finance expense 9 5,408 3,264
Profit on disposal of investment properties 13 (130) (308)
Changes in fair value of put option 16 1,811 -
Changes in fair value of investment properties 13 14,456 (4,220)
Net cash flow before working capital changes 35,233 30,632
Working capital changes
Increase in trade and other receivables (5,952) (9,183)
Increase in trade and other payables 207 2,133
Net cash flow generated from operating activities 29,488 23,582
Investing activities
Purchase of investment properties 13 (69,217) (26,900)
Proceeds on sale of investment property 2,625 1,676
Acquisition costs capitalised (2,661) (1,230)
Capital improvements (11,195) (1,050)
Loan advanced to operator for portfolio acquisition - (37,500)
Loan associated costs (478) (93)
Interest received 3,270 2
Net cash flow used in investing activities (77,656) (65,095)
Financing activities
Proceeds from issue of shares 21 62,269 35,334
Issue costs of ordinary share capital 21 (1,757) (707)
Borrowings drawn 17, 25 85,074 92,685
Borrowings repaid 17, 25 (57,362) (54,507)
Loan arrangement fees paid 25 (1,265) (1,844)
Loan commitment fees paid (628) (430)
Interest payments received on interest rate derivatives 25 112 -
Interest paid on bank borrowings (3,281) (1,864)
Dividends paid to equity holders 12 (25,724) (21,872)
Net cash flow generated from financing activities 57,438 46,795
Net (decrease)/increase in cash and cash equivalents for the year 9,270 5,282
Cash and cash equivalents at the start of the year 13,261 7,979
Cash and cash equivalents at the end of the year 22,531 13,261
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Notes Share capital Share premium Capital reduction reserve Retained earnings Total
£'000 £'000 £'000 £'000 £'000
1 January 2022 3,506 305,672 24,077 60,989 394,244
Total comprehensive income - - - 16,888 16,888
Transactions with owners
Dividends paid 12 - - - (25,724) (25,724)
Share issue 21 542 61,727 - - 62,269
Share issue costs 21 - (1,757) - - (1,757)
31 December 2022 4,048 365,642 24,077 52,153 445,920
For the year ended 31 December 2021
Notes Share capital Share premium Capital reduction reserve Retained earnings Total
£'000 £'000 £'000 £'000 £'000
1 January 2021 3,189 271,362 24,077 50,893 349,521
Total comprehensive income - - - 31,968 31,968
Transactions with owners
Dividends paid 12 - - - (21,872) (21,872)
Share issue 21 317 35,017 - - 35,334
Share issue costs 21 - (707) - - (707)
31 December 2021 3,506 305,672 24,077 60,989 394,244
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2022
1. Basis of preparation
General information
The consolidated financial statements for the year ended 31 December 2022 are
prepared in accordance with UK adopted international accounting standards.
The financial information does not constitute the Group's financial statements
for the periods ended 31 December 2022 or 31 December 2021, but is derived
from those financial statements. Financial statements for the year ended 31
December 2021 have been delivered to the Registrar of Companies and those for
the year ended 31 December 2022 will be delivered following the Company's
Annual General Meeting. The auditor's reports on both the 31 December 2021
and 31 December 2022 financial statements were unqualified; did not draw
attention to any matters by way of emphasis; and did not contain statements
under section 498 (2) or (3) of the Companies Act 2006.
The consolidated financial statements have been prepared on a historical cost
basis, except for investment properties, the put option and the interest rate
derivative, which have been measured at fair value.
The Group has chosen to adopt EPRA best practices recommendations guidelines
for calculating key metrics such as earnings per share.
The Company is a public listed company incorporated and domiciled in England
and Wales. The Company's ordinary shares are listed on the Premium Listing
Segment of the Official List and trade on the premium segment of the main
market of the London Stock Exchange. The registered address of the Company is
disclosed in the corporate information.
Convention
The consolidated financial statements are presented in Sterling, which is also
the Group's functional currency, and all values are rounded to the nearest
thousand (£'000), except when otherwise indicated.
Going concern
The Strategic report describes the Group's financial position, cash flows and
liquidity position. The principal risks are set out in this report and note 19
to the financial statements also provide details of the Group's financial
instruments and its exposure to liquidity and credit risk.
The ongoing effect of the high inflationary environment and rising interest
rates have been considered by the directors. The directors have reviewed the
forecasts for the Group taking into account the impact of increasing interest
rates and rising costs, as a result of inflation, on trading over the 12
months from the date of signing this annual report. The forecasts have been
assessed against a range of possible downside outcomes incorporating
significantly lower levels of income and higher costs, see Going concern and
viability for further detail.
The directors believe that there are currently no material uncertainties in
relation to the Group's ability to continue for a period of at least 12 months
from the date of approval of the Group's financial statements. The board is,
therefore, of the opinion that the going concern basis adopted in the
preparation of the annual report is appropriate.
2. Significant accounting judgements, estimates and assumptions
The preparation of the Group's financial statements requires management to
make judgements, estimates and assumptions that affect the reported amounts
recognised in the financial statements and disclosures. However, uncertainty
about these assumptions and estimates could result in outcomes that could
require material adjustment to the carrying amount of the assets or
liabilities in future periods.
Information about significant areas of estimation, uncertainty and critical
judgements in applying accounting policies that have the most significant
effect on the amount recognised in the financial statements are disclosed
below:
2.1 Judgements
Operating lease contracts - the Group as lessor
The Group has acquired investment properties that are subject to commercial
property leases with tenants. The Group has determined, based on an evaluation
of the terms and conditions of the arrangements, particularly the duration of
the lease terms and minimum lease payments, that it retains all the
significant risks and rewards of ownership of these properties and so accounts
for the leases as operating leases.
The leases, when signed, are for between 20 and 30 years with a tenant‑only
option to extend for one or two periods of ten years. At the inception of the
lease, management do not judge any extension of the leases to be reasonably
certain and, as such, do not factor any lease extensions into their
considerations of lease incentives and their treatment.
2.2 Estimates
Fair valuation of investment property
The valuations have been prepared in accordance with the RICS Valuation -
current edition of the global and UK standards as at the valuation date, or
the RICS "Red Book" as it has become widely known.
The basis of value adopted is that of fair value being "the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date" in accordance
with IFRS 13. The concept of fair value is considered to be consistent with
that of market value.
The significant methods and assumptions used by the valuers in estimating the
fair value of the investment properties are set out in note 13.
Gains or losses arising from changes in the fair values are included in the
Consolidated statement of comprehensive income in the period in which they
arise. In order to avoid double counting, the assessed fair value may be
increased or reduced by the carrying amount of any accrued income resulting
from the spreading of lease incentives and/or guaranteed minimum rent uplifts
at the inception of the lease.
The nature of uncertainty regarding the estimation of fair value as well as
sensitivity analysis has been considered as set out in note 13.
Put and call options
The fair value of the assets underlying the put and call options, being the
property portfolio to which they relate, are measured in line with investment
property, the fair value movement is shown on the Consolidated statement of
comprehensive income as Changes in fair value of put/call option, and on the
Consolidated statement of financial position as put/call option. Further
detail of these options is outlined in note 16.
3. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and all of its subsidiaries drawn up to 31 December 2022. Subsidiaries
are those entities, including special purpose entities, controlled by the
Company. Control exists when the Company is exposed, or has rights, to
variable returns from its investment with the investee and has the ability to
affect those returns through its power over the investee. In assessing
control, potential voting rights that presently are exercisable are taken into
account. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until
the date that control ceases.
Segmental information
The board is of the opinion that the Group is engaged in a single segment
business, being the investment in the United Kingdom in healthcare assets. The
board consider that these properties have similar economic characteristics and
as a result these individual properties have been aggregated into a single
reportable operating element. Reporting on tenants providing greater than 10%
of revenue is included in note 5.
Rental income
Rental income arising on investment properties is included in gross rental
income in the Consolidated statement of comprehensive income and is accounted
for on a straight‑line basis over the lease term. The change in the RPI is
reviewed annually, with the minimum uplifts being taken into consideration
when accounting for the rental income on a straight‑line basis upon
inception of the lease. The resulting asset or liability is reflected as a
receivable or payable in the Consolidated statement of financial position.
When a contract includes both lease and non‑lease components, the Group
applies IFRS 16 to allocate the consideration under the contract to each
component.
The valuation of investment properties is increased or reduced by the total of
the unamortised lease incentive and straight‑line receivable or payable
balances. Any remaining balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at disposal.
The initial lease rental payments and guaranteed rental uplifts are spread
evenly over the lease term, even if payments are not made on such a basis. The
lease term is the non‑cancellable period of the lease together with any
further term for which the tenant has the option to continue the lease, except
for where, at the inception of the lease, the directors have no certainty that
the tenant will exercise that option.
Increased rental payments arising from the variation of the lease on capital
improvement licences are spread evenly over the remaining lease term from the
date of signing the licence agreement.
At each rent review, the uplift in rent is calculated in accordance with the
terms of the lease. If greater than the minimum uplift then the uplift above
and beyond the minimum recognised is calculated and recognised in the period
in which it arises, with there being no rebasing of the amounts to recognise
over the remaining lease.
Finance income
Finance income is accounted for on an accruals basis.
Service charges, insurance and other expenses recoverable from tenants
Income arising from expenses recharged to tenants is recognised in the year
which the compensation becomes receivable. Service, insurance and other
similar charges that are recoverable are included in gross rental income as
the directors consider that the Group acts as principal in this respect.
Finance expense
Finance expenses consist principally of interest payable, amortisation of loan
arrangement fees and fair value movements on interest rate derivatives.
Loan arrangement fees are expensed over the term of the relevant loan.
Interest payable and other finance costs which the Group incurs on bank
facilities, are expensed in the period to which they relate.
Taxation
The Group is a REIT in relation to its property investments and is therefore
exempt from tax, subject to the Group maintaining its REIT status.
Current tax is the expected tax payable on any non‑REIT taxable income for
the year, using tax rates enacted or substantively enacted at the balance
sheet date.
Investment properties
Investment properties consist of land and buildings (principally care homes)
which are held to earn rental income and for capital growth potential.
Investment properties are initially recognised at cost, being the fair value
of consideration given, including transaction costs associated with the
investment property. Investment properties are recognised when the risk and
rewards on the acquired properties passes to the Group on completion of the
purchase. Any subsequent capital expenditure incurred in improving investment
properties is capitalised in the period incurred and included within the book
cost of the property.
After initial recognition, investment properties are measured at fair value,
with gains and losses recognised in the Consolidated statement of
comprehensive income in the period which they arise. Fair value measurement
takes into consideration the improvements to the investment property during
the year taking into account the future cash flows from increases in rent that
have been contracted in relation to the improvement and discounting them at an
appropriate rate to reflect the percentage of completion of the works being
undertaken and the risk to completion that remains.
Gains and losses on disposals of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset.
These are recognised in the Consolidated statement
of comprehensive income in the period in which they arise.
Trade and other receivables
Trade receivables comprise mainly lease income receivable.
Trade and other receivables are initially recognised at fair value plus
transaction costs and subsequently measured at amortised cost less impairment.
The Group applies the amortised cost basis as trade and other receivables are
normally held with an objective to collect contractual cash flows, i.e. "held
to collect"; which comprises payment of principal and interest on the
principal amount outstanding.
The Group applies the IFRS 9 simplified approach to measuring the expected
credit losses ("ECLs") for trade receivables whereby the allowance or
provision for all trade receivables are based on the lifetime ECLs.
The Group applies the general approach for initial recognition and subsequent
measurement of ECL provisions for the loan receivable and other receivables
which have maturities of 12 months or more and have a significant finance
component.
This approach comprises of a three‑stage approach to evaluating ECLs. These
stages are classified as follows:
Stage one
Twelve‑month ECLs are recognised in profit or loss at initial recognition
and a loss allowance is established. For financial instruments that have not
deteriorated significantly in credit quality since initial recognition or that
have low credit risk at the reporting date, the loss allowance for 12‑month
ECLs is maintained and updated for changes in amount. Interest revenue is
calculated on the gross carrying amount of the asset (i.e. without reduction
for ECLs).
Stage two
If the credit risk increases significantly and the resulting credit quality is
not considered to be low credit risk, full lifetime ECLs are recognised and
includes those financial instruments that do not have objective evidence of a
credit loss event. Interest revenue is still calculated on the gross carrying
amount of the asset.
Stage three
If the credit risk of a financial asset increases to the point that it is
considered credit impaired (there is objective evidence of impairment at the
reporting date), lifetime ECLs continue to be recognised. For financial assets
in this stage, lifetime ECLs will generally be individually assessed. Interest
revenue is calculated on the amortised cost net carrying amount (amortised
cost less impairment).
The key estimation techniques including key inputs and assumptions regarding
the Group's ECL provision for trade and other receivables are included as part
of the Group's assessment of credit risk as set out in note 19.
Rent smoothing adjustments are not considered to be financial assets as the
amounts are not yet contractually due. As such, the requirements of IFRS 9
(including the expected credit loss method) are not applied to those balances,
although the credit risk is considered in the determination of the fair value
of the related property.
Put and call options
Put and call option instruments, comprising the right for an operator to sell
to the Group or Impact to acquire from the operator the share capital of a
company holding a portfolio of properties, are measured at fair value.
Changes in fair value of put and call option instrument are recognised within
the Consolidated statement of comprehensive income in the period in which they
occur.
The Group does not apply hedge accounting in accordance with IFRS 9.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and deposits with maturities of
three months, or less, held at call with banks.
Dividends
Dividends are recognised when they become legally payable.
Share capital
The share capital relates to amounts subscribed for share capital at its par
value.
Share premium
The surplus of net proceeds received from the issuance of new shares over
their par value is credited to this account and the related issue costs are
deducted from this account. The reserve is non‑distributable.
Capital reduction reserve
The capital reduction reserve is the result of the transfer of a portion of
share premium into a distributable reserve.
Trade payables
Trade payables are initially recognised at their fair value and are
subsequently measured at amortised cost.
Borrowings
All borrowings are initially recognised at fair value net of attributable
transaction costs. After initial recognition, all borrowings are measured at
amortised cost, using the effective interest method. The effective interest
rate is calculated to include all associated transaction costs.
Fees paid on the establishment of loan facilities are recognised as
transaction costs of the loan to the extent that it is probable that some or
all of the facility will be drawn down. The fee is capitalised as a prepayment
for liquidity services and amortised over the period of the facility to which
it relates within finance costs in the Consolidated statement of comprehensive
income.
Interest rate derivatives
Derivative financial instruments, comprising interest rate caps for hedging
purposes, are initially recognised at fair value and are subsequently measured
at fair value.
Changes in fair value of interest rate derivatives are recognised within the
Consolidated statement of comprehensive income in the period in which they
occur.
The Group does not apply hedge accounting in accordance with IFRS 9.
4. New standards issued
4.1 New standards issued with effect from 1 January 2022
No new standards have been applied that have had a material effect on the
financial position or performance of the Group.
4.2 New standards issued but not yet effective
There are no new standards issued but not yet effective that are expected to
have a material effect on the Group.
5. Property income
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Rental income cash received in the year 35,889 30,472
Rent received in advance of recognition1 170 143
Rent recognised in advance of receipt2 6,324 5,873
Rental lease incentive amortisation (3) (141) (90)
Gross rental income 42,242 36,398
Insurance/service charge income 704 496
Insurance/service charge expense (704) (496)
Net rental income 42,242 36,398
1 This relates to movement in rent premiums received in prior periods as well
as any rent premiums received during the year, deemed to be a premium over the
term of the lease.
2 Relates to movement in both rent‑free periods being recognised on a
straight‑line basis over the term of the lease and rent recognised in the
period to reflect the minimum uplift in rents over the term of the lease on a
straight‑line basis.
3 Lease incentives relate to the amortisation of payments made to tenants that
are not part of any acquisition contractual obligations. These payments are
made in return for an increase in rent.
For accounting purposes, premiums received are reflected on a straight‑line
basis over the term of the lease. In addition, the Group benefits from a
minimum annual rental uplift of 1% or 2% on all care home leases. For
accounting purposes these uplifts are also incorporated to recognise income on
a straight‑line basis.
Insurance/service charge relates to property insurance that is paid by the
Group and recharged to tenants.
Minster Care Management Limited and Croftwood Care UK Limited are both part of
the Minster Care Group Limited and together represent 44.7% of Gross rental
income; Holmes Care Group Limited also represents more than 10% of the Gross
rental income:
2022 2021
Minster Care Management Ltd 29.3% 31.1%
Croftwood Care UK Ltd 15.4% 17.3%
Holmes Care 10.3% 11.6%
Others 45.0% 40.0%
6. Administrative and other expenses
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Investment Manager fees (see note 22) 4,581 3,858
Directors' remuneration (see note 7) 250 221
Auditor's fees
- Statutory audit of the Company and Group (including subsidiaries) 280 203
- Agreed upon procedures for the Company's interim report 16 14
Total auditor's fees1 296 217
Administration fees 497 472
Regulatory fees 18 20
Legal and professional 630 509
Recruitment services and remuneration committee advice 70 12
Other administrative costs 667 457
7,009 5,766
1 In 2022, the Auditor also received fees of £66,000 (2021: £nil) relating
to other advisory services in relation to share issues during the year. These
fees have been recognised in Share premium as share issue costs.
The amounts shown above include irrecoverable VAT as appropriate.
7. Directors' remuneration
The Group had no employees in the current or prior period. The directors, who
are key management personnel of the Company, are appointed under letters of
appointment for services. Directors' remuneration, all of which represents
their fees for services provided during the year, are as follows:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Rupert Barclay (Chairman) 49 46
Rosemary Boot 35 33
Philip Hall 35 33
Paul Craig 35 33
Amanda Aldridge 41 38
Chris Santer 35 21
230 204
Employer's National Insurance 20 17
250 221
Directors' remuneration payable at 31 December 2022 amounted to £10,242
(2021: £8,860).
8. Finance income
Note Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Bank interest 8 2
Loan interest 3,192 70
3,200 72
Loan interest income relates to interest on loans made to operators to
purchase property portfolios. Upon granting these loans the Group enters into
put and call option agreements that allows it to purchase the property owning
entity for £1 upon certain conditions being met.
9. Finance expenses
Note Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Interest payable on bank borrowings 3,985 1,874
Commitment fee payable on borrowings 599 517
Amortisation of loan arrangement fee 1,205 960
Changes in fair value of interest rate derivatives 18 (381) (87)
5,408 3,264
The total interest payable on financial liabilities carried at amortised cost
comprises interest payable on borrowings, which was £142.3 million at 31
December 2022 (2021: £114.5 million). Amortisation on loan arrangement fees
relates to capitalised fees being amortised over the term of the facility, in
the year ended 31 December 2022 £2,628,000 was capitalised (2021:
£2,444,000).
10. Taxation
As a REIT, the Group is exempt from corporation tax on the profits and gains
from its property investment business, provided it continues to meet certain
conditions as per REIT regulations. For the year ended 31 December 2022 and
the year ended 31 December 2021, the Group did not have any non‑qualifying
profits except interest income.
Tax charge in the Consolidated statement of comprehensive income:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
UK corporation tax - -
Reconciliation of the corporation tax charge:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Profit before tax 16,888 31,968
Theoretical tax at UK corporation tax rate (19%) 3,209 6,074
Effects of:
REIT exempt income (5,905) (5,256)
Non‑taxable items 2,696 (818)
Total tax charge - -
Under the UK REIT rules within which the Group operates, capital gains on the
Group's UK properties are generally exempt from UK corporation tax, provided
they are not held for trading.
11. Earnings per share
Earnings per share (EPS) amounts are calculated by dividing profit for the
period attributable to ordinary equity holders of the Company by the
time‑weighted average number of ordinary shares outstanding during the
period. As there are no dilutive instruments outstanding, basic and diluted
earnings per share are identical.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Total comprehensive income (attributable to shareholders) 16,888 31,968
Adjusted for:
- Revaluation movement 8,103 (12,896)
- Rental lease incentive (141) 2,660
- Rental income arising from recognising rental premiums and 6,494 6,016
future guaranteed rent uplifts
Change in fair value of investment properties 14,456 (4,220)
Change in fair value of put option 1,811 -
Profit on disposal of investment property (130) (308)
Change in fair value of interest rate derivative (381) (87)
EPRA earnings 32,644 27,353
Adjusted for:
Rental income arising from recognising rental premiums and (6,494) (6,016)
future guaranteed rent uplifts
Amortisation of lease incentives 141 90
Interest received on interest rate cap 112 -
Amortisation of loan arrangement fees 1,205 960
Profit on disposal of investment property 130 308
Adjusted earnings 27,738 22,695
Average number of ordinary shares 390,058,661 339,705,743
Earnings per share (pence)1 4.33p 9.41p
EPRA basic and diluted earnings per share (pence)1 8.37p 8.05p
Adjusted basic and diluted earnings per share (pence)1 7.11p 6.68p
1 There is no difference between basic and diluted earnings per share.
The European Public Real Estate Association ("EPRA") publishes guidelines for
calculating adjusted earnings designed to represent core operational
activities.
The EPRA earnings are arrived at by adjusting for the changes in fair value of
investment properties and interest rate derivatives, and removal of profit or
loss on disposal of investment properties.
Adjusted earnings:
Adjusted earnings is used by the board to help assess the Group's ability to
deliver a cash covered dividend from recurring net income. The metric reduces
EPRA earnings by other non‑cash items credited or charged to the Group
statement of comprehensive income including the effect of straight‑lining of
rental income from fixed rental uplift adjustments and amortisation of loan
arrangement fees. The metric also adjusts for any one‑off costs that are not
expected to be recurring.
Fixed rental uplift adjustments relate to adjustments to net rental income on
leases with minimum uplifts embedded within their review profiles. The total
minimum income recognised over the lease term is recognised on a
straight‑line basis and therefore not supported by cash flows during the
early term of the lease, but this reverses towards the end of the lease.
The board uses the adjusted earnings alongside the available distributable
reserves in its consideration and approval of dividends.
12. Dividends
Dividend rate Year ended Year ended
(pence per share) 31 December 2022 31 December 2021
£'000 £'000
Fourth interim dividend for the period ended 31 December 2020 (ex‑dividend - 1.5725p - 5,015
11 February 2021)
First interim dividend for the period ended 31 December 2021 (ex‑dividend - 1.6025p - 5,619
27 May 2021)
Second interim dividend for the period ended 31 December 2021 (ex‑dividend - 1.6025p - 5,619
5 August 2021)
Third interim dividend for the period ended 31 December 2021 (ex‑dividend - 1.6025p - 5,619
28 October 2021)
Fourth interim dividend for the period ended 31 December 2021 (ex‑dividend - 1.6025p 6,181 -
25 February 2022)
First interim dividend for the period ended 31 December 2022 (ex‑dividend - 1.6350p 6,307 -
5 May 2022)
Second interim dividend for the period ended 31 December 2022 (ex‑dividend - 1.6350p 6,618 -
25 August 2022)
Third interim dividend for the period ended 31 December 2022 (ex‑dividend - 1.6350p 6,618 -
3 November 2022)
Total dividends paid 25,724 21,872
Total dividends paid in respect of the year 4.9050p 4.8075p
Total dividends unpaid but declared in respect of the year 1.6350p 1.6025p
Total dividends declared in respect of the year - per share 6.54p 6.41p
On 4 February 2022, the Company declared an interim dividend of 1.6025 pence
per share for the period from 1 October 2021 to 31 December 2021 and was paid
on 11 March 2022.
On 25 April 2022, the Company declared an interim dividend of 1.6350 pence per
ordinary share for the period from 1 January 2022 to 31 March 2022 and was
paid on 20 May 2022.
On 16 August 2022, the Company declared an interim dividend of 1.6350 pence
per share for the period from 1 April 2022 to 30 June 2022 and was paid on 9
September 2022.
On 21 October 2022, The Company declared an interim dividend of 1.6350 pence
per share for the period 1 July 2022 to 30 September 2022 and was paid on 24
November 2022.
13. Investment property
In accordance with the RICS "Red Book" the properties have been independently
valued on the basis of fair value by Cushman & Wakefield, an accredited
independent valuer with a recognised professional qualification. They have
recent and relevant experience in the locations and categories of investment
property being valued and skills and understanding to undertake the valuations
competently. The properties have been valued on an individual basis and their
values aggregated rather than the portfolio valued as a single entity. The
valuers have used recognised valuation techniques in accordance with those
recommended by the International Valuation Standards Committee and are
compliant with IFRS 13. Factors reflected include current market conditions,
annual rentals, lease lengths, property condition including improvements
affected during the year, rent coverage, location and comparable evidence.
The valuations are the ultimate responsibility of the directors. Accordingly,
the critical assumptions used in establishing the independent valuation are
reviewed by the board.
All corporate acquisitions during the year have been treated as asset
purchases rather than business combinations because they are considered to be
acquisitions of properties rather than businesses.
As at As at
31 December 2022 31 December 2021
£'000 £'000
Opening value 459,442 418,788
Property additions 69,217 26,900
Property disposals1 (2,495) (1,368)
Acquisition costs capitalised 2,591 1,311
Capital improvements 11,826 915
Revaluation movement (8,102) 12,896
Closing value per independent valuation report 532,479 459,442
Guaranteed rent reviews debtor (28,112) (21,788)
Lease incentive debtor (2,519) (2,660)
Rent premium creditor 2,470 2,641
Closing fair value per Consolidation statement of financial position 504,318 437,635
1 In 2022 the carrying value of disposals was £2,495,000 (2021: £1,368,000),
this combined with the profit on disposal of £130,000 (2021: £308,000) makes
up the total net proceeds shown in the Consolidated statement of cash flows.
During the year, the Group acquired an additional 12 assets. During the year
the Group disposed of one property.
The majority of the properties owned are freehold except for 11 properties
which are long leasehold, eight of these are under a minimum of 999-year
leases at a peppercorn rent and the remaining three are under 125 year leases
at a peppercorn rent.
Change in fair value of investment properties
The following elements are included in the change in fair value of investment
properties reported in the consolidated financial statements:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Revaluation movement (8,102) 12,896
Rental lease incentive(1) 141 (2,660)
Rental income arising from recognising rental premiums and (6,495) (6,016)
guaranteed rent uplifts
Change in fair value of investment properties (14,456) 4,220
1 Lease incentives relate to the amortisation of payments made to tenants that
are not part of any acquisition contractual obligations. These payments are
made in return for an increase in rent.
Rental income arising from recognising guaranteed rent uplifts and initial
lease rental payment includes the adjustments to rental receipts for the
period to reflect the total minimum income recognised over the expected lease
terms on a straight‑line basis. Rent premiums received are being reflected
on a straight‑line basis over the term of the lease. In addition, the Group
benefits from a minimum annual rental uplift of 1% or 2% on all leases. These
uplifts are also incorporated to recognise income on a straight‑line basis.
The elements are reported in the table below. Capital improvements funded by
the Group are undertaken under Deeds of Variation to the leases. The period
between signing the Deed of Variation and rent commencing is a rent‑free
period and rent is recognised on a straight‑line basis from the signing of
the Deed of Variation.
Note Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Rent received in advance of recognition1 5 170 143
Rent recognised in advance of receipt2 5 6,324 5,873
Rental income arising from recognising rental premium and future guaranteed 6,494 6,016
rent uplifts
1 Rent premiums received in prior periods as well as any rent premiums
received during the year, deemed to be a premium over the term of the lease.
2 Relates to both rent‑free periods being recognised on a straight‑line
basis over the term of the lease and rent recognised in the period to reflect
the minimum 1% or 2% uplift in rents over the term of the care home lease on a
straight‑line basis.
Descriptions and definitions relating to valuation techniques and key
unobservable inputs made in determining fair values are as follows:
Valuation techniques used to derive fair values
The valuations have been prepared on the basis of fair value which is defined
in the RICS "Red Book" as the "price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date" in accordance with IFRS 13. The concept
of fair value is considered to be consistent with that of market value. The
valuation takes into consideration the current market conditions including
improvements effected during the year, annual rentals, lease lengths, property
condition, rent coverage and location.
Unobservable inputs
These include: estimated average increase in rent based on both market
estimations and contractual situations; equivalent yield (defined as the
weighted average of the net initial yield and reversionary yield); estimated
rental value ("ERV") based on market conditions prevailing at the valuation
date and the physical condition of the property determined by inspections on a
rotational basis. A decrease in the ERV would decrease fair value. A decrease
in the equivalent yield would increase the fair value. An increase in the
remaining lease term would increase the fair value.
Sensitivity of measurement of significant unobservable inputs
Initial yields range from 3.75% to 12.50% across the portfolio, the EPRA
"topped-up" net initial yield for the portfolio was 6.98% as at 31 December
2022. ERVs range from £73k to £1,238k across the portfolio.
A 0.25% movement of the valuation yield would have approximately a £18.2
million impact on the investment property valuation. A 1% movement in the
rental income would have approximately a £5.3 million impact on the
investment property valuation.
Fair value hierarchy
The Group is required to classify fair value measurements of its investment
properties using a fair value hierarchy, in accordance with IFRS 13 "Fair
Value Measurement". This hierarchy reflects the subjectivity of the inputs
used, and has the following levels:
Level 1 - unadjusted quoted prices in active markets;
Level 2 - observable inputs other than quoted prices included within level
1; and
Level 3 - unobservable inputs.
The following table provides the fair value measurement hierarchy for
investment property:
Date of Total Level 1 Level 2 Level 3
valuation £'000 £'000 £'000 £'000
Assets measured at fair value:
Investment properties 31 December 2022 504,318 - - 504,318
Investment properties 31 December 2021 437,635 - - 437,635
There have been no transfers between any of the levels during the year.
14. Trade and other receivables
As at As at
31 December 2022 31 December 2021
£'000 £'000
Non‑current
Rent recognised in advance of receipt 28,112 21,788
Rental lease incentive 2,519 2,660
Loan receivable1 37,500 37,500
68,131 61,948
Current
Loan interest receivable1 - 70
Loan associated costs 671 748
Prepayments 510 739
1,181 1,557
69,312 63,505
1 In December 2021, the Group entered into a loan agreement with the Holmes
Care Group, in which the Group provided a term loan facility of £37,500,000
which bears interest at 8.57% per annum. The funds were lent to Holmes Care
Group to acquire a portfolio of properties. Upon certain conditions being met,
a put and call option for the Group to acquire this portfolio of assets for
£1 is exercisable (see note 16 for further detail).
No impairment losses have been recognised during the year (refer to note 19).
15. Cash and cash equivalents
As at As at
31 December 2022 31 December 2021
£'000 £'000
Cash and cash equivalents 22,531 13,261
Included as part of cash and cash equivalents is restricted cash of £14.7m
(2021: nil). This restricted cash relates to the proceeds of the loan notes
issued and will be released upon addition of the designated properties into
the security pool.
16. Trade and other payables
As at As at
31 December 2022 31 December 2021
£'000 £'000
Non‑current
Rent received in advance of recognition 2,471 2,641
Put option 1,811 -
Current
Trade and other payables 3,420 2,859
Interest payable 1,149 474
Withholding tax payable - (PID Dividends) 609 505
Rental received in advance 1,949 1,427
Rental deposits 443 443
Capital improvements payable 1,556 995
9,126 6,703
13,408 9,344
To reconcile Working capital changes in the Consolidated statement of cash
flows, the Interest payable and Capital improvements payable movements are
excluded as these are allocated to Financing activities and Investing
activities respectively.
On 23 December 2021, the Group entered into a loan agreement with the Holmes
Care Group, in which the Group provided a term loan facility of £37,500,000
which bears interest at 8.57% per annum. The funds were lent to Holmes Care
Group to acquire a portfolio of properties.
On the same date, put and call options were entered into between entities
owned by Holmes Care Group and Impact Property 6 Limited which, upon certain
conditions being met, gives the Group the right to acquire and Holmes Care
Group the right to sell the company holding the portfolio of properties and
the £37,500,000 loan liability, to the options' counterparty for
consideration of £1.
This option becomes exercisable primarily upon Holmes Care Group receiving
approval from the Care Inspectorate to re-register the operations of the care
homes into another operating entity. This is considered to be a substantive
condition to be met before the options will be exercisable and therefore
management do not consider there is any present ownership interest in the
property company which may be acquired at a future date. The fair value of the
option reflects the underlying investment properties, offset by loan and
interest due at the balance sheet date. The investment properties have been
valued on the same basis as the Group's investment property (see note 3 for
further detail).
17. Borrowings
A summary of the bank borrowings drawn in the period are shown below:
As at As at
31 December 2022 31 December 2021
£'000 £'000
At the beginning of the year 114,548 76,370
Borrowings drawn in the year 85,074 92,685
Borrowings repaid in the year (57,362) (54,507)
Total bank borrowings drawn(1) 142,260 114,548
1 Total bank borrowings drawn are equal to its fair value
As at 31 December 2022, the Group had £241 million (2021: £168 million) of
available facilities of which £98.7 million was undrawn (2021: £53.4
million).
The Group signed a £50 million five-year loan facility with Metro Bank PLC
(the "Metro Facility") on 15 June 2018; this facility terminates on 15 June
2023. The Metro Facility initially had two elements: a term loan of £25
million (the "Term Loan") and a revolving credit facility of £25 million (the
"RCF"). During 2022, the Group cancelled its RCF. As at 31 December 2022, the
balance of the Term Loan was £15 million (31 December 2021: £15 million) and
the cancelled RCF £nil (31 December 2021: £7.3 million).
The Metro Facility has a margin of 265 basis points over Metro Bank PLC's
published Base Lending Rate. The five-year Term Loan can be repaid without
penalty. The loan is secured against a portfolio of 16 care homes (2021: 38)
held in wholly owned Group companies (Impact Property 1 Limited (IP1) and
Impact Property 2 Limited (IP2)). These assets had a closing value per the
independent valuation report of £53.9 million as at 31 December 2022 (2021:
£109.4 million). The change in value from 2021 to 2022 is primarily driven by
the removal of assets from the security pool upon the cancellation of the RCF
portion of the loan facility. The lender also holds charges over the shares of
the subsidiaries and intermediate holding companies.
On 23 December 2022, the Group agreed a seven‑year revolving credit facility
of £50 million (the "Clydesdale Facility") with Clydesdale Bank PLC
("Clydesdale"), replacing the £25 million revolving credit facility
previously secured with Clydesdale which was due to expire in 2024; this
facility terminates on 23 December 2029. In 2022, the Group drew down £12
million (2021: £5 million) from the Clydesdale Facility and repaid £5
million (2021: £5 million). As at 31 December 2022, the Group had drawn £17
million (2021: £10 million) from the Clydesdale Facility.
The Clydesdale Facility has a margin of 200 basis points over SONIA and is
secured against a portfolio of
23 properties (2021: 15), 20 of which are held in a wholly owned Group company
(Impact Property 3 Limited (IP3)). These assets had a closing value per the
independent valuation report of £110.9 million as at 31 December 2022 (2021:
£68.7 million).
On 6 April 2020, the Group secured a three‑year revolving credit facility of
£50 million (the "HSBC Facility") with HSBC UK Bank Plc ("HSBC") with two
one‑year extension options, subject to HSBC approval. On 31 October 2022,
the HSBC Facility was amended and restated to £75 million with a maturity in
2025 and a one-year extension option. The Group drew down £35 million (2021:
£15 million) from the HSBC Facility and repaid £45 million (2021: £16
million) in 2022. As at 31 December 2022, the Group had drawn £10 million
(2021: £20 million) from the HSBC Facility.
The HSBC Facility has a margin of 200 or 205 basis points over SONIA,
depending on the loan to value ratio of the 34 properties (2021: 22) over
which the Group has granted security to HSBC as security for the loan held in
a wholly owned Group company (Impact Property 4 Limited (IP4)). These assets
had a closing value per the independent valuation report of £146.8 million as
at 31 December 2022 (2021: £114.1 million).
On 25 June 2021, the Group agreed a revolving credit facility of £26 million
(the "NatWest Facility") with National Westminster Bank Plc ("NatWest"). The
Group did not draw down (2021: £25 million) from the NatWest Facility and
made no repayments (2021: £nil) in 2022. As at 31 December 2022, the Group
had drawn £25.3 million (2021: £25.3 million) from the NatWest Facility.
The three-year NatWest Facility has a margin of 190 basis points per annum
over SONIA and is secured against a portfolio of 16 properties (2021: 16)
which are held in a wholly owned Group company (Impact Property 7 Limited
(IP7)). These assets had a closing value per the independent valuation report
of £64.7 million as at 31 December 2022 (2021: £61.2 million).
On 21 December 2021, the Group agreed a long-term debt financing in the form
of senior secured notes of £75 million with two large institutional
investors. The Group issued £75 million of senior secured notes ("Notes"),
comprising two tranches with a weighted average coupon of 2.967%, and a
weighted average maturity of 14 years. The first tranche comprises of £37
million of Notes at a fixed coupon of 2.932% which were issued on 21 December
2021 and mature in December 2035. The second tranche comprises of £38 million
of Notes at a fixed coupon of 3.002% which were issued on 20 June 2022 and
mature in June 2035. The debt is secured over a portfolio of 21 care homes
(2021: 14) held in a wholly owned Group company (Impact Property 8 Limited
(IP8)). These assets had a closing value per the independent valuation report
of £128.9 million as at 31 December 2022 (2021: £82.5 million). The debt has
been guaranteed by Impact Healthcare REIT plc.
Under the covenants related to the loans the Group is required to ensure that
the:
IP1 and IP2 IP3 IP4 IP7 IP8
Loan to value does not exceed 35% 50% 55% 50% 55%
Interest cover based on passing rent from the ring-fenced properties must 200% 250% 250% 250% 250%
exceed
The Group has been in compliance with all of the financial covenants of the
loan facilities as applicable throughout the year covered by these financial
statements.
Any fees associated with arranging the borrowings unamortised as at the year
end are offset against amounts drawn on the facilities as shown in the table
below:
As at As at
31 December 2022 31 December 2021
£'000 £'000
Borrowings drawn 142,260 114,548
Arrangement fees - brought forward (3,641) (2,157)
Arrangement fees incurred during the year (2,628) (2,444)
Amortisation of loan arrangement fees 1,205 960
Borrowings at amortised cost 137,196 110,907
Borrowings at amortised cost due within one year 14,814 -
Borrowings at amortised cost due after one year 122,382 110,907
Maturity analysis of borrowings:
As at As at
31 December 2022 31 December 2021
£'000 £'000
Repayable within one year 15,000 -
Repayable between one and two years 25,260 22,286
Repayable between two and five years 10,000 55,262
Repayable in over five years 92,000 37,000
Total 142,260 114,548
The weighted average term of the Group's committed facilities is 6.3 years
(2021: 4.7 years).
18. Interest rate derivatives
As at As at
31 December 2022 31 December 2021
£'000 £'000
At the beginning of the year 94 7
Change in fair value of interest rate derivatives 381 87
Payments received on interest rate derivative (112) -
363 94
To mitigate the interest rate risk that arises as a result of entering into
variable rate linked loans, the Group entered into an interest rate cap with
the notional value of £25 million and a strike rate of 1% effective from 21
June 2018 with a termination date of 15 June 2023. The fair value of the
interest rate cap is based on a floating reference of 1-month SONIA.
At 31 December 2022, the Group had loans of £67.3 million (2021: £77.5
million) which were exposed to interest rate risk.
19. Financial instruments and financial risk management
The Group's principal financial assets and liabilities are those that arise
directly from its operations: trade and other receivables, trade and other
payables and cash held at bank. The Group's other principal financial assets
and liabilities are borrowings and interest rate derivatives, the main purpose
of which is to finance the acquisition and development of the Group's
investment property portfolio and hedge against the interest rate risk
arising.
Set out below is a comparison by class of the carrying amounts of the Group's
financial instruments:
As at As at
31 December 2022 31 December 2021
£'000 £'000
Financial assets at amortised cost:
Loan receivable 37,500 37,570
Cash and cash equivalents 22,531 13,261
Financial assets at fair value:
Interest rate derivative 363 94
Financial liabilities at amortised cost:
Borrowings 137,196 110,907
Trade and other payables 6,568 4,711
Financial liabilities at fair value:
Put option 1,811 -
The interest rate derivative and put option are the only financial instruments
that are measured at fair value through the Group's Consolidated statement of
comprehensive income.
The following table provides the fair value measurement hierarchy for the
interest rate derivative and put option:
Date of Total Level 1* Level 2* Level 3*
Valuation £'000 £'000 £'000 £'000
Assets measured at fair value:
Interest rate derivative 31 December 2022 - - 363 -
Interest rate derivative 31 December 2021 - - 94 -
Financial liabilities at fair value:
Put option 31 December 2022 - - - 1,811
Put option 31 December 2021 - - - -
* The fair value categories are defined in note 13
Risk management
The Group is exposed to market risk (including interest rate risk), credit
risk and liquidity risk. The board oversees the management of these risks. The
board reviews and agrees policies for managing each of the risks that are
summarised below.
Market risk (including interest rate risk)
Market risk is the risk that the fair values or future cash flows of financial
instruments will fluctuate because of changes in market prices. The financial
assets held by the Group that are affected by interest rate risk are
principally the Group's cash balances and the interest rate derivative.
The Group monitors its interest rate exposure on a regular basis. A
sensitivity analysis performed to ascertain the impact on profit or loss and
net assets of a 50-basis point shift in interest rates on the Group's cash
balances would result in an increase of £112,660 (2021: £66,310) or a
decrease of £112,660 (2021: £66,310) in interest receivable for the year.
The financial liabilities held by the Group that are affected by interest rate
risk are principally the Group's borrowings. The Group has entered into an
interest rate derivative to reduce its exposure to interest rate risk on its
Metro floating-rate term debt (refer to note 18). A sensitivity analysis is
performed to ascertain the impact on profit or loss and net assets of a
50-basis point shift in interest rates on the Group's unhedged borrowings
would result in an increase of £211,300 (2021: £447,740) or a decrease of
£211,300 (2021: £447,740) in interest payable for the year.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations
under a financial instrument or customer contract, leading to a financial
loss.
The Group is exposed to credit risks from its leasing activities. Credit risk
is reduced by requiring tenants to pay rentals in advance under their lease
obligations. The credit quality of the tenant is also assessed based at the
time of entering into a lease agreement thereby reducing credit risk.
Outstanding trade receivables are regularly monitored. There are no
outstanding trade receivables at 31 December 2022.
Credit risk also arises with the cash balances held with banks and financial
institutions. The board believes that the credit risk on current account cash
balances is limited because the counterparties are reputable banks with high
credit ratings assigned by international credit‑rating agencies. The
impairment loss identified on cash balances was considered immaterial.
The loan of £37.5 million, granted to one of the Group's operators, is
secured against the property portfolio it was used to purchase. Periodic
valuations of these properties are carried out to assess if the loan is credit
impaired. There has been no deterioration in credit quality since initial
recognition and the 12-month expected credit losses are nil.
Liquidity risk
Liquidity risk arises from the Group's management of working capital. It is
the risk that the Group will encounter difficulty in meeting its financial
obligations as they fall due, as the majority of the Group's assets are
property investments and are therefore not readily realisable. The Group's
objective is to ensure it has sufficient available funds for its operations
and to fund its capital expenditure. This is achieved by regular monitoring of
forecast and actual cash flows by the AIFM ensuring the Group has appropriate
levels of cash and available drawings to meet liabilities as they fall due.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments:
<3 months 3‑12 months 1‑2 years 2‑5 years >5 years Total
£'000 £'000 £'000 £'000 £'000 £'000
31 December 2022:
Borrowings - 15,000 25,260 10,000 92,000 142,260
Interest and commitment fees on borrowings 968 2,765 3,458 8,195 18,065 33,451
Trade and other payables 6,568 - - - - 6,568
31 December 2021:
Borrowings - - 22,286 55,262 37,000 114,548
Interest and commitment fees on borrowings 629 2,544 3,393 3,527 19,400 29,493
Trade and other payables 4,771 - - - - 4,771
20. Capital management
The objective of the Group is to acquire, own, lease, renovate, extend and
redevelop high‑quality, healthcare real estate assets in the UK and lease
those assets, under full repairing and insuring leases, primarily to
healthcare operators providing residential healthcare services. This provides
ordinary shareholders with an attractive level of income together with the
potential for income and capital growth from investing in a diversified
portfolio of freehold and long leasehold care homes.
The board has responsibility for ensuring the Group's ability to continue as a
going concern and continues to qualify for UK REIT status. This involves the
ability to borrow monies in the short and long term and pay dividends out of
reserves, all of which are considered and approved by the board on a regular
basis.
The Company achieved its increased targeted aggregate dividend of 6.54 pence
per share for the year ended 31 December 2022 and its target aggregate
dividend of 6.41 pence per share for the year ended 31 December 2021.
As at 31 December 2022, the Group remains within its maximum loan to value
("LTV") covenant which is 35% of gross asset value of the Group as a whole.
The Group has a further £98.7 million RCF facilities available from which it
can draw.
To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders, return capital to shareholders, issue new
shares or buyback shares for cancellation or for holding in treasury. Capital
consists of ordinary share capital, other capital reserves and retained
earnings.
21. Share capital, share premium and capital reduction reserve
Shares in issue Share capital Share premium Capital reduction reserve Total
Number £'000 £'000 £'000 £'000
As at 31 December 2020 318,953,861 3,189 271,362 24,077 298,628
Share issue 31,690,327 317 35,017 - 35,334
Share issue costs - - (707) - (707)
As at 31 December 2021 350,644,188 3,506 305,672 24,077 333,255
Share issue 54,120,140 542 61,727 - 62,269
Share issue cost - - (1,757) - (1,757)
As at 31 December 2022 404,764,328 4,048 365,642 24,077 393,767
The Company had 404,764,328 shares of nominal value of 1 pence each in issue
at the end of the year (2021: 350,644,188).
On 21 February 2022, the Company issued 35,087,720 ordinary shares at a price
of 1.14 pence per ordinary share raising gross proceeds of £40,000,000.
On 8 July 2022, the Company issued a further 19,032,420 ordinary shares at a
price of 1.17 pence per ordinary share raising gross proceeds of £22,267,931.
22. Transactions with related parties
Investment Manager
The fees calculated and paid for the year to the Investment Manager were as
follows:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Amounts payable to Impact Health Partners LLP
Net fee 4,581 3,858
Gross fee 4,581 3,858
For the year ended 31 December 2022, the principals and Finance Director of
Impact Health Partners LLP, the Investment Manager, are considered key
management personnel. Mr Patel and Mr Cowley are the principals and Mr Yaldron
is the Finance Director of Impact Health Partners LLP and they own 3.14%,
0.35% and 0.02% respectively (either directly, with related parties or through
a wholly owned company) of the total issued ordinary share capital of Impact
Healthcare REIT plc. Mr Patel also (directly and/or indirectly) holds a
majority 72.5% stake in Minster Care Group Limited "MCGL". Mr Cowley also
holds a 20% interest in MCGL. 41% of the Group's rental income was received
from MCGL or its subsidiaries. A trade receivable of £nil was outstanding at
the year end (2021: £nil).
During the year the key management of Impact Health Partners LLP received the
following dividends from Impact Healthcare REIT plc: Mahesh Patel £723,130
(2021: £701,160); Andrew Cowley £91,871 (2021: £74,140) and David Yaldron
£7,975 (2021: £5,319).
Directors' interests
Paul Craig is a director of the Company. He was also the portfolio manager at
Quilter Investors, which has an interest in 66,923,191 ordinary shares of the
Company through funds under management. The remaining directors who are
shareholders in the Company do not hold significant interest in the ordinary
share capital of the Company.
During the year the directors, who are considered key management personnel,
received the following dividends from the Company: Rupert Barclay £11,927
(2021: £11,694); Rosemary Boot £1,952 (2021: £1,914); Chris Santer £920
(2021: £201) and Philip Hall £1,952 (2021: £1,914). In addition, funds
which were managed by Paul Craig received dividends from the Company of
£4,089,458 (2021: £3,582,078).
Directors' remuneration for the year is disclosed in note 7 as well as in the
Directors' remuneration report.
Minster Care Group Limited ("MCGL")
MCGL, a tenant of the Group, is considered a related party as it is majority
owned by the principals of the Investment Manager. As at 31 December 2022, the
Group leased 59 properties to MCGL (2021: 60), all properties owned for over
one year underwent an inflation-linked rent review in line with their lease
provisions. In 2022, the Group entered into no new leases with MGCL (2021: one
new lease at a rent of £414,000) and disposed of one property let to MCGL to
a third party, the lease, which was subject to annual rent of £278,661, was
cancelled with 15 years remaining (2021: disposed of no properties). In 2021,
the Group paid a performance-related deferred payment on one property of £2.0
million in return for a £160,000 increase in rent. In 2022, the Group spent
£0.8 million on approved capital expenditure, which was rentalised at 8%
(2021: £0.2 million). These transactions were fully compliant with the
Company's related party policy.
23. Net Asset Value (NAV) per share
Basic NAV per share is calculated by dividing net assets in the Consolidated
statement of financial position attributable to ordinary equity holders of the
Company by the number of ordinary shares outstanding at the end of the year.
As there are no dilutive instruments outstanding, basic and diluted NAV per
share are identical.
The Group has chosen to adopt EPRA net tangible assets ("EPRA NTA") as its
primary EPRA NAV measure as it most closely aligns with the business practices
of the Group. The adjustments between NAV and EPRA NTA are reflected in the
following table:
As at As at
31 December 2022 31 December 2021
£'000 £'000
Net assets per Consolidated statement of financial position 445,920 394,244
Fair value of derivatives (363) (94)
EPRA NTA 445,557 394,150
Issued share capital (number) 404,764,328 350,644,188
Basic NAV per share 110.17p 112.43p
EPRA NTA per share 110.08p 112.41p
24. Operating leases
The following table sets out the maturity analysis of leases receivables,
showing the undiscounted lease payments under non‑cancellable operating
leases receivable by the Group:
As at As at
31 December 2022 31 December 2021
£'000 £'000
Year one 40,477 33,281
Year two 41,125 33,904
Year three 41,901 34,538
Year four 42,509 35,034
Year five 43,270 35,693
Onwards 762,841 612,974
Total 972,123 785,424
The Group's investment properties are leased to tenants under the terms of
property leases that include upward only rent reviews that are performed
annually. These are annual inflation uplifts linked to either CPI or RPI. RPI
linked leases have a floor and cap at either 2% and 4% or 1% and 5%.
25. Reconciliation of liabilities to cash flows from financing activities
Notes Borrowings Interest rate derivative Interest payable Total
£'000
£'000 £'000 £'000
As at 1 January 2021 74,213 (7) 377 74,583
Cash flows from financing activities:
Borrowings drawn 17 92,685 - - 92,685
Borrowings repaid 17 (54,507) - - (54,507)
Loan arrangement fees paid 17 (1,844) - - (1,844)
Interest and commitment fees paid - - (2,294) (2,294)
Non‑cash movements:
Amortisation of loan arrangement fees 17 960 - - 960
Fair value movement 18 - (87) - (87)
Loan arrangement fees accrued (600) - - (600)
Interest and commitment charge 9 - - 2,391 2,391
As at 31 December 2021 110,907 (94) 474 111,287
Cash flows from financing activities:
Borrowings drawn 17 85,074 - - 85,074
Borrowings repaid 17 (57,362) - - (57,362)
Loan arrangement fees paid 17 (1,265) - - (1,265)
Interest received 18 - 112 - 112
Interest and commitment fees paid - - (3,909) (3,909)
Non‑cash movements:
Amortisation of loan arrangement fees 17 1,205 - - 1,205
Fair value movement 18 - (381) - (381)
Loan arrangement fees accrued (1,363) - - (1,363)
Interest and commitment charge 9 - - 4,584 4,584
As at 31 December 2022 137,196 (363) 1,149 137,982
26. Capital commitments
At 31 December 2022, the Group had committed capital expenditure on one
forward-funded development of a new property and on capital improvements to
three existing properties; this amounted to £9.2 million (2021: £19.8
million).
The Group has committed to deferred payment agreements on two acquisitions in
return for increased rent based on trading performance. As at 31 December
2022, the total capital commitment for these deferred payments is estimated at
£4.6 million (2021: £6.5 million).
27. Controlling parties
The Company is not aware of any person who, directly or indirectly, owns or
controls the Company. The Company is not aware of any arrangements the
operations of which may give rise to a change in control of the Company.
28. Subsequent events
In January 2023, the Group invested in six care homes in Shropshire and
Cheshire, for consideration of £56.0 million. 80% (£44.8 million) of the
consideration was paid in cash with the remainder paid in shares issued at
116.62 pence per share, which was the last reported NAV. This investment has
been made via a loan to the operator to acquire the portfolio, where the Group
has an option to acquire for £1 consideration. These properties will be
leased to an existing tenant, Welford, for an initial annual rent of £3.9
million.
In January 2023, the Group purchased an interest rate option for £1.5
million, which caps SONIA at 3.0% for two years on £50 million.
In February 2023, the Group exchanged contracts to sell a non-core care home
for £1.25 million, in line with the latest valuation as at 31 December 2022.
As part of the sale the Group entered into a lease surrender with the
incumbent tenant, Minster.
The following rent reviews took place in the period between year end and the
date of this report:
(i) on 3 March 2023, in relation to six assets let to Silverline;
(ii) on 7 March 2023, in relation to a portfolio of 57 assets let to Minster
and Croftwood;
(iii) on 10 March 2023, in relation to three assets let to MMCG;
(iv) on 21 January 2023 and 16 March 2023, in relation to two assets let to
Prestige;
(v) on 18 March 2023, in relation to two assets let to the NHS; and
(vi) on 7 February 2023, in relation to two assets let to Electus.
Rent reviews were linked to the annual RPI over the 12 months up to the rent
review date, with a floor of 2% and a cap of 4% for Minster, Croftwood,
Prestige, Silverline, MMCG and Electus. The two properties let to the NHS had
an annual consumer price index-linked rent review. These rent reviews have
contributed £0.8 million to annual contracted rent.
The Group has paid £0.3 million of capital expenditure in relation to £9.2
million of committed capital expenditure outstanding as at 31 December 2022.
No other significant events have occurred between the statement of financial
position date and the date when the financial statements have been authorised
by the directors, which would require adjustments to, or disclosure in, the
financial statements.
COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
Company Registration Number: 10464966
Notes 31 December 2022 31 December 2021
£'000 £'000
Non‑current assets
Investment in subsidiaries 6 430,079 392,486
Total non‑current assets 430,079 392,486
Current assets
Trade and other receivables 7 18,862 7,828
Cash and cash equivalents 8 283 10,336
Total current assets 19,145 18,164
Total assets 449,224 410,650
Current liabilities
Trade and other payables 9 (11,720) (25,490)
Total liabilities (11,720) (25,490)
Total net assets 437,504 385,160
Equity
Share capital 10 4,048 3,506
Share premium reserve 10 365,642 305,672
Capital reduction reserve 10 24,077 24,077
Retained earnings 43,737 51,905
Total equity 437,504 385,160
The Company has taken advantage of the exemption allowed under section 408 of
the Companies Act 2006 and has not presented its own statement of
comprehensive income in these financial statements. The profit attributable to
the parent company for the year ended 31 December 2022 amounted to
£17,556,000 (2021: profit of £36,504,000).
The financial statements were approved and authorised for issue by the board
of directors on 27 March 2023 and are signed on its behalf by:
Rupert Barclay Chairman
The accompanying notes form an integral part of these financial statements.
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Notes Share capital Share premium Capital reduction reserve Retained earnings Total
£'000 £'000 £'000 £'000 £'000
1 January 2022 3,506 305,672 24,077 51,905 385,160
Total comprehensive income - - - 17,556 17,556
Transactions with owners
Dividends paid 5 - - - (25,724) (25,724)
Share issue 10 542 61,727 - - 62,269
Share issue costs 10 - (1,757) - - (1,757)
31 December 2022 4,048 365,642 24,077 43,737 437,504
For the year ended 31 December 2021
Notes Share capital Share premium Capital reduction reserve Retained earnings Total
£'000 £'000 £'000 £'000 £'000
1 January 2021 3,189 271,362 24,077 37,273 335,901
Total comprehensive income - - - 36,504 36,504
Transactions with owners
Dividends paid 5 - - - (21,872) (21,872)
Share issue 10 317 35,017 - - 35,334
Share issue costs 10 - (707) - - (707)
31 December 2021 3,506 305,672 24,077 51,905 385,160
The accompanying notes form an integral part of these financial statements.
NOTES TO THE COMPANY FINANCIAL STATEMENTS
For the year ended 31 December 2022
1. Basis of preparation
General information
The financial statements for the year ended 31 December 2022, are prepared in
accordance with Financial Reporting Standard 102, the Financial Reporting
Standard applicable in the United Kingdom and the Republic of Ireland ("FRS
102") and in accordance with the Companies Act 2006, with comparatives
presented for the year ended 31 December 2021.
Disclosure exemptions adopted
In preparing these financial statements the Company has taken advantage of all
disclosure exemptions conferred by FRS 102.
In preparing the separate financial statements of the Company, advantage has
been taken of the following disclosure exemptions available in FRS 102:
A reconciliation of the number of shares outstanding at the beginning and
end of the period has not been presented as the reconciliations of the Group
and the parent company would be identical;
No statement of cash flows has been presented for the parent company;
Disclosures in respect of the parent company's financial instruments have
not been presented as equivalent disclosures have been provided in respect of
the Group as a whole;
The requirement to present related party disclosures between the Company
and fellow subsidiaries where ownership is all 100%; and
No disclosures have been given for the aggregate remuneration of the key
management personnel of the Company as their remuneration is included in the
totals for the Group as a whole.
Convention
The financial statements are presented in Sterling, which is also the
Company's functional currency, and all values are rounded to the nearest
thousand (£'000), except when otherwise indicated.
Going concern
After making enquiries and bearing in mind the nature of the Company's
business and assets, the directors consider that the Company has adequate
resources to continue in operational existence for the next 12 months from the
date of approval of these financial statements. For this reason, they continue
to adopt the going concern basis in preparing the financial statements.
The ongoing effect of the high inflationary environment and rising interest
rates have been considered by the directors. The directors have reviewed the
forecasts for the Group taking into account the impact of increasing interest
rates and rising costs, as a result of inflation, on trading over the 12
months from the date of signing this annual report. The forecasts have been
assessed against a range of possible downside outcomes incorporating
significantly lower levels of income and higher costs, see Going concern and
viability for further detail.
The directors believe that there are currently no material uncertainties in
relation to the Company's ability to continue for a period of at least 12
months from the date of approval of the Company's financial statements.
The board is, therefore, of the opinion that the going concern basis adopted
in the preparation of the annual report is appropriate.
2. Significant accounting judgements, estimates and assumptions
The preparation of the Company's financial statements requires management to
make judgements, estimates and assumptions that affect the reported amounts
recognised in the financial statements and disclosures. However, uncertainty
about these assumptions and estimates could result in outcomes that could
require material adjustment to the carrying amount of the assets or
liabilities in future periods.
The most significant estimates, assumptions and judgements relate to the
determination of carrying value of unlisted investments in the Company's
subsidiary undertakings. The nature, facts and circumstance of the investment
are taken into account in assessing whether there are any indications of
impairment. Provisions provided reflect any reduction in net asset value of
subsidiaries in the year.
3. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
financial statements are set out below.
Trade and other receivables
Trade and other receivables are recognised and carried at the lower of their
original invoiced value and recoverable amount. Where the time value of money
is material, receivables are initially recognised at fair value and
subsequently measured at amortised cost. A provision for impairment is made
when there is objective evidence that the Company will not be able to recover
balances in full.
Balances are written off when the probability of recovery is assessed as being
remote.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and short‑term deposits.
Dividends
Dividends are recognised when they become legally payable.
Share premium
The surplus of net proceeds received from the issuance of new shares over
their par value is credited to this account and the related issue costs are
deducted from this account. The reserve is non‑distributable.
Capital reduction reserve
The capital reduction reserve is the result of the transfer of a portion of
the share premium into a distributable reserve.
Trade and other payables
Trade payables are initially recognised at their fair value and are
subsequently measured at cost.
Investments in subsidiaries
The investments in subsidiary companies are included in the Company's
statement of financial position at cost less provision for impairment.
4. Taxation
The Company is exempt from corporation tax on the profits and gains from its
property investment business, provided it continues to meet certain conditions
as per REIT regulations. Any non‑qualifying profits and gains however, will
continue to be subject to corporation tax.
Tax charge included in total comprehensive income:
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
UK corporation tax - -
5. Dividends
Details of dividends paid by the Company are included in note 12 to the
consolidated financial statements.
6. Investment in subsidiaries
31 December 2022 31 December 2021
£'000 £'000
At the beginning of the year 392,486 369,371
Additions 93,425 210,135
Impairment (55,832) (187,020)
At the end of the year 430,079 392,486
The Company has the following subsidiaries:
Principal activity Country of incorporation Ownership %
Impact Property 1 Limited ("Propco 1")* Real Estate Investment England and Wales 100
Impact Property 2 Limited ("Propco 2")* Real Estate Investment England and Wales 100
Impact Property 3 Limited ("Propco 3")* Real Estate Investment England and Wales 100
Impact Property 4 Limited ("Propco 4")* Real Estate Investment England and Wales 100
Impact Property 5 Limited ("Propco 5")* Real Estate Investment England and Wales 100
Impact Property 6 Limited ("Propco 6")* Real Estate Investment England and Wales 100
Impact Property 7 Limited ("Propco 7")* Real Estate Investment England and Wales 100
Impact Property 8 Limited ("Propco 8")* Real Estate Investment England and Wales 100
Impact Property 9 Limited ("Propco 9")* Real Estate Investment England and Wales 100
Impact Finance 1 Limited ("Finance 1")* Financing company England and Wales 100
Impact Finance 2 Limited ("Finance 2")* Financing company England and Wales 100
Impact Finance 3 Limited ("Finance 3")* Financing company England and Wales 100
Impact Finance 4 Limited ("Finance 4")* Financing company England and Wales 100
Impact Finance 5 Limited ("Finance 5")* Financing company England and Wales 100
Impact Finance 6 Limited ("Finance 6")* Financing company England and Wales 100
Impact Holdco 1 Limited ("Holdco 1") Investment holding company England and Wales 100
Impact Holdco 2 Limited ("Holdco 2") Investment holding company England and Wales 100
Impact Holdco 3 Limited ("Holdco 3") Investment holding company England and Wales 100
Impact Holdco 4 Limited ("Holdco 4") Investment holding company England and Wales 100
Impact Holdco 5 Limited ("Holdco 5") Investment holding company England and Wales 100
Impact Holdco 6 Limited ("Holdco 6") Investment holding company England and Wales 100
Roseville Property Limited*# Property holding company England and Wales 100
Sandbanks Property Redcar Limited*# Property holding company England and Wales 100
Cardinal Healthcare (UK) Ltd*# Property holding company England and Wales 100
Cholwell Care (Nailsea) Limited*# Property holding company England and Wales 100
Barham Care Centre Limited*# Property holding company England and Wales 100
Baylham Care Centre Limited*# Property holding company England and Wales 100
Butterfly Cumbria Properties Limited* Property holding company England and Wales 100
The Holmes Care Holdings Limited*# Property holding company England and Wales 100
Hollyblue Healthcare (Countrywide) Limited*# Property holding company England and Wales 100
Hollyblue Healthcare (Ulster) Limited*# Property holding company England and Wales 100
Tower Bridge Homes Care Limited*# Property holding company England and Wales 100
The Holmes Care Group GB Limited*# Property holding company England and Wales 100
Beeley (Holdings) Limited*# Property holding company England and Wales 100
Hillcrest House Limited* Property holding company England and Wales 100
Springhill Properties (No.1) Limited*# Property holding company England and Wales 100
Carlton Hall (Lowestoft) Limited* Property holding company England and Wales 100
Abingdon Manor Care Centre Limited* Property holding company Northern Ireland 100
Larne Care Centre Limited* Property holding company Northern Ireland 100
Larne C C Limited* Property holding company Northern Ireland 100
Eastleigh Care Group Limited* Property holding company England and Wales 100
Woodleigh Christian Care Home Limited* Property holding company England and Wales 100
Welford Bidco 2 Midco Limited* Investment holding company England and Wales 100
Welford Bidco 4 Midco Limited* Investment holding company England and Wales 100
* As at 31 December 2022 these entities were held indirectly by the Company.
# As at 31 December 2022 these entities are in the process of winding up.
The registered address for the above subsidiaries incorporated in England and
Wales is:
The Scalpel, 18th Floor, 52 Lime Street, London EC3M 7AF, England
The registered address for the above subsidiaries incorporated in Northern
Ireland is:
21 Arthur Street, Belfast, BT1 4GA, Northern Ireland
Where the entity is in the process of winding up, the registered address is
that of the liquidator appointed by the Company.
7. Trade and other receivables
As at As at
31 December 2022 31 December 2021
£'000 £'000
Loan to Group companies 18,658 7,766
Prepayments 204 62
18,862 7,828
As at 31 December 2022, there were no trade receivables past due or impaired
(2021: none). Loans to subsidiaries are interest free, repayable on demand and
management expect them to be settled within the next 12 months.
8. Cash and cash equivalents
As at As at
31 December 2022 31 December 2021
£'000 £'000
Cash and cash equivalents 283 10,336
None of the Company's cash balances are held in restricted accounts.
9. Trade and other payables
As at As at
31 December 2022 31 December 2021
£'000 £'000
Loan from Group companies 9,977 23,954
Trade and other payables 1,743 1,536
11,720 25,490
Loans from Group companies are unsecured, interest-free and are repayable on
demand.
10. Share capital, share premium and capital reduction reserve
Details on movements in share capital, share premium and capital reduction
reserve of the Company are the same as that of the Group and are included in
note 21 to the consolidated financial statements.
11. Transactions with related parties
The Company has taken advantage of the exemption provided by FRS 102 not to
disclose transactions with other members of the Group as the Company's own
financial statements are presented together with its consolidated financial
statements.
See note 22 of the consolidated financial statements for disclosure of related
party transactions of the Group.
12. Capital commitments
There were no capital commitments held by the Company (2021: nil).
13. Contingent liabilities
On 21 December 2021, the Company guaranteed a long-term loan note issue made
by its wholly owned subsidiary. The loan notes total £75 million and mature
in 2035. See note 17 of the consolidated financial statements for further
detail.
14. Subsequent events
Significant events after the reporting period are the same as those of the
Group. See note 28 to the consolidated financial statements.
No other significant events have occurred between the Statement of financial
position date and the date when the financial statements have been authorised
by the directors, which would require adjustments to, or disclosure in, the
financial statements.
EPRA PERFORMANCE MEASURES (UNAUDITED)
The table below shows additional performance measures, calculated in
accordance with
the Best Practices Recommendations of the European Public Real Estate
Association (EPRA). We provide these measures to aid comparison with other
European real estate businesses.
1. EPRA earnings per share 2.1 EPRA net reinstatement value ("NRV") 2.2 EPRA net tangible assets
("NTA")
£32.6m £479.7m £445.6m
8.37p per share 118.51p per share 110.08p per share
for the year to 31 December 2022 for the year to 31 December 2022 for the year to 31 December 2022
(for the year to 31 December 2021:
(for the year to 31 December 2021:
(for the year to 31 December 2021:
£27.4m / 8.05p)
£423.7m / 120.84p per share)
£394.2m / 112.41p per share)
Definition Definition Definition
Earnings from operational activities. The EPRA calculation removes revaluation Net asset value adjusted for fair value of derivatives and transaction costs Net asset value adjusted for fair value of derivatives as these will not
movements in the investment portfolio and interest rate derivatives, but under the assumption they will not crystallise if the company never sells crystallise if held to maturity.
includes rent smoothing. assets.
Purpose Purpose Purpose
A key measure of a company's underlying operating results are an indication of The aim of this measure is to represent the value required to rebuild the This represents the value of the company assuming assets are bought and sold.
the extent to which current dividend payments are supported by earnings. entity.
2.3 EPRA net disposal value ("NDV") 3.1 EPRA Net Initial Yield ("NIY") 3.2 EPRA "topped-up" NIY
£440.9m
108.92p per share 6.98% 6.98%
for the year to 31 December 2022 for the year 31 December 2022 (for the year to 31 December 2021: 6.71%) for the year to 31 December 2022 (for the year to 31 December 2021: 6.71%)
(for the year to 31 December 2021:
£398.8m / 111.16p per share)
Definition Definition Definition
Net asset value adjusted to align borrowings to their drawn amount. If the Annualised rental income based on the cash rents passing at the balance sheet This measure adjusts the EPRA NIY
company was in an immediate disposal scenario certain assets and liabilities date, less non-recoverable property operating expenses, divided by the market
in respect of the expiration of rent-
are adjusted to show the full value if not held to maturity. value of the property, increased with (estimated) purchasers' costs.
free periods (or other unexpired lease incentives, such as discounted rent
periods and step rents).
Purpose Purpose Purpose
This measure aims to show the shareholders' value under a disposal scenario. This measure should make it easier for investors to judge for themselves how This measure should make it easier for investors to judge for themselves how
the valuation of one portfolio compares with another portfolio. the valuation of one portfolio compares with another portfolio.
4. EPRA vacancy rate 5. EPRA cost ratio 6. Like-for-like rental growth
0.00% 16.59% 5.07%
for the year to 31 December 2022 (for the year to 31 December 2021: 0.00%) for the year to 31 December 2022 (for the year to 31 December 2021: 15.84%) for the year to 31 December 2022 (for the year to 31 December 2021: 5.74%)
Definition Definition Definition
Estimated market rental value (ERV) of vacant space divided by the ERV of the Administrative and operating costs (including, and excluding, direct vacancy Rental growth on the portfolio
whole portfolio. costs) divided by gross rental income.
of properties that have been owned and operational for two
full reporting cycles.
Purpose Purpose Purpose
A "pure" (%) measure of investment property space that is vacant, based on A key measure, to enable meaningful measurement of the changes in a company's Growth of rental income excludes acquisitions and disposals, but includes
ERV. operating costs. The EPRA cost ratio does not include the interest income increases in rent from inflationary uplifts and rentalised capital
received on the Group's property investments made via a loan to operator, expenditure. This allows stakeholders to estimate the organic income growth.
adjusting for this gives
a cost ratio of 15.4%.
NOTES TO THE EPRA PERFORMANCE MEASURES (UNAUDITED)
For the year ended 31 December 2022
1.
EPRA earnings per share
31 December 2022 31 December 2021
£'000 £'000
Total comprehensive income (attributable to shareholders) 16,888 31,968
Adjusted for:
Profit on disposal of investment property (130) (308)
Change in fair value of put option 1,811 -
Change in fair value of investment properties 8,103 (12,896)
Rental lease incentives (141) 2,660
Rental income arising from recognising guaranteed rent uplifts and 6,494 6,016
rental premiums
16,137 (4,528)
Change in fair value of interest rate derivatives (381) (87)
Profits to calculate EPRA earnings per share 32,644 27,353
Weighted average number of ordinary shares (basic and diluted) 390,058,661 339,761,521
EPRA earnings per share - basic and diluted 8.37p 8.05p
2. EPRA NAV measures
The updated EPRA best practice recommendations, released in October 2020, give
three new NAV metrics: EPRA net reinstatement value ("NRV"), EPRA net tangible
assets ("NTA") and EPRA net disposal value ("NDV") to replace the previously
reported EPRA NAV and EPRA NNNAV. NRV aims to show the value of assets on a
long-term basis, adjusting for items that would not be expected to crystallise
under normal circumstances, NTA is calculated on the basis that assets are
bought and sold whilst NDV intends to show shareholders the value of assets
and liabilities in the event they cannot be held until maturity. The Group has
adopted NTA as its primary EPRA NAV measure as it most closely aligns with the
Group's business practices.
As at 31 December 2022:
EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000
Net assets at end of year 445,919 445,919 445,919
Exclude:
Fair value of derivatives (363) (363) -
Include:
Fair value of debt (1) - - (5,064)
Transaction costs (2) 34,139 - -
Net assets (per EPRA NAV measure) 479,695 445,556 440,855
Shares in issue at 31 December (basic and diluted) 404,764,329 404,764,329 404,764,329
Net assets per share (per EPRA NAV measure) 118.51p 110.08p 108.92p
2. EPRA NAV measures
As at 31 December 2021:
EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000
Net assets at end of year 394,244 394,244 394,244
Exclude:
Fair value of derivatives (94) (94) -
Include:
Fair value of debt (1) - - (4,471)
Transaction costs (2) 29,581 - -
Net assets (per EPRA NAV measure) 423,731 394,150 389,773
Shares in issue at 31 December (basic and diluted) 350,644,188 350,644,188 350,644,188
Net assets per share (per EPRA NAV measure) 120.84p 112.41p 111.16p
1 Difference between interest-bearing loans and borrowings included in the
balance sheet at amortised cost, and fair value of interest-bearing loans and
borrowings at drawn amount.
2 NTA and NDV are calculated using property values in line with IFRS, where
values are net of real estate transfer tax and other purchasers' costs.
These transaction costs are added back for NRV.
3. EPRA net initial yield ("NIY") and EPRA "topped-up" NIY
31 December 2022 31 December 2021
£'000 £'000
Investment property - wholly owned 532,478 459,442
Less capital improvements under construction (7,535) (5,614)
Completed property portfolio 524,943 453,828
Allowance for estimated purchasers' cost (1) 33,071 28,591
Gross up completed property portfolio valuation (B) 558,014 482,419
Annualised cash passing rental income 38,932 32,353
Property outgoings (non-recoverable insurance) - -
Annualised net rents (A) 38,932 32,353
Add:
Contractual uplifts on rent-free periods of funded capital improvements - -
Topped-up net annualised rent (C) 38,932 32,353
EPRA net initial yield (A/B) 6.98% 6.71%
EPRA topped-up net initial yield (C/B) 6.98% 6.71%
1 Assumes a purchaser of the Company's portfolio would pay SDLT and
transaction costs equal to 6.3% of the portfolio's value.
4. EPRA vacancy rate
31 December 2022 31 December 2021
£'000 £'000
Estimated rental value of vacant space - -
Estimated rental value of the whole portfolio 39,476 30,277
EPRA vacancy rate 0.00% 0.00%
5. EPRA cost ratio
31 December 2022 31 December 2021
£'000 £'000
Administrative and other expenses 7,008 5,766
Net service charge cost - -
Total costs including and excluding vacant property costs 7,008 5,766
Gross rental income 42,243 36,398
Total EPRA cost ratio (including, and excluding, direct vacancy costs) 16.59% 15.84%
None of the costs in this note have been capitalised. Only costs directly
associated with the purchase of properties as well as subsequent
value-enhancing capital expenditure qualify as acquisition costs and are
capitalised.
6. Like-for-like rental growth
This note shows the rental income and market value for property assets that
have been owned and operational for two full reporting periods, hence all
below information relates to the property portfolio that has been owned and
operational since 31 December 2020.
Rent Market value
£'000
£'000
Property portfolio as at 31 December 2020 28,713 413,338
Inflation-linked rental uplifts 740
Rental uplifts in return for capital improvements or deferred payments 932
Increase/(decrease) due to vacancy rate -
Property portfolio as at 31 December 2021 30,385 426,867
Inflation-linked rental uplifts 1,273
Rental uplifts in return for capital improvements or deferred payments 269
Increase/(decrease) due to vacancy rate -
Property portfolio as at 31 December 2022 31,926 428,104
All properties operate within the same sector, UK healthcare.
ALTERNATIVE PERFORMANCE MEASURES
The other alternative performance measures may not be comparable with
similarly titled measures presented by other companies. Alternative
performance measures should not be viewed in isolation but as supplementary
information.
1.
Total expense ratio ("TER")
Total recurring administration costs as a percentage of average NAV throughout
the period.
Year ended Year ended
31 December 2022
31 December 2021
£'000 £'000
Opening NAV 394,244 349,521
Closing NAV 445,919 394,244
Average NAV for the year 420,082 371,883
Administrative expenses 7,008 5,766
One-off costs - -
Recurring expenses 7,008 5,766
TER 1.67% 1.55%
2. Total accounting return
The growth in NAV per share plus dividends paid expressed as a percentage of
NAV per share at the beginning of the period.
Year ended Year ended
31 December 2022
31 December 2021
Opening NAV per share (pence) 112.43 109.58
Closing NAV per share (pence) 110.17 112.43
NAV growth for the year (pence) (2.26) 2.85
Dividends per share paid in the year (pence) 6.51 6.38
Total return (pence) 4.25 9.23
Total accounting return 3.78% 8.42%
3. Gross loan to value ("LTV")
The gross debt as a percentage of our gross asset value.
As at As at
31 December 2022
31 December 2021
£'000 £'000
Gross debt 142,260 114,548
Gross assets 596,524 514,495
LTV 23.85% 22.26%
4. Property Investments
This relates to the portfolio valuation along with investments via loans to
operators for the acquisition
of property portfolios.
As at As at
31 December 2022
31 December 2021
£'000 £'000
Portfolio valuation 532,478 459,442
Investments in properties via loans to operators 36,360 37,500
Property Investments 568,838 496,942
AIFM STATEMENT (UNAUDITED)
Impact Health Partners LLP have served as the Alternative Investment Fund
Manager since 15 March 2019; references in this statement to "AIFM" are to
Impact Health Partners LLP.
Quantitative remuneration disclosure for the AIFM
Information in relation to the remuneration paid by the AIFM is available upon
request.
Liquidity
At the date of this annual report there are no assets held by the Company
which are subject to special arrangements arising from their illiquid nature.
There has been no change to the liquidity management system and procedures
during the period since incorporation. Please refer to note 19 in the
financial statements for an analysis of the Company's liabilities and their
maturity dates at 31 December 2022.
The current risk profile of the Company and the risk management systems
employed by the AIFM to manage those risks
The Company's risk management framework and risk appetite are set out in
"Audit, risk and internal control" on pages 82-85 of the annual report.
Please refer to page 60 for the board's assessment of the principal risks and
uncertainties facing the Company. The AIFM has assessed the current risk
profile of the Company to be low.
Leverage
The Group's maximum and actual leverage levels at 31 December 2022 are shown
below:
Leverage exposure Gross method Commitment
Maximum limit 200.0% 200.0%
Actual 126.7% 131.8%
For the purposes of (i) the EU Alternative Investment Fund Managers Directive
(Directive 2011/61/EU) (the "EU AIFMD"); and (ii) the UK version of EU AIFMD
as it forms part of UK law by virtue of the European Union (Withdrawal) Act
2018, and as implemented by the Financial Conduct Authority in the UK (the "UK
AIFMD"), leverage is any method that increases the Group's exposure, including
the borrowing of cash and the use of derivatives. It is expressed as a
percentage of the Group's exposure to its net asset value and is calculated on
both a gross and commitment method.
Under the gross method, exposure represents the sum of the Group's positions
after deduction of cash balances, without taking account of any hedging or
netting arrangements. Under the commitment method, exposure is calculated
without the deduction of cash balances and after certain hedging and netting
positions are offset against each other. Both methods include the Group's
interest rate swaps measured at notional value.
There has been no change to the maximum level of leverage that the AIFM may
employ on behalf of the Company. The actual level of gearing employed by the
Company at 31 December 2022 was 23.85%.
Material changes to information
Article 23 of the EU AIFMD (in respect of the marketing of the Company in the
EU) and FUND 3.2.2, 3.2.5 and 3.2.6 if the UK AIFMD (in respect of the
marketing of the Company in the UK) require certain information to be made
available to investors before they invest (the "Required Information") and
require material changes to the Required Information to be disclosed to
investors. An updated copy of the Company's disclosure schedule containing the
Required Information was published on 27 January 2022. There have been no
other material changes to the Required Information.
INVESTMENT POLICY
The Company's investment policy is to acquire, own, lease, renovate, extend
and redevelop high-quality, healthcare real estate assets in the UK, in
particular elderly care homes, and to lease those assets to care home
operators and other healthcare service providers under full repairing and
insuring leases.
The Company pursues the investment policy as follows:
Policy Status
In order to manage risk in the portfolio, at the time of investment, no single achieved
asset shall exceed in value 15% of the total gross asset value of the Group.
No single customer paying for care provided in assets owned by the Group will achieved
account for more than 15% of the aggregate revenues of the tenants to whom the
Group's assets are leased from time to time, measured at the time of
acquisition.
The annual contracted rent from any single tenant is not expected to exceed achieved
40% of the total annual contracted rent of the Group, measured at the time of
investment.
The portfolio will be diversified by location across the UK with focus on achieved
areas where there is a good balance of supply and demand for the provision of
care and assets are available at attractive valuations.
Within these locations, the Group will acquire existing modern buildings or achieved
those that are currently considered fit for purpose by occupiers, but in
respect of which the Investment Manager has developed a plan to add value to,
and improve the environmental sustainability of, the asset through targeted
capital expenditure.
Leases granted by the Group will be linked to inflation, have long duration achieved
(with an unexpired lease term of at least 20 years) and will not be subject to
break clauses. The Group will seek to amend any future leases acquired by the
Group to obtain similar terms.
The Group will not undertake speculative development (that is, development of achieved
property which has not been leased or preleased), subject to the limitation in
the final bullet below,
so as to reposition a home in its local market and thus to increase the rent
due.
The Group may invest in forward-funding agreements or forward commitments to achieved
pre-let developments, or as part of a structured acquisition of an asset,
subject to the limitation in the final bullet below, where the Group will own
the asset on the completion of the work, or has the ability to acquire the
asset upon agreed conditions being satisfied.
The gross budgeted development costs of any refurbishment, extension or achieved
replacement of existing holdings and/or forward funding and forward
commitments, is limited to 25% of the Company's gross assets at the time of
commitment.
The Group is permitted to generate up to 15% of its gross income in any
financial year from non-rental revenue or profit-related payments from the
tenants in addition to the rental income due under the leases. The Group is
also permitted to invest up to:
(i) 10% of its gross assets, at the time of investment, in non-residential
Healthcare Real Estate Assets, such as properties which accommodate GP or
dental practices and other healthcare-related services including occupational
health and physiotherapy practices, pharmacies and hospitals or in
non-healthcare-related residential assets attached to residential Healthcare
Real Estate Assets;
(ii) 25% of its gross assets, at the time of investment, in indirect property
investment funds (including joint ventures) with a similar investment policy
to that of the Company; and
(iii) 15% of its gross assets, at the time of investment, in other
closed-ended investment funds listed on the Official List. The directors have
no current intention to acquire non-residential Healthcare Real Estate Assets
or indirect property investment funds.
The Group may also acquire or establish companies, funds or other SPVs which
themselves own assets falling within the Company's investment policy.
The Group will not acquire any asset or enter into any lease or related
agreement if that would:
(i) result in a breach of the conditions applying to the Company to hold
real estate investment trust ("REIT") status or
(ii) result in any investment by the Group in assets located outside of the
UK.
The Company may invest cash held for working capital purposes and awaiting
investment in cash deposits, gilts and money market funds. It will not invest
in derivatives but it may use derivatives for hedging purposes.
Any material change to the investment policy will require the prior approval
of shareholders.
OUR PORTFOLIO
At 31 December 2022, the Group owned the homes listed in the table below:
Tenant and home Region Acquisition date(1) Beds(2) Capital projects (3)
Belmont Healthcare
Madeira Lodge South East Nov 2022 48
Wombwell Hall South East Nov 2022 120
Value at 31 December 2022: £13.6m
Careport
Briardene North East Aug 2018 60
Derwent North East Aug 2018 45
Holly Lodge North East Nov 2018 41
Kingston Court North West Jun 2019 75
Old Prebendal House and Court South East Jun 2019 39
Riverwell Beck North West Dec 2020 60 +6
Sovereign Court North East Aug 2018 60
and Lodge ⁴
The Grove North East Sep 2018 57
Value at 31 December 2022: £33.2m
Carlton Hall
Carlton Hall East of England Sep 2021 86
Oasis Development Site East of England Sep 2021 - +80
Value at 31 December 2022: £13.4m
Croftwood Care *
Ancliffe North West 40
Astbury Lodge North West 41
Croftwood North West 47
Crossways North West 39
Elm House North West 40
Florence Grogan North West 40
Garswood North West 53
Gleavewood North West 32
Golborne House North West 40
Greenacres North West 40
Hourigan North West 40
Ingersley Court North West 46
Lakelands North West 40
Leycester House North West 40
Loxley Hall North West 40 +5
Lyndhurst North West 40
New Milton House North West 39
Parklands North West 40
The Cedars North West 27
The Elms North West 41
The Hawthorns North West 39
The Laurels North West 40
Thorley House North West 40
Turnpike Court North West 53
Wealstone North West 42
Westhaven North West 52
Whetstone Hey North West 42
Value at 31 December 2022: £69.3m
Tenant and home Region Acquisition date(1) Beds(2) Capital
projects (3)
Electus Care
Abingdon Manor Northern Ireland Feb 2022 60
Cedarhurst Lodge Northern Ireland Dec 2020 67
Edgewater Lodge Northern Ireland Dec 2020 75
Larne Northern Ireland Feb 2022 87
Saintfield Lodge Northern Ireland Dec 2020 51
Value at 31 December 2022: £22.0m
Holmes Care Group
Alexander House (5) Scotland Dec 2021 44
Almond Court Scotland Aug 2020 42
Almond View Scotland Aug 2020 78
Bankview (&BVDC) Scotland Aug 2020 65
Barrogil House (5) Scotland Dec 2021 40
Beechwood Scotland Aug 2020 90
Camilla (5) Scotland Dec 2021 42
Craigie House (5) Scotland Dec 2021 30
Cragielea Scotland Aug 2020 85
Fernlea House (5) Scotland Dec 2021 38
Finavon Court (5) Scotland Dec 2021 24
Grandholm Scotland Aug 2020 79
Heatherfield Scotland Aug 2020 60
Larkfield Scotland Aug 2020 90
Lomond View (5) Scotland Dec 2021 50
Methven House (5) Scotland Dec 2021 62
Preston House (5) Scotland Dec 2021 64
Roselea House (5) Scotland Dec 2021 20
Three Towns Scotland Aug 2020 60
Walton House (5) Scotland Dec 2021 40
Willow House (5) Scotland Dec 2021 40
Value at 31 December 2022: £89.3m
Maria Mallaband and Countrywide Group (MMCG)
Belmont House Yorkshire & The Humber May 2019 106
Croft House Yorkshire & The Humber Mar 2020 68
Howgate House Yorkshire & The Humber Mar 2020 63
Manor Park Yorkshire & The Humber Mar 2020 75
Parksprings Scotland May 2019 96
Thorntree Mews Scotland May 2019 40
Wallace View Scotland May 2019 60
Value at 31 December 2022: £34.4m
Tenant and home Region Acquisition date(1) Beds(2) Capital
projects (3)
Minster Care *
Abbeywell West Midlands 45
Amberley South West 30
Ashgrove Yorkshire & The Humber 56
Broadgate East Midlands 40
Carnbroe Scotland May 2018 74
Craigend Scotland 48
Diamond House East Midlands 74
Duncote Hall East Midlands 40
Duncote, The Lakes East Midlands 47
Emmanuel Yorkshire & The Humber 44
Eryl Fryn Wales 31
Falcon House East Midlands 46
Freeland House South East 111
Gray's Court East of England 87
Grenville East of England May 2018 64
Hamshaw Court Yorkshire & The Humber 45
Hillcrest South West Nov 2021 88
Ideal West Midlands 50
Karam Court West Midlands 47
Littleport Grange East of England 80
Meadows & Haywain East of England 65
Mowbray West Midlands 39
Mulberry Manor Yorkshire & The Humber 49
Red Hill West Midlands Jan 2020 90
Rydal North East 60
Saffron East Midlands Jun 2017 48
Sovereign House West Midlands 60
Stansty House Wales 74
Three Elms North West 60
Waterside West Midlands 47
Woodlands Court North West 40
Wordsley West Midlands 44
Value at 31 December 2022: £134.4m
NCUH NHS Trust
Reiver House North West Jun 2019 -
Surgical Unit North West Jun 2019 -
Value at 31 December 2022: £4.1m
Optima
Barham East of England Aug 2019 44
Baylham East of England Aug 2019 55
Value at 31 December 2022: £15.0m
Tenant and home Region Acquisition( Beds(2) Capital (3)
) date(1)
projects (3)
Prestige Group
Merlin Manor Care Centre North East Mar 2020 94
Parkville North East Mar 2018 94
Roseville North East Mar 2018 103
Sandbanks North East Oct 2018 77
Yew Tree North East Jan 2019 76
Value at 31 December 2022: £33.4m
Renaissance Care
Croftbank Scotland Nov 2018 68
Rosepark Scotland Nov 2018 60
Value at 31 December 2022: £12.9m
Silverline
Baillieston Scotland Aug 2022 60
Cardonald Scotland Aug 2022 35
Laurel Bank Yorkshire & The Humber Mar 2020 63
Springhill Scotland Nov 2021 61
Stobhill Scotland Aug 2022 60
The Beeches Yorkshire & The Humber Mar 2020 60
Willow Bank Yorkshire & The Humber Mar 2020 59
Value at 31 December 2022: £18.5m
Welford
Argentum Lodge South West Sep 2019 56
Baily House East Midland Jun 2022 66
Birchlands Yorkshire & The Humber Jun 2019 54
Eastleigh - East Street & Rossiter House South West May 2022 54
Eastleigh - Periton Road South West May 2022 69
Eastleigh - Raleigh Mead South West May 2022 61
Fairview Court and House (4) South West Mar 2018 73 +11
Mavern House South West Jan 2021 51 +8
St Peter's House East of England Dec 2020 66
Vale View Heights Care Home South West Jun 2019 55
Woodleigh Christian Care Home East Midlands Jun 2022 44
Value at 31 December 2022: £75.3m
1 May 2017 unless stated
2 Number of registered beds
3 Capital improvement bed additions under development
4 Treated as two properties
5 These assets were invested in via a loan
* Croftwood Care and Minster Care are both part of
Minster Care Group
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