REG - Impact Healthcare - ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
25/03/2024 07:00
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RNS Number : 0574I Impact Healthcare REIT PLC 25 March 2024
25 March 2024
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")
ANNUAL RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2023
Financial and operational gains with improved rent cover
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, with a focus on care homes, today announces the Company's
annual results for the year ended 31 December 2023.
Summary of 2023
Our tenants continued to improve their performance with higher care home
occupancy and increased fees to residents, as inflation peaked in the year.
Our rent increases are largely capped at 4%, so this helps tenants' rent
cover, and makes our income more secure. Boosted by an acquisition, our total
rent roll grew strongly, and this has flowed through to both earnings and
dividend growth.
Statutory profit before tax was up by 189% over the previous year, but this is
flattered by revaluation movements. Adjusted earnings per share gives the best
view of underlying performance, and it grew by 2.4%. We therefore met our
dividend target, whilst still 108% covered by adjusted earnings.
Rental growth from the inflation-linkage in all of our leases drove up the
value of our property investments by 4.1% on a like-for-like basis. This in
turn grew NAV per share by 4.7% to 115.38 pence. Including the benefit of our
dividend meant that total accounting return was 10.8% for the year.
Our dividend target for 2024 is 6.95 pence(1), up 2.7% on 2023.
Strategic Priorities
These are our strategic priorities, with an update on how they have fared in
2023:
· Growing our business: With a net increase of five homes taking
our total to 140 properties and over 7,700 completed beds and contracted rent
up 13.2% to £48.8 million(2). Further growth was constrained by the general
economic situation and the share price.
· Working with our tenants: They have successfully increased fees
and occupancy in the year broadly in line with inflation, whilst reducing
their dependency on expensive agency staff. Our weighted average unexpired
lease term lengthened to 20.8 years (19.7 years in 2022). We managed the
transfer of one failing tenant(3) as part of a recovery programme while
achieving 99% rent collection across the portfolio.
· Improving the quality of our portfolio: We approved £11.7
million of new asset management projects that will increase the number of
available beds and improve EPC ratings. The growing strength of our portfolio
and its ability to generate stable and growing income enabled EPRA topped-up
net initial yield to firm up to 6.9%.
· Maintaining the affordability of our rents: Our tenants' improved
operational performance, alongside the 4% rent cap, led to rent cover(4)
rising to 2.0x in the year, the highest annual cover since we listed in 2017.
Rent cover was 2.2x in the second half of 2023.
· Enhancing our environmental sustainability: We increased the
percentage of our homes rated EPC B or higher to 57% (up from 53%). We have
set a target of achieving net zero status by 2045 with an interim target of a
15% reduction in absolute carbon emissions on a like-for-like basis by 2025.
Our strategic priorities are supported by our balance sheet with low gearing.
We have £250 million of committed debt facilities and a weighted average term
of 6.3 years. Drawn debt was £184.8 million at a 4.56% average cost, and 95%
of our drawn debt facilities are fixed or hedged against interest rate rises.
At the year-end our EPRA (net) LTV was 27.8%.
Simon Laffin, Chair, commented;
"Our aim is to work with our tenants to provide quality, affordable and
sustainable care homes. The country needs a thriving and growing care home
sector. The private sector can play an even more significant role in providing
care for elderly people and helping the NHS, deploying capital and resources
to enhance and grow affordable care home provision. By offering more
step-down, nursing and residential care for elderly people, the sector has the
medium-term potential to take tens of thousands of patients out of hospital
beds: freeing up NHS resources and reducing costs.
As the economy recovers from 2023's high inflation and interest rate rises,
and as government begins to recognise the larger role that this sector can
play in the health infrastructure we believe that there will be opportunities
for Impact. We are well positioned to play a larger role in helping both
residents and the NHS, whilst delivering long-term sustainable returns to
shareholders."
Financial Highlights
Year ended Year ended Change
31 December 2023 31 December 2022
Dividends declared per share 6.77p 6.54p +3.5%
Profit before tax £48.8m £16.9m +188.8%
Earnings per share ("EPS") 11.79p 4.33p +172.3%
EPRA EPS 8.33p 8.37p -0.5%
Adjusted earnings per share 7.28p 7.11p +2.4%
Adjusted earnings dividend cover 108% 109%
Contracted annual rent roll(2) £48.8m £43.1m +13.2%
Property Investments(5) £651.3m £568.8m +14.5%
Net asset value ("NAV") per share 115.38p 110.17p +4.7%
EPRA (net) LTV 27.8% 24.1% +3.7% pts
Total accounting return 10.82% 3.78% +7.0% pts
Cash £9.4m £22.5m
ANNUAL RESULTS PRESENTATION
A Company presentation for analysts and investors will take place today at
8.30am (UK) via an in-person meeting and a live webcast and conference call.
To attend the in-person presentation, please contact:
impacthealth-maitland@h-advisors.global
(mailto:impacthealth-maitland@h-advisors.global)
To view the live webcast, please register in advance at:
https://stream.brrmedia.co.uk/broadcast/65e9a4042cbb0478a930d370
(https://stream.brrmedia.co.uk/broadcast/65e9a4042cbb0478a930d370)
The conference call dial-in is available using the below details:
Phone number: +44 (0) 33 0551 0200
Participant access quote: Impact Healthcare - Full Year Results
If you would like to ask your questions verbally, please use the dial in
number. Alternatively, you can type questions into the webcast question box.
The presentation will also be accessible on demand later in the day on the
Company's website: www.impactreit.uk (http://www.impactreit.uk/)
ANNUAL REPORT
We have completely redesigned the Annual Report this year to make it more
concise with less duplication, while making the key elements of the Company's
strategy and its performance clearer. It can be accessed here
http://www.rns-pdf.londonstockexchange.com/rns/0574I_1-2024-3-24.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/0574I_1-2024-3-24.pdf)
A copy of the Annual Report is also available on the Company's website at
https://www.impactreit.uk/investors/reporting-centre/reports/
(https://www.impactreit.uk/investors/reporting-centre/reports/) . The Annual
Report has also been submitted to the National Storage Mechanism and will
shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
2024 NOTICE OF ANNUAL GENERAL MEETING
The 2024 Notice of Annual General Meeting is now available to view on the
Company's website at https://www.impactreit.uk/investors/reporting-centre/
(https://www.impactreit.uk/investors/reporting-centre/) . The Company's Annual
General Meeting will be held at 9:00 a.m. on Tuesday, 21 May 2024, at the
offices of Travers Smith LLP, 10 Snow Hill, London EC1A 2AL.
The formal Notice of the Annual General Meeting will be posted to those
shareholders who have requested that the Company should continue with postal
correspondence and in accordance with Listing Rule 9.6.1 has been submitted to
the Financial Conduct Authority and will shortly be available for inspection
from the National Storage Mechanism at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
The Board encourages Shareholders to vote on any of the matters of business at
the AGM in advance by proxy.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Impact Health Partners LLP Via H/Advisors Maitland
Andrew Cowley
David Yaldron
Jefferies International Limited 020 7029 8000
Tom Yeadon tyeadon@jefferies.com
Neil Winward nwinward@jefferies.com
Ollie Nott onott@jefferies.com
Winterflood Securities Limited 020 3100 0000
Neil Langford neil.langford@winterflood.com
Joe Winkley joe.winkley@winterflood.com
H/Advisors Maitland (Communications advisor) impacthealth-maitland@h-advisors.global
James Benjamin 07747 113 930
Rachel Cohen 020 7379 5151
Billy Moran 020 7379 5151
The Company's LEI is 213800AX3FHPMJL4IJ53.
Further information on Impact Healthcare REIT plc 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 good 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's dividend policy is to maintain a progressive dividend that is
covered by adjusted earnings.
On this basis, the target total dividend for the year ending 31 December 2024
is 6.95 pence per share(1), a 0.18 pence increase over the 6.77 pence in
dividends paid or declared per ordinary share for the year ended 31 December
2023.
The Group's Ordinary Shares trade on the main market of the London Stock
Exchange, premium segment. The Company is a constituent of the FTSE
EPRA/NAREIT index.
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) The annualised rent adjusting for: rent due following
rent-free periods; underlying contractual rent on temporarily varied leases
including rent due from Melrose); rent due on capex projects or
profit‑related deferred payments where the Group recognises a capital
commitment; and post-tax income from interest received from property
investments made via loans to operators for the acquisition of property
portfolios.
(3) These homes were transferred to Melrose Holdings Limited, an
affiliate of a related party, Minster Care Group.
(4) Rent cover is total annual rent divided by our tenants'
EBITDARM (earnings before interest, tax, depreciation, amortisation, rent and
management charges). EBITDARM is a useful approximation for our tenants' cash
earnings, which they can use to pay their rent. This excludes Rent cover has
been adjusted to exclude seven turnaround homes and one new home in build-up.
These were also excluded in the quoted comparative adjusted rent covers.
(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.
INVESTING IN UK CARE HOMES FOR EVERYONE
2023 ANNUAL REPORT AND FINANCIAL STATEMENTS
About us
Impact Healthcare REIT plc is a specialist and responsible long-term owner of
care homes and other healthcare properties across the UK.
We take a long-term view and look to generate secure and growing income. This
has allowed us to offer attractive and progressive dividends to our
shareholders, and the potential for capital growth.
Our purpose
Our purpose is to work with tenants to provide quality, affordable and
sustainable care homes in order to deliver an attractive risk adjusted return.
Our values
· We focus on the long-term sustainability of our business.
· We are open and transparent with our stakeholders.
· We are a dependable partner who's trusted to deliver.
· We combine the strengths of a listed company with entrepreneurship.
Find us online
www.impactreit.uk (http://www.impactreit.uk)
Key statistics
Year ended Year ended Change
31 December 2023 31 December 2022
Properties 140 135 +3.7%
Beds 7,721 7,336 +5.2%
Tenants(1) 14 14
Portfolio valuation £651.3m £568.8m(2) +14.5%
Contracted rent roll(3) £48.8m £43.1m +13.2%
Weighted average unexpired lease term 20.8 years 19.7 years +5.6%
Leases that are inflation linked 100% 100%
Pence per share dividend for 2023 6.77p 6.54p +3.5%
Assets rated EPC B or better based on English equivalent ratings 57% 53% +4% pts
Tenant CQC ratings - Good or Outstanding 80.6% 78.0% +2.6% pts
(1) Includes Minster and Croftwood, which are subsidiaries of Minster
Care Group, and Melrose, which is an affiliate of Minster Care Group.
(2) Includes properties invested in via loans to operators where the
Group has an option to acquire.
(3) Contracted rent roll is a defined term in the Glossary, this
includes contractual rent on temporarily varied leases (including Melrose).
WE'RE HELPING TO MEET THE GROWING NEED FOR CARE BEDS FOR THE ELDERLY
The UK needs more care beds for the elderly
We're a real estate company that's deeply immersed in the social
infrastructure of this country.
The UK has an ageing population, with 6.5 million people aged over 75 living
in the United Kingdom in 2024. That number is forecast to increase by 55%, to
10.1 million over the next 25 years, and to double over the next years. The
over 75s are the fastest growing part of the UK population. These increases
will happen during the lives of our long leases. Demand for care home beds is
therefore rising, but supply has changed little for almost three decades. This
has important implications for the care older people receive, as well as for
our wider healthcare system. Many thousands of older people find themselves
stuck in hospital because there are no free care home beds or step-down care
places to take them. On average during 2023, there were just over 12,000
people in hospital every night who had no clinical reason to be there but
could not be safely discharged. Half of those people, nearly all of them
elderly, had been waiting more than 21 days to be discharged. This "bed
blocking" also has a knock-on effect on other patients in the NHS, who can't
be admitted to hospital without a vacant bed.
Our society needs a thriving care home sector, which can provide the care
older people need and relieve the cost and bed blocking pressure on the NHS.
In short, the care home sector is vital to the health and wellbeing of
everyone in the UK.
Our purpose and strategy reflect the need for more care beds for the elderly
Our purpose is to work with tenants to provide quality, affordable and
sustainable care homes in order to deliver an attractive risk adjusted return.
This purpose and our business model determine our strategic priorities. These
are to:
Grow our business
By adding assets to the portfolio while carefully managing risk, so we can
invest in care home beds for more of the people who need them;
Work with our tenants
To form long-term, mutually beneficial partnerships, so we can grow together;
Focus on quality
By investing in our buildings and supporting our tenants who provide quality
care to their residents;
Maintain affordability
By seeking to set initial rents at affordable levels, which our tenants can
afford both now and in the long term. This in turn helps our tenants to charge
fees that are likely to be more affordable to residents; and
Increase our sustainability
By continuing to improve our portfolio's social and environmental
sustainability.
We have opportunities to create value
We currently own 1.7% of a highly fragmented market. Successfully implementing
our strategy gives us substantial scope for long‑term growth. Our focus on
generating secure income from a growing portfolio allows us to offer
attractive and progressive dividends, that are targeted to be fully covered,
to our shareholders, alongside the potential for capital growth. In the
process, we add value for our tenants by helping them to grow their
businesses, so they in turn can provide high standards of care to more people.
Impact Health Partners LLP, our Investment Manager (IM), plays a vital role in
our success. Its senior team has decades of experience of owning and operating
healthcare real estate, and their knowledge, skills and relationships give us
an important advantage in our market.
2023 IN BRIEF
Our financial performance was robust and we made further progress with our
strategy
Putting our purpose into practice: delivering attractive risk-adjusted returns
Our objectives are to generate:
· a progressive dividend that's fully covered by adjusted(1) earnings per
share (EPS); and
· an average total accounting return of 9.0% per annum(2).
Achieving these goals requires us to grow our profit, cash earnings and the
value of our assets, to produce an attractive overall return.
Despite some risks materialising in the year, we were able to deliver our
highest total accounting return of the past five years and a growing dividend
fully covered by adjusted EPS.
Our performance highlights in 2023 included the following
· We met our dividend target for 2023 of 6.77 pence per share, with the
total dividend being 108% covered by adjusted EPS and 123% by EPRA EPS.
· The value of our property investments rose by 4.1% on a like-for-like
basis (2022: (8.1)% like-for-like reduction). This was mainly due to
inflation-linked rental growth which contributed to NAV per share increasing
by 4.7%.
· Total accounting return improved by over seven percentage points to
10.82%, reflecting more stable asset values compared with 2022(2).
· Our dividend target for 2024 is 6.95 pence per share, up 2.66%(2).
The Group performed well in 2023, as shown below:
Year ended 31 December 2023 Year ended 31 December 2022 Year ended 31 December 2021 Year ended 31 December 2020 Year ended 31 December 2019
Dividends declared per share 6.77p 6.54p 6.41p 6.29p 6.17p
(+3.5%)
Adjusted EPS(1) 7.28p 7.11p 6.68p 5.93p 5.26p
(+2.4%)
Profit before tax £48.8m £16.9m £32.0m £28.8m £26.3m
(+188.8%)
EPRA EPS(1,3) 8.33p 8.37p 8.05p 7.25p 6.95p
(-0.5%)
Property investments(3) £651.3m £568.8m £496.9m £418.8m £318.8m
(+14.5%)
Net asset value (NAV) per share 115.38p 110.17p 112.43p 109.58p 106.81p
(+4.7%)
Total accounting return(3) 10.82% 3.78% 8.42% 8.46% 9.46%
(+7.0% pts)
EPRA (net) LTV 27.85% 24.10% 23.17% 17.06% -%
(+3.8%)
(1) Adjusted EPS strips out non-cash and one-off items.
(2) 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. Total accounting return
reflects the dividend we pay and growth in the value of our assets. We expect
higher valuations to mainly result from rising rents and our asset management
projects, rather than relying on wider market improvements.
(3) EPRA alternative performance measures have been calculated in line
with EPRA best practices recommendation.
Putting our purpose into practice: growing the business so we can invest in
much-needed care home beds
We continued to grow the portfolio during the year, with a net increase of
five homes. This resulted from:
· buying a portfolio of six homes for £56 million, on a net initial
yield(1) of 7%; and
· selling one non-core asset for £1.25 million, in line with its book
value.
At the year end, the key indicators of growth in our portfolio compared to the
prior year were as follows:
Year ended Year ended Change
31 December 2023 31 December 2022
Properties 140 135 +3.7%
Completed Beds 7,721 7,336 +5.2%
Portfolio let 100% 100%
Contracted annual rent roll £48.8m £43.1m +13.2%
Working with our tenants
We work closely with our tenants to identify ways we can grow together, while
keeping a close eye on their financial and operational performance. During
2023:
· higher occupancy and strong fee increases (see below) contributed to
improved financial performance for most of our tenants;
· one tenant, Silverline, got into financial difficulties. We took firm
action and successfully transferred their seven homes to another tenant(2) on
variable rent. Trading in these homes has shown good signs of improvement
since the transfer. Silverline's issues reduced our rental income for 2023 by
£1.2 million;
· we expanded our relationship with Welford, which operates the six care
homes we bought in 2023. Welford now runs 18 of our homes with 1,094 beds,
making it one of our largest tenants; and
· our long-term partnership approach to our tenants is reflected in
weighted average unexpired lease term (WAULT)(3) of 20.8 years at 31 December
2023 (31 December 2022: 19.7 years), with the increase reflecting new 30 and
35-year leases entered into during 2023.
Putting our purpose into practice: our focus on quality
Improving the quality of our assets
We continue to invest in our assets to improve the environment for residents
and staff, enable our tenants to broaden their offer (for example, by adding
specialist dementia beds) and to make them more environmentally sustainable.
We typically rentalise these inflation-linked investments at 8%, which means
we earn an extra £8 in annual rent for every £100 we invest.
In 2023:
· we approved £11.7 million new asset management projects;
· delays to some projects resulted in our actual investment in existing
asset management projects in the year being lower than expected, at £4.7
million; and
· at the year end, we had four projects in the pipeline, with anticipated
funding of £9.5 million over the next two to three years.
In addition to our total accounting return and the WAULT, the quality of our
portfolio is reflected in the following metrics:
Year ended Year ended Change
31 December 2023 31 December 2022
EPRA topped up net initial yield (NIY)(4) 6.92% 6.98% (6) bps
Bed occupancy 88.2% 86.6% +1.6% pts
· The NIY indicates the portfolio's ability to generate income, in
comparison to its market value. It has improved during the year, reflecting a
general trend of larger, better specified homes in our area of the market
seeing improvement in their valuation yield.
· Occupancy continued to recover from the lows during the pandemic,
showing our assets remain attractive to potential residents. We've seen signs
that tenants are prioritising fee increases (see below) over filling empty
beds, resulting in occupancy remaining around half a percent below the
pre-pandemic average.
Our tenants continue to provide good care
While the quality of our assets is important, the quality of care our tenants
provide to their residents is paramount: poor care in a great building is
still poor care.
At the end of 2023, 80.6% of our homes were rated good or outstanding by the
regulator. This was above the national average of 79% for comparable homes(5).
Putting our purpose into practice: maintaining affordability
With our leases running for up to 35 years, it's vital that our rents remain
affordable to tenants in the long term. We therefore look to set initial rents
at sustainable levels and then increase them only with inflation each year.
Almost all our leases set out minimum and maximum annual increases, which are
typically 2% and 4% respectively.
We monitor affordability using the following metrics:
Year ended Year ended Change
31 December 2023 31 December 2022
Rent cover(6) 2.00x 1.80x +0.20x
Average rental growth 4.1% 4.1% +0% pts
Rent collection 99% 100% (1)% pts
(1) The net initial yield is the annual rent generated by the assets,
less non-recoverable property costs, divided by the assets' value.
(2) These leases were transferred to Melrose, an affiliate of a related
party, Minster Care Group.
(3) The WAULT is the average unexpired lease term of the property
portfolio, weighted by annual passing rents. The passing rent is the actual
rent a tenant is paying at that point in time.
(4) This is the net income from the portfolio (rent less irrecoverable
property costs) divided by the total amount a purchaser would have to pay to
buy the assets (the market value plus the estimated costs the purchaser would
incur).
(5) Homes outside of England are inspected by different regulatory
bodies and rated on a separate system, in our reported metric we have aligned
these ratings to those used by the CQC.
(6) Rent cover is our tenants' EBITDARM (earnings before interest,
tax, depreciation, amortisation, rent and management charges) divided by total
annual rent. EBITDARM is a useful approximation for our tenants' cash
earnings, which they can use to pay their rent. This has been adjusted to
exclude seven turnaround homes and one new home in build-up.
Rent cover is one of our most important key performance indicators. The
increase in the year reflects improved occupancy, and in particular, our
tenants' ability to continue to increase their fees in line with or ahead of
inflation. The average weekly fee across the portfolio increased by 13.3% to
£1,049 during 2023.
Our tenants' staff costs have benefited from reduced agency staff use, which
declined from an average of 8.9% of their revenue to 4.7% in the year. The
rate of inflation for other key costs such as energy and food came down in the
second half of the year.
Rent reviews in the year increased rents by 4.1% on average, adding £1.6
million to the contracted rent roll.
One test to measure the sustainability of our rents over the long life of our
leases is the percentage of their revenues our tenants pay in rent, with
anything over 15% being potentially too high. In 2023 on average they paid
12.6% of their revenues to us in rent, down from 13.2% in 2022.
We collected 99% of rent due in respect of the year, with all tenants other
than Silverline paying in full.
Putting our purpose into practice: increasing our sustainability
We continued to focus on improvements to the environmental sustainability of
our portfolio with a target to achieve net zero status by 2045. During 2023,
we continued to improve the energy efficiency of homes through asset
management projects and improved energy performance certificate (EPC)(1)
ratings through further energy efficiency projects.
We are also focusing on reducing the carbon emissions per m(2). During the
year these increased slightly from 50kg to 54kg which is in part explained by
the increased occupancy over the past two years while the improvements we are
focusing on are taking time to embed. Reducing this metric remains a core
focus, with an interim target to reduce by 15% by the end of 2025.
We also carried out "deep-dive" sustainability surveys of six homes, to inform
our net zero delivery plan and ensure that our tenants' businesses and the
care they provide can continue sustainably.
Year ended Year ended Change
31 December 2023 31 December 2022
Carbon emissions (kg CO(2)e per m(2)) 54 50 +8%
EPC B and above 57% 53% +4% pts
Prudently financing the business
We use debt financing to support our growth and increase returns, while making
sure we have a strong balance sheet at all times.
We use the following metrics to monitor our financial position:
Year ended Year ended Change
31 December 2023 31 December 2022
Net debt(2) £181.4m £128.3m +41.3%
EPRA (net) LTV(2) 27.8% 24.1% +3.7% pts
During 2023 we:
· increased our revolving credit facility (RCF) with NatWest by £24
million to £50 million, extended the term from 2024 to 2028, and extended the
term on our £75 million RCF with HSBC by one year to 2026;
· paid off the remaining £15 million of our term loan with Metro Bank,
which was our most expensive debt; and
· increased our interest rate hedging by a net £75 million.
At the year end:
· the increase in LTV during 2023 was largely to finance the acquisition
of a portfolio of six care homes in January 2023. This acquisition was
accretive to earnings during the year after taking into account these
additional financing costs;
· we had committed bank facilities of £250 million, with a weighted
average term (excluding options to extend) of 6.3 years;
· we had significant liquidity available to us, with £65.2 million of
undrawn facilities and £9.4 million of cash, against commitments of £16.2
million;
· the average cost of our drawn debt was 4.56%, with 95% of our drawn
facilities fixed or hedged against interest rate rises; and
· our LTV was well within the maximum in our policy of 35%.
Outlook
We're well positioned to continue to deliver long-term sustainable returns to
shareholders. As the economy recovers from 2023's high inflation and interest
rate rises, and as the government sees the role that this sector can play in
both health and the economy, we believe that we'll see more opportunities for
growth in the future.
(1) An EPC rates a property's energy efficiency from A (most efficient) to G
(least efficient).
(2) EPRA (net) LTV is calculated using net debt to gross portfolio valuation.
THE SOCIAL NEED FOR CARE BEDS FOR THE ELDERLY
Demand for care beds for the elderly is rising
There are 6.5 million people aged over 75 living in the United Kingdom in
2024. That number is forecast to increase by 55%, to 10.1 million over the
next 25 years. The over 75s are the fastest growing part of the UK population.
These increases will happen during the lives of our long leases.
Care needs are becoming more complex
While rising life expectancies are good news, the downside is that most people
will spend the last 15 years of their life with some ill health. Around 10% of
people over 80 have care needs that make it difficult for them to live at
home.
Many people end up stuck in hospital beds, which means they're in the wrong
setting for the type of care they need, particularly if they have dementia,
and this increases costs for the NHS. On average during 2023, there were just
over 12,000 people in hospital every night who had no clinical reason to be
there but could not be safely discharged. Half of those people, nearly all of
them elderly, had been waiting more than 21 days to be discharged. This "bed
blocking" also has a knock-on effect on other patients in the NHS, who can't
be admitted to hospital without a vacant bed.
Since the COVID-19 pandemic, there's evidence that people are moving into care
homes later than before, that they're more likely to be frail or ill and that
their stays are shorter. This is creating a longer term shift in the industry,
with increasing demand for care providers who can deliver higher acuity care.
Dementia is the most common acute condition affecting people in care homes.
Around 70% of care home residents suffer from some form of memory loss, which
ranges from being mildly confused to severe dementia. The Alzheimer's Society
projects that the number of people with some form of dementia in the UK will
rise from just over 900,000 in 2020, to over 1.2 million in 2023, with the
greatest rise being amongst people who have a severe form of the condition. By
2022 dementia and Alzheimer's diseases had already replaced heart disease and
cancer as the leading cause of death in England and Wales.
The number of care beds isn't responding to demand
Despite the ageing population and rising acuity, the number of available care
beds for elderly care has been stagnant. Between 2012 and 2021, the number of
beds in nursing and residential care homes fell from 11.3 per 100 people aged
over 75 to 9.4 - a 17% decrease. Looking at longer-term trends, an estimated
25% of over 85s lived in care homes for the elderly in 1996. By 2017, this had
fallen to 15%. This reflects several factors, including a shift in social care
policy towards home care. It might also reflect an element of rationing in the
care system, as many older people struggle to access the care they need.
Although the care home market is attractive, for existing care homes the
economics make it difficult to create much new supply.
Construction costs have risen substantially over the past two years, making it
difficult to deliver a high quality new care home for less than £200,000 per
bed. In contrast, an older home with an established record for providing good
quality care can cost less than £100,000 per bed, which we believe offers a
better risk adjusted return. Given the higher capital costs of brand new
homes, tenants have to pay higher rents - up to 20% of their revenues as
opposed to our average of 12.6% - which means that they in turn have to pass
these costs on by charging higher fees to their residents. Higher fees do not
automatically translate into better quality care, which depends more on the
quality and stability of the team than the building.
Staffing rotas are highly regulated and tend to be similar in new and older
homes. The higher fees needed by newly built care homes limit the number of
residents who can afford this, restricting the size and growth of this segment
of the market.
Slightly older homes also offer opportunities to add value, by updating them,
adding facilities and improving their environmental performance, which is
another reason we favour this part of the market over new builds.
The market is highly fragmented
There are currently just over 12,000 registered care homes in the UK. Our
market is unusually fragmented. Over the past 15 years that fragmentation has
increased as the market share of the top-10 care providers in the UK has
declined from a peak of 27% in 2006, to 19% in 2023. The market share of sole
traders operating one or two care homes has also declined, from over 80% in
the early 1990s, to under 30% today.
Where there has been growth is of mid-sized care providers operating between
three and 80 homes. Developing partnerships with operators in this space has
given us the opportunity to acquire good quality assets at attractive yields.
We currently own 1.7% of a highly fragmented market. Successfully implementing
our strategy gives us substantial scope for long‑term growth.
Government policy and funding for care is complicated
To put it mildly, government policy and funding for adult social care is a
complicated field. There is no national government budget for adult social
care in England. A person's care needs might be met by their local authority's
social services budget or by their local NHS Trust, and the individual or
their relatives may also have to contribute to the cost.
Most local authorities support their adult social care costs through a council
tax levy and, in certain situations, local authority or NHS funding is means
tested. The system is ripe for reform, but successive governments have failed
to implement it, despite numerous white and green papers, plus industry
reports. Our tenants are experienced at delivering care in this complex
environment while also running sustainable businesses.
DELIVERING ATTRACTIVE RISK-ADJUSTED RETURNS | OUR BUSINESS MODEL
Our business model allows us to generate attractive returns, with managed
risk.
We consider risk from many angles, from ensuring our balance sheet stays
strong, to the way we pick tenants and make sure they're performing well, to
our focus on sustainability and creating a positive social impact.
What we do
Select tenants Identify and appraise assets Agree leases
We have a diversified portfolio of tenants that includes national, regional Sometimes tenants bring new opportunities to us and sometimes we select assets Our leases are typically for 25 years or more and balance rental growth with
and local businesses. When selecting a new tenant we consider: we'd like to acquire and determine which current or new tenant will operate ensuring rent remains affordable to tenants. The leases require tenants to
them. We then check every aspect of the homes, including reviewing their local spend a minimum amount every year on repairs and maintenance, and all our
market and the building's environmental sustainability. Our disciplined leases since 2020 include "green" clauses, to help us work with tenants on our
approach means we can buy at attractive prices, which are often less than the ESG objectives.
· track record and financial performance; cost of replacing the asset.
· the strength of their business plan;
· their ability to provide high-quality care to residents; and
· their ability to deliver strong trading returns over the longer
term, that will support our investment.
Monitor tenants' performance Work with tenants to improve our assets Optimise portfolio
We keep a careful watch on many aspects of our tenants' performance, including We agree plans with our tenants to upgrade and extend our homes. This makes We regularly review our assets and categorise them as core, value-add or
their financial results and the quality of their care, which we discuss with them better places to live and work, increases their capacity, improves their non‑core. Value-add assets are candidates for asset management. We may sell
our tenants on a quarterly basis. sustainability and can broaden their offer, for example by adding specialist non‑core assets, so we can reinvest the proceeds and create more value,
dementia beds. We can also work with tenants to develop new homes in areas while improving overall portfolio quality.
with strong demand. These activities increase our rent, the value of our homes
and our tenants' revenues.
Our competitive advantages
Our strategy delivered by our Investment Manager is our main source of
competitive advantage. In particular, we benefit from:
· our strategic focus on upper mid-market care homes which we can acquire
at below replacement cost with rents at affordable rates;
· the IM's deep sector knowledge and understanding of how care businesses
work, which helps with everything from buying the right assets to forming and
maintaining supportive tenant partnerships;
· the IM's relationships with care-home owners who might want to sell,
the agents they work with and with potential new tenants. Great relationships
and a proven track record can help us to buy assets off-market or beat the
competition even when we're not the highest bidder; and
· the IM's asset management and development skills, so we can identify
how to improve a care home before we buy it, successfully complete each
project and improve returns by developing new homes.
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 and their carers
Residents benefit from security, stability and high-quality care and their
carers benefit from a stable environment in which to receive training
alongside potential career progression in a vocational sector supporting
vulnerable members of their community. As a landlord we seek to support both
residents and their carers through our willingness to invest in their homes to
improve the spaces they live and work in to create a lasting social impact.
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 delivers predictable and rising revenue, so we can pay a
progressive, fully covered dividend. There is also the potential for capital
growth, which supports an attractive total return.
Careful cost control enables us to benefit from economies of scale as we grow.
Many of our costs are fixed and some variable costs will step down as our
asset value rises (including the IM fee which reduces from 1.0% to 0.7% of NAV
above £500 million). Along with our conservative approach to debt finance,
this helps to maximise the cash we can distribute to shareholders.
1 | GROWING THE BUSINESS SO WE CAN INVEST IN MUCH-NEEDED CARE HOME BEDS FOR
EVERYONE
Year ended Year ended Change
31 December 2023 31 December 2022
Beds 7,721 7,336 +5.2%
Properties 140 135 +3.7%
Growing our business requires us to make strategic choices that influence our
returns and the risks we face.
These choices include the types of assets we buy, where they are and how we
use debt finance to finance our growth.
Strategy: choosing which assets to buy
Our investment policy allows us to invest in different types of healthcare
properties. Given the growing demand for care beds for the elderly, we've
chosen to focus on care homes, in particular existing homes in the mid-market.
These are attractive to us because:
· they provide a good setting for quality care;
· they're affordable for many more people than high-end homes, so they
have a larger target market, which should mean fewer unfilled beds for our
tenants;
· they're lower risk than new developments, as the capital cost is
significantly less per bed and they don't need to build their occupancy and
staff team from scratch; and
· they often give us scope to add value through asset management.
In January, we invested in a portfolio of six homes in Shropshire and
Cheshire, for £56 million. The homes have 438 high-quality beds, a track
record of strong operational performance and good sustainability credentials.
We funded 80% in cash and the remainder by issuing 9.6 million shares at
116.62 pence per share. We made the initial investment by lending the money to
Welford, an existing tenant of ours.
This allowed Welford to buy the companies that owned the homes and immediately
take over running them, rather than having to wait several months for Care
Quality Commission(1) (CQC) approval to come through. This minimised
disruption for residents and made sure Welford could focus on care. The CQC
approved the transfer in June, allowing us to take up our option to buy the
homes from Welford and complete the 35-year leases we'd already agreed, at an
initial rent of £3.9 million a year.
Approving the completion of the deal was one of the board's key decisions in
the year. We also sell non-core assets, as the business model explains. During
2023, we sold Mulberry Manor, a 49-bed care home in Mexborough, which we
acquired as part of the portfolio we bought following our IPO in 2017. The
home wasn't a strategic fit for either us or the tenant, hence it wasn't
classified as core and we disposed of it for £1.25 million, in line with its
book value. We expect to make further disposals of non-core assets in 2024.
The transactions in 2023 increased our portfolio by a net five homes, from 135
at 31 December 2022 to 140 at the year end.
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Stakeholders' interests: long-term impact and the environment
We sign long leases with tenants and as directors, we require extensive due
diligence, both before we start working with them and careful monitoring once
they're running our homes.
In this case the directors concluded that Welford was a good partner for us,
that the acquisition would further strengthen both businesses and that it was
appropriate to agree 35-year lease terms.
The directors also have a keen interest in the assets' sustainability and we
discussed the cost, strategy and regulations associated with decarbonising the
homes and improving their energy performance certificate (EPC) ratings and
alignment with our net zero delivery plans, before approving the acquisition.
(1) The CQC is the independent regulator for health and social care in
England.
Measuring our progress
We also use the following key performance indicators (KPIs) to monitor our
returns from the portfolio.
Year ended Year ended
31 December 2023 31 December 2022
Profit before tax £48.8m £16.9m
Profits have been enhanced by rental income growing at a faster rate than
expenses as shown in the Group's reducing cost ratios. However, the key driver
this year has been the valuation gains reversing the fair value losses seen in
the previous period.
Year ended Year ended
31 December 2023 31 December 2022
NAV £478.1m £445.9m
Primarily driven by steady yields across the portfolio with rent reviews
feeding directly into valuation growth.
Year ended Year ended
31 December 2023 31 December 2022
NAV per share 115.38p 110.17p
Total NAV of the Group grew by 7.22% to £478.1 million and the NAV per share
grew by 4.73% to 115.38p. The reduced growth per share is reflective of the
incremental 9.6 million shares issued in January 2023 as part (£11.2 million)
of the consideration for the acquisition of six care homes.
Year ended Year ended
31 December 2023 31 December 2022
Adjusted earnings per share 7.28p 7.11p
The Group's adjusted earnings (closely aligned to cash profits) continued to
increase in 2023 owing to inflation-linked rent reviews improving cash revenue
while administrative costs further reduced as a percentage of income and the
Group's well-hedged debt position mitigated the effects of high interest
rates.
Strategy: where we buy assets
We manage risk by spreading the portfolio around the UK, so we don't rely on a
small number of local markets. Most of our homes are in areas where asset
prices are more attractive, there's strong demand for care and often less
competition. This makes our homes an even more important part of their local
communities.
At 31 December 2023, we owned homes in the following locations:
Number of 2023 change 2023 change % of portfolio
Location properties in properties Beds in beds market value
England
East Midlands 8 - 405 - 6.0%
East of England 9 - 547 - 10.0%
North East 12 - 767 - 8.9%
North West 33 - 1,348 +6 14.3%
South East 4 - 318 +1 6.0%
South West 10 - 537 +5 9.9%
West Midlands 14 +6 860 +440 14.1%
Yorkshire & The Humber 11 (1) 693 (49) 6.3%
Northern Ireland 5 - 340 - 3.4%
Scotland 32 - 1,805 (16) 20.4%
Wales 2 - 105 (2) 0.7%
Total 140 +5 7,721 +385
Strategy: financing our growth
We can grow the portfolio more quickly and increase returns by using an
appropriate amount of debt. We're very aware of the risks of having too much
leverage, so our policy is to have a maximum loan-to-value(1) (LTV) ratio of
35% at the time we drawdown the debt and to hedge at least 75% of our drawn
debt against rising interest rates. We have also updated our hedging policy to
ensure we have adequate hedging in place to manage the risk of interest rate
increases within our risk tolerance. At the year end, 95% of our drawn debt
was hedged against interest rate increases.
In June, we increased our revolving credit facility (RCF) with NatWest by £24
million to £50 million, and extended the term from 2024 to 2028. The interest
rate on this RCF is 200 basis points above SONIA. We also extended the term of
our £75 million RCF with HSBC by one year to 2026. At the same time, we
agreed lower interest cover covenants with both banks.
Increasing the NatWest RCF enabled us to replace the last £15 million of our
loan from Metro Bank. This was our most expensive debt, at 265 basis points
above SONIA(2).
To manage our interest rate costs, we took out two interest rate caps in the
year. These each hedge the cost of £50 million of debt, with the first
capping SONIA at 3.0% until January 2025 and the second capping SONIA at 4.0%
until August 2025. In June, a hedge which capped the interest rate on £25
million of debt expired. At the year end, we therefore had either fixed rates
or caps on £175 million of debt or 95% of our drawn debt, in line with our
policy.
Strategy: who funds our tenants' residents
We like our portfolio to have a good balance of funding for tenants'
residents, from local authorities, the NHS and private pay. This helps to make
our tenants' revenues more resilient than relying on one source of fees and
means, we earn a predictable income from our assets.
Funding for our tenants' fee income changed only modestly during the year and
remained well balanced:
Source of tenant income
Year ended Year ended
31 December 2023 31 December 2022
Local authorities 58.8% 60.2%
Private pay 31.3% 31.7%
NHS 9.9% 8.1%
How we monitor our financing
We use the following KPIs to monitor our debt position:
Year ended Year ended
31 December 2023 31 December 2022
Net debt £181.4m £128.3m
The increase was predominantly due to £44.8 million cash consideration to
acquire the portfolio of six assets acquired in January 2023.
Year ended Year ended
31 December 2023 31 December 2022
EPRA (net) LTV 27.8% 24.1%
Increased in the year owing to an acquisition and capital expenditure on the
existing portfolio, partially tempered by growing portfolio valuation.
(1) The gross LTV is our gross debt as a percentage of our gross asset value.
(2) The interest costs on our variable rate debt are linked to an interest
rate benchmark called the Sterling Overnight Index Average (SONIA), which in
turn is driven by the Bank of England's base rate.
Engaging with our shareholders and lenders
While all our stakeholders have an interest in the growth of our business and
our financial stability, our shareholders and lenders are the most directly
affected.
Understanding our shareholders' interests
The IM leads our investor relations programme and, along with our corporate
brokers, ensures the board is kept well informed of shareholder views.
The Chair also offered meetings to our largest shareholders in the year.
Understanding our lenders' interests
The IM also regularly engages with our debt providers, providing quarterly
information that shows we're complying with the covenants in our debt
facilities and reporting on the performance of the tenants and the homes the
facilities are secured against. In 2023, the IM was in regular contact with
NatWest and HSBC, as it negotiated the increased and extended RCFs discussed
above.
During the year, the IM took the lenders to visit several of the homes in
their security pool to provide full transparency of the intended asset
management works and environmental criteria we are upgrading these properties
to. This regular and open engagement with our lenders, along with improved
familiarity with the properties, has allowed us to increase and extend these
facilities efficiently.
Key board decision - refining the dividend policy
Relevant stakeholders: shareholders
Dividends are a key attraction for shareholders in real estate investment
trusts (REITs), with the UK REIT rules requiring us to pay out at least 90% of
the profits from our property rental business each year. Paying an attractive
and progressive dividend is therefore one of our most important objectives.
In 2018, the board adopted a policy of increasing the target dividend each
year in line with the inflation-linked rental growth in the previous year. The
board reviewed this policy in 2023.
While the policy gave shareholders certainty about dividend growth, the
directors concluded that it was in shareholders' interests for the policy to
be more flexible and forward looking.
The board therefore agreed an updated policy, to seek to maintain a
progressive dividend that's covered by adjusted earnings. The directors
continue to see adjusted earnings as the best yardstick for dividend payments,
as they more closely reflect the Company's cash earnings than the IFRS or EPRA
measures.
Case study
Morris Care
What was the opportunity?
To acquire a group of six homes in Shropshire and Cheshire, with a focus upon
the wider Shrewsbury catchment area. We were attracted by the high
specification of the assets, their local reputation and weighting towards
higher acuity care provision.
Whilst the vendor was looking for a clean exit from the elderly care market,
they were keen to ensure continuity of care for the residents. Operational and
local management would remain with the business post completion and Welford
agreed a licence to continue to use their well-established local brand name
for at least three years after completion.
The IM identified an existing portfolio tenant, Welford Healthcare, as the
best fit for the transfer of the operational businesses. Welford's own due
diligence aligned with the IM's assessment regarding the potential for the
portfolio and as a result, we were able to provide confidence to the vendor
regarding continuity of care.
How did the timeline unfold?
The transaction was agreed in principle in mid-2022, with exchange targeted
for the end of September. Unfortunately, the mini-budget in September 2022
created a market-wide hiatus and the transaction was paused by joint
agreement. The terms were then revised to reflect the rise in the cost of
capital after the mini-budget and agreement was reached in early December
2022, with completion occurring in January 2023. Given the increase in the
cost of debt, the vendors' agreement to take 20% of the consideration in new
shares issued by Impact at NAV was critical to ensure that the acquisition
would be accretive to our earnings in 2023.
What has gone well?
Both Welford and ourselves saw opportunity within the trading performance,
focusing on fees, occupancy and staffing. In particular, by extending an
overseas recruitment campaign, there was scope to reduce the use of agency
staffing in the short term. Coupled with some revenue growth as refurbished
beds in one of the homes were filled, the business plan was expected to
improve profit, and hence rent cover to over two times, within 6 - 12 months.
The latest available data demonstrates outperformance against the original
business plan, with strong rent cover in the context of the portfolio overall.
As a result of trading performance, despite wider market conditions, asset
value is showing a healthy return against the original purchase price.
Looking forward, there are significant potential development concepts at two
of the properties, including one that incorporates planning permission for a
solar farm, which will help advance our ESG strategy.
Value uplift since acquisition
£3.3m +5.8%
% of Group's portfolio by market value
9.1%
2 | WORKING WITH OUR TENANTS
Year ended Year ended Change
31 December 2023 31 December 2022
WAULT 20.8yrs 19.7yrs +5.6%
Bed occupancy 88.2% 86.6% +1.6% pts
We don't run our care homes, so we need to partner with tenants who will
operate them well and who share our focus on providing high-quality, and
increasingly higher-acuity, care.
We keep in close contact with our tenants throughout the year, receive
detailed monthly and quarterly reporting from them and carefully monitor their
performance.
The business model describes our process for selecting tenants. We also have
important choices to make as we grow our portfolio. In particular, we need to
determine the right balance between adding new tenants and growing with
existing tenants, as well as deciding how long we want our tenant
relationships to be.
Strategy: adding tenants and growing with them
When we buy assets, we can select a new tenant to run them or increase the
number of homes an existing tenant operates. Adding new tenants manages risk
by reducing our reliance on individual tenants. However, growing with an
existing tenant strengthens their business and supports our long-term
partnership.
The acquisition we made during the year further increased the number of assets
run by Welford, which has been a tenant since 2018. Over that time, we've
expanded our relationship from an initial two homes to the current 18 homes
with 1,087 beds, making Welford one of our largest tenants.
There was one change to our tenant base during the year, as we replaced
Silverline with Melrose(1).
At the year end, our tenant base was as follows:
Tenant Contracted rent (%) Homes Beds
Minster(1) 22 31 1,774
Welford 20 18 1,094
Holmes 14 21 1,129
Croftwood(1) 12 27 1,118
Careport 5 9 439
MMCG 5 7 508
Prestige 5 5 444
Electus 4 5 340
Carlton Hall 3 2 86
Melrose(1) 3 7 394
Belmont 2 2 168
Renaissance 2 2 128
Optima 2 2 99
NHS 1 2 -
100 140 7,721
(1) Minster and Croftwood are part of Minster Care Group. Melrose is an
affiliate of Minster Care Group.
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Stakeholders' interests: business relationships
The directors must consider the Group's business relationships, including with
our tenants. In addition to receiving regular updates and detailed reports
from the IM on each of our tenants, the directors all took part in calls with
tenants during the year.
This allowed them to hear first-hand what tenants think of the Company as a
landlord, and to discuss the issues tenants are facing.
Strategy: choosing the length of our tenant relationships
The length of new leases is an important decision for us. We favour leases of
25 years or more, since this generates long-term and growing income for our
shareholders, encourages tenants to take a partnership approach, and gives
residents and care home staff a stable environment to live and work in. Leases
of this length also require us to be very selective when signing new tenants.
During the year, new leases came into effect on 18 assets. These were:
· the 35-year leases with Welford on the six homes we acquired in January
2023; and
· 30-year leases on 12 care homes we originally invested in through a
loan to Holmes. We had an option to buy the homes following regulatory
approval, which we exercised in June 2023.
How we measure our progress
The portfolio's weighted average unexpired lease term (WAULT) is a KPI for us.
At 31 December
KPI 2023 2022 Comment
WAULT 20.8 years 19.7 years The WAULT increased by one year during 2023, due to the new 30 and 35-year
leases described above. This was partially offset by the passage of time
reducing the remaining period of existing leases.
Monitoring our tenants' performance
The IM engages with tenants on a weekly and monthly basis and in more depth
each quarter, when it receives reports from them setting out their financial
and operating performance.
Three main factors affect our tenants' financial performance and their ability
to pay our rents: their occupancy; the fees they charge for the care they
provide; and the cost and availability of staff. Trends in occupancy and fees
were positive in 2023 and most tenants reported improved financial performance
and higher rent cover.
In 2022, tenants struggled to recruit permanent staff and used more agency
staff as a result. Encouragingly, we've seen clear signs since that tenants
are getting these issues under control.
Their spending on agency staff fell from an average high of 14% of their total
spending on staff at the beginning of 2022, to an average of 8% at the end
of 2023.
With our largest tenants, we can also track whether they're maintaining
staffing levels. Hours worked per occupied bed were stable at 36 hours a week,
showing that while costs were rising sharply as inflation surged tenants were
not cutting back on their main cost, staff.
Among other important costs, food prices rose but were steady as a percentage
of tenants' revenues, and energy costs fell back to more normal levels in the
second half of 2023.
Key board decision - replacing Silverline with Melrose
Relevant stakeholders: shareholders, lenders, tenants, tenants' residents
Despite the generally positive backdrop for our tenants in 2023, it became
apparent at the start of the year that Silverline was in financial
difficulties and in January 2023 they asked us for a six‑month rent holiday.
Silverline rented seven homes from us - four in Scotland and three in
Yorkshire - for £1.6 million per year. The IM reviewed the situation in
detail, including why the homes were underperforming, and continued to engage
with Silverline about its financial position.
The board and the IM considered several options for the homes and were clear
throughout these discussions that the solution had to minimise disruption for
residents and staff. Ultimately, the board decided it was in the best
interests of all stakeholders to replace Silverline as the operator. After
running a competitive process, the board agreed with the IM's recommendation
to replace Silverline with Melrose, an affiliate of a related party - Minster
Care Group Limited (our largest tenant), at the beginning of June 2023. For
further detail of this transfer of operations please see Note 22 to the
financial statements.
The lessons learnt
Between the Company's inception in 2017 and the end of 2022 our rent
collection record was 100%. This was the first time we have had a problem with
rent collection. Following Silverline, we've reviewed and updated the due
diligence we carry out on potential new tenants.
We first started working with Silverline when we bought the three Yorkshire
homes in 2020. These homes were bought as a turnaround project on pricing that
reflected their under-performance. We thought they had the potential to do
much better. Silverline had a plan for turning them around but unfortunately
failed to do so. Clearly the COVID pandemic made delivering a successful
turnaround much more challenging. While we may buy homes that need turning
around in the future, we'll only do this with an existing tenant and probably
not with an operator we haven't worked with before.
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Stakeholders' interests: community impact and business reputation
The directors must consider how their decisions could affect the community,
and whether they could harm the Group's reputation for high standards of
business conduct. A fundamental stakeholder consideration in the board's
decision making, is the conflict of interest risk as a result of the related
party relationship between the Investment Manager and Minster, the Group's
largest tenant. The directors take this very seriously.
These issues were relevant to Silverline. One option available to the Group
would have led to the homes closing and then reopening under a new tenant.
This would have caused the most disruption to the local community, given its
impact on residents and staff, and could also have harmed the Group's
reputation, which is important for attracting new tenants.
Case study
Silverline
Silverline was a tenant of the Group, operating three of our homes in Bradford
with turnaround opportunities identified, and four in or near to Glasgow. The
Bradford homes were acquired immediately prior to Covid, resulting in delays
to the planned turnaround strategy at these homes. The acquisition of the four
homes in Scotland was expected to help deliver growth for both Impact and
Silverline; however, there were delays to the completion of this portfolio
which was compounded by a material change in the broader business activity of
the Silverline group. As a result, they requested a rent payment holiday for
six months from the beginning of January 2023. Following a five-month period
during which several solutions were considered, we decided that the best
outcome for the residents, employees of the homes and our wider stakeholders
was a consensual transfer of the Silverline operations to Melrose, an
affiliate of a related party, Minster Group, who has been operating the homes
since June 2023. In identifying the best alternative operator to partner with,
both new and existing operators were approached. Ultimately, Melrose was
selected due to a number of factors, including their significant experience
operating mid-market homes in both England and Scotland, track record in
turnarounds and the competitive cost structure offered to the Group.
To support the transfer of these operations to Melrose and the continued
investment in the turnaround of the individual homes, we agreed a variable
rent structure and provided a £1.6 million loan facility accruing interest at
8% on drawn funds.
Since transferring the operations of the homes, their underlying performance
has improved, albeit at a faster pace in the assets located close to Glasgow
than in Bradford, confirming our conviction in the quality of the homes. We
will continue to work closely with all parties involved to secure the
long-term future of the homes and to ensure the essential care services
provided within the homes remain unaffected.
Whilst there is still a lot of hard work to do at each of the homes, we are
proud to say that one year on from the failure to pay rent, the homes are now
cash flow positive and each with their own future ahead. This unfortunate
event helps demonstrate the positive impact we as landlord can have on the
residents and staff who live and work within our buildings.
Number of beds
394
(properties: seven)
% of Group's portfolio by market value
2.6%
3 | OUR FOCUS ON QUALITY
Capex invested in improving homes for residents and staff
£4.69m
Quality has two main aspects for us: care and buildings. The quality of care
is paramount for both us and our tenants.
We focus on the buildings which will best support our tenants in providing
care. Both the quality of care and the building itself determine how full the
homes are, how much our tenants can charge and how secure our income is.
Our strategic choices include how much capital we should allocate to asset
management, what sort of improvements we should target, and the extent to
which we should fund new developments. Our tenants are responsible for
repairing and maintaining the buildings and for their quality of care. We
monitor both of these and discuss them with our tenants on at least a
quarterly basis.
Strategy: increasing quality by investing in our assets
Everyone gains from successful asset management: the residents who live in our
homes; the staff who work there, our tenant who operates the home; and us as
its owner. When we invest to improve our homes, the lease terms typically
allow us to rentalise the investment at 8% with potential for valuation uplift
on the capital invested, giving a rate of return above just the yield alone.
The returns on asset management are therefore higher than on most asset
acquisitions. These projects are also generally lower risk, since we and the
tenant have a good understanding of the home and how the project will improve
its performance.
However, we have to carefully consider how much to invest each year and which
projects to favour, since:
· we want to continue to grow the portfolio and need to retain enough
capital to buy assets; and
· our tenants have to balance a project's longer-term benefits with the
short-term disruption to the home, which can reduce their income while rooms
are upgraded and disturb residents. We therefore need our tenant's permission
for a project to go ahead.
Our portfolio management process identifies homes with the potential to add
value through asset management. Where we acquire homes as part of a portfolio,
this may include non-core assets that have limited credentials for a long-term
hold and will be earmarked for disposal. We then target projects that:
· improve the home for residents and staff, such as adding ensuite
bedrooms and upgrading kitchens, laundries and other facilities;
· improve the environmental performance of the home and future-proof the
home against obsolescence;
· expand the services our tenants can offer, such as adding specialist
beds for dementia care; and/or
· improve the home for residents and staff, such as adding ensuite
bedrooms and upgrading kitchens, laundries, outside spaces and other
facilities.
We made good progress with our ongoing project at Fairview House and Court in
Bristol, where we have invested £3.2 million to link the two buildings, add
bedrooms and improve the environmental performance. When we bought Fairview in
2018, the rent was £356,000. After five years of inflation-linked rent
increases and rentalising our investment in the home, we've grown the annual
rent to £690,000. At the same time, the home's improved trading position has
seen its rent cover rise.
The asset value has, as a result, grown by more than the capital investment.
Overall, however, we did not invest as much in asset management as we intended
in 2023. Some larger projects were delayed, for example because increased
build costs meant we needed to revisit the plans, while several smaller
projects also started later than we expected. In total, we invested £4.7
million in asset management in the year.
Our pipeline currently has 24 such projects at various stages. The total
funding for these projects is up to £31 million over the next two to three
years, which we will support if it enhances the quality of care and
environment, is accretive to shareholder returns and we have adequate
financial resources available to deploy.
Our progress in 2023
During the year, we approved £11.7 million to asset management projects of
which £2.2 million was spent in the year and £9.5 million remains
outstanding. The largest projects are shown in the table below:
Asset and tenant Amount committed Project benefits
Mavern House
Welford £1.9m Eight new bedrooms and improved EPC rating (C to B).
Elm House
Croftwood £3.0m Extension with 21 high-specification bedrooms with wet rooms, upgraded
bathrooms for five existing bedrooms, and improved EPC rating (C to B).
Amberley
Minster £2.5m 16 new bedrooms with wet rooms, upgrades to 10 existing bedrooms and
bathrooms, and improved EPC rating (C to B).
Yew Tree
Prestige £2.5m New 25-bed building on land we already own, increasing beds at Yew Tree to
101.
Ensuring our tenants maintain our buildings
Regular repairs and maintenance protect the value of our homes and keep them
up to standard for residents and staff.
Our leases specify the minimum amount our tenants need to spend and we monitor
this carefully, looking at spend in the current year and the total over the
last three years. The IM regularly visits homes to inspect them and check
progress, with over 110 visits taking place in 2023.
In addition, our valuer, surveyors, environmental specialists and other
advisers support the IM in reviewing the quality of our buildings.
Collectively, they undertook 197 home inspections in the year.
Where we identify concerns either by tenants falling behind on their repairs
and maintenance commitments against our covenant requirements, or more
generally a concern that the home does not meet the fully repairing standards
expected, we will engage proactively with those tenants to resolve these
issues.
How we measure our portfolio quality
The following KPIs reflect the overall quality of our assets. Our total return
and the WAULT are also important measures of quality:
EPRA topped-up net initial yield (NIY)
2023 6.92%
2022 6.98%
The EPRA topped-up NIY has been steadily reducing over the year as the
property values have stabilised following a sudden outward move at the end of
2022. This has been benefited further by the acquisition of high-quality
assets during the year alongside continued improvements to the existing
portfolio.
Year-end bed occupancy
2023 88.2%
2022 86.6%
Occupancy across the portfolio continued to increase during the year, although
it was still around half a percent below pre-COVID levels at the year end.
Tenants have prioritised passing on cost inflation rather than discounting
fees to fill beds, which is reflected in the 13.3% average increase in their
fees in 2023.
Impact Group average adjusted bed occupancy(1)
Looked at over a longer period, occupancy has steadily recovered since the
COVID low point of 79% in January 2021, but has not yet fully returned to
pre-covid levels of 90%.
(1) Excludes one new home in build-up and three turnaround assets which have
not reached maturity.
Monitoring the quality of care
The IM tracks reports and ratings from regulators, and regularly reviews
customer feedback on the homes.
During 2023, the regulator inspected 27 of our homes. If the regulator rates a
home as inadequate or requires improvement, the IM reviews the report in
detail and discusses the findings with the tenant's operations director.
This allows us to understand the issues, the actions the tenant is taking and
whether there are any broader operational concerns the tenant is looking to
address. Where appropriate, we'll seek independent support to help resolve
any ongoing issues.
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Stakeholders' interest: community impact and business reputation
In addition to the financial implications of building and care quality
discussed above, the directors must consider how these issues can affect the
community and the Group's reputation. Poor buildings or care have a direct
impact on residents' quality of life and the working environment for staff and
therefore the community within which they operate. Badly maintained buildings
and poor care could do significant damage to tenants' reputations, which in
turn could harm perceptions of the Group.
How we measure our tenants' care quality
The regulator's ratings are a KPI for us:
Home rated good or outstanding by CQC
2023 80.6%
2022 78.2%
The proportion of good or outstanding homes improved during the year and is
above the sector average of 79%. At the year end, two homes were rated
inadequate and 23 required improvement.
Taking account of residents' interests
Our tenants are responsible for their residents and we don't directly engage
with them, except when we meet them during home visits. The main ways we look
after residents' interests are through our oversight of care quality ratings
and ensuring the homes are well maintained, as described above.
Case study
Asset management timeline
January February May June July
Works commence at Mavern, Wiltshire to add eight new bedrooms and residents Works commence at Golborne, adding new bedrooms and wet rooms Handover of link block incorporating 11 new bedrooms at Fairview, Bristol, Handover at Isle Court Shropshire, creating three new premium rooms Works commence on new 25-bed care home alongside the existing Yew Tree Care
lounge enabling improved operational efficiency Centre in Redcar
August October November December
Works commence at Amberley House, Truro, to create 16 new bedrooms, laundry Works commence at Elm House, Cheshire, to add 21 bedrooms, resident lounge and Handover at Golborne Handover at Mavern
and improved resident day space sensory garden
Mavern - refurbishment and extension in progress
We approved an extension and extensive refurbishment of Mavern in January 2023
which is due for completion in early 2024. The refurbishment will modernise
the care home ensuring it can continue to provide high quality care over the
term of the lease while delivering improved energy efficiency in line with our
ESG strategy.
· Beds: +8 beds to 62 beds.
· New resident lounge.
· EPC improvement from C to B - including air source heat pumps and solar
pv.
· Capital expenditure of £1.9 million.
· Target value uplift of £0.5 million.
"We are so pleased with the investment in our home and the wonderful new
bedrooms and day spaces that have been created. We are sure that residents and
staff will benefit from the improvements and further enhance our reputation
locally."
Justine Old, Registered Manager
Freeland Lodge - three years on
Construction of Freeland Lodge, a 46-bed care home, was completed in 2020.
Located adjacent to Freeland House the home offers nursing, dementia and
residential care. Three years after opening, the home is delivering in line
with projections with strong occupancy and similar fees from both self-funded
and publicly funded residents, reflective of the quality of environment and
care provided.
· Beds: 46.
· Capital expenditure: £5.2 million.
· Value uplift since completion £1.6 million(1).
· Year-end occupancy: 93.5%.
· AWF: £1,480.
· Carehome.co.uk: 9.5/10.
· CQC: Good.
· EPC: B37.
(1) This includes uplifts on the existing property, Freeland House.
"We are so pleased with the progress we have made over the last three years.
Residents and staff really love the light and airy spaces and the wonderful
views out over the gardens and beyond."
May Hernandez Vidal-Payne, Registered Manager
4 | OUR FOCUS ON AFFORDABILITY
Rent cover
2.0x +11.7%
2022: 1.8x
For our business to be sustainable, our tenants must be able to afford our
rent and their fees must be affordable to a sufficient number of potential
residents, both private and publicly funded.
Our strategic choices relate to the rents we set when we first agree leases
and how we structure our rent review clauses.
Strategy: setting initial rents and ensuring sustainable rental growth
We believe that all our stakeholders will be better off in the long run if we
make sure rents remain affordable. With this in mind:
· we typically set initial rents to ensure strong rent cover from day
one; and
· all our leases include annual inflation-linked rental growth, with
minimum and maximum increases each year. For most leases, these are set at 2%
and 4% respectively.
This structure shares risk between us and our tenants. It guarantees that our
income will grow every year, including when inflation is low, while protecting
our tenants when inflation is high, as it has been over the last 12 to 18
months.
Impact leases inflation linkage
Percentage of Impact leases with RPI linkage 99%(1)
Percentage of Impact leases with CPI linkage 1%
Impact leases caps and collars
Percentage with floor 2%/cap 4%
85%(1)
Percentage with floor 1%/cap 5%
14%
Percentage with upwards-only inflation linkage 1%
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Stakeholders' interests: long-term impact and business reputation
The way we set initial rents and structure rent reviews are good examples of
our focus on the long term. If rents become too high, we'll lose tenants and
hence income, causing major disruption to residents and staff, reducing the
value of our assets and risking damage to our reputation. Balancing rental
growth with affordability is therefore a key part of providing sustainable
returns for shareholders.
(1) This includes the seven leases with Melrose which have been temporarily
amended to variable rent.
How we measure affordability
Rent cover is one of the most important KPIs for our business. We also track
our rental growth and the amount of rent that's overdue:
Last 12 Months (LTM) Rent cover
2023 2.00x
2022 1.80x
Rent cover increased throughout the year and was the highest we'd recorded at
the year end. This reflects our tenants' success in passing on inflationary
cost pressures through higher fees, and the fact that fees grew faster than
rent due to the caps in our leases.
Average rental growth from rent reviews
2023 4.1%
2022 4.1%
Across both years, all the Group's care home rents had increased in line with
the rent review cap in their lease.
Rent collection
2023 99%
2022 100%
In the first half of 2023 Silverline stopped paying rent, the homes were
re-tenanted by June 2023, although this was partially mitigated by a rental
deposit held by the Group; it resulted in £236,000 rent written off.
The chart on page 31 of the annual report shows rent cover over time,
demonstrating that rents have been consistently affordable for our tenants, as
well as the scale of the improvement this year
The chart on page 31 of the annual report sets out the rental growth we've
achieved over the last six years and compares the percentage increase with the
rate of inflation. It shows that we've received above-inflation increases for
much of this period, with our tenants being protected more recently from high
inflation. In total, rent reviews added £1.6 million to our contracted rent
in 2023.
(1) Rent cover excludes seven turnaround homes which were previously operated
by Silverline and were re‑tenanted in June 2023 and one new home in build-up
stage. The adjustments are consistent with reporting in previous periods.
Affordability of our tenants' rent
An important indicator of whether our tenants' rent is affordable, is whether
they can increase their fees at or ahead of the rate of inflation. As shown
below, care home operators have a long history of achieving this:
This continued in 2023. Across our portfolio, the average weekly fee (AWF)
rose by 13.3% to £1,049, contributing to rising tenant profitability and
rent cover.
Case study
Q&A with our tenant - Careport
Careport summary
Number of care homes with us
9
2023 average occupancy
96%
Public/private fee split
74% / 26%
Average EBITDARM margin (since January 2020)
26%
Q: What are your main aims as a business?
A: Our principal aim is to ensure that Careport is the preferred provider of
dementia care in all areas where we operate.
Q: How do you do that?
A: We need to show we can deliver on three fronts: we provide good quality
care; we are a reliable partner for our staff, residents and the people paying
for their care; and we manage well-invested care homes where people want to
live and work.
Q: What are your plans for 2024 and beyond?
A: During the COVID pandemic we really focused on being a reliable and trusted
care provider during a very challenging period. Then, in 2023, we had to
concentrate on managing cost inflation. We are now moving into the next period
where we are thinking about the investment required to enable our business to
perform over the longer term.
Q: What kind of investments are you considering?
A: We are already quite advanced in rolling out modern digital care management
tools and want to take that investment further. Our aim is not to reduce
staff, but to ensure the staff we have work consistently better and have more
job satisfaction.
That leads into the second major area of investment - our staff - where we are
putting in place measures to be able recruit the best people, train them and
offer a career with real potential.
Q: Over 75% of the residents you care for are funded by their local council or
NHS on lower fees than are typically paid in the private market. Can you
afford to invest?
A: We aim to deliver excellent care at affordable rates and never forget that
in order to be a sustainable organisation we also need to be a profitable
business. Since we started our relationship with Impact in 2018, our rent
cover has been consistently better than two times during some very challenging
times.
Q: There are significant capex programmes agreed with Impact due to start in
2024.What's the best project you've worked with Impact on so far?
A: The completion of the large-scale project we undertook to convert Blackwell
Vale, a weak and underinvested care home bought in partnership with Impact,
into what is now Riverwell Beck has been transformational. Impact supported us
by envisioning the potential in Blackwell Vale and assisting us to undertake a
complete overhaul of the internal layout, including a refurbishment and an
extension which culminated in an additional five bedrooms and a significant
improvement in the building specification and energy efficiency.
We worked with Impact to agree an affordable rent from day one which provided
headroom for further investment. On Riverwell Beck, Impact challenged us to be
more optimistic on the extent of the refurbishment and we are delighted we
took this risk as performance has outperformed our initial expectations.
Q: And of course Impact have also worked with you on sustainability
improvement programmes…
A: We are fully aware of the need for greener and more sustainable properties
and have embarked on projects across our entire portfolio to enhance the
energy efficiency of our buildings; a consequence of which has been lower
energy costs. Impact has been instrumental in providing us with the tools and
funding to improve our buildings' sustainability. This is an area of capex
that we continue to explore, such as installing solar PV on many of our
properties.
5 | INCREASING OUR SUSTAINABILITY
EPCs improved
12
8 of which moved up to a higher band
Carbon Intensity (kg CO(2)e per m(2) per year)
54kg
(2022: 50kg)
Carbon intensity has increased, in part due to increased occupancy, while
energy efficiency measures take time to embed.
We believe that high quality, affordable care should be accessible to all.
We were pleased to retain our EPRA sBPR Gold award for the fourth year
running, demonstrating our commitment to transparent disclosure on the
environmental performance of our portfolio. In 2023, our initial Carbon
Disclosure Project report received a D grade. This is a good platform for a
first submission and we are looking to build on this in the future. The IM 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.
Care homes are an essential part of the UK's social infrastructure and have a
crucial part to play in their communities. Our care homes can also free up
much-needed bed space in hospitals, improving people's lives by reducing the
time they spend in hospital and providing them with a more appropriate setting
for community‑based care. Our homes also benefit the wider community and
sustain and create local employment. We believe that our long-term investment
in these homes delivers positive social outcomes for residents, their families
and the staff providing their care in a community setting.
Homes for publicly funded residents have traditionally had less investment
than those for private payers.
As a long-term investor and partner to care home operators, ensuring our rents
are at appropriate levels helps enable our tenants to provide affordable care
for residents who may have less choice which aligns with our purpose.
We set rents at levels that enable operators to provide quality care and value
for money to residents, irrespective of whether they are funded privately or
by the local authority and NHS.
Alongside supporting tenants to deliver excellent care, we are focused on
improving the environmental performance of our portfolio, by increasing our
EPC ratings and by achieving net zero by 2045. We are engaging with tenants to
identify areas where energy consumption can be reduced in line with our net
zero milestones and targets. While the EPC rating of our homes improved in the
year our energy intensity increased from 50kg CO(2)e/m(2)/year to 54kg
CO(2)e/m(2)/year. This can in part be explained by the increased occupancy in
our homes and increased carbon factors for energy compared to 2022. Energy
efficiency measures will take time to embed, and we recognise that our 2025
interim target of a 15% like for like reduction in carbon emissions is
challenging. We remain committed to identifying areas to invest in measures to
achieve this and are engaging with our tenants to seek alignment of reducing
energy use and carbon emissions in a managed and affordable way.
Building on our materiality assessment completed in 2022, the priorities
(listed below) informed our ESG strategy, both of which we referenced in last
year's report. During 2023, we have made good progress with embedding these
priorities in our day-to-day operations and our decision-making, as well as
setting ourselves performance targets where appropriate. Our challenge, as for
many businesses, is that we do not have direct control over certain areas. We
also need to ensure that everything we do is set within a commercial context.
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
Environment Social Governance
Strategic investment in our portfolio to improve environmental impact. Having a positive impact on the people living and working in our homes. Robust governance and transparent reporting to all stakeholders.
Improving EPCs through enhancements to our properties' energy efficiency and Recognising the vital social role care homes play and investing in homes that Maintain effective partnerships with key stakeholders and providing clear and
reduction in carbon emissions in line with our net zero pathway. provide high-quality care to a range of residents. accountable data.
Aligns with the following UN Sustainable Development Goals. Aligns with the following UN Sustainable Development Goals. Aligns with the following UN Sustainable Development Goals.
13, 11 3, 10, 11 8
Key pillars of our ESG framework
ESG Pillar 1 Strategic Investment in our portfolio to improve environmental
impact.
Objectives How we do it Metrics Update
Ensure all assets achieve a minimum of EPC Grade C by 2026 and a minimum of B Investing in assets that are highly energy efficient or have the potential to Percentage of assets with EPC of C or higher. 93% of portfolio rated C or higher. (2022: 88%)(1).
by 2030. be with further capex.
Number of assets with improved EPC. 12 homes with improved EPCs (2022: 5).
Ensure our portfolio is net zero by 2045 with interim targets of: Modelling the carbon footprint of the portfolio and implementing our net zero
strategy and plan. Carbon intensity of portfolio in kg CO(2)e/m(2)/year. Carbon intensity has increased to 54 kg CO(2)e/m(2)/year (2022: 50).
- 15% reduction in absolute carbon emission on a like-for-like
basis by the end of 2025, and Investing in asset management projects to improve energy efficiency.
- 50% reduction in absolute carbon emission on a like-for-like Embodied carbon associated with developments and extensions. Asset specific carbon mapping underway on potential capital projects.
basis by the end of 2030.
Climate change scenario planning.
Percentage of assets with green leases. 17% (2022: 13%).
Ensure our portfolio is resilient to climate change.
Absolute carbon emissions. 15,923 tCO(2)e (2022: 13,768).
Capex deployed on environment improvements. £741,000 capital deployed on sustainability measures in 2023 (2022: n/a).
Pillar 2: Having a positive impact on the people living and working in our
homes.
Objectives How we do it Metrics Update
Support health and well-being of vulnerable people. Investing in quality buildings and actively monitor care provider performance. Tenant satisfaction survey. 82% rate relationship with Impact as moderately or very satisfied (2022: 87%).
Ensure access to quality and value for money care for both the publicly funded Developing close partnerships with operators through formal and informal Affordability of rental payments to tenants. Rent cover 2.0x (2022: 1.8x).
and private-pay sectors. engagement.
Proportion of publicly funded and private-pay residents. 69% of tenant income funded by NHS/LA (2022: 69%).
Conducting detailed due diligence on long-term need for care.
Independent impact report. Not commissioned for 2023.
Maintaining balance of private and publicly funded residents.
CQC ratings. 80.6% of homes rated Good or Outstanding (2022: 78%).
Pillar 3: Robust Governance and transparent reporting to all stakeholders.
Objectives How we do it Metrics Update
Be transparent with all stakeholders. Maintain clear disclosures on operational performance. Investment Manager's UN PRI submission. UN PRI Signatory Status (2022 N/A).
Maintain robust corporate governance. Maintain policies on supplier code of conduct, anti-money laundering and EPRA sustainability rating. Gold rated (fourth year running).
bribery.
Proactively listen and engage with public and private stakeholders.
Carbon Disclosure Project rating. D rated (2022: F).
Manage the business in accordance with our responsible investment policy.
Engage with tenants on good governance practices.
(1) Based of English equivalent data for Scottish EPCs.
Delivering on a credible net zero delivery plan
In 2022, we published our commitment to achieving net zero by 2045, following
a specialist consultancy's desktop analysis of the care homes in our
portfolio, using the widely adopted CRREM toolkit. We also included interim
targets for 2025 (15% reduction against 2022 baseline) and 2030 (50% reduction
against 2022 baseline), mindful that it's important that we demonstrate
progress in the near to medium term whilst balancing the affordability of the
investment for our tenants. Over time we expect the affordability and
efficiency of low carbon technologies to improve, however we are focusing on
what measures can also be achieved today to help deliver against these
targets.
In 2023, our CO(2)e emissions on a like-for-like basis increased on a m(2)
basis. Occupancy is a key driver of energy intensity and this has increased
over the past two years, however our target remains to reduce this overall and
as we implement energy efficiency measures through asset management projects
we expect these emissions to fall.
During 2023, we have continued to research and refine our path to net zero to
ensure that we're creating a credible net zero delivery plan. We've conducted
on-site energy audits in six homes, which are representative of our portfolio.
The audit results are helping us to engage more effectively with our tenants
to agree a practical, sustainability-related capital expenditure programme,
which takes into account our tenants' considerations.
We continue to improve our data collection for energy consumption from our
tenants. We have 85% coverage, with estimates based on previous years for
where we don't have up to date data. As the quality and quantity of our data
improves, we're in a better position to engage with tenants to identify
opportunities where we can increase energy efficiency, reduce harmful CO(2)
emissions and reduce running costs.
In 2023, the energy use intensity and carbon emissions of our portfolio were
as follows:
2023 2022
Like-for-like building energy intensity (kWh per bed) 10,966 10,615
Like-for-like greenhouse gas emissions from building energy 2.02 1.99
consumptions (tCO(2)e per bed)
Like-for-like total indirect greenhouse gas emissions (kg CO(2)e per m(2)) 53 50
Total indirect greenhouse gas emissions (kg CO(2)e per m(2)) 54 50
Improving the energy performance of our portfolio
In 2022, we also set out our target to improve the EPC ratings across our
portfolio. Our objective is to achieve a minimum B rating (or Scottish
equivalent) by 2030, with an interim target of 50% by 2025.
During 2023, we continued to assess where EPC ratings can be improved through
interventions such as building fabric improvements, more efficient LED
lighting and more efficient heating systems. Where we have implemented
measures like these, we have updated the EPC in accordance with current
building regulations. As a result, we're pleased to report a positive movement
in the proportion of our homes rated EPC B or higher across the portfolio.
Percentage of assets with an EPC of B or above(1):
Year Target Progress in 2023
2025 50% 57%
2030 100%
(1) This data is derived using the English equivalent EPC ratings for all
properties including Scotland as documented by the published EPC
Certification. The full breakdown of EPCs in Scotland, based on Scottish
methodology, is C (3%), D, (15%), E (59%), F (12%) and G (12%).
Charitable causes
In 2023, we were delighted to establish a partnership with the Care Workers
Charity. It supports care workers in times of need, particularly with mental
health support, financial grants and advocating for care workers generally. We
look forward to supporting its work throughout 2024.
Satisfaction with Impact as long‑term partner
Very satisfied 46%
Moderately satisfied 36%
Neutral
9%
Not satisfied at all 9%
Tenant survey
In 2023, we have again conducted a tenant survey, facilitated by an
independent external body. We are pleased to report a 92% response rate of
which 81% of tenants reported having a positive relationship with Impact and
viewed us a good long-term partner and 91% reported satisfaction with Impact's
level of engagement with them. We are always keen to get feedback from tenants
and we seek to maintain and grow our positive relationships with them.
Progress with our climate resilience
In last year's report, we included our initial response to the Task Force on
Climate-related Financial Disclosures (TCFD) methodology. We examined the
possible physical climate change risks of three IPCC warming scenarios: RCP
2.6 (1.5-2 degrees), RCP 4.5 (2-3.5 degrees) and RCP 8.5 (4 degrees) across a
representative sample of 20 properties from our portfolio and considered the
wider climate transition risks and opportunities. The findings, alongside the
concurrent work on our net zero strategy, helped to inform our financial
planning and risk management processes.
During 2023 we have made good progress with developing our understanding,
management, measurement and decision-making in regard to climate action.
The IM has established an ESG committee to drive actions and monitor progress,
and improved EPC ratings. From a risk and opportunity perspective,
"deep‑dives" have been undertaken into four material issues, namely:
· physical risk of flooding;
· stranded assets due to an inability to satisfy MEES requirements;
· the associated costs involved in improving energy efficiency and
fulfilling our net zero delivery plan; and
· initial consideration of carbon pricing mechanisms.
RISK MANAGEMENT IS INTEGRAL TO THE WAY WE MANAGE OUR BUSINESS
Our purpose is to deliver attractive risk-adjusted returns.
To achieve that, we've built risk management into everything we do.
The board sets our risk appetite, which then guides the IM's actions when
implementing our strategy. While our appetite for risk will vary over time, in
general we maintain a balanced overall level of risk, which is appropriate for
achieving our strategic objective; working with tenants to provide quality,
affordable and sustainable care homes. The board reviews our risk appetite
each year.
The diagram on page 39 of the annual report shows the Group's principal risks
and uncertainties, in order of the residual risk that remains after taking
account of the mitigations we have in place.
As the diagram shows, two of our risks are outside our risk appetite and we're
looking to mitigate them further:
· for significant tenant default, our target is for no tenant to account
for more than 25% of our contracted rent. The Minster Group and its affiliates
are currently 37% of our contracted rent. We aim to continue adding new
tenants over time, to further diversify our income; and
· for underinvestment in care homes, the board is working with the IM to
understand the cost and delivery plan for achieving our net zero carbon target
by 2045. We're looking at whether we can do this by investing in the homes in
return for higher rents, whether our tenants could fund the work through
increased fees for residents, or, in the worst case, if it could be an
irrecoverable cost for us.
Risk tolerance
Our appetite for risk has been reviewed to assess whether we are operating
within our risk tolerance. Risk tolerance is a continuum and the range for
some risks extends over more than one of these categories.
Risk appetite
We have defined risk appetite from high to low in the following categories:
'Accepting' (where we are focused on maximising opportunities); 'Flexible'
(willing to consider all options); 'Cautious' (where we are willing to
tolerate a degree of risk); 'Minimalist' (preferring options with low inherent
risk); and 'Averse' (where we avoid risk and uncertainty).
Infectious diseases
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
An outbreak of a significant new infectious disease would clearly place care
home residents, who are naturally vulnerable, at significant danger. It may
result in lower care home occupancy, reduced tenant profitability and higher
costs. All of these would impact on the ability of our tenants to pay us rent,
the value our portfolio and our ability to work with tenants successfully.
How we manage this risk
COVID-19, together with other illnesses, means care home operators have
experience of managing infectious diseases. Since the outbreak of COVID-19, we
have increased our monitoring of occupancy statistics to a weekly format,
giving us rapid feedback on this KPI. Also, having an affordable rent, and
thus strong rent cover, enables our tenant operating partners to react better
to unforeseen changes. In an extreme outbreak we would expect the government
to support operators as they did through COVID-19; however, should they not
provide this support, we have ensured that our business can sustain a delay in
rent collection.
We continually work with our tenants to explore improvements to the homes,
this can include ensuring the home is better protected to help with infection
control, including air filtration, temperature sensors and unitisation of the
home, to help with isolating outbreaks.
We believe that, especially with the learnings from the recent pandemic, the
mitigations are sufficient to reduce the risk to moderate, and to be within
our risk tolerance.
Opportunity
None.
Significant tenant default
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
This is the risk that either a single large tenant (more than 10% of rent
roll) defaults or several smaller tenants default. Any tenant failure is
likely to cost us money (as the Silverline situation shows), but some tenants
are larger than others. Failure of most tenants would have a moderate impact
on us, but a Minster Group failure, as by far the largest group (37% of rent,
including affiliates), would be critical and is why the risk is outside of our
risk tolerance. This could reduce our revenues and asset values.
How we manage this risk
Our close monitoring of tenants' performance enables us to spot issues quickly
and we have shown we can replace a tenant if needed. Most tenants have seen
improved profitability this year.
Our strategy is for no tenant to account for more than 25% of our contracted
rent. Accordingly, we aim to continue adding new tenants over time, to further
diversify our income. We also maintain close contact with Minster and the IM
receives quarterly accounts which they discuss in detail with the tenant,
confirming its financial health.
Opportunity
None.
Underinvestment in care homes
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Underinvestment could occur if: tenants don't invest in maintaining the
properties, which could reduce the quality of care they can provide; the
market or regulation may demand enhanced or different facilities (such as
limiting the size of a care home); or, failure to consider the effects of
climate change which could accelerate obsolescence of our care homes (both
physical and low carbon transition risks) including minimum requirements for
EPCs and to meet our net zero target by 2045.
How we manage this risk
All of our leases have full repair and maintenance obligations, as described
above. In extreme circumstances, we could replace a tenant who fails to
comply.
We identify asset management opportunities before we buy assets and where
appropriate we commit with our tenants to ensure this works begins in the
first 12 to 18 months.
The board is working with the IM to understand the cost and delivery plan for
achieving our net zero carbon target by 2045. We are looking at whether we can
do this by investing in the homes in return for higher rents, whether our
tenants could fund the work through increased fees for residents, or, in the
worst case, if it could be an irrecoverable cost for us. While we continue
this work and await guidance on future regulation, we have put this risk
slightly outside of our risk tolerance and we keep it under close review.
Opportunity
We can fund building extensions or other improvements, in return for an
increase in rent.
Economic disruption
Probability: High
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
An economic downturn could have a moderate to significant impact on the
business, but we believe that our mitigations are sufficient to bring it
within our risk tolerance.
Difficult economic conditions could put further pressure on local authority
funding, affecting our tenants' fees and their ability to pay our rent.
High inflation has led to sharp increases in interest rates, hitting property
valuations across all sectors and placing pressure on the financial covenants
of our debt facilities which if breached, could result in the banks taking
security over our assets. While inflation has come down, interest rates are
not expected to return to the previous very low levels.
How we manage this risk
We can limit the impact of this risk by buying well, ensuring our tenants have
strong rent cover and managing the assets to increase their value.
Tenant profitability and long-term affordable rents are the key to a
sustainable business. We regularly assess our tenants' financial performance,
particularly their rent cover. The Care Act 2014 places responsibilities upon
local authorities to support individuals who need care, which helps to
mitigate this risk.
The board agrees cash flow and debt levels, maintaining a cautious leverage in
line with our risk appetite. Our LTV cap is 35% and we our aiming to keep our
debt levels below this cap. We also have a policy to limit our exposure to
increases in interest rates through fixed rate debt and interest rate caps.
Our inflation-linked leases ensure our income grows every year, which supports
property valuations.
Opportunity
Reduced asset valuations and/or higher debt costs may create attractive buying
opportunities.
Political events
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Changes to government in the next 12 months are likely to heighten the risk of
changes in policy and funding that affect our market. Increased regulation,
changes to immigration or changes to care worker pay levels alongside the risk
of alternative ways of providing care could make it harder for our tenants to
pay their rent, reducing the value of our properties.
How we manage this risk
We see this risk as moderate, because if government were to change regulation
that increases operational costs in care homes (for whatever reason) it would
have to accept that fees would rise to pay for this - the alternative being
tenants losing money and homes closing, which would be politically
unacceptable and disastrous for local authorities and the NHS. We have
enhanced our knowledge of likely future developments in the health service and
sought contact with opinion formers to increase their understanding of the
sector.
Opportunity
Increased government funding could help the sector to grow and provide more
opportunities for us to support adult social care.
Reputational damage
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Minimalist
Circumstances that could damage our reputation include our tenants providing
poor care or breaching standards around matters like minimum wage or modern
slavery. In addition, Minster Group is a related party to the IM. If there is
a breakdown in trust on related party disclosures, this could damage our
reputation.
We have also set targets to deliver net zero carbon by 2045, failure to
deliver against our carbon reduction strategy could damage our reputation with
investors and the community within which our care homes operate.
How we manage this risk
We are a responsible company and so conscious of reputational risks, which we
think could be critical if unmitigated, but are minor after the measures we
take. We monitor tenants carefully for the quality of the care, through
regular meetings, care home visits and CQC ratings. We select only tenants
with high standards.
The board ensures we transparently disclose related party activities and take
decisions in the best interest of stakeholders. The board also oversees the
monitoring of our progress against our ESG targets.
Opportunity
None.
Investment Manager fails
Probability: Low
Impact: High
Change in the year: No change
Risk appetite: Minimalist
We rely on the IM's capabilities to execute our strategy and support our
day-to-day relationships. If the IM fails to retain the key staff, this could
result in poor relationships with stakeholders and, ultimately, failure to
collect rent and a reduction in value of our portfolio.
How we manage this risk
The service requirements are set out in the Investment Management Agreement
which the board monitors annually through the management engagement committee
and more regularly through board member interactions with the IM. The IM is a
well-run partnership closely bound into the success of the Company. In the
last resort, the board believes that it could find an alternative manager to
take over. The net risk is therefore within our risk tolerance.
Opportunity
None.
Other risks
There are several other risks that we monitor closely but we don't believe are
principal risks for us. These include:
Taxation risk - We're a UK REIT and have to comply with certain rules to
maintain that status. Any change to our tax status or in UK tax legislation
could make it harder to achieve our investment objectives.
Cyber security - We need to protect our customer and company data from cyber
attacks. Losing sensitive information could materially harm our financial
condition. We have relatively few IT systems, as the IM runs our business and
the Administrator runs the accounting and banking systems. The risk committee
reviews our internal controls and provides assurance to the audit committee
that they're effective. The audit committee also reviews our internal controls
once a year.
Financial management - There's a risk that our budgets and plans are
inaccurate, that we've made unrealistic assumptions or not applied them
correctly, leading to our financial position deteriorating. The board reviews
our financial results and any differences to our forecasts at least once a
quarter, so we can investigate any issues.
Development activity - Developments are inherently risky and can face
unexpected cost overruns and delays. High inflation and global supply chain
delays have increased this risk over recent years. Through careful planning,
site optimisation and ensuring our forward-fund commitments are capped, we
seek to ensure all developments remain accretive to investors even if risks
materialise.
FINANCIAL REVIEW
Portfolio valuation reflects stabilising asset values
Cushman & Wakefield independently values our portfolio in accordance with
the RICS Valuation - Professional Standard (the "Red Book").
As at 31 December 2023, the portfolio was valued at £651.3 million (31
December 2022: £532.5 million), up £118.8 million or 22.3%. The increase
was made up as follows:
Contribution to
valuation increase
£'m %
Acquisitions completed 91.7(1) 17.2
Acquisition costs capitalised 1.8 0.3
Capital improvements 4.7 0.9
Disposals (1.3) (0.2)
Valuation movement 21.9 4.1
Total 118.8 22.3
The like-for-like valuation increase of £21.9 million equates to 5.30 pence
per share. Of this, 5.22 pence per share resulted from inflation-linked
rental growth, with 0.08 pence per share due to market value movements.
Resilient financial performance
Net rental income for the year increased by 17.0% to £49.4 million (2022:
£42.2 million). Under IFRS, net rental income includes some rent we're
required to recognise as income before we receive it, reflecting the minimum
uplift in rents over the lease terms, on a straight‑line basis. Our cash
rental income for the year increased by 18.5% to £42.5 million (2022: £35.9
million). The issue with Silverline resulted in written off rental income of
£0.2 million for the year.
In addition to our net rental income, the total income we earned from the
portfolio in the year included interest on the loans we'd made to Holmes in
December 2021 and Welford in January 2023, to finance asset purchases. This
income totalled £3.7 million in 2023 (2022: £3.2 million) and is included
within our interest income (see below). Having exercised our options to buy
the assets in June 2023, this finance income came to an end and was replaced
by rental income from that date.
Our administrative and other expenses totalled £7.1 million (2022: £7.0
million), which led to a total expense ratio of 1.54% for the year (2022:
1.67%). The EPRA cost ratio reduced to 14.4% (2022: 16.6%). Adjusting revenue
to include interest income from our loans to operators and exclude the
Silverline rent write-off reduces the cost ratio further to 13.4% (2022:
15.4%).
Finance costs were £12.0 million (2022: £5.4 million), mainly reflecting the
increase in SONIA. Interest income was £3.8 million (2022: £3.2 million),
which was largely from the operator loans and also included £0.1 million of
interest on deposits.
The change in the fair value of investment properties was a gain of £14.8
million (2022: £(14.5) million loss), contributing to profit before tax of
£48.8 million (2022: £16.9 million).
Earnings per share (EPS) for the year was 11.79 pence (2022: 4.33 pence) and
EPRA EPS was 8.33 pence (2022: 8.37 pence per share). Adjusted EPS, which
strips out non-cash and one-off items, was 7.28 pence (2022: 7.11 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
1.6925 pence each in respect of 2023, meeting the total dividend target of
6.77 pence per share, up 3.5% on the 6.54 pence paid in respect of 2022. All
four dividends were Property Income Distributions.
The details of these dividends were as follows:
Quarter to Declared Paid Cash cost £'m
31 March 2023 25 April 2023 19 May 2023 7.0
30 June 2023 9 August 2023 20 September 2023 7.0
30 September 2023 20 October 2023 24 November 2023 7.0
31 December 2023 30 January 2024 23 February 2024 7.0
Total 28.0
The total dividend for 2023 was 123% covered by EPRA EPS and 108% covered by
adjusted EPS.
At 31 December 2023, the Company had distributable reserves of £97.2 million.
(1) This includes the acquisition of a portfolio of nine assets which were
invested in via a loan to operator in December 2021, where the Group had an
option to acquire upon certain regulatory requirements being met.
This option was exercised in June 2023.
Portfolio valuation drives higher net asset value
The NAV at 31 December 2023 was £478.1 million, up 7.2% (31 December 2022:
£445.9 million). NAV per share was 115.38 pence (31 December 2022: 110.17
pence per share), with the growth rate of 4.7% reflecting the share issue as
part of the portfolio acquisition in January, which increased the number of
shares in issue by 2.4%.
The chart on page 44 of the annual report shows the main contributors to the
movement in NAV per share. As we're required to pay out the large majority of
our property rental earnings, the portfolio revaluation was the largest
factor.
Strong and prudent balance sheet
During the year, we increased the size and duration of our RCFs, repaid our
£15.0 million term loan with Metro Bank and put further interest rate caps in
place. As a result, our facilities at the year end were as follows:
Drawn at
Facility size 31 Dec 2023 Propco interest Propco LTV
Expiry (£'m) (£'m) cover covenant covenant
CYBG
RCF Dec 2029 50.0 32.5 200% 50%
HSBC
RCF Apr 2026 75.0 47.0 200% 55%
NatWest
RCF Jun 2028(1) 50.0 30.3 175%(2) 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 250.0 184.8
With the option to extend for up to two years to June 2030, subject to
NatWest's agreement.
Interest cover covenant is 175% until June 2025 after which it will increase
to 200% for the remainder of the term.
At the year end, our debt facilities had an average maturity of 6.3 years (31
December 2022: 6.3 years). If we exercise the extension options on the NatWest
facility, this increases to 6.7 years.
We had significant liquidity at 31 December 2023, with cash and cash
equivalents of £9.4 million and undrawn debt facilities of £65.2 million.
This gave us total headroom of £60.5 million, after accounting for our
capital commitments.
Dividends and net interest costs fully covered by operating cashflows:
Our cash movements in the year show that our dividends and net annual interest
payments are fully covered by operating activities.
GOING CONCERN
The board regularly monitors the Company and 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 2025. 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. 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 the 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; and
· the risk of a fall in investment property values. This may be because
of a multitude of risks. 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.
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 corresponding reductions in costs as valuations
fall, the use of unsecured properties to prevent covenant breaches and
stopping dividends 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 5.5% 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 IM and presented to the
audit committee and board for 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 38% before loan-to-value
covenant breaches would arise with all facilities being fully drawn. Rental
income would need to fall by 36% 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.
In 2024, the Company's Articles of Association require the board to propose an
ordinary resolution at the Annual General Meeting (AGM) 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 AGM 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 AGM approaches. In the event that a continuation
vote was not passed, and the Group instructed to wind up, there would be a
process of selling off the Group's assets and exiting its current business
agreements, this would be expected to take at least 12 months following the
AGM so the Company would continue to be a going concern.
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 2029.
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 re-financings during the forecast period. 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; and
· 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.
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 2029.
Section 172 statement
Section 172 of the Companies Act 2006 gives the directors several duties
relating to the matters shown in the table below. During 2023, the directors
consider that they've acted in good faith and in the way that would be most
likely to promote the Company's success for the benefit of shareholders, while
also considering the broad range of stakeholders who interact with our
business.
Matter Response
a) The likely consequence of any decision in the long term. See pages 13 and 30 of the annual report.
b) The interests of the Company's employees. The Company doesn't have any employees, so this doesn't apply.
c) The need to foster the Company's business relationships with suppliers, Tenants: see pages 19, 21 and 54 of the annual report.
customers and others.
Service providers: see pages 54 and 55 of the annual report.
d) The impact of the Company's operations on the community and environment. See pages 13, 21 and 26 of the annual report.
e) The desirability of the Company maintaining a reputation for high standards See pages 21, 26 and 30 of the annual report.
of business conduct.
f) The need to act fairly between members of the Company. The directors must ensure they treat all shareholders fairly when making their
decisions. The board wasn't required to make any decisions in 2023 where any
group of shareholders could be treated differently from others, so this issue
didn't arise.
Key board decisions
The board's key decisions in the year included approving:
· the portfolio acquisition in January (page 17 of the annual report);
· the revised dividend policy (page 16 of the annual report); and
· replacing Silverline as a tenant (page 21 of the annual report).
The other significant matters the directors considered are shown on pages 52
to 54 of the annual report.
This strategic report was approved by the board on 22 March 2024 and signed on
its behalf by:
Simon Laffin
Chair
STATEMENT 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
https://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:
Simon Laffin
Chair
22 March 2024
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2023
Notes 31 December 2023 Total £'000 31 December 2022 Total £'000
Gross rental income 5 49,659 42,242
Bad debts written off 5 (236) -
Insurance/service charge income 5 871 704
Insurance/service charge expense 5 (871) (704)
Net rental income 49,423 42,242
Administrative and other expenses 6 (7,137) (7,009)
(Loss)/profit on disposal of investment properties 13 (16) 130
Operating profit before changes in fair value 42,270 35,363
Changes in fair value of put option - (1,811)
Changes in fair value of investment properties 13 14,788 (14,456)
Operating profit 57,058 19,096
Finance income 8 3,761 3,200
Finance expense 9 (11,988) (5,408)
Profit before tax 48,831 16,888
Tax charge on profit for the year 10 - -
Profit and total comprehensive income (attributable to shareholders) 48,831 16,888
Earnings per share - basic and diluted (pence) 11 11.79p 4.33p
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 2023
Notes 31 December 2023 £'000 31 December 2022
Non-current assets
Investment property 13 616,006 504,318
Interest rate derivatives 18 1,750 -
Trade and other receivables 14 39,237 68,131
Total non-current assets 656,993 572,449
Current assets
Trade and other receivables 14 907 1,181
Interest rate derivatives 18 - 363
Cash and cash equivalents 15 9,389 22,531
Total current assets 10,296 24,075
Total assets 667,289 596,524
Current liabilities
Borrowings 17 - (14,814)
Trade and other payables 16 (6,915) (9,126)
Total current liabilities (6,915) (23,940)
Non-current liabilities
Borrowings 17 (179,937) (122,382)
Put option 16 - (1,811)
Trade and other payables 16 (2,330) (2,471)
Total non-current liabilities (182,267) (126,664)
Total liabilities (189,182) (150,604)
Total net assets 478,107 445,920
Equity
Share capital 21 4,144 4,048
Share premium reserve 21 376,716 365,642
Capital reduction reserve 21 24,077 24,077
Retained earnings 73,170 52,153
Total equity 478,107 445,920
Net asset value per ordinary share (pence) 23 115.38p 110.17p
The consolidated financial statements for Impact Healthcare REIT plc
(registered number: 10464966) were approved and authorised for issue by the
board of directors on 22 March 2024 and are signed on its behalf by:
Simon Laffin
Chair
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2023
Notes 31 December 2023 £'000 31 December 2022 £'000
Cash flows from operating activities
Profit for the year (attributable to equity shareholders) 48,831 16,888
Finance income 8 (3,761) (3,200)
Finance expense 9 11,988 5,408
Loss/(profit) on disposal of investment properties 13 16 (130)
Changes in fair value of put option 18 - 1,811
Changes in fair value of investment properties 13 (14,788) 14,456
Net cash flow before working capital changes 42,286 35,233
Working capital changes
Increase in trade and other receivables (6,308) (5,952)
(Decrease)/increase in trade and other payables (2,618) 207
Net cash flow generated from operating activities 33,360 29,488
Investing activities
Purchase of investment properties (44,799) (69,217)
Proceeds on sale of investment property 1,234 2,625
Acquisition costs capitalised (1,765) (2,661)
Capital improvements (3,375) (11,195)
Loan advanced to operator (1,600) -
Loan associated costs - (478)
Interest received 3,695 3,270
Net cash flow used in investing activities (46,610) (77,656)
Financing activities
Proceeds from issue of shares 21 - 62,269
Issue costs of ordinary share capital 21 (30) (1,757)
Borrowings drawn 17 82,500 85,074
Borrowings repaid 17 (40,000) (57,362)
Loan arrangement fees paid (2,827) (1,265)
Loan commitment fees paid (528) (628)
Purchase of derivative (3,238) -
Interest payments received on interest rate derivatives 18 1,035 112
Interest paid on bank borrowings (8,990) (3,281)
Dividends paid to equity holders 12 (27,814) (25,724)
Net cash flow generated from financing activities 108 57,438
Net (decrease)/increase in cash and cash equivalents for the year (13,142) 9,270
Cash and cash equivalents at the start of the year 22,531 13,261
Cash and cash equivalents at the end of the year 15 9,389 22,531
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2023
Notes Share capital £'000 Share premium £'000 Capital reduction reserve £'000 Retained earnings £'000 Total £'000
1 January 2023 4,048 365,642 24,077 52,153 445,920
Total comprehensive income - - - 48,831 48,831
Transactions with owners
Dividends paid 12 - - - (27,814) (27,814)
Share issue 21 96 11,104 - - 11,200
Share issue costs 21 - (30) - - (30)
31 December 2023 4,144 376,716 24,077 73,170 478,107
For the year ended 31 December 2022
Notes Share capital £'000 Share premium £'000 Capital reduction reserve £'000 Retained earnings £'000 Total £'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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2023
1. Basis of preparation
General information
The consolidated financial statements for the year ended 31 December 2023 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 2023 or 31 December 2022, but is derived
from those financial statements. Financial statements for the year ended 31
December 2022 have been delivered to the Registrar of Companies and those for
the year ended 31 December 2023 will be delivered following the Company's
Annual General Meeting. The auditor's reports on both the 31 December 2022 and
31 December 2023 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 interest rate
derivatives, 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 inflation and interest rate environment has
been considered by the directors. The directors have reviewed the forecasts
for the Group taking into account the impact of heightened interest rates and
rising costs 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 10 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.
3. Summary of material accounting policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below or alongside the relevant
note.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and all of its subsidiaries drawn up to 31 December 2023. 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.
4. New standards issued
4.1. New standards issued with effect from 1 January 2023
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 31 December 2023 £'000 Year ended 31 December 2022 £'000
Rental income cash received in the year 42,513 35,889
Rent received in advance of recognition(1) 141 170
Rent recognised in advance of receipt(2) 7,145 6,324
Rental lease incentive amortisation(3) (140) (141)
Gross rental income 49,659 42,242
Bad debts written off(4) (236) -
Insurance/service charge income 871 704
Insurance/service charge expense (871) (704)
Net rental income 49,423 42,242
(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.
(4) Bad debts written off relates to rental arrears due from one tenant who
leased seven of the Group's properties, in the period these properties were
re-tenanted, see note 22 for further detail.
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 38.4% of gross rental
income:
2023 2022
Minster Care Management Limited 24.9% 29.3%
Welford 17.1% 11.3%
Croftwood Care UK Limited 13.5% 15.4%
Holmes Care Group 12.5% 10.3%
Others 32.0% 33.7%
Accounting policy
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.
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.
6. Administrative and other expenses
Year ended Year ended
31 December 31 December
2023 2022
£'000 £'000
Investment Manager fees (see note 22) 4,810 4,581
Directors' remuneration (see note 7) 276 250
Auditor's fees
- Statutory audit of the Company and Group (including subsidiaries) 302 280
- Agreed upon procedures for the Company's interim report 17 16
Total auditor's fees(1) 319 296
Administration fees 523 497
Regulatory fees 34 18
Legal and professional 912 630
Recruitment services and remuneration committee advice 32 70
Other administrative costs 231 667
7,137 7,009
(1) In 2023, the auditor also received fees of £nil (2022: £66,000) 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 31 December
2023 2022
£'000 £'000
Simon Laffin (Chair) 55 -
Rupert Barclay (resigned) 15 49
Rosemary Boot 40 35
Philip Hall 40 35
Paul Craig (resigned) 15 35
Amanda Aldridge 46 41
Chris Santer 40 35
251 230
Employer's National Insurance 25 20
276 250
Directors' remuneration payable at 31 December 2023 amounted to £18,440
(2022: £10,242).
8. Finance income
Year ended Year ended
31 December 31 December
2023 2022
£'000 £'000
Bank interest 55 8
Loan interest 3,706 3,192
3,761 3,200
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.
Accounting policy
Finance income
Finance income is accounted for on an accruals basis.
9. Finance expenses
Year ended Year ended
31 December 31 December
2023 2022
Note £'000 £'000
Interest payable on bank borrowings 9,584 3,985
Commitment fee payable on borrowings 528 599
Amortisation of loan arrangement fee 1,418 1,205
Changes in fair value of interest rate derivatives 18 458 (381)
11,988 5,408
The total interest payable on financial liabilities carried at amortised cost
comprises interest payable on borrowings, which was £184.8m at 31 December
2023 (2022: £142.3m). Amortisation on loan arrangement fees relates to
capitalised fees being amortised over the term of the facility, in the year
ended 31 December 2023 £1.2m was capitalised (2022: £2.6m).
Accounting policy
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.
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 2023 and
the year ended 31 December 2022, 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 31 December
2023 2022
£'000 £'000
UK corporation tax - -
Reconciliation of the corporation tax charge:
Year ended Year ended
31 December 31 December
2023 2022
£'000 £'000
Profit before tax 48,831 16,888
Theoretical tax at UK corporation tax rate 23.5% (2022: 19%) 11,475 3,209
Effects of:
REIT exempt profits (8,860) (5,905)
Non-taxable items (2,615) 2,696
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. The Group also received income outside of the
property rental business (not covered by the REIT tax exemptions), this was
namely in the form of interest income on loans to operators for the
acquisition of property portfolios where the Group had an option to acquire
upon certain regulatory requirements being met. This income was offset by
residual business expenses and carried forward losses so incurred no tax
charge for the period.
Accounting policy
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.
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 31 December
2023 2022
£'000 £'000
Total comprehensive income (attributable to shareholders) 48,831 16,888
Adjusted for:
- Revaluation movement (21,934) 8,103
- Rental lease incentive (140) (141)
- Rental income arising from recognising rental premiums and future 7,286 6,494
guaranteed rent uplifts
Change in fair value of investment properties (14,788) 14,456
Change in fair value of put option - 1,811
Loss/(profit) on disposal of investment property 16 (130)
Change in fair value of interest rate derivative 458 (381)
EPRA earnings 34,517 32,644
Adjusted for:
Rental income arising from recognising rental premiums and future guaranteed (7,287) (6,494)
rent uplifts
Amortisation of lease incentives 141 141
Cash received on interest rate cap 1,393 112
Amortisation of loan arrangement fees 1,418 1,205
(Loss)/profit on disposal of investment property (16) 130
Adjusted earnings 30,166 27,738
Average number of ordinary shares 414,157,674 390,058,661
Earnings per share (pence)(1) 11.79p 4.33p
EPRA basic and diluted earnings per share (pence)(1) 8.33p 8.37p
Adjusted basic and diluted earnings per share (pence)(1) 7.28p 7.11p
(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 adjusts
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 and for cash items which are excluded from the EPRA
earnings calculation such as interest income on hedging arrangement.
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
Year ended Year ended
31 December 31 December
Dividend rate 2023 2022
(pence per share) £'000 £'000
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 - 5 1.6350p - 6,307
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)
Fourth interim dividend for the period ended 31 December 2022 (ex-dividend - 1.6350p 6,775 -
31 January 2023)
First interim dividend for the period ended 31 December 2023 (ex-dividend - 1.6925p 7,013 -
25 April 2023)
Second interim dividend for the period ended 31 December 2023 (ex-dividend - 1.6925p 7,013 -
9 August 2023)
Third interim dividend for the period ended 31 December 2023 (ex-dividend - 1.6925p 7,013 -
20 October 2023)
Total dividends paid 27,814 25,724
Total dividends paid in respect of the year 5.0775p 4.9050p
Total dividends unpaid but declared in respect of the year 1.6925p 1.6350p
Total dividends declared in respect of the year - per share 6.77p 6.54p
On 31 January 2023, the Company declared an interim dividend of 1.6350 pence
per share for the period from 1 October 2022 to 31 December 2022 and was paid
on 24 February 2023.
On 25 April 2023, the Company declared an interim dividend of 1.6925 pence per
ordinary share for the period from 1 January 2023 to 31 March 2023 and was
paid on 19 May 2023.
On 9 August 2023, the Company declared an interim dividend of 1.6925 pence per
share for the period from 1 April 2023 to 30 June 2023 and was paid on 20
September 2023.
On 20 October 2023, the Company declared an interim dividend of 1.6925 pence
per share for the period 1 July 2023 to 30 September 2023 and was paid on 24
November 2023.
Accounting policy
Dividends
Dividends are recognised when they become legally payable.
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 valuers of the Group property portfolio have a working knowledge of the
various ways that environmental, social and governance factors can impact the
value of property. Concerning Governance, within the care sector in the UK,
the valuers reflect the latest available regulatory reports from the various
regulatory bodies within the UK (being CQC, CSSIW, Care Inspectorate and
RQIA). With regards to Social, there are fewer established benchmarks in this
area but the valuers are aware that care homes generally meet a social need to
residents and are also employment providers.
Environmental and sustainability standards, which vary across parts of the UK
are also referenced within the valuers' report. The valuers also note that
they continue to monitor the wider property market for evidence of
transactional activity that evidences the views of market participants in this
area.
The Group continues to share recently conducted physical climate and
transitional risk assessments with the valuers, which they have reviewed and
reflected in their valuations to the extent that current market participants
would do so.
Valuers observe, assess and monitor evidence from market activities, including
market sentiment, on issues such as longer-term obsolescence and, where
known, future environmental, social and governance related risks. These may
include, for example, the market's approach to capital expenditure required to
maintain the utility of the asset. In the absence of reliable benchmarking
data and indices for estimating costs, specialist advice on cost management
may be required. This is usually agreed with the valuer in the terms of
engagement and without reasonable estimates, assumptions may be needed
properly to reflect market expectations in arriving at the valuation.
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 31 December
2023 2022
£'000 £'000
Opening value 532,479 459,442
Property additions 91,688 69,217
Property disposals(1) (1,250) (2,495)
Acquisition costs capitalised 1,765 2,591
Capital improvements 4,697 11,826
Revaluation movement 21,934 (8,102)
Closing value per independent valuation report 651,313 532,479
Guaranteed rent reviews debtor (35,258) (28,112)
Lease incentive debtor (2,379) (2,519)
Rent premium creditor 2,330 2,470
Closing fair value per consolidation statement of financial position 616,006 504,318
(1) In 2023 the carrying value of disposals was £1,250,000 (2022:
£2,495,000), this combined with the loss on disposal of £16,000 (2022:
£130,000 profit), makes up the total net proceeds shown in the consolidated
statement of cash flows.
During the year, the Group acquired an additional £91.7m assets, of which
£35.7m relates to a portfolio which was purchased via a loan to operator in
December 2021 where the Group had an option to acquire, this option was
exercised in June 2023 and £56m relates to the purchase of a portfolio in
2023 where 20% of the consideration was made up of shares in the Company, see
note 21 for further detail.
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 31 December
2023 2022
£'000 £'000
Revaluation movement 21,934 (8,102)
Rental lease incentive(1) 140 141
Rental income arising from recognising rental premiums and guaranteed rent (7,286) (6,495)
uplifts
Change in fair value of investment properties 14,788 (14,456)
(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 care home
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.
Year ended Year ended
31 December 31 December
2023 2022
Note £'000 £'000
Rent received in advance of recognition(1) 5 140 170
Rent recognised in advance of receipt(2) 5 7,145 6,324
Rental income arising from recognising rental premium and future guaranteed 7,286 6,494
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
The Group's investment properties, which are all healthcare assets, are
considered to be a single class of asset. Initial yields range from 3.6% to
12.5% across the portfolio, the average yield, as measured by the EPRA
"topped-up" net initial yield for the portfolio, was 6.92% as at
31 December 2023. Annual rent roll for the portfolio as at 31 December 2023
was £47.2m and the total ERV was £48.2m. ERV per bed ranges from
£2,300/bed to £12,000/bed.
A 0.25% movement of the valuation yield would have approximately a £22.6m
impact on the investment property valuation. A 1% movement in the rental
income would have approximately a £6.5m 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 2023 616,006 - - 616,006
Investment properties 31 December 2022 504,318 - - 504,318
There have been no transfers between any of the levels during the year.
Accounting policy
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.
14. Trade and other receivables
As at As at
31 December 31 December
2023 2022
£'000 £'000
Non-current
Rent recognised in advance of receipt 35,258 28,112
Rental lease incentive 2,379 2,519
Loan receivable(1,2) 1,600 37,500
39,237 68,131
Current
Interest receivable on interest rate derivatives 358 -
Interest receivable on operator loan 66 -
Loan associated costs - 671
Accrued income 142 -
Prepayments 196 510
Other receivables 145 -
907 1,181
40,144 69,312
(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). In June 2023, the option
was exercised and the portfolio was acquired by the Group.
(2) In June 2023, the Group entered into a loan agreement with Melrose
Holdings Limited, a related party, where the Group provided a working capital
loan of £1,600,000 which bears interest at 8.00% per annum (see note 22 for
further detail).
No impairment losses have been recognised as at 31 December 2023 (2022:
£nil), refer to note 19 for further detail. However, the Group did write-off
£236,000 of rent in the period as a result of non‑payment by one of the
Group's tenants, see note 22 for further detail.
Accounting policy
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.
15. Cash and cash equivalents
As at As at
31 December 31 December
2023 2022
£'000 £'000
Cash and cash equivalents 9,389 22,531
Included as part of cash and cash equivalents is restricted cash of £nil
(2022: £14.7m). 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.
Accounting policy
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.
16. Trade and other payables
As at As at
31 December 31 December
2023 2022
£'000 £'000
Non-current
Rent received in advance of recognition 2,330 2,471
Put option - 1,811
Current
Trade and other payables 1,686 3,420
Interest payable 1,745 1,149
Withholding tax payable - (PID dividends) 606 609
Rental received in advance - 1,949
Rental deposits - 443
Capital improvements payable 2,878 1,556
6,915 9,126
9,245 13,408
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 bore 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, gave 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 became 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 was considered to be a substantive
condition to be met before the options was exercisable and therefore
management did not consider there was any present ownership interest in the
property company which may be acquired at a future date until the conditions
were met. The fair value of the option reflects the underlying investment
properties, offset by loan and interest due at each balance sheet date. The
investment properties were valued on the same basis as the Group's investment
property. In June 2023 the option was exercised, and the portfolio was
acquired by the Group.
Accounting policy
Trade payables
Trade payables are initially recognised at their fair value and are
subsequently measured at amortised cost.
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.
17. Borrowings
A summary of the bank borrowings drawn in the period are shown below:
As at As at
31 December 31 December
2023 2022
£'000 £'000
At the beginning of the year 142,260 114,548
Borrowings drawn in the year 82,500 85,074
Borrowings repaid in the year (40,000) (57,362)
Total bank borrowings drawn(1) 184,760 142,260
(1) Total bank borrowings drawn are equal to its fair value.
As at 31 December 2023, the Group had £250m (2022: £241m) of available
facilities of which £65.2m was undrawn (2022: £98.7m).
A summary of the bank borrowings by lender are shown below:
As at 31 December 2023:
National
Clydesdale HSBC UK Westminster Senior secured Senior secured
Bank PLC Bank Plc Bank Plc loan notes loan notes
('Virgin') ('HSBC') ('NatWest') (tranche A) (tranche B) Total
Facility type RCF RCF RCF Private placement Private placement
Size (£'m) 50.0 75.0 50.0 37.0 38.0 250
Drawn debt (£'m) 32.5 47.0 30.3 37.0 38.0 184.8
Start date December 2022 April 2020 May 2017 December 2021 December 2021
Expiry date December 2029 April 2026 June 2028 December 2035 June 2035
Margin 2.00% 2.00% 2.00% N/A N/A
Fixed interest rate N/A N/A N/A 2.93% 3.00%
Independent valuation of secured properties (£'m) 118.2 163.6 129.2 171.3 582.3
Financial covenants:
LTV(1) 50% 55% 50% 55%
Interest cover(2) 2.00x 2.00x 1.75x 2.50x
As at 31 December 2022:
National
Metro Bank Clydesdale HSBC UK Westminster Senior secured Senior secured
PLC Bank PLC Bank Plc Bank Plc loan notes loan notes
('Metro') ('Virgin') ('HSBC') ('NatWest') (tranche A) (tranche B) Total
Facility type Term loan RCF RCF RCF Private placement Private placement
Size (£'m) 15.0 50.0 75.0 26.0 37.0 38.0 241.0
Drawn debt (£'m) 15.0 17.0 10.0 25.3 37.0 38.0 142.3
Start date June 2018 December 2022 April 2020 May 2017 December 2021 December 2021
Expiry date June 2023 December 2029 April 2025 June 2024 December 2035 June 2035
Margin 2.65% 2.00% 2.00% 1.90% N/A N/A
Fixed interest rate N/A N/A N/A N/A 2.93% 3.00%
Independent valuation of secured properties (£'m) 53.9 110.9 146.8 64.7 128.9 505.2
Financial covenants:
LTV(1) 50% 55% 50% 55%
Interest cover(2) 2.00x 2.50x 2.50x 2.50x
(1) Loan to value must not exceed the stated percentage.
(2) Passing rent from ringfenced properties divided by interest expense must
exceed the stated cover ratio.
In June 2023, the Group repaid its £15m term loan with Metro Bank PLC.
In June 2023, the Group increased its RCF facility with NatWest from £26m to
£50m, extended the facility term from June 2024 to June 2028 with a further
two one-year extension options (subject to lender approval) to June 2030. In
recognition of the maturity extension, the margin was increased to 200 bps
above SONIA (previously 190 bps). The interest cover covenant was reduced from
2.50x to 1.75x in the first two years, after which it increases to 2.00x for
the remainder of the term.
In June 2023, the Group agreed a one-year extension option to its HSBC RCF to
April 2026. The interest cover covenant was reduced from 2.50x to 2.00x, with
the margin remaining at 200 bps above SONIA.
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 31 December
2023 2022
£'000 £'000
Borrowings drawn 184,760 142,260
Arrangement fees - brought forward (5,064) (3,641)
Arrangement fees incurred during the year (1,177) (2,628)
Amortisation of loan arrangement fees 1,418 1,205
Borrowings at amortised cost 179,937 137,196
Borrowings at amortised cost due within one year - 14,814
Borrowings at amortised cost due after one year 179,937 122,382
Maturity analysis of borrowings:
As at As at
31 December 31 December
2023 2022
£'000 £'000
Repayable within one year - 15,000
Repayable between one and two years - 25,260
Repayable between two and five years 77,260 10,000
Repayable in over five years 107,500 92,000
Total 184,760 142,260
The weighted average term of the Group's committed facilities is 6.8 years
(2022: 6.3 years).
As at 31 December 2023, the nominal value of the Group's loans equated to
£184.8m, the fair value of these loans, based on a discounted cash flow using
relevant rates based on market conditions as at 31 December 2023, totalled
£161.8m.
Accounting policy
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.
18. Interest rate derivatives
As at As at
31 December 31 December
2023 2022
£'000 £'000
At the beginning of the year 363 94
Purchase of derivative 3,238 -
Change in fair value of interest rate derivatives (458) 381
Payments received and accrued on interest rate derivatives (1,393) (112)
1,750 363
To mitigate the interest rate risk that arises as a result of entering into
variable rate linked loans, the Group has entered into interest rate caps.
In June 2018, the Group entered into an interest rate cap with the notional
value of £25m and a strike rate of 1% which terminated in June 2023.
In January 2023, the Group purchased a two-year interest rate cap for £1.5m,
which caps SONIA at 3% for a notional amount of £50m.
In August 2023, the Group purchased a two-year interest rate cap for £1.8m,
which caps SONIA at 4% for a notional amount of £50m.
At 31 December 2023, the Group had loans of £109.8m (2022: £67.3m) which
were exposed to interest rate risk.
Accounting policy
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.
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 31 December
2023 2022
£'000 £'000
Financial assets at amortised cost:
Loan receivable 1,600 37,500
Cash and cash equivalents 9,389 22,531
Trade and other receivables 711 -
Financial assets at fair value:
Interest rate derivative 1,750 363
Financial liabilities at amortised cost:
Borrowings 179,937 137,196
Trade and other payables 6,309 6,568
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(1) Level 2(1) Level 3(1)
valuation £'000 £'000 £'000 £'000
Assets measured at fair value:
Interest rate derivative 31 December 2023 1,750 - 1,750 -
Interest rate derivative 31 December 2022 363 - 363 -
Financial liabilities at fair value:
Put option 31 December 2023 - - - -
Put option 31 December 2022 1,811 - - 1,811
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 a movement of £46,945 (2022: £112,660) 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 derivatives to reduce its exposure to interest rate risk on its
floating-rate 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 a
movement of £48,800 (2022: £211,300) 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 2023.
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.
Accounting policy
Expected credit losses
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
12-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).
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.
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 2023:
Borrowings - - - 77,260 107,500 184,760
Interest and commitment fees on borrowings 937 2,853 3,790 9,318 15,382 32,280
Trade and other payables 6,309 - - - - 6,309
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
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 6.77 pence
per share for the year ended 31 December 2023 and its target aggregate
dividend of 6.54 pence per share for the year ended 31 December 2022.
As at 31 December 2023, 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 £65.2m of 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
Capital reduction
Shares in issue Share capital Share premium reserve Total
Number £'000 £'000 £'000 £'000
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
Share issue 9,603,841 96 11,104 - 11,200
Share issue cost - - (30) - (30)
As at 31 December 2023 414,368,169 4,144 376,716 24,077 404,937
The Company had 414,368,169 shares of nominal value of 1 pence each in issue
at the end of the year (2022: 404,764,328).
On 13 January 2023, the Company issued 9,603,841 ordinary shares at a price of
116.62 pence per ordinary share raising gross proceeds of £11.2m. These
shares were part consideration for the acquisition of a portfolio of six
properties purchased in January 2023, the remaining consideration of £44.8m
was paid in cash, see note 13 for further detail.
Accounting policy
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.
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 31 December
2023 2022
£'000 £'000
Amounts payable to Impact Health Partners LLP
Net fee 4,810 4,581
Gross fee 4,810 4,581
Certain members of the Investment Manager are also directors of the Group's
subsidiary companies. Neither they, nor the Investment Manager receive any
additional remuneration in relation to fulfilling this role.
For the year ended 31 December 2023, 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. No trade receivables were outstanding at the
year end (2022: £nil).
During the year, the key management of Impact Health Partners LLP received the
following dividends from Impact Healthcare REIT plc: Mahesh Patel £722,610
(2022: £723,130); Andrew Cowley £109,445 (2022: £91,871) and David Yaldron
£11,137 (2022: £7,975).
Directors' interests
During the year, the directors, who are considered key management personnel,
received the following dividends from the Company: Simon Laffin £5,078 (2022:
£nil); Rupert Barclay (resigned on 31 March 2023) £2,997 (2022: £11,927);
Rosemary Boot £2,014 (2022: £1,952); Chris Santer £949 (2022: £920) and
Philip Hall £2,014 (2022: £1,952). In addition, funds which were managed by
Paul Craig (resigned on 17 May 2023) received dividends from the Company of
£1,070,323 (2022: £4,089,458).
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 2023, the
Group leased 58 properties to MCGL (2022: 59), all properties owned for over
one year underwent an inflation-linked rent review in line with their lease
provisions. In 2023, the Group entered into no new leases with MCGL (2022: no
new leases) and disposed of one property let to MCGL to a third party, the
lease, which was subject to annual rent of £166,035, was cancelled with 14
years remaining (2022: disposed of one property). In 2023, the Group spent
£nil on approved capital expenditure on homes operated by MCGL (2022:
£0.8m). These transactions were fully compliant with the Company's related
party policy.
The Group had seven homes let to Silverline (3.4% of the Group's contracted
annual income), who did not pay its contractual rent for the quarters to 31
March 2023 and 30 June 2023. This was partially covered by a £0.4m rent
deposit. The Group had extensive discussions with alternative care providers
to take over Silverline's responsibilities, following which it decided on
2 June 2023 that it was in the best interests of the Group's stakeholders
that it enable the solvent sale of Silverline's tenant companies to Melrose
Holdings Limited (MHL). MHL immediately took over responsibility for operating
the seven homes. MHL is a new company, wholly-owned by connected parties of
Mahesh Patel, and benefits from a service agreement with MCGL, under which
MCGL supports the turnaround of these homes. To assist in the funding of
Silverline's overdue liabilities to third parties other than the Group and to
fund remedial capital expenditure, the Group agreed to provide a £1.6m loan
facility for up to three years to MHL. This facility has an interest rate of
8.0% per annum on drawn funds and will be repaid in priority to rent from
surplus funds in MHL. In the initial phase of the operational turnaround of
these care homes, the existing leases have been temporarily amended to replace
the fixed rent with a variable rent, payable once the loan has been repaid.
The lease variations allow MHL to pay MCGL a fixed management fee of £1,000
per registered bed in the homes (approximately £400,000 per annum plus VAT)
to cover the direct costs it incurs in overseeing the turnaround, payable only
from any surplus cash generated by the seven homes. Any surplus cash after the
management fee will first be used to repay the loan facility and accrued
interest and, once the loan is repaid, will be paid as rent to the Group. Once
the turnaround is complete, it is expected that the lease amendment will be
cancelled by mutual consent and the rent payable will revert to the amount
under the original lease.
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 31 December
2023 2022
£'000 £'000
Net assets per consolidated statement of financial position 478,107 445,920
Fair value of derivatives (1,750) (363)
EPRA NTA 476,357 445,557
Issued share capital (number) 414,368,169 404,764,328
Basic NAV per share 115.38p 110.17p
EPRA NTA per share 114.96p 110.08p
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 31 December
2023 2022
£'000 £'000
Year one 48,541 40,477
Year two 49,409 41,125
Year three 50,158 41,901
Year four 51,046 42,509
Year five 51,761 43,270
Onwards 986,920 762,841
Total 1,237,835 972,123
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
Interest rate derivative payable Total
£'000 £'000 £'000 £'000
As at 1 January 2022 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 (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 - - 4,584 4,584
As at 31 December 2022 137,196 (363) 1,149 137,982
Cash flows from financing activities:
Borrowings drawn 17 82,500 - - 82,500
Borrowings repaid 17 (40,000) - - (40,000)
Loan arrangement fees paid (2,827) - - (2,827)
Interest received 18 - 1,035 - 1,035
Interest and commitment fees paid - - (9,518) (9,518)
Purchase of interest rate derivatives 18 - (3,238) - (3,238)
Non-cash movements:
Amortisation of loan arrangement fees 17 1,418 - - 1,418
Fair value movement 18 - 458 - 458
Loan arrangement fees - reversal of accrual 1,650 - - 1,650
Interest and commitment charge - - 10,114 10,114
Accrued interest receivable on interest rate derivatives - 358 - 358
As at 31 December 2023 179,937 (1,750) 1,745 179,932
26. Capital commitments
At 31 December 2023, 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 £9.5m (2022: £9.2m).
The Group has committed to deferred payment agreements on two acquisitions in
return for increased rent based on certain trading performance conditions
being met by the tenant. As at 31 December 2023, the total capital
commitment for these deferred payments is estimated at £4.6m (2022: £4.6m).
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
No 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 2023
Company Registration Number: 10464966
31 December 31 December
2023 2022
Notes £'000 £'000
Non-current assets
Investment in subsidiaries 6 418,861 430,079
Total non-current assets 418,861 430,079
Current assets
Trade and other receivables 7 60,994 18,862
Cash and cash equivalents 8 7,773 283
Total current assets 68,767 19,145
Total assets 487,628 449,224
Current liabilities
Trade and other payables 9 (9,521) (11,720)
Total liabilities (9,521) (11,720)
Total net assets 478,107 437,504
Equity
Share capital 10 4,144 4,048
Share premium reserve 10 376,716 365,642
Capital reduction reserve 10 24,077 24,077
Retained earnings 73,170 43,737
Total equity 478,107 437,504
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 2023 amounted to
£57,247,000 (2022: profit of £17,556,000).
The financial statements were approved and authorised for issue by the board
of directors on 22 March 2024 and are signed on its behalf by:
Simon Laffin
Chair
The accompanying notes form an integral part of these financial statements.
Company statement of changes in equity
For the year ended 31 December 2023
Capital
Share reduction Retained
Share capital premium reserve earnings Total
Notes £'000 £'000 £'000 £'000 £'000
1 January 2023 4,048 365,642 24,077 43,737 437,504
Total comprehensive income - - - 57,247 57,247
Transactions with owners
Dividends paid 5 - - - (27,814) (27,814)
Share issue 10 96 11,104 - - 11,200
Share issue costs 10 - (30) - - (30)
31 December 2023 4,144 376,716 24,077 73,170 478,107
For the year ended 31 December 2022
Capital
Share reduction Retained
Share capital premium reserve earnings Total
Notes £'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
The accompanying notes form an integral part of these financial statements.
NOTES TO THE COMPANY FINANCIAL STATEMENTS
For the year ended 31 December 2023
1. Basis of preparation
General information
The financial statements for the year ended 31 December 2023 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 2022.
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 Company would be identical;
· no statement of cash flows has been presented for the Company;
· disclosures in respect of the 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 inflation and interest rate environment has
been considered by the directors. The directors have reviewed the forecasts
for the Company, taking into account the impact of heightened interest rates
and rising costs 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, typically as a result of dividends declared in the
year.
3. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
financial statements are set out alongside the relevant note.
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 31 December
2023 2022
£'000 £'000
UK corporation tax - -
5. Dividends
Details of dividends paid by the Company are included in note 12 to the
consolidated financial statements.
Accounting policy
Dividends
Dividends are recognised when they become legally payable.
6. Investment in subsidiaries
31 December 31 December
2023 2022
£'000 £'000
At the beginning of the year 430,079 392,486
Additions 165,234 93,425
Impairment (176,452) (55,832)
At the end of the year 418,861 430,079
The Company has the following subsidiaries:
Principal activity Country of incorporation Ownership %
Impact Property 1 Limited ('Propco 1')(1) Real estate investment England and Wales 100
Impact Property 2 Limited ('Propco 2') (1) Real estate investment England and Wales 100
Impact Property 3 Limited ('Propco 3') (1) Real estate investment England and Wales 100
Impact Property 4 Limited ('Propco 4') (1) 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') (1) Real estate investment England and Wales 100
Impact Property 8 Limited ('Propco 8') (1) Real estate investment England and Wales 100
Impact Property 9 Limited ('Propco 9') (1) Real estate investment England and Wales 100
Impact Finance 1 Limited ('Finance 1') (1) Financing company England and Wales 100
Impact Finance 2 Limited ('Finance 2') (1) Financing company England and Wales 100
Impact Finance 3 Limited ('Finance 3') (1) Financing company England and Wales 100
Impact Finance 4 Limited ('Finance 4') (1) Financing company England and Wales 100
Impact Finance 5 Limited ('Finance 5') (1) Financing company England and Wales 100
Impact Finance 6 Limited ('Finance 6') (1) 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(1,2) Property holding company England and Wales 100
Romney Care Home Limited(1,2) Property holding company England and Wales 100
Cholwell Care (Nailsea) Limited(1,2) Property holding company England and Wales 100
Butterfly Cumbria Properties Limited(1) Property holding company England and Wales 100
The Holmes Care Holdings Limited(1,2) Property holding company England and Wales 100
Hollyblue Healthcare (Ulster) Limited(1,2) Property holding company England and Wales 100
Tower Bridge Homes Care Limited(1,2) Property holding company England and Wales 100
The Holmes Care Group GB Limited(1,2) Property holding company England and Wales 100
Hillcrest House Limited(1,2) Property holding company England and Wales 100
Carlton Hall (Lowestoft) Limited(1,2) Property holding company England and Wales 100
Abingdon Manor Care Centre Limited(1,2) Property holding company Northern Ireland 100
Larne Care Centre Limited(1,2) Property holding company Northern Ireland 100
Larne C C Limited(1,2) Property holding company Northern Ireland 100
Welford Bidco 5 Midco Limited(1) Investment holding company England and Wales 100
Morris Care Limited(1) Property holding company England and Wales 100
Kingdom Finco 1 Limited(1) Investment holding company England and Wales 100
Kingdom Homes Limited(1) Property holding company Scotland 100
Barrogil Limited(1) Property holding company Scotland 100
Eastleigh Care Group Limited(1) Property holding company England and Wales 100
Woodleigh Christian Care Home Limited(1) Property holding company England and Wales 100
Welford Bidco 2 Midco Limited(1) Investment holding company England and Wales 100
Welford Bidco 4 Midco Limited(1) Investment holding company England and Wales 100
(1) As at 31 December 2023 these entities were held indirectly by the Company.
(2) As at 31 December 2023 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
The registered address for the above subsidiaries incorporated in Scotland is:
177 Bothwell Street, Glasgow, G2 7ER, Scotland
Where the entity is in the process of winding up, the registered address is
that of the liquidator appointed by the Company.
Accounting policy
Investments in subsidiaries
The investments in subsidiary companies are included in the Company's
statement of financial position at cost less provision for impairment.
7. Trade and other receivables
As at As at
31 December 31 December
2023 2022
£'000 £'000
Loan to Group companies 60,797 18,658
Prepayments 197 204
60,994 18,862
As at 31 December 2023, there were no trade receivables past due or impaired
(2022: none). Loans to subsidiaries are interest free, repayable on demand and
management expect them to be settled within the next 12 months.
Accounting policy
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.
8. Cash and cash equivalents
As at As at
31 December 31 December
2023 2022
£'000 £'000
Cash and cash equivalents 7,773 283
None of the Company's cash balances are held in restricted accounts.
Accounting policy
Cash and cash equivalents
Cash and cash equivalents include cash at bank and short-term deposits.
9. Trade and other payables
As at As at
31 December 31 December
2023 2022
£'000 £'000
Loan from Group companies 7,781 9,977
Trade and other payables 1,740 1,743
9,521 11,720
Loans from Group companies are unsecured, interest-free and are repayable on
demand.
Trade and other payables
Trade payables are initially recognised at their fair value and are
subsequently measured at cost.
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.
Accounting policy
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.
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 (2022: £nil).
13. Contingent liabilities
On 21 December 2021, the Company guaranteed a long-term loan note issue made
by a wholly owned subsidiary. The loan notes total £75m 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.
Reporting against the Task Force on Climate-Related Financial Disclosures
framework
Positive progress
In last year's report, we included our initial response to the Task Force on
Climate-related Financial Disclosures (TCFD) methodology, where we reported
across the framework's four key pillars of governance, strategy, risk
management and metrics and targets and responded to the underlying 11
recommended disclosures. In line with the TCFD's suggested approach, we
considered a 1.5-2 degrees warming scenario, based on the Intergovernmental
Panel on Climate Change's (IPCC) defined Representative Concentration Pathway
2.6 and assessed the associated physical and transition risks. We also
considered IPCC's RCP 4.5 (2-3.5 degrees warming) and RCP 8.5 (4 degrees
warming). We have not repeated that analysis in this report.
During 2023 we have made good progress in terms of continuing to develop our
understanding, management, measurement and decision-making in regard to
climate action. The IM has established an ESG committee chaired by the Finance
Director; we have continued to develop a credible climate net zero delivery
plan and model the associated finances; and, building on last year's TCFD
analysis, we have considered specific material risks and opportunities in
greater detail.
Reporting against the TCFD Framework
The table below highlights how we have reported in line with the 11
recommendations of TCFD and includes our own informed assessment of our level
of alignment. We recognise that this is an iterative process and have
highlighted those areas where we still need to make improvement or continue to
progress.
Recommended disclosure Current status Comment
Governance
Describe the board's oversight of climate-related risks and opportunities Reporting in line with the recommendations We have included these disclosures in the report
Describe the management's role in assessing and managing climate‑related Reporting in line with the recommendations We have included these disclosures in the report
risks and opportunities
Strategy
Describe the climate-related risks and opportunities the organisation Reporting in line with the recommendations We have included these disclosures in the report
has identified over the short, medium and long term
Describe the impact of climate‑related risks and opportunities on the We have made disclosures but are not yet fully reporting in line with the We have assessed the impacts of climate-related risks and opportunities from a
organisation's businesses, strategy and financial planning recommendations qualitative perspective but have yet to translate this fully into quantifiable
financial impacts. This will continue to be reviewed during 2024
Describe the resilience of the organisation's strategy, taking into We have made disclosures but are not yet fully reporting in line with the We have assessed the impacts of climate-related risks and opportunities and
consideration different climate-related scenarios, including a 2°C or lower recommendations the actions we are taking to increase our resilience, however we have yet to
scenario translate this fully into quantifiable financial impacts and articulate our
resilience on this basis. This will continue to be reviewed during 2024
Risk management
Describe the organisation's processes for identifying and assessing Reporting in line with the recommendations We have included these disclosures in the report
climate‑related risks
Describe the organisation's processes for managing climate-related risks Reporting in line with the recommendations We have included these disclosures in the report
Describe how processes for identifying, assessing and managing Reporting in line with the recommendations We have included these disclosures in the report
climate‑related risks are integrated into the organisation's overall risk
management
Metrics and targets
Disclose the metrics used by the organisation to assess climate-related risks Reporting in line with the recommendations We have included these disclosures in the report
and opportunities in line with its strategy and risk management processes
Describe Scope 1, Scope 2 and if appropriate, Scope 3 greenhouse gas (GHG) We have made disclosures but are not yet fully reporting in line with the We continue to improve the accuracy of our reported Scope 3 emissions, which
emissions, and the related risks recommendations represents a significant proportion of our total emissions. We now collect
over 85% of scope 3 emissions data from our tenants and continue to explore
ways to improve the quality and quantity of this data capture and disclosure
Describe the targets used by the organisation to manage climate‑related We have made disclosures but are not yet fully reporting in line with the We have developed some headline targets but in 2024, we will consider further
risks and opportunities and performance against targets recommendations targets related to transition and physical risks and opportunities
Governance
The board sets our risk appetite and oversees our risk management, which the
Investment Manager carries out on our behalf. 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.
Following the board's approval of the ESG Strategy in February 2023 the IM
established an ESG Committee to provide further structure and formality to its
ESG workstreams and to track progress against targets for climate related
targets.
The IM's ESG Committee, which meets on a quarterly basis and documents minutes
and actions, is responsible for reviewing and advising on the recommendations
made by the IM's ESG Working Group, also established in 2023, chaired by the
IM's Development Director.
The IM's ESG Committee is chaired by the IM's Finance Director who, in
partnership with the Development Director, oversees the operational and
financial aspects of our sustainability programme. The IM's Finance Director
reports directly into the board and consults with the audit committee to
ensure the relevant level of assurance is being provided. ESG/Sustainability
is an item on the board agenda and a dedicated Board session takes place
periodically.
More information on our governance of climate change considerations can be
found within our reporting on Principal Risk and our Audit, Risk and Internal
Control.
Board
Overall accountability for ESG strategy
Audit committee
Identification and management of climate risks
ESG committee
Review and advise on climate strategy
Risk committee
Identification and management of climate risks
ESG working group
Accountable for execution of Sustainability/ ESG strategy
TCFD working group
Initial assessment of risks and opportunities linked to climate change
Strategy
Having modelled a net zero strategy, which we reported on in our 2022 annual
report, we used 2023 to develop further our net zero delivery plan. We
identified six properties which were representative of the energy performance
across our portfolio and commissioned detailed on-site energy audits to test
our assumptions and associated financial modelling.
In tandem with our net zero delivery planning we continue to make good
progress on making the necessary improvements to our properties to ensure that
they comply with future MEES regulation.
Building on last year's assessments of risks and opportunities, we undertook a
detailed review of the following areas which we considered material to our
business (see below). Once again, to align with our business strategy, we
have defined short term as one to three years, medium term as five to 10 years
and a long-term timeframe as up to 25 years.
While we have assessed the potential financial impacts relating to our net
zero planning and MEES compliance, we still need to quantify the financial
impacts posed by physical risks of flooding and other risks and opportunities.
Following our review of climate related risks and opportunities in 2022 we
have highlighted in the table below the most material risks and how we are
managing these.
Detailed review of risks and opportunities
Flooding
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium/Long
Disruption to provision of care or possible closure of care home
How we are assessing the risk
Using the Environment Agency (EA) current data, we have assessed all care
homes within our portfolio for flood risk related to seas, rivers, surface and
ground water. We have also cross-referenced IPCC longer-term data which we had
mapped against a representative 20 care homes in our portfolio. As regards
EA's current data, we have identified 12 assets which are potentially at high
risk (greater than 3.3% chance of flooding each year), and within our
longer-term assessment, we have identified three properties from our
representative sample which are at high risk from rising sea levels under a
high‑emissions longer term scenario.
Flooding risk is also included in our due diligence sustainability reports for
new acquisitions. During 2024, we will conduct a more detailed risk assessment
for those considered high risk, reviewing aspects such as local authority
flood defence planning.
How we manage this risk
All of our homes are fully insured against damage including loss of rent.
Our tenants separately have insurance for loss of earnings for their own
business. Where flood risk has been identified, or occurred, we look to work
with our tenants and insurers to enhance the flood defences and safety for
residents.
Opportunity
Increased investment in our homes and capital deployed in return for
increased rent.
Improved long-term care of residents
Additional capital expenditure
Probability: High
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium/Long
Additional costs required to improve energy efficiency and realise net zero
targets
How we are assessing the risk
We have mapped and estimated a capex profile from the present day until 2045
when we plan to be net zero. We are targeting approximately 15% of our asset
management budget towards energy-efficiency improvements.
During 2023, we conducted a first round of on-site energy audits to verify our
net zero modelling assumptions. These findings and costings are being
incorporated into our climate transition planning.
How we manage this risk
Our leases with our tenants are fully insuring and repairing and require
tenants to ensure the property is compliant with legislation. Therefore, as
legislation comes in to align with these targets, our tenants will be
responsible for the cost and have the ability to factor this in to the cost of
their services.
We are working with our tenants to ensure our buildings are well prepared for
future legislation and our ESG targets. We do this by having a good
understanding of the environmental performance of our homes We also ensure
that any capital improvements that require our permission include some
environmental enhancements.
Opportunity
Increased investment in our homes and capital deployed in return for
increased rent.
Ability to utilise Improvements in technology to help reducing the carbon
footprint of our portfolio
Improved long-term care of residents
Regulation
Probability: High
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium/Long
Potential loss of value for assets not meeting expected future standards.
Assets may become "stranded" by evolving environmental legislation
How we are assessing the risk
We work closely with environmental and political consultants to help us
understand future proposals for any changes in regulation and we appraise our
portfolio against these proposed regulations.
For new acquisitions, we have set ourselves a target of an EPC B rating or the
ability to achieve a B rating in the short term. We also undertake
environmental due diligence including CRREM analysis to model stranding year
and key mitigations. An objective of our net zero delivery plan is to ensure
our portfolio is upgraded to meet our targets.
We now have full visibility of EPCs across our entire portfolio of properties
and have an active asset management improvements schedule in place to ensure
we are compliant with anticipated 2030 MEES regulation. Our leases require our
tenant operators to ensure the buildings are in compliance with legislation.
How we manage this risk
As explained above, our leases require our tenant operators to ensure the
buildings are in compliance with legislation.
Opportunity
Increased investment in our homes and capital deployed in return for increased
rent.
Ability to utilise Improvements in technology to help reducing the carbon
footprint of our portfolio.
Cost of carbon
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium
Introduction of carbon levy by Govt to encourage reduction in carbon
emissions that results in additional taxation liability for the Company
How we are assessing the risk
The IM has held two workshops to discuss the possible options re carbon
pricing/taxation and how best to introduce this into our business strategy and
financial planning.
We continue to ensure we are capturing as much underlying data from our
tenants on our Scope 3 emissions.
We will continue to monitor the situation in 2024 and also ensure that we are
compliant with future ISSB/government guidance. We expect to start to embed an
internal carbon price within our planning to inform decision-making.
How we manage this risk
By understanding the legislation being applied in other countries we are able
to model similar legislation being applied in the UK and ensuring this can be
incorporated into our risk modelling in 2024.
Opportunity
With increased regulation there is the opportunity for our tenants to charge
increased fees for their services and therefore enable us to increase our
investment in our homes in return for an increased rent.
Additional Risk & opportunities disclosed in 2022
Water stress and heatwaves
Probability: Medium
Impact: Significant
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium/Long
Environment within assets is detrimental for wellbeing of residents and staff
and additional capex is required to retro fit cooling and improve water use
How we are assessing the risk
Our net zero strategy includes assumptions on additional cooling requirements
for existing assets.
We will continue to work with our environmental consultants to help us
understand the expected regular peak temperatures across the UK as a result of
a 1.5(o) or more global increase in temperature and ensure this is factored
into our design parameters when approving asset management activity.
How we manage this risk
This continues to be work in progress to understand on an asset by asset basis
what the implications could be and how we can mitigate these.
Opportunity
Increased investment in our homes and capital deployed in return for increased
rent.
Market
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Cautious
Timescale: Medium
Investors and markets increasing awareness of environmental performance. If we
fail to communicate a strategy and implications for our portfolio investors
are less likely to want to invest in our business
How we are assessing the risk
We are undertaking a significant amount of work to ensure we can deliver
against our ESG strategy and net zero targets and communicate the risks and
opportunities that come with this.
We regularly engage with investors and ensure we are open and transparent
about our business in our reporting to ensure we understand any investor
concerns and address these.
How we manage this risk
Alongside investor engagement we have already retained our EPRA sBPR Gold
award for our sustainability reporting and a D rating for our initial Carbon
Disclosure Project submission (a voluntary disclosure for companies seeking to
be transparent on climate related risks and opportunities.
In 2024 we are looking to gain GRESB accreditation which will
provide investors with incremental benchmarking about the quality
of information we hold on our portfolio.
Opportunity
By taking our environmental targets seriously and transparently reporting,
more investors could be interested in investing in our business.
Reputation
Probability: Medium
Impact: Moderate
Change in the year: No change
Risk appetite: Minimalist
Timescale: Short
Investors, tenants and commissioners may have increasing expectations of real
estate owners for environmental issues and if we fail to meet these or deliver
against our objectives and net zero targets our reputation would be damaged
and stakeholders may be less willing to engage with us
How we are assessing the risk
We are continuing to appraise our portfolio and collect as much evidence as
possible to be able to benchmark and report on our portfolio.
How we manage this risk
We aim to be fully transparent and honest about our ESG targets, the
activities we are undertaking and how we are performing against these. Our aim
is to achieve these targets and provide comfort that the Company is committed
to improving environmental standards.
Opportunity
If we are successful in communicating and delivering against these targets,
existing stakeholders will want to continue to work with us and potentially,
more will be keen to work with us.
Risk management
As a principal risk for the business, climate-related risks are subject to the
same formal governance and review process as other risks on our risk register.
The Investment Management team has a risk committee which assesses and reviews
the Company's risk register on a quarterly basis and reports to the audit
committee. Prioritised risks are discussed and considered by the audit
committee and board twice a year. Environmental regulation and impact of
climate change is already a principal risk for the Group; the assessment has
been maintained/changed from Probability: Medium, Impact: Low to Probability:
Medium, Impact: Medium. Following a full climate risk analysis undertaken in
2022 we continue to review risks and opportunities.
As part of our due diligence process for potential new acquisitions and asset
management projects, environmental performance and opportunities to
decarbonise are considered in detail. Risks around our portfolio and ability
to decarbonise in accordance with our net zero delivery plan are assessed
using the CRREM toolkit which measures the potential rate of decarbonisation
against the Paris Climate Treaty 1.5 degree warming scenario. Assets with
higher risks associated with this are reviewed annually as part of our
portfolio stratification (Core, Value Add and Non‑Core).
Looking ahead, this due diligence will continue to factor in possible
identified risks and opportunities associated with climate change and a
decarbonisation pathway.
Metrics and targets
As part of our EPRA reporting responsibilities, we have been disclosing our
energy consumption data since 2019 in accordance with the EPRA Best Practice
Sustainability requirements. Impact's Scope 1 and 2 emissions are minimal with
all reported emissions relating to tenant-obtained energy consumption falling
under Scope 3. In this report we have included our GHG emissions for the
12 months to 31 December 2023 in order to provide as up-to-date information
as possible.
We have been modelling our portfolio as part of our net zero strategy planning
and have referenced our progress within this report. This net zero strategy
incorporates projections and impacts based on the size of our current
portfolio and on the size of our projected portfolio.
Last year, we published our incremental emissions reduction targets and
longer-term net zero target. As we continue to gain greater insight into our
Scope 3 emissions, we will continue to review and refine our metrics and
targets.
In 2023 our CO2e emissions per m2 increased slightly from 50kg to 54kg. This
in part reflects the increased occupancy experienced over this period. It will
take time for the improvement measures being implemented to embed in energy
performance. We continue to explore how we can accelerate progress to meet our
interim milestone of a 15% reduction in like-for-like emissions by 2025,
whilst maintaining affordability for our tenant's businesses.
Our key climate related metrics are:
· EPC Ratings
· Energy Intensity per bed (KWh per bed)
· GHG Emissions Intensity (CO(2)e per bed)
· Capex deployed on sustainability improvements (£pa)
· Interim net zero targets
· Proportion of leases with 'Green' obligations
Energy and carbon disclosures
Environmental performance measures(1,2,3)
Performance measure - Impact Healthcare REIT plc Unit Scope 2023 2022 Change
Electricity Absolute Consumption kWh 3 21,197 18,077 17%
Electricity Total & like-for-like consumption kWh 3 19,630 18,077 9%
Gas Absolute Consumption kWh 3 60,502 52,592 15%
Gas Total & like-for-like consumption kWh 3 54,464 52,592 4%
Other Fuels Absolute Consumption kWh 3 5,424 2,758 97%
Other Fuels Like-for-like consumption(1) kWh 3 4,349 2,758 58%
Building energy intensity absolute(1) kWh/bed/year 3 11,284 10,615 6%
Building energy intensity like-for-like(1) kWh/bed/year 3 10,966 10,615 3%
Building energy intensity like-for-like kWh/m(2)/year 3 286 268 7%
Total indirect greenhouse gas (GHG) emissions from tenant obtained fuel Tonnes CO(2)e 3 15,923 13,768 16%
usage(1)
Total indirect greenhouse gas (GHG) emissions from tenant obtained fuel usage Tonnes CO(2)e 3 14,482 13,768 5%
like-for-like(1)
Greenhouse gas (GHG) emissions intensity from building energy consumption Tonnes CO(2)e /bed/year 3 2.06 1.99 3%
Greenhouse gas (GHG) emissions intensity from building energy consumption Kg CO(2)e/m(2)/year 3 54 50 8%
Greenhouse gas (GHG) emissions intensity from building energy consumption Tonnes CO(2)e/bed/year 3 2.02 1.99 1%
like-for-like(1)
Greenhouse gas (GHG) emissions intensity from building energy consumption Kg CO(2)e/m(2)/year 3 53 50 5%
like-for-like(1)
Performance measure - Investment Manager Unit Scope 2023 2022 Change
Total electricity consumption kWh Total Investment Manager electricity 7,336 5,470 34%
Investment Manager energy intensity kWh/FTE Average kWh electricity consumption per FTE in year 734 521 41%
Total indirect greenhouse gas (GHG) emissions tCO(2)e Indirect - Scope 2 (location-based) 1.5 1.1 44%
Business travel - Land - Car tCO(2)e Scope 3 - Private vehicles (incl. WTT2) 4.0 3.7 8%
Business travel - Land - Air tCO(2)e Scope 3 - Flights (With RF incl. WTT3) 1.7 1.6 9%
Business travel - Land - Rail tCO(2)e Scope 3 - Rail (incl. WTT3) 0.2 1.2 (84)%
Total Emissions tCO(2)e 7.4 7.6 (3)%
(1) Like-for-like figures adjusted to exclude 3 biomass boilers which were
not disclosed in 2022 based on available data at time of publication.
(2) 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.
(3) 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.
EPRA PERFORMANCE MEASURES
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
£34.5m
8.33p per share
for the year to 31 December 2023
(for the year to 31 December 2022: £32.6m/8.37p per share)
2023 8.33p
2022 8.37p
2021 8.05p
2020 7.25p
Definition
Earnings from operational activities. The EPRA calculation removes
revaluation movements in the investment portfolio and interest rate
derivatives, but includes rent smoothing.
Purpose
A key measure of a company's underlying operating results is an indication of
the extent to which current dividend payments are supported by earnings.
2.1 EPRA net reinstatement value (NRV)
£518.8m
125.20p per share
as at 31 December 2023
(as at 31 December 2022: £479.7m/118.51p per share)
2023 125.20p
2022 118.51p
2021 120.84p
2020 118.04p
Definition
Net asset value adjusted for fair value of derivatives and transaction costs
under the assumption they will not crystallise if the Company never sells
assets.
Purpose
The aim of this measure is to represent the value required to rebuild the
entity.
2.2 EPRA net tangible assets (NTA)
£476.4m
114.96p per share
as at 31 December 2023
(as at 31 December 2022: £445.6m/110.08p per share)
2023 114.96p
2022 110.08p
2021 112.41p
2020 109.58p
Definition
Net asset value adjusted for fair value of derivatives as these will not
crystallise if held to maturity.
Purpose
This represents the value of the Company assuming assets are bought and sold.
2.3 EPRA net disposal value (NDV)
£473.3m
114.22p per share
as at 31 December 2023
(as at 31 December 2022: £440.9/108.92p per share)
2023 114.22p
2022 108.92p
2021 111.16p
2020 108.91p
Definition
Net asset value adjusted to align borrowings to their drawn amount. If the
Company was in an immediate disposal scenario certain assets and liabilities
are adjusted to show the full value if not held to maturity.
Purpose
This measure aims to show the shareholders' value under a disposal scenario.
3.1 EPRA net initial yield (NIY)
6.69%
as at 31 December 2023
(as at 31 December 2022: 6.98%)
2023 6.69%
2022 6.98%
2021 6.71%
2020 6.57%
Definition
Annualised rental income based on the cash rents passing at the balance sheet
date, less non-recoverable property operating expenses, divided by the market
value of the property, increased with (estimated) purchasers' costs.
Purpose
This measure should make it easier for investors to judge for themselves how
the valuation of one portfolio compares with another portfolio.
3.2 EPRA "topped-up" NIY
6.92%
as at 31 December 2023
(as at 31 December 2022: 6.98%)
2023 6.92%
2022 6.98%
2021 6.71%
2020 6.71%
Definition
This measure adjusts the EPRA NIY in respect of the expiration of rent-free
periods (or other unexpired lease incentives, such as discounted rent periods
and step rents).
Purpose
This measure should make it easier for investors to judge for themselves how
the valuation of one portfolio compares with another portfolio.
4. EPRA vacancy rate
0.00%
as at 31 December 2023
(as at 31 December 2022: 0.00%)
2023 0.00%
2022 0.00%
2021 0.00%
2020 0.00%
Definition
Estimated market rental value (ERV) of vacant space divided by the ERV of the
whole portfolio.
Purpose
A "pure" (%) measure of investment property space that is vacant, based on
ERV.
5. EPRA cost ratio
14.37%
for the year to 31 December 2023
(for the year to 31 December 2022: 16.59%)
2023 14.37%
2022 16.59%
2021 15.84%
2020 17.09%
Definition
Administrative and operating costs (including, and excluding, direct vacancy
costs) divided by gross rental income.
Purpose
A key measure, to enable meaningful measurement of the changes in a company's
operating costs. The EPRA cost ratio does not include the interest income
received on the Group's property investments made via a loan to operator,
adjusting for this gives a cost ratio of 13.4%.
6. Like-for-like rental growth
4.67%
for the year to 31 December 2023
(for the year to 31 December 2022: 5.07%)
2023 4.67%
2022 5.07%
2021 5.74%
2020 4.26%
Definition
Rental growth on the portfolio of properties that have been owned and
operational for two full reporting cycles.
Purpose
Growth of rental income excludes acquisitions and disposals, but includes
increases in rent from inflationary uplifts and rentalised capital
expenditure. This allows stakeholders to estimate the organic income growth.
7. EPRA (net) LTV
27.85%
as at 31 December 2023
(as at 31 December 2022: 24.10%)
2023 27.85%
2022 24.10%
2021 23.17%
2020 17.06%
Definition
Debt drawn at nominal value net of cash and net payables divided by portfolio
value.
Purpose
To assess the gearing of the shareholder equity within a real estate company.
Notes to the EPRA performance measures
For the year ended 31 December 2023
1. EPRA earnings per share
31 December 31 December
2023 2022
£'000 £'000
Total comprehensive income (attributable to shareholders) 48,831 16,888
Adjusted for:
- Revaluation movement (21,934) 8,103
- Rental lease incentives (140) (141)
- Rental income arising from recognising future guaranteed rent uplifts and 7,286 6,494
rental premiums
Change in fair value of investment properties (14,788) 14,456
Loss/(profit) on disposal of investment property 16 (130)
Change in fair value of put option - 1,811
Change in fair value of interest rate derivatives 458 (381)
Profits to calculate EPRA earnings per share 34,517 32,644
Weighted average number of ordinary shares (basic and diluted) 414,157,674 390,058,661
EPRA earnings per share - basic and diluted 8.33p 8.37p
2. EPRA NAV measures
The EPRA best practice recommendations, released in October 2020, give three
NAV metrics: EPRA net reinstatement value (NRV), EPRA net tangible assets
(NTA) and EPRA net disposal value (NDV). 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 2023:
EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000
Net assets at end of year 478,107 478,107 478,107
Exclude:
Fair value of derivatives (1,750) (1,750) -
Include:
Fair value of debt(1) - - (4,823)
Transaction costs(2) 42,452 - -
Net assets (per EPRA measure) 518,809 476,357 473,284
Shares in issue at 31 December (basic and diluted) 414,368,169 414,368,169 414,368,169
Net assets per share (per EPRA measure) 125.20p 114.96p 114.22p
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 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 measure) 118.51p 110.08p 108.92p
(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 31 December
2023 2022
£'000 £'000
Investment property - wholly owned 651,313 532,478
Less capital improvements under construction (9,669) (7,535)
Completed property portfolio 641,644 524,943
Allowance for estimated purchasers' cost(1) 40,424 33,071
Gross up completed property portfolio valuation (B) 682,068 558,014
Annualised cash passing rental income 45,601 38,932
Property outgoings (non-recoverable insurance) - -
Annualised net rents (A) 45,601 38,932
Add:
Contractual rent on properties with interim variable rents
whilst in turnaround 1,617 -
Topped-up net annualised rent (C) 47,218 38,932
EPRA net initial yield (A/B) 6.69% 6.98%
EPRA topped-up net initial yield (C/B) 6.92% 6.98%
(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 31 December
2023 2022
£'000 £'000
Estimated rental value of vacant space - -
Estimated rental value of the whole portfolio 48,154 39,476
EPRA vacancy rate 0.00% 0.00%
5. EPRA cost ratio
31 December 31 December
2023 2022
£'000 £'000
Administrative and other expenses 7,137 7,008
Net service charge cost - -
Total costs including and excluding vacant property costs 7,137 7,008
Gross rental income 49,659 42,243
Total EPRA cost ratio (including, and excluding, direct vacancy costs) 14.37% 16.59%
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 2021. It therefore excludes any rental increases
or values in relation to properties acquired after 31 December 2021.
Rent Market value
£'000 £'000
Property portfolio as at 31 December 2021 31,925 450,897
Inflation-linked rental uplifts 1,308
Rental uplifts in return for capital improvements or deferred payments 269
Increase/(decrease) due to vacancy rate -
Property portfolio as at 31 December 2022 33,502 451,664
Inflation-linked rental uplifts 1,395
Rental uplifts in return for capital improvements or deferred payments 168
Increase/(decrease) due to vacancy rate -
Property portfolio as at 31 December 2023 35,065 472,808
All properties operate within the same sector, UK healthcare.
7. EPRA (net) LTV
31 December 31 December
2023 2022
£'000 £'000
Gross debt 184,760 142,260
Include:
Net payables 6,009 8,617
Less:
Cash and cash equivalents (9,389) (22,531)
Net debt 181,380 128,346
Property portfolio 651,313 532,478
EPRA (net) LTV 27.85% 24.10%
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 31 December
2023 2022
£'000 £'000
Opening NAV 445,920 394,244
Closing NAV 478,107 445,920
Average NAV for the year 462,013 420,082
Administrative expenses 7,137 7,009
One-off costs - -
Recurring expenses 7,137 7,009
TER 1.54% 1.67%
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 31 December
2023 2022
Opening NAV per share (pence) 110.17 112.43
Closing NAV per share (pence) 115.38 110.17
NAV growth for the year (pence) 5.21 (2.26)
Dividends per share paid in the year (pence) 6.71 6.51
Total return (pence) 11.92 4.25
Total accounting return 10.82% 3.78%
3. Gross loan to value (LTV)
The gross debt as a percentage of our gross asset value.
As at As at
31 December 31 December
2023 2022
£'000 £'000
Gross debt 184,760 142,260
Gross assets 667,289 596,524
LTV 27.69% 23.85%
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 31 December
2023 2022
£'000 £'000
Portfolio valuation 651,313 532,478
Investments in properties via loans to operators - 36,360
Property Investments 651,313 568,838
OUR PORTFOLIO
At 31 December 2023, the Group owned the homes listed in the table below:
Acquisition Capital
Tenant and home Region date(1) Beds(2) projects(3)
Belmont Healthcare
Madeira Lodge South East Nov 2022 48
Wombwell Hall South East Nov 2022 120
Value at 31 December 2023: £14.2m
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 76
Old Prebendal House and Court South East Jun 2019 40
Riverwell Beck North West Dec 2020 60
Sovereign Court and Lodge4 North East Aug 2018 60
The Grove North East Sep 2018 57
Value at 31 December 2023: £35.5m
Carlton Hall
Carlton Hall East of England Sep 2021 86
Oasis Development Site East of England Sep 2021 - +80
Value at 31 December 2023: £13.8m
Croftwood Care(5)
Ancliffe North West 40
Astbury Lodge North West 41
Croftwood North West 47
Crossways North West 39
Elm House North West 40 +19
Florence Grogan North West 40
Garswood North West 53
Gleavewood North West 32
Golborne House North West 45
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
Lyndhurst North West 40
New Milton House North West 39
Parklands North West 40 +1
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 2023: £72.8m
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 2023: £22.9m
Holmes Care Group
Alexander House Scotland Dec 2021 40
Almond Court Scotland Aug 2020 42
Almond View Scotland Aug 2020 78
Bankview (& BVDC) Scotland Aug 2020 65
Barrogil House Scotland Dec 2021 40
Beechwood Scotland Aug 2020 90
Camilla Scotland Dec 2021 40
Craigie House Scotland Dec 2021 30
Cragielea Scotland Aug 2020 85
Fernlea House Scotland Dec 2021 36
Finavon Court Scotland Dec 2021 24
Grandholm Scotland Aug 2020 79
Heatherfield Scotland Aug 2020 60
Larkfield Scotland Aug 2020 90
Lomond View Scotland Dec 2021 50
Methven House Scotland Dec 2021 60
Preston House Scotland Dec 2021 60
Roselea House Scotland Dec 2021 20
Three Towns Scotland Aug 2020 60
Walton House Scotland Dec 2021 40
Willow House Scotland Dec 2021 40
Value at 31 December 2023: £92.1m
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 2023: £35.7m
Minster Care(5)
Abbeywell West Midlands 45
Amberley South West 30 +7
Ashgrove Yorkshire & The Humber 56
Broadgate East Midlands 40
Carnbroe Scotland May 2018 76
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 30
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
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 73
Three Elms North West 60
Waterside West Midlands 47
Woodlands Court North West 40
Wordsley West Midlands 44
Value at 31 December 2023: £137.3m
NCUH NHS Trust
Reiver House North West Jun 2019 -
Surgical Unit North West Jun 2019 -
Value at 31 December 2023: £4.3m
Optima
Barham East of England Aug 2019 44
Baylham East of England Aug 2019 55
Value at 31 December 2023: £15.6m
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 +25
Value at 31 December 2023: £36.3m
Renaissance Care
Croftbank Scotland Nov 2018 68
Rosepark Scotland Nov 2018 60
Value at 31 December 2023: £13.3m
Melrose(5)
Baillieston Scotland Aug 2022 60
Cardonald Scotland Aug 2022 31
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 2023: £17.1m
Welford
Argentum Lodge South West Sep 2019 56
Baily House East Midland Jun 2022 66
Birchlands Yorkshire & The Humber Jun 2019 54
Corbrook Park North West Jan 2023 80
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 62
Fairview Court and House4 South West Mar 2018 73
Isle Court West Midlands Jan 2023 82
Mavern House South West Jan 2021 55
Morris Care Centre West Midlands Jan 2023 96
Oldbury Grange West Midlands Jan 2023 69
Radbrook West Midlands Jan 2023 63
Stretton Hall West Midlands Jan 2023 50
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 2023: £140.5m
(1) May 2017 unless stated.
(2) Number of registered beds.
(3) Capital improvement bed additions under development.
(4) Treated as two properties.
(5) Croftwood Care and Minster Care are both part of Minster Care Group
Limited. Melrose Holdings Limited is an affiliate of Minster Care Group
Limited.
AIFM statement
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 2023.
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 127 to 129 of the annual report.
Please refer to pages 39 to 42 of the annual report 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 2023 are shown
below:
Leverage exposure Gross method Commitment
Maximum limit 200.0% 200.0%
Actual 149.8% 151.7%
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 2023 was 27.69%.
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.
Board composition and diversity reporting in line with LR9
The tables below show the diversity of the board as at 31 December 2023
Number of
senior positions
Number of Percentage of on the board
board members the board (SID and Chair)
Men 3 60% 1
Women 2 40% 1
Number of
senior positions
Number of on the board
board members (SID and Chair)
White British or other White (including minority-white groups) 5 2
Black/African/Caribbean/Black British 0(1) 0
The data was collected by asking the directors to confirm their diversity
characteristics. The Company has no executive management and these disclosures
are therefore not applicable.
(1) This increases to one with effect from 1 April 2024.
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