REG - Target H'care REIT - Final Results
To: RNS
From: Target Healthcare REIT plc
LEI: 213800RXPY9WULUSBC04
Date: 20 October 2021
ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2021
Focus on best-in-class real estate, portfolio diversification and improving sector outlook provides platform for continued growth
Target Healthcare REIT plc (the "Company" or the "Group"), the listed specialist investor in modern, purpose-built UK care homes, is pleased to announce its results for the year ended 30 June 2021.
Asset management and yield compression driving high single digit returns and progressive dividend
· NAV total return(1) of 8.8% (2020: 7.0%), driven by growth of the underlying portfolio value as a result of modest yield compression and annual rental uplifts
· EPRA NTA per share increased 2.1% to 110.4 pence (2020: 108.1 pence)
· Group specific adjusted EPRA earnings per share increased 3.6% to 5.46 pence per share (2020: 5.27 pence), despite cautious investment activity as a result of COVID-19
· Continued progressive dividend policy, with dividends increased by 0.6% to 6.72 pence in respect of the period (2020: 6.68 pence)
· Dividends in respect of the period 80% covered by adjusted EPRA earnings, fully covered based on EPRA earnings
· Low net loan-to-value ("LTV") of 15.9% as at 30 June 2021 (average cost of drawn debt 2.9%, average term to maturity 4.8 years)
· Completion of two oversubscribed equity issuances, reflecting the Company's supportive investor base and its conviction in the asset class' fundamentals:
o A £60 million equity issuance in March 2021
o A post-period end £125 million equity issuance, as announced on 10 September 2021, with prompt deployment anticipated on assets under diligence
Focus on diversification and quality real estate underpins improving income characteristics
· Resilient portfolio performance, with 95% of rent collected
· Portfolio value increased by £67.2 million, or 10.9%, to £684.8 million, including like-for-like valuation growth of 3.8% (2020: 2.8%)
· Contractual rent increased by 5.6% to £41.2 million per annum (2020: £39.0 million), with the assets that were subject to rent review in the period delivering an average increase of 1.8%
· Acquisition commitments during the year totalling £70 million, taking the portfolio to 77 properties, consisting of 73 operational care homes and four pre-let sites
· Resident occupancy levels across the mature portfolio continue to recover from the low point in Q1 2021, with twelve-month rolling rent cover of 1.5 times at 30 June 2021.
Responsible investment with a clear purpose to improve the UK's care home real estate
· Modern, purpose-built care homes; full en suite wet-rooms account for 96% of the portfolio compared to just 28% for all UK care homes
· Compelling long-term demand supply dynamics support both investor and operator activity in the sector, with recent Government consideration of social care reform and steps towards a funding solution
· Strong alignment of ESG principles, with continued social purpose and advocacy of minimum real estate standards across the sector
o 92% of the portfolio A or B EPC rated
(1) Based on EPRA NAV movement and dividends paid
Malcolm Naish, Chairman of the Company, said:
"We are once again pleased to have achieved our key objectives: stable investment returns provided to shareholders and excellent care home real estate to our tenants and their residents. It is crucial to us that our longstanding approach is "doing the right thing" through the provision of fit-for-purpose care facilities which are also comfortable living, visiting & social spaces. Our business model, which prioritises stability of returns, and our portfolio resiliency were fundamentals which stood out strongly during a period of uncertainty. We own real estate of the highest standards and build relationships with tenants who have proven to be capable of caring for residents and operating commercially well through the most challenging of conditions.
"Our recent £125 million equity issuance, alongside additional debt capacity, allows us to add further assets to the portfolio, including our first significant portfolio of 18 assets which will deliver £9.1 million of annual rent immediately following completion of the acquisition, expected imminently.
"The Board remains confident in the Group's prospects, whilst remaining cautious and patient with respect to the portfolio returning to normalised trading levels. Our strategy and decisions will reflect our commitment to being a long-term backer of our tenants and the social care sector, doing so in a responsible and supportive manner."
All enquiries:
Kenneth MacKenzie / Gordon Bland
Target Fund Managers
Mark Young / Mark Bloomfield
Stifel Nicolaus Europe Limited
01786 845 912
020 7710 7600
Dido Laurimore / Claire Turvey / Richard Gotla
FTI Consulting
020 3727 1000
targethealthcare@fticonsulting.com
Notes to editors:
UK listed Target Healthcare REIT plc (THRL) is an externally managed Real Estate Investment Trust which provides shareholders with an attractive level of income, together with the potential for capital and income growth, from investing in a diversified portfolio of modern, purpose-built care homes.
The Group's portfolio at 30 June 2021 comprised 77 assets, 73 operational assets and four pre-let development sites, let to 28 different tenants with a total value of £684.8 million.
The Group invests in modern, purpose-built care homes that are let to high quality tenants who demonstrate strong operational capabilities and a strong care ethos. The Group builds collaborative, supportive relationships with each of its tenants as it believes working in this way helps raise standards of care and helps its tenants build sustainable businesses. In turn, that helps the Group deliver stable returns to its investors.
Chairman's Statement
We are once again pleased to have achieved our key objectives: stable investment returns provided to shareholders and excellent care home real estate to our tenants and their residents. It is crucial to us that our longstanding approach is "doing the right thing" through the provision of fit-for-purpose care facilities which are also comfortable living, visiting & social spaces.
1. Performance
Our financial performance during the year has been robust, with EPRA NTA growth of 2.1% (110.4 pence from 108.1 pence) underpinned by a portfolio which has performed resiliently - 95% of rents have been collected, with rent cover at our mature homes, a key underlying profitability metric, at 1.5 times which compares well to the 1.6 times we would expect in normal trading conditions. Our tenants have been reporting steady increases in occupancy since the sector's low point earlier this year as the COVID-19 pandemic eases somewhat.
Growth in the portfolio's valuation has exceeded that which is driven by rental uplifts, with an overall like-for-like increase of 3.8% as market pricing reacts to the portfolio's stable returns relative to other commercial property classes and demand from a number of buyers in the market. Contracted rent has increased by 5.6% to £41.2 million and adjusted EPRA earnings have increased by 11.8% to £26.0 million. This translates to dividend cover of 80% and an adjusted EPRA EPS of 5.46 pence. Under the more widely-used EPRA earnings metric the dividend was 105% covered.
The COVID-19 pandemic has had an impact on our business, however rental concessions have only been requested by a limited number of our tenants. Physical restrictions have translated to some delays in portfolio initiatives, though we are pleased with progress made more recently with acquisition and re-tenanting transactions as we build and shape a robust portfolio as a basis for long-term stable returns.
We look forward to growing earnings and dividend cover following our recent equity raise and significant pipeline of imminent acquisitions, and take pride in having delivered a NAV total return of 8.8% for the year.
2. Business model and investment case
Whilst financial performance and tenant feedback on our real estate have been satisfying, following the impact of the COVID-19 pandemic it would be inappropriate not to have reflected fully on our strategy and objectives - it is important to us that we can be a supportive partner to the social care sector now and for many years to come.
Our business model is set out in the Annual Report and, whilst we have not amended it significantly in response to COVID-19, our reflections provided three findings of note:
1. We unapologetically use en suite wet-room provision as a proxy for real estate quality. By this, we mean fully private and functional spaces for each resident's personal hygiene requirements, often with assistance. Eleven years into my involvement in the sector I still find it astonishing that 72% of care home places in the UK fail to provide this. This will continue to be a strict requirement of our responsible investment approach.
2. Sustainable rents are crucial. The social care sector needs long-term, patient capital partners who understand and support the investment and commitments made by care providers. Setting rents at appropriate levels to weather variable trading performance, whether that be local/seasonal or pandemic-type events, helps drive good behaviours and long-term thinking at care providers, and investment returns for us. We will continue to act with discipline when assessing what rent a home will support over the long-term.
3. ESG and our responsibilities to society. We take pride in having delivered a positive social impact from day one, both directly via our investment approach and via our wider advocacy of responsible investment in the sector. We will enhance our environmental sustainability efforts, firstly by more explicit incorporation into our acquisition, development and portfolio management activities, and secondly by moving towards comprehensive collection, analysis and reporting of data from our tenants on energy usage at our homes.
3. COVID-19 - outlook
We talk more about the impact and our response in the Annual Report. The most significant impact has been on our tenants in their caring for residents and their staff, and their experience of challenging trading conditions for a prolonged period as resident occupancy levels dropped and remained depressed. Our tenants have responded well, with resident care as a priority, but also commercially and operationally to protect their businesses and meet their obligations to us as long-term capital providers. We are pleased to see underlying resident occupancy levels now recovering and increased optimism from our tenants.
General staff availability, the effect of mandatory vaccinations, and local authority funding constraints will continue to challenge our tenants in the coming weeks and months, though we believe our portfolio is well-placed to manage these and it is comforting to report that COVID-19 cases across the portfolio now are very low. Vigilance will be required in respect of emerging variants, though the booster vaccination programme will benefit residents ahead of the general population. The focus in care homes is on managing the return to normalised occupancy levels safely. As restrictions ease, homes should once again experience the full vibrancy which increased socialising, activities and community interaction bring.
4. Governance
Board Succession
With the majority of the current Directors having been appointed at the Company's launch in 2013, we continue the process of refreshment started in the prior year. Subsequent to the year end, I am pleased to welcome Mr Vince Niblett to the Board. Mr Niblett has many years of financial and commercial experience and is expected to be appointed as Chair of the Audit Committee shortly, with Mr Coull assuming the role of Senior Independent Director. I would also like to take the opportunity to express the Board's gratitude for the service and expertise provided by Mr Hutchison and Professor Andrews, both of whom will retire following the conclusion of the forthcoming AGM.
Annual General Meeting ('AGM')
The AGM will be held on 14 December 2021. Shareholders are encouraged to make use of the proxy form provided in order to lodge their votes and to raise any questions or comments they may have in advance of the AGM through the Company Secretary.
5. Outlook and dividend
I stated last year that our business model, which prioritises stability of returns, and our portfolio resiliency were fundamentals which stood out strongly during a period of uncertainty. We own real estate of the highest standards and build relationships with tenants who have proven to be capable of caring for residents and operating commercially well through the most challenging of conditions. Allied with the non-cyclical, needs-based demand for places in care homes such as ours we are confident in being well-placed to continue to deliver on our objectives.
We once again are grateful for shareholder support by way of our recent £125 million equity issuance, which follows our £60 million issuance during the year. This capital, alongside additional debt capacity, allows us to add further assets to the portfolio, including our first significant portfolio of 18 assets which will deliver £9.1 million of annual rent immediately following completion of the acquisition, expected imminently.
We have carefully considered portfolio performance and trading conditions as we emerge from pandemic conditions in setting our target dividend level for the year to June 2022, and remain committed to providing a progressive dividend. As previously announced, in the absence of unforeseen circumstances, the Board intends to increase quarterly dividend levels by 0.6% to 1.69 pence per share, providing an annual dividend of 6.76 pence per share.
The Board remains confident in the Group's prospects, whilst remaining cautious and patient with respect to the portfolio returning to normalised trading levels. Our strategy and decisions will reflect our commitment to being a long-term backer of our tenants and the social care sector, doing so in a responsible and supportive manner.
Malcolm Naish Chairman
19 October 2021
Investment Manager's Report
The portfolio has outperformed the MSCI UK Annual Healthcare Property Index once again, in respect of the calendar year to 31 December 2020, with a portfolio total return of 8.2% relative to the Index's 6.8%.
Portfolio review
The portfolio has outperformed the MSCI UK Annual Healthcare Property Index once again, in respect of the calendar year to 31 December 2020, with a portfolio total return of 8.2% relative to the Index's 6.8%. The portfolio's annualised total return since launch now stands at 11.2% while the portfolio's last five-year period has an annualised total return of 10.5% relative to 8.6% for the Index.
An analysis of the investment yield progression and the risk/return based on data from MSCI, further details on which are shown in the Annual Report, both demonstrate stable returns and movements consistent with other stable and "lower risk" asset classes in UK gilts and the listed primary healthcare composite which consists primarily of GP surgery funds with almost 100% government-backed underlying income. The portfolio's EPRA topped-up NIY now stands at 5.83%, down from 6.04% in 2020, which reflects well the shift in market pricing we have seen. This valuation level also reflects the portfolio's underlying trading performance, robust rent collection and positive outlook/demand for our real estate through, and emerging from, the COVID-19 pandemic.
The portfolio's low volatility measure is a core aspect of the investment case, which anticipates stable, non-cyclical returns at a total return level which could suggest a mispricing of the asset class. Although we acknowledge this may be partially driven by the relatively low collateral in our tenants' balance sheets (as they tend to be family/owner-managed regional businesses), we believe our investment approach, skill in investment appraisal, and assembly of a diversified portfolio of scale helps in mitigation.
UK care home investment market
The market experienced a subdued 2020 due to the COVID-19 pandemic, as market participants focussed on managing their way through the crisis, protecting residents and their own personnel. Asset visits for inspections, home management meetings and general marketing were logistically difficult, and not a priority for operators regardless.
As restrictions eased later in the year we saw activity pick-up again, with pricing continuing to respond to significant investment demand in what is a competitive market for the type of assets we acquire and hold. We did not see many acquisition opportunities reflecting distressed circumstances as the sector traded robustly, and would expect sales processes for assets whose trading has been significantly affected by COVID-19 to delay until resident occupancy recovers towards normalised levels.
As well as demand from the typical domestic investors, the main change we have noted in the year has been an uptick in activity from European investors, these are generally larger and less specialist healthcare real estate investors whose home markets are saturated and lower-yielding. Their initial forays were into poorer quality real estate, by way of portfolio acquisitions in recent years, though they are currently more active in their pursuit of the real estate we have been advocating for as fit-for-purpose.
None of this is a surprise in a market where only 28% of beds meet our quality standards, and which needs substantial modernisation overall. The non-cyclical nature of returns, which are still relatively high-yielding, make the investment desirable for the income investor. Whilst we welcome new capital to support development of real estate and operator growth, we would argue that specialist knowledge and a committed long-term holder would be characteristics of the suitable investor.
Health & social care
We write at a time when our tenants report a positive outlook and underlying occupancies within the homes they run are increasing towards normalised levels as we emerge from the pandemic. We believe the combination of quality real estate, talented operators, and the demographic tailwinds supporting demand for needs-based care will see this improved trading with time. In the meantime, we note below a number of areas which are prominent in our minds and those of our tenants:
Path to occupancy recovery
Occupancy has been depressed from normal levels in the past 18 months, not necessarily through unusually high deaths, but through lack of admissions as families sought to keep their loved ones at home. Many families found more time to care due to furlough and working from home. As lockdowns dissipate and furloughs come to an end, occupancy is on the rise again, for what is a "needs-based" service. We anticipate steady increases as homes cautiously admit new residents in small numbers, ensuring people settle into their new homes with adequate staffing and care plans effected.
Sector reputation
Early on in the pandemic, care home sector reputations appeared to suffer from the perception operators were unable to adequately protect those in their care, despite the strength of pre-existing infection control protocols which we are now all familiar with applying. More recently that perception has shifted somewhat, as evidence emerged of unreasonable pressure put on operators by the volume of hospital discharge patients into homes with undue haste and lack of robust testing protocols. We pause at this point to pay tribute to those staff who worked through these outbreaks, and the care they provided, and would endorse a positive view of the people in the sector.
Staffing pressures
We see evidence of staffing shortages affecting our sector similar to leisure, hospitality and some logistics businesses. The majority of our tenants feel this will be manageable and are enhancing their recruitment and HR functions in response, as well as taking advantage of some flexibility in immigration allowances to find suitably skilled individuals. Good staffing management is crucial to good care provision, and as the largest single item on a care provider's expense line, is directly core to profitability. Regardless of our tenants' ability to manage this well, we do foresee wage cost inflation in response to these supply-side challenges. We anticipate our tenants will effectively manage these through fee increases, principally through privately-funded residents.
Residual COVID-19 considerations
Mandatory vaccinations for social care staff is a point of discussion currently. Many of our larger tenants are reporting staff vaccination rates at 95% plus, and are not unduly concerned, though find it to be a frustration that other healthcare sectors' staff do not have the same restrictions. We will all be alert to the possibility of new variants and waning immunity with time, though this sector will likely have the advantage of priority access to booster vaccinations and any necessary supplemental vaccination rollouts.
Government policy (support and onwards)
Government minds have once again been concentrated on social care reform and a funding solution. Deadlines for a comprehensive solution via a detailed White Paper have slipped, having been replaced with some interim measures. These measures, whilst bordering on being a weak positive for the sector overall in recognising and delivering some funding, are statistically insignificant given (a) the overall size of the funding need and (b) being unclear on the efficiency of directing funding to the care providers.
Government financial support through the pandemic was, however, well targeted and well-received, with England's Infection Control Fund (similar in other UK nations) covering some of the costs of staff overtime, additional equipment and supplies, as well as the management burden of the testing regime.
Summary
At the height of the pandemic, there were calls to review the use of care homes as a future resource for our ageing elders. We in the social care sector and wider healthcare environment know that to be naïve; care homes will always be required as part of the mix of resources in this rapidly ageing society, but quality of facility must improve, and we are pleased to be at the forefront of that provision.
Target Fund Managers Limited
19 October 2021
Our Strategy
Our purpose to improve the standard of living for older people in the UK is achieved through our four strategic pillars.
Strategic pillar #1
To grow a robust portfolio
We are creating a portfolio of scale with a clear focus on the quality of real estate and diversification of income sources to provide a stable long-term platform for returns.
Acquisitions and developments
£70 million of investment, inclusive of costs, has been committed to five new assets during the year, growing the portfolio to 77 assets, inclusive of 73 operational care homes and four development sites, the latter being underpinned by fixed-price or capped development agreements and which are pre-let on long (30 years plus) FRI leases to trusted operating partners.
These investment commitments made during the year along with the acquisition of a further three assets completed post-period end have fully committed the capital raised in the March 2021 equity issuance.
One of the Group's existing development sites reached practical completion early in the year with that brand new care home in Burscough welcoming residents in July 2020. A further two development sites have reached practical completion since the period end, with the three homes together providing a combined total of 214 new beds to their local markets, all benefiting from en suite wet rooms within modern, fit-for-purpose homes.
Real estate standards: commitment to responsible investing
We have a clear vision on what makes care home real estate fit-for-purpose, with the principal objective that residents can live with choice, dignity and privacy in a comfortable and pleasant environment. We also want intelligent layouts and facilities for our tenants to efficiently deliver their services. We require our homes to include generous bedrooms, spacious communal areas and en suite wetroom facilities that are vital for both dignity during care and for infection control within a home. 96% of the 5,351 beds in the portfolio are equipped with en suite wet rooms while 100% have en suites. We are committed to upgrading the remaining beds in the portfolio that do not meet this minimum requirement as identified during diligence on these acquisitions.
The national comparator on en suite wet rooms has grown to be 28% currently from only 17% in 2017, driven both by the provision of new homes and the exit of many non-compliant older homes from the market.
Diversification
Diversification continues to be a focus for the Group in order to manage portfolio risk with the metrics remaining broadly unchanged from 2020 other than the positive addition of two (net) new tenants bringing the total to 28. The largest tenant is unchanged from 2020 being Ideal Carehomes, accounting for 13.1 per cent of the Group's contractual rent.
Sources of resident fees, the underlying income received by our tenants, continue to originate from both public and private sources, with a deliberate bias towards the latter in our portfolio assembly. Census data collected during the period notes that 44 per cent of the portfolio's underlying residents are funded exclusively from private sources, 18 per cent by a mix of private and public funding, where "top-up" payments are made by Local Authorities, and 38 per cent are funded from public sources.
Geographically, the largest region by asset value remains Yorkshire & the Humber, with 20 per cent. The Group's portfolio contains homes from all regions of the UK and the Investment Manager continues to explore opportunities for acquisitions that will further enhance the existing geographic diversification.
Strategic pillar #2
Sustainable returns from a portfolio management approach with valued relationships as its core
The Investment Manager has deep experience within the sector and uses that specialism to engage effectively with our tenants, understanding the complexities inherent in the sector.
Engaged
The Investment Manager has continued to support the Group's growing base of 28 tenants while the importance of selecting operators demonstrating high levels of care ethos and expertise has been reaffirmed throughout the pandemic. We once again pay tribute to the carers, staff and management who have performed admirably throughout the challenges that the care sector has faced over the last year. As a highly engaged landlord, the Group through its Investment Manager will continue to liaise closely with its tenants to ensure that the Group's income is protected through sustainable rental levels and that we remain supportive of operators that seek to raise the overall standard of care.
As part of our ongoing desire to be an effective and engaged landlord, we invited our tenants to participate in a survey to evaluate their satisfaction with our engagement. The results from this survey were very encouraging:
· 100% of responders agreed that working with us is a positive experience and that we actively listen, taking time to understand their business, proactively resolving questions and issues.
· 82% also agreed that we demonstrate our commitment to investing in homes that provide the best environments for residents and their care providers.
We look forward to enhancing this survey in future years to supplement our ongoing discussions with our tenants and addressing any concerns or suggested improvements forthcoming.
As part of our ongoing data gathering and support of our tenants during the year we:
· Collected and analysed monthly management information for each home.
· Visited (either virtually or physically) each home in the portfolio.
· Had >1,000 calls/interactions with our operators at all levels of management.
While these calls were often emotional during lockdown as a number of homes experienced difficulties through COVID-19 outbreaks, the dedication and diligence of the care staff across the portfolio was demonstrated repeatedly while their appreciation for our engagement was also noted.
Performance
The Group's key metrics have performed positively. The portfolio total return has again outperformed the MSCI UK Annual Healthcare Property Index, with a total return for the calendar year to December 2020 of 8.2 per cent relative to the Index's 6.8 per cent.
The portfolio has outperformed the Index each year since launch, as shown in the table below.
Portfolio total return (%)
MSCI Index total return (%)
Year to 31 December 2015
14.5
10.3
Year to 31 December 2016
10.6
7.9
Year to 31 December 2017
11.9
11.7
Year to 31 December 2018
12.7
9.1
Year to 31 December 2019
9.2
7.4
Year to 31 December 2020
8.2
6.8
Valuation growth on a like-for-like basis was 3.8 per cent and a substantial driver to overall growth in the portfolio value of 10.9 per cent during the year. The remainder was driven by acquisitions and developments at 4.0 per cent (net of disposals) and 3.1 per cent respectively. Contractual rent increased by 5.6 per cent over the period with new acquisitions, net of disposals, contributing 3.8 per cent and the completion of developments contributing 1.8 per cent. The annual uplifts from rent-reviews in the year of 1.8% were netted off by rental reallocations and adjustments made as a result of asset management initiatives.
Rental collection has continued its robust performance throughout the pandemic, at 95% for the year. This strong performance in a challenging context demonstrates the portfolio's resiliency with its sustainable rent levels and diversified tenant base, further supported by portfolio rent cover of 1.5x. This metric reflects the underlying profitability at the homes, over a period substantially affected by depressed occupancy levels as a result of COVID-19. Sustainable rent levels; commercially astute trading by our tenants; and some government support have each contributed. The portfolio has retained a level of rent cover (1.2x) if non-recurring government contributions are excluded. Recovery in occupancy levels, as reported by our tenants as COVID-19 restrictions ease, provides a platform for the portfolio to return to normalised trading conditions which we anticipate will translate to steady growth to stable rent cover levels at or above 1.6x in time.
Current COVID-19 prevalence across the portfolio is very low, however the Investment Manager continues to collect case numbers from the Group's operators and will monitor this closely.
Portfolio Management
The Investment Manager has been closely monitoring a small number of tenants and completed some initiatives to further improve rent collection and portfolio resiliency going forward. A tenant operating two of the Group's homes had been a contributor to rental arrears for some time as they experienced financial distress and went through a restructuring of their business. The Group has resolved its position with this tenant, reaching an agreement for partial settlement of outstanding rent and a consensual re-tenanting of both homes. The re-tenanting of one of these homes was completed during the year to a family-owned operator providing an immediate valuation and net income uplift. The re-tenanting of the second home is expected to complete imminently with revised rental terms and a lengthened lease duration.
A further re-tenanting was completed during the year from a large national operator to a family-owned operator on a lengthened lease term with a substantial transfer payment received from the outgoing tenant which will fund capital expenditure on the home along with the rental incentives provided to the new tenant. The impact on residents and staff was minimised during this transition.
The Investment Manager's experience and sector expertise has been apparent in a conviction to support the Group's other tenant who has been a significant contributor to rent arrears. That tenant's two high-end, immature homes are now trading well, with strong occupancy levels and growing rent covers, with full value recovery to investment case levels anticipated.
The combination of decisive re-tenanting action when required alongside patience and support when justified for the right operators reflect our approach to achieving shareholder returns in a responsible manner.
Strategic pillar #3
Regular dividends for shareholders
Total dividends of 6.72 pence per share were declared and paid in respect of the year to 30 June 2021, an increase of 0.6 per cent on 2020, and reflecting a yield of 5.8 per cent based on the 30 June 2021 closing share price of 115.4 pence.
Earnings & dividend
Adjusted EPRA earnings per share, used by management as a key metric in assessing operational performance, increased to 5.46 pence for the year. Dividend cover using the adjusted earnings measure also increased, to 80% for the year. Applying the more widely used comparative of EPRA earnings, the dividend was fully covered at 105%.
The Group anticipates achieving a covered dividend when fully invested at an appropriate gearing level. The significant share issuance subsequent to year-end is intended to fund a substantial pipeline of imminent acquisitions, the majority of which are fully income generating immediately on completion. The Group's current scale, patiently earned through modest fund raises to date, its track record as a reliable counterparty and its flexible debt arrangements, provide the platform to grow the portfolio and earnings whilst minimising the cash drag effect of undeployed capital on dividend cover.
For the year under review, cash drag has impacted earnings and dividend cover as acquisitions were slowed due to COVID-19 initially. The oversubscribed equity issuance of £60 million in March 2021 has been deployed during the final quarter and subsequent to the year-end, with earnings now accruing on this capital. Admin expenses of £11.1 million (2020: £9.5 million) includes £2.7 million of provisions for doubtful rental income, also adversely impacting reported dividend cover. The Investment Manager has implemented a number of asset management initiatives during the year and the Group is confident of successful solutions being reached on the other homes contributing to arrears which have shown much improved performance in recent months. The quality of the real estate available and supportive local demographics for these homes reaffirms the Group's view that we expect to see positive developments in these homes in the coming weeks and months.
As previously announced, and reflecting a cautiously optimistic outlook for the portfolio, in the absence of unforeseen circumstances the Board intends to increase quarterly dividend levels by 0.6% to 1.69 pence per share, providing an annual dividend of 6.76 pence per share.
2021
£m
Movement
2020
£m
Rental income (excluding guaranteed uplifts)
41.2
+14%
36.0
Admin expenses (including management fee)
(11.1)
+17%
(9.5)
Net financing costs
(4.8)
+12%
(4.3)
Interest from development funding
0.6
-40%
1.0
Adjusted EPRA earnings
26.0
+12%
23.2
Adjusted EPRA EPS (pence)
5.46
+3.6%
5.27
EPRA EPS (pence)
7.16
+3.5%
6.92
Adjusted EPRA cost ratio
26.6%
+90bps
25.7%
EPRA cost ratio
22.3%
+80bps
21.5%
Ongoing charges figure
1.55%
+4bps
1.51%
Total Returns
The Group targets modest capital growth as well as its income priority, with a belief that a quality portfolio of modern care home real estate is likely to be in demand. Despite the difficult trading conditions across the portfolio from COVID-19, and depressed occupancy levels from slower admissions, the portfolio has continued to perform, with robust rent collection, and has a positive outlook. Being one of the first investment asset classes to fully benefit from the COVID-19 vaccination programme has helped stimulate the anticipated return towards normalised trading.
This robust and sustainable performance, the completion of some portfolio initiatives, and the investment demand for the stable, non-cyclical returns from a diversified portfolio of quality assets, has seen asset value appreciation. EPRA NTA has grown 2.1 per cent to 110.4 pence per share from 108.1 pence per share, NAV total return for the year has been 8.8 per cent, and annualised NAV total return over the period since the Group's launch in March 2013 has been 7.8 per cent. The portfolio's EPRA topped-up NIY has tightened to 5.83 per cent from 6.04 per cent.
EPRA NTA per share
EPRA NTA per share has increased to 110.4 pence, primarily driven by an increase in property valuations.
Pence per share
EPRA NTA per share as at 30 June 2020
108.1
Acquisition costs
(0.5)
Property revaluations
4.2
Adjusted EPRA earnings
5.4
Dividends paid
(6.6)
Loan repayment costs
(0.2)
Equity issuance
-
EPRA NTA per share as at 30 June 2021
110.4
Efficient capital structure
In November 2020, the Group entered into agreements with two of its existing lenders (RBS and HSBC) in order to extend the terms and increase its facilities with each. These revised arrangements increased available facilities to £220 million from £180 million while maintaining the weighted average cost of debt and extending the weighted average term to maturity. At 30 June 2021, these metrics were 2.9% (2020: 2.9%) and 4.8 years respectively (2020: 4.2 years).
The Group was also the first real estate client of each of these lenders to transition its facilities to a SONIA interest basis from LIBOR, with the latter due to be phased-out by June 2023.
The Group retains flexibility through its debt-mix with £140 million of the £220 million being fully revolving facilities and continues to focus on achieving competitively-priced debt at appropriate durations.
Subsequent to the year-end the Group has agreed heads of terms for an additional £100 million of long-term facilities with an existing lender which are intended to complement the equity issuance to efficiently fund the significant pipeline. Diligence procedures and legal documentation are currently being completed on this anticipated facility increase.
Strategic pillar #4
To achieve our social purpose
Pillar
What this means for Target
What we did in 2021
What we'll do in 2022 and beyond
1. Responsible investment
As an investor we understand that our actions have influence. We use our platform to lead by example through embedding appropriate ESG considerations into our decision-making.
Leading in social impact for care home real estate
- We understand the importance of maintaining a portfolio that supports the needs of tenants and residents, which in turn contributes to the long-term sustainability of social care infrastructure in the UK.
Energy and climate change: Responsible acquisitions & portfolio management
- Energy efficiency is a specific consideration in our investment analysis for acquisitions, developments and portfolio management decisions.
- In our role as a responsible landlord we are committed to helping our tenants identify and implement energy reduction and efficiency measures.
Social
- 5 homes acquired, 344 resident spaces
- Development commitments for 272 new beds as at year-end
- 96% wet-rooms
- Homes provide space of 47m2 per resident
- All real estate has generous social and outdoor space
Energy
- 100% A-C EPC ratings
- Introduced energy efficiency consideration into policies
- Instructed BREEAM-in use assessment for a representative sample of portfolio
- "Green" provision on energy usage reporting introduced into our standard lease
- Target Fund Managers supports the Edinburgh Science Climate and Sustainability programme and became a founding pledger of its Mission Net Zero project in 2021
Social
- Continue to advocate for quality real estate
- Monitor new ideas (architecture, dementia friendly design, energy)
- Monitor design and innovation response to COVID-19
Energy
- Balanced assessment of data &
recommendations obtained from BREEAM reports
- Increase proportion of leases with "green" reporting provisions to gather more data on energy consumption patterns from our tenants for use in decision-making
- Manager to use toolkit and resources to progress its net zero journey
2. Responsible partnerships
We engage with all our stakeholders to drive the creation of economic, social and environmental value around our buildings and in wider society.
Tenant selection, engagement & collaboration
- As a responsible, proactive landlord we prioritise good, open relationships with our tenants.
- We make sure that we solicit, assess and respond to feedback on our portfolio and our behaviours to ensure carers and residents can be respected and cared for with dignity.
- We only select tenants who share our care ethos and can deliver operationally.
Communities and society
- We fully appreciate the vital role that care homes play in every community, and take decisions in the best interest of maintaining continuity of care for residents.
- Advocate for and support the sector.
Tenants
- 10/10 "positive experience" satisfaction score
- Committed engagement with our tenants to consider and consent to real estate alterations in response to COVID-19 challenge
Communities
- Re-tenanted two homes with new tenants committed to continuing care provision
Tenants
- Focus on supporting our tenants with COVID-19 recovery, considering further real estate design enhancements in response
- Invest in fully understanding and responding to lower-scoring areas from tenant survey
Communities
- Complete re-tenanting initiatives identified which will benefit long-term care continuity
- Continue to facilitate tenant interaction and learning sessions as COVID-19 restrictions ease
3. Responsible business
We will treat all stakeholders with respect and deal fairly in a manner consistent with how we would expect to be treated ourselves.
Governance & transparency
- We uphold the highest ethical standards and adhere to best practice in every aspect of our business.
- Our governance and behaviour treat transparency for all of our stakeholders as core.
People, culture and wellbeing
- We encourage employment practices across our key service providers that reflect our core values, with a focus on wellbeing, fairness and opportunity for all.
Governance & transparency
- Undertook director recruitment process resulting in Mr Niblett being appointed post year end
- Investment Manager successfully applied to become signatory to the FRC Stewardship Code
- £3 million taxation directly paid to the UK government by way of VAT and stamp duty land taxes. Dividends paid of £32 million are assessed for tax upon reaching shareholders
Governance & transparency
- To prepare and publish enhanced reporting suite, inclusive of:
· GRESB reporting following data collection process
· Comprehensive sustainability reporting, inclusive of EPRA measures
Promoting the success of Target Healthcare REIT plc
The Board considers that it has made decisions during the year which will promote the success of the Group for the benefit of its members as a whole.
This section, which serves as the Company's section 172 statement, explains how the Directors have had regard to the matters set out in section 172(a)-(f) of the Companies Act 2006 for the financial year to 30 June 2021, taking into account the likely long-term consequences of decisions and the need to foster relationships with all stakeholders in accordance with the AIC Code.
a) The likely consequences of any decision in the long term
Our investment approach is long-term with an average lease length of 28.8 years. We believe this is the most responsible approach to provide stability and sustainability to tenants and key stakeholders. Therefore, most decisions require consideration of long-term consequences, from determining a sustainable rent level and the right tenant partner for each investment, to considering the impact of debt and key contracts with service providers on the recurring earnings which support dividends to shareholders.
b) The interests of the Company's employees
The Company is externally managed and therefore has no employees.
c) The need to foster the Company's business relationships with
suppliers, customers and others
As a REIT with no employees, the Board works in close partnership with the Manager, which runs the Group's operations and portfolio within parameters set by the Board and subject to appropriate oversight. The Manager has deep relationships with tenants, the wider care home sector, and many of the Group's other suppliers. These are set out in more detail in the following table.
d) The impact of the Company's operations on the community and
the environment
The Board is confident the Group's approach to investing in a sensitive sector is responsible with regard to social and environmental impact. This is set out in more detail in the community and the environment section of the following table.
e) The desirability of the Company maintaining a reputation for high standards of business conduct, and
The Board requires high standards of itself, service providers and stakeholders. The Group's purpose and investment objectives dictate that these standards are met in order to retain credibility. The ethos and tone is set by the Board and the Manager.
f) The need to act fairly as between members of the Company
The Board encourages an active dialogue with shareholders to ensure effective communication, either directly or via its broker and/or Manager. The interests of all shareholders are considered when issuing new shares.
The significant transactions where the interests of stakeholders were actively considered by the Board during the year were:
Dividends paid
The Board recognised the importance of dividends to its shareholders and, after careful analysis of the Group's forecast cash position and expected rental collection, concluded that continuing dividend payments at the level announced in the Annual Report 2020 remained in the interests of all stakeholders. With rental collection remaining robust, the Company recently announced an increase in the expected dividend level, barring unforeseen circumstances, for the year ending 30 June 2022.
Ongoing investment and asset management activity
Following a short hiatus towards the end of the previous financial year, the Group recommenced its investment activity in July 2020. Progress was made in resolving a position with a distressed tenant with a settlement agreed, a re-tenanting completed, and limited rent concessions were granted, ensuring on each occasion that the transactions agreed appropriately balanced the interest of shareholders, tenants (both incoming and outgoing) and the underlying residents of the relevant care homes.
Capital financing
During the year, the Group refinanced its loan facilities with the Royal Bank of Scotland and HSBC Bank, extending the term and increasing the quantum of each on terms that are expected to be beneficial to significant stakeholders over the duration of the facilities. The Company also issued £60 million of ordinary shares, at a premium to NAV, in March 2021 and a further £125 million post year end. The equity raised was used to temporarily repay some of the Group's loan facilities whilst it awaited investment.
Appointment of a Director
Subsequent to the year end, as part of the Board succession plan, Mr Niblett was appointed as a Director. Mr Niblett's significant financial experience and expertise is expected to benefit all stakeholders over the period of his appointment.
Stakeholders
The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are shareholders, tenants and their underlying residents, debt providers, the Investment Manager, other service providers and the community and the environment. The Board considers the long-term consequences of its decisions on its stakeholders to ensure the long-term sustainability of the Company.
Shareholders
Shareholders are key stakeholders and the Board proactively seeks the views of its shareholders and places great importance on communication with them.
The Board reviews the detail of significant shareholders and recent movements at each Board Meeting and receives regular reports from the Investment Manager and Broker on the views of shareholders, and prospective shareholders, as well as updates on general market trends and expectations. The Chairman and other Directors make themselves available to meet shareholders when required to discuss the Group's business and address shareholder queries. Whilst government guidelines prevented the holding of a physical AGM during the year, provisions were made for any questions to be raised with the Board by email in advance of the meeting.
The Company and Investment Manager also provides regular updates to shareholders and the market through the Annual Report, Interim Report, regular RNS announcements (including the quarterly NAV), quarterly investor reports and the Company's website. The Investment Manager will also meet with analysts and members of the financial press.
Tenants and underlying residents
As set out in more detail in the 'Our Strategy' section above, the Investment Manager liaises closely with tenants to understand their needs, and those of their underlying residents, through visits to properties and regular communication with both care home personnel and senior management of the tenant operators. The effectiveness of this engagement is assessed through an annual survey.
The Investment Manager also receives, and analyses, management information provided by each tenant at least quarterly and regularly monitors the CQC, or equivalent, rating for each home and any online reviews. Any significant matters are discussed with the tenant and included within the Board reporting.
Debt providers
The Group has term loan and revolving credit facilities with the Royal Bank of Scotland plc, HSBC Bank plc and ReAssure Limited (see note 8 to the extract from the Consolidated Financial Statements for more information). The Company maintains a positive working relationship with each of its lenders and provides regular updates, at least quarterly, on portfolio activity and compliance with its loan covenants in relation to each loan facility.
Investment Manager
The Investment Manager has responsibility for the day-to-day management of the Group pursuant to the Investment Management Agreement. The Board, and its committees, are in regular communication with the Investment Manager and receive formal presentations at every Board Meeting to aid its oversight of the Group's activities and the formulation of its ongoing strategy.
The Board, through the Management Engagement Committee, formally reviews the performance of the Investment Manager, the terms of its appointment and the quality of the other services provided at least annually. Further details on this process and the conclusions reached in relation to the year ended 30 June 2021 are contained in the Annual Report.
Other service providers
The Board, through the Management Engagement Committee, formally reviews the performance of each of its significant service providers at least annually. The reviews will include the Company's legal advisers, brokers, tax advisers, auditors, depositary, valuers, company secretary, insurance broker, surveyors and registrar. The purpose of the review is to ensure that the quality of the service provided remains of the standard expected by the Board and that overall costs and other contractual arrangements remain in the interests of the Group and other significant stakeholders. The Investment Manager also reports regularly to the Board on these relationships.
The significant other service providers, particularly the Group's legal advisers and brokers, will be invited to attend Board Meetings and report directly to the Directors where appropriate.
Community and the environment
The Group's principal non-financial objective is to generate a positive social impact for the end-users of its real estate. Investment decisions are made based on the fundamental premise that the real estate is suitable for its residents, the staff who care for them, and their friends, families and local communities, both on original acquisition and for the long-term.
Environmental considerations are an integral part of the acquisition and portfolio management process, given the strategy of only acquiring modern buildings which benchmark well from an energy efficiency aspect. The Group's ESG strategy is currently prioritising the gathering of useful energy/consumption data on our portfolio which will be used to align the portfolio appropriately with benchmarks over the medium and longer term.
Principal and emerging risks and uncertainties
Risks
Description of risk and factors
affecting risk rating
Mitigation
Poor performance of assets
Risk rating & change: High (unchanged)
There is a risk that a tenant's business could become unsustainable if it fails to trade successfully and sustain a sufficient rent cover. This could lead to a loss of income for the Group and an adverse impact on the Group's results and shareholder returns. The strategy of investing in new purpose-built care homes could lead to additional fill-up risk and there may be a limited amount of time that small regional operators can fund start-up losses. There is also a risk that the effects of COVID-19 may lead to longer fill times before a home becomes mature.
Tenant diversification across the Group's portfolio is an important criteria taken into consideration before any investment transaction. Investment decisions are made with reference to the Investment Manager's analysis and projections, based on the local market dynamics for the home, and the Investment Manager focuses on ensuring that rents are set at sustainable levels. Rent deposits or other guarantees are sought, where appropriate, to provide additional security for the Group. As at 30 June 2021, the Group had a diversified portfolio consisting of 28 tenants. The Investment Manager has ongoing engagement with the Group's tenants to proactively assist and monitor performance.
Pandemic reduces demand for care home beds
Risk rating & change:
High (unchanged)
As a result of the COVID-19 pandemic, there is a risk that overall demand for care home beds is reduced causing asset performance to fall below expectations. While demographic shifts and the realities of needs-based demand remain intact, and the rollout of the vaccination programme has been a positive development, occupancy levels have fallen across the sector and the speed of recovery may depend on the prevalence of COVID-19 in the UK generally, increased levels of resident admissions by tenants, the availability of booster vaccines and the efficacy of existing vaccines.
The Group is committed to investing in high quality real estate with high quality operators. These assets are expected to experience demand ahead of the sector average while in the wider market a large number of care homes without fit-for-purpose facilities are expected to close. Our tenants are well-versed in best practice for responding to infection control and the wider pandemic while the Investment Manager has been actively engaged with the tenants in the portfolio during the outbreak and continues to maintain good lines of communication.
Availability
of capital
Risk rating & change:
Medium (unchanged)
Without access to equity or debt capital, the Group may be unable to grow through acquisition of attractive investment opportunities. This is likely to be driven by both investor demand and lender appetite which will reflect Group performance, competitor performance, general market conditions and the relative attractiveness of investment in UK healthcare property.
The Group maintains regular communication with investors and existing debt providers, and, with the assistance of its broker and sponsor, regularly monitors the Group's capital requirements and investment pipeline alongside opportunities to raise both equity and debt. During the year, the Group has extended the weighted average term of its debt facilities (30 June 2021: 4.8 years).
Breach of REIT regulations
Risk rating & change:
Medium (unchanged)
A breach of REIT regulations, primarily in relation to making the necessary level of distributions, may result in loss of tax advantages derived from the Group's REIT status. The Group remains fully compliant with the REIT regulations and is fully domiciled in the UK.
The Group's activities, including the level of distributions, are monitored to ensure all conditions are adhered to. The REIT rules are considered during investment appraisal and transactions structured to ensure conditions are met.
Changes in government policies
Risk rating & change:
Medium (unchanged)
Changes in government policies, including those affecting local authority funding of elderly care, may render the Group's strategy inappropriate. Secure income and property valuations will be at risk if tenant finances suffer from policy changes. Whilst the care sector is facing significant challenges and reform has been mooted by successive governments, including the recent introduction of the health and social care levy, a white paper containing full detail is still awaited.
Government policy is monitored by the Group to increase the ability to anticipate changes. The Group's tenants also typically have a multiplicity of income sources, with their business models dependent on government funding.
Debt covenant compliance /adverse interest rate fluctuations
Risk rating & change:
Medium (increased)
Falls in property valuations could adversely affect the Group's borrowing capacity which is primarily linked to the value of its properties. Property valuations are inherently subjective and can fluctuate dependent on market conditions. Similarly, a large increase in market interest rates would be detrimental to overall returns and may limit borrowing capacity.
The Group has a conservative gearing strategy although net gearing is anticipated to increase from its level of 15.9% at 30 June 2021 as the Group nears full investment. Loan covenants and liquidity levels are closely monitored for compliance and headroom is projected.
The Group has fixed interest costs on its £80 million of fixed term borrowings as at 30 June 2021.
Reliance on third party service providers
Risk rating & change:
Medium (unchanged)
The Group is externally managed and, as such, relies on a number of service providers. Poor quality service from providers such as the Investment Manager, company secretary, broker, legal advisers or depositary could have potentially negative impacts on the Group's investment performance, legal obligations and compliance as well as shareholder relations.
The Investment Manager, along with all other service providers, is subject to regular performance appraisal by the Board. The Manager has retained key personnel since the Group's IPO and has successfully hired further skilled individuals and invested in its systems. The sustained number of years of service from both the Investment Manager and other key providers further mitigates this risk.
Reduced availability of carers, nurses and other care home staff
Risk rating & change:
Medium (new and emerging)
The combined impacts of the pandemic and Brexit has reduced the availability of key staff in the care sector which may result in a reduction in the quality of care for underlying residents, restrict tenants from being able to admit residents or result in wage inflation. Mandatory vaccination for care home staff and an expected recovery in other sectors, such as retail or hospitality, that may draw further staff from the care sector introduces further uncertainties.
The Group is committed to investing in high quality real estate with high quality operators and these should be better placed to attract staff.
The Investment Manager continues to engage with tenants in the portfolio and to share examples of best practice in recruitment and retention of staff.
Failure to differentiate qualities from competitors & to communicate ESG strategy
Risk rating & change:
Medium (unchanged)
Failing to differentiate strategy and qualities from competitors is a significant risk for the business with increased competition in the healthcare real estate sector. The failure to communicate effectively the ESG and sustainable impact qualities of the Group to investors and other stakeholders could have a negative impact on future demand for equity raises and wider reputational damage as investor groups demand greater participation in sustainability pledges/disclosures.
The stakeholder communications strategy of the Group has always been to highlight the quality of the real estate in which the Group invests and the ESG KPIs continue to be developed and improved. The regular production of investor relations materials (annual and interim reports, investor presentations and quarterly factsheets) along with direct engagement with investors has helped to mitigate this risk.
Risk to business continuity from IT downtime/ loss of data
Risk rating & change:
Medium (decreased)
The loss of confidential information through a breach of the Manager's IT systems could have a significant detrimental effect on the business activities of the Group as well as the potential for financial loss from fraud, breach of GDPR legislation and reputational damage to the Group. As some business activities are now being carried out virtually, there is an increased reliance on the IT systems and the control environment surrounding them.
The Investment Manager has IT policies and associated cyber-insurance which mitigate the potential for loss of data while key data is also held with other service providers (solicitors, registrars and depositary). The Group's control environment is also assessed annually by a third party who report to the Board.
Malcolm Naish
Chairman
19 October 2021
Viability Statement
The AIC Code requires the Board to assess the Group's prospects, including a robust assessment of the emerging and principal risks facing the Group including those that would threaten its business model, future performance, solvency or liquidity. This assessment is undertaken with the aim of stating that the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities as they fall due over the period of their assessment.
The Board has conducted this review over a five-year time horizon, which is a period thought to be appropriate for a company investing in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial model covering a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can be forecast with a reasonable degree of accuracy. The Group has a property portfolio at 30 June 2021 which has long leases and a weighted average unexpired lease term of 28.8 years. The Group has borrowings of £130.0 million, on which the interest rate has been fixed, either directly or through the use of interest rate swaps, on £80.0 million at 2.98 per cent per annum (excluding the amortisation of arrangement costs), and the remaining £50.0 million carries interest at SONIA plus a weighted margin of 2.17 per cent per annum (excluding the amortisation of arrangement costs). The Group has access to a further £90.0 million of available debt under committed loan facilities.
The Group's committed loan facilities have staggered expiry dates with £100.0 million being committed to 5 November 2023, £70.0 million to 5 November 2025 and £50.0 million to 12 January 2032. Discussions with existing and/or new potential lenders do not indicate any issues with re-financing and/or increasing the quantum of these loans on acceptable terms in due course.
The Directors' assessment of the Group's principal risks are highlighted above. The most significant risks identified as relevant to the viability statement were those relating to:
· Poor performance of assets. The risk that a tenant is unable to sustain a sufficient rental cover, leading to a loss of rental income for the Group;
· Pandemic reduces demand for care home beds. The risk that overall demand for care home beds is reduced resulting in a decline in the capital and/or income return from the property portfolio;
· Reduced availability of care home staff. The risk that unavailability of staff restricts the ability of tenants to admit residents or results in significant wage cost inflation, impacting on the tenant's rental cover and leading to a loss of rental income for the Group; and
· Debt finance. The risk that falls in property valuations or rental income from the portfolio reduce the Group's borrowing capacity, or that an increase in interest rates reduces net returns.
In assessing the Group's viability, the Board has considered the key outputs from a detailed model of the Group's expected cashflows over the coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on rental receipts from the Group's tenants. The stressed level of default from the Group's tenants assumed in the financial modelling was based on a detailed assessment of the financial position of each individual tenant or tenant group, the structure in place to secure rental income (such as the strength of tenants' balance sheets, rental guarantees in place or rental deposits held) and included consideration of the financial impact on each tenant from the COVID-19 pandemic.
Based on the results of the scenario analysis outlined above, the Board has 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 of its assessment.
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2021
Year ended 30 June 2021
Year ended 30 June 2020
Revenue
Capital
Total
Revenue
Capital
Total
Notes
£'000
£'000
£'000
£'000
£'000
£'000
Revenue
Rental income
41,168
8,739
49,907
36,025
8,219
44,244
Other income
73
-
73
23
-
23
Total revenue
41,241
8,739
49,980
36,048
8,219
44,267
Gains on revaluation of investment properties
5
-
9,536
9,536
-
198
198
Gains on investment properties realised
5
-
1,306
1,306
-
642
642
(Losses)/ gains on revaluation of properties held for sale
6
-
(92)
(92)
-
1,505
1,505
Total income
41,241
19,489
60,730
36,048
10,564
46,612
Expenditure
Investment management fee
2
(5,796)
-
(5,796)
(5,264)
-
(5,264)
Credit loss allowance and bad debts
3
(2,717)
-
(2,717)
(2,171)
-
(2,171)
Other expenses
3
(2,617)
-
(2,617)
(2,090)
(47)
(2,137)
Total expenditure
(11,130)
-
(11,130)
(9,525)
(47)
(9,572)
Profit before finance costs and taxation
30,111
19,489
49,600
26,523
10,517
37,040
Net finance costs
Interest receivable
39
-
39
111
-
111
Interest payable and similar charges
(4,850)
(913)
(5,763)
(4,388)
(1,144)
(5,532)
Profit before taxation
25,300
18,576
43,876
22,246
9,373
31,619
Taxation
8
-
8
3
-
3
Profit for the year
25,308
18,576
43,884
22,249
9,373
31,622
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate swaps
-
298
298
-
(232)
(232)
Reclassification to profit and loss on
discontinuation of interest rate swaps
-
180
180
-
712
712
Total comprehensive income for the year
25,308
19,054
44,362
22,249
9,853
32,102
Earnings per share (pence)
4
5.32
3.91
9.23
5.05
2.13
7.18
The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement are derived from continuing operations.
No operations were discontinued in the year.
Consolidated Statement of Financial Position (audited)
As at 30 June 2021
As at
30 June 2021
As at
30 June 2020
Notes
£'000
£'000
Non-current assets
Investment properties
5
629,606
570,086
Trade and other receivables
54,580
46,044
Interest rate swaps
251
-
684,437
616,130
Current assets
Trade and other receivables
5,531
3,702
Cash and cash equivalents
21,106
36,440
26,637
40,142
Properties held for sale
6
7,320
7,500
33,957
47,642
Total assets
718,394
663,772
Non-current liabilities
Bank loans
8
(127,904)
(150,135)
Interest rate swaps
-
(227)
Trade and other payables
(6,840)
(6,183)
(134,744)
(156,545)
Current liabilities
Trade and other payables
(18,465)
(13,114)
Total liabilities
(153,209)
(169,659)
Net assets
565,185
494,113
Stated capital and reserves
Share capital
9
5,115
4,575
Share premium
9
135,228
77,452
Merger reserve
47,751
47,751
Distributable reserve
265,164
296,770
Hedging reserve
251
(227)
Capital reserve
64,112
45,536
Revenue reserve
47,564
22,256
Equity shareholders' funds
565,185
494,113
Net asset value per ordinary share (pence)
4
110.5
108.0
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2021
Share capital
Share premium
Merger reserve
Distrib-utable
reserve
Hedging
reserve
Capital reserve
Revenue reserve
Total
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
At 30 June 2020
4,575
77,452
47,751
296,770
(227)
45,536
22,256
494,113
Total comprehensive income for the year:
-
-
-
-
478
18,576
25,308
44,362
Transactions with owners recognised in equity:
Dividends paid
1
-
-
-
(31,606)
-
-
-
(31,606)
Issue of ordinary shares
9
540
59,460
-
-
-
-
-
60,000
Expenses of issue
9
-
(1,684)
-
-
-
-
-
(1,684)
At 30 June 2021
5,115
135,228
47,751
265,164
251
64,112
47,564
565,185
For the year ended 30 June 2020
Stated capital account
Share capital
Share premium
Merger reserve
Distrib-utable
reserve
Hedging
reserve
Capital reserve
Revenue reserve
Total
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
At 30 June 2019
372,685
-
-
-
-
(707)
36,163
4,948
413,089
Total comprehensive income for the year:
-
-
-
-
-
480
9,373
22,249
32,102
Transactions with owners recognised in equity:
Group reconstruction
(371,292)
385,090
-
47,751
(61,549)
-
-
-
-
Reduction of share capital
-
(381,239)
-
-
381,239
-
-
-
-
Dividends paid
1
(1,393)
-
-
-
(22,920)
-
-
(4,941)
(29,254)
Issue of ordinary shares
9
-
724
79,276
-
-
-
-
-
80,000
Expenses of issue
9
-
-
(1,824)
-
-
-
-
-
(1,824)
At 30 June 2020
-
4,575
77,452
47,751
296,770
(227)
45,536
22,256
494,113
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2021
Year ended
30 June 2021
Year ended
30 June 2020
Note
£'000
£'000
Cash flows from operating activities
Profit before tax
43,876
31,619
Adjustments for:
Interest receivable
(39)
(111)
Interest payable
5,763
5,532
Revaluation gains on investment properties and movements in lease incentives, net of acquisition costs written off
5
(19,581)
(9,059)
Revaluation losses/(gains) on properties held for sale
6
92
(1,505)
Increase in trade and other receivables
(2,782)
(1,238)
Increase in trade and other payables
1,859
370
29,188
25,608
Interest paid
(4,266)
(4,177)
Interest received
39
111
Tax paid
(5)
(73)
(4,232)
(4,139)
Net cash inflow from operating activities
24,956
21,469
Cash flows from investing activities
Purchase of investment properties and properties held for sale, including acquisition costs
(51,400)
(117,501)
Disposal of investment properties and properties held for sale, net of lease incentives
7,825
14,086
Net cash outflow from investing activities
(43,575)
(103,415)
Cash flows from financing activities
Issue of ordinary share capital
60,000
80,000
Expenses of issue of ordinary share capital
(1,684)
(1,824)
Drawdown of bank loan facilities
152,000
162,000
Repayment of bank loan facilities
(174,000)
(118,000)
Expenses of arrangement of bank loan facilities
(1,538)
(1,585)
Dividends paid
(31,493)
(29,151)
Net cash inflow from financing activities
3,285
91,440
Net (decrease)/increase in cash and cash equivalents
(15,334)
9,494
Opening cash and cash equivalents
36,440
26,946
Closing cash and cash equivalents
21,106
36,440
Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives
9,656
10,014
Fixed or guaranteed rent reviews derecognised on disposal or re-tenanting
(1,556)
(988)
Total
8,100
9,026
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
In accordance with Chapter 4 of the Disclosure Guidelines and Transparency Rules, we confirm that to the best of our knowledge:
· The financial statements contained within the Annual Report for the year ended 30 June 2021, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
· The Chairman's Statement, Investment Manager's Report and Our Strategy include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;
· 'Principal and emerging risks and uncertainties' includes a description of the Company's principal and emerging risks and uncertainties; and
· The Annual Report includes details of related party transactions that have taken place during the financial year.
On behalf of the Board
Malcolm Naish
Chairman
19 October 2021
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2021.
Dividend rate
(pence per share)
Year ended
30 June 2021
£'000
Fourth interim dividend for the year ended 30 June 2020
1.67000
7,640
First interim dividend for the year ended 30 June 2021
1.68000
7,686
Second interim dividend for the year ended 30 June 2021
1.68000
7,686
Third interim dividend for the year ended 30 June 2021
1.68000
8,594
Total
6.71000
31,606
Amounts paid as distributions to equity holders during the year to 30 June 2020.
Dividend rate
(pence per share)
Year ended
30 June 2020
£'000
Fourth interim dividend for the year ended 30 June 2019
1.64475
6,334
First interim dividend for the year ended 30 June 2020
1.67000
7,640
Second interim dividend for the year ended 30 June 2020
1.67000
7,640
Third interim dividend for the year ended 30 June 2020
1.67000
7,640
Total
6.65475
29,254
It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend. The fourth interim dividend in respect of the year ended 30 June 2021, of 1.68 pence per share, was paid on 27 August 2021 to shareholders on the register on 13 August 2021 amounting to £8,594,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.
2. Fee paid to the Investment Manager
Year ended
30 June 2021
Year ended
30 June 2020
£'000
£'000
Management fee
5,796
5,264
Total
5,796
5,264
The Group's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Fund Managers Limited (the 'Investment Manager' or 'Target'). The Investment Manager is entitled to an annual management fee on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.
Net assets of the Group
Management fee percentage
Up to and including £500 million
1.05
Above £500 million and up to and including £750 million
0.95
Above £750 million and up to and including £1 billion
0.85
Above £1 billion and up to and including £1.5 billion
0.75
Above £1.5 billion
0.65
The Investment Manager is entitled to an additional fee of £121,000 per annum (plus VAT), increasing annually in line with inflation, in relation to their appointment as Company Secretary and Administrator to the Group.
The Investment Management Agreement can be terminated by either party on 24 months' written notice. Should the Company terminate the Investment Management Agreement earlier then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board has not given its prior consent.
3. Other expenses
Year ended
30 June 2021
£'000
Year ended
30 June 2020
£'000
Credit loss allowance
1,697
2,141
Bad debts written off
1,020
30
Valuation and other professional fees
1,008
707
Auditor's remuneration for:
- statutory audit of the Company
104
71
- statutory audit of the Company's subsidiaries
184
209
- review of interim financial information
15
15
Other taxation compliance and advisory*
436
242
Public relations and marketing
213
185
Directors' fees
181
160
Secretarial and administration fees
172
186
Printing, postage and website
92
57
Listing & Registrar fees
78
89
Direct property costs
32
30
Other
102
139
Total
5,334
4,261
* The other taxation compliance and advisory fees were all paid to parties other than the Company's Auditor.
4. Earnings per share and Net Asset Value per share
Earnings per share
Year ended 30 June 2021
Year ended 30 June 2020
£'000
Pence per share
£'000
Pence per share
Revenue earnings
25,308
5.32
22,249
5.05
Capital earnings
18,576
3.91
9,373
2.13
Total earnings
43,884
9.23
31,622
7.18
Average number of shares in issue
475,406,929
440,278,234
There were no dilutive shares or potentially dilutive shares in issue.
EPRA is an industry body which issues best practice reporting guidelines for property companies and the Group report an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below. Other EPRA measures are included in the section below entitled EPRA Performance Measures.
The EPRA earnings are arrived at by adjusting for the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group.
The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for rental income arising from recognising guaranteed rental review uplifts and for development interest received from developers in relation to monies advanced under forward fund agreements which, in the Group's IFRS financial statements, is required to be offset against the book cost of the property under development. The Board believes that the Group's specific adjusted EPRA earnings represents the underlying performance measure appropriate for the Group's business model as it illustrates the underlying revenue stream and costs generated by the Group's property portfolio.
The reconciliations are provided in the table below:
Year ended
30 June 2021
£'000
Year
ended
30 June 2020
£'000
Earnings per IFRS Consolidated Statement of Comprehensive Income
43,884
31,622
Adjusted for gains on investment properties realised
(1,306)
(642)
Adjusted for revaluations of investment properties
(9,536)
(198)
Adjusted for revaluations of properties held for sale
92
(1,505)
Adjusted for other capital items
913
1,191
EPRA earnings
34,047
30,468
Adjusted for rental income arising from recognising guaranteed rent review uplifts
(8,739)
(8,219)
Adjusted for development interest under forward fund agreements
647
975
Group specific adjusted EPRA earnings
25,955
23,224
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income
9.23
7.18
EPRA EPS
7.16
6.92
Group specific adjusted EPRA EPS
5.46
5.27
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 110.5 pence (2020: 108.0 pence) is based on equity shareholders' funds of £565,185,000 (2020: £494,113,000) and on 511,541,694 (2020: 457,487,640) ordinary shares, being the number of shares in issue at the year-end.
In October 2019, EPRA published new best practice recommendations for financial disclosures by public real estate companies for accounting periods commencing after 1 January 2020. These introduced a new set of EPRA NAV metrics that are arrived at by adjusting the net asset value calculated under International Financial Reporting Standards ('IFRS') to provide stakeholders with what EPRA believe to be the most relevant information on the fair value of the assets and liabilities of a real estate investment company, under different scenarios. The three EPRA NAV metrics are:
· EPRA Net Reinstatement Value ('NRV'): Assumes that entities never sell assets and aims to represent the value required to rebuild the entity. The objective is to highlight the value of net assets on a long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value movements on financial derivatives, are excluded and the costs of recreating the Group through investment markets, such as property acquisition costs and taxes, are included.
· EPRA Net Tangible Assets ('NTA'): Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax. Given the Group's REIT status, it is not expected that significant deferred tax will be applicable to the Group.
· EPRA Net Disposal Value ('NDV'): Represents the shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. At 30 June 2021, the Group held all its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements apart from its fixed-rate debt facility where the fair value is estimated to be higher than the nominal value. See note 8 for further details on the Group's loan facilities.
Given the nature of the Group's assets and liabilities, the EPRA NTA is the same as the EPRA NAV reported in prior years, with the EPRA NDV being the same as the previously reported EPRA NNNAV.
2021
EPRA NRV
£'000
2021
EPRA NTA
£'000
2021
EPRA NDV
£'000
2020
EPRA NRV
£'000
2020
EPRA NTA
£'000
2020
EPRA NDV
£'000
IFRS NAV per financial statements
565,185
565,185
565,185
494,113
494,113
494,113
Fair value of interest rate swaps
(251)
(251)
-
227
227
-
Fair value of loans
-
-
(1,389)
-
-
(1,511)
Estimated purchasers' costs
44,696
-
-
40,916
-
-
EPRA net assets
609,630
564,934
563,796
535,256
494,340
492,602
EPRA net assets (pence per share)
119.2
110.4
110.2
117.0
108.1
107.7
5. Investment properties
Freehold and leasehold properties
As at
30 June 2021
As at
30 June 2020
£'000
£'000
Opening market value
610,084
500,884
Opening fixed or guaranteed rent reviews and lease incentives
(39,998)
(31,288)
Opening carrying value
570,086
469,596
Disposals - proceeds
(7,616)
(14,402)
- gain/(loss) on sale
2,336
(438)
Purchases
52,295
108,852
Acquisition costs capitalised
2,264
3,896
Acquisition costs written off
(2,264)
(3,896)
Unrealised (gain)/loss realised during the period
(1,030)
1,080
Revaluation movement - gains
26,565
18,905
Revaluation movement - losses
(5,109)
(4,797)
Movement in market value
67,441
109,200
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting
1,735
1,304
Movement in fixed or guaranteed rent reviews and lease incentives
(9,656)
(10,014)
Movement in carrying value
59,520
100,490
Closing market value
677,525
610,084
Closing fixed or guaranteed rent reviews and lease incentives
(47,919)
(39,998)
Closing carrying value
629,606
570,086
Changes in the valuation of investment properties
Year ended
30 June 2021
£'000
Year ended
30 June 2020
£'000
Gain/(loss) on sale of investment properties
2,336
(438)
Unrealised (gain)/loss realised during the period
(1,030)
1,080
Gains on sale of investment properties realised
1,306
642
Revaluation movement
21,456
14,108
Acquisition costs written off
(2,264)
(3,896)
Movement in lease incentives
(917)
(1,795)
Movement in fixed or guaranteed rent reviews
(8,739)
(8,219)
Gains on revaluation of investment properties
10,842
840
The investment properties can be analysed as follows:
As at
30 June 2021
As at
30 June 2020
£'000
£'000
Standing assets
655,175
597,484
Developments under forward fund agreements
22,350
12,600
Closing market value
677,525
610,084
The properties were valued at £677,525,000 (2020: £610,084,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Global Standards, incorporating the International Valuation Standards (the 'Red Book Global', 31 January 2020) issued by the Royal Institution of Chartered Surveyors ('RICS') on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Colliers has recent experience in the location and category of the investment properties being valued.
Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £629,606,000 (2020: £570,086,000). The adjustment consisted of £41,949,000 (2020: £34,766,000) relating to fixed or guaranteed rent reviews and £5,970,000 (2020: £5,232,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the accounts as non-current or current assets within 'trade and other receivables'
6. Properties held for sale
As at
30 June 2021
As at
30 June 2020
£'000
£'000
Opening fair value
7,500
-
Purchases
300
5,695
Acquisition costs capitalised
-
300
Acquisition costs written off
-
(300)
Disposals - proceeds
(388)
-
- gain on sale
34
-
Unrealised gain realised during the period
(126)
-
Revaluation movement - gains
-
1,805
Closing fair value
7,320
7,500
The properties held for sale were valued at £7,320,000 (30 June 2020: £7,500,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'). The properties held for sale consist of two blocks of apartments adjacent to an existing property holding which were acquired to consolidate ownership of the overall retirement village. The intention is to sell the leasehold on the individual apartments.
7. Investment in subsidiary undertakings
The Group included 50 subsidiary companies as at 30 June 2021 (30 June 2020: 46). All subsidiary companies were wholly owned, either directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was to act as an investment and property company. Other than one subsidiary incorporated in Jersey, two subsidiaries incorporated in Gibraltar and two subsidiaries incorporated in Luxembourg, all subsidiaries are incorporated within the United Kingdom.
During the period, the Group incorporated four new subsidiaries, THR Number 37 Limited, THR Number 38 Limited, THR Number 39 Limited and THR Number 40 Limited. The Group includes eight companies which were acquired as part of previous corporate acquisitions which are currently dormant and which will be placed into liquidation imminently.
8. Bank loans
As at
30 June 2021
£'000
As at
30 June 2020
£'000
Principal amount outstanding
130,000
152,000
Set-up costs
(2,476)
(3,732)
Amortisation of set-up costs
380
1,867
Total
127,904
150,135
On 5 November 2020, the Group entered into an amended and restated £70.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.18 per cent per annum on £50.0 million of the facility and 2.33 per cent per annum on the remaining £20.0 million of the revolving credit facility, both for the duration of the loan. A non-utilisation fee of 1.13 per cent per annum is payable on the first £20 million of any undrawn element of the facility, reducing to 1.05 per cent per annum thereafter. Prior to the amendment, the interest on the £50.0 million facility was based on LIBOR plus a margin of 1.50 per cent per annum and a non-utilisation fee of 0.75 per cent per annum. As at 30 June 2021, the Group had drawn £30.0 million under this facility (30 June 2020: £50.0 million).
On 5 November 2020, the Group entered into an amended and restated £100.0 million revolving credit facility with HSBC Bank plc ('HSBC') which is repayable in November 2023, with the option of two one-year extensions thereafter subject to the consent of HSBC. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.17 per cent per annum for the duration of the loan and a non-utilisation fee of 0.92 per cent per annum is payable on any undrawn element of the facility. Prior to the amendment, the interest on the £80.0 million facility was based on LIBOR plus a margin of 1.70 per cent per annum and a non-utilisation fee of 0.75 per cent per annum. As at 30 June 2021, the Group had drawn £50.0 million under this facility (30 June 2020: £52.0 million).
The Group has a £50.0 million committed term loan facility with ReAssure which is repayable on 12 January 2032. Interest accrues on the loan at an aggregate fixed rate of interest of 3.28 per cent per annum and is payable quarterly. As at 30 June 2021, the Group had drawn £50.0 million under this facility (30 June 2020: £50.0 million).
The following interest rate swaps were in place during the year ended 30 June 2021:
Notional Value
Starting Date
Ending Date
Interest Paid
Interest Received
Counter-party
21,000,000
24 June 2019
1 September 2021*
0.70%
3-month LIBOR
RBS
9,000,000
7 April 2017
1 September 2021*
0.86%
3-month LIBOR
RBS
30,000,000
5 November 2020
5 November 2025
0.30%
Daily compounded SONIA (floor at
-0.08%)
RBS
* These interest rate swaps were closed out in November 2020 at the time of amendment of the related loan. The cost of such early redemption was recognised in capital.
Inclusive of all interest rate swaps, the interest rate on £80.0 million of the Group's borrowings is fixed, inclusive of the amortisation of arrangement costs, at an all-in rate of 3.16 per cent per annum until at least 5 November 2025. The remaining £140.0 million of debt, of which £50.0 million was drawn at 30 June 2021, would, if fully drawn, carry interest at a variable rate equal to SONIA plus a weighted average lending margin, inclusive of the amortisation of arrangement costs, of 2.44 per cent per annum.
The fair value of the interest rate swaps at 30 June 2021 was an aggregate asset of £251,000 (30 June 2020: liability of £227,000) and all interest rate swaps are categorised as level 2 in the fair value hierarchy.
At 30 June 2021, the nominal value of the Group's loans equated to £130,000,000 (2020: £152,000,000). Excluding the interest rate swaps referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated margin based on market conditions at 30 June 2021, totalled, in aggregate, £131,389,000 (2020: £153,511,000). The payment required to redeem the loans in full, incorporating the terms of the Spens clause in relation to the ReAssure facility, would have been £139,748,000 (2020: £165,974,000). The loans are categorised as level 3 in the fair value hierarchy.
The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group ('THR1 Group') which consists of THR1 and its two subsidiaries. The ReAssure loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its four subsidiaries. The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and its 18 subsidiaries (excluding those subsidiaries which are currently dormant). In aggregate, the Group has granted a fixed charge over properties with a market value of £526 million as at 30 June 2021 (2020: £496 million).
Under the bank covenants related to the loans, the Group is to ensure that:
· the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;
· the loan to value percentage for THR12 Group does not exceed 60 per cent; and
· the interest cover, or equivalent, for each of THR1 Group, THR12 Group and THR15 Group is greater than c.300 per cent on any calculation date.
All bank loan covenants have been complied with during the year.
Analysis of net debt:
Cash and cash equivalents
Borrowing
Net debt
Cash and cash equivalents
Borrowing
Net debt
2021
2021
2021
2020
2020
2020
£'000
£'000
£'000
£'000
£'000
£'000
Opening balance
36,440
(150,135)
(113,695)
26,946
(106,420)
(79,474)
Cash flows
(15,334)
23,538
8,204
9,494
(42,511)
(33,017)
Non-cash flows
-
(1,307)
(1,307)
-
(1,204)
(1,204)
Closing balance
21,106
(127,904)
(106,798)
36,440
(150,135)
(113,695)
9. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each
Number of shares
£'000
Opening balance
457,487,640
4,575
Issued on 1 March 2021
54,054,054
540
Balance at 30 June 2021
511,541,694
5,115
Under the Company's Articles of Association, the Company may issue an unlimited number of ordinary shares. Ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.
During the year to 30 June 2021, the Company issued 54,054,054 (2020: 72,398,191) ordinary shares raising gross proceeds of £60,000,000 (2020: £80,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses of issue of £1,684,000 (2020: £1,824,000), has been credited to the share premium account. See note 15 for details of ordinary shares issued subsequent to the year end.
During the year to 30 June 2021, the Company did not repurchase any ordinary shares into treasury (2020: nil) or resell any ordinary shares from treasury (2020: nil). At 30 June 2021, the Company did not hold any shares in treasury (2020: nil).
Capital management
The Group's capital is represented by the share capital, share premium, merger reserve, distributable reserve, hedging reserve, capital reserve, revenue reserve and long-term borrowings. The Group is not subject to any externally-imposed capital requirements, other than the financial covenants on its loan facilities as detailed in note 8.
The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective.
Capital risk management
The objective of the Group is to provide 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 that are let to care home operators; and other healthcare assets in the UK.
The Board has responsibility for ensuring the Group's ability to continue as a going concern. 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.
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. The Company may also increase or decrease its level of long-term borrowings.
Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in accordance with the Company's investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding excess cash on its balance sheet over the longer term.
No changes were made in the objectives, policies or processes during the year.
10. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, bank loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £24,563,000 (2020: £39,854,000), consisting of cash of £21,106,000 (2020: £36,440,000), net rent receivable of £955,000 (2020: £1,520,000), accrued development interest of £739,000 (2020: £996,000) and other debtors of £1,763,000 (2020: £898,000).
In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants. The expected credit risk in relation to tenants is an inherent element of the due diligence considered by the Investment Manager on all property transactions with an emphasis being placed on ensuring that initial rents are set at a sustainable level. The risk is further mitigated by rental deposits or guarantees where considered appropriate. The majority of rental income is received in advance.
As at 30 June 2021, the Group had recognised a credit loss allowance totalling £4,098,000 against a gross rent receivable balance of £4,641,000 and gross loans to tenants totalling £1,262,000. Whilst this allowance has increased during the year ended 30 June 2021, it remains low relative to the Group's overall balance sheet, and relates primarily to the tenant of two immature homes which are now trading well. As at 30 June 2020, the gross rent receivable was £3,922,000, of which £660,000 was subsequently recovered, £753,000 was written off and £2,509,000 is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2021 (2020: nil).
All of the Group's cash is placed with financial institutions with a long-term credit rating of BBB or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed, limited or lost. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.
Should the Group hold significant cash balances for an extended period, then counterparty risk will be spread, by placing cash across different financial institutions. At 30 June 2021 the Group held £20.9 million (2020: £36.4 million) with The Royal Bank of Scotland plc and £0.2 million (2020: £nil) with HSBC Bank plc.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an on-going basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.
Interest rate risk
Some of the Company's financial instruments are interest-bearing. Interest-rate risk is the risk that future cash flows will change adversely as a result of changes in market interest rates.
The Group's policy is to hold cash in variable rate or short-term fixed rate bank accounts. At 30 June 2021 interest was being received on cash at a weighted average variable rate of nil (2020: 0.01 per cent). Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
The Group has £170.0 million (2020: £130.0 million) of committed term loans and revolving credit facilities which were charged interest at a rate of SONIA (2020: three-month LIBOR) plus the relevant margin. At the year-end £80.0 million of the variable rate facilities had been drawn down (2020: £102.0 million). The fair value of the variable rate borrowings is affected by changes in the market rate of the lending margin that would apply to similar loans. The variable rate borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value at 30 June 2021 and 30 June 2020.
The Group has not hedged its exposure on £50.0 million of the drawn variable rate borrowings at 30 June 2021 (2020: £72.0 million). On these loans the interest was payable at a variable rate equal to SONIA (2020: three-month LIBOR) plus the weighted average lending margin, including the amortisation of costs, of 2.43 per cent per annum (2020: 2.17 per cent). The variable rate borrowings expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
The Group has a £50.0 million fixed rate term loan (2020: £50.0 million) and has hedged its exposure on £30.0 million (2020: £30.0 million) of the variable rate loans, as referred to above, through entering into a fixed rate interest rate swap. Fixing the interest rate exposes the Group to fair value interest rate risk as the fair value of the fixed rate borrowings, or the fair value of the interest rate swap used to fix the interest rate on an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £50.0 million fixed rate term loan is carried at amortised cost on the Group's balance sheet, with the estimated fair value and cost of repayment being disclosed in note 8, whereas the fair value of the interest rate swap is recognised directly on the Group's balance sheet. At 30 June 2021, an increase of 0.25 per cent in interest rates would have increased the fair value of the interest rate swap asset and increased the reported total comprehensive income for the year by £0.3 million (2020: £0.1 million). The same movement in interest rates would have decreased the fair value of the fixed rate term loan by £1.1 million (2020: £1.2 million); however, as the fixed rate loan is held at amortised cost, the reported total comprehensive income for the year would have remained unchanged. A decrease in interest rates would have had an approximately equal and opposite effect.
Market price risk
The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.
11. Capital commitments
The Group had capital commitments as follows:
30 June 2021
£'000
30 June 2020
£'000
Amounts due to complete forward fund developments
21,054
5,394
Other capital expenditure commitments
3,158
530
Total
24,212
5,924
12. Contingent assets and liabilities
As at 30 June 2021, twelve (2020: ten) properties within the Group's investment property portfolio contained deferred consideration clauses meaning that, subject to contracted performance conditions being met, deferred payments totalling £20.03 million (2020: £18.03 million) may be payable by the Group to the vendors/tenants of these properties. The potential timings of these payments are also conditional on the date(s) at which the contracted performance conditions are met and are therefore uncertain.
It is highlighted that any deferred consideration subsequently paid will result in an increase in the rental income due from the tenant of the relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the investment yield used to arrive at the valuation of the properties, any deferred consideration paid would be expected to result in a commensurate increase in the value of the Group's investment property portfolio.
Having assessed each clause on an individual basis, the Group has determined that the contracted performance conditions were highly likely to be met in relation to one of these properties and therefore an amount of £1.55 million has been recognised as a liability at 30 June 2021 (2020: £nil). An equal but opposite amount has been recognised in other debtors to reflect the increase in the investment property value that would be expected to arise were the deferred consideration to be paid and the contracted rental income increased accordingly.
13. Related party transactions
The Board of Directors is considered to be a related party. No Director has an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Group. The Directors of the Group received fees for their services. Total fees for the year were £181,000 (2020: £160,000) of which £12,000 (2020: £12,000) remained payable at the year-end.
The Investment Manager received £5,796,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2021 (2020: £5,264,000). Of this amount £1,551,000 (2020: £1,364,000) remained payable at the year-end. The Investment Manager received a further £146,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2021 (2020: £129,000) in relation to its appointment as Company Secretary and Administrator, of which £36,000 (2020: £35,000) remained payable at the year end. Certain employees of the Investment Manager are directors of some of the Group's subsidiaries. Neither they nor the Investment Manager receive any additional remuneration in relation to fulfilling this role.
There were related party transactions within the Group and its wholly-owned subsidiaries which are eliminated upon consolidation.
14. Operating segments
The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the EPRA NTA. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NTA is detailed in note 4.
The view that the Group is engaged in a single segment of business is based on the following considerations:
- One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;
- There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the benchmark; and
- The management of the portfolio is ultimately delegated to a single property manager, Target.
15. Post balance sheet events
Property transactions
Subsequent to the year end, practical completion was achieved at the Group's development site in Rudheath, Cheshire, delivering a 68-bed care home. The home was completed under a fixed-priced forward-fund arrangement and leased to L&M Healthcare, an existing tenant of the Group, on a 30-year lease with RPI-linked increases, subject to a cap and collar. Similarly, practical completion was achieved at the Group's development site in Droitwich Spa, Worcestershire and leased to the Group's largest tenant, Ideal Carehomes.
In addition the Company has acquired one operational care home and two forward fund developments, committing total capital of £32.0 million, plus acquisition costs.
Equity issuance
On 9 September 2021, the Company issued 108,695,652 ordinary shares at a price of 115.0 pence per share, raising gross proceeds of £125 million.
16. Financial statements
This statement was approved by the Board on 19 October 2021. It is not the Company's full statutory financial statements in terms of Section 434 of the Companies Act 2006. The statutory annual report and financial statements for the year ended 30 June 2021 has been approved and audited and received an unqualified audit report which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. The statutory annual report and financial statements for the year to 30 June 2021 will be posted to shareholders in November 2021 and will be available for inspection at Level 13, Broadgate Tower, 20 Primrose Street, London, EC2A 2EW, the registered office of the Company.
The statutory annual report and financial statements will be made available on the website www.targethealthcarereit.co.uk. Copies may also be obtained from Target Fund Managers Limited, Laurel House, Laurelhill Business Park, Stirling FK7 9JQ.
The audited financial statements for the year to 30 June 2021 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 14 December 2021.
Alternative Performance Measures
The Company uses Alternative Performance Measures ('APMs'). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities. The definitions of all APMs used by the Company are highlighted in the glossary contained in the Annual Report, with detailed calculations, including reconciliation to the IFRS figures where appropriate, being set out below and within the EPRA Performance Measures which follow.
Discount or Premium - the share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. This price is not identical to the NAV. If the share price is lower than the NAV per share, the shares are trading at a discount and, if the share price is higher than the NAV per share, are said to be at a premium. The figure is calculated at a point in time and, unless stated otherwise, the Company measures its discount or premium relative to the EPRA NTA per share.
2021
pence
2020
pence
EPRA Net Tangible Assets per share (see note 4)
(a)
110.4
108.1
Share price
(b)
115.4
110.0
Premium
= (b-a)/a
4.5%
1.8%
Dividend Cover - the percentage by which Group specific adjusted EPRA earnings for the year cover the dividend paid.
2021
£'000
2020
£'000
Group-specific EPRA earnings for the year (see note 4)
(a)
25,955
23,224
First interim dividend
7,686
7,640
Second interim dividend
7,686
7,640
Third interim dividend
8,594
7,640
Fourth interim dividend
8,594
7,640
Dividends paid in relation to the year
(b)
32,560
30,560
Dividend cover
= (a/b)
80%
76%
Ongoing Charges - a measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that year. Operating costs exclude costs of buying and selling investments, interest costs, taxation, non-recurring costs and the costs of buying back or issuing ordinary shares.
2021
£'000
2020
£'000
Investment management fee
5,796
5,264
Other expenses
5,334
4,261
Less movement in impairment for credit losses and bad debts written off
(2,717)
(2,171)
Less direct property costs and other non-recurring items
(263)
(138)
Adjustment to management fee arrangements and irrecoverable VAT*
49
259
Total
(a)
8,199
7,475
Average net assets
(b)
528,035
493,691
Ongoing charges
= (a/b)
1.55%
1.51%
* Based on the Group's net asset value at 30 June 2021, the management fee is expected to be paid at a weighted average rate of 1.04% (2020: 1.05%) of the Group's average net assets plus an effective irrecoverable VAT rate of approximately 7%. The management fee has therefore been amended so that the Ongoing Charges figure includes the expected all-in management fee rate of 1.11% (2020: 1.12%).
Total Return - the return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets.
2021
2020
EPRA NTA
(pence)
IFRS NAV
(pence)
Share price
(pence)
EPRA NTA
(pence)
IFRS NAV
(pence)
Share price
(pence)
Value at start of year
(a)
108.1
108.0
110.0
107.5
107.3
115.6
Value at end of year
(b)
110.4
110.5
115.4
108.1
108.0
110.0
Change in value during year (b-a)
(c)
2.3
2.5
5.4
0.6
0.7
(5.6)
Dividends paid
(d)
6.7
6.7
6.7
6.7
6.7
6.7
Additional impact of dividend reinvestment
(e)
0.5
0.4
0.3
0.2
0.3
-
Total gain in year (c+d+e)
(f)
9.5
9.6
12.4
7.5
7.7
1.1
Total return for the year
= (f/a)
8.8%
8.9%
11.3%
7.0%
7.2%
0.9%
EPRA Performance Measures
The European Public Real Estate Association is the industry body representing listed companies in the real estate sector. EPRA publishes Best Practice Recommendations ('BPR') to establish consistent reporting by European property companies. Further information on the EPRA BPR can be found at www.epra.com.
The figures below are calculated and presented in line with the BPR Guidelines published by EPRA in October 2019, applicable for accounting periods commencing after 1 January 2020.
2021
2020
EPRA Net Reinstatement Value (£'000)
609,630
535,256
EPRA Net Tangible Assets (£'000)
564,934
494,340
EPRA Net Disposal Value (£'000)
563,796
492,602
EPRA Net Reinstatement Value per share (pence)
119.2
117.0
EPRA Net Tangible Assets per share (pence)
110.4
108.1
EPRA Net Disposal Value per share (pence)
110.2
107.7
EPRA Earnings (£'000)
34,047
30,468
Group specific adjusted EPRA earnings (£'000)
25,955
23,224
EPRA Earnings per share (pence)
7.16
6.92
Group specific adjusted EPRA earnings per share (pence)
5.46
5.27
EPRA Net Initial Yield
5.76%
5.69%
EPRA Topped-up Net Initial Yield
5.83%
6.04%
EPRA Vacancy Rate
-
-
EPRA Cost Ratio - including direct vacancy costs
22.3%
21.5%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
26.6%
25.7%
EPRA Cost Ratio - excluding direct vacancy costs
22.3%
21.5%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
26.6%
25.7%
Capital Expenditure (£'000)
54,859
118,743
Like-for-like Rental Growth
0.1%
1.5%
EPRA NAV metrics and EPRA Earnings
Full details of these calculations, including reconciliations of each to the IFRS measures, are detailed in note 4 to the extract from the Consolidated Financial Statements.
EPRA Net Initial Yield and EPRA Topped-up Net Initial Yield
EPRA Net Initial Yield is calculated as 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. The EPRA Topped-up Net Initial Yield incorporates an adjustment in respect of the expiration of rent-free periods (or other unexpired lease incentives).
2021
£'000
2020
£'000
Annualised passing rental income based on cash rents
(a)
40,763
36,749
Notional rent expiration of rent-free periods or other lease incentives
450
2,264
Topped-up net annualised rent
(b)
41,213
39,013
Standing assets including properties held for sale (see notes 5 and 6)
662,495
604,984
Allowance for estimated purchasers' costs
44,696
40,916
Grossed-up completed property portfolio valuation
(c)
707,191
645,900
EPRA Net Initial Yield
= (a/c)
5.76%
5.69%
EPRA Topped-up Net Initial Yield
= (b/c)
5.83%
6.04%
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space (excluding forward fund developments and properties held for sale) divided by the contractual rent of the investment property portfolio, expressed as a percentage.
2021
£'000
2020
£'000
Annualised potential rental value of vacant premises*
(a)
-
-
Annualised potential rental value of the property portfolio (including vacant properties)
(b)
41,213
39,013
EPRA Vacancy Rate
= (a/b)
-
-
* There were no unoccupied properties at either 30 June 2021 or 30 June 2020.
EPRA Cost Ratio
The EPRA cost ratios are produced using EPRA methodology, which aims to provide a consistent base-line from which companies can provide additional information, and include all property expenses and management fees. Consistent with the Group specific adjusted EPRA earnings detailed in note 4 to the extract from the Consolidated Financial Statements, similar adjustments have been made to also present the adjusted Cost Ratio which is thought more appropriate for the Group's business model.
Year ended
30 June 2021
£'000
Year ended
30 June 2020
£'000
Investment management fee
5,796
5,264
Other expenses
5,334
4,261
EPRA costs (including direct vacancy costs)
(a)
11,130
9,525
Specific cost adjustments, if applicable
-
-
Group specific adjusted EPRA costs (including direct vacancy costs)
(b)
11,130
9,525
Direct vacancy costs
(c)
-
-
Gross rental income per IFRS
(d)
49,980
44,267
Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives
(8,739)
(8,219)
Adjusted for development interest under forward fund arrangements
647
975
Group specific adjusted gross rental income
(e)
41,888
37,023
EPRA Cost Ratio (including direct vacancy costs)
= (a/d)
22.3%
21.5%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
= (b/e)
26.6%
25.7%
EPRA Cost Ratio (excluding direct vacancy costs)
= ((a-c)/d)
22.3%
21.5%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
= ((b-c)/e)
26.6%
25.7%
EPRA Capital Expenditure
Year ended
30 June 2021
£'000
Year ended
30 June 2020
£'000
Acquisitions (including acquisition costs)
34,808
108,024
Forward fund developments
20,032
9,245
Like-for-like portfolio
19
1,474
Total capital expenditure
54,859
118,743
Conversion from accrual to cash basis
(3,458)
(1,242)
Total capital expenditure on a cash basis
51,401
117,501
Like-for-like Rental Growth
Year ended
30 June 2021
£'000
Year ended
30 June 2020
£'000
Opening contractual rent
(a)
39,013
32,193
Rent reviews
686
732
Movement in variable rental leases
(162)
(56)
Re-tenanting of properties*
(468)
(199)
Like-for-like rental growth
(b)
56
477
Acquisitions and developments
2,582
7,490
Disposals
(438)
(1,147)
Total movement
(c)
2,200
6,820
Closing contractual rent
= (a+c)
41,213
39,013
Like-for-like rental growth*
= (b/a)
0.1%
1.5%
* During the year ended 30 June 2021, the Group resolved its position with a tenant which had been operating two of the Group's homes. The re-tenanting of one of these homes was completed during the year resulting in a small uplift in rental income; however, this asset management activity has resulted in a temporary reduction in contractual rent in relation to the other home, thereby reducing the reported like-for-like rental growth for the year by 1.2%. The re-tenanting of the second home is expected to complete imminently.
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