REG - Target H'care REIT - Final Results
10/10/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20231010:nRSJ4856Pa&default-theme=true
RNS Number : 4856P Target Healthcare REIT PLC 10 October 2023
10 October 2023
Target Healthcare REIT plc
ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2023
Modern care home portfolio delivering strong operational performance
underpinned by continued institutional investor and end-user demand.
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 annual results for the year ended 30 June 2023.
Continued earnings growth; EPRA NTA and valuation growth in the second half of
the financial year; clear path for sustainable dividend
· NAV total return((1)) of -1.2% (2022: 8.1%), with valuation uplifts
of 1.5% in the second half of the financial year predominantly reflecting
inflation-linked leases.
· EPRA NTA per share decreased 6.9% to 104.5 pence (2022: 112.3 pence)
· Group specific adjusted EPRA earnings per share increased 18.8%
to 6.00 pence per share (2022: 5.05 pence)
· Dividend decreased by 8.6% to 6.18 pence in respect of the year
(2022: 6.76 pence), following the reduction in Q1 2023
· Intention to increase the quarterly dividend in respect of the year
ending 30 June 2024 by 2.0% to 1.428 pence per share, representing an annual
total dividend of 5.712 pence
· Dividends in respect of the period were 97% covered by adjusted
EPRA earnings, with full cover for dividends paid in respect of the periods
from January 2023 onwards. Under the widely-used EPRA earnings metric the
annual dividend was 124% covered
· Net loan-to-value ("LTV") of 24.7% as at 30 June 2023, with an
average cost of drawn debt, inclusive of the amortisation of loan arrangement
costs, of 3.70% and weighted average term to maturity of 6.2 years. £230
million of debt, being 100% of total drawn debt at 30 June 2023, fully hedged
to maturity against further interest rate increases
Strong portfolio performance through year; Rent cover ahead of pre-pandemic
levels and other key portfolio metrics trending upward, supported by
needs-based demand for care services and lack of supply of modern real estate.
· Portfolio to 97 properties, consisting of 93 modern operational care
homes and four pre-let sites let to 32 tenants with a total value of £868.7
million
· Robust and improving portfolio performance, 97% of
rent collected for the year, with 99% rent collection and mature home rent
cover of 1.75x for the most recent quarter. Mature homes spot occupancy
currently at 86%
· Resilient portfolio performance versus wider commercial real
estate market with portfolio value decreased by £42.9 million, or 4.7%, to
£868.7 million, including a like-for-like valuation decrease of 4.1% (2022:
increase of 4.2%) versus 19% capital decline in the CBRE UK monthly index (all
property)
· Contractual rent increased by 2.0% to £56.6 million per annum (2022:
£55.5 million), including a like-for-like increase of 3.8% predominantly
driven by rent reviews
· Portfolio becoming increasingly mature, with 90% of the operational
portfolio having passed the "fill up" stage, relative to 71% at the start of
the pandemic, supporting tenant profitability and resilience.
· Disposals of £27 million, ahead of carrying value, in order to
recycle capital out of older, non-core assets in less preferred geographies,
with the sale of the four-property portfolio delivering an annualised ungeared
IRR in excess of 10% over the period of ownership
· One of the longest weighted average unexpired lease terms in the
listed UK real estate sector of 26.5 years (2022: 27.2 years)
Compelling sector tailwinds; responsible investment strategy with a clear
purpose to improve the UK's care home real estate and future-proofed portfolio
· Compelling sector tailwinds with long-term demand from ageing
population supporting both investor and operator activity in the sector
· Strong alignment of ESG principles, with continued social purpose and
advocacy of minimum real estate standards across the sector
o Modern, purpose-built care homes; full en suite wet-rooms account for 98% of
the portfolio compared to just 31% for all UK care homes
o 80% of the portfolio purpose-built from 2010 onwards, compared to 12% for
all care homes in England and Scotland
o 94% of the portfolio A or B EPC rated
o Sector-leading average 47m(2) of space per resident
((1)) Based on EPRA NTA movement and dividends paid
Alison Fyfe, Chair of the Company, said:
"The Board remains confident in the Group's prospects. Our portfolio consists
of premium quality assets in a critical real estate investment class with
compelling sector tailwinds.
"Our portfolio is performing strongly, benefitting from our initiatives to
dispose of non-core assets, from further capex to refresh or enhance our real
estate, from our active engagement with tenants, and from the more favourable
trading environment. Our vacancy rate remains at nil with rent collection,
rent cover and underlying resident occupancy all improving. Asset valuations
remain stable, and our financing costs are well-protected from higher interest
rates.
"This improvement in portfolio performance, when combined with our effective
management of interest rate exposure, gives us confidence in the Group's
earnings outlook, allowing us to increase our dividend in line with rental
growth."
A webcast presentation for investors and analysts will take place at 8.30am
BST this morning, which can be accessed at:
https://stream.brrmedia.co.uk/broadcast/64e771c98fa54022913411e5
(https://stream.brrmedia.co.uk/broadcast/64e771c98fa54022913411e5)
LEI: 213800RXPY9WULUSBC04
Enquiries:
Target Fund Managers 01786 845 912
Kenneth MacKenzie / Gordon Bland
Stifel Nicolaus Europe Limited 020 7710 7600
Mark Young / Rajpal Padam / Catriona Neville
FTI Consulting 020 3727 1000
Dido Laurimore / Richard Gotla 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 2023 comprised 97 assets let to 32 tenants
with a total value of £868.7 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
I am delighted to provide you with this update, which clearly shows a strong
real estate business providing unique social impact in the sector. Our
portfolio's key performance metrics show the significant progress we have
made. Our vacancy rate remains at nil with rent collection, rent cover and
underlying resident occupancy all improving. Asset valuations remain stable,
and our financing costs are well-protected from higher interest rates.
1. Reflections
At this time last year, we reaffirmed that our business model and strategy
would provide stable long-term income and total returns despite the
challenging macro headwinds. Our share price has declined alongside the UK
REIT sector, reflecting the expected impact of higher interest rates and
concerns for the UK economy on earnings and valuation outlooks. We believe our
own outlook is more positive, given the high levels of investment demand for
our assets, the underlying demographics of an ageing population, and the
dearth of quality care home real estate across the UK. Our portfolio is
performing strongly, benefitting from our initiatives to dispose of non-core
assets, from further capex to refresh or enhance our real estate, from our
active engagement with tenants, and from the more favourable trading
environment.
The downward pressure on real estate valuations was muted in our portfolio,
underpinned by the strength of investment demand for our type of modern,
purpose-built assets and from the improved trading conditions our tenants are
encountering. The net result has been a valuation move of c.40 basis points on
yield, significantly lower than UK real estate has experienced more widely.
The targeted disposals of some older properties, which the Investment Manager
assessed as having a less favourable outlook, were achieved at or above book
values recorded prior to the market valuation decline in late 2022, with the
sale of the four-property portfolio delivering an annualised IRR in excess of
10% over the period of ownership.
Our earnings outlook remains robust, with rent collection having improved to
99% in the most recent quarter (97% for the year). Improved tenant
profitability across the portfolio (rent cover of 1.75x for the most recent
quarter) supports our sustainable rental levels and embedded annual rental
growth. We have minimised the impact of the higher interest rate environment
on the Group's earnings through our existing long-term fixed rate facilities
and our hedging programme applied to our flexible debt.
We have also maintained our social and environmental impact commitments,
prioritising investment capital towards developing new-build homes which offer
the best modern amenities for residents and minimise energy usage. Likewise,
we have continued to collect energy usage data from our portfolio, analysis of
which shapes our ongoing investment to reduce carbon emissions.
The change in market interest rates experienced earlier in the year did, of
course, have a significant impact on our ability to grow earnings through
acquisitions. We substantially reduced our new investment programme as the
relative outward movement in income yields did not correlate with the more
significant increase in the Group's cost of capital. We reduced the dividend
level in response to ensure earnings were immediately covering our payouts to
shareholders, providing a stable platform for future growth and total returns.
2. Outlook
Despite the more challenging macroeconomic environment, strong sector
tailwinds continue to support investment in modern care home real estate.
Underlying demand for residential care places is supported by demographic
change, evidenced by projected growth in the number of those aged over 85, and
investment demand for modern, ESG-compliant care home real estate remains
strong.
On inflation and recessionary concerns, our portfolio bias towards private pay
provides comfort that our tenants are more likely to be able to pass on their
cost increases through higher resident fees, supporting sustainable tenant
trading. We have seen evidence over the year that the quality of our real
estate allows tenants to secure commercially appropriate fee levels.
We feel that portfolio valuations are robust and our rental income is high
quality. On the former, we note transactional evidence of healthy competition
for assets which are being marketed for sale. A number of buyers are
participating in processes for prime assets such as ours, though we note this
is not the case for sub-prime, poorer quality real estate.
3. Performance
Our total return performance of -1.2% for the year, driven by an EPRA NTA
reduction of 6.9% (104.5 pence from 112.3 pence) and dividends of 6.18 pence
per share, reflects our resilient portfolio and the muted impact of the wider
correction in commercial real estate valuations.
The Investment Manager comments in more detail on rent cover and occupancy in
the Investment Manager's Report, with these key metrics trending positively as
trading conditions and performance in prime care homes improves.
The portfolio valuation movement has been driven by market movements, our
disposals programme and the impact of rental uplifts, providing an overall
valuation reduction of 4.7% and a like-for-like decrease of 4.1%. Contracted
rent has increased by 2.0% to £56.6 million, and 3.8% on a like-for-like
basis.
Adjusted EPRA earnings increased by 23% to £37.2 million, equating to an
adjusted EPRA earnings per share of 6.00 pence. This translates to 97%
dividend cover for the year with full cover for dividends paid in respect of
the periods from January 2023 onwards. Under the widely-used EPRA earnings
metric the dividend was 124% covered.
4. Investment market and care home trading
We saw a pause and a re-pricing of deals in progress as an immediate reaction
to September 2022's mini-budget and the uncertainty which followed. During
early 2023 a number of these transactions slowly started to complete again, at
prices generally higher than those considered during re-pricing discussions at
the trough. The strength of demand and the number of buyers active in the
market were influential supporters of values, as was the continued improvement
in trading profitability at operational homes. This market activity continues
today, with a weight of capital investing in the ESG‑compliant, modern homes
which are our staple.
In care home trading we have seen a reversal of pandemic fortunes between
homes focussed on private residents versus those with a local authority bias.
Profitability is now increasing in the former, which is reflected in our
portfolio performance. Tellingly, we have seen a focus from tenants on
admitting new residents at an appropriate fee level, as opposed to a "fill at
any cost" approach. This has seen operator profitability improve to levels
ahead of where they were prior to the COVID-19 pandemic and at resident
occupancies around 5% lower (85% vs. 90%). This data is very encouraging and
is consistent with the positivity on trading we hear from our tenants.
5. Governance
Board succession
Our succession plan has been completed with the appointments of Richard Cotton
in November 2022 and Michael Brodtman in January 2023. Richard Cotton assumed
the role of SID, and I assumed the Chair, on the retirements of Gordon Coull
and Malcolm Naish on 6 December 2022.
Annual General Meeting ('AGM')
The AGM will be held in London on 29 November 2023. 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.
6. Looking ahead
We see the following as our priorities:
• Manage our portfolio to ensure its performance is consistent with
its inherent quality and trading advantages.
• Set ambitious but realistic environmental targets, and start to
deliver tangible and observable progress towards these.
• Increase earnings from our embedded rental growth and efficient
management of operating expenses and financing costs.
In the absence of unforeseen circumstances, the Board intends to increase the
quarterly dividend in respect of the year ending June 2024 by 2.0% to 1.428
pence per share, representing an annual total dividend of 5.712 pence. In the
six months since 1 January 2023 our portfolio has achieved rental growth of
2%, rental collection has increased to 99% and portfolio rent cover has
increased to 1.75 times. This improvement in portfolio performance, when
combined with our effective management of interest rate exposure, gives us
confidence in the Group's earnings outlook, allowing us to increase our
dividend in line with rental growth.
The Board remains confident in the Group's prospects. Our portfolio consists
of premium quality assets in a critical real estate investment class with
compelling sector tailwinds.
Alison Fyfe
Chair
9 October 2023
Investment Manager's Report
Overall portfolio performance
The year has seen conflicting pressures impacting portfolio returns. Our homes
remain fully let with no vacancies and our rent collection has increased, to
99% for the most recent quarter and 97% for the year, in response to operator
profitability growth across the portfolio from sustained higher occupancy and
more stable trading conditions. Underlying resident occupancy was 85% for the
portfolio at June 2023 and is 86% at the time of writing, with rent cover for
the June 2023 quarter of 1.75x (June 2022: 1.3x). This improvement to the
financial performance has supported property valuations for our type of
modern, purpose-built assets, as has continued strong investment demand.
Nevertheless, valuations have decreased overall, driven by the downwards
pressure on commercial real estate mainly from higher interest rates and
persistent inflation.
In relative terms, the portfolio has performed well. The portfolio once again
outperformed the MSCI UK Annual Healthcare Property Index in respect of the
calendar year to 31 December 2022 (THRL portfolio total return of 2.5%
relative to the Index's 1.7%), and the like-for-like valuation decrease of
4.1% for the year to 30 June 2023 compares well to the 19% capital decline in
the CBRE UK monthly index (all property) over the same period. The valuation
of the portfolio partially recovered in the second half of the financial year,
with the like-for-like value increasing by 1.5%. The portfolio's annualised
total return since launch now stands at 10.2% while the portfolio's last
five-year period has an annualised total return of 8.6% relative to 8.1% and
6.9% respectively for the MSCI Index.
Rental quality and home trading
We have observed many operators sensibly focussing on admitting new residents
at fee levels appropriate to the care package required, as opposed to
prioritising occupancy. With management of costs, this approach is driving
tenant profitability recovery to levels ahead of those seen prior to the
pandemic. With resident occupancy levels around 5% lower now than
pre-pandemic, further occupancy growth will translate to profitability
increases and improved rent covers.
Average weekly resident fees across the portfolio have increased by 13%,
reflecting the inflationary environment and the cost of care focus noted
above. Operators' staff costs have increased by 6% due to wage increases,
though expensive agency costs have decreased significantly. Energy costs and
other operational expenses of 16% of revenues have remained stable. The
following aspects of our investment strategy and asset management in the year
have enhanced the quality of our rental streams:
• Mature homes(1): 90% of our operational portfolio has passed the
"fill-up" stage and is now mature, relative to 71% at start of the pandemic.
This supports tenant profitability and resilience.
• Private pay bias: High-quality real estate supports tenants in
setting resident fee rates, with further evidence that profitability at such
homes is outperforming Local Authority biased-homes.
• Disposals of £27 million, moving on some of our older, non-core
assets in less preferred geographies to refresh the portfolio.
• Re-tenantings: Full recovery of rent arrears from one tenant (6.4%
of contracted rent roll) and completion of re-tenanting programme with another
tenant, to 3.3% of rent roll from 5.3%.
Mature Homes as a Proportion of Total Portfolio
Mature Homes
Percentage
Q2 2020 73%
Q2 2021 79%
Q2 2022 84%
Q2 2023 90%
UK care home investment market & valuation drivers
Modern and ESG-compliant UK care homes with inflation-linked, long-term rents
have continued to attract investment interest, with several buyers having
remained active in the market through the year. Whilst a number of live
transactions were paused and subject to re-pricing (by c.50bps) immediately
following the mini-budget, there was little deal volume. Instead, sellers
remained patient and net initial yields recovered by 10-20bps as deals
re-emerged for completion early into 2023. This net movement of 30-40bps
remains consistent with where we see pricing today. It should be noted that
institutional buyers remain scarce/limited for non-prime, older care home real
estate with these depressed demand levels likely to impact valuations thereon.
The established, specialist investors have been active in the market through
the year, with a focus on the development of new-builds, and a limited volume
of mature trading assets. The more generalist UK pension funds have become
active again after a period of quiet due to tight yields for the strong tenant
covenants they prefer and are making their way back in, alongside the US REITs
who appear to be targeting the higher end of the yield curve at this point. In
contrast to recent years, the larger European healthcare investors have been
quiet, perhaps focussed on their existing portfolios following operator
challenges on the continent.
On the operator side, we see M&A activity and some consolidation: partly
as some well-run, smaller groups feel market conditions now suit following the
tough pandemic years. Additionally, we see some of the larger operator groups
looking to shift the overall quality and modernity of their estates through
the acquisition of businesses operating exclusively from modern, purpose-built
homes.
Health & social care update
We note below a number of areas which are prominent in our minds and those of
our tenants:
Resident occupancy
Occupancy has continued on a slow but consistent upward trajectory towards
pre-COVID levels. Progress in this respect has, at times, been stalled by
workforce recruitment challenges, but, as mentioned elsewhere, we also note a
new trend toward operators being more fee focused than in the pre-pandemic
era, resisting the natural push to fill beds even where staff are available
but where fees do not reflect the cost of care. Concerns that future residents
have been put off by negative press around care homes during the pandemic seem
to be fading, with good interest reported at lower ends of the acuity scale,
where loneliness, isolation, and security play on people's minds. At the high
end of the scale, acuity has become even more pronounced, as care homes seek
to support the NHS with timely discharges from hospital, and many operators
are focused on this task, but as noted, require sensible fee rates to provide
this level of care.
Public funding of care
Following a trend of more than two decades, reform of (English) Social Care
policy has stalled yet again. New funding in the main has been diverted
primarily to the NHS and wider reform pushed into the long grass. On a more
positive note, the sector (across the whole UK) has at least enjoyed some
silver linings, not least being recognised as an essential contributor to the
health of the NHS. Ring‑fenced Government funding for hospital discharge has
been useful, with continued funds this coming winter expected to benefit all
parties. The "fair cost of care" exercise, implemented to establish core data
for any reform, has proven useful in educating many stakeholders on the true
costs of providing a care home placement. However, the funding of Local
Authority care obligations and the cross‑subsidisation of publicly-funded
residents by private-fee paying residents remains unaddressed.
Staffing pressures
Staffing (recruitment) has settled down to more normalised everyday pressures
compared to the crisis levels felt by many care homes over the last 18 months.
Many operators continue to make use of the sponsorship licences, albeit there
are concerns over calls for restrictions on the legislation. Few homes now are
obliged to restrict occupancy due to staffing pressure, and most have reduced
their agency dependency to occasional routine cover, or in many cases zero
use, which is a welcome position to be in.
There has been much pressure on Government to introduce wider workforce
policies, alongside a campaign to address the stigmas that exist around
working in social care as opposed to the NHS. A funding pot of £600 million
over the next two years was announced, part of which will be available to
promote workforce issues, albeit operators are likely to have little control
over the direction of such funds.
Inflationary pressures
Operators continue to focus on inflation. For two years those who have a
healthy exposure to private residents (which we feel is essential), have been
able to recover escalating costs with corresponding fee rises. Those in the
sector who are not as fortunate to have this flexibility have taken some
comfort in useful public pay awards, albeit not all Local Authorities have
been well positioned (or willing) to match inflation, and pockets of poor
public fee award/pressure remain, not least north of the border. Progressive
operators are also becoming more adept at adopting an 'open book' policy with
public funders (Local Authorities, NHS, etc), and many of the latter have
engaged positively in the setting of fees in light of the current climate.
Families of private residents are also well aware of inflationary pressures
and have therefore generally been acceptive of corresponding fee rises, albeit
operators are concerned that this patience may eventually be exhausted. Care
homes of course, like other businesses, enjoyed some Government protection
from energy price rises previously, but while that protection has come to an
end, we have found that most progressive (and larger) operators have been
reasonably protected from extreme pricing by prudent locking in to fixed price
tariffs.
Pandemic as accelerant to change
While COVID-19 is still with us, and care homes remain on alert but confident
in now well versed infection control protocols, we note that the pandemic has
focussed the minds of many operators on building layout and suitability, and
we believe that the now historic COVID-19 lockdowns may ultimately be seen as
a catalyst for change, where modern homes with self-contained living units and
en suite wet-rooms are regarded as de rigueur, which in time will further
increase demand for quality beds.
Target Fund Managers Limited
9 October 2023
(1) A mature home is a care home which has been in operation for more than
three years.
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
Build a high-quality real estate 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.
Better homes, modernising the sector
The Group's portfolio has historically grown through acquisitions of
individual assets which meet our investment quality criteria.
Today, with the higher cost of capital and our marginal rate of debt financing
currently exceeding initial rental returns, we are choosing to recycle our
capital to ensure our portfolio remains modern and high quality and underpins
the best possible care. This has seen us dispose of five properties in the
current year:
• One property which was below the average standard of the 18-home
portfolio acquired in December 2021.
• Four properties in Northern Ireland, being an exit from that local
market where the fee and funding dynamics outlook is unfavourable.
All disposals were made at or above book value.
Proceeds of the sales have initially been used to repay flexible debt, and
beyond that allocated to the development of new homes. Of the four homes in
development at the start of the year, one reached practical completion in
November, with the 66-bed home leased to a new tenant to the Group on a
35‑year lease. One new 60-bed care home development site was acquired in
January 2023. Following the year end, on 4 July, the Group acquired a pre-let
development site for the construction of a 66‑bed home, which will be built
to exceptional ESG standards, with the highest certification standards
anticipated which offer carbon net zero operational ability.
Funds have also been invested in the continual improvement of the portfolio,
with the conversion of 128 beds into full wet-rooms at four of the Group's
care-homes and work commenced at one care home to add an additional 18 rooms.
A portion of capital has also been allocated to direct carbon reduction
initiatives, most notably the installation of photovoltaic panels.
Valuation Analysis £millions
Valuation at 30 June 2022 912
Acquisitions and developments 20
Disposals (26)
Market yield shift (73)
Rent reviews 36
Valuation at 30 June 2023 869
Valuation movement
The portfolio value reduced by 4.7% during the year, driven by the c.40 basis
points of market yield shift applied as real estate valuations were impacted
by the changed economic conditions. The like-for-like decrease was 4.1%,
largely reflecting the positive impact of the Group's rental growth on
valuations. The Group's disposals and development programmes resulted in a
small net decrease to year-end portfolio value.
Best-in-class real estate
Our investment thesis remains that modern, purpose-built care homes will
out-perform poorer real estate assets and provide compelling returns.
Wet-rooms (98%): These are essential for private and dignified hygiene, with
trends continuing to show residents expect and demand this.
Carbon reduction (94% EPC A or B; 100% C or better): Energy efficiency of real
estate is critical, with legislative change and public opinion demanding
higher standards. Our portfolio is substantially better than peers.
Purpose-built and modern (100%): All our properties are designed and built to
be used as care homes and to best meet the needs of residents and staff.
Financials: Our metrics reflecting capital values and rental levels compare
favourably with peers, demonstrating sustainability and longevity.
Portfolio Differentiators
We know the standard of UK care home real estate. The metrics below compare
our portfolio with other listed care home portfolios.
Group Listed Peer Group(1)
En suite wet-rooms with shower 98% 28%
En suite WC rooms 100% 86%
Purpose-built 2010 onwards 80% 13%
Purpose-built 2000 - 2009 17% 27%
Purpose-built 1990 - 1999 3% 21%
Purpose-built pre-1990's - 20%
Converted property - 19%
Average sqm per bedroom 47 40
EPC B or better 94% 58%
EPC C 6% 35%
EPC D or lower - 7%
Average value per bed £131k £101k
Value per built sqm £2.8k £2.5k
Average rent per bed per annum £8.8k £6.8k
Rent per built sqm £180 £172
(1) The Investment Manager monitors the key statistics for its listed peer
group, and the analysis in the table is the weighted average scores for this
peer group.
Diversification
We continue to ensure the portfolio remains diversified, by leasing our homes
to a range of high-quality regional operators. The Group has 32 tenants, down
from 34 in the previous year due to the disposals in the year. The largest
tenant is unchanged from 2022, being Ideal Carehomes who operate 18 of the
Group's homes and account for 16% of contracted rent as at 30 June 2023.
Overall, our top five tenants account for 41% and top ten, 63% of our
contracted rents.
Underlying resident fees are balanced between private and public sources, with
a deliberate bias towards private. There is long-term evidence and strong
current anecdotal evidence that this group is accepting of higher fees,
particularly for the quality real estate and care services our properties and
their operators provide.
Census data from our tenants shows that 73% of residents are privately-funded,
with 50% being fully private and 23% from "top up" payments where residents
pay over and above that which the Local Authority funds for them. 27% of
residents are wholly publicly funded.
Geographically, Yorkshire and the Humber remains the largest region by asset
value at 25%.
Strategic pillar #2
Manage portfolio as a trusted landlord in a fair and commercial manner.
The Investment Manager has deep experience within the sector and uses its
unique knowledge to manage the portfolio. Starting with informed assessment of
home performance using profitability and operational metrics, through
empathetic and sensitive engagement with our tenants and sector participants
as a whole - we are trusted and respected and people want to partner with us.
This enables fair treatment and commerciality to be balanced, essential in a
complex sector.
What Why Achieved
£27m of disposals • One property of a standard of • Network and relationships identified potential purchasers.
• Five properties. physical real estate that met our strict acquisition criteria when acquired as • Sales proceeds obtained ahead of carrying values and crystallising
part of a portfolio, but which was below the overall standard of the satisfactory IRRs.
• 3% of opening portfolio value. portfolio.
• Proceeds applied to reduce drawn variable rate debt in time of rising
• Four properties with total return outlook lower than that of the overall interest rates.
portfolio given resident funding and fee pressures specific to their
geographic area. • Capital allocated long-term to a next generation energy‑efficient
development.
Engagement with tenants and • Assisted the tenants with operational and cash flow pressures following Demand from care providers for our best-in-class assets allowed us to:
persistence of pandemic affected trading.
wider operator network
• Maintain prevailing rent levels on re-tenanting.
• Protected rental quality and asset values.
Constructive dialogue with two
• Fully recovered £1.1 million of rental arrears from one tenant group with
• Maintained uninterrupted care for residents. fair commercial pressure applied from having agreed terms with alternative
tenants and alternative operators allowed us to:
operators.
• Recover rent arrears from one.
• Re-tenant a further home from
one, moving to our preferred three-home position.
Further investment to maintain • To further increase proportion of wet rooms towards 100%. • £3.7 million of capex committed to, and rentalised at market NIYs.
and enhance property standards • To enhance homes with specific asset management initiatives. • Maintain our commitment to social impact through fit-for-purpose
facilities for all residents.
Portfolio profitability
Rent collection measured 97% (2022: 95%) for the year, with improvement
throughout the year leading to 99% collection for the final quarter of the
financial year.
Our portfolio is fully let therefore continues to have a vacancy rate of nil.
Underlying resident occupancies have grown to 85% at the year end and 86% at
the date of this report. Whilst this remains lower than the pre-pandemic norm
of 90%, many operators are focussed on accepting new residents at fee levels
commensurate with the services provided, rather than filling to capacity at
uneconomic fees. This approach efficiently manages demand, minimises the need
for expensive agency staff, and facilitates a care-led approach when welcoming
new residents to a home. Staffing shortages have eased, having been an
operational challenge limiting occupancy growth early in the year.
Rent covers have grown in response, supporting rental payments and the
rebuilding of tenant financial reserves. Portfolio rent cover for mature homes
for the quarter to 30 June 2023 was 1.75x and for the year was 1.6x. These
profitability and headroom levels are higher than those delivered prior to the
pandemic when occupancy levels were higher, at around 90%. Clearly, there is
potential for enhancement to tenant profitability and rent covers with higher
occupancies, should homes choose to do so (enquiry levels are generally
reported to be high). Whilst the focus of attention has been on resident fee
levels, homes have generally managed their cost bases effectively, with the
reduction in agency cost being the most material improvement.
Total returns and rental growth
The portfolio total return has again outperformed the MSCI UK Annual
Healthcare Property Index, with a total return for the calendar year to 31
December 2022 of 2.5 per cent relative to the Index's 1.7 per cent. This
outperformance has occurred consistently since launch in 2013 as shown in the
table below.
Portfolio MSCI UK Annual Healthcare Property Index total return (%)
total return
(%)
Period to 31 December 2014 20.3 15.0
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
Year to 31 December 2021 10.5 9.6
Year to 31 December 2022 2.5 1.7
Accounting total return was -1.2% for the year ended June 2023 and an
annualised 6.9% since launch. The decline in property values seen in the
second half of 2022 was the main driver of the decrease in NAV, with our
quarterly dividends paid to shareholders now fully covered by earnings (97%
covered for the full year). Property values now appear to have stabilised, as
noted elsewhere, with continued investment demand for prime care homes.
Contractual rent has increased to £56.6 million, with like-for-like rental
growth of 3.8% having been achieved for our annual, upward-only rent reviews
with typical collars and caps at 2% and 4% respectively.
Pence per share
EPRA NTA per share as at 30 June 2022 112.3
Acquisition costs (0.1)
Disposals 0.1
Property revaluations (6.9)
Adjusted EPRA earnings 6.0
Dividends paid (6.5)
Cost of interest rate cap (0.4)
EPRA NTA per share as at 30 June 2023 104.5
Demand for assets from investors and operators
During the year, the Investment Manager's specialist knowledge, data-led
assessment, and wide sector relationships, have allowed successful portfolio
management initiatives noted in the table above to complete.
Tenant engagement and satisfaction
We remain committed to our role as an effective, supportive and engaged
landlord. We once again invited our tenants to provide formal feedback via a
survey, which, alongside learnings from the many points of contact we have, is
used to inform our approach. The survey returned positive quantitative
results, and more usefully some qualitative feedback on how we may consider
altering our interactions with tenants to recognise that no two tenants are
the same.
In summary:
• 10/10 of responders agreed that working with Target was a positive
experience (2022: 9/10).
• 9/10 of responders agreed that Target provides real estate that is
a great working environment and helps deliver dignified care to residents
(2022: 9/10).
• 10/10 of responders agreed that Target participates in sector
events and appropriately shares knowledge (2022: 10/10).
Resident satisfaction
Regulator (CQC in England) ratings are informative but limited. The Investment
Manager also monitors reviews on "Carehome.co.uk", a "Tripadvisor" style
website for care homes, as a useful source of real-time feedback which is more
focussed on the resident experience, and that of their loved ones.
The portfolio's current average rating is 9.4/10 (2022: 9.3/10) with
sufficient review volume and frequency to be considered a valuable data point
for the quality of service experienced by residents.
Strategic pillar #3
Regular dividends for shareholders
Total dividends of 6.18 pence per share were declared and paid in respect of
the year to 30 June 2023, a decrease of 0.58 pence on 2022 reflecting the
decision to reduce the dividend from 1 January 2023. This represents a yield
of 8.6% based on the 30 June 2023 closing share price of 71.8 pence.
Earnings
Earnings increased by 19%, as measured by adjusted EPRA EPS; the Group's
primary performance measure. Rental income has increased, with operating
expenses and financing costs being managed effectively.
Despite the disposal of five assets, rental income increased by 13% (£6.6
million) over the prior year, driven by the full-year effect of a significant
portfolio of assets acquired part-way through the previous year,
inflation-linked rental growth and the practical completion of development
assets and new leases entered into.
The Group's operating expenses reduced by £3.0 million from the effects of
the portfolio's trading performance improvements. In line with the increase to
near full rent collection, credit loss allowances and bad debts improved to a
charge of £0.3 million, £2.9 million lower than the prior year. Other
administrative expenses remained consistent with 2022.
Net finance costs increased from £6.6 million to £10.1 million,
predominantly driven by the annualisation effect of the increase in drawn debt
in the previous year relating to the acquisition of the portfolio of assets.
The significant increase in market interest rates in the second half of the
financial year have been managed through existing fixed or hedged debt
arrangements, supplemented by the acquisition of a £50 million 3% SONIA cap
in November 2022, which has protected the Group's interest costs from further
increases in interest rates as SONIA has risen to 4.93% at 30 June 2023.
Expense ratio
The Group's expense ratios reflect these movements.
The EPRA cost ratio decreased to 15.8% in 2023 from 21.5% in 2022 as a result
of the significant reduction in the credit loss allowance and bad debts in the
year. Both the Investment Manager fee and other expenses were broadly in line
with the prior year in absolute terms resulting in a decrease in the cost
ratio expressed as a percentage of the Group's increased rental income. The
Ongoing Charges Figure was fairly stable at 1.53% (2022: 1.51%), the marginal
increase driven by the decrease in the value of the portfolio.
2023 2022
£m Movement £m
Rental income (excluding guaranteed uplifts) 56.4 +13% 49.8
Administrative expenses (including management fee) (10.7) -22% (13.7)
Net financing costs (9.4) +42% (6.6)
Interest from development funding 0.9 +13% 0.8
Adjusted EPRA earnings 37.2 +23% 30.2
Adjusted EPRA EPS (pence) 6.00 +19% 5.05
EPRA EPS (pence) 7.67 +16% 6.62
Adjusted EPRA cost ratio 18.7% -840bps 27.1%
EPRA cost ratio 15.8% -570bps 21.5%
Ongoing Charges Figure ('OCF') 1.53% +2bps 1.51%
Uninvested Capital
At 30 June 2023 the Group had cash and undrawn debt of £105 million. £41.5
million of this is committed to developments or portfolio improvements, with
£16.0m allocated to the acquisition of a further development site post year
end which was awaiting drawdown. £47.5 million remains available. The Group
continues to assess pipeline assets carefully on a case-by-case basis, with
respect to market conditions and financing costs.
Debt
Debt facilities were unchanged in the year at £320m. The Group's £100
million revolving credit facility with HSBC was extended by one year to
November 2025 and at 30 June 2023 the weighted average term to expiry on the
Group's total committed loan facilities was 6.2 years (30 June 2022: 6.9
years)
In November 2022, the Group acquired a 3% SONIA interest rate cap, covering
£50 million of the Group's revolving credit facilities. £230 million of the
£320 million available debt was drawn at 30 June 2023, at a weighted average
cost, inclusive of amortisation of loan arrangement costs, of 3.70%.
£180 million of the drawn debt was fixed prior to the significant rise in
interest rates seen in the second half of 2022.
The Group retains flexibility on debt levels, with £90 million of the Group's
revolving credit facilities available to be drawn/repaid in line with capital
requirements. If drawn, appropriate hedging protection will be considered.
Debt facilities are considered prudent with LTV of 24.7%, weighted average
term of 6.2 years and all debt drawn at 30 June 2023 being hedged against
further interest rate increases.
Debt provider Facility size Drawn at
Debt type 30 June 2023 Maturity
Phoenix Group £150m Term debt £150m (fixed rate) Jan 2032 - £87m
Jan 2037 - £63m
RBS £70m £30m term debt, £40m revolving credit facility £30m (hedged) Nov 2025
HSBC £100m Revolving credit facility £50m (hedged) Nov 2025
Total £320m £230m
Strategic pillar #4
To achieve our social purpose
ESG Principles What this means for Target What we did in 2023 What we'll do in 2024 and beyond
1. Responsible investment Leading in social impact for care home real estate Social Social
As an investor we understand that our actions have influence. We use our • We understand the importance of maintaining a portfolio that supports the • Development commitments for 262 new beds as at year-end. • Continue to advocate for quality real estate
platform to lead by example through embedding appropriate ESG considerations needs and well-being of residents, our tenants and their staff, which in turn
into our decision-making. contributes to the long-term sustainability of social care infrastructure in • 66 new beds construction completed in year. • Continue to fund new homes, modernising the sector's real estate
the UK.
• 98% wet-rooms.
• Homes provide space of 47m(2) per resident.
Energy and climate change: Responsible acquisitions and portfolio management
• All real estate has generous social and useable outdoor space.
• Energy efficiency is a specific consideration in our investment analysis
for acquisitions,
developments and portfolio management decisions.
Energy
• In our role as a responsible landlord we are committed to helping our
tenants identify • 100% A-C EPC ratings.
and implement energy reduction and efficiency measures. • Increased data collection to obtain portfolio coverage of 75% electricity
and 79% gas usage.
• Used this data to benchmark energy usage and identify outlier homes - Energy
providing insightful feedback to tenants.
• Continue data analysis to best target portfolio enhancements.
• Further used the data to target green building enhancements with £1
million of funding allocated to solar PV panels, delivering 20% CO(2) • Assess ongoing asset reviews and certifications (i.e. EPCs, BREEAMs) to
reduction per home. initiate improvement programmes where aligned with long-term value.
• External specialist engaged with carbon technical skills to guide in • Increase proportion of leases with "green" reporting provisions to gather
setting tangible and measurable targets by way of a steps plan to Net Zero. more data on energy consumption patterns from our tenants for use in
decision-making.
2. Responsible partnerships Tenant selection, engagement and collaboration Tenants Tenants
We engage with all our stakeholders to drive the creation of economic, social • As a responsible, proactive landlord we prioritise good, open • 10/10 "positive experience" satisfaction score. • Invest in fully understanding and responding to feedback from tenant
and environmental value around our buildings and in wider society. relationships with our tenants, sharing best practice.
survey.
• Reprised hosting of tenant event with focus on knowledge sharing and best
• We make sure that we solicit, assess and respond to feedback on our practice.
portfolio and our behaviours to ensure carers are respected and residents are
cared for with dignity.
• We 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.
Communities
Communities
• Re-tenanted homes with new tenants committed to continuing care provision
where required. • Continue to prioritise the provision of modern real estate and continuity
of services across our portfolio.
• Worked constructively with tenants in rental arrears to deliver positive
solutions to maintain continuity of care.
3. Responsible business Governance and transparency Governance and transparency Governance and transparency
We will treat all stakeholders with • We uphold the highest ethical standards and adhere to best practice in • Undertook director recruitment process resulting in Michael Brodtman and • ESG committee will continue to provide momentum to the Group's carbon
every aspect of our business. Richard Cotton being appointed during the year. reduction investment and sustainability reporting.
respect and deal fairly in a manner consistent with how we would expect to be
treated ourselves • Our governance and behaviour treat transparency for all of our • Investment Manager successfully retained position as a signatory to the
stakeholders as core. FRC Stewardship Code.
• £1.3 million taxation directly paid to the UK government by way of VAT
and stamp duty land taxes. Dividends paid of £40.1 million are assessed for
People, culture and wellbeing tax upon reaching shareholders.
• We encourage employment practices across our key service providers that • Inaugural ESG report issued with enhanced disclosures.
reflect our core values, with a focus on wellbeing, fairness and opportunity
for all.
Principal and emerging risks and uncertainties
Risk Description of risk and factors Mitigation
affecting risk rating
Poor performance of assets There is a risk that a tenant's business could become unsustainable if it The Investment Manager focuses on tenant diversification across the portfolio
fails to trade successfully. This could lead to a loss of income for the Group and, considering the local market dynamics for each home, focuses on ensuring
Risk rating & change: High (unchanged) and an adverse impact on the Group's results and shareholder returns. The that rents are set at sustainable levels. Rent deposits or other guarantees
strategy of investing in new purpose-built care homes could lead to additional are sought, where appropriate, to provide additional security for the Group.
fill-up risk and there may be a limited amount of time that small regional The Investment Manager has ongoing engagement with the Group's tenants to
operators can fund start-up losses. proactively assist and monitor performance.
High inflationary An increase in the UK inflation rate to a level above the rent review caps in The Group's portfolio includes inflation-linked leases, with primarily annual
place across the portfolio's long-term leases may result in a real term upwards-only rent reviews within a cap and collar. The Manager is monitoring
environment decrease in the Group's income and be detrimental to its performance. In tenant performance, including whether average weekly fees paid by the
addition, cost increases for tenants, particularly in relation to staffing and underlying diversified mix of publicly funded and private-fee paying residents
Risk rating & change: utilities, may erode their profitability and rent cover unless their revenue are growing in line with inflation.
increases accordingly.
High (unchanged)
Adverse interest Adverse interest rate fluctuations will increase the cost of the Group's The Group has a conservative gearing strategy, although net gearing is
variable rate debt facilities; limit borrowing capacity; adversely impact anticipated to increase as the Group nears full investment. Loan covenants and
rate fluctuations property valuations; and be detrimental to the Group's overall returns. liquidity levels are closely monitored for compliance and headroom. The Group
has fixed interest costs on £230 million of borrowings as at 30 June 2023.
/ debt covenant
compliance
Risk rating & change:
Medium (decreased)
Development The high inflationary environment, particularly for building materials and The Group is not significantly exposed to development risk, with forward
staff, combined with supply chain difficulties, may result in an increased funded acquisitions being developed under fixed price contracts, with the
costs risk that the developers of contracted developments do not fulfil their Investment Manager having considered both the financial strength of the
obligations and/or may increase the cost of new development opportunities. developer and the ability of the developer's profit to absorb any cost
Risk rating & change: overruns.
Medium (unchanged)
Negative A negative perception of the care home sector, due to matters such as societal The Group is committed to investing in high quality real estate with high
trends, pandemic or safeguarding failures, or difficulties in accessing social quality operators. These assets are expected to experience demand ahead of the
perception of care, may result in a reduction in demand for care home beds, causing asset sector average while in the wider market a large number of care homes without
performance to fall below expectations despite the demographic shifts and the fit-for-purpose facilities are expected to close. A trend of improving
the care home realities of needs-based demand in the sector. The resultant reputational occupancy rates across the portfolio has been noted in recent times.
damage could impact occupancy levels and rent covers across the portfolio.
sector
Risk rating & change:
Medium (increased)
ESG and climate A change in climate, such as an increased risk of local or coastal flooding, The Group is committed to investing in high quality real estate with high
or a change in tenant/ investor demands or regulatory requirements for quality operators.
change properties which meet certain environmental criteria, such as integral heat
pumps, may result in a fall in demand for the Group's properties, reducing The portfolio's EPC and BREEAM in-use ratings suggest the portfolio is well
Risk rating & change: rental income and/or property valuations. positioned to meet future requirements/expectations. The Investment Manager
has introduced a house standard to ensure ESG factors are fully considered
Medium (unchanged) during the acquisition process.
Reduced The combined impacts of the pandemic and increased employment and wage The Group is committed to investing in high quality real estate with high
inflation in competing sectors has reduced the availability of key staff in quality operators and these should be better placed to attract staff. The
availability of the care sector which may result in a reduction in the quality of care for Investment Manager continues to engage with tenants in the portfolio and to
underlying residents, restrict tenants from being able to admit residents or share examples of best practice in recruitment and retention of staff.
carers, nurses result in wage inflation.
and other care
home staff
Risk rating & change:
Medium (unchanged)
Breach A breach of REIT regulations, primarily in relation to making the necessary The Group's activities, including the level of distributions, are monitored to
level of distributions, may result in loss of tax advantages derived from the ensure all conditions are adhered to. The REIT rules are considered during
of REIT Group's REIT status. The Group remains fully compliant with the REIT investment appraisal and transactions structured to ensure conditions are met.
regulations and is fully domiciled in the UK.
regulations
Risk rating & change:
Medium (unchanged)
Changes in Changes in government policies, including those affecting local authority Government policy is monitored by the Group to increase the ability to
funding of care, may render the Group's strategy inappropriate. Secure income anticipate changes. The Group's tenants also typically have a multiplicity of
government and property valuations will be at risk if tenant finances suffer from policy income sources, with their business models not wholly dependent on government
changes. funding.
policies
Risk rating & change:
Medium (unchanged)
Availability Without access to equity or debt capital, the Group may be unable to grow The Group maintains regular communication with investors and existing debt
through acquisition of attractive investment opportunities. This is likely to providers, and, with the assistance of its broker and sponsor, regularly
of capital be driven by both investor demand and lender appetite which will reflect Group monitors the Group's capital requirements and investment pipeline alongside
performance, competitor performance, general market conditions and the opportunities to raise both equity and debt. During the year, the Group has
Risk rating & change: relative attractiveness of investment in UK healthcare property. extended its £100m RCF facility with HSBC by one year.
Medium (unchanged)
Reliance on The Group is externally managed and, as such, relies on a number of service The Investment Manager, along with all other service providers, is subject to
providers. Poor quality service from providers such as the Investment Manager, regular performance appraisal by the Board. The Manager has retained key
third party company secretary, broker, legal advisers or depositary could have potentially personnel since the Group's IPO and has successfully hired further skilled
negative impacts on the Group's investment performance, legal obligations, individuals and invested in its systems.
service compliance or shareholder relations.
providers
Risk rating & change:
Medium (unchanged)
Failure to Failing to differentiate strategy and qualities from competitors is a The stakeholder communications strategy of the Group has always been to
significant risk for the business, with increased competition in the highlight the quality of the real estate in which the Group invests. The
differentiate healthcare real estate sector. The failure to communicate these effectively to regular production of investor relations materials (annual and interim
stakeholders could have a negative impact on the Company's share price, future reports, investor presentations and quarterly factsheets) along with direct
qualities from demand for equity raises and/or debt finance and wider reputational damage. engagement with investors helps to mitigate this risk.
competitors or
poor investment
performance
Risk rating & change:
Medium (unchanged)
The Company's risk matrix is reviewed regularly by the Board. Emerging risks
are identified though regular discussion at Board meetings of matters relevant
to the Company and the sectors in which it operates; including matters that
may impact on the underlying tenant operators. In addition, the Board holds an
annual two-day strategy meeting which includes presentations from relevant
external parties to ensure that the Board are fully briefed on relevant
matters. At the strategy meeting, principal and emerging risks are discussed
and reviewed to ensure that they have all been appropriately identified and,
where necessary, addressed. The detailed consideration of the Company's
viability and its continuation as a going concern, including sensitivity
analysis to address the appropriate risks, is set out below.
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 (1)
(a)-(f) of the Companies Act 2006 for the financial year to 30 June 2023,
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 26.5
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 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
suppliers, customers and others 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 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
the environment 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 The Board requires high standards of itself, service providers and
of business conduct 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 net revenue concluded that it
was in the interests of all stakeholders to reduce the Company's dividend to a
level at which it is expected to be fully covered with the potential for
growth.
Ongoing investment and asset management activity
The Group acquired two new development sites, including one in July 2023. The
new, high-quality beds which will be added to the market when these
developments complete, combined with the Group's asset management activities
to increase the percentage of wet rooms in the property portfolio to 98% and
add further beds at another of the Group's properties, illustrate the Group's
intent of improving the overall level of care home real estate in the UK. This
approach targets attractive long‑term returns to shareholders by focusing on
a sustainable and 'future proofed' sector of the care home market. The latest
development site acquired is for a care home to be built to exceptional ESG
standards, with the highest certifications anticipated, which will offer
carbon net-zero operational ability.
The sale of four homes in Northern Ireland was completed in the year. This
followed the successful re-tenanting of the properties in the prior year and
crystallised an annualised ungeared IRR in excess of 10% over the period of
ownership. The disposal represented a full exit from the Northern Irish market
and formed part of the Group's wider capital recycling and asset management
strategy. The Group also sold a non-core asset that had been acquired as part
of the 18-home portfolio in the prior year.
Capital financing
The Group extended its loan facility with HSBC plc by a further year, to
November 2025 and entered into an interest rate cap on the £50 million of
this facility currently drawn in order to reduce the Group's exposure to
rising interest rates on its borrowings.
Director appointments
During the year, as part of the Board succession plan, Mr Cotton and Mr
Brodtman were appointed as Directors. Mr Cotton's experience of real estate
corporate finance and Mr Brodtman's extensive knowledge of the property sector
is expected to benefit all stakeholders over the period of their respective
appointments. These appointments complete the Board's succession plan for the
medium term.
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 Chair and other
Directors make themselves available to meet shareholders when required to
discuss the Group's business and address shareholder queries. The Directors
make themselves available at the AGM in person, with the Company also
providing the ability for any questions to be raised with the Board by email
in advance of the meeting.
The Company and Investment Manager also provide 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 intends to hold a results
presentation on the day of publication of the Annual Report, as undertaken for
the first time in October 2022, and will also meet with analysts and members
of the financial press.
Tenants and underlying residents 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, such as
carehome.co.uk. 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 Phoenix Group (see Note 7 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
2023 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, are 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 its portfolio which will be used to align the
portfolio appropriately with benchmarks over the medium and longer term.
During the year, the Group has improved its ESG reporting through the
introduction of its annual Sustainability Report, first published in March
2023, and through collating, submitting and publishing data under the GRESB
benchmark standards. Under the remit of the newly established ESG Committee,
the Board has encouraged the further development of the Investment Manager's
property-by-property asset management plan to identify areas where the energy
efficiency and carbon emissions of the Group's property portfolio can be
further improved and approved an initial budget to action initiatives
identified.
Alison Fyfe
Chair
9 October 2023
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.
At 30 June 2023, the Group had a property portfolio which has long leases and
a weighted average unexpired lease term of 26.5 years. The Group had drawn
borrowings of £230.0 million, on which the interest rate had been fixed,
either directly or through the use of interest rate derivatives, at a maximum
weighted interest rate of 3.52 per cent per annum (excluding the amortisation
of arrangement costs). The Group had access to a further £90.0 million of
available debt under committed loan facilities which,
if drawn, would carry interest at a variable rate equal to SONIA plus 2.21%.
The Group's committed loan facilities have staggered expiry dates with £170.0
million being committed to 5 November 2025, £87.3 million to 12 January 2032
and £62.7 million to 12 January 2037. Discussions with existing and/or new
potential lenders do not indicate any issues with re-financing 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;
· High inflationary environment: The risk that the level of the UK
inflation rate results in a real term decrease in the Group's income or erodes
the profitability of tenants;
· Adverse interest rate fluctuations: The risk that an increase in
interest rates may impact property valuations, increase the cost of the
Group's variable rate debt facilities, and/or limit the Group's borrowing
capacity;
· Negative perception of the care home sector 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; and
· 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 tenants' rental
cover and leading to a loss of rental income for the Group.
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 cumulative impact on each tenant's financial reserves
from recent economic conditions, including increasing staff and utilities
costs and the reduced level of resident occupancy experienced following the
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
2023
Year ended 30 June 2022
Year ended 30 June 2023
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Rental income 56,354 11,308 67,662 48,807 10,215 59,022
Other rental income - - - 796 3,877 4,673
Other income 86 - 86 164 - 164
Total revenue 56,440 11,308 67,748 49,767 14,092 63,859
(Losses)/gains on revaluation of investment properties 5 - (54,021) (54,021) - 5,553 5,553
Gains on investment properties realised 5 - 575 575 - - -
Losses on revaluation of properties held for sale - - - - (7) (7)
Total income 56,440 (42,138) 14,302 49,767 19,638 69,405
Expenditure
Investment management fee 2 (7,428) - (7,428) (7,307) - (7,307)
Credit loss allowance and bad debts 3 (264) - (264) (3,232) - (3,232)
Other expenses 3 (3,046) - (3,046) (3,163) - (3,163)
Total expenditure (10,738) - (10,738) (13,702) - (13,702)
Profit/(loss) before finance costs and taxation 45,702 (42,138) 3,564 36,065 19,638 55,703
Net finance costs
Interest income 134 - 134 71 - 71
Finance costs (9,572) (698) (10,270) (6,671) - (6,671)
Net finance costs (9,438) (698) (10,136) (6,600) - (6,600)
Profit/(loss) before taxation 36,264 (42,836) (6,572) 29,465 19,638 49,103
Taxation - - - (6) - (6)
Profit/(loss) for the year 36,264 (42,836) (6,572) 29,459 19,638 49,097
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate derivatives designated as cash flow - 2,742 2,742 - 2,033 2,033
hedges
Total comprehensive income for the year 36,264 (40,094) (3,830) 29,459 21,671 51,130
Earnings per share (pence) 4 5.85 (6.91) (1.06) 4.92 3.28 8.20
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 2023
As at As at
30 June 2023 30 June 2022
Notes £'000 £'000
Non-current assets
Investment properties 5 800,155 857,691
Trade and other receivables 76,373 63,651
Interest rate derivatives 6,905 2,284
883,433 923,626
Current assets
Trade and other receivables 9,459 5,549
Cash and cash equivalents 15,366 34,483
24,825 40,032
Total assets 908,258 963,658
Non-current liabilities
Loans 7 (227,051) (231,383)
Trade and other payables (8,093) (7,145)
(235,144) (238,528)
Current liabilities
Trade and other payables (18,306) (26,363)
Total liabilities (253,450) (264,891)
Net assets 654,808 698,767
Share capital and reserves
Share capital 8 6,202 6,202
Share premium 8 256,633 256,633
Merger reserve 47,751 47,751
Distributable reserve 187,887 226,461
Hedging reserve 5,026 2,284
Capital reserve 40,914 83,750
Revenue reserve 110,395 75,686
Equity shareholders' funds 654,808 698,767
Net asset value per ordinary share (pence) 4 105.6 112.7
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2023
Distrib-utable
Share capital Share premium Merger reserve reserve Hedging Capital reserve Revenue reserve
reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 30 June 2022 6,202 256,633 47,751 226,461 2,284 83,750 75,686 698,767
Total comprehensive income for the year:
- - - - 2,742 (42,836) 36,264 (3,830)
Transactions with owners recognised in equity:
Dividends paid 1 - - - (38,574) - - (1,555) (40,129)
At 30 June 2023 6,202 256,633 47,751 187,887 5,026 40,914 110,395 654,808
For the year ended 30 June 2022
Distrib-utable
Share capital Share premium Merger reserve reserve Hedging Capital reserve Revenue reserve
reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 30 June 2021 5,115 135,228 47,751 265,164 251 64,112 47,564 565,185
Total comprehensive income for the year:
- - - - 2,033 19,638 29,459 51,130
Transactions with owners recognised in equity:
Dividends paid 1 - - - (38,703) - - (1,337) (40,040)
Issue of ordinary shares 8 1,087 123,913 - - - - - 125,000
Expenses of issue 8 - (2,508) - - - - - (2,508)
At 30 June 2022 6,202 256,633 47,751 226,461 2,284 83,750 75,686 698,767
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2023
Year ended Year ended
30 June 2023 30 June 2022
Note £'000 £'000
Cash flows from operating activities
(Loss)/profit before tax (6,572) 49,103
Adjustments for:
Interest income (134) (71)
Finance costs 10,270 6,671
Revaluation gains on investment properties and movements in lease incentives, 5 42,138 (19,645)
net of acquisition costs written off
Revaluation losses on properties held for sale - 7
Increase in trade and other receivables (4,550) (3,768)
(Decrease)/increase in trade and other payables (325) 3,340
40,827 35,637
Interest paid (8,719) (5,310)
Premium paid on interest rate cap (2,577) -
Interest received 134 71
Tax paid - (6)
(11,162) (5,245)
Net cash inflow from operating activities 29,665 30,392
Cash flows from investing activities
Purchase of investment properties and properties held for sale, including (29,342) (206,993)
acquisition costs
Disposal of investment properties and properties held for sale, net of lease 25,789 4,360
incentives
Net cash outflow from investing activities (3,553) (202,633)
Cash flows from financing activities
Issue of ordinary share capital - 125,000
Expenses of issue of ordinary share capital - (2,508)
Drawdown of bank loan facilities 62,000 222,000
Repayment of bank loan facilities (66,750) (117,250)
Expenses of arrangement of bank loan facilities (205) (1,839)
Dividends paid (40,274) (39,785)
Net cash (outflow)/inflow from financing activities (45,229) 185,618
Net (decrease)/increase in cash and cash equivalents (19,117) 13,377
Opening cash and cash equivalents 34,483 21,106
Closing cash and cash equivalents 15,366 34,483
Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives 13,516 12,148
Fixed or guaranteed rent reviews derecognised on disposal or (732) (3,362)
re-tenanting
Total 12,784 8,786
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 2023, of which this statement of results is an extract,
have been prepared in accordance with applicable UK-adopted 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
Alison Fyfe
Chair
9 October 2023
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June
2023.
Dividend rate Year ended
(pence per share) 30 June 2023
£'000
Fourth interim dividend for the year ended 30 June 2022 1.69 10,482
First interim dividend for the year ended 30 June 2023 1.69 10,482
Second interim dividend for the year ended 30 June 2023 1.69 10,482
Third interim dividend for the year ended 30 June 2023 1.40 8,683
Total 6.47 40,129
Amounts paid as distributions to equity holders during the year to 30 June
2022.
Dividend rate Year ended
(pence per share) 30 June 2022
£'000
Fourth interim dividend for the year ended 30 June 2021 1.68 8,594
First interim dividend for the year ended 30 June 2022 1.69 10,482
Second interim dividend for the year ended 30 June 2022 1.69 10,482
Third interim dividend for the year ended 30 June 2022 1.69 10,482
Total 6.75 40,040
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 2023, of 1.40
pence per share, was paid on 25 August 2023 to shareholders on the register on
11 August 2023 and amounted to £8,683,000. 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 Year ended
30 June 2023 30 June 2022
£'000 £'000
Investment management fee 7,428 7,307
Total 7,428 7,307
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
calculated 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 £141,000 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 Year ended
30 June 2023 30 June 2022
£'000 £'000
Total movement in credit loss allowance (4,991) 2,865
Bad debts written off 5,255 367
Credit loss allowance charge 264 3,232
Year ended Year ended
30 June 2023 30 June 2022
£'000 £'000
Valuation and other professional fees 1,131 1,143
Auditor's remuneration for:
- statutory audit of the Company 131 118
- statutory audit of the Company's subsidiaries 221 230
- review of interim financial information 16 16
Other taxation compliance and advisory* 258 361
Public relations and marketing 229 327
Directors' fees 218 214
Secretarial and administration fees 208 177
Direct property costs 182 160
Printing, postage and website 95 111
Listing and Registrar fees 114 102
Other 243 204
Total other expenses 3,046 3,163
* 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 2023 Year ended 30 June 2022
£'000 Pence per share £'000 Pence per share
Revenue earnings 36,264 5.85 29,459 4.92
Capital earnings (42,836) (6.91) 19,638 3.28
Total earnings (6,572) (1.06) 49,097 8.20
Average number of shares in issue 620,237,346 599,093,808
There were no dilutive shares or potentially dilutive shares in issue.
EPRA is an industry body which issues best practice reporting guidelines for
financial disclosures by public real estate companies and the Group reports 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 Year
30 June 2023 ended
£'000 30 June 2022
£'000
Earnings per IFRS Consolidated Statement of Comprehensive Income (6,572) 49,097
Adjusted for gains on investment properties realised (575) -
Adjusted for revaluations of investment properties 54,021 (5,553)
Adjusted for revaluations of properties held for sale - 7
Adjusted for finance and transaction costs on the interest rate cap and other 698 (3,877)
capital items
EPRA earnings 47,572 39,674
Adjusted for rental income arising from recognising guaranteed rent review (11,308) (10,215)
uplifts
Adjusted for development interest under forward fund agreements 952 783
Group specific adjusted EPRA earnings 37,216 30,242
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income (1.06) 8.20
EPRA EPS 7.67 6.62
Group specific adjusted EPRA EPS 6.00 5.05
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 105.6 pence (2022: 112.7
pence) is based on equity shareholders' funds of £654,808,000 (2022:
£698,767,000) and on 620,237,346 (2022: 620,237,346) ordinary shares, being
the number of shares in issue at the year-end.
The EPRA best practice recommendations include a 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 2023, 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 facilities where the fair value is estimated to be lower than
the nominal value. See note 7 for further details on the Group's loan
facilities.
2023 2023 2023 2022 2022 2022
EPRA NRV EPRA NTA EPRA NDV EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000 £'000 £'000 £'000
IFRS NAV per financial statements 654,808 654,808 654,808 698,767 698,767 698,767
Fair value of interest rate derivatives (6,905) (6,905) - (2,284) (2,284) -
Fair value of loans - - 39,672 - - 22,257
Estimated purchasers' costs 57,461 - - 60,225 - -
EPRA net assets 705,364 647,903 694,480 756,708 696,483 721,024
EPRA net assets (pence per share) 113.7 104.5 112.0 122.0 112.3 116.2
5. Investment properties
Freehold and leasehold properties
As at As at
30 June 2023 30 June 2022
£'000 £'000
Opening market value 911,596 677,525
Opening fixed or guaranteed rent reviews and lease incentives (56,705) (47,919)
Opening performance payments 2,800 1,550
Opening carrying value 857,691 631,156
Disposals - proceeds (26,728) -
- gain on sale 6,088 -
Purchases and performance payments 23,494 199,869
Transfer from properties held for sale - 6,830
Acquisition costs capitalised 273 9,671
Acquisition costs written off (273) (9,671)
Unrealised gain realised during the year (5,513) -
Revaluation movement - gains 3,645 43,234
Revaluation movement - losses (43,877) (15,862)
Movement in market value (42,891) 234,071
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal
or re-tenanting
1,671 3,362
Movement in fixed or guaranteed rent reviews and lease incentives (13,516) (12,148)
Movement in performance payments (2,800) 1,250
Movement in carrying value (57,536) 226,535
Closing market value 868,705 911,596
Closing fixed or guaranteed rent reviews and lease incentives (68,550) (56,705)
Closing performance payments (see Note 10) - 2,800
Closing carrying value 800,155 857,691
Changes in the valuation of investment properties Year ended Year ended
30 June 2023 30 June 2022
£'000 £'000
Gain on sale of investment properties 6,088 -
Unrealised gain realised during the year (5,513) -
Gains on sale of investment properties realised 575 -
Revaluation movement (40,232) 27,372
Acquisition costs written off (273) (9,671)
Movement in lease incentives (2,208) (1,933)
Movement in fixed or guaranteed rent reviews (11,308) (10,215)
(Losses)/gains on revaluation of investment properties (53,446) 5,553
The investment properties can be analysed as follows:
As at As at
30 June 2023 30 June 2022
£'000 £'000
Standing assets 851,305 892,336
Developments under forward fund agreements 17,400 19,260
Closing market value 868,705 911,596
The properties were valued at £868,705,000 (2022: £911,596,000) 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 2022) 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 £800,155,000 (2022:
£857,691,000). The adjustment consisted of £59,378,000 (2022: £48,802,000)
relating to fixed or guaranteed rent reviews and £9,172,000 (2022:
£7,903,000) 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'. An adjustment is also made to
reflect the amount by which the portfolio value is expected to increase if the
performance payments recognised in 'trade and other payables' are paid and the
passing rent at the relevant property increased accordingly (see Note 10). The
total purchases in the year to 30 June 2023, excluding the performance
payments recognised in the prior year, were £20,694,000 (2022:
£201,119,000).
6. Investment in subsidiary undertakings
The Group included 49 subsidiary companies as at 30 June 2023 (30 June 2022:
57). 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.
The Group did not incorporate or acquire any new subsidiaries during the year.
At 30 June 2022, the Group included eight companies which had been acquired as
part of previous corporate acquisitions and which, having remained dormant
throughout the prior year, were dissolved during the year ended 30 June 2023.
7. Loans
As at As at
30 June 2023 30 June 2022
£'000 £'000
Principal amount outstanding 230,000 234,750
Set-up costs (4,520) (4,315)
Amortisation of set-up costs 1,571 948
Total 227,051 231,383
In November 2020, the Group entered into a £70,000,000 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 £50,000,000 of
the facility and 2.33 per cent per annum on the remaining £20,000,000
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
£20,000,000 of any undrawn element of the facility, reducing to 1.05 per cent
per annum thereafter. As at 30 June 2023, the Group had drawn £30,000,000
under this facility (2022: £50,000,000).
In November 2020, the Group entered into a £100,000,000 revolving credit
facility with HSBC Bank plc ('HSBC') 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
2.17 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.
As at 30 June 2023, the Group had drawn £50,000,000 under this facility
(2022: £34,750,000).
In January 2020 and November 2021, the Group entered into committed term loan
facilities with Phoenix Group of £50,000,000 and £37,250,000, respectively.
Both these facilities are repayable on 12 January 2032. The Group has a
further committed term loan facility with Phoenix Group of £62,750,000 which
is repayable on 12 January 2037. Interest accrues on these three loans at
aggregate annual fixed rates of interest of 3.28 per cent, 3.13 per cent and
3.14 per cent, respectively and is payable quarterly. As at 30 June 2023, the
Group had drawn £150,000,000 under these facilities (2022: £150,000,000).
The following interest rate derivatives were in place during the year ended 30
June 2023:
Notional Value Interest Paid Counter-party
Starting Date Ending Date Interest Received
30,000,000 5 November 2020 5 November 2025 0.30% Daily compounded SONIA (floor at RBS
-0.08%)
50,000,000 1 November 2022 5 November 2025 nil Daily compounded SONIA above 3.0% cap HSBC
The Group paid a premium of £2,577,000, inclusive of transaction costs of
£169,000, on entry into the £50,000,000 interest rate cap.
At 30 June 2023, inclusive of the interest rate derivatives, the interest rate
on £230,000,000 of the Group's borrowings has been capped, including the
amortisation of loan arrangement costs, at an all-in rate of 3.70 per cent per
annum until at least 5 November 2025. The remaining £90,000,000 of debt,
which was undrawn at 30 June 2023, would, if fully drawn, carry interest at a
variable rate equal to daily compounded SONIA plus a weighted average lending
margin, including the amortisation of loan arrangement costs, of 2.46 per cent
per annum.
The aggregate fair value of the interest rate derivatives held at 30 June 2023
was an asset of £6,905,000 (2022: £2,284,000). The Group categorises all
interest rate derivatives as level 2 in the fair value hierarchy.
At 30 June 2023, the nominal value of the Group's loans equated to
£230,000,000 (2022: £234,750,000). Excluding the interest rate derivatives
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 2023, totalled, in aggregate,
£190,328,000 (2022: £212,493,000). The payment required to redeem the loans
in full, incorporating the terms of the Spens clause in relation to the
Phoenix Group facilities, would have been £209,898,000 (2022: £239,728,000).
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 five subsidiaries. The Phoenix Group loans of
£50,000,000 and £37,250,000 are 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 eight subsidiaries. The Phoenix Group
loan of £62,750,000 is secured by way of a fixed and floating charge over the
majority of the assets of THR Number 43 plc ('THR43'). 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. In aggregate, the Group has granted a fixed charge over
properties with a market value of £762,100,000 as at 30 June 2023 (2022:
£795,949,000).
Under the 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 and THR43 does not
exceed 60 per cent;
· the interest cover for THR1 Group is greater than 225 per cent
(30 June 2022: 300 per cent) on any calculation date;
· the interest cover for THR15 Group is greater than 200 per cent
(30 June 2022: 300 per cent) on any calculation date; and
· the debt yield for each of THR12 Group and THR43 is greater than
10 per cent on any calculation date.
During the year ended 30 June 2023, the Group entered into agreements with
HSBC and RBS to relax the interest cover covenants on the relevant loans with
effect from 1 January 2023. All other significant terms of the facilities
remained unchanged. All loan covenants have been complied with during the
year.
Analysis of net debt:
Cash and cash equivalents Cash and cash equivalents
Borrowing Net debt Borrowing Net debt
2023 2023 2023 2022 2022 2022
£'000 £'000 £'000 £'000 £'000 £'000
Opening balance 34,483 (231,383) (196,900) 21,106 (127,904) (106,798)
Cash flows (19,117) 4,955 (14,162) 13,377 (102,911) (89,534)
Non-cash flows - (623) (623) - (568) (568)
Closing balance 15,366 (227,051) (211,685) 34,483 (231,383) (196,900)
8. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each Number of shares £'000
Balance as at 30 June 2022 and 30 June 2023 620,237,346 6,202
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 2023, the Company did not issue any ordinary shares
(2022: issued 108,695,652 ordinary shares of £0.01 each raising gross
proceeds of £125,000,000). The Company did not repurchase any ordinary shares
into treasury (2022: nil) or resell any ordinary shares from treasury (2022:
nil). At 30 June 2023, the Company did not hold any shares in treasury (2022:
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 7.
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.
9. Financial instruments
Consistent with its objective, the Group holds UK care home property
investments. In addition, the Group's financial instruments comprise cash,
loans and receivables and payables that arise directly from its operations.
The Group's exposure to derivative instruments consists of interest rate swaps
and interest rate caps 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 £23,517,000 (2022: £38,996,000), consisting of cash of £15,366,000
(2022: £34,483,000), cash held in escrow for property purchases of
£4,295,000 (2022: £nil), net rent receivable of £1,088,000 (2022:
£906,000), VAT recoverable of £667,000 (2022: £1,387,000), accrued
development interest of £1,010,000 (2022: £452,000) and other debtors of
£1,091,000 (2022: £1,768,000).
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 Group may also require to
provide rental incentives to the incoming tenant. 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 2023, the Group had recognised a credit loss allowance totalling
£1,972,000 against a gross rent receivable balance of £2,496,000 and gross
loans to tenants totalling £989,000. As at 30 June 2022, the gross receivable
was £8,496,000, of which £1,280,000 was subsequently recovered, £5,117,000
was written off and £2,099,000 is still outstanding. There were no other
financial assets which were either past due or considered impaired at 30 June
2023 (2022: 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 2023 the Group held £15.2 million (2022: £34.5
million) with The Royal Bank of Scotland plc and £0.2 million (2022: £nil)
with HSBC Bank plc. Given the credit quality of the counterparties used, no
credit loss allowance is recognised against cash balances as it is considered
to be immaterial.
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 2022 interest was being received on cash at a
weighted average variable rate of nil (2022: nil). 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 £170,000,000 (2022: £170,000,000) of committed term loans and
revolving credit facilities which were charged interest at a rate of SONIA
plus the relevant margin. At the year-end £80,000,000 of the variable rate
facilities had been drawn down (2022: £84,750,000). 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 2023 and 30 June 2022.
At 30 June 2023, the Group had fully hedged its exposure on the £80,000,000
of drawn variable rate borrowings (2022: £54,750,000 of the £84,750,000 of
variable rate facilities was unhedged). On any unhedged variable rate
borrowings, interest is payable at a variable rate equal to SONIA plus the
weighted average lending margin, including the amortisation of costs, of 2.46
per cent per annum (2022: 2.43 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 fixed rate term loans totalling £150,000,000 (2022:
£150,000,000) and has hedged its exposure to increases in interest rates on
£80,000,000 (2022: £30,000,000) of the variable rate loans, as referred to
above, through entering into a £30,000,000 fixed rate interest rate swap and
a £50,000,000 interest rate cap at 3.0%. 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 derivative used to fix the
interest rate on an otherwise variable rate loan, will be affected by
movements in the market rate of interest. The £150,000,000 fixed rate term
loans are carried at amortised cost on the Group's balance sheet, with the
estimated fair value and cost of repayment being disclosed in Note 7, whereas
the fair value of the interest rate derivatives are recognised directly on the
Group's balance sheet. At 30 June 2023, an increase of 0.25 per cent in
interest rates would have increased the fair value of the interest rate
derivative assets and increased the reported total comprehensive income for
the year by £377,000 (2022: £211,000). The same movement in interest rates
would have decreased the fair value of the fixed rate term loans by an
aggregate of £2,169,000 (2022: £2,822,000); 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.
The external valuers are mindful of the potential impacts ESG may have on
capital and rental valuations. Currently in the UK, the external valuers have
not seen consistent prima facie evidence to suggest that ESG has a direct
impact on the valuation of all commercial and residential buildings. However,
as the UK real estate market continues to adapt to ESG development practices
and legislative requirements, the valuers anticipate an evolution in the
analysis undertaken when providing real estate valuations. This may
potentially impact on the valuation of a property over the course of a typical
investment period.
10. Contingent assets and liabilities
As at 30 June 2023, six (2022: fourteen) properties within the Group's
investment property portfolio contained performance payment clauses meaning
that, subject to contracted performance conditions being met, further capital
payments totalling £5,720,000 (2022: £13,320,000) 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 performance payments 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 performance
payments made 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 had not been met in relation to any
of these properties and therefore at 30 June 2023 no liability was recognised
(2022: £2,800,000). Had a liability been recognised, an equal but opposite
amount would have been recognised as an asset in 'investment properties' in
Note 5 to reflect the increase in the investment property value that would be
expected to arise from the payment of the performance payment(s) and the
resulting increase in the contracted rental income. The performance payments
of £2,800,000 recognised as a liability at 30 June 2022 were paid during the
year ended 30 June 2023 (see Note 5).
11. Capital commitments
The Group had capital commitments as follows:
30 June 2023 30 June 2022
£'000 £'000
Amounts due to complete forward fund developments 31,066 34,458
Other capital expenditure commitments 2,160 3,594
Total 33,226 38,052
12. 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 £218,000 (2022:
£214,000) of which £nil (2022: £nil) remained payable at the year-end.
The Investment Manager received £7,428,000 (inclusive of irrecoverable VAT)
in management fees in relation to the year ended 30 June 2023 (2022:
£7,307,000). Of this amount £1,835,000 (2022: £1,895,000) remained payable
at the year-end. The Investment Manager received a further £169,000
(inclusive of irrecoverable VAT) during the year ended 30 June 2023 (2022:
£151,000) in relation to its appointment as Company Secretary and
Administrator, of which £42,000 (2022: £38,000) 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.
13. 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.
14. Post balance sheet events
Subsequent to the year end, the Group acquired a pre-let development site
subject to a forward funding agreement to construct a 66-bed care home in
Weston-super-Mare, Somerset for a maximum commitment of £16.0 million
including acquisition costs. Construction on the home has commenced and is
expected to be completed in the summer of 2024.
15. Financial statements
This statement was approved by the Board on 9 October 2023. 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 2023 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 2023 will be posted to shareholders in October 2023 and will be
available for inspection at Level 4, Dashwood House, 69 Old Broad Street,
London, EC2M 1QS, the registered office of the Company.
The statutory annual report and financial statements will be made available on
the website www.targethealthcarereit.co.uk
(http://www.targethealthcarereit.co.uk) . Copies may also be obtained from
Target Fund Managers Limited, Glendevon House, Castle Business Park, Stirling
FK9 4TZ.
The audited financial statements for the year to 30 June 2023 will be lodged
with the Registrar of Companies following the Annual General Meeting to be
held on 29 November 2023.
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.
2023 2022
pence pence
EPRA Net Tangible Assets per share (see note 4) (a) 104.5 112.3
Share price (b) 71.8 108.4
(Discount)/premium = (b-a)/a (31.3)% (3.5)%
Dividend Cover - the percentage by which Group specific adjusted EPRA earnings
for the year cover the dividend paid.
2023 2022
£'000 £'000
Group-specific EPRA earnings for the year (see note 4) (a) 37,216 30,242
First interim dividend 10,482 10,482
Second interim dividend 10,482 10,482
Third interim dividend 8,683 10,482
Fourth interim dividend 8,683 10,482
Dividends paid in relation to the year (b) 38,330 41,928
Dividend cover = (a/b) 97% 72%
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.
2023 2022
£'000 £'000
Investment management fee 7,428 7,307
Other expenses 3,046 3,163
Less direct property costs and other non-recurring items (292) (347)
Adjustment to management fee arrangements and irrecoverable VAT*
(35) 312
Total (a) 10,147 10,435
Average net assets (b) 661,231 693,292
Ongoing charges = (a/b) 1.53% 1.51%
* Based on the Group's net asset value at 30 June 2023, the management fee is
expected to be paid at a weighted average rate of 1.03% (2022: 1.02%) of the
Group's average net assets plus an effective irrecoverable VAT rate of
approximately 9% (2022: 7%). The management fee has therefore been amended so
that the Ongoing Charges figure includes the expected all-in management fee
rate of 1.12% (2022: 1.10%).
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.
2023 2022
EPRA NTA IFRS NAV Share price EPRA NTA IFRS NAV Share price
(pence) (pence) (pence) (pence) (pence) (pence)
Value at start of year (a) 112.3 112.7 108.4 110.4 110.5 115.4
Value at end of year (b) 104.5 105.6 71.8 112.3 112.7 108.4
Change in value during year (b-a) (c) (7.8) (7.1) (36.6) 1.9 2.2 (7.0)
Dividends paid (d) 6.2 6.2 6.2 6.8 6.8 6.8
Additional impact of dividend reinvestment
(e) 0.3 0.4 - 0.3 0.3 (0.2)
Total (loss)/gain in year (c+d+e) (f) (1.3) (0.5) (30.4) 9.0 9.3 (0.4)
Total return for the year = (f/a) (1.2)% (0.5)% (28.1)% 8.1% 8.4% (0.3)%
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
(http://www.epra.com) .
The figures below are calculated and presented in line with the BPR Guidelines
published by EPRA in February 2022.
2023 2022
EPRA Net Reinstatement Value (£'000) 705,364 756,708
EPRA Net Tangible Assets (£'000) 647,903 696,483
EPRA Net Disposal Value (£'000) 694,480 721,024
EPRA Net Reinstatement Value per share (pence) 113.7 122.0
EPRA Net Tangible Assets per share (pence) 104.5 112.3
EPRA Net Disposal Value per share (pence) 112.0 116.2
EPRA Earnings (£'000) 47,572 39,674
Group specific adjusted EPRA earnings (£'000) 37,216 30,242
EPRA Earnings per share (pence) 7.67 6.62
Group specific adjusted EPRA earnings per share (pence) 6.00 5.05
EPRA Net Initial Yield 6.05% 5.38%
EPRA Topped-up Net Initial Yield 6.22% 5.82%
EPRA Vacancy Rate - -
EPRA Cost Ratio - including direct vacancy costs 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) 18.7% 27.1%
EPRA Cost Ratio - excluding direct vacancy costs 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
18.7% 27.1%
EPRA Loan-to-Value 25.8% 24.0%
Capital Expenditure (£'000) 23,767 209,540
Like-for-like Rental Growth 3.8% 4.6%
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).
30 June 30 June
2023 2022
£'000 £'000
Annualised passing rental income based on cash rents (a) 55,003 51,217
Notional rent expiration of rent-free periods or other lease incentives
1,554 4,259
Topped-up net annualised rent (b) 56,557 55,476
Standing assets (see note 5) 851,305 892,336
Allowance for estimated purchasers' costs 57,461 60,225
Grossed-up completed property portfolio valuation (c) 908,766 952,561
EPRA Net Initial Yield = (a/c) 6.05% 5.38%
EPRA Topped-up Net Initial Yield = (b/c) 6.22% 5.82%
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space
(excluding forward fund developments) divided by the contractual rent of the
investment property portfolio, expressed as a percentage.
30 June 30 June
2023 2022
£'000 £'000
Annualised potential rental value of vacant premises* (a) - -
Annualised potential rental value of the property portfolio (including vacant
properties)
(b) 56,557 55,476
EPRA Vacancy Rate = (a/b) - -
* There were no unoccupied properties at either 30 June 2022 or 30 June 2023.
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 Year ended
30 June 2023 30 June 2022
£'000 £'000
Investment management fee 7,428 7,307
Credit loss allowance and bad debts 264 3,232
Other expenses 3,046 3,163
EPRA costs (including direct vacancy costs) (a) 10,738 13,702
Specific cost adjustments, if applicable - -
Group specific adjusted EPRA costs (including direct vacancy costs) (b)
10,738 13,702
Direct vacancy costs (c) - -
Gross rental income per IFRS (d) 67,748 63,859
Adjusted for rental income arising from recognising guaranteed rent review
uplifts and lease incentives
(11,308) (10,215)
Adjusted for surrender premiums recognised in capital - (3,877)
Adjusted for development interest under forward fund arrangements
952 783
Group specific adjusted gross rental income (e) 57,392 50,550
EPRA Cost Ratio (including direct vacancy costs) = (a/d) 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
= (b/e) 18.7% 27.1%
EPRA Cost Ratio (excluding direct vacancy costs) = ((a-c)/d) 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
= ((b-c)/e) 18.7% 27.1%
EPRA Loan-to-Value
As at As at
30 June 2023 30 June 2022
£'000 £'000
Borrowings 230,000 234,750
Net payables 9,117 18,213
Cash and cash equivalent (15,366) (34,483)
Net debt (a) 223,751 218,480
Investment properties at market value 868,705 911,596
Total property value (b) 868,705 911,596
EPRA Loan-to-Value = (a/b) 25.8% 24.0%
EPRA Capital Expenditure
Year ended Year ended
30 June 2023 30 June 2022
£'000 £'000
Acquisitions (including acquisition costs) 234 178,830
Forward fund developments 17,385 28,851
Like-for-like portfolio 6,148 1,859
Total capital expenditure 23,767 209,540
Conversion from accrual to cash basis 5,575 (2,547)
Total capital expenditure on a cash basis 29,342 206,993
Like-for-like Rental Growth
Year ended Year ended
30 June 2023 30 June 2022
£'000 £'000
Opening contractual rent (a) 55,476 41,213
Rent reviews 2,080 1,581
Re-tenanting of properties 39 312
Like-for-like rental growth (b) 2,119 1,893
Acquisitions and developments 1,019 12,370
Disposals (2,057) -
Total movement (c) 1,081 14,263
Closing contractual rent = (a+c) 56,557 55,476
Like-for-like rental growth = (b/a) 3.8% 4.6%
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR UKVAROKURRUARecent news on Target Healthcare Reit
See all newsREG - Target H'care REIT - Director/PDMR Shareholding
AnnouncementREG - Target H'care REIT - Half-year Report
AnnouncementREG - Target H'care REIT - Investor Presentation via Investor Meet Company
AnnouncementREG - Target H'care REIT - Notice of Half Year Results
AnnouncementREG - Target H'care REIT - Net Asset Value, Corporate Update & Dividend
Announcement