REG - Target H'care REIT - Half-year Report
16/03/2022 07:00
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RNS Number : 8959E Target Healthcare REIT PLC 16 March 2022
16 March 2022
Target Healthcare REIT plc
HALF-YEAR RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2021
£191 million of investment activity and strengthened balance sheet underpins
robust financial performance and provides platform for future earnings growth
Target Healthcare REIT plc (the "Company" or the "Group"), the UK listed
specialist investor in modern, purpose-built care homes, is pleased to
announce its results for the six months ended 31 December 2021.
Key highlights
· Significant portfolio growth, driven by new investment and development
commitments of £191 million, including an 18-home portfolio acquisition, the
Group's largest to date, which added stable assets with a mature trading
history and annual rental income of £9.3 million
· Enhanced balance sheet stability and flexibility from new,
long-term capital, with £100 million of additional long-term debt secured at
attractive fixed interest rate and a £125 million oversubscribed equity
issuance in September 2021
· Resilient portfolio performance with robust rent collection, and
like-for-like rental and valuation growth
· The recovery in resident occupancy levels had slowed over the
winter as a result of rising COVID-19 case numbers and staff shortages caused
by the Omicron variant. Tenants report that enquiry levels remain strong and
staff availability is now improving.
Robust portfolio growth and increasing diversification
· Portfolio market value increased by £186 million, or 27.1%, to
£870.5 million (June 2021: £684.8 million), primarily driven by £171
million of acquisitions and development activity; like for like portfolio
valuation uplift of 2.2%
· Contractual rent increased by 29.6% to £53.4 million (June 2021:
£41.2 million), including like for like rental growth of 2.8%.
· Growing and diversified tenant base, increasing to 31((1)) (June
2021: 28 tenants)
· Weighted average unexpired lease term of 27.5 years (June 2021:
28.8 years)
Sustainable returns from portfolio management and inflation-linked
characteristics
· EPRA NTA per share increased by 0.4% to 110.8 pence (June 2021:
110.4 pence)
· NAV total return((2)) of 3.4% (2020: 3.3%)
· Portfolio total return of 4.8% (2020: 4.1%)
· Rent collection of 96%
· 96% of leases benefit from upwards only inflation-linked rent
reviews; 4% fixed uplifts
· Weighted average cost of drawn debt at 3.1% (June 2021: 2.9%), with
average term to maturity significantly increasing to 7.4 years (June 2021: 4.8
years)
· Net LTV increased to 20.7% (June 2021: 15.9%)
Progressive dividend policy maintained
· Dividends increased by 0.6% to 3.38 pence (2020: 3.36 pence)
· Adjusted EPRA Earnings per share((3)) of 2.36 pence (2020: 2.66
pence), reflecting the temporary cash drag from the time between the £125m
equity issuance and the completion of the portfolio acquisition
· EPRA Earnings per share((3)) of 3.08 pence (2020: 3.61 pence)
· Adjusted EPRA Cost Ratio of 27.7% (2020: 29.2%); EPRA Cost Ratio
of 23.3% (2020: 24.1%)
Responsible investment with a clear purpose to improve the UK's care home real
estate
· Compelling long-term demand supply dynamics support both
investor and operator activity in the sector
· Selective investment into new developments of new-build care
homes; two homes (134 beds) opened in the period, and four homes (270 beds)
being funded at period end
· Full en suite wet-rooms account for 96% of the portfolio, compared
to the UK national average of just 29%
· EPC ratings: 100% A-C ratings, with 88% A or B ratings
· Initial sample of BREEAM In-Use assessments completed, all rated
'good', 'very good' or 'excellent'
Unless otherwise stated in the above, references to 2020 mean the comparative
six month period to 31 December 2020 and references to 2021 mean 30 June 2021,
being the start of the period under review.
( )
((1)) At 31 December 2021. Will increase to 32 tenants upon completion of
development sites.
((2) )Based on EPRA NTA movement and dividends paid, see alternative
performance measures below.
((3) )For the details of EPRA earnings and adjusted EPRA earnings refer to
note 6 to the Condensed Consolidated Financial Statements.
Malcolm Naish, Chairman of the Company, said:
"This has been a transformative six months for the Company. In testament to
the continued appeal of our strategy, we successfully completed an
oversubscribed £125 million equity raise, the proceeds of which were deployed
into our largest acquisition to date, providing robust portfolio growth and
driving the 27.1% increase in the market value of our portfolio. Additionally,
we have further strengthened our balance sheet through securing an additional
£100 million long-term fixed-rate debt facility. Our portfolio has maintained
a strong level of rent collection, with our tenants' underlying trading
remaining resilient despite the ongoing challenges arising from the COVID-19
pandemic.
"We remain confident in the demand for modern, purpose-built care homes in
strategic locations. In particular, we believe that the portfolio's long-term
inflation linked income characteristics and clear social purpose provide
investors with a unique and compelling investment proposition. More broadly,
the sector's structural drivers are hugely supportive, and we are ideally
placed to capitalise on these through our increasingly diverse tenant base,
modern, fit for purpose portfolio and deep sector expertise."
A live webcast presentation for analysts will be held at 10.00am this morning
and can be accessed via:
https://webcasting.brrmedia.co.uk/broadcast/6229c2e861bd9a4d1028bf27
(https://webcasting.brrmedia.co.uk/broadcast/6229c2e861bd9a4d1028bf27)
LEI: 213800RXPY9WULUSBC04
Enquiries:
Kenneth MacKenzie; Gordon Bland
Target Fund Managers Limited
01786 845 912
Mark Young; Mark Bloomfield
Stifel Nicolaus Europe Limited
020 7710 7600
Dido Laurimore; Claire Turvey; Richard Gotla
FTI Consulting
020 3727 1000
TargetHealthcare@fticonsulting.com (mailto: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 31 December 2021 comprised 98 assets let to 31
tenants with a total value of £870.5 million.
The Group invests in modern, purpose-built care homes that are let to high
quality tenants who demonstrate strong operational capabilities and a strong
care ethos. The Group builds collaborative, supportive relationships with each
of its tenants as it believes working in this way helps raise standards of
care and helps its tenants build sustainable businesses. In turn, that helps
the Group deliver stable returns to its investors.
Chairman's Statement
We continue to find ourselves in uncertain times; 2016's Brexit referendum
sparked domestic political turbulence; the global COVID-19 pandemic provided a
serious public health emergency with unprecedented impact; 2022 has started
with conflict in Ukraine and coordinated sanctions against Russia. Scarcity of
energy supplies, rising inflation & interest rates, and a potential
retreat from recent "net zero" commitments as a response to energy worries,
appear to be the major themes which will be impacting financial markets and
investor confidence in the coming months. There is also a significant relief
effort required, both within Ukraine itself and outside its borders, given the
millions seeking refuge within Europe.
Owning and managing a care home portfolio, on behalf of shareholders, provides
a valuable sense of perspective, and we continue to hear touching stories of
care being provided to residents by the many dedicated professionals within
our homes. This care, and the modern real estate we provide, has been the
basis for the stable, sustainable returns our portfolio has provided
throughout the turbulent times I note above. The Company's share price,
however, will not be immune to the short term volatility currently being
experienced by equity markets as a whole.
We have made significant progress in the six months under review. Improved
scale has resulted from our successful fundraise to secure a desirable
portfolio of mature assets. Our continued patience and discipline have been
crucial in completing these major transactions and also in making portfolio
management decisions to protect value for the long-term.
Portfolio performance has followed the pattern we have seen throughout the
COVID-19 pandemic. Strong rent collection has been maintained despite the
occupancy challenges our tenants have faced, with underlying trading remaining
resilient. Occupancy levels improved through the early part of the period,
though this stalled with the emergence of the Omicron variant. We witnessed a
pause in the rebuild of occupancy as new admissions were affected by increased
COVID-19 cases and the staffing pressures which resulted from isolation
requirements.
Positively, our tenants reported the majority of cases affecting residents to
be mild or indeed asymptomatic, and recently the position has improved:
declining case numbers, increasing staff availability and ongoing strong
demand for places as evidenced by enquiry levels. This sees resident occupancy
growth resuming, with sustained profitability likely to follow. However,
whilst the outlook for the sector is expected to continue to improve, the
pandemic is not yet over and individual tenants may continue to face
operational and financial challenges over the short to medium term.
Group performance
Underlying profits, measured by adjusted EPRA earnings, have increased by 12%
to £13.7 million (2020: £12.2 million), being 2.36 pence per share (2020:
2.66 pence). The accounting total return for the period was 3.4% (2020:
3.3%).((1))
The temporary cash drag from the time between the £125 million equity
issuance of September 2021 and the completion of the portfolio acquisition
impacted the earnings per share performance. Following the portfolio
acquisition on 17 December 2021, the capital is now substantially invested.
This investment will generate £9.3 million of annual rental income which is
not fully reflected in earnings for the period under review, which will boost
earnings and dividend cover going forward.
The portfolio continues to provide attractive total returns (4.8% for the
period) as capital values have grown alongside the rental income generated.
Valuation yields have tightened (EPRA topped-up net initial yield: 5.84%) as a
result of (a) the stable performance of the assets and (b) the continued
competitive investment market for modern care homes, given the asset class'
long-term, inflation-linked sustainable rental cashflows.
Portfolio & balance sheet strength
Following commitments of £191 million for new acquisitions during the period,
the Group's busiest period in its almost nine year history, as at 31 December
2021 the Group's portfolio has grown to 98 properties valued at £870.5
million. Our 31 tenants provide diversity of income with rental and valuation
growth delivered on a like-for-like basis at 2.8% and 2.2%, respectively, from
annual rental uplifts, yield compression and asset management initiatives. The
underlying trading performance at the homes has proven remarkably resilient -
notably, rent cover for the mature homes in the portfolio was 1.4 times((2))
at 31 December 2021.
Gearing increased to 21% net LTV following the drawdowns in December 2021 (a)
to fund the acquisitions and (b) to secure long-term fixed rates on the new
£100 million of loan facilities. Having now reached a portfolio of scale, and
our targeted debt structure, the Group anticipates this to be the base level
of gearing looking forward. Revolving credit facilities remain available to
fund our development portfolio and cover further pipeline acquisitions as they
arise, which will see gearing increase to our medium-term target of c.27-29%.
We have the ability to manage a modest level of pipeline acquisitions beyond
this level using our available facilities ahead of permanent and
dividend-paying equity, achieving portfolio growth whilst minimising cash
drag.
The £100 million of additional debt capacity and maturity extensions during
the period have further strengthened the balance sheet and provide increased
certainty of funding. Our weighted average term to maturity now exceeds seven
years at a weighted interest rate of 3.1%.
Board succession
We have continued to address board succession and, in line with the
expectations set out in the previous Annual Report, Professor Andrews and Mr
Hutchison retired from the Board at the Annual General Meeting in December
2021 and I thank them for their service. Subsequent to the period end, I am
pleased to welcome Dr Amanda Thompsell to the Board. Dr Thompsell has
significant clinical experience of all aspects of caring for older people and
a comprehensive knowledge of the care home sector.
Dividend and outlook
We have maintained our progressive dividend policy having increased quarterly
dividends by 0.6% to 1.69 pence per share, with the first interim dividend for
the year having been paid in November 2021 in respect of the quarter to
September 2021. Subsequent to the period end, the second interim dividend has
also been paid in respect of the quarter to December 2021. Whilst dividend
cover((3)) (65%) was depressed in the period, we have a clear path to full
cover when fully invested and geared. Increased earnings are already arising
from our recent capital deployment.
Perhaps most importantly, we are well-positioned for an environment of higher
inflation and increasing interest rates. The upwards-only annual rent reviews
embedded in our leases, and our addition of £100 million of fixed-rate debt
during the period at a weighted average duration of 13 years, are two aspects
of our strategy designed to provide certainty and stability, with the
opportunity for progressive returns, in the months and years to come.
We were delighted with the support from both existing shareholders and new
investors for the oversubscribed £125 million equity issuance completed in
September 2021. We carefully considered the prospects for the portfolio and
the sector alongside the acquisition opportunities presented to us by the
Investment Manager. Our tenants remain optimistic about upcoming trading, and
with our beds being part of the 29% of the UK market which we believe meets
the minimum standards in which our elderly should be cared for, we are
confident that the demand dynamics strongly support this optimism. The
sector's long-term fundamentals remain compelling, and we are well placed to
capitalise on these through our broadening occupier mix and balance sheet
strength.
Malcolm Naish
Chairman
15 March 2022
( )
((1)) Based on EPRA NTA movement and dividends paid, see alternative
performance measures below.
((2)) Twelve month rolling average to 31 December 2021.
((3) )Based on adjusted EPRA earnings, see alternative performance measures
below.
Investment Manager's Report
Overview
The Group's portfolio of 98 assets, comprising 94 operational homes and four
pre-let development sites, was valued at £870.5 million at 31 December 2021.
The operational homes were let to 31 tenants, providing 6,522 beds for
residents, and generating a contractual rent of £53.4 million per annum. The
EPRA topped-up net initial yield was 5.84% and the EPRA net initial yield was
5.58%.
The portfolio value has increased by 27.1% in the period. Of this, 24.9% is
due to net capital deployment in 19 new acquisitions and further investment
into developments (two having completed during the period, two ongoing
throughout the period and two new commitments), with a positive like-for-like
movement in the operational portfolio of 2.2%, which primarily reflects the
impact of both inflation-linked rent reviews and yield compression.
The contractual rent roll has increased by 29.6% in the period, primarily from
a 26.8% increase from acquisitions and completed development sites. The
Group's upwards-only rent reviews contributed a 1.6% like-for-like increase,
with the remaining 1.2% increase attributable to the successful re‑tenanting
of the remaining home of one of the previous tenants who had already been in
financial distress prior to the COVID-19 pandemic. The weighted average
unexpired lease term has shortened slightly to 27.5 years.
The portfolio total return for the six-month period was 4.8% (10.5% for the
2021 calendar year), maintaining its stable performance since IPO.
COVID-19 & asset trading performance
The period under review was another in which COVID-19 was a substantial driver
of trading performance in our homes. The average occupancy level improved
early in the period until the effects of the emergence of the Omicron variant
were experienced. This resulted in both staff shortages due to self-isolation
and rising case numbers in home residents. Each of these factors are barriers
to accepting new residents, with the combination resulting in the stalling of
admission rates.
As with previous periods, in another display of resilience and the long-term
sustainability which underpins our strategy, trading performance at these
reduced occupancy levels has remained robust, supporting rental receipts by
the Group. Average rent cover as at 31 December 2021 was 1.4 times on a last
twelve months' basis.((1)) This level has been consistently achieved during
the two years of COVID-19, with the recent data showing the positive effects
of (i) early occupancy increases (ii) fee increases achieved and (iii)
efficient operational management offsetting the reduction in government
support.
Current challenges for the sector, aside from the clear need to rebuild
occupancy to pre-COVID-19 levels, are to navigate the effects of general cost
inflation and staffing shortages. Increases in staff costs, and general
inflationary pressures, are likely to be managed by passing these onto
residents by way of annual fee increases, more easily achieved in private pay
settings. We have evidence of continued success by our tenants in achieving
this from both the private and public purse, based on the demand for, and
quality of, the services provided and the real estate in which these are
provided from. Mandated vaccinations in care home settings from November 2021,
a policy which the Government has advised at the time of writing will be
reversed, was not a material concern to our tenants who had been reporting
high vaccination uptake from their staff since early in the rollout.
Our tenants are optimistic, with reported enquiry levels once again high and
conversion rates to resident admissions expected to increase as we emerge from
the Omicron wave.
Asset management initiatives
As at 15 March 2022, the Group had collected 96% of the rent that was due and
payable in respect of the six months under review. Through the two years of
challenging trading as a result of the COVID-19 pandemic, we have initiated
some tenant changes to protect rent and property values and will continue to
closely monitor the portfolio to identify further areas where this will be
required.
During the period we have completed the re-tenanting of the second of two
homes from a national operator which had financial challenges prior to the
pandemic. The second home's re-tenanting has, like the first, been achieved on
rental terms consistent with the existing lease and our investment case for
the asset, with comprehensive refurbishment capex committed for both assets to
improve the standard of the real estate. Late in the period, contracts were
exchanged to re-tenant four homes from a large national operator to a regional
operator. Completion is subject to regulatory approval, expected to be
received shortly, and strategically sees us move to a tenant whose knowledge
of the local markets in which these homes trade is expected to enhance
performance and better serve their communities. Consistent with the Group's
prior re-tenantings, the quality of the assets and the rental levels inherent
in the leases have resulted in attractive commercial arrangements being
achieved.
Investment market
The investment market for assets which meet the Group's investment criteria
remains very competitive. Higher standard real estate assets are attracting
numerous offers, partly due to their scarcity and partly due to the
recognition by investors that much of the UK's care home stock is not fit for
purpose. This is being reflected in pricing, with yields generally remaining
unchanged, though with continued tightening on higher quality assets. We
continue to see a number of new development opportunities, noting that pricing
is being impacted by higher land/ build/construction costs. Despite this
competitive landscape, we continue to access pipeline stock through (a)
existing relationships (b) our long-established team (c) our reputation and
(d) our expertise, which provides valuable commercial insight and the ability
to secure sustainable returns.
Sectoral
The sector is in a period of cautious optimism as the Omicron variant seems to
be on the wane. Residents have remained generally protected and, while we owe
a debt to the science of vaccinations in this regard, we should not
underestimate how adept care homes have become at testing, safe visiting, and
infection control procedures.
After suffering some unwarranted reputational damage in the early stages of
the pandemic, public scrutiny of the sector mellowed and helped focus
Government attention on sector change and funding. The resulting White Paper,
while heralded by Government Ministers as ground-breaking, was generally met
with disappointment by the sector, with concern that the public funding of
those with means is not as generous as first impressions suggest. In fact, the
national insurance fuelled tax raise does little for the social care sector,
with the lions' share ending up in the NHS for the first few years.
Eyebrows were raised in the sector by the mention of 'levelling' fees, a
reference buried in the white paper in relation to the common practice of
operators subsidising publicly funded residents by charging private residents
higher fees. While the sector rightly feels some consternation regarding this
point, the intention to require Local Authorities to address fees paid to
private operators in line with the 'true cost of care' is a welcome directive.
This, coupled with strong demand by clientele for quality accommodation and
the fact that residents will still be able to 'top-up' to the quality of their
choice, means we envisage operators will not be unduly troubled by the
potential changes. Other white paper proposals are welcome, such as increased
integration between authorities and joined up health pathways for the public.
2022 will remain a challenging year for operators. Even if COVID-19 should
fade, or more likely become endemic, the spectre of inflation is firmly on the
horizon; wages, energy and food costs, coupled with a continued difficult
recruitment environment will keep the pressure on. While the pandemic has been
tough on smaller operators, particularly those with older real estate, which
will likely speed their demise, a new public focus on the quality of
accommodation will support operators such as our own tenants.
Target Fund Managers Limited
Investment Manager
15 March 2022
((1)) All occupancy and rent cover figures quoted relate to mature homes
within the portfolio.
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 31 December
2021
Six months ended Six months ended
31 December 2021 31 December 2020
(unaudited) (unaudited)
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Rental income 21,929 4,515 26,444 20,308 4,554 24,862
Other income 66 - 66 6 - 6
Total revenue 21,995 4,515 26,510 20,314 4,554 24,868
8
Gains on investment properties - 871 871 - 307 307
Losses on properties held for sale 9 - - - - (92) (92)
Total income 21,995 5,386 27,381 20,314 4,769 25,083
Expenditure
Investment management fee 2 (3,553) - (3,553) (2,821) - (2,821)
Credit loss allowance and bad debts 3 (1,073) - (1,073) (1,940) - (1,940)
Other expenses 3 (1,558) - (1,558) (1,230) - (1,230)
Total expenditure (6,184) - (6,184) (5,991) - (5,991)
Profit before finance costs and taxation
15,811 5,386 21,197 14,323 4,769 19,092
Net finance costs
Interest receivable 36 - 36 18 - 18
Interest payable and similar charges 4 (2,519) - (2,519) (2,389) (913) (3,302)
Profit before taxation 13,328 5,386 18,714 11,952 3,856 15,808
Taxation 5 (6) - (6) 12 - 12
Profit for the period 13,322 5,386 18,708 11,964 3,856 15,820
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate swaps
- 678 678 - (141) (141)
Reclassification to profit and loss on discontinuation of interest rate swaps
- - - - 180 180
Total comprehensive income for the period
13,322 6,064 19,386 11,964 3,895 15,859
Earnings per share (pence) 6 2.31 0.93 3.24 2.62 0.84 3.46
The total column of this statement represents the Group's Condensed
Consolidated Statement of Comprehensive Income, prepared in accordance with UK
adopted IAS 34 'Interim Financial Reporting'. 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 period.
Condensed Consolidated Statement of Financial Position
As at 31 December 2021
As at As at
31 December 30 June
2021 2021
(unaudited) (audited)
Notes £'000 £'000
Non-current assets
Investment properties 8 810,277 629,606
Trade and other receivables 10 59,969 54,580
Interest rate swap 12 929 251
871,175 684,437
Current assets
Trade and other receivables 10 19,017 5,531
Cash and cash equivalents 34,647 21,106
53,664 26,637
Properties held for sale 9 7,320 7,320
60,984 33,957
Total assets 932,159 718,394
Non-current liabilities
Bank loans 12 (219,109) (127,904)
Trade and other payables 13 (7,302) (6,840)
(226,411) (134,744)
Current liabilities
Trade and other payables 13 (17,758) (18,465)
Total liabilities (244,169) (153,209)
Net assets 687,990 565,185
Share capital and reserves
Share capital 14 6,202 5,115
Share premium 256,636 135,228
Merger reserve 47,751 47,751
Distributable reserve 246,088 265,164
Hedging reserve 929 251
Capital reserve 69,498 64,112
Revenue reserve 60,886 47,564
Equity shareholders' funds 687,990 565,185
Net asset value per ordinary share (pence) 6 110.9 110.5
Condensed Consolidated Statement of Changes in Equity
For the six months ended 31 December 2021
(unaudited)
Distrib-utable
Share capital Share premium Merger reserve reserve Hedging Capital reserve Revenue reserve
Notes reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
As at 30 June 2021 5,115 135,228 47,751 265,164 251 64,112 47,564 565,185
Total comprehensive income for the period
- - - - 678 5,386 13,322 19,386
Transactions with owners recognised in equity:
Dividends paid 7 - - - (19,076) - - - (19,076)
Issue of ordinary shares 14 1,087 123,913 - - - - - 125,000
Expenses of issue 14 - (2,505) - - - - - (2,505)
As at 31 December 2021
6,202 256,636 47,751 246,088 929 69,498 60,886 687,990
For the six months ended 31 December 2020
(unaudited)
Distrib-utable
Share capital Share premium Merger reserve reserve Hedging Capital reserve Revenue reserve
Notes reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
As at 30 June 2020 4,575 77,452 47,751 296,770 (227) 45,536 22,256 494,113
Total comprehensive income for the period
- - - - 39 3,856 11,964 15,859
Transactions with owners recognised in equity:
Dividends paid 7 - - - (15,326) - - - (15,326)
As at 31 December 2020
4,575 77,452 47,751 281,444 (188) 49,392 34,220 494,646
Condensed Consolidated Statement of Cash Flows
For the six months ended 31 December
2021
Six months ended Six months ended
31 December 31 December
2021 2020
(unaudited) (unaudited)
Notes £'000 £'000
Cash flows from operating activities
Profit before tax 18,714 15,808
Adjustments for:
Interest receivable (36) (18)
Interest payable 2,519 3,302
Revaluation losses on properties held for sale - 92
Revaluation gains on investment properties and movements in lease incentives,
net of acquisition costs written off
(5,386) (4,861)
Increase in trade and other receivables (14,331) (348)
Increase in trade and other payables 1,216 498
2,696 14,473
Interest paid (2,201) (2,158)
Interest received 36 18
Tax paid (6) -
(2,171) (2,140)
Net cash inflow from operating activities 525 12,333
Cash flows from investing activities
Disposal of properties held for sale - 388
Purchase of investment properties and properties held for sale, including
acquisition costs
(181,873) (24,013)
Net cash outflow from investing activities (181,873) (23,625)
Cash flows from financing activities
Issue of ordinary share capital 14 125,000 -
Expenses of issue of ordinary share capital (2,505) -
Drawdown of bank loan facilities 12 210,000 112,000
Expenses of arrangement of bank loan facilities (1,519) (1,449)
Repayment of bank loan facilities 12 (117,250) (102,000)
Dividends paid (18,837) (15,375)
Net cash inflow/(outflow) from financing activities 194,889 (6,824)
Net increase/(decrease) in cash and cash equivalents 13,541 (18,116)
Opening cash and cash equivalents 21,106 36,440
Closing cash and cash equivalents 34,647 18,324
Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives 4,938 5,311
Notes to the Condensed Consolidated Financial Statements
1. Basis of Preparation
The condensed consolidated financial statements have been prepared in
accordance with IAS 34 'Interim Financial Reporting' and the accounting
policies set out in the statutory financial statements of the Group for the
year ended 30 June 2021.
The condensed consolidated financial statements do not include all of the
information required for a complete set of IFRS financial statements and
should be read in conjunction with the consolidated financial statements of
the Group for the year ended 30 June 2021, which were prepared under full IFRS
requirements.
Going concern
The condensed consolidated financial statements have been prepared on the
going concern basis. In assessing the going concern basis of accounting the
Directors have had regard to the guidance issued by the Financial Reporting
Council. Given the potentially significant impact of COVID-19 on the economic
conditions in which the Group is operating, the Directors have continued to
place a particular focus on the appropriateness of adopting the going concern
basis in preparing the financial statements for the period ended 31 December
2021.
The Group's going concern assessment particularly considered that:
· The value of the Group's portfolio of assets significantly
exceeds the value of its liabilities, with the valuation yield applied to the
portfolio having tightened marginally since the start of the pandemic;
· The Group is contractually entitled to receive rental income
which significantly exceeds its forecast expenses and loan interest; and
· The Group remains within its loan covenants, with its finance
facilities having been extended and increased during the period, resulting in
a weighted average term to maturity of 7.4 years at 31 December 2021 and an
earliest repayment date of November 2024.
The Group has a significant balance of cash and undrawn debt available and the
Group's current policy is to prudently retain a proportion of this to ensure
it can continue to pay the Group's expenses and loan interest in the unlikely
scenario that the level of rental income received deteriorates significantly.
The proportion retained will be kept under review dependent on portfolio
performance and market conditions.
Based on these considerations, the Directors consider that the Group has
adequate resources to continue in operational existence for the foreseeable
future and at least the next twelve months from the date of issuance of this
report. For this reason, they continue to adopt the going concern basis in
preparing the financial statements.
2. Investment Management Fee
For the six month For the six month
period ended period ended
31 December 2021 31 December 2020
£'000 £'000
Investment management fee 3,553 2,821
The Group's Investment Manager and Alternative Investment Fund Manager
('AIFM') is Target Fund Managers Limited. The Investment Manager is entitled
to an annual management fee on a tiered basis based on the net assets of the
Group as set out below. Where applicable, VAT is payable in addition.
Net assets of the Group Management fee percentage
Up to and including £500 million 1.05
Above £500 million and up to and including £750 million 0.95
Above £750 million and up to and including £1 billion 0.85
Above £1 billion and up to and including £1.5 billion 0.75
Above £1.5 billion 0.65
2. Investment Management Fee (continued)
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; 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
For the six month period ended For the six month period ended
31 December 2021 31 December 2020
£'000 £'000
Credit loss allowance and bad debts written off 1,073 1,940
Valuation and other professional fees 932 853
Secretarial and administration fees 90 88
Directors' fees 114 91
Other 422 198
Total 2,631 3,170
4. Interest payable and similar charges
For the six month period ended For the six month period ended
31 December 2021 31 December 2020
£'000 £'000
Interest paid on bank loans 2,264 2,056
Amortisation of loan costs 255 333
Cost of early redemption - 913
Total 2,519 3,302
5. Taxation
The Directors intend to conduct the Group's affairs such that management and
control is exercised in the United Kingdom and so that the Group carries on
any trade in the United Kingdom.
The Group has entered the REIT regime for the purposes of UK taxation. Subject
to continuing relevant UK-REIT criteria being met, the profits from the
Group's property rental business, arising from both income and capital gains,
are exempt from corporation tax.
6. Earnings per share and Net Asset Value per share
Earnings per share
For the six month For the six month
period ended period ended
31 December 2021 31 December 2020
Pence per share Pence per share
£'000 £'000
Revenue earnings 13,322 2.31 11,964 2.62
Capital earnings 5,386 0.93 3,856 0.84
Total earnings 18,708 3.24 15,820 3.46
Average number of shares in issue 578,295,002 457,487,640
The European Public Real Estate Association ('EPRA') is an industry body which
issues best practice reporting guidelines for property 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.
The EPRA earnings are arrived at by adjusting for the revaluation movements on
investment properties and properties held for sale 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 that 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:
For the six month period ended For the six month period ended
31 December 2021 31 December 2020
£'000 £'000
Earnings per IFRS Consolidated Statement of Comprehensive Income
18,708 15,820
Adjusted for gains on investment properties (871) (307)
Adjusted for losses on properties held for sale - 92
Adjusted for cost of debt refinancing and other capital items
- 913
EPRA earnings 17,837 16,518
Adjusted for rental income arising from recognising guaranteed rent review
uplifts
(4,515) (4,554)
Adjusted for development interest under forward fund agreements
335 212
Group specific adjusted EPRA earnings 13,657 12,176
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income
3.24 3.46
EPRA EPS 3.08 3.61
Group specific adjusted EPRA EPS 2.36 2.66
Earnings for the period ended 31 December 2021 should not be taken as a guide
to the results for the year to 30 June 2022.
6. Earnings per share and Net Asset Value per share (continued)
Net Asset Value per share
The Group's net asset value per ordinary share of 110.9 pence (30 June 2021:
110.5 pence) is based on equity shareholders' funds of £687,990,000 (30 June
2021: £565,185,000) and on 620,237,346 (30 June 2021: 511,541,694) ordinary
shares, being the number of shares in issue at the period end.
The three EPRA NAV metrics are shown below. Further details are included in
the glossary.
31 December 2021 30 June 2021
EPRA NRV EPRA NTA EPRA NDV EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000 £'000 £'000 £'000
IFRS NAV per financial statements 687,990 687,990 687,990 565,185 565,185 565,185
Fair value of interest rate swap (929) (929) - (251) (251) -
Fair value of loans - - 472 - - (1,389)
Estimated purchasers' costs 57,875 - - 44,696 - -
EPRA net assets 744,936 687,061 688,462 609,630 564,934 563,796
EPRA net assets (pence per share) 120.1 110.8 111.0 119.2 110.4 110.2
7. Dividends
Dividends paid as distributions to equity shareholders during the period.
For the six month period ended For the six month period ended
31 December 2021 31 December 2020
Pence £'000 Pence £'000
Fourth interim dividend for prior year 1.68 8,594 1.67 7,640
First interim dividend 1.69 10,482 1.68 7,686
Total 3.37 19,076 3.35 15,326
A second interim dividend for the year to 30 June 2022, of 1.69 pence per
share, was paid on 25 February 2022 to shareholders on the register on 11
February 2022.
8. Investment properties
As at
31 December
2021
Freehold and Leasehold Properties £'000
Opening market value 677,525
Opening fixed or guaranteed rent reviews and lease incentives (47,919)
Opening carrying value 629,606
Purchases 171,200
Acquisition costs capitalised 8,600
Acquisition costs written off (8,600)
Revaluation movement - gains 18,937
Revaluation movement - losses (4,528)
Movement in market value 185,609
Movement in fixed or guaranteed rent reviews and lease incentives (4,938)
Movement in carrying value 180,671
Closing market value 863,134
Closing fixed or guaranteed rent reviews and lease incentives (52,857)
Closing carrying value 810,277
The investment properties can be analysed as follows:
As at As at
31 December 30 June
2021 2021
£'000 £'000
Standing assets 850,324 655,175
Developments under forward fund agreements 12,810 22,350
Closing market value 863,134 677,525
Changes in the valuation of investment properties For the six month period ended For the six month period ended
31 December 31 December
2021 2020
£'000 £'000
Revaluation movement 14,409 6,597
Acquisition costs written off (8,600) (979)
Movement in lease incentives (423) (757)
Movement in fixed or guaranteed rent reviews (4,515) (4,554)
Gains on revaluation of investment properties 871 307
The investment properties were valued at £863,134,000 (30 June 2021:
£677,525,000) by Colliers International Healthcare Property Consultants
Limited ('Colliers'), in their capacity as external valuers. The valuation was
undertaken in accordance with the RICS Valuation - Professional Standards,
incorporating the International Valuation Standards, ('the Red Book Global',
31 January 2020) issued by the Royal Institution of Chartered Surveyors
('RICS') on the basis of Market Value, supported by reference to market
evidence of transaction prices for similar properties. Market Value represents
the estimated amount for which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm's length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion.
8. Investment properties (continued)
The fair value of the properties after adjusting for the movement in the fixed
or guaranteed rent reviews and lease incentives was £810,277,000 (30 June
2021: £629,606,000). The adjustment consisted of £46,464,000 (30 June 2021:
£41,949,000) relating to fixed or guaranteed rent reviews and £6,393,000 (30
June 2021: £5,970,000) 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 financial statements as
non-current and current assets within 'trade and other receivables' (see note
10).
The Group is required to classify fair value measurements of its investment
properties using a fair value hierarchy, in accordance with IFRS 13 'Fair
Value Measurement'. This hierarchy reflects the subjectivity of the inputs
used, and has the following levels:
-- Level 1: unadjusted quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement date;
-- Level 2: observable inputs other than quoted prices included within level
1;
-- Level 3: use of inputs that are not based on observable market data.
The Group's investment properties are valued by Colliers on a quarterly basis.
The valuation methodology used is the yield model, which is a consistent basis
for the valuation of investment properties within the healthcare industry.
This model has regard to the current investment market and evidence of
investor interest in properties with income streams secured on healthcare
businesses. On an asset-specific basis, the valuer makes an assessment of: the
quality of the asset; recent and current performance of the asset; and the
financial position and performance of the tenant operator. This asset specific
information is used alongside a review of comparable transactions in the
market and an investment yield is applied to the asset which, along with the
contracted rental level, is used to derive a market value.
In determining what level of the fair value hierarchy to classify the Group's
investments within, the Directors have considered the content and conclusion
of the position paper on IFRS 13 prepared by the European Public Real Estate
Association ('EPRA'), the representative body of the publicly listed real
estate industry in Europe. This paper concludes that, even in the most
transparent and liquid markets, it is likely that valuers of investment
property will use one or more significant unobservable inputs or make at least
one significant adjustment to an observable input, resulting in the vast
majority of investment properties being classified as level 3.
Observable market data is considered to be that which is readily available,
regularly distributed or updated, reliable and verifiable, not proprietary,
and provided by independent sources that are actively involved in the relevant
market. In arriving at the valuation Colliers make adjustments to observable
data of similar properties and transactions to determine the fair value of a
property and this involves the use of considerable judgement.
Considering the Group's specific valuation process, industry guidance, and the
level of judgement required in the valuation process, the Directors believe it
appropriate to classify the Group's investment properties within level 3 of
the fair value hierarchy.
The Group's investment properties, which are all care homes, are considered to
be a single class of assets. The weighted average net initial yield ('NIY') on
these assets, as measured by the EPRA topped-up net initial yield, is 5.8%.
The yield on the majority of the individual assets ranges from 5.0 per cent to
8.6 per cent. There have been no changes to the valuation technique used
through the period, nor have there been any transfers between levels.
The key unobservable inputs made in determining the fair values are:
· Contracted rental level: The rent payable under the lease
agreement at the date of valuation or, where applicable, on expiry of the rent
free period; and
· Yield: The yield is defined as the initial net income from a
property at the date of valuation, expressed as a percentage of the gross
purchase price including the costs of purchase.
8. Investment properties (continued)
The contracted rental level and yield are not directly correlated although
they may be influenced by similar factors. Rent is set at a long-term,
supportable level and is likely to be influenced by property-specific matters.
The yield also reflects market sentiment and the strength of the covenant
provided by the tenant, with a stronger covenant attracting a lower yield.
The lease agreements on the properties held within the Group's property
portfolio generally allow for annual increases in the contracted rental level
in line with inflation, within a cap and a collar. An increase of 1.0 per cent
in the contracted rental level will increase the fair value of the portfolio,
and consequently the Group's reported income from unrealised gains on
investments, by £8.6 million (30 June 2021: £6.8 million); an equal and
opposite movement would have decreased net assets and decreased the Group's
income by the same amount.
A decrease of 0.25 per cent in the net initial yield applied to the property
portfolio, including properties held for sale, will increase the fair value of
the portfolio by £38.8 million (30 June 2021: £30.1 million), and
consequently increase the Group's reported income from unrealised gains on
investments. An increase of 0.25 per cent in the net initial yield will
decrease the fair value of the portfolio by £35.6 million (30 June 2021:
£27.7 million) and reduce the Group's income.
9. Properties held for sale
As at
31 December
2021
£'000
Opening fair value 7,320
Closing fair value 7,320
The properties held for sale were valued at £7,320,000 (30 June 2021:
£7,320,000) by Colliers International Healthcare Property Consultants Limited
('Colliers'). The properties held for sale consist of two blocks of apartments
adjacent to an existing property holding which were acquired to consolidate
ownership of the overall retirement village. The intention is to sell the
leasehold on the individual apartments. The apartments are being actively
marketed, with one being sold subsequent to the period end.
10. Trade and other receivables
As at As at
31 December 30 June
2021 2021
Non-current trade and other receivables £'000 £'000
Fixed rent reviews 46,464 41,949
Rental deposits held in escrow for tenants 7,302 6,840
Lease incentives 6,203 5,791
Total 59,969 54,580
As at As at
31 December 30 June
2021 2021
Current trade and other receivables £'000 £'000
Cash held as security in relation to the bank loan 7,601 -
Cash held in escrow for property acquisitions 6,700 -
Lease incentives 190 179
VAT recoverable 572 732
Accrued income - rent receivable 650 955
Accrued development interest under forward fund agreements 306 739
Other debtors and prepayments 2,998 2,926
Total 19,017 5,531
11. Investment in subsidiary undertakings
The Group included 55 subsidiary companies as at 31 December 2021. 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
which are incorporated in Gibraltar and two subsidiaries which are
incorporated in Luxembourg, all subsidiaries are incorporated within the
United Kingdom.
During the period, the Group incorporated five new subsidiaries; THR Number 41
Limited, THR Number 42 Limited, THR Number 43 plc, THR Number 45 Limited and
THR Number 46 Limited, which are each incorporated in England & Wales.
The Group includes eight dormant companies which were acquired as part of
previous corporate acquisitions. These companies were placed into liquidation
during the period and are expected to be dissolved shortly.
12. Bank loans
As at As at
31 December 30 June
2021 2021
£'000 £'000
Principal amounts outstanding 222,750 130,000
Set-up costs (4,276) (2,476)
Amortisation of set-up costs 635 380
Total 219,109 127,904
The Group has entered into a £70.0 million committed term loan and revolving
credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable
in November 2025. Interest accrues on the bank loan at a variable rate, based
on SONIA plus margin and mandatory lending costs, and is payable quarterly.
The margin is 2.18 per cent per annum on £50.0 million of the facility and
2.33 per cent per annum on the remaining £20.0 million 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 £20.0 million of any undrawn element
of the facility, reducing to 1.05 per cent per annum thereafter. As at 31
December 2021, the Group had drawn £50.0 million under this facility (30 June
2021: £30.0 million).
The Group has entered into a £100.0 million revolving credit facility with
HSBC Bank plc ('HSBC') which is repayable in November 2024, with the option of
a one-year extension thereafter subject to the consent of HSBC. Interest
accrues on the bank loan at a variable rate, based on SONIA plus margin and
mandatory lending costs, and is payable quarterly. The margin is 2.17 per cent
per annum for the duration of the loan and a non-utilisation fee of 0.92 per
cent per annum is payable on any undrawn element of the facility. As at 31
December 2021, the Group had drawn £22.75 million under this facility (30
June 2021: £50.0 million).
The Group has a £50.0 million committed term loan facility with ReAssure
which is repayable on 12 January 2032. During the period, the Group entered
into further committed term loan facilities of £37.25 million, also repayable
on 12 January 2032, and of £62.75 million, 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 31 December 2021, the Group had drawn £150.0
million under these facilities (30 June 2021: £50.0 million).
The following interest rate swap was in place during the period ended 31
December 2021:
Notional Value Starting Date Ending Date Interest paid Interest received Counterparty
30,000,000 5 November 2020 5 November 2025 0.30% Daily compounded SONIA (floor at -0.08%) RBS
12. Bank loans (continued)
At 31 December 2021, inclusive of the interest rate swap, the interest rate on
£180.0 million of the Group's borrowings had been fixed, including the
amortisation of arrangement costs, at an all-in rate of 3.22 per cent per
annum until at least November 2025. The remaining £140.0 million of debt, of
which £42.75 million was drawn at 31 December 2021, would, if fully drawn,
carry interest at a variable rate equal to daily compounded SONIA plus a
weighted average lending margin, inclusive of the amortisation of arrangement
costs, of 2.44 per cent per annum.
The fair value of the interest rate swap at 31 December 2021 was an asset of
£929,000 (30 June 2021: asset of £251,000). The Group categorises all
interest rate swaps as level 2 in the fair value hierarchy (see note 8).
At 31 December 2021, the nominal value of the Group's loans equated to
£222,750,000 (30 June 2021: £130,000,000). Excluding the interest rate swap
referred to above, the fair value of these loans, based on a discounted
cashflow using the market rate on the relevant treasuries plus an estimated
margin based on market conditions at 31 December 2021, totalled, in aggregate,
£222,278,000 (30 June 2021: £131,389,000). The payment required to redeem
the loans in full, incorporating the terms of the Spens clause in relation to
the ReAssure facilities, would have been £249,742,000 (30 June 2021:
£139,748,000). 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 ReAssure loans of £50.0
million and £37.25 million 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 ReAssure loan of
£62.75 million 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 (excluding those subsidiaries which are currently dormant). In
aggregate, the Group has granted a fixed charge over properties with a market
value of £780 million as at 31 December 2021 (30 June 2021: £526 million).
Under the bank covenants related to the loans, the Group is to ensure that:
- the loan to value percentage for 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 each of THR1 Group and THR15 Group is greater than
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.
All bank loan covenants have been complied with during the period.
13. Trade and other payables
As at As at
31 December 30 June
2021 2021
Non-current trade and other payables £'000 £'000
Rental deposits 7,302 6,840
Total 7,302 6,840
As at As at
31 December 30 June
2021 2021
Current trade and other payables £'000 £'000
Rental income received in advance 6,908 5,719
Property acquisition and development costs accrued 5,676 8,182
Investment Manager's fees payable 1,889 1,551
Interest payable 1,032 969
Other payables 2,253 2,044
Total 17,758 18,465
13. Trade and other payables (continued)
The Group's payment policy is to ensure settlement of supplier invoices in
accordance with stated terms.
14. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each Number of shares £'000
Balance as at 30 June 2021 511,541,694 5,115
Issued on 9 September 2021 108,695,652 1,087
Balance as at 31 December 2021 620,237,346 6,202
During the period to 31 December 2021, the Company issued 108,695,652 ordinary
shares of £0.01 each (period to 31 December 2020: nil) raising gross proceeds
of £125,000,000. The consideration in excess of the par value of the ordinary
shares issued, net of the expenses of issue of £2,505,000, has been credited
to the share premium account. The Company did not buyback or resell any
ordinary shares (period to 31 December 2020: nil).
At 31 December 2021, the Company did not hold any shares in treasury (30 June
2021: nil).
15. Commitments
The Group had capital commitments as follows:
As at As at
31 December 30 June
2021 2021
£'000 £'000
Amounts due to complete forward fund developments 32,753 21,054
Other capital expenditure commitments 3,858 3,158
Total 36,611 24,212
16. Contingent assets and liabilities
As at 31 December 2021, twelve (30 June 2021: twelve) properties within the
Group's investment property portfolio contained deferred consideration clauses
meaning that, subject to contracted performance conditions being met, deferred
payments totalling £20.03 million (30 June 2021: £20.03 million) may be
payable by the Group to the vendors/tenants of these properties. The potential
timings of these payments are also conditional on the date(s) at which the
contracted performance conditions are met and are therefore uncertain.
It is highlighted that any deferred consideration subsequently paid will
result in an increase in the rental income due from the tenant of the relevant
property. As the net initial yield used to calculate the additional rental
which would be payable is not significantly different from the investment
yield used to arrive at the valuation of the properties, any deferred
consideration paid would be expected to result in a commensurate increase in
the value of the Group's investment property portfolio.
Having assessed each clause on an individual basis, the Company has determined
that the contracted performance conditions were highly likely to be met in
relation to one of these properties and therefore an amount of £1.55 million
has been recognised as a liability at 31 December 2021 (30 June 2021: £1.55
million). An equal but opposite amount has been recognised in other debtors to
reflect the increase in the investment property value that would be expected
to arise were the deferred consideration to be paid and the contracted rental
income to increase accordingly.
17. Related party transactions
The Directors are considered to be related parties to the Company. No
Director has an interest in any transactions which are, or were, unusual in
their nature or significant to the nature of the Company.
The Directors of the Company received fees for their services. Total fees for
the period were £114,000 (period ended 31 December 2020: £91,000) of which
£18,000 (31 December 2020: £12,000) remained payable at the period end.
The Investment Manager received £3,553,000 (inclusive of estimated
irrecoverable VAT) in management fees in relation to the period ended 31
December 2021 (period ended 31 December 2020: £2,821,000). Of this amount
£1,889,000 remained payable at the period end (31 December 2020:
£1,401,000). The Investment Manager received a further £75,000 (inclusive of
irrecoverable VAT) during the period ended 31 December 2021 (period ended 31
December 2020: £73,000) in relation to its appointment as Company Secretary
and Administrator, of which £38,000 (31 December 2020: £36,000) remained
payable at the period 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.
18. 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 is the EPRA NTA. The reconciliation between the NAV, as calculated
under IFRS, and the EPRA NTA is detailed in note 6.
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.
19. Post balance sheet event
On 7 January 2022, the Group completed the acquisition of a modern,
purpose-built care home in Westhoughton, greater Manchester, for £7.2 million
including acquisition costs. The home has been trading for seven years with an
attractive track record of care/service, occupancy and profitability. It will
be operated by Harbour Healthcare, new to the home and a new tenant to the
Group, and comprises 55 bedrooms with full en suite facilities. The property
is leased on a 35-year term with RPI-linked increases, subject to a cap and
collar. The majority of the monies required to complete this transaction was
held in escrow at 31 December 2021 (see note 10).
20. Interim Report Statement
These are not full statutory accounts in terms of Section 434 of the Companies
Act 2006 and are unaudited. Statutory accounts for the Company for the year
ended 30 June 2021, which received an unqualified audit report and which did
not contain a statement under Section 498 of the Companies Act 2006, have been
lodged with the Registrar of Companies. No full statutory accounts, for either
the Company or Group, in respect of any period after 30 June 2021 have been
reported on by the Company's auditor or delivered to the Registrar of
Companies.
The Interim Report and Condensed Consolidated Financial Statements for the six
months ended 31 December 2021 will be posted to shareholders and made
available on the website: www.targethealthcarereit.co.uk. Copies may also be
obtained from the Company Secretary, Target Fund Managers Limited, 1st Floor,
Glendevon House, Castle Business Park, Stirling FK9 4TZ.
Directors' Statement of Principal Risks and Uncertainties
The risks, and the way in which they are managed, are described in more detail
in the Strategic Report within the Annual Report and Financial Statements for
the year to 30 June 2021. The Board has also concluded that the recent
increase in the rate of UK-inflation has raised the risk that this represents
for the Group. This has therefore been re-assessed as constituting an
additional principal risk, rated as medium. This risk is partially mitigated
by the fact that the property lease agreements generally allow for a regular
increase in the contracted rental level in line with inflation, either within
a cap and a collar, or at a fixed level. However, should UK-inflation be at a
level in excess of this cap, whilst this may improve the tenants' level of
rent cover, the increase in the Group's overall rental income may not be
entirely commensurate with the level of inflation.
Other than the above, and as disclosed in the Chairman's Statement and
Investment Manager's Report, the Group's principal risks and uncertainties
have not changed materially since the date of the report and are not expected
to change materially for the remainder of the Group's financial year.
Statement of Directors' Responsibilities in Respect of the Interim Report
We confirm that to the best of our knowledge:
• the condensed set of financial statements has been prepared in accordance
with IAS 34 'Interim Financial Reporting' and gives a true and fair view of
the assets, liabilities, financial position and profit of the Group;
• the Chairman's Statement and Investment Manager's Report (together
constituting the Interim Management Report) include a fair review of the
information required by the Disclosure Guidance and Transparency Rules ('DTR')
4.2.7R, being an indication of important events that have occurred during the
period and their impact on the financial statements;
• the Statement of Principal Risks and Uncertainties referred to above is a
fair review of the information required by DTR 4.2.7R; and
• the condensed set of financial statements includes a fair review of the
information required by DTR 4.2.8R, being related party transactions that have
taken place in the period and that have materially affected the financial
position or performance of the Group during the period.
On behalf of the Board
Malcolm Naish
Chairman
15 March 2022
Independent Review Report to Target Healthcare REIT plc
Introduction
We have been engaged by Target Healthcare REIT plc ("the Company") to review
the condensed consolidated set of financial statements in the Interim Report
and Financial Statements for the six months ended 31 December 2021 which
comprises the Condensed Consolidated Statement of Comprehensive Income,
Condensed Consolidated Statement of Financial Position, Condensed Consolidated
Statement of Changes in Equity, Condensed Consolidated Statement of Cash Flows
and the related notes 1 to 20 to the Condensed Consolidated Financial
Statements. We have read the other information contained in the Interim Report
and Financial Statements and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed consolidated set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed consolidated set of financial statements in the
Interim Report and Financial Statements for the six months ended 31 December
2021 is not prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34 and the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK and Ireland) 'Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the Group will be
prepared in accordance with UK adopted international accounting standards. The
condensed set of consolidated financial statements included in this Interim
Report and Financial Statements has been prepared in accordance with UK
adopted International Accounting Standard 34, 'Interim Financial Reporting'.
Responsibilities of the Directors
The Directors are responsible for preparing the Interim Report and Financial
Statements in accordance with the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Auditor's Responsibilities for the Review of the Financial Information
In reviewing the Interim Report and Financial Statements, we are responsible
for expressing to the Company a conclusion on the condensed consolidated set
of financial statements in the Interim Report and Financial Statements. Our
conclusion is based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of this report.
Use of our Report
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) 'Review of Interim Financial Information Performed by the Independent
Auditor of the Entity' issued by the Auditing Practices Board. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company, for our work, for this report, or for the conclusions
we have formed.
Ernst & Young LLP
Edinburgh
15 March 2022
Glossary of Terms and Definitions
Contractual Rent The annual rental income receivable on a property as at the balance sheet
date, adjusted for the inclusion of rent currently subject to a rent free
period.
Discount/ The amount by which the market price per share of a Closed-end Investment
Company is lower or higher than the net asset value per share. The discount or
Premium* premium is expressed as a percentage of the net asset value per share.
Dividend Cover* The absolute value of Group specific adjusted EPRA Earnings divided by the
absolute value of dividends relating to the period of calculation.
Dividend Yield* The annual Dividend expressed as a percentage of the share price at the date
of calculation.
EPRA Cost Ratio* Reflects the relevant overhead and operating costs of the business. It is
calculated by expressing the sum of property expenses (net of service charge
recoveries and third-party asset management fees) and administration expenses
(excluding exceptional items) as a percentage of gross rental income.
EPRA Group specific adjusted Cost Ratio* The EPRA Cost Ratio adjusted for items thought appropriate for the Group's
specific business model. The adjustments made are consistent with those made
to the Group specific adjusted EPRA earnings as detailed in note 6.
EPRA Earnings Recurring earnings from core operational activities. A key measure of a
company's underlying operating results from its property rental business and
per Share* an indication of the extent to which current dividend payments are supported
by earnings. A reconciliation of the earnings per IFRS and the EPRA earnings,
including any items specific to the Group, is contained in note 6.
EPRA Net Disposal Value ('NDV')* A measure of Net Asset Value which 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.
EPRA Net Reinstatement Value ('NRV')* A measure of Net Asset Value which 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')* A measure of Net Asset Value which assumes that entities buy and sell assets,
thereby crystallising certain levels of unavoidable deferred tax.
EPRA Net Initial Annualised rental income based on the cash rents passing at the balance sheet
date, less non-recoverable property operating expenses, divided by the market
Yield* value of the property, increased with (estimated) purchasers' costs. EPRA's
purpose is to provide a comparable measure around Europe for portfolio
valuations.
EPRA Topped-up Incorporates an adjustment to the EPRA Net Initial Yield in respect of the
expiration of rent-free periods (or other unexpired lease incentives).
Net Initial Yield*
Loan-to-Value A measure of the Group's Gearing level. Gross LTV is calculated as total gross
debt as a proportion of gross property value. Net LTV is calculated as total
('LTV')* gross debt less cash (including any cash held as security in relation to the
debt facilities) as a proportion of gross property value.
Mature Homes Care homes which have been in operation for more than three years.
Portfolio or Passing Rent* The annual rental income currently receivable on a property as at the balance
sheet date, excluding rental income where a rent free period is in operation.
The gross rent payable by a tenant at a point in time.
Rent Cover* A measure of a tenant's ability to meet its rental liability from the profit
generated by their underlying operations. Generally calculated as the tenant's
EBITDARM (earnings before interest, taxes, depreciation, amortisation, rent
and management fees) divided by the contracted rent.
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.
WAULT* Weighted average unexpired lease term. The average lease term remaining to
expiry across the portfolio weighted by contracted rental income.
* Alternative Performance Measure
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 above, with detailed
calculations, including reconciliation to the IFRS figures where appropriate,
being set out below.
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.
31 December 30 June
2021 2021
pence pence
EPRA Net Tangible Assets per share (see note 6) (a) 110.8 110.4
Share price (b) 118.0 115.4
Premium = (b-a)/a 6.5% 4.5%
Dividend Cover - the percentage by which Group specific adjusted EPRA earnings
for the period cover the dividend paid.
Period ended Period ended
31 December 31 December
2021 2020
£'000 £'000
Group-specific EPRA earnings for the period (see note 6) (a) 13,657 12,176
First interim dividend 10,482 7,686
Second interim dividend 10,482 7,686
Dividends paid in relation to the period (b) 20,964 15,372
Dividend cover = (a/b) 65% 79%
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.
The Group did not have any vacant properties during the periods and therefore
separate measures excluding direct vacancy costs are not presented. Consistent
with the Group specific adjusted EPRA earnings detailed in note 6 to the
Condensed 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.
Period ended Period ended
31 December 2021 31 December
£'000 2020
£'000
Investment management fee 3,553 2,821
Credit loss allowance and bad debts written off 1,073 1,940
Other expenses 1,558 1,230
EPRA costs (a) 6,184 5,991
Specific cost adjustments, if applicable - -
Group specific adjusted EPRA costs (b) 6,184 5,991
Gross rental income per IFRS (c) 26,510 24,868
Adjusted for rental income arising from recognising guaranteed rent review
uplifts and lease incentives
(4,515) (4,554)
Adjusted for development interest under forward fund arrangements
335 212
Group specific adjusted gross rental income (d) 22,330 20,526
EPRA Cost Ratio (including direct vacancy costs) = (a/c) 23.3% 24.1%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
= (b/d) 27.7% 29.2%
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).
31 December 30 June
2021 2021
£'000 £'000
Annualised passing rental income based on cash rents (a) 51,069 40,763
Notional rent expiration of rent-free periods or other lease incentives
2,358 450
Topped-up net annualised rent (b) 53,427 41,213
Standing assets including properties held for sale (see notes 8 and 9)
857,644 662,495
Allowance for estimated purchasers' costs 57,875 44,696
Grossed-up completed property portfolio valuation (c) 915,519 707,191
EPRA Net Initial Yield = (a/c) 5.58% 5.76%
EPRA Topped-up Net Initial Yield = (b/c) 5.84% 5.83%
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.
Period ended Period ended
31 December 2021 31 December 2020
EPRA NTA IFRS NAV Share price EPRA NTA IFRS NAV Share price
(pence) (pence) (pence) (pence) (pence) (pence)
Value at start of period (a) 110.4 110.5 115.4 108.1 108.0 110.0
Value at end of period (b) 110.8 110.9 118.0 108.2 108.1 114.0
Change in value during period (b-a) (c) 0.4 0.4 2.6 0.1 0.1 4.0
Dividends paid (d) 3.4 3.4 3.4 3.4 3.4 3.4
Additional impact of dividend reinvestment
(e) (0.1) - - - - 0.1
Total gain in period (c+d+e) (f) 3.7 3.8 6.0 3.5 3.5 7.5
Total return for the period = (f/a) 3.4% 3.5% 5.2% 3.3% 3.3% 6.8%
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