REG - Target H'care REIT - Half-year Report
27/03/2023 07:00
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RNS Number : 2294U Target Healthcare REIT PLC 27 March 2023
27 March 2023
Target Healthcare REIT plc
HALF-YEAR RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2022
Earnings growth and portfolio valuation supported by above carrying value
property disposal post period end; with a rebasing of dividend to reflect the
interest rate environment
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 2022.
Portfolio performance supported by inflation-linked rental uplifts
· Portfolio market value decreased by 4.8% to £867.7 million (June
2022: £911.6 million), primarily driven by a like-for-like portfolio
valuation movement of -5.5% and net acquisitions of 0.7%. The like-for-like
valuation movement consists of a decrease of 7.3%, reflecting the outward
shift in yields, offset by a 1.8% increase from inflation-linked rental
uplifts
· Contractual rent increased by 2.9% to £57.1 million (June 2022:
£55.5 million), including like‑for-like rental growth of 1.8%
· Diversified tenant base, with 33 tenants across 100 properties
(June 2022: 34 tenants and 101 properties)
· Underlying trading performance at the homes recovering towards
pre-pandemic levels. Most recent resident occupancy and rent covers for the
mature homes in the portfolio were 84% and 1.5 times, respectively
· Post period end £22 million disposal of four assets for above
carrying value and June 2022 valuation, representing a full exit from Northern
Ireland
Sustainable returns generated through portfolio management and
inflation-linked characteristics of leases
· EPRA NTA per share decreased by 8.3% to 103.0 pence (June 2022:
112.3 pence)
· NAV total return((1)) of -5.4% (2021: 3.4%)
· Portfolio total return on standing assets of -2.2% (2021: 4.8%)
· Rent collection of 96%
· Full recovery of rent outstanding from one tenant, of which £1.1
million had been provided for at 30 June 2022
· 99% of leases benefit from upwards only inflation-linked rent
reviews; 1% fixed uplifts
· Weighted average unexpired lease term of 26.8 years (June 2022:
27.2 years)
· Weighted average cost of drawn debt at 3.8% (June 2022: 3.3%),
with average term to maturity of 6.7 years (June 2022: 6.9 years) and interest
rate hedged on 96% of drawn debt until expiry
· Net LTV increased to 25.1% (June 2022: 22.0%)
Rebasing of target dividend to sustainable level reflecting higher interest
rate environment
· Dividend per share in respect of the period maintained at 3.38
pence (2021: 3.38 pence)
· Annual dividend target rebased to 5.60 pence per share, commencing with
the third interim dividend payable in May 2023, providing a sustainable
dividend level which will be fully covered by earnings whilst allowing for
annual growth. This represents a reduction of 17%
· Adjusted EPRA Earnings per share((2)) of 3.01 pence (2021: 2.36
pence)
· EPRA Earnings per share((2)) of 3.89 pence (2021: 3.08 pence)
· Adjusted EPRA Cost Ratio of 18.7% (2021: 27.7%); EPRA Cost Ratio
of 15.7% (2021: 23.3%)
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; one home (66 beds) opened in the period, three homes (203 beds) were
being funded at period end and a further development site (60 beds) was
acquired post period end
· Full en suite wet-rooms account for 97% of the portfolio,
compared to the UK national average of just 31%
· Our homes provide generous space at an average of 47m(2) per
resident
· EPC ratings: 100% A-C ratings, with 93% A or B ratings and
currently compliant with the minimum energy efficiency standards anticipated
to apply from 2030
Unless otherwise stated in the above, references to 2021 mean the comparative
six month period to 31 December 2021 and references to 2022 mean 30 June 2022,
being the start of the period under review.
( )
((1)) Based on EPRA NTA movement and dividends paid, see alternative
performance measures below.
((2)) For the details of EPRA earnings and adjusted EPRA earnings refer to
note 6 to the Condensed Consolidated Financial Statements.
Alison Fyfe, Chair of the Company, said:
"We remain committed to our primary investment objective, producing long-term
stable income and attractive total returns, with positive social impact by
investing in fit-for-purpose care homes for older people in society. There is
an increased national focus on supporting people in the community rather than
having them experience unnecessary and potentially distressing hospital
admission and care homes play a crucial role in this.
"The recent increases in interest rates have impacted on earnings but our
tenants' underlying trading performance is improving and maturing, with this
property sector benefitting from significant tailwinds of demographic change
and needs-based demand for care. With a rebased dividend to reflect the
Group's current recurring earnings, we believe the Group's modern portfolio is
well positioned to deliver sustainable long-term returns to shareholders."
A live webcast presentation for analysts will be held at 9.00 a.m. BST this
morning and can be accessed via the following link:
https://stream.brrmedia.co.uk/broadcast/63fe469cd684866e54345175
(https://stream.brrmedia.co.uk/broadcast/63fe469cd684866e54345175)
LEI: 213800RXPY9WULUSBC04
Enquiries:
Kenneth MacKenzie; Gordon Bland
Target Fund Managers Limited
01786 845 912
Mark Young; Rajpal Padam
Stifel Nicolaus Europe Limited
020 7710 7600
Dido Laurimore; Richard Gotla, Talia Shirion
FTI Consulting
020 3727 1000
TargetHealthcare@fticonsulting.com (mailto:TargetHealthcare@fticonsulting.com)
Important information
The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the UK version of the Market
Abuse Regulations (EU) No. 596/2014, which is part of UK law by virtue of the
European Union (Withdrawal) Act 2018, as amended. Upon the publication of this
announcement via Regulatory Information Service, this inside information is
now considered to be in the public domain.
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 2022 comprised 100 assets let to 33
tenants with a total value of £867.7 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
Introduction & reflection
It is a great privilege for me to take over the role of Chair for this
remarkable company. I would like to start by thanking my predecessor, Malcolm
Naish, for his outstanding leadership and dedication. His contribution has
laid firm foundations for the Company's growth and track record to date. I am
committed to building on this legacy so that we deliver further long-term
success.
Our investment strategy and business model has worked well, producing a total
return based on EPRA NTA of 91.2% since IPO. The seven years to 2020 saw us
patiently grow the portfolio, refine our capital structure through adding
long-term fixed rate debt, and deliver earnings growth based on robust rental
income.
Conditions then changed dramatically, with the COVID-19 pandemic in March 2020
and its persistent effect on the care home sector. This was exacerbated with
the chain of headwinds that emerged from early 2022: the Russian invasion of
Ukraine; supply-side trouble for energy and food, with its swift inflationary
impact; and the volatility experienced in the second half of 2022 with the
decisive end to the period of ultra-low interest rates. Through this, our
business model and the performance of the portfolio have been resilient and we
have grown large enough to become a constituent of the FTSE 250 with a solid
and secure capital structure.
However, the changes noted above and their impact on the real estate
investment market detailed below lead us to consider fine tuning our business
model to meet today's conditions which are very different from those at our
launch some 10 years ago:
· Inflation appears to be more persistent than many forecasts, and
interest rates have reached 14-year highs, meaning our marginal rate of
financing currently exceeds the initial rental yields we can obtain on new
investments. This changes our view on what earnings levels are achievable.
· The net initial yields available on assets that meet our strict
investment criteria, to enable long term earnings, have compressed
significantly. The earlier assets in our portfolio, acquired at net initial
yields of 7.3%, if acquired new today would be at c.5.5%. These valuation
yields reflect the quality of our prime real estate, its inflation-linked
rental streams and strong ESG credentials, all of which result in robust
market demand for these assets. Our investment strategy also has the
significant tailwinds of demographic change and needs-based demand for care,
resulting in a portfolio that is well-placed for the long-term.
· Our portfolio was categorised as 71% mature when the COVID-19
pandemic emerged. The small 5% shortfall in rent collection since then is
primarily attributable to a combination of newly-opened homes and a limited
number of tenants who were also maturing as businesses and who did not yet
have sufficient reserves to absorb a materially slower rate of occupancy
growth - an inevitable consequence of acquiring new real estate. We will
continue to invest in new-build care homes which support the sector's
modernisation and provide attractive long-term returns. Our mature home
proportion is currently 90%.
Following careful consideration of these matters, and of the trends and
outlook we note below, the Board believes the most appropriate response is to
rebase the target annual dividend level to 5.60 pence per share to reflect the
Group's current recurring earnings, commencing with our third interim dividend
payable in May 2023. The Board's priority is to offer an attractive dividend
to shareholders which (i) will be fully covered by earnings (ii) allows annual
growth and (iii) fully contributes to an attractive level of total return.
This is a strong and resilient business with a clear purpose and a business
model which has delivered for shareholders and which will continue to do so.
We note the following trends seen over the last 10 years which are very much
aligned to our investment strategy:
· Private wet-room provision now accounts for 31% of total care home
places in the UK, up from 14% in 2014. This trend is supportive of long-term
resident demand for places in our homes and our view of what should be
considered the minimum acceptable standard and the clear direction of travel.
Our portfolio benefits from 97% en suite wet-room provision.
· The demographic tailwinds continue, with further significant growth
in the proportion of older people predicted.
· ESG - we have always prioritised social impact, and our real
estate's environmental credentials are compelling with 93% of the portfolio
having been rated EPC B or above(1), supporting the longevity of our real
estate and minimising the need for costly and disruptive building alterations
to be compliant with upcoming legislative changes.
· Our portfolio's occupancy levels and trading performance are continuing
their improvement following the persistent impact of COVID-19, including
through this past winter.
2. Performance & balance sheet
Underlying profits, measured by adjusted EPRA earnings, have increased by 37%
to £18.7 million (31 December 2021: £13.7 million), being 3.01 pence per
share (31 December 2021: 2.36 pence). The accounting total return for the
period was -5.4% (31 December 2021: 3.4%).(2)
This increase in earnings has improved dividend cover to 89% based on adjusted
EPRA earnings (31 December 2021: 65%) and is reflected in an improved EPRA
cost ratio of 15.7% (31 December 2021: 23.3%).(3)
As with other commercial real estate classes, property valuations have
declined, driven by the outward shift in yields applied by valuers in response
to the higher interest rate environment. Our like-for-like portfolio valuation
decrease in the period of 5.5% demonstrates the stable and resilient nature of
our assets in contrast to the 19% capital decline in the CBRE UK monthly index
(all property) over the same period. The fall in property values contributes
to an IFRS loss of £34.2 million (31 December 2021: profit £18.7 million).
The portfolio's EPRA topped-up net initial yield is 6.22% (30 June 2022:
5.82%).
Net LTV increased to 25.1% (30 June 2022: 22.0%) with the Group's debt
arrangements providing a weighted average term to maturity of 6.7 years at a
weighted interest rate on drawn debt, inclusive of amortisation of loan
arrangement costs, of 3.79%. 96% of the £240 million of drawn debt is fully
hedged against further increases in interest rates.
The Group has £62 million of capital available, net of its development
commitments, which provides flexibility with regard to capital allocation for
activities such as making strategically important new investments, portfolio
improvements or other asset management initiatives.
3. Portfolio
The Group's portfolio of 100 properties is valued at £867.7 million with 33
tenants. The portfolio's rental growth on a like-for-like basis was 1.8%
driven by annual rental uplifts.
The underlying trading performance at the homes has been recovering towards
pre-pandemic levels. Most recent occupancy and rent covers for the mature
homes in the portfolio were 84% and 1.5 times, respectively.
4. Board
We have completed our board succession programme, in line with the
expectations set out in the previous Annual Report. As Malcolm Naish stepped
down as Chair, Gordon Coull also retired from his role as Senior Independent
Director, having previously chaired the Audit Committee. Our sincere thanks to
them both for their commitment and dedication.
Following the appointment of Richard Cotton as Senior Independent Director in
November 2022, the new Board reached its full complement with the appointment
of Michael Brodtman in January 2023. I am enjoying working with my fellow
Directors and the range of skills and experience identified during the
recruitment processes is evident from the many valuable contributions made
early in our collective tenure.
5. Outlook
As we look ahead to the next 10 years, I am optimistic about the outlook for
our company. We remain committed to our primary investment objective,
producing long-term stable income and attractive total returns with positive
social impact by investing in fit-for-purpose care homes for older people in
society. There is an increased national focus on supporting people in the
community rather than having them experience unnecessary and potentially
distressing hospital admission and care homes play a crucial role in this.
Our portfolio trading is improving and maturing, which we believe will deliver
sustainable long-term returns to shareholders, whom we thank for their
long-term and stable presence on our register.
Alison Fyfe
Chair
24 March 2023
((1)) EPC ratings are, where required, converted to their English-equivalent.
((2)) Based on EPRA NTA movement and dividends paid, see alternative
performance measures below.
((3)) See alternative performance measures below.
Investment Manager's Report
Overview
The Group's portfolio of 100 assets, comprising 97 operational homes and three
pre-let development sites, was valued at £867.7 million at 31 December 2022.
The operational homes were let to 33 tenants, providing 6,701 beds for
residents, and generating a contractual rent of £57.1 million per annum.
The portfolio value decreased by 4.8% overall, and 5.5% on a like-for-like
basis in the period. The contractual rent roll has increased by 2.9%, 1.8%
like-for-like. The WAULT has shortened slightly to 26.8 years while the EPRA
topped-up net initial yield has moved out to 6.22% and the EPRA net initial
yield was 6.06%.
Portfolio
The focus of trading performance shifted in the period, from a welcome easing
of the persistent impacts of the pandemic to the influence of high inflation
on the costs of delivering care. Pleasingly, and consistent with the
structural drivers of demographics and demand for places in quality real
estate, we have seen tenants' profitability metrics improve: operators have
been able to articulate the inflationary cost pressures to residents and their
families and receive commensurate fee increases; occupancy is steadily
improving, with the usual seasonal variations having negligible impact this
winter; and, crucially, rent covers are responding, with the December 2022
portfolio rent cover at 1.5 times (30 June 2022: 1.3 times). Portfolio
occupancy is at 84% at the time of writing.(1)
Our portfolio has a bias towards the private fee payer - there is long-term
evidence that this group is accepting of higher fees, particularly for quality
real estate and care services. For those receiving local authority funding,
whilst increases have come through in recent years, these are inevitably under
pressure. An element of council tax rises in England announced in February
2023 appear to be "allocated" towards social care. Staffing costs are
increasing with inflation, which is expected and encouraged, and operators are
reporting easing in staff availability challenges. Visa programmes have
helped, and many of our tenants have used these to sponsor overseas staff to
fill a number of vacancies. All-in, we see underlying tenant profitability
improving across our portfolio even while occupancy continues its recovery to
pre-COVID-19 levels of c.90%.
Asset management initiatives
As at 24 March 2023, the Group had collected 96% of the rent that was due and
payable in respect of the six months under review. Since the outbreak of the
pandemic in March 2020, 95% of portfolio rent has been collected. To manage
the portfolio's sustainable long-term returns, and improve shorter-term rent
collection prospects, we have completed the following notable portfolio
initiatives:
Subsequent to the period-end:
· The disposal of four homes for sales proceeds of £22 million to a
care home operator. This pricing was ahead of both carrying value from June
2022, prior to the general decline in property valuations seen through the
second half of 2022, and that of December 2022.
· The completion of the final stage of a re-tenanting programme to
leave a tenant with three homes whose trading performance covers current rent
in full. Existing lease terms, including rent levels, have been maintained
with the incoming tenant being granted a short-term rent-free period to manage
the rebuild in occupancy.
· Rent collection has increased from the tenant which has historically
been responsible for a significant proportion of the Group's rent arrears,
with rent having been received in full from this tenant during the first two
months of 2023.
During the period:
· Practical completion of the Group's development site in Weymouth,
Dorset was reached in November 2022, contributing 66 new beds to the
portfolio. A new tenant to the Group has entered into a 35-year lease which
incorporates green provisions and annual rent reviews (subject to caps and
collars).
· Completion of retrofit programmes on 47 rooms to bring two of the
Group's small number of homes without full en suite wet-room provision to
acceptable modern standards.
· The disposal of a non-core asset. This care home was part of the
18-home portfolio acquired in December 2021, with real estate standards below
the average of that portfolio. It has been sold to the operator for proceeds
consistent with carrying value. The home represented 0.5% of the portfolio by
value.
Ten years in, having supported the creation of 15 brand new homes providing
more than 1,000 fit-for-purpose beds to the sector, and following delay from
the major global pandemic, our portfolio has now reached a more optimal level
of operational maturity. We assess acquisition opportunities on the assumption
that a premium home targeting private fee-paying residents will typically take
three years to fill and reach trading maturity. Currently 90% of our portfolio
is mature, with the immature proportion progressing well, inclusive of the
initiatives noted above. Our mission will invariably still have us supporting
new homes/tenants, whilst using experience gained to ensure rental income is
appropriately protected through the fill-up period.
Investment market
The investment market has shown some signs of recovery since the start of 2023
following a pause in the second half of 2022 due to uncertainty regarding
valuation levels across the real estate sector. Deals are now being completed
at pricing levels that reflect discounts that are consistent with the move in
the valuation of the Group's portfolio. We would anticipate competitive
bidding processes and pricing for prime real estate with strong ESG
credentials, whilst expecting pricing to decline further for sub-prime assets.
Sectoral
Reform of the social care sector was again moved down the priority list as the
Government's Manifesto pledge to 'fix' social care was pushed back by two
years in late 2022. Care providers understand the public's desire for a 'cap'
on care costs but a discarding of the less prominent national assessment of a
'fair cost of care' was seen as a negative for many, who believe it will
produce compelling evidence of the unreasonably low fees many Local
Authorities are paying. The need for cross-subsidisation of these residents by
privately funded residents has been a long standing and contentious issue. In
part, the Government has tried to address this issue by allowing Local
Authorities to again raise council tax beyond the normal threshold, with the
proceeds ring-fenced for social care, but commentators argue the proceeds to
be inadequate and risk a 'postcode lottery' based on the demographics and
affluence of Local Authority areas.
The Government has also recently announced funding to clear discharge backlogs
in hospitals. Care providers are willing to help, not least to support the
beleaguered patients trapped in hospital.
Commercial decision-making within homes is responding. We believe we see a new
trend emerging from the pandemic, with operators no longer rushing to simply
fill beds, but to fill them at reasonable fees, even if that means occupancy
trails behind the pre-pandemic norm. It is likely this trend also partly
explains the gradual progression of occupancy recovery, despite strong demand
and enquiries. However, staff recruitment and retention has played its part,
having become the main frustration within the sector in the past year. On
recruitment, many tenants within our portfolio have lately made use of the
Government Immigration Licence scheme, which, when implemented quickly, has
proven to be valuable. We note that many homes are recently reporting a more
settled workforce, which helps from a cost perspective (lower agency) and the
quality of care.
Inflationary pressures, particularly around energy have of course also been a
concern in the sector, but as (originally) a fairly small part of the budget
these have been of lesser concern than staffing. We also note that many
established operators have traditionally used brokers and had locked in
reasonable rates. The sector is also lobbying the Government to remain on
'special status' after the proposed lifting of the energy cap in the summer,
albeit recent drops in pricing may negate the importance of such an
intervention.
The pandemic highlighted the benefits of modern, purpose-built care homes,
where residents had the dignity and privacy provided by their en suite
wet-room, and the infection control advantage which that brought. But memories
are short, and the public are generally unaware of the vagaries in quality of
UK care homes (where approximately 70% do not provide private wet-rooms and
which we consider are no longer fit for purpose), until they have to find
accommodation for a loved one in a hurry. We believe many families and
commissioners of care are becoming more discerning. Ironically it may be ESG
which drives quicker change, with modern homes simply more aligned to best ESG
principles.
Target Fund Managers Limited
Investment Manager
24 March 2023
((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
2022
Six months ended Six months ended
31 December 2022 31 December 2021
(unaudited) (unaudited)
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Rental income 28,058 5,897 33,955 21,929 4,515 26,444
Other income 81 - 81 66 - 66
Total revenue 28,139 5,897 34,036 21,995 4,515 26,510
(Losses)/gains on investment properties 8
- (58,058) (58,058) - 871 871
Gains on sale of investment properties 8
- 55 55 - - -
Total income 28,139 (52,106) (23,967) 21,995 5,386 27,381
Expenditure
Investment management fee 2 (3,799) - (3,799) (3,553) - (3,553)
Credit loss allowance and bad debts 3 8 - 8 (1,073) - (1,073)
Other expenses 3 (1,564) - (1,564) (1,558) - (1,558)
Total expenditure (5,355) - (5,355) (6,184) - (6,184)
Profit/(loss) before finance costs and taxation
22,784 (52,106) (29,322) 15,811 5,386 21,197
Net finance costs
Interest receivable 84 - 84 36 - 36
Interest payable and similar charges 4 (4,636) (302) (4,938) (2,519) - (2,519)
Profit/(loss) before taxation 18,232 (52,408) (34,176) 13,328 5,386 18,714
Taxation 5 - - - (6) - (6)
Profit/(loss) for the period 18,232 (52,408) (34,176) 13,322 5,386 18,708
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
hedges
- 879 879 - 678 678
Total comprehensive income for the period
18,232 (51,529) (33,297) 13,322 6,064 19,386
Earnings/(loss) per share (pence) 6 2.94 (8.45) (5.51) 2.31 0.93 3.24
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 2022
As at As at
31 December 30 June
2022 2022
(unaudited) (audited)
Notes £'000 £'000
Non-current assets
Investment properties 8 803,831 857,691
Trade and other receivables 9 70,814 63,651
Interest rate derivatives 11 5,438 2,284
880,083 923,626
Current assets
Trade and other receivables 9 4,921 5,549
Cash and cash equivalents 21,801 34,483
26,722 40,032
Total assets 906,805 963,658
Non-current liabilities
Loans 11 (236,744) (231,383)
Trade and other payables 12 (7,255) (7,145)
(243,999) (238,528)
Current liabilities
Trade and other payables 12 (18,300) (26,363)
Total liabilities (262,299) (264,891)
Net assets 644,506 698,767
Share capital and reserves
Share capital 13 6,202 6,202
Share premium 256,633 256,633
Merger reserve 47,751 47,751
Distributable reserve 205,497 226,461
Hedging reserve 3,163 2,284
Capital reserve 31,342 83,750
Revenue reserve 93,918 75,686
Equity shareholders' funds 644,506 698,767
Net asset value per ordinary share (pence) 6 103.9 112.7
Condensed Consolidated Statement of Changes in Equity
For the six months ended 31 December 2022
(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 2022 6,202 256,633 47,751 226,461 2,284 83,750 75,686 698,767
Total comprehensive income for the period
- - - - 879 (52,408) 18,232 (33,297)
Transactions with owners recognised in equity:
Dividends paid 7 - - - (20,964) - - - (20,964)
As at 31 December 2022
6,202 256,633 47,751 205,497 3,163 31,342 93,918 644,506
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 13 1,087 123,913 - - - - - 125,000
Expenses of issue - (2,505) - - - - - (2,505)
As at 31 December 2021
6,202 256,636 47,751 246,088 929 69,498 60,886 687,990
Condensed Consolidated Statement of Cash Flows
For the six months ended 31 December
2022
Six months ended Six months ended
31 December 31 December
2022 2021
(unaudited) (unaudited)
Notes £'000 £'000
Cash flows from operating activities
(Loss)/profit before tax (34,176) 18,714
Adjustments for:
Interest receivable (84) (36)
Interest payable 4,938 2,519
Revaluation losses/(gains) on investment properties and movements in lease
incentives, net of acquisition costs written off
52,106 (5,386)
Increase in trade and other receivables (512) (14,331)
(Decrease)/increase in trade and other payables (358) 1,216
21,914 2,696
Interest paid (4,101) (2,201)
Premium paid on interest rate cap 11 (2,577) -
Interest received 84 36
Tax paid - (6)
(6,594) (2,171)
Net cash inflow from operating activities 15,320 525
Cash flows from investing activities
Disposal of investment properties, net of lease incentives 4,280 -
Purchase of investment properties, including acquisition costs
(16,457) (181,873)
Net cash outflow from investing activities (12,177) (181,873)
Cash flows from financing activities
Issue of ordinary share capital 13 - 125,000
Expenses of issue of ordinary share capital 13 - (2,505)
Drawdown of bank loan facilities 11 42,000 210,000
Expenses of arrangement of bank loan facilities 11 (205) (1,519)
Repayment of bank loan facilities 11 (36,750) (117,250)
Dividends paid (20,870) (18,837)
Net cash (outflow)/inflow from financing activities (15,825) 194,889
Net (decrease)/increase in cash and cash equivalents (12,682) 13,541
Opening cash and cash equivalents 34,483 21,106
Closing cash and cash equivalents 21,801 34,647
Transactions which do not require the use of cash
Fixed or guaranteed rent reviews derecognised on disposal (50) -
Movement in fixed or guaranteed rent reviews and lease incentives 7,349 4,938
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 2022.
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 2022, which were prepared under full UK
Adopted 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 continuing 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 2022.
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;
· 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 during the period, resulting in a weighted
average term to maturity of 6.7 years at 31 December 2022 and an earliest
repayment date of November 2025.
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 2022 31 December 2021
£'000 £'000
Investment management fee 3,799 3,553
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 2022 31 December 2021
£'000 £'000
Credit loss allowance (323) 936
Bad debts written off 315 137
Total credit loss allowance and bad debts (8) 1,073
Valuation and other professional fees 922 932
Secretarial and administration fees 106 90
Directors' fees 110 114
Other 426 422
Total other expenses 1,564 1,558
The movement in the credit loss allowance during the period ended 31 December
2022 includes the full recovery of £1,144,000 of rent outstanding from one
tenant of seven homes, against which a credit loss allowance of £1,138,000
had been recognised at 30 June 2022.
4. Interest payable and similar charges
For the six month period ended For the six month period ended
31 December 2022 31 December 2021
£'000 £'000
Interest paid on loans 4,320 2,264
Amortisation of loan costs 316 255
Finance and transaction costs relating to the interest rate cap
302 -
Total 4,938 2,519
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 2022 31 December 2021
Pence per share Pence per share
£'000 £'000
Revenue earnings 18,232 2.94 13,322 2.31
Capital earnings (52,408) (8.45) 5,386 0.93
Total earnings (34,176) (5.51) 18,708 3.24
Average number of shares in issue 620,237,346 578,295,002
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 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 2022 31 December 2021
£'000 £'000
Earnings per IFRS Consolidated Statement of Comprehensive Income
(34,176) 18,708
Adjusted for (losses)/gains on investment properties 58,058 (871)
Adjusted for gains on investment properties realised (55) -
Adjusted for finance and transaction costs on the interest rate cap and other
capital items
302 -
EPRA earnings 24,129 17,837
Adjusted for rental income arising from recognising guaranteed rent review
uplifts
(5,897) (4,515)
Adjusted for development interest under forward fund agreements
460 335
Group specific adjusted EPRA earnings 18,692 13,657
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income
(5.51) 3.24
EPRA EPS 3.89 3.08
Group specific adjusted EPRA EPS 3.01 2.36
Earnings for the period ended 31 December 2022 should not be taken as a guide
to the results for the year to 30 June 2023.
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 103.9 pence (30 June 2022:
112.7 pence) is based on equity shareholders' funds of £644,506,000 (30 June
2022: £698,767,000) and on 620,237,346 (30 June 2022: 620,237,346) 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 2022 30 June 2022
EPRA NRV EPRA NTA EPRA NDV EPRA NRV EPRA NTA EPRA NDV
£'000 £'000 £'000 £'000 £'000 £'000
IFRS NAV per financial statements 644,506 644,506 644,506 698,767 698,767 698,767
Fair value of interest rate derivatives (5,438) (5,438) - (2,284) (2,284) -
Fair value of loans - - 35,306 - - 22,257
Estimated purchasers' costs 57,980 - - 60,225 - -
EPRA net assets 697,048 639,068 679,812 756,708 696,483 721,024
EPRA net assets (pence per share) 112.4 103.0 109.6 122.0 112.3 116.2
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 2022 31 December 2021
Pence £'000 Pence £'000
Fourth interim dividend for prior year 1.69 10,482 1.68 8,594
First interim dividend 1.69 10,482 1.69 10,482
Total 3.38 20,964 3.37 19,076
A second interim dividend for the year to 30 June 2023, of 1.69 pence per
share, was paid on 24 February 2023 to shareholders on the register on 10
February 2023.
8. Investment properties
As at
31 December
2022
Freehold and Leasehold Properties £'000
Opening market value 911,596
Opening fixed or guaranteed rent reviews and lease incentives (56,705)
Performance payments 2,800
Opening carrying value 857,691
Disposals - proceeds (4,455)
- loss on sale (559)
Purchases and performance payments 11,057
Acquisition costs capitalised 116
Acquisition costs written off (116)
Unrealised loss realised during the year 614
Revaluation movement - gains 1,425
Revaluation movement - losses (52,018)
Movement in market value (43,936)
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal
225
Movement in fixed or guaranteed rent reviews and lease incentives (7,349)
Movement in performance payments (2,800)
Movement in carrying value (53,860)
Closing market value 867,660
Closing fixed or guaranteed rent reviews and lease incentives (63,829)
Closing carrying value 803,831
The investment properties can be analysed as follows:
As at As at
31 December 30 June
2022 2022
£'000 £'000
Standing assets 859,060 892,336
Developments under forward fund agreements 8,600 19,260
Closing market value 867,660 911,596
Changes in the valuation of investment properties For the six month period ended For the six month period ended
31 December 31 December
2022 2021
£'000 £'000
Loss on sale of investment properties (559) -
Unrealised loss realised during the year 614 -
Gains on sale of investment properties realised 55 -
Revaluation movement (50,593) 14,409
Acquisition costs written off (116) (8,600)
Movement in lease incentives (1,452) (423)
Movement in fixed or guaranteed rent reviews (5,897) (4,515)
(Losses)/gains on revaluation of investment properties (58,003) 871
8. Investment properties (continued)
The investment properties were valued at £867,660,000 (30 June 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 - Professional 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. 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.
The fair value of the properties after adjusting for the movement in the fixed
or guaranteed rent reviews and lease incentives was £803,831,000 (30 June
2022: £857,691,000). The adjustment consisted of £54,649,000 (30 June 2022:
£48,802,000) relating to fixed or guaranteed rent reviews and £9,180,000 (30
June 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 financial statements as
non-current and current assets within 'trade and other receivables' (see note
9).
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.
8. Investment properties (continued)
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 6.2%.
The yield on the majority of the individual assets ranges from 5.6 per cent to
8.7 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.
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 £8,677,000 (30 June 2022: £9,116,000); 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 will increase the fair value of the portfolio by £37,905,000 (30
June 2022: £40,729,000), 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
£34,994,000 (30 June 2022: £37,388,000) and reduce the Group's income.
9. Trade and other receivables
As at As at
31 December 30 June
2022 2022
Non-current trade and other receivables £'000 £'000
Fixed rent reviews 54,649 48,802
Rental deposits held in escrow for tenants 7,255 7,145
Lease incentives 8,910 7,704
Total 70,814 63,651
As at As at
31 December 30 June
2022 2022
Current trade and other receivables £'000 £'000
Lease incentives 270 199
VAT recoverable 1,317 1,387
Accrued income - rent receivable 2,115 906
Accrued development interest under forward fund agreements 518 452
Other debtors and prepayments 701 2,605
Total 4,921 5,549
10. Investment in subsidiary undertakings
The Group included 49 subsidiary companies as at 31 December 2022. 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.
11. Loans
As at As at
31 December 30 June
2022 2022
£'000 £'000
Principal amounts outstanding 240,000 234,750
Set-up costs (4,520) (4,315)
Amortisation of set-up costs 1,264 948
Total 236,744 231,383
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 31 December 2022, the Group had drawn £40,000,000
under this facility (30 June 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 31 December 2022, the Group had drawn £50,000,000 under this facility
(30 June 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 31 December 2022,
the Group had drawn £150,000,000 under these facilities (30 June 2022:
£150,000,000).
The following interest rate derivatives were in place during the period ended
31 December 2022:
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
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.
11. Loans (continued)
At 31 December 2022, inclusive of the interest rate derivatives, the interest
rate on £230,000,000 of the Group's borrowings had been capped, including the
amortisation of loan arrangement costs, at an all-in rate of 3.70 per cent per
annum until at least November 2025. The remaining £90,000,000 of debt, of
which £10,000,000 was drawn at 31 December 2022, 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
2.46 per cent per annum.
The aggregate fair value of the interest rate derivatives at 31 December 2022
was an asset of £5,438,000 (30 June 2022: asset of £2,284,000). The Group
categorises all interest rate derivatives as level 2 in the fair value
hierarchy (see note 8).
At 31 December 2022, the nominal value of the Group's loans equated to
£240,000,000 (30 June 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 treasuries plus an
estimated margin based on market conditions at 31 December 2022, totalled, in
aggregate, £204,694,000 (30 June 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 £226,173,000 (30
June 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 £758,770,000 as at 31 December 2022 (30
June 2022: £795,949,000).
Under the financial covenants related to the loans, as at 31 December 2022,
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 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 period ended 31 December 2022, 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
period.
12. Trade and other payables
As at As at
31 December 30 June
2022 2022
Non-current trade and other payables £'000 £'000
Rental deposits 7,255 7,145
Total 7,255 7,145
12. Trade and other payables (continued)
As at As at
31 December 30 June
2022 2022
Current trade and other payables £'000 £'000
Rental income received in advance 8,435 8,390
Property acquisition and development costs accrued 3,674 8,892
Interest payable 1,981 1,762
Investment Manager's fees payable 1,816 1,895
Performance payments - 2,800
Other payables 2,394 2,624
Total 18,300 26,363
The Group's payment policy is to ensure settlement of supplier invoices in
accordance with stated terms.
13. 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 31 December 2022 620,237,346 6,202
During the period to 31 December 2022, the Company did not issue any ordinary
shares of £0.01 each (period to 31 December 2021: 108,695,652 ordinary
shares) raising gross proceeds of £nil (period to 31 December 2021:
£125,000,000). The Company did not buyback or resell any ordinary shares
(period to 31 December 2021: nil).
At 31 December 2022, the Company did not hold any shares in treasury (30 June
2022: nil).
14. Commitments
The Group had capital commitments as follows:
As at As at
31 December 30 June
2022 2022
£'000 £'000
Amounts due to complete forward fund developments 31,853 34,458
Other capital expenditure commitments 2,763 3,594
Total 34,616 38,052
15. Contingent assets and liabilities
As at 31 December 2022, seven (30 June 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 £8,220,000 (30 June 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 paid would be expected to result in a commensurate increase in the
value of the Group's investment property portfolio.
15. Contingent assets and liabilities (continued)
Having assessed each clause on an individual basis, the Group has determined
that the contracted performance conditions were not highly likely to be met in
relation to any of these properties and therefore an amount of £nil has been
recognised as a liability at 31 December 2022 (30 June 2022: two properties
resulting in the recognition of a liability of £2,800,000). Where relevant,
an equal but opposite amount would have been recognised as an asset in
'investment properties' in note 8 to reflect the increase in the investment
property value that would be expected to arise were the performance payments
to be paid and the contracted rental income increased accordingly.
16. 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 £110,000 (period ended 31 December 2021: £114,000) of which
£56,000 (31 December 2021: £18,000) remained payable at the period end.
The Investment Manager received £3,799,000 (inclusive of estimated
irrecoverable VAT) in management fees in relation to the period ended 31
December 2022 (period ended 31 December 2021: £3,553,000). Of this amount
£1,816,000 remained payable at the period end (31 December 2021:
£1,889,000). The Investment Manager received a further £85,000 (inclusive of
irrecoverable VAT) during the period ended 31 December 2022 (period ended 31
December 2021: £75,000) in relation to its appointment as Company Secretary
and Administrator, of which £42,000 (31 December 2021: £38,000) 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.
17. 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.
18. Post balance sheet event
In the summer of 2022, the Group had exchanged contracts in relation to the
acquisition of a development site near Malvern, Worcestershire on a
subject-to-planning basis. This acquisition completed on 27 January 2023
following the receipt of the required planning consent for the construction of
a 60-bed care home. The home is pre-let to an existing tenant of the Group and
has in place a capped development agreement which is itself underpinned by a
fixed price construction contract.
In March 2023, the Group sold four homes for proceeds of £22 million to a
care home operator. The sale value was ahead of the carrying value of these
properties at both 30 June 2022 and 31 December 2022.
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 2022, 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 2022 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 2022 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 2022. Other than 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
Alison Fyfe
Chair
24 March 2023
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 2022 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 19 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
2022 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 Financial
Reporting Council. 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'.
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
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.
In preparing the Interim Report and Financial Statements, the Directors are
responsible for assessing the Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the Directors either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
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
London
24 March 2023
Glossary of Terms and Definitions
Building Research Establishment BREEAM is the world's leading science-based suite of validation and
certification systems for sustainable built environment. The BREEAM in-use
Environmental Assessment standards provide a framework to enable property investors, owners, managers
and occupiers to determine and drive sustainable improvements in the
Method ('BREEAM') operational performance of their assets, leading to benchmarking, assurance
and validation of operational asset data.
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.
Energy Performance Certificate ('EPC') An Energy Performance Certificate (EPC) rates how energy efficient a building
is using grades from A to G (with 'A' the most efficient grade). All
commercial properties leased to a tenant must have an EPC. All EPCs are valid
for 10 years.
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. Homes which
do not meet this definition are referred to as 'immature'.
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
2022 2022
pence pence
EPRA Net Tangible Assets per share (see note 6) (a) 103.0 112.3
Share price (b) 80.2 108.4
Discount = (b-a)/a (22.1)% (3.5)%
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
2022 2021
£'000 £'000
Group-specific EPRA earnings for the period (see note 6) (a) 18,692 13,657
First interim dividend 10,482 10,482
Second interim dividend 10,482 10,482
Dividends paid in relation to the period (b) 20,964 20,964
Dividend cover = (a/b) 89% 65%
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 2022 31 December
£'000 2021
£'000
Investment management fee 3,799 3,553
Credit loss allowance and bad debts written off (8) 1,073
Other expenses 1,564 1,558
EPRA costs (a) 5,355 6,184
Specific cost adjustments, if applicable - -
Group specific adjusted EPRA costs (b) 5,355 6,184
Gross rental income per IFRS (c) 34,036 26,510
Adjusted for rental income arising from recognising guaranteed rent review
uplifts
(5,897) (4,515)
Adjusted for development interest under forward fund arrangements
460 335
Group specific adjusted gross rental income (d) 28,599 22,330
EPRA Cost Ratio (including direct vacancy costs) = (a/c) 15.7% 23.3%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
= (b/d) 18.7% 27.7%
EPRA Loan-to-Value ('LTV') - A shareholder-gearing measure to determine the
percentage of debt comparing to the appraised value of the properties. EPRA
LTV is calculated as total gross debt (adding net trade payables and less
cash) as a proportion of gross property value.
31 December 2022 30 June
£'000 2022
£'000
Borrowings 240,000 234,750
Net payables 13,649 18,213
Cash and cash equivalent (21,801) (34,483)
Net debt (a) 231,848 218,480
Investment properties at market value 867,660 911,596
Total property value (b) 867,660 911,596
EPRA Loan-to-Value = (a/b) 26.7% 24.0%
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
2022 2022
£'000 £'000
Annualised passing rental income based on cash rents (a) 55,547 51,217
Notional rent expiration of rent-free periods or other lease incentives
1,529 4,259
Topped-up net annualised rent (b) 57,076 55,476
Standing assets (see note 8) 859,060 892,336
Allowance for estimated purchasers' costs 57,980 60,225
Grossed-up completed property portfolio valuation (c) 917,040 952,561
EPRA Net Initial Yield = (a/c) 6.06% 5.38%
EPRA Topped-up Net Initial Yield = (b/c) 6.22% 5.82%
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 2022 31 December 2021
EPRA NTA IFRS NAV Share price EPRA NTA IFRS NAV Share price
(pence) (pence) (pence) (pence) (pence) (pence)
Value at start of period (a) 112.3 112.7 108.4 110.4 110.5 115.4
Value at end of period (b) 103.0 103.9 80.2 110.8 110.9 118.0
Change in value during period (b-a)
(c) (9.3) (8.8) (28.2) 0.4 0.4 2.6
Dividends paid (d) 3.4 3.4 3.4 3.4 3.4 3.4
Additional impact of dividend reinvestment
(e) (0.2) (0.1) (0.2) (0.1) - -
Total gain in period (c+d+e)
(f) (6.1) (5.5) (25.0) 3.7 3.8 6.0
Total return for the period = (f/a) (5.4)% (4.9)% (23.1)% 3.4% 3.5% 5.2%
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