REG - Target H'care REIT - Net Asset Value, Corporate Update & Dividend

Target Healthcare ReitAnnouncement

27/01/2022 07:00

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RNS Number : 7751Z  Target Healthcare REIT PLC  27 January 2022

27 January 2022

 

Target Healthcare REIT plc and its subsidiaries

 

("Target Healthcare" or "the Group")

 

Net Asset Value, update on corporate activity and dividend declaration

 

Target Healthcare (LSE: THRL), the UK listed specialist investor in modern,
purpose-built care homes, announces its unaudited quarterly Net Asset Value
('NAV') as at 31 December 2021, together with an update on corporate activity,
and declares its second interim dividend for the year ending 30 June 2022.

 

Corporate activity highlights

 

Significant portfolio acquisition, further strengthening of balance sheet with
additional long-term fixed-rate debt secured

·      EPRA Net Tangible Assets ('NTA') per share marginally decreased
by 0.4% to 110.8 pence (30 September 2021: 111.3 pence) reflecting
non-recurring acquisition costs on £173 million of new investments in the
quarter, including, on 20 December 2021, a portfolio of 18 homes which
represents the Group's first acquisition at this scale

·      The Group's portfolio value and earnings continued to increase,
generating a NAV total return of 1.0% for the quarter (based on EPRA NTA and
including dividend)

·      £173 million deployed with 19 assets acquired during the
quarter. The 18-asset portfolio is generating £9.3 million of annual rental
income immediately from a diversified tenant group, increases the portfolio
size by c.20% and will deliver earnings growth compared to the current quarter

·      £100 million of new long-term debt drawn at an attractive
weighted fixed rate of 3.14% and a weighted average term of 13.2 years to (i)
fix a significant proportion of the Group's debt at low interest rates in the
face of an uncertain outlook (ii) free-up flexible facilities to give
investment headroom which can be used to increase gearing and manage cash
drag; and (iii) strengthen the balance sheet via increased duration of
guaranteed facilities

·      Net LTV, including the post period end acquisition, is 20.7%, up
from 1.0% at 30 September 2021 (at which point the LTV had been temporarily
reduced by the recent equity issuance). The investible capital available
(comprising cash and undrawn debt) at 27 January 2022 is £82 million, which
is allocated to an identified pipeline in late-stage diligence. All else being
equal, on completion of these acquisitions and the developments currently in
progress, the Group's pro forma LTV would be 32%

 

Portfolio performance

·      1.3% increase in the like-for-like value of the operational
portfolio; total property portfolio value of £870.5 million and an EPRA
"topped-up" net initial yield of 5.84%

·      17 rent reviews were completed at an average uplift of 4.0% per
annum, contributing a 1.0% increase in like-for-like contractual rent

·      Weighted average unexpired lease term across the portfolio,
including the effect of acquisitions, decreased slightly to 27.5 years (30
September 2021: 28.8 years) remaining one of the longest within the listed
real estate sector

·      Substantially all of the portfolio's leases provide upwards-only
rent reviews annually, providing consistent rental growth and a linkage to
inflation, subject to the caps and collars

·      Resilient rent collection performance during the most recent
period consistent with prior quarters, demonstrating the secure and stable
nature of the portfolio's cashflows

·      Diversified rental income, with 31 tenants across the portfolio
and a further two to be added through both an acquisition post period end and
from when one of the Group's development sites becomes operational in the
second half of 2022

·      Following 12 months of recovering occupancy levels, an enforced
reduction in staffing levels from isolation requirements and outbreaks caused
by the Omicron variant have seen this recovery slow. Our tenants continue to
report strong enquiry levels from potential residents and anticipate occupancy
increases to resume as the Omicron peak subsides. Reported COVID-19 cases
amongst residents have increased in-line with levels seen in the first wave,
with reported symptoms typically mild

 

Other acquisitions and asset management

·      Two acquisitions in addition to the 18-home portfolio, totalling
£21 million and adding two new tenants to the portfolio:

o  On 11 October 2021, the Group acquired a pre-let development site subject
to a forward funding agreement, to construct a 66-bed care home
in Weymouth, Dorset.

o  Post period-end, the Group acquired a 55-bed modern, purpose-built
operational care home in Westhoughton, greater Manchester, let to Harbour
Healthcare, a new tenant to the Group.

 

·      The Group has resolved the position with the remaining home of
one of the previous tenants who had already been in financial distress prior
to the COVID-19 pandemic, with a new lease to a new tenant.  The landlord
will now progress the capex investment envisaged by the Group since
acquisition thereby further enhancing the real estate.

 

 

Dividend

·      Second interim dividend of 1.69 pence per share declared for the
year ending 30 June 2022, representing an increase of 0.6% on the FY 2021
quarterly dividends. On an annualised basis, this reflects a payment of 6.76
pence per share and a dividend yield of 5.9% based on the closing share price
of 114.6 pence on 26 January 2022

 

 

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

 

"The highlight of the period was completing the 18-home acquisition, which
continued our track record of putting the capital raised from our widening
shareholder base to good use. The transaction grows the portfolio size by
c.20% and adds high quality real estate, whilst increasing our proportion of
homes with a multi-year track record of strong trading performance. As
importantly, the acquired portfolio's strong sustainability credentials align
with our long-standing social impact and environmental focus. The £9.3
million of annualised contracted rent will support a material improvement in
dividend cover, a strategic priority for the Group, with ongoing benefits due
to its inflation linked characteristics. Our additional £100 million of
long-term debt is an attractive financing option when its fixed costs are
considered against these annual rental uplifts."

 

"The sector's long-term fundamentals remain highly compelling, and we are well
placed to capitalise on these through our broadening occupier mix and balance
sheet strength. In our role as an engaged landlord, we have worked closely
with all our tenants as they have dealt with challenges of the latest Covid
outbreak. We are tentatively confident that we are through the worst and that
the portfolio is well-placed to perform through 2022, albeit the pandemic's
residual effects may result in some limited asset management initiatives being
required in the short-term to protect income and value."

 

 

Net Total Assets

 

The Group's unaudited EPRA NTA per share as at 31 December 2021 was 110.8
pence. The total return for the quarter based on EPRA NTA was 1.0%.

 

A balance sheet summary and an analysis of the movement in the EPRA NTA over
the quarter is presented at the end of this announcement in the Appendix.

 

Corporate Update

 

Portfolio performance

 

As at 31 December 2021, the Group's portfolio was valued at £870.5 million
and comprised 98 properties, consisting of 94 operational care homes and four
pre-let sites, which are being developed through capped forward funding
commitments with established development partners.

 

The portfolio value increased by 23.9% over the quarter. This comprised a
21.5% increase resulting from acquisitions, 1.3% from a like-for-like uplift
in the operational portfolio value and an increase of 1.1% from further
investment into the development portfolio and capital expenditure on existing
assets. The like-for-like movement primarily reflects the portfolio's
inflation-linked rental reviews as well as continued modest yield compression
in the investment market for modern, purpose-built care homes.

 

Contractual rent increased by 23.6% over the period, comprising:

·      21.5% from acquisitions

·      1.0% from 17 inflation-linked upwards-only rent reviews, with an
average uplift of 4.0%

·      1.1% from successful asset management initiatives

 

The portfolio's weighted average unexpired lease term reduced slightly to 27.5
years (30 September 2021: 28.8 years).

 

The portfolio had an EPRA topped-up net initial yield of 5.84% based on an
annualised contractual rent of £53.4 million. The portfolio's EPRA net
initial yield was 5.58% with five assets in rent-free periods.

 

 

Acquisitions and asset management

 

In addition to the 18-asset portfolio acquisition detailed above (and in the
announcement dated 20 December 2021):

 

·      On 11 October 2021, as previously announced, the Group acquired
a pre-let development site subject to a forward funding agreement to construct
a 66-bed care home in Weymouth, Dorset for a maximum commitment of £14.3
million including acquisition costs. Construction on the home has commenced
and is expected to be completed in the second half of 2022.

·      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, in line
with the Group's strict investment criteria. The property is leased on a
35-year term with RPI-linked increases, subject to a cap and collar.

·      The Group has resolved the position with the remaining home of
one of the previous tenants who had already been in financial distress prior
to the COVID-19 pandemic. As the rent had been waived on the home whilst the
re-tenanting progressed, this immediately improves the contractual rent
attributable to the property whilst also contributing 0.1% to the increase in
portfolio value over the quarter.

 

 

Debt facilities and swap arrangements

 

As at 31 December 2021, the Group's total borrowings were £223 million,
giving a net LTV of 20.7% (total gross debt less cash, as a proportion of
gross property value). This followed the major portfolio acquisition and new
£100 million long-term loan facilities put in place during the quarter, along
with the prudent partial repayment of revolving credit facilities as the Group
continues to progress further acquisition opportunities. The Group's weighted
average cost on its drawn debt, inclusive of amortisation of arrangement
costs, was 3.09% (30 September 2021: 3.16%). The weighted average term to
expiry was 7.4 years (30 September 2021: 4.6 years).

 

The Group has £180 million of fixed term debt facilities and £140 million of
revolving credit facilities, with a diversified mix of maturities and lenders.
As at 31 December 2021, the Group had drawn £180 million of fixed term debt,
with interest costs fixed, and £43 million under the revolving credit
facilities which carry a variable interest rate linked to SONIA.

 

Dividends in the period

 

The Group paid its first interim dividend for the year ending 30 June 2022, in
respect of the period from 1 July 2021 to 30 September 2021, of 1.69 pence per
share, on 26 November 2021 to shareholders on the register on 12 November
2021. This distribution was comprised wholly of a property income distribution
(PID).

 

Dividend cover

 

The Company remains confident of achieving a covered dividend when fully
invested at an appropriate gearing level. The Company's level of dividend
cover has been depressed following September 2021's equity issuance and in
advance of the completion of the significant portfolio acquisition just prior
to the period end which, along with other transactions and portfolio
initiatives, has now seen contractual rent increase by 23.6%. This is
anticipated to progress further as the Group completes its existing
development assets and invests remaining investible capital of £82 million to
allocated pipeline opportunities at a yield in excess of the interest cost on
the Group's remaining debt facilities.

 

The recent progress made in improving the quality of the Group's debt
facilities is fundamental to the Group's approach. The significant increase in
long-term fixed rate borrowings frees-up the Group's more flexible facilities
to finance acquisition opportunities. This, when coupled with the increase in
the overall debt capacity, allows the Group to exceed the stated medium term
level of borrowings of approximately 25 per cent of assets at the time of
drawdown, thereby financing a volume of acquisitions more efficiently than
equity over the short to medium term.

 

The other significant driver of dividend cover is the Group's level of net
rental income. Whilst the residual effects of the COVID-19 pandemic may result
in short term fluctuations in net rental income due to asset management or
credit loss provisioning, the Group remains confident in the quality of the
underlying real estate. All else being equal, the completion of the recent
investment activity significantly improves the underlying earnings profile of
the Company.

 

Valuation

 

The property portfolio was externally valued at £870.5 million at 31 December
2021.

 

Announcement of second interim dividend

 

The Company today declares its second interim dividend for the year ending 30
June 2022, in respect of the period from 1 October 2021 to 31 December 2021,
of 1.69 pence per share as detailed in the schedule below:

 

Interim Property Income Distribution (PID):     1.69 pence per share

 

 Ex-Dividend Date:  10 February 2022
 Record Date:       11 February 2022
 Payment Date:      25 February 2022

 

The dividend reflects an annualised payment of 6.76 pence per share and a
dividend yield of 5.9% based on the 26 January 2022 closing share price of
114.6 pence.

 

 

The Company had 620,237,346 ordinary shares in issue at 31 December 2021 and
has not issued or bought back any shares since that date.

 

Shareholders entitled to elect to receive distributions without deduction for
withholding tax may complete the declaration form which is available on
request from the Company through the contact details provided on its website
www.targethealthcarereit.co.uk (http://www.targethealthcarereit.co.uk) , or
from the Company's registrar. Shareholders who qualify for gross payments are,
principally, UK resident companies, certain UK public bodies, UK charities, UK
pension schemes and the managers of ISAs, PEPs and Child Trust Funds, in each
case subject to certain conditions. Individuals and non-UK residents do not
qualify for gross payments of distributions and should not complete the
declaration form.

LEI: 213800RXPY9WULUSBC04

 

ENDS

 

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.

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.

APPENDIX

 

1.     Analysis of movement in EPRA NTA

 

The following table provides an analysis of the movement in the unaudited EPRA
NTA per share for the period from 1 October 2021 to 31 December 2021:

 

                                                                 Pence per share
 EPRA NTA per share as at 30 September 2021                                        111.3

 Revaluation gains / (losses) on investment properties           1.4
 Revaluation gains / (losses) on assets under construction^      -
 Net impact of acquisition costs                                 (1.3)
 Movement in revenue reserve                                     1.1
 First interim dividend payment for the year ended 30 June 2022  (1.7)
 EPRA NTA per share as at 31 December 2021                       110.8
 Percentage change in the quarter                                (0.4%)

 

The EPRA Best Practices Recommendations Guidelines state that companies should
publish a set of three NAV metrics. The full set of EPRA NAV metrics are
published in the Group's Annual Report. The Company intends to continue to
announce the EPRA NTA on a quarterly basis.

 

At 31 December 2021, due to the valuation ascribed to the Group's interest
rate derivative contract used to hedge its exposure to variable interest
rates, which is excluded from the calculation of the EPRA NTA, the NAV
calculated under International Financial Reporting Standards was 110.9 pence
per share.

 

^Consistent with standard valuation practice for assets under construction,
the carrying value of these assets is calculated by the valuer through
application of a discount to accumulated costs to date. This discount varies
depending on factors such as the remaining development time. As the asset
progresses towards completion, the discount that has been applied is unwound.

 

 2.     Summary balance sheet (unaudited)

                                      Dec-21        Sept-21       Jun-21        Mar-21
                                      £m            £m            £m            £m
 Property portfolio*                  870.5         702.7         684.8         650.8
 Cash                                 49.0          72.8          21.1          26.6
 Net current assets / (liabilities)*  (9.6)         (4.9)         (11.0)        (5.1)
 Bank loans                           (222.8)       (80.0)        (130.0)       (114.0)
 Net assets                           687.1         690.6         564.9         558.3

 EPRA NTA per share (pence)           110.8         111.3         110.4         109.1

 

*Properties within the portfolio are stated at the market value provided by
the external valuer and the IFRS effects of fixed/guaranteed minimum rent
reviews are not reflected.

 

The next quarterly valuation of the property portfolio will be conducted by
Colliers International Healthcare Property Consultants Limited during April
2022 and the unaudited EPRA NTA per share as at 31 March 2022 is expected to
be announced in April 2022.

 

3.     EPRA NIY profiles and unwind of rent-free periods

 

The Group currently has five assets with rent-free periods. As these unwind,
assuming no other changes including inter alia the portfolio valuation or
rental profile, the EPRA yield profiles for the portfolio will be as follows:

 

                         31 December  30 June  31 December 2022  30 June

                         2021         2022                       2023
 EPRA topped-up NIY      5.84%        5.84%    5.84%             5.84%
 EPRA NIY                5.58%        5.68%    5.79%             5.84%
 Contractual rent (£m)   53.4         53.4     53.4              53.4
 Passing rent (£m)       51.1         52.0     53.0              53.4

 

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