REG - Target Healthcare - Final Results <Origin Href="QuoteRef">THRLT.L</Origin> - Part 2
04/10/2017 07:06
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5. Grow portfolio - Lack of attractive investment opportunities and/or an inability to invest on acceptable terms in suitable timeframes will hamper the Group's growth - Activity levels in the market remain competitive, particularly for premium assets exclusively aimed at self-funded residents in prime locations. The Group continues to see opportunities which meet its criteria, as identified by the Investment Manager, and is actively pursuing these. - The Investment Manager develops and maintains a network of relationships with property owners and developers which it is expected will provide the Group with the best possible opportunity to acquire suitable properties. - The Board monitors the Group's pace of deployment of capital via regular reporting by the Investment Manager.
prospects. Change to risk rating: unchanged
6. General - People. Recruitment and retention of Board members and key personnel at the Investment Manager with relevant and appropriate skills and experience is - The Investment Manager has bolstered its team further during the year. - Directors are subject to annual performance assessment, and are subject to re-election by shareholders. The Board has a succession strategy in place which is subject to regular review and discussion. - The Investment Manager is subject to regular performance appraisal; has its remuneration aligned with group performance; and there is a key man provision within the investment management agreement between the manager and the Group.
vital to the Group's ability to meet its objectives. Failure to do so could result in the Group failing to meet its objectives. Change to risk rating: unchanged
Malcolm Naish
Chairman
3 October 2017
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2017
Year ended 30 June 2017 Year ended 30 June 2016
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Rental income 17,760 5,127 22,887 12,677 4,136 16,813
Other income 221 450 671 61 - 61
Total revenue 17,981 5,577 23,558 12,738 4,136 16,874
Gains on revaluation of investment properties 4 - 2,211 2,211 - 425 425
Cost of corporate acquisitions - (626) (626) - (998) (998)
Total income 17,981 7,162 25,143 12,738 3,563 16,301
Expenditure
Investment management fee
- base fee 2 (2,761) - (2,761) (1,783) - (1,783)
- performance fee 2 (997) - (997) (871) - (871)
Other expenses (1,236) - (1,236) (992) - (992)
Total expenditure (4,994) - (4,994) (3,646) - (3,646)
Profit before finance costs and taxation 12,987 7,162 20,149 9,092 3,563 12,655
Net finance costs
Interest receivable 113 - 113 173 - 173
Interest payable and similar charges (921) - (921) (1,102) - (1,102)
Profit before taxation 12,179 7,162 19,341 8,163 3,563 11,726
Taxation 25 (244) (219) (24) - (24)
Profit for the year 12,204 6,918 19,122 8,139 3,563 11,702
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in valuation of interest rate swaps - 307 307 - (316) (316)
Total comprehensive income for the year 12,204 7,225 19,429 8,139 3,247 11,386
Earnings per share (pence) 3 4.84 2.74 7.58 4.74 2.07 6.81
The total column of this statement represents the Group's Consolidated
Statement of Comprehensive Income, prepared in accordance with IFRS. The
supplementary revenue return and capital return columns are both prepared
under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement are derived from
continuing operations.
No operations were discontinued in the year.
Consolidated Statement of Financial Position (audited)
As at 30 June 2017
As at 30 June 2017 As at 30 June 2016
Notes £'000 £'000
Non-current assets
Investment properties 4 266,219 200,720
Trade and other receivables 3,988 3,742
270,207 204,462
Current assets
Trade and other receivables 25,629 13,222
Cash and cash equivalents 10,410 65,107
Total assets 306,246 282,791
Non-current liabilities
Bank loan 6 (39,331) (20,449)
Interest rate swaps (9) (316)
Trade and other payables (3,988) (3,742)
(43,328) (24,507)
Current liabilities
Trade and other payables (5,981) (5,002)
Total liabilities (49,309) (29,509)
Net assets 256,937 253,282
Stated capital and reserves
Stated capital account 7 241,664 246,533
Hedging reserve (9) (316)
Capital reserve 11,616 4,698
Revenue reserve 3,666 2,367
Equity shareholders' funds 256,937 253,282
Net asset value per ordinary share (pence) 3 101.9 100.4
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2017
Stated capital account Hedging reserve Capital reserve Revenue reserve Total
Notes £'000 £'000 £'000 £'000 £'000
At 30 June 2016 246,533 (316) 4,698 2,367 253,282
Total comprehensive income for the year: - 307 6,918 12,204 19,429
Transactions with owners recognised in equity:
Dividends paid 1 (4,869) - - (10,905) (15,774)
At 30 June 2017 241,664 (9) 11,616 3,666 256,937
For the year ended 30 June 2016
Stated capital account Hedging reserve Capital reserve Revenue reserve Total
Notes £'000 £'000 £'000 £'000 £'000
At 30 June 2015 136,846 - 495 1,951 139,292
Total comprehensive income for the year: - (316) 3,563 8,139 11,386
Transactions with owners recognised in equity:
Dividends paid 1 (1,973) - - (7,723) (9,696)
Issue of ordinary shares 7 114,438 - - - 114,438
Buyback of ordinary shares into treasury 7 - - (14,159) - (14,159)
Resale of ordinary shares from treasury 7 - - 14,799 - 14,799
Expenses of issue 7 (2,778) - - - (2,778)
At 30 June 2016 246,533 (316) 4,698 2,367 253,282
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2017
Year ended30 June 2017 Year ended30 June 2016
Note £'000 £'000
Cash flows from operating activities
Profit before tax 19,341 11,726
Adjustments for:
Interest receivable (113) (173)
Interest payable 921 1,102
Revaluation gains on property portfolio 4 (7,339) (4,787)
Cost of corporate acquisitions 626 998
Increase in trade and other receivables (9,062) (233)
Increase in trade and other payables 20 1,271
4,394 9,904
Interest paid (728) (854)
Interest received 113 173
Tax paid (543) (164)
(1,158) (845)
Net cash inflow from operating activities 3,236 9,059
Cash flows from investing activities
Purchase of investment properties (37,698) (34,833)
Acquisition of subsidiaries including acquisition costs, net of cash acquired (25,552) (28,089)
Repayment/(grant) of development loan 2,170 (2,170)
Net cash outflow from investing activities (61,080) (65,092)
Cash flows from financing activities
Issue of ordinary share capital - 100,279
Expenses of issue paid - (2,778)
Resale of ordinary shares from treasury - 14,799
Drawdown/(repayment) of bank loan facility, net of costs 18,736 (10,638)
Dividends paid (15,589) (9,681)
Net cash inflow from financing activities 3,147 91,981
Net (decrease)/increase in cash and cash equivalents (54,697) 35,948
Opening cash and cash equivalents 65,107 29,159
Closing cash and cash equivalents 10,410 65,107
Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives 5,786 4,362
Issue of ordinary share capital - 14,159
Buyback of ordinary shares into treasury - (14,159)
Statement of Directors' Responsibilities in Respect of the Annual Financial
Report
In accordance with Chapter 4 of the Disclosure Guidelines and Transparency
Rules, we confirm that to the best of our knowledge:
· The financial statements contained within the Annual Report for the
year ended 30 June 2017, of which this statement of results is an extract,
have been prepared in accordance with applicable International Financial
Reporting Standards, on a going concern basis, and give a true and fair view
of the assets, liabilities, financial position and return of the Company;
· The Chairman's Statement, Investment Manager's Report and Strategic
Objectives include a fair review of the important events that have occurred
during the financial year and their impact on the financial statements;
· 'Risk Rating' includes a description of the Company's principal risks
and uncertainties; and
· The Annual Report includes details of related party transactions that
have taken place during the financial year.
On behalf of the Board
Malcolm Naish
Chairman
3 October 2017
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June
2017.
Dividend rate(pence per share) Year ended30 June 2017£'000
Fourth interim dividend for the year ended 30 June 2016 1.545 3,897
First interim dividend for the year ended 30 June 2017 1.570 3,959
Second interim dividend for the year ended 30 June 2017 1.570 3,959
Third interim dividend for the year ended 30 June 2017 1.570 3,959
Total 6.255 15,774
Amounts paid as distributions to equity holders during the year to 30 June
2016.
Dividend rate(pence per share) Year ended30 June 2016£'000
Fourth interim dividend for the year ended 30 June 2015 1.530 2,177
First interim dividend for the year ended 30 June 2016 1.545 2,199
Second interim dividend for the year ended 30 June 2016 1.545 2,660
Third interim dividend for the year ended 30 June 2016 1.545 2,660
Total 6.165 9,696
It is the policy of the Directors to declare and pay dividends as interim
dividends. The Directors do not therefore recommend a final dividend. The
fourth interim dividend in respect of the year ended 30 June 2017, of 1.57
pence per share, was paid on 25 August 2017 to shareholders on the register on
4 August 2017 amounting to £3,959,000. It is the intention of the Directors
that the Group will continue to pay dividends quarterly.
2. Fees paid to Target Advisers LLP
Year ended30 June 2017 Year ended30 June 2016
£'000 £'000
Base management fee 2,761 1,783
Performance fee 997 871
Total 3,758 2,654
The Company's Investment Manager is Target Advisers LLP (the 'Investment
Manager' or 'Target') and is responsible for the day-to-day management of the
Company. Target has also been appointed as the Company's Alternative
Investment Fund Manager (the "AIFM"). The Investment Manager is entitled to an
annual base management fee of 0.90 per cent of the net assets of the Group and
an annual performance fee calculated by reference to 10 per cent of the
outperformance of the Group's portfolio total return relative to the IPD UK
Annual Healthcare Index ('the Index'). The maximum amount of total fees
payable by the Group to the Investment Manager is limited to 1.25 per cent of
the average net assets of the Group over a financial year.
Performance fee periods will be annually to 31 December, in line with the
Index. Portfolio performance is measured over three cumulative rolling
performance periods whereby any performance fees paid to the Investment
Manager are subject to clawback if cumulative performance underperforms the
Index.
A performance fee in respect of the year to 31 December 2016 totalling
£946,000 (year to 31 December 2015: £636,000) has been paid of which £345,000
(2016: £110,000) was accrued in the prior period accounts. At the year-end an
accrual of £396,000 (inclusive of estimated irrecoverable VAT) in relation to
the year to 31 December 2017 has been made based on the Group's historic
portfolio performance relative to the Index.
The Investment Management Agreement can be terminated by either party on 12
months' written notice provided that such notice shall not expire earlier than
30 September 2019. Should the Company terminate the Investment Management
Agreement earlier than 30 September 2019 then compensation in lieu of notice
will be payable to the Investment Manager. The Investment Management Agreement
may be terminated immediately without compensation if the Investment Manager:
is in material breach of the agreement; is guilty of negligence, wilful
default or fraud; is the subject of insolvency proceedings; or there occurs a
change of Key Managers to which the Board has not given its prior consent.
3. Earnings per share and Net Asset Value per share
EPRA is an industry body which issues best practice reporting guidelines and
the Group report an EPRA NAV quarterly. EPRA has issued best practice
recommendations for the calculation of certain figures which are included
below.
Earnings per share
Year ended 30 June 2017 Year ended 30 June 2016
£'000 Pence per share £'000 Pence per share
Revenue earnings 12,204 4.84 8,139 4.74
Capital earnings 6,918 2.74 3,563 2.07
Total earnings 19,122 7.58 11,702 6.81
Average number of shares in issue 252,180,851 171,734,587
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 the
performance fee.
The reconciliations are provided in the table below:
Year ended30 June 2017 Year ended30 June 2016
Earnings per IFRS Consolidated Statement of Comprehensive Income 19,122 11,702
Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives (5,127) (4,136)
Adjusted for revaluations of investment properties (2,211) (425)
Adjusted for cost of corporate acquisitions and other capital items 420 998
EPRA earnings 12,204 8,139
Adjusted for performance fee 997 871
Group specific adjusted EPRA earnings 13,201 9,010
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income 7.58 6.81
EPRA EPS 4.84 4.74
Group specific adjusted EPRA EPS 5.23 5.25
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 101.9 pence (2016: 100.4
pence) is based on equity shareholders' funds of £256,937,000 (2016:
£253,282,000) and on 252,180,851 (2016: 252,180,851) ordinary shares, being
the number of shares in issue at the year-end.
The EPRA Net Asset Value ('EPRA NAV') per share is arrived at by adjusting the
net asset value ('NAV') calculated under International Financial Reporting
Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a
company on a long-term basis. The only adjustment required to the NAV is that
the EPRA NAV excludes the fair value of the Group's interest rate swaps, which
were recognised as a liability of £9,000 under IFRS as at 30 June 2017 (2016:
liability of £316,000).
EPRA believes that, under normal circumstances, the financial derivatives
which property investment companies use to provide an economic hedge are held
until maturity and so the theoretical gain or loss at the balance sheet date
will not crystallise.
As at30 June 2017 As at 30 June 2016
NAV per financial statements (pence per share) 101.9 100.4
Valuation of interest rate swaps - 0.2
EPRA NAV (pence per share) 101.9 100.6
4. Investments
Freehold and leasehold properties
As at 30 June 2017 As at 30 June 2016
£'000 £'000
Opening market value 210,666 143,748
Opening fixed or guaranteed rent reviews and lease incentives (9,946) (5,584)
Opening carrying value 200,720 138,164
Purchases 35,622 32,912
Purchase of property through a business combination 25,590 27,298
Acquisition costs capitalised 2,076 1,921
Acquisition costs written off (2,076) (1,921)
Revaluation movement - gains 11,660 7,724
Revaluation movement - losses (1,587) (1,016)
Movement in market value 71,285 66,918
Movement in fixed or guaranteed rent reviews and lease incentives (5,786) (4,362)
Movement in carrying value 65,499 62,556
Closing market value 281,951 210,666
Closing fixed or guaranteed rent reviews and lease incentives (15,732) (9,946)
Closing carrying value 266,219 200,720
Changes in the valuation of investment properties
Year ended30 June 2017£'000 Year ended30 June 2016£'000
Revaluation movement 10,073 6,708
Acquisition costs written off (2,076) (1,921)
Movement in lease incentives (658) -
7,339 4,787
Movement in fixed or guaranteed rent reviews (5,128) (4,362)
Gains on revaluation of investment properties 2,211 425
The properties were valued at £281,951,000 (2016: £210,666,000) 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 January 2014 ('the Red Book') 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 an asset or
liability should exchange on the valuation date between a willing buyer and a
willing seller in an arm's length transaction, after proper marketing where
the parties had each acted knowledgeably, prudently and without compulsion.
The quarterly property valuations are reviewed by the Board at each Board
meeting. The fair value of the properties after adjusting for the movement in
the fixed or guaranteed rent reviews and lease incentives was £266,219,000
(2016: £200,720,000). The adjustment consisted of £14,847,000 (2016:
£9,719,000) relating to fixed or guaranteed rent reviews and £885,000 (2016:
£227,000) of accrued income relating to the recognition of rental income over
rent free periods subsequently amortised over the life of the lease, which are
both separately recorded in the accounts as current assets within 'trade and
other receivables'.
5. Investment in subsidiary undertakings
The Group included 14 subsidiary companies as at 30 June 2017. 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 two subsidiaries, which are incorporated in Gibraltar, all
subsidiaries are incorporated within the United Kingdom.
The Group acquired THR Number 7 Limited and THR Number 8 Limited on 26 August
2016 and acquired THR Number 9 Limited on 24 October 2016. In addition, the
Group acquired four newly established companies during the year to 30 June
2017: THR Number 10 Limited, THR Number 12 plc, THR Number 13 Limited and THR
Number 14 Limited.
6. Bank loan
As at30 June 2017£'000 As at30 June 2016£'000
Principal amount outstanding 40,000 21,000
Set-up costs (1,100) (836)
Amortisation of set-up costs 431 285
Total 39,331 20,449
At 30 June 2016, the Group had a £50.0 million committed term loan and
revolving credit facility with the Royal Bank of Scotland plc ('RBS') which
was repayable on 23 June 2019. Interest accrued on the bank loan at a variable
rate, based on three month LIBOR plus margin and mandatory lending costs, and
was payable quarterly. At 30 June 2016, the margin was 2.0 per cent per annum
for the duration of the loan and a non-utilisation fee of 1.0 per cent per
annum was payable on any undrawn element of the facility.
On 1 September 2016, the Group extended its loan facility to 1 September 2021,
with an option of two further one year extensions thereafter, subject to the
consent of RBS. The margin on the extended facility was reduced from 2.0 per
cent to 1.5 per cent per annum for the duration of the loan. The
non-utilisation fee payable on any undrawn element of the facility was reduced
to 0.75 per cent per annum. There were no other material amendments to the
facility. The Group drew down a further £19.0 million under this facility
during the year ended 30 June 2017.
The Group has entered into an interest rate swap for a notional value of £21.0
million, with a starting date of 7 July 2016 and a termination date of 23 June
2019. Under the terms of the interest rate swap, the Group will pay quarterly
a fixed rate of interest of 0.85 per cent per annum and will receive three
month LIBOR. On 21 September 2016, the Group entered into a second interest
rate swap, also for a notional value of £21.0 million, under which, for the
period from 24 June 2019 to 1 September 2021, the Group will pay quarterly a
fixed rate of interest of 0.70 per cent per annum and will receive three month
LIBOR.
On 27 March 2017, the Group entered into a third interest rate swap for a
notional value of £9.0 million, with a starting date of 7 April 2017 and a
termination date of 1 September 2021. Under the terms of the third interest
rate swap, the Group will pay quarterly a fixed rate of interest of 0.86 per
cent per annum and will receive three month LIBOR.
Inclusive of all three interest rate swaps, the interest rate on £30.0 million
of the Group's borrowings is fixed at an all-in rate of 2.36 per cent per
annum until 23 June 2019 and 2.25 per cent per annum from 24 June 2019 to 1
September 2021. The remaining £10.0m of debt is drawn from the revolving
credit facility with interest payable at a variable rate equal to three month
LIBOR plus the lending margin of 1.50 per cent per annum.
The fair value of the interest rate swaps at 30 June 2017 was an aggregate
liability of £9,000 (2016: liability of £316,000).
This bank 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 three subsidiaries; THR Number Two Limited, THR
Number 3 Limited and THR Number 9 Limited. Under the bank covenants related to
this loan, the Group is to ensure that for THR1 Group:
- The loan to value percentage does not exceed 50 per cent; and
- The interest cover is greater than 300 per cent on any calculation date.
THR1 Group has complied with all the bank loan covenants during the year.
Subsequent to the year end, the Group entered into an additional £40.0 million
five year loan facility. See note 11 for details.
7. Stated capital movements
As at 30 June 2017
Number of shares £'000
Allotted, called-up and fully paid ordinary shares of no par value
Opening balance 252,180,851 246,533
Dividends allocated to capital (4,869)
Balance as at 30 June 2017 252,180,851 241,664
Under the Company's Articles of Incorporation, the Company may issue an
unlimited number of ordinary shares.
During the year to 30 June 2017, the Company did not repurchase any ordinary
shares into treasury (2016: 14,229,822 ordinary shares at a total cost of
£14,159,000). The Company did not resell any ordinary shares from treasury
(2016: 14,229,822 ordinary shares raising gross proceeds of £14,799,000).
During the year to 30 June 2017, the Company did not issue any ordinary shares
(2016: 109,882,625 ordinary shares raising gross proceeds of £114,438,000).
Capital management
The Company's capital is represented by the stated capital account, hedging
reserve, capital reserve and revenue reserve. The Company is not subject to
any externally-imposed capital requirements.
The capital of the Company is managed in accordance with its investment
policy, in pursuit of its investment objective. The Company is able to pay a
dividend out of the Stated Capital Account as permitted by the Companies
(Jersey) Law 1991 (as amended).
Capital risk management
The objective of the Group is to provide ordinary shareholders with an
attractive level of income together with the potential for income and capital
growth from investing in a diversified portfolio of freehold and long
leasehold care homes that are let to care home operators; and other healthcare
assets in the UK.
The Board has responsibility for ensuring the Group's ability to continue as a
going concern. This involves the ability to borrow monies in the short and
long term; and pay dividends out of reserves, all of which are considered and
approved by the Board on a regular basis.
To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders, return capital to shareholders, issue new
shares or buyback shares for cancellation or for holding in treasury.
Where ordinary shares are held in treasury these are available to be sold to
meet on-going market demand. The ordinary shares will be sold only at a
premium to the prevailing NAV per share. The net proceeds of any subsequent
sales of shares out of treasury will provide the Company with additional
capital to enable it to take advantage of investment opportunities in the
market and make further investments in accordance with the Company's
investment policy and within its appraisal criteria. Holding shares in
treasury for this purpose assists the Company in matching its on-going capital
requirements to its investment opportunities and therefore reduces the
negative effect of holding excess cash on its balance sheet over the longer
term.
No changes were made in the objectives, policies or processes during the
year.
8. Financial instruments
Consistent with its objective, the Group holds UK care home property
investments. In addition, the Group's financial instruments comprise cash, a
bank loan and receivables and payables that arise directly from its
operations. The Group's exposure to derivative instruments consists of
interest rate swaps used to fix the interest rate on the Group's variable rate
borrowings.
The Group is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Group are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Group's risk exposure.
These policies are summarised below and have remained unchanged for the year
under review. These disclosures include, where appropriate, consideration of
the Group's investment properties which, whilst not constituting financial
instruments as defined by IFRS, are considered by the Board to be integral to
the Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group. At the
reporting date, the Group's financial assets exposed to credit risk amounted
to £20.3 million (2016: £68.4 million).
In the event of default by a tenant if it is in financial difficulty or
otherwise unable to meet its obligations under the lease, the Group will
suffer a rental shortfall and incur additional expenses until the property is
relet. These expenses could include legal and surveyor's costs in reletting,
maintenance costs, insurances, rates and marketing costs and may have a
material adverse impact on the financial condition and performance of the
Group and/or the level of dividend cover. The Board receives regular reports
on concentrations of risk and any tenants in arrears. The Investment Manager
monitors such reports in order to anticipate, and minimise the impact of,
defaults by occupational tenants.
There were no financial assets which were either past due or considered
impaired at 30 June 2017 (2016: nil).
All of the Group's cash is placed with financial institutions with a long-term
credit rating of BBB or better. Bankruptcy or insolvency of such financial
institutions may cause the Group's ability to access cash placed on deposit to
be delayed, limited or lost. Should the credit quality or the financial
position of the banks currently employed significantly deteriorate, cash
holdings would be moved to another bank.
During the year, due to the quantum of cash balances held, counterparty risk
was spread by placing cash across two different financial institutions. As the
cash balance held had reduced by the year end, monies were held with a single
financial institution. At 30 June 2017 the Group held £10.4 million (2016:
£26.0 million) with The Royal Bank of Scotland plc and £nil (2016: £39.1
million) with Lloyds Bank plc.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
Group's investments comprise UK care homes. Property and property-related
assets in which the Group invests are not traded in an organised public market
and may be illiquid. As a result, the Group may not be able to liquidate
quickly its investments in these properties at an amount close to their fair
value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an ongoing basis by the Investment
Manager and monitored on a quarterly basis by the Board. In order to mitigate
liquidity risk the Group aims to have sufficient cash balances (including the
expected proceeds of any property sales) to meet its obligations for a period
of at least twelve months.
Interest rate risk
Some of the Company's financial instruments are interest-bearing.
Interest-rate risk is the risk that future cash flows will change adversely as
a result of changes in market interest rates.
The Group's policy is to hold cash in variable rate or short term fixed rate
bank accounts. Interest is received on cash at a variable rate of 0.01 per
cent (2016: 0.50 per cent and 0.55 per cent). Exposure varies throughout the
period as a consequence of changes in the composition of the net assets of the
Group arising out of the investment and risk management policies. These
balances expose the Group to cash flow interest rate risk as the Group's
income and operating cash flows will be affected by movements in the market
rate of interest.
The Group has a £50 million (2016: £50 million) committed term loan and
revolving credit facility which at 30 June 2017 was charged interest at a rate
of three month LIBOR plus a margin of 1.5 per cent per annum (2016: 2.0 per
cent per annum) At the year-end £40.0 million of the facility was drawn down
(2016: £21.0 million). The bank borrowings are carried at amortised cost and
the Group considers this to be a close approximation to fair value. The fair
value of the bank borrowings is affected by changes in the market interest
rate.
The Group has hedged its exposure on £30.0 million (2016: £21.0 million) of
the loan drawn down at 30 June 2017 through entering into fixed rate Interest
Rate Swaps (see note 6). Fixing the interest rate exposes the Group to fair
value interest rate risk.
The Group has not hedged its exposure on £10.0 million of the loan drawn down
at 30 June 2017 (2016: £nil) on which interest is payable at a variable rate
equal to three month LIBOR plus the lending margin of 1.50 per cent per annum.
This balance exposes the Group to cash flow interest rate risk as the Group's
income and operating cash flows will be affected by movements in the market
rate of interest.
Market price risk
The management of market price risk is part of the investment management
process and is typical of a property investment company. The portfolio is
managed with an awareness of the effects of adverse valuation movements
through detailed and continuing analysis, with an objective of maximising
overall returns to shareholders. Investments in property and property-related
assets are inherently difficult to value due to the individual nature of each
property. As a result, valuations are subject to substantial uncertainty.
There is no assurance that the estimates resulting from the valuation process
will reflect the actual sales price even where such sales occur shortly after
the valuation date. Such risk is minimised through the appointment of external
property valuers.
9. Related party transactions
The Board of Directors is considered to be a related party. No Director has an
interest in any transactions which are, or were, unusual in their nature or
significant to the nature of the Company.
Mr Ross, who retired as a Director following the Annual General Meeting on 10
November 2016, was a director of the Company Secretary and the Administrator,
R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, each of
which receive fees from the Company. Mr Webster, who was appointed as a
Director of the Company with effect from 11 November 2016, is an employee of
the Company Secretary, R&H Fund Services (Jersey) Limited. Mrs Jones is a
director of the Company Secretary, R&H Fund Services (Jersey) Limited.
The Directors of the Company received fees for their services. Total fees for
the year were £165,000 (2016: £115,000) of which £18,000 (2016: £16,000)
remained payable at the year-end.
Target Advisers LLP, the Investment Manager, received £3,758,000 (2016:
£2,654,000) in relation to the year of which £997,000 (2016: £871,000) related
to the performance fee. Of this amount £941,000 (2016: £885,000) (inclusive of
VAT) remained payable at the year-end.
10. Operating segments
The Board has considered the requirements of IFRS 8 'Operating Segments'. The
Board is of the view that the Group is engaged in a single segment of
business, being property investment, and in one geographical area, the United
Kingdom, and that therefore the Group has only a single operating segment. The
Board of Directors, as a whole, has been identified as constituting the chief
operating decision maker of the Group. The key measure of performance used by
the Board to assess the Group's performance is the EPRA NAV. The
reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV is
detailed in note 3.
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.
11. Post balance sheet events
On 6 July 2017, the Group completed the acquisition of an 88 bed home in
Melton Mowbray, Leicestershire for £8.4 million, including acquisition costs.
The home opened its doors to residents in March 2017 and boasts very large
lounges and well laid out gardens providing good outdoor space for residents
and visitors. The home was leased back to Melton Care Limited and is subject
to a 35 year lease with RPI-linked uplifts with a cap and collar. Melton Care
is a joint venture between Magnum Care, a Leicestershire-based operator, and
the principals behind Care Concern, the national operator with whom the Group
have worked in a number of homes.
On 11 July 2017, the Group acquired a development site, with planning
permission, in Birkdale, Merseyside, and entered into a capped development
contract to develop a home with 55 large bedrooms and good public space in an
impressive building on this corner location. The development will be carried
out by Athena Healthcare, who have also contracted to pre-let the property on
completion at an agreed rental level. The lease will be for 35 years with RPI
uplifts subject to a cap and collar. The home will target the premium
residential market and, once completed, will become the third home in the
Group's portfolio with Athena, a growing operator with three operational homes
and several further in development. The home is expected to complete by March
2019, with a total development price of around £8.2 million including costs.
On 30 August 2017, the Group entered into a new five year £40 million
committed term loan facility with First Commercial Bank, Limited (the 'FCB
Facility'). The FCB Facility can be drawn down flexibly over the period to 30
August 2019 with £5.0 million of the facility having been drawn to date.
Interest is payable quarterly in arrears at a margin of 175 basis points over
three month LIBOR. The Group intends to hedge a significant part of its
interest rate exposure on the facility once it has drawn sufficient funds. The
facility agreement contains a typical security package including loan to value
and interest cover ratio covenants which are broadly in-line with the Group's
existing debt arrangements.
12. Financial statements
These are not full statutory accounts. The report and financial statements
for the year to 30 June 2017 will be posted to shareholders and made available
on the website: www.targethealthcarereit.co.uk. Copies may also be obtained
from the Administrator, Maitland Administration Services (Scotland) Limited,
20 Forth Street, Edinburgh, EH1 3LH.
This information is provided by RNS
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