TIDMTHRL
RNS Number : 4856P
Target Healthcare REIT PLC
10 October 2023
10 October 2023
Target Healthcare REIT plc
ANNUAL RESULTS FOR THE YEARED 30 JUNE 2023
Modern care home portfolio delivering strong operational
performance underpinned by continued institutional investor and
end-user demand.
Target Healthcare REIT plc (the "Company" or the "Group"), the
listed specialist investor in modern, purpose-built UK care homes,
is pleased to announce its annual results for the year ended 30
June 2023.
Continued earnings growth; EPRA NTA and valuation growth in the
second half of the financial year; clear path for sustainable
dividend
-- NAV total return(1) of -1.2% (2022: 8.1%), with valuation
uplifts of 1.5% in the second half of the financial year
predominantly reflecting inflation-linked leases.
-- EPRA NTA per share decreased 6.9% to 104.5 pence (2022: 112.3 pence)
-- Group specific adjusted EPRA earnings per share increased
18.8% to 6.00 pence per share (2022: 5.05 pence)
-- Dividend decreased by 8.6% to 6.18 pence in respect of the
year (2022: 6.76 pence), following the reduction in Q1 2023
-- Intention to increase the quarterly dividend in respect of
the year ending 30 June 2024 by 2.0% to 1.428 pence per share,
representing an annual total dividend of 5.712 pence
-- Dividends in respect of the period were 97% covered by
adjusted EPRA earnings, with full cover for dividends paid in
respect of the periods from January 2023 onwards. Under the
widely-used EPRA earnings metric the annual dividend was 124%
covered
-- Net loan-to-value ("LTV") of 24.7% as at 30 June 2023, with
an average cost of drawn debt, inclusive of the amortisation of
loan arrangement costs, of 3.70% and weighted average term to
maturity of 6.2 years. GBP230 million of debt, being 100% of total
drawn debt at 30 June 2023, fully hedged to maturity against
further interest rate increases
Strong portfolio performance through year; Rent cover ahead of
pre-pandemic levels and other key portfolio metrics trending
upward, supported by needs-based demand for care services and lack
of supply of modern real estate.
-- Portfolio to 97 properties, consisting of 93 modern
operational care homes and four pre-let sites let to 32 tenants
with a total value of GBP868.7 million
-- Robust and improving portfolio performance, 97% of rent
collected for the year, with 99% rent collection and mature home
rent cover of 1.75x for the most recent quarter. Mature homes spot
occupancy currently at 86%
-- Resilient portfolio performance versus wider commercial real
estate market with portfolio value decreased by GBP42.9 million, or
4.7%, to GBP868.7 million, including a like-for-like valuation
decrease of 4.1% (2022: increase of 4.2%) versus 19% capital
decline in the CBRE UK monthly index (all property)
-- Contractual rent increased by 2.0% to GBP56.6 million per
annum (2022: GBP55.5 million), including a like-for-like increase
of 3.8% predominantly driven by rent reviews
-- Portfolio becoming increasingly mature, with 90% of the
operational portfolio having passed the "fill up" stage, relative
to 71% at the start of the pandemic, supporting tenant
profitability and resilience.
-- Disposals of GBP27 million, ahead of carrying value, in order
to recycle capital out of older, non-core assets in less preferred
geographies , with the sale of the four-property portfolio
delivering an annualised ungeared IRR in excess of 10% over the
period of ownership
-- One of the longest weighted average unexpired lease terms in
the listed UK real estate sector of 26.5 years (2022: 27.2
years)
Compelling sector tailwinds; responsible investment strategy
with a clear purpose to improve the UK's care home real estate and
future-proofed portfolio
-- Compelling sector tailwinds with long-term demand from ageing
population supporting both investor and operator activity in the
sector
-- Strong alignment of ESG principles, with continued social
purpose and advocacy of minimum real estate standards across the
sector
o Modern, purpose-built care homes; full en suite wet-rooms
account for 98% of the portfolio compared to just 31% for all UK
care homes
o 80% of the portfolio purpose-built from 2010 onwards, compared
to 12% for all care homes in England and Scotland
o 94% of the portfolio A or B EPC rated
o Sector-leading average 47m(2) of space per resident
(1) Based on EPRA NTA movement and dividends paid
Alison Fyfe, Chair of the Company, said:
"The Board remains confident in the Group's prospects. Our
portfolio consists of premium quality assets in a critical real
estate investment class with compelling sector tailwinds.
"Our portfolio is performing strongly, benefitting from our
initiatives to dispose of non-core assets, from further capex to
refresh or enhance our real estate, from our active engagement with
tenants, and from the more favourable trading environment. Our
vacancy rate remains at nil with rent collection, rent cover and
underlying resident occupancy all improving. Asset valuations
remain stable, and our financing costs are well-protected from
higher interest rates.
"This improvement in portfolio performance, when combined with
our effective management of interest rate exposure, gives us
confidence in the Group's earnings outlook, allowing us to increase
our dividend in line with rental growth."
A webcast presentation for investors and analysts will take
place at 8.30am BST this morning, which can be accessed at:
https://stream.brrmedia.co.uk/broadcast/64e771c98fa54022913411e5
LEI: 213800RXPY9WULUSBC04
Enquiries:
Target Fund Managers
Kenneth MacKenzie / Gordon Bland
01786 845 912
Stifel Nicolaus Europe Limited
Mark Young / Rajpal Padam / Catriona
Neville 020 7710 7600
FTI Consulting 020 3727 1000
Dido Laurimore / Richard Gotla targethealthcare@fticonsulting.com
Notes to editors:
UK listed Target Healthcare REIT plc (THRL) is an externally
managed Real Estate Investment Trust which provides shareholders
with an attractive level of income, together with the potential for
capital and income growth, from investing in a diversified
portfolio of modern, purpose-built care homes.
The Group's portfolio at 30 June 2023 comprised 97 assets let to
32 tenants with a total value of GBP868.7 million.
The Group invests in modern, purpose-built care homes that are
let to high quality tenants who demonstrate strong operational
capabilities and a strong care ethos. The Group builds
collaborative, supportive relationships with each of its tenants as
it believes working in this way helps raise standards of care and
helps its tenants build sustainable businesses. In turn, that helps
the Group deliver stable returns to its investors.
Chairman's Statement
I am delighted to provide you with this update, which clearly
shows a strong real estate business providing unique social impact
in the sector. Our portfolio's key performance metrics show the
significant progress we have made. Our vacancy rate remains at nil
with rent collection, rent cover and underlying resident occupancy
all improving. Asset valuations remain stable, and our financing
costs are well-protected from higher interest rates.
1. Reflections
At this time last year, we reaffirmed that our business model
and strategy would provide stable long-term income and total
returns despite the challenging macro headwinds. Our share price
has declined alongside the UK REIT sector, reflecting the expected
impact of higher interest rates and concerns for the UK economy on
earnings and valuation outlooks. We believe our own outlook is more
positive, given the high levels of investment demand for our
assets, the underlying demographics of an ageing population, and
the dearth of quality care home real estate across the UK. Our
portfolio is performing strongly, benefitting from our initiatives
to dispose of non-core assets, from further capex to refresh or
enhance our real estate, from our active engagement with tenants,
and from the more favourable trading environment.
The downward pressure on real estate valuations was muted in our
portfolio, underpinned by the strength of investment demand for our
type of modern, purpose-built assets and from the improved trading
conditions our tenants are encountering. The net result has been a
valuation move of c.40 basis points on yield, significantly lower
than UK real estate has experienced more widely. The targeted
disposals of some older properties, which the Investment Manager
assessed as having a less favourable outlook, were achieved at or
above book values recorded prior to the market valuation decline in
late 2022, with the sale of the four-property portfolio delivering
an annualised IRR in excess of 10% over the period of
ownership.
Our earnings outlook remains robust, with rent collection having
improved to 99% in the most recent quarter (97% for the year).
Improved tenant profitability across the portfolio (rent cover of
1.75x for the most recent quarter) supports our sustainable rental
levels and embedded annual rental growth. We have minimised the
impact of the higher interest rate environment on the Group's
earnings through our existing long-term fixed rate facilities and
our hedging programme applied to our flexible debt.
We have also maintained our social and environmental impact
commitments, prioritising investment capital towards developing
new-build homes which offer the best modern amenities for residents
and minimise energy usage. Likewise, we have continued to collect
energy usage data from our portfolio, analysis of which shapes our
ongoing investment to reduce carbon emissions.
The change in market interest rates experienced earlier in the
year did, of course, have a significant impact on our ability to
grow earnings through acquisitions. We substantially reduced our
new investment programme as the relative outward movement in income
yields did not correlate with the more significant increase in the
Group's cost of capital. We reduced the dividend level in response
to ensure earnings were immediately covering our payouts to
shareholders, providing a stable platform for future growth and
total returns.
2. Outlook
Despite the more challenging macroeconomic environment, strong
sector tailwinds continue to support investment in modern care home
real estate. Underlying demand for residential care places is
supported by demographic change, evidenced by projected growth in
the number of those aged over 85, and investment demand for modern,
ESG-compliant care home real estate remains strong.
On inflation and recessionary concerns, our portfolio bias
towards private pay provides comfort that our tenants are more
likely to be able to pass on their cost increases through higher
resident fees, supporting sustainable tenant trading. We have seen
evidence over the year that the quality of our real estate allows
tenants to secure commercially appropriate fee levels.
We feel that portfolio valuations are robust and our rental
income is high quality. On the former, we note transactional
evidence of healthy competition for assets which are being marketed
for sale. A number of buyers are participating in processes for
prime assets such as ours, though we note this is not the case for
sub-prime, poorer quality real estate.
3. Performance
Our total return performance of -1.2% for the year, driven by an
EPRA NTA reduction of 6.9% (104.5 pence from 112.3 pence) and
dividends of 6.18 pence per share, reflects our resilient portfolio
and the muted impact of the wider correction in commercial real
estate valuations.
The Investment Manager comments in more detail on rent cover and
occupancy in the Investment Manager's Report, with these key
metrics trending positively as trading conditions and performance
in prime care homes improves.
The portfolio valuation movement has been driven by market
movements, our disposals programme and the impact of rental
uplifts, providing an overall valuation reduction of 4.7% and a
like-for-like decrease of 4.1%. Contracted rent has increased by
2.0% to GBP56.6 million, and 3.8% on a like-for-like basis.
Adjusted EPRA earnings increased by 23% to GBP37.2 million,
equating to an adjusted EPRA earnings per share of 6.00 pence. This
translates to 97% dividend cover for the year with full cover for
dividends paid in respect of the periods from January 2023 onwards.
Under the widely-used EPRA earnings metric the dividend was 124%
covered.
4. Investment market and care home trading
We saw a pause and a re-pricing of deals in progress as an
immediate reaction to September 2022's mini-budget and the
uncertainty which followed. During early 2023 a number of these
transactions slowly started to complete again, at prices generally
higher than those considered during re-pricing discussions at the
trough. The strength of demand and the number of buyers active in
the market were influential supporters of values, as was the
continued improvement in trading profitability at operational
homes. This market activity continues today, with a weight of
capital investing in the ESG--compliant, modern homes which are our
staple.
In care home trading we have seen a reversal of pandemic
fortunes between homes focussed on private residents versus those
with a local authority bias. Profitability is now increasing in the
former, which is reflected in our portfolio performance. Tellingly,
we have seen a focus from tenants on admitting new residents at an
appropriate fee level, as opposed to a "fill at any cost" approach.
This has seen operator profitability improve to levels ahead of
where they were prior to the COVID-19 pandemic and at resident
occupancies around 5% lower (85% vs. 90%). This data is very
encouraging and is consistent with the positivity on trading we
hear from our tenants.
5. Governance
Board succession
Our succession plan has been completed with the appointments of
Richard Cotton in November 2022 and Michael Brodtman in January
2023. Richard Cotton assumed the role of SID, and I assumed the
Chair, on the retirements of Gordon Coull and Malcolm Naish on 6
December 2022.
Annual General Meeting ('AGM')
The AGM will be held in London on 29 November 2023. Shareholders
are encouraged to make use of the proxy form provided in order to
lodge their votes and to raise any questions or comments they may
have in advance of the AGM through the Company Secretary.
6. Looking ahead
We see the following as our priorities:
-- Manage our portfolio to ensure its performance is consistent
with its inherent quality and trading advantages.
-- Set ambitious but realistic environmental targets, and start
to deliver tangible and observable progress towards these.
-- Increase earnings from our embedded rental growth and
efficient management of operating expenses and financing costs.
In the absence of unforeseen circumstances, the Board intends to
increase the quarterly dividend in respect of the year ending June
2024 by 2.0% to 1.428 pence per share, representing an annual total
dividend of 5.712 pence. In the six months since 1 January 2023 our
portfolio has achieved rental growth of 2%, rental collection has
increased to 99% and portfolio rent cover has increased to 1.75
times. This improvement in portfolio performance, when combined
with our effective management of interest rate exposure, gives us
confidence in the Group's earnings outlook, allowing us to increase
our dividend in line with rental growth.
The Board remains confident in the Group's prospects. Our
portfolio consists of premium quality assets in a critical real
estate investment class with compelling sector tailwinds.
Alison Fyfe
Chair
9 October 2023
Investment Manager's Report
Overall portfolio performance
The year has seen conflicting pressures impacting portfolio
returns. Our homes remain fully let with no vacancies and our rent
collection has increased, to 99% for the most recent quarter and
97% for the year, in response to operator profitability growth
across the portfolio from sustained higher occupancy and more
stable trading conditions. Underlying resident occupancy was 85%
for the portfolio at June 2023 and is 86% at the time of writing,
with rent cover for the June 2023 quarter of 1.75x (June 2022:
1.3x). This improvement to the financial performance has supported
property valuations for our type of modern, purpose-built assets,
as has continued strong investment demand. Nevertheless, valuations
have decreased overall, driven by the downwards pressure on
commercial real estate mainly from higher interest rates and
persistent inflation.
In relative terms, the portfolio has performed well. The
portfolio once again outperformed the MSCI UK Annual Healthcare
Property Index in respect of the calendar year to 31 December 2022
(THRL portfolio total return of 2.5% relative to the Index's 1.7%),
and the like-for-like valuation decrease of 4.1% for the year to 30
June 2023 compares well to the 19% capital decline in the CBRE UK
monthly index (all property) over the same period. The valuation of
the portfolio partially recovered in the second half of the
financial year, with the like-for-like value increasing by 1.5%.
The portfolio's annualised total return since launch now stands at
10.2% while the portfolio's last five-year period has an annualised
total return of 8.6% relative to 8.1% and 6.9% respectively for the
MSCI Index.
Rental quality and home trading
We have observed many operators sensibly focussing on admitting
new residents at fee levels appropriate to the care package
required, as opposed to prioritising occupancy. With management of
costs, this approach is driving tenant profitability recovery to
levels ahead of those seen prior to the pandemic. With resident
occupancy levels around 5% lower now than pre-pandemic, further
occupancy growth will translate to profitability increases and
improved rent covers.
Average weekly resident fees across the portfolio have increased
by 13%, reflecting the inflationary environment and the cost of
care focus noted above. Operators' staff costs have increased by 6%
due to wage increases, though expensive agency costs have decreased
significantly. Energy costs and other operational expenses of 16%
of revenues have remained stable. The following aspects of our
investment strategy and asset management in the year have enhanced
the quality of our rental streams:
-- Mature homes(1) : 90% of our operational portfolio has passed
the "fill-up" stage and is now mature, relative to 71% at start of
the pandemic. This supports tenant profitability and
resilience.
-- Private pay bias: High-quality real estate supports tenants
in setting resident fee rates, with further evidence that
profitability at such homes is outperforming Local Authority
biased-homes.
-- Disposals of GBP27 million, moving on some of our older,
non-core assets in less preferred geographies to refresh the
portfolio.
-- Re-tenantings: Full recovery of rent arrears from one tenant
(6.4% of contracted rent roll) and completion of re-tenanting
programme with another tenant, to 3.3% of rent roll from 5.3%.
Mature Homes as a Proportion of Total Portfolio
Mature Homes
Percentage
Q2 2020 73%
-------------
Q2 2021 79%
-------------
Q2 2022 84%
-------------
Q2 2023 90%
-------------
UK care home investment market & valuation drivers
Modern and ESG-compliant UK care homes with inflation-linked,
long-term rents have continued to attract investment interest, with
several buyers having remained active in the market through the
year. Whilst a number of live transactions were paused and subject
to re-pricing (by c.50bps) immediately following the mini-budget,
there was little deal volume. Instead, sellers remained patient and
net initial yields recovered by 10-20bps as deals re-emerged for
completion early into 2023. This net movement of 30-40bps remains
consistent with where we see pricing today. It should be noted that
institutional buyers remain scarce/limited for non-prime, older
care home real estate with these depressed demand levels likely to
impact valuations thereon.
The established, specialist investors have been active in the
market through the year, with a focus on the development of
new-builds, and a limited volume of mature trading assets. The more
generalist UK pension funds have become active again after a period
of quiet due to tight yields for the strong tenant covenants they
prefer and are making their way back in, alongside the US REITs who
appear to be targeting the higher end of the yield curve at this
point. In contrast to recent years, the larger European healthcare
investors have been quiet, perhaps focussed on their existing
portfolios following operator challenges on the continent.
On the operator side, we see M&A activity and some
consolidation: partly as some well-run, smaller groups feel market
conditions now suit following the tough pandemic years.
Additionally, we see some of the larger operator groups looking to
shift the overall quality and modernity of their estates through
the acquisition of businesses operating exclusively from modern,
purpose-built homes.
Health & social care update
We note below a number of areas which are prominent in our minds
and those of our tenants:
Resident occupancy
Occupancy has continued on a slow but consistent upward
trajectory towards pre-COVID levels. Progress in this respect has,
at times, been stalled by workforce recruitment challenges, but, as
mentioned elsewhere, we also note a new trend toward operators
being more fee focused than in the pre-pandemic era, resisting the
natural push to fill beds even where staff are available but where
fees do not reflect the cost of care. Concerns that future
residents have been put off by negative press around care homes
during the pandemic seem to be fading, with good interest reported
at lower ends of the acuity scale, where loneliness, isolation, and
security play on people's minds. At the high end of the scale,
acuity has become even more pronounced, as care homes seek to
support the NHS with timely discharges from hospital, and many
operators are focused on this task, but as noted, require sensible
fee rates to provide this level of care.
Public funding of care
Following a trend of more than two decades, reform of (English)
Social Care policy has stalled yet again. New funding in the main
has been diverted primarily to the NHS and wider reform pushed into
the long grass. On a more positive note, the sector (across the
whole UK) has at least enjoyed some silver linings, not least being
recognised as an essential contributor to the health of the NHS.
Ring--fenced Government funding for hospital discharge has been
useful, with continued funds this coming winter expected to benefit
all parties. The "fair cost of care" exercise, implemented to
establish core data for any reform, has proven useful in educating
many stakeholders on the true costs of providing a care home
placement. However, the funding of Local Authority care obligations
and the cross--subsidisation of publicly-funded residents by
private-fee paying residents remains unaddressed.
Staffing pressures
Staffing (recruitment) has settled down to more normalised
everyday pressures compared to the crisis levels felt by many care
homes over the last 18 months. Many operators continue to make use
of the sponsorship licences, albeit there are concerns over calls
for restrictions on the legislation. Few homes now are obliged to
restrict occupancy due to staffing pressure, and most have reduced
their agency dependency to occasional routine cover, or in many
cases zero use, which is a welcome position to be in.
There has been much pressure on Government to introduce wider
workforce policies, alongside a campaign to address the stigmas
that exist around working in social care as opposed to the NHS. A
funding pot of GBP600 million over the next two years was
announced, part of which will be available to promote workforce
issues, albeit operators are likely to have little control over the
direction of such funds.
Inflationary pressures
Operators continue to focus on inflation. For two years those
who have a healthy exposure to private residents (which we feel is
essential), have been able to recover escalating costs with
corresponding fee rises. Those in the sector who are not as
fortunate to have this flexibility have taken some comfort in
useful public pay awards, albeit not all Local Authorities have
been well positioned (or willing) to match inflation, and pockets
of poor public fee award/pressure remain, not least north of the
border. Progressive operators are also becoming more adept at
adopting an 'open book' policy with public funders (Local
Authorities, NHS, etc), and many of the latter have engaged
positively in the setting of fees in light of the current climate.
Families of private residents are also well aware of inflationary
pressures and have therefore generally been acceptive of
corresponding fee rises, albeit operators are concerned that this
patience may eventually be exhausted. Care homes of course, like
other businesses, enjoyed some Government protection from energy
price rises previously, but while that protection has come to an
end, we have found that most progressive (and larger) operators
have been reasonably protected from extreme pricing by prudent
locking in to fixed price tariffs.
Pandemic as accelerant to change
While COVID-19 is still with us, and care homes remain on alert
but confident in now well versed infection control protocols, we
note that the pandemic has focussed the minds of many operators on
building layout and suitability, and we believe that the now
historic COVID-19 lockdowns may ultimately be seen as a catalyst
for change, where modern homes with self-contained living units and
en suite wet-rooms are regarded as de rigueur, which in time will
further increase demand for quality beds.
Target Fund Managers Limited
9 October 2023
(1) A mature home is a care home which has been in operation for
more than three years.
Our Strategy
Our purpose, to improve the standard of living for older people
in the UK, is achieved through our four strategic pillars.
Strategic pillar #1
Build a high-quality real estate portfolio
We are creating a portfolio of scale with a clear focus on the
quality of real estate and diversification of income sources to
provide a stable long-term platform for returns.
Better homes, modernising the sector
The Group's portfolio has historically grown through
acquisitions of individual assets which meet our investment quality
criteria.
Today, with the higher cost of capital and our marginal rate of
debt financing currently exceeding initial rental returns, we are
choosing to recycle our capital to ensure our portfolio remains
modern and high quality and underpins the best possible care. This
has seen us dispose of five properties in the current year:
-- One property which was below the average standard of the
18-home portfolio acquired in December 2021.
-- Four properties in Northern Ireland, being an exit from that
local market where the fee and funding dynamics outlook is
unfavourable.
All disposals were made at or above book value.
Proceeds of the sales have initially been used to repay flexible
debt, and beyond that allocated to the development of new homes. Of
the four homes in development at the start of the year, one reached
practical completion in November, with the 66-bed home leased to a
new tenant to the Group on a 35--year lease. One new 60-bed care
home development site was acquired in January 2023. Following the
year end, on 4 July, the Group acquired a pre-let development site
for the construction of a 66--bed home, which will be built to
exceptional ESG standards, with the highest certification standards
anticipated which offer carbon net zero operational ability.
Funds have also been invested in the continual improvement of
the portfolio, with the conversion of 128 beds into full wet-rooms
at four of the Group's care-homes and work commenced at one care
home to add an additional 18 rooms. A portion of capital has also
been allocated to direct carbon reduction initiatives, most notably
the installation of photovoltaic panels.
Valuation Analysis GBPmillions
------------------------------- ------------
Valuation at 30 June 2022 912
Acquisitions and developments 20
Disposals (26)
Market yield shift (73)
Rent reviews 36
------------------------------- ------------
Valuation at 30 June 2023 869
------------------------------- ------------
Valuation movement
The portfolio value reduced by 4.7% during the year, driven by
the c.40 basis points of market yield shift applied as real estate
valuations were impacted by the changed economic conditions. The
like-for-like decrease was 4.1%, largely reflecting the positive
impact of the Group's rental growth on valuations. The Group's
disposals and development programmes resulted in a small net
decrease to year-end portfolio value.
Best-in-class real estate
Our investment thesis remains that modern, purpose-built care
homes will out-perform poorer real estate assets and provide
compelling returns.
Wet-rooms (98%) : These are essential for private and dignified
hygiene, with trends continuing to show residents expect and demand
this.
Carbon reduction (94% EPC A or B; 100% C or better) : Energy
efficiency of real estate is critical, with legislative change and
public opinion demanding higher standards. Our portfolio is
substantially better than peers.
Purpose-built and modern (100%) : All our properties are
designed and built to be used as care homes and to best meet the
needs of residents and staff.
Financials: Our metrics reflecting capital values and rental
levels compare favourably with peers, demonstrating sustainability
and longevity.
Portfolio Differentiators
We know the standard of UK care home real estate. The metrics
below compare our portfolio with other listed care home
portfolios.
Group Listed Peer
Group(1)
-------------------------------- -------- ------------
En suite wet-rooms with shower 98% 28%
En suite WC rooms 100% 86%
Purpose-built 2010 onwards 80% 13%
Purpose-built 2000 - 2009 17% 27%
Purpose-built 1990 - 1999 3% 21%
Purpose-built pre-1990's - 20%
Converted property - 19%
-------------------------------- -------- ------------
Average sqm per bedroom 47 40
-------------------------------- -------- ------------
EPC B or better 94% 58%
EPC C 6% 35%
EPC D or lower - 7%
-------------------------------- -------- ------------
Average value per bed GBP131k GBP101k
Value per built sqm GBP2.8k GBP2.5k
-------------------------------- -------- ------------
Average rent per bed per annum GBP8.8k GBP6.8k
Rent per built sqm GBP180 GBP172
-------------------------------- -------- ------------
(1) The Investment Manager monitors the key statistics for its
listed peer group, and the analysis in the table is the weighted
average scores for this peer group.
Diversification
We continue to ensure the portfolio remains diversified, by
leasing our homes to a range of high-quality regional operators.
The Group has 32 tenants, down from 34 in the previous year due to
the disposals in the year. The largest tenant is unchanged from
2022, being Ideal Carehomes who operate 18 of the Group's homes and
account for 16% of contracted rent as at 30 June 2023. Overall, our
top five tenants account for 41% and top ten, 63% of our contracted
rents.
Underlying resident fees are balanced between private and public
sources, with a deliberate bias towards private. There is long-term
evidence and strong current anecdotal evidence that this group is
accepting of higher fees, particularly for the quality real estate
and care services our properties and their operators provide.
Census data from our tenants shows that 73% of residents are
privately-funded, with 50% being fully private and 23% from "top
up" payments where residents pay over and above that which the
Local Authority funds for them. 27% of residents are wholly
publicly funded.
Geographically, Yorkshire and the Humber remains the largest
region by asset value at 25%.
Strategic pillar #2
Manage portfolio as a trusted landlord in a fair and commercial
manner.
The Investment Manager has deep experience within the sector and
uses its unique knowledge to manage the portfolio. Starting with
informed assessment of home performance using profitability and
operational metrics, through empathetic and sensitive engagement
with our tenants and sector participants as a whole - we are
trusted and respected and people want to partner with us. This
enables fair treatment and commerciality to be balanced, essential
in a complex sector.
What Why Achieved
GBP27m of disposals -- One property of -- Network and relationships
-- Five properties. a standard of identified potential
-- 3% of opening portfolio physical real estate purchasers.
value. that met our strict -- Sales proceeds obtained
acquisition criteria ahead of carrying values
when acquired as part and crystallising satisfactory
of a portfolio, but IRRs.
which was below the -- Proceeds applied
overall standard of to reduce drawn variable
the portfolio. rate debt in time of
-- Four properties rising interest rates.
with total return outlook -- Capital allocated
lower than that of long-term to a next
the overall portfolio generation energy--efficient
given resident funding development.
and fee pressures specific
to their geographic
area.
----------------------------- --------------------------------
Engagement with tenants -- Assisted the tenants Demand from care providers
and with operational and for our best-in-class
wider operator network cash flow pressures assets allowed us to:
Constructive dialogue following persistence -- Maintain prevailing
with two of pandemic affected rent levels on re-tenanting.
tenants and alternative trading. -- Fully recovered
operators allowed us -- Protected rental GBP1.1 million of rental
to: quality and asset values. arrears from one tenant
-- Recover rent arrears -- Maintained uninterrupted group with fair commercial
from one. care for residents. pressure applied from
-- Re-tenant a further having agreed terms
home from with alternative
one, moving to our operators.
preferred three-home
position.
----------------------------- --------------------------------
Further investment -- To further increase -- GBP3.7 million of
to maintain proportion of wet rooms capex committed to,
and enhance property towards 100%. and rentalised at market
standards -- To enhance homes NIYs.
with specific asset -- Maintain our commitment
management initiatives. to social impact through
fit-for-purpose facilities
for all residents.
----------------------------- --------------------------------
Portfolio profitability
Rent collection measured 97% (2022: 95%) for the year, with
improvement throughout the year leading to 99% collection for the
final quarter of the financial year.
Our portfolio is fully let therefore continues to have a vacancy
rate of nil. Underlying resident occupancies have grown to 85% at
the year end and 86% at the date of this report. Whilst this
remains lower than the pre-pandemic norm of 90%, many operators are
focussed on accepting new residents at fee levels commensurate with
the services provided, rather than filling to capacity at
uneconomic fees. This approach efficiently manages demand,
minimises the need for expensive agency staff, and facilitates a
care-led approach when welcoming new residents to a home. Staffing
shortages have eased, having been an operational challenge limiting
occupancy growth early in the year.
Rent covers have grown in response, supporting rental payments
and the rebuilding of tenant financial reserves. Portfolio rent
cover for mature homes for the quarter to 30 June 2023 was 1.75x
and for the year was 1.6x. These profitability and headroom levels
are higher than those delivered prior to the pandemic when
occupancy levels were higher, at around 90%. Clearly, there is
potential for enhancement to tenant profitability and rent covers
with higher occupancies, should homes choose to do so (enquiry
levels are generally reported to be high). Whilst the focus of
attention has been on resident fee levels, homes have generally
managed their cost bases effectively, with the reduction in agency
cost being the most material improvement.
Total returns and rental growth
The portfolio total return has again outperformed the MSCI UK
Annual Healthcare Property Index, with a total return for the
calendar year to 31 December 2022 of 2.5 per cent relative to the
Index's 1.7 per cent. This outperformance has occurred consistently
since launch in 2013 as shown in the table below.
Portfolio MSCI UK Annual Healthcare
total return Property Index total
(%) return (%)
Period to 31 December
2014 20.3 15.0
-------------- --------------------------
Year to 31 December
2015 14.5 10.3
-------------- --------------------------
Year to 31 December
2016 10.6 7.9
-------------- --------------------------
Year to 31 December
2017 11.9 11.7
-------------- --------------------------
Year to 31 December
2018 12.7 9.1
-------------- --------------------------
Year to 31 December
2019 9.2 7.4
-------------- --------------------------
Year to 31 December
2020 8.2 6.8
-------------- --------------------------
Year to 31 December
2021 10.5 9.6
-------------- --------------------------
Year to 31 December
2022 2.5 1.7
-------------- --------------------------
Accounting total return was -1.2% for the year ended June 2023
and an annualised 6.9% since launch. The decline in property values
seen in the second half of 2022 was the main driver of the decrease
in NAV, with our quarterly dividends paid to shareholders now fully
covered by earnings (97% covered for the full year). Property
values now appear to have stabilised, as noted elsewhere, with
continued investment demand for prime care homes.
Contractual rent has increased to GBP56.6 million, with
like-for-like rental growth of 3.8% having been achieved for our
annual, upward-only rent reviews with typical collars and caps at
2% and 4% respectively.
Pence per share
--------------------------- ----------------
EPRA NTA per share as at
30 June 2022 112.3
Acquisition costs (0.1)
Disposals 0.1
Property revaluations (6.9)
Adjusted EPRA earnings 6.0
Dividends paid (6.5)
Cost of interest rate cap (0.4)
--------------------------- ----------------
EPRA NTA per share as at
30 June 2023 104.5
--------------------------- ----------------
Demand for assets from investors and operators
During the year, the Investment Manager's specialist knowledge,
data-led assessment, and wide sector relationships, have allowed
successful portfolio management initiatives noted in the table
above to complete.
Tenant engagement and satisfaction
We remain committed to our role as an effective, supportive and
engaged landlord. We once again invited our tenants to provide
formal feedback via a survey, which, alongside learnings from the
many points of contact we have, is used to inform our approach. The
survey returned positive quantitative results, and more usefully
some qualitative feedback on how we may consider altering our
interactions with tenants to recognise that no two tenants are the
same.
In summary:
-- 10/10 of responders agreed that working with Target was a positive experience (2022: 9/10).
-- 9/10 of responders agreed that Target provides real estate
that is a great working environment and helps deliver dignified
care to residents (2022: 9/10).
-- 10/10 of responders agreed that Target participates in sector
events and appropriately shares knowledge (2022: 10/10).
Resident satisfaction
Regulator (CQC in England) ratings are informative but limited.
The Investment Manager also monitors reviews on "Carehome.co.uk", a
"Tripadvisor" style website for care homes, as a useful source of
real-time feedback which is more focussed on the resident
experience, and that of their loved ones.
The portfolio's current average rating is 9.4/10 (2022: 9.3/10)
with sufficient review volume and frequency to be considered a
valuable data point for the quality of service experienced by
residents.
Strategic pillar #3
Regular dividends for shareholders
Total dividends of 6.18 pence per share were declared and paid
in respect of the year to 30 June 2023, a decrease of 0.58 pence on
2022 reflecting the decision to reduce the dividend from 1 January
2023. This represents a yield of 8.6% based on the 30 June 2023
closing share price of 71.8 pence.
Earnings
Earnings increased by 19%, as measured by adjusted EPRA EPS; the
Group's primary performance measure. Rental income has increased,
with operating expenses and financing costs being managed
effectively.
Despite the disposal of five assets, rental income increased by
13% (GBP6.6 million) over the prior year, driven by the full-year
effect of a significant portfolio of assets acquired part-way
through the previous year, inflation-linked rental growth and the
practical completion of development assets and new leases entered
into.
The Group's operating expenses reduced by GBP3.0 million from
the effects of the portfolio's trading performance improvements. In
line with the increase to near full rent collection, credit loss
allowances and bad debts improved to a charge of GBP0.3 million,
GBP2.9 million lower than the prior year. Other administrative
expenses remained consistent with 2022.
Net finance costs increased from GBP6.6 million to GBP10.1
million, predominantly driven by the annualisation effect of the
increase in drawn debt in the previous year relating to the
acquisition of the portfolio of assets. The significant increase in
market interest rates in the second half of the financial year have
been managed through existing fixed or hedged debt arrangements,
supplemented by the acquisition of a GBP50 million 3% SONIA cap in
November 2022, which has protected the Group's interest costs from
further increases in interest rates as SONIA has risen to 4.93% at
30 June 2023.
Expense ratio
The Group's expense ratios reflect these movements.
The EPRA cost ratio decreased to 15.8% in 2023 from 21.5% in
2022 as a result of the significant reduction in the credit loss
allowance and bad debts in the year. Both the Investment Manager
fee and other expenses were broadly in line with the prior year in
absolute terms resulting in a decrease in the cost ratio expressed
as a percentage of the Group's increased rental income. The Ongoing
Charges Figure was fairly stable at 1.53% (2022: 1.51%), the
marginal increase driven by the decrease in the value of the
portfolio.
2023 2022
GBPm Movement GBPm
------------------------------------- ------- ----------- -------
Rental income (excluding guaranteed
uplifts) 56.4 +13% 49.8
Administrative expenses (including
management fee) (10.7) -22% (13.7)
Net financing costs (9.4) +42% (6.6)
Interest from development funding 0.9 +13% 0.8
------------------------------------- ------- ----------- -------
Adjusted EPRA earnings 37.2 +23% 30.2
------------------------------------- ------- ----------- -------
Adjusted EPRA EPS (pence) 6.00 +19% 5.05
EPRA EPS (pence) 7.67 +16% 6.62
Adjusted EPRA cost ratio 18.7% -840bps 27.1%
EPRA cost ratio 15.8% -570bps 21.5%
Ongoing Charges Figure ('OCF') 1.53% +2bps 1.51%
------------------------------------- ------- ----------- -------
Uninvested Capital
At 30 June 2023 the Group had cash and undrawn debt of GBP105
million. GBP41.5 million of this is committed to developments or
portfolio improvements, with GBP16.0m allocated to the acquisition
of a further development site post year end which was awaiting
drawdown. GBP47.5 million remains available. The Group continues to
assess pipeline assets carefully on a case-by-case basis, with
respect to market conditions and financing costs.
Debt
Debt facilities were unchanged in the year at GBP320m. The
Group's GBP100 million revolving credit facility with HSBC was
extended by one year to November 2025 and at 30 June 2023 the
weighted average term to expiry on the Group's total committed loan
facilities was 6.2 years (30 June 2022: 6.9 years)
In November 2022, the Group acquired a 3% SONIA interest rate
cap, covering GBP50 million of the Group's revolving credit
facilities. GBP230 million of the GBP320 million available debt was
drawn at 30 June 2023, at a weighted average cost, inclusive of
amortisation of loan arrangement costs, of 3.70%. GBP180 million of
the drawn debt was fixed prior to the significant rise in interest
rates seen in the second half of 2022.
The Group retains flexibility on debt levels, with GBP90 million
of the Group's revolving credit facilities available to be
drawn/repaid in line with capital requirements. If drawn,
appropriate hedging protection will be considered.
Debt facilities are considered prudent with LTV of 24.7%,
weighted average term of 6.2 years and all debt drawn at 30 June
2023 being hedged against further interest rate increases.
Debt Facility Drawn at
provider size Debt type 30 June 2023 Maturity
---------- --------- --------------------------- ---------------- ------------
Phoenix GBP150m Term debt GBP150m (fixed Jan 2032 -
Group rate) GBP87m
Jan 2037 -
GBP63m
RBS GBP70m GBP30m term debt, GBP40m GBP30m (hedged) Nov 2025
revolving credit facility
HSBC GBP100m Revolving credit facility GBP50m (hedged) Nov 2025
---------- --------- --------------------------- ---------------- ------------
Total GBP320m GBP230m
---------- --------- --------------------------- ---------------- ------------
Strategic pillar #4
To achieve our social purpose
ESG Principles What this means for Target What we did in 2023 What we'll do in 2024
and beyond
1. Responsible Leading in social impact Social Social
investment for care home real estate -- Development commitments -- Continue to advocate
As an investor -- We understand the for 262 new beds as at for quality real estate
we understand importance year-end. -- Continue to fund new
that our actions of maintaining a portfolio -- 66 new beds construction homes, modernising the
have influence. that supports the needs and completed in year. sector's real estate
We use our platform well-being of residents, -- 98% wet-rooms.
to lead by example our -- Homes provide space of
through embedding tenants and their staff, 47m(2)
appropriate which per resident.
ESG considerations in turn contributes to the -- All real estate has
into our decision-making. long-term sustainability of generous
social care infrastructure social and useable outdoor
in the UK. space.
Energy and climate change:
Responsible acquisitions
and Energy
portfolio management -- 100% A-C EPC ratings.
-- Energy efficiency is a -- Increased data Energy
specific consideration in collection -- Continue data analysis
our investment analysis for to obtain portfolio to best target portfolio
acquisitions, coverage enhancements.
developments and portfolio of 75% electricity and 79% -- Assess ongoing asset
management decisions. gas usage. reviews and certifications
-- In our role as a -- Used this data to (i.e. EPCs, BREEAMs) to
responsible benchmark initiate improvement
landlord we are committed energy usage and identify programmes
to helping our tenants outlier where aligned with long-term
identify homes - providing value.
and implement energy insightful -- Increase proportion
reduction feedback to tenants. of leases with "green"
and efficiency measures. -- Further used the data to reporting provisions to
target green building gather more data on energy
enhancements consumption patterns from
with GBP1 million of our tenants for use in
funding decision-making.
allocated to solar PV
panels,
delivering 20% CO(2)
reduction
per home.
-- External specialist
engaged
with carbon technical
skills
to guide in setting
tangible
and measurable targets by
way
of a steps plan to Net
Zero.
---------------------------- ---------------------------- -----------------------------
2. Responsible Tenant selection, engagement Tenants Tenants
partnerships and collaboration -- 10/10 "positive -- Invest in fully
We engage with -- As a responsible, experience" understanding
all our stakeholders proactive satisfaction score. and responding to feedback
to drive the landlord we prioritise good, -- Reprised hosting of tenant from tenant survey.
creation of open relationships with our event with focus on knowledge
economic, social tenants, sharing best sharing and best practice.
and environmental practice.
value around -- We make sure that we
our buildings solicit,
and in wider assess and respond to
society. feedback
on our portfolio and our
behaviours
to ensure carers are
respected
and residents are cared for
with dignity.
-- We select tenants who
share
our care ethos and can
deliver
operationally. Communities
-- Re-tenanted homes with new Communities
Communities and society tenants committed to -- Continue to prioritise
-- We fully appreciate the continuing the provision of modern
vital role that care homes care provision where real estate and continuity
play in every community, and required. of services across our
take decisions in the best -- Worked constructively with portfolio.
interest of maintaining tenants in rental arrears to
continuity deliver positive solutions
of care for residents. to maintain continuity of
-- Advocate for and support care.
the sector.
3. Responsible Governance and transparency Governance and transparency Governance and transparency
business -- We uphold the highest -- Undertook director -- ESG committee will
We will treat ethical recruitment continue to provide momentum
all stakeholders standards and adhere to best process resulting in Michael to the Group's carbon
with practice in every aspect of Brodtman and Richard Cotton reduction investment and
respect and our business. being appointed during the sustainability reporting.
deal fairly -- Our governance and year.
in a manner behaviour -- Investment Manager
consistent with treat transparency for all successfully
how we would of our stakeholders as core. retained position as a
expect to be signatory
treated ourselves People, culture and wellbeing to the FRC Stewardship Code.
-- We encourage employment -- GBP1.3 million taxation
practices across our key directly paid to the UK
service government
providers that reflect our by way of VAT and stamp duty
core values, with a focus land taxes. Dividends paid
on wellbeing, fairness and of GBP40.1 million are
opportunity for all. assessed
for tax upon reaching
shareholders.
-- Inaugural ESG report
issued
with enhanced disclosures.
------------------------------ ------------------------------ ------------------------------
Principal and emerging risks and uncertainties
Risk Description of risk and Mitigation
factors
affecting risk rating
Poor performance There is a risk that a tenant's The Investment Manager
of assets business could become unsustainable focuses on tenant diversification
Risk rating if it fails to trade successfully. across the portfolio
& change: High This could lead to a loss and, considering the
(unchanged) of income for the Group and local market dynamics
an adverse impact on the for each home, focuses
Group's results and shareholder on ensuring that rents
returns. The strategy of are set at sustainable
investing in new purpose-built levels. Rent deposits
care homes could lead to or other guarantees are
additional fill-up risk and sought, where appropriate,
there may be a limited amount to provide additional
of time that small regional security for the Group.
operators can fund start-up The Investment Manager
losses. has ongoing engagement
with the Group's tenants
to proactively assist
and monitor performance.
-------------------------------------- ----------------------------------------
High inflationary An increase in the UK inflation The Group's portfolio
environment rate to a level above the includes inflation-linked
Risk rating rent review caps in place leases, with primarily
& change: across the portfolio's long-term annual upwards-only rent
High (unchanged) leases may result in a real reviews within a cap
term decrease in the Group's and collar. The Manager
income and be detrimental is monitoring tenant
to its performance. In addition, performance, including
cost increases for tenants, whether average weekly
particularly in relation fees paid by the underlying
to staffing and utilities, diversified mix of publicly
may erode their profitability funded and private-fee
and rent cover unless their paying residents are
revenue increases accordingly. growing in line with
inflation.
-------------------------------------- ----------------------------------------
Adverse interest Adverse interest rate fluctuations The Group has a conservative
rate fluctuations will increase the cost of gearing strategy, although
/ debt covenant the Group's variable rate net gearing is anticipated
compliance debt facilities; limit borrowing to increase as the Group
Risk rating capacity; adversely impact nears full investment.
& change: property valuations; and Loan covenants and liquidity
Medium (decreased) be detrimental to the Group's levels are closely monitored
overall returns. for compliance and headroom.
The Group has fixed interest
costs on GBP230 million
of borrowings as at 30
June 2023.
-------------------------------------- ----------------------------------------
Development The high inflationary environment, The Group is not significantly
costs particularly for building exposed to development
Risk rating materials and staff, combined risk, with forward funded
& change: with supply chain difficulties, acquisitions being developed
Medium (unchanged) may result in an increased under fixed price contracts,
risk that the developers with the Investment Manager
of contracted developments having considered both
do not fulfil their obligations the financial strength
and/or may increase the cost of the developer and
of new development opportunities. the ability of the developer's
profit to absorb any
cost overruns.
-------------------------------------- ----------------------------------------
Negative A negative perception of The Group is committed
perception the care home sector, due to investing in high
of to matters such as societal quality real estate with
the care home trends, pandemic or safeguarding high quality operators.
sector failures, or difficulties These assets are expected
Risk rating in accessing social care, to experience demand
& change: may result in a reduction ahead of the sector average
Medium (increased) in demand for care home beds, while in the wider market
causing asset performance a large number of care
to fall below expectations homes without fit-for-purpose
despite the demographic shifts facilities are expected
and the realities of needs-based to close. A trend of
demand in the sector. The improving occupancy rates
resultant reputational damage across the portfolio
could impact occupancy levels has been noted in recent
and rent covers across the times.
portfolio.
-------------------------------------- ----------------------------------------
ESG and climate A change in climate, such The Group is committed
change as an increased risk of local to investing in high
Risk rating or coastal flooding, or a quality real estate with
& change: change in tenant/ investor high quality operators.
Medium (unchanged) demands or regulatory requirements The portfolio's EPC and
for properties which meet BREEAM in-use ratings
certain environmental criteria, suggest the portfolio
such as integral heat pumps, is well positioned to
may result in a fall in demand meet future requirements/expectations.
for the Group's properties, The Investment Manager
reducing rental income and/or has introduced a house
property valuations. standard to ensure ESG
factors are fully considered
during the acquisition
process.
-------------------------------------- ----------------------------------------
Reduced The combined impacts of the The Group is committed
availability pandemic and increased employment to investing in high
of and wage inflation in competing quality real estate with
carers, nurses sectors has reduced the availability high quality operators
and other of key staff in the care and these should be better
care sector which may result in placed to attract staff.
home staff a reduction in the quality The Investment Manager
Risk rating of care for underlying residents, continues to engage with
& change: restrict tenants from being tenants in the portfolio
Medium (unchanged) able to admit residents or and to share examples
result in wage inflation. of best practice in recruitment
and retention of staff.
-------------------------------------- ----------------------------------------
Breach A breach of REIT regulations, The Group's activities,
of REIT primarily in relation to including the level of
regulations making the necessary level distributions, are monitored
Risk rating of distributions, may result to ensure all conditions
& change: in loss of tax advantages are adhered to. The REIT
Medium (unchanged) derived from the Group's rules are considered
REIT status. The Group remains during investment appraisal
fully compliant with the and transactions structured
REIT regulations and is fully to ensure conditions
domiciled in the UK. are met.
-------------------------------------- ----------------------------------------
Changes in Changes in government policies, Government policy is
government including those affecting monitored by the Group
policies local authority funding of to increase the ability
Risk rating care, may render the Group's to anticipate changes.
& change: strategy inappropriate. Secure The Group's tenants also
Medium (unchanged) income and property valuations typically have a multiplicity
will be at risk if tenant of income sources, with
finances suffer from policy their business models
changes. not wholly dependent
on government funding.
-------------------------------------- ----------------------------------------
Availability Without access to equity The Group maintains regular
of capital or debt capital, the Group communication with investors
Risk rating may be unable to grow through and existing debt providers,
& change: acquisition of attractive and, with the assistance
Medium (unchanged) investment opportunities. of its broker and sponsor,
This is likely to be driven regularly monitors the
by both investor demand and Group's capital requirements
lender appetite which will and investment pipeline
reflect Group performance, alongside opportunities
competitor performance, general to raise both equity
market conditions and the and debt. During the
relative attractiveness of year, the Group has extended
investment in UK healthcare its GBP100m RCF facility
property. with HSBC by one year.
-------------------------------------- ----------------------------------------
Reliance on The Group is externally managed The Investment Manager,
third party and, as such, relies on a along with all other
service number of service providers. service providers, is
providers Poor quality service from subject to regular performance
Risk rating providers such as the Investment appraisal by the Board.
& change: Manager, company secretary, The Manager has retained
Medium (unchanged) broker, legal advisers or key personnel since the
depositary could have potentially Group's IPO and has successfully
negative impacts on the Group's hired further skilled
investment performance, legal individuals and invested
obligations, compliance or in its systems.
shareholder relations.
-------------------------------------- ----------------------------------------
Failure to Failing to differentiate The stakeholder communications
differentiate strategy and qualities from strategy of the Group
qualities competitors is a significant has always been to highlight
from risk for the business, with the quality of the real
competitors increased competition in estate in which the Group
or the healthcare real estate invests. The regular
poor investment sector. The failure to communicate production of investor
performance these effectively to stakeholders relations materials (annual
Risk rating could have a negative impact and interim reports,
& change: on the Company's share price, investor presentations
Medium (unchanged) future demand for equity and quarterly factsheets)
raises and/or debt finance along with direct engagement
and wider reputational damage. with investors helps
to mitigate this risk.
-------------------------------------- ----------------------------------------
The Company's risk matrix is reviewed regularly by the Board.
Emerging risks are identified though regular discussion at Board
meetings of matters relevant to the Company and the sectors in
which it operates; including matters that may impact on the
underlying tenant operators. In addition, the Board holds an annual
two-day strategy meeting which includes presentations from relevant
external parties to ensure that the Board are fully briefed on
relevant matters. At the strategy meeting, principal and emerging
risks are discussed and reviewed to ensure that they have all been
appropriately identified and, where necessary, addressed. The
detailed consideration of the Company's viability and its
continuation as a going concern, including sensitivity analysis to
address the appropriate risks, is set out below.
Promoting the success of Target Healthcare REIT plc
The Board considers that it has made decisions during the year
which will promote the success of the Group for the benefit of its
members as a whole.
This section, which serves as the Company's section 172
statement, explains how the Directors have had regard to the
matters set out in section 172 (1) (a)-(f) of the Companies Act
2006 for the financial year to 30 June 2023, taking into account
the likely long-term consequences of decisions and the need to
foster relationships with all stakeholders in accordance with the
AIC Code.
a) The likely consequences Our investment approach is long-term with
of any decision an average lease length of 26.5 years. We
in the long term believe this is the most responsible approach
to provide stability and sustainability to
tenants and key stakeholders. Therefore, most
decisions require consideration of long-term
consequences, from determining a sustainable
rent level and the right tenant partner for
each investment, to considering the impact
of debt and key contracts with service providers
on the recurring earnings which support dividends
to shareholders.
b) The interests The Company is externally managed and therefore
of the Company's has no employees.
employees
---------------------------------------------------
c) The need to As a REIT with no employees, the Board works
foster the Company's in close partnership with the Manager, which
business relationships runs the Group's operations and portfolio
with within parameters set by the Board and subject
suppliers, customers to appropriate oversight. The Manager has
and others deep relationships with tenants, the wider
care home sector, and many of the Group's
other suppliers. These are set out in more
detail in the following table.
---------------------------------------------------
d) The impact of The Board is confident the Group's approach
the Company's operations to investing in a sensitive sector is responsible
on the community with regard to social and environmental impact.
and This is set out in more detail in the community
the environment and the environment section of the following
table.
---------------------------------------------------
e) The desirability The Board requires high standards of itself,
of the Company maintaining service providers and stakeholders. The Group's
a reputation for purpose and investment objectives dictate
high standards of that these standards are met in order to retain
business conduct credibility. The ethos and tone is set by
the Board and the Manager.
---------------------------------------------------
f) The need to The Board encourages an active dialogue with
act fairly as between shareholders to ensure effective communication,
members of the Company either directly or via its broker and/or Manager.
The interests of all shareholders are considered
when issuing new shares.
---------------------------------------------------
The significant transactions where the interests of stakeholders
were actively considered by the Board during the year were:
Dividends paid
The Board recognised the importance of dividends to its
shareholders and, after careful analysis of the Group's forecast
net revenue concluded that it was in the interests of all
stakeholders to reduce the Company's dividend to a level at which
it is expected to be fully covered with the potential for
growth.
Ongoing investment and asset management activity
The Group acquired two new development sites, including one in
July 2023. The new, high-quality beds which will be added to the
market when these developments complete, combined with the Group's
asset management activities to increase the percentage of wet rooms
in the property portfolio to 98% and add further beds at another of
the Group's properties, illustrate the Group's intent of improving
the overall level of care home real estate in the UK. This approach
targets attractive long--term returns to shareholders by focusing
on a sustainable and 'future proofed' sector of the care home
market. The latest development site acquired is for a care home to
be built to exceptional ESG standards, with the highest
certifications anticipated, which will offer carbon net-zero
operational ability.
The sale of four homes in Northern Ireland was completed in the
year. This followed the successful re-tenanting of the properties
in the prior year and crystallised an annualised ungeared IRR in
excess of 10% over the period of ownership. The disposal
represented a full exit from the Northern Irish market and formed
part of the Group's wider capital recycling and asset management
strategy. The Group also sold a non-core asset that had been
acquired as part of the 18-home portfolio in the prior year.
Capital financing
The Group extended its loan facility with HSBC plc by a further
year, to November 2025 and entered into an interest rate cap on the
GBP50 million of this facility currently drawn in order to reduce
the Group's exposure to rising interest rates on its
borrowings.
Director appointments
During the year, as part of the Board succession plan, Mr Cotton
and Mr Brodtman were appointed as Directors. Mr Cotton's experience
of real estate corporate finance and Mr Brodtman's extensive
knowledge of the property sector is expected to benefit all
stakeholders over the period of their respective appointments.
These appointments complete the Board's succession plan for the
medium term.
Stakeholders
The Company is a REIT and has no executive directors or
employees and is governed by the Board of Directors. Its main
stakeholders are shareholders, tenants and their underlying
residents, debt providers, the Investment Manager, other service
providers and the community and the environment. The Board
considers the long-term consequences of its decisions on its
stakeholders to ensure the long-term sustainability of the
Company.
Shareholders Shareholders are key stakeholders and the
Board proactively seeks the views of its shareholders
and places great importance on communication
with them.
The Board reviews the detail of significant
shareholders and recent movements at each
Board Meeting and receives regular reports
from the Investment Manager and Broker on
the views of shareholders, and prospective
shareholders, as well as updates on general
market trends and expectations. The Chair
and other Directors make themselves available
to meet shareholders when required to discuss
the Group's business and address shareholder
queries. The Directors make themselves available
at the AGM in person, with the Company also
providing the ability for any questions to
be raised with the Board by email in advance
of the meeting.
The Company and Investment Manager also provide
regular updates to shareholders and the market
through the Annual Report, Interim Report,
regular RNS announcements (including the quarterly
NAV), quarterly investor reports and the Company's
website. The Investment Manager intends to
hold a results presentation on the day of
publication of the Annual Report, as undertaken
for the first time in October 2022, and will
also meet with analysts and members of the
financial press.
Tenants and underlying The Investment Manager liaises closely with
residents tenants to understand their needs, and those
of their underlying residents, through visits
to properties and regular communication with
both care home personnel and senior management
of the tenant operators. The effectiveness
of this engagement is assessed through an
annual survey.
The Investment Manager also receives, and
analyses, management information provided
by each tenant at least quarterly and regularly
monitors the CQC, or equivalent, rating for
each home and any online reviews, such as
carehome.co.uk. Any significant matters are
discussed with the tenant and included within
the Board reporting.
--------------------------------------------------------------
Debt providers The Group has term loan and revolving credit
facilities with the Royal Bank of Scotland
plc, HSBC Bank plc and Phoenix Group (see
Note 7 to the extract from the Consolidated
Financial Statements for more information).
The Company maintains a positive working relationship
with each of its lenders and provides regular
updates, at least quarterly, on portfolio
activity and compliance with its loan covenants
in relation to each loan facility.
--------------------------------------------------------------
Investment Manager The Investment Manager has responsibility
for the day-to-day management of the Group
pursuant to the Investment Management Agreement.
The Board, and its committees, are in regular
communication with the Investment Manager
and receive formal presentations at every
Board Meeting to aid its oversight of the
Group's activities and the formulation of
its ongoing strategy.
The Board, through the Management Engagement
Committee, formally reviews the performance
of the Investment Manager, the terms of its
appointment and the quality of the other services
provided at least annually. Further details
on this process and the conclusions reached
in relation to the year ended 30 June 2023
are contained in the Annual Report.
.
--------------------------------------------------------------
Other service providers The Board, through the Management Engagement
Committee, formally reviews the performance
of each of its significant service providers
at least annually. The reviews will include
the Company's legal advisers, brokers, tax
advisers, auditors, depositary, valuers, company
secretary, insurance broker, surveyors and
registrar. The purpose of the review is to
ensure that the quality of the service provided
remains of the standard expected by the Board
and that overall costs and other contractual
arrangements remain in the interests of the
Group and other significant stakeholders.
The Investment Manager also reports regularly
to the Board on these relationships.
The significant other service providers, particularly
the Group's legal advisers and brokers, are
invited to attend Board Meetings and report
directly to the Directors where appropriate.
--------------------------------------------------------------
Community and the The Group's principal non-financial objective
environment is to generate a positive social impact for
the end-users of its real estate. Investment
decisions are made based on the fundamental
premise that the real estate is suitable for
its residents, the staff who care for them,
and their friends, families and local communities,
both on original acquisition and for the long-term.
Environmental considerations are an integral
part of the acquisition and portfolio management
process, given the strategy of only acquiring
modern buildings which benchmark well from
an energy efficiency aspect. The Group's ESG
strategy is currently prioritising the gathering
of useful energy/consumption data on its portfolio
which will be used to align the portfolio
appropriately with benchmarks over the medium
and longer term. During the year, the Group
has improved its ESG reporting through the
introduction of its annual Sustainability
Report, first published in March 2023, and
through collating, submitting and publishing
data under the GRESB benchmark standards.
Under the remit of the newly established ESG
Committee, the Board has encouraged the further
development of the Investment Manager's property-by-property
asset management plan to identify areas where
the energy efficiency and carbon emissions
of the Group's property portfolio can be further
improved and approved an initial budget to
action initiatives identified.
--------------------------------------------------------------
Alison Fyfe
Chair
9 October 2023
Viability Statement
The AIC Code requires the Board to assess the Group's prospects,
including a robust assessment of the emerging and principal risks
facing the Group including those that would threaten its business
model, future performance, solvency or liquidity. This assessment
is undertaken with the aim of stating that the Directors have a
reasonable expectation that the Group will continue in operation
and be able to meet its liabilities as they fall due over the
period of their assessment.
The Board has conducted this review over a five-year time
horizon, which is a period thought to be appropriate for a company
investing in UK care homes with a long-term investment outlook. At
each Board Meeting, the Directors consider the key outputs from a
detailed financial model covering a similar five year rolling
period, as this is considered the maximum timescale over which the
performance of the Group can be forecast with a reasonable degree
of accuracy. At 30 June 2023, the Group had a property portfolio
which has long leases and a weighted average unexpired lease term
of 26.5 years. The Group had drawn borrowings of GBP230.0 million,
on which the interest rate had been fixed, either directly or
through the use of interest rate derivatives, at a maximum weighted
interest rate of 3.52 per cent per annum (excluding the
amortisation of arrangement costs). The Group had access to a
further GBP90.0 million of available debt under committed loan
facilities which,
if drawn, would carry interest at a variable rate equal to SONIA
plus 2.21%. The Group's committed loan facilities have staggered
expiry dates with GBP170.0 million being committed to 5 November
2025, GBP87.3 million to 12 January 2032 and GBP62.7 million to 12
January 2037. Discussions with existing and/or new potential
lenders do not indicate any issues with re-financing these loans on
acceptable terms in due course.
The Directors' assessment of the Group's principal risks are
highlighted above The most significant risks identified as relevant
to the viability statement were those relating to:
-- Poor performance of assets: The risk that a tenant is unable
to sustain a sufficient rental cover, leading to a loss of rental
income for the Group;
-- High inflationary environment: The risk that the level of the
UK inflation rate results in a real term decrease in the Group's
income or erodes the profitability of tenants;
-- Adverse interest rate fluctuations: The risk that an increase
in interest rates may impact property valuations, increase the cost
of the Group's variable rate debt facilities, and/or limit the
Group's borrowing capacity;
-- Negative perception of the care home sector reduces demand
for care home beds: The risk that overall demand for care home beds
is reduced resulting in a decline in the capital and/or income
return from the property portfolio; and
-- Reduced availability of care home staff: The risk that
unavailability of staff restricts the ability of tenants to admit
residents or results in significant wage cost inflation, impacting
on the tenants' rental cover and leading to a loss of rental income
for the Group.
In assessing the Group's viability, the Board has considered the
key outputs from a detailed model of the Group's expected cashflows
over the coming five years under both normal and stressed
conditions. The stressed conditions, which were intended to
represent severe but plausible scenarios, included modelling
increases in interest rates, movements in the capital value of the
property portfolio and a significant default on rental receipts
from the Group's tenants. The stressed level of default from the
Group's tenants assumed in the financial modelling was based on a
detailed assessment of the financial position of each individual
tenant or tenant group, the structure in place to secure rental
income (such as the strength of tenants' balance sheets, rental
guarantees in place or rental deposits held) and included
consideration of the cumulative impact on each tenant's financial
reserves from recent economic conditions, including increasing
staff and utilities costs and the reduced level of resident
occupancy experienced following the pandemic.
Based on the results of the scenario analysis outlined above,
the Board has a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall due
over the five--year period of its assessment.
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2023
Year ended 30 Year ended 30 June
June 2023 2022
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Revenue
Rental income 56,354 11,308 67,662 48,807 10,215 59,022
Other rental income - - - 796 3,877 4,673
Other income 86 - 86 164 - 164
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Total revenue 56,440 11,308 67,748 49,767 14,092 63,859
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
(Losses)/gains on revaluation
of investment properties 5 - (54,021) (54,021) - 5,553 5,553
Gains on investment properties
realised 5 - 575 575 - - -
Losses on revaluation of properties
held for sale - - - - (7) (7)
Total income 56,440 (42,138) 14,302 49,767 19,638 69,405
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Expenditure
Investment management fee 2 (7,428) - (7,428) (7,307) - (7,307)
Credit loss allowance and
bad debts 3 (264) - (264) (3,232) - (3,232)
Other expenses 3 (3,046) - (3,046) (3,163) - (3,163)
Total expenditure (10,738) - (10,738) (13,702) - (13,702)
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Profit/(loss) before finance
costs and taxation 45,702 (42,138) 3,564 36,065 19,638 55,703
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Net finance costs
Interest income 134 - 134 71 - 71
Finance costs (9,572) (698) (10,270) (6,671) - (6,671)
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Net finance costs (9,438) (698) (10,136) (6,600) - (6,600)
Profit/(loss) before taxation 36,264 (42,836) (6,572) 29,465 19,638 49,103
Taxation - - - (6) - (6)
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Profit/(loss) for the year 36,264 (42,836) (6,572) 29,459 19,638 49,097
Other comprehensive income:
Items that are or may be
reclassified subsequently
to profit or loss
Movement in fair value of
interest rate derivatives
designated as cash flow hedges - 2,742 2,742 - 2,033 2,033
Total comprehensive income
for the year 36,264 (40,094) (3,830) 29,459 21,671 51,130
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
Earnings per share (pence) 4 5.85 (6.91) (1.06) 4.92 3.28 8.20
------------------------------------- ------ --------- --------- --------- --------- -------- ---------
The total column of this statement represents the Group's
Consolidated Statement of Comprehensive Income, prepared in
accordance with IFRS. The supplementary revenue return and capital
return columns are both prepared under guidance published by the
Association of Investment Companies.
All revenue and capital items in the above statement are derived
from continuing operations.
No operations were discontinued in the year.
Consolidated Statement of Financial Position (audited)
As at 30 June 2023
As at
30 June As at
2023 30 June 2022
Notes GBP'000 GBP'000
------------------------------ ------ ---------- --------------
Non-current assets
Investment properties 5 800,155 857,691
Trade and other receivables 76,373 63,651
Interest rate derivatives 6,905 2,284
------------------------------ ------ ---------- --------------
883,433 923,626
Current assets
Trade and other receivables 9,459 5,549
Cash and cash equivalents 15,366 34,483
24,825 40,032
Total assets 908,258 963,658
------------------------------ ------ ---------- --------------
Non-current liabilities
Loans 7 (227,051) (231,383)
Trade and other payables (8,093) (7,145)
------------------------------ ------ ---------- --------------
(235,144) (238,528)
Current liabilities
Trade and other payables (18,306) (26,363)
------------------------------ ------ ---------- --------------
Total liabilities (253,450) (264,891)
------------------------------ ------ ---------- --------------
Net assets 654,808 698,767
------------------------------ ------ ---------- --------------
Share capital and reserves
Share capital 8 6,202 6,202
Share premium 8 256,633 256,633
Merger reserve 47,751 47,751
Distributable reserve 187,887 226,461
Hedging reserve 5,026 2,284
Capital reserve 40,914 83,750
Revenue reserve 110,395 75,686
Equity shareholders' funds 654,808 698,767
------------------------------ ------ ---------- --------------
Net asset value per ordinary
share (pence) 4 105.6 112.7
------------------------------ ------ ---------- --------------
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2023
Distrib-utable
Share Share Merger reserve Hedging Capital Revenue
capital premium reserve reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 June
2022 6,202 256,633 47,751 226,461 2,284 83,750 75,686 698,767
Total
comprehensive
income for
the year: - - - - 2,742 (42,836) 36,264 (3,830)
Transactions
with
owners
recognised
in equity:
Dividends paid 1 - - - (38,574) - - (1,555) (40,129)
At 30 June
2023 6,202 256,633 47,751 187,887 5,026 40,914 110,395 654,808
--------------- --- --------- ---------- --------- --------------- --------- ----------- ---------- ----------
For the year ended 30 June 2022
Distrib-utable
Share Share Merger reserve Hedging Capital Revenue
capital premium reserve reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 June
2021 5,115 135,228 47,751 265,164 251 64,112 47,564 565,185
Total
comprehensive
income for
the year: - - - - 2,033 19,638 29,459 51,130
Transactions
with
owners
recognised
in equity:
Dividends paid 1 - - - (38,703) - - (1,337) (40,040)
Issue of
ordinary
shares 8 1,087 123,913 - - - - - 125,000
Expenses of
issue 8 - (2,508) - - - - - (2,508)
--------------- --- --------- ---------- --------- --------------- --------- ---------- ---------- ----------
At 30 June
2022 6,202 256,633 47,751 226,461 2,284 83,750 75,686 698,767
--------------- --- --------- ---------- --------- --------------- --------- ---------- ---------- ----------
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2023
Year ended
30 June Year ended
2023 30 June 2022
Note GBP'000 GBP'000
-------------------------------------------- ----- ----------- --------------
Cash flows from operating activities
(Loss)/profit before tax (6,572) 49,103
Adjustments for:
Interest income (134) (71)
Finance costs 10,270 6,671
Revaluation gains on investment properties
and movements in lease incentives,
net of acquisition costs written off 5 42,138 (19,645)
Revaluation losses on properties held
for sale - 7
Increase in trade and other receivables (4,550) (3,768)
(Decrease)/increase in trade and other
payables (325) 3,340
-------------------------------------------- ----- ----------- --------------
40,827 35,637
-------------------------------------------- ----- ----------- --------------
Interest paid (8,719) (5,310)
Premium paid on interest rate cap (2,577) -
Interest received 134 71
Tax paid - (6)
-------------------------------------------- ----- ----------- --------------
(11,162) (5,245)
-------------------------------------------- ----- ----------- --------------
Net cash inflow from operating activities 29,665 30,392
-------------------------------------------- ----- ----------- --------------
Cash flows from investing activities
Purchase of investment properties
and properties held for sale, including
acquisition costs (29,342) (206,993)
Disposal of investment properties
and properties held for sale, net
of lease incentives 25,789 4,360
Net cash outflow from investing activities (3,553) (202,633)
-------------------------------------------- ----- ----------- --------------
Cash flows from financing activities
Issue of ordinary share capital - 125,000
Expenses of issue of ordinary share
capital - (2,508)
Drawdown of bank loan facilities 62,000 222,000
Repayment of bank loan facilities (66,750) (117,250)
Expenses of arrangement of bank loan
facilities (205) (1,839)
Dividends paid (40,274) (39,785)
-------------------------------------------- ----- ----------- --------------
Net cash (outflow)/inflow from financing
activities (45,229) 185,618
-------------------------------------------- ----- ----------- --------------
Net (decrease)/increase in cash and
cash equivalents (19,117) 13,377
Opening cash and cash equivalents 34,483 21,106
-------------------------------------------- ----- ----------- --------------
Closing cash and cash equivalents 15,366 34,483
-------------------------------------------- ----- ----------- --------------
Transactions which do not require the use
of cash
Movement in fixed or guaranteed rent reviews
and lease incentives 13,516 12,148
Fixed or guaranteed rent reviews derecognised
on disposal or re-tenanting (732) (3,362)
----------------------------------------------- ------- --------
Total 12,784 8,786
----------------------------------------------- ------- --------
Statement of Directors' Responsibilities in Respect of the
Annual Financial Report
In accordance with Chapter 4 of the Disclosure Guidelines and
Transparency Rules, we confirm that to the best of our
knowledge:
-- The financial statements contained within the Annual Report
for the year ended 30 June 2023, of which this statement of results
is an extract, have been prepared in accordance with applicable
UK-adopted International Financial Reporting Standards, on a going
concern basis, and give a true and fair view of the assets,
liabilities, financial position and return of the Company;
-- The Chairman's Statement, Investment Manager's Report and Our
Strategy include a fair review of the important events that have
occurred during the financial year and their impact on the
financial statements;
-- 'Principal and emerging risks and uncertainties' includes a
description of the Company's principal and emerging risks and
uncertainties; and
-- The Annual Report includes details of related party
transactions that have taken place during the financial year.
On behalf of the Board
Alison Fyfe
Chair
9 October 2023
Extract from Notes to the Audited Consolidated Financial
Statements
1. Dividends
Amounts paid as distributions to equity holders during the year
to 30 June 2023.
Dividend rate Year ended
(pence per 30 June 2023
share) GBP'000
-------------------------------------- -------------- --------------
Fourth interim dividend for the year
ended 30 June 2022 1.69 10,482
First interim dividend for the year
ended 30 June 2023 1.69 10,482
Second interim dividend for the year
ended 30 June 2023 1.69 10,482
Third interim dividend for the year
ended 30 June 2023 1.40 8,683
-------------------------------------- -------------- --------------
Total 6.47 40,129
-------------------------------------- -------------- --------------
Amounts paid as distributions to equity holders during the year
to 30 June 2022.
Dividend rate Year ended
(pence per 30 June 2022
share) GBP'000
-------------------------------------- -------------- --------------
Fourth interim dividend for the year
ended 30 June 2021 1.68 8,594
First interim dividend for the year
ended 30 June 2022 1.69 10,482
Second interim dividend for the year
ended 30 June 2022 1.69 10,482
Third interim dividend for the year
ended 30 June 2022 1.69 10,482
-------------------------------------- -------------- --------------
Total 6.75 40,040
-------------------------------------- -------------- --------------
It is the policy of the Directors to declare and pay dividends
as interim dividends. The Directors do not therefore recommend a
final dividend. The fourth interim dividend in respect of the year
ended 30 June 2023, of 1.40 pence per share, was paid on 25 August
2023 to shareholders on the register on 11 August 2023 and amounted
to GBP8,683,000. It is the intention of the Directors that the
Group will continue to pay dividends quarterly.
2. Fee paid to the Investment Manager
Year ended Year ended
30 June 2023 30 June 2022
GBP'000 GBP'000
--------------------------- -------------- ---------------
Investment management fee 7,428 7,307
Total 7,428 7,307
--------------------------- -------------- ---------------
The Group's Investment Manager and Alternative Investment Fund
Manager ('AIFM') is Target Fund Managers Limited (the 'Investment
Manager' or 'Target'). The Investment Manager is entitled to an
annual management fee calculated on a tiered basis based on the net
assets of the Group as set out below. Where applicable, VAT is
payable in addition.
Net assets of the Group Management fee percentage
---------------------------------------------- --------------------------
Up to and including GBP500 million 1.05
Above GBP500 million and up to and including
GBP750 million 0.95
Above GBP750 million and up to and including
GBP1 billion 0.85
Above GBP1 billion and up to and including
GBP1.5 billion 0.75
Above GBP1.5 billion 0.65
---------------------------------------------- --------------------------
The Investment Manager is entitled to an additional fee of
GBP141,000 per annum (plus VAT), increasing annually in line with
inflation, in relation to their appointment as Company Secretary
and Administrator to the Group.
The Investment Management Agreement can be terminated by either
party on 24 months' written notice. Should the Company terminate
the Investment Management Agreement earlier then compensation in
lieu of notice will be payable to the Investment Manager. The
Investment Management Agreement may be terminated immediately
without compensation if the Investment Manager: is in material
breach of the agreement; is guilty of negligence, wilful default or
fraud; is the subject of insolvency proceedings; or there occurs a
change of Key Managers to which the Board has not given its prior
consent.
3. Other expenses
Year ended Year ended
30 June 2023 30 June 2022
GBP'000 GBP'000
----------------------------------------- -------------- --------------
Total movement in credit loss allowance (4,991) 2,865
Bad debts written off 5,255 367
Credit loss allowance charge 264 3,232
----------------------------------------- -------------- --------------
Year ended Year ended
30 June 2023 30 June 2022
GBP'000 GBP'000
------------------------------------------- -------------- --------------
Valuation and other professional fees 1,131 1,143
Auditor's remuneration for:
- statutory audit of the Company 131 118
- statutory audit of the Company's
subsidiaries 221 230
- review of interim financial information 16 16
Other taxation compliance and advisory* 258 361
Public relations and marketing 229 327
Directors' fees 218 214
Secretarial and administration fees 208 177
Direct property costs 182 160
Printing, postage and website 95 111
Listing and Registrar fees 114 102
Other 243 204
Total other expenses 3,046 3,163
------------------------------------------- -------------- --------------
* The other taxation compliance and advisory fees were all paid
to parties other than the Company's Auditor.
4. Earnings per share and Net Asset Value per share
Earnings per share
Year ended 30 June Year ended 30 June
2023 2022
----------------------- ----------------------
Pence per Pence per
GBP'000 share GBP'000 share
-------------------------- --------- ------------ -------- ------------
Revenue earnings 36,264 5.85 29,459 4.92
Capital earnings (42,836) (6.91) 19,638 3.28
Total earnings (6,572) (1.06) 49,097 8.20
-------------------------- --------- ------------ -------- ------------
Average number of shares
in issue 620,237,346 599,093,808
-------------------------- --------- ------------ -------- ------------
There were no dilutive shares or potentially dilutive shares in
issue.
EPRA is an industry body which issues best practice reporting
guidelines for financial disclosures by public real estate
companies and the Group reports an EPRA NAV quarterly. EPRA has
issued best practice recommendations for the calculation of certain
figures which are included below. Other EPRA measures are included
in the section below entitled EPRA Performance Measures.
The EPRA earnings are arrived at by adjusting for the
revaluation movements on investment properties and other items of a
capital nature and represents the revenue earned by the Group.
The Group's specific adjusted EPRA earnings adjusts the EPRA
earnings for rental income arising from recognising guaranteed
rental review uplifts and for development interest received from
developers in relation to monies advanced under forward fund
agreements which, in the Group's IFRS financial statements, is
required to be offset against the book cost of the property under
development. The Board believes that the Group's specific adjusted
EPRA earnings represents the underlying performance measure
appropriate for the Group's business model as it illustrates the
underlying revenue stream and costs generated by the Group's
property portfolio.
The reconciliations are provided in the table below:
Year
Year ended ended
30 June 30 June
2023 2022
GBP'000 GBP'000
------------------------------------------------------ ----------- ---------
Earnings per IFRS Consolidated Statement of
Comprehensive Income (6,572) 49,097
Adjusted for gains on investment properties
realised (575) -
Adjusted for revaluations of investment properties 54,021 (5,553)
Adjusted for revaluations of properties held
for sale - 7
Adjusted for finance and transaction costs on
the interest rate cap and other capital items 698 (3,877)
------------------------------------------------------ ----------- ---------
EPRA earnings 47,572 39,674
Adjusted for rental income arising from recognising
guaranteed rent review uplifts (11,308) (10,215)
Adjusted for development interest under forward
fund agreements 952 783
Group specific adjusted EPRA earnings 37,216 30,242
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive
Income (1.06) 8.20
EPRA EPS 7.67 6.62
Group specific adjusted EPRA EPS 6.00 5.05
------------------------------------------------------ ----------- ---------
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 105.6 pence
(2022: 112.7 pence) is based on equity shareholders' funds of
GBP654,808,000 (2022: GBP698,767,000) and on 620,237,346 (2022:
620,237,346) ordinary shares, being the number of shares in issue
at the year-end.
The EPRA best practice recommendations include a set of EPRA NAV
metrics that are arrived at by adjusting the net asset value
calculated under International Financial Reporting Standards
('IFRS') to provide stakeholders with what EPRA believe to be the
most relevant information on the fair value of the assets and
liabilities of a real estate investment company, under different
scenarios. The three EPRA NAV metrics are:
-- EPRA Net Reinstatement Value ('NRV'): Assumes that entities
never sell assets and aims to represent the value required to
rebuild the entity. The objective is to highlight the value of net
assets on a long-term basis. Assets and liabilities that are not
expected to crystallise in normal circumstances, such as the fair
value movements on financial derivatives, are excluded and the
costs of recreating the Group through investment markets, such as
property acquisition costs and taxes, are included.
-- EPRA Net Tangible Assets ('NTA'): Assumes that entities buy
and sell assets, thereby crystallising certain levels of
unavoidable deferred tax. Given the Group's REIT status, it is not
expected that significant deferred tax will be applicable to the
Group.
-- EPRA Net Disposal Value ('NDV'): Represents the shareholders'
value under a disposal scenario, where deferred tax, financial
instruments and certain other adjustments are calculated to the
full extent of their liability, net of any resulting tax. At 30
June 2023, the Group held all its material balance sheet items at
fair value, or at a value considered to be a close approximation to
fair value, in its financial statements apart from its fixed-rate
debt facilities where the fair value is estimated to be lower than
the nominal value. See note 7 for further details on the Group's
loan facilities.
2023 2023 2023 2022 2022 2022
EPRA EPRA EPRA EPRA EPRA EPRA
NRV NTA NDV NRV NTA NDV
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ --------- --------- --------- --------- --------- ---------
IFRS NAV per financial
statements 654,808 654,808 654,808 698,767 698,767 698,767
Fair value of interest
rate derivatives (6,905) (6,905) - (2,284) (2,284) -
Fair value of loans - - 39,672 - - 22,257
Estimated purchasers'
costs 57,461 - - 60,225 - -
------------------------ --------- --------- --------- --------- --------- ---------
EPRA net assets 705,364 647,903 694,480 756,708 696,483 721,024
------------------------ --------- --------- --------- --------- --------- ---------
EPRA net assets (pence
per share) 113.7 104.5 112.0 122.0 112.3 116.2
------------------------ --------- --------- --------- --------- --------- ---------
5. Investment properties
Freehold and leasehold properties
As at As at
30 June 30 June 2022
2023
GBP'000 GBP'000
------------------------------------------------------ --------- --------------
Opening market value 911,596 677,525
Opening fixed or guaranteed rent reviews
and lease incentives (56,705) (47,919)
Opening performance payments 2,800 1,550
------------------------------------------------------ --------- --------------
Opening carrying value 857,691 631,156
------------------------------------------------------ --------- --------------
Disposals - proceeds (26,728) -
- gain on sale 6,088 -
Purchases and performance payments 23,494 199,869
Transfer from properties held for sale - 6,830
Acquisition costs capitalised 273 9,671
Acquisition costs written off (273) (9,671)
Unrealised gain realised during the year (5,513) -
Revaluation movement - gains 3,645 43,234
Revaluation movement - losses (43,877) (15,862)
------------------------------------------------------ --------- --------------
Movement in market value (42,891) 234,071
Fixed or guaranteed rent reviews and lease
incentives derecognised on disposal or re-tenanting 1,671 3,362
Movement in fixed or guaranteed rent reviews
and lease incentives (13,516) (12,148)
Movement in performance payments (2,800) 1,250
------------------------------------------------------ --------- --------------
Movement in carrying value (57,536) 226,535
------------------------------------------------------ --------- --------------
Closing market value 868,705 911,596
Closing fixed or guaranteed rent reviews
and lease incentives (68,550) (56,705)
Closing performance payments (see Note 10) - 2,800
------------------------------------------------------ --------- --------------
Closing carrying value 800,155 857,691
------------------------------------------------------ --------- --------------
Changes in the valuation of investment properties Year ended
30 June Year ended
2023 30 June 2022
GBP'000 GBP'000
--------------------------------------------------- ----------- --------------
Gain on sale of investment properties 6,088 -
Unrealised gain realised during the year (5,513) -
--------------------------------------------------- ----------- --------------
Gains on sale of investment properties realised 575 -
Revaluation movement (40,232) 27,372
Acquisition costs written off (273) (9,671)
Movement in lease incentives (2,208) (1,933)
Movement in fixed or guaranteed rent reviews (11,308) (10,215)
--------------------------------------------------- ----------- --------------
(Losses)/gains on revaluation of investment
properties (53,446) 5,553
--------------------------------------------------- ----------- --------------
The investment properties can be analysed as follows:
As at As at
30 June 30 June 2022
2023
GBP'000 GBP'000
-------------------------------------------- --------- --------------
Standing assets 851,305 892,336
Developments under forward fund agreements 17,400 19,260
-------------------------------------------- --------- --------------
Closing market value 868,705 911,596
-------------------------------------------- --------- --------------
The properties were valued at GBP868,705,000 (2022:
GBP911,596,000) by Colliers International Healthcare Property
Consultants Limited ('Colliers'), in their capacity as external
valuers. The valuation was undertaken in accordance with the RICS
Valuation - Global Standards, incorporating the International
Valuation Standards (the 'Red Book Global', 31 January 2022) issued
by the Royal Institution of Chartered Surveyors ('RICS') on the
basis of Market Value, supported by reference to market evidence of
transaction prices for similar properties. Colliers has recent
experience in the location and category of the investment
properties being valued.
Market Value represents the estimated amount for which an asset
or liability should exchange on the valuation date between a
willing buyer and a willing seller in an arm's length transaction,
after proper marketing where the parties had each acted
knowledgeably, prudently and without compulsion. The quarterly
property valuations are reviewed by the Board at each Board
meeting. The fair value of the properties after adjusting for the
movement in the fixed or guaranteed rent reviews and lease
incentives was GBP800,155,000 (2022: GBP857,691,000). The
adjustment consisted of GBP59,378,000 (2022: GBP48,802,000)
relating to fixed or guaranteed rent reviews and GBP9,172,000
(2022: GBP7,903,000) of accrued income relating to the recognition
of rental income over rent free periods subsequently amortised over
the life of the lease, which are both separately recorded in the
accounts as non-current or current assets within 'trade and other
receivables'. An adjustment is also made to reflect the amount by
which the portfolio value is expected to increase if the
performance payments recognised in 'trade and other payables' are
paid and the passing rent at the relevant property increased
accordingly (see Note 10). The total purchases in the year to 30
June 2023, excluding the performance payments recognised in the
prior year, were GBP20,694,000 (2022: GBP201,119,000).
6. Investment in subsidiary undertakings
The Group included 49 subsidiary companies as at 30 June 2023
(30 June 2022: 57). All subsidiary companies were wholly owned,
either directly or indirectly, by the Company and, from the date of
acquisition onwards, the principal activity of each company within
the Group was to act as an investment and property company. Other
than one subsidiary incorporated in Jersey, two subsidiaries
incorporated in Gibraltar and two subsidiaries incorporated in
Luxembourg, all subsidiaries are incorporated within the United
Kingdom.
The Group did not incorporate or acquire any new subsidiaries
during the year. At 30 June 2022, the Group included eight
companies which had been acquired as part of previous corporate
acquisitions and which, having remained dormant throughout the
prior year, were dissolved during the year ended 30 June 2023.
7. Loans
As at
30 June As at
2023 30 June 2022
GBP'000 GBP'000
------------------------------ --------- --------------
Principal amount outstanding 230,000 234,750
Set-up costs (4,520) (4,315)
Amortisation of set-up costs 1,571 948
------------------------------ --------- --------------
Total 227,051 231,383
------------------------------ --------- --------------
In November 2020, the Group entered into a GBP70,000,000
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 GBP50,000,000
of the facility and 2.33 per cent per annum on the remaining
GBP20,000,000 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 GBP20,000,000 of any undrawn element of the
facility, reducing to 1.05 per cent per annum thereafter. As at 30
June 2023, the Group had drawn GBP30,000,000 under this facility
(2022: GBP50,000,000).
In November 2020, the Group entered into a GBP100,000,000
revolving credit facility with HSBC Bank plc ('HSBC') which is
repayable in November 2025. Interest accrues on the bank loan at a
variable rate, based on SONIA plus margin and mandatory lending
costs, and is payable quarterly. The margin is 2.17 per cent per
annum for the duration of the loan and a non-utilisation fee of
0.92 per cent per annum is payable on any undrawn element of the
facility. As at 30 June 2023, the Group had drawn GBP50,000,000
under this facility (2022: GBP34,750,000).
In January 2020 and November 2021, the Group entered into
committed term loan facilities with Phoenix Group of GBP50,000,000
and GBP37,250,000, respectively. Both these facilities are
repayable on 12 January 2032. The Group has a further committed
term loan facility with Phoenix Group of GBP62,750,000 which is
repayable on 12 January 2037. Interest accrues on these three loans
at aggregate annual fixed rates of interest of 3.28 per cent, 3.13
per cent and 3.14 per cent, respectively and is payable quarterly.
As at 30 June 2023, the Group had drawn GBP150,000,000 under these
facilities (2022: GBP150,000,000).
The following interest rate derivatives were in place during the
year ended 30 June 2023:
Notional Interest Counter-party
Value Starting Ending Date Paid Interest Received
Date
----------- ----------- -------------- --------- -------------------- --------------
Daily compounded
SONIA (floor
5 November 5 November at
30,000,000 2020 2025 0.30% -0.08%) RBS
50,000,000 1 November 5 November nil Daily compounded HSBC
2022 2025 SONIA above
3.0% cap
----------- ----------- -------------- --------- -------------------- --------------
The Group paid a premium of GBP2,577,000, inclusive of
transaction costs of GBP169,000, on entry into the GBP50,000,000
interest rate cap.
At 30 June 2023, inclusive of the interest rate derivatives, the
interest rate on GBP230,000,000 of the Group's borrowings has been
capped, including the amortisation of loan arrangement costs, at an
all-in rate of 3.70 per cent per annum until at least 5 November
2025. The remaining GBP90,000,000 of debt, which was undrawn at 30
June 2023, would, if fully drawn, carry interest at a variable rate
equal to daily compounded SONIA plus a weighted average lending
margin, including the amortisation of loan arrangement costs, of
2.46 per cent per annum.
The aggregate fair value of the interest rate derivatives held
at 30 June 2023 was an asset of GBP6,905,000 (2022: GBP2,284,000).
The Group categorises all interest rate derivatives as level 2 in
the fair value hierarchy.
At 30 June 2023, the nominal value of the Group's loans equated
to GBP230,000,000 (2022: GBP234,750,000). Excluding the interest
rate derivatives referred to above, the fair value of these loans,
based on a discounted cashflow using the market rate on the
relevant treasury plus an estimated margin based on market
conditions at 30 June 2023, totalled, in aggregate, GBP190,328,000
(2022: GBP212,493,000). 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 GBP209,898,000 (2022:
GBP239,728,000). 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 GBP50,000,000 and GBP37,250,000 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 GBP62,750,000 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 GBP762,100,000 as at 30 June
2023 (2022: GBP795,949,000).
Under the covenants related to the loans, the Group is to ensure
that:
-- the loan to value percentage for each of THR1 Group and THR15
Group does not exceed 50 per cent;
-- the loan to value percentage for THR12 Group and THR43 does not exceed 60 per cent;
-- the interest cover for THR1 Group is greater than 225 per
cent (30 June 2022: 300 per cent) on any calculation date;
-- the interest cover for THR15 Group is greater than 200 per
cent (30 June 2022: 300 per cent) on any calculation date; and
-- the debt yield for each of THR12 Group and THR43 is greater
than 10 per cent on any calculation date.
During the year ended 30 June 2023, the Group entered into
agreements with HSBC and RBS to relax the interest cover covenants
on the relevant loans with effect from 1 January 2023. All other
significant terms of the facilities remained unchanged. All loan
covenants have been complied with during the year.
Analysis of net debt:
Cash Cash and
and cash cash equivalents
equivalents Borrowing Net debt Borrowing Net debt
2023 2023 2023 2022 2022 2022
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------- ------------- ------------ ----------- ------------------ ------------ -----------
Opening balance 34,483 (231,383) (196,900) 21,106 (127,904) (106,798)
Cash flows (19,117) 4,955 (14,162) 13,377 (102,911) (89,534)
Non-cash flows - (623) (623) - (568) (568)
----------------- ------------- ------------ ----------- ------------------ ------------ -----------
Closing balance 15,366 (227,051) (211,685) 34,483 (231,383) (196,900)
----------------- ------------- ------------ ----------- ------------------ ------------ -----------
8. Share capital
Allotted, called-up and fully paid ordinary
shares of GBP0.01 each Number of shares GBP'000
--------------------------------------------- ----------------- --------
Balance as at 30 June 2022 and 30 June
2023 620,237,346 6,202
--------------------------------------------- ----------------- --------
Under the Company's Articles of Association, the Company may
issue an unlimited number of ordinary shares. Ordinary shareholders
are entitled to all dividends declared by the Company and to all of
the Company's assets after repayment of its borrowings and ordinary
creditors. Ordinary shareholders have the right to vote at meetings
of the Company. All ordinary shares carry equal voting rights.
During the year to 30 June 2023, the Company did not issue any
ordinary shares (2022: issued 108,695,652 ordinary shares of
GBP0.01 each raising gross proceeds of GBP125,000,000). The Company
did not repurchase any ordinary shares into treasury (2022: nil) or
resell any ordinary shares from treasury (2022: nil). At 30 June
2023, the Company did not hold any shares in treasury (2022:
nil).
Capital management
The Group's capital is represented by the share capital, share
premium, merger reserve, distributable reserve, hedging reserve,
capital reserve, revenue reserve and long-term borrowings. The
Group is not subject to any externally-imposed capital
requirements, other than the financial covenants on its loan
facilities as detailed in note 7.
The capital of the Group is managed in accordance with its
investment policy, in pursuit of its investment objective.
Capital risk management
The objective of the Group is to provide ordinary shareholders
with an attractive level of income together with the potential for
income and capital growth from investing in a diversified portfolio
of freehold and long leasehold care homes that are let to care home
operators; and other healthcare assets in the UK.
The Board has responsibility for ensuring the Group's ability to
continue as a going concern. This involves the ability to borrow
monies in the short and long term; and pay dividends out of
reserves, all of which are considered and approved by the Board on
a regular basis.
To maintain or adjust the capital structure, the Company may
adjust the dividend payment to shareholders, return capital to
shareholders, issue new shares or buyback shares for cancellation
or for holding in treasury. The Company may also increase or
decrease its level of long-term borrowings.
Where ordinary shares are held in treasury these are available
to be sold to meet on-going market demand. The ordinary shares will
be sold only at a premium to the prevailing NAV per share. The net
proceeds of any subsequent sales of shares out of treasury will
provide the Company with additional capital to enable it to take
advantage of investment opportunities in the market and make
further investments in accordance with the Company's investment
policy and within its appraisal criteria. Holding shares in
treasury for this purpose assists the Company in matching its
on-going capital requirements to its investment opportunities and
therefore reduces the negative effect of holding excess cash on its
balance sheet over the longer term.
No changes were made in the objectives, policies or processes
during the year.
9. Financial instruments
Consistent with its objective, the Group holds UK care home
property investments. In addition, the Group's financial
instruments comprise cash, loans and receivables and payables that
arise directly from its operations. The Group's exposure to
derivative instruments consists of interest rate swaps and interest
rate caps used to fix the interest rate on the Group's variable
rate borrowings.
The Group is exposed to various types of risk that are
associated with financial instruments. The most important types are
credit risk, liquidity risk, interest rate risk and market price
risk. There is no foreign currency risk as all assets and
liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's
risk exposure. These policies are summarised below and have
remained unchanged for the year under review. These disclosures
include, where appropriate, consideration of the Group's investment
properties which, whilst not constituting financial instruments as
defined by IFRS, are considered by the Board to be integral to the
Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group. At the reporting date, the Group's financial assets
exposed to credit risk amounted to GBP23,517,000 (2022:
GBP38,996,000), consisting of cash of GBP15,366,000 (2022:
GBP34,483,000), cash held in escrow for property purchases of
GBP4,295,000 (2022: GBPnil), net rent receivable of GBP1,088,000
(2022: GBP906,000), VAT recoverable of GBP667,000 (2022:
GBP1,387,000), accrued development interest of GBP1,010,000 (2022:
GBP452,000) and other debtors of GBP1,091,000 (2022:
GBP1,768,000).
In the event of default by a tenant if it is in financial
difficulty or otherwise unable to meet its obligations under the
lease, the Group will suffer a rental shortfall and incur
additional expenses until the property is relet. These expenses
could include legal and surveyor's costs in reletting, maintenance
costs, insurances, rates and marketing costs and may have a
material adverse impact on the financial condition and performance
of the Group and/or the level of dividend cover. The Group may also
require to provide rental incentives to the incoming tenant. The
Board receives regular reports on concentrations of risk and any
tenants in arrears. The Investment Manager monitors such reports in
order to anticipate, and minimise the impact of, defaults by
occupational tenants. The expected credit risk in relation to
tenants is an inherent element of the due diligence considered by
the Investment Manager on all property transactions with an
emphasis being placed on ensuring that initial rents are set at a
sustainable level. The risk is further mitigated by rental deposits
or guarantees where considered appropriate. The majority of rental
income is received in advance.
As at 30 June 2023, the Group had recognised a credit loss
allowance totalling GBP1,972,000 against a gross rent receivable
balance of GBP2,496,000 and gross loans to tenants totalling
GBP989,000. As at 30 June 2022, the gross receivable was
GBP8,496,000, of which GBP1,280,000 was subsequently recovered,
GBP5,117,000 was written off and GBP2,099,000 is still outstanding.
There were no other financial assets which were either past due or
considered impaired at 30 June 2023 (2022: nil).
All of the Group's cash is placed with financial institutions
with a long-term credit rating of BBB or better. Bankruptcy or
insolvency of such financial institutions may cause the Group's
ability to access cash placed on deposit to be delayed, limited or
lost. Should the credit quality or the financial position of the
banks currently employed significantly deteriorate, cash holdings
would be moved to another bank.
Should the Group hold significant cash balances for an extended
period, then counterparty risk will be spread, by placing cash
across different financial institutions. At 30 June 2023 the Group
held GBP15.2 million (2022: GBP34.5 million) with The Royal Bank of
Scotland plc and GBP0.2 million (2022: GBPnil) with HSBC Bank plc.
Given the credit quality of the counterparties used, no credit loss
allowance is recognised against cash balances as it is considered
to be immaterial.
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The Group's investments comprise UK care
homes. Property and property-related assets in which the Group
invests are not traded in an organised public market and may be
illiquid. As a result, the Group may not be able to liquidate
quickly its investments in these properties at an amount close to
their fair value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an on-going basis by
the Investment Manager and monitored on a quarterly basis by the
Board. In order to mitigate liquidity risk the Group aims to have
sufficient cash balances (including the expected proceeds of any
property sales) to meet its obligations for a period of at least
twelve months.
Interest rate risk
Some of the Company's financial instruments are
interest-bearing. Interest-rate risk is the risk that future cash
flows will change adversely as a result of changes in market
interest rates.
The Group's policy is to hold cash in variable rate or
short-term fixed rate bank accounts. At 30 June 2022 interest was
being received on cash at a weighted average variable rate of nil
(2022: nil). Exposure varies throughout the period as a consequence
of changes in the composition of the net assets of the Group
arising out of the investment and risk management policies. These
balances expose the Group to cash flow interest rate risk as the
Group's income and operating cash flows will be affected by
movements in the market rate of interest.
The Group has GBP170,000,000 (2022: GBP170,000,000) of committed
term loans and revolving credit facilities which were charged
interest at a rate of SONIA plus the relevant margin. At the
year-end GBP80,000,000 of the variable rate facilities had been
drawn down (2022: GBP84,750,000). The fair value of the variable
rate borrowings is affected by changes in the market rate of the
lending margin that would apply to similar loans. The variable rate
borrowings are carried at amortised cost and the Group considers
this to be a close approximation to fair value at 30 June 2023 and
30 June 2022.
At 30 June 2023, the Group had fully hedged its exposure on the
GBP80,000,000 of drawn variable rate borrowings (2022:
GBP54,750,000 of the GBP84,750,000 of variable rate facilities was
unhedged). On any unhedged variable rate borrowings, interest is
payable at a variable rate equal to SONIA plus the weighted average
lending margin, including the amortisation of costs, of 2.46 per
cent per annum (2022: 2.43 per cent). The variable rate borrowings
expose the Group to cash flow interest rate risk as the Group's
income and operating cash flows will be affected by movements in
the market rate of interest.
The Group has fixed rate term loans totalling GBP150,000,000
(2022: GBP150,000,000) and has hedged its exposure to increases in
interest rates on GBP80,000,000 (2022: GBP30,000,000) of the
variable rate loans, as referred to above, through entering into a
GBP30,000,000 fixed rate interest rate swap and a GBP50,000,000
interest rate cap at 3.0%. Fixing the interest rate exposes the
Group to fair value interest rate risk as the fair value of the
fixed rate borrowings, or the fair value of the interest rate
derivative used to fix the interest rate on an otherwise variable
rate loan, will be affected by movements in the market rate of
interest. The GBP150,000,000 fixed rate term loans are carried at
amortised cost on the Group's balance sheet, with the estimated
fair value and cost of repayment being disclosed in Note 7, whereas
the fair value of the interest rate derivatives are recognised
directly on the Group's balance sheet. At 30 June 2023, an increase
of 0.25 per cent in interest rates would have increased the fair
value of the interest rate derivative assets and increased the
reported total comprehensive income for the year by GBP377,000
(2022: GBP211,000). The same movement in interest rates would have
decreased the fair value of the fixed rate term loans by an
aggregate of GBP2,169,000 (2022: GBP2,822,000); however, as the
fixed rate loan is held at amortised cost, the reported total
comprehensive income for the year would have remained unchanged. A
decrease in interest rates would have had an approximately equal
and opposite effect.
Market price risk
The management of market price risk is part of the investment
management process and is typical of a property investment company.
The portfolio is managed with an awareness of the effects of
adverse valuation movements through detailed and continuing
analysis, with an objective of maximising overall returns to
shareholders. Investments in property and property-related assets
are inherently difficult to value due to the individual nature of
each property. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting
from the valuation process will reflect the actual sales price even
where such sales occur shortly after the valuation date. Such risk
is minimised through the appointment of external property
valuers.
The external valuers are mindful of the potential impacts ESG
may have on capital and rental valuations. Currently in the UK, the
external valuers have not seen consistent prima facie evidence to
suggest that ESG has a direct impact on the valuation of all
commercial and residential buildings. However, as the UK real
estate market continues to adapt to ESG development practices and
legislative requirements, the valuers anticipate an evolution in
the analysis undertaken when providing real estate valuations. This
may potentially impact on the valuation of a property over the
course of a typical investment period.
10. Contingent assets and liabilities
As at 30 June 2023, six (2022: fourteen) properties within the
Group's investment property portfolio contained performance payment
clauses meaning that, subject to contracted performance conditions
being met, further capital payments totalling GBP5,720,000 (2022:
GBP13,320,000) may be payable by the Group to the vendors/tenants
of these properties. The potential timings of these payments are
also conditional on the date(s) at which the contracted performance
conditions are met and are therefore uncertain.
It is highlighted that any performance payments subsequently
paid will result in an increase in the rental income due from the
tenant of the relevant property. As the net initial yield used to
calculate the additional rental which would be payable is not
significantly different from the investment yield used to arrive at
the valuation of the properties, any performance payments made
would be expected to result in a commensurate increase in the value
of the Group's investment property portfolio.
Having assessed each clause on an individual basis, the Group
has determined that the contracted performance conditions had not
been met in relation to any of these properties and therefore at 30
June 2023 no liability was recognised (2022: GBP2,800,000). Had a
liability been recognised, an equal but opposite amount would have
been recognised as an asset in 'investment properties' in Note 5 to
reflect the increase in the investment property value that would be
expected to arise from the payment of the performance payment(s)
and the resulting increase in the contracted rental income. The
performance payments of GBP2,800,000 recognised as a liability at
30 June 2022 were paid during the year ended 30 June 2023 (see Note
5).
11. Capital commitments
The Group had capital commitments as follows:
30 June 30 June 2022
2023 GBP'000
GBP'000
--------------------------------------------------- --------- -------------
Amounts due to complete forward fund developments 31,066 34,458
Other capital expenditure commitments 2,160 3,594
--------------------------------------------------- --------- -------------
Total 33,226 38,052
--------------------------------------------------- --------- -------------
12. Related party transactions
The Board of Directors is considered to be a related party. No
Director has an interest in any transactions which are, or were,
unusual in their nature or significant to the nature of the Group.
The Directors of the Group received fees for their services. Total
fees for the year were GBP218,000 (2022: GBP214,000) of which
GBPnil (2022: GBPnil) remained payable at the year-end.
The Investment Manager received GBP7,428,000 (inclusive of
irrecoverable VAT) in management fees in relation to the year ended
30 June 2023 (2022: GBP7,307,000). Of this amount GBP1,835,000
(2022: GBP1,895,000) remained payable at the year-end. The
Investment Manager received a further GBP169,000 (inclusive of
irrecoverable VAT) during the year ended 30 June 2023 (2022:
GBP151,000) in relation to its appointment as Company Secretary and
Administrator, of which GBP42,000 (2022: GBP38,000) remained
payable at the year end. Certain employees of the Investment
Manager are directors of some of the Group's subsidiaries. Neither
they nor the Investment Manager receive any additional remuneration
in relation to fulfilling this role.
There were related party transactions within the Group and its
wholly-owned subsidiaries which are eliminated upon
consolidation.
13. Operating segments
The Board has considered the requirements of IFRS 8 'Operating
Segments'. The Board is of the view that the Group is engaged in a
single segment of business, being property investment, and in one
geographical area, the United Kingdom, and that therefore the Group
has only a single operating segment. The Board of Directors, as a
whole, has been identified as constituting the chief operating
decision maker of the Group. The key measure of performance used by
the Board to assess the Group's performance is the EPRA NTA. The
reconciliation between the NAV, as calculated under IFRS, and the
EPRA NTA is detailed in note 4.
The view that the Group is engaged in a single segment of
business is based on the following considerations:
- One of the key financial indicators received and reviewed by
the Board is the total return from the property portfolio taken as
a whole;
- There is no active allocation of resources to particular types
or groups of properties in order to try to match the asset
allocation of the benchmark; and
- The management of the portfolio is ultimately delegated to a single property manager, Target.
14. Post balance sheet events
Subsequent to the year end, the Group acquired a pre-let
development site subject to a forward funding agreement to
construct a 66-bed care home in Weston-super-Mare, Somerset for a
maximum commitment of GBP16.0 million including acquisition costs.
Construction on the home has commenced and is expected to be
completed in the summer of 2024.
15. Financial statements
This statement was approved by the Board on 9 October 2023. It
is not the Company's full statutory financial statements in terms
of Section 434 of the Companies Act 2006. The statutory annual
report and financial statements for the year ended 30 June 2023 has
been approved and audited and received an unqualified audit report
which did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying the
report. The statutory annual report and financial statements for
the year to 30 June 2023 will be posted to shareholders in October
2023 and will be available for inspection at Level 4, Dashwood
House, 69 Old Broad Street, London, EC2M 1QS, the registered office
of the Company.
The statutory annual report and financial statements will be
made available on the website www.targethealthcarereit.co.uk .
Copies may also be obtained from Target Fund Managers Limited,
Glendevon House, Castle Business Park, Stirling FK9 4TZ.
The audited financial statements for the year to 30 June 2023
will be lodged with the Registrar of Companies following the Annual
General Meeting to be held on 29 November 2023.
Alternative Performance Measures
The Company uses Alternative Performance Measures ('APMs'). APMs
do not have a standard meaning prescribed by GAAP and therefore may
not be comparable to similar measures presented by other entities.
The definitions of all APMs used by the Company are highlighted in
the glossary contained in the Annual Report, with detailed
calculations, including reconciliation to the IFRS figures where
appropriate, being set out below and within the EPRA Performance
Measures which follow.
Discount or Premium - the share price of an Investment Company
is derived from buyers and sellers trading their shares on the
stock market. This price is not identical to the NAV. If the share
price is lower than the NAV per share, the shares are trading at a
discount and, if the share price is higher than the NAV per share,
are said to be at a premium. The figure is calculated at a point in
time and, unless stated otherwise, the Company measures its
discount or premium relative to the EPRA NTA per share.
2023 2022
pence pence
------------------------------------ ----------- -------- -------
EPRA Net Tangible Assets per share
(see note 4) (a) 104.5 112.3
Share price (b) 71.8 108.4
------------------------------------ ----------- -------- -------
(Discount)/premium = (b-a)/a (31.3)% (3.5)%
------------------------------------ ----------- -------- -------
Dividend Cover - the percentage by which Group specific adjusted
EPRA earnings for the year cover the dividend paid.
2023 2022
GBP'000 GBP'000
-------------------------------------- --------- --------- ---------
Group-specific EPRA earnings for the
year (see note 4) (a) 37,216 30,242
First interim dividend 10,482 10,482
Second interim dividend 10,482 10,482
Third interim dividend 8,683 10,482
Fourth interim dividend 8,683 10,482
------------------------------------------------- --------- ---------
Dividends paid in relation to the
year (b) 38,330 41,928
Dividend cover = (a/b) 97% 72%
-------------------------------------- --------- --------- ---------
Ongoing Charges - a measure of all operating costs incurred in
the reporting period, calculated as a percentage of average net
assets in that year. Operating costs exclude costs of buying and
selling investments, interest costs, taxation, non-recurring costs
and the costs of buying back or issuing ordinary shares.
2023 2022
GBP'000 GBP'000
------------------------------------------- --------- --------- ---------
Investment management fee 7,428 7,307
Other expenses 3,046 3,163
Less direct property costs and other
non-recurring items (292) (347)
Adjustment to management fee arrangements
and irrecoverable VAT* (35) 312
------------------------------------------------------ --------- ---------
Total (a) 10,147 10,435
------------------------------------------- --------- --------- ---------
Average net assets (b) 661,231 693,292
Ongoing charges = (a/b) 1.53% 1.51%
------------------------------------------- --------- --------- ---------
* Based on the Group's net asset value at 30 June 2023, the
management fee is expected to be paid at a weighted average rate of
1.03% (2022: 1.02%) of the Group's average net assets plus an
effective irrecoverable VAT rate of approximately 9% (2022: 7%).
The management fee has therefore been amended so that the Ongoing
Charges figure includes the expected all-in management fee rate of
1.12% (2022: 1.10%).
Total Return - the return to shareholders calculated on a per
share basis by adding dividends paid in the period to the increase
or decrease in the Share Price or NAV. The dividends are assumed to
have been reinvested in the form of Ordinary Shares or Net
Assets.
2023 2022
------------------------ --------- ------------------------------- -------------------------------
EPRA IFRS Share EPRA IFRS Share
NTA NAV price NTA NAV price
(pence) (pence) (pence) (pence) (pence) (pence)
------------------------ --------- --------- --------- --------- --------- --------- ---------
Value at start of year (a) 112.3 112.7 108.4 110.4 110.5 115.4
Value at end of year (b) 104.5 105.6 71.8 112.3 112.7 108.4
------------------------ --------- --------- --------- --------- --------- --------- ---------
Change in value during
year (b-a) (c) (7.8) (7.1) (36.6) 1.9 2.2 (7.0)
Dividends paid (d) 6.2 6.2 6.2 6.8 6.8 6.8
Additional impact of
dividend reinvestment (e) 0.3 0.4 - 0.3 0.3 (0.2)
------------------------ --------- --------- --------- --------- --------- --------- ---------
Total (loss)/gain in
year (c+d+e) (f) (1.3) (0.5) (30.4) 9.0 9.3 (0.4)
------------------------ --------- --------- --------- --------- --------- --------- ---------
Total return for the
year = (f/a) (1.2)% (0.5)% (28.1)% 8.1% 8.4% (0.3)%
------------------------ --------- --------- --------- --------- --------- --------- ---------
EPRA Performance Measures
The European Public Real Estate Association is the industry body
representing listed companies in the real estate sector. EPRA
publishes Best Practice Recommendations ('BPR') to establish
consistent reporting by European property companies. Further
information on the EPRA BPR can be found at www.epra.com .
The figures below are calculated and presented in line with the
BPR Guidelines published by EPRA in February 2022.
2023 2022
---------------------------------------------------- -------- --------
EPRA Net Reinstatement Value (GBP'000) 705,364 756,708
EPRA Net Tangible Assets (GBP'000) 647,903 696,483
EPRA Net Disposal Value (GBP'000) 694,480 721,024
EPRA Net Reinstatement Value per share (pence) 113.7 122.0
EPRA Net Tangible Assets per share (pence) 104.5 112.3
EPRA Net Disposal Value per share (pence) 112.0 116.2
EPRA Earnings (GBP'000) 47,572 39,674
Group specific adjusted EPRA earnings (GBP'000) 37,216 30,242
EPRA Earnings per share (pence) 7.67 6.62
Group specific adjusted EPRA earnings per share
(pence) 6.00 5.05
EPRA Net Initial Yield 6.05% 5.38%
EPRA Topped-up Net Initial Yield 6.22% 5.82%
EPRA Vacancy Rate - -
EPRA Cost Ratio - including direct vacancy
costs 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (including
direct vacancy costs) 18.7% 27.1%
EPRA Cost Ratio - excluding direct vacancy
costs 15.8% 21.5%
EPRA Group specific adjusted Cost Ratio (excluding
direct vacancy costs) 18.7% 27.1%
EPRA Loan-to-Value 25.8% 24.0%
Capital Expenditure (GBP'000) 23,767 209,540
Like-for-like Rental Growth 3.8% 4.6%
---------------------------------------------------- -------- --------
EPRA NAV metrics and EPRA Earnings
Full details of these calculations, including reconciliations of
each to the IFRS measures, are detailed in note 4 to the extract
from the Consolidated Financial Statements.
EPRA Net Initial Yield and EPRA Topped-up Net Initial Yield
EPRA Net Initial Yield is calculated as annualised rental income
based on the cash rents passing at the balance sheet date, less
non-recoverable property operating expenses, divided by the market
value of the property, increased with (estimated) purchasers'
costs. The EPRA Topped-up Net Initial Yield incorporates an
adjustment in respect of the expiration of rent-free periods (or
other unexpired lease incentives).
30 June 30 June
2023 2022
GBP'000 GBP'000
------------------------------------------- --------- --------- ---------
Annualised passing rental income based
on cash rents (a) 55,003 51,217
Notional rent expiration of rent-free
periods or other lease incentives 1,554 4,259
------------------------------------------------------ --------- ---------
Topped-up net annualised rent (b) 56,557 55,476
------------------------------------------- --------- --------- ---------
Standing assets (see note 5) 851,305 892,336
Allowance for estimated purchasers' costs 57,461 60,225
------------------------------------------------------ --------- ---------
Grossed-up completed property portfolio
valuation (c) 908,766 952,561
------------------------------------------- --------- --------- ---------
EPRA Net Initial Yield = (a/c) 6.05% 5.38%
EPRA Topped-up Net Initial Yield = (b/c) 6.22% 5.82%
------------------------------------------- --------- --------- ---------
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant
space (excluding forward fund developments) divided by the
contractual rent of the investment property portfolio, expressed as
a percentage.
30 June 30 June
2023 2022
GBP'000 GBP'000
------------------------------------------- --------- --------- ---------
Annualised potential rental value of (a) - -
vacant premises*
Annualised potential rental value of
the property portfolio (including vacant
properties) (b) 56,557 55,476
------------------------------------------- --------- --------- ---------
EPRA Vacancy Rate = (a/b) - -
------------------------------------------- --------- --------- ---------
* There were no unoccupied properties at either 30 June 2022 or
30 June 2023.
EPRA Cost Ratio
The EPRA cost ratios are produced using EPRA methodology, which
aims to provide a consistent base-line from which companies can
provide additional information, and include all property expenses
and management fees. Consistent with the Group specific adjusted
EPRA earnings detailed in note 4 to the extract from the
Consolidated Financial Statements, similar adjustments have been
made to also present the adjusted Cost Ratio which is thought more
appropriate for the Group's business model.
Year ended Year ended
30 June 30 June 2022
2023 GBP'000
GBP'000
-------------------------------------------- --------------- ----------- --------------
Investment management fee 7,428 7,307
Credit loss allowance and bad debts 264 3,232
Other expenses 3,046 3,163
------------------------------------------------------------- ----------- --------------
EPRA costs (including direct vacancy
costs) (a) 10,738 13,702
Specific cost adjustments, if applicable - -
-------------------------------------------- --------------- ----------- --------------
Group specific adjusted EPRA costs
(including direct vacancy costs) (b) 10,738 13,702
-------------------------------------------- --------------- ----------- --------------
Direct vacancy costs (c) - -
-------------------------------------------- --------------- ----------- --------------
Gross rental income per IFRS (d) 67,748 63,859
Adjusted for rental income arising
from recognising guaranteed rent
review uplifts and lease incentives (11,308) (10,215)
Adjusted for surrender premiums recognised
in capital - (3,877)
Adjusted for development interest
under forward fund arrangements 952 783
Group specific adjusted gross rental
income (e) 57,392 50,550
EPRA Cost Ratio (including direct
vacancy costs) = (a/d) 15.8% 21.5%
EPRA Group specific adjusted Cost
Ratio (including direct vacancy costs) = (b/e) 18.7% 27.1%
EPRA Cost Ratio (excluding direct
vacancy costs) = ((a-c)/d) 15.8% 21.5%
EPRA Group specific adjusted Cost
Ratio (excluding direct vacancy costs) = ((b-c)/e) 18.7% 27.1%
-------------------------------------------- --------------- ----------- --------------
EPRA Loan-to-Value
As at As at
30 June 30 June 2022
2023 GBP'000
GBP'000
--------------------------------------- --------- --------- --------------
Borrowings 230,000 234,750
Net payables 9,117 18,213
Cash and cash equivalent (15,366) (34,483)
-------------------------------------------------- --------- --------------
Net debt (a) 223,751 218,480
--------------------------------------- --------- --------- --------------
Investment properties at market value 868,705 911,596
Total property value (b) 868,705 911,596
--------------------------------------- --------- --------- --------------
EPRA Loan-to-Value = (a/b) 25.8% 24.0%
--------------------------------------- --------- --------- --------------
EPRA Capital Expenditure
Year ended Year ended
30 June 30 June 2022
2023 GBP'000
GBP'000
--------------------------------------- ----------- --------------
Acquisitions (including acquisition
costs) 234 178,830
Forward fund developments 17,385 28,851
Like-for-like portfolio 6,148 1,859
---------------------------------------- ----------- --------------
Total capital expenditure 23,767 209,540
Conversion from accrual to cash basis 5,575 (2,547)
---------------------------------------- ----------- --------------
Total capital expenditure on a cash
basis 29,342 206,993
---------------------------------------- ----------- --------------
Like-for-like Rental Growth
Year ended Year ended
30 June 30 June 2022
2023 GBP'000
GBP'000
------------------------------- --------- ----------- --------------
Opening contractual rent (a) 55,476 41,213
------------------------------- --------- ----------- --------------
Rent reviews 2,080 1,581
Re-tenanting of properties 39 312
------------------------------------------ ----------- --------------
Like-for-like rental growth (b) 2,119 1,893
Acquisitions and developments 1,019 12,370
Disposals (2,057) -
------------------------------- --------- ----------- --------------
Total movement (c) 1,081 14,263
Closing contractual rent = (a+c) 56,557 55,476
------------------------------- --------- ----------- --------------
Like-for-like rental growth = (b/a) 3.8% 4.6%
------------------------------- --------- ----------- --------------
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END
FR UKVAROKURRUA
(END) Dow Jones Newswires
October 10, 2023 02:00 ET (06:00 GMT)
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