To: RNS
From: Target Healthcare REIT plc
LEI: 213800RXPY9WULUSBC04
Date: 12 October 2022
ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2022
Modern portfolio of scale with diversified tenant base and inflation-linked rental growth
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 results for the year ended 30 June 2022.
Benefit of inflation-linked leases, combined with asset management and yield compression driving high single digit returns
· NAV total return(1) of 8.1% (2021: 8.8%), with valuation uplifts reflecting inflation-linked leases
· EPRA NTA per share increased 1.7% to 112.3 pence (2021: 110.4 pence)
· Group specific adjusted EPRA earnings per share decreased 7.5% to 5.05 pence per share (2021: 5.46 pence), partially reflecting the time lag between the oversubscribed £125 million equity issuance in September 2021 and the investment of the proceeds in December 2021
· Dividend increased by 0.6% to 6.76 pence in respect of the year (2021: 6.72 pence)
· Dividends in respect of the period 72% covered by adjusted EPRA earnings, 95% covered based on EPRA earnings
· Low net loan-to-value ("LTV") of 22.0% as at 30 June 2022, with an average cost of drawn debt (interest-only) of 3.1% and average term to maturity of 6.9 years. £180 million of fixed rate debt, being 77% of total drawn debt at 30 June 2022.
Focus on diversification, and real estate and tenant quality, underpins like-for-like rental and valuation growth
· Resilient portfolio performance, with 95% of rent collected
· Portfolio value increased by £226.8 million, or 33%, to £911.6 million, including like-for-like valuation growth of 4.2% (2021: 3.8%)
· Contractual rent increased by 35% to £55.5 million per annum (2021: £41.2 million), including a like-for-like increase of 4.6% from rent reviews and asset management initiatives
· Acquisition commitments during the year totalling £223 million, taking the portfolio to 101 properties, consisting of 97 operational care homes and four pre-let sites
· Resident occupancy levels across the mature portfolio continue to recover from Q1 2021 low point, with mature homes spot occupancy currently at 83%
· Weighted average unexpired lease term of 27.2 years (2021: 28.8 years)
Responsible investment strategy with a clear purpose to improve the UK's care home real estate
· Compelling long-term demand from ageing population supports 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 96% of the portfolio compared to just 29% for all UK care homes
o 92% of the portfolio A or B EPC rated
o Sector-leading average 47m2 of space per resident
(1) Based on EPRA NTA movement and dividends paid
Malcolm Naish, Chairman of the Company, said:
"Amidst the current market uncertainty and economic headwinds, we continue to focus on the favourable long-term prospects for our portfolio. We have been delighted to grow through the addition of a significant value of assets during the year, with inclusion in the FTSE 250 testament to valued shareholder support and the stable total returns from our well-diversified portfolio.
"Our portfolio remains well-placed, resident occupancies are improving, and home environments are returning to "normal" trading and activity conditions. Our rent collection for the year was 95%, inclusive of successful arrears recovery post year-end, and our immediate focus is on moving as quickly as possible towards full rent collection, for which initiatives are in progress and remain under our control. We expect our ESG-compliant modern assets to provide sustainable long-term returns, and in volatile times such as these we are thankful to have remained prudent in the rents we have set, capital prices paid and in our borrowing levels and terms.
"The Board remains confident in the Group's prospects and I would personally like to thank shareholders for their support. We collectively are making a positive social impact through our committed backing of the care sector."
A webcast presentation for investors and analysts will take place at 9am BST this morning, which can be accessed at: https://stream.brrmedia.co.uk/broadcast/6324a53956f8df42425ec404
All enquiries:
| Kenneth MacKenzie / Gordon Bland Target Fund Managers
Mark Young / Mark Bloomfield Stifel Nicolaus Europe Limited
| 01786 845 912
020 7710 7600 | |
| Dido Laurimore / Richard Gotla FTI Consulting | 020 3727 1000 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 2022 comprised 101 assets let to 34 tenants with a total value of £911.6 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
1. Reflections
Despite the persistent COVID-19 impact faced by UK care homes this past year, our portfolio remains well-placed. Resident occupancies are improving (mature home occupancy now at 83% from 73% at its lowest point in early 2021) and home environments are returning to "normal" trading and activity conditions. The quality of our real estate, and the level of demand for it in the UK care home investment market, has driven a healthy and consistent accounting total return of 8.1%, with valuation increases reflecting our inflation-linked leases and positive sentiment as to future trading conditions.
Our rent collection for the year was 95%, inclusive of successful arrears recovery post year-end. We have collected 95% of rent since the start of the COVID-19 pandemic in March 2020. We remain confident our portfolio will deliver sustainable value over the long-term.
The start of the year brought shareholder support for our capital raise to fund the acquisition of a portfolio of 18 homes. We were delighted to secure this in what was a competitive bidding process, with the mature trading histories complementing our many newer homes. Following the disposal of one non-core asset post-year-end, the integration of the portfolio is complete with performance in line with expectations on acquisition and we look forward to many years of stable income returns.
Late 2021 optimism was tempered early in 2022 with the emergence of the COVID-19 Omicron variant. This slowed trading recovery across the portfolio as the frequency of embargoes on admissions increased once more. A small number of tenants most exposed to newly opened/ immature homes were significantly impacted. We have resolved an arrears position with one tenant who represented 6.8% of contracted rent and have initiatives in progress on the remaining affected assets, giving visibility on rent collection improving towards pre-pandemic norms.
2. Outlook
Other headwinds have emerged in 2022 which are potentially more long-lasting and impactful, though we feel our business model and strategy provides insulation. Matters of concern include: energy and food source supplies; inflation; monetary policy tightening by Central Banks and fast-rising interest rates; the cost of living crisis, and general fears of a significant economic downturn/recession. The repricing of financial assets is likely to arise with commercial real estate tipped by many to bear the brunt, as reflected in the sector's recent share price movements.
However, our investment class benefits from tailwinds. Underlying demand for residential care places is supported by demographic change, evidenced by projected growth in the number of over 85s, and investment demand for modern, ESG-compliant care home real estate remains strong.
The Group has some protection from higher interest rates, having fixed rates on £180 million of its borrowings prior to recent market increases. On inflation, our portfolio bias towards private pay provides comfort that our tenants are more likely to be able to reflect their cost increases in resident fees, supporting sustainable trading.
3. Performance
Our total return performance over the year has been robust, with EPRA NTA* growth of 1.7% (112.3 pence from 110.4 pence) underpinned by a portfolio which has performed resiliently.
The Manager comments in more detail on rent cover and occupancy in the Investment Manager's Report below, with these key metrics trending positively as trading in the homes improves further following the Omicron impacts earlier in 2022.
Growth in the portfolio's valuation has largely been driven by rental uplifts, with some additional yield tightening from strength of demand, providing an overall like-for-like increase of 4.2%. Contracted rent has increased by 35% to £55.5 million, including 4.6% on a like-for-like basis.
Under the widely-used EPRA earnings metric the dividend was 95% covered, though we focus on an adjusted EPRA earnings per share result of 5.05 pence. Adjusted EPRA earnings increased by 16% to £30.2 million, translating to 72% cover.
4. Investment market and care home trading
There remains a weight of capital investing in the ESG-compliant, modern homes which are our staple. Demand and activity has not yet dampened in response to either the wider macro-environment or the sector's trading difficulties through "late-COVID". We note valuations starting to soften in other commercial real estate sectors and would be surprised were ours to be immune. However, high volatility is not something inherent in the asset class and we would note the performance of premium quality homes relative to the yield expansion in poorer quality homes following the 2007-08 global financial crisis.
The sector's challenges this past year are well-documented, and the Manager discusses these in more detail below. We are pleased to see the sustained rise in occupancy levels in our homes. Whilst homes with a focus on publicly funded residents have outperformed those focusing on the private market through much of the pandemic, this has recently reversed and the majority of our tenants report a positive outlook.
5. Governance
Board Succession
The succession plan detailed in last year's report is drawing to a successful conclusion. We were pleased to welcome Dr Amanda Thompsell to the Board on 1 February 2022 and, subsequent to the year end, Richard Cotton has also been appointed. The appointment of Michael Brodtman, expected early in the next calendar year, will complete the planned changes to the Board.
Having previously announced my intention to retire following the conclusion of the forthcoming AGM, along with Gordon Coull, this will be my last statement to shareholders. However, in handing over the chair to Alison Fyfe, ably supported by an experienced and skilled Board, I know I am leaving the Company in good hands.
Annual General Meeting ('AGM')
The AGM will be held on 6 December 2022. 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
Our immediate focus is on moving as quickly as possible towards full rent collection, for which initiatives are in progress and remain under our control. We have a solid track record of achieving change in the portfolio when required.
We continually review our investment policy and business model and believe both to be sound. We expect our ESG-compliant modern assets to provide sustainable long-term returns, and in volatile times such as these we are thankful to have remained prudent in the rents we have set, capital prices paid and in our borrowing levels and terms.
Our portfolio consists of premium quality assets in a non-cyclical investment class where underlying trading is improving as COVID-19 recedes.
The interest rate environment has a significant impact on our path to full dividend cover. Drawing available debt to fund portfolio growth is not currently accretive to earnings, having a negative impact to cover of c.10% relative to what our planning showed a few short weeks ago. We have a stable platform providing a clear path to cover exceeding 90% and will closely watch interest rates with a view to acting quickly on our borrowings should market conditions improve.
Given the current environment, we believe it is prudent to maintain our dividend level, though will be mindful of any further adverse impact that the many matters outwith our control may have.
The Board remains confident in the Group's prospects and I would personally like to thank shareholders for their support. We collectively are making a positive social impact through our committed backing of the care sector.
Malcolm Naish, Chairman
11 October 2022
Investment Manager's Report
Portfolio performance and UK care home investment market
The portfolio has outperformed the MSCI UK Annual Healthcare Property Index once again, in respect of the calendar year to 31 December 2021, with a portfolio total return of 10.5% relative to the Index's 9.6%. The portfolio's annualised total return since launch now stands at 11.1% while the portfolio's last five-year period has an annualised total return of 10.5% relative to 8.9% for the Index.
Rent collection for the year was 95%, and has measured 95% since March 2020 as the COVID-19 pandemic emerged. Our portfolio has shown robust performance in the face of the depressed occupancies and other trading challenges our tenants have encountered. We have seen some underperforming assets, typically reflecting our exposure to recently opened or new-build homes and growing tenants with a number of new homes. Start-up losses during the pandemic have run beyond the ordinary "fill-up" period when a home is building occupancy and moving to mature trading, straining financial reserves at our tenants. We reaffirm our commitment to supporting the sector's modernisation and will continue to hold a proportion of such assets in the portfolio recognising their investment case to provide long-term sustainable value.
Modern and ESG-compliant UK care homes as an investment asset class have continued to provide attractive returns with low volatility. The risk premia relative to other "safe" asset classes, GP surgery funds whose rents are effectively 100% government backed, and the 15-year gilt rate, have remained steady until recent months where the "risk-free" gilt rate has increased sharply. We have not yet observed valuation/yield softening in the section of the care home real estate market in which we invest and note the more significant yield impact on poorer quality care home real estate following the 2007-08 global financial crisis. The tailwind of stronger demand for modern stock may moderate any valuation response for our portfolio. This would be consistent with the low volatility in returns from the asset class experienced historically.
The portfolio's EPRA topped-up Net Initial Yield ('NIY') has been stable, at 5.82% compared with 5.83% at the start of the year, which reflects well the trends in market activity and pricing we have seen and are seeing.
Following a subdued 2020 and early 2021, market activity accelerated once more with a weight of capital and a number of participants eager to invest in high quality care home real estate. Participation from the larger European healthcare investors continues, as they seek higher yields than their home markets can offer, and their pursuit of the fit-for-purpose home types we have been advocating has accelerated as they complement their existing older portfolios.
H1 22 saw equity raises from UK and European healthcare funds, with proceeds being allocated to investment in care homes, primarily in the premium part of the sector in which we invest. Significant capital has also been made available to private funds which invest in the same. We welcome the demand and interest in the sector though would note we have declined to participate in a number of acquisition processes recently where we have not been willing to accept rental levels offered by vendors.
We are seeing a number of development opportunities coming to the market with enhanced environmental credentials such as BREEAM "Excellent" ratings. It is pleasing that the design aspects we have long advocated are now generally accepted in new homes, and developers and designers are now taking this to the next level of excellence. We expect such opportunities to command premium pricing and, as always, we will carefully assess the sustainability of rental levels in their local markets in our considerations.
We comment on some of the "hot topic" issues facing the sector below. An additional trend which could have a real impact in a short timescale is the potential for regulatory/legislative change in relation to environmental and social standards in respect of care home real estate which currently falls short. The most relevant current example is the authorities in Wales considering mandating Net-Zero/ low-carbon standards for real estate where residents receive public care funding. Our immediate impact will be on ensuring any new build homes we acquire will meet these, or anticipated future, requirements as our typical home already does. However, the wider challenge for the sector and other investors will be on the many (71%) not fit-for-purpose homes which are being used to deliver care to the majority of residents in the UK.
Health & social care update
We note below a number of areas which are prominent in our minds and those of our tenants:
Path to occupancy recovery
Occupancy levels in our homes are showing a steady and consistent improvement following the decline from the widespread embargoes during H1 22 due to the Omicron variant and its rate of spread. COVID-19 is now seen as a frustration in homes, rather than the trauma it has been.
Helping occupancy:
· Visiting is "friendlier", with mask and testing requirements relaxed
· Latent demand exists from delayed admissions (300k potential residents awaiting social worker assessment)
· Vaccinations protecting residents, and boosters expected to become an annual/seasonal ritual
· Homes have improved their online presence as more decisions are made using this medium
· Embargoes, if arising, are sensibly restricted to floors/wings
Public funding of care
Consistency and clarity is still awaited, which is frustrating for operators. The National Insurance increase to direct funds to health and social care, swallowed largely by the NHS, has since been reversed.
Policies designed to remove the "lottery of care funding" are in some doubt also. The "Care cap" is a long awaited and complex plan to track an individual's care costs across their lifetime, capping when required to protect from the "catastrophic costs" described in the 2010/11 Dilnot Report. The testing and assessment of Local Authority 'Pilot' areas has already been pushed back, with the reasonable conclusion being that introduction of the policy, if adopted, would also be delayed.
The adequacy of both manpower to administer the policy, and the funding requirement, have been raised as concerns, resulting in some legitimately founded anticipation that the whole policy may find "the long grass" as the Government prioritises other workstreams.
Staffing pressures
Following admissions, staffing remains perhaps the biggest day-today headache, though solutions are being found. With access to EU staff restricted, many operators are taking advantage of Government Sponsorship Licences to bring nursing and senior care staff from countries such as the Philippines and India, where language and training are reasonably aligned with the UK.
We have seen some encouraging internal solutions from our tenants also, with more investment in training and development, as well as recognition through enhanced policies which reward loyalty and contribution. Ensuring adequate staffing allows operators to grow occupancy.
Inflationary pressures
"Household costs" have been a relatively small part of the typical care home's expenditure, with staffing consuming the lion's share of turnover, however inflation will erode margins unless fees can keep pace. With recent reports of 10-20% rises in private fees to reflect staff / household inflationary pressures there is some indication that for our care homes this will be achievable, although public funding is potentially less likely to keep pace with this than private feepayers are. Feedback from tenants suggests that an excess in energy cost inflation would be passed onto residents through private fee increases.
Target Fund Managers Limited
11 October 2022
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
To grow a robust 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.
Significant portfolio growth
The Group's portfolio has historically been assembled in small increments, both by necessity, due to the relatively low number of assets which meet our investment quality criteria, and deliberately, as we have maintained a bias towards smaller, regional operators. In the current year a portfolio of homes was marketed by an institutional investor whose vehicle was at the end of its life. The Manager was familiar with those assets, having advised that vehicle on acquisition and management of many of the homes. The Group was ultimately successful in the acquisition of a diversified portfolio of 18 modern homes for c.£160 million, including costs, in December 2021 (a number of weeks later than hoped due to COVID-19 accessibility restrictions) and support from shareholders was secured via new equity issuance. Overall, £223 million (including costs) has been committed to 24 new assets during the year, growing the portfolio to 101, comprising 97 operational care homes and four development sites.
Three existing development sites reached practical completion, adding 206 brand new beds to their local markets and bringing total new homes supported by the Group's development commitments to 11 (749 beds), with four currently under construction which will provide a further 269 new beds.
| Valuation Growth Analysis | £'m |
| Valuation at 30 June 2021 | 684.8 |
| Acquisitions and developments | 199.4 |
| Rent reviews and yield shifts | 27.4 |
| Valuation at 30 June 2022 | 911.6 |
Investment discipline maintained
In addition to the physical real estate, our investment appraisals remain focussed on (i) the local market and trading prospects for a home and (ii) sustainable rental levels for a home in that context. This approach has not changed and will continue to guide our assessment of long-term value during the competitive conditions we currently see. Key metrics for acquisitions completed during the year were consistent with portfolio metrics at the start of the year, see table below.
| EPRA topped-up NIY at 30 June 2021 | 5.83% |
| Blended NIY on acquisitions during the year | 5.64% |
| EPRA topped-up NIY at 30 June 2022 | 5.82% |
Portfolio Differentiators
We know the standard of UK care home real estate. The KPIs below benchmark well against peer group portfolios and provide assurance as to long-term sustainable returns.
| Ensuite WC rooms | 100% |
| Ensuite wet-rooms with shower | 96% |
| Purpose-Built 2010s+ | 79% |
| Purpose-Built 00's | 18% |
| Purpose-Built 90's | 3% |
| Purpose-Built pre-90's | 0% |
| Converted property | 0% |
| Average sqm per bedroom | 47 |
|
EPC B or better |
92% |
| EPC C | 8% |
| EPC D or worse | 0% |
| Average value per bed | £132k |
| Value per built sqm | £2,871 |
| Average rent per bed per annum | £8.3k |
| Rent per built sqm | £175 |
The continued tightening of NIYs, relative to the increase in gilt yields (the traditional "risk-free" benchmark), of course may be suggestive that the top of the market may have been reached for this cycle. Whilst the weight of capital coveting fit-for-purpose assets counters that, the drop in spread/ yield gap between rental yields and cost of funding goes some way to discouraging new investment from us at this time.
The Manager's ESG House Standard was developed and adopted during the year, and will be used as a tool to ensure compliant assets are added to the portfolio.
Diversification
We continue to diversify the portfolio, most importantly increasing the number of tenants and mitigating risk from over-concentration on a small number of tenant groups. The Group now has 34 tenants, having grown from 28, and will increase to 36 following practical completion of the Group's development assets.
The largest tenant is unchanged from 2021, being Ideal Carehomes who operate 18 of the Group's homes and account for 15.7% of contractual rent as at 30 June 2022.
Underlying resident fees are balanced between private and public sources, with a deliberate bias towards the former. Census data from our tenants shows private sources contribute to 67% of fee revenue, with 49% being fully private and 18% from "top-up" payments where residents pay over and above that which the Local Authority funds for them. 33% of residents are wholly publicly funded.
Geographically, Yorkshire & the Humber remains the largest region by asset value, at 24%.
Strategic pillar #2
Sector specialist portfolio management that values relationships
The Investment Manager has deep experience within the sector and uses that specialism to engage effectively with our tenants, understanding the complexities inherent in the sector.
Positive returns
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 2021 of 10.5 per cent relative to the Index's 9.6 per cent. This outperformance has occurred consistently since launch in 2013.
| | Portfolio total return (%) | MSCI UK Annual Healthcare Property Index total return (%) |
| 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 |
NAV total return also remains stable and consistent, at 8.1 per cent for the year to June 2022, and with an annualised 7.8 per cent since launch.
Underpinning these returns figures are quality assets with attractive long-term leases. Like-for-like rental growth of 4.6 per cent has been achieved with 3.8 per cent of this from annual rent reviews and the remainder from re-tenanting initiatives. Like-for-like valuation growth was 4.2 per cent driven by rent reviews, the demand for the asset class and the portfolio's stable trading performance.
Overall, the Group's portfolio value has increased by 33.1 per cent and the contractual rent roll by 34.6 per cent.
Resiliency through pandemic; trading outlook much improved
Rent collection measured 95% for the year, including amounts collected subsequent to the year-end, with a 95% collection record since the start of the pandemic in March 2020. This stable performance comes despite the significant operational challenges our tenants have faced through the pandemic, demonstrating the sustainable nature of our underlying rental income.
Resident occupancies are recovering following the Omicron wave in the first half of 2022 with steady growth since March of this year. Our tenants continue to report strong enquiry levels and are now consistently converting these to admissions as restrictions have eased.
Rent cover at the portfolio level has been stable and should respond with the recovery in occupancy levels. We anticipate inflationary cost increases to largely be passed on to residents through fee increases, allowing rent covers to improve with occupancy.
The Manager has been supporting tenants, closely monitoring home performance and actively initiating changes where required. As well as protecting long-term value for shareholders, the Manager strives to ensure continuity of care for residents as a social priority, and is pleased to note that all portfolio initiatives have seen care provided throughout. Completed and ongoing initiatives are:
· Group of homes in Northern Ireland identified as likely to benefit from new management. Re-tenanting initiated and completed from large national to a smaller operator focused on the region.
· Alternative tenants were lined-up for seven homes where the incumbent tenant faced financial challenges. Patient and disciplined response allowed full recovery of outstanding rent and uninterrupted care provision for residents.
· Solutions proposed and agreed to re-tenant two of five homes allowing focus on the incumbent tenant's care geography and services and reducing liquidity strain.
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:
· 9/10 of responders agreed that working with Target was a positive experience (2021: 10/10)
· 9/10 of responders agreed that Target provides real estate that is a great working environment and helps deliver dignified care to residents (2021: 8/10)
· 10/10 of responders agreed that Target participates in sector events and appropriately shares knowledge
Resident satisfaction
Regulator (CQC in England) ratings are informative but limited. The 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 9.3/10 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 6.76 pence per share were declared and paid in respect of the year to 30 June 2022, an increase of 0.6 per cent on 2021, and reflecting a yield of 6.2 per cent based on the 30 June 2022 closing share price of 108.4 pence.
Earnings & dividend cover
Adjusted EPRA earnings per share is the key performance metric used in assessing recurring profitability levels. This reduced to 5.05 pence per share relative to dividends of 6.76 pence per share. Dividend cover on adjusted EPRA earnings was 72% for the year. Applying the more widely used EPRA earnings measure, dividend cover was 95%.
The three main drivers of reduced earnings level were:
· Portfolio acquisition and equity issuance proceeds. Earnings dilution from cash drag occurred during the three-month acquisition process following the Group's £125 million associated equity issuance in September 2021. The 18 care home assets began generating rental income immediately upon acquisition on 17 December 2021.
· Prudent rental income provisioning. As rent collection declined during 2022 following the Omicron wave of the pandemic, the Group prudently provided for an increased level of doubtful debts. Initiatives to successfully manage these positions have seen £1.1 million subsequently collected which has not been adjusted for in the year's results. The Manager is progressing further initiatives to move towards full rent collection across the portfolio.
· Uninvested capital. At 30 June 2022 the Group had cash and undrawn debt awaiting investment of £105 million. £54 million of this is committed to developments or portfolio improvements and is awaiting drawdown, with £51 million remaining available. Had the spread level between investment yields and debt costs which existed through the Group's lifetime persisted, conversion of the Group's identified pipeline assets would have seen the Group fully geared and invested and generating earnings fully covering dividends.
However, the significant reduction in that spread (from c.250 bps to nil) impacts the Group's ability to invest available capital in immediately earnings-accretive assets at the current time. The Group is carefully assessing pipeline assets on a case-by-case basis with respect to wider market conditions, and is currently minded to retain a conservative buffer of uninvested capital as a defence against further market deterioration.
The combined effect of the above is that the long-planned progression to full investment at targeted gearing levels will be delayed, with the knock-on effect to also delay the Group's path to full dividend cover.
Total Returns
The attractive investment characteristics of the asset class has seen continued yield tightening and valuation increases. Whilst limiting earnings-accretive new investment, this has been a tailwind for valuation growth and returns from the existing portfolio.
EPRA NTA has increased 1.7% to 112.3 pence per share over the year. NAV total return for the year was 8.1%, with the portfolio's EPRA topped-up net initial yield ending the year stable at 5.82% from 5.83%.
Debt funding: More fixed interest rates and longer terms
The Group entered new long-term, fixed-rate facilities of £100 million with an existing lender during the year, increasing total debt available to £320 million.
This increased the weighted average term to maturity of the Group's facilities to 6.9 years at 30 June 2022 (2021: 4.8 years) and increased the quantum of the Group's drawn debt at fixed interest rates, being £180 million at 30 June 2022 (2021: £80 million).
The Group's weighted average cost (interest-only) of its drawn debt was 3.1%, reflecting the low-rate environment when these fixes were struck. In December 2021 when the most recent 15-year debt transaction completed, the relevant gilt reference was c.1% compared to c.4.5% today.
The Group retains flexibility on debt levels, with £140 million of revolving credit facilities which can be drawn/repaid in-line with capital requirements. The Group is currently reviewing the suitability of these facilities given the interest rate environment and outlook and anticipates increasing fixed-rate or hedged debt, subject to market conditions.
|
| 2022 £m |
Movement | 2021 £m |
| Rental income (excluding guaranteed uplifts) | 49.8 | +21% | 41.2 |
| Administrative expenses (including management fee) | (13.7) | +23% | (11.1) |
| Net financing costs | (6.6) | +38% | (4.8) |
| Interest from development funding | 0.8 | +33% | 0.6 |
| Adjusted EPRA earnings | 30.2 | +16% | 26.0 |
|
|
| | |
| Adjusted EPRA EPS (pence) | 5.05 | -7.5% | 5.46 |
| EPRA EPS (pence) | 6.62 | -7.5% | 7.16 |
| Adjusted EPRA cost ratio | 27.1% | +50bps | 26.6% |
| EPRA cost ratio | 21.5% | -80bps | 22.3% |
| Ongoing charges figure ('OCF') | 1.51% | -4bps | 1.55% |
EPRA NTA per share (pence)
EPRA NTA per share has increased to 112.3 pence, primarily driven by an increase in property valuations.
|
| Pence per share |
| EPRA NTA per share as at 30 June 2021 | 110.4 |
|
|
|
| Acquisition costs | (1.5) |
| Property revaluations | 4.7 |
| Adjusted EPRA earnings | 4.8 |
| Dividends paid | (6.5) |
| Equity issuance | 0.4 |
|
|
|
| EPRA NTA per share as at 30 June 2022 | 112.3 |
Strategic pillar #4
To achieve our social purpose
| ESG Principles | What this means for Target | What we did in 2022 | What we'll do in 2023 and beyond |
| 1. Responsible investment As an investor we understand that our actions have influence. We use our platform to lead by example through embedding appropriate ESG considerations into our decision-making. | Leading in social impact for care home real estate - We understand the importance of maintaining a portfolio that supports the needs of tenants and residents, which in turn contributes to the long-term sustainability of social care infrastructure in the UK.
Energy and climate change: Responsible acquisitions and portfolio management - Energy efficiency is a specific consideration in our investment analysis for acquisitions, developments and portfolio management decisions. - In our role as a responsible landlord we are committed to helping our tenants identify and implement energy reduction and efficiency measures. | Social - 24 homes acquired, 1,632 resident spaces - Development commitments for 269 new beds as at year-end - 96% wet-rooms - Homes provide space of 47m2 per resident - All real estate has generous social and useable outdoor space
Energy - 100% A-C EPC ratings - Manager created and adopted "house standard" to formally incorporate minimum and aspirational ESG standards into investment appraisal. - Representative sample of BREEAM-in use ratings substantially Excellent and Very Good. - Increased data collection from our tenants on energy usage equating to 40% of the portfolio - Target Fund Managers supports the Edinburgh Science Climate and Sustainability programme being a founding pledger of its Mission Net Zero project.
| Social - Continue to advocate for quality real estate - Continue to fund new homes, modernising the sector's real estate
Energy - Assess BREEAM recommendations and initiate improvements where aligned with long-term value. - Increase proportion of leases with "green" reporting provisions to gather more data on energy consumption patterns from our tenants for use in decision-making - Manager to use toolkit and resources to progress its net zero journey |
| 2. Responsible partnerships We engage with all our stakeholders to drive the creation of economic, social and environmental value around our buildings and in wider society. | Tenant selection, engagement & collaboration - As a responsible, proactive landlord we prioritise good, open relationships with our tenants. - We make sure that we solicit, assess and respond to 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 and society - We fully appreciate the vital role that care homes play in every community, and take decisions in the best interest of maintaining continuity of care for residents. - Advocate for and support the sector. | Tenants - 9/10 "positive experience" satisfaction score
Communities - Re-tenanted homes with new tenants committed to continuing care provision where required - Worked constructively with tenants in rental arrears to deliver positive solutions to maintain continuity of care
| Tenants - Focus on supporting our tenants with COVID-19 recovery, considering further real estate design enhancements in response - Invest in fully understanding and responding feedback from tenant survey
Communities - Complete portfolio initiatives identified which will benefit long-term care continuity - Continue to facilitate tenant interaction and learning sessions as COVID-19 restrictions ease
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| 3. Responsible business We will treat all stakeholders with respect and deal fairly in a manner consistent with how we would expect to be treated ourselves. | Governance & transparency - We uphold the highest ethical standards and adhere to best practice in every aspect of our business. - Our governance and behaviour treat transparency for all of our stakeholders as core.
People, culture and wellbeing - We encourage employment practices across our key service providers that reflect our core values, with a focus on wellbeing, fairness and opportunity for all.
| Governance & transparency - Undertook director recruitment process resulting in Vince Niblett and Amanda Thompsell being appointed during the year - Investment Manager successfully retained position as a signatory to the FRC Stewardship Code - £13.2 million taxation directly paid to the UK government by way of VAT and stamp duty land taxes. Dividends paid of £40.0 million are assessed for tax upon reaching shareholders | Governance & transparency - Complete Board succession plan by appointing two new Directors - To prepare and publish enhanced reporting suite, inclusive of: · GRESB reporting following data collection process · Comprehensive sustainability reporting, inclusive of EPRA measures |
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 2022, 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 of any decision in the long term | Our investment approach is long-term with an average lease length of 27.2 years. We 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.
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| b) The interests of the Company's employees
| The Company is externally managed and therefore has no employees.
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| c) The need to foster the Company's business relationships with suppliers, customers and others | As a REIT with no employees, the Board works in close partnership with the Manager, which runs the Group's operations and portfolio within parameters set by the Board and subject to appropriate oversight. The Manager has 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.
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| d) The impact of the Company's operations on the community and the environment | The Board is confident the Group's approach to investing in a sensitive sector is responsible with regard to social and environmental impact. This is set out in more detail in the community and the environment section of the following table.
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| e) The desirability of the Company maintaining a reputation for high standards of business conduct
| The Board requires high standards of itself, service providers and stakeholders. The Group's purpose and investment objectives dictate that these standards are met in order to retain credibility. The ethos and tone is set by the Board and the Manager. |
| f) The need to act fairly as between members of the Company | The Board encourages an active dialogue with shareholders to ensure effective communication, either directly or via its broker and/or Manager. The interests of all shareholders are considered when issuing new shares.
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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 cash position and expected rental collection, concluded that continuing dividend payments at the level announced in the Annual Report 2021 remained in the interests of all stakeholders.
Ongoing investment and asset management activity
The Group acquired a significant portfolio in December 2021, consisting of 18 operational care homes of which the Investment Manager had unparalleled knowledge. This acquisition expanded the Group's portfolio of high-quality real estate, the vast majority of which benefitted from full wet-rooms, operated by eight tenants, three of which were new to the Group.
The re-tenanting of four homes in Northern Ireland was completed in the year, resulting in a move from a large, national operator to a smaller operator more focussed in that local market, with the Group receiving a surrender premium from the outgoing tenant. Stakeholders benefitted from (i) a positive net financial effect, following agreed capex which will improve each of the homes; and (ii) the addition of an established regional operator.
Capital financing
The Company issued £125 million of ordinary shares, at a premium to NAV, in September 2021. The equity raised was used to temporarily repay some of the Group's loan facilities whilst it awaited investment before being utilised primarily to finance the portfolio acquisition in December 2021.
The Group also increased its loan facilities with Phoenix Group, increasing the existing £50 million 10-year facility to an aggregate of £150 million with a weighted term to maturity of 12 years, on terms that are expected to be beneficial to significant stakeholders over the duration of the facilities.
Director appointments
During the year, as part of the Board succession plan, Mr Niblett and Dr Thompsell were appointed as Directors. Mr Niblett's significant financial experience and expertise and Dr Thompsell's knowledge of healthcare and care homes is expected to benefit all stakeholders over the period of their respective appointments.
Subsequent to the year end, the Board have appointed one Director and have identified another who is expected to be appointed early in the following calendar year.
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 Chairman and other Directors make themselves available to meet shareholders when required to discuss the Group's business and address shareholder queries. Following disruption during the pandemic, the Directors were pleased to be able to return to holding the AGM in person, whilst also retaining 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 and will also meet with analysts and members of the financial press. |
| Tenants and underlying residents | The Investment Manager liaises closely with 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.
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| 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 8 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.
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| 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 2022 are contained in the Annual Report.
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| 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.
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| Community and the environment | The Group's principal non-financial objective 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 our portfolio which will be used to align the portfolio appropriately with benchmarks over the medium and longer term.
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Principal and emerging risks and uncertainties
| Risks | Description of risk and factors affecting risk rating | Mitigation |
| Poor performance of assets Risk rating & change: High (unchanged)
| There is a risk that a tenant's business could become unsustainable if it fails to trade successfully. This could lead to a loss of income for the Group and an adverse impact on the Group's results and shareholder returns. The strategy of investing in new purpose-built care homes could lead to additional fill-up risk and there may be a limited amount of time that small regional operators can fund start-up losses. | The Investment Manager focuses on tenant diversification across the portfolio and, considering the local market dynamics for each home, focuses on ensuring that rents are set at sustainable levels. Rent deposits or other guarantees are sought, where appropriate, to provide additional security for the Group. The Investment Manager has ongoing engagement with the Group's tenants to proactively assist and monitor performance. |
| Adverse interest rate fluctuations / debt covenant compliance Risk rating & change: High (increased)
| Adverse interest rate fluctuations will increase the cost of the Group's variable rate debt facilities; limit borrowing capacity; adversely impact property valuations; and be detrimental to the Group's overall returns. | The Group has a conservative gearing strategy, although net gearing is anticipated to increase as the Group nears full investment. Loan covenants and liquidity levels are closely monitored for compliance and headroom. The Group has fixed interest costs on £180 million of borrowings as at 30 June 2022. |
| High inflationary environment (emerging) Risk rating & change: High (increased)
NEW
| An increase in the UK inflation rate to a level above the rent review caps in place across the portfolio's long-term leases may result in a real term decrease in the Group's income and be detrimental to its performance. In addition, cost increases for tenants, particularly in relation to staffing and utilities, may erode their profitability and rent cover unless their revenue increases accordingly. | The Group's portfolio includes inflation-linked leases, with primarily annual upwards-only rent reviews within a cap and collar. The Manager is monitoring tenant performance, including whether average weekly fees paid by the underlying diversified mix of publicly funded and private-fee paying residents are growing in line with inflation. |
| Development costs (emerging) Risk rating & change: Medium (increased)
NEW | The high inflationary environment, particularly for building materials and staff, combined with supply chain difficulties, may result in an increased risk that the developers of contracted developments do not fulfil their obligations and/ or may increase the cost of new development opportunities. | The Group is not significantly exposed to development risk, with forward funded acquisitions being developed under fixed price contracts, with the Investment Manager having considered both the financial strength of the developer and the ability of the developer's profit to absorb any cost overruns. |
| Pandemic reduces demand for care home beds Risk rating & change: Medium (decreased)
| As a result of the COVID-19 pandemic, there is a risk that overall demand for care home beds is reduced causing asset performance to fall below expectations. While demographic shifts and the realities of needs-based demand remain intact, occupancy across the sector remains below pre-pandemic levels and the emergence of new variants of COVID-19 remains a possibility. | The Group is committed to investing in high quality real estate with high quality operators. These assets are expected to experience demand ahead of the sector average while in the wider market a large number of care homes without fit-for-purpose facilities are expected to close. A trend of improving occupancy rates across the portfolio has been noted in recent times. |
| ESG and climate change Risk rating & change: Medium (increased)
NEW | A change in climate, such as an increased risk of local or coastal flooding, or a change in tenant/ investor demands or regulatory requirements for properties which meet certain environmental criteria, such as integral heat pumps, may result in a fall in demand for the Group's properties, reducing rental income and/or property valuations. | The Group is committed to investing in high quality real estate with high quality operators. The portfolio's EPC and BREEAM in-use ratings suggest the portfolio is well positioned to meet future requirements/ expectations. The Investment Manager has introduced a house standard to ensure ESG factors are fully considered during the acquisition process. |
| Reduced availability of carers, nurses and other care home staff Risk rating & change: Medium (unchanged) | The combined impacts of the pandemic and increased employment and wage inflation in competing sectors has reduced the availability of key staff in the care sector which may result in a reduction in the quality of care for underlying residents, restrict tenants from being able to admit residents or result in wage inflation. | The Group is committed to investing in high quality real estate with high quality operators and these should be better placed to attract staff. The Investment Manager continues to engage with tenants in the portfolio and to share examples of best practice in recruitment and retention of staff.
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| Breach of REIT regulations Risk rating & change: Medium (unchanged)
| A breach of REIT regulations, primarily in relation to making the necessary level of distributions, may result in loss of tax advantages derived from the Group's REIT status. The Group remains fully compliant with the REIT regulations and is fully domiciled in the UK. | The Group's activities, including the level of distributions, are monitored to ensure all conditions are adhered to. The REIT rules are considered during investment appraisal and transactions structured to ensure conditions are met. |
| Changes in government policies Risk rating & change: Medium (unchanged) | Changes in government policies, including those affecting local authority funding of care, may render the Group's strategy inappropriate. Secure income and property valuations will be at risk if tenant finances suffer from policy changes. | Government policy is monitored by the Group to increase the ability to anticipate changes. The Group's tenants also typically have a multiplicity of income sources, with their business models not wholly dependent on government funding. |
| Availability of capital Risk rating & change: Medium (unchanged) | Without access to equity or debt capital, the Group may be unable to grow through acquisition of attractive investment opportunities. This is likely to be driven by both investor demand and lender appetite which will reflect Group performance, competitor performance, general market conditions and the relative attractiveness of investment in UK healthcare property. | The Group maintains regular communication with investors and existing debt providers, and, with the assistance of its broker and sponsor, regularly monitors the Group's capital requirements and investment pipeline alongside opportunities to raise both equity and debt. During the year, the Group has extended the weighted average term and quantum of its debt facilities. |
| Reliance on third party service providers Risk rating & change: Medium (unchanged) | The Group is externally managed and, as such, relies on a number of service providers. Poor quality service from providers such as the Investment Manager, company secretary, broker, legal advisers or depositary could have potentially negative impacts on the Group's investment performance, legal obligations, compliance or shareholder relations. | The Investment Manager, along with all other service providers, is subject to regular performance appraisal by the Board. The Manager has retained key personnel since the Group's IPO and has successfully hired further skilled individuals and invested in its systems. |
| Failure to differentiate qualities from competitors or poor investment performance Risk rating & change: Medium (unchanged) | Failing to differentiate strategy and qualities from competitors is a significant risk for the business, with increased competition in the healthcare real estate sector. The failure to communicate these effectively to stakeholders could have a negative impact on the Company's share price, future demand for equity raises and/or debt finance and wider reputational damage. | The stakeholder communications strategy of the Group has always been to highlight the quality of the real estate in which the Group invests. The regular production of investor relations materials (annual and interim reports, investor presentations and quarterly factsheets) along with direct engagement 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.
Malcolm Naish
Chairman
11 October 2022
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. The Group has a property portfolio at 30 June 2022 which has long leases and a weighted average unexpired lease term of 27.2 years. The Group has drawn borrowings of £234.8 million, on which the interest rate has been fixed, either directly or through the use of interest rate swaps, on £180.0 million at a weighted interest rate of 3.07 per cent per annum (excluding the amortisation of arrangement costs), and the remaining £54.8 million carries interest at SONIA plus a weighted margin of 2.17 per cent per annum (excluding the amortisation of arrangement costs). The Group has access to a further £85.2 million of available debt under committed loan facilities. The Group's committed loan facilities have staggered expiry dates with £100.0 million being committed to 5 November 2024, £70.0 million to 5 November 2025, £87.3 million to 12 January 2032 and £62.7 million to 12 January 2037. Discussions with existing and/or new potential lenders do not indicate any issues with re-financing and/or increasing the quantum of 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;
· Adverse interest rate fluctuations: The risk that an increase in interest rates may increase the cost of the Group's variable rate debt facilities, impact property valuations and/or limit the Group's borrowing capacity;
· 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;
· Pandemic 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 financial impact on each tenant from the COVID‑19 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 2022
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Year ended 30 June 2022 | Year ended 30 June 2021 | ||||
| |
| Revenue | Capital | Total | Revenue | Capital | Total |
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| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Revenue |
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| | | |
| Rental income | | 48,807 | 10,215 | 59,022 | 41,168 | 8,739 | 49,907 |
| Other rental income | | 796 | 3,877 | 4,673 | - | - | - |
| Other income | | 164 | - | 164 | 73 | - | 73 |
| Total revenue | | 49,767 | 14,092 | 63,859 | 41,241 | 8,739 | 49,980 |
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| | | |
| Gains on revaluation of investment properties | 5 | - | 5,553 | 5,553 | - | 9,536 | 9,536 |
| Gains on investment properties realised | 5 | - | - | - | - | 1,306 | 1,306 |
| Losses on revaluation of properties held for sale | 6 | - | (7) | (7) | - | (92) | (92) |
| Total income | | 49,767 | 19,638 | 69,405 | 41,241 | 19,489 | 60,730 |
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| |
|
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| | | |
| Expenditure | |
|
|
| | | |
| Investment management fee | 2 | (7,307) | - | (7,307) | (5,796) | - | (5,796) |
| Credit loss allowance and bad debts | 3 | (3,232) | - | (3,232) | (2,717) | - | (2,717) |
| Other expenses | 3 | (3,163) | - | (3,163) | (2,617) | - | (2,617) |
| Total expenditure | | (13,702) | - | (13,702) | (11,130) | - | (11,130) |
| Profit before finance costs and taxation | | 36,065 | 19,638 | 55,703 | 30,111 | 19,489 | 49,600 |
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| | | |
| Net finance costs | |
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| | | |
| Interest receivable | | 71 | - | 71 | 39 | - | 39 |
| Interest payable and similar charges | | (6,671) | - | (6,671) | (4,850) | (913) | (5,763) |
| Profit before taxation | | 29,465 | 19,638 | 49,103 | 25,300 | 18,576 | 43,876 |
| Taxation | | (6) | - | (6) | 8 | - | 8 |
| Profit for the year | | 29,459 | 19,638 | 49,097 | 25,308 | 18,576 | 43,884 |
| Other comprehensive income: | |
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| | | |
| Items that are or may be reclassified subsequently to profit or loss | |
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| Movement in fair value of interest rate swaps | | - | 2,033 | 2,033 | - | 298 | 298 |
| Reclassification to profit and loss on discontinuation of interest rate swaps | | - | - | - | - | 180 | 180 |
| Total comprehensive income for the year | | 29,459 | 21,671 | 51,130 | 25,308 | 19,054 | 44,362 |
| Earnings per share (pence) | 4 | 4.92 | 3.28 | 8.20 | 5.32 | 3.91 | 9.23 |
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 2022
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| As at 30 June 2022 | As at 30 June 2021 |
| | Notes | £'000 | £'000 |
| Non-current assets | | | |
| Investment properties | 5 | 857,691 | 631,156 |
| Trade and other receivables | | 63,651 | 54,580 |
| Interest rate swap | | 2,284 | 251 |
| | | 923,626 | 685,987 |
| Current assets | |
| |
| Trade and other receivables | | 5,549 | 3,981 |
| Cash and cash equivalents | | 34,483 | 21,106 |
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| | 40,032 | 25,087 |
| Properties held for sale | 6 | - | 7,320 |
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| | 40,032 | 32,407 |
| Total assets | | 963,658 | 718,394 |
| Non-current liabilities | |
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| Bank loans | 8 | (231,383) | (127,904) |
| Trade and other payables | | (7,145) | (6,840) |
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| | (238,528) | (134,744) |
| Current liabilities | |
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| Trade and other payables | | (26,363) | (18,465) |
| Total liabilities | | (264,891) | (153,209) |
| Net assets | | 698,767 | 565,185 |
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| Stated capital and reserves | |
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| Share capital | 9 | 6,202 | 5,115 |
| Share premium | 9 | 256,633 | 135,228 |
| Merger reserve | | 47,751 | 47,751 |
| Distributable reserve | | 226,461 | 265,164 |
| Hedging reserve | | 2,284 | 251 |
| Capital reserve | | 83,750 | 64,112 |
| Revenue reserve | | 75,686 | 47,564 |
| Equity shareholders' funds | | 698,767 | 565,185 |
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| Net asset value per ordinary share (pence) | 4 | 112.7 | 110.5 |
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Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2022
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Share capital |
Share premium |
Merger reserve | Distrib-utable reserve |
Hedging reserve |
Capital reserve |
Revenue reserve |
Total |
| |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'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: |
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- |
- |
- |
- |
2,033 |
19,638 |
29,459 |
51,130 |
| Transactions with owners recognised in equity: |
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|
|
|
|
|
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| Dividends paid | 1 | - | - | - | (38,703) | - | - | (1,337) | (40,040) |
| Issue of ordinary shares | 9 | 1,087 | 123,913 | - | - | - | - | - | 125,000 |
| Expenses of issue | 9 | - | (2,508) | - | - | - | - | - | (2,508) |
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At 30 June 2022 |
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6,202 |
256,633 |
47,751 |
226,461 |
2,284 |
83,750 |
75,686 |
698,767 |
For the year ended 30 June 2021
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|
|
Share capital |
Share premium |
Merger reserve | Distrib-utable reserve |
Hedging reserve |
Capital reserve |
Revenue reserve |
Total |
| |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 30 June 2020 |
| 4,575 | 77,452 | 47,751 | 296,770 | (227) | 45,536 | 22,256 | 494,113 |
| Total comprehensive income for the year: |
|
- |
- |
- |
- |
478 |
18,576 |
25,308 |
44,362 |
| Transactions with owners recognised in equity: |
|
| | | | | | | |
| Dividends paid | 1 | - | - | - | (31,606) | - | - | - | (31,606) |
| Issue of ordinary shares | 9 | 540 | 59,460 | - | - | - | - | - | 60,000 |
| Expenses of issue | 9 | - | (1,684) | - | - | - | - | - | (1,684) |
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At 30 June 2021 |
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5,115 |
135,228 |
47,751 |
265,164 |
251 |
64,112 |
47,564 |
565,185 |
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2022
| | | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | Note | £'000 | £'000 |
| Cash flows from operating activities |
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|
|
| Profit before tax | | 49,103 | 43,876 |
| Adjustments for: | |
| |
| Interest receivable | | (71) | (39) |
| Interest payable | | 6,671 | 5,763 |
| Revaluation gains on investment properties and movements in lease incentives, net of acquisition costs written off | 5 | (19,645) | (19,581) |
| Revaluation losses on properties held for sale | 6 | 7 | 92 |
| Increase in performance payments | | (1,250) | (1,550) |
| Increase in trade and other receivables | | (3,768) | (1,232) |
| Increase in trade and other payables | | 4,590 | 1,859 |
|
|
| 35,637 | 29,188 |
| Interest paid | | (5,310) | (4,266) |
| Interest received | | 71 | 39 |
| Tax paid | | (6) | (5) |
| | | (5,245) | (4,232) |
| Net cash inflow from operating activities |
| 30,392 | 24,956 |
| | |
| |
| Cash flows from investing activities | |
| |
| Purchase of investment properties and properties held for sale, including acquisition costs | | (206,993) | (51,400) |
| Disposal of investment properties and properties held for sale, net of lease incentives | | 4,360 | 7,825 |
| Net cash outflow from investing activities |
| (202,633) | (43,575) |
|
Cash flows from financing activities | |
| |
| Issue of ordinary share capital | | 125,000 | 60,000 |
| Expenses of issue of ordinary share capital | | (2,508) | (1,684) |
| Drawdown of bank loan facilities | | 222,000 | 152,000 |
| Repayment of bank loan facilities | | (117,250) | (174,000) |
| Expenses of arrangement of bank loan facilities | | (1,839) | (1,538) |
| Dividends paid | | (39,785) | (31,493) |
| Net cash inflow from financing activities |
| 185,618 | 3,285 |
| | |
| |
| Net increase/(decrease) in cash and cash equivalents |
| 13,377 | (15,334) |
| Opening cash and cash equivalents | | 21,106 | 36,440 |
| Closing cash and cash equivalents | | 34,483 | 21,106 |
| Transactions which do not require the use of cash | | |
| Movement in fixed or guaranteed rent reviews and lease incentives | 12,148 | 9,656 |
| Fixed or guaranteed rent reviews derecognised on disposal or re-tenanting | (3,362) | (1,556) |
| Total | 8,786 | 8,100 |
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 2022, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
· The Chairman's Statement, Investment Manager's Report and 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
Malcolm Naish
Chairman
11 October 2022
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2022.
|
| Dividend rate (pence per share) | Year ended 30 June 2022 £'000 |
| Fourth interim dividend for the year ended 30 June 2021 | 1.68000 | 8,594 |
| First interim dividend for the year ended 30 June 2022 | 1.69000 | 10,482 |
| Second interim dividend for the year ended 30 June 2022 | 1.69000 | 10,482 |
| Third interim dividend for the year ended 30 June 2022 | 1.69000 | 10,482 |
| Total | 6.75000 | 40,040 |
Amounts paid as distributions to equity holders during the year to 30 June 2021.
|
| Dividend rate (pence per share) | Year ended 30 June 2021 £'000 |
| Fourth interim dividend for the year ended 30 June 2020 | 1.67000 | 7,640 |
| First interim dividend for the year ended 30 June 2021 | 1.68000 | 7,686 |
| Second interim dividend for the year ended 30 June 2021 | 1.68000 | 7,686 |
| Third interim dividend for the year ended 30 June 2021 | 1.68000 | 8,594 |
| Total | 6.71000 | 31,606 |
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 2022, of 1.69 pence per share, was paid on 26 August 2022 to shareholders on the register on 12 August 2022 and amounted to £10,482,000. 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 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Management fee | 7,307 | 5,796 |
| Total | 7,307 | 5,796 |
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 on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.
| Net assets of the Group | Management fee percentage |
| Up to and including £500 million | 1.05 |
| Above £500 million and up to and including £750 million | 0.95 |
| Above £750 million and up to and including £1 billion | 0.85 |
| Above £1 billion and up to and including £1.5 billion | 0.75 |
| Above £1.5 billion | 0.65 |
The Investment Manager is entitled to an additional fee of £126,000 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 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Credit loss allowance | 2,865 | 1,697 |
| Bad debts written off | 367 | 1,020 |
| Total credit loss allowance and bad debts | 3,232 | 2,717 |
| | Year ended 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Valuation and other professional fees | 1,143 | 1,008 |
| Auditor's remuneration for: |
| |
| - statutory audit of the Company | 118 | 104 |
| - statutory audit of the Company's subsidiaries | 230 | 184 |
| - review of interim financial information | 16 | 15 |
| Other taxation compliance and advisory* | 361 | 436 |
| Public relations and marketing | 327 | 213 |
| Directors' fees | 214 | 181 |
| Secretarial and administration fees | 177 | 172 |
| Direct property costs | 160 | 32 |
| Printing, postage and website | 111 | 92 |
| Listing and Registrar fees | 102 | 78 |
| Other | 204 | 102 |
| Total other expenses | 3,163 | 2,617 |
* 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 2022 | Year ended 30 June 2021 | ||
|
| £'000 | Pence per share | £'000 | Pence per share |
| Revenue earnings | 29,459 | 4.92 | 25,308 | 5.32 |
| Capital earnings | 19,638 | 3.28 | 18,576 | 3.91 |
| Total earnings | 49,097 | 8.20 | 43,884 | 9.23 |
|
|
|
| | |
| Average number of shares in issue |
| 599,093,808 | | 475,406,929 |
There were no dilutive shares or potentially dilutive shares in issue.
EPRA is an industry body which issues best practice reporting guidelines for property companies and the Group report 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 ended 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Earnings per IFRS Consolidated Statement of Comprehensive Income | 49,097 | 43,884 |
| Adjusted for gains on investment properties realised | - | (1,306) |
| Adjusted for revaluations of investment properties | (5,553) | (9,536) |
| Adjusted for revaluations of properties held for sale | 7 | 92 |
| Adjusted for other capital items | (3,877) | 913 |
| EPRA earnings | 39,674 | 34,047 |
| Adjusted for rental income arising from recognising guaranteed rent review uplifts | (10,215) | (8,739) |
| Adjusted for development interest under forward fund agreements | 783 | 647 |
| Group specific adjusted EPRA earnings | 30,242 | 25,955 |
|
|
| |
| Earnings per share ('EPS') (pence per share) |
| |
| EPS per IFRS Consolidated Statement of Comprehensive Income | 8.20 | 9.23 |
| EPRA EPS | 6.62 | 7.16 |
| Group specific adjusted EPRA EPS | 5.05 | 5.46 |
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 112.7 pence (2021: 110.5 pence) is based on equity shareholders' funds of £698,767,000 (2021: £565,185,000) and on 620,237,346 (2021: 511,541,694) 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 2022, 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 facility where the fair value is estimated to be lower than the nominal value. See note 8 for further details on the Group's loan facilities.
| | 2022 EPRA NRV £'000 | 2022 EPRA NTA £'000 | 2022 EPRA NDV £'000 | 2021 EPRA NRV £'000 | 2021 EPRA NTA £'000 | 2021 EPRA NDV £'000 |
| IFRS NAV per financial statements | 698,767 | 698,767 | 698,767 | 565,185 | 565,185 | 565,185 |
| Fair value of interest rate swap | (2,284) | (2,284) | - | (251) | (251) | - |
| Fair value of loans | - | - | 22,257 | - | - | (1,389) |
| Estimated purchasers' costs | 60,225 | - | - | 44,696 | - | - |
| EPRA net assets | 756,708 | 696,483 | 721,024 | 609,630 | 564,934 | 563,796 |
| EPRA net assets (pence per share) | 122.0 | 112.3 | 116.2 | 119.2 | 110.4 | 110.2 |
5. Investment properties
Freehold and leasehold properties
| | As at 30 June 2022 | As at 30 June 2021 |
| | £'000 | £'000 |
| Opening market value | 677,525 | 610,084 |
| Opening fixed or guaranteed rent reviews and lease incentives | (47,919) | (39,998) |
| Opening performance payments | 1,550 | - |
| Opening carrying value | 631,156 | 570,086 |
| |
| |
| Disposals - proceeds | - | (7,616) |
| - gain on sale | - | 2,336 |
| Purchases | 199,869 | 52,295 |
| Transfer from properties held for sale | 6,830 | - |
| Acquisition costs capitalised | 9,671 | 2,264 |
| Acquisition costs written off | (9,671) | (2,264) |
| Unrealised gain realised during the period | - | (1,030) |
| Revaluation movement - gains | 43,234 | 26,565 |
| Revaluation movement - losses | (15,862) | (5,109) |
| Movement in market value | 234,071 | 67,441 |
| Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting |
3,362 |
1,735 |
| Movement in fixed or guaranteed rent reviews and lease incentives | (12,148) | (9,656) |
| Movement in performance payments | 1,250 | 1,550 |
| Movement in carrying value | 226,535 | 61,070 |
| |
| |
| Closing market value | 911,596 | 677,525 |
| Closing fixed or guaranteed rent reviews and lease incentives | (56,705) | (47,919) |
| Closing performance payments (see Note 12) | 2,800 | 1,550 |
| Closing carrying value | 857,691 | 631,156 |
| Changes in the valuation of investment properties | Year ended 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Gain on sale of investment properties | - | 2,336 |
| Unrealised gain realised during the year | - | (1,030) |
| Gains on sale of investment properties realised | - | 1,306 |
| Revaluation movement | 27,372 | 21,456 |
| Acquisition costs written off | (9,671) | (2,264) |
| Movement in lease incentives | (1,933) | (917) |
| Movement in fixed or guaranteed rent reviews | (10,215) | (8,739) |
| Gains on revaluation of investment properties | 5,553 | 10,842 |
The investment properties can be analysed as follows:
| | As at 30 June 2022 | As at 30 June 2021 |
| | £'000 | £'000 |
| Standing assets | 892,336 | 655,175 |
| Developments under forward fund agreements | 19,260 | 22,350 |
| Closing market value | 911,596 | 677,525 |
The properties were valued at £911,596,000 (2021: £677,525,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - 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 £857,691,000 (2021: £631,156,000). The adjustment consisted of £48,802,000 (2021: £41,949,000) relating to fixed or guaranteed rent reviews and £7,903,000 (2021: £5,970,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the 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 12). The total purchases in the year to 30 June 2022, inclusive of the performance payments recognised, were £201,119,000 (2021: £53,845,000).
6. Properties held for sale
| | As at 30 June 2022 | As at 30 June 2021 |
| | £'000 | £'000 |
| Opening fair value | 7,320 | 7,500 |
| Purchases | - | 300 |
| Disposals - proceeds | (483) | (388) |
| - gain on sale | 122 | 34 |
| Unrealised gain realised during the period | (129) | (126) |
| Transfer to investment properties | (6,830) | - |
| Closing fair value | - | 7,320 |
The properties held for sale were valued by Colliers International Healthcare Property Consultants Limited ('Colliers'). The properties held for sale consist of two blocks of apartments adjacent to an existing property holding which were acquired to consolidate ownership of the overall retirement village. Certain of the apartments are being rented on a short-term basis whilst awaiting sale.
As the apartments have been held for a period of more than twelve months since initial acquisition, they have been reclassified as investment properties and transferred at their fair value at 30 June 2022. However, there is no change to the Group's commercial intention in relation to these apartments which is to sell the leasehold on the individual apartments in the short to medium term.
7. Investment in subsidiary undertakings
The Group included 57 subsidiary companies as at 30 June 2022 (30 June 2021: 50). 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.
During the period, the Group incorporated five new subsidiaries, THR Number 41 Limited, THR Number 42 Limited, THR Number 43 plc, THR Number 45 Limited and THR Number 46 Limited. The Group also acquired two new companies which have been renamed THR Number 47 Limited and THR Number 48 Limited. The Group includes eight companies which were acquired as part of previous corporate acquisitions and which, having remained dormant throughout the year, have been placed into liquidation.
8. Bank loans
|
| As at 30 June 2022 £'000 | As at 30 June 2021 £'000 |
| Principal amount outstanding | 234,750 | 130,000 |
| Set-up costs | (4,315) | (2,476) |
| Amortisation of set-up costs | 948 | 380 |
| Total | 231,383 | 127,904 |
In November 2020, the Group entered into a £70,000,000 committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.18 per cent per annum on £50,000,000 of the facility and 2.33 per cent per annum on the remaining £20,000,000 revolving credit facility, both for the duration of the loan. A non-utilisation fee of 1.13 per cent per annum is payable on the first £20,000,000 of any undrawn element of the facility, reducing to 1.05 per cent per annum thereafter. As at 30 June 2022, the Group had drawn £50,000,000 under this facility (2021: £30,000,000).
In November 2020, the Group entered into a £100,000,000 revolving credit facility with HSBC Bank plc ('HSBC') which is repayable in November 2024, with the option of a one-year extension thereafter subject to the consent of HSBC. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.17 per cent per annum for the duration of the loan and a non-utilisation fee of 0.92 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2022, the Group had drawn £34,750,000 under this facility (2021: £50,000,000).
In January 2020, the Group entered into a £50,000,000 committed term loan facility with Phoenix Group which is repayable on 12 January 2032. During the period, the Group entered into further committed term loan facilities of £37,250,000, also repayable on 12 January 2032, and of £62,750,000, which is repayable on 12 January 2037. Interest accrues on these three loans at aggregate annual fixed rates of interest of 3.28 per cent, 3.13 per cent and 3.14 per cent, respectively and is payable quarterly. As at 30 June 2022, the Group had drawn £150,000,000 under these facilities (2021: £50,000,000).
The following interest rate swap was in place during the year ended 30 June 2022. to hedge the £30,000,000 RBS committed term loan:
| Notional Value |
Starting Date |
Ending Date | Interest Paid |
Interest Received | Counter-party |
| 30,000,000 | 5 November 2020 | 5 November 2025 | 0.30% | Daily compounded SONIA (floor at -0.08%) | RBS |
Inclusive of all interest rate swaps, the interest rate on £180,000,000 of the Group's borrowings is fixed, including the amortisation of arrangement costs, at an all-in rate of 3.22 per cent per annum until at least 5 November 2025. The remaining £140,000,000 of debt, of which £54,750,000 was drawn at 30 June 2022, would, if fully drawn, carry interest at a variable rate equal to SONIA plus a weighted average lending margin, including the amortisation of arrangement costs, of 2.44 per cent per annum.
The fair value of the interest rate swap at 30 June 2022 was an aggregate asset of £2,284,000 (2021: £251,000) and all interest rate swaps are categorised as level 2 in the fair value hierarchy.
At 30 June 2022, the nominal value of the Group's loans equated to £234,750,000 (2021: £130,000,000). Excluding the interest rate swap referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated margin based on market conditions at 30 June 2022, totalled, in aggregate, £212,493,000 (2021: £131,389,000). 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 £239,728,000 (2021: £139,748,000). The loans are categorised as level 3 in the fair value hierarchy.
The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group ('THR1 Group') which consists of THR1 and its five subsidiaries. The Phoenix Group loans of £50,000,000 and £37,250,000 are secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its eight subsidiaries. The Phoenix Group loan of £62,750,000 is secured by way of a fixed and floating charge over the majority of the assets of THR Number 43 plc ('THR43'). The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and its 18 subsidiaries (excluding those subsidiaries which are currently dormant). In aggregate, the Group has granted a fixed charge over properties with a market value of £795,949,000 as at 30 June 2022 (2021: £525,526,000).
Under the bank 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 each of THR1 Group and THR15 Group is greater than 300 per cent on any calculation date; and
- the debt yield for THR12 Group and THR43 is greater than 10 per cent on any calculation date.
All bank loan covenants have been complied with during the year.
Analysis of net debt:
| | Cash and cash equivalents |
Borrowing |
Net debt | Cash and cash equivalents |
Borrowing |
Net debt |
| | 2022 | 2022 | 2022 | 2021 | 2021 | 2021 |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Opening balance | 21,106 | (127,904) | (106,798) | 36,440 | (150,135) | (113,695) |
| Cash flows | 13,377 | (102,911) | (89,534) | (15,334) | 23,538 | 8,204 |
| Non-cash flows | - | (568) | (568) | - | (1,307) | (1,307) |
| Closing balance | 34,483 | (231,383) | (196,900) | 21,106 | (127,904) | (106,798) |
9. Share capital
| Allotted, called-up and fully paid ordinary shares of £0.01 each | Number of shares | £'000 |
| Balance as at 30 June 2021 | 511,541,694 | 5,115 |
| Issued on 9 September 2021 | 108,695,652 | 1,087 |
| Balance as at 30 June 2022 | 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 2022, the Company issued 108,695,652 (2021: 54,054,054) ordinary shares raising gross proceeds of £125,000,000 (2021: £60,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses of issue of £2,508,000 (2021: £1,684,000), has been credited to the share premium account.
During the year to 30 June 2022, the Company did not repurchase any ordinary shares into treasury (2021: nil) or resell any ordinary shares from treasury (2021: nil). At 30 June 2022, the Company did not hold any shares in treasury (2021: 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 8.
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.
10. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, bank loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £38,996,000 (2021: £24,563,000), consisting of cash of £34,483,000 (2021: £21,106,000), net rent receivable of £906,000 (2021: £955,000), VAT recoverable of £1,387,000 (2021: £732,000), accrued development interest of £452,000 (2021: £739,000) and other debtors of £1,768,000 (2021: £1,031,000).
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 2022, the Group had recognised a credit loss allowance totalling £6,963,000 against a gross rent receivable balance of £7,399,000 and gross loans to tenants totalling £1,097,000. Whilst this allowance has increased during the year ended 30 June 2022, it remains low relative to the Group's overall balance sheet, and relates primarily to the tenant of two immature homes where rent is now being received in full in relation to one of the homes, and partial rent being received in relation to the other. As at 30 June 2021, the gross rent receivable was £4,641,000, of which £40,000 was subsequently recovered, £147,000 was written off and £4,454,000 is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2022 (2021: 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 2022 the Group held £34.5 million (2021: £20.9 million) with The Royal Bank of Scotland plc and £nil (2021: £0.2 million) with HSBC Bank plc.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an 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 (2021: 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 £170,000,000 (2021: £170,000,000) 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 £84,750,000 of the variable rate facilities had been drawn down (2021: £80,000,000). 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 2022 and 30 June 2021.
The Group has not hedged its exposure on £54,750,000 of the drawn variable rate borrowings at 30 June 2022 (2021: £50,000,000). On these loans the interest was payable at a variable rate equal to SONIA plus the weighted average lending margin, including the amortisation of costs, of 2.43 per cent per annum (2021: 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 £150,000,000 (2021: £50,000,000) and has hedged its exposure on £30,000,000 (2021: £30,000,000) of the variable rate loans, as referred to above, through entering into a fixed rate interest rate swap. 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 swap used to fix the interest rate on an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £150,000,000 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 8, whereas the fair value of the interest rate swap is recognised directly on the Group's balance sheet. At 30 June 2022, an increase of 0.25 per cent in interest rates would have increased the fair value of the interest rate swap asset and increased the reported total comprehensive income for the year by £211,000 (2021: £298,000). The same movement in interest rates would have decreased the fair value of the fixed rate term loans by an aggregate of £2,822,000 (2021: £1,106,000); 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.
11. Capital commitments
The Group had capital commitments as follows:
|
| 30 June 2022 £'000 | 30 June 2021 £'000 |
| Amounts due to complete forward fund developments | 34,458 | 21,054 |
| Other capital expenditure commitments | 3,594 | 3,158 |
| Total | 38,052 | 24,212 |
12. Contingent assets and liabilities
As at 30 June 2022, fourteen (2021: twelve) 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 £13,320,000 (2021: £20,025,000) 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 were highly likely to be met in relation to two of these properties and therefore at 30 June 2022 an amount of £2,800,000 (2021: £1,550,000) has been recognised as a liability. An equal but opposite amount has 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 were the performance payments to be paid and the contracted rental income increased accordingly.
13. 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 £214,000 (2021: £181,000) of which £nil (2021: £12,000) remained payable at the year-end.
The Investment Manager received £7,307,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2022 (2021: £5,796,000). Of this amount £1,895,000 (2021: £1,551,000) remained payable at the year-end. The Investment Manager received a further £151,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2022 (2021: £146,000) in relation to its appointment as Company Secretary and Administrator, of which £38,000 (2021: £36,000) 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.
14. 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.
15. Post balance sheet events
As at 10 October 2022, the Company's share price was 86.0 pence per share (30 June 2022: 108.4 pence).
16. Financial statements
This statement was approved by the Board on 11 October 2022. 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 2022 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 2022 will be posted to shareholders in October/November 2022 and will be available for inspection at Level 13, Broadgate Tower, 20 Primrose Street, London, EC2A 2EW, 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 2022 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 6 December 2022.
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.
| | | 2022 pence | 2021 pence |
| EPRA Net Tangible Assets per share (see note 4) | (a) | 112.3 | 110.4 |
| Share price | (b) | 108.4 | 115.4 |
| (Discount)/premium | = (b-a)/a | (3.5)% | 4.5% |
Dividend Cover - the percentage by which Group specific adjusted EPRA earnings for the year cover the dividend paid.
| | | 2022 £'000 | 2021 £'000 |
| Group-specific EPRA earnings for the year (see note 4) | (a) | 30,242 | 25,955 |
|
First interim dividend | |
10,482 |
7,686 |
| Second interim dividend | | 10,482 | 7,686 |
| Third interim dividend | | 10,482 | 8,594 |
| Fourth interim dividend | | 10,482 | 8,594 |
| Dividends paid in relation to the year | (b) | 41,928 | 32,560 |
| Dividend cover | = (a/b) | 72% | 80% |
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.
| | | 2022 £'000 | 2021 £'000 |
| Investment management fee | | 7,307 | 5,796 |
| Other expenses | | 3,163 | 2,617 |
| Less direct property costs and other non-recurring items | | (347) | (263) |
| Adjustment to management fee arrangements and irrecoverable VAT* | |
312 |
49 |
| Total | (a) | 10,435 | 8,199 |
| Average net assets | (b) | 693,292 | 528,035 |
| Ongoing charges | = (a/b) | 1.51% | 1.55% |
* Based on the Group's net asset value at 30 June 2022, the management fee is expected to be paid at a weighted average rate of 1.02% (2021: 1.04%) of the Group's average net assets plus an effective irrecoverable VAT rate of approximately 7% (2021: 7%). The management fee has therefore been amended so that the Ongoing Charges figure includes the expected all-in management fee rate of 1.10% (2021: 1.11%).
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.
| | | 2022 | 2021 | ||||
| | | EPRA NTA (pence) | IFRS NAV (pence) | Share price (pence) | EPRA NTA (pence) | IFRS NAV (pence) | Share price (pence) |
| Value at start of year | (a) | 110.4 | 110.5 | 115.4 | 108.1 | 108.0 | 110.0 |
| Value at end of year | (b) | 112.3 | 112.7 | 108.4 | 110.4 | 110.5 | 115.4 |
| Change in value during year (b-a) | (c) | 1.9 | 2.2 | (7.0) | 2.3 | 2.5 | 5.4 |
| Dividends paid | (d) | 6.8 | 6.8 | 6.8 | 6.7 | 6.7 | 6.7 |
| Additional impact of dividend reinvestment |
(e) |
0.3 |
0.3 |
(0.2) |
0.5 |
0.4 |
0.3 |
| Total gain in year (c+d+e) | (f) | 9.0 | 9.3 | (0.4) | 9.5 | 9.6 | 12.4 |
| Total return for the year | = (f/a) | 8.1% | 8.4% | (0.3)% | 8.8% | 8.9% | 11.3% |
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.
| | 2022 | 2021 |
| EPRA Net Reinstatement Value (£'000) | 756,708 | 609,630 |
| EPRA Net Tangible Assets (£'000) | 696,483 | 564,934 |
| EPRA Net Disposal Value (£'000) | 721,024 | 563,796 |
| EPRA Net Reinstatement Value per share (pence) | 122.0 | 119.2 |
| EPRA Net Tangible Assets per share (pence) | 112.3 | 110.4 |
| EPRA Net Disposal Value per share (pence) | 116.2 | 110.2 |
| EPRA Earnings (£'000) | 39,674 | 34,047 |
| Group specific adjusted EPRA earnings (£'000) | 30,242 | 25,955 |
| EPRA Earnings per share (pence) | 6.62 | 7.16 |
| Group specific adjusted EPRA earnings per share (pence) | 5.05 | 5.46 |
| EPRA Net Initial Yield | 5.38% | 5.76% |
| EPRA Topped-up Net Initial Yield | 5.82% | 5.83% |
| EPRA Vacancy Rate | - | - |
| EPRA Cost Ratio - including direct vacancy costs | 21.5% | 22.3% |
| EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) | 27.1% | 26.6% |
| EPRA Cost Ratio - excluding direct vacancy costs | 21.5% | 22.3% |
| EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) |
27.1% |
26.6% |
| EPRA Loan-to-Value | 24.0% | 17.8% |
| Capital Expenditure (£'000) | 209,540 | 54,859 |
| Like-for-like Rental Growth | 4.6% | 0.1% |
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).
| | | 2022 £'000 | 2021 £'000 |
| Annualised passing rental income based on cash rents | (a) | 51,217 | 40,763 |
| Notional rent expiration of rent-free periods or other lease incentives | |
4,259 |
450 |
| Topped-up net annualised rent | (b) | 55,476 | 41,213 |
| Standing assets including properties held for sale (see notes 5 and 6) | |
892,336 |
662,495 |
| Allowance for estimated purchasers' costs | | 60,225 | 44,696 |
| Grossed-up completed property portfolio valuation | (c) | 952,561 | 707,191 |
| EPRA Net Initial Yield | = (a/c) | 5.38% | 5.76% |
| EPRA Topped-up Net Initial Yield | = (b/c) | 5.82% | 5.83% |
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space (excluding forward fund developments and properties held for sale) divided by the contractual rent of the investment property portfolio, expressed as a percentage.
| | | 2022 £'000 | 2021 £'000 |
| Annualised potential rental value of vacant premises* | (a) | - | - |
| Annualised potential rental value of the property portfolio (including vacant properties) |
(b) |
55,476 |
41,213 |
| EPRA Vacancy Rate | = (a/b) | - | - |
* There were no unoccupied properties at either 30 June 2022 or 30 June 2021.
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 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Investment management fee | | 7,307 | 5,796 |
| Credit loss allowance and bad debts | | 3,232 | 2,717 |
| Other expenses | | 3,163 | 2,617 |
| EPRA costs (including direct vacancy costs) | (a) | 13,702 | 11,130 |
| Specific cost adjustments, if applicable | | - | - |
| Group specific adjusted EPRA costs (including direct vacancy costs) | (b) |
13,702 |
11,130 |
| Direct vacancy costs | (c) | - | - |
| Gross rental income per IFRS | (d) | 63,859 | 49,980 |
| Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives |
|
(10,215) |
(8,739) |
| Adjusted for surrender premiums recognised in capital |
| (3,877) | - |
| Adjusted for development interest under forward fund arrangements |
|
783 |
647 |
| Group specific adjusted gross rental income | (e) | 50,550 | 41,888 |
| EPRA Cost Ratio (including direct vacancy costs) | = (a/d) | 21.5% | 22.3% |
| EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) |
= (b/e) |
27.1% |
26.6% |
| EPRA Cost Ratio (excluding direct vacancy costs) | = ((a-c)/d) | 21.5% | 22.3% |
| EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) |
= ((b-c)/e) |
27.1% |
26.6% |
EPRA Loan-to-Value
| | | As at 30 June 2022 £'000 | As at 30 June 2021 £'000 |
| Borrowings | | 234,750 | 130,000 |
| Net payables | | 18,213 | 13,113 |
| Cash and cash equivalent | | (34,483) | (21,106) |
| Net debt | (a) | 218,480 | 122,007 |
| | |
| |
| Investment properties at market value | | 911,596 | 677,525 |
| Properties held for sale | | - | 7,320 |
| Total property value | (b) | 911,596 | 684,845 |
| EPRA Loan-to-Value | = (a/b) | 24.0% | 17.8% |
EPRA Capital Expenditure
| | | Year ended 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Acquisitions (including acquisition costs) | | 178,830 | 34,808 |
| Forward fund developments | | 28,851 | 20,032 |
| Like-for-like portfolio | | 1,859 | 19 |
| Total capital expenditure |
| 209,540 | 54,859 |
| Conversion from accrual to cash basis |
| (2,547) | (3,459) |
| Total capital expenditure on a cash basis |
| 206,993 | 51,400 |
Like-for-like Rental Growth
| | | Year ended 30 June 2022 £'000 | Year ended 30 June 2021 £'000 |
| Opening contractual rent | (a) | 41,213 | 39,013 |
| Rent reviews | | 1,581 | 686 |
| Movement in variable rental leases | | - | (162) |
| Re-tenanting of properties | | 312 | (468) |
| Like-for-like rental growth | (b) | 1,893 | 56 |
| Acquisitions and developments | | 12,370 | 2,582 |
| Disposals | | - | (438) |
| Total movement | (c) | 14,263 | 2,200 |
| Closing contractual rent | = (a+c) | 55,476 | 41,213 |
| Like-for-like rental growth | = (b/a) | 4.6% | 0.1% |
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