10 October 2023
Target Healthcare REIT plc
ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2023
Modern care home portfolio delivering strong operational performance underpinned by continued institutional investor and end-user demand.
Target Healthcare REIT plc (the "Company" or the "Group"), the listed specialist investor in modern, purpose-built UK care homes, is pleased to announce its annual results for the year ended 30 June 2023.
Continued earnings growth; EPRA NTA and valuation growth in the second half of the financial year; clear path for sustainable dividend
· NAV total return(1) of -1.2% (2022: 8.1%), with valuation uplifts of 1.5% in the second half of the financial year predominantly reflecting inflation-linked leases.
· EPRA NTA per share decreased 6.9% to 104.5 pence (2022: 112.3 pence)
· Group specific adjusted EPRA earnings per share increased 18.8% to 6.00 pence per share (2022: 5.05 pence)
· Dividend decreased by 8.6% to 6.18 pence in respect of the year (2022: 6.76 pence), following the reduction in Q1 2023
· Intention to increase the quarterly dividend in respect of the year ending 30 June 2024 by 2.0% to 1.428 pence per share, representing an annual total dividend of 5.712 pence
· Dividends in respect of the period were 97% covered by adjusted EPRA earnings, with full cover for dividends paid in respect of the periods from January 2023 onwards. Under the widely-used EPRA earnings metric the annual dividend was 124% covered
· Net loan-to-value ("LTV") of 24.7% as at 30 June 2023, with an average cost of drawn debt, inclusive of the amortisation of loan arrangement costs, of 3.70% and weighted average term to maturity of 6.2 years. £230 million of debt, being 100% of total drawn debt at 30 June 2023, fully hedged to maturity against further interest rate increases
Strong portfolio performance through year; Rent cover ahead of pre-pandemic levels and other key portfolio metrics trending upward, supported by needs-based demand for care services and lack of supply of modern real estate.
· Portfolio to 97 properties, consisting of 93 modern operational care homes and four pre-let sites let to 32 tenants with a total value of £868.7 million
· Robust and improving portfolio performance, 97% of rent collected for the year, with 99% rent collection and mature home rent cover of 1.75x for the most recent quarter. Mature homes spot occupancy currently at 86%
· Resilient portfolio performance versus wider commercial real estate market with portfolio value decreased by £42.9 million, or 4.7%, to £868.7 million, including a like-for-like valuation decrease of 4.1% (2022: increase of 4.2%) versus 19% capital decline in the CBRE UK monthly index (all property)
· Contractual rent increased by 2.0% to £56.6 million per annum (2022: £55.5 million), including a like-for-like increase of 3.8% predominantly driven by rent reviews
· Portfolio becoming increasingly mature, with 90% of the operational portfolio having passed the "fill up" stage, relative to 71% at the start of the pandemic, supporting tenant profitability and resilience.
· Disposals of £27 million, ahead of carrying value, in order to recycle capital out of older, non-core assets in less preferred geographies, with the sale of the four-property portfolio delivering an annualised ungeared IRR in excess of 10% over the period of ownership
· One of the longest weighted average unexpired lease terms in the listed UK real estate sector of 26.5 years (2022: 27.2 years)
Compelling sector tailwinds; responsible investment strategy with a clear purpose to improve the UK's care home real estate and future-proofed portfolio
· Compelling sector tailwinds with long-term demand from ageing population supporting both investor and operator activity in the sector
· Strong alignment of ESG principles, with continued social purpose and advocacy of minimum real estate standards across the sector
o Modern, purpose-built care homes; full en suite wet-rooms account for 98% of the portfolio compared to just 31% for all UK care homes
o 80% of the portfolio purpose-built from 2010 onwards, compared to 12% for all care homes in England and Scotland
o 94% of the portfolio A or B EPC rated
o Sector-leading average 47m2 of space per resident
(1) Based on EPRA NTA movement and dividends paid
Alison Fyfe, Chair of the Company, said:
"The Board remains confident in the Group's prospects. Our portfolio consists of premium quality assets in a critical real estate investment class with compelling sector tailwinds.
"Our portfolio is performing strongly, benefitting from our initiatives to dispose of non-core assets, from further capex to refresh or enhance our real estate, from our active engagement with tenants, and from the more favourable trading environment. Our vacancy rate remains at nil with rent collection, rent cover and underlying resident occupancy all improving. Asset valuations remain stable, and our financing costs are well-protected from higher interest rates.
"This improvement in portfolio performance, when combined with our effective management of interest rate exposure, gives us confidence in the Group's earnings outlook, allowing us to increase our dividend in line with rental growth."
A webcast presentation for investors and analysts will take place at 8.30am BST this morning, which can be accessed at: https://stream.brrmedia.co.uk/broadcast/64e771c98fa54022913411e5
LEI: 213800RXPY9WULUSBC04
Enquiries:
| Target Fund Managers Kenneth MacKenzie / Gordon Bland
Stifel Nicolaus Europe Limited Mark Young / Rajpal Padam / Catriona Neville
| 01786 845 912
020 7710 7600 | |
| FTI Consulting Dido Laurimore / Richard Gotla
| 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 2023 comprised 97 assets let to 32 tenants with a total value of £868.7 million.
The Group invests in modern, purpose-built care homes that are let to high quality tenants who demonstrate strong operational capabilities and a strong care ethos. The Group builds collaborative, supportive relationships with each of its tenants as it believes working in this way helps raise standards of care and helps its tenants build sustainable businesses. In turn, that helps the Group deliver stable returns to its investors.
Chairman's Statement
I am delighted to provide you with this update, which clearly shows a strong real estate business providing unique social impact in the sector. Our portfolio's key performance metrics show the significant progress we have made. Our vacancy rate remains at nil with rent collection, rent cover and underlying resident occupancy all improving. Asset valuations remain stable, and our financing costs are well-protected from higher interest rates.
1. Reflections
At this time last year, we reaffirmed that our business model and strategy would provide stable long-term income and total returns despite the challenging macro headwinds. Our share price has declined alongside the UK REIT sector, reflecting the expected impact of higher interest rates and concerns for the UK economy on earnings and valuation outlooks. We believe our own outlook is more positive, given the high levels of investment demand for our assets, the underlying demographics of an ageing population, and the dearth of quality care home real estate across the UK. Our portfolio is performing strongly, benefitting from our initiatives to dispose of non-core assets, from further capex to refresh or enhance our real estate, from our active engagement with tenants, and from the more favourable trading environment.
The downward pressure on real estate valuations was muted in our portfolio, underpinned by the strength of investment demand for our type of modern, purpose-built assets and from the improved trading conditions our tenants are encountering. The net result has been a valuation move of c.40 basis points on yield, significantly lower than UK real estate has experienced more widely. The targeted disposals of some older properties, which the Investment Manager assessed as having a less favourable outlook, were achieved at or above book values recorded prior to the market valuation decline in late 2022, with the sale of the four-property portfolio delivering an annualised IRR in excess of 10% over the period of ownership.
Our earnings outlook remains robust, with rent collection having improved to 99% in the most recent quarter (97% for the year). Improved tenant profitability across the portfolio (rent cover of 1.75x for the most recent quarter) supports our sustainable rental levels and embedded annual rental growth. We have minimised the impact of the higher interest rate environment on the Group's earnings through our existing long-term fixed rate facilities and our hedging programme applied to our flexible debt.
We have also maintained our social and environmental impact commitments, prioritising investment capital towards developing new-build homes which offer the best modern amenities for residents and minimise energy usage. Likewise, we have continued to collect energy usage data from our portfolio, analysis of which shapes our ongoing investment to reduce carbon emissions.
The change in market interest rates experienced earlier in the year did, of course, have a significant impact on our ability to grow earnings through acquisitions. We substantially reduced our new investment programme as the relative outward movement in income yields did not correlate with the more significant increase in the Group's cost of capital. We reduced the dividend level in response to ensure earnings were immediately covering our payouts to shareholders, providing a stable platform for future growth and total returns.
2. Outlook
Despite the more challenging macroeconomic environment, strong sector tailwinds continue to support investment in modern care home real estate. Underlying demand for residential care places is supported by demographic change, evidenced by projected growth in the number of those aged over 85, and investment demand for modern, ESG-compliant care home real estate remains strong.
On inflation and recessionary concerns, our portfolio bias towards private pay provides comfort that our tenants are more likely to be able to pass on their cost increases through higher resident fees, supporting sustainable tenant trading. We have seen evidence over the year that the quality of our real estate allows tenants to secure commercially appropriate fee levels.
We feel that portfolio valuations are robust and our rental income is high quality. On the former, we note transactional evidence of healthy competition for assets which are being marketed for sale. A number of buyers are participating in processes for prime assets such as ours, though we note this is not the case for sub-prime, poorer quality real estate.
3. Performance
Our total return performance of -1.2% for the year, driven by an EPRA NTA reduction of 6.9% (104.5 pence from 112.3 pence) and dividends of 6.18 pence per share, reflects our resilient portfolio and the muted impact of the wider correction in commercial real estate valuations.
The Investment Manager comments in more detail on rent cover and occupancy in the Investment Manager's Report, with these key metrics trending positively as trading conditions and performance in prime care homes improves.
The portfolio valuation movement has been driven by market movements, our disposals programme and the impact of rental uplifts, providing an overall valuation reduction of 4.7% and a like-for-like decrease of 4.1%. Contracted rent has increased by 2.0% to £56.6 million, and 3.8% on a like-for-like basis.
Adjusted EPRA earnings increased by 23% to £37.2 million, equating to an adjusted EPRA earnings per share of 6.00 pence. This translates to 97% dividend cover for the year with full cover for dividends paid in respect of the periods from January 2023 onwards. Under the widely-used EPRA earnings metric the dividend was 124% covered.
4. Investment market and care home trading
We saw a pause and a re-pricing of deals in progress as an immediate reaction to September 2022's mini-budget and the uncertainty which followed. During early 2023 a number of these transactions slowly started to complete again, at prices generally higher than those considered during re-pricing discussions at the trough. The strength of demand and the number of buyers active in the market were influential supporters of values, as was the continued improvement in trading profitability at operational homes. This market activity continues today, with a weight of capital investing in the ESG?compliant, modern homes which are our staple.
In care home trading we have seen a reversal of pandemic fortunes between homes focussed on private residents versus those with a local authority bias. Profitability is now increasing in the former, which is reflected in our portfolio performance. Tellingly, we have seen a focus from tenants on admitting new residents at an appropriate fee level, as opposed to a "fill at any cost" approach. This has seen operator profitability improve to levels ahead of where they were prior to the COVID-19 pandemic and at resident occupancies around 5% lower (85% vs. 90%). This data is very encouraging and is consistent with the positivity on trading we hear from our tenants.
5. Governance
Board succession
Our succession plan has been completed with the appointments of Richard Cotton in November 2022 and Michael Brodtman in January 2023. Richard Cotton assumed the role of SID, and I assumed the Chair, on the retirements of Gordon Coull and Malcolm Naish on 6 December 2022.
Annual General Meeting ('AGM')
The AGM will be held in London on 29 November 2023. Shareholders are encouraged to make use of the proxy form provided in order to lodge their votes and to raise any questions or comments they may have in advance of the AGM through the Company Secretary.
6. Looking ahead
We see the following as our priorities:
? Manage our portfolio to ensure its performance is consistent with its inherent quality and trading advantages.
? Set ambitious but realistic environmental targets, and start to deliver tangible and observable progress towards these.
? Increase earnings from our embedded rental growth and efficient management of operating expenses and financing costs.
In the absence of unforeseen circumstances, the Board intends to increase the quarterly dividend in respect of the year ending June 2024 by 2.0% to 1.428 pence per share, representing an annual total dividend of 5.712 pence. In the six months since 1 January 2023 our portfolio has achieved rental growth of 2%, rental collection has increased to 99% and portfolio rent cover has increased to 1.75 times. This improvement in portfolio performance, when combined with our effective management of interest rate exposure, gives us confidence in the Group's earnings outlook, allowing us to increase our dividend in line with rental growth.
The Board remains confident in the Group's prospects. Our portfolio consists of premium quality assets in a critical real estate investment class with compelling sector tailwinds.
Alison Fyfe
Chair
9 October 2023
Investment Manager's Report
Overall portfolio performance
The year has seen conflicting pressures impacting portfolio returns. Our homes remain fully let with no vacancies and our rent collection has increased, to 99% for the most recent quarter and 97% for the year, in response to operator profitability growth across the portfolio from sustained higher occupancy and more stable trading conditions. Underlying resident occupancy was 85% for the portfolio at June 2023 and is 86% at the time of writing, with rent cover for the June 2023 quarter of 1.75x (June 2022: 1.3x). This improvement to the financial performance has supported property valuations for our type of modern, purpose-built assets, as has continued strong investment demand. Nevertheless, valuations have decreased overall, driven by the downwards pressure on commercial real estate mainly from higher interest rates and persistent inflation.
In relative terms, the portfolio has performed well. The portfolio once again outperformed the MSCI UK Annual Healthcare Property Index in respect of the calendar year to 31 December 2022 (THRL portfolio total return of 2.5% relative to the Index's 1.7%), and the like-for-like valuation decrease of 4.1% for the year to 30 June 2023 compares well to the 19% capital decline in the CBRE UK monthly index (all property) over the same period. The valuation of the portfolio partially recovered in the second half of the financial year, with the like-for-like value increasing by 1.5%. The portfolio's annualised total return since launch now stands at 10.2% while the portfolio's last five-year period has an annualised total return of 8.6% relative to 8.1% and 6.9% respectively for the MSCI Index.
Rental quality and home trading
We have observed many operators sensibly focussing on admitting new residents at fee levels appropriate to the care package required, as opposed to prioritising occupancy. With management of costs, this approach is driving tenant profitability recovery to levels ahead of those seen prior to the pandemic. With resident occupancy levels around 5% lower now than pre-pandemic, further occupancy growth will translate to profitability increases and improved rent covers.
Average weekly resident fees across the portfolio have increased by 13%, reflecting the inflationary environment and the cost of care focus noted above. Operators' staff costs have increased by 6% due to wage increases, though expensive agency costs have decreased significantly. Energy costs and other operational expenses of 16% of revenues have remained stable. The following aspects of our investment strategy and asset management in the year have enhanced the quality of our rental streams:
? Mature homes1: 90% of our operational portfolio has passed the "fill-up" stage and is now mature, relative to 71% at start of the pandemic. This supports tenant profitability and resilience.
? Private pay bias: High-quality real estate supports tenants in setting resident fee rates, with further evidence that profitability at such homes is outperforming Local Authority biased-homes.
? Disposals of £27 million, moving on some of our older, non-core assets in less preferred geographies to refresh the portfolio.
? Re-tenantings: Full recovery of rent arrears from one tenant (6.4% of contracted rent roll) and completion of re-tenanting programme with another tenant, to 3.3% of rent roll from 5.3%.
Mature Homes as a Proportion of Total Portfolio
| | Mature Homes Percentage |
| Q2 2020 | 73% |
| Q2 2021 | 79% |
| Q2 2022 | 84% |
| Q2 2023 | 90% |
UK care home investment market & valuation drivers
Modern and ESG-compliant UK care homes with inflation-linked, long-term rents have continued to attract investment interest, with several buyers having remained active in the market through the year. Whilst a number of live transactions were paused and subject to re-pricing (by c.50bps) immediately following the mini-budget, there was little deal volume. Instead, sellers remained patient and net initial yields recovered by 10-20bps as deals re-emerged for completion early into 2023. This net movement of 30-40bps remains consistent with where we see pricing today. It should be noted that institutional buyers remain scarce/limited for non-prime, older care home real estate with these depressed demand levels likely to impact valuations thereon.
The established, specialist investors have been active in the market through the year, with a focus on the development of new-builds, and a limited volume of mature trading assets. The more generalist UK pension funds have become active again after a period of quiet due to tight yields for the strong tenant covenants they prefer and are making their way back in, alongside the US REITs who appear to be targeting the higher end of the yield curve at this point. In contrast to recent years, the larger European healthcare investors have been quiet, perhaps focussed on their existing portfolios following operator challenges on the continent.
On the operator side, we see M&A activity and some consolidation: partly as some well-run, smaller groups feel market conditions now suit following the tough pandemic years. Additionally, we see some of the larger operator groups looking to shift the overall quality and modernity of their estates through the acquisition of businesses operating exclusively from modern, purpose-built homes.
Health & social care update
We note below a number of areas which are prominent in our minds and those of our tenants:
Resident occupancy
Occupancy has continued on a slow but consistent upward trajectory towards pre-COVID levels. Progress in this respect has, at times, been stalled by workforce recruitment challenges, but, as mentioned elsewhere, we also note a new trend toward operators being more fee focused than in the pre-pandemic era, resisting the natural push to fill beds even where staff are available but where fees do not reflect the cost of care. Concerns that future residents have been put off by negative press around care homes during the pandemic seem to be fading, with good interest reported at lower ends of the acuity scale, where loneliness, isolation, and security play on people's minds. At the high end of the scale, acuity has become even more pronounced, as care homes seek to support the NHS with timely discharges from hospital, and many operators are focused on this task, but as noted, require sensible fee rates to provide this level of care.
Public funding of care
Following a trend of more than two decades, reform of (English) Social Care policy has stalled yet again. New funding in the main has been diverted primarily to the NHS and wider reform pushed into the long grass. On a more positive note, the sector (across the whole UK) has at least enjoyed some silver linings, not least being recognised as an essential contributor to the health of the NHS. Ring?fenced Government funding for hospital discharge has been useful, with continued funds this coming winter expected to benefit all parties. The "fair cost of care" exercise, implemented to establish core data for any reform, has proven useful in educating many stakeholders on the true costs of providing a care home placement. However, the funding of Local Authority care obligations and the cross?subsidisation of publicly-funded residents by private-fee paying residents remains unaddressed.
Staffing pressures
Staffing (recruitment) has settled down to more normalised everyday pressures compared to the crisis levels felt by many care homes over the last 18 months. Many operators continue to make use of the sponsorship licences, albeit there are concerns over calls for restrictions on the legislation. Few homes now are obliged to restrict occupancy due to staffing pressure, and most have reduced their agency dependency to occasional routine cover, or in many cases zero use, which is a welcome position to be in.
There has been much pressure on Government to introduce wider workforce policies, alongside a campaign to address the stigmas that exist around working in social care as opposed to the NHS. A funding pot of £600 million over the next two years was announced, part of which will be available to promote workforce issues, albeit operators are likely to have little control over the direction of such funds.
Inflationary pressures
Operators continue to focus on inflation. For two years those who have a healthy exposure to private residents (which we feel is essential), have been able to recover escalating costs with corresponding fee rises. Those in the sector who are not as fortunate to have this flexibility have taken some comfort in useful public pay awards, albeit not all Local Authorities have been well positioned (or willing) to match inflation, and pockets of poor public fee award/pressure remain, not least north of the border. Progressive operators are also becoming more adept at adopting an 'open book' policy with public funders (Local Authorities, NHS, etc), and many of the latter have engaged positively in the setting of fees in light of the current climate. Families of private residents are also well aware of inflationary pressures and have therefore generally been acceptive of corresponding fee rises, albeit operators are concerned that this patience may eventually be exhausted. Care homes of course, like other businesses, enjoyed some Government protection from energy price rises previously, but while that protection has come to an end, we have found that most progressive (and larger) operators have been reasonably protected from extreme pricing by prudent locking in to fixed price tariffs.
Pandemic as accelerant to change
While COVID-19 is still with us, and care homes remain on alert but confident in now well versed infection control protocols, we note that the pandemic has focussed the minds of many operators on building layout and suitability, and we believe that the now historic COVID-19 lockdowns may ultimately be seen as a catalyst for change, where modern homes with self-contained living units and en suite wet-rooms are regarded as de rigueur, which in time will further increase demand for quality beds.
Target Fund Managers Limited
9 October 2023
1 A mature home is a care home which has been in operation for more than three years.
Our Strategy
Our purpose, to improve the standard of living for older people in the UK, is achieved through our four strategic pillars.
Strategic pillar #1
Build a high-quality real estate portfolio
We are creating a portfolio of scale with a clear focus on the quality of real estate and diversification of income sources to provide a stable long-term platform for returns.
Better homes, modernising the sector
The Group's portfolio has historically grown through acquisitions of individual assets which meet our investment quality criteria.
Today, with the higher cost of capital and our marginal rate of debt financing currently exceeding initial rental returns, we are choosing to recycle our capital to ensure our portfolio remains modern and high quality and underpins the best possible care. This has seen us dispose of five properties in the current year:
? One property which was below the average standard of the 18-home portfolio acquired in December 2021.
? Four properties in Northern Ireland, being an exit from that local market where the fee and funding dynamics outlook is unfavourable.
All disposals were made at or above book value.
Proceeds of the sales have initially been used to repay flexible debt, and beyond that allocated to the development of new homes. Of the four homes in development at the start of the year, one reached practical completion in November, with the 66-bed home leased to a new tenant to the Group on a 35?year lease. One new 60-bed care home development site was acquired in January 2023. Following the year end, on 4 July, the Group acquired a pre-let development site for the construction of a 66?bed home, which will be built to exceptional ESG standards, with the highest certification standards anticipated which offer carbon net zero operational ability.
Funds have also been invested in the continual improvement of the portfolio, with the conversion of 128 beds into full wet-rooms at four of the Group's care-homes and work commenced at one care home to add an additional 18 rooms. A portion of capital has also been allocated to direct carbon reduction initiatives, most notably the installation of photovoltaic panels.
| Valuation Analysis | £millions |
| Valuation at 30 June 2022 | 912 |
| Acquisitions and developments | 20 |
| Disposals | (26) |
| Market yield shift | (73) |
| Rent reviews | 36 |
| Valuation at 30 June 2023 | 869 |
Valuation movement
The portfolio value reduced by 4.7% during the year, driven by the c.40 basis points of market yield shift applied as real estate valuations were impacted by the changed economic conditions. The like-for-like decrease was 4.1%, largely reflecting the positive impact of the Group's rental growth on valuations. The Group's disposals and development programmes resulted in a small net decrease to year-end portfolio value.
Best-in-class real estate
Our investment thesis remains that modern, purpose-built care homes will out-perform poorer real estate assets and provide compelling returns.
Wet-rooms (98%): These are essential for private and dignified hygiene, with trends continuing to show residents expect and demand this.
Carbon reduction (94% EPC A or B; 100% C or better): Energy efficiency of real estate is critical, with legislative change and public opinion demanding higher standards. Our portfolio is substantially better than peers.
Purpose-built and modern (100%): All our properties are designed and built to be used as care homes and to best meet the needs of residents and staff.
Financials: Our metrics reflecting capital values and rental levels compare favourably with peers, demonstrating sustainability and longevity.
Portfolio Differentiators
We know the standard of UK care home real estate. The metrics below compare our portfolio with other listed care home portfolios.
| | Group | Listed Peer Group1 |
| En suite wet-rooms with shower | 98% | 28% |
| En suite WC rooms | 100% | 86% |
| Purpose-built 2010 onwards | 80% | 13% |
| Purpose-built 2000 - 2009 | 17% | 27% |
| Purpose-built 1990 - 1999 | 3% | 21% |
| Purpose-built pre-1990's | - | 20% |
| Converted property | - | 19% |
| Average sqm per bedroom | 47 | 40 |
|
EPC B or better |
94% |
58% |
| EPC C | 6% | 35% |
| EPC D or lower | - | 7% |
| Average value per bed | £131k | £101k |
| Value per built sqm | £2.8k | £2.5k |
| Average rent per bed per annum | £8.8k | £6.8k |
| Rent per built sqm | £180 | £172 |
1 The Investment Manager monitors the key statistics for its listed peer group, and the analysis in the table is the weighted average scores for this peer group.
Diversification
We continue to ensure the portfolio remains diversified, by leasing our homes to a range of high-quality regional operators. The Group has 32 tenants, down from 34 in the previous year due to the disposals in the year. The largest tenant is unchanged from 2022, being Ideal Carehomes who operate 18 of the Group's homes and account for 16% of contracted rent as at 30 June 2023. Overall, our top five tenants account for 41% and top ten, 63% of our contracted rents.
Underlying resident fees are balanced between private and public sources, with a deliberate bias towards private. There is long-term evidence and strong current anecdotal evidence that this group is accepting of higher fees, particularly for the quality real estate and care services our properties and their operators provide.
Census data from our tenants shows that 73% of residents are privately-funded, with 50% being fully private and 23% from "top up" payments where residents pay over and above that which the Local Authority funds for them. 27% of residents are wholly publicly funded.
Geographically, Yorkshire and the Humber remains the largest region by asset value at 25%.
Strategic pillar #2
Manage portfolio as a trusted landlord in a fair and commercial manner.
The Investment Manager has deep experience within the sector and uses its unique knowledge to manage the portfolio. Starting with informed assessment of home performance using profitability and operational metrics, through empathetic and sensitive engagement with our tenants and sector participants as a whole - we are trusted and respected and people want to partner with us. This enables fair treatment and commerciality to be balanced, essential in a complex sector.
| What | Why | Achieved |
| £27m of disposals ? Five properties. ? 3% of opening portfolio value. | ? One property of a standard of physical real estate that met our strict acquisition criteria when acquired as part of a portfolio, but which was below the overall standard of the portfolio. ? Four properties with total return outlook lower than that of the overall portfolio given resident funding and fee pressures specific to their geographic area.
| ? Network and relationships identified potential purchasers. ? Sales proceeds obtained ahead of carrying values and crystallising satisfactory IRRs. ? Proceeds applied to reduce drawn variable rate debt in time of rising interest rates. ? Capital allocated long-term to a next generation energy?efficient development. |
| Engagement with tenants and wider operator network Constructive dialogue with two tenants and alternative operators allowed us to: ? Recover rent arrears from one. ? Re-tenant a further home from one, moving to our preferred three-home position. | ? Assisted the tenants with operational and cash flow pressures following persistence of pandemic affected trading. ? Protected rental quality and asset values. ? Maintained uninterrupted care for residents. | Demand from care providers for our best-in-class assets allowed us to: ? Maintain prevailing rent levels on re-tenanting. ? Fully recovered £1.1 million of rental arrears from one tenant group with fair commercial pressure applied from having agreed terms with alternative operators.
|
| Further investment to maintain and enhance property standards | ? To further increase proportion of wet rooms towards 100%. ? To enhance homes with specific asset management initiatives. | ? £3.7 million of capex committed to, and rentalised at market NIYs. ? Maintain our commitment to social impact through fit-for-purpose facilities for all residents. |
Portfolio profitability
Rent collection measured 97% (2022: 95%) for the year, with improvement throughout the year leading to 99% collection for the final quarter of the financial year.
Our portfolio is fully let therefore continues to have a vacancy rate of nil. Underlying resident occupancies have grown to 85% at the year end and 86% at the date of this report. Whilst this remains lower than the pre-pandemic norm of 90%, many operators are focussed on accepting new residents at fee levels commensurate with the services provided, rather than filling to capacity at uneconomic fees. This approach efficiently manages demand, minimises the need for expensive agency staff, and facilitates a care-led approach when welcoming new residents to a home. Staffing shortages have eased, having been an operational challenge limiting occupancy growth early in the year.
Rent covers have grown in response, supporting rental payments and the rebuilding of tenant financial reserves. Portfolio rent cover for mature homes for the quarter to 30 June 2023 was 1.75x and for the year was 1.6x. These profitability and headroom levels are higher than those delivered prior to the pandemic when occupancy levels were higher, at around 90%. Clearly, there is potential for enhancement to tenant profitability and rent covers with higher occupancies, should homes choose to do so (enquiry levels are generally reported to be high). Whilst the focus of attention has been on resident fee levels, homes have generally managed their cost bases effectively, with the reduction in agency cost being the most material improvement.
Total returns and rental growth
The portfolio total return has again outperformed the MSCI UK Annual Healthcare Property Index, with a total return for the calendar year to 31 December 2022 of 2.5 per cent relative to the Index's 1.7 per cent. This outperformance has occurred consistently since launch in 2013 as shown in the table below.
| | Portfolio total return (%) | MSCI UK Annual Healthcare Property Index total return (%) |
| Period to 31 December 2014 | 20.3 | 15.0 |
| Year to 31 December 2015 | 14.5 | 10.3 |
| Year to 31 December 2016 | 10.6 | 7.9 |
| Year to 31 December 2017 | 11.9 | 11.7 |
| Year to 31 December 2018 | 12.7 | 9.1 |
| Year to 31 December 2019 | 9.2 | 7.4 |
| Year to 31 December 2020 | 8.2 | 6.8 |
| Year to 31 December 2021 | 10.5 | 9.6 |
| Year to 31 December 2022 | 2.5 | 1.7 |
Accounting total return was -1.2% for the year ended June 2023 and an annualised 6.9% since launch. The decline in property values seen in the second half of 2022 was the main driver of the decrease in NAV, with our quarterly dividends paid to shareholders now fully covered by earnings (97% covered for the full year). Property values now appear to have stabilised, as noted elsewhere, with continued investment demand for prime care homes.
Contractual rent has increased to £56.6 million, with like-for-like rental growth of 3.8% having been achieved for our annual, upward-only rent reviews with typical collars and caps at 2% and 4% respectively.
|
| Pence per share |
| EPRA NTA per share as at 30 June 2022 | 112.3 |
|
|
|
| Acquisition costs | (0.1) |
| Disposals | 0.1 |
| Property revaluations | (6.9) |
| Adjusted EPRA earnings | 6.0 |
| Dividends paid | (6.5) |
| Cost of interest rate cap | (0.4) |
|
|
|
| EPRA NTA per share as at 30 June 2023 | 104.5 |
Demand for assets from investors and operators
During the year, the Investment Manager's specialist knowledge, data-led assessment, and wide sector relationships, have allowed successful portfolio management initiatives noted in the table above to complete.
Tenant engagement and satisfaction
We remain committed to our role as an effective, supportive and engaged landlord. We once again invited our tenants to provide formal feedback via a survey, which, alongside learnings from the many points of contact we have, is used to inform our approach. The survey returned positive quantitative results, and more usefully some qualitative feedback on how we may consider altering our interactions with tenants to recognise that no two tenants are the same.
In summary:
? 10/10 of responders agreed that working with Target was a positive experience (2022: 9/10).
? 9/10 of responders agreed that Target provides real estate that is a great working environment and helps deliver dignified care to residents (2022: 9/10).
? 10/10 of responders agreed that Target participates in sector events and appropriately shares knowledge (2022: 10/10).
Resident satisfaction
Regulator (CQC in England) ratings are informative but limited. The Investment Manager also monitors reviews on "Carehome.co.uk", a "Tripadvisor" style website for care homes, as a useful source of real-time feedback which is more focussed on the resident experience, and that of their loved ones.
The portfolio's current average rating is 9.4/10 (2022: 9.3/10) with sufficient review volume and frequency to be considered a valuable data point for the quality of service experienced by residents.
Strategic pillar #3
Regular dividends for shareholders
Total dividends of 6.18 pence per share were declared and paid in respect of the year to 30 June 2023, a decrease of 0.58 pence on 2022 reflecting the decision to reduce the dividend from 1 January 2023. This represents a yield of 8.6% based on the 30 June 2023 closing share price of 71.8 pence.
Earnings
Earnings increased by 19%, as measured by adjusted EPRA EPS; the Group's primary performance measure. Rental income has increased, with operating expenses and financing costs being managed effectively.
Despite the disposal of five assets, rental income increased by 13% (£6.6 million) over the prior year, driven by the full-year effect of a significant portfolio of assets acquired part-way through the previous year, inflation-linked rental growth and the practical completion of development assets and new leases entered into.
The Group's operating expenses reduced by £3.0 million from the effects of the portfolio's trading performance improvements. In line with the increase to near full rent collection, credit loss allowances and bad debts improved to a charge of £0.3 million, £2.9 million lower than the prior year. Other administrative expenses remained consistent with 2022.
Net finance costs increased from £6.6 million to £10.1 million, predominantly driven by the annualisation effect of the increase in drawn debt in the previous year relating to the acquisition of the portfolio of assets. The significant increase in market interest rates in the second half of the financial year have been managed through existing fixed or hedged debt arrangements, supplemented by the acquisition of a £50 million 3% SONIA cap in November 2022, which has protected the Group's interest costs from further increases in interest rates as SONIA has risen to 4.93% at 30 June 2023.
Expense ratio
The Group's expense ratios reflect these movements.
The EPRA cost ratio decreased to 15.8% in 2023 from 21.5% in 2022 as a result of the significant reduction in the credit loss allowance and bad debts in the year. Both the Investment Manager fee and other expenses were broadly in line with the prior year in absolute terms resulting in a decrease in the cost ratio expressed as a percentage of the Group's increased rental income. The Ongoing Charges Figure was fairly stable at 1.53% (2022: 1.51%), the marginal increase driven by the decrease in the value of the portfolio.
|
| 2023 £m |
Movement | 2022 £m |
| Rental income (excluding guaranteed uplifts) | 56.4 | +13% | 49.8 |
| Administrative expenses (including management fee) | (10.7) | -22% | (13.7) |
| Net financing costs | (9.4) | +42% | (6.6) |
| Interest from development funding | 0.9 | +13% | 0.8 |
| Adjusted EPRA earnings | 37.2 | +23% | 30.2 |
|
|
| | |
| Adjusted EPRA EPS (pence) | 6.00 | +19% | 5.05 |
| EPRA EPS (pence) | 7.67 | +16% | 6.62 |
| Adjusted EPRA cost ratio | 18.7% | -840bps | 27.1% |
| EPRA cost ratio | 15.8% | -570bps | 21.5% |
| Ongoing Charges Figure ('OCF') | 1.53% | +2bps | 1.51% |
Uninvested Capital
At 30 June 2023 the Group had cash and undrawn debt of £105 million. £41.5 million of this is committed to developments or portfolio improvements, with £16.0m allocated to the acquisition of a further development site post year end which was awaiting drawdown. £47.5 million remains available. The Group continues to assess pipeline assets carefully on a case-by-case basis, with respect to market conditions and financing costs.
Debt
Debt facilities were unchanged in the year at £320m. The Group's £100 million revolving credit facility with HSBC was extended by one year to November 2025 and at 30 June 2023 the weighted average term to expiry on the Group's total committed loan facilities was 6.2 years (30 June 2022: 6.9 years)
In November 2022, the Group acquired a 3% SONIA interest rate cap, covering £50 million of the Group's revolving credit facilities. £230 million of the £320 million available debt was drawn at 30 June 2023, at a weighted average cost, inclusive of amortisation of loan arrangement costs, of 3.70%. £180 million of the drawn debt was fixed prior to the significant rise in interest rates seen in the second half of 2022.
The Group retains flexibility on debt levels, with £90 million of the Group's revolving credit facilities available to be drawn/repaid in line with capital requirements. If drawn, appropriate hedging protection will be considered.
Debt facilities are considered prudent with LTV of 24.7%, weighted average term of 6.2 years and all debt drawn at 30 June 2023 being hedged against further interest rate increases.
| Debt provider | Facility size |
Debt type | Drawn at 30 June 2023 |
Maturity |
| Phoenix Group | £150m | Term debt | £150m (fixed rate) | Jan 2032 - £87m Jan 2037 - £63m |
| RBS | £70m | £30m term debt, £40m revolving credit facility | £30m (hedged) | Nov 2025 |
| HSBC | £100m | Revolving credit facility | £50m (hedged) | Nov 2025 |
| Total | £320m |
| £230m |
|
Strategic pillar #4
To achieve our social purpose
| ESG Principles | What this means for Target | What we did in 2023 | What we'll do in 2024 and beyond |
| 1. Responsible 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 and well-being of residents, our tenants and their staff, 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 ? Development commitments for 262 new beds as at year-end. ? 66 new beds construction completed in year. ? 98% 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. ? Increased data collection to obtain portfolio coverage of 75% electricity and 79% gas usage. ? Used this data to benchmark energy usage and identify outlier homes - providing insightful feedback to tenants. ? Further used the data to target green building enhancements with £1 million of funding allocated to solar PV panels, delivering 20% CO2 reduction per home. ? External specialist engaged with carbon technical skills to guide in setting tangible and measurable targets by way of a steps plan to Net Zero. | Social ? Continue to advocate for quality real estate ? Continue to fund new homes, modernising the sector's real estate
Energy ? Continue data analysis to best target portfolio enhancements. ? Assess ongoing asset reviews and certifications (i.e. EPCs, BREEAMs) to initiate improvement programmes 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. |
| 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 and collaboration ? As a responsible, proactive landlord we prioritise good, open relationships with our tenants, sharing best practice. ? 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 ? 10/10 "positive experience" satisfaction score. ? Reprised hosting of tenant event with focus on knowledge sharing and best practice.
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 ? Invest in fully understanding and responding to feedback from tenant survey.
Communities ? Continue to prioritise the provision of modern real estate and continuity of services across our portfolio. |
| 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 and 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 and transparency ? Undertook director recruitment process resulting in Michael Brodtman and Richard Cotton being appointed during the year. ? Investment Manager successfully retained position as a signatory to the FRC Stewardship Code. ? £1.3 million taxation directly paid to the UK government by way of VAT and stamp duty land taxes. Dividends paid of £40.1 million are assessed for tax upon reaching shareholders. ? Inaugural ESG report issued with enhanced disclosures.
| Governance and transparency ? ESG committee will continue to provide momentum to the Group's carbon reduction investment and sustainability reporting. |
Principal and emerging risks and uncertainties
| Risk | 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. |
| High inflationary environment Risk rating & change: High (unchanged)
| 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. |
| Adverse interest rate fluctuations / debt covenant compliance Risk rating & change: Medium (decreased)
| 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 £230 million of borrowings as at 30 June 2023. |
| Development costs Risk rating & change: Medium (unchanged)
| 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. |
| Negative perception of the care home sector Risk rating & change: Medium (increased)
| A negative perception of the care home sector, due to matters such as societal trends, pandemic or safeguarding failures, or difficulties in accessing social care, may result in a reduction in demand for care home beds, causing asset performance to fall below expectations despite the demographic shifts and the realities of needs-based demand in the sector. The resultant reputational damage could impact occupancy levels and rent covers across the portfolio. | 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 (unchanged)
| 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. |
| 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 its £100m RCF facility with HSBC by one year. |
| 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. The detailed consideration of the Company's viability and its continuation as a going concern, including sensitivity analysis to address the appropriate risks, is set out below.
Promoting the success of Target Healthcare REIT plc
The Board considers that it has made decisions during the year which will promote the success of the Group for the benefit of its members as a whole.
This section, which serves as the Company's section 172 statement, explains how the Directors have had regard to the matters set out in section 172 (1) (a)-(f) of the Companies Act 2006 for the financial year to 30 June 2023, taking into account the likely long-term consequences of decisions and the need to foster relationships with all stakeholders in accordance with the AIC Code.
| a) The likely consequences of any decision in the long term | Our investment approach is long-term with an average lease length of 26.5 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. |
| b) The interests of the Company's employees
| The Company is externally managed and therefore has no employees.
|
| 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.
|
| 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.
|
| 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.
|
The significant transactions where the interests of stakeholders were actively considered by the Board during the year were:
Dividends paid
The Board recognised the importance of dividends to its shareholders and, after careful analysis of the Group's forecast net revenue concluded that it was in the interests of all stakeholders to reduce the Company's dividend to a level at which it is expected to be fully covered with the potential for growth.
Ongoing investment and asset management activity
The Group acquired two new development sites, including one in July 2023. The new, high-quality beds which will be added to the market when these developments complete, combined with the Group's asset management activities to increase the percentage of wet rooms in the property portfolio to 98% and add further beds at another of the Group's properties, illustrate the Group's intent of improving the overall level of care home real estate in the UK. This approach targets attractive long?term returns to shareholders by focusing on a sustainable and 'future proofed' sector of the care home market. The latest development site acquired is for a care home to be built to exceptional ESG standards, with the highest certifications anticipated, which will offer carbon net-zero operational ability.
The sale of four homes in Northern Ireland was completed in the year. This followed the successful re-tenanting of the properties in the prior year and crystallised an annualised ungeared IRR in excess of 10% over the period of ownership. The disposal represented a full exit from the Northern Irish market and formed part of the Group's wider capital recycling and asset management strategy. The Group also sold a non-core asset that had been acquired as part of the 18-home portfolio in the prior year.
Capital financing
The Group extended its loan facility with HSBC plc by a further year, to November 2025 and entered into an interest rate cap on the £50 million of this facility currently drawn in order to reduce the Group's exposure to rising interest rates on its borrowings.
Director appointments
During the year, as part of the Board succession plan, Mr Cotton and Mr Brodtman were appointed as Directors. Mr Cotton's experience of real estate corporate finance and Mr Brodtman's extensive knowledge of the property sector is expected to benefit all stakeholders over the period of their respective appointments. These appointments complete the Board's succession plan for the medium term.
Stakeholders
The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are shareholders, tenants and their underlying residents, debt providers, the Investment Manager, other service providers and the community and the environment. The Board considers the long-term consequences of its decisions on its stakeholders to ensure the long-term sustainability of the Company.
| Shareholders | Shareholders are key stakeholders and the Board proactively seeks the views of its shareholders and places great importance on communication with them.
The Board reviews the detail of significant shareholders and recent movements at each Board Meeting and receives regular reports from the Investment Manager and Broker on the views of shareholders, and prospective shareholders, as well as updates on general market trends and expectations. The Chair and other Directors make themselves available to meet shareholders when required to discuss the Group's business and address shareholder queries. The Directors make themselves available at the AGM in person, with the Company also providing the ability for any questions to be raised with the Board by email in advance of the meeting.
The Company and Investment Manager also provide regular updates to shareholders and the market through the Annual Report, Interim Report, regular RNS announcements (including the quarterly NAV), quarterly investor reports and the Company's website. The Investment Manager intends to hold a results presentation on the day of publication of the Annual Report, as undertaken for the first time in October 2022, and will also meet with analysts and members of the financial press.
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| 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 7 to the extract from the Consolidated Financial Statements for more information). The Company maintains a positive working relationship with each of its lenders and provides regular updates, at least quarterly, on portfolio activity and compliance with its loan covenants in relation to each loan facility.
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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 2023 are contained in the Annual Report. . |
| Other service providers | The Board, through the Management Engagement Committee, formally reviews the performance of each of its significant service providers at least annually. The reviews will include the Company's legal advisers, brokers, tax advisers, auditors, depositary, valuers, company secretary, insurance broker, surveyors and registrar. The purpose of the review is to ensure that the quality of the service provided remains of the standard expected by the Board and that overall costs and other contractual arrangements remain in the interests of the Group and other significant stakeholders. The Investment Manager also reports regularly to the Board on these relationships.
The significant other service providers, particularly the Group's legal advisers and brokers, are invited to attend Board Meetings and report directly to the Directors where appropriate.
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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 its portfolio which will be used to align the portfolio appropriately with benchmarks over the medium and longer term. During the year, the Group has improved its ESG reporting through the introduction of its annual Sustainability Report, first published in March 2023, and through collating, submitting and publishing data under the GRESB benchmark standards. Under the remit of the newly established ESG Committee, the Board has encouraged the further development of the Investment Manager's property-by-property asset management plan to identify areas where the energy efficiency and carbon emissions of the Group's property portfolio can be further improved and approved an initial budget to action initiatives identified.
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Alison Fyfe
Chair
9 October 2023
Viability Statement
The AIC Code requires the Board to assess the Group's prospects, including a robust assessment of the emerging and principal risks facing the Group including those that would threaten its business model, future performance, solvency or liquidity. This assessment is undertaken with the aim of stating that the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities as they fall due over the period of their assessment.
The Board has conducted this review over a five-year time horizon, which is a period thought to be appropriate for a company investing in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial model covering a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can be forecast with a reasonable degree of accuracy. At 30 June 2023, the Group had a property portfolio which has long leases and a weighted average unexpired lease term of 26.5 years. The Group had drawn borrowings of £230.0 million, on which the interest rate had been fixed, either directly or through the use of interest rate derivatives, at a maximum weighted interest rate of 3.52 per cent per annum (excluding the amortisation of arrangement costs). The Group had access to a further £90.0 million of available debt under committed loan facilities which,
if drawn, would carry interest at a variable rate equal to SONIA plus 2.21%. The Group's committed loan facilities have staggered expiry dates with £170.0 million being committed 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 these loans on acceptable terms in due course.
The Directors' assessment of the Group's principal risks are highlighted above The most significant risks identified as relevant to the viability statement were those relating to:
· Poor performance of assets: The risk that a tenant is unable to sustain a sufficient rental cover, leading to a loss of rental income for the Group;
· High inflationary environment: The risk that the level of the UK inflation rate results in a real term decrease in the Group's income or erodes the profitability of tenants;
· Adverse interest rate fluctuations: The risk that an increase in interest rates may impact property valuations, increase the cost of the Group's variable rate debt facilities, and/or limit the Group's borrowing capacity;
· Negative perception of the care home sector reduces demand for care home beds: The risk that overall demand for care home beds is reduced resulting in a decline in the capital and/or income return from the property portfolio; and
· Reduced availability of care home staff: The risk that unavailability of staff restricts the ability of tenants to admit residents or results in significant wage cost inflation, impacting on the tenants' rental cover and leading to a loss of rental income for the Group.
In assessing the Group's viability, the Board has considered the key outputs from a detailed model of the Group's expected cashflows over the coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on rental receipts from the Group's tenants. The stressed level of default from the Group's tenants assumed in the financial modelling was based on a detailed assessment of the financial position of each individual tenant or tenant group, the structure in place to secure rental income (such as the strength of tenants' balance sheets, rental guarantees in place or rental deposits held) and included consideration of the cumulative impact on each tenant's financial reserves from recent economic conditions, including increasing staff and utilities costs and the reduced level of resident occupancy experienced following the pandemic.
Based on the results of the scenario analysis outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five?year period of its assessment.
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2023
| | |
Year ended 30 June 2023 | Year ended 30 June 2022 | ||||
| |
| Revenue | Capital | Total | Revenue | Capital | Total |
|
| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Revenue |
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|
|
| | | |
| Rental income | | 56,354 | 11,308 | 67,662 | 48,807 | 10,215 | 59,022 |
| Other rental income | | - | - | - | 796 | 3,877 | 4,673 |
| Other income | | 86 | - | 86 | 164 | - | 164 |
| Total revenue | | 56,440 | 11,308 | 67,748 | 49,767 | 14,092 | 63,859 |
| | |
|
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| | | |
| (Losses)/gains on revaluation of investment properties | 5 | - | (54,021) | (54,021) | - | 5,553 | 5,553 |
| Gains on investment properties realised | 5 | - | 575 | 575 | - | - | - |
| Losses on revaluation of properties held for sale | | - | - | - | - | (7) | (7) |
| Total income | | 56,440 | (42,138) | 14,302 | 49,767 | 19,638 | 69,405 |
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| |
|
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| | | |
| Expenditure | |
|
|
| | | |
| Investment management fee | 2 | (7,428) | - | (7,428) | (7,307) | - | (7,307) |
| Credit loss allowance and bad debts | 3 | (264) | - | (264) | (3,232) | - | (3,232) |
| Other expenses | 3 | (3,046) | - | (3,046) | (3,163) | - | (3,163) |
| Total expenditure | | (10,738) | - | (10,738) | (13,702) | - | (13,702) |
| Profit/(loss) before finance costs and taxation | | 45,702 | (42,138) | 3,564 | 36,065 | 19,638 | 55,703 |
| | |
|
|
| | | |
| Net finance costs | |
|
|
| | | |
| Interest income | | 134 | - | 134 | 71 | - | 71 |
| Finance costs | | (9,572) | (698) | (10,270) | (6,671) | - | (6,671) |
| Net finance costs | | (9,438) | (698) | (10,136) | (6,600) | - | (6,600) |
| Profit/(loss) before taxation | | 36,264 | (42,836) | (6,572) | 29,465 | 19,638 | 49,103 |
| Taxation | | - | - | - | (6) | - | (6) |
| Profit/(loss) for the year | | 36,264 | (42,836) | (6,572) | 29,459 | 19,638 | 49,097 |
| Other comprehensive income: | |
|
|
| | | |
| Items that are or may be reclassified subsequently to profit or loss | |
|
|
| | | |
| Movement in fair value of interest rate derivatives designated as cash flow hedges | | - | 2,742 | 2,742 | - | 2,033 | 2,033 |
| Total comprehensive income for the year | | 36,264 | (40,094) | (3,830) | 29,459 | 21,671 | 51,130 |
| Earnings per share (pence) | 4 | 5.85 | (6.91) | (1.06) | 4.92 | 3.28 | 8.20 |
The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement are derived from continuing operations.
No operations were discontinued in the year.
Consolidated Statement of Financial Position (audited)
As at 30 June 2023
| |
| As at 30 June 2023 | As at 30 June 2022 |
| | Notes | £'000 | £'000 |
| Non-current assets | | | |
| Investment properties | 5 | 800,155 | 857,691 |
| Trade and other receivables | | 76,373 | 63,651 |
| Interest rate derivatives | | 6,905 | 2,284 |
| | | 883,433 | 923,626 |
| Current assets | |
| |
| Trade and other receivables | | 9,459 | 5,549 |
| Cash and cash equivalents | | 15,366 | 34,483 |
|
| | 24,825 | 40,032 |
| Total assets | | 908,258 | 963,658 |
| Non-current liabilities | |
| |
| Loans | 7 | (227,051) | (231,383) |
| Trade and other payables | | (8,093) | (7,145) |
|
| | (235,144) | (238,528) |
| Current liabilities | |
| |
| Trade and other payables | | (18,306) | (26,363) |
| Total liabilities | | (253,450) | (264,891) |
| Net assets | | 654,808 | 698,767 |
| | |
| |
| Share capital and reserves | |
| |
| Share capital | 8 | 6,202 | 6,202 |
| Share premium | 8 | 256,633 | 256,633 |
| Merger reserve | | 47,751 | 47,751 |
| Distributable reserve | | 187,887 | 226,461 |
| Hedging reserve | | 5,026 | 2,284 |
| Capital reserve | | 40,914 | 83,750 |
| Revenue reserve | | 110,395 | 75,686 |
| Equity shareholders' funds | | 654,808 | 698,767 |
| | |
| |
| Net asset value per ordinary share (pence) | 4 | 105.6 | 112.7 |
| | |
| |
| | | | |
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2023
|
|
|
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 2022 |
| 6,202 | 256,633 | 47,751 | 226,461 | 2,284 | 83,750 | 75,686 | 698,767 |
| Total comprehensive income for the year: |
|
- |
- |
- |
- |
2,742 |
(42,836) |
36,264 |
(3,830) |
| Transactions with owners recognised in equity: |
|
|
|
|
|
|
|
|
|
| Dividends paid | 1 | - | - | - | (38,574) | - | - | (1,555) | (40,129) |
|
At 30 June 2023 |
|
6,202 |
256,633 |
47,751 |
187,887 |
5,026 |
40,914 |
110,395 |
654,808 |
For the year ended 30 June 2022
|
|
|
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: |
|
- |
- |
- |
- |
2,033 |
19,638 |
29,459 |
51,130 |
| Transactions with owners recognised in equity: |
|
|
|
|
|
|
|
|
|
| Dividends paid | 1 | - | - | - | (38,703) | - | - | (1,337) | (40,040) |
| Issue of ordinary shares | 8 | 1,087 | 123,913 | - | - | - | - | - | 125,000 |
| Expenses of issue | 8 | - | (2,508) | - | - | - | - | - | (2,508) |
|
At 30 June 2022 |
|
6,202 |
256,633 |
47,751 |
226,461 |
2,284 |
83,750 |
75,686 |
698,767 |
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2023
| | | Year ended 30 June 2023 | Year ended 30 June 2022 |
| | Note | £'000 | £'000 |
| Cash flows from operating activities |
|
|
|
| (Loss)/profit before tax | | (6,572) | 49,103 |
| Adjustments for: | |
| |
| Interest income | | (134) | (71) |
| Finance costs | | 10,270 | 6,671 |
| Revaluation gains on investment properties and movements in lease incentives, net of acquisition costs written off | 5 | 42,138 | (19,645) |
| Revaluation losses on properties held for sale | | - | 7 |
| Increase in trade and other receivables | | (4,550) | (3,768) |
| (Decrease)/increase in trade and other payables | | (325) | 3,340 |
|
|
| 40,827 | 35,637 |
| Interest paid | | (8,719) | (5,310) |
| Premium paid on interest rate cap | | (2,577) | - |
| Interest received | | 134 | 71 |
| Tax paid | | - | (6) |
| | | (11,162) | (5,245) |
| Net cash inflow from operating activities |
| 29,665 | 30,392 |
| | |
| |
| Cash flows from investing activities | |
| |
| Purchase of investment properties and properties held for sale, including acquisition costs | | (29,342) | (206,993) |
| Disposal of investment properties and properties held for sale, net of lease incentives | | 25,789 | 4,360 |
| Net cash outflow from investing activities |
| (3,553) | (202,633) |
|
Cash flows from financing activities | |
| |
| Issue of ordinary share capital | | - | 125,000 |
| Expenses of issue of ordinary share capital | | - | (2,508) |
| Drawdown of bank loan facilities | | 62,000 | 222,000 |
| Repayment of bank loan facilities | | (66,750) | (117,250) |
| Expenses of arrangement of bank loan facilities | | (205) | (1,839) |
| Dividends paid | | (40,274) | (39,785) |
| Net cash (outflow)/inflow from financing activities |
| (45,229) | 185,618 |
| | |
| |
| Net (decrease)/increase in cash and cash equivalents |
| (19,117) | 13,377 |
| Opening cash and cash equivalents | | 34,483 | 21,106 |
| Closing cash and cash equivalents | | 15,366 | 34,483 |
| Transactions which do not require the use of cash | | |
| Movement in fixed or guaranteed rent reviews and lease incentives | 13,516 | 12,148 |
| Fixed or guaranteed rent reviews derecognised on disposal or re-tenanting | (732) | (3,362) |
| Total | 12,784 | 8,786 |
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
In accordance with Chapter 4 of the Disclosure Guidelines and Transparency Rules, we confirm that to the best of our knowledge:
· The financial statements contained within the Annual Report for the year ended 30 June 2023, of which this statement of results is an extract, have been prepared in accordance with applicable UK-adopted International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
· The Chairman's Statement, Investment Manager's Report and Our Strategy include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;
· 'Principal and emerging risks and uncertainties' includes a description of the Company's principal and emerging risks and uncertainties; and
· The Annual Report includes details of related party transactions that have taken place during the financial year.
On behalf of the Board
Alison Fyfe
Chair
9 October 2023
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2023.
|
| Dividend rate (pence per share) | Year ended 30 June 2023 £'000 |
| Fourth interim dividend for the year ended 30 June 2022 | 1.69 | 10,482 |
| First interim dividend for the year ended 30 June 2023 | 1.69 | 10,482 |
| Second interim dividend for the year ended 30 June 2023 | 1.69 | 10,482 |
| Third interim dividend for the year ended 30 June 2023 | 1.40 | 8,683 |
| Total | 6.47 | 40,129 |
Amounts paid as distributions to equity holders during the year to 30 June 2022.
|
| Dividend rate (pence per share) | Year ended 30 June 2022 £'000 |
| Fourth interim dividend for the year ended 30 June 2021 | 1.68 | 8,594 |
| First interim dividend for the year ended 30 June 2022 | 1.69 | 10,482 |
| Second interim dividend for the year ended 30 June 2022 | 1.69 | 10,482 |
| Third interim dividend for the year ended 30 June 2022 | 1.69 | 10,482 |
| Total | 6.75 | 40,040 |
It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend. The fourth interim dividend in respect of the year ended 30 June 2023, of 1.40 pence per share, was paid on 25 August 2023 to shareholders on the register on 11 August 2023 and amounted to £8,683,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.
2. Fee paid to the Investment Manager
| | Year ended 30 June 2023 | Year ended 30 June 2022 |
| | £'000 | £'000 |
| Investment management fee | 7,428 | 7,307 |
| Total | 7,428 | 7,307 |
The Group's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Fund Managers Limited (the 'Investment Manager' or 'Target'). The Investment Manager is entitled to an annual management fee calculated on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.
| Net assets of the Group | Management fee percentage |
| Up to and including £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 £141,000 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 2023 £'000 | Year ended 30 June 2022 £'000 |
| Total movement in credit loss allowance | (4,991) | 2,865 |
| Bad debts written off | 5,255 | 367 |
| Credit loss allowance charge | 264 | 3,232 |
| | Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Valuation and other professional fees | 1,131 | 1,143 |
| Auditor's remuneration for: |
| |
| - statutory audit of the Company | 131 | 118 |
| - statutory audit of the Company's subsidiaries | 221 | 230 |
| - review of interim financial information | 16 | 16 |
| Other taxation compliance and advisory* | 258 | 361 |
| Public relations and marketing | 229 | 327 |
| Directors' fees | 218 | 214 |
| Secretarial and administration fees | 208 | 177 |
| Direct property costs | 182 | 160 |
| Printing, postage and website | 95 | 111 |
| Listing and Registrar fees | 114 | 102 |
| Other | 243 | 204 |
| Total other expenses | 3,046 | 3,163 |
* The other taxation compliance and advisory fees were all paid to parties other than the Company's Auditor.
4. Earnings per share and Net Asset Value per share
Earnings per share
|
| Year ended 30 June 2023 | Year ended 30 June 2022 | ||
|
| £'000 | Pence per share | £'000 | Pence per share |
| Revenue earnings | 36,264 | 5.85 | 29,459 | 4.92 |
| Capital earnings | (42,836) | (6.91) | 19,638 | 3.28 |
| Total earnings | (6,572) | (1.06) | 49,097 | 8.20 |
|
|
|
| | |
| Average number of shares in issue |
| 620,237,346 | | 599,093,808 |
There were no dilutive shares or potentially dilutive shares in issue.
EPRA is an industry body which issues best practice reporting guidelines for financial disclosures by public real estate companies and the Group reports an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below. Other EPRA measures are included in the section below entitled EPRA Performance Measures.
The EPRA earnings are arrived at by adjusting for the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group.
The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for rental income arising from recognising guaranteed rental review uplifts and for development interest received from developers in relation to monies advanced under forward fund agreements which, in the Group's IFRS financial statements, is required to be offset against the book cost of the property under development. The Board believes that the Group's specific adjusted EPRA earnings represents the underlying performance measure appropriate for the Group's business model as it illustrates the underlying revenue stream and costs generated by the Group's property portfolio.
The reconciliations are provided in the table below:
|
| Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Earnings per IFRS Consolidated Statement of Comprehensive Income | (6,572) | 49,097 |
| Adjusted for gains on investment properties realised | (575) | - |
| Adjusted for revaluations of investment properties | 54,021 | (5,553) |
| Adjusted for revaluations of properties held for sale | - | 7 |
| Adjusted for finance and transaction costs on the interest rate cap and other capital items | 698 | (3,877) |
| EPRA earnings | 47,572 | 39,674 |
| Adjusted for rental income arising from recognising guaranteed rent review uplifts | (11,308) | (10,215) |
| Adjusted for development interest under forward fund agreements | 952 | 783 |
| Group specific adjusted EPRA earnings | 37,216 | 30,242 |
|
|
| |
| Earnings per share ('EPS') (pence per share) |
| |
| EPS per IFRS Consolidated Statement of Comprehensive Income | (1.06) | 8.20 |
| EPRA EPS | 7.67 | 6.62 |
| Group specific adjusted EPRA EPS | 6.00 | 5.05 |
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 105.6 pence (2022: 112.7 pence) is based on equity shareholders' funds of £654,808,000 (2022: £698,767,000) and on 620,237,346 (2022: 620,237,346) ordinary shares, being the number of shares in issue at the year-end.
The EPRA best practice recommendations include a set of EPRA NAV metrics that are arrived at by adjusting the net asset value calculated under International Financial Reporting Standards ('IFRS') to provide stakeholders with what EPRA believe to be the most relevant information on the fair value of the assets and liabilities of a real estate investment company, under different scenarios. The three EPRA NAV metrics are:
· EPRA Net Reinstatement Value ('NRV'): Assumes that entities never sell assets and aims to represent the value required to rebuild the entity. The objective is to highlight the value of net assets on a long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value movements on financial derivatives, are excluded and the costs of recreating the Group through investment markets, such as property acquisition costs and taxes, are included.
· EPRA Net Tangible Assets ('NTA'): Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax. Given the Group's REIT status, it is not expected that significant deferred tax will be applicable to the Group.
· EPRA Net Disposal Value ('NDV'): Represents the shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. At 30 June 2023, the Group held all its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements apart from its fixed-rate debt facilities where the fair value is estimated to be lower than the nominal value. See note 7 for further details on the Group's loan facilities.
| | 2023 EPRA NRV £'000 | 2023 EPRA NTA £'000 | 2023 EPRA NDV £'000 | 2022 EPRA NRV £'000 | 2022 EPRA NTA £'000 | 2022 EPRA NDV £'000 |
| IFRS NAV per financial statements | 654,808 | 654,808 | 654,808 | 698,767 | 698,767 | 698,767 |
| Fair value of interest rate derivatives | (6,905) | (6,905) | - | (2,284) | (2,284) | - |
| Fair value of loans | - | - | 39,672 | - | - | 22,257 |
| Estimated purchasers' costs | 57,461 | - | - | 60,225 | - | - |
| EPRA net assets | 705,364 | 647,903 | 694,480 | 756,708 | 696,483 | 721,024 |
| EPRA net assets (pence per share) | 113.7 | 104.5 | 112.0 | 122.0 | 112.3 | 116.2 |
5. Investment properties
Freehold and leasehold properties
| | As at 30 June 2023 | As at 30 June 2022 |
| | £'000 | £'000 |
| Opening market value | 911,596 | 677,525 |
| Opening fixed or guaranteed rent reviews and lease incentives | (56,705) | (47,919) |
| Opening performance payments | 2,800 | 1,550 |
| Opening carrying value | 857,691 | 631,156 |
| |
| |
| Disposals - proceeds | (26,728) | - |
| - gain on sale | 6,088 | - |
| Purchases and performance payments | 23,494 | 199,869 |
| Transfer from properties held for sale | - | 6,830 |
| Acquisition costs capitalised | 273 | 9,671 |
| Acquisition costs written off | (273) | (9,671) |
| Unrealised gain realised during the year | (5,513) | - |
| Revaluation movement - gains | 3,645 | 43,234 |
| Revaluation movement - losses | (43,877) | (15,862) |
| Movement in market value | (42,891) | 234,071 |
| Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting |
1,671 |
3,362 |
| Movement in fixed or guaranteed rent reviews and lease incentives | (13,516) | (12,148) |
| Movement in performance payments | (2,800) | 1,250 |
| Movement in carrying value | (57,536) | 226,535 |
| |
| |
| Closing market value | 868,705 | 911,596 |
| Closing fixed or guaranteed rent reviews and lease incentives | (68,550) | (56,705) |
| Closing performance payments (see Note 10) | - | 2,800 |
| Closing carrying value | 800,155 | 857,691 |
| Changes in the valuation of investment properties | Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Gain on sale of investment properties | 6,088 | - |
| Unrealised gain realised during the year | (5,513) | - |
| Gains on sale of investment properties realised | 575 | - |
| Revaluation movement | (40,232) | 27,372 |
| Acquisition costs written off | (273) | (9,671) |
| Movement in lease incentives | (2,208) | (1,933) |
| Movement in fixed or guaranteed rent reviews | (11,308) | (10,215) |
| (Losses)/gains on revaluation of investment properties | (53,446) | 5,553 |
The investment properties can be analysed as follows:
| | As at 30 June 2023 | As at 30 June 2022 |
| | £'000 | £'000 |
| Standing assets | 851,305 | 892,336 |
| Developments under forward fund agreements | 17,400 | 19,260 |
| Closing market value | 868,705 | 911,596 |
The properties were valued at £868,705,000 (2022: £911,596,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - 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 £800,155,000 (2022: £857,691,000). The adjustment consisted of £59,378,000 (2022: £48,802,000) relating to fixed or guaranteed rent reviews and £9,172,000 (2022: £7,903,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the accounts as non-current or current assets within 'trade and other receivables'. An adjustment is also made to reflect the amount by which the portfolio value is expected to increase if the performance payments recognised in 'trade and other payables' are paid and the passing rent at the relevant property increased accordingly (see Note 10). The total purchases in the year to 30 June 2023, excluding the performance payments recognised in the prior year, were £20,694,000 (2022: £201,119,000).
6. Investment in subsidiary undertakings
The Group included 49 subsidiary companies as at 30 June 2023 (30 June 2022: 57). All subsidiary companies were wholly owned, either directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was to act as an investment and property company. Other than one subsidiary incorporated in Jersey, two subsidiaries incorporated in Gibraltar and two subsidiaries incorporated in Luxembourg, all subsidiaries are incorporated within the United Kingdom.
The Group did not incorporate or acquire any new subsidiaries during the year. At 30 June 2022, the Group included eight companies which had been acquired as part of previous corporate acquisitions and which, having remained dormant throughout the prior year, were dissolved during the year ended 30 June 2023.
7. Loans
|
| As at 30 June 2023 £'000 | As at 30 June 2022 £'000 |
| Principal amount outstanding | 230,000 | 234,750 |
| Set-up costs | (4,520) | (4,315) |
| Amortisation of set-up costs | 1,571 | 948 |
| Total | 227,051 | 231,383 |
In November 2020, the Group entered into a £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 2023, the Group had drawn £30,000,000 under this facility (2022: £50,000,000).
In November 2020, the Group entered into a £100,000,000 revolving credit facility with HSBC Bank plc ('HSBC') which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.17 per cent per annum for the duration of the loan and a non-utilisation fee of 0.92 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2023, the Group had drawn £50,000,000 under this facility (2022: £34,750,000).
In January 2020 and November 2021, the Group entered into committed term loan facilities with Phoenix Group of £50,000,000 and £37,250,000, respectively. Both these facilities are repayable on 12 January 2032. The Group has a further committed term loan facility with Phoenix Group of £62,750,000 which is repayable on 12 January 2037. Interest accrues on these three loans at aggregate annual fixed rates of interest of 3.28 per cent, 3.13 per cent and 3.14 per cent, respectively and is payable quarterly. As at 30 June 2023, the Group had drawn £150,000,000 under these facilities (2022: £150,000,000).
The following interest rate derivatives were in place during the year ended 30 June 2023:
| 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 |
| 50,000,000 | 1 November 2022 | 5 November 2025 | nil | Daily compounded SONIA above 3.0% cap | HSBC |
The Group paid a premium of £2,577,000, inclusive of transaction costs of £169,000, on entry into the £50,000,000 interest rate cap.
At 30 June 2023, inclusive of the interest rate derivatives, the interest rate on £230,000,000 of the Group's borrowings has been capped, including the amortisation of loan arrangement costs, at an all-in rate of 3.70 per cent per annum until at least 5 November 2025. The remaining £90,000,000 of debt, which was undrawn at 30 June 2023, would, if fully drawn, carry interest at a variable rate equal to daily compounded SONIA plus a weighted average lending margin, including the amortisation of loan arrangement costs, of 2.46 per cent per annum.
The aggregate fair value of the interest rate derivatives held at 30 June 2023 was an asset of £6,905,000 (2022: £2,284,000). The Group categorises all interest rate derivatives as level 2 in the fair value hierarchy.
At 30 June 2023, the nominal value of the Group's loans equated to £230,000,000 (2022: £234,750,000). Excluding the interest rate derivatives referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated margin based on market conditions at 30 June 2023, totalled, in aggregate, £190,328,000 (2022: £212,493,000). The payment required to redeem the loans in full, incorporating the terms of the Spens clause in relation to the Phoenix Group facilities, would have been £209,898,000 (2022: £239,728,000). The loans are categorised as level 3 in the fair value hierarchy.
The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group ('THR1 Group') which consists of THR1 and its five subsidiaries. The Phoenix Group loans of £50,000,000 and £37,250,000 are secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its eight subsidiaries. The Phoenix Group loan of £62,750,000 is secured by way of a fixed and floating charge over the majority of the assets of THR Number 43 plc ('THR43'). The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and its 18 subsidiaries. In aggregate, the Group has granted a fixed charge over properties with a market value of £762,100,000 as at 30 June 2023 (2022: £795,949,000).
Under the covenants related to the loans, the Group is to ensure that:
· the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;
· the loan to value percentage for THR12 Group and THR43 does not exceed 60 per cent;
· the interest cover for THR1 Group is greater than 225 per cent (30 June 2022: 300 per cent) on any calculation date;
· the interest cover for THR15 Group is greater than 200 per cent (30 June 2022: 300 per cent) on any calculation date; and
· the debt yield for each of THR12 Group and THR43 is greater than 10 per cent on any calculation date.
During the year ended 30 June 2023, the Group entered into agreements with HSBC and RBS to relax the interest cover covenants on the relevant loans with effect from 1 January 2023. All other significant terms of the facilities remained unchanged. All loan covenants have been complied with during the year.
Analysis of net debt:
| | Cash and cash equivalents |
Borrowing |
Net debt | Cash and cash equivalents |
Borrowing |
Net debt |
| | 2023 | 2023 | 2023 | 2022 | 2022 | 2022 |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Opening balance | 34,483 | (231,383) | (196,900) | 21,106 | (127,904) | (106,798) |
| Cash flows | (19,117) | 4,955 | (14,162) | 13,377 | (102,911) | (89,534) |
| Non-cash flows | - | (623) | (623) | - | (568) | (568) |
| Closing balance | 15,366 | (227,051) | (211,685) | 34,483 | (231,383) | (196,900) |
8. Share capital
| Allotted, called-up and fully paid ordinary shares of £0.01 each | Number of shares | £'000 |
| Balance as at 30 June 2022 and 30 June 2023 | 620,237,346 | 6,202 |
Under the Company's Articles of Association, the Company may issue an unlimited number of ordinary shares. Ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.
During the year to 30 June 2023, the Company did not issue any ordinary shares (2022: issued 108,695,652 ordinary shares of £0.01 each raising gross proceeds of £125,000,000). The Company did not repurchase any ordinary shares into treasury (2022: nil) or resell any ordinary shares from treasury (2022: nil). At 30 June 2023, the Company did not hold any shares in treasury (2022: nil).
Capital management
The Group's capital is represented by the share capital, share premium, merger reserve, distributable reserve, hedging reserve, capital reserve, revenue reserve and long-term borrowings. The Group is not subject to any externally-imposed capital requirements, other than the financial covenants on its loan facilities as detailed in note 7.
The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective.
Capital risk management
The objective of the Group is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and other healthcare assets in the UK.
The Board has responsibility for ensuring the Group's ability to continue as a going concern. This involves the ability to borrow monies in the short and long term; and pay dividends out of reserves, all of which are considered and approved by the Board on a regular basis.
To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders, issue new shares or buyback shares for cancellation or for holding in treasury. The Company may also increase or decrease its level of long-term borrowings.
Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in accordance with the Company's investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding excess cash on its balance sheet over the longer term.
No changes were made in the objectives, policies or processes during the year.
9. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps and interest rate caps used to fix the interest rate on the Group's variable rate borrowings.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £23,517,000 (2022: £38,996,000), consisting of cash of £15,366,000 (2022: £34,483,000), cash held in escrow for property purchases of £4,295,000 (2022: £nil), net rent receivable of £1,088,000 (2022: £906,000), VAT recoverable of £667,000 (2022: £1,387,000), accrued development interest of £1,010,000 (2022: £452,000) and other debtors of £1,091,000 (2022: £1,768,000).
In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Group may also require to provide rental incentives to the incoming tenant. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants. The expected credit risk in relation to tenants is an inherent element of the due diligence considered by the Investment Manager on all property transactions with an emphasis being placed on ensuring that initial rents are set at a sustainable level. The risk is further mitigated by rental deposits or guarantees where considered appropriate. The majority of rental income is received in advance.
As at 30 June 2023, the Group had recognised a credit loss allowance totalling £1,972,000 against a gross rent receivable balance of £2,496,000 and gross loans to tenants totalling £989,000. As at 30 June 2022, the gross receivable was £8,496,000, of which £1,280,000 was subsequently recovered, £5,117,000 was written off and £2,099,000 is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2023 (2022: nil).
All of the Group's cash is placed with financial institutions with a long-term credit rating of BBB or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed, limited or lost. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.
Should the Group hold significant cash balances for an extended period, then counterparty risk will be spread, by placing cash across different financial institutions. At 30 June 2023 the Group held £15.2 million (2022: £34.5 million) with The Royal Bank of Scotland plc and £0.2 million (2022: £nil) with HSBC Bank plc. Given the credit quality of the counterparties used, no credit loss allowance is recognised against cash balances as it is considered to be immaterial.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an on-going basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.
Interest rate risk
Some of the Company's financial instruments are interest-bearing. Interest-rate risk is the risk that future cash flows will change adversely as a result of changes in market interest rates.
The Group's policy is to hold cash in variable rate or short-term fixed rate bank accounts. At 30 June 2022 interest was being received on cash at a weighted average variable rate of nil (2022: nil). Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
The Group has £170,000,000 (2022: £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 £80,000,000 of the variable rate facilities had been drawn down (2022: £84,750,000). The fair value of the variable rate borrowings is affected by changes in the market rate of the lending margin that would apply to similar loans. The variable rate borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value at 30 June 2023 and 30 June 2022.
At 30 June 2023, the Group had fully hedged its exposure on the £80,000,000 of drawn variable rate borrowings (2022: £54,750,000 of the £84,750,000 of variable rate facilities was unhedged). On any unhedged variable rate borrowings, interest is payable at a variable rate equal to SONIA plus the weighted average lending margin, including the amortisation of costs, of 2.46 per cent per annum (2022: 2.43 per cent). The variable rate borrowings expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
The Group has fixed rate term loans totalling £150,000,000 (2022: £150,000,000) and has hedged its exposure to increases in interest rates on £80,000,000 (2022: £30,000,000) of the variable rate loans, as referred to above, through entering into a £30,000,000 fixed rate interest rate swap and a £50,000,000 interest rate cap at 3.0%. Fixing the interest rate exposes the Group to fair value interest rate risk as the fair value of the fixed rate borrowings, or the fair value of the interest rate derivative used to fix the interest rate on an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £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 7, whereas the fair value of the interest rate derivatives are recognised directly on the Group's balance sheet. At 30 June 2023, an increase of 0.25 per cent in interest rates would have increased the fair value of the interest rate derivative assets and increased the reported total comprehensive income for the year by £377,000 (2022: £211,000). The same movement in interest rates would have decreased the fair value of the fixed rate term loans by an aggregate of £2,169,000 (2022: £2,822,000); however, as the fixed rate loan is held at amortised cost, the reported total comprehensive income for the year would have remained unchanged. A decrease in interest rates would have had an approximately equal and opposite effect.
Market price risk
The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.
The external valuers are mindful of the potential impacts ESG may have on capital and rental valuations. Currently in the UK, the external valuers have not seen consistent prima facie evidence to suggest that ESG has a direct impact on the valuation of all commercial and residential buildings. However, as the UK real estate market continues to adapt to ESG development practices and legislative requirements, the valuers anticipate an evolution in the analysis undertaken when providing real estate valuations. This may potentially impact on the valuation of a property over the course of a typical investment period.
10. Contingent assets and liabilities
As at 30 June 2023, six (2022: fourteen) properties within the Group's investment property portfolio contained performance payment clauses meaning that, subject to contracted performance conditions being met, further capital payments totalling £5,720,000 (2022: £13,320,000) may be payable by the Group to the vendors/tenants of these properties. The potential timings of these payments are also conditional on the date(s) at which the contracted performance conditions are met and are therefore uncertain.
It is highlighted that any performance payments subsequently paid will result in an increase in the rental income due from the tenant of the relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the investment yield used to arrive at the valuation of the properties, any performance payments made would be expected to result in a commensurate increase in the value of the Group's investment property portfolio.
Having assessed each clause on an individual basis, the Group has determined that the contracted performance conditions had not been met in relation to any of these properties and therefore at 30 June 2023 no liability was recognised (2022: £2,800,000). Had a liability been recognised, an equal but opposite amount would have been recognised as an asset in 'investment properties' in Note 5 to reflect the increase in the investment property value that would be expected to arise from the payment of the performance payment(s) and the resulting increase in the contracted rental income. The performance payments of £2,800,000 recognised as a liability at 30 June 2022 were paid during the year ended 30 June 2023 (see Note 5).
11. Capital commitments
The Group had capital commitments as follows:
|
| 30 June 2023 £'000 | 30 June 2022 £'000 |
| Amounts due to complete forward fund developments | 31,066 | 34,458 |
| Other capital expenditure commitments | 2,160 | 3,594 |
| Total | 33,226 | 38,052 |
12. Related party transactions
The Board of Directors is considered to be a related party. No Director has an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Group. The Directors of the Group received fees for their services. Total fees for the year were £218,000 (2022: £214,000) of which £nil (2022: £nil) remained payable at the year-end.
The Investment Manager received £7,428,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2023 (2022: £7,307,000). Of this amount £1,835,000 (2022: £1,895,000) remained payable at the year-end. The Investment Manager received a further £169,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2023 (2022: £151,000) in relation to its appointment as Company Secretary and Administrator, of which £42,000 (2022: £38,000) remained payable at the year end. Certain employees of the Investment Manager are directors of some of the Group's subsidiaries. Neither they nor the Investment Manager receive any additional remuneration in relation to fulfilling this role.
There were related party transactions within the Group and its wholly-owned subsidiaries which are eliminated upon consolidation.
13. Operating segments
The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the EPRA NTA. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NTA is detailed in note 4.
The view that the Group is engaged in a single segment of business is based on the following considerations:
- One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;
- There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the benchmark; and
- The management of the portfolio is ultimately delegated to a single property manager, Target.
14. Post balance sheet events
Subsequent to the year end, the Group acquired a pre-let development site subject to a forward funding agreement to construct a 66-bed care home in Weston-super-Mare, Somerset for a maximum commitment of £16.0 million including acquisition costs. Construction on the home has commenced and is expected to be completed in the summer of 2024.
15. Financial statements
This statement was approved by the Board on 9 October 2023. It is not the Company's full statutory financial statements in terms of Section 434 of the Companies Act 2006. The statutory annual report and financial statements for the year ended 30 June 2023 has been approved and audited and received an unqualified audit report which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. The statutory annual report and financial statements for the year to 30 June 2023 will be posted to shareholders in October 2023 and will be available for inspection at Level 4, Dashwood House, 69 Old Broad Street, London, EC2M 1QS, the registered office of the Company.
The statutory annual report and financial statements will be made available on the website www.targethealthcarereit.co.uk. Copies may also be obtained from Target Fund Managers Limited, Glendevon House, Castle Business Park, Stirling FK9 4TZ.
The audited financial statements for the year to 30 June 2023 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 29 November 2023.
Alternative Performance Measures
The Company uses Alternative Performance Measures ('APMs'). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities. The definitions of all APMs used by the Company are highlighted in the glossary contained in the Annual Report, with detailed calculations, including reconciliation to the IFRS figures where appropriate, being set out below and within the EPRA Performance Measures which follow.
Discount or Premium - the share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. This price is not identical to the NAV. If the share price is lower than the NAV per share, the shares are trading at a discount and, if the share price is higher than the NAV per share, are said to be at a premium. The figure is calculated at a point in time and, unless stated otherwise, the Company measures its discount or premium relative to the EPRA NTA per share.
| | | 2023 pence | 2022 pence |
| EPRA Net Tangible Assets per share (see note 4) | (a) | 104.5 | 112.3 |
| Share price | (b) | 71.8 | 108.4 |
| (Discount)/premium | = (b-a)/a | (31.3)% | (3.5)% |
Dividend Cover - the percentage by which Group specific adjusted EPRA earnings for the year cover the dividend paid.
| | | 2023 £'000 | 2022 £'000 |
| Group-specific EPRA earnings for the year (see note 4) | (a) | 37,216 | 30,242 |
|
First interim dividend | |
10,482 |
10,482 |
| Second interim dividend | | 10,482 | 10,482 |
| Third interim dividend | | 8,683 | 10,482 |
| Fourth interim dividend | | 8,683 | 10,482 |
| Dividends paid in relation to the year | (b) | 38,330 | 41,928 |
| Dividend cover | = (a/b) | 97% | 72% |
Ongoing Charges - a measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that year. Operating costs exclude costs of buying and selling investments, interest costs, taxation, non-recurring costs and the costs of buying back or issuing ordinary shares.
| | | 2023 £'000 | 2022 £'000 |
| Investment management fee | | 7,428 | 7,307 |
| Other expenses | | 3,046 | 3,163 |
| Less direct property costs and other non-recurring items | | (292) | (347) |
| Adjustment to management fee arrangements and irrecoverable VAT* | |
(35) |
312 |
| Total | (a) | 10,147 | 10,435 |
| Average net assets | (b) | 661,231 | 693,292 |
| Ongoing charges | = (a/b) | 1.53% | 1.51% |
* Based on the Group's net asset value at 30 June 2023, the management fee is expected to be paid at a weighted average rate of 1.03% (2022: 1.02%) of the Group's average net assets plus an effective irrecoverable VAT rate of approximately 9% (2022: 7%). The management fee has therefore been amended so that the Ongoing Charges figure includes the expected all-in management fee rate of 1.12% (2022: 1.10%).
Total Return - the return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets.
| | | 2023 | 2022 | ||||
| | | EPRA NTA (pence) | IFRS NAV (pence) | Share price (pence) | EPRA NTA (pence) | IFRS NAV (pence) | Share price (pence) |
| Value at start of year | (a) | 112.3 | 112.7 | 108.4 | 110.4 | 110.5 | 115.4 |
| Value at end of year | (b) | 104.5 | 105.6 | 71.8 | 112.3 | 112.7 | 108.4 |
| Change in value during year (b-a) | (c) | (7.8) | (7.1) | (36.6) | 1.9 | 2.2 | (7.0) |
| Dividends paid | (d) | 6.2 | 6.2 | 6.2 | 6.8 | 6.8 | 6.8 |
| Additional impact of dividend reinvestment |
(e) |
0.3 |
0.4 |
- |
0.3 |
0.3 |
(0.2) |
| Total (loss)/gain in year (c+d+e) | (f) | (1.3) | (0.5) | (30.4) | 9.0 | 9.3 | (0.4) |
| Total return for the year | = (f/a) | (1.2)% | (0.5)% | (28.1)% | 8.1% | 8.4% | (0.3)% |
EPRA Performance Measures
The European Public Real Estate Association is the industry body representing listed companies in the real estate sector. EPRA publishes Best Practice Recommendations ('BPR') to establish consistent reporting by European property companies. Further information on the EPRA BPR can be found at www.epra.com.
The figures below are calculated and presented in line with the BPR Guidelines published by EPRA in February 2022.
| | 2023 | 2022 |
| EPRA Net Reinstatement Value (£'000) | 705,364 | 756,708 |
| EPRA Net Tangible Assets (£'000) | 647,903 | 696,483 |
| EPRA Net Disposal Value (£'000) | 694,480 | 721,024 |
| EPRA Net Reinstatement Value per share (pence) | 113.7 | 122.0 |
| EPRA Net Tangible Assets per share (pence) | 104.5 | 112.3 |
| EPRA Net Disposal Value per share (pence) | 112.0 | 116.2 |
| EPRA Earnings (£'000) | 47,572 | 39,674 |
| Group specific adjusted EPRA earnings (£'000) | 37,216 | 30,242 |
| EPRA Earnings per share (pence) | 7.67 | 6.62 |
| Group specific adjusted EPRA earnings per share (pence) | 6.00 | 5.05 |
| EPRA Net Initial Yield | 6.05% | 5.38% |
| EPRA Topped-up Net Initial Yield | 6.22% | 5.82% |
| EPRA Vacancy Rate | - | - |
| EPRA Cost Ratio - including direct vacancy costs | 15.8% | 21.5% |
| EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) | 18.7% | 27.1% |
| EPRA Cost Ratio - excluding direct vacancy costs | 15.8% | 21.5% |
| EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) |
18.7% |
27.1% |
| EPRA Loan-to-Value | 25.8% | 24.0% |
| Capital Expenditure (£'000) | 23,767 | 209,540 |
| Like-for-like Rental Growth | 3.8% | 4.6% |
EPRA NAV metrics and EPRA Earnings
Full details of these calculations, including reconciliations of each to the IFRS measures, are detailed in note 4 to the extract from the Consolidated Financial Statements.
EPRA Net Initial Yield and EPRA Topped-up Net Initial Yield
EPRA Net Initial Yield is calculated as annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs. The EPRA Topped-up Net Initial Yield incorporates an adjustment in respect of the expiration of rent-free periods (or other unexpired lease incentives).
| | | 30 June 2023 £'000 | 30 June 2022 £'000 |
| Annualised passing rental income based on cash rents | (a) | 55,003 | 51,217 |
| Notional rent expiration of rent-free periods or other lease incentives | |
1,554 |
4,259 |
| Topped-up net annualised rent | (b) | 56,557 | 55,476 |
| Standing assets (see note 5) | | 851,305 | 892,336 |
| Allowance for estimated purchasers' costs | | 57,461 | 60,225 |
| Grossed-up completed property portfolio valuation | (c) | 908,766 | 952,561 |
| EPRA Net Initial Yield | = (a/c) | 6.05% | 5.38% |
| EPRA Topped-up Net Initial Yield | = (b/c) | 6.22% | 5.82% |
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space (excluding forward fund developments) divided by the contractual rent of the investment property portfolio, expressed as a percentage.
| | | 30 June 2023 £'000 | 30 June 2022 £'000 |
| Annualised potential rental value of vacant premises* | (a) | - | - |
| Annualised potential rental value of the property portfolio (including vacant properties) |
(b) |
56,557 |
55,476 |
| EPRA Vacancy Rate | = (a/b) | - | - |
* There were no unoccupied properties at either 30 June 2022 or 30 June 2023.
EPRA Cost Ratio
The EPRA cost ratios are produced using EPRA methodology, which aims to provide a consistent base-line from which companies can provide additional information, and include all property expenses and management fees. Consistent with the Group specific adjusted EPRA earnings detailed in note 4 to the extract from the Consolidated Financial Statements, similar adjustments have been made to also present the adjusted Cost Ratio which is thought more appropriate for the Group's business model.
| | | Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Investment management fee | | 7,428 | 7,307 |
| Credit loss allowance and bad debts | | 264 | 3,232 |
| Other expenses | | 3,046 | 3,163 |
| EPRA costs (including direct vacancy costs) | (a) | 10,738 | 13,702 |
| Specific cost adjustments, if applicable | | - | - |
| Group specific adjusted EPRA costs (including direct vacancy costs) | (b) |
10,738 |
13,702 |
| Direct vacancy costs | (c) | - | - |
| Gross rental income per IFRS | (d) | 67,748 | 63,859 |
| Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives |
|
(11,308) |
(10,215) |
| Adjusted for surrender premiums recognised in capital |
| - | (3,877) |
| Adjusted for development interest under forward fund arrangements |
|
952 |
783 |
| Group specific adjusted gross rental income | (e) | 57,392 | 50,550 |
| EPRA Cost Ratio (including direct vacancy costs) | = (a/d) | 15.8% | 21.5% |
| EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) |
= (b/e) |
18.7% |
27.1% |
| EPRA Cost Ratio (excluding direct vacancy costs) | = ((a-c)/d) | 15.8% | 21.5% |
| EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) |
= ((b-c)/e) |
18.7% |
27.1% |
EPRA Loan-to-Value
| | | As at 30 June 2023 £'000 | As at 30 June 2022 £'000 |
| Borrowings | | 230,000 | 234,750 |
| Net payables | | 9,117 | 18,213 |
| Cash and cash equivalent | | (15,366) | (34,483) |
| Net debt | (a) | 223,751 | 218,480 |
| | |
| |
| Investment properties at market value | | 868,705 | 911,596 |
| Total property value | (b) | 868,705 | 911,596 |
| EPRA Loan-to-Value | = (a/b) | 25.8% | 24.0% |
EPRA Capital Expenditure
| | | Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Acquisitions (including acquisition costs) | | 234 | 178,830 |
| Forward fund developments | | 17,385 | 28,851 |
| Like-for-like portfolio | | 6,148 | 1,859 |
| Total capital expenditure |
| 23,767 | 209,540 |
| Conversion from accrual to cash basis |
| 5,575 | (2,547) |
| Total capital expenditure on a cash basis |
| 29,342 | 206,993 |
Like-for-like Rental Growth
| | | Year ended 30 June 2023 £'000 | Year ended 30 June 2022 £'000 |
| Opening contractual rent | (a) | 55,476 | 41,213 |
| Rent reviews | | 2,080 | 1,581 |
| Re-tenanting of properties | | 39 | 312 |
| Like-for-like rental growth | (b) | 2,119 | 1,893 |
| Acquisitions and developments | | 1,019 | 12,370 |
| Disposals | | (2,057) | - |
| Total movement | (c) | 1,081 | 14,263 |
| Closing contractual rent | = (a+c) | 56,557 | 55,476 |
| Like-for-like rental growth | = (b/a) | 3.8% | 4.6% |
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