To:                   RNS Company Announcements

Date:                27 February 2017

Company:        Target Healthcare REIT Limited

Subject:           Interim Report and Financial Statements for the six months ended

31 December 2016

Key Performance Indicators

For the six months ended 31 December 2016

The Group has added further quality assets to its portfolio of care homes, which has continued to generate long-term, secure rental income allowing for the payment of a progressive dividend

Unless otherwise stated in the above table, references to 2015 mean the comparative six month period to 31 December 2015 and references to 2016 mean 30 June 2016, being the start of the period under review.

Enquiries:

Chairman's Statement

Performance

I am pleased to once again report on a successful six months for the Group. When considered against the prevailing background of macroeconomic uncertainty and financial market volatility, it has been particularly pleasing to have delivered stable performance. In contrast to the wider real estate equity market the Company's shares have consistently traded at a solid premium to NAV, reflecting the appeal of our long duration income stream, diversified by our growing number of tenants. Share price total return for the period has been 6.1% with a current dividend yield of 5.5% based on the 24 February 2017 price.

Underlying profits, measured by EPRA earnings, have increased by 45% to £5.8 million. The property portfolio, excluding the effects of acquisitions, continues to increase in value with a valuation uplift of 3.1% based on the opening portfolio value. Our EPRA NAV per share has increased by 1.2% to 101.8 pence per share.

We believe the Group is well-placed to continue to deliver in a period of volatility. The fundamentals of the investment case remain compelling despite the inherent sectoral difficulties faced by our tenants in their provision of care to their residents. That is why we firmly believe it is essential for careful stewardship of investments by a specialist investment manager, who report on the portfolio and their thoughts on the sector below.

Investment

We have continued to carefully invest shareholders' funds, with £77 million (including acquisition costs) of the £84 million equity issued in May 2016 having been allocated. Five homes have become new additions to the rent roll in the period, including the completion of one renovation project. Each of the homes meet our strict investment criteria and are accretive to a portfolio which is now diversified across 15 tenants and geographically across the UK. Rooms are provided in suitably modern surroundings for residents to be cared for by tenants who share our care ethos.

All available capital, including undrawn debt, is committed or allocated to accretive acquisition opportunities which are in solicitors' hands and expected to be completed or contractually committed to during Spring 2017.

Income and dividend

Underlying profit generated by the Group represents EPRA earnings per share of 2.3 pence. We have increased quarterly dividends by 1.6% to 3.14 pence for the period. Dividend cover for the six months was 78% (excluding performance fee) due to the effects of cash drag as we perform our diligence on potential acquisitions, though this has increased to 87% for the three months to December as further earnings from portfolio enhancements and acquisitions came online.

Capital structure

We have strengthened the Group's capital structure with longer and lower-cost debt through the renegotiation of our existing facility. We expect to fully utilise our available debt facility in the short term and, with gearing still below our medium term target of 20%, we continue to actively pursue further debt to provide flexible capital to fund near-term investment opportunities.

Outlook

We are delighted to be providing capital investment to a sector in critical need of a modern estate to facilitate quality care provision to its residents. The Group, through its investment manager, continues to be a highly-engaged landlord, supporting our tenants through observations and advice based on their comprehensive sector knowledge and experience.

We will continue to be focussed and diligent in the management of shareholders' funds, allowing the assembled portfolio to provide the secure, diversified and growing long-term income which is the basis for shareholder returns with those same characteristics.

The Board are committed to growing the Group in a disciplined and sustainable manner and remain confident this strategy will deliver increased earnings supporting a progressive dividend policy.

Malcolm Naish

Chairman

24 February 2017

Investment Manager's Report

Portfolio

As at 31 December 2016, the Group's portfolio comprised 41 modern, purpose-built care homes with a market value of £253.1 million (June 2016: £210.7 million), the majority of which were constructed in 2010 or later. Each home meets our high specification criteria with generously proportioned bedrooms and large areas of communal space. All the 2,797 bedrooms within the portfolio have en-suite facilities, the vast majority with wet rooms, and the homes also include additional on-site facilities such as hairdressing salons, libraries, cinemas and spa facilities.

The portfolio is fully let to 15 separate tenant groups with two new tenants added in the period, further enhancing the diversification of the Group's income source.  Additionally, the Group has exchanged contracts to acquire a property in Sutton-in-Ashfield which, once completed in April 2017, will be let to a 16^th tenant.

All leases are long-term Full Repairing and Insuring leases and include upwards-only annual rental reviews, either linked to RPI or through fixed-rate uplifts. The portfolio includes two assets which are let on variable rental agreements wherein the Group receives a fixed base rent plus a variable figure dependant on home performance. 

The 31 December 2016 annual rent roll was £18.2m (June 2016: £15.5m).  This represents an increase of 17.6% during the period: acquisitions have added 15.3%; like-for-like rent review increases 0.4%; and completion of an asset renovation adding 1.9%. The weighted average unexpired lease term across the portfolio remains the longest in the sector at 29.4 years (June 2016: 28.6 years). The net initial yield on acquisitions across the portfolio remains ahead of the 7.0% blended initial yield modelled at the launch of the Group, supporting the Company's stated dividend policy.

Additions

In the six months to 31 December 2016, four new care homes were acquired and one development asset was completed for a total value of £36.3m (including costs). These assets are located in Dundee, Derbyshire, Tonbridge, Camberley, and Sheffield.

In addition to suitable standing assets, we work with our tenants and other market participants to acquire assets through forward commitments, forward funding agreements, or refurbishment programmes for secondary stock to enhance such assets to the Group's high specification standards in line with the Group's investment policy.  Strong relationships held with our tenants and others are key in identifying and successfully delivering these types of transactions. 

Continuing the Group's investment ethos of being an actively engaged landlord, we continue to undertake, at minimum, bi-annual inspections of each of the care homes on behalf of the Group. The experience of the investment management team in the elderly care sector, in relation to funding and in the direct provision of care services, is invaluable during this process.

Geographic Split by Property Valuation

The Group continues to diversify the portfolio in terms of geographic spread, with the South East region now representing the largest share of the portfolio by capital value.

Valuation

The property portfolio was externally valued as at 31 December 2016 at £253.1m. This valuation represents a total increase of 20.1% during the reporting period with additions contributing 16.6%, a like-for-like increase of 3.1%, and the forward commitment contributing 0.4%.

The valuation uplift is due to three factors: a general market yield shift, yield tightening across individual assets which display improved trading performance, and the annual rental uplifts included in the lease agreements. The external valuation was performed by Colliers International Property Consultants Limited.

UK Healthcare Investment Market

The adult and social care sector continues to face challenges largely due to funding pressures with the tail end of 2016 seeing increased scrutiny from the public and the media.  The homes impacted the most are those that are reliant on Local Authority funding versus homes with high proportions of private pay residents.  Increases in the national living wage, staff shortages particularly in nursing staff, government austerity measures tightening LA budgetary constraints, and the Local Government Association's report highlighting a £2.6bn funding gap in social care by 2020, are a few of the key headwinds facing the sector in the short to medium term.  Additionally, the Competitions and Market Authority is conducting a review into the sector with the report due by December 2017.

However, despite these challenges, opportunities exist for investors who back efficient tenants providing a high standard of care in modern, future proof homes.  With secondary stock home closures leading to a net decrease in care home beds coupled with the demographic changes across the country, demand for modern, purpose build care facilities operated by high quality care providers remains high.

Pipeline

We continue to draw on our well-established relationships with regional and national operators and agents alike to source a variety of care home investment opportunities for the Group. These have contributed to a good pipeline of additional investment opportunities consisting of single and multi-asset acquisitions located across the UK.

Target Advisers LLP

Investment Manager

24 February 2017

Condensed Consolidated Statement of Comprehensive Income 

For the six months ended 31 December 2016                                                                         

The total column of this statement represents the Group's Condensed 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 period.

Condensed Consolidated Statement of Financial Position

As at 31 December 2016

Condensed Consolidated Statement of Changes in Equity 

For the six months ended 31 December 2016  (unaudited)                             

For the six months ended 31 December 2015  (unaudited)                             

Condensed Consolidated Cash Flow Statement

For the six months ended 31 December 2016                         

Notes to the Condensed Consolidated Financial Statements

1.   Basis of Preparation

The condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS'), IAS 34 'Interim Financial Reporting' and the accounting policies set out in the statutory financial statements of the Group for the year ended 30 June 2016. The condensed consolidated financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 30 June 2016, which were prepared under full IFRS requirements.

Going concern

The condensed consolidated financial statements have been prepared on the going concern basis. In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries, and bearing in mind the nature of the Group's business and assets, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

2.   Investment Management Fee

All amounts are inclusive of irrecoverable VAT.

The Company's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Advisers LLP (the 'Investment Manager' or 'Target'). Target is entitled to an annual base management fee of 0.90 per cent. of the net assets of the Group and an annual performance fee calculated by reference to 10 per cent. of the outperformance of the Group's portfolio total return relative to the MSCI UK Annual Healthcare Index ('the Index'). The maximum amount of total fees payable by the Group to the Investment Manager is limited to 1.25 per cent. of the average net assets of the Group over a financial year.

Performance fee periods are annually to 31 December, in line with the Index. Portfolio performance is measured over three cumulative rolling performance periods, whereby any performance fees paid to the Investment Manager are subject to clawback if cumulative performance underperforms the index. 

At 30 June 2016 a performance fee of £345,000 (inclusive of estimated irrecoverable VAT) had been accrued based on the Group's portfolio performance and available Index data.  An additional £345,000 was accrued for the six month period ended 31 December 2016 (2015: £110,000) resulting in a total accrual for the performance period for the year ended 31 December 2016 of £690,000 (2015: accrual of £220,000). The final performance fee payable for the year ended 31 December 2015 was £636,000. The final performance fee for the year ended 31 December 2016 will be calculated once the Index figures for the year ended 31 December 2016 are available.

The Investment Management Agreement can be terminated by either party on twelve months' written notice provided that such notice shall not expire earlier than 30 September 2019. Should the Company terminate the Investment Management Agreement earlier than 30 September 2019 then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if: the Investment Manager is in material breach of the agreement; 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.

Both the base management fee and the performance fee are charged to revenue.

3.   Taxation

The Directors intend to conduct the Company's affairs such that management and control is exercised in the United Kingdom and so that the Company carries on any trade in the United Kingdom.

The Company has entered the REIT regime for the purposes of UK taxation. Subject to continuing relevant UK-REIT criteria being met, the profits from the Group's property rental business, arising from both income and capital gains, are exempt from corporation tax.

The taxation charge for the period principally relates to the taxation of a capital gain arising in connection with the acquisition of a subsidiary company.  The Group's previous tax adviser failed to identify this liability as part of the Company's diligence procedures and the Directors are seeking full redress for this loss.  As no acceptable compensation amount has yet been agreed, none has been recognised in these financial statements.

4.   Earnings per Share and Net Asset Value per share

The European Public Real Estate Association ('EPRA') is an industry body which issues best practice reporting guidelines and the Group reports an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below.

Earnings per share

The EPRA earnings are arrived at by adjusting the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group. The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for the performance fee.

The reconciliations are provided in the table below:

Earnings for the period ended 31 December 2016 should not be taken as a guide to the results for the year to 30 June 2017.

Net Asset Value per share

The Group's net asset value per ordinary share of 101.8 pence (30 June 2016: 100.4 pence) is based on equity shareholders' funds of £256,753,000 (30 June 2016: £253,282,000) and on 252,180,851 (30 June 2016: 252,180,851) ordinary shares, being the number of shares in issue at the period end.

The EPRA Net Asset Value ('EPRA NAV') per share is arrived at by adjusting the net asset value ('NAV') calculated under International Financial Reporting Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. The only adjustments required to the NAV is that the EPRA NAV excludes the fair value of the Group's interest rate swaps which are, in aggregate, recognised as a liability of £93,000 under IFRS as at 31 December 2016 (30 June 2016: £316,000).

5.   Dividends

Dividends paid as distributions to equity shareholders during the period.

A second interim dividend for the year to 30 June 2017, of 1.570 pence per share, was paid on 24 February 2017 to shareholders on the register on 3 February 2017.

The Company is able to pay a dividend out of the Stated Capital Account in accordance with the requirements of the Companies (Jersey) Law 1991.

6.   Investments

Changes in the carrying value of investment properties

The properties were valued at £253,113,000 (30 June 2016: £210,666,000) by Colliers International Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Professional Standards, incorporating the International Valuation Standards, January 2014 ('the Red Book') issued by the Royal Institution of Chartered Surveyors ('RICS') on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Market Value represents the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £240,444,000 (30 June 2016: £200,720,000). The adjustment consisted of £12,139,000 (30 June 2016: £9,719,000) relating to fixed or guaranteed rent reviews and £530,000 (30 June 2016: £227,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the financial statements as current assets within 'trade and other receivables'

The Group is required to classify fair value measurements of its investment properties using a fair value hierarchy, in accordance with IFRS 13 'Fair Value Measurement'. This hierarchy reflects the subjectivity of the inputs used, and has the following levels:

-- Level 1: unadjusted quoted prices in active markets;

-- Level 2: observable inputs other than quoted prices included within level 1;

-- Level 3: unobservable inputs.

The Group's investment properties are valued by Colliers on a quarterly basis. The valuation methodology used is the yield model, which is a consistent basis for the valuation of investment properties within the healthcare industry. This model has regard to the current investment market and evidence of investor interest in properties with income streams secured on healthcare businesses. On an asset-specific basis, the valuer makes an assessment of: the quality of the asset; recent and current performance of the asset; and the financial position and performance of the tenant operator. This asset specific information is used alongside a review of comparable transactions in the market and an investment yield is applied to the asset which, along with the contracted rental level, is used to derive a market value.

In determining what level of the fair value hierarchy to classify the Group's investments within, the Directors have considered the content and conclusion of the position paper on IFRS 13 prepared by the European Public Real Estate Association ('EPRA'), the representative body of the publicly listed real estate industry in Europe. This paper concludes that, even in the most transparent and liquid markets, it is likely that valuers of investment property will use one or more significant unobservable inputs or make at least one significant adjustment to an observable input, resulting in the vast majority of investment properties being classified as level 3.

Observable market data is considered to be that which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In arriving at the valuation Colliers will have to make adjustments to observable data of similar properties and transactions to determine the fair value of a property and this will involve the use of considerable judgement. 

Considering the Group's specific valuation process, industry guidance, and the level of judgement required in the valuation process, the Directors believe it appropriate to classify the Group's assets within level 3 of the fair value hierarchy.

The Group's investment properties, which are all care homes, are considered to be a single class of assets. The weighted average net initial yield on these assets is ahead of the blended 7 per cent modelled at the time of launch. The yield on individual assets ranges from 6.0 per cent to 8.0 per cent. There have been no changes to the valuation technique used through the period, nor have there been any transfers between levels.

The key unobservable inputs made in determining the fair values are:

- Estimated rental value ('ERV'): The rent at which space could be let in the market conditions prevailing at the date of valuation; and

- Yield: The equivalent yield is defined as the internal rate of return of the cash flow from the property, assuming a rise to ERV at the next review, but with no further rental growth.

A decrease in the ERV applied to an asset will decrease the fair value of the asset, and consequently decrease the Group's reported income from unrealised gains on investments. An increase in the ERV will increase the fair value of an asset and increase the Group's income.

A decrease in the investment yield applied to the portfolio by 0.25 per cent will increase the fair value of the portfolio by £8.1 million (30 June 2016: £7.8 million), and consequently increase the Group's reported income from unrealised gains on investments. An increase in yield by 0.25 per cent will decrease the fair value of the portfolio by £7.5 million (30 June 2016: £7.3 million) and reduce the Group's income.

7.   Investment in subsidiary undertakings

Acquisition of THR Number 7 Limited ('THR7') and THR Number 8 Limited ('THR8')

On 26 August 2016, the Company acquired 100 per cent of the voting shares of Blatent Limited and Vingo Properties Limited, both being companies registered in Gibraltar. It is intended that the names of these companies be changed to THR Number 7 Limited and THR Number 8 Limited respectively.  Prior to acquisition, each company owned an individual care home. As part of the transaction, the care homes continued to be leased to the existing tenants. The companies are investment and property companies.

Acquisition of THR Number 9 Limited ('THR9')

On 24 October 2016, the Company acquired 100 per cent of the voting shares of THCM (Tonbridge) Limited, a company registered in England & Wales. It is intended that the name of the company be changed to THR Number 9 Limited. Prior to acquisition, the company's principal activity was to purchase and develop care homes across the UK and had constructed a single property in Tonbridge, having originally entered into a forward sale agreement for the property with the Group. The principal activity of the company following acquisition is that of a property and investment company.

Acquisition of THR Number 10 Limited ('THR10')

On 14 December 2016, the Company acquired 100 per cent of the voting shares of DMWSL 844 Limited, a newly established company registered in England & Wales. Subsequent to the period end, the name of the company was changed to THR Number 10 Limited.  The company has been established to purchase the land and fund the development of a care home property.

Fair value recognised on acquisition

The fair values of the identifiable assets and liabilities of the subsidiaries acquired by the Company during the period ended 31 December 2016 were:

In addition to the cost of corporate acquisitions stated above, there were costs of £23,000 charged to the Income Statement which related to acquisitions which completed in the prior year.

The Company sought independent valuations by Colliers of the investment property held within each of the companies at the time of acquisition. From the date of acquisition, the profit and total comprehensive income of each company included within the Consolidated Statement of Comprehensive Income for the six months ended 31 December 2016 were as follows:

8.   Bank Loan

The Group has a £50.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which was repayable on 23 June 2019. On 1 September 2016, the Group extended the loan facility to 1 September 2021, with the option of two further one year extensions thereafter, subject to the consent of RBS. Interest accrues on the bank loan at a variable rate, based on 3 month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.5 per cent. per annum for the duration of the loan (30 June 2016: 2.0 per cent). A non-utilisation fee of 0.75 per cent per annum is payable on any undrawn element of the facility.

The Group has hedged the interest rate by entering into interest rate swaps for a notional value of £21.0 million. Under the terms of the interest rate swaps, the Group will pay quarterly a fixed rate of interest of 0.85 per cent per annum and will receive 3-month LIBOR for the period to 23 June 2019. For the period from 24 June 2019 to 1 September 2021, the Group will pay quarterly a fixed rate of interest of 0.70 per cent per annum and will receive 3-month LIBOR. The fair value of the interest rate swaps at 31 December 2016 was a liability of £93,000 (30 June 2016: £316,000).

Inclusive of both the interest rate swaps, the interest rate on the Group's £21.0 million of drawn down borrowings has therefore been fixed at an all-in rate of 2.35 per cent per annum until 23 June 2019 and 2.20 per cent per annum from 24 June 2019 to 1 September 2021.

The bank loan is secured by way of a fixed and floating charge over the whole of the assets of the THR Number One PLC Group ('THR1 Group') which consists of THR1 and its two directly held subsidiaries, THR Number Two Limited and THR Number 3 Limited. Under the bank covenants related to this loan, the Group is to ensure that for THR1 Group:

·      the loan to value percentage, based on the market value of the secured properties, does not exceed 50 per cent; and

·      the interest cover is greater than 300 per cent on any calculation date.

THR1 Group has complied with all the bank loan covenants during the period.

9.   Stated Capital Movements

During the period to 31 December 2016, the Company did not issue, buyback or resell any ordinary shares (period to 31 December 2015: the Company issued 29,882,625 ordinary shares raising gross proceeds of £30,438,000, repurchased 14,229,822 ordinary shares to be held in treasury at a cost of £14,159,000 and resold 14,229,822 ordinary shares from treasury raising gross proceeds of £14,799,000).

At 31 December 2016, the Company did not hold any shares in treasury (30 June 2016: nil).

10.  Commitments

At 31 December 2016, the Group had entered into contractual arrangements as follows:

·      In June 2016, the Company exchanged contracts to acquire a purpose-built care home in the village of Kirby Cross near Frinton-on-Sea, Essex. The home will be acquired for approximately £9.2 million, including acquisition costs, once works have been undertaken to complete the home to the Group's specification. Completion of the transaction is expected in March 2017, at which point payment will become due.

·      In November 2016, the Company exchanged contracts to acquire a purpose-built care home located in the town of Sutton-in-Ashfield, Nottinghamshire. The home will be acquired for approximately £5.6 million including acquisition costs. The transaction is expected to conclude by April 2017 once the build has been completed and the home has been fitted out to the Group and Operator's specifications.

Update on commitments previously reported:

·      In February 2016, the Company exchanged contracts to acquire a 12-bed specialist care home in Bricket Wood, St Albans for approximately £2.3 million including acquisition costs. As part of the agreed terms, the Group provided a short-term loan facility to HSN Care, the tenant operator who holds the lease on the property, in order to fund the land acquisition and refurbishment of the property. The loan facility attracted an accrued coupon of 8.85 per cent per annum and the loan capital and accrued interest was expected to be repayable from the consideration proceeds once the acquisition completed. This loan was included in trade and other receivables at 31 December 2016. HSN subsequently notified the Company that they did not wish to complete this transaction. The loan was repaid in full, including accrued interest, on 14 February 2017 and the Company discharged its security over the company and property and released HSN of their obligations under the forward sale contract.

11.  Related Party Transactions and fees paid to Target Advisers LLP

The Directors are considered to be related parties to the Company. No Director has an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Company.

Mr G Ross, who retired as a Director following the Annual General Meeting on 10 November 2016, was a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, which receive fees from the Company. Mr I Webster, who was appointed as a Director of the Company with effect from 11 November 2016, is an employee of the Company Secretary, R&H Fund Services (Jersey) Limited. Mrs H Jones is a director of the Company Secretary, R&H Fund Services (Jersey) Limited. Secretarial and administration fees for the period were £98,000 (six months ended 31 December 2015: £71,000).

The Directors of the Company received fees for their services. Total fees for the period were £83,000 (six months ended 31 December 2015: £56,000) of which £18,000 (31 December 2015: £16,000) remained payable at the period end.

Target Advisers LLP received £1,696,000 (six months ended 31 December 2015: £914,000) during the period of which £345,000 related to the performance fee (six months ended 31 December 2015: £110,000). Of these amounts £1,346,000 (inclusive of estimated irrecoverable VAT) remained payable at the period end (31 December 2015: £634,000).

12.  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 is the EPRA NAV. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV 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.

13.  Contingent Assets and Liabilities

Update on contingent assets/ liabilities reported in previous Annual Report

At 30 June 2016, one property within the portfolio had met contracted performance conditions and this triggered a deferred payment of £2.0 million to the vendor, which was subsequently paid during the period to 31 December 2016. The Group received an uplift in rental income consistent with the net initial yield of the original acquisition commencing from the date the deferred payment was made.

14.  Interim Report and Financial Statements

The interim report and financial statements for the six months ended 31 December 2016 will be posted to shareholders and made available on the website: www.targethealthcare.co.uk. Copies may also be obtained from the Company Secretary, R&H Fund Services (Jersey) Limited, Ordnance House, 31 Pier Road, Jersey JE4 8PW.

Directors' Statement of Principal Risks and Uncertainties

The risks, and the way in which they are managed, are described in more detail in the Strategic Report within the Annual Report and Financial Statements for the year to 30 June 2016. The Group's principal risks and uncertainties have not changed materially since the date of the report and are not expected to change materially for the remainder of the Group's financial year.

Statement of Directors' Responsibilities in Respect of the Interim Report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit of the Group;

• the Chairman's Statement and Investment Manager's Review (together constituting the Interim Management Report) include a fair review of the information required by the Disclosure Guidance and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the period and their impact on the financial statements;

• the Statement of Principal Risks and Uncertainties referred to above is a fair review of the information required by DTR 4.2.7R; and

• the condensed set of financial statements includes a fair review of the information required by DTR  4.2.8R, being related party transactions that have taken place in the period and that have materially affected the financial position or performance of the Group during the period.

On behalf of the Board

M Naish

Chairman

24 February 2017

Independent Review Report to Target Healthcare REIT Limited

Introduction

We have been engaged by the Company to review the condensed set of consolidated financial statements in the Interim Report and Financial Statements for the six months ended 31 December 2016 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Cash Flow Statement and the related explanatory notes to the Condensed Consolidated Financial Statements. We have read the other information contained in the Interim Report and Financial Statements and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of consolidated financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements  (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The Interim Report and Financial Statements are the responsibility of, and have been approved by, the Directors. The Directors are responsible for preparing Interim Report and Financial Statements in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual consolidated financial statements of the Company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of consolidated financial statements included in this Interim Report and Financial Statements has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of consolidated financial statements in the Interim Report and Financial Statements based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the Interim Report and Financial Statements for the six months ended 31 December 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP,

Edinburgh

24 February 2017