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By LSE RNS

RNS Number : 6166S
Target Healthcare REIT Limited
04 October 2017
 

To: RNS

From: Target Healthcare REIT Limited

LEI: 2138008VQQ5Y9QXMX749

Date: 4 October 2017

 

Report and Results Announcement

Target Healthcare REIT Limited (the "Company" or the "Group"), a specialist investor in UK care homes, is pleased to announce its results for the year ended 30 June 2017.

Financial Highlights

·      EPRA* NAV per share of 101.9p (2016: 100.6p)

·      NAV total return of 7.8 per cent (2016: 9.3 per cent)**

·      Dividend declared of 6.28p (2016: 6.18p)

·      IFRS profit for the year £19.1m (2016: £11.7m)

·      Dividend cover of 77 per cent (2016: 72 per cent)

·      EPRA Earnings Per Share of 4.8p (2016: 4.7p)

 

 

Portfolio Highlights

 

·      Valuation of £282.0m (2016: £210.7m)

·      Passing rent of £20.3m (2016: £15.5m)

·      Number of tenants: 16 (2016: 13)

·      Weighted average unexpired lease term ('WAULT'): 29.5 years (2016: 28.6 years)

·      Number of acquisitions in the year: 8 (2016: 9)

·      Value of acquisitions in the year (including costs): £63.3m (2016: £64.4m)

 

* European Public Real Estate Association

** Based on EPRA NAVs

 

Malcolm Naish, Chairman of the Company, said:

"Target Healthcare REIT has continued to assemble a portfolio of UK care homes capable of delivering stable rental returns through diversification by tenant, location, service and resident-choice. We retain a conviction that placing long-term investment capital in purpose-built properties which offer suitably modern and well-equipped environments for residents and their carers, is the right thing to do."

 

The Group has continued to be patient and disciplined in placing shareholder capital: 8 transactions completed during the year, and a further 2 since June, totalling £79.9 million of new investment. Each of these assets, and the tenants entrusted to run them, has the essential characteristics identified by our specialist investment manager which drive our investment policy. The Manager continues to see many potential deals which do not meet these strict quality criteria.

 

With the Group nearing full investment, the balance sheet is better able to support our long-term performance objectives. Dividend cover has improved to 77 per cent1 and we expect this to near 100 per cent in the coming year, dependent on future growth. The portfolio Net Initial Yield, a good indicator of the Group's prospects, has remained stable. Despite the competitive investment market, positive valuation movements have been more influential than acquisition yields in moving the portfolio NIY to 6.75 per cent from 7.0 per cent.

 

The Group's increased scale has, subsequent to year-end, allowed an increase of debt facilities to £90 million, adding a new debt provider at a competitive interest cost. Making full use of available debt would increase the Group's gearing ratio above the 20 per cent stated longer-term level. Whilst increased gearing can enhance portfolio returns, the Board will continue to monitor the gearing ratio and make use of the flexibility within the facilities with respect to investment opportunities to manage gearing within an appropriate range.

 

The Company has declared and paid dividends of 6.28 pence per share in respect of the year. This was an increase of 1.6 per cent on 2016, and meets our objective of a progressive dividend policy. In the absence of unforeseen circumstances, I am delighted to announce that the Board intends to increase the quarterly dividend in respect of the year ending June 2018 by 2.71 per cent to 1.6125 pence per share, in-line with recent inflation data and providing an annual total of 6.45 pence.

 

We remain grateful for the support of our shareholders, both long-term holders and those new to the register as we continue to increase in scale. We are proud of our role in helping the UK modernise its care home real estate for those using it, whilst achieving stable returns for investors. The fundamentals of increasing demand alongside mixed-quality and dwindling supply make a compelling investment case, however we recognise the market as being challenging for care providers to operate in, particularly for those dependent on public funding. That said, efficient operators caring for publicly funded residents in well-equipped modern homes sit firmly within our investment criteria alongside self-funded premium homes in affluent locations. We will continue to look for opportunities in each in building a diversified portfolio, as well as supporting tenants in actively managing the assets.

 

Policy ideas announced during the recent general election campaign, whilst not progressing to the stage of firm policy, were useful in prompting wider public discussion of elderly care funding. Divergence on the extent of private vs. public funding, and the apparent generational divide, were prominent during the debate. We welcome the discussion and hope to see the issues and challenges remain high on the priority list of those in power.

 

Finally, I would like to take this opportunity to welcome Ian Webster onto the Board. Ian brings skills and experience relevant to the Company's Jersey domicile and has provided a valued contribution thus far.

 

 

Malcolm Naish

Chairman

3 October 2017

 

1 83 per cent excluding Manager performance fee

 

 

Enquiries:

Target Advisers

Kenneth MacKenzie, Gordon Bland

 

01786 845 912

Stifel Nicolaus Europe Limited

Mark Young, Neil Winward, Tom Yeadon

 

020 7710 7600

Quill PR

Fiona Harris, Sam Emery

 

020 7466 5058, 020 7466 5056

 

 

Investment Manager's Report

 

Portfolio review

We are pleased to have continued to grow and diversify the portfolio to 45 assets (30 June 2016: 37) let to 16 tenants (2016: 13) with a net initial yield of 6.75 per cent (30 June 2016: 7 per cent). The South East (16.4 per cent) and Ideal Carehomes (16.9 per cent) retain the largest share of geographical and tenant concentration respectively, with each having reduced during the year. The portfolio is further diversified through a balanced mix of bed registrations (nursing, residential) and of private and publicly funded residents.

 

The portfolio has outperformed its benchmark, the IPD UK annual healthcare property index, since launch, with an annualised total return of 10.4 per cent. 92 per cent of properties have maintained or increased in value in the year, providing like-for-like capital growth of 5.0 per cent. WAULT of 29.5 years on passing rent of £20.3 million provides long-term indexed income. 100 per cent of portfolio rent has been collected.

 

With a growing and increasingly diversified portfolio, we anticipate property-specific challenges to arise. For example, one home has closed temporarily to allow a registration change from nursing to residential in response to local staffing difficulties. We have also arranged a tenant change in a separate home which has under-performed in respect of regulatory/quality reviews. Rental income and valuation have been maintained on each, and we have considered detailed business plans in respect of future trading.

 

UK Care home investment & transactions overview

The UK care home market remains highly fragmented. The top four independent care home groups account for less than 15 per cent of the overall market and the industry continues to be dominated by smaller operators. Whilst the much-speculated HC-One / Bupa transaction has been making the headlines in recent months, this transfer of a group of older assets from one large group to another does not reflect the current focus of market activity, which is focused on either new developments, single assets or small portfolios where purchasers are willing to consider a mix of prime and secondary assets.

 

A number of new REITs (both specialist and generalist funds) have launched over the last twelve months and Sterling's recent devaluation post-EU referendum has made all classes of UK real estate more attractive to international investors. Key overseas buyers include Asian and Middle Eastern private investment groups and developers as well as US buyers, albeit appetite in the sector from US REITS remains muted. These new entrants have all been active in the UK care home market which has resulted in significant investor demand, in particular for high quality, purpose-built care homes in prime locations with a focus on the self-funded market, such as the South East of England. This demand is further accentuated where strong operator covenants are on offer and which have led to some substantial prices being paid for highly sought-after assets.

 

Despite the competitive landscape, we continue to identify attractive opportunities through our long-term relationships with operators experienced in providing high-quality care. These relationships extend across the UK and include national, regional and local operators alike. Our focus on tenant selection remains a core tenet of our business, ensuring those operators who we choose to support demonstrate the local knowledge, robust operational management and market presence to deliver both high quality care and strong financial performance. As well as working with the Group's existing tenants, we are also proactively developing new relationships with operators who both share our caring ethos and have a desire to build strong, long-term relationships in order to deliver their growth strategies which will further support our investment pipeline.

 

Health/social care

Once again the last year has been a challenging and frustrating one for the UK care sector. Political uncertainty, staffing shortages whether Brexit-induced or not, public funding and a challenging regulatory regime continue to challenge operators, particularly those working in poorly equipped properties and reliant on local authority funding.

 

 

Publicly-funded fee increases

Laing & Buisson, the sector analysts, confirmed in July that the average English council had raised its 2017/18 fees paid for residents in privately-owned homes by 3.6 per cent, stating this does little more than cover National Living Wage (NLW) costs than inflation costs in general. This would appear to have been funded by councils again, utilising the full 3 per cent 'Adult Social Care Precept' Council Tax (CT) rise sanctioned by the Chancellor on top of their standard CT rise.

 

Scotland, Wales and Northern Ireland have had similar experiences. Fee increases in Scotland, though nominally higher, have been decried as inadequate by Scottish Care given the higher than NLW 'care-worker' minimum wage of £8.45. Scottish Care have for many years successfully negotiated a national fee via COSLA, the umbrella organisation for most Scottish councils, but worries abound that this era is coming to an end.

 

In contrast, Laing & Buisson note that private fees have been relatively buoyant, and are likely to continue to experience faster growth than public fees.

 

Margin erosion contributing to closures

Operators are finding staff costs, the single highest expense for any home, challenging to manage to achieve profitability improvements. Alongside the hourly rate increases from NLW, regulators, particularly the English CQC, are rightfully pressing for robust staffing levels, increasing the number of hours required. The lack of qualified nurses is an additional problem, with many operators facing high agency rates to adequately staff homes.

 

Homes who are overly-exposed to public fee payers are seeing margins eroded year on year, as they lose the traditional ability to achieve savings by tailoring and careful planning, something being taken out of their hands by the regulator's demands. Whilst the practical impact of the regulator driving higher standards is to be welcomed, commentators continue to note an increasing number of smaller home closures as these often single 'mom and pop' operators (as they are known in the sector) throw in the towel after 20 or 30 years in business. Most of these smaller establishments are unsellable as going concerns, both due to their inability to achieve economies of scale operationally, and also due to their unsuitable and dated facilities (for example, greater than 25 per cent of beds have no en-suite facility at all, never mind full wet-room shower facilities).

 

Politics and long-term funding of social care

The recent general election campaign demonstrated clearly the sensitivities inherent in sector funding with adult social care and the NHS featuring heavily. The Conservative party's manifesto launch featured a controversial proposal which would fundamentally change funding, consistent with growing calls from think tanks for the public to either pay for their own care via housing wealth, through such additional taxation of their estates, or for the public as a whole to pay into social care through increases in taxation or national insurance. The plans were shelved in reaction to widespread criticism, most memorably a 'dementia tax' branding. It is worth noting that a 2010 proposal by Labour to introduce a property tax for older home owners was similarly branded a 'death tax' by the Conservatives. Politics does, perhaps, slow the pace of essential social care policy changes.

 

And yet the problem will persist, and grow, as the number of over-85s is set to double over the next 20 years and an estimated 1.2 million people are expected to be living with dementia by 2040 relative to today's 0.85 million. The sector is promised another 'Green Paper' on funding in the autumn, cynics note there have been a dozen such reviews of Social Care in the last 20 years!

 

Conclusion

We retain our conviction that operators utilising purpose built, modern properties and managing their operations effectively with a focus on staff training, retention and care quality can continue to perform well. Those who also have an element of control over fee-setting are particularly well placed to serve a sector with such fundamental demand drivers.

 

 

Target Advisers LLP

3 October 2017

 

 

Strategic Objectives

 

KPIs and Performance

 

Progress made and areas of 2018 focus

Key risks

Objective 1: Dividend

To pay a progressive dividend fully covered when the Group is fully invested.

-    Dividend rates Progressive annual dividend of 6.28 pence, 1.6 per cent increase on 2016

-    Dividend cover of 77 per cent (2016: 72 per cent)

-    Control of operating costs ongoing charges ratio 1.48 per cent (2016: 1.42 per cent)

-    Growth in earnings see objective 4

Maximise rental income profits during period of growth.

Dividend cover on recurring EPRA earnings improved to 83 per cent1 as the Group moved to full equity investment during the year. The impact of cash drag from capital awaiting investment continues to reduce as the portfolio grows to scale. Full dividend cover is expected to be achieved for the year to June 20182, subject to timely completion of near-term opportunities to be funded by available debt capital.

 

A key focus for 2018 and beyond will be to sensitively match acquisition opportunities with capital availability, minimising cash drag without sacrificing other benefits expected to result from a larger Group.

 

Control costs to provide a fully covered dividend when the Group is fully invested.

The OCF, a ratio of recurring expenses relative to NAV, has increased slightly. Costs directly linked to portfolio value have increased in the year as the portfolio has grown. Value for money will continue to be sought from service providers.

 

1 Excluding performance fee

2 Assumes no equity issuance during 2018

 

 

 

 

 

 

 

 

 

 

 

 

-    Reliance on third party service providers

-    Market opportunities, or performance of Investment Manager, limit efficient deployment of capital

-    Breach of REIT regulations

Objective 2: Total returns

To maximise total returns to shareholders by complementing dividends with capital appreciation.

-    Annual NAV total return of 7.8 per cent (2016: 9.3 per cent)

-    Share price total return of 14.1 per cent (2016: 7.8 per cent)

-    Portfolio performance relative to benchmark Annualised portfolio total return (excluding acquisition costs) per IPD of 9.1 per cent vs. Index return of 7.9 per cent (year to 31 December 2016)

-    Asset valuations Like-for-like  revaluation gains of 5.0 per cent (2016: 5.3 per cent)

 

Active management of portfolio.

The portfolio continues to provide like-for-like growth as rent reviews and individual asset performance are reflected in valuations. 92 per cent of assets held at the start of the year maintained or increased in value.

 

Into 2018, the Manager will continue to closely manage properties to ensure they meet tenants' needs, and to identify opportunities to enhance where supported by their local markets - such as refurbishments/extensions.

-    Property valuations could adversely affect returns

Objective 3: Business funding

To fund the business through shareholder equity enhanced by modest leverage within predetermined risk thresholds.

 

-    Equity capital is fully invested

-    Existing debt at low weighted-average cost of 2.2 per cent

-    Group loan-to-value (LTV) of 14.2 per cent (total gross debt as a proportion of gross property value, excluding cash), within 35 per cent limit.

-    New £40 million facility arranged in August 2017. Capacity to gear to 26 per cent.

Debt facilities arranged to support portfolio and capital structure objectives.

Utilisation of the Group's existing facilities has increased to £40 million as at 30 June 2017. 100 per cent of fixed term debt has had its interest cost fixed at 2.35 per cent.         £10 million was available to be drawn flexibly as required.

 

In August 2017, a new £40 million debt facility was arranged with a new lender. Pricing was obtained at an attractive margin, with funds available to be drawn immediately for acquisition opportunities. The new facility allows the Group to meet its stated gearing target, whilst the combined facilities provide management flexibility to efficiently manage capital structure in response to investment opportunities and overall capital availability.

 

The key focus for 2018 is to invest available debt as allocated to near-term opportunities, and to fix interest costs in-line with the Group's hedging strategy.

 

-    Lack of equity and debt capital

-    Interest rate risk

Objective 4: Long-term rental income

To have high quality care providers as tenants with secure, sustainable rental income giving long-term growth.

 

-    Like-for-like passing rental growth of 1.8 per cent (2016: 2.0 per cent)

-    Overall rent roll increase of 31.3 per cent

-    Addition of 3 new tenants, to 16

-    WAULT of 29.5 years (2016: 28.6 years)

 

 

Continued improvement in portfolio balance and continued support to our tenants.

Portfolio diversification will be retained as a focus into 2018, as contributor to stable performance. Increased tenant base despite acquiring 4 assets for 3 existing tenants to support the expansion plans of their businesses.

 

100 per cent rent collected, with growing rent roll from acquisitions, asset management and rent reviews.

-    Government policies/ funding of elderly care

-    Concentration risk

Objective 5: Grow portfolio

To acquire a diversified portfolio of high quality modern care homes providing excellent accommodation standards for residents.

-    8 assets with total commitment value of £63.3 million (inc. costs) completed during the year

-    All acquired assets are modern, the majority being less than 4 years old

-    Substantially all rooms are single occupancy with en-suite facilities including wet room showers

 

Continue to invest in attractively-priced assets which meet the Group's investment criteria and support investment objectives.

The market is competitive, with mainstream investors active and low yields being seen for certain assets. The Group has acquired further quality assets at NIYs which allow achievement of our investment objectives, with a continued aim of portfolio assembly at attractive pricing whilst seeking appropriate diversification.

 

An additional £16.6 million has been committed subsequent to 30 June 2017. As at the date of this report the Group has uncommitted capital to deploy of approximately £39 million, available from undrawn debt facilities. The Investment Manager is performing diligence on near-term acquisitions of a value in excess of capital available, and is also assessing on wider pipeline opportunities.

-    Lack of available properties

-    Inability to invest on
acceptable terms

 

 

Risk Rating

 

The principal risks faced by the Group together with the procedures employed to manage them are described in the table below:

 

 Risk and Impact

 Factors affecting risk rating

 Ongoing mitigation

1.   Dividend

-    The group has no employees and relies on third parties such as the Investment Manager to effectively manage operations. Poor performance by providers may result in reduced return to shareholders.

 

Change to risk rating: unchanged

 

 

-    A breach of REIT regulations in relation to payment of dividends may result in loss of tax advantages derived from the Group's REIT status

 

Change to risk rating: unchanged

 

 

 

 

 

-    Dividend cover has improved in the year as acquisitions have reduced non-deployed capital, portfolio performance has been positive, and operating costs have remained low. With its current portfolio scale and the anticipated meeting of the stated gearing target, dividend cover is expected to improve further in the year to June 2018.

 

-    The Group remains fully compliant with the REIT regulations.

 

 

-    All key service providers, including the Investment Manager, are subject to performance assessment at least annually. If performance is assessed as not meeting expectations the provider will either be provided with feedback to facilitate improved service levels or replaced.

 

 

-    The Group's activities 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.

2. Total returns

-    Property valuations are inherently subjective and can fluctuate dependent on market conditions and assumptions. Falls in property valuations could adversely affect the Group's borrowing capacity which is linked to the value of its properties.

 

Change to risk rating: unchanged

 

-    The Group's portfolio has increased on a like-for-like basis during the year, >90 per cent of properties have maintained or increased in value. The portfolio NIY is stable.

 

-    LTV remains at a conservative level, increasing to 14 per cent as the Group draws debt to fund acquisitions.

 

-    Debt facility covenants have been complied with during the year, with adequate headroom at year-end.

 

 

 

 

 

 

 

 

-    Loan covenants are closely monitored for compliance, with headroom projected.

 

-    All investments are subject to a detailed investment appraisal and approval process prior to acquisition.

 

-    The finished portfolio is 100 per cent let with sustainable rental levels and upwards-only annual rental reviews which support asset values.

 

3. Business funding

-    Without access to equity capital (or further debt) the Group may be unable to grow through acquisition of attractive investment opportunities, and may be unable to meet future financial commitments. This is likely to be driven by investor demand which will reflect Group performance, competitor performance and the relative attractiveness of investment in UK healthcare property.

 

Change to risk rating: unchanged

 

-    Interest rate fluctuations could increase the Group's costs and increase the likelihood of non-compliance with lender covenants.

 

Change to risk rating: unchanged

 

 

-    Political and economic uncertainty exists in relation to the UK's decision to leave the EU. The Group's ability to access the capital markets to meet its strategic objectives could be impacted in the longer-term.

 

-    The Group has, subsequent to the year-end, increased its available debt facilities by £40 million, providing capital to fund pipeline acquisitions and investment commitments.

 

-    The Group has fixed interest costs on 100 per cent of its drawn fixed term borrowings as at 30 June 2017 until September 2021.

 

 

 

-    The Group maintains regular communication with investors, and, with the assistance of its broker and sponsor, regularly monitors the Group's capital requirements and investment pipeline alongside opportunities to raise equity.

 

-    Liquidity available from income, equity and debt is kept under constant review to ensure the Group can meet any forward commitments as they fall due.

 

4. Long-term rental income

-    Changes in government policies, including specific policies affecting local-authority funding of elderly care, may render the Group's strategy inappropriate. Secure income will be at risk if tenant finances suffer from policy changes, and property valuations would be impacted in the case of a demand downturn.

 

Change to risk rating: unchanged

 

-    Concentration risk. Significant exposure to a single tenant group or geographic area could adversely affect Group performance in certain circumstances.

 

Change to risk rating: decreased

 

 

 

-    Whilst the care sector continues to face challenges, the associated pressures are tending to be felt most by businesses reliant on local authority funding of residents. The Group's portfolio is diversified in respect of the fee income received by its tenants, with a significant proportion being self-funded.

 

 

 

 

 

 

-    The Group's portfolio diversification has improved with continued growth. The Group's largest tenant is now 17 per cent from 22 per cent, and largest geographical region is 16 per cent from 19 per cent.

 

 

 

-    Government policy is monitored by the Group so as to increase ability to anticipate changes.

 

-    Tenants typically have a multiplicity of income sources, thereby not being totally dependent on government pay.

 

-    The Group's properties are let on long-term leases at sustainable rent levels, providing security of income.

5. Grow portfolio

-    Lack of attractive investment opportunities and/or an inability to invest on acceptable terms in suitable timeframes will hamper the Group's growth prospects.

 

Change to risk rating: unchanged

 

-    Activity levels in the market remain competitive, particularly for premium assets exclusively aimed at self-funded residents in prime locations. The Group continues to see opportunities which meet its criteria, as identified by the Investment Manager, and is actively pursuing these.
 

 

-    The Investment Manager develops and maintains a network of relationships with property owners and developers which it is expected will provide the Group with the best possible opportunity to acquire suitable properties.

 

-    The Board monitors the Group's pace of deployment of capital via regular reporting by the Investment Manager.

 

6. General

-    People. Recruitment and retention of Board members and key personnel at the Investment Manager with relevant and appropriate skills and experience is vital to the Group's ability to meet its objectives. Failure to do so could result in the Group failing to meet its objectives.

 

Change to risk rating: unchanged

 

-    The Investment Manager has bolstered its team further during the year.

 

-    Directors are subject to annual performance assessment, and are subject to re-election by shareholders. The Board has a succession strategy in place which is subject to regular review and discussion.

 

-    The Investment Manager is subject to regular performance appraisal; has its remuneration aligned with group performance; and there is a key man provision within the investment management agreement between the manager and the Group.

 

 

Malcolm Naish

Chairman

3 October 2017

 

 

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 June 2017                                                                                                        

 

 

 

Year ended 30 June 2017

Year ended 30 June 2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

Revenue

 

 

 

 

 

 

 

Rental income

 

17,760

5,127

22,887

12,677

4,136

16,813

Other income

 

221

450

671

61

-

61

Total revenue

 

17,981

5,577

23,558

12,738

4,136

16,874

 

 

 

 

 

 

 

 

Gains on revaluation of investment properties

4

-

2,211

2,211

-

425

425

Cost of corporate acquisitions

 

-

(626)

(626)

-

(998)

(998)

Total income

 

17,981

7,162

25,143

12,738

3,563

16,301

 

 

 

 

 

 

 

 

Expenditure

 

 

 

 

 

 

 

Investment management fee

 

 

 

 

 

 

 

- base fee                                            

2

(2,761)

-

(2,761)

(1,783)

-

(1,783)

- performance fee

2

(997)

-

(997)

(871)

-

(871)

Other expenses

 

(1,236)

-

(1,236)

(992)

-

(992)

Total expenditure

 

(4,994)

-

(4,994)

(3,646)

-

(3,646)

Profit before finance costs and taxation

 

12,987

7,162

20,149

9,092

3,563

12,655

 

 

 

 

 

 

 

 

Net finance costs

 

 

 

 

 

 

 

Interest receivable

 

113

-

113

173

-

173

Interest payable and similar charges

 

(921)

-

(921)

(1,102)

-

(1,102)

Profit before taxation

 

12,179

7,162

8,163

3,563

11,726

Taxation

 

25

(244)

(219)

(24)

-

(24)

Profit for the year

 

12,204

6,918

8,139

3,563

11,702

Other comprehensive income:

 

 

 

 

 

 

 

Items that are or may be reclassified subsequently to profit or loss

 

 

 

 

 

 

 

Movement in valuation of interest rate swaps

 

-

307

307

-

(316)

(316)

Total comprehensive income for the year

 

12,204

7,225

19,429

8,139

3,247

11,386

Earnings per share (pence)

3

4.84

2.74

7.58

4.74

2.07

6.81

 

The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

 

All revenue and capital items in the above statement are derived from continuing operations.

 

No operations were discontinued in the year.

 

 

 

 

Consolidated Statement of Financial Position (audited)

As at 30 June 2017

 

 

As at

30 June 2017

As at

30 June 2016

 

Notes

 £'000

 £'000

Non-current assets

 

 

 

Investment properties

4

266,219

200,720

Trade and other receivables

 

3,988

3,742

 

 

270,207

204,462

Current assets

 

 

 

Trade and other receivables

 

25,629

13,222

Cash and cash equivalents

 

10,410

65,107

Total assets

 

306,246

282,791

Non-current liabilities

 

 

 

Bank loan

6

(39,331)

(20,449)

Interest rate swaps

 

(9)

(316)

Trade and other payables

 

(3,988)

(3,742)

 

 

(43,328)

(24,507)

Current liabilities

 

 

 

Trade and other payables

 

(5,981)

(5,002)

Total liabilities

 

(49,309)

(29,509)

Net assets

 

256,937

253,282

 

 

 

 

Stated capital and reserves

 

 

 

Stated capital account

7

241,664

246,533

Hedging reserve

 

(9)

(316)

Capital reserve

 

11,616

4,698

Revenue reserve

 

3,666

2,367

Equity shareholders' funds

 

256,937

253,282

 

 

 

 

Net asset value per ordinary share (pence)

3

101.9

100.4

 

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 June 2017                                                                                            

 

 

 

Stated capital account

Hedging reserve

 

Capital reserve

 

Revenue reserve

 

 

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

At 30 June 2016

 

246,533

(316)

4,698

2,367

253,282

 

Total comprehensive income  for the year:

 

-

307

6,918

12,204

19,429

 

 

 

 

 

 

 

Transactions with owners recognised in equity:

 

 

 

 

 

 

Dividends paid

1

(4,869)

-

-

(10,905)

(15,774)

At 30 June 2017

 

241,664

(9)

11,616

3,666

256,937

 

 

For the year ended 30 June 2016

           

 

 

Stated capital account

Hedging reserve

 

Capital reserve

 

Revenue reserve

 

 

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

At 30 June 2015

 

136,846

-

495

1,951

139,292

 

Total comprehensive income  for the year:

 

-

(316)

3,563

8,139

11,386

 

 

 

 

 

 

 

Transactions with owners recognised in equity:

 

 

 

 

 

 

Dividends paid

1

(1,973)

-

-

(7,723)

(9,696)

Issue of ordinary shares

7

114,438

-

-

-

114,438

Buyback of ordinary shares into treasury

7

-

-

(14,159)

-

(14,159)

Resale of ordinary shares from treasury

7

-

-

14,799

-

14,799

Expenses of issue

7

(2,778)

-

-

-

(2,778)

At 30 June 2016

 

246,533

(316)

4,698

2,367

253,282

 

 

 

 

Consolidated Statement of Cash Flows (audited)

For the year ended 30 June 2017

                       

 

 

Year ended

30 June 2017

Year ended

30 June 2016

 

Note

 £'000

 £'000

Cash flows from operating activities

 

 

 

Profit before tax

 

19,341

11,726

Adjustments for:

 

 

 

Interest receivable

 

(113)

(173)

Interest payable

 

921

1,102

Revaluation gains on property portfolio

4

(7,339)

(4,787)

Cost of corporate acquisitions

 

626

998

Increase in trade and other receivables

 

(9,062)

(233)

Increase in trade and other payables

 

20

1,271

 

 

4,394

9,904

Interest paid

 

(728)

(854)

Interest received

 

113

173

Tax paid

 

(543)

(164)

 

 

(1,158)

(845)

Net cash inflow from operating activities

 

3,236

9,059

 

 

 

 

Cash flows from investing activities

 

 

 

Purchase of investment properties

 

(37,698)

(34,833)

Acquisition of subsidiaries including acquisition costs, net of cash acquired

 

(25,552)

(28,089)

Repayment/(grant) of development loan

 

2,170

(2,170)

Net cash outflow  from investing activities

 

(61,080)

(65,092)

 

Cash flows from financing activities

 

 

 

Issue of ordinary share capital

 

-

100,279

Expenses of issue paid

 

-

(2,778)

Resale of ordinary shares from treasury

 

-

14,799

Drawdown/(repayment) of bank loan facility, net of costs

 

18,736

(10,638)

Dividends paid

 

(15,589)

(9,681)

Net cash inflow from financing activities

 

3,147

91,981

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(54,697)

35,948

Opening cash and cash equivalents

 

65,107

29,159

Closing cash and cash equivalents

 

10,410

65,107

 

 

Transactions which do not require the use of cash

 

 

Movement in fixed or guaranteed rent reviews and lease incentives

5,786

4,362

Issue of ordinary share capital

-

14,159

Buyback of ordinary shares into treasury

-

(14,159)

 

 

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure Guidelines and Transparency Rules, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 30 June 2017, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement, Investment Manager's Report and Strategic Objectives include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Risk Rating' includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

 

On behalf of the Board

Malcolm Naish

Chairman

3 October 2017

 

 

Extract from Notes to the Audited Consolidated Financial Statements

 

1.  Dividends

Amounts paid as distributions to equity holders during the year to 30 June 2017.

 

 

Dividend rate

(pence per share)

Year ended

30 June 2017

£'000

Fourth interim dividend for the year ended 30 June 2016

1.545

3,897

First interim dividend for the year ended 30 June 2017

1.570

3,959

Second interim dividend for the year ended 30 June 2017

1.570

3,959

Third interim dividend for the year ended 30 June 2017

1.570

3,959

Total

6.255

15,774

 

Amounts paid as distributions to equity holders during the year to 30 June 2016.

 

 

Dividend rate

(pence per share)

Year ended

30 June 2016

£'000

Fourth interim dividend for the year ended 30 June 2015

1.530

2,177

First interim dividend for the year ended 30 June 2016

1.545

2,199

Second interim dividend for the year ended 30 June 2016

1.545

2,660

Third interim dividend for the year ended 30 June 2016

1.545

2,660

Total

6.165

9,696

 

It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend. The fourth interim dividend in respect of the year ended 30 June 2017, of 1.57 pence per share, was paid on 25 August 2017 to shareholders on the register on 4 August 2017 amounting to £3,959,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

 

2. Fees paid to Target Advisers LLP

 

Year ended

30 June 2017

 Year ended

30 June 2016

 

 £'000

£'000

Base management fee

2,761

1,783

Performance fee

997

871

Total

3,758

2,654

 

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

 

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

 

A performance fee in respect of the year to 31 December 2016 totalling £946,000 (year to 31 December 2015: £636,000) has been paid of which £345,000 (2016: £110,000) was accrued in the prior period accounts. At the year-end an accrual of £396,000 (inclusive of estimated irrecoverable VAT) in relation to the year to 31 December 2017 has been made based on the Group's historic portfolio performance relative to the Index.

 

The Investment Management Agreement can be terminated by either party on 12 months' written notice provided that such notice shall not expire earlier than 30 September 2019. Should the Company terminate the Investment Management Agreement earlier than 30 September 2019 then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board has not given its prior consent.

 

3. Earnings per share and Net Asset Value per share

 

EPRA is an industry body which issues best practice reporting guidelines and the Group report an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below.

 

Earnings per share

 

Year ended 30 June 2017

Year ended 30 June 2016

 

£'000

Pence per share

£'000

Pence per share

Revenue earnings

12,204

4.84

8,139

4.74

Capital earnings

6,918

2.74

3,563

2.07

Total earnings

19,122

7.58

11,702

6.81

 

 

 

 

 

Average number of shares in issue

 

252,180,851

 

171,734,587

 

The EPRA earnings are arrived at by adjusting for the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group.

 

The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for the performance fee.

 

The reconciliations are provided in the table below:

 

 

Year ended

30 June 2017

Year

ended

30 June 2016

Earnings per IFRS Consolidated Statement of Comprehensive Income

19,122

11,702

Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives

(5,127)

(4,136)

Adjusted for revaluations of investment properties

(2,211)

(425)

Adjusted for cost of corporate acquisitions and other capital items

420

998

EPRA earnings

12,204

8,139

Adjusted for performance fee

997

871

Group specific adjusted EPRA earnings

13,201

9,010

 

 

 

Earnings per share ('EPS') (pence per share)

 

 

EPS per IFRS Consolidated Statement of Comprehensive Income

7.58

6.81

EPRA EPS

4.84

4.74

Group specific adjusted EPRA EPS

5.23

5.25

 

Net Asset Value per share

 

The Group's Net Asset Value per ordinary share of 101.9 pence (2016: 100.4 pence) is based on equity shareholders' funds of £256,937,000 (2016: £253,282,000) and on 252,180,851 (2016: 252,180,851) ordinary shares, being the number of shares in issue at the year-end.

 

The EPRA Net Asset Value ('EPRA NAV') per share is arrived at by adjusting the net asset value ('NAV') calculated under International Financial Reporting Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. The only adjustment required to the NAV is that the EPRA NAV excludes the fair value of the Group's interest rate swaps, which were recognised as a liability of £9,000 under IFRS as at 30 June 2017 (2016: liability of £316,000).

 

EPRA believes that, under normal circumstances, the financial derivatives which property investment companies use to provide an economic hedge are held until maturity and so the theoretical gain or loss at the balance sheet date will not crystallise.

 

 

As at

30 June 2017

As at

 30 June 2016

NAV per financial statements (pence per share)

101.9

100.4

Valuation of interest rate swaps

-

0.2

EPRA NAV (pence per share)

101.9

100.6

 

 

4. Investments

 

Freehold and leasehold properties

 

As at

30 June 2017

As at

30 June 2016

 

 £'000

£'000

Opening market value

210,666

143,748

Opening fixed or guaranteed rent reviews and lease incentives

(9,946)

(5,584)

Opening carrying value

200,720

138,164

 

 

 

Purchases

35,622

32,912

Purchase of property through a business combination

25,590

27,298

Acquisition costs capitalised

2,076

1,921

Acquisition costs written off

(2,076)

(1,921)

Revaluation movement - gains

11,660

7,724

Revaluation movement - losses

(1,587)

(1,016)

Movement in market value

71,285

66,918

Movement in fixed or guaranteed rent reviews and lease incentives

(5,786)

(4,362)

Movement in carrying value

65,499

62,556

 

 

 

Closing market value

281,951

210,666

Closing fixed or guaranteed rent reviews and lease incentives

(15,732)

(9,946)

Closing carrying value

266,219

200,720

 

Changes in the valuation of investment properties

 

Year ended

30 June 2017

£'000

Year ended

30 June 2016

£'000

Revaluation movement

10,073

6,708

Acquisition costs written off

(2,076)

(1,921)

Movement in lease incentives

(658)

-

 

7,339

4,787

Movement in fixed or guaranteed rent reviews

(5,128)

(4,362)

Gains on revaluation of investment properties

2,211

425

 

The properties were valued at £281,951,000 (2016: £210,666,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Professional Standards, incorporating the International Valuation Standards January 2014 ('the Red Book') issued by the Royal Institution of Chartered Surveyors ('RICS') on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £266,219,000 (2016: £200,720,000). The adjustment consisted of £14,847,000 (2016: £9,719,000) relating to fixed or guaranteed rent reviews and £885,000 (2016: £227,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the accounts as current assets within 'trade and other receivables'.

 

5. Investment in subsidiary undertakings

 

The Group included 14 subsidiary companies as at 30 June 2017. All subsidiary companies were wholly owned, either directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was to act as an investment and property company. Other than two subsidiaries, which are incorporated in Gibraltar, all subsidiaries are incorporated within the United Kingdom.

 

The Group acquired THR Number 7 Limited and THR Number 8 Limited on 26 August 2016 and acquired THR Number 9 Limited on 24 October 2016. In addition, the Group acquired four newly established companies during the year to 30 June 2017: THR Number 10 Limited, THR Number 12 plc, THR Number 13 Limited and THR Number 14 Limited.

 

6. Bank loan

 

As at

30 June 2017

£'000

As at

30 June 2016

£'000

Principal amount outstanding

40,000

21,000

Set-up costs

(1,100)

(836)

Amortisation of set-up costs

431

285

Total

39,331

20,449

 

At 30 June 2016, the Group had a £50.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which was repayable on 23 June 2019. Interest accrued on the bank loan at a variable rate, based on three month LIBOR plus margin and mandatory lending costs, and was payable quarterly. At 30 June 2016, the margin was 2.0 per cent per annum for the duration of the loan and a non-utilisation fee of 1.0 per cent per annum was payable on any undrawn element of the facility.

 

On 1 September 2016, the Group extended its loan facility to 1 September 2021, with an option of two further one year extensions thereafter, subject to the consent of RBS. The margin on the extended facility was reduced from 2.0 per cent to 1.5 per cent per annum for the duration of the loan. The non-utilisation fee payable on any undrawn element of the facility was reduced to 0.75 per cent per annum. There were no other material amendments to the facility. The Group drew down a further £19.0 million under this facility during the year ended 30 June 2017.

 

The Group has entered into an interest rate swap for a notional value of £21.0 million, with a starting date of 7 July 2016 and a termination date of 23 June 2019. Under the terms of the interest rate swap, the Group will pay quarterly a fixed rate of interest of 0.85 per cent per annum and will receive three month LIBOR. On 21 September 2016, the Group entered into a second interest rate swap, also for a notional value of £21.0 million, under which, for the period from 24 June 2019 to 1 September 2021, the Group will pay quarterly a fixed rate of interest of 0.70 per cent per annum and will receive three month LIBOR.

 

On 27 March 2017, the Group entered into a third interest rate swap for a notional value of £9.0 million, with a starting date of 7 April 2017 and a termination date of 1 September 2021. Under the terms of the third interest rate swap, the Group will pay quarterly a fixed rate of interest of 0.86 per cent per annum and will receive three month LIBOR.

 

Inclusive of all three interest rate swaps, the interest rate on £30.0 million of the Group's borrowings is fixed at an all-in rate of 2.36 per cent per annum until 23 June 2019 and 2.25 per cent per annum from 24 June 2019 to 1 September 2021. The remaining £10.0m of debt is drawn from the revolving credit facility with interest payable at a variable rate equal to three month LIBOR plus the lending margin of 1.50 per cent per annum.

 

The fair value of the interest rate swaps at 30 June 2017 was an aggregate liability of £9,000 (2016: liability of £316,000).

 

This bank loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One PLC Group ('THR1 Group') which consists of THR1 and its three subsidiaries; THR Number Two Limited, THR Number 3 Limited and THR Number 9 Limited. Under the bank covenants related to this loan, the Group is to ensure that for THR1 Group:

- The loan to value percentage does not exceed 50 per cent; and

- The interest cover is greater than 300 per cent on any calculation date.

 

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

 

Subsequent to the year end, the Group entered into an additional £40.0 million five year loan facility. See note 11 for details.

 

7. Stated capital movements

 

 

As at 30 June 2017

 

Number of shares

£'000

Allotted, called-up and fully paid ordinary shares of no par value

 

 

Opening balance

252,180,851

246,533

Dividends allocated to capital

 

(4,869)

Balance as at 30 June 2017

252,180,851

241,664

 

Under the Company's Articles of Incorporation, the Company may issue an unlimited number of ordinary shares.

 

During the year to 30 June 2017, the Company did not repurchase any ordinary shares into treasury (2016: 14,229,822 ordinary shares at a total cost of £14,159,000). The Company did not resell any ordinary shares from treasury (2016: 14,229,822 ordinary shares raising gross proceeds of £14,799,000).

 

During the year to 30 June 2017, the Company did not issue any ordinary shares (2016: 109,882,625 ordinary shares raising gross proceeds of £114,438,000).

 

Capital management

The Company's capital is represented by the stated capital account, hedging reserve, capital reserve and revenue reserve. The Company is not subject to any externally-imposed capital requirements.

 

The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective. The Company is able to pay a dividend out of the Stated Capital Account as permitted by the Companies (Jersey) Law 1991 (as amended).

 

Capital risk management

The objective of the Group is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and other healthcare assets in the UK.

 

The Board has responsibility for ensuring the Group's ability to continue as a going concern. This involves the ability to borrow monies in the short and long term; and pay dividends out of reserves, all of which are considered and approved by the Board on a regular basis.

 

To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders, issue new shares or buyback shares for cancellation or for holding in treasury.

 

Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in accordance with the Company's investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding excess cash on its balance sheet over the longer term.

 

No changes were made in the objectives, policies or processes during the year.

 

8. Financial instruments

Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, a bank loan and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.

 

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

 

The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.

 

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £20.3 million (2016: £68.4 million).

 

In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

 

There were no financial assets which were either past due or considered impaired at 30 June 2017 (2016: nil).

 

All of the Group's cash is placed with financial institutions with a long-term credit rating of BBB or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed, limited or lost. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

 

During the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across two different financial institutions. As the cash balance held had reduced by the year end, monies were held with a single financial institution. At 30 June 2017 the Group held £10.4 million (2016: £26.0 million) with The Royal Bank of Scotland plc and £nil (2016: £39.1 million) with Lloyds Bank plc.

 

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

 

The Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.

 

Interest rate risk

Some of the Company's financial instruments are interest-bearing. Interest-rate risk is the risk that future cash flows will change adversely as a result of changes in market interest rates.

 

The Group's policy is to hold cash in variable rate or short term fixed rate bank accounts. Interest is received on cash at a variable rate of 0.01 per cent (2016: 0.50 per cent and 0.55 per cent). Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.

 

The Group has a £50 million (2016: £50 million) committed term loan and revolving credit facility which at 30 June 2017 was charged interest at a rate of three month LIBOR plus a margin of 1.5 per cent per annum (2016: 2.0 per cent per annum) At the year-end £40.0 million of the facility was drawn down (2016: £21.0 million). The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate.

 

The Group has hedged its exposure on £30.0 million (2016: £21.0 million) of the loan drawn down at 30 June 2017 through entering into fixed rate Interest Rate Swaps (see note 6). Fixing the interest rate exposes the Group to fair value interest rate risk.

 

The Group has not hedged its exposure on £10.0 million of the loan drawn down at 30 June 2017 (2016: £nil) on which interest is payable at a variable rate equal to three month LIBOR plus the lending margin of 1.50 per cent per annum. This balance exposes the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.

 

Market price risk

The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

 

9. Related party transactions

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

 

Mr Ross, who retired as a Director following the Annual General Meeting on 10 November 2016, was a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, each of which receive fees from the Company. Mr Webster, who was appointed as a Director of the Company with effect from 11 November 2016, is an employee of the Company Secretary, R&H Fund Services (Jersey) Limited. Mrs Jones is a director of the Company Secretary, R&H Fund Services (Jersey) Limited.

 

The Directors of the Company received fees for their services. Total fees for the year were £165,000 (2016: £115,000) of which £18,000 (2016: £16,000) remained payable at the year-end.

 

Target Advisers LLP, the Investment Manager, received £3,758,000 (2016: £2,654,000) in relation to the year of which £997,000 (2016: £871,000) related to the performance fee. Of this amount £941,000 (2016: £885,000) (inclusive of VAT) remained payable at the year-end.

 

10. Operating segments

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the EPRA NAV. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV is detailed in note 3.

 

The view that the Group is engaged in a single segment of business is based on the following considerations:

-     One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;

-     There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the benchmark; and

-     The management of the portfolio is ultimately delegated to a single property manager, Target.

 

11. Post balance sheet events

On 6 July 2017, the Group completed the acquisition of an 88 bed home in Melton Mowbray, Leicestershire for £8.4 million, including acquisition costs. The home opened its doors to residents in March 2017 and boasts very large lounges and well laid out gardens providing good outdoor space for residents and visitors. The home was leased back to Melton Care Limited and is subject to a 35 year lease with RPI-linked uplifts with a cap and collar. Melton Care is a joint venture between Magnum Care, a Leicestershire-based operator, and the principals behind Care Concern, the national operator with whom the Group have worked in a number of homes.

 

On 11 July 2017, the Group acquired a development site, with planning permission, in Birkdale, Merseyside, and entered into a capped development contract to develop a home with 55 large bedrooms and good public space in an impressive building on this corner location. The development will be carried out by Athena Healthcare, who have also contracted to pre-let the property on completion at an agreed rental level. The lease will be for 35 years with RPI uplifts subject to a cap and collar. The home will target the premium residential market and, once completed, will become the third home in the Group's portfolio with Athena, a growing operator with three operational homes and several further in development. The home is expected to complete by March 2019, with a total development price of around £8.2 million including costs.

 

On 30 August 2017, the Group entered into a new five year £40 million committed term loan facility with First Commercial Bank, Limited (the 'FCB Facility'). The FCB Facility can be drawn down flexibly over the period to 30 August 2019 with £5.0 million of the facility having been drawn to date. Interest is payable quarterly in arrears at a margin of 175 basis points over three month LIBOR. The Group intends to hedge a significant part of its interest rate exposure on the facility once it has drawn sufficient funds. The facility agreement contains a typical security package including loan to value and interest cover ratio covenants which are broadly in-line with the Group's existing debt arrangements.

 

12. Financial statements

These are not full statutory accounts.  The report and financial statements for the year to 30 June 2017 will be posted to shareholders and made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from the Administrator, Maitland Administration Services (Scotland) Limited, 20 Forth Street, Edinburgh, EH1 3LH.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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