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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Target Healthcare Reit Plc | LSE:THRL | London | Ordinary Share | GB00BJGTLF51 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.40 | 1.76% | 81.00 | 80.90 | 81.40 | 81.30 | 79.50 | 79.70 | 2,417,361 | 16:35:10 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Finance Services | 67.75M | -6.57M | -0.0106 | -75.66 | 497.43M |
From May 2019 to May 2024
TIDMTHRL
RNS Number : 1441L
Target Healthcare REIT Limited
29 September 2016
To: RNS
From: Target Healthcare REIT Limited
Date: 29 September 2016
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 2016.
Financial Highlights
-- EPRA* NAV per share of 100.6p (2015: 97.9p) -- EPRA NAV total return of 9.3% (2015:10.3%) -- Dividends declared of 6.18p (2015: 6.12p) -- IFRS profit for the year GBP11.7m (2015: GBP9.6m) -- Dividend cover of 72% (2015: 84%) -- EPRA Earnings Per Share of 4.7p (2015: 5.7p)
Portfolio Highlights
Hot Features
Premium
-- Portfolio valuation of GBP210.7m (2015: GBP143.7m)
-- Portfolio passing rent of GBP15.5m (2015: GBP11.0m)
-- Number of tenant operator groups: 13 (2015: 8)
-- Weighted average unexpired lease term ('WAULT'): 28.6 years (2015: 29.5 years)
-- Number of acquisitions in the year: 9 (2015: 11)
-- Value of acquisitions in the year (including costs): GBP64.4m (2015: GBP57.6m)
* European Public Real Estate Association
Malcolm Naish, Chairman of the Company, said:
I am pleased to present the Group's annual report for 2016, a year in which we have continued to deliver on our key goal of growing the Group in a disciplined and sustainable manner. Accretive acquisitions have further diversified the Group's portfolio, both by tenant and geography of asset, whilst maintaining rental income and lease length at levels we believe provide a solid basis for the Group to continue to deliver its strategy.
Performance Highlights
The Group's EPRA NAV per share increased by 2.8 per cent to 100.6 pence. When combined with dividends paid during the year, this has provided a NAV total return of 9.3 per cent. EPRA earnings have increased by 20 per cent to GBP8.1 million delivering EPRA earnings per share of 4.7 pence (2015: 5.7 pence).
These figures reflect another year of growth. Passing rent has increased by 40 per cent to GBP15.5 million, and new shareholder capital of GBP115.1 million has been issued. Whilst having significant capital awaiting investment does temporarily detract from revenue returns, shown by reductions in EPS and dividend cover, we believe the longer-term benefits to shareholders from growing the Group outweigh this short-term drag. When the Group is fully invested, net rental income is expected to fully cover intended dividend levels as a result of careful asset selection process and control of the Group's costs.
Significant cost savings have been obtained for future periods from a renegotiation of the Group's debt facilities. A reduction to borrowing margin of 50 basis points has been obtained alongside an extension of the now GBP50 million RBS facility to 1 September 2021. Exposure to interest rate risk has been actively managed, with protection obtained through an interest rate swap arrangement relating to GBP21 million of debt.
Dividends
The Company has declared and paid dividends of 6.18 pence per share in respect of the year. This is an increase of 1 per cent on 2015, 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 2017 by 1.6 per cent to 1.570 pence per share, in-line with inflation and providing an annual total of 6.28 pence.
Outlook
We are operating in an environment of political and economic uncertainty, both worldwide and more locally as demonstrated by the EU referendum result. Dividends payable by property companies with long lease terms and annual rental uplifts provide an attractive investment case, reflected in robust share price responses by the healthcare investment market. We believe the underlying fundamentals of population demographics and supply/demand imbalance of quality UK care home stock remain compelling.
As in previous years, the care sector in the UK is facing various headwinds, including: introduction of the living wage; nursing shortages; mediocre fee increases from government; and, the ongoing challenges of a more engaged regulatory regime. Our Investment Manager expands on these within 'UK Healthcare Investment' below. We believe specialist investment management is key for this sector, the performance of an informed 'bottom-up' investment appraisal process enables long-term investment, providing a stable yield for our shareholders and a platform for our tenants to provide a quality care service to their residents.
Our primary challenge is in continuing to craft a portfolio which meets our investment objectives and is balanced by region, tenant and size. I am pleased that we are investing our capital well, with over GBP57 million of the GBP84 million raised in May 2016 having been committed to assets which meet our quality requirements at pricing which is accretive to portfolio returns. The Investment Manager is working diligently on a pipeline of opportunities in which to place our remaining capital.
Finally, Graeme Ross has indicated his intention to retire from the Board following the AGM and I would like to take this opportunity to thank him for his valuable contribution to the Company during a period of considerable growth. Recognising the skills and experience that Graeme provided, the Board intends to appoint another Jersey-resident Director shortly.
Mr Malcolm Naish
Chairman
28 September 2016
Enquiries:
Target Advisers Kenneth MacKenzie 01786 845 912 ------------------------------------------ -------------------------- Stifel Nicolaus Europe Limited Mark Young, Neil Winward, Roger Clarke, Tom Yeadon 020 7710 7600 ------------------------------------------ -------------------------- Quill PR 020 7466 5058, 020 7466 Fiona Harris, Sam Emery 5056 ------------------------------------------ --------------------------
UK Healthcare Investment
Market/transactions overview
The investment case for high quality recently built care homes in the UK remains compelling. Good levels of investment activity in the elderly care sector have continued during the year although the volume of transactions has dipped slightly recently and there has been somewhat of a post-Brexit, summer lull in new opportunities coming to market. However, we expect to see an uptick in transaction activity in the Autumn.
We had seen a reduction in investment appetite from US REITs who had been very active investors in the UK market for the past couple of years, however, the recent favourable exchange rate on the back of the pound falling in value against the dollar has made the UK market more attractive again for US buyers.
Traditional real estate investors have been active recently making direct investment in UK care homes for pension and annuity funds attracted by income producing assets in a low interest rate economy.
We continue to see some very keen yields paid for the most highly desirable assets particularly in the South East of England. The Company has a selective interest in such opportunities although we continue to follow our strategy of seeking out value in the mid-market, single asset/smaller portfolio categories with regional operators. We retain our conviction that they can best apply their local knowledge and market presence to deliver high quality care within their communities which in turn we believe allows them to achieve excellent financial performance.
We continue to identify and assess a wider pipeline of potential opportunities.
Brexit
So far, we have not seen any significant movement in yields following voters' decision of 23 June to leave the European Union, one of the most significant political decisions in decades. Whilst the initial reaction has been well documented, and the UK real estate market now faces a period of significant uncertainty, the fundamentals of the Health & Social Care market have not changed. The demographics will continue to shift towards a greater proportion of elderly people creating the supply-demand imbalance that will require greater investment into care home development.
In the four weeks following the vote, Healthcare REITs outperformed core real estate by a significant margin due to their long lease terms and annual rent uplifts providing good visibility of future revenues and cash flows. Care home leases with terms of approximately 30 years compare very favourably with shorter term office leases. Also, the movement in gilt pricing making long income real estate more attractive.
The effects of the Brexit vote cannot be predicted with any certainty or accuracy. The UK will experience a period of uncertainty, however, due to the demographic imperative, businesses in the UK healthcare sector are more likely to be insulated from the worst effects of any such market uncertainty.
Continued headwinds: National living wage; funding; staffing; regulatory pressures; home closures
As reported in 2015 the new living wage came into effect in April 2016. Care homes, while welcoming the sentiment of staff being better rewarded, were initially concerned about individual local authorities having the resources and/or inclination to match the uplift in fees paid to reflect this additional cost of caring for state-funded residents. The government went some way in easing the situation by introducing the 'Adult Social Care Precept' allowing Local Authorities to raise council tax bills by a further 2%, with these funds allocated toward social care, albeit not exclusively for care homes. Laing & Buisson subsequently announced in July 2016 that the average rise in state funded fees across the UK equated to 4%, (3.4% in England) and this has essentially balanced the 3.5% rise in costs experienced by homes. Operators however continue to have longer term concerns as the Living Wage is pushed toward its 2020 target of GBP9.00 per hour from the initial GBP7.20. Operators have noted that wages at all levels have often had to be adjusted, as staff at higher levels expected a realignment of their own pay grade.
From a wider funding perspective research by Prestige Nursing released in Aug 2016, showed that despite the base need for a 3.5% rise in fees to cover costs, the average annual rise had been 5.2% over the last year, showing that care homes had been using the time honoured route of using private fee payers to subsidise local authority residents. This reinforces the sophisticated operator's viewpoint that there is a requirement for a good percentage of a home's residents to be self-funders, both as a safety net against austerity in the public sector and as a route to create a more attractive environment via suitable buildings and services offered to meet the expectations of a more discerning public. This private fee payer requirement also sees operators continuing to favour the more southerly and wealthy regions when it comes to new development, potentially creating a bed crisis in future years for areas with poorer demographics.
As far as individuals requiring care are concerned, those reliant on state funded care will continue to see less choice available to them, with 'top-ups' more likely to become the norm, rather than the exception. Private fee payers also continue to be exposed to losing significant elements of their net worth as the 'Dilnot' protection against 'catastrophic care costs', while still said to be on the government's agenda, is now regarded by most as unlikely to be implemented, not least as a close aide to the May government has recently indicated that people should use their housing wealth to pay for care.
Despite the introduction of the living wage, operators continue to experience staffing difficulties, with many believing that Brexit will further compound the problem. Some operators are noted to be choosing to move away from nursing care, and a number of high profile closures have cited staffing pressure as the 'final nail in the coffin' for their decision.
As reported in 2015, Care Commissions, particularly the English CQC remain challenging. Most homes have now experienced their first check under the new CQC standards, and many have found it a frustrating and challenging experience. The CQC themselves have noted some improvements in those found wanting in the first round of inspections, with the majority making the required improvements deemed necessary by the inspectorate. It is noted anecdotally by Target that there is a significant 'casualty' rate amongst managers in connection with these inspections, and also a growing reluctance by deputies to step up to the manager role with the extra scrutiny and responsibility that the role entails.
Home closures continue to be a theme in the sector, with closures noted on virtually a daily basis. Many of these closures are of homes in the 'mom and pop' operator category, which dominates this sector. These homes are typically sub 30 residents, housed in older, dated conversions. Some operators have little scope to market their homes due to poor or impractical building environments, and trade past their preferred retirement date due to the dilemma of disposing of the business. For some, the final straw is a poor CQC inspection which seals the decision to close. The raft of closures is seen as useful to most continuing operators, with subsequent pressure put upon the authorities for beds and ultimately less opportunity for local authorities to dictate low fee scenarios.
Target Advisers LLP
28 September 2016
Strategic Objectives
KPIs and Performance Progress made and current focus Key risks
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Objective 1:
Dividend * Dividend rates Progressive annual dividend of 6.18 * Maximise rental income from efficient deployment of * Reliance on third party service providers
To pay a pence, 1 per cent increase on 2015 capital.
progressive
dividend * Market opportunities, or performance of Investment
fully covered * Dividend cover of 72 per cent (2015: 84 per cent) * Control costs to provide a fully covered dividend Manager, limit efficient deployment of capital
when the when the Group is fully invested.
Group is
fully * Control of operating costs on-going charges ratio * Breach of REIT regulations
invested. 1.42 per cent (2015: 1.58 per cent)
The Group's investment objective,
when fully invested, is to provide
* Growth in earnings see objective 4 a progressive dividend to shareholders
which is fully covered by EPRA earnings.
When not fully invested, as has been
the case during the year as the Group
has grown through significant equity
issuance, there can be a drag on earnings
whilst transaction diligence and comprehensive
appraisal of investment opportunities
takes place.
Pace of deployment of capital will
continue to be a focus in 2017 and
whilst the Group is in growth phase,
however the quality of assets and sustainability
of their long-term returns will not
be compromised.
Efficiencies of operations and value
for money will continue to be sought
from service providers.
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Objective 2:
Total * Annual EPRA NAV total return of 9.3 per cent (2015: * Continue to invest in attractively-priced assets * Property valuations could adversely affect returns
returns 10.3 per cent) which meet the Group's investment criteria.
To maximise
total returns
to * Portfolio performance relative to benchmark The Board is pleased with assets acquired
shareholders Annualised portfolio total return (excluding in the year (and subsequent to) which
through acquisition costs) per IPD of 13.6 per cent vs. Index meet the investment objectives and
a combination return of 9.5 per cent (to 31 December 2015) collectively have been acquired at
of dividends a NIY broadly consistent with the Group's
and capital existing portfolio. This will continue
appreciation. * Asset valuations Like-for-like revaluation gains of to be a focus in 2017.
5.3 per cent (2015: 6.0 per cent)
* Active management of portfolio.
The Investment Manager will continue
to manage the portfolio to ensure returns
are optimised with capital values maintained
and enhanced where possible.
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Objective 3:
Funding * Gross equity of GBP115.1 million raised during year * Continue to monitor debt terms available to the * Lack of equity and debt capital
To fund the Group.
business
through * Group loan-to-value (LTV) of 10.0 per cent (total * Interest rate risk
shareholder gross debt as a proportion of gross property value, The Group has entered into an amended
equity excluding cash), within 35 per cent limit agreement with RBS to improve its interest
enhanced by costs and extend the duration of its
modest debt. The Group will actively consider
leverage the most appropriate composition of
within debt facilities and instruments to
predetermined manage its interest rate exposure.
risk
thresholds.
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Objective 4:
Long-term * Like-for-like growth of 2.0 per cent (2015: 2.2 per * Continued diversification of tenants as the portfolio * Government policies/ funding of elderly care
secure rental cent) grows.
income
To have high * Concentration risk
quality * Rent roll increase of 40 per cent The Group has added 5 new tenants in
care the year, and 1 subsequent to the year-end.
providers as The Group's largest tenant accounted
tenants * Addition of 5 new tenants, to 13 for 22 per cent of passing rent at
with secure, 30 June 2016, with new acquisitions
sustainable since 30 June 2016 adding tenants who
rental income * WAULT of 28.6 years (2015: 29.5 years) further diversify the Group's portfolio.
giving
long-term
growth.
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Objective 5:
Grow * 9 assets with total commitment value of GBP64.4 * To convert the current pipeline, and continue to * Lack of available properties
portfolio million (inc. costs) completed during the year source new opportunities, through the Investment
To acquire a Manager.
diversified * Inability to invest on acceptable terms
portfolio of * All acquired assets are modern, the majority being
high quality less than 4 years old Over GBP64 million has been committed
modern care during the year, with an additional
homes GBP21 million having been invested
providing * Substantially all rooms are single occupancy with subsequent to 30 June 2016. As at the
excellent en-suite facilities including wet room showers date of this report the Group has uncommitted
accommodation capital to deploy of approximately
standards for GBP40 million (including undrawn debt)
residents. with near-term opportunities, inclusive
of development funded acquisitions,
of GBP44 million. The Investment Manager
is also assessing a wider pipeline
of potential opportunities.
-------------- --------------------------------------------------------------- ------------------------------------------------------------ ---------------------------------------------------------
Principal Risks and Uncertainties
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 Ongoing mitigation
rating
----------------------------------------------------------------- ------------------------------------------------------------------ -----------------------------------------------------------------
1. Dividend
* The group has no employees and relies on third * The pace of deployment of capital has dragged on * All key service providers, including the Investment
parties such as the Investment Manager to effectively investment returns in the period as the Investment Manager, are subject to performance assessment at
manage operations. Poor performance by providers may Manager has encountered a number of transactions least annually.
result in reduced return to shareholders. which have taken longer than average to progress
through the diligence process to completion. There is
no change to the risk rating as the associated
complexities are assessed to be deal specific. The * The Board monitors the Group's pace of deployment of
* A breach of REIT regulations in relation to payment Investment Manager retains a robust and comprehensive capital via regular reporting by the Investment
of dividends may result in loss of tax advantages investment appraisal and diligence process, and has a Manager of: status of diligence on agreed deals;
derived from the Group's REIT status pipeline of identified assets in excess of available progress on conversion on pipeline assets to agreed
capital in which to place shareholder funds. deals; and, details of pipeline assets.
* The Group's costs have been managed effectively, * The Group's activities are monitored to ensure all
demonstrated by a decrease in the Ongoing Charges conditions are adhered to. The REIT rules are
Figure to 1.42 per cent for the year. considered during investment appraisal and
transactions structured to ensure conditions are met
.
* The Group remains fully compliant with the REIT
regulations.
----------------------------------------------------------------- ------------------------------------------------------------------ -----------------------------------------------------------------
2. Total returns
* Property valuations are inherently subjective and can * The Group's portfolio has increased on a * Loan covenants are closely monitored for compliance,
fluctuate dependent on market conditions and like-for-like basis by 5.3 per cent. with headroom projected.
assumptions. Falls in property valuations could
adversely affect the Group's borrowing capacity which
is linked to the value of its properties.
* LTV has decreased to 10 per cent while the Group has * All investments are subject to a detailed investment
capital awaiting investment. appraisal and approval process prior to acquisition.
* Debt facility covenants have been complied with * The finished portfolio is 100 per cent let with
during the year, with adequate headroom at year-end. sustainable rental levels and upwards-only annual
rental reviews which support asset values.
----------------------------------------------------------------- ------------------------------------------------------------------ -----------------------------------------------------------------
3. Funding
* Without access to equity capital (or further debt) * The Group has successfully increased its levels of * The Group maintains regular communication with
the Group may be unable to grow through acquisition equity, by GBP115.1 million, and its debt investors, and, with the assistance of its broker and
of attractive investment opportunities, and may be availability, by GBP15 million, during the year. sponsor, regularly monitors the Group's capital
unable to meet future financial commitments. This is requirements and investment pipeline alongside
likely to be driven by investor demand which will opportunities to raise equity.
reflect Group performance, competitor performance and
the relative attractiveness of investment in UK * Political and economic uncertainty exists in relation
healthcare property. to the UK's decision late in the year to leave the
EU. Whilst initial market volatility has eased, the * Liquidity available from income, equity and debt is
Group's ability to access the capital markets to meet kept under constant review to ensure the Group can
its strategic objectives could be impacted in the meet any forward commitments as they fall due.
* Interest rate fluctuations could increase the Group's longer-term.
costs and increase the likelihood of non-compliance
with lender covenants.
* The Group has reduced its borrowing margin, extended
access to its facilities until 1 September 2021, and
fixed interest costs on GBP21 million of its debt
until September 2021.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
4. Long-term secure
rental income * The care sector continues to face challenges: The * Government policy is monitored by the Group so as to
* Changes in government policies, including specific National Living Wage has increased costs, these not increase ability to anticipate changes.
policies affecting local-authority funding of elderly universally matched by fee increases from Local
care, may render the Group's strategy inappropriate. Authorities; nursing shortages; and, the ongoing
Secure income will be at risk if tenant finances difficulty of more engaged regulators.
suffer from policy changes, and property valuations * Tenants typically have a multiplicity of income
would be impacted in the case of a demand downturn sources, thereby not being totally dependent on
government pay.
* Tenant concentration has reduced as portfolio
diversification increases. Single largest tenant
* Concentration risk. Significant exposure to a single exposure is 22 per cent.
tenant group or geographic area could adversely * The Group's properties are let on long-term leases at
affect Group performance in certain circumstances. sustainable rent levels, providing security of
income.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
5. Grow portfolio
* Lack of attractive investment opportunities and/or an * Activity levels in the market remain competitive, * The Investment Manager develops and maintains a
inability to invest on acceptable terms in suitable particularly for the most desirable assets in the network of relationships with property owners and
timeframes will hamper the Group's growth prospects. South East of England. The Group continues to see developers which it is expected will provide the
opportunities which meet its criteria, as identified Group with the best possible opportunity to acquire
by the Investment Manager, and is actively pursuing suitable properties.
these.
* Demographics are such that many new homes require to
be built to satisfy demand. The Group is
well-positioned to participate in acquiring a share
of these.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
6. General
* People. Recruitment and retention of Board members * The Investment Manager has bolstered its team, with * Directors are subject to annual performance
and key personnel at the Investment Manager with additions of investment and healthcare professionals assessment, and are subject to re-election by
relevant and appropriate skills and experience is as well as a dedicated portfolio management team. shareholders.
vital to the Group's ability to meet its objectives.
Failure to do so could result in the Group failing to
meet its objectives.
* 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.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
Mr Malcolm Naish
Chairman
28 September 2016
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2016
Year ended 30 June Year ended 30 June
2016 2015
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Revenue
Rental income 12,677 4,136 16,813 9,898 3,760 13,658
Other income 61 - 61 66 - 66
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total revenue 12,738 4,136 16,874 9,964 3,760 13,724
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Gains/(Losses) on revaluation
of investment properties 4 - 425 425 - (839) (839)
Cost of corporate acquisitions - (998) (998) - (174) (174)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total income 12,738 3,563 16,301 9,964 2,747 12,711
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Expenditure
Investment management fee
- base fee 2 (1,783) - (1,783) (1,140) - (1,140)
- performance fee 2 (871) - (871) (466) - (466)
VAT refund on management fees - - - 82 - 82
Other expenses (992) - (992) (880) - (880)
Total expenditure (3,646) - (3,646) (2,404) - (2,404)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit before finance costs
and taxation 9,092 3,563 12,655 7,560 2,747 10,307
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Net finance costs
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Interest receivable 173 - 173 99 - 99
Interest payable and similar
charges (1,102) - (1,102) (815) - (815)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit before taxation 8,163 3,563 11,726 6,844 2,747 9,591
Taxation (24) - (24) (39) - (39)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit for the year 8,139 3,563 11,702 6,805 2,747 9,552
Other comprehensive income:
Items that are or may be reclassified
subsequently to profit or
loss
Movement in valuation of interest
rate swap - (316) (316) - - -
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total comprehensive income
for the year 8,139 3,247 11,386 6,805 2,747 9,552
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Earnings per share (pence) 3 4.74 2.07 6.81 5.71 2.31 8.02
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
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 2016
As at As at
30 June 2016 30 June 2015
Notes GBP'000 GBP'000
------------------------------ ------ -------------- --------------
Non-current assets
Investment properties 4 200,720 138,164
Trade and other receivables 3,742 2,530
------------------------------ ------ -------------- --------------
204,462 140,694
------------------------------ ------ -------------- --------------
Current assets
Trade and other receivables 13,222 6,457
Cash and cash equivalents 65,107 29,159
Total assets 282,791 176,310
------------------------------ ------ -------------- --------------
Non-current liabilities
Bank loan 6 (20,449) (30,865)
Interest rate swap (316) -
Trade and other payables (3,742) (2,530)
------------------------------ ------ -------------- --------------
(24,507) (33,395)
------------------------------ ------ -------------- --------------
Current liabilities
Trade and other payables (5,002) (3,623)
------------------------------ ------ -------------- --------------
Total liabilities (29,509) (37,018)
------------------------------ ------ -------------- --------------
Net assets 253,282 139,292
------------------------------ ------ -------------- --------------
Stated capital and reserves
Stated capital account 7 246,533 136,846
Hedging reserve (316) -
Capital reserve 4,698 495
Revenue reserve 2,367 1,951
Equity shareholders' funds 253,282 139,292
------------------------------ ------ -------------- --------------
Net asset value per ordinary
share (pence) 3 100.4 97.9
------------------------------ ------ -------------- --------------
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2016
Stated
capital Hedging Capital Revenue
account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
------------------------------ ------ --------- --------- ---------- ---------- ---------
For the year ended 30 June 2015
Stated capital Capital Revenue
account reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ------ --------------- ---------- ---------- --------
At 30 June 2014 91,516 (2,252) 954 90,218
Total comprehensive income
for the year: - 2,747 6,805 9,552
Transactions with owners
recognised in equity:
Dividends paid 1 (1,313) - (5,808) (7,121)
Issue of ordinary shares 47,802 - - 47,802
Expenses of issue (1,159) - - (1,159)
------------------------------ ------ --------------- ---------- ---------- --------
At 30 June 2015 136,846 495 1,951 139,292
------------------------------ ------ --------------- ---------- ---------- --------
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2016
Year ended Year ended
30 June 2016 30 June 2015
Notes GBP'000 GBP'000
------------------------------------------- ------ -------------- --------------
Cash flows from operating activities
Profit before tax 11,726 9,591
Adjustments for:
Interest receivable (173) (99)
Interest payable 1,102 815
Revaluation gains on property portfolio (4,787) (2,921)
Increase in trade and other receivables (233) (308)
Increase in trade and other payables 1,271 1,003
------------------------------------------- ------ -------------- --------------
8,906 8,081
------------------------------------------- ------ -------------- --------------
Interest paid (854) (613)
Interest received 173 99
Tax paid (164) (47)
------------------------------------------- ------ -------------- --------------
(845) (561)
------------------------------------------- ------ -------------- --------------
Net cash inflow from operating activities 8,061 7,520
------------------------------------------- ------ -------------- --------------
Cash flows from investing activities
Purchase of investment properties 4 (34,833) (51,736)
Acquisition of subsidiaries (27,091) (5,845)
------------------------------------------- ------ -------------- --------------
Net cash outflow from investing
activities (61,924) (57,581)
------------------------------------------- ------ -------------- --------------
Cash flows from financing activities
Issue of ordinary share capital 100,279 47,802
Expenses of issue paid (2,778) (1,158)
Resale of ordinary shares from treasury 14,799 -
(Repayment)/drawdown of bank loan
facility (10,638) 19,225
(Grant)/repayment of development
loan (2,170) 3,300
Dividends paid (9,681) (7,074)
------------------------------------------- ------ -------------- --------------
Net cash inflow from financing activities 89,811 62,095
------------------------------------------- ------ -------------- --------------
Net increase in cash and cash equivalents 35,948 12,034
Opening cash and cash equivalents 29,159 17,125
------------------------------------------- ------ -------------- --------------
Closing cash and cash equivalents 65,107 29,159
------------------------------------------- ------ -------------- --------------
Transactions which do not require the use
of cash
Movement in fixed or guaranteed rent reviews
and lease incentives 4,362 3,760
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 2016, 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, UK Healthcare Investment 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;
-- 'Principal Risks and Uncertainties' 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
Mr Malcolm Naish
Chairman
28 September 2016
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2016.
Dividend rate Year ended
(pence per 30 June 2016
share) GBP'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
-------------------------------------- -------------- --------------
Amounts paid as distributions to equity holders during the year to 30 June 2015.
Dividend rate Year ended
(pence per 30 June 2015
share) GBP'000
--------------------------------------- -------------- --------------
Sixth interim dividend for the period
ended 30 June 2014 1.50 1,428
First interim dividend for the year
ended 30 June 2015 1.53 1,721
Second interim dividend for the year
ended 30 June 2015 1.53 1,795
Third interim dividend for the year
ended 30 June 2015 1.53 2,177
--------------------------------------- -------------- --------------
Total 6.09 7,121
--------------------------------------- -------------- --------------
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 2016, of 1.545 pence per share, was paid on 26 August 2016 to shareholders on the register on 12 August 2016 amounting to GBP3,896,000. 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 Year ended
30 June 2016 30 June 2015
GBP'000 GBP'000
--------------------- -------------- ---------------
Base management fee 1,783 1,140
Performance fee 871 466
--------------------- -------------- ---------------
Total 2,654 1,606
--------------------- -------------- ---------------
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 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.
The first performance fee period was 8 March 2013 to 31 December 2014. Subsequent 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 2015 totalling GBP636,000 (period to 31 December 2014: GBP506,000) has been paid of which GBP110,000 (2015: GBP150,000) was accrued in the prior period accounts. At the year-end an accrual of GBP345,000 (inclusive of estimated irrecoverable VAT) has been made based on the Group's historical portfolio performance relative to the Index.
With effect from 30 September 2016, 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 Year ended 30 June
2016 2015
---------------------- ----------------------
Pence per Pence per
GBP'000 share GBP'000 share
----------------------------- -------- ------------ -------- ------------
Revenue earnings 8,139 4.74 6,805 5.71
Capital earnings 3,563 2.07 2,747 2.31
Total earnings 11,702 6.81 9,552 8.02
----------------------------- -------- ------------ -------- ------------
Average number of shares in
issue 171,734,587 119,160,560
----------------------------- -------- ------------ -------- ------------
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
Year ended ended
30 June 30 June
2016 2015
------------------------------------------------------ ----------- ---------
Earnings per IFRS Consolidated Statement of
Comprehensive Income 11,702 9,552
Adjusted for rental income arising from recognising
guaranteed rent review uplifts and lease incentives (4,136) (3,760)
Adjusted for revaluations of investment properties (425) 839
Adjusted for cost of corporate acquisitions 998 174
------------------------------------------------------ ----------- ---------
EPRA earnings 8,139 6,805
Adjusted for performance fee 871 466
------------------------------------------------------ ----------- ---------
Group specific adjusted EPRA earnings 9,010 7,271
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive
Income 6.81 8.02
EPRA EPS 4.74 5.71
Group specific adjusted EPRA EPS 5.25 6.10
------------------------------------------------------ ----------- ---------
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 100.4 pence (2015: 97.9 pence) is based on equity shareholders' funds of GBP253,282,000 (2015: GBP139,292,000) and on 252,180,851 (2015: 142,298,226) 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 swap, which was recognised as a liability of GBP316,000 under IFRS as at 30 June 2016 (2015: nil).
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 As at
30 June 30 June
2016 2015
------------------------------------------------ --------- ---------
NAV per financial statements (pence per share) 100.4 97.9
Valuation of interest rate swap 0.2 -
------------------------------------------------ --------- ---------
EPRA NAV (pence per share) 100.6 97.9
------------------------------------------------ --------- ---------
4. Investments
Freehold and leasehold properties
As at As at
30 June 2016 30 June 2015
GBP'000 GBP'000
----------------------------------------------------- -------------- --------------
Opening market value 143,748 83,246
Opening fixed or guaranteed rent reviews
and lease incentives (5,584) (1,824)
----------------------------------------------------- -------------- --------------
Opening carrying value 138,164 81,422
----------------------------------------------------- -------------- --------------
Purchases 32,912 49,424
Purchase of property through a business combination 27,298 5,845
Acquisition costs capitalised 1,921 2,312
Acquisition costs written off (1,921) (2,312)
Revaluation movement 6,708 5,233
----------------------------------------------------- -------------- --------------
Movement in market value 66,918 60,502
Movement in fixed or guaranteed rent reviews
and lease incentives (4,362) (3,760)
----------------------------------------------------- -------------- --------------
Movement in carrying value 62,556 56,742
----------------------------------------------------- -------------- --------------
Closing market value 210,666 143,748
Closing fixed or guaranteed rent reviews
and lease incentives (9,946) (5,584)
----------------------------------------------------- -------------- --------------
Closing carrying value 200,720 138,164
----------------------------------------------------- -------------- --------------
Changes in the valuation of investment properties
Year ended Year ended
30 June 2016 30 June 2015
GBP'000 GBP'000
---------------------------------------------- -------------- --------------
Revaluation movement 6,708 5,233
Acquisition costs written off (1,921) (2,312)
Movement in fixed or guaranteed rent reviews
and lease incentives (4,362) (3,760)
---------------------------------------------- -------------- --------------
Gains/(losses) on revaluation of investment
properties 425 (839)
---------------------------------------------- -------------- --------------
The properties were valued at GBP210,666,000 (2015: GBP143,748,000) 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 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 GBP200,720,000 (2015: GBP138,164,000). The adjustment consisted of GBP9,719,000 relating to fixed or guaranteed rent reviews and GBP227,000 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 Company owns 100 per cent of the issued ordinary share capital of Target Healthcare REIT (Mossvale) Limited ('THRM'), a company registered in Scotland. The principal activity of Target Healthcare REIT (Mossvale) Limited is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of THR Number One PLC ('THR1'), a company registered in England & Wales. The principal activity of THR1 is that of an investment and property company.
THR1 owns 100 per cent of the share capital of THR Number Two Limited ('THR2'), a company registered in England & Wales. The principal activity of THR2 is that of an investment and property company. THR1 also owns 100 per cent of the share capital of THR Number 3 Limited ('THR3'), a company registered in England & Wales. The principal activity of THR3 is that of an investment and property company.
Acquisition of THR Number 4 Limited ('THR4')
On 6 October 2015, the Company acquired 100 per cent of the voting shares of THR Number 4 Limited, a company registered in England and Wales. Prior to acquisition, the company owned and operated a care home. As part of the transaction, the operation of the care home was sold to a third party specialist elderly care home operator, who entered into an agreement with the company to lease the care home property. Therefore from the date of acquisition onwards, the company has been an investment and property company.
Acquisition of THR Number 5 Limited ('THR5')
On 3 February 2016, the Company acquired 100 per cent of the voting shares of THR Number 5 Limited, a company registered in England and Wales. Prior to acquisition, the company owned and operated a care home. As part of the transaction, the care home continued to be operated by the incumbent operator, who entered into an agreement with the company to lease the property. Therefore from the date of acquisition onwards, the company has been an investment and property company.
Acquisition of THR Number 6 Limited ('THR6')
On 23 June 2016, the Company acquired 100 per cent of the voting shares of Hi-Hand Limited, a company registered in England and Wales. Prior to acquisition, the company owned and operated a care home. As part of the transaction, the operation of the care home was sold by the company to a UK-wide care home operator, who entered into an agreement with the company to lease the property. Therefore from the date of acquisition onwards, the company has been an investment and property company. Subsequent to the year end, the name of the company was changed from Hi-Hand Limited to THR Number 6 Limited.
6. Bank Loan
As at As at
30 June 2016 30 June 2015
GBP'000 GBP'000
------------------------------ -------------- --------------
Principal amount outstanding 21,000 31,510
Set-up costs (836) (708)
Amortisation of set-up costs 285 63
------------------------------ -------------- --------------
Total 20,449 30,865
------------------------------ -------------- --------------
At 30 June 2015, the Group had a GBP35.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which was repayable on 23 June 2019. With effect from 1 April 2016, the quantum of the facility was increased to GBP50.0 million, with other significant terms of the loan remaining unchanged. 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. At 30 June 2016, the margin was 2 per cent per annum for the duration of the loan. A non-utilisation fee of 1 per cent per annum was payable on any undrawn element of the facility.
This 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, THR2 and THR3. 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.
On 22 June 2016, the Group entered into an interest rate swap for a notional value of GBP21.0 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 3-month LIBOR. The fair value of the interest rate swap at 30 June 2016 was a liability of GBP316,000 (2015: nil).
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. On 21 September 2016, the Group entered into a second interest rate swap 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 3-month LIBOR. Inclusive of both the interest rate swaps, the interest rate on the Group's GBP21.0 million of drawn down borrowings was therefore 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. There were no other material amendments to the loan facility.
7. Stated Capital Movements
As at 30 June 2016
Number of
shares GBP'000
--------------------------------------------- ------------ --------
Allotted, called-up and fully paid ordinary
shares of no par value
Opening balance 142,298,226 136,846
Issued on 27 August 2015 14,229,822 14,159
Issued on 20 November 2015 15,652,803 16,279
Issued on 12 May 2016 80,000,000 84,000
--------------------------------------------- ------------ --------
251,284
Expenses of issue (2,778)
--------------------------------------------- ------------ --------
248,506
Dividends allocated to capital (1,973)
--------------------------------------------- ------------ --------
Balance as at 30 June 2016 252,180,851 246,533
--------------------------------------------- ------------ --------
Under the Company's Articles of Incorporation, the Company may issue an unlimited number of ordinary shares.
During the year to 30 June 2016, the Company repurchased 14,229,822 ordinary shares (2015: nil) into treasury at a total cost of GBP14,159,000. During the year to 30 June 2016, the Company resold 14,229,822 ordinary shares (2015: nil) from treasury raising gross proceeds of GBP14,799,000. At 30 June 2016, the Company did not hold any ordinary shares in treasury (2015: nil). Transactions through treasury are recorded through the capital reserve and are not included in the stated capital movements above.
During the year, the Company issued 109,882,625 ordinary shares raising gross proceeds of GBP114,438,000. The total expenses of issuing these shares were GBP2,778,000.
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 and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of an interest rate swap 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 GBP68.4 million (2015: GBP29.8 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 2016 (2015: 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 and at the year-end the Group held GBP26.0 million (2015: GBP14.1 million) with The Royal Bank of Scotland plc and GBP39.1 million (2015: GBP15.0 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 fixed rates of 0.50 per cent and 0.55 per cent and earns interest at these fixed rates for six months. 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 GBP50 million (2015: GBP35 million) committed term loan and revolving capital facility which at 30 June 2016 was charged interest at a rate of 3 month LIBOR plus a margin of 2 per cent per annum and at the year-end GBP21 million was drawn-down (2015: GBP31.5 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 the GBP21.0 million loan drawn down at 30 June 2016 through entering into a fixed rate Interest Rate Swap. Fixing the interest rate exposes the Group to fair value interest rate risk.
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 is a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited respectively, which each receive fees from the Company. 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 GBP115,000 (2015: GBP113,000) of which GBP16,000 (2015: GBP16,000) remained payable at the year-end.
Target Advisers LLP is considered to be a related party. Target Advisers LLP received GBP2,654,000 (2015: GBP1,606,000) in relation to the year of which GBP871,000 (2015: GBP466,000) related to performance fee. Of this amount GBP885,000 (2015: GBP450,000) (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 26 August 2016, the Group completed the acquisition of two modern, purpose built care homes located in Dundee, Scotland and Sandiacre, Derbyshire for approximately GBP14.0 million including acquisition costs. The Group acquired the properties through the Company's corporate acquisition of two existing property-holding companies incorporated in Gibraltar.
The properties comprise a total of 151 bedrooms with full en-suite bathrooms including wetrooms and opened in 2007 and 2015. A refurbishment programme on the older property will be completed imminently with both properties due to reach operational maturity by the year end. The homes will continue to be operated by the incumbent operator, Hudson Healthcare. The homes are subject to 35-year leases with RPI-linked cap and collar. The net initial yield on the transaction is broadly consistent with the overall average of the Group's portfolio.
On 1 September 2016, the Group completed the acquisition of a modern, purpose built care home in Mytchett near Camberley, Surrey, for approximately GBP6.5 million including acquisition costs. Kingsmead House was completed in 2015 and has 40 bedrooms over three floors. Upon acquisition, the home was leased back to the existing tenant, Care Concern Group, who has operated the home since its opening. The lease is for a term of 35-years and is subject to an RPI-linked cap and collar. The net initial yield on the transaction is broadly consistent with the overall average of the Group's portfolio.
12. Financial Statements
These are not full statutory accounts. The report and financial statements for the year to 30 June 2016 will posted to shareholders and made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from the Administrator, R&H Fund Services Limited, 20 Forth Street, Edinburgh, EH1 3LH.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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September 29, 2016 02:01 ET (06:01 GMT)
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