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Share Name Share Symbol Market Type Share ISIN Share Description
Impact Healthcare Reit Plc LSE:IHR London Ordinary Share GB00BYXVMJ03 ORD 1P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  0.00 0.0% 96.60 96.60 98.60 0.00 0.00 0.00 0.00 08:00:01
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Real Estate Investment Trusts 24.0 26.3 10.4 9.3 308

Impact Healthcare REIT PLC RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2019

08/04/2020 7:00am

UK Regulatory (RNS & others)


Impact Healthcare Reit (LSE:IHR)
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TIDMIHR

RNS Number : 1377J

Impact Healthcare REIT PLC

08 April 2020

The information contained in this announcement is restricted and is not for publication, release or distribution in the United States of America, any member state of the European Economic Area (other than the Republic of Ireland or the Netherlands), Canada, Australia, Japan or the Republic of South Africa.

8 April 2020

Impact Healthcare REIT plc

("Impact" or the "Company" or, together with its subsidiaries, the "Group")

RESULTS FOR THE 12 MONTHSED 31 DECEMBER 2019

The Board of Directors of Impact Healthcare REIT plc (ticker: IHR), the real estate investment trust which gives investors exposure to a diversified portfolio of UK healthcare real estate assets, in particular care homes, today announces the Company's audited results for the 12 months ended 31 December 2019.

Financial highlights

 
                         Year ended 31    Year ended 31    Year ended 31 
                         December 2019    December 2018    December 2017 
 Dividends declared 
  per share                      6.17p            6.00p           4.50p* 
                       ---------------  ---------------  --------------- 
 Profit before                GBP26.3m         GBP16.5m         GBP9.5m* 
  tax 
                       ---------------  ---------------  --------------- 
 Earnings per 
  share ("EPS")                 10.37p            8.57p           5.82p* 
                       ---------------  ---------------  --------------- 
 EPRA EPS                        6.95p            6.47p           4.35p* 
                       ---------------  ---------------  --------------- 
 Adjusted EPS 
  (1)                            5.10p            5.07p           4.39p* 
                       ---------------  ---------------  --------------- 
 Contracted rent              GBP23.1m         GBP17.8m         GBP11.9m 
  roll 
                       ---------------  ---------------  --------------- 
 Portfolio valuation         GBP318.8m        GBP223.8m        GBP156.2m 
                       ---------------  ---------------  --------------- 
 Net asset value 
  ("NAV") per share            106.81p          103.18p          100.65p 
                       ---------------  ---------------  --------------- 
 Share price                   108.00p          103.50p          102.38p 
                       ---------------  ---------------  --------------- 
 Loan to value 
  ratio                          6.81%           11.62%              Nil 
                       ---------------  ---------------  --------------- 
 NAV total return                9.46%            8.47%         7.19%(2) 
                       ---------------  ---------------  --------------- 
 

* 2017 - Period from the Company's IPO on 7 March 2017 to 31 December 2017

1 Adjusted earnings 5.10p per share reflects underlying cash earnings per share in the year. The adjustments made to EPS in arriving at EPRA and Adjusted EPS are set out in note 10 of the Group Financial Statements

2 Annualised for 2017

-- This was the first year of implementing our progressive dividend policy, under which we aim to grow the target dividend in line with the inflation-linked rental uplifts received in the previous year.

-- Paid four dividends of 1.5425p each in relation to 2019, thereby meeting our target for the year of 6.17p per share, an increase of 2.83% on the 6.0p paid in respect of 2018.

-- Dividends 112.6% covered by our EPRA earnings per share, which increased 7.4% to 6.95p (2018: 6.47p).

-- Portfolio valuation increased by 42.4% to GBP318.8 million as at 31 December 2019 (as at 31 December 2018: GBP223.8 million), reflecting GBP73.8 million of acquisitions, GBP7.2 million invested in capital improvements and a value uplift of GBP13.9 million. The value uplift was driven by rent increases and the Group's investment in capital improvements.

   --      NAV per share increased 3.5% to 106.81p (31 December 2018: 103.18p). 

-- NAV total return for the period of 9.46%, composed of a dividend paid in the period of 6.13p per share and 3.63p per share growth in NAV.

-- Delivered a 59.9% increase in profit before tax to GBP26.3 million (31 December 2018: GBP16.5 million).

-- Our shares were admitted to the premium listing segment of the Official List and to trading on the premium segment of the main market of the London Stock Exchange from February 2019 and we were included in the FTSE EPRA/NAREIT Global Real Estate Index Series from the end of June.

Operational highlights

-- Acquired 14 properties with 757 beds in 2019. At the year end, the portfolio comprised 86 properties with 4,274 registered beds, let to nine tenants(1) .

-- Adding three new tenants increasing the total number of tenants to nine(1) . All leases continue to be inflation-linked with upwards only rent reviews.

-- Weighted average unexpired lease term ("WAULT") of 19.7 years at 31 December 2019 (31 December 2018: 19.5 years).

-- Rent reviews in the year added GBP0.41 million to contracted rent, representing a 2.3% increase on the associated portfolio.

-- Grew the contracted rent roll by 30.1% to GBP23.1 million (31 December 2018: GBP17.8 million).

-- Two equity raises gave proceeds of GBP135 million. A further GBP25 million debt facility was also secured.

1 Including Croftwood and Minster, which are both part of the Minster Care Group.

Post balance sheet highlights

-- Exchanged contracts to acquire for GBP68.5 million of capital 17 care homes with a total of 1,194 beds. The acquisition of eight of these homes have completed, with an average yield of 7.5%.

-- Agreed new leases with two new tenants, Holmes Care and Silverline Care. The new leases have fixed terms of 25 years and annual inflation-linked adjustments.

-- New transactions increase contracted rent roll on completion by 25.5% (GBP5.9 million) to GBP29.0 million.

-- 170 beds of asset management: Completed projects added 76 new beds at Freeland House and Diamond House and entered into a forward funding agreement for the development of a new 94-bed care home in Hartlepool.

   --      Secured a new GBP50 million revolving credit facility with HSBC. 

COVID-19

As the quarter unfolded, the COVID-19 virus evolved from a potential threat to the full-blown pandemic that we are in the midst of. We believe that the Group has good resilience in the face of this crisis which comes from the satisfactory operational and financial position of our tenants and the healthy financial position of the Group.

The Group's tenants provide an essential service to the communities in which they operate and will play a critical role in helping to provide care to vulnerable elderly people during the COVID-19 pandemic. Our top priority remains the health, welfare and safety of the Group's tenants, care home residents, care professionals and wider stakeholders.

Up to the date of the publication of this report, there had been no direct effect on our tenants measured by occupancy at their homes, which the Investment Manager is now monitoring on a weekly basis. The Group's tenants have a strong level of rent cover, with an average of 1.8 times rent cover across Impact's portfolio in the year to 31 December 2019. They have limited debt in their businesses and all care home rents due to 30 June have been paid to the Group.

The Group is in a healthy financial position. We have deliberately maintained low gearing with a loan to value ("LTV") ratio of 6.8% at 31 December 2019 rising to a maximum of 18% if all the post balance sheet transactions mentioned above are completed. The Group does not have to refinance any debt before June 2023 and has GBP110 million of cash and available undrawn facilities against a maximum of GBP62 million of commitments to acquisitions, asset management, and potential deferred payments.

Rupert Barclay, Chairman of Impact Healthcare REIT PLC, commented:

"We are a long-term business and we do not expect the fundamentals of our industry to change. The provision of residential care for the elderly is an essential service, and can be critical in reducing pressure on healthcare provided by the NHS, particularly at times of crisis. There is an imbalance between demand for care and the supply of beds creating a need for permanent capital to support the operations and growth of capable tenants and we are well-placed to provide that capital.

However, the outcomes of the COVID-19 crisis are uncertain and although we enter this period well positioned, with tenants with a current high level of rent cover and little debt on their balance sheets, we cannot rule out the possibility of one or more of our tenants defaulting. We believe the strength of our balance sheet will enable us to withstand the potential effects of this and to come though this period in a position to grow and thrive in the medium and longer term."

FOR FURTHER INFORMATION, PLEASE CONTACT:

 
 Impact Health Partners LLP              via Maitland/AMO 
  Mahesh Patel 
  Andrew Cowley 
 
 Winterflood Securities Limited          Tel: 020 3100 0000 
  Joe Winkley 
  Neil Langford 
 
 RBC Capital Markets                     Tel: 020 7653 4000 
  Rupert Walford 
  Matthew Coakes 
 
 Maitland/AMO (Communications Adviser)   Tel: 020 7379 5151 
  James Benjamin                          Email: impacthealth-maitland@maitland.co.uk 
 

The Company's LEI is 213800AX3FHPMJL4IJ53.

Further information on Impact Healthcare REIT is available at www.impactreit.uk .

NOTES:

Impact Healthcare REIT plc is a real estate investment trust ("REIT") which aims to provide shareholders with an attractive return, principally in the form of quarterly income distributions and with the potential for capital and income growth, through exposure to a diversified portfolio of UK healthcare real estate opportunities, in particular care homes for the elderly. The Group's investment policy is to acquire, renovate, extend and redevelop high quality healthcare real estate assets in the UK and lease those assets primarily to healthcare operators providing residential healthcare services under full repairing and insuring leases.

The Company has a progressive dividend policy with a target to grow its annual aggregate dividend in line with the inflation-linked rental uplifts received by the Group under the terms of the rent review provisions contained in the Group's leases in the prior financial year.

The Group's Ordinary Shares were admitted to trading on the main market of the London Stock Exchange, premium segment, on 8 February 2019. The Company is a constituent of the FTSE EPRA/NAREIT index.

The Company presentation of its full year results for investors and analysts will take place via a webcast and conference call at 9.00am on the day .

For those who wish to access the live webcast, please register here: https://www.investis-live.com/impact-reit/5e8479a4f9c5af8d002ad848/lklk

For those who wish to access the live conference call, please contact Maitland/AMO at

impacthealth-maitland@maitland.co.uk   or by telephone on +44 (0) 20 7379 5151. 

The recording of the webcast/conference call will also be made available later in the day via the Company website: http://www.impactreit.uk/documents

The Annual Report and Accounts will today be available on the Company's website at www.impactreit.uk . In accordance with Listing Rule 9.6.1, copies of these documents will also be submitted today to the UK Listing Authority via the National Storage Mechanism and will be available for viewing shortly at www.morningstar.co.uk/uk/NSM .

CHAIRMAN'S STATEMENT

The Company had a successful year in 2019. This performance, combined with our strong balance sheet, places the Company in a good position to face the uncertainties caused by the COVID-19 pandemic.

The world has changed since we began work on the annual report at the beginning of 2020. The COVID-19 pandemic has affected all of us - in our businesses and our personal lives - and the future is quite uncertain. Since the end of February, reflecting this, the Company's share price has dropped before starting to recover. While this market reaction is understandable, we continue to have confidence in the underlying strength of the Company.

The majority of this report relates to the events of the last financial year, but it also contains clear statements about the going concern and viability status of your Company. You will find throughout the report that we have taken care to inform you of our thinking about the impact of COVID-19 on the risks and the outlook for your Company. In my statement, these are summarised in the Post balance sheet events, COVID-19 and Outlook and summary sections below:

Overall performance in 2019

This was another positive year for the Group. We grew the portfolio, diversified our tenant base and saw the initial benefits from asset management.

We have continued to grow the Group's NAV, which stood at GBP340.7 million or 106.81p per share at the year end (31 December 2018: GBP198.3 million or 103.18p per share).

At 31 December 2019, the portfolio was independently valued at GBP318.8 million (31 December 2018: GBP223.8 million). The acquisitions in the year were the primary contributor to this growth. The valuation uplift, resulting primarily from rent increases and asset management, was GBP8.5 million.

Basic earnings per share ("EPS") was 10.37p (2018: 8.57p), with EPRA EPS increasing by 7.4% to 6.95p (2018: 6.47p). Adjusted EPS was 5.10p (2018: 5.07p).

Dividends and total return

This was the first year of implementing our progressive dividend policy, under which we aim to grow the target dividend in line with the inflation-linked rental uplifts received in the previous year. We paid four dividends of 1.5425p each in relation to 2019, thereby meeting our target for the year of 6.17p per share, an increase of 2.83% on the 6.0p paid in respect of 2018. The total dividend was 112.6% covered by EPRA EPS and 82.7% by adjusted EPS.

At the start of the year, we introduced an NAV total return target of 9.0% per annum. This represents the change in the NAV over the period, plus dividends paid. The NAV total return for the year was 9.46%.

Operational performance

The Investment Manager has continued to identify a pipeline of attractive and accretive acquisition opportunities. This allowed us to add 12 care homes with 757 beds and two additional healthcare assets leased to the NHS to the portfolio during the year, for a total cost of GBP73.8 million. The portfolio is entirely let on long, inflation-linked leases, giving us a contracted rent roll of GBP23.1 million at the year end, up 30.1% since the end of 2018.

Our asset management programme continues to create value for us and our tenants. By 31 December 2019 the board had approved capital improvements totalling GBP18.4 million since IPO. Our asset management programme has added 189 beds so far and the Investment Manager is appraising projects at a number of other homes.

Our tenants

Diversifying our tenant base is a key element of our strategy. We added a further three tenants during 2019, bringing the total to nine(1) .

Financing

We successfully raised further equity and debt finance during 2019. In May 2019, we raised GBP100 million through a share placing at 106p per share and, having successfully deployed this capital, we raised a further GBP35 million in December 2019 through a placing at 108p per share. Importantly, our shares transferred from the specialist fund segment of the main market to the premium listing segment of the London Stock Exchange in February 2019 and were included in the FTSE EPRA/NAREIT Global Real Estate Index Series from the end of June, enabling us to attract a broader range of institutional and retail shareholders.

In addition, we agreed a second revolving credit facility of GBP25 million with Clydesdale Bank, taking our total debt facilities to GBP75 million. Our drawn debt at 31 December 2019 was GBP25.1 million, giving us an LTV of 6.8% and GBP49.9 million of available but undrawn debt.

Corporate governance

As previously announced, Amanda Aldridge joined the board as a non-executive director on 1 March 2019 and became chair of the Audit Committee following the Annual General Meeting on 14 May 2019. She is a chartered accountant and was an audit and advisory partner for KPMG LLP from 1996 to 2017.

The board is committed to maintaining high standards of corporate governance and recognises the importance of governance to the successful delivery of our strategy. The board focuses on strategy at each of its regular board meetings. In addition, we had an annual strategy day in November 2019. At this meeting, we considered the Group's purpose and values and received presentations from industry experts on the care home market and on strategic finance planning from our debt advisers.

One of our core values is to focus on the long-term sustainability of our business. The board and Investment Manager have spent time this year considering our approach to sustainability and developing an environmental, social and governance ("ESG") policy.

Investment Manager

On 15 March 2019, we were pleased to appoint Impact Health Partners ("IHP") as our Investment Manager and AIFM, following its receipt of authorisation from the Financial Conduct Authority. IHP was previously our Investment Adviser. To ensure we maintain an independent risk management function, the Investment Manager has delegated responsibility for risk management to Carne, our former AIFM. These appointments simplify our operating and governance structure, as well as generating a net cost saving for us.

The Investment Manager has carried out a substantial amount of work on our behalf this year, increasing the number of homes we manage, bringing new tenants on board and strengthening its own team, in particular on the property side. This improves our ability to manage our tenants and investments, and ensure our properties are well maintained.

Post balance sheet events

The Group had an active first quarter of 2020. We exchanged contracts to acquire 17 care homes with a total of 1,194 beds. Eight of these acquisitions have completed. On completion of all of these acquisitions, we will have added two new tenants which will bring our total number of tenants to 11(1) .

We have also been active in asset management, with significant developments at Freeland House and Diamond House completing during the quarter. We also committed to forward fund the development of a new 94-bed care home to be operated by Prestige, one of the Group's existing tenants. Taken together, these transactions will increase our contracted rent roll by GBP5.9 million to GBP29.0 million, a 25.5% increase on contracted rent at 31 December 2019. In addition, we have secured an additional GBP50 million facility with HSBC, ensuring the Company continues to be well capitalised with a strong balance sheet.

COVID-19

As the quarter unfolded, the COVID-19 virus evolved from a potential threat to the full-blown pandemic that we are in the midst of. We believe that the Group has good resilience in the face of this crisis which comes from the satisfactory operational and financial position of our tenants and the healthy financial position of the Group.

The Group's tenants provide an essential service to the communities in which they operate and will play a critical role in helping to provide care to vulnerable elderly people during the COVID-19 pandemic. Our top priority remains the health, welfare and safety of the Group's tenants, care home residents, care professionals and wider stakeholders.

Up to the date of the publication of this report, there had been no direct effect on our tenants measured by occupancy at their homes, which the Investment Manager is now monitoring on a weekly basis. The Group's tenants have a strong level of rent cover, with an average of 1.8 times rent cover across Impact's portfolio in the year to 31 December 2019. They have limited debt in their businesses and all care home rents due to 30 June have been paid to the Group.

The Group is in a healthy financial position. We have deliberately maintained low gearing with a loan to value ("LTV") ratio of 6.8% at 31 December 2019 rising to a maximum of 18% if all the post balance sheet transactions mentioned above are completed. The Group does not have to refinance any debt before June 2023 and has GBP110 million of cash and available undrawn facilities against a maximum of GBP62 million of commitments to acquisitions, asset management, and potential deferred payments.

Outlook and summary

We are a long-term business and we do not expect the fundamentals of our industry to change. The provision of residential care for the elderly is an essential service, and can be critical in reducing pressure on healthcare provided by the NHS, particularly at times of crisis. There is an imbalance between demand for care and the supply of beds creating a need for permanent capital to support the operations and growth of capable tenants and we are well-placed to provide that capital.

However, the outcomes of the COVID-19 crisis are uncertain and although we enter this period well positioned, with tenants with a current high level of rent cover and little debt on their balance sheets, we cannot rule out the possibility of one or more of our tenants defaulting. We believe the strength of our balance sheet will enable us to withstand the potential effects of this and to come though this period in a position to grow and thrive in the medium and longer term.

Rupert Barclay Chairman

7 April 2020

1 Including Croftwood and Minster, which are both part of the Minster Care Group.

INVESTMENT MANAGER'S REPORT

2019 was another successful year for the Company. It has continued to grow and diversify its portfolio, while maintaining a strong balance sheet. The Company's resilience will be tested in 2020, but it is well placed to meet the uncertainties that lie ahead.

By their nature these reports are backward looking. However, as the Chairman writes in his statement, the world has been changed by the outbreak of the COVID-19 pandemic and it feels right at this exceptional time to begin by considering events which have happened post balance sheet.

As of the date of publishing this report there have been limited direct effects of the COVID-19 pandemic on the Company and its tenants. But it is still early days and things are likely to get worse before they get better.

Our tenants provide an essential service to the communities that they serve. Local Authorities are under a legal obligation to meet the care needs of their communities, which are nondiscretionary. Hence the demand for care is less likely to be linked to wider economic conditions. While the government's ability to fund this care has from time to time been constrained in the past, in the short-term the government has committed to provide additional financial support to protect the vulnerable from the pandemic. At a time of a healthcare crisis, you would expect demand for care beds to be more likely to rise, rather than fall. However, while there is still much we do not understand about COVID-19, it does appear to affect hot spots severely, which means there could be significant, short-term impacts on individual care homes.

One of the most important services the Investment Manager provides to the Company is careful tenant selection, combined with developing a long-term partnership with the tenants that have been selected. A principal focus of our work during 2019 was continuing to diversify the Company's tenants while not diluting the quality of those tenants. The tenant base is still compact enough that it has been possible for the Investment Manager to be in almost constant communication with tenants as the severity of the pandemic has become apparent, monitoring their key indicators, such as occupancy, on a weekly basis. While it is too early to assess the full effect of this crisis, we believe that the quality of the Group's tenants, combined with the strength of its balance sheet, mean that it is well placed to tackle the uncertainties that lie ahead. The Investment Manager is continuing to monitor the development of COVID-19 carefully and will aim to keep all stakeholders, via the board, updated with material developments as the pandemic evolves.

Investment activity in 2019

The Group deployed GBP73.8 million into acquisitions during the year. All the acquisitions complied with the Group's investment criteria and have risk/return profiles in line with the existing portfolio. Additional capital has also been committed to acquisitions since the year end, as described under Subsequent events (note 28 to the consolidated financial statements).

The Group acquired a total of 14 properties with 757 beds in 2019, equivalent to 21.5% growth on the 3,517 beds owned at the end of 2018. These acquisitions, combined with rent increases received during the year, increased our contracted rent roll by 30.1%, from GBP17.8 million at 31 December 2018 to GBP23.1 million at 31 December 2019.

The acquisitions further diversified our tenant base, increasing the number of tenants we work with from six to nine(1) . The new tenants added in the year were the NHS, Maria Mallaband and Countrywide Group, and Optima Care.

The assets acquired during the year comprise 12 care homes and two properties leased to the NHS. All of the care homes have been let on fixed terms of 25 years with no tenant break rights, annual rent adjustments at RPI, with a floor of 2% and a cap of 4%, and tenant commitments to a minimum level of annual expenditure on maintenance. The two units let to the NHS are currently used as a cancer out-patient facility and an orthodontic surgery. They were acquired on existing leases, which had four and six years respectively left to run on acquisition. These properties have asset management potential in the medium-term.

The Group continued to comply with its investment policy throughout the year.

1 Including Croftwood and Minster, which are both part of the Minster Care Group.

Asset management

Well-delivered asset management has the potential to create value for shareholders and tenants, while offering a high-quality environment for the homes' residents. The Group's asset management programme both adds beds to and improves existing homes. As the Group already owns the land and the tenants already have central services such as kitchens, laundry and offices on site, the marginal cost of adding beds is lower than for a new build and the risks are easier to assess.

Activity in the year included 11 new beds being completed and brought into operation at Garswood, and work on building two new dementia units at Freeland House (46 beds) and Diamond House (30 beds). These 76 new beds reached practical completion in early 2020. We are working with tenants on a further five projects, which will require an investment of circa GBP9 million, subject to board approval.

Details of the Group's approved capital expenditure programme is shown in the table below. In total, this will increase the Group's rental income by GBP2.04 million per annum and deliver a forecast blended yield on the capital invested of 8.3% per annum.

In addition to this capital investment, under the terms of the leases, the tenants are fully responsible for keeping the Group's buildings in good repair, through regular repair and maintenance programmes. We monitor these programmes carefully, to ensure they are being effectively implemented.

 
 Home             Tenant       Capex (GBPm)         Beds added   Status           Description 
 Projects completed in prior years 
                                                                                  Conversion 
                                                                                   of closed 
                                                                                   supported 
                                                                                   living unit 
 Turnpike         Croftwood            0.92                 25   Completed         to care beds 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Development 
                                                                                   of new dementia 
 Littleport       Minster              2.17                 21   Completed         unit 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Conversion 
                                                                                   of closed 
                                                                                   supported 
                                                                                   living unit 
 Ingersley        Croftwood            0.20                 12   Completed         to care beds 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Conversion 
                                                                                   of closed 
                                                                                   building 
 Parkville                                                                         to new dementia 
  II              Prestige         2.17 (1)                 38   Completed         unit 
                 -----------  -------------  -----------------  ---------------  ------------------ 
 Projects completed or commenced in 2019 
                                                                                  Reconfiguration 
                                                                                   and extension 
 Garswood         Croftwood            1.10                 11   Completed         of home 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Development 
                                                                                   of new dementia 
 Diamond House    Minster              2.65                 30   Completed         unit 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Development 
 Freeland                                                                          of new dementia 
  House           Minster              4.85                 46   Completed         unit 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Reconfiguration 
                                                                                   and extension 
 Loxley           Croftwood            0.50                  4   Under way         of home 
                 -----------  -------------  -----------------  ---------------  ------------------ 
 Old Prebendal    Careport             0.75                N/A   Under way        Reconfiguration 
  House                                                                            and improvements 
                                                                                   to home 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Enhancement 
                                                                                   of day spaces 
 Amberley,                                                                         and bathrooms. 
  Craigend,                                                                        Work completed 
  Duncote Hall                                                                     at Amberley 
  and Falcon      Minster              0.69                  6   Part-completed    and Craigend. 
                 -----------  -------------  -----------------  ---------------  ------------------ 
 Approved projects planned to start in 2020 
                                                                                  Link two 
                                                                                   existing 
 Fairview                                                                          homes and 
  Court and                                                      Awaiting          create new 
  House           Welford              2.35              10(2)    planning         bedrooms 
                 -----------  -------------  -----------------  ---------------  ------------------ 
                                                                                  Forward funding 
                                                                                   of a new 
 Hartlepool       Prestige             6.10                 94   Underway          home 
                 -----------  -------------  -----------------  ---------------  ------------------ 
 Total                                24.45                297 
                              -------------                     ----------------------------------- 
 

1 Maximum deferred payment

2 17 new beds in link between two buildings and reduction from 22 beds to 15 en suite rooms in Fairview House

The portfolio

The acquisitions in the year increased the number of assets in the portfolio from 72 at 31 December 2018 to 86 at the year end. As a result, the number of beds at the year end was 4,274, up 21.5% on a year earlier.

We carefully monitor the operating performance of the Group's tenants, both in terms of quality of care provided and their financial performance, which continues to be strong. The rent cover across the portfolio was 1.8 times for the year to 31 December 2019, in line with the financial performance in 2018. This reflects our intention not to dilute rent cover as we add further tenants.

Valuation

The portfolio is independently valued by Cushman & Wakefield each quarter, in accordance with the RICS Valuation - Professional Standard (the "Red Book").

As at 31 December 2019, the portfolio was valued at GBP318.8 million, an increase of GBP95.0 million or 42.4% from the valuation of GBP223.8 million at 31 December 2018. The components of this valuation increase were as follows:

   --      acquisitions: GBP73.8 million; 
   --      capital improvements to the Group's homes: GBP7.2 million; and 
   --      valuation uplift: GBP13.9 million. 

The like-for-like valuation uplift was largely driven by rent increases during the year, as well as the Group's capital improvement investments.

 
 Year ended             31 December   31 December   Change% 
                               2019          2018 
 Dividends                    6.17p          6.0p     +2.8% 
                       ------------  ------------  -------- 
 Profit before 
  tax                      GBP26.3m      GBP16.5m    +59.9% 
                       ------------  ------------  -------- 
 Earnings per 
  share                      10.37p         8.57p    +21.0% 
                       ------------  ------------  -------- 
 EPRA earnings 
  per share                   6.95p         6.47p     +7.4% 
                       ------------  ------------  -------- 
 Adjusted earnings 
  per share(1)                5.10p         5.07p     +0.6% 
                       ------------  ------------  -------- 
 Contracted 
  rent roll                GBP23.1m      GBP17.8m    +30.1% 
                       ------------  ------------  -------- 
 Portfolio valuation      GBP318.8m     GBP223.8m    +42.4% 
                       ------------  ------------  -------- 
 Net asset value 
  ("NAV") per 
  share                     106.81p       103.18p     +3.5% 
                       ------------  ------------  -------- 
 Share price                108.00p       103.50p     +4.3% 
                       ------------  ------------  -------- 
 Loan to value 
  ("LTV") ratio                6.8%         11.6%    -41.4% 
                       ------------  ------------  -------- 
 

1 Adjusted earnings 5.10p per share reflects underlying cash earnings per share in the year. The adjustments made to EPS in arriving at EPRA and Adjusted EPS are set out in note 10 of the Group Financial Statements.

Financial results

Total net rental income for the year was GBP24.0 million (2018: GBP17.3 million), an increase of 38.5%. Under IFRS, the Group must recognise some rent in advance of receipt, reflecting the minimum 2% uplift in rents over the term of the lease, on a straight-line basis. Excluding this, cash rental income for the year was GBP19.1 million (2018: GBP13.9 million).

The Group's cost base is primarily made up of the Investment Manager's fee, other professional fees including valuations and audit, and the directors' fees. Administrative and other expenses totalled GBP4.6 million for 2019, including GBP0.2 million of costs incurred in relation to the Company's transition to the main market of the London Stock Exchange. Underlying costs were therefore GBP4.4 million. Administrative and other costs in 2018 were GBP4.3 million, including one-off deal-related costs of GBP0.74 million, incurred in relation to a large potential acquisition that did not proceed.

The total expense ratio, which is the Group's recurring administrative and operating costs as a percentage of average net assets, was 1.60% (2018: 1.80%). The EPRA cost ratio, which is administrative and operating costs as a percentage of gross rental income, was 19.2% (2018:24.7%). The reduction in the Group's cost ratios reflects economies of scale as the portfolio grows, plus the benefits of efficiencies.

Finance costs were GBP2.2 million (2018: GBP0.7 million), reflecting a higher average level of debt to support business growth and the Group only having arranged its initial debt facility in mid-2018, resulting in only half a year of interest charges in the prior year.

The change in fair value of investment properties was GBP9.1 million (2018: GBP4.1 million), contributing to profit before tax of GBP26.3 million (2018: GBP16.5 million). As a REIT, the Group is exempt from corporation tax on the profits and gains from its property investment business.

EPS for the year was 10.37p (2018: 8.57p), EPRA EPS was 6.95p (2018: 6.47p) and Adjusted EPS was 5.10p (2018: 5.07p). These EPS figures are the same on both a basic and diluted basis.

Dividends and distributable reserves

To ensure the Company benefits from the full exemption from tax on rental income afforded by the UK REIT regime, it must distribute at least 90% of the property income each year from the Group's qualifying rental business. This is calculated based on the underlying property earnings in the subsidiary property companies which is more closely aligned to the adjusted earnings.

The Company has paid four quarterly dividends of 1.5425p each in respect of the year. Three of those dividends were Property Income Distributions and one an ordinary dividend. The details of these dividends were as follows:

 
 Quarter                  Declared                  Paid            Pence/share        Cash cost 
  to                                                                                        GBPm 
 31 Mar 
  2019                    1 May 2019                7 Jun 2019        1.5425(1)             4.42 
                         ------------------------  ------------  --------------  --------------- 
 30 Jun                   30 Jul                    30 Aug 
  2019                     2019                      2019             1.5425(1)             4.42 
                         ------------------------  ------------  --------------  --------------- 
 30 Sep                   23 Oct                    22 Nov 
  2019                     2019                      2019             1.5425(2)             4.42 
                         ------------------------  ------------  --------------  --------------- 
 31 Dec                   31 Jan                    21 Feb 
  2019                     2020                      2020             1.5425(1)             4.92 
                         ------------------------  ------------  --------------  --------------- 
  Total                                                                    6.17            18.18 
---------------------------------------------   ---------------      ----------  --------------- 
 
   1 Property Income Distribution dividend 
   2 Non-Property Income Distribution dividend 
 
 

At 31 December 2019, the Group had distributable reserves of GBP66.2 million, giving it significant capacity to pay dividends in line with its dividend policy.

Equity financing

The Company successfully raised further equity financing during the year and took important steps to enable it to attract new institutional shareholders. The key events in the year were as follows:

-- 5 February 2019: announced a placing programme for up to 200 million shares and the Company's migration from the specialist fund segment of the main market of the London Stock Exchange to the premium segment of the main market;

-- 10 May 2019: closed an over-subscribed equity offer, in which the Company placed 94,339,623 new shares at a price of 106p per share, raising gross proceeds of GBP100 million;

-- 24 June 2019: inclusion of the Company's shares in the FTSE EPRA/NAREIT Global Real Estate Index Series; and

-- 5 December 2019: closed the placing of 32,407,407 new shares at a price of 108p per share, raising gross proceeds of GBP35 million.

As a result of the equity issuance during the year, the Company had 318,953,861 ordinary shares outstanding at the year end.

Debt financing

On 7 March 2019, the Group agreed a new revolving credit facility of GBP25.0 million with Clydesdale Bank PLC. The five-year facility has a margin of 225 or 250 basis points over three-month LIBOR, depending on the LTV ratio of the 14 properties over which the Group has granted security to Clydesdale.

At the year end, the Group therefore had the following bank facilities in place:

 
 Lender and           Expiry               Facility       Drawn at 
  facility                                size GBPm    31 Dec 2019 
  type                                                        GBPm 
 Metro Bank 
 Term loan            June 2023            25.0           25.0 
 Revolving 
  credit facility     June 2023            25.0           0.1 
-------------------  ---------------  -------------  ------------- 
 Clydesdale Bank 
 Revolving            March 2024           25.0            - 
  credit facility 
-------------------  ---------------  -------------  ------------- 
 Total                                   75.0             25.1 
------------------------------------  -------  ----  ------------- 
 
 

At 31 December 2019, the Group had GBP25.1 million of debt drawn from its available facilities of GBP75.0 million, giving an LTV ratio of 6.8% (2018: 11.6%) and cash balance of GBP47.8 million (2018: GBP1.5 million). A further GBP2.1 million is committed for asset management projects approved by the board and GBP4.2 million is estimated to be due for payment under deferred payment structures.

Acquisition pipeline

We have identified a strong pipeline of potential acquisitions for the Group, in addition to the transactions to which the Group committed in the first quarter of 2020 as outlined below. However, we have now told our various counterparties that we would like to pause those transactions while we assess the potential effect of COVID-19. We are confident that, when the situation is clearer, there will continue to be attractive acquisition opportunities for the Group and we will continue to exercise robust capital discipline, to deliver value at the point of acquisition or investment.

Post balance sheet events

-- Acquisition of 17 new care homes, all leased with inflation-linked rent reviews; of these eight have completed on the signing of this annual report. These transactions introduce two new tenants to the Group and add a total of 1,194 beds. Consideration for these properties was GBP68.5 million with an additional GBP5.0 million deferred payments contingent on the trading performance of the care homes.

-- The Group entered into a forward funding agreement with an existing tenant, Prestige, for the development

   --      of a 94-bed care home at a consideration of GBP6.1 million. 

-- Inflation-linked rent reviews following the year end added a further GBP0.4 million to the Group's contracted rent.

   --      The Group has secured a GBP50 million revolving credit facility with HSBC. 

We would like to end by drawing attention to the extraordinary work being done by our tenants' care professionals at a time of great stress. They deserve our great respect and thanks.

Impact Health Partners Investment Manager

7 April 2020

PORTFOLIO MANAGEMENT

Our aim is to continue carefully building a portfolio of attractive UK healthcare assets, principally residential care properties, with an appropriate balance of high-quality core assets that generate attractive, secure, long-term income; and value add assets with potential to create further value for shareholders and our wider stakeholders. We continuously assess the overall balance of our portfolio, identify the right asset management and capital recycling opportunities. We categorise each of our assets as follows:

Core

These assets are the primary contributors to our long-term, stable income.

   --      Good quality buildings with a useful life greater than the duration of the lease 
   --      Invested to an appropriate standard 
   --      Stable trading, underpinning a sustainable level of rent cover 

Value add

Value add assets are candidates for asset management initiatives.

   --      Present opportunities to deploy capital to enhance the asset and its performance 

-- May be a smaller home, have a low level of en-suite bathrooms or have other elements of functional obsolescence

-- Value uplift through enabling the tenant to offer a new service, such as dementia and/or targeting private residents

Non-core

Non-core assets may be candidates for sale and are likely to have been acquired as part of larger portfolios.

   --      Limited lifespan homes with a high degree of functional obsolescence 
   --      Higher alternative use value 
   --      Could be geographically isolated 

A strong core portfolio underpinning value:

 
              % of portfolio by market value 
 Core         69.0% 
 Value add    26.3% 
 Non-core     4.7% 
 

Homes of scale, delivering an efficient service to residents:

 
              Average number of beds per property 
 Core         56.3 
 Value add    43.5 
 Non-core     39.5 
 Average      49.7 
 

A core portfolio delivering an en suite facility service:

 
              % of rooms with en suite facilities 
 Core         94.0% 
 Value add    35.2% 
 Non-core     50.8% 
 

A proportional rent per bed with strong rent cover across the portfolio:

 
             Average rent per bed 
 Core        GBP5,927 
 Value add   GBP4,340 
 Non-core    GBP3,586 
 

Significant opportunity to enhance value from the value-add portfolio:

 
              % of portfolio by number of 
               homes 
 Core         52.3% 
 Value add    38.4% 
 Non-core     9.3% 
 

PORTFOLIO

At 31 December 2019, the Group owned the homes listed in the table below:

 
                                              Acquisition 
 Tenant & Home             Region              Date(1)       Beds(2)   Capital Projects(3) 
 
 Minster Care* 
                          -----------------  -------------  --------  -------------------- 
 Abbeywell                 West Midlands                          45 
                          --------------------------------  --------  -------------------- 
 Amberley                  South West                             30 
                          --------------------------------  --------  -------------------- 
                           Yorkshire & The 
 Ashgrove                   Humber                                56 
                          --------------------------------  --------  -------------------- 
                           Yorkshire & The 
 Attlee Court               Humber                                68 
                          --------------------------------  --------  -------------------- 
 Broadgate                 East Midlands                          40 
                          --------------------------------  --------  -------------------- 
 Carnbroe                  Scotland           May 2018            74 
                          -----------------  -------------  --------  -------------------- 
 Craigend                  Scotland                               48 
                          --------------------------------  --------  -------------------- 
 Diamond House             East Midlands                          44                   +30 
                          --------------------------------  --------  -------------------- 
 Duncote Hall              East Midlands                          40 
                          --------------------------------  --------  -------------------- 
 Duncote The Lakes         East Midlands                          47 
                          --------------------------------  --------  -------------------- 
                           Yorkshire & The 
 Emmanuel                   Humber                                44 
                          --------------------------------  --------  -------------------- 
 Eryl Fryn                 Wales                                  31 
                          --------------------------------  --------  -------------------- 
 Falcon                    East Midlands                          46 
                          --------------------------------  --------  -------------------- 
 Freeland                  South East                             65                   +46 
                          --------------------------------  --------  -------------------- 
 Gray's Court              East of England                        87 
                          --------------------------------  --------  -------------------- 
 Grenville                 East of England    May 2018            64 
                          -----------------  -------------  --------  -------------------- 
                           Yorkshire & The 
 Hamshaw Court              Humber                                45 
                          --------------------------------  --------  -------------------- 
 Ideal                     West Midlands                          50 
                          --------------------------------  --------  -------------------- 
 Karam Court               West Midlands                          47 
                          --------------------------------  --------  -------------------- 
 Littleport Grange         East of England                        80 
                          --------------------------------  --------  -------------------- 
 Meadows & Haywain         East of England                        65 
                          --------------------------------  --------  -------------------- 
 Mowbray                   West Midlands                          39 
                          --------------------------------  --------  -------------------- 
                           Yorkshire & The 
 Mulberry Manor             Humber                                49 
                          --------------------------------  --------  -------------------- 
 Rydal                     North East                             60 
                          --------------------------------  --------  -------------------- 
 Saffron                   East Midlands      June 2017           48 
                          -----------------  -------------  --------  -------------------- 
 Shrubbery                 West Midlands                          36 
                          --------------------------------  --------  -------------------- 
 Sovereign                 West Midlands      Sept 2018           60 
                          -----------------  -------------  --------  -------------------- 
 Stansty House             Wales                                  74 
                          --------------------------------  --------  -------------------- 
 Three Elms                North West                             60 
                          --------------------------------  --------  -------------------- 
 Waterside                 West Midlands                          47 
                          --------------------------------  --------  -------------------- 
 Woodlands                 North West                             40 
                          --------------------------------  --------  -------------------- 
 Wordsley                  West Midlands                          41 
                          --------------------------------  --------  -------------------- 
 Value at 31 December 2019: GBP126.88m 
                                             -------------  --------  -------------------- 
 
 Croftwood Care* 
                          -----------------  -------------  --------  -------------------- 
 Ancliffe                  North West                             40 
                          --------------------------------  --------  -------------------- 
 Astbury Lodge             North West                             41 
                          --------------------------------  --------  -------------------- 
 Croftwood                 North West                             47 
                          --------------------------------  --------  -------------------- 
 Crossways                 North West                             39 
                          --------------------------------  --------  -------------------- 
 Elm House                 North West                             40 
                          --------------------------------  --------  -------------------- 
 Florence Grogan           North West                             40 
                          --------------------------------  --------  -------------------- 
 Garswood                  North West                             53 
                          --------------------------------  --------  -------------------- 
 Gleavewood                North West                             30 
                          --------------------------------  --------  -------------------- 
 Golborne House            North West                             40 
                          --------------------------------  --------  -------------------- 
 Greenacres                North West                             40 
                          --------------------------------  --------  -------------------- 
 Hourigan                  North West                             40 
                          --------------------------------  --------  -------------------- 
 Ingersley Court           North West                             46 
                          --------------------------------  --------  -------------------- 
 Lakelands                 North West                             40 
                          --------------------------------  --------  -------------------- 
 Leycester House           North West                             40 
                          --------------------------------  --------  -------------------- 
 Loxley Hall               North West                             40                    +5 
                          --------------------------------  --------  -------------------- 
 Lyndhurst                 North West                             40 
                          --------------------------------  --------  -------------------- 
 New Milton House          North West                             39 
                          --------------------------------  --------  -------------------- 
 Parklands                 North West                             40 
                          --------------------------------  --------  -------------------- 
 The Cedars                North West                             27 
                          --------------------------------  --------  -------------------- 
 The Elms                  North West                             41 
                          --------------------------------  --------  -------------------- 
 The Hawthorns             North West                             39 
                          --------------------------------  --------  -------------------- 
 The Laurels               North West                             40 
                          --------------------------------  --------  -------------------- 
 Thorley                   North West                             40 
                          --------------------------------  --------  -------------------- 
 Turnpike Court            North West                             53 
                          --------------------------------  --------  -------------------- 
 Wealstone                 North West                             42 
                          --------------------------------  --------  -------------------- 
 West Haven                North West                             52 
                          --------------------------------  --------  -------------------- 
 Whetstone Hey             North West                             42 
                          --------------------------------  --------  -------------------- 
 
 Value at 31 December 2019: GBP64.63m 
                                             -------------  --------  -------------------- 
 
 
 
 Careport Group 
                          -----------------  -------------  --------  -------------------- 
 Briardene                 North East         Aug 2018            60 
                          -----------------  -------------  --------  -------------------- 
 Derwent                   North East         Aug 2019            45 
                          -----------------  -------------  --------  -------------------- 
 Holly Lodge               North East         Nov 2018            41 
                          -----------------  -------------  --------  -------------------- 
 Kingston Court            North West         Jun 2019            75 
                          -----------------  -------------  --------  -------------------- 
 Old Prebendal House 
  and Court                South East         Jun 2019            39 
                          -----------------  -------------  --------  -------------------- 
 Sovereign Lodge and 
  Court(4)                 North East         Aug 2018            60 
                          -----------------  -------------  --------  -------------------- 
                           Yorkshire & The 
 The Grove                  Humber            Sept 2018           55 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP25.28m 
                                             -------------  --------  -------------------- 
 
 NCUH NHS Trust 
                          -----------------  -------------  --------  -------------------- 
 KC Riever House           North West         Jun 2019             - 
                          -----------------  -------------  --------  -------------------- 
 KC Surgical Unit          North West         Jun 2019             - 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP4.37m 
                                             -------------  --------  -------------------- 
 
 Prestige Group 
                          -----------------  -------------  --------  -------------------- 
 Parkville 1 &2            North East         Mar 2018            94 
                          -----------------  -------------  --------  -------------------- 
 Roseville Care Centre     North East         Mar 2018           103 
                          -----------------  -------------  --------  -------------------- 
 Sand Banks                North East         Oct 2018            77 
                          -----------------  -------------  --------  -------------------- 
 Yew Tree                  North East         Jan 2019            76 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP24.01m 
                                             -------------  --------  -------------------- 
 
 Renaissance 
                          -----------------  -------------  --------  -------------------- 
 Croftbank                 Scotland           Nov 2018            68 
                          -----------------  -------------  --------  -------------------- 
 Rosepark                  Scotland           Nov 2018            60 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP12.64m 
                                             -------------  --------  -------------------- 
 
 Maria Mallaband and Countrywide 
  Group (MMCG) 
                                             -------------  --------  -------------------- 
                           Yorkshire & The 
 Belmont                    Humber            May 2019           106 
                          -----------------  -------------  --------  -------------------- 
 Park springs              Scotland           May 2019            96 
                          -----------------  -------------  --------  -------------------- 
 Thorntree Mews Nursing 
  Home                     Scotland           May 2019            40 
                          -----------------  -------------  --------  -------------------- 
 Wallace View              Scotland           May 2019            60 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP23.66m 
                                             -------------  --------  -------------------- 
 
 Welford Group 
                          -----------------  -------------  --------  -------------------- 
 Argentum Lodge            South West         Sept 2019           56 
                          -----------------  -------------  --------  -------------------- 
                           Yorkshire & The 
 Birchlands                 Humber            Jun 2019            54 
                          -----------------  -------------  --------  -------------------- 
 Fairview Court and 
  House(4)                 South West         Mar 2019            73 
                          -----------------  -------------  --------  -------------------- 
 Holmesley                 South West         Jun 2019            55 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP23.37m 
                                             -------------  --------  -------------------- 
 
 Optima 
                          -----------------  -------------  --------  -------------------- 
 Barham                    East of England    Aug 2019            45 
                          -----------------  -------------  --------  -------------------- 
 Baylham                   East of England    Aug 2019            55 
                          -----------------  -------------  --------  -------------------- 
 Value at 31 December 2019: GBP13.95m 
                                             -------------  --------  -------------------- 
 

1 May 2017 unless stated

2 Number of registered beds

3 Capital improvement bed additions under development

4 Treated as two properties

* Minster and Croftwood are both part of Minster Care Group

MARKET DRIVERS

A number of drivers influence demand for the care of older people. Taken together, they make it an attractive opportunity for well-capitalised asset owners working in partnership with well-managed operators, who are committed to providing high standards of care.

1. Growing demand

People aged over 85 are the fastest growing part of the UK population and make up the core client group for care homes. According to the Office for National Statistics, the number of people over 85 years old in the UK is forecast almost to double by 2043.

Except in the most extreme forecasts of the potential shorter-term consequence of COVID-19 on the UK population, demand for elderly care is forecast to continue to grow over the longer term. Research by LaingBuisson, a leading consultancy in social care, forecasts that an additional 79,000 beds will be required to satisfy this increased demand over the next 10 years, an increase of 20% on demand today. Though this data was forecast prior to the outbreak of COVID-19, long-term demand is not expected to be significantly affected over the life of our leases.

2. Capacity is not rising in line with demand

Over the past 10 years, the supply of available beds has not increased. Underlying this apparent stability have been a number of changes in the structure of the market.

Independent operators, both for profit and not for profit, have continued to take market share from homes owned and operated by the public sector. At the same time, the number of independent sector homes has shrunk by 10% over the past 10 years as older, obsolete buildings are withdrawn from the market to be replaced by more modern, larger homes. The average size of an independent care home has grown from 35 beds to 42 beds in that period. The average size of care homes in Impact's portfolio is 50 beds.

3. An increasingly fragmented market

Over recent years the market has seen deconsolidation at its top end. The market share of the 10 largest independent operators has declined from a peak of 27% in 2006 to 21% in 2019. This reflects diseconomies of scale in the care business. For the larger operators, the potential benefits of access to capital at lower cost and purchasing power for consumables such as utilities and food tend to be more than cancelled out by higher group overheads and the lack of economies of scale in pay rates for care staff, which are operators' largest expenditure.

Over the same time period from 2006 to 2019, the market share of sole traders with one or two homes shrank from 49% to 32%. Groups with between three and 80 homes in the middle market have been more vibrant, growing their market share from 24% to 47%. Most of Impact's tenants are active in this part of the middle market.

4. Dementia

The Alzheimer's Society estimates that in 2019 there were 883,100 people in the UK with dementia, of whom 510,600 were suffering from a severe form of the condition. Projections by the Care Policy and Evaluation Centre at the London School of Economics suggest that the number of people with dementia could increase by 80% by 2040.

An estimated 69% of the residents in care homes in 2019 had some form of dementia. As our understanding grows on how to provide good care for people with dementia, there has been more emphasis on building dedicated units to provide this care. That has been a particular focus of our asset management activities during 2019.

5. Funding

In 2019 LaingBuisson estimates that GBP16.5 billion was spent on long-term care for elderly people in care homes. Approximately equal numbers of residents are now paid for either purely privately or by a combination of local authorities and the NHS. A growing minority are funded through a combination of funding from local authorities and top-up payments from their families.

There has been much debate about how the government will fund adult social care in the longer term. The Institute for Fiscal Studies estimates that total government spending on adult social care increased from GBP17.1 billion in 2015/16, to GBP23.5 billion in 2018/19, a 37% increase. About half of this money is spent on providing care for adults over 65.

After the election held in December 2019, the new government announced it would allocate an additional GBP1 billion for elderly care in 2020/21 and plans to start cross-party talks to develop a long-term and equitable solution for funding elderly care. The Secretary of State for Health and Social Care wrote to all MPs and Members of the House of Lords in March 2020 to initiate those talks.

6. Fees rising faster than inflation

As a result of increasing demand, limited new capacity and a shift from government provision to independent providers, the independent sector has seen sustained and above-inflation growth. Over the past two decades average weekly fees charged by operators have grown on average by 3.7% per annum. Over the same time period, RPI has averaged 2.8% per annum. This gives us confidence that the RPI linkage in our leases is sustainable.

INVESTMENT CASE

Delivering attractive and sustainable returns for our shareholders over the longer term.

1. A large and growing market

GBP16.5 billion pounds a year is spent on providing residential care for elderly people in the UK, approximately 0.8% of UK GDP. The market is expected to grow as the population ages. Demand for care is non-cyclical and hence more predictable, enabling us to plan for the longer term.

2. Risk-adjusted returns

We think about risk at different levels: maintaining a strong balance sheet, with modest levels of debt; monitoring the performance of tenants carefully; not diluting our level of rent cover as we add new tenants; and thinking about the future sustainability of our portfolio and how we can best manage it through asset and portfolio management.

3. Experienced and strategic management team

We benefit from the knowledge, expertise and relationships of our Investment Manager. They allow us to source and negotiate deals off market, which offer shareholders good value and deliver to vendors the certain execution they are looking for. A main focus of our Investment Manager is to establish and develop long-term partnerships with our tenants.

4. Strong cash generation and dividend growth

Our portfolio generates a high-quality, sustainable and growing income stream. This allows us to target a progressive dividend policy. We aim to grow shareholder returns through dividend increases and capital appreciation. Our strong lease structures offer us 100% inflation-linked income with low volatility.

5. Adding value through asset management

Our portfolio is carefully constructed to combine core assets which generate predictable income and assets where there is potential to add value through asset management initiatives. Asset management benefits our shareholders, our tenants and the residents in our homes.

6. Positioned for further accretive growth

At the end of 2019 we owned less than 1% of the operational beds in the highly fragmented UK elderly

care market. Since early 2018 we have been growing our portfolio, adding an average of a new tenant each quarter and acquiring homes which are accretive to our portfolio. The transactions announced post balance sheet demonstrate we can continue to grow while exercising strong capital discipline.

OUR BUSINESS MODEL

Our business model is designed to achieve our purpose, which is to form long-term partnerships with our tenants, through which we own and invest in the buildings they require in return for a predictable rent, enabling our tenants to concentrate on providing excellent care to their residents.

To implement our business model, we have a clear, five-stage process:

Building strong relationships with high-quality care providers

Our tenants will run our homes for at least 20 years, so we want to be certain they provide good care, while running a sustainable and profitable business that generates a secure, well-covered rental stream for us. We look for tenants with a strong balance sheet, preferably with little or no debt, who have experience of improving homes, and who are ambitious to grow their businesses, through our acquiring more homes they will manage and through asset management opportunities. We draw on our Investment Manager's strong existing relationships with operators and develop relationships with new operators. The Investment Manager's deep knowledge of how to run care homes is a critical advantage in assessing potential operators.

Identify attractive assets to acquire in partnership with those operators

We look to acquire homes our existing or proposed operators would run well, by jointly reviewing their existing portfolios or identifying homes owned by third parties, where the operator could create value with us.

As there are relatively few potential buyers of portfolios, acquiring a portfolio can help us achieve a better value. However, we may buy single homes to add to an existing tenant portfolio or with a strategy to acquire more homes with the new tenant.

The Investment Manager's vendor relationships mean we can buy some homes off-market. We can also move quickly, using the Investment Manager's knowledge to carefully and swiftly assess the quality of a potential opportunity through our selection process and procedures.

Perform rigorous due diligence and selectively purchase and lease care assets

We perform thorough due diligence, combining an in-depth assessment of the operator and its quality of care, as well as ensuring that the homes are sound, that they align with our investment objectives and that there is sufficient demand for care in the area. Where we are proposing to acquire assets operating below their potential, we identify the measures required to enable them to operate at their full potential.

We fund asset purchases through equity and a prudent level of debt, recognising that appropriate gearing can help to drive returns. Our policy is to sign individual leases of at least 20 years with our tenants, with upwards-only inflation-linked rental growth.

Work closely with our tenants to create value sustainably over the longer term

We ensure we have a detailed knowledge of our tenants' operations, helping us to work with them to identify asset management opportunities that create value for them and for us. Examples could include adding beds, improving facilities or enhancing communal space, to reposition the home in its local market. These projects increase revenue for the tenant, further strengthen their rental cover and grow rental income and capital values for us.

Our leases require our tenants to repair and maintain our buildings and our Investment Manager is diligent in ensuring compliance with this obligation.

Optimise our portfolio to enhance long-term shareholder value

We regularly review the portfolio, to ensure it remains effective and efficient for us and our operators. If we believe it is value enhancing for shareholders, we may agree with the operator to sell a home, so we can reinvest the proceeds in opportunities to create more value.

The outputs from our business model

Effectively implementing our business model ensures we maintain a high-quality business that delivers sustainable value to our shareholders and wider stakeholders. This quality is underpinned by three pillars that we use to monitor performance:

The quality of the buildings we own

We own a diversified portfolio, a significant majority of which are good-quality, upper-middle-market care homes, which provide a welcoming physical environment for their residents.

We classify the majority of our buildings as core, meaning they will be viable for at least the lease term, have a suitable design for the target client group and are in good condition. Most of the remainder of our portfolio is classified as value-add, meaning it has the potential, working in partnership with our tenants, to change the fabric of the buildings and reposition them in their local markets.

The quality of care our tenants provide

The security of our rental streams depends on our tenants providing good-quality care to their residents, so the homes remain in demand and sustain their profits. Our Investment Manager's sector knowledge helps it to engage effectively with tenants. The Investment Manager reviews CQC or relevant regulator ratings and the outcomes of inspections, visits homes and receives quarterly reports from tenants, to ensure they are maintaining their quality of care and complying with their covenants.

The quality of the cash flows we generate

Strong operators providing good care in suitable buildings generate secure and growing rental income streams for us. Our leases provide highly predictable revenue, with rental payments typically received quarterly in advance.

We carefully monitor our tenants' financial performance, paying particular attention to their ability to grow their revenues in line with or ahead of inflation, to maintain a stable EBITDA margin and hence maintain or grow our rent cover.

A disciplined approach to capital allocation has led to high net initial yields on acquisitions and a conservative approach to using debt maximises cash available for distribution to shareholders.

We also look to control our own costs rigorously and exploit economies of scale as the portfolio grows, as many of our costs are fixed and some variable costs step down as our asset value rises.

OBJECTIVES AND STRATEGY

Our objectives

We aim to provide shareholders with attractive and sustainable returns, primarily in the form of quarterly

dividends, while also generating growth in net asset values over the medium-term.

Our targets are to deliver:

-- a progressive dividend policy, with a total target dividend of 6.29p per share in respect of 2020(1) ; and

-- a NAV total return of 9.0% per annum(1) . The capital growth element of this return will be delivered largely from annual, inflation-linked rent increases and the impact of active asset management, rather than relying on yield compression.

Our strategy

To achieve our value-creation objectives, we:

   --      buy the right assets on the right terms, by implementing our investment strategy; 

-- effectively manage the portfolio as a whole as well as individual assets, by implementing our portfolio management and asset management strategies; and

   --      optimise our balance sheet, by implementing our financing strategy. 

Investment strategy

Our investment policy allows us to invest in a broad range of healthcare real estate assets. The market dynamics underline that the care home sector currently offers the most attractive opportunities for the Group. Our investment strategy is, therefore, to primarily acquire care homes, while continuing to broaden the range of tenants we work with, thus reducing our exposure to any one tenant.

We mainly look to acquire portfolios, which helps us to maximise value. These portfolios may include healthcare real estate assets in addition to care homes. We will acquire these where they have a future strategic opportunity to deliver care home services, or where we are confident, we can deliver value in the short-term for our shareholders, as part of our portfolio management activities.

Portfolio management strategy

We categorise each of our assets into one of three categories - core, value add and non-core. This enables us to manage appropriately the balance between these categories, so we deliver our target returns, and to identify the assets which can benefit from our approach to active asset management (see below).

Asset management strategy

A hands-on asset management strategy helps to enhance shareholder returns over the longer term while helping to mitigate risk. To deliver our target long-term shareholder returns, our asset management strategy prioritises investment in our value-add portfolio and in projects that enhance the sustainability of our assets, including those that improve the quality of the environment for residents and the sustainability of the home, while extending the useful economic life of the property.

Financing strategy

We fund our business through equity and a prudent level of debt. In doing so we look to minimise the effects of 'cash drag' on our earnings per share, which is the effect of issuing equity and holding the cash raised on the balance sheet, ahead of investing it in income-producing assets.

Our conservative gearing policy is to have a maximum Group loan-to-value ratio of 35% at the time of drawdown. Our approach to hedging and debt is designed to prudently maximise the return to shareholders while mitigating the long-term risk from interest-rate fluctuations.

The outbreak of COVID-19 has caused us to reflect on appropriate short-term measures to safeguard the Group's financial position. We are taking a prudent approach to capital management and we expect to complete all investments with exchanged contracts but are currently pausing new investments until the outcome from the COVID-19 pandemic becomes clearer.

1 This is a target only and not a profit forecast. There can be no assurance that the target will be met and it should not be taken as an indicator of the Company's expected or actual results.

INVESTMENT POLICY

 
 Policy                                 Status   2019 performance 
 No asset can exceed 15% of                      The largest value single home 
  the Group's gross asset value                   is Freeland House, which equates 
  ("GAV"), at the time of investment.             to 4.6% of our GAV. 
                                       -------  ------------------------------------- 
 No single customer paying for                   The largest single customer 
  care provided in our assets                     paying for care represents 
  can account for more than 15%                   7.9% of the aggregate revenues 
  of our tenants' aggregate revenues,             of the associated tenant. 
  at the time of acquisition. 
                                       -------  ------------------------------------- 
 The annual contracted rent                      Minster is the largest contributor 
  from any single tenant is not                   to our annual contracted rent, 
  expected to exceed 40% of our                   at 39.3%. 
  total annual contracted rent 
  at 31 December 2019. Thereafter, 
  the annual contracted rent 
  from any single tenant is not 
  expected to exceed 40% of our 
  total annual contracted rent, 
  measured at the time of investment. 
                                       -------  ------------------------------------- 
 The portfolio will be diversified               The portfolio is well diversified 
  by location, focusing on areas                  by geography. 
  where there is a good balance 
  of supply and demand for care 
  and assets are available at 
  attractive valuations. 
                                       -------  ------------------------------------- 
 We will acquire existing modern                 All the assets acquired during 
  buildings or those that are                     the year are suitable for our 
  currently fit for purpose and                   tenants' needs. Where opportunities 
  for which the Investment Manager                exist, the Investment Manager 
  has developed an asset management               works with tenants to develop 
  plan.                                           asset management plans for 
                                                  homes. 
                                       -------  ------------------------------------- 
 We will grant leases linked                     All leases granted during the 
  to the Retail Price Index ("RPI"),              year were RPI linked and had 
  with an unexpired term of at                    a term of at least 20 years. 
  least 20 years and without 
  tenant break clauses. We will 
  seek to amend any future leases 
  we acquire, to obtain similar 
  terms. 
                                       -------  ------------------------------------- 
 We will not speculatively develop               We did not undertake any speculative 
  assets, except for refurbishing,                development in the year. 
  extending or replacing existing 
  assets, so as to reposition 
  a home and increase rent. 
                                       -------  ------------------------------------- 
 We may invest in forward funding                No additional beds were approved 
  agreements or forward commitments               during the period, for development 
  to pre-let developments, where                  at existing assets under forward 
  we will own the completed asset.                funding agreements. 
                                       -------  ------------------------------------- 
 The gross budgeted development                  Forward funding commitments 
  costs of any refurbishment,                     equated to 0% of our gross 
  extension or replacement of                     assets at 31 December 2019. 
  existing holdings, and/or forward 
  funding and forward commitments, 
  is limited to 25% of our gross 
  assets at the time of commitment. 
                                       -------  ------------------------------------- 
 We have a conservative gearing                  The LTV at 31 December 2019 
  policy. Gross borrowings as                     was 6.8%. 
  a percentage of our gross assets 
  may not exceed 35% LTV at the 
  time of drawdown. 
                                       -------  ------------------------------------- 
 

KEY PERFORMANCE INDICATORS

The Group uses the following measures to assess its strategic progress.

 
  1. Net Asset Total          2. Dividends               3. EPRA earnings             4. EPRA 'topped-up' 
   Return ("NATR")                                        per share                    Net Initial Yield 
                                                                                       ("NIY") 
 9.46%                         6.17p per share          6.95p per share              6.66% 
  for the year to 31           for the year to           for the year to              at 31 December 
   December 2019                31 December 2019          31 December 2019             2019 
  (+11.7% on 2018)             (+2.8% on 2018)           (+7.4% on 2018)              (-4.4% on 2018) 
                             ------------------------  ---------------------------  ---------------------------- 
 2019: 9.46%                  2019: 6.17p               2019: 6.95p                  2019: 6.66% 
  2018: 8.47%                  2018: 6.00p               2018: 6.47p                  2018: 6.97% 
                             ------------------------  ---------------------------  ---------------------------- 
 Definition                   Definition                Definition                   Definition 
  The change in the            Dividends declared        Earnings from operational    Annualised rental 
  net asset value ("NAV")      in relation to            activities. The              income based 
  over the period,             the period.               EPRA calculation             on the cash rents 
  plus dividends paid                                    removes revaluation          passing on the 
  in the period, as                                      movements in the             balance sheet 
  a percentage of NAV                                    investment portfolio         date, less non-recoverable 
  at the start of the                                    and interest rate            property operating 
  period.                                                derivatives, but             expenses, divided 
                                                         includes rent smoothing.     by the market 
                                                                                      value of the 
                                                                                      property portfolio, 
                                                                                      increased by 
                                                                                      6.5% to reflect 
                                                                                      a buyer's costs 
                                                                                      and adjusted 
                                                                                      for the expiration 
                                                                                      of rent-free 
                                                                                      periods or other 
                                                                                      unexpired lease 
                                                                                      incentives. 
                             ------------------------  ---------------------------  ---------------------------- 
 Relevance to strategy        Relevance to strategy     Relevance to strategy        Relevance to 
  Demonstrates our             Reflects our ability      A key measure of             strategy 
  ability to add value         to generate a             a property company's         This measure 
  for our shareholders,        secure and growing        underlying operating         should make it 
  by distributing earnings     income stream             results and an               easier for investors 
  and growing our portfolio    from our portfolio.       indication of the            to judge for 
  value.                                                 extent to which              themselves how 
                                                         current dividend             the valuations 
                                                         payments are supported       of one portfolio 
                                                         by earnings.                 compares with 
                                                                                      another portfolio. 
                             ------------------------  ---------------------------  ---------------------------- 
 Commentary                   Commentary                Commentary                   Commentary 
  The net asset total          We implemented            EPRA EPS increased           The average net 
  return comprised             our new progressive       by 7.42% giving              initial yield 
  a dividend of 6.13p          dividend policy           112.64% dividend             of the acquisitions 
  per share in the             and met our dividend      cover.                       made in 2019 
  period and NAV growth        target for the                                         was 6.64%. 
  of 3.63p per share.          year. Our dividend 
  Our target is a net          target for 2020 
  asset total return           is 6.29p, representing 
  of 9.0% per annum.           1.94% growth. 
                             ------------------------  ---------------------------  ---------------------------- 
 
 
 5. NAV per share           6. Gross Loan                 7. Weighted Average        8. Total Expense 
                             to Value ("LTV")              Unexpired Lease            Ratio ("TER") 
                                                           Term ("WAULT") 
 106.81p per share         6.81% per share               19.7 years                 1.60% 
  at 31 December 2019       as at 31 December             as at 31 December          as at 31 December 
                             2019                          2019                       2019 
  (+3.5% on 2018)           (-41.4% on 2018)              (+0.6% on 2018)            (-11.1% on 2018) 
                          ----------------------------  -------------------------  ------------------------ 
 2019: 106.81p             2019: 6.81%                   2019: 19.7yrs              2019: 1.60% 
  2018: 103.18p             2018: 11.62%                  2018: 19.5yrs              2018: 1.80% 
                          ----------------------------  -------------------------  ------------------------ 
 Definition                Definition                    Definition                 Definition 
  Net asset value based     The proportion                The average unexpired      Total recurring 
  on the properties         of our gross asset            lease term of              administration 
  and other investment      value that is                 the property portfolio,    costs as a percentage 
  interests at fair         funded by borrowings.         weighted by annual         of average net 
  value.                                                  passing rents.             asset value throughout 
                                                                                     the period. 
                          ----------------------------  -------------------------  ------------------------ 
 Relevance to strategy     Relevance to strategy         Relevance to strategy      Relevance to 
  Provides shareholders     We have a conservative        The WAULT is a             strategy 
  with the most relevant    gearing policy,               key measure of             The TER is a 
  information on the        with borrowings               the secure nature          key measure of 
  fair value of the         as a percentage               of our portfolio.          our operational 
  assets and liabilities    of Group assets               Long lease terms           efficiency. 
  within a property         limited to 35%                underpin the quality 
  investment company        at the time of                of our income 
  with a long-term          drawdown.                     stream and hence 
  strategy.                                               our dividends. 
                          ----------------------------  -------------------------  ------------------------ 
 Commentary                Commentary                    Commentary                 Commentary 
  NAV growth during         The Group has                 All the leases             TER has reduced 
  the year was driven       total debt facilities         entered into during        due to the Group 
  primarily by rent         of GBP75 million,             2019 had fixed             benefitting from 
  increases and the         of which GBP25.1              terms of 25 years.         economies of 
  benefits of active        million had been              The Group's policy         scale as the 
  asset management.         drawn at the year             is to only grant           portfolio grows. 
                            end. If the facilities        leases of at least         The EPRA cost 
                            were fully drawn,             20 years, without          ratio, calculated 
                            with no changes               any tenant break           by dividing our 
                            to the Group's                clauses.                   administrative 
                            current gross                                            and operating 
                            asset value, the                                         costs by gross 
                            LTV would be approximately                               rental income, 
                            20.3%.                                                   was 19.15% for 
                                                                                     the year (2018: 
                                                                                     24.69%). 
                          ----------------------------  -------------------------  ------------------------ 
 

SUSTAINABILITY

Generating attractive financial returns from our business, continues to be vital for the long-term sustainability of Impact as a business. The long-term success of our business requires us to have a well-considered approach to sustainability that is part of our business strategy DNA and to take into consideration the interests of our stakeholders and wider society in the way that we do business.

We are looking closely into how we can work in harmony with the communities of which we are a part of and to have a positive impact on the customers, shareholders and other stakeholders which we serve and how we can minimise our effects on the environment in which we operate. The balance between our financial and wider social returns and impact needs to be central to our business and growth strategy and culture as we look to position ourselves for the years ahead.

Our approach to sustainability

A key piece of work this year has been to determine our approach to sustainability issues and develop our environmental and social policies and bring these together with governance in an overarching ESG policy, along with a data-gathering exercise to determine the baseline for these elements of our performance.

Background

While the Group does not control the day-to-day running of its homes, its value creation model offers numerous touchpoints for maximising opportunities and minimising the risks associated with ESG issues in its homes. These range from the strategy and due diligence procedures applied to asset selection and acquisitions, to the emphasis on securing leases with operators who demonstrate the highest quality of care to residents, and working with them to identify asset management opportunities, and including aspects such as energy efficiency and renewables.

During the year, we reviewed the requirements of the Global Real Estate Sustainability Benchmark and EPRA's Sustainability Best Practice Recommendations, to ensure that the Group's strategy and reporting are aligned to these widely-used industry standards, where applicable. We have begun the process of data capture, which will allow us to report against these standards if we conclude that it is appropriate to do so.

Our ESG policy

We believe that a robust approach to environmental, social and governance issues is intrinsic to developing a strong, sustainable business. It is a fundamental part of our business model and activities. This means having in place the right checks and balances, decision-making frameworks and management processes to promote long-term thinking.

We have established our core principles of sustainability which are detailed in the table (bottom). Our ESG policy is available in full on our website.

By utilising these guiding principles our aims are:

   --      To be transparent in our conduct and reporting. 

-- To create homes which are better prepared for the future - more efficient, climate resilient, more comfortable for our tenants' residents and staff, and respecting the environment.

-- To foster co-operative and successful relationships with tenants, residents, shareholders and lenders to create long-term shared value for all.

-- Acknowledging and utilising the importance of our relationships with our tenants, we also aim to create and support a healthy, safe, and positive living environment, which the residents are proud to call home.

Actions for 2020

Some of our key actions for 2020 include:

-- Putting in place policies which address anti-corruption and bribery, whistleblowing and supplier code of conduct.

-- Develop a sustainability strategy and plan, including policies, material issues, targets, and risks and opportunities, to ensure ongoing relevance and effectiveness.

-- Recognise the urgency of addressing climate change and explore taking baseline measurements against which to establish targets.

Our core principles of sustainability

Conduct our business with integrity and in an open and ethical manner and require the same standards from our stakeholder relationships.

Operate in an environmentally sustainable manner and minimise the environmental impact of our operations, including on climate change.

Climate resilience - protecting the business from the future effects of climate change and anticipated low carbon transition policies.

Extend the economically useful lives of our buildings through monitoring our tenant obligations and investing in refurbishment and reconfiguration.

Disseminate the Group's policies to advisors, suppliers, occupiers and our key stakeholders.

Comply with all legal and regulatory requirements and, where feasible, exceed minimum compliance.

Promote diversity and inclusion throughout our activities.

STAKEHOLDERS

Stakeholder relationships underpin our business model and the design and execution of our strategic objectives

Relationships

The board has identified our key stakeholders as our tenants, the residents in our care homes, our shareholders and our lenders. Given the nature of its services the Investment Manager has significant dealings with shareholders, lenders and other stakeholders, as such it provides an integral point of contact between the Group and its stakeholders.

The Investment Manager is one of our two main service providers, along with the Administrator. They and our other service providers are fundamental to the quality of our product and to ensuring we meet the high standards of conduct that we set ourselves. The Management Engagement Committee (MEC) meets at least annually to review the performance of the key service providers and the board has regular interactions with the Investment Manager and the Administrator.

The Group has a number of other stakeholders, in addition to the key stakeholders discussed in this section. These include the government and regulators, who set and oversee the policies and regulations that govern the care home sector. We do not have direct relationships with the government or regulators, as these relationships are managed by our tenants as the operators of the care homes.

Employees and directors

As an externally managed business, the Group has no employees and therefore does not require any employee related policies. At the year end, the board comprised five non-executive directors, including the Chairman. Three of the directors are male and two are female.

 
 Key stakeholder              How we engage                Stakeholder interests 
 Tenants                      We engage through            Our tenants' interests 
  The Group has a steadily    a variety of formal           include our: 
  growing tenant base,        and informal mechanisms,       *    ability to support their business plans through 
  comprising strong           including site visits               acquisitions and asset management; 
  national and local          and meetings. We also 
  operators. Working          receive quarterly 
  in long-term partnership    reports                        *    financial strength; and 
  with our tenants is         from tenants setting 
  central to our ability      out their performance 
  to grow our business        and work with tenants          *    knowledge and understanding of their operations. 
  while managing risk.        to identify and implement 
                              asset management 
                              opportunities. 
                              The board looks to 
                              meet new tenants when 
                              they are appointed, 
                              or within six months 
                              of appointment. A 
                              number of tenants 
                              have presented to 
                              the board on aspects 
                              of their business, 
                              and the directors 
                              also keep abreast 
                              of their views through 
                              quarterly reporting, 
                              site visits and ad 
                              hoc meetings. 
 Tenants' residents           Our tenants are              Residents' interests 
 The quality of care          responsible                   include: 
 our tenants provide          for the relationship           *    the quality of care provided by our tenants; 
 to their residents           with residents and 
 is of prime importance       we do not directly 
 to us. The quality           engage with them,              *    the quality of their home and the investment in 
 of care is central           except for residents                regular repairs and maintenance; 
 to residents' quality        we may meet during 
 of life and also directly    site visits. 
 influences demand            We regularly monitor           *    the security and stability of their home; and 
 for our tenants' services,   the CQC rating for 
 which in turn affects        each home and the 
 their ability to pay         outcomes of inspections,       *    our ability to improve their home through asset 
 rent to us.                  and engage with tenants             management. 
                              where necessary on 
                              the findings. 
                              The board also carefully 
                              monitors CQC ratings, 
                              to ensure tenants 
                              are managing their 
                              homes properly and 
                              therefore providing 
                              an appropriate resident 
                              experience. 
 Shareholders                 The Investment Manager       Shareholders' interests 
 To continue to grow          conducts a regular            include: 
 our business, we need        programme of meetings          *    the security and growth of our dividend; 
 a well-informed and          with institutional 
 supportive shareholder       investors, as well 
 base. We therefore           as opinion formers             *    our ability to source accretive investments and add 
 look to ensure regular       such as analysts and                value through asset management; 
 and open communications      the financial press. 
 and high quality corporate   We also look to provide 
 reporting.                   regular and timely             *    developments in the care home market; 
                              news flow. Other important 
                              communication channels 
                              include our interim            *    the quality of our environmental, sustainability and 
                              and annual reports                  corporate governance policies; and 
                              and the annual general 
                              meeting. 
                              Members of the board           *    our financial and operational performance. 
                              offered to meet major 
                              shareholders in Spring 
                              2019, with one taking 
                              up the opportunity. 
                              Shareholders are also 
                              invited to speak to 
                              the Chairman and other 
                              directors when the 
                              Company is raising 
                              funds through share 
                              placings. The board 
                              receives regular investor 
                              relations reports, 
                              containing information 
                              about changes to the 
                              Company's shareholder 
                              base and feedback 
                              from investor meetings. 
 Lenders                      The Investment Manager       Lenders' interests 
 An appropriate amount         is responsible for          include: 
 of gearing is important       engaging with our            *    the quality of the security we provide for our loans; 
 for generating higher         lenders. It does this 
 returns. We therefore         through quarterly 
 look to build strong          reporting.                   *    our ability to meet our interest payments; and 
 relationships with            Information about 
 lenders, who will             debt funding is provided 
 provide the debt              as appropriate to            *    the diversification and strength of our income 
 facilities                    the board, as part                streams. 
 needed to support             of its regular papers 
 our business growth.          ahead of board meetings. 
                               The board also received 
                               a presentation during 
                               the year from the 
                               Group's debt advisers, 
                               as part of the annual 
                               strategy day. 
 

PRINCIPAL RISKS AND UNCERTAINTIES

POLITICAL

   1.   Changes to government social care policy (including Brexit) 

Probability: Medium

Impact: Moderate

Care for older people is at the heart of our business. The government may change policy or introduce legislation that affects the sector. This creates both opportunity and risk, depending on the nature of the changes proposed and our preparedness to engage in the drafting and implementation of legislation.

The route to a negotiated settlement on leaving the EU still remains unclear and as a result the effects on the Group and our tenants' operations is uncertain.

Of particular note is the UK care sector's partial reliance on workers from other EU countries. There is a risk that the UK's withdrawal from the EU will result in stricter controls on EU citizens moving to and working in the UK, thus restricting our tenants' ability to hire sufficient staff, especially nurses. This may result in higher staff costs and reduced service levels, with an adverse effect on our tenants' profitability.

Mitigation

The Investment Manager closely monitors developments around funding for adult social care. The new government formed in December 2019 is committed to entering into cross-party talks for that funding. The Secretary of State for the Health and Social Care wrote to all members of Parliament and Members of the House of Lords to initiate those talks in March 2020.

There is normally a lead time of at least a year before new legislation comes into effect, giving us time to adapt if necessary.

Different policies will apply in England, Wales, Scotland and Northern Ireland, enabling us to focus investment in the countries with favourable regulatory regimes.

In relation to Brexit, the Investment Manager actively engages with tenants and regularly reviews their ability to recruit and retain different categories of staff. We continue to monitor staff costs and agency use, as an indicator of potential issues.

Change in the year: No change

Opportunity

Increased focus by the government on elderly care may provide increased revenue opportunities with focused investment aligned with changing regulation.

   2.   Pandemics 

Probability: High

Impact: Major

Significant outbreaks of infectious diseases, in particular pandemics such as COVID-19, can have long lasting and far-reaching effects across all businesses. Care for older people is a particular area of heightened concern.

The immediate risks of an outbreak are reduced occupancy at care homes and the lack of availability of key workers at the care homes as a result of infection or a requirement to self-isolate.

Should a pandemic take hold and not be capable of being contained, it could compound and enhance a number of principal risks, not least general economic conditions, default of one or more tenants and ability to meet our financing obligations.

Mitigation

The healthcare sector, including care home operators and staff, are experienced in preparing for and implementing procedures to deal with infections.

As the NHS prepares for a continuing and growing outbreak of the COVID-19 pandemic, our tenants have noticed an increase in demand for beds as the NHS seeks to relieve pressure on hospitals. This increase in demand could help mitigate the effect on reduced occupancy if an outbreak occurs in a care home.

Tenants are exploring all options to reduce the impact of staff shortages including recruitment from the hospitality sector.

Change in the year: New

Opportunity

The opportunity to support the NHS in relieving bed blocking at hospitals and provide appropriate care in a suitable environment for older people.

MARKET CONDITIONS

3. Adverse change in investment opportunities

Probability: Medium

Impact: Low

Our investment objective allows us to invest in further assets. Market conditions may restrict the availability of investments and reduce our ability to identify and acquire suitable assets that would generate acceptable returns. Any delay in investing funding raised or drawn will reduce our returns.

With the effect of COVID-19, our focus is on supporting our existing portfolio and the resilience of our balance sheet. It is not our intention to make further investments until the outlook as a result of the pandemic is clearer.

Mitigation

We have a robust due diligence process to assess new investments, to ensure they align with our investment objectives and that we understand and appropriately manage any associated risks.

The quantity of deal flow that the Investment Manager is reviewing allows us to be selective in the homes that we are acquiring. Short-term reductions in the valuation of assets could also make the terms of new acquisitions more attractive.

Change in the year: increased

Opportunity

We undertake a measured approach to raising equity and securing debt to ensure it aligns with our investment pipeline.

4. General economic conditions

Probability: High

Impact: Moderate

Adverse market conditions in our target areas could result in a decline in real estate valuations, lower market rents and suboptimal occupancy, including tenancy terms.

Adverse economic conditions bring greater risk of tenant default or covenant breaches.

A weakening market may also limit our ability to grow through acquisition. Market conditions as a result of COVID-19, have paused the majority of investment activity. There is no immediate effect on trading performance of care home operators, however if this changes, it will increase the risk of tenant defaults, impacting on valuations across the market.

Mitigation

Our homes are let on leases of at least 20 years, with annual rental increases linked to the Retail Price Index. We regularly assess and monitor the financial robustness of our tenants.

Demand for care home places is relatively uncorrelated to economic conditions. A decline in the economy would therefore take time to have an effect on our business.

Our year end LTV was 6.8% and our investment and growth strategy ensures Group leverage is limited to 35%, limiting our overall reliance on leverage.

The Company's strategy is to deliver growth through both acquisition and asset management. If the investment market is restricted, the Company can continue to progress asset management opportunities, to continue to deliver growth.

Change in the year: increased

Continued uncertainty about the general economic outlook and the effects of COVID-19 in recent weeks has increased our focus on this risk since last year's review.

Opportunity

With adverse market conditions comes increased opportunity for additional assets that meet our investment criteria and we have established relationships across the market to seek out these opportunities as they arise.

5. Weakening care market

Probability: Low

Impact: Moderate

Several factors may affect the market for care for older people, including:

   --      adverse conditions in the healthcare sector; 

-- local authority funding partners amending their payment terms, affecting our tenants' revenues; and

   --      increased regulatory responsibility and associated costs for our tenants. 

These could all materially affect our tenants' covenant strength and their ability to pay rent, resulting in a higher risk of default.

Mitigation

We work closely with our tenants to understand the underlying performance of the individual homes, so we identify any concerns early and can explore mitigating actions such as additional investment, or discussing with our tenants staffing levels and the public/ private resident mix.

Change in the year: No change

Opportunity

Our investment criteria seeks to identify assets which can be acquired at or below their replacement cost with strong rent cover to ensure our tenants have resilient operating cashflows. This provides us and our tenants the headroom to invest in our assets and their services to ensure our tenants are the providers of choice in a changing market.

UNDERPERFORMANCE OF ASSETS

6. Default of one or more tenants

Probability: Medium/High

Impact: Major

Our IPO was based on the acquisition of a Seed Portfolio of homes, with two tenants under a single framework agreement (the "Tenant Group"). Even with an additional seven tenants, we continue to have a high exposure to a Tenant Group default, albeit this risk is decreasing as we continue to diversify. A Tenant Group default would affect the value of our homes and both our ability to pay dividends to our shareholders and to meet our financing obligations.

Residents of care homes are in the high risk bracket of the effects of COVID-19. As a result, a continuing pandemic could have a material effect on tenant viability from reduced occupancy resulting in an increased risk of default.

Mitigation

The Investment Manager actively engages with all of our tenants, with regular reviews of performance, repairs and maintenance spend, and strategic planning.

The tenants have controls in place to identify issues early and resolve them. They have a clear objective to enhance the homes and their rent cover.

Our investment policy is focused on diversifying our tenant base, to reduce the effect of a single tenant default.

The initial effect of COVID 19 is to increase demand and inquiries for beds as the NHS seeks to relieve bed pressure in hospitals.

Change in the year: Increased

The evolving risk of COVID-19 has increased the risk of tenant default if occupancy begins to decline.

Opportunity

We have strong mutually rewarding relationships with our tenants and a diversified tenant base with a range of strengths. We have the opportunity to explore different service provisions at our homes to ensure they are successful. This could (for example) be through a change of tenant at an individual home.

7. Underinvestment by tenants in the repair and maintenance of our assets

Probability: Low

Impact Low

The attractiveness of our portfolio is based on the quality of the operators, measured by their regulatory and financial performance, and our properties' ability to provide effective space from which our tenants can operate.

This does not require our homes to be new but it does require them to be well maintained and fit for purpose.

There is a risk that a tenant fails to adequately repair and maintain the properties it leases from us, in accordance with the agreed annual repair and maintenance budget. This could result in reduced bed occupancy and/ or increased future maintenance costs, with a material adverse effect on our financial position and business prospects.

Mitigation

All of our leases with tenants have full repair and maintenance obligations, with the additional clarity of a minimum spend per annum per bed (based on a three-year average spend), which tenants are required to report against and we actively monitor.

Failure to comply with the terms of the lease will result in a default enabling us to replace the tenant in an extreme circumstance.

Change in the year: Decreased

Opportunity

We work very closely with our tenants to identify opportunities to maintain and enhance the portfolio and where appropriate agree to fund these improvements, in return for an increase in rent. The benefit of operating a portfolio reduces our exposure to changes in individual properties.

8. Environmental regulation

Probability: Medium

Impact: Moderate

Tightening environmental regulations may increase the need for investment or redevelopment of our portfolio and restrict our tenants' ability to provide care and earn revenue.

Mitigation

Our leases require that our tenants maintain our buildings in line with regulation requirements.

In addition, as part of our asset management strategy we are undertaking a review of our buildings with an EPC rating of C and below and preparing asset management plans to improve these ratings.

Change in the year: New

Opportunity

Investment in our homes by the Company and our tenants will make our homes more sustainable over the long term.

FINANCING

9. Ability to meet our debt financing obligations

Probability: Medium

Impact: Moderate

If we are unable to operate within our debt covenants, this could lead to default and our debt funding being recalled.

Interest on our variable rate debt facilities is payable based on a margin over LIBOR and bank base rates. Any adverse movements in these rates could significantly impair our profitability and ability to pay dividends to shareholders.

With the effect of COVID-19, the risk of more than one tenant, or our largest tenant, having a material reduction in occupancy and therefore defaulting has increased. As a result there is a greater risk of a financing default.

Mitigation

We continually monitor our debt covenant compliance, to ensure we have sufficient headroom and to give us early warning of any issues that may arise. Our LTV is low (limited to 35% on a group-wide basis) and we selectively enter into interest rate caps to mitigate the risk of interest rate rises.

Furthermore, we invest in homes with long WAULTs, reducing the volatility in our property values.

Assets are held outside of the security groups currently secured by the existing debt and can be transferred into the security pool if LTV breaches are anticipated.

Holding a higher level of cash on our balance sheet to enable us to manage a drop in income and service our financing obligations is part of our strategic planning during this pandemic.

Change in the year: Increased

Opportunity

Our investment policy limits our gearing and exposure to movements in interest rates. This improves our opportunity to secure financing at attractive rates while remaining resilient to interest rate rises, which may in turn present additional investment opportunities.

CORPORATE RISK

10. Reliance on the Investment Manager

Probability: Low

Impact: Major

As an externally managed Company, we rely on the Investment Manager's services and reputation to execute our strategy and support our day-to day relationships.

As a result, our performance will depend to some extent on the Investment Manager's ability and the retention of its key staff.

There is a risk of potential conflicts with the Investment Manager and its initial tenant for the Seed Portfolio.

Mitigation

We have an Investment Management Agreement with the Investment Manager, which sets out the basis on which the Investment Manager provides services to us, the restrictions it must operate within and certain additional rights we have, such as a right of pre-emption for investment opportunities. The Agreement may be terminated by 12 months' notice, which cannot be served before the fourth anniversary of Admission, except in certain circumstances such as a material breach, when it can be terminated immediately.

The Management Engagement Committee's role and responsibilities include reviewing the Investment Manager's performance. The board as a whole remains actively engaged with the Investment Manager to ensure a positive and collaborative working relationship.

The board has put in a number of controls and procedures to mitigate the risk of conflicts.

Change in the year: No change

Opportunity

The Company has secured an experienced team that is delivering on the investment objectives for our shareholders.

TAXATION RISK

11. Maintaining REIT status

Probability: Low

Impact: Major

We are a UK REIT and have a tax-efficient corporate structure. Any change to our tax status or in UK tax legislation could affect our ability to achieve our investment objectives and provide favourable returns to shareholders.

The Company is obligated to pay 90% of its PID income to shareholders, withholding dividends could result in a breach of its REIT obligations.

If the Company fails to remain a REIT, our primary profits and gains will be subject to UK corporation tax.

Mitigation

The board is ultimately responsible for ensuring we adhere to the UK REIT Regime. The board has engaged a third party tax adviser to help monitor our REIT status and ensure our investment and shareholding structure do not put this status at risk.

The Company has 12 months after the year end to satisfy its PID dividend obligations for the year. The Company currently meets the majority of its PID dividend obligations in the year the income is generated, providing it with greater flexibility on the timing of future dividend payments.

Change in the year: Increased

Opportunity

The REIT structure enables us to deliver tax efficient returns to our shareholders.

OTHER RISKS THAT WE MONITOR CLOSELY

Cyber security

Inappropriate access to customer or Company data may lead to loss of sensitive information and result in a material adverse effect on the Company's financial condition, reputation and investor confidence.

Conflicts of interest

Risk that a transaction with a related party may not be at arm's length. The board has in place a conflicts of interest policy and reviews its potential conflicts regularly.

Financial management

Budgets and plans may be inaccurate, based on unrealistic assumptions or inappropriately applied leading to adverse material financial conditions, performance, results, and investor concerns.

Development activity

Development contracts have inherent risks in relation to cost and quality management that can result in cost overruns and delays. The 2020 year presents a challenge to developments due to slowing in construction activity in wake of the COVID-19 outbreak; we continue to monitor this risk as the situation evolves.

The Company has a robust risk management framework in place to monitor and control the above risks.

GOING CONCERN AND VIABILITY

Going Concern Statement

At 7 April 2020 the Group had cash of GBP27.2 million and a further GBP83.4 million in headroom on the Group's committed debt facilities. GBP25.6 million of this cash is held in the parent company current and deposit accounts. There are GBP98.9 million of undrawn debt facilities, of which GBP83.4 million is drawable immediately, and GBP15.5 million is conditional on security registration of Scottish assets and completion of acquisitions that are exchanged.

At 7 April 2020 GBP54.6 million is committed to acquisitions and asset management and a further GBP7.2 million to financial performance based deferred payments, all of which are expected to deliver incremental rental returns. There is no intention to make further commitments to acquisitions or asset management opportunities until the impact of COVID-19 pandemic is clearer.

The COVID-19 pandemic increases the risk, at a tenant level, of a fall in occupancy, reduced availability of staff, and increased operational costs, which could result in tenant default. As part of our going concern assessment we have modelled downside scenarios including single and multiple tenant defaults or rent payment holidays for periods of up to 12 months. Analysis of the impact of tenants not paying rent on banking covenants indicates potential breaches of interest cover covenants. Latest PRA guidance to banks is that waivers should be provided in these COVID-19 related circumstances, however, we have also considered the scenario where banks do not provide these waivers. Mitigating actions which could be taken at the Group's discretion include use of central funds to reduce debt, in particular charging pools, to avoid covenant breaches and reduction or suspension of dividends.

The Group and the Company have adequate cash resources to continue to operate in all of these scenarios. The directors believe that there are currently no material uncertainties in relation to the Company's and Group's ability to continue for a period of at least 12 months from the date of approval of the Company and Group financial statements. The board is, therefore, of the opinion that the going concern basis adopted in the preparation of the annual report is appropriate.

Assessment of viability

The period over which the directors consider it feasible and appropriate to report on the Group's viability is the five-year period to 31 March 2025. This period has been selected because it is the period that is used for the Group's medium-term business plans.

The Principal risks and uncertainties section summarises those matters that could prevent the Group from delivering on its strategy and is derived from our robust assessment of the principal risks to our business model, future performance, liquidity and solvency. A number of these principal risks, because of their nature or potential impact, could also threaten the Group's ability to continue in business in its current form if they were to occur.

The assumptions underpinning these cash flow forecasts and covenant compliance forecasts have been tested to explore the resilience of the Group to the current COVID-19 pandemic and the potential impact of the Group's other significant risks, or a combination of those risks.

COVID-19 pandemic and associated risks

The effects of the COVID-19 pandemic as outlined in the going concern statement above, have been applied to our assessment of viability.

Other significant risks

The impact of tenants having rising operational and finance costs and defaulting as a result of poor operational performance are more probable in the current operating environment and are effectively considered in the section above. All of the sensitivity scenarios modelled include no further acquisitions and asset management opportunities beyond those already committed so they effectively take account of the risk of the weakened investment and financing market we are currently experiencing. In all scenarios modelled it has been assumed that there are no significant changes to regulatory policies or levels of funding by local authorities.

The remaining principal risks, while having an impact on the Group's business model, are not considered by the directors to have a reasonable likelihood of impacting the Group's viability over the next five years to 31 March 2025.

Sensitivities and mitigating actions

The sensitivities performed were designed to be severe but plausible, and to take full account of the availability of mitigating actions that could be taken to avoid, or reduce, the impact or occurrence of the underlying risks. Mitigating actions which could be taken at the Group's discretion include use of central funds to reduce debt, in particular charging pools, to avoid covenant breaches and reduction or suspension of dividend payments.

Stress tests

We have considered the fall in property values which could be sustained without an impact on banking covenants including acquisitions that have exchanged but not completed, the Group is expecting to have drawn debt of GBP75.0 million and assets with a value of c.GBP390 million. Values could fall by over GBP200 million from this valuation before loan to value covenant breaches would arise. As part of this, the Group can utilise its unsecured assets and undrawn debt facilities to manage the leverage and level of drawn debt within each security pool.

We have further considered the effect of a reduction in rent on interest cover covenants. The Group could sustain a fall of over two thirds in rent and remain compliant with its interest cover covenants.

Extreme - permanently impaired

We have also considered an extreme scenario where trading performance of our tenants has been permanently impaired and the banks exercise their security rights over the relevant properties. In this extreme scenario, the remaining assets within the group would be reduced by an estimated 50%, but would be more than sufficient to cover any costs and liabilities of the business and would allow the directors to consider whether to continue in a reduced form or begin an orderly winding up.

Availability of finance

The Group does not have a refinancing event occurring until June 2023. However, financing is arranged in advance of expected requirements and the directors have reasonable confidence that additional replacement debt facilities will be put in place. Furthermore, the Group has the ability to make disposals of investment properties to meet its future financing requirements.

Viability Statement

Having considered the forecast cash flows and the impact of the sensitivities in combination, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period ending 31 March 2025.

SECTION 172 STATEMENT

The directors have had regard for the matters set out in section 172(1)(a)-(f) of the Companies Act 2006 when performing their duty under section 172. The directors consider that they have acted in good faith in the way that would be most likely to promote the success of the Company for the benefit of its members as a whole, while also considering the broad range of stakeholders who interact with and are impacted by our business, especially with regard to major decisions.

In doing the above the directors have taken into account the following:

(a) the likely consequences of any decision in the long-term;

(b) the interests of the Company's employees;

(c) the need to foster the Company's business relationships with suppliers, customers and others;

(d) the impact of the Company's operations on the community and the environment;

(e) the desirability of the Company maintaining a reputation for high standards of business conduct; and

(f) the need to act fairly as between members of the Company.

This annual report demonstrates how we act in accordance with these requirements of s.172.

The role of the board

The board has overall responsibility for setting our purpose, strategy and objectives, approving our investment activities - including acquisitions and capital improvement programmes - and reviewing our performance. The board delegates day-to-day responsibility for managing the portfolio to the Investment Manager.

Understanding stakeholder views

As an externally managed property investment company, we do not have any employees and have an indirect impact on the community and the environment, as our tenants are responsible for operating our homes. The board working with the Investment Manager has therefore identified our tenants, their residents, our shareholders and lenders as our key stakeholders.

Understanding our stakeholder's views has influenced our investment strategy, including our focus on tenant diversification and introduction of a consolidated ESG policy.

Key board decisions

The board's principal decisions each year typically include approving acquisitions, capital expenditure and capital raises (equity and debt), making acquisitions and paying dividends. During 2019, the board also approved the appointment of Impact Health Partners as the Group's Investment Manager.

Where potential conflicts of interest arose, these were discussed at the board and resolved in line with the formal Conflicts of Interest policy. No conflicts of interest occurred that prevented the directors from carrying out their duties during the year.

The nature of the Group's business means that the directors must consider the long-term impact of its decisions, given that the Group expects its relationships with tenants to last for a minimum of 20 years.

The Group relies on a reputation for high standards of business conduct and this is reflected in one of our core values, which is to always act openly and transparently with all of our stakeholders. The directors are aware that potential tenants will only sign leases of 20 years or more with landlords they can trust and want to work in partnership with over the long term.

Board approval of the Strategic report

The Strategic report was approved on behalf of the board by:

Rupert Barclay Chairman

7 April 2020

STATEMENTS OF RESPONSIBILITIES

Directors' statement of responsibilities

The directors are responsible for preparing the annual report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare the Group and Company financial statements for each financial year. The Group financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and the Company financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the directors must not approve the financial statements unless they are satisfied they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the Group and Company for that year.

In preparing the financial statements, the directors are required to:

-- select suitable accounting policies and then apply them consistently;

-- make judgements and estimates that are reasonable and prudent;

-- for the Group financial statements, state whether they have been prepared in accordance with IFRS's as adopted by the European Union, subject to any material departures disclosed and explained in the Group financial statements;

-- for the Company financial statements, state whether they have been prepared in accordance with Financial Reporting Standard 102 ("FRS102"), subject to any material departures disclosed and explained in the Company financial statements; and

-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that its financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Directors' report, a Strategic report, a Directors' remuneration report and a Corporate governance statement that comply with that law and those regulations.

Disclosure of information to the auditor

The directors who were members of the board at the time of approving the Directors' report have confirmed that:

-- so far as each director is aware, there is no relevant audit information of which the Company's auditor is not aware; and

-- each director has taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Website publication

The directors are responsible for ensuring the annual report, including the financial statements, is made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website (at http://www.impactreit.uk) is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Directors' responsibility statement, pursuant to DTR4

We confirm that to the best of our knowledge:

-- the financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and Article 4 of the IAS Regulation and, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and

-- the Management Report includes a fair review of the development and performance of the business and the financial position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Signed on behalf of the board by:

Rupert Barclay Chairman

7 April 2020

Consolidated statement of comprehensive income

For the year ended 31 December 2019

 
                                           31 December   31 December 
                                                  2019          2018 
                                                 Total         Total 
                                   Notes       GBP'000       GBP'000 
--------------------------------  ------  ------------  ------------ 
 
 Gross rental income                 5          23,980        17,309 
 Insurance/service charge 
  income                             5             252           155 
 Insurance/service charge 
  expense                            5           (254)         (158) 
 
 Net rental Income                              23,978        17,306 
 
 Administrative and other 
  expenses                           6         (4,589)       (4,270) 
--------------------------------  ------  ------------  ------------ 
 Operating profit before 
  changes in fair value 
  of investment properties                      19,389        13,036 
 Changes in fair value 
  of investment properties           12          9,070         4,134 
--------------------------------  ------  ------------  ------------ 
 Operating profit                               28,459        17,170 
 
 Finance income                                    110            39 
 Finance expense                     8         (2,237)         (737) 
--------------------------------  ------  ------------  ------------ 
 Profit before tax                              26,332        16,472 
 Tax charge on profit 
  for the year                       9               -             - 
--------------------------------  ------  ------------  ------------ 
 Profit and total comprehensive 
  income (attributable 
  to shareholders)                              26,332        16,472 
 Earnings per share - 
  basic and diluted (pence)         10          10.37p         8.57p 
 
 

The results are derived from continuing operations during the year, the Group had no other comprehensive income in the current or prior year.

The accompanying notes form an integral part of these financial statements.

Consolidated statement of financial position

As at 31 December 2019

 
 
                                          31 December     31 December 
                                                 2019            2018 
                                Notes         GBP'000         GBP'000 
-----------------------------  ------  --------------  -------------- 
 
 Non-current assets 
 Investment property             12           310,542         220,463 
 Interest rate derivatives       17                94             477 
 Trade and other receivables     13            10,017           5,248 
-----------------------------  ------  --------------  -------------- 
 Total non-current 
  assets                                      320,653         226,188 
 
 Current assets 
 Trade and other receivables     13               554             587 
 Cash and cash equivalents       14            47,790           1,470 
 Total current assets                          48,344           2,057 
 Total assets                                 368,997         228,245 
-----------------------------  ------  --------------  -------------- 
 
 Current liabilities 
 Trade and other payables        15           (3,086)         (3,333) 
 Total current liabilities                    (3,086)         (3,333) 
 
 Non-current liabilities 
 Bank borrowings                 16          (23,461)        (24,709) 
 Trade and other payables        15           (1,768)         (1,866) 
-----------------------------  ------  --------------  -------------- 
 Total non-current 
  liabilities                                (25,229)        (26,575) 
 Total liabilities                           (28,315)        (29,908) 
-----------------------------  ------  --------------  -------------- 
 
 Total net assets                             340,682         198,337 
-----------------------------  ------  --------------  -------------- 
 
 Equity 
 Share capital                   20             3,189           1,922 
 Share premium reserve           20           271,341         140,452 
 Capital reduction 
  reserve                        20            24,077          35,800 
 Retained earnings                             42,075          20,163 
-----------------------------  ------  --------------  -------------- 
 Total equity                                 340,682         198,337 
-----------------------------  ------  --------------  -------------- 
 
 Net Asset Value per 
  ordinary Share (pence)         22            106.81         103.18p 
 
 

The accompanying notes form an integral part of these financial statements.

The consolidated financial statements for Impact Healthcare REIT plc (registered number:10464966) were approved and authorised for issue by the board of directors on 7 April 2020 and are signed on its behalf by:

Rupert Barclay, Chairman

Consolidated statement of cash flows

For the year ended 31 December 2019

 
                                              31 December   31 December 
                                                     2019          2018 
                                      Notes       GBP'000       GBP'000 
-----------------------------------  ------  ------------  ------------ 
 
 Cash flows from operating 
  activities 
 Profit for the year (attributable 
  to equity shareholders)                          26,332        16,472 
 Finance income                                     (110)          (39) 
 Finance expense                        8           2,237           737 
 Changes in fair value of 
  investment properties                12         (9,070)       (4,134) 
-----------------------------------  ------  ------------  ------------ 
 Net cash flow before working 
  capital changes                                  19,389        13,036 
 
 Working capital changes 
 Increase in trade and other 
  receivables                          13         (4,736)       (4,065) 
 increase in trade and other 
  payables                             15             288         1,020 
-----------------------------------  ------  ------------  ------------ 
 Net cash flow generated from 
  operating activities                             14,941         9,991 
-----------------------------------  ------  ------------  ------------ 
 
 Investing activities 
 Purchase of investment properties     12        (69,969)      (53,365) 
 Acquisition costs capitalised         12         (3,447)       (1,711) 
 Capital improvements                  12         (8,226)       (3,886) 
 Interest received                                    110            39 
-----------------------------------  ------  ------------  ------------ 
 Net cash flow used in investing 
  activities                                     (81,532)      (58,923) 
-----------------------------------  ------  ------------  ------------ 
 
 Financing activities 
 Proceeds from issue of ordinary 
  share capital                        20         135,000             - 
 Issue costs of ordinary share 
  capital                              20         (2,844)          (53) 
 Bank borrowings drawn                16,24        35,971        26,000 
 Bank borrowings repaid               16,24      (36,844)             - 
 Loan arrangement fees paid           16,24         (791)       (1,483) 
 Loan commitment fees paid              8           (395)             - 
 Interest rate cap premium 
  paid                                17,24             -         (582) 
 Interest paid on bank borrowings       8         (1,043)         (256) 
 Dividends paid to equity 
  holders                              11        (16,143)      (11,611) 
-----------------------------------  ------  ------------  ------------ 
 Net cash flow generated from 
  financing activities                            112,911        12,015 
-----------------------------------  ------  ------------  ------------ 
 
 Net increase / (decrease) 
  in cash and cash equivalents 
  for the year                                     46,320      (36,917) 
 Cash and cash equivalents 
  at the start of the year             14           1,470        38,387 
-----------------------------------  ------  ------------  ------------ 
 Cash and cash equivalents 
  at the end of the year                           47,790         1,470 
-----------------------------------  ------  ------------  ------------ 
 
 

The accompanying notes form an integral part of these financial statements.

Consolidated statement of changes in equity

For the year ended 31 December 2019

 
                                                         Capital 
                                   Share      Share    reduction    Retained 
                        Notes    capital    premium      reserve    earnings      Total 
                                 GBP'000    GBP'000      GBP'000     GBP'000    GBP'000 
---------------------  ------  ---------  ---------  -----------  ----------  --------- 
 
 1 January 2019                    1,922    140,452       35,800      20,163    198,337 
---------------------  ------  ---------  ---------  -----------  ----------  --------- 
 Total comprehensive 
  income                               -          -            -      26,332     26,332 
---------------------  ------  ---------  ---------  -----------  ----------  --------- 
 
 Transactions 
  with owners 
 Dividends paid          11            -          -     (11,723)     (4,420)   (16,143) 
 Shares issued           20        1,267    133,733            -           -    135,000 
 Share issue 
  costs                  20            -    (2,844)            -           -    (2,844) 
 31 December 
  2019                             3,189    271,341       24,077      42,075    340,682 
---------------------  ------  ---------  ---------  -----------  ----------  --------- 
 
 

For the year ended 31 December 2018

 
                                                          Capital 
                                   Share       Share    reduction       Retained 
                        Notes    capital     premium      reserve       earnings      Total 
                                 GBP'000     GBP'000      GBP'000        GBP'000    GBP'000 
---------------------  ------  ---------  ----------  -----------  -------------  --------- 
 
 1 January 2018                    1,922     140,505       41,566          9,457    193,450 
---------------------  ------  ---------  ----------  -----------  -------------  --------- 
 Total comprehensive 
  income                               -           -            -         16,472     16,472 
---------------------  ------  ---------  ----------  -----------  -------------  --------- 
 
 Transactions 
  with owners 
 Dividends paid          11            -           -      (5,766)        (5,766)   (11,532) 
 Share issue 
  costs                  20            -        (53)            -              -       (53) 
---------------------  ------  ---------  ----------  -----------  -------------  --------- 
 31 December 
  2018                             1,922     140,452       35,800         20,163    198,337 
---------------------  ------  ---------  ----------  -----------  -------------  --------- 
 
 

The accompanying notes form an integral part of these financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARED 31 DECEMBER 2019

   1.     Basis of preparation 

General information

The consolidated financial statements for the year ended 31 December 2019 are prepared in accordance with International Financial Reporting Standards ('IFRS') and interpretations issued by the International Accounting Standards Board ("IASB") as adopted by the European Union and in accordance with the Companies Act 2006, with comparatives presented for the year ended 31 December 2018.

The financial information does not constitute the Group and Parent Company's statutory accounts for the year ended 31 December 2019 or the year ended 31 December 2018 but is derived from those accounts. The Group and Parent Company's statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies. The Group and Parent Company's statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar of Companies in due course. The Auditor has reported on both the December 2019 and December 2018 accounts; the reports were unqualified, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and did not contain any statement under Section 498 of the Companies Act 2006.

The principal accounting policies adopted in the preparation of this financial information are set out below. The policies have been consistently applied to both years, with the exception of the adoption of IFRS 16 in the year to 31 December 2019.

The consolidated financial statements have been prepared on a historical cost basis, except for investment properties and the interest rate derivative which have been measured at fair value.

The Group has chosen to adopt EPRA best practice guidelines for calculating key metrics such as earnings per share.

The Company is a public listed company incorporated and domiciled in England and Wales. The Company's ordinary shares are listed on the Premium Listing Segment. The registered address of the Company is disclosed in the Corporate Information .

Convention

The consolidated financial statements are presented in Sterling, which is also the Group's functional currency, and all values are rounded to the nearest thousand (GBP'000), except when otherwise indicated.

Going concern

The Strategic report describes the Group's financial position, cash flows, and liquidity position. The principal risks and note 18 to the financial statements also provides details of the Group's financial instruments and its exposure to liquidity and credit risk.

The effect of the COVID-19 pandemic has been considered by the directors. The directors have reviewed the forecasts for the Group taking into account the impact of COVID-19 on trading over the twelve months from the date of signing this annual report. The forecasts have been assessed against a range of possible downside outcomes incorporating significantly lower levels of income in line with the possible effects of the pandemic, see Going concern and viability and Subsequent events (note 28), for further detail.

The directors believe that there are currently no material uncertainties in relation to the Group's ability to continue for a period of at least 12 months from the date of approval of the Group's financial statements. The board is, therefore, of the opinion that the going concern basis adopted in the preparation of the annual report is appropriate.

   2.     Significant accounting judgements, estimates and assumptions 

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosures. However, uncertainty about these assumptions and estimates could result in outcomes that could require material adjustment to the carrying amount of the assets or liabilities in future periods.

Information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are disclosed below:

   2.1    Judgements 

Operating lease contracts - the Group as lessor

The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments, that it retains all the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

The leases when signed, are for between 20 and 25 years with a tenant-only option to extend for one or two periods of 10 years. At the inception of the lease, the directors do not judge any extension of the leases to be reasonably certain and, as such do not factor any lease extensions into their considerations of lease incentives and their treatment.

Business combinations

The Group acquires subsidiaries that own property and other property interests. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property that are capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Where such acquisitions are not judged to be the acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or deferred tax arises. The fair value of assets and liabilities are established using industry-leading third-party professionals, instructed by the Company.

During 2019, the Group completed the acquisition of a number of assets and SPV's. The assets held by the SPV's have been incorporated into the existing subsidiaries of the Group without maintaining any of the underlying activities of the purchased SPV. The directors have reviewed the terms of the acquisition and determined that a business, as defined by IFRS 3, was not acquired. In the context of the acquisitions during the year, the principal consideration was whether an integrated set of activities were acquired. As part of the acquisition, new agreements were entered into between the Group and the operators of the assets, with the management of the assets going forward being independent of the SPV's purchased and their previous activities. No significant functions were acquired as part of the purchases and, as such the acquisitions are not determined by directors to be business combinations under IFRS 3.

   2.2    Estimates 

Fair valuation of investment property

The Valuations have been prepared in accordance with the RICS Valuation - Global Standards 2017 or the RICS 'Red Book' as it has become widely known.

The basis of value adopted is that of fair value being "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date" in accordance with IFRS 13. The concept of fair value is considered to be consistent with that of market value.

The significant methods and assumptions used by the valuers in estimating the fair value of the investment properties are set out in note 12.

Gains or losses arising from changes in the fair values are included in the Consolidated statement of comprehensive income in the period in which they arise. In order to avoid double counting, the assessed fair value may be increased or reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or guaranteed minimum rent uplifts at the inception of the lease.

The nature of uncertainty regarding the estimation of fair value as well as sensitivity analysis has been considered as set out in note 12.

   3.      Summary of significant accounting policies 

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below:

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and all of its subsidiaries drawn up to 31 December 2019. Subsidiaries are those entities, including special purpose entities, controlled by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its investment with the investee and has the ability to affect those returns through its power over the investee. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Segmental information

The board is of the opinion that the Group is engaged in a single segment business, being the investment in the United Kingdom in healthcare assets. The board consider that these properties have similar economic characteristics and as a result these individual properties have been aggregated into a single reportable operating element. Reporting on customers with greater than 10% of revenue is included in note 5.

Rental income

Rental income arising on investment properties is included in gross rental income in the Consolidated statement of comprehensive income and is accounted for on a straight-line basis over the lease term. The change in the RPI is reviewed annually, with the minimum uplifts being taken into consideration when accounting for the rental income on a straight-line basis upon inception of the lease. The resulting asset or liability is reflecting as a receivable or payable in the Consolidated statement of financial position.

When a contract includes both lease and non-lease components, the Group applies IFRS 15 to allocate the

consideration under the contract to each component.

The valuation of investment properties is increased or reduced by the total of the unamortised lease incentive and straight-line receivable or payable balances. Any remaining balances in respect of properties disposed of are included in the calculation of the profit or loss arising at disposal.

The initial lease rental payments and guaranteed rental uplifts are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, except for where, at the inception of the lease, the directors have no certainty that the tenant will exercise that option.

Increased rental payments arising from the variation of the lease on capital improvement licenses are spread evenly over the remaining lease term from the date of signing the license agreement.

At each rent review, the uplift in rent is calculated in accordance with the terms of the lease. If greater than the minimum uplift then the uplift above and beyond the minimums recognised is calculated and recognised in the period in which it arises, with there being no rebasing of the amounts to recognise over the remaining term of the lease.

Service charges, insurance and other expenses recoverable from tenants

Income arising from expenses recharged to tenants is recognised in the year which the compensation becomes receivable. Service, insurance and other similar charges which are recoverable are included in gross rental income as the directors consider that the Group acts as principal in this respect.

Finance expense

Finance expenses consist principally of interest payable, amortisation of loan arrangement fees and fair value movements on interest rate derivatives.

Loan arrangement fees are expensed over the term of the relevant loan. Interest payable and other finance costs which the Group incurs on bank facilities, are expensed in the period to which they relate.

Taxation

The Group is a REIT in relation to its property investments is therefore exempt from tax, subject to the Group maintaining its REIT status.

Current tax is the expected tax payable on any non-REIT taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date.

Investment properties

Investment properties consist of land and buildings (principally care homes) which are held to earn rental income and for capital growth potential.

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Investment properties are recognised when the risk and rewards on the acquired properties passes to the Group on completion of the purchase Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and included within the book cost of the property.

After initial recognition, investment properties are measured at fair value, with gains and losses recognised in the Consolidated statement of comprehensive income in the period which they arise. Fair value measurement takes into consideration the improvements to the investment property during the year taking into account the future cash flows from increases in rent that have been contracted in relation to the improvement and discounting them at an appropriate rate to reflect the percentage of completion of the works being undertaken and the risk to completion that remains.

Gains and losses on disposals of investment properties are determined as the difference between net disposal proceeds and the carrying value of the asset. These are recognised in the Consolidated statement of comprehensive income in the period in which they arise.

Trade and other receivables

Trade receivables comprises mainly of lease income receivable.

Trade and other receivables are initially recognised at fair value plus transaction costs and subsequently measured at amortised cost less impairment.

The Group applies the amortised cost basis as trade and other receivables are normally held with an objective to collect contractual cash flows, i.e. "held to collect"; which comprises of payment of principal and interest on the principal amount outstanding.

The Group applies the IFRS 9 simplified approach to measuring the expected credit losses ("ECLs") for trade receivables whereby the allowance or provision for all trade receivables are based on the lifetime ECLs.

The Group applies the general approach for initial recognition and subsequent measurement of ECL provisions for the loan receivable and other receivables which have maturities of 12 months or more and have a significant finance component.

This approach comprises of a three-stage approach to evaluating ECLs. These stages are classified as follows:

Stage one

Twelve-month ECLs are recognised in profit or loss at initial recognition and a loss allowance is established. For financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk at the reporting date, the loss allowance for twelve-month ECLs is maintained and updated for changes in amount. Interest revenue is calculated on the gross carrying amount of the asset (i.e. without reduction for ECLs).

Stage two

If the credit risk increases significantly and the resulting credit quality is not considered to be low credit risk, full lifetime ECLs are recognised and includes those financial instruments that do not have objective evidence of a credit loss event. Interest revenue is still calculated on the gross carrying amount of the asset.

Stage three

If the credit risk of a financial asset increases to the point that it is considered credit impaired (there is objective evidence of impairment at the reporting date), lifetime ECLs continue to be recognised. For financial assets in this stage, lifetime ECLs will generally be individually assessed. Interest revenue is calculated on the amortised cost net carrying amount (amortised cost less impairment).

The key estimation techniques including key inputs and assumptions regarding the Group's ECL provision for trade and other receivables are included as part of the Group's assessment of credit risk as set out in note 18.

Cash and cash equivalents

Cash and cash equivalents include cash at bank and deposits held at call with banks.

Dividends

Dividends are recognised when they become legally payable.

Share capital

The share capital relates to amounts subscribed for share capital at its par value.

Share premium

The surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.

Capital reduction reserve

On 12 April 2017, an application to the High Court was successfully made for the reduction of GBP0.30 per share of the share premium account plus GBP3,000,000 which allowed the transfer of GBP46,851,708 to the capital reduction reserve. This is a distributable reserve.

Trade payables

Trade payables are initially recognised at their fair value and are subsequently measured at amortised cost.

Borrowings

All bank borrowings are initially recognised at fair value net of attributable transaction costs. After initial recognition, all bank borrowings are measured at amortised cost, using the effective interest method. The effective interest rate is calculated to include all associated transaction costs.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. The fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates within finance costs in the Consolidated statement of comprehensive income.

Interest rate derivatives

Derivative financial instruments, comprising interest rate caps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Group would receive or pay to terminate the agreement at the year end date, taking into account current interest rate expectations and the current credit rating of the Group and its counterparties. Premiums payable under such arrangements are initially capitalised into the Consolidated statement of financial position.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole. Changes in fair value of interest rate derivatives are recognised within the Consolidated statement of comprehensive income in the period in which they occur.

The Group does not apply hedge accounting in accordance with IFRS 9.

   4.      Standards issued and effective from 1 January 2019 

The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS effective for the Group as of 1 January 2019. This adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements:

   --      IFRS 16 'Leases' 

IFRS 16 'Leases'

IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance lease and requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

The change in definition of a lease under IFRS 16 mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. This is in contrast to the focus on 'risks and rewards' in IAS 17 and IFRIC 4.

IFRS 16 does not change substantially how a lessor accounts for leases. Under IFRS 16, a lessor continues to classify leases as either finance leases or operating leases and account for those two types of leases differently.

Under IFRS 16, an intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. The intermediate lessor is required to classify the sub-lease as a finance or operating lease by reference to the right-of-use asset arising from the head lease (and not by reference to the underlying asset as was the case under IAS 17).

The only sub-leases the Group holds are in relation to properties transferred by way of 999 year leases. The Group continues to recognise investment property held in relation to these leases.

The Group has applied IFRS 16 from 1 January 2019 and adopted the modified retrospective approach without restatement of comparative information.

The adoption of IFRS 16 including the above changes does not have a significant impact on the Group's disclosure on leases from what was previously disclosed under IAS 17.

   4.1   Standards issued but not yet effective 

The following standard has been issued but is not effective for this accounting period and has not been adopted early:

IFRS 3 'Business Combinations'

On 22 October 2018, the IASB issued 'Definition of a Business (Amendments to IFRS 3)' aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets.

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020.

The standard is not expected to have material impact on the Group and the Group already performs this assessment. Refer to note 2 where this assessment is considered.

The Group does not consider the adoption of any new standards or amendments, other than those noted above to be applicable to the Group.

   5.      Property Income 
 
                                                   Year ended         Year ended 
                                                  31 December        31 December 
                                                         2019               2018 
                                                      GBP'000            GBP'000 
---------------------------------------     -----------------  ----------------- 
 Rental income cash received 
  in the year/period                                   19,113             13,866 
------------------------------------------  -----------------  ----------------- 
 Rent received in advance 
  of recognition(1)                                        98              (154) 
 Rent recognised in advance 
  of receipt(2)                                         4,769              3,597 
------------------------------------------  -----------------  ----------------- 
 Gross rental income                                   23,980             17,309 
------------------------------------------  -----------------  ----------------- 
 
 Insurance/service charge 
  income                                                  252                155 
 Insurance/service charge 
  expense                                               (254)              (158) 
------------------------------------------  -----------------  ----------------- 
 Net rental income                                     23,978             17,306 
 
 1 Rent premiums received in prior periods as well as any rent 
  premiums received during the year, deemed to be a premium over 
  the term of the leases. 
 2 Relates to both rent free periods being recognised on a straight-line 
  basis over the term of the lease and rent recognised in the 
  period to reflect the minimum 2% uplift in rents over the term 
  of the lease on a straight-line basis. 
 
 

For accounting purposes, premiums received are reflected on a straight-line basis over the term of the lease. In addition, the Group benefits from a minimum annual rental uplift of 2% on all leases. For accounting purposes these uplifts are also incorporated to recognise income on a straight-line basis.

Minster Care Management Ltd and Croftwood Care UK Ltd are both part of the Minster Care Group and represent more than 10% of the gross rental income:

 
                                 2019    2018 
 
 Minster Care Management Ltd    43.3%   56.6% 
 Croftwood Care UK Ltd          25.4%   34.4% 
 Others                         31.3%    9.0% 
-----------------------------  ------  ------ 
 
   6.      Administrative and other expenses 
 
                                                                 Year ended    Year ended 
                                                                31 December   31 December 
                                                                       2019          2018 
                                                                    GBP'000       GBP'000 
-------------------------------------------------------------  ------------  ------------ 
 Investment Manager fees (note 21)                                    2,756         2,364 
 Directors' remuneration (see note 7)                                   193           165 
 
 Auditor's fees 
 
   *    Statutory audit of the Company and Group (including 
        subsidiaries)                                                   166            90 
 
   *    Additional fees payable to the auditor in respect of 
        the 2018 audit                                                   22             - 
 
   *    Agreed upon procedures of the Company's interim 
        report                                                           13            11 
 
   *    Other services                                                   15            55 
-------------------------------------------------------------  ------------  ------------ 
 Total Auditor's fees                                                   216           156 
 Administration fees                                                    345           301 
 Regulatory fees                                                         38            25 
 Legal and professional                                                 419           286 
 Other administrative costs                                             451           266 
 One-off costs(1)                                                       171           707 
-------------------------------------------------------------  ------------  ------------ 
                                                                      4,589         4,270 
-------------------------------------------------------------  ------------  ------------ 
 

1. One-off costs relate to premium listing costs incurred during the year. In the prior year costs were incurred on a large acquisition opportunity that did not proceed. Total costs were GBP742,000, GBP707,000 is separately disclosed above with the balance of GBP35,000 included in the items within this note.

The amounts shown above include irrecoverable VAT as appropriate.

   7.      Directors' remuneration 

The Group had no employees in the current or prior period. The directors, who are key management personnel of the Company, are appointed under letters of appointment for services. Directors' remuneration, all of which represents their fees for services provided during the year, are as follows:

 
                                          Year ended      Year ended 
                                         31 December     31 December 
                                                2019            2018 
                                             GBP'000         GBP'000 
------------------------------------  --------------  -------------- 
 Rupert Barclay (Chairman)                        46              42 
 Rosemary Boot                                    35              33 
 David Brooks(1)                                   -              16 
 Philip Hall                                   33(2)              31 
 Paul Craig                                       33              31 
 Amanda Aldridge                                  31               - 
------------------------------------  --------------  -------------- 
 Employer's National Insurance                    15              12 
                                                 193             165 
------------------------------------  --------------  -------------- 
 
 1. David Brooks died on 13 July 2018. 
  2. An additional GBP3,399 in expenses was paid to Philip Hall 
  during the 2019 year. 
 

Directors' remuneration payable at 31 December 2019 amounted to GBP8,000 (2018: GBP15,000).

   8.      Finance expenses 
 
                                                Year ended    Year ended 
                                               31 December   31 December 
                                                      2019          2018 
                                        Note       GBP'000       GBP'000 
-------------------------------------  -----  ------------  ------------ 
 Interest payable on bank borrowings                 1,043           440 
 Commitment fee payable on bank 
  borrowings                                           395            79 
 Amortisation of loan arrangement 
  fee                                                  416           113 
 Changes in fair value of interest 
  rate derivatives                       17            383           105 
-------------------------------------  -----  ------------  ------------ 
                                                     2,237           737 
-------------------------------------  -----  ------------  ------------ 
 

The total interest payable on financial liabilities carried at amortised cost comprises interest payable on bank borrowings which were GBP25.1 million at 31 December 2019 (2018: GBP26.0 million). Amortisation on loan arrangement fees relates to capitalised fees being amortised over the term of the facility, in the year ended 31 December 2019 GBP791,000 was capitalised (2018: GBP1,483,000).

   9.      Taxation 

As a REIT, the Group is exempt from corporation tax on the profits and gains from its property investment business, provided it continues to meet certain conditions as per REIT regulations. For the year ended 31 December 2019 and the year ended 31 December 2018, the Group did not have any non-qualifying profits except interest income on bank deposits.

Tax charge in the Consolidated statement of comprehensive income:

 
                       Year ended      Year ended 
                      31 December     31 December 
                             2019            2018 
                          GBP'000         GBP'000 
-------------------  ------------    ------------ 
 UK corporation tax             -               - 
-------------------  ------------    ------------ 
 

Reconciliation of the corporation tax charge:

 
                                           Year ended    Year ended 
                                          31 December   31 December 
                                                 2019          2018 
                                              GBP'000       GBP'000 
---------------------------------------  ------------  ------------ 
 Profit before tax                             26,332        16,472 
 Theoretical tax at UK corporation tax 
  rate (19%)                                    5,003         3,130 
 Effects of: 
 REIT exempt income                           (3,352)       (2,350) 
 Non-taxable items                            (1,651)         (765) 
 Residual losses                                    -          (15) 
 
 Total tax charge                                   -             - 
---------------------------------------  ------------  ------------ 
 

Under the UK REIT rules within which the Group operates, capital gains on the Group's UK properties are generally exempt from UK corporation tax, provided they are not held for trading.

   10.    Earnings per share 

Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the time weighted average number of ordinary shares outstanding during the period. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.

 
                                                              Year ended     Year ended 
                                                             31 December    31 December 
                                                                    2019           2018 
                                                                 GBP'000        GBP'000 
------------------------------------------------------     -------------  ------------- 
 
 Total comprehensive income (attributable 
  to shareholders)                                                26,332         16,472 
 Adjusted for: 
 
   *    Revaluation movement                                    (13,937)        (7,577) 
 
   *    Rental income arising from recognising rental 
        premiums and future guaranteed rent uplifts                4,867          3,443 
---------------------------------------------------------  -------------  ------------- 
 Change in fair value of investment 
  properties                                                     (9,070)        (4,134) 
 Change in fair value of interest 
  rate derivative                                                    383            105 
---------------------------------------------------------  -------------  ------------- 
 EPRA earnings                                                    17,645         12,443 
 Adjusted for: 
 Rental income arising from recognising 
  rental premiums and future guaranteed 
  rent uplifts                                                   (4,867)        (3,443) 
 Non-recurring costs                                                 171            742 
---------------------------------------------------------  -------------  ------------- 
 Adjusted Earnings                                                12,949          9,742 
---------------------------------------------------------  -------------  ------------- 
 
   Average number of ordinary shares                         253,954,592    192,206,831 
---------------------------------------------------------  -------------  ------------- 
 Earnings per share (pence)(1)                                    10.37p          8.57p 
 EPRA basic and diluted earnings 
  per share (pence)(1)                                             6.95p          6.47p 
 Adjusted basic and diluted earnings 
  per share (pence)(1)                                             5.10p          5.07p 
---------------------------------------------------------  -------------  ------------- 
  1 There is no difference between basic and diluted earnings 
   per share 
 

The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings designed to represent core operational activities.

The EPRA earnings are arrived at by adjusting for the changes in fair value of on investment properties and interest rate derivatives.

Adjusted Earnings:

EPRA earnings have been adjusted to exclude the effect of straight-lining of rental income and one-off costs.

These include non-recurring listing fees incurred in the current year. In the prior year, non-recurring costs included due diligence costs incurred on a large transaction that was not reflective of the standard underlying costs. These have been adjusted to enable the board to consider the level of ongoing cash earnings.

   11.    Dividends 
 
                                      Dividend   31 December   31 December 
                                          rate          2019          2018 
                                    (pence per 
                                        share)       GBP'000       GBP'000 
---------------------------------  -----------  ------------  ------------ 
 
 Third interim dividend for 
  the period ended 31 December 
  2017 (ex-dividend - 8 February 
  2018)                                1.5p                -         2,883 
 First interim dividend for 
  the period ended 31 December 
  2018 ( ex-dividend - 3 May 
  2018)                                1.5p                -         2,883 
 Second interim dividend for 
  the period ended 31 December 
  2018 (ex-dividend - 16 August 
  2018)                                1.5p                -         2,883 
 Third interim dividend for 
  the period ended 31 December 
  2018 (ex-dividend - 1 November 
  2018)                                1.5p                -         2,883 
 Forth interim dividend for 
  the period ended 31 December 
  2018 (ex-dividend - 7 February 
  2019)                                1.5p            2,883             - 
 First interim dividend for 
  the period ended 31 December 
  2019 (ex-dividend - 16 May 
  2019)                              1.5425p           4,420             - 
 Second interim dividend for 
  the period ended 31 December 
  2019 (ex-dividend - 8 August 
  2019)                              1.5425p           4,420             - 
 Third interim dividend for 
  the period ended 31 December 
  2019 (ex-dividend - 31 October 
  2019)                               1.5425p          4,420             - 
---------------------------------  -----------  ------------  ------------ 
 Total dividends paid                                 16,143        11,532 
---------------------------------  -----------  ------------  ------------ 
 
 Total dividends paid in respect 
  of the year                                        4.6275p          4.5p 
 Total dividends unpaid but 
  declared in respect of the 
  year                                               1.5425p          1.5p 
---------------------------------  -----------  ------------  ------------ 
 Total dividends declared in 
  respect of the year - per 
  share                                                6.17p          6.0p 
---------------------------------  -----------  ------------  ------------ 
 
 

On 30 January 2019, the Company declared an interim dividend of 1.50 pence per ordinary share for the period from 1 November 2018 to 31 December 2018 and was paid in February 2019.

On 1 May 2019, the Company declared an interim dividend of 1.5425 pence per ordinary share for the period from 1 January 2019 to 31 March 2019 and was paid in June 2019.

On 30 July 2019, the Company declared an interim dividend of 1.5425 pence per share for the period from 1 April 2019 to 30 June 2019 and was paid in August 2019.

On 23 October 2019, the Company declared an interim dividend of 1.5425 pence per share for the period from 1 July 2019 to 30 September 2019 and was paid in November 2019.

On 31 January 2020, the Company declared an interim dividend of 1.5425 pence per share for the period from 1 October 2019 to 31 December 2019 payable on 21 February 2020 .

   12.    Investment property 

In accordance with the RICS 'Red Book' the properties have been independently valued on the basis of fair value by Cushman & Wakefield an accredited independent valuer with a recognised professional qualification. They have recent and relevant experience in the locations and categories of investment property being valued and skills and understanding to undertake the valuations competently. The properties have been valued on an individual basis and their values aggregated rather than the portfolio valued as a single entity. The valuers have used recognised valuation techniques in accordance with those recommended by the International Valuation Standards Committee and are compliant with IFRS13. Factors reflected include current market conditions, annual rentals, lease lengths, property condition including improvements affected during the year, rent coverage, location and comparable evidence.

The valuations are the ultimate responsibility of the directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the board.

All corporate acquisitions during the year have been treated as asset purchases rather than business combinations because they are considered to be acquisitions of properties rather than businesses.

 
                                                  As at          As at 
                                            31 December    31 December 
                                                   2019           2018 
                                                GBP'000        GBP'000 
-------------------------------------     -------------  ------------- 
 Opening value                                  223,845        156,165 
 Property additions                              69,969         53,365 
 Acquisition costs capitalised                    3,857          2,071 
 Capital improvements                             7,183          4,667 
 Revaluation movement                            13,937          7,577 
----------------------------------------  -------------  ------------- 
 Closing value per independent 
  valuation report                              318,791        223,845 
 Guaranteed rent reviews 
  and initial lease rental 
  payment net (debtor) / creditor               (8,249)        (3,382) 
----------------------------------------  -------------  ------------- 
 Closing fair value per Consolidated 
  statement of financial position               310,542        220,463 
----------------------------------------  -------------  ------------- 
 

During the year, the Group acquired an additional 14 properties.

The majority of the properties owned are freehold except for nine properties which are long leasehold under 999 year leases at a peppercorn rent.

Change in fair value of investment properties

The following elements are included in the change in fair value of investment properties reported in the consolidated financial statements:

 
                                    31 December   31 December 
                                           2019          2018 
                                        GBP'000       GBP'000 
------------------------------     ------------  ------------ 
 Revaluation movement                    13,937         7,577 
 Rental income arising from 
  recognising rental premiums 
  and guaranteed rent uplifts           (4,867)       (3,443) 
---------------------------------  ------------  ------------ 
 Change in fair value of 
  investment properties                   9,070         4,134 
---------------------------------  ------------  ------------ 
 

Rental income arising from recognising guaranteed rent uplifts and initial lease rental payment includes the adjustments to rental receipts for the period to reflect the total minimum income recognised over the expected lease terms on a straight-line basis. Rent premiums received are being reflected on a straight-line basis over the term of the lease. In addition, the Group benefits from a minimum annual rental uplift of 2% on all leases. These uplifts are also incorporated to recognise income on a straight-line basis. The elements are reported in the table below. Capital improvements funded by the Group are under taken under Deeds of Variation to the leases. The period between signing the Deed of Variation and rent commencing is a rent-free period and rent is recognised on a straight-line basis from the signing of the Deed of Variation.

 
                                                     Year ended      Year ended 
                                                    31 December     31 December 
                                         Note              2019            2018 
                                                        GBP'000         GBP'000 
------------------------------------  --------  ---------------  -------------- 
 Rent received in advance 
  of recognition(1)                       5                  98           (154) 
 Rent recognised in advance 
  of receipt(2)                           5               4,769           3,597 
------------------------------------  --------  ---------------  -------------- 
 Rental income arising 
  from recognising rental 
  premium and future guaranteed 
  rent uplifts                                            4,867           3,443 
------------------------------------  --------  ---------------  -------------- 
 
 1 Rent premiums received during the year reflected over the 
  term of the lease. 
 2 Relates to both rent free periods being recognised on a straight-line 
  basis over the term of the lease and rent recognised in the 
  period to reflect the minimum 2% uplift in rents over the term 
  of the lease on a straight-line basis. 
 

Descriptions and definitions relating to valuation techniques and key unobservable inputs made in determining fair values are as follows:

Valuation techniques used to derive fair values

The valuations have been prepared on the basis of fair value which is defined in the RICS 'Red Book' as the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date" in accordance with IFRS 13. The concept of fair value is considered to be consistent with that of market value. The valuation takes into consideration the current market conditions including improvements effected during the year, annual rentals, lease lengths, property condition, rent coverage and location.

Unobservable inputs

These include: estimated rental value ("ERV") based on market conditions prevailing at the valuation date; estimated average increase in rent based on both market estimations and contractual situations; equivalent yield (defined as the weighted average of the net initial yield and reversionary yield); and the physical condition of the property determined by inspections on a rotational basis. A decrease in the ERV would decrease fair value. A decrease in the equivalent yield would increase the fair value. An increase in the remaining lease term would increase the fair value.

Sensitivity of measurement of significant unobservable inputs

Initial yields range from 3.22% to 10.00% across the portfolio.

A 0.25% movement of the valuation yield would have approximately a GBP12.7 million impact on the investment property valuation. A 1% movement in the rental income would have approximately a GBP3.2 million impact on the investment property valuation.

Fair value hierarchy

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

- Level 1 - unadjusted quoted prices in active markets;

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

- Level 3 - unobservable inputs.

The following table provides the fair value measurement hierarchy for investment property:

 
                                                       Level     Level     Level 
                                Date of      Total         1         2         3 
                              valuation    GBP'000   GBP'000   GBP'000   GBP'000 
-----------------------   -------------   --------  --------  --------  -------- 
 Assets measured 
  at fair value: 
                              31 December 
 Investment properties               2019   310,542         -         -   310,542 
 
                              31 December 
 Investment properties               2018   220,463         -         -   220,463 
------------------------   --------------  --------  --------  --------  -------- 
 
 

There have been no transfers between any of the levels during the year.

   13.    Trade and other receivables 
 
                                           31 December   31 December 
                                                  2019          2018 
                                               GBP'000       GBP'000 
---------------------------------------   ------------  ------------ 
 Non-current 
 Rent recognised in advance of receipt          10,017         5,248 
 Current 
 Loan receivable(1)                                 69           250 
 Prepayments                                       485           337 
                                                10,571         5,835 
 ---------------------------------------  ------------  ------------ 
 

1. During the year ended 31 December 2018, the Group entered into a loan agreement with Mariposa Care Group Limited (Careport) in which the Group provided a term loan facility of GBP250,000 which bears interest at 7.5% per annum. During the year ended 31 December 2019, the Group entered into a revolving loan agreement with Careport which includes a facility up to GBP250,000 to settle the former loan. The existing loan facility also bears interest at 7.5%.

No impairment losses have been recognised during the year (refer to note 18).

   14.    Cash and cash equivalents 
 
                               31 December   31 December 
                                      2019          2018 
                                   GBP'000       GBP'000 
---------------------------   ------------  ------------ 
 Cash and cash equivalents          47,790         1,470 
----------------------------  ------------  ------------ 
 

Included as part of cash and cash equivalents are funds held on overnight deposit of GBP 39,090,000 (2018: GBP983,000) .

None of the Group's cash balances are held in restricted accounts.

   15.    Trade and other payables 
 
                                               31 December   31 December 
                                                      2019          2018 
                                                   GBP'000       GBP'000 
-------------------------------------------   ------------  ------------ 
 Non-current 
 Rent received in advance of recognition             1,768         1,866 
 
 Current 
 Trade and other payables                            1,158         1,195 
 Interest payable                                      250           236 
 Withholding tax payable - (PID Dividends)               -           250 
 Rental received in advance                            659             - 
 Capital improvements payable                        1,019         1,652 
                                              ------------  ------------ 
                                                     3,086         3,333 
                                                     4,854         5,199 
 -------------------------------------------  ------------  ------------ 
 
 
   16.    Bank borrowings 

A summary of the bank borrowings drawn in the period are shown below:

 
                                             As at          As at 
                                       31 December    31 December 
                                              2019           2018 
                                           GBP'000        GBP'000 
--------------------------------     -------------  ------------- 
 At the beginning of the 
  year                                      26,000              - 
 Bank borrowings drawn in 
  the yea r                                 35,971         26,000 
 Bank borrowings repaid in 
  the yea r                               (36,844)              - 
--------------------------------     -------------  ------------- 
 Total bank borrowings drawn(1)             25,127         26,000 
-----------------------------------  -------------  ------------- 
 Total bank borrowings undrawn              49,873         24,000 
-----------------------------------  -------------  ------------- 
 
   1.     Total bank borrowings drawn are equal to its fair value 

The Group signed a GBP50 million five-year loan facility with Metro Bank PLC (the "Loan Facility") on 15 June 2018, this facility terminates on 15 June 2023. The Loan Facility has two elements: an interest only term loan of GBP25 million (the "Term Loan") which was fully drawn at 31 December 2019 and 31 December 2018, and a revolving credit facility of GBP25 million (the "RCF"), GBP127,000 thousand of which was drawn at 31 December 2019 (2018: GBP1 million). The Group drew down GBP23.7 million under existing loan facilities with Metro Bank PLC and repaid GBP24.5 million during the year ended 31 December 2019.

The Loan Facility has a margin of 265 basis points over Metro Bank PLC's published Base Lending Rate. The five-year Term Loan is repayable without penalty after two years, and with a 1% penalty if prepaid within the first two years. Amounts drawn under the RCF can be repaid at any time without penalty. The loan is secured over a portfolio of 54 care homes held in wholly-owned Group companies (Impact Property 1 Limited (IP1) and Impact Property 2 Limited (IP2)). These assets had a closing value per the independent valuation report of GBP176.2 million as at 31 December 2019 (2018: GBP160.7 million). The lender also hold charges over the shares of the subsidiaries and intermediate holding companies.

On 6 March 2019, the Group agreed a new revolving credit facility of GBP25 million (the "Clydesdale Facility") with Clydesdale Bank PLC ("Clydesdale"), this facility terminates on 6 March 2024. The Group drew down GBP12.3 million from the Clydesdale Facility and repaid the amount in full during the year ended 31 December 2019.

The five-year Clydesdale Facility has a margin of 225 or 250 basis points over three-month LIBOR, depending on the loan-to value ratio of the 14 properties over which the Group has granted security to Clydesdale as security for the loan held in a wholly-owned Group company (Impact Property 3 Limited (IP3)). Under the bank covenants related to the loans the Group is required to ensure that the:

- Loan to value of IP1 and IP2 combined does not exceed 35%;

- Loan to value of IP3 does not exceed 55%;

- Interest cover of IP1 and IP2 combined based on passing rent from the ring-fenced properties must exceed 200%;

- Interest cover of IP3 based on passing rent from the ring-fenced properties must exceed 325%.

The Group has been in compliance with all of the financial covenants of the loan facilities as applicable throughout the year covered by these financial statements.

Any fees associated with arranging the bank borrowings unamortised as at the year end are offset against amounts drawn on the facilities as shown in the table below:

 
                                               As at          As at 
                                         31 December    31 December 
                                                2019           2018 
                                             GBP'000        GBP'000 
----------------------------------     -------------  ------------- 
 Bank borrowings drawn: 
  due after more than one 
  year (1)                                    25,127         26,000 
-------------------------------------  -------------  ------------- 
 Arrangements fees - brought 
  forward                                    (1,291)              - 
 Arrangement fees paid during 
  the year (1)                                 (791)        (1,483) 
 Amortisation of loan arrangement 
  fees                                           416            192 
-------------------------------------  -------------  ------------- 
 Non-current liabilities: 
  Bank borrowings                             23,461         24,709 
-------------------------------------  -------------  ------------- 
 
   1.      Represents cash flow arising from financing activities. 

Maturity analysis of borrowings:

 
                                           As at          As at 
                                     31 December    31 December 
                                            2019           2018 
                                         GBP'000        GBP'000 
------------------------------     -------------  ------------- 
 Repayable between one and 
  two years                                    -              - 
 Repayable between two and 
  five years                              25,127         26,000 
 Repayable in over five years                  -              - 
 Total                                    25,127         26,000 
---------------------------------  -------------  ------------- 
 

The weighted average term of the Group's debt as at the year end is 3.5 years (2018: 4.5 years ).

   17.    Interest rate derivatives 
 
                                         As at          As at 
                                   31 December    31 December 
                                          2019           2018 
                                       GBP'000        GBP'000 
----------------------------     -------------  ------------- 
 At the beginning of the 
  year                                     477              - 
 Interest cap costs paid                     -            582 
 Change in fair value of 
  interest rate derivatives              (383)          (105) 
-------------------------------  -------------  ------------- 
                                            94            477 
   ----------------------------  -------------  ------------- 
 

To mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Group entered into an interest rate cap with the notional value of GBP25 million and a strike rate of 1% effective from 21 June 2018 with a termination date of 15 June 2023. The fair value of the interest rate cap is based on a floating reference of 1 month LIBOR.

The interest rate cap was acquired at a premium of GBP570,000, plus associated costs of GBP12,000.

The fair value of the derivative interest rate cap contract is estimated by discounting expected future cash flows using market interest rates. A sensitivity analysis performed to assess the impact of an increase of 0.25% in the interest rate would result in an increase of GBP70,000 in the fair value of the interest rate derivative. A decrease of 0.25% in the interest rate would result in a decrease of GBP42,000 in the fair value of the interest rate derivative.

At 31 December 2019 the Group has a loan of GBP25.1 million (2018: GBP26.0 million) which is exposed to interest rate risk.

   18.    Financial instruments and financial risk management 

The Group's principal financial assets and liabilities are those that arise directly from its operations: trade and other receivables, trade and other payables and cash held at bank. The Group's other principal financial assets and liabilities are bank borrowings and interest rate derivatives, the main purpose of which is to finance the acquisition and development of the Group's investment property portfolio and hedge against the interest rate risk arising.

Set out below is a comparison by class of the carrying amounts of the Group's financial instruments:

 
                                      As at          As at 
                                31 December    31 December 
                                       2019           2018 
                                    GBP'000        GBP'000 
-----------------------       -------------  ------------- 
 Financial assets 
  at amortised 
  cost: 
 Loan receivable                         69            250 
 Cash and cash 
  equivalents                        47,790          1,470 
 
 Financial assets 
  at fair value: 
 Interest rate 
  derivative                             94            477 
 
 Financial liabilities 
  at amortised 
  cost: 
 Bank borrowings                     23,461         24,709 
 Trade and other 
  payables                            2,427          3,333 
----------------------------  -------------  ------------- 
 

The interest rate derivative is the only financial instrument that is measured at fair value through the Group's Consolidated statement of comprehensive income.

The following table provides the fair value measurement hierarchy for the interest rate derivative:

 
                                                   Level       Level       Level 
                         Date of       Total          1*          2*          3* 
                       Valuation     GBP'000     GBP'000     GBP'000     GBP'000 
----------------    ------------    --------    --------    --------    -------- 
 Assets measured 
  at fair value: 
 Interest rate       31 December 
  derivative                2019           -           -          94           - 
 Interest rate       31 December 
  derivative                2018           -           -         477           - 
 
 

*The fair value categories are defined in note 12

Risk Management

The Group is exposed to market risk (including interest rate risk), credit risk and liquidity risk. The board oversees the management of these risks. The board reviews and agrees policies for managing each of these risks that are summarised below:

Market risk (including interest rate risk)

Market risk is the risk that the fair values or future cash flows of financial instruments will fluctuate because of changes in market prices. The financial assets held by the Group that are affected by interest rate risk are principally the Group's cash balances and the interest rate derivative.

The Group monitors its interest rate exposure on a regular basis. A sensitivity analysis performed to ascertain the impact on profit or loss and net assets of a 50 basis point shift in interest rates on the Group's cash balances would result in an increase of GBP238,950 (2018: GBP7,350) or a decrease of GBP238,950 (2018: GBP7,350).

The financial liabilities held by the Group that are affected by interest rate risk are principally the Group's borrowings. The Group has entered into an interest rate derivative to reduce its exposure to interest rate risk on term debt (refer to note 17).

Credit risk

Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.

The Group is exposed to credit risks from its leasing activities. Credit risk is minimised by requiring tenants to pay rentals in advance under their lease obligations. The credit quality of the tenant is also assessed based at the time of entering into a lease agreement thereby minimising credit risk. Outstanding trade receivables are regularly monitored. There are no outstanding trade receivables at 31 December 2019.

At 31 December 2019, the Group is exposed to credit risk in relation to the loan receivable from one of its tenants, Careport, of GBP69,000 (2018: GBP250,000). In assessing the probability of default of the individual debtor, the directors have considered a number of factors including history of default, past experience, future expectations as well as the support the debtor receives from its parent company and the ability to settle the loan receivable when due. In assessing the ECL provision of the loan receivable, the impairment loss identified by the directors was considered immaterial.

Credit risk also arises with the cash balances held with banks and financial institutions. The board believes that the credit risk on current account cash balances is limited because the counterparties are reputable banks with high credit ratings assigned by international credit-rating agencies. The impairment loss identified on cash balances was considered immaterial.

Liquidity risk

Liquidity risk arises from the Group's management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due, as the majority of the Group's assets are property investments and are therefore not readily realisable. The Group's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management ensuring it has appropriate levels of cash and available drawings to meet liabilities as they fall due.

The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:

 
                                     3-12       1-2       2-5 
                     < 3 months    months     years     years   >5 years              Total 
                        GBP'000   GBP'000   GBP'000   GBP'000    GBP'000            GBP'000 
-----------------   -----------  --------  --------  --------  ---------  ----------------- 
 31 December 
  2019: 
 Bank borrowings              -         -         -    25,127          -             25,127 
 Trade and 
  other payables          2,427         -         -         -          -              2,427 
------------------  -----------  --------  --------  --------  ---------  ----------------- 
 
 
 31 December 
  2018: 
 Bank borrowings         -   -   -   26,000   -   26,000 
 Trade and 
  other payables     3,333   -   -        -   -    3,333 
------------------  ------          -------      ------- 
 
   19.    Capital management 

The objective of the Group is to acquire, own, lease, renovate, extend and redevelop high-quality, healthcare real estate assets in the UK and lease those assets, under full repairing and insuring leases, primarily to healthcare operators providing residential healthcare services. This provides 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.

The board has responsibility for ensuring the Group's ability to continue as a going concern and continues to qualify for UK REIT status. 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.

The Company has met its targeted aggregate dividend of 6.0 pence per share for the first 12 months from IPO which equates to a yield of 6% per annum on the IPO Issue Price, payable in quarterly instalments. The Company achieved its increased targeted aggregate dividend to 6.17 pence per share for the year ended 31 December 2019.

As at 31 December 2019, the Group remains within its maximum loan to value ("LTV") which is 35% of gross asset value of the Group as a whole. The Group has a further GBP49.9 million RCF facilities available from which the Group can draw.

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. Capital consists of ordinary share capital, other capital reserves and retained earnings.

   20.    Share capital, Share premium and Capital reduction reserve 
 
                                                                           Capital 
                             Shares              Share          Share    reduction 
                           in issue            capital        premium      reserve             Total 
                             Number            GBP'000        GBP'000      GBP'000           GBP'000 
--------------------   ------------  -----------------  -------------  -----------  ---------------- 
 As at 31 December 
  2017                  192,206,831              1,922        140,505       41,566           183,993 
 Share issue 
  costs(1)                        -                  -           (53)            -              (53) 
 Dividends declared 
  (note 11)                       -                  -              -      (5,766)           (5,766) 
---------------------  ------------  -----------------  -------------  -----------  ---------------- 
 As at 31 December 
  2018                  192,206,831              1,922        140,452       35,800           178,174 
 Shares issued 
  15 May 2019            94,339,623                943         99,057            -           100,000 
 Shares issued 
  9 December 
  2019                   32,407,407                324         34,676            -            35,000 
 Share issue 
  costs                           -                  -        (2,844)            -           (2,844) 
 Dividends declared 
  (note 11)                       -                  -              -     (11,723)          (11,723) 
 
 As at 31 December 
  2019                  318,953,861              3,189        271,341       24,077           298,607 
---------------------  ------------  -----------------  -------------  -----------  ---------------- 
 

1. Share issue costs for the year includes incremental costs invoiced in the period in relation to the shares issued in November 2017. These costs had not been accrued at 31 December 2017.

The Company had 318,953,861 shares of nominal value of 1 pence each in issue at the end of the year (31 December 2018: 192,206,831).

On 15 May 2019, the Company issued a further 94,339,623 ordinary shares at a price of 106 pence per ordinary share raising gross proceeds of GBP100.0 million.

On 9 December 2019, the Company issued a further 32,407,407 ordinary shares at a price of 108 pence per ordinary share raising gross proceeds of GBP35.0 million.

There were no shares issued during the year ended 31 December 2018.

21. Transactions with related parties

Investment Manager

The fees calculated and paid for the year/period to the Investment Manager were as follows:

 
                                               Year ended   Period ended 
                                              31 December    31 December 
                                                     2019           2018 
                                                  GBP'000        GBP'000 
-------------------------------------------  ------------  ------------- 
 Amounts payable to Impact Health Partners 
  LLP 
 Net fee                                            2,674          1,970 
 VAT                                                   82            394 
-------------------------------------------  ------------  ------------- 
 Gross fee                                          2,756          2,364 
-------------------------------------------  ------------  ------------- 
 

For the year ended 31 December 2019 the principals and Finance Director of Impact Health Partners LLP, the Investment Manager, are considered key management personnel. Mr Patel and Mr Cowley are the principals and Mr Yaldron is the Finance Director of Impact Health Partners LLP and they own 3.42%, 0.28% and 0.02% respectively (either directly, with related parties or through a wholly-owned company) of the total issued ordinary share capital of Impact Healthcare REIT plc. Mr Patel also (directly and/or indirectly) holds a majority 72.5% stake in Minster Care Group Limited "MCGL". Mr Cowley also holds a 20% interest in MCGL. 68.7% of the Group's rental income was received from MCGL or its subsidiaries. A trade receivable of GBP349,490 was outstanding at the year end (2018: none).

During the year the key management of Impact Health Partners LLP received the following dividends from Impact Healthcare REIT plc: Mahesh Patel GBP666,915 (2018: GBP600,000); Andrew Cowley GBP51,190 (2018: GBP37,800) and David Yaldron GBP3,378 (2018: GBP2,400).

Directors' interests

Paul Craig is a director of the Company. He is also the portfolio manager at Quilter Investors, which has an interest in 54,073,678 ordinary shares of the Company through funds under management. The remaining directors who are shareholders in the Company do not hold significant interest in the ordinary share capital of the Company.

During the year the directors, who are considered key management personnel, received the following dividends from the Company: Rupert Barclay GBP9,982 (2018: GBP6,000); Rosemary Boot GBP1,838 (2018: GBP1,800) and Philip Hall GBP1,838 (2018: GBP1,800). In addition, funds managed by Paul Craig received dividends from the Company of GBP3,136,080 (2018: GBP2,377,067).

Directors' remuneration for the year is disclosed in note 7 as well as in the Directors' remuneration report.

Minster Care Group Limited ("MCGL")

MCGL is considered a related party, as a tenant, which is majority owned by the principals of the Investment Manager. The Group has undertaken the following transactions with MCGL:

-- On 5 May 2017, the Company entered into a sale and leaseback of 56 homes and a further home was transferred under the sale and leaseback in June 2017. The net purchase price of this portfolio was GBP156.2 million. The group entered into new leases for two more properties on 22 May 2018 with net purchase price of GBP8.0 million.

-- In accordance with the leases, undertook rent review uplifts on 7 March 2019 in relation to the portfolios acquired on 5 May 2017 and June 2017. On 22 May 2019 a rent review uplift was carried out for two other properties acquired on 22 May 2018.

-- Out of approved capital improvement expenditure of GBP5.2 million (on three homes in 2018) and GBP7.9 million (on eight homes in 2017) in MCGL portfolio, GBP11.7 million has been delivered and GBP1.4 million is remaining at 31 December 2019 (on two homes).

These transactions were fully compliant with the Company's related party policy.

   22.    Net Asset Value (NAV) per share 

Basic NAV per share is calculated by dividing net assets in the Consolidated statement of financial position attributable to ordinary equity holders of the Company by the number of ordinary shares outstanding at the end of the year. As there are no dilutive instruments outstanding, basic and diluted NAV per share are identical.

EPRA has issued guidelines aimed at providing a measure of net asset value on the basis of long term fair values. The adjustments between basic and EPRA NAV are reflected in the following table:

 
                                               As at          As at 
                                         31 December    31 December 
                                                2019           2018 
                                             GBP'000        GBP'000 
----------------------------------     -------------  ------------- 
 
 Net assets per Consolidated 
  statement of financial position            340,682        198,337 
 Fair value of derivatives                      (94)          (477) 
 EPRA NAV                                    340,588        197,860 
-------------------------------------  -------------  ------------- 
 
 Issued share capital (number)           318,953,861    192,206,831 
-------------------------------------  -------------  ------------- 
 Basic NAV per share                          106.81         103.18 
-------------------------------------  -------------  ------------- 
 EPRA NAV per share                           106.78         102.94 
-------------------------------------  -------------  ------------- 
 
   23.    Operating leases 

The following table sets out the maturity analysis of leases receivables, showing the undiscounted lease payments under non-cancellable operating leases receivable by the Group:

 
 
                  31 December     31 December 
                         2019            2018 
                      GBP'000         GBP'000 
------------     ------------  -------------- 
 Year one              22,713          16,649 
 Year two              23,685          17,209 
 Year three            24,152          18,141 
 Year four             24,584          18,510 
 Year five             25,160          18,868 
 Onwards              462,013         322,370 
---------------  ------------  -------------- 
 Total                582,307         411,747 
---------------  ------------  -------------- 
 

The Group's investment properties are leased to tenants under the terms of property leases that include upward only rent reviews which are performed annually. These are linked to annual RPI uplifts, with a floor of 2% and cap of 4%.

   24.    Reconciliation of liabilities to cash flows from financing activities 
 
                                                                Interest 
                              Notes   Bank Borrowings    rate derivative      Total 
                                              GBP'000            GBP'000    GBP'000 
---------------------------  ------  ----------------  -----------------  --------- 
 As at 1 January 2018                               -                  -          - 
 Cash flows from financing 
  activities: 
 Bank borrowings drawn        16               26,000                  -     26,000 
 Loan arrangement fees 
  paid                        16              (1,483)                  -    (1,483) 
 Interest rate cap premium 
  paid                        17                    -              (582)      (582) 
 
 Non-cash movements: 
 Amortisation of loan 
  arrangement fees            16                  192                  -        192 
 Fair value movement          17                    -                105        105 
 
 As at 31 December 2018                        24,709              (477)     24,232 
---------------------------  ------  ----------------  -----------------  --------- 
 Cash flows from financing 
  activities: 
 Bank borrowings drawn        16               35,971                  -     35,971 
 Bank borrowings repaid       16             (36,844)                  -   (36,844) 
 Loan arrangement fees 
  paid                        16                (791)                  -      (791) 
 
 Non-cash movements: 
 Amortisation of loan 
  arrangement fees            16                  416                  -        416 
 Fair value movement          17                    -                383        383 
 
 As at 31 December 2019                        23,461               (94)     23,367 
---------------------------  ------  ----------------  -----------------  --------- 
 
 
   25.    Capital commitments 

The Group has entered into Licenses for Alterations and Deeds of Variation for one of its properties in 2019 (2018: five) and completed its capital commitments on another of its properties during 2019. At the 31 December 2019 the Group had Capex outstanding on five properties (2018: five), of these two have completed since the year end, and the other three are due for completion in 2020. The Group has outstanding capital commitments of GBP2.1 million (2018: GBP8.3 million) in relation to the cost of improvements on these properties.

The Group has paid GBP2.7 million committed deferred payments on one property as at 31 December 2019 in return for increased rent of GBP0.22 million from January 2020 based on trading performance at September 2019 as per the agreement. The Group has remaining commitments estimated at GBP2.1 million (2018: GBP4.9million).

   26.    Contingent liabilities 

Full relief for Stamp Duty Land Tax (SDLT) has been granted in relation to the transfer of properties between companies which are members of the Group. Should there be a change in control of the Company within three years of completion, or a single shareholder acquires a substantial stake in the Company a liability in the subsidiary companies could arise. This is equal to approximately 5% of the aggregate value of the properties and is estimated at GBP9.4 million (2018: GBP8.9 million) on the net purchase price of assets acquired in corporate acquisitions since incorporation. GBP7.0 million of this contingent liability relates to the SDLT on the seed portfolio, in the 2020 year these properties will have been owned for three years and hence this portion of the contingent liability will no longer be recognised.

   27.    Controlling parties 

The Company is not aware of any person who, directly or indirectly owns or controls the Company. The Company is not aware of any arrangements the operations of which may give rise to a change in control of the Company.

   28.    Subsequent events 

-- On 6 January 2020, the Group completed the acquisition of Red Hill Nursing Home in Worcester and leased it to an existing tenant, Minster (see note 21). This added 90 beds to the Group's portfolio for an initial consideration of GBP3.0 million with a performance based deferred payment of GBP2.0 million. The initial consideration was funded from the Group's cash.

-- On 3 March 2020, the Group completed the acquisition of three care homes in Bradford which have been leased to a new tenant for the Group, Silverline Care. This added 182 beds to the Group's portfolio at a consideration of GBP7.5 million, this was funded from the Group's cash.

-- On 7 March 2020, the Group exchanged on a portfolio of nine Scottish care homes in a sale and leaseback with Holmes Care, a new tenant for the Group. This portfolio totals 649 beds for an initial consideration of GBP47.5 million with a deferred payment of up to GBP3 million based on the tenant's performance over the 12 months from exchange. The acquisition has not completed at the date of the signing of this annual report.

-- On 7 March 2020, the Group entered into a forward funding arrangement with an existing tenant, Prestige, for the development of a 94 bed care home in Hartlepool. Total consideration is GBP6.1 million, this is expected to be completed within 12 months from the arrangement date at which point it will be leased to Prestige. This was funded from the Group's cash.

-- On 10 March 2020, the Group completed on four care homes in Yorkshire which have been leased to MMCG. Total consideration for the 273 beds was GBP10.5 million, this was funded from the Group's cash.

Rent reviews took place in the period between year end and the date of this report as follows:

-- On 7 March 2020 in relation to the portfolio of assets acquired in May 2017 in relation to the IPO, let to Minster and Croftwood.

   --      On 16 March 2020 in relation to a single asset let to Prestige. 
   --      On 18 March 2020 in relation to two assets let to NHS. 
   --      On 23 March 2010 in relation to a single asset let to Welford. 

Rent reviews were linked to the annual RPI over the 12 months up to the rent review date with a floor of 2% and a cap of 4% for Minster, Croftwood, Prestige and Welford except for two asset for Minster had a nine months pro rata rent review and NHS properties had annual CPI linked rent reviews.

As a result of these reviews and transactions occurring post year end, the annual contracted rent increased from GBP23.1 million to GBP29.4 million, of which GBP0.4 million was from rent reviews.

Following the 2019 year end the Group secured a GBP50 million revolving credit facility with HSBC. UK Bank plc ("HSBC") for an initial term of three years. This facility has a margin of 195 or 205 basis points per annum over three-month LIBOR depending on the loan to value ratio of the properties over which the Group has granted security to HSBC as security of the loan. At the signing of this annual report 17 of the Group's properties are used as security for this facility.

On the 11 March 2020 the World Health Organisation recognised the spread of COVID-19 to be a pandemic with over a million cases reported across the world at the signing date of this annual report. The severity of the spread has caused significant strain on the global economy and stringent measures to be taken to subdue the outbreak by policy-makers worldwide. We are unable to forecast the financial consequence of this pandemic, as it cannot be quantified at this time; however, the changes as a result of COVID-19 to date have been:

-- a revised assessment of going concern and viability, including scenarios that consider the effect of payment holidays on rent for our tenants of up to 12 months, and also the effect of tenant defaults and breaches of our loan covenants.

-- Cushman & Wakefield, our independent valuers, since the 18 March 2020 (after the valuation report date for 31 December 2019) have notified us that they will be adding a material uncertainty statement to all future valuation reports. We expect this to be included in their Q1 report due towards the end of April 2020.

Further details can be seen in the Principal risks and uncertainties, Chairman's statement, Investment Manager's report and Going concern and Viability sections of the annual report and accounts.

No other significant events have occurred between the statement of financial position date and the date when the financial statements have been authorised by the directors, which would require adjustments to, or disclosure in the financial statements.

Company statement of financial position

As at 31 December 2019

Company Registration Number: 10464966

 
 
                                         31 December   31 December 
                                                2019          2018 
                                 Notes       GBP'000       GBP'000 
------------------------------  ------  ------------  ------------ 
 
 Non-current assets 
 Investment in subsidiaries        6         242,990       188,223 
------------------------------  ------  ------------  ------------ 
 Total non-current assets                    242,990       188,223 
 
 Current assets 
 Trade and other receivables       7          44,829        39,963 
 Cash and cash equivalents         8          46,702            41 
------------------------------  ------  ------------  ------------ 
 Total current assets                         91,531        40,004 
 
 Total assets                                334,521       228,227 
------------------------------  ------  ------------  ------------ 
 
 Current liabilities 
 Trade and other payables          9        (27,215)      (37,404) 
 Total liabilities                          (27,215)      (37,404) 
------------------------------  ------  ------------  ------------ 
 
 Total net assets                            307,306       190,823 
------------------------------  ------  ------------  ------------ 
 
 Equity 
 Share capital                    10           3,189         1,922 
 Share premium reserve            10         271,341       140,452 
 Capital reduction reserve        10          24,077        35,800 
 Retained earnings                             8,699        12,649 
------------------------------  ------  ------------  ------------ 
 Total equity                                307,306       190,823 
------------------------------  ------  ------------  ------------ 
 
 Net Asset Value per ordinary 
  Share (pence)                   12          96.35p        99.28p 
 
 

The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own statement of comprehensive income in these financial statements. The profit attributable to the parent company for the year ended 31 December 2019 amounted to GBP470,000 (2018: profit of GBP20.7 million).

The accompanying notes form an integral part of these financial statements.

The financial statements were approved and authorised for issue by the board of directors on 7 April 2020 and are signed on its behalf by:

Rupert Barclay, Chairman

Company statement of changes in equity

 
 
 1 January 2018                    1,922      140,505        41,566              (2,313)     181,680 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 
 Total comprehensive 
  income                               -            -             -               20,728      20,728 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 
 Transactions 
  with owners 
 Dividends paid           5            -            -       (5,766)              (5,766)    (11,532) 
 Share issue 
  costs                  10            -         (53)             -                    -        (53) 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 31 December 
  2018                             1,922      140,452        35,800               12,649     190,823 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 
                                                            Capital 
                                   Share        Share     reduction             Retained 
                        Notes    capital      premium       reserve             earnings       Total 
                                 GBP'000      GBP'000       GBP'000              GBP'000     GBP'000 
 
 1 January 2019                    1,922      140,452        35,800               12,649     190,823 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 Total comprehensive 
  income                               -            -             -                  470         470 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 
 Transactions 
  with owners 
 Dividends paid           5            -            -      (11,723)              (4,420)    (16,143) 
 Shares issued           10        1,267      133,733             -                    -     135,000 
 Share issue 
  costs                  10            -      (2,844)             -                    -     (2,844) 
 31 December 
  2019                             3,189      271,341        24,077                8,699     307,306 
---------------------  ------  ---------   ----------   -----------   ------------------   --------- 
 
 
 

The accompanying notes form an integral part of these financial statements.

NOTES TO THE COMPANY FINANCIAL STATEMENTS

FOR THE YEARED 31 DECEMBER 2019

   1.      Basis of Preparation 

General information

The financial statements for the year ended 31 December 2019, are prepared in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland ("FRS 102") and in accordance with the Companies Act 2006, with comparatives presented for the year ended 31 December 2018.

Disclosure exemptions adopted

In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 102.

In preparing the separate financial statements of the Company, advantage has been taken of the following disclosure exemptions available in FRS 102:

-- A reconciliation of the number of shares outstanding at the beginning and end of the period has not been presented as the reconciliations of the group and the parent company would be identical;

-- No statement of cash flows has been presented for the parent company

-- Disclosures in respect of the parent company's financial instruments have not been presented as equivalent disclosures have been provided in respect of the Group as a whole;

-- The requirement to present related party disclosures between the Company and fellow subsidiaries where ownership is all 100%; and

-- No disclosures have been given for the aggregate remuneration of the key management personnel of the Company as their remuneration is included in the totals for the Group as a whole.

Convention

The financial statements are presented in Sterling, which is also the Company's functional currency, and all values are rounded to the nearest thousand (GBP'000), except when otherwise indicated.

Going concern

After making enquiries, and bearing in mind the nature of the Company's business and assets, the directors consider that the Company has adequate resources to continue in operational existence for next 12 months from the date of approval of these financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

The effect of the COVID-19 pandemic has been considered by the directors. The directors have reviewed the forecasts for the Group taking into account the impact of COVID-19 on trading over the 12 months from the date of signing this annual report. The forecasts have been assessed against a range of possible downside outcomes incorporating significantly lower levels of income in line with the possible effects of the pandemic, see Going concern and viability report and Subsequent events for further detail.

   2.    Significant accounting judgements, estimates and assumptions 

The preparation of the Company's financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosures. However, uncertainty about these assumptions and estimates could result in outcomes that could require material adjustment to the carrying amount of the assets or liabilities in future periods. There were no significant accounting judgements, estimates or assumptions in preparing these financial statements.

   3.      Summary of significant accounting policies 

The principal accounting policies applied in the preparation of these financial statements are set out below.

Trade and other receivables

Trade and other receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are initially recognised at fair value and subsequently measured at amortised cost. A provision for impairment is made when there is objective evidence that the Company will not be able to recover balances in full.

Balances are written off when the probability of recovery is assessed as being remote.

Cash and cash equivalents

Cash and cash equivalents include cash at bank and deposits on call.

Dividends

Dividends are recognised when they become legally payable.

Share premium

The surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.

Capital reduction reserve

On 12 April 2017, an application to the High Court was successfully made for the reduction of GBP0.30 per share of the share premium account plus GBP3,000,000 which allowed the transfer of GBP46,851,708 to the capital reduction reserve. This is a distributable reserve.

Trade and other payables

Trade payables are initially recognised at their fair value and are subsequently measured at cost.

Investments in subsidiaries

The investments in subsidiary companies are included in the Company's statement of financial position at cost less provision for impairment.

   4.      Taxation 

The Company is exempt from corporation tax on the profits and gains from its property investment business, provided it continues to meet certain conditions as per REIT regulations. Any non-qualifying profits and gains however will continue to be subject to corporation tax.

Tax charge included in total comprehensive income:

 
                       Year ended      Year ended 
                      31 December     31 December 
                             2019            2018 
                          GBP'000         GBP'000 
-------------------  ------------    ------------ 
 UK corporation tax             -               - 
-------------------  ------------    ------------ 
 
   5.      Dividends 

Details of dividends paid by the Company are included in note 11 to the consolidated financial statements.

   6.      Investment in subsidiaries 
 
                                   31 December   31 December 
                                          2019          2018 
                                       GBP'000       GBP'000 
 At the beginning of the year          188,223       153,338 
 Cost of investments acquired 
  through share purchases               54,767        34,885 
 At the end of the year                242,990       188,223 
--------------------------------  ------------  ------------ 
 

The Company has the following subsidiaries:

 
                                                          Country of    Ownership 
                              Principal activity       incorporation            % 
---------------------------  --------------------   ----------------   ---------- 
 Impact Property 1 Limited    Real Estate                  England and 
  ("Propco 1")*                Investment                        Wales         100 
 Impact Property 2 Limited    Real Estate                  England and 
  ("Propco 2")*                Investment                        Wales         100 
 Impact Property 3 Limited    Real Estate                  England and 
  ("Propco 3")*                Investment                        Wales         100 
 Impact Property 4 Limited    Real Estate                  England and 
  ("Propco 4")                 Investment                        Wales         100 
 Impact Property 5 Limited    Real Estate                  England and 
  ("Propco 5")                 Investment                        Wales         100 
 Impact Finance 1 Limited                                  England and 
  ("Finance 1")*              Financing company                  Wales         100 
 Impact Finance 2 Limited                                  England and 
  ("Finance 2")*              Financing company                  Wales         100 
 Impact Finance 3 Limited                                  England and 
  ("Finance 3")*              Financing company                  Wales         100 
 Impact Holdco 1 Limited      Investment holding           England and 
  ("Holdco 1")                 company                           Wales         100 
 Impact Holdco 2 Limited      Investment holding           England and 
  ("Holdco 2")                 company                           Wales         100 
 Impact Holdco 3 Limited      Investment holding           England and 
  ("Holdco 3")                 company                           Wales         100 
 Alpha Care Management        Intermediate                 England and 
  Services Group Limited*      holding company                   Wales         100 
 Alpha Care (Grenville)       Property holding             England and 
  Limited *                    company                           Wales         100 
                              Intermediate 
 Umber (GP) Limited*           holding company                  Jersey         100 
                              Intermediate 
 Umber Properties Limited*     holding company                  Jersey         100 
                              Property holding 
 Umber Properties LP*          partnership                      Jersey         100 
 
 
                                 Property holding        England and 
 Roseville Property Limited*      company                      Wales   100 
 Sandbanks Property Redcar       Property holding        England and 
  Limited*                        company                      Wales   100 
 Cardinal Healthcare (UK)        Property holding        England and 
  Ltd*                            company                      Wales   100 
 Cholwell Care (Nailsea)         Property holding        England and 
  Limited*                        company                      Wales   100 
                                 Property holding        England and 
 Barham Care Centre Limited*      company                      Wales   100 
                                 Property holding        England and 
 Baylham Care Centre Limited*     company                      Wales   100 
 Butterfly Cumbria Properties    Property holding        England and 
  Limited*                        company                      Wales   100 
------------------------------  -------------------   --------------  ---- 
 
   *As at 31 December 2019 these entities were held indirectly 
   by the Company. 
 

The registered address for the above subsidiaries is:

The Scalpel, 18th Floor, 52 Lime Street, London, England, EC3M 7AF.

   7.      Trade and other receivables 
 
                                          31 December   31 December 
                                                 2019          2018 
                                              GBP'000       GBP'000 
--------------------------------------   ------------  ------------ 
 Loan to Group companies                       43,829        39,694 
 Interest on loans to Group companies             805             - 
 Loan receivable(1)                                69           250 
 Prepayments                                      126            19 
---------------------------------------  ------------  ------------ 
                                               44,829        39,963 
 --------------------------------------  ------------  ------------ 
 

1. During the year ended 31 December 2018, the Group entered into a loan agreement with Mariposa Care Group Limited (Careport) in which the Group provided a term loan facility of GBP250,000 which bears interest at 7.5% per annum. During the year ended 31 December 2019, the Group entered into a revolving loan agreement with Careport which includes a facility up to GBP250,000 to settle the former loan. The existing loan facility also bears interest at 7.5%.

As at 31 December 2019, there were no trade receivables past due or impaired (2018: none).

Loans to Group companies are unsecured and are repayable on demand.

   8.      Cash and cash equivalents 
 
                               31 December   31 December 
                                      2019          2018 
                                   GBP'000       GBP'000 
---------------------------   ------------  ------------ 
 Cash and cash equivalents          46,702            41 
----------------------------  ------------  ------------ 
 

Included as part of cash and cash equivalents are funds held on overnight deposit of GBP39,090,000.

None of the Company's cash balances are held in restricted accounts.

   9.      Trade and other payables 
 
                                               31 December   31 December 
                                                      2019          2018 
                                                   GBP'000       GBP'000 
-------------------------------------------   ------------  ------------ 
 Loan from Group companies                          26,358        36,147 
 Trade and other payables                              857         1,007 
 Withholding tax payable - (PID Dividends)               -           250 
--------------------------------------------  ------------  ------------ 
                                                    27,215        37,404 
 -------------------------------------------  ------------  ------------ 
 

Loans from Group companies are unsecured and are repayable on demand.

   10.    Share capital, Share premium and Capital reduction reserve 

Details on movements in share capital, share premium and capital reduction reserve of the Company are the same as that of the Group and are included in note 20 to the consolidated financial statements.

   11.    Transactions with related parties 

The Company has taken advantage of the exemption provided by FRS102 not to disclose transactions with other members of the Group as the Company's own financial statements are presented together with its consolidated financial statements.

See note 21 of the consolidated financial statements for disclosure of related party transactions of the Group.

   12.    Net Asset Value (NAV) per share 

Basic NAV per share is calculated by dividing net assets in the statement of financial position attributable to ordinary equity holders of the parent by the number of ordinary shares outstanding at the end of the year. As there are no dilutive instruments outstanding, basic and diluted NAV per share are identical.

EPRA has issued guidelines aimed at providing a measure of net asset value on the basis of long-term fair values. There are no adjustments between basic and EPRA NAV.

 
                                          31 December   31 December 
                                                 2019          2018 
                                              GBP'000       GBP'000 
---------------------------------------  ------------  ------------ 
 
 Net assets per statement of financial 
  position                                    307,306       190,823 
 EPRA NAV                                     307,306       190,823 
---------------------------------------  ------------  ------------ 
 
 Issued share capital (number)            318,953,861   192,206,831 
---------------------------------------  ------------  ------------ 
 Basic and EPRA NAV per share                  96.35p        99.28p 
---------------------------------------  ------------  ------------ 
 
 
   13.    Capital commitments 

There were no capital commitments held by the Company (2018: nil).

   14.    Subsequent events 

Significant events after the reporting period are the same as those of the Group. See note 28 to the consolidated financial statements.

No other significant events have occurred between the Statement of financial position date and the date when the financial statements have been authorised by the directors, which would require adjustments to, or disclosure in the financial statements.

EPRA PERFORMANCE MEASURES (UNAUDITED)

The table below shows additional performance measures, calculated in accordance with the Best Practices Recommendations of the European Public Real Estate Association (EPRA). We provide these measures to aid comparison with other European real estate businesses.

   1.     EPRA earnings per share 

GBP17.6m

6.95p per share

for the year to 31 December 2019 (for the year to 31 December 2018: GBP12.4m / 6.47p)

2019: 6.95p

2018: 6.47p

Definition

Earnings from operational activities.

Purpose

A key measure of a company's underlying operating results are an indication of the extent to which current dividend payments are supported by earnings.

   2.     EPRA NAV per share 

GBP340.6m

106.78p per share

for the year to 31 December 2019 (for the year to 31 December 2018: GBP197.9m / 102.94p)

2019: 106.78p

2018: 102.94p

Definition

Net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise under normal circumstances of an investment property business.

Purpose

Makes adjustments to the IFRS NAV to provide stakeholders with the most relevant information on the fair value of assets and liabilities within a true real estate investment company with long term investment strategy and what would be necessary to recreate the company through the investment markets based on its current structure.

   3.     EPRA Triple Net Asset Value (NNNAV) 

GBP339.0m

106.29p per share

for the year to 31 December 2019 (for the year to 31 December 2018: GBP197.0m / 102.52p)

2019: 106.29p

2018: 102.52p

Definition

EPRA NAV adjusted to include the fair values of:

(i) financial instruments;

(ii) debt and;

(iii) deferred taxes.

Purpose

Makes adjustments to EPRA NAV to provide stakeholders with the most relevant information on the current fair value of all the assets and liabilities within a real estate company.

4.1. EPRA Net Initial Yield (NIY)

6.66%

for the year 31 December 2019 (for the year to 31 December 2018: 6.85%)

2019: 6.66%

2018: 6.85%

Definition

Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs.

Purpose

This measure should make it easier for investors to judge for themselves how the valuation of one portfolio compares with another portfolio.

4.2 EPRA "topped-up" NIY

6.66%

for the year to 31 December 2019 (for the year to 31 December 2018: 6.97%)

2019: 6.66%

2018: 6.97%

Definition

This measure adjusts the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives, such as discounted rent periods and step rents).

Purpose

This measure should make it easier for investors to judge for themselves how the valuation of one portfolio compares with another portfolio.

   5.     EPRA vacancy rate 

0.00%

for the year to 31 December 2019 (for the year to 31 December 2018: 0.00%)

Definition

Estimated market rental value (ERV) of vacant space divided by the ERV of the whole portfolio.

Purpose

A "pure" (%) measure of investment property space that is vacant, based on ERV.

   6.     EPRA cost ratio 

19.15%

for the year to 31 December 2019 (for the year to 31 December 2018: 24.69%)

2019: 19.15%

2018: 24.69%

Definition

Administrative and operating costs (including and excluding costs of direct vacancy) divided by gross rental income.

Purpose

A key measure, to enable meaningful measurement of the changes in a company's operating costs.

   7.     Like-for-like rental growth 

2.56%

for the year to 31 December 2019 (for the year to 31 December 2018: 3.96%)

2019: 2.56%

2018: 3.96%

Definition

Rental growth on the portfolio of properties that have been owned and operational for two full reporting cycles.

Purpose

Growth of rental income excluding acquisitions, disposals and capital expenditure allows stakeholders to estimate the organic income growth.

NOTES TO THE EPRA PERFORMANCE MEASURES (UNAUDITED)

FOR THE YEARED 31 DECEMBER 2019

   1.            EPRA earnings per share 
 
                                                                                                        31 Dec 
                                                                            31 Dec 19                       18 
                                                                              GBP'000                  GBP'000 
 
 Total comprehensive income (attributable to shareholders)                     26,333                   16,472 
 Adjusted for: 
 Change in fair value of investment properties                               (13,937)                  (7,577) 
 Rental income arising from recognising guaranteed 
  rent uplifts and rental premiums                                              4,867                    3,443 
-----------------------------------------------------------  ------------------------  ----------------------- 
                                                                              (9,070)                  (4,134) 
 
 Change in fair value of interest rate derivatives                                383                      105 
-----------------------------------------------------------  ------------------------  ----------------------- 
 
 Profits to calculate EPRA earnings per share                                  17,646                   12,443 
-----------------------------------------------------------  ------------------------  ----------------------- 
 
 Weighted average number of Ordinary shares (basic 
  and diluted)                                                            253,954,292              192,206,831 
 
 EPRA earnings per share - basic and diluted                                    6.95p                    6.47p 
 
   2.         EPRA NAV per share 
 
                                                         31 Dec 19             31 Dec 18 
                                                           GBP'000               GBP'000 
 
 Net assets at end of period                               340,682               198,337 
 Adjustments to calculate EPRA NAV 
 Fair value of derivatives                                    (95)                 (477) 
-------------------------------------------  ---------------------  -------------------- 
 EPRA NAV                                                  340,587               197,860 
-------------------------------------------  ---------------------  -------------------- 
 
 Shares in issue at 31 December (Basic and 
  diluted)                                             318,953,861           192,206,831 
 
 EPRA NAV per share                                        106.78p               102.94p 
 
   3.    EPRA NNNAV per share 
 
                                                                              31 Dec 19                           31 Dec 18 
                                                                                GBP'000                             GBP'000 
 
 EPRA net assets at end of period                                               340,588                             197,860 
 include: 
 Fair value of financial instruments                                                 95                                 477 
 Fair value of debt(1)                                                          (1,666)                             (1,291) 
----------------------------------------------  ---------------------------------------  ---------------------------------- 
 EPRA NNNAV                                                                     339,017                             197,047 
 
 Shares in issue at 31 December (Basic and 
  diluted)                                                                  318,953,861                         192,206,831 
 
 EPRA NNAV per share                                                            106.29p                             102.52p 
 
                                                        1 Difference between interest-bearing loans and borrowings included 
                                                 in the balance sheet at amortised cost, and fair value of interest bearing 
                                                                                      loans and borrowings at drawn amount. 
 
 
                                                                   4. EPRA net initial yield (NIY) and EPRA "topped-up" NIY 
                                                                                                           31 Dec    31 Dec 
                                                                                                               19        18 
                                                                                                          GBP'000   GBP'000 
                                                   ----------------------------------------------------  --------  -------- 
                                                    Investment property - wholly owned                    318,791   223,844 
                                                    Less capital improvements under construction          (6,954)   (1,076) 
                                                   ----------------------------------------------------  --------  -------- 
                                                    Completed property portfolio                          311,837   222,768 
                                                    Allowance for estimated purchasers" costs(1)          19,765    13,878 
                                                                            Gross up completed property portfolio valuation 
                                                     (B)                                                  331,602   236,647 
                                                   ----------------------------------------------------  --------  -------- 
 
                                                    Annualised cash passing rental income                  22,081    16,214 
                                                    property outgoings (non recoverable insurance)            (2)       (3) 
                                                   ----------------------------------------------------  --------  -------- 
                                                    Annualised net rents (A)                               22,079    16,211 
                                                                                                                        Add 
                                                                         Contractual uplifts on rent free periods of funded 
                                                     capital improvements                                       -       276 
                                                   ----------------------------------------------------  --------  -------- 
                                                    Topped-up net annualised rent (C)                      22,079    16,487 
                                                   ----------------------------------------------------  --------  -------- 
 
                                                    EPRA Net Initial Yield (A/B)                            6.66%     6.85% 
                                                    EPRA Topped-Up Net Initial Yield (C/B)                  6.66%     6.97% 
 
                                                            1 Assumes a purchaser of the Company's portfolio would pay SDLT 
                                                               and transaction costs equal to 6.2% of the portfolio's value 
 
 
 
                                                                                                       5. EPRA vacancy rate 
                                                                                                           31 Dec    31 Dec 
                                                                                                               19        18 
                                                                                                          GBP'000   GBP'000 
                                                        -----------------------------------------------  --------  -------- 
                                                         Estimated rental value of vacant space                 -         - 
                                                         Estimated rental value of the whole portfolio     22,512    16,509 
                                                        -----------------------------------------------  --------  -------- 
 
                                                         EPRA Vacancy rate                                  0.00%     0.00% 
 
 
                                                                                                         6. EPRA cost ratio 
                                                                                                            31 
                                                                                                           Dec 
                                                                       31 Dec 19                            18 
                                                                         GBP'000                       GBP'000 
 Administrative and other expenses                                         4,589                         4,270 
 Net service charge cost                                                       2                             3 
 Total costs including and excluding vacant 
  property 
  costs                                                                    4,591                         4,273 
---------------------------------------------------  ---------------------------  ---------------------------- 
 
 Gross rental income                                                      23,980                        17,309 
---------------------------------------------------  ---------------------------  ---------------------------- 
 Total EPRA cost ratio (including, and excluding, 
  direct vacancy costs)                                                   19.15%                        24.69% 
---------------------------------------------------  ---------------------------  ---------------------------- 
 
 None of the costs in this note have been capitalised. Only costs 
  directly associated with the purchase of properties as well as 
  subsequent value-enhancing capital expenditure qualify as acquisition 
  costs and are capitalised. 
 
 
   7. Like-for-like rental growth 
 This note shows the rental income and market value for property assets 
  that have been owned and operational for two full reporting periods, 
  hence all below information relates to the property portfolio owned 
  as at the 31 December 2017: 
 
 
                                                                      Contracted 
                                                                            rent                           Market value 
                                                                         GBP'000                                GBP'000 
 Property portfolio as at 31 December 2017                                11,600                                156,165 
 Inflation-linked rental uplifts                                             459 
 Increase/(decrease) due to vacancy rates                                      - 
 Property portfolio as at 31 December 2018                                12,059                                167,489 
----------------------------------------------  --------------------------------  ------------------------------------- 
 
 Inflation-linked rental uplifts                                             309 
 Increase/(decrease) due to vacancy rates                                      - 
 Property portfolio as at 31 December 2019                                12,368                                182,878 
==============================================  ================================  ===================================== 
 
 All properties operate within the same 
  sector, 
  UK healthcare. 
 
 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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