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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Target Healthcare Reit Plc | LSE:THRL | London | Ordinary Share | GB00BJGTLF51 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -1.00 | -1.25% | 79.00 | 78.90 | 79.10 | 80.60 | 78.60 | 80.20 | 316,387 | 14:46:35 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Finance Services | 67.75M | -6.57M | -0.0106 | -74.53 | 489.99M |
From May 2019 to May 2024
TIDMTHRL
RNS Number : 6166S
Target Healthcare REIT Limited
04 October 2017
To: RNS
From: Target Healthcare REIT Limited
LEI: 2138008VQQ5Y9QXMX749
Date: 4 October 2017
Report and Results Announcement
Target Healthcare REIT Limited (the "Company" or the "Group"), a specialist investor in UK care homes, is pleased to announce its results for the year ended 30 June 2017.
Financial Highlights
-- EPRA* NAV per share of 101.9p (2016: 100.6p) -- NAV total return of 7.8 per cent (2016: 9.3 per cent)** -- Dividend declared of 6.28p (2016: 6.18p) -- IFRS profit for the year GBP19.1m (2016: GBP11.7m) -- Dividend cover of 77 per cent (2016: 72 per cent) -- EPRA Earnings Per Share of 4.8p (2016: 4.7p)
Portfolio Highlights
Hot Features
Premium
-- Valuation of GBP282.0m (2016: GBP210.7m)
-- Passing rent of GBP20.3m (2016: GBP15.5m)
-- Number of tenants: 16 (2016: 13)
-- Weighted average unexpired lease term ('WAULT'): 29.5 years (2016: 28.6 years)
-- Number of acquisitions in the year: 8 (2016: 9)
-- Value of acquisitions in the year (including costs): GBP63.3m (2016: GBP64.4m)
* European Public Real Estate Association
** Based on EPRA NAVs
Malcolm Naish, Chairman of the Company, said:
"Target Healthcare REIT has continued to assemble a portfolio of UK care homes capable of delivering stable rental returns through diversification by tenant, location, service and resident-choice. We retain a conviction that placing long-term investment capital in purpose-built properties which offer suitably modern and well-equipped environments for residents and their carers, is the right thing to do."
The Group has continued to be patient and disciplined in placing shareholder capital: 8 transactions completed during the year, and a further 2 since June, totalling GBP79.9 million of new investment. Each of these assets, and the tenants entrusted to run them, has the essential characteristics identified by our specialist investment manager which drive our investment policy. The Manager continues to see many potential deals which do not meet these strict quality criteria.
With the Group nearing full investment, the balance sheet is better able to support our long-term performance objectives. Dividend cover has improved to 77 per cent(1) and we expect this to near 100 per cent in the coming year, dependent on future growth. The portfolio Net Initial Yield, a good indicator of the Group's prospects, has remained stable. Despite the competitive investment market, positive valuation movements have been more influential than acquisition yields in moving the portfolio NIY to 6.75 per cent from 7.0 per cent.
The Group's increased scale has, subsequent to year-end, allowed an increase of debt facilities to GBP90 million, adding a new debt provider at a competitive interest cost. Making full use of available debt would increase the Group's gearing ratio above the 20 per cent stated longer-term level. Whilst increased gearing can enhance portfolio returns, the Board will continue to monitor the gearing ratio and make use of the flexibility within the facilities with respect to investment opportunities to manage gearing within an appropriate range.
The Company has declared and paid dividends of 6.28 pence per share in respect of the year. This was an increase of 1.6 per cent on 2016, and meets our objective of a progressive dividend policy. In the absence of unforeseen circumstances, I am delighted to announce that the Board intends to increase the quarterly dividend in respect of the year ending June 2018 by 2.71 per cent to 1.6125 pence per share, in-line with recent inflation data and providing an annual total of 6.45 pence.
We remain grateful for the support of our shareholders, both long-term holders and those new to the register as we continue to increase in scale. We are proud of our role in helping the UK modernise its care home real estate for those using it, whilst achieving stable returns for investors. The fundamentals of increasing demand alongside mixed-quality and dwindling supply make a compelling investment case, however we recognise the market as being challenging for care providers to operate in, particularly for those dependent on public funding. That said, efficient operators caring for publicly funded residents in well-equipped modern homes sit firmly within our investment criteria alongside self-funded premium homes in affluent locations. We will continue to look for opportunities in each in building a diversified portfolio, as well as supporting tenants in actively managing the assets.
Policy ideas announced during the recent general election campaign, whilst not progressing to the stage of firm policy, were useful in prompting wider public discussion of elderly care funding. Divergence on the extent of private vs. public funding, and the apparent generational divide, were prominent during the debate. We welcome the discussion and hope to see the issues and challenges remain high on the priority list of those in power.
Finally, I would like to take this opportunity to welcome Ian Webster onto the Board. Ian brings skills and experience relevant to the Company's Jersey domicile and has provided a valued contribution thus far.
Malcolm Naish
Chairman
3 October 2017
(1) 83 per cent excluding Manager performance fee
Enquiries:
Target Advisers Kenneth MacKenzie, Gordon Bland 01786 845 912 --------------------------------------- -------------------------- Stifel Nicolaus Europe Limited Mark Young, Neil Winward, Tom Yeadon 020 7710 7600 --------------------------------------- -------------------------- Quill PR 020 7466 5058, 020 7466 Fiona Harris, Sam Emery 5056 --------------------------------------- --------------------------
Investment Manager's Report
Portfolio review
We are pleased to have continued to grow and diversify the portfolio to 45 assets (30 June 2016: 37) let to 16 tenants (2016: 13) with a net initial yield of 6.75 per cent (30 June 2016: 7 per cent). The South East (16.4 per cent) and Ideal Carehomes (16.9 per cent) retain the largest share of geographical and tenant concentration respectively, with each having reduced during the year. The portfolio is further diversified through a balanced mix of bed registrations (nursing, residential) and of private and publicly funded residents.
The portfolio has outperformed its benchmark, the IPD UK annual healthcare property index, since launch, with an annualised total return of 10.4 per cent. 92 per cent of properties have maintained or increased in value in the year, providing like-for-like capital growth of 5.0 per cent. WAULT of 29.5 years on passing rent of GBP20.3 million provides long-term indexed income. 100 per cent of portfolio rent has been collected.
With a growing and increasingly diversified portfolio, we anticipate property-specific challenges to arise. For example, one home has closed temporarily to allow a registration change from nursing to residential in response to local staffing difficulties. We have also arranged a tenant change in a separate home which has under-performed in respect of regulatory/quality reviews. Rental income and valuation have been maintained on each, and we have considered detailed business plans in respect of future trading.
UK Care home investment & transactions overview
The UK care home market remains highly fragmented. The top four independent care home groups account for less than 15 per cent of the overall market and the industry continues to be dominated by smaller operators. Whilst the much-speculated HC-One / Bupa transaction has been making the headlines in recent months, this transfer of a group of older assets from one large group to another does not reflect the current focus of market activity, which is focused on either new developments, single assets or small portfolios where purchasers are willing to consider a mix of prime and secondary assets.
A number of new REITs (both specialist and generalist funds) have launched over the last twelve months and Sterling's recent devaluation post-EU referendum has made all classes of UK real estate more attractive to international investors. Key overseas buyers include Asian and Middle Eastern private investment groups and developers as well as US buyers, albeit appetite in the sector from US REITS remains muted. These new entrants have all been active in the UK care home market which has resulted in significant investor demand, in particular for high quality, purpose-built care homes in prime locations with a focus on the self-funded market, such as the South East of England. This demand is further accentuated where strong operator covenants are on offer and which have led to some substantial prices being paid for highly sought-after assets.
Despite the competitive landscape, we continue to identify attractive opportunities through our long-term relationships with operators experienced in providing high-quality care. These relationships extend across the UK and include national, regional and local operators alike. Our focus on tenant selection remains a core tenet of our business, ensuring those operators who we choose to support demonstrate the local knowledge, robust operational management and market presence to deliver both high quality care and strong financial performance. As well as working with the Group's existing tenants, we are also proactively developing new relationships with operators who both share our caring ethos and have a desire to build strong, long-term relationships in order to deliver their growth strategies which will further support our investment pipeline.
Health/social care
Once again the last year has been a challenging and frustrating one for the UK care sector. Political uncertainty, staffing shortages whether Brexit-induced or not, public funding and a challenging regulatory regime continue to challenge operators, particularly those working in poorly equipped properties and reliant on local authority funding.
Publicly-funded fee increases
Laing & Buisson, the sector analysts, confirmed in July that the average English council had raised its 2017/18 fees paid for residents in privately-owned homes by 3.6 per cent, stating this does little more than cover National Living Wage (NLW) costs than inflation costs in general. This would appear to have been funded by councils again, utilising the full 3 per cent 'Adult Social Care Precept' Council Tax (CT) rise sanctioned by the Chancellor on top of their standard CT rise.
Scotland, Wales and Northern Ireland have had similar experiences. Fee increases in Scotland, though nominally higher, have been decried as inadequate by Scottish Care given the higher than NLW 'care-worker' minimum wage of GBP8.45. Scottish Care have for many years successfully negotiated a national fee via COSLA, the umbrella organisation for most Scottish councils, but worries abound that this era is coming to an end.
In contrast, Laing & Buisson note that private fees have been relatively buoyant, and are likely to continue to experience faster growth than public fees.
Margin erosion contributing to closures
Operators are finding staff costs, the single highest expense for any home, challenging to manage to achieve profitability improvements. Alongside the hourly rate increases from NLW, regulators, particularly the English CQC, are rightfully pressing for robust staffing levels, increasing the number of hours required. The lack of qualified nurses is an additional problem, with many operators facing high agency rates to adequately staff homes.
Homes who are overly-exposed to public fee payers are seeing margins eroded year on year, as they lose the traditional ability to achieve savings by tailoring and careful planning, something being taken out of their hands by the regulator's demands. Whilst the practical impact of the regulator driving higher standards is to be welcomed, commentators continue to note an increasing number of smaller home closures as these often single 'mom and pop' operators (as they are known in the sector) throw in the towel after 20 or 30 years in business. Most of these smaller establishments are unsellable as going concerns, both due to their inability to achieve economies of scale operationally, and also due to their unsuitable and dated facilities (for example, greater than 25 per cent of beds have no en-suite facility at all, never mind full wet-room shower facilities).
Politics and long-term funding of social care
The recent general election campaign demonstrated clearly the sensitivities inherent in sector funding with adult social care and the NHS featuring heavily. The Conservative party's manifesto launch featured a controversial proposal which would fundamentally change funding, consistent with growing calls from think tanks for the public to either pay for their own care via housing wealth, through such additional taxation of their estates, or for the public as a whole to pay into social care through increases in taxation or national insurance. The plans were shelved in reaction to widespread criticism, most memorably a 'dementia tax' branding. It is worth noting that a 2010 proposal by Labour to introduce a property tax for older home owners was similarly branded a 'death tax' by the Conservatives. Politics does, perhaps, slow the pace of essential social care policy changes.
And yet the problem will persist, and grow, as the number of over-85s is set to double over the next 20 years and an estimated 1.2 million people are expected to be living with dementia by 2040 relative to today's 0.85 million. The sector is promised another 'Green Paper' on funding in the autumn, cynics note there have been a dozen such reviews of Social Care in the last 20 years!
Conclusion
We retain our conviction that operators utilising purpose built, modern properties and managing their operations effectively with a focus on staff training, retention and care quality can continue to perform well. Those who also have an element of control over fee-setting are particularly well placed to serve a sector with such fundamental demand drivers.
Target Advisers LLP
3 October 2017
Strategic Objectives
KPIs and Performance Progress made and areas of Key risks
2018 focus
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Objective 1: Maximise rental income
Dividend * Dividend rates Progressive annual dividend of 6.28 profits during * Reliance on third party service providers
To pay a pence, 1.6 per cent increase on 2016 period of growth.
progressive Dividend cover on
dividend recurring EPRA earnings * Market opportunities, or performance of Investment
fully covered * Dividend cover of 77 per cent (2016: 72 per cent) improved to 83 per cent(1) Manager, limit efficient deployment of capital
when the as the Group
Group is moved to full equity
fully * Control of operating costs ongoing charges ratio 1.48 investment during * Breach of REIT regulations
invested. per cent (2016: 1.42 per cent) the year. The impact of
cash drag from
capital awaiting
* Growth in earnings see objective 4 investment continues
to reduce as the portfolio
grows to
scale. Full dividend cover
is expected
to be achieved for the
year to June
2018(2) , subject to
timely completion
of near-term opportunities
to be funded
by available debt capital.
A key focus for 2018 and
beyond will
be to sensitively match
acquisition
opportunities with capital
availability,
minimising cash drag
without sacrificing
other benefits expected to
result from
a larger Group.
Control costs to provide a
fully covered
dividend when the Group is
fully invested.
The OCF, a ratio of
recurring expenses
relative to NAV, has
increased slightly.
Costs directly linked to
portfolio
value have increased in
the year as
the portfolio has grown.
Value for
money will continue to be
sought from
service providers.
(1) Excluding performance
fee
(2) Assumes no equity
issuance during
2018
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Objective 2: Active management of
Total * Annual NAV total return of 7.8 per cent (2016: 9.3 portfolio. * Property valuations could adversely affect returns
returns per cent) The portfolio continues to
To maximise provide
total returns like-for-like growth as
to * Share price total return of 14.1 per cent (2016: 7.8 rent reviews
shareholders per cent) and individual asset
by performance are
complementing reflected in valuations.
dividends * Portfolio performance relative to benchmark 92 per cent
with capital Annualised portfolio total return (excluding of assets held at the
appreciation. acquisition costs) per IPD of 9.1 per cent vs. Index start of the
return of 7.9 per cent (year to 31 December 2016) year maintained or
increased in value.
* Asset valuations Like-for-like revaluation gains of Into 2018, the Manager
5.0 per cent (2016: 5.3 per cent) will continue
to closely manage
properties to ensure
they meet tenants' needs,
and to identify
opportunities to enhance
where supported
by their local markets -
such as
refurbishments/extensions.
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Objective 3: Debt facilities arranged
Business * Equity capital is fully invested to support * Lack of equity and debt capital
funding portfolio and capital
To fund the structure objectives.
business * Existing debt at low weighted-average cost of 2.2 per Utilisation of the Group's * Interest rate risk
through cent existing
shareholder facilities has increased
equity to GBP40 million
enhanced by * Group loan-to-value (LTV) of 14.2 per cent (total as at 30 June 2017. 100
modest gross debt as a proportion of gross property value, per cent of
leverage excluding cash), within 35 per cent limit. fixed term debt has had
within its interest
predetermined cost fixed at 2.35 per
risk * New GBP40 million facility arranged in August 2017. cent. GBP10
thresholds. Capacity to gear to 26 per cent. million was available to
be drawn flexibly
as required.
In August 2017, a new
GBP40 million
debt facility was arranged
with a new
lender. Pricing was
obtained at an
attractive margin, with
funds available
to be drawn immediately
for acquisition
opportunities. The new
facility allows
the Group to meet its
stated gearing
target, whilst the
combined facilities
provide management
flexibility to efficiently
manage capital structure
in response
to investment
opportunities and overall
capital availability.
The key focus for 2018 is
to invest
available debt as
allocated to near-term
opportunities, and to fix
interest
costs in-line with the
Group's hedging
strategy.
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Objective 4: Continued improvement in
Long-term * Like-for-like passing rental growth of 1.8 per cent portfolio * Government policies/ funding of elderly care
rental income (2016: 2.0 per cent) balance and continued
To have high support to our
quality tenants. * Concentration risk
care * Overall rent roll increase of 31.3 per cent Portfolio diversification
providers as will be retained
tenants as a focus into 2018, as
with secure, * Addition of 3 new tenants, to 16 contributor
sustainable to stable performance.
rental income Increased tenant
giving * WAULT of 29.5 years (2016: 28.6 years) base despite acquiring 4
long-term assets for
growth. 3 existing tenants to
support the expansion
plans of their businesses.
100 per cent rent
collected, with growing
rent roll from
acquisitions, asset
management and rent
reviews.
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Objective 5: Continue to invest in
Grow * 8 assets with total commitment value of GBP63.3 attractively-priced * Lack of available properties
portfolio million (inc. costs) completed during the year assets which meet the
To acquire a Group's investment
diversified criteria and support * Inability to invest on acceptable terms
portfolio of * All acquired assets are modern, the majority being investment objectives.
high quality less than 4 years old The market is competitive,
modern care with mainstream
homes investors active and low
providing * Substantially all rooms are single occupancy with yields being
excellent en-suite facilities including wet room showers seen for certain assets.
accommodation The Group
standards for has acquired further
residents. quality assets
at NIYs which allow
achievement of
our investment objectives,
with a continued
aim of portfolio assembly
at attractive
pricing whilst seeking
appropriate
diversification.
An additional GBP16.6
million has been
committed subsequent to 30
June 2017.
As at the date of this
report the Group
has uncommitted capital to
deploy of
approximately GBP39
million, available
from undrawn debt
facilities. The Investment
Manager is performing
diligence on
near-term acquisitions of
a value in
excess of capital
available, and is
also assessing on wider
pipeline opportunities.
-------------- ---------------------------------------------------------------- --------------------------- ---------------------------------------------------------
Risk Rating
The principal risks faced by the Group together with the procedures employed to manage them are described in the table below:
Risk and Impact Factors affecting risk Ongoing mitigation
rating
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
1. Dividend
* The group has no employees and relies on third * Dividend cover has improved in the year as * All key service providers, including the Investment
parties such as the Investment Manager to effectively acquisitions have reduced non-deployed capital, Manager, are subject to performance assessment at
manage operations. Poor performance by providers may portfolio performance has been positive, and least annually. If performance is assessed as not
result in reduced return to shareholders. operating costs have remained low. With its current meeting expectations the provider will either be
portfolio scale and the anticipated meeting of the provided with feedback to facilitate improved service
stated gearing target, dividend cover is expected to levels or replaced.
improve further in the year to June 2018.
Change to risk rating:
unchanged
* The Group remains fully compliant with the REIT * The Group's activities are monitored to ensure all
* A breach of REIT regulations in relation to payment regulations. conditions are adhered to. The REIT rules are
of dividends may result in loss of tax advantages considered during investment appraisal and
derived from the Group's REIT status transactions structured to ensure conditions are met.
Change to risk rating:
unchanged
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
2. Total returns
* Property valuations are inherently subjective and can * The Group's portfolio has increased on a * Loan covenants are closely monitored for compliance,
fluctuate dependent on market conditions and like-for-like basis during the year, >90 per cent of with headroom projected.
assumptions. Falls in property valuations could properties have maintained or increased in value. The
adversely affect the Group's borrowing capacity which portfolio NIY is stable.
is linked to the value of its properties.
* All investments are subject to a detailed investment
appraisal and approval process prior to acquisition.
* LTV remains at a conservative level, increasing to 14
Change to risk rating: per cent as the Group draws debt to fund
unchanged acquisitions.
* The finished portfolio is 100 per cent let with
sustainable rental levels and upwards-only annual
rental reviews which support asset values.
* Debt facility covenants have been complied with
during the year, with adequate headroom at year-end.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
3. Business funding
* Without access to equity capital (or further debt) * Political and economic uncertainty exists in relation * The Group maintains regular communication with
the Group may be unable to grow through acquisition to the UK's decision to leave the EU. The Group's investors, and, with the assistance of its broker and
of attractive investment opportunities, and may be ability to access the capital markets to meet its sponsor, regularly monitors the Group's capital
unable to meet future financial commitments. This is strategic objectives could be impacted in the requirements and investment pipeline alongside
likely to be driven by investor demand which will longer-term. opportunities to raise equity.
reflect Group performance, competitor performance and
the relative attractiveness of investment in UK
healthcare property.
* The Group has, subsequent to the year-end, increased * Liquidity available from income, equity and debt is
its available debt facilities by GBP40 million, kept under constant review to ensure the Group can
providing capital to fund pipeline acquisitions and meet any forward commitments as they fall due.
Change to risk rating: investment commitments.
unchanged
* Interest rate fluctuations could increase the Group's
costs and increase the likelihood of non-compliance * The Group has fixed interest costs on 100 per cent of
with lender covenants. its drawn fixed term borrowings as at 30 June 2017
until September 2021.
Change to risk rating:
unchanged
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
4. Long-term rental
income * Whilst the care sector continues to face challenges, * Government policy is monitored by the Group so as to
* Changes in government policies, including specific the associated pressures are tending to be felt most increase ability to anticipate changes.
policies affecting local-authority funding of elderly by businesses reliant on local authority funding of
care, may render the Group's strategy inappropriate. residents. The Group's portfolio is diversified in
Secure income will be at risk if tenant finances respect of the fee income received by its tenants,
suffer from policy changes, and property valuations with a significant proportion being self-funded. * Tenants typically have a multiplicity of income
would be impacted in the case of a demand downturn. sources, thereby not being totally dependent on
government pay.
Change to risk rating:
unchanged * The Group's properties are let on long-term leases at
sustainable rent levels, providing security of
* Concentration risk. Significant exposure to a single income.
tenant group or geographic area could adversely * The Group's portfolio diversification has improved
affect Group performance in certain circumstances. with continued growth. The Group's largest tenant is
now 17 per cent from 22 per cent, and largest
geographical region is 16 per cent from 19 per cent.
Change to risk rating:
decreased
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
5. Grow portfolio
* Lack of attractive investment opportunities and/or an * Activity levels in the market remain competitive, * The Investment Manager develops and maintains a
inability to invest on acceptable terms in suitable particularly for premium assets exclusively aimed at network of relationships with property owners and
timeframes will hamper the Group's growth prospects. self-funded residents in prime locations. The Group developers which it is expected will provide the
continues to see opportunities which meet its Group with the best possible opportunity to acquire
criteria, as identified by the Investment Manager, suitable properties.
and is actively pursuing these.
Change to risk rating:
unchanged
* The Board monitors the Group's pace of deployment of
capital via regular reporting by the Investment
Manager.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
6. General
* People. Recruitment and retention of Board members * The Investment Manager has bolstered its team further * Directors are subject to annual performance
and key personnel at the Investment Manager with during the year. assessment, and are subject to re-election by
relevant and appropriate skills and experience is shareholders. The Board has a succession strategy in
vital to the Group's ability to meet its objectives. place which is subject to regular review and
Failure to do so could result in the Group failing to discussion.
meet its objectives.
* The Investment Manager is subject to regular
Change to risk rating: performance appraisal; has its remuneration aligned
unchanged with group performance; and there is a key man
provision within the investment management agreement
between the manager and the Group.
----------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------------------
Malcolm Naish
Chairman
3 October 2017
Consolidated Statement of Comprehensive Income (audited)
For the year ended 30 June 2017
Year ended 30 June Year ended 30 June
2017 2016
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Revenue
Rental income 17,760 5,127 22,887 12,677 4,136 16,813
Other income 221 450 671 61 - 61
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total revenue 17,981 5,577 23,558 12,738 4,136 16,874
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Gains on revaluation of investment
properties 4 - 2,211 2,211 - 425 425
Cost of corporate acquisitions - (626) (626) - (998) (998)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total income 17,981 7,162 25,143 12,738 3,563 16,301
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Expenditure
Investment management fee
- base fee 2 (2,761) - (2,761) (1,783) - (1,783)
- performance fee 2 (997) - (997) (871) - (871)
Other expenses (1,236) - (1,236) (992) - (992)
Total expenditure (4,994) - (4,994) (3,646) - (3,646)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit before finance costs
and taxation 12,987 7,162 20,149 9,092 3,563 12,655
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Net finance costs
Interest receivable 113 - 113 173 - 173
Interest payable and similar
charges (921) - (921) (1,102) - (1,102)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit before taxation 12,179 7,162 19,341 8,163 3,563 11,726
Taxation 25 (244) (219) (24) - (24)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Profit for the year 12,204 6,918 19,122 8,139 3,563 11,702
Other comprehensive income:
Items that are or may be reclassified
subsequently to profit or
loss
Movement in valuation of interest
rate swaps - 307 307 - (316) (316)
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Total comprehensive income
for the year 12,204 7,225 19,429 8,139 3,247 11,386
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
Earnings per share (pence) 3 4.84 2.74 7.58 4.74 2.07 6.81
--------------------------------------- ------ -------- -------- --------- -------- -------- ---------
The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in the above statement are derived from continuing operations.
No operations were discontinued in the year.
Consolidated Statement of Financial Position (audited)
As at 30 June 2017
As at As at
30 June 2017 30 June 2016
Notes GBP'000 GBP'000
------------------------------ ------ -------------- --------------
Non-current assets
Investment properties 4 266,219 200,720
Trade and other receivables 3,988 3,742
------------------------------ ------ -------------- --------------
270,207 204,462
Current assets
Trade and other receivables 25,629 13,222
Cash and cash equivalents 10,410 65,107
Total assets 306,246 282,791
------------------------------ ------ -------------- --------------
Non-current liabilities
Bank loan 6 (39,331) (20,449)
Interest rate swaps (9) (316)
Trade and other payables (3,988) (3,742)
------------------------------ ------ -------------- --------------
(43,328) (24,507)
Current liabilities
Trade and other payables (5,981) (5,002)
------------------------------ ------ -------------- --------------
Total liabilities (49,309) (29,509)
------------------------------ ------ -------------- --------------
Net assets 256,937 253,282
------------------------------ ------ -------------- --------------
Stated capital and reserves
Stated capital account 7 241,664 246,533
Hedging reserve (9) (316)
Capital reserve 11,616 4,698
Revenue reserve 3,666 2,367
Equity shareholders' funds 256,937 253,282
------------------------------ ------ -------------- --------------
Net asset value per ordinary
share (pence) 3 101.9 100.4
------------------------------ ------ -------------- --------------
Consolidated Statement of Changes in Equity (audited)
For the year ended 30 June 2017
Stated
capital Hedging Capital Revenue
account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ------ --------- --------- ---------- ---------- ---------
At 30 June 2016 246,533 (316) 4,698 2,367 253,282
Total comprehensive income
for the year: - 307 6,918 12,204 19,429
Transactions with owners
recognised in equity:
Dividends paid 1 (4,869) - - (10,905) (15,774)
At 30 June 2017 241,664 (9) 11,616 3,666 256,937
------------------------------ ------ --------- --------- ---------- ---------- ---------
For the year ended 30 June 2016
Stated
capital Hedging Capital Revenue
account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ------ --------- --------- ---------- ---------- ---------
At 30 June 2015 136,846 - 495 1,951 139,292
Total comprehensive income
for the year: - (316) 3,563 8,139 11,386
Transactions with owners
recognised in equity:
Dividends paid 1 (1,973) - - (7,723) (9,696)
Issue of ordinary shares 7 114,438 - - - 114,438
Buyback of ordinary shares
into treasury 7 - - (14,159) - (14,159)
Resale of ordinary shares
from treasury 7 - - 14,799 - 14,799
Expenses of issue 7 (2,778) - - - (2,778)
------------------------------ ------ --------- --------- ---------- ---------- ---------
At 30 June 2016 246,533 (316) 4,698 2,367 253,282
------------------------------ ------ --------- --------- ---------- ---------- ---------
Consolidated Statement of Cash Flows (audited)
For the year ended 30 June 2017
Year ended Year ended
30 June 2017 30 June 2016
Note GBP'000 GBP'000
-------------------------------------------- ----- -------------- --------------
Cash flows from operating activities
Profit before tax 19,341 11,726
Adjustments for:
Interest receivable (113) (173)
Interest payable 921 1,102
Revaluation gains on property portfolio 4 (7,339) (4,787)
Cost of corporate acquisitions 626 998
Increase in trade and other receivables (9,062) (233)
Increase in trade and other payables 20 1,271
-------------------------------------------- ----- -------------- --------------
4,394 9,904
-------------------------------------------- ----- -------------- --------------
Interest paid (728) (854)
Interest received 113 173
Tax paid (543) (164)
-------------------------------------------- ----- -------------- --------------
(1,158) (845)
-------------------------------------------- ----- -------------- --------------
Net cash inflow from operating activities 3,236 9,059
-------------------------------------------- ----- -------------- --------------
Cash flows from investing activities
Purchase of investment properties (37,698) (34,833)
Acquisition of subsidiaries including
acquisition costs, net of cash acquired (25,552) (28,089)
Repayment/(grant) of development loan 2,170 (2,170)
-------------------------------------------- ----- -------------- --------------
Net cash outflow from investing activities (61,080) (65,092)
-------------------------------------------- ----- -------------- --------------
Cash flows from financing activities
Issue of ordinary share capital - 100,279
Expenses of issue paid - (2,778)
Resale of ordinary shares from treasury - 14,799
Drawdown/(repayment) of bank loan
facility, net of costs 18,736 (10,638)
Dividends paid (15,589) (9,681)
-------------------------------------------- ----- -------------- --------------
Net cash inflow from financing activities 3,147 91,981
-------------------------------------------- ----- -------------- --------------
Net (decrease)/increase in cash and
cash equivalents (54,697) 35,948
Opening cash and cash equivalents 65,107 29,159
-------------------------------------------- ----- -------------- --------------
Closing cash and cash equivalents 10,410 65,107
-------------------------------------------- ----- -------------- --------------
Transactions which do not require the use
of cash
Movement in fixed or guaranteed rent reviews
and lease incentives 5,786 4,362
Issue of ordinary share capital - 14,159
Buyback of ordinary shares into treasury - (14,159)
---------------------------------------------- ------ ---------
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
In accordance with Chapter 4 of the Disclosure Guidelines and Transparency Rules, we confirm that to the best of our knowledge:
-- The financial statements contained within the Annual Report for the year ended 30 June 2017, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
-- The Chairman's Statement, Investment Manager's Report and Strategic Objectives include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;
-- 'Risk Rating' includes a description of the Company's principal risks and uncertainties; and
-- The Annual Report includes details of related party transactions that have taken place during the financial year.
On behalf of the Board
Malcolm Naish
Chairman
3 October 2017
Extract from Notes to the Audited Consolidated Financial Statements
1. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2017.
Dividend rate Year ended
(pence per 30 June 2017
share) GBP'000
-------------------------------------- -------------- --------------
Fourth interim dividend for the year
ended 30 June 2016 1.545 3,897
First interim dividend for the year
ended 30 June 2017 1.570 3,959
Second interim dividend for the year
ended 30 June 2017 1.570 3,959
Third interim dividend for the year
ended 30 June 2017 1.570 3,959
-------------------------------------- -------------- --------------
Total 6.255 15,774
-------------------------------------- -------------- --------------
Amounts paid as distributions to equity holders during the year to 30 June 2016.
Dividend rate Year ended
(pence per 30 June 2016
share) GBP'000
-------------------------------------- -------------- --------------
Fourth interim dividend for the year
ended 30 June 2015 1.530 2,177
First interim dividend for the year
ended 30 June 2016 1.545 2,199
Second interim dividend for the year
ended 30 June 2016 1.545 2,660
Third interim dividend for the year
ended 30 June 2016 1.545 2,660
-------------------------------------- -------------- --------------
Total 6.165 9,696
-------------------------------------- -------------- --------------
It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend. The fourth interim dividend in respect of the year ended 30 June 2017, of 1.57 pence per share, was paid on 25 August 2017 to shareholders on the register on 4 August 2017 amounting to GBP3,959,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.
2. Fees paid to Target Advisers LLP
Year ended Year ended
30 June 2017 30 June 2016
GBP'000 GBP'000
--------------------- -------------- ---------------
Base management fee 2,761 1,783
Performance fee 997 871
--------------------- -------------- ---------------
Total 3,758 2,654
--------------------- -------------- ---------------
The Company's Investment Manager is Target Advisers LLP (the 'Investment Manager' or 'Target') and is responsible for the day-to-day management of the Company. Target has also been appointed as the Company's Alternative Investment Fund Manager (the "AIFM"). The Investment Manager is entitled to an annual base management fee of 0.90 per cent of the net assets of the Group and an annual performance fee calculated by reference to 10 per cent of the outperformance of the Group's portfolio total return relative to the IPD UK Annual Healthcare Index ('the Index'). The maximum amount of total fees payable by the Group to the Investment Manager is limited to 1.25 per cent of the average net assets of the Group over a financial year.
Performance fee periods will be annually to 31 December, in line with the Index. Portfolio performance is measured over three cumulative rolling performance periods whereby any performance fees paid to the Investment Manager are subject to clawback if cumulative performance underperforms the Index.
A performance fee in respect of the year to 31 December 2016 totalling GBP946,000 (year to 31 December 2015: GBP636,000) has been paid of which GBP345,000 (2016: GBP110,000) was accrued in the prior period accounts. At the year-end an accrual of GBP396,000 (inclusive of estimated irrecoverable VAT) in relation to the year to 31 December 2017 has been made based on the Group's historic portfolio performance relative to the Index.
The Investment Management Agreement can be terminated by either party on 12 months' written notice provided that such notice shall not expire earlier than 30 September 2019. Should the Company terminate the Investment Management Agreement earlier than 30 September 2019 then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board has not given its prior consent.
3. Earnings per share and Net Asset Value per share
EPRA is an industry body which issues best practice reporting guidelines and the Group report an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below.
Earnings per share
Year ended 30 June Year ended 30 June
2017 2016
---------------------- ----------------------
Pence per Pence per
GBP'000 share GBP'000 share
----------------------------- -------- ------------ -------- ------------
Revenue earnings 12,204 4.84 8,139 4.74
Capital earnings 6,918 2.74 3,563 2.07
Total earnings 19,122 7.58 11,702 6.81
----------------------------- -------- ------------ -------- ------------
Average number of shares in
issue 252,180,851 171,734,587
----------------------------- -------- ------------ -------- ------------
The EPRA earnings are arrived at by adjusting for the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group.
The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for the performance fee.
The reconciliations are provided in the table below:
Year
Year ended ended
30 June 30 June
2017 2016
------------------------------------------------------ ----------- ---------
Earnings per IFRS Consolidated Statement of
Comprehensive Income 19,122 11,702
Adjusted for rental income arising from recognising
guaranteed rent review uplifts and lease incentives (5,127) (4,136)
Adjusted for revaluations of investment properties (2,211) (425)
Adjusted for cost of corporate acquisitions
and other capital items 420 998
------------------------------------------------------ ----------- ---------
EPRA earnings 12,204 8,139
Adjusted for performance fee 997 871
------------------------------------------------------ ----------- ---------
Group specific adjusted EPRA earnings 13,201 9,010
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive
Income 7.58 6.81
EPRA EPS 4.84 4.74
Group specific adjusted EPRA EPS 5.23 5.25
------------------------------------------------------ ----------- ---------
Net Asset Value per share
The Group's Net Asset Value per ordinary share of 101.9 pence (2016: 100.4 pence) is based on equity shareholders' funds of GBP256,937,000 (2016: GBP253,282,000) and on 252,180,851 (2016: 252,180,851) ordinary shares, being the number of shares in issue at the year-end.
The EPRA Net Asset Value ('EPRA NAV') per share is arrived at by adjusting the net asset value ('NAV') calculated under International Financial Reporting Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. The only adjustment required to the NAV is that the EPRA NAV excludes the fair value of the Group's interest rate swaps, which were recognised as a liability of GBP9,000 under IFRS as at 30 June 2017 (2016: liability of GBP316,000).
EPRA believes that, under normal circumstances, the financial derivatives which property investment companies use to provide an economic hedge are held until maturity and so the theoretical gain or loss at the balance sheet date will not crystallise.
As at As at
30 June 30 June
2017 2016
------------------------------------------------ --------- ---------
NAV per financial statements (pence per share) 101.9 100.4
Valuation of interest rate swaps - 0.2
------------------------------------------------ --------- ---------
EPRA NAV (pence per share) 101.9 100.6
------------------------------------------------ --------- ---------
4. Investments
Freehold and leasehold properties
As at As at
30 June 2017 30 June 2016
GBP'000 GBP'000
----------------------------------------------------- -------------- --------------
Opening market value 210,666 143,748
Opening fixed or guaranteed rent reviews
and lease incentives (9,946) (5,584)
----------------------------------------------------- -------------- --------------
Opening carrying value 200,720 138,164
----------------------------------------------------- -------------- --------------
Purchases 35,622 32,912
Purchase of property through a business combination 25,590 27,298
Acquisition costs capitalised 2,076 1,921
Acquisition costs written off (2,076) (1,921)
Revaluation movement - gains 11,660 7,724
Revaluation movement - losses (1,587) (1,016)
----------------------------------------------------- -------------- --------------
Movement in market value 71,285 66,918
Movement in fixed or guaranteed rent reviews
and lease incentives (5,786) (4,362)
----------------------------------------------------- -------------- --------------
Movement in carrying value 65,499 62,556
----------------------------------------------------- -------------- --------------
Closing market value 281,951 210,666
Closing fixed or guaranteed rent reviews
and lease incentives (15,732) (9,946)
----------------------------------------------------- -------------- --------------
Closing carrying value 266,219 200,720
----------------------------------------------------- -------------- --------------
Changes in the valuation of investment properties
Year ended Year ended
30 June 2017 30 June 2016
GBP'000 GBP'000
----------------------------------------------- -------------- --------------
Revaluation movement 10,073 6,708
Acquisition costs written off (2,076) (1,921)
Movement in lease incentives (658) -
----------------------------------------------- -------------- --------------
7,339 4,787
Movement in fixed or guaranteed rent reviews (5,128) (4,362)
----------------------------------------------- -------------- --------------
Gains on revaluation of investment properties 2,211 425
----------------------------------------------- -------------- --------------
The properties were valued at GBP281,951,000 (2016: GBP210,666,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Professional Standards, incorporating the International Valuation Standards January 2014 ('the Red Book') issued by the Royal Institution of Chartered Surveyors ('RICS') on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was GBP266,219,000 (2016: GBP200,720,000). The adjustment consisted of GBP14,847,000 (2016: GBP9,719,000) relating to fixed or guaranteed rent reviews and GBP885,000 (2016: GBP227,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the accounts as current assets within 'trade and other receivables'.
5. Investment in subsidiary undertakings
The Group included 14 subsidiary companies as at 30 June 2017. All subsidiary companies were wholly owned, either directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was to act as an investment and property company. Other than two subsidiaries, which are incorporated in Gibraltar, all subsidiaries are incorporated within the United Kingdom.
The Group acquired THR Number 7 Limited and THR Number 8 Limited on 26 August 2016 and acquired THR Number 9 Limited on 24 October 2016. In addition, the Group acquired four newly established companies during the year to 30 June 2017: THR Number 10 Limited, THR Number 12 plc, THR Number 13 Limited and THR Number 14 Limited.
6. Bank loan
As at As at
30 June 2017 30 June 2016
GBP'000 GBP'000
------------------------------ -------------- --------------
Principal amount outstanding 40,000 21,000
Set-up costs (1,100) (836)
Amortisation of set-up costs 431 285
------------------------------ -------------- --------------
Total 39,331 20,449
------------------------------ -------------- --------------
At 30 June 2016, the Group had a GBP50.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which was repayable on 23 June 2019. Interest accrued on the bank loan at a variable rate, based on three month LIBOR plus margin and mandatory lending costs, and was payable quarterly. At 30 June 2016, the margin was 2.0 per cent per annum for the duration of the loan and a non-utilisation fee of 1.0 per cent per annum was payable on any undrawn element of the facility.
On 1 September 2016, the Group extended its loan facility to 1 September 2021, with an option of two further one year extensions thereafter, subject to the consent of RBS. The margin on the extended facility was reduced from 2.0 per cent to 1.5 per cent per annum for the duration of the loan. The non-utilisation fee payable on any undrawn element of the facility was reduced to 0.75 per cent per annum. There were no other material amendments to the facility. The Group drew down a further GBP19.0 million under this facility during the year ended 30 June 2017.
The Group has entered into an interest rate swap for a notional value of GBP21.0 million, with a starting date of 7 July 2016 and a termination date of 23 June 2019. Under the terms of the interest rate swap, the Group will pay quarterly a fixed rate of interest of 0.85 per cent per annum and will receive three month LIBOR. On 21 September 2016, the Group entered into a second interest rate swap, also for a notional value of GBP21.0 million, under which, for the period from 24 June 2019 to 1 September 2021, the Group will pay quarterly a fixed rate of interest of 0.70 per cent per annum and will receive three month LIBOR.
On 27 March 2017, the Group entered into a third interest rate swap for a notional value of GBP9.0 million, with a starting date of 7 April 2017 and a termination date of 1 September 2021. Under the terms of the third interest rate swap, the Group will pay quarterly a fixed rate of interest of 0.86 per cent per annum and will receive three month LIBOR.
Inclusive of all three interest rate swaps, the interest rate on GBP30.0 million of the Group's borrowings is fixed at an all-in rate of 2.36 per cent per annum until 23 June 2019 and 2.25 per cent per annum from 24 June 2019 to 1 September 2021. The remaining GBP10.0m of debt is drawn from the revolving credit facility with interest payable at a variable rate equal to three month LIBOR plus the lending margin of 1.50 per cent per annum.
The fair value of the interest rate swaps at 30 June 2017 was an aggregate liability of GBP9,000 (2016: liability of GBP316,000).
This bank loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One PLC Group ('THR1 Group') which consists of THR1 and its three subsidiaries; THR Number Two Limited, THR Number 3 Limited and THR Number 9 Limited. Under the bank covenants related to this loan, the Group is to ensure that for THR1 Group:
- The loan to value percentage does not exceed 50 per cent; and
- The interest cover is greater than 300 per cent on any calculation date.
THR1 Group has complied with all the bank loan covenants during the year.
Subsequent to the year end, the Group entered into an additional GBP40.0 million five year loan facility. See note 11 for details.
7. Stated capital movements
As at 30 June 2017
Number of
shares GBP'000
--------------------------------------------- ------------ --------
Allotted, called-up and fully paid ordinary
shares of no par value
Opening balance 252,180,851 246,533
Dividends allocated to capital (4,869)
--------------------------------------------- ------------ --------
Balance as at 30 June 2017 252,180,851 241,664
--------------------------------------------- ------------ --------
Under the Company's Articles of Incorporation, the Company may issue an unlimited number of ordinary shares.
During the year to 30 June 2017, the Company did not repurchase any ordinary shares into treasury (2016: 14,229,822 ordinary shares at a total cost of GBP14,159,000). The Company did not resell any ordinary shares from treasury (2016: 14,229,822 ordinary shares raising gross proceeds of GBP14,799,000).
During the year to 30 June 2017, the Company did not issue any ordinary shares (2016: 109,882,625 ordinary shares raising gross proceeds of GBP114,438,000).
Capital management
The Company's capital is represented by the stated capital account, hedging reserve, capital reserve and revenue reserve. The Company is not subject to any externally-imposed capital requirements.
The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective. The Company is able to pay a dividend out of the Stated Capital Account as permitted by the Companies (Jersey) Law 1991 (as amended).
Capital risk management
The objective of the Group is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and other healthcare assets in the UK.
The Board has responsibility for ensuring the Group's ability to continue as a going concern. This involves the ability to borrow monies in the short and long term; and pay dividends out of reserves, all of which are considered and approved by the Board on a regular basis.
To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders, issue new shares or buyback shares for cancellation or for holding in treasury.
Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in accordance with the Company's investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding excess cash on its balance sheet over the longer term.
No changes were made in the objectives, policies or processes during the year.
8. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, a bank loan and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to GBP20.3 million (2016: GBP68.4 million).
In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.
There were no financial assets which were either past due or considered impaired at 30 June 2017 (2016: nil).
All of the Group's cash is placed with financial institutions with a long-term credit rating of BBB or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed, limited or lost. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.
During the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across two different financial institutions. As the cash balance held had reduced by the year end, monies were held with a single financial institution. At 30 June 2017 the Group held GBP10.4 million (2016: GBP26.0 million) with The Royal Bank of Scotland plc and GBPnil (2016: GBP39.1 million) with Lloyds Bank plc.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.
Interest rate risk
Some of the Company's financial instruments are interest-bearing. Interest-rate risk is the risk that future cash flows will change adversely as a result of changes in market interest rates.
The Group's policy is to hold cash in variable rate or short term fixed rate bank accounts. Interest is received on cash at a variable rate of 0.01 per cent (2016: 0.50 per cent and 0.55 per cent). Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
The Group has a GBP50 million (2016: GBP50 million) committed term loan and revolving credit facility which at 30 June 2017 was charged interest at a rate of three month LIBOR plus a margin of 1.5 per cent per annum (2016: 2.0 per cent per annum) At the year-end GBP40.0 million of the facility was drawn down (2016: GBP21.0 million). The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate.
The Group has hedged its exposure on GBP30.0 million (2016: GBP21.0 million) of the loan drawn down at 30 June 2017 through entering into fixed rate Interest Rate Swaps (see note 6). Fixing the interest rate exposes the Group to fair value interest rate risk.
The Group has not hedged its exposure on GBP10.0 million of the loan drawn down at 30 June 2017 (2016: GBPnil) on which interest is payable at a variable rate equal to three month LIBOR plus the lending margin of 1.50 per cent per annum. This balance exposes the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.
Market price risk
The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.
9. Related party transactions
The Board of Directors is considered to be a related party. No Director has an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Company.
Mr Ross, who retired as a Director following the Annual General Meeting on 10 November 2016, was a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, each of which receive fees from the Company. Mr Webster, who was appointed as a Director of the Company with effect from 11 November 2016, is an employee of the Company Secretary, R&H Fund Services (Jersey) Limited. Mrs Jones is a director of the Company Secretary, R&H Fund Services (Jersey) Limited.
The Directors of the Company received fees for their services. Total fees for the year were GBP165,000 (2016: GBP115,000) of which GBP18,000 (2016: GBP16,000) remained payable at the year-end.
Target Advisers LLP, the Investment Manager, received GBP3,758,000 (2016: GBP2,654,000) in relation to the year of which GBP997,000 (2016: GBP871,000) related to the performance fee. Of this amount GBP941,000 (2016: GBP885,000) (inclusive of VAT) remained payable at the year-end.
10. Operating segments
The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the EPRA NAV. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV is detailed in note 3.
The view that the Group is engaged in a single segment of business is based on the following considerations:
- One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;
- There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the benchmark; and
- The management of the portfolio is ultimately delegated to a single property manager, Target.
11. Post balance sheet events
On 6 July 2017, the Group completed the acquisition of an 88 bed home in Melton Mowbray, Leicestershire for GBP8.4 million, including acquisition costs. The home opened its doors to residents in March 2017 and boasts very large lounges and well laid out gardens providing good outdoor space for residents and visitors. The home was leased back to Melton Care Limited and is subject to a 35 year lease with RPI-linked uplifts with a cap and collar. Melton Care is a joint venture between Magnum Care, a Leicestershire-based operator, and the principals behind Care Concern, the national operator with whom the Group have worked in a number of homes.
On 11 July 2017, the Group acquired a development site, with planning permission, in Birkdale, Merseyside, and entered into a capped development contract to develop a home with 55 large bedrooms and good public space in an impressive building on this corner location. The development will be carried out by Athena Healthcare, who have also contracted to pre-let the property on completion at an agreed rental level. The lease will be for 35 years with RPI uplifts subject to a cap and collar. The home will target the premium residential market and, once completed, will become the third home in the Group's portfolio with Athena, a growing operator with three operational homes and several further in development. The home is expected to complete by March 2019, with a total development price of around GBP8.2 million including costs.
On 30 August 2017, the Group entered into a new five year GBP40 million committed term loan facility with First Commercial Bank, Limited (the 'FCB Facility'). The FCB Facility can be drawn down flexibly over the period to 30 August 2019 with GBP5.0 million of the facility having been drawn to date. Interest is payable quarterly in arrears at a margin of 175 basis points over three month LIBOR. The Group intends to hedge a significant part of its interest rate exposure on the facility once it has drawn sufficient funds. The facility agreement contains a typical security package including loan to value and interest cover ratio covenants which are broadly in-line with the Group's existing debt arrangements.
12. Financial statements
These are not full statutory accounts. The report and financial statements for the year to 30 June 2017 will be posted to shareholders and made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from the Administrator, Maitland Administration Services (Scotland) Limited, 20 Forth Street, Edinburgh, EH1 3LH.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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October 04, 2017 02:00 ET (06:00 GMT)
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