2 November 2022

Target Healthcare REIT plc and its subsidiaries

("Target Healthcare" or "the Group")

Net Asset Value, update on corporate activity and dividend declaration

Target Healthcare (LSE: THRL), the UK listed specialist investor in modern, purpose-built care homes, announces its unaudited quarterly Net Asset Value ('NAV') as at 30 September 2022, together with an update on corporate activity, and declares its first interim dividend for the year ending 30 June 2023.

Corporate activity highlights

Stable financial performance with focus on debt management and maintaining capital headroom:

·      EPRA Net Tangible Assets ('NTA') per share broadly flat at 112.1 pence (30 June 2022: 112.3 pence), with the like-for-like portfolio valuation increasing 0.1%, reflecting inflation-linked annual rental uplifts and completion of portfolio management initiatives partially offset by outward yield movement on select assets

·      NAV total return of 1.3% for the quarter (based on EPRA NTA and including dividend)

·      No debt maturity until November 2025 following extension of £100 million HSBC facility by one year

·      Interest costs on drawn debt fully hedged out to November 2025 following entry into interest rate cap in October 2022

·      Net Loan to Value stable at 22.3% (30 June 2022: 22.0%)

·      Capital headroom of £42 million net of the Group's development commitments

Improving portfolio trading, with sustained occupancy growth, increased rent collection and significant arrears collection:

·      Diversified portfolio of 100 assets let to 33 tenants and valued at £913.7 million, following disposal of one non-core home for carrying value which represented 0.5% of portfolio value

·      0.3% net increase in contracted rent roll reflecting the decrease from the above-mentioned disposal and uplifts from rent reviews and portfolio management initiatives, including a 0.7% like-for-like increase from 16 rent reviews at an average uplift of 3.8% per annum

·      Portfolio EPRA "topped-up" net initial yield of 5.84% (30 June 2022: 5.82%)

·      Weighted average unexpired lease term of 26.9 years remains one of the longest in the listed real estate sector (30 June 2022: 27.2 years)

·      High quality, modern and ESG-compliant real estate:

o  93% of the portfolio is A or B EPC rated, and 2030 compliant with minimum energy efficiency standards

o  Leading High social impact from sector-leading real estate standards: 97% wet-rooms; 47 sqm space per resident; rent per sqm £177

·      Rent collection of 96% (30 June 2022: 94%):

o  Arrears collected from seven-home tenant; initiatives in progress to re-tenant two homes following Covid trading challenges

·      Mature home resident occupancy has increased to 84%, maintaining consistent upward trend since February 2022

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"Our focus this quarter has been securing certainty on debt costs and availability on our shorter-term facilities and managing our underperforming assets to improve rent collection.

"We have extended the weighted average term to debt maturity to 6.9 years by exercising our option with the HSBC facility, as well as capping the remaining drawn debt we had which was not otherwise fixed or hedged. We have a plan to efficiently manage interest rate risk on the c.£50 million we will draw to fund the construction of our development assets. We intend to retain capital headroom beyond our existing portfolio commitments.

"We also made significant operational progress at those assets still underperforming due to Covid challenges. Two of those homes are in the process of being transferred to alternative operators. Having lined up five parties willing to step into the leases on a seven-home group, we collected in full the rental arrears from the incumbent tenant and have welcomed their renewed commitment to those homes. We are encouraged that our view on their future trading outlook and prospects for long-term profitability was shared across several parties with specialist knowledge of the sector and the advantages of modern real estate. We look forward to our tenant delivering to its residents and staff in the homes and flourishing in the more favourable trading conditions we are now seeing.

"Our portfolio is modern, ESG-compliant and provides long-term, sustainable, inflation-linked income. Given these attributes and the demographic tailwinds within the care home sector, we would expect to see downward valuation movements which are more muted than those anticipated across the wider real estate market. In the current challenging economic conditions, we will continue to monitor the resilience of our tenants' trading, as well as the impact of changes in interest rates and inflation. We will remain responsive to significant developments and will assess the impact of these factors on our business model and earnings as volatility eases towards a more settled outlook, on which longer-term planning can be based."

Net Total Assets

The Group's unaudited EPRA NTA per share as at 30 September 2022 was 112.1 pence. The total return for the quarter based on EPRA NTA was 1.3%.

A balance sheet summary and an analysis of the movement in the EPRA NTA over the quarter is presented at the end of this announcement in the Appendix.

Corporate Update

Portfolio performance

As at 30 September 2022, the Group's portfolio was valued at £913.7 million and comprised 100 properties, consisting of 96 operational care homes and four pre-let sites, which are being developed through capped forward funding commitments with established development partners.

The portfolio value increased by 0.2% over the quarter. This comprised a 0.5% decrease resulting from the disposal of a non-core asset, a 0.1% increase in the like-for-like value of the operational portfolio and 0.6% from further investment into the development portfolio and performance payments/capital expenditure on existing assets. The like-for-like movement primarily reflects the portfolio's inflation-linked rental reviews partially offset by some outward yield movements on specific assets.

Contractual rent increased by 0.3% over the period, comprising:

·      0.8% decrease from the disposal

·      0.4% increase from performance payments/rentalised capex on existing assets

·      0.7% increase from 16 inflation-linked upwards-only rent reviews, with an average uplift of 3.8%

The portfolio's weighted average unexpired lease term was 26.9 years (30 June 2022: 27.2 years).

The portfolio had an EPRA topped-up net initial yield of 5.84% based on an annualised contractual rent of £55.6 million. The portfolio's EPRA net initial yield was 5.61% with five assets in rent-free periods.

Acquisitions and other asset management

During the quarter, the following transactions and asset management initiatives were completed:

·      The disposal of a non-core asset. This care home was part of the 18-home portfolio acquired in December 2021, with real estate standards below the average of that portfolio. It has been sold to the operator for proceeds consistent with carrying value. The home represented 0.5% of the portfolio by value.

·      Payments totalling £2.8 million were made in respect of contractual commitments on two homes made at original acquisition in the event of strong trading performance. Rent cover thresholds have been consistently met over the relevant time period since the homes opened, triggering the payments which are rentalised at a level consistent with the acquisition NIY, which maintain rent cover headroom at investment case level, and increase portfolio rent by 0.4%.

Debt facilities and swap arrangements

As at 30 September 2022, the Group's total borrowings were £223 million, giving a net LTV of 22.3% (total gross debt less cash, as a proportion of gross property value). The Group's weighted average cost on its drawn debt, inclusive of amortisation of arrangement costs, was 3.49% (30 June 2022: 3.31%). The increase over the quarter was due to the increase in market interest rates impacting the variable rate paid on the Group's revolving credit facilities.

£180 million of the drawn debt has been fixed prior to the rise in interest rates seen during 2022. £150 million is fixed for a weighted average of 11.4 years with a weighted average interest rate excluding the amortisation of arrangement fees of 3.18%. £30 million of the Group's bank facilities is fixed at 2.48% for 3.1 years through an interest rate swap entered into in November 2020. An interest rate cap was entered into during October 2022 which caps SONIA at 3% on a further £50 million of the Group's revolving credit facilities until November 2025. The premium paid to acquire the cap equates to 0.4 pence per share. 

The Group's £100 million revolving credit facility with HSBC Bank plc was extended by one year, to November 2025, during October 2022. Inclusive of this extension, the weighted average term to expiry on the Group's total committed loan facilities was 6.9 years as at 1 November 2022 (30 June 2022: 6.9 years).

Dividends in the period

The Group paid its fourth interim dividend for the year ended 30 June 2022, in respect of the period from 1 April 2022 to 30 June 2022, of 1.69 pence per share, on 26 August 2022 to shareholders on the register on 12 August 2022. This distribution was comprised wholly of an ordinary dividend.

Announcement of first interim dividend

The Company today declares its first interim dividend for the year ending 30 June 2023, in respect of the period from 1 July 2022 to 30 September 2022, of 1.69 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID):     1.69 pence per share

Interim ordinary dividend:                                  nil

The dividend reflects an annualised payment of 6.76 pence per share and a dividend yield of 7.6% based on the 1 November 2022 closing share price of 89.4 pence.

The Company had 620,237,346 ordinary shares in issue at 30 September 2022 and has not issued or bought back any shares since that date.

Shareholders entitled to elect to receive distributions without deduction for withholding tax may complete the declaration form which is available on request from the Company through the contact details provided on its website www.targethealthcarereit.co.uk, or from the Company's registrar. Shareholders who qualify for gross payments are, principally, UK resident companies, certain UK public bodies, UK charities, UK pension schemes and the managers of ISAs, PEPs and Child Trust Funds, in each case subject to certain conditions. Individuals and non-UK residents do not qualify for gross payments of distributions and should not complete the declaration form.

LEI: 213800RXPY9WULUSBC04

ENDS

Enquiries:

Kenneth MacKenzie; Gordon Bland

Target Fund Managers Limited

01786 845 912

Mark Young; Mark Bloomfield

Stifel Nicolaus Europe Limited

020 7710 7600

Dido Laurimore; Richard Gotla

FTI Consulting

020 3727 1000

TargetHealthcare@fticonsulting.com

Notes to editors:

UK listed Target Healthcare REIT plc (THRL) is an externally managed Real Estate Investment Trust which provides shareholders with an attractive level of income, together with the potential for capital and income growth, from investing in a diversified portfolio of modern, purpose-built care homes.

The Group's portfolio at 30 September 2022 comprised 100 assets let to 33 tenants with a total value of £913.7 million.

The Group invests in modern, purpose-built care homes that are let to high quality tenants who demonstrate strong operational capabilities and a strong care ethos. The Group builds collaborative, supportive relationships with each of its tenants as it believes working in this way helps raise standards of care and helps its tenants build sustainable businesses. In turn, that helps the Group deliver stable returns to its investors.

Important information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK version of the Market Abuse Regulations (EU) No. 596/2014, which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

APPENDIX

1.     Analysis of movement in EPRA NTA

The following table provides an analysis of the movement in the unaudited EPRA NTA per share for the period from 1 July 2022 to 30 September 2022:

The EPRA Best Practices Recommendations Guidelines state that companies should publish a set of three NAV metrics. The full set of EPRA NAV metrics are published in the Group's Annual Report. The Company intends to continue to announce the EPRA NTA on a quarterly basis.

At 30 September 2022, due to the valuation ascribed to the Group's interest rate derivative contract used to hedge its exposure to variable interest rates, which is excluded from the calculation of the EPRA NTA, the unaudited NAV calculated under International Financial Reporting Standards was 112.8 pence per share.

^Consistent with standard valuation practice for assets under construction, the carrying value of these assets is calculated by the valuer through application of a discount to accumulated costs to date. This discount varies depending on factors such as the remaining development time. As the asset progresses towards completion, the discount that has been applied is unwound.

*Properties within the portfolio are stated at the market value provided by the external valuer and the IFRS effects of fixed/guaranteed minimum rent reviews are not reflected.

The next quarterly valuation of the property portfolio will be conducted by Colliers International Healthcare Property Consultants Limited during January 2023 and the unaudited EPRA NTA per share as at 31 December 2022 is expected to be announced in January 2023.

3.     EPRA NIY profiles and unwind of rent-free periods

The Group currently has five assets with rent-free periods. As these unwind, assuming no other changes including inter alia the portfolio valuation or rental profile, the EPRA yield profiles for the portfolio will be as follows: