Principal and emerging risks and uncertainties

 

Risk	Description of risk and factors affecting risk rating	Mitigation
Poor performance of assets Risk rating & change: High (unchanged)	There is a risk that a tenant's business could become unsustainable if it fails to trade successfully. This could lead to a loss of income for the Group and an adverse impact on the Group's results and shareholder returns. The strategy of investing in new purpose-built care homes could lead to additional fill-up risk and there may be a limited amount of time that small regional operators can fund start-up losses.	The Investment Manager focuses on tenant diversification across the portfolio and, considering the local market dynamics for each home, focuses on ensuring that rents are set at sustainable levels. Rent deposits or other guarantees are sought, where appropriate, to provide additional security for the Group. The Investment Manager has ongoing engagement with the Group's tenants to proactively assist and monitor performance.
High inflationary environment Risk rating & change: High (unchanged)	An increase in the UK inflation rate to a level above the rent review caps in place across the portfolio's long-term leases may result in a real term decrease in the Group's income and be detrimental to its performance. In addition, cost increases for tenants, particularly in relation to staffing and utilities, may erode their profitability and rent cover unless their revenue increases accordingly.	The Group's portfolio includes inflation-linked leases, with primarily annual upwards-only rent reviews within a cap and collar. The Manager is monitoring tenant performance, including whether average weekly fees paid by the underlying diversified mix of publicly funded and private-fee paying residents are growing in line with inflation.
Adverse interest rate fluctuations / debt covenant compliance Risk rating & change: Medium (decreased)	Adverse interest rate fluctuations will increase the cost of the Group's variable rate debt facilities; limit borrowing capacity; adversely impact property valuations; and be detrimental to the Group's overall returns.	The Group has a conservative gearing strategy, although net gearing is anticipated to increase as the Group nears full investment. Loan covenants and liquidity levels are closely monitored for compliance and headroom. The Group has fixed interest costs on £230 million of borrowings as at 30 June 2023.
Development costs Risk rating & change: Medium (unchanged)	The high inflationary environment, particularly for building materials and staff, combined with supply chain difficulties, may result in an increased risk that the developers of contracted developments do not fulfil their obligations and/or may increase the cost of new development opportunities.	The Group is not significantly exposed to development risk, with forward funded acquisitions being developed under fixed price contracts, with the Investment Manager having considered both the financial strength of the developer and the ability of the developer's profit to absorb any cost overruns.
Negative perception of the care home sector Risk rating & change: Medium (increased)	A negative perception of the care home sector, due to matters such as societal trends, pandemic or safeguarding failures, or difficulties in accessing social care, may result in a reduction in demand for care home beds, causing asset performance to fall below expectations despite the demographic shifts and the realities of needs-based demand in the sector. The resultant reputational damage could impact occupancy levels and rent covers across the portfolio.	The Group is committed to investing in high quality real estate with high quality operators. These assets are expected to experience demand ahead of the sector average while in the wider market a large number of care homes without fit-for-purpose facilities are expected to close. A trend of improving occupancy rates across the portfolio has been noted in recent times.
ESG and climate change Risk rating & change: Medium (unchanged)	A change in climate, such as an increased risk of local or coastal flooding, or a change in tenant/ investor demands or regulatory requirements for properties which meet certain environmental criteria, such as integral heat pumps, may result in a fall in demand for the Group's properties, reducing rental income and/or property valuations.	The Group is committed to investing in high quality real estate with high quality operators. The portfolio's EPC and BREEAM in-use ratings suggest the portfolio is well positioned to meet future requirements/expectations. The Investment Manager has introduced a house standard to ensure ESG factors are fully considered during the acquisition process.
Reduced availability of carers, nurses and other care home staff Risk rating & change: Medium (unchanged)	The combined impacts of the pandemic and increased employment and wage inflation in competing sectors has reduced the availability of key staff in the care sector which may result in a reduction in the quality of care for underlying residents, restrict tenants from being able to admit residents or result in wage inflation.	The Group is committed to investing in high quality real estate with high quality operators and these should be better placed to attract staff. The Investment Manager continues to engage with tenants in the portfolio and to share examples of best practice in recruitment and retention of staff.
Breach of REIT regulations Risk rating & change: Medium (unchanged)	A breach of REIT regulations, primarily in relation to making the necessary level of distributions, may result in loss of tax advantages derived from the Group's REIT status. The Group remains fully compliant with the REIT regulations and is fully domiciled in the UK.	The Group's activities, including the level of distributions, are monitored to ensure all conditions are adhered to. The REIT rules are considered during investment appraisal and transactions structured to ensure conditions are met.
Changes in government policies Risk rating & change: Medium (unchanged)	Changes in government policies, including those affecting local authority funding of care, may render the Group's strategy inappropriate. Secure income and property valuations will be at risk if tenant finances suffer from policy changes.	Government policy is monitored by the Group to increase the ability to anticipate changes. The Group's tenants also typically have a multiplicity of income sources, with their business models not wholly dependent on government funding.
Availability of capital Risk rating & change: Medium (unchanged)	Without access to equity or debt capital, the Group may be unable to grow through acquisition of attractive investment opportunities. This is likely to be driven by both investor demand and lender appetite which will reflect Group performance, competitor performance, general market conditions and the relative attractiveness of investment in UK healthcare property.	The Group maintains regular communication with investors and existing debt providers, and, with the assistance of its broker and sponsor, regularly monitors the Group's capital requirements and investment pipeline alongside opportunities to raise both equity and debt. During the year, the Group has extended its £100m RCF facility with HSBC by one year.
Reliance on third party service providers Risk rating & change: Medium (unchanged)	The Group is externally managed and, as such, relies on a number of service providers. Poor quality service from providers such as the Investment Manager, company secretary, broker, legal advisers or depositary could have potentially negative impacts on the Group's investment performance, legal obligations, compliance or shareholder relations.	The Investment Manager, along with all other service providers, is subject to regular performance appraisal by the Board. The Manager has retained key personnel since the Group's IPO and has successfully hired further skilled individuals and invested in its systems.
Failure to differentiate qualities from competitors or poor investment performance Risk rating & change: Medium (unchanged)	Failing to differentiate strategy and qualities from competitors is a significant risk for the business, with increased competition in the healthcare real estate sector. The failure to communicate these effectively to stakeholders could have a negative impact on the Company's share price, future demand for equity raises and/or debt finance and wider reputational damage.	The stakeholder communications strategy of the Group has always been to highlight the quality of the real estate in which the Group invests. The regular production of investor relations materials (annual and interim reports, investor presentations and quarterly factsheets) along with direct engagement with investors helps to mitigate this risk.

 

The Company's risk matrix is reviewed regularly by the Board. Emerging risks are identified though regular discussion at Board meetings of matters relevant to the Company and the sectors in which it operates; including matters that may impact on the underlying tenant operators. In addition, the Board holds an annual two-day strategy meeting which includes presentations from relevant external parties to ensure that the Board are fully briefed on relevant matters. At the strategy meeting, principal and emerging risks are discussed and reviewed to ensure that they have all been appropriately identified and, where necessary, addressed. The detailed consideration of the Company's viability and its continuation as a going concern, including sensitivity analysis to address the appropriate risks, is set out below.

 

Promoting the success of Target Healthcare REIT plc

The Board considers that it has made decisions during the year which will promote the success of the Group for the benefit of its members as a whole.

 

This section, which serves as the Company's section 172 statement, explains how the Directors have had regard to the matters set out in section 172 (1) (a)-(f) of the Companies Act 2006 for the financial year to 30 June 2023, taking into account the likely long-term consequences of decisions and the need to foster relationships with all stakeholders in accordance with the AIC Code.

 

a) The likely consequences of any decision in the long term	Our investment approach is long-term with an average lease length of 26.5 years. We believe this is the most responsible approach to provide stability and sustainability to tenants and key stakeholders. Therefore, most decisions require consideration of long-term consequences, from determining a sustainable rent level and the right tenant partner for each investment, to considering the impact of debt and key contracts with service providers on the recurring earnings which support dividends to shareholders.
b) The interests of the Company's employees	The Company is externally managed and therefore has no employees.
c) The need to foster the Company's business relationships with suppliers, customers and others	As a REIT with no employees, the Board works in close partnership with the Manager, which runs the Group's operations and portfolio within parameters set by the Board and subject to appropriate oversight. The Manager has deep relationships with tenants, the wider care home sector, and many of the Group's other suppliers. These are set out in more detail in the following table.
d) The impact of the Company's operations on the community and the environment	The Board is confident the Group's approach to investing in a sensitive sector is responsible with regard to social and environmental impact. This is set out in more detail in the community and the environment section of the following table.
e) The desirability of the Company maintaining a reputation for high standards of business conduct	The Board requires high standards of itself, service providers and stakeholders. The Group's purpose and investment objectives dictate that these standards are met in order to retain credibility. The ethos and tone is set by the Board and the Manager.
f) The need to act fairly as between members of the Company	The Board encourages an active dialogue with shareholders to ensure effective communication, either directly or via its broker and/or Manager. The interests of all shareholders are considered when issuing new shares.

 

The significant transactions where the interests of stakeholders were actively considered by the Board during the year were:

 

Dividends paid

The Board recognised the importance of dividends to its shareholders and, after careful analysis of the Group's forecast net revenue concluded that it was in the interests of all stakeholders to reduce the Company's dividend to a level at which it is expected to be fully covered with the potential for growth.

 

Ongoing investment and asset management activity

The Group acquired two new development sites, including one in July 2023. The new, high-quality beds which will be added to the market when these developments complete, combined with the Group's asset management activities to increase the percentage of wet rooms in the property portfolio to 98% and add further beds at another of the Group's properties, illustrate the Group's intent of improving the overall level of care home real estate in the UK. This approach targets attractive long‑term returns to shareholders by focusing on a sustainable and 'future proofed' sector of the care home market. The latest development site acquired is for a care home to be built to exceptional ESG standards, with the highest certifications anticipated, which will offer carbon net-zero operational ability.

 

The sale of four homes in Northern Ireland was completed in the year. This followed the successful re-tenanting of the properties in the prior year and crystallised an annualised ungeared IRR in excess of 10% over the period of ownership. The disposal represented a full exit from the Northern Irish market and formed part of the Group's wider capital recycling and asset management strategy. The Group also sold a non-core asset that had been acquired as part of the 18-home portfolio in the prior year.

 

Capital financing

The Group extended its loan facility with HSBC plc by a further year, to November 2025 and entered into an interest rate cap on the £50 million of this facility currently drawn in order to reduce the Group's exposure to rising interest rates on its borrowings.

 

Director appointments

During the year, as part of the Board succession plan, Mr Cotton and Mr Brodtman were appointed as Directors. Mr Cotton's experience of real estate corporate finance and Mr Brodtman's extensive knowledge of the property sector is expected to benefit all stakeholders over the period of their respective appointments. These appointments complete the Board's succession plan for the medium term.

 

Stakeholders

The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are shareholders, tenants and their underlying residents, debt providers, the Investment Manager, other service providers and the community and the environment. The Board considers the long-term consequences of its decisions on its stakeholders to ensure the long-term sustainability of the Company.

 

 

Shareholders	Shareholders are key stakeholders and the Board proactively seeks the views of its shareholders and places great importance on communication with them.   The Board reviews the detail of significant shareholders and recent movements at each Board Meeting and receives regular reports from the Investment Manager and Broker on the views of shareholders, and prospective shareholders, as well as updates on general market trends and expectations. The Chair and other Directors make themselves available to meet shareholders when required to discuss the Group's business and address shareholder queries. The Directors make themselves available at the AGM in person, with the Company also providing the ability for any questions to be raised with the Board by email in advance of the meeting.   The Company and Investment Manager also provide regular updates to shareholders and the market through the Annual Report, Interim Report, regular RNS announcements (including the quarterly NAV), quarterly investor reports and the Company's website. The Investment Manager intends to hold a results presentation on the day of publication of the Annual Report, as undertaken for the first time in October 2022, and will also meet with analysts and members of the financial press.
Tenants and underlying residents	The Investment Manager liaises closely with tenants to understand their needs, and those of their underlying residents, through visits to properties and regular communication with both care home personnel and senior management of the tenant operators. The effectiveness of this engagement is assessed through an annual survey.   The Investment Manager also receives, and analyses, management information provided by each tenant at least quarterly and regularly monitors the CQC, or equivalent, rating for each home and any online reviews, such as carehome.co.uk. Any significant matters are discussed with the tenant and included within the Board reporting.
Debt providers	The Group has term loan and revolving credit facilities with the Royal Bank of Scotland plc, HSBC Bank plc and Phoenix Group (see Note 7 to the extract from the Consolidated Financial Statements for more information). The Company maintains a positive working relationship with each of its lenders and provides regular updates, at least quarterly, on portfolio activity and compliance with its loan covenants in relation to each loan facility.
Investment Manager	The Investment Manager has responsibility for the day-to-day management of the Group pursuant to the Investment Management Agreement. The Board, and its committees, are in regular communication with the Investment Manager and receive formal presentations at every Board Meeting to aid its oversight of the Group's activities and the formulation of its ongoing strategy.   The Board, through the Management Engagement Committee, formally reviews the performance of the Investment Manager, the terms of its appointment and the quality of the other services provided at least annually. Further details on this process and the conclusions reached in relation to the year ended 30 June 2023 are contained in the Annual Report. .
Other service providers	The Board, through the Management Engagement Committee, formally reviews the performance of each of its significant service providers at least annually. The reviews will include the Company's legal advisers, brokers, tax advisers, auditors, depositary, valuers, company secretary, insurance broker, surveyors and registrar. The purpose of the review is to ensure that the quality of the service provided remains of the standard expected by the Board and that overall costs and other contractual arrangements remain in the interests of the Group and other significant stakeholders. The Investment Manager also reports regularly to the Board on these relationships.   The significant other service providers, particularly the Group's legal advisers and brokers, are invited to attend Board Meetings and report directly to the Directors where appropriate.
Community and the environment	The Group's principal non-financial objective is to generate a positive social impact for the end-users of its real estate. Investment decisions are made based on the fundamental premise that the real estate is suitable for its residents, the staff who care for them, and their friends, families and local communities, both on original acquisition and for the long-term.   Environmental considerations are an integral part of the acquisition and portfolio management process, given the strategy of only acquiring modern buildings which benchmark well from an energy efficiency aspect. The Group's ESG strategy is currently prioritising the gathering of useful energy/consumption data on its portfolio which will be used to align the portfolio appropriately with benchmarks over the medium and longer term. During the year, the Group has improved its ESG reporting through the introduction of its annual Sustainability Report, first published in March 2023, and through collating, submitting and publishing data under the GRESB benchmark standards. Under the remit of the newly established ESG Committee, the Board has encouraged the further development of the Investment Manager's property-by-property asset management plan to identify areas where the energy efficiency and carbon emissions of the Group's property portfolio can be further improved and approved an initial budget to action initiatives identified.

 

 

Alison Fyfe

Chair

9 October 2023

Viability Statement

The AIC Code requires the Board to assess the Group's prospects, including a robust assessment of the emerging and principal risks facing the Group including those that would threaten its business model, future performance, solvency or liquidity. This assessment is undertaken with the aim of stating that the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities as they fall due over the period of their assessment.

 

The Board has conducted this review over a five-year time horizon, which is a period thought to be appropriate for a company investing in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial model covering a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can be forecast with a reasonable degree of accuracy. At 30 June 2023, the Group had a property portfolio which has long leases and a weighted average unexpired lease term of 26.5 years. The Group had drawn borrowings of £230.0 million, on which the interest rate had been fixed, either directly or through the use of interest rate derivatives, at a maximum weighted interest rate of 3.52 per cent per annum (excluding the amortisation of arrangement costs). The Group had access to a further £90.0 million of available debt under committed loan facilities which,

if drawn, would carry interest at a variable rate equal to SONIA plus 2.21%. The Group's committed loan facilities have staggered expiry dates with £170.0 million being committed to 5 November 2025, £87.3 million to 12 January 2032 and £62.7 million to 12 January 2037. Discussions with existing and/or new potential lenders do not indicate any issues with re-financing these loans on acceptable terms in due course.

 

The Directors' assessment of the Group's principal risks are highlighted above The most significant risks identified as relevant to the viability statement were those relating to:

·      Poor performance of assets: The risk that a tenant is unable to sustain a sufficient rental cover, leading to a loss of rental income for the Group;

·      High inflationary environment: The risk that the level of the UK inflation rate results in a real term decrease in the Group's income or erodes the profitability of tenants;

·      Adverse interest rate fluctuations: The risk that an increase in interest rates may impact property valuations, increase the cost of the Group's variable rate debt facilities, and/or limit the Group's borrowing capacity;

·      Negative perception of the care home sector reduces demand for care home beds: The risk that overall demand for care home beds is reduced resulting in a decline in the capital and/or income return from the property portfolio; and

·      Reduced availability of care home staff: The risk that unavailability of staff restricts the ability of tenants to admit residents or results in significant wage cost inflation, impacting on the tenants' rental cover and leading to a loss of rental income for the Group.

 

In assessing the Group's viability, the Board has considered the key outputs from a detailed model of the Group's expected cashflows over the coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on rental receipts from the Group's tenants. The stressed level of default from the Group's tenants assumed in the financial modelling was based on a detailed assessment of the financial position of each individual tenant or tenant group, the structure in place to secure rental income (such as the strength of tenants' balance sheets, rental guarantees in place or rental deposits held) and included consideration of the cumulative impact on each tenant's financial reserves from recent economic conditions, including increasing staff and utilities costs and the reduced level of resident occupancy experienced following the pandemic.

 

Based on the results of the scenario analysis outlined above, the Board has 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 of its assessment.

 

 

 

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 June 2023                                                                                                         

		Year ended 30 June 2023			Year ended 30 June 2022
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		56,354	11,308	67,662	48,807	10,215	59,022
Other rental income		-	-	-	796	3,877	4,673
Other income		86	-	86	164	-	164
Total revenue		56,440	11,308	67,748	49,767	14,092	63,859
(Losses)/gains on revaluation of investment properties	5	-	(54,021)	(54,021)	-	5,553	5,553
Gains on investment properties realised	5	-	575	575	-	-	-
Losses on revaluation of properties held for sale		-	-	-	-	(7)	(7)
Total income		56,440	(42,138)	14,302	49,767	19,638	69,405
Expenditure
Investment management fee	2	(7,428)	-	(7,428)	(7,307)	-	(7,307)
Credit loss allowance and bad debts	3	(264)	-	(264)	(3,232)	-	(3,232)
Other expenses	3	(3,046)	-	(3,046)	(3,163)	-	(3,163)
Total expenditure		(10,738)	-	(10,738)	(13,702)	-	(13,702)
Profit/(loss) before finance costs and taxation		45,702	(42,138)	3,564	36,065	19,638	55,703
Net finance costs
Interest income		134	-	134	71	-	71
Finance costs		(9,572)	(698)	(10,270)	(6,671)	-	(6,671)
Net finance costs		(9,438)	(698)	(10,136)	(6,600)	-	(6,600)
Profit/(loss) before taxation		36,264	(42,836)	(6,572)	29,465	19,638	49,103
Taxation		-	-	-	(6)	-	(6)
Profit/(loss) for the year		36,264	(42,836)	(6,572)	29,459	19,638	49,097
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate derivatives designated as cash flow hedges		-	2,742	2,742	-	2,033	2,033
Total comprehensive income for the year		36,264	(40,094)	(3,830)	29,459	21,671	51,130
Earnings per share (pence)	4	5.85	(6.91)	(1.06)	4.92	3.28	8.20

 

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 2023

		As at 30 June 2023	As at 30 June 2022
	Notes	£'000	£'000
Non-current assets
Investment properties	5	800,155	857,691
Trade and other receivables		76,373	63,651
Interest rate derivatives		6,905	2,284
		883,433	923,626
Current assets
Trade and other receivables		9,459	5,549
Cash and cash equivalents		15,366	34,483
		24,825	40,032
Total assets		908,258	963,658
Non-current liabilities
Loans	7	(227,051)	(231,383)
Trade and other payables		(8,093)	(7,145)
		(235,144)	(238,528)
Current liabilities
Trade and other payables		(18,306)	(26,363)
Total liabilities		(253,450)	(264,891)
Net assets		654,808	698,767
Share capital and reserves
Share capital	8	6,202	6,202
Share premium	8	256,633	256,633
Merger reserve		47,751	47,751
Distributable reserve		187,887	226,461
Hedging reserve		5,026	2,284
Capital reserve		40,914	83,750
Revenue reserve		110,395	75,686
Equity shareholders' funds		654,808	698,767
Net asset value per ordinary share (pence)	4	105.6	112.7

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 June 2023         

 

		Share capital	Share premium	Merger reserve	Distrib-utable reserve	Hedging reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 June 2022		6,202	256,633	47,751	226,461	2,284	83,750	75,686	698,767
Total comprehensive income for the year:		-	-	-	-	2,742	(42,836)	36,264	(3,830)
Transactions with owners recognised in equity:
Dividends paid	1	-	-	-	(38,574)	-	-	(1,555)	(40,129)
At 30 June 2023		6,202	256,633	47,751	187,887	5,026	40,914	110,395	654,808

                                                                                   

 

 

For the year ended 30 June 2022

 

		Share capital	Share premium	Merger reserve	Distrib-utable reserve	Hedging reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 June 2021		5,115	135,228	47,751	265,164	251	64,112	47,564	565,185
Total comprehensive income for the year:		-	-	-	-	2,033	19,638	29,459	51,130
Transactions with owners recognised in equity:
Dividends paid	1	-	-	-	(38,703)	-	-	(1,337)	(40,040)
Issue of ordinary shares	8	1,087	123,913	-	-	-	-	-	125,000
Expenses of issue	8	-	(2,508)	-	-	-	-	-	(2,508)
At 30 June 2022		6,202	256,633	47,751	226,461	2,284	83,750	75,686	698,767

 

 

 

 

 

 

           

 

 

 

Consolidated Statement of Cash Flows (audited)

For the year ended 30 June 2023

                       

		Year ended 30 June 2023	Year ended 30 June 2022
	Note	£'000	£'000
Cash flows from operating activities
(Loss)/profit before tax		(6,572)	49,103
Adjustments for:
Interest income		(134)	(71)
Finance costs		10,270	6,671
Revaluation gains on investment properties and movements in lease incentives, net of acquisition costs written off	5	42,138	(19,645)
Revaluation losses on properties held for sale		-	7
Increase in trade and other receivables		(4,550)	(3,768)
(Decrease)/increase in trade and other payables		(325)	3,340
		40,827	35,637
Interest paid		(8,719)	(5,310)
Premium paid on interest rate cap		(2,577)	-
Interest received		134	71
Tax paid		-	(6)
		(11,162)	(5,245)
Net cash inflow from operating activities		29,665	30,392
Cash flows from investing activities
Purchase of investment properties and properties held for sale, including acquisition costs		(29,342)	(206,993)
Disposal of investment properties and properties held for sale, net of lease incentives		25,789	4,360
Net cash outflow from investing activities		(3,553)	(202,633)
Cash flows from financing activities
Issue of ordinary share capital		-	125,000
Expenses of issue of ordinary share capital		-	(2,508)
Drawdown of bank loan facilities		62,000	222,000
Repayment of bank loan facilities		(66,750)	(117,250)
Expenses of arrangement of bank loan facilities		(205)	(1,839)
Dividends paid		(40,274)	(39,785)
Net cash (outflow)/inflow from financing activities		(45,229)	185,618
Net (decrease)/increase in cash and cash equivalents		(19,117)	13,377
Opening cash and cash equivalents		34,483	21,106
Closing cash and cash equivalents		15,366	34,483

 

Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives	13,516	12,148
Fixed or guaranteed rent reviews derecognised on disposal or      re-tenanting	(732)	(3,362)
Total	12,784	8,786

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 2023, of which this statement of results is an extract, have been prepared in accordance with applicable UK-adopted 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 Our Strategy include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal and emerging risks and uncertainties' includes a description of the Company's principal and emerging 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

 

Alison Fyfe

Chair

9 October 2023

 

Extract from Notes to the Audited Consolidated Financial Statements

 

1.  Dividends

Amounts paid as distributions to equity holders during the year to 30 June 2023.

 

	Dividend rate (pence per share)	Year ended 30 June 2023 £'000
Fourth interim dividend for the year ended 30 June 2022	1.69	10,482
First interim dividend for the year ended 30 June 2023	1.69	10,482
Second interim dividend for the year ended 30 June 2023	1.69	10,482
Third interim dividend for the year ended 30 June 2023	1.40	8,683
Total	6.47	40,129

 

Amounts paid as distributions to equity holders during the year to 30 June 2022.

 

	Dividend rate (pence per share)	Year ended 30 June 2022 £'000
Fourth interim dividend for the year ended 30 June 2021	1.68	8,594
First interim dividend for the year ended 30 June 2022	1.69	10,482
Second interim dividend for the year ended 30 June 2022	1.69	10,482
Third interim dividend for the year ended 30 June 2022	1.69	10,482
Total	6.75	40,040

 

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 2023, of 1.40 pence per share, was paid on 25 August 2023 to shareholders on the register on 11 August 2023 and amounted to £8,683,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

 

2. Fee paid to the Investment Manager

	Year ended 30 June 2023	Year ended 30 June 2022
	£'000	£'000
Investment management fee	7,428	7,307
Total	7,428	7,307

 

The Group's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Fund Managers Limited (the 'Investment Manager' or 'Target'). The Investment Manager is entitled to an annual management fee calculated on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.

 

Net assets of the Group	Management fee percentage
Up to and including £500 million	1.05
Above £500 million and up to and including £750 million	0.95
Above £750 million and up to and including £1 billion	0.85
Above £1 billion and up to and including £1.5 billion	0.75
Above £1.5 billion	0.65

 

The Investment Manager is entitled to an additional fee of £141,000 per annum (plus VAT), increasing annually in line with inflation, in relation to their appointment as Company Secretary and Administrator to the Group.

 

The Investment Management Agreement can be terminated by either party on 24 months' written notice. Should the Company terminate the Investment Management Agreement earlier 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. Other expenses

 

	Year ended 30 June 2023 £'000	Year ended 30 June 2022 £'000
Total movement in credit loss allowance	(4,991)	2,865
Bad debts written off	5,255	367
Credit loss allowance charge	264	3,232

 

 

	Year ended 30 June 2023 £'000	Year ended 30 June 2022 £'000
Valuation and other professional fees	1,131	1,143
Auditor's remuneration for:
- statutory audit of the Company	131	118
- statutory audit of the Company's subsidiaries	221	230
- review of interim financial information	16	16
Other taxation compliance and advisory*	258	361
Public relations and marketing	229	327
Directors' fees	218	214
Secretarial and administration fees	208	177
Direct property costs	182	160
Printing, postage and website	95	111
Listing and Registrar fees	114	102
Other	243	204
Total other expenses	3,046	3,163

 

* The other taxation compliance and advisory fees were all paid to parties other than the Company's Auditor.

 

4. Earnings per share and Net Asset Value per share

 

Earnings per share

	Year ended 30 June 2023		Year ended 30 June 2022
	£'000	Pence per share	£'000	Pence per share
Revenue earnings	36,264	5.85	29,459	4.92
Capital earnings	(42,836)	(6.91)	19,638	3.28
Total earnings	(6,572)	(1.06)	49,097	8.20
Average number of shares in issue		620,237,346		599,093,808

 

There were no dilutive shares or potentially dilutive shares in issue.

 

EPRA is an industry body which issues best practice reporting guidelines for financial disclosures by public real estate companies and the Group reports an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below. Other EPRA measures are included in the section below entitled EPRA Performance Measures.

 

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 rental income arising from recognising guaranteed rental review uplifts and for development interest received from developers in relation to monies advanced under forward fund agreements which, in the Group's IFRS financial statements, is required to be offset against the book cost of the property under development. The Board believes that the Group's specific adjusted EPRA earnings represents the underlying performance measure appropriate for the Group's business model as it illustrates the underlying revenue stream and costs generated by the Group's property portfolio.

 

The reconciliations are provided in the table below:

	Year ended 30 June 2023 £'000	Year ended 30 June 2022 £'000
Earnings per IFRS Consolidated Statement of Comprehensive Income	(6,572)	49,097
Adjusted for gains on investment properties realised	(575)	-
Adjusted for revaluations of investment properties	54,021	(5,553)
Adjusted for revaluations of properties held for sale	-	7
Adjusted for finance and transaction costs on the interest rate cap and other capital items	698	(3,877)
EPRA earnings	47,572	39,674
Adjusted for rental income arising from recognising guaranteed rent review uplifts	(11,308)	(10,215)
Adjusted for development interest under forward fund agreements	952	783
Group specific adjusted EPRA earnings	37,216	30,242
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income	(1.06)	8.20
EPRA EPS	7.67	6.62
Group specific adjusted EPRA EPS	6.00	5.05

 

Net Asset Value per share

 

The Group's Net Asset Value per ordinary share of 105.6 pence (2022: 112.7 pence) is based on equity shareholders' funds of £654,808,000 (2022: £698,767,000) and on 620,237,346 (2022: 620,237,346) ordinary shares, being the number of shares in issue at the year-end.

 

The EPRA best practice recommendations include a set of EPRA NAV metrics that are arrived at by adjusting the net asset value calculated under International Financial Reporting Standards ('IFRS') to provide stakeholders with what EPRA believe to be the most relevant information on the fair value of the assets and liabilities of a real estate investment company, under different scenarios. The three EPRA NAV metrics are:

 

·      EPRA Net Reinstatement Value ('NRV'): Assumes that entities never sell assets and aims to represent the value required to rebuild the entity. The objective is to highlight the value of net assets on a long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value movements on financial derivatives, are excluded and the costs of recreating the Group through investment markets, such as property acquisition costs and taxes, are included.

·      EPRA Net Tangible Assets ('NTA'): Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax. Given the Group's REIT status, it is not expected that significant deferred tax will be applicable to the Group.

·      EPRA Net Disposal Value ('NDV'): Represents the shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. At 30 June 2023, the Group held all its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements apart from its fixed-rate debt facilities where the fair value is estimated to be lower than the nominal value. See note 7 for further details on the Group's loan facilities.

 

 

	2023 EPRA NRV £'000	2023 EPRA NTA £'000	2023 EPRA NDV £'000	2022 EPRA NRV £'000	2022 EPRA NTA £'000	2022 EPRA NDV £'000
IFRS NAV per financial statements	654,808	654,808	654,808	698,767	698,767	698,767
Fair value of interest rate derivatives	(6,905)	(6,905)	-	(2,284)	(2,284)	-
Fair value of loans	-	-	39,672	-	-	22,257
Estimated purchasers' costs	57,461	-	-	60,225	-	-
EPRA net assets	705,364	647,903	694,480	756,708	696,483	721,024
EPRA net assets (pence per share)	113.7	104.5	112.0	122.0	112.3	116.2

 

 

5. Investment properties

 

Freehold and leasehold properties

	As at 30 June 2023	As at 30 June 2022
	£'000	£'000
Opening market value	911,596	677,525
Opening fixed or guaranteed rent reviews and lease incentives	(56,705)	(47,919)
Opening performance payments	2,800	1,550
Opening carrying value	857,691	631,156
Disposals - proceeds	(26,728)	-
- gain on sale	6,088	-
Purchases and performance payments	23,494	199,869
Transfer from properties held for sale	-	6,830
Acquisition costs capitalised	273	9,671
Acquisition costs written off	(273)	(9,671)
Unrealised gain realised during the year	(5,513)	-
Revaluation movement - gains	3,645	43,234
Revaluation movement - losses	(43,877)	(15,862)
Movement in market value	(42,891)	234,071
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting	1,671	3,362
Movement in fixed or guaranteed rent reviews and lease incentives	(13,516)	(12,148)
Movement in performance payments	(2,800)	1,250
Movement in carrying value	(57,536)	226,535
Closing market value	868,705	911,596
Closing fixed or guaranteed rent reviews and lease incentives	(68,550)	(56,705)
Closing performance payments (see Note 10)	-	2,800
Closing carrying value	800,155	857,691

 

Changes in the valuation of investment properties	Year ended 30 June 2023 £'000	Year ended 30 June 2022 £'000
Gain on sale of investment properties	6,088	-
Unrealised gain realised during the year	(5,513)	-
Gains on sale of investment properties realised	575	-
Revaluation movement	(40,232)	27,372
Acquisition costs written off	(273)	(9,671)
Movement in lease incentives	(2,208)	(1,933)
Movement in fixed or guaranteed rent reviews	(11,308)	(10,215)
(Losses)/gains on revaluation of investment properties	(53,446)	5,553

 

The investment properties can be analysed as follows:

	As at 30 June 2023	As at 30 June 2022
	£'000	£'000
Standing assets	851,305	892,336
Developments under forward fund agreements	17,400	19,260
Closing market value	868,705	911,596

 

The properties were valued at £868,705,000 (2022: £911,596,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Global Standards, incorporating the International Valuation Standards (the 'Red Book Global', 31 January 2022) 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. Colliers has recent experience in the location and category of the investment properties being valued.

 

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 £800,155,000 (2022: £857,691,000). The adjustment consisted of £59,378,000 (2022: £48,802,000) relating to fixed or guaranteed rent reviews and £9,172,000 (2022: £7,903,000) 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 non-current or current assets within 'trade and other receivables'. An adjustment is also made to reflect the amount by which the portfolio value is expected to increase if the performance payments recognised in 'trade and other payables' are paid and the passing rent at the relevant property increased accordingly (see Note 10). The total purchases in the year to 30 June 2023, excluding the performance payments recognised in the prior year, were £20,694,000 (2022: £201,119,000).

 

6. Investment in subsidiary undertakings

 

The Group included 49 subsidiary companies as at 30 June 2023 (30 June 2022: 57). 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 one subsidiary incorporated in Jersey, two subsidiaries incorporated in Gibraltar and two subsidiaries incorporated in Luxembourg, all subsidiaries are incorporated within the United Kingdom.

 

The Group did not incorporate or acquire any new subsidiaries during the year. At 30 June 2022, the Group included eight companies which had been acquired as part of previous corporate acquisitions and which, having remained dormant throughout the prior year, were dissolved during the year ended 30 June 2023.

 

7. Loans

	As at 30 June 2023 £'000	As at 30 June 2022 £'000
Principal amount outstanding	230,000	234,750
Set-up costs	(4,520)	(4,315)
Amortisation of set-up costs	1,571	948
Total	227,051	231,383

 

In November 2020, the Group entered into a £70,000,000 committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.18 per cent per annum on £50,000,000 of the facility and 2.33 per cent per annum on the remaining £20,000,000 revolving credit facility, both for the duration of the loan. A non-utilisation fee of 1.13 per cent per annum is payable on the first £20,000,000 of any undrawn element of the facility, reducing to 1.05 per cent per annum thereafter. As at 30 June 2023, the Group had drawn £30,000,000 under this facility (2022: £50,000,000).

 

In November 2020, the Group entered into a £100,000,000 revolving credit facility with HSBC Bank plc ('HSBC') which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.17 per cent per annum for the duration of the loan and a non-utilisation fee of 0.92 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2023, the Group had drawn £50,000,000 under this facility (2022: £34,750,000).

 

In January 2020 and November 2021, the Group entered into committed term loan facilities with Phoenix Group of £50,000,000 and £37,250,000, respectively. Both these facilities are repayable on 12 January 2032. The Group has a further committed term loan facility with Phoenix Group of £62,750,000 which is repayable on 12 January 2037. Interest accrues on these three loans at aggregate annual fixed rates of interest of 3.28 per cent, 3.13 per cent and 3.14 per cent, respectively and is payable quarterly. As at 30 June 2023, the Group had drawn £150,000,000 under these facilities (2022: £150,000,000).

 

The following interest rate derivatives were in place during the year ended 30 June 2023:

Notional Value	Starting Date	Ending Date	Interest Paid	Interest Received	Counter-party
30,000,000	5 November 2020	5 November 2025	0.30%	Daily compounded SONIA (floor at -0.08%)	RBS
50,000,000	1 November 2022	5 November 2025	nil	Daily compounded SONIA above 3.0% cap	HSBC

 

The Group paid a premium of £2,577,000, inclusive of transaction costs of £169,000, on entry into the £50,000,000 interest rate cap.

 

At 30 June 2023, inclusive of the interest rate derivatives, the interest rate on £230,000,000 of the Group's borrowings has been capped, including the amortisation of loan arrangement costs, at an all-in rate of 3.70 per cent per annum until at least 5 November 2025. The remaining £90,000,000 of debt, which was undrawn at 30 June 2023, would, if fully drawn, carry interest at a variable rate equal to daily compounded SONIA plus a weighted average lending margin, including the amortisation of loan arrangement costs, of 2.46 per cent per annum.

 

The aggregate fair value of the interest rate derivatives held at 30 June 2023 was an asset of £6,905,000 (2022: £2,284,000). The Group categorises all interest rate derivatives as level 2 in the fair value hierarchy.

 

At 30 June 2023, the nominal value of the Group's loans equated to £230,000,000 (2022: £234,750,000). Excluding the interest rate derivatives referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated margin based on market conditions at 30 June 2023, totalled, in aggregate, £190,328,000 (2022: £212,493,000). The payment required to redeem the loans in full, incorporating the terms of the Spens clause in relation to the Phoenix Group facilities, would have been £209,898,000 (2022: £239,728,000). The loans are categorised as level 3 in the fair value hierarchy.

 

The RBS 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 five subsidiaries. The Phoenix Group loans of £50,000,000 and £37,250,000 are secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its eight subsidiaries. The Phoenix Group loan of £62,750,000 is secured by way of a fixed and floating charge over the majority of the assets of THR Number 43 plc ('THR43'). The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and its 18 subsidiaries. In aggregate, the Group has granted a fixed charge over properties with a market value of £762,100,000 as at 30 June 2023 (2022: £795,949,000).

 

Under the covenants related to the loans, the Group is to ensure that:

·      the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;

·      the loan to value percentage for THR12 Group and THR43 does not exceed 60 per cent;

·      the interest cover for THR1 Group is greater than 225 per cent (30 June 2022: 300 per cent) on any calculation date;

·      the interest cover for THR15 Group is greater than 200 per cent (30 June 2022: 300 per cent) on any calculation date; and

·      the debt yield for each of THR12 Group and THR43 is greater than 10 per cent on any calculation date.

 

During the year ended 30 June 2023, the Group entered into agreements with HSBC and RBS to relax the interest cover covenants on the relevant loans with effect from 1 January 2023. All other significant terms of the facilities remained unchanged. All loan covenants have been complied with during the year.

 

Analysis of net debt:

	Cash and cash equivalents	Borrowing	Net debt	Cash and cash equivalents	Borrowing	Net debt
	2023	2023	2023	2022	2022	2022
	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	34,483	(231,383)	(196,900)	21,106	(127,904)	(106,798)
Cash flows	(19,117)	4,955	(14,162)	13,377	(102,911)	(89,534)
Non-cash flows	-	(623)	(623)	-	(568)	(568)
Closing balance	15,366	(227,051)	(211,685)	34,483	(231,383)	(196,900)

 

8. Share capital

 

Allotted, called-up and fully paid ordinary shares of £0.01 each	Number of shares	£'000
Balance as at 30 June 2022 and 30 June 2023	620,237,346	6,202

 

Under the Company's Articles of Association, the Company may issue an unlimited number of ordinary shares. Ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.

 

During the year to 30 June 2023, the Company did not issue any ordinary shares (2022: issued 108,695,652 ordinary shares of £0.01 each raising gross proceeds of £125,000,000). The Company did not repurchase any ordinary shares into treasury (2022: nil) or resell any ordinary shares from treasury (2022: nil). At 30 June 2023, the Company did not hold any shares in treasury (2022: nil).

 

Capital management

The Group's capital is represented by the share capital, share premium, merger reserve, distributable reserve, hedging reserve, capital reserve, revenue reserve and long-term borrowings. The Group is not subject to any externally-imposed capital requirements, other than the financial covenants on its loan facilities as detailed in note 7.

 

The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective.

 

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. The Company may also increase or decrease its level of long-term borrowings.

 

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.

 

9. Financial instruments

Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps and interest rate caps 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 £23,517,000 (2022: £38,996,000), consisting of cash of £15,366,000 (2022: £34,483,000), cash held in escrow for property purchases of £4,295,000 (2022: £nil), net rent receivable of £1,088,000 (2022: £906,000), VAT recoverable of £667,000 (2022: £1,387,000), accrued development interest of £1,010,000 (2022: £452,000) and other debtors of £1,091,000 (2022: £1,768,000).

 

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 Group may also require to provide rental incentives to the incoming tenant. 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. The expected credit risk in relation to tenants is an inherent element of the due diligence considered by the Investment Manager on all property transactions with an emphasis being placed on ensuring that initial rents are set at a sustainable level. The risk is further mitigated by rental deposits or guarantees where considered appropriate. The majority of rental income is received in advance.

 

As at 30 June 2023, the Group had recognised a credit loss allowance totalling £1,972,000 against a gross rent receivable balance of £2,496,000 and gross loans to tenants totalling £989,000. As at 30 June 2022, the gross receivable was £8,496,000, of which £1,280,000 was subsequently recovered, £5,117,000 was written off and £2,099,000 is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2023 (2022: 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.

 

Should the Group hold significant cash balances for an extended period, then counterparty risk will be spread, by placing cash across different financial institutions. At 30 June 2023 the Group held £15.2 million (2022: £34.5 million) with The Royal Bank of Scotland plc and £0.2 million (2022: £nil) with HSBC Bank plc. Given the credit quality of the counterparties used, no credit loss allowance is recognised against cash balances as it is considered to be immaterial.

 

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 on-going 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. At 30 June 2022 interest was being received on cash at a weighted average variable rate of nil (2022: nil). 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 £170,000,000 (2022: £170,000,000) of committed term loans and revolving credit facilities which were charged interest at a rate of SONIA plus the relevant margin. At the year-end £80,000,000 of the variable rate facilities had been drawn down (2022: £84,750,000). The fair value of the variable rate borrowings is affected by changes in the market rate of the lending margin that would apply to similar loans. The variable rate borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value at 30 June 2023 and 30 June 2022.

 

At 30 June 2023, the Group had fully hedged its exposure on the £80,000,000 of drawn variable rate borrowings (2022: £54,750,000 of the £84,750,000 of variable rate facilities was unhedged). On any unhedged variable rate borrowings, interest is payable at a variable rate equal to SONIA plus the weighted average lending margin, including the amortisation of costs, of 2.46 per cent per annum (2022: 2.43 per cent). The variable rate borrowings 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 fixed rate term loans totalling £150,000,000 (2022: £150,000,000) and has hedged its exposure to increases in interest rates on £80,000,000 (2022: £30,000,000) of the variable rate loans, as referred to above, through entering into a £30,000,000 fixed rate interest rate swap and a £50,000,000 interest rate cap at 3.0%. Fixing the interest rate exposes the Group to fair value interest rate risk as the fair value of the fixed rate borrowings, or the fair value of the interest rate derivative used to fix the interest rate on an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £150,000,000 fixed rate term loans are carried at amortised cost on the Group's balance sheet, with the estimated fair value and cost of repayment being disclosed in Note 7, whereas the fair value of the interest rate derivatives are recognised directly on the Group's balance sheet. At 30 June 2023, an increase of 0.25 per cent in interest rates would have increased the fair value of the interest rate derivative assets and increased the reported total comprehensive income for the year by £377,000 (2022: £211,000). The same movement in interest rates would have decreased the fair value of the fixed rate term loans by an aggregate of £2,169,000 (2022: £2,822,000); however, as the fixed rate loan is held at amortised cost, the reported total comprehensive income for the year would have remained unchanged. A decrease in interest rates would have had an approximately equal and opposite effect.

 

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.

 

The external valuers are mindful of the potential impacts ESG may have on capital and rental valuations. Currently in the UK, the external valuers have not seen consistent prima facie evidence to suggest that ESG has a direct impact on the valuation of all commercial and residential buildings. However, as the UK real estate market continues to adapt to ESG development practices and legislative requirements, the valuers anticipate an evolution in the analysis undertaken when providing real estate valuations. This may potentially impact on the valuation of a property over the course of a typical investment period.

 

10. Contingent assets and liabilities

As at 30 June 2023, six (2022: fourteen) properties within the Group's investment property portfolio contained performance payment clauses meaning that, subject to contracted performance conditions being met, further capital payments totalling £5,720,000 (2022: £13,320,000) may be payable by the Group to the vendors/tenants of these properties. The potential timings of these payments are also conditional on the date(s) at which the contracted performance conditions are met and are therefore uncertain.

 

It is highlighted that any performance payments subsequently paid will result in an increase in the rental income due from the tenant of the relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the investment yield used to arrive at the valuation of the properties, any performance payments made would be expected to result in a commensurate increase in the value of the Group's investment property portfolio.

 

Having assessed each clause on an individual basis, the Group has determined that the contracted performance conditions had not been met in relation to any of these properties and therefore at 30 June 2023 no liability was recognised (2022: £2,800,000). Had a liability been recognised, an equal but opposite amount would have been recognised as an asset in 'investment properties' in Note 5 to reflect the increase in the investment property value that would be expected to arise from the payment of the performance payment(s) and the resulting increase in the contracted rental income. The performance payments of £2,800,000 recognised as a liability at 30 June 2022 were paid during the year ended 30 June 2023 (see Note 5).

 

11. Capital commitments

The Group had capital commitments as follows:

	30 June 2023 £'000	30 June 2022 £'000
Amounts due to complete forward fund developments	31,066	34,458
Other capital expenditure commitments	2,160	3,594
Total	33,226	38,052

 

 

12. 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 Group. The Directors of the Group received fees for their services. Total fees for the year were £218,000 (2022: £214,000) of which £nil (2022: £nil) remained payable at the year-end.

 

The Investment Manager received £7,428,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2023 (2022: £7,307,000). Of this amount £1,835,000 (2022: £1,895,000) remained payable at the year-end. The Investment Manager received a further £169,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2023 (2022: £151,000) in relation to its appointment as Company Secretary and Administrator, of which £42,000 (2022: £38,000) remained payable at the year end. Certain employees of the Investment Manager are directors of some of the Group's subsidiaries. Neither they nor the Investment Manager receive any additional remuneration in relation to fulfilling this role.

 

There were related party transactions within the Group and its wholly-owned subsidiaries which are eliminated upon consolidation.

 

13. 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 NTA. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NTA is detailed in note 4.

 

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.

 

14. Post balance sheet events

Subsequent to the year end, the Group acquired a pre-let development site subject to a forward funding agreement to construct a 66-bed care home in Weston-super-Mare, Somerset for a maximum commitment of £16.0 million including acquisition costs. Construction on the home has commenced and is expected to be completed in the summer of 2024.

 

15. Financial statements

This statement was approved by the Board on 9 October 2023. It is not the Company's full statutory financial statements in terms of Section 434 of the Companies Act 2006. The statutory annual report and financial statements for the year ended 30 June 2023 has been approved and audited and received an unqualified audit report which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. The statutory annual report and financial statements for the year to 30 June 2023 will be posted to shareholders in October 2023 and will be available for inspection at Level 4, Dashwood House, 69 Old Broad Street, London, EC2M 1QS, the registered office of the Company.

 

The statutory annual report and financial statements will be made available on the website www.targethealthcarereit.co.uk. Copies may also be obtained from Target Fund Managers Limited, Glendevon House, Castle Business Park, Stirling FK9 4TZ.

 

The audited financial statements for the year to 30 June 2023 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 29 November 2023.