Target Healthcare REIT

27 April 2021

Target Healthcare REIT plc and its subsidiaries

("Target Healthcare" or "the Group")

Net Asset Value, update on corporate activity & 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 31 March 2021, together with an update on corporate activity, and declares its third interim dividend for the year ending 30 June 2021.

Corporate activity highlights

Continued NAV progression and balance sheet strength

·      EPRA NAV per share increased by 0.8% to 109.1 pence (31 December 2020: 108.2 pence) reflecting improved earnings and valuation uplifts across the portfolio from modest yield tightening and annual rental uplifts

·      NAV total return (including dividend) of 2.5% for the quarter

·      Substantially oversubscribed placing raised gross proceeds of £60 million, with strong support from existing and new shareholders. The targeted size of the placing was increased from £50 million during the marketing period due to investor demand and strong acquisition pipeline visibility

·      Available cash & undrawn debt totalled £132.6 million, with a low net loan-to-value ("LTV") of 13.4% providing significant operational flexibility. All proceeds from the equity placing have been allocated to acquisitions under non-binding heads-of-terms, and in the meantime have been used to temporarily reduce drawn debt during the diligence periods.

Portfolio performance

·      1.0% increase in the like-for-like value of the operational portfolio; total property portfolio value of £650.8 million and an EPRA net initial yield of 5.94%

·      19 rent reviews were completed at an average uplift of 1.8% per annum with a 0.4% like-for-like growth in contractual rent

·      Weighted average unexpired lease term across the portfolio of 28.6 years

·      Rent collection continues to be resilient, with 92% of the rent due and payable to date in respect of the current quarter having been collected as at 23 April 2021, in line with recent quarters, demonstrating the stable and secure nature of the portfolio's cashflows

·      Occupancy levels across the mature portfolio have stabilised in recent weeks, with recovery anticipated during 2021 based on underlying demand as evidenced from strong enquiry levels from potential residents, as reported by our tenants

·      COVID-19 cases remain low across the portfolio (<1% of beds). Residents in 100% of homes were offered a first vaccine dose by the end of January, with the substantial majority now also having had access to their second dose.

Acquisitions, disposals & asset management

·      Substantially all capital available for investment has been allocated to Board-approved acquisitions with heads-of-terms agreed, inclusive of March's equity proceeds, with these transactions advanced to formal due diligence ahead of expected exchange of contracts/completion in the near term 

·      The disposal of one asset (c.1% of portfolio value) for sale proceeds ahead of both carrying value and cost

·      Re-tenanted one asset (c.1% of portfolio value) from large national operator to a family-owned operator on a lengthened lease term, providing an immediate net valuation uplift and better positioning the home for the future. Lease transfer payment received to fund agreed capex on home, cover rent incentives granted to incoming tenant and to reflect the change in circumstances.

·      Overall net reduction of 0.8% in contractual rent as a result of the like-for-like rental growth stated above and the combined 1.2% reduction from the disposal and re-tenanting

Dividend

·      Third interim dividend of 1.68 pence per share declared for the year ending 30 June 2021, representing an increase of 0.6% on the FY 2020 quarterly dividends. On an annualised basis, this reflects a payment of 6.72 pence per share and a dividend yield of 5.7% based on the closing share price of 117.60 pence on 26 April 2021

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"The successful capital raise in March allows us to continue our mission to support the sector through careful investment exclusively in modern, purpose-built care homes. We have heard powerful first-hand accounts from home managers and staff relating how the standards of our real estate have proven essential in their efforts to protect the wellbeing and dignity of residents through the COVID-19 pandemic.

"The non-cyclical nature of returns continue to attract participants to the market. We will not deviate from our disciplined investment approach, focussing on the sustainability of rent levels and the ability of a home to thrive within the dynamics of its local market. We base our assessment on knowledge gained having analysed thousands of homes, the skills of our stable and experienced investment team, and our proprietary research database.

"This is long-term investment with a positive social impact within a complex sector. A diversified portfolio of scale carefully assembled and managed with our specialist knowledge, will deliver sustainable returns whilst also delivering better living environments for those elderly people with care needs."

Net Asset Value

The Group's unaudited EPRA NAV per share as at 31 March 2021 was 109.1 pence. The total return for the quarter based on EPRA NAV was 2.5%.

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

Corporate Update

Portfolio performance

As at 31 March 2021, the Group's portfolio was valued at £650.8 million and comprised 75 properties, consisting of 72 operational care homes and three pre-let sites, which are being developed through capped forward funding commitments with established development partners.

The portfolio value increased by 0.5% over the quarter. This comprised a 0.7% increase from further investment into the development portfolio, a 1.2% decrease as a result of asset disposals, and a like-for-like uplift in the operational portfolio value of 1.0%. The latter movement reflects yield tightening in the investment market for modern, purpose-built care homes, the portfolio's inflation-linked rental reviews and the result of asset management initiatives.

Contractual rent increased by 0.4% from inflation-linked upwards-only rent reviews, which averaged uplifts of 1.8%. Following portfolio management activities resulting in the disposal of one asset and the re-tenanting of another, contractual rent has seen an overall net reduction of 0.8%.

Rent collection, at 92% of the rent due and payable in respect of the current quarter as at 23 April 2021, remains consistent with recent quarters. Tangible progress has been made in relation to two tenants who comprise the majority of recent and ongoing rent arrears, with a re-tenanting transaction imminent on one tenant and trading performance improving towards levels anticipated by our investment case at the other.

The portfolio's weighted average unexpired lease term remained broadly flat at 28.6 years (31 December 2020: 28.7 years).

The portfolio had an EPRA net initial yield of 5.94% based on an annualised contractual rent of £40.3 million. The portfolio had no assets in rent-free periods, therefore the EPRA topped-up net initial yield is the same as the EPRA net initial yield and is not disclosed separately.

Pipeline and investment market

The investment market for high quality, modern, fit-for-purpose assets which meet the Group's investment criteria remains very competitive. Strong investor appetite continues, with the best properties and sites attracting offers and transacting at pre-COVID-19 pandemic pricing.

The Investment Manager, as well as working through the diligence process on transactions which will see the equity proceeds invested, is also assessing a number of earlier stage opportunities as the anticipated uptick in the construction/development of fit-for-purpose care homes following COVID-19 becomes more apparent. Commitments to future acquisitions will continue to be considered carefully, taking into account both the market outlook and the Group's available capital.

Debt facilities and swap arrangements

As at 31 March 2021, the Group's total borrowings were £114 million, giving a net LTV of 13.4% (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 2.95% (31 December 2020: 2.81%). The weighted average term to expiry was 5.1 years (31 December 2020: 5.3 years).

The Group has £80 million of fixed term debt facilities and £140 million of revolving credit facilities, with a diversified mix of maturities and lenders. As at 31 March 2021, the Group has drawn £80 million of fixed term debt, with interest costs fixed, and £34 million under the revolving credit facilities which carry a variable interest rate linked to SONIA.

Dividends in the period

The Group paid its second interim dividend for the year to 30 June 2021, in respect of the period from 1 October 2020 to 31 December 2020, of 1.68 pence per share, on 26 February 2021 to shareholders on the register on 12 February 2021. This distribution was wholly comprised of a property income distribution (PID).

Valuation

The property portfolio was externally valued at £650.8 million at 31 March 2021.

The pandemic and the measures taken to tackle COVID-19 continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date some property markets have started to function again, with transaction volumes and other relevant evidence returning to levels where an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, and for the avoidance of doubt, the Colliers valuation at 31 March 2021 is not reported as being subject to 'material valuation uncertainty' as defined by VPS 3 and VPGA 10 of the RICS Valuation - Global Standards.

Announcement of third interim dividend

The Company today declares its third interim dividend for the year ending 30 June 2021, in respect of the period from 1 January 2021 to 31 March 2021, of 1.68 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID):     1.68 pence per share

The dividend reflects an annualised payment of 6.72 pence per share and a dividend yield of 5.7% based on the 26 April 2021 closing share price of 117.60 pence.

During the quarter, the Company issued 54,054,054 ordinary shares at a price of 111 pence per ordinary share. The Company had 511,541,694 ordinary shares in issue at 31 March 2021 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; Claire Turvey; Richard Gotla

FTI Consulting

020 3727 1000

[email protected] 

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 31 March 2021 comprised 75 assets let to 27 tenants with a total value of £650.8 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 NAV

The following table provides an analysis of the movement in the unaudited EPRA NAV per share for the period from 1 January 2021 to 31 March 2021:

The EPRA NAV provides a measure of the fair value of a company on a long-term basis. At 31 March 2021, 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 NAV, the NAV calculated under International Financial Reporting Standards was 109.2 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 July 2021 and the unaudited EPRA NAV per share as at 30 June 2021 is expected to be announced in July 2021.