Target Healthcare REIT

4 August 2021

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 June 2021, together with an update on corporate activity, and declares its fourth interim dividend for the year ended 30 June 2021.

Corporate activity highlights

Continued NAV progression, balance sheet strength and portfolio growth

·      EPRA NAV per share increased by 1.2% to 110.4 pence (31 March 2021: 109.1 pence) primarily reflecting valuation uplifts across the portfolio driven by modest yield compression and annual rental uplifts

·      NAV total return (including dividend) of 2.8% for the quarter

·      Available cash and undrawn debt in excess of £100 million, with a low net loan-to-value ("LTV") of 15.9% providing significant operational flexibility

·      £33 million of new investment commitments undertaken in the period, with the remaining capital available from the March 2021 equity raise allocated to Board-approved deals, which are in late-stage diligence.

Portfolio performance

·      1.4% increase in the like-for-like value of the operational portfolio; total property portfolio value of £684.8 million and an EPRA "topped-up" net initial yield of 5.83%

·      17 rent reviews were completed at an average uplift of 2.3% per annum, contributing a 0.6% increase to like-for-like contractual rent

·      Weighted average unexpired lease term across the portfolio increased to 28.8 years (31 March 2021: 28.6 years) and remains one of the longest in the listed real estate sector

·      Portfolio cashflows continue to improve from their robust base. Current period rent collection is following the pattern seen for the two most recent quarters (calendar Q1 21 and Q4 20) which each returned 96%, an improvement from the 94% collected for the two quarters prior

·      Occupancy levels across the mature portfolio have commenced their anticipated recovery from the low points seen in Q1 2021, with encouraging growth in the quarter of c.5 percentage points. This aligns with the strong enquiry levels from potential residents reported by our tenants in recent months. Reported COVID-19 cases across the portfolio remain very low.

Acquisitions and asset management

·      On 4 June 2021, the Group acquired a well-established luxury care home in Scotland. The home is situated in a densely populated area and has spacious bedrooms with full en-suite wetroom facilities, exceptional living space for the residents, and impressive outdoor space on all floors

·      On 3 June 2021, a pre-let development site subject to a forward funding agreement was acquired in Olney, Buckinghamshire. Construction on the home has commenced and is expected to complete in the first half of 2023

·      Shortly after the quarter end, practical completion was achieved at the Group's development site in Rudheath, Cheshire, delivering a 68-bed care home and lease commencement with another of the Group's existing tenants

·      Each of the three homes noted above will be operated on fully repairing and insuring occupational leases, with terms of 30-years or longer, which include annual, upwards-only RPI-linked increases, subject to a cap and collar

·      The Group has resolved the position with a tenant of two of its homes, which had already been in financial distress prior to the COVID-19 pandemic. Net income and valuation are each positively impacted immediately, with a partial settlement being received for arrears which had been provided for:

o  One home (representing c.1% of portfolio by value) has been re-tenanted to a family-owned operator, a new tenant to the Group, on revised rental terms and a lengthened lease duration

o  Terms have been agreed with a new tenant for the second home, which is being progressed to complete shortly. Current rent is being waived on this home whilst the re-tenanting progresses, with the existing tenant continuing to care for residents and facilitate an orderly handover.

Dividend

·      Fourth interim dividend of 1.68 pence per share declared for the year ended 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 5.4% based on the closing share price of 124.0 pence on 3 August 2021

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"We continue to grow the portfolio by adding high quality assets, including new developments, which we are confident will perform and contribute positively to stable returns over the long-term. We have several other deals progressing to completion which would see our remaining capital being put to work, as we play our part in the sector's efforts to modernise its real estate. Investing only in high quality, purpose-built and future proof homes is fundamental to our mission to support the care sector whilst delivering attractive returns to shareholders.

"The valuation uplifts we have seen during the quarter demonstrate the quality of the portfolio we have been patiently building. Furthermore, the increase in occupancy we are seeing is encouraging and as anticipated based on feedback from our tenants in recent months. We have achieved a milestone in resolving key portfolio challenges in respect of two tenants, with one further re-tenanting transaction to conclude. We will closely monitor the other tenant's continued improvements in trading, as we will for all tenants as we emerge from the pandemic, supporting them in our capacity as an engaged landlord."

Net Asset Value

The Group's unaudited EPRA NAV per share as at 30 June 2021 was 110.4 pence. The total return for the quarter based on EPRA NAV was 2.8%.

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 30 June 2021, the Group's portfolio was valued at £684.8 million and comprised 77 properties, consisting of 73 operational care homes and four pre-let sites, which are being developed through capped forward funding commitments with established development partners. As noted above, one of these developments reached completion in early July 2021.

The portfolio value increased by 5.2% over the quarter. This comprised a 1.1% increase from further investment into the development portfolio, a 2.7% increase resulting from acquisitions, and 1.4% from a like-for-like uplift in the operational portfolio value. The last movement reflects modest yield compression 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 2.2% over the period, comprising:

·      0.6% from 17 inflation-linked upwards-only rent reviews, with an average uplift of 2.3%.

·      Following the asset management activities in relation to two homes, a 0.2% uplift resulting from the re-tenanted asset and a temporary 1.2% reduction in relation to the other asset

·      2.6% as a result of new acquisitions

The portfolio's weighted average unexpired lease term increased slightly to 28.8 years (31 March 2021: 28.6 years) as a result of new acquisitions and successful asset management activity including the abovementioned re-tenanting and new lease agreements.

The portfolio had an EPRA topped-up net initial yield of 5.83% based on an annualised contractual rent of £41.2 million. The portfolio's EPRA net initial yield was 5.76% with one asset in a rent-free period.

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 is working through the diligence process on a number of transactions, which when progressed to completion will see all available equity and debt capital invested.

Debt facilities and swap arrangements

As at 30 June 2021, the Group's total borrowings were £130 million, giving a net LTV of 15.9% (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 2.90% (31 March 2021: 2.95%). The weighted average term to expiry was 4.8 years (31 March 2021: 5.1 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 30 June 2021, the Group has drawn £80 million of fixed term debt, with interest costs fixed, and £50 million under the revolving credit facilities which carry a variable interest rate linked to SONIA.

Dividends in the period

The Group paid its third interim dividend for the year ended 30 June 2021, in respect of the period from 1 January 2021 to 31 March 2021, of 1.68 pence per share, on 28 May 2021 to shareholders on the register on 14 May 2021. This distribution was wholly comprised of a property income distribution (PID).

Valuation

The property portfolio was externally valued at £684.8 million at 30 June 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 30 June 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 fourth interim dividend

The Company today declares its fourth interim dividend for the year ended 30 June 2021, in respect of the period from 1 April 2021 to 30 June 2021, of 1.68 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID):     0.168 pence per share

Interim Ordinary Dividend:                               1.512 pence per share

The dividend reflects an annualised payment of 6.72 pence per share and a dividend yield of 5.4% based on the 3 August 2021 closing share price of 124.0 pence.

The Company had 511,541,694 ordinary shares in issue at 30 June 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 30 June 2021 comprised 77 assets let to 28 tenants with a total value of £684.8 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 April 2021 to 30 June 2021:

The EPRA Best Practices Recommendations Guidelines published in October 2019, which became effective for the Company for the year ended 30 June 2021, state that companies should publish a set of three NAV metrics. The EPRA NAV included in this, and previous, company announcements is equivalent to the EPRA Net Tangible Assets ("NTA"). The Company intends to continue to announce the EPRA NTA on a quarterly basis and will provide the full EPRA NAV set of metrics in its Annual Report.

At 30 June 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/NTA, the NAV calculated under International Financial Reporting Standards was 110.5 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 October 2021 and the unaudited EPRA NTA per share as at 30 September 2021 is expected to be announced in October 2021.

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

The Group currently has one asset in a rent-free period which will expire in August 2022. At that point, assuming no other changes, including inter alia the portfolio valuation or rental profile, the EPRA topped-up NIY (currently 5.83%) and EPRA NIY (currently 5.76%) will be equal.