Target Healthcare REIT

3 November 2020

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 30 September 2020, together with an update on corporate activity and declares its first interim dividend for the year ending 30 June 2021.

Corporate activity highlights

Stable NAV and balance sheet strength

·      EPRA NAV per share of 108.0 pence (30 June 2020: 108.1 pence). The portfolio has continued to perform in line with recent quarters, with revaluation gains being offset by costs incurred as the Group has cautiously resumed acquisition activity

·      NAV total return (including dividend) of 1.5% for the quarter

·      Available cash reserves of £17 million (at 30 September 2020) together with £28 million available in undrawn facilities, and low net loan-to-value ("LTV") of 21.1% provides significant operational flexibility

Portfolio performance

·      0.5% increase in the like-for-like value of the operational portfolio; total property portfolio value of £637.5 million and an EPRA topped-up net initial yield of 6.02%

·      13 rent reviews completed at an average uplift of 1.9% per annum

·      Like-for-like rental growth of 0.3%; contractual rent roll of £40.6 million per annum generated from 73 operational properties

·      Weighted average unexpired lease term across the portfolio of 28.9 years

·      Rent collection continues to be resilient, with around 90% of the rent due and payable to date in respect of the current quarter having been collected as at 2 November 2020, demonstrating the stable and secure nature of the portfolio's cashflows

Acquisitions & asset management

·      On 3 July 2020, the Group completed the acquisition of a 66-bed new-build care home in Bicester, Oxfordshire, for £15 million (including costs)

·      On 30 September 2020, the Group acquired a pre-let development site for £7 million, subject to a forward funding agreement, to construct a 72-bed care home in Chesterfield, Derbyshire

·      Practical completion of the Group's pre-let development site in Burscough, Lancashire, in July 2020, delivering an 80-bed care home

Dividend

·      First 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 6.4% based on the closing share price of 105.6 pence on 2 November 2020

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"The portfolio continues to benefit from the quality of the underlying real estate and its diversification characteristics, as demonstrated by the strong rental collection figures, rent covers being maintained and the like-for-like valuation increase.

"We have received positive feedback from care home managers that the standard of our real estate has made a real difference in their ability to successfully care for residents and manage their homes through the pandemic, in particular the full provision of private en suite wet-rooms. Whilst we remain highly vigilant to the ongoing threat of the pandemic, we are encouraged by the relatively low levels of COVID-19 prevalence our tenants are reporting. We would, however, expect infection rates to increase, and believe the combination of enhanced protocols, additional safety equipment, stable guidance from the authorities, and the experience of our tenants leaves them well-placed to manage further challenges. Together we are focused on recovering occupancy, enabling safe visiting, and caring effectively for our residents.

"Looking further ahead, we continue to undertake a rolling assessment of the portfolio, which includes identifying opportunities to manage the tenant base to ensure the long-term stability and sustainability of returns. Additionally, buoyed by the performance of our modern, fit-for-purpose care homes, we have cautiously resumed investment in our pipeline. Our intention is to carefully balance moving towards full investment, which will generate returns to fully cover the dividend, with the prudent retention of flexible debt capital."

Net Asset Value

The Group's unaudited EPRA NAV per share as at 30 September 2020 was 108.0 pence. The total return for the quarter based on EPRA NAV was 1.5%.

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 30 September 2020, the Group's portfolio was valued at £637.5 million and comprised 75 properties, consisting of 73 operational care homes and two pre-let sites which are being developed through capped forward funding commitments with established development partners.

The portfolio value increased by 3.2% over the quarter. Of this, 2.4% was derived from acquisitions, 0.3% from further investment into the development portfolio and a positive like-for-like movement in the operational portfolio value of 0.5%, reflecting the impact of the inflation-linked rental reviews and the passage of time shortening the remaining rent-free periods.

Contractual rent has increased by 4.2% over the quarter. Of this, 2.1% was derived from new acquisitions, 1.8% from development activities and 0.3% on a like-for-like basis as a result of the portfolio's inflation-linked upwards-only rent reviews. Where these were completed during the quarter, the average increase was 1.9%.

The portfolio's rent collection pattern remains consistent with recent quarters, however the collection metric has decreased as a result of the expiry of a rent deferral agreement in relation to one tenant. This agreement, which pre-existed the COVID-19 outbreak, reflected trading at two newly-opened homes maturing at a rate slower than budgeted. Occupancy in these homes is now improving.

The portfolio's weighted average unexpired lease term remained broadly flat at 28.9 years (30 June 2020: 29.0 years).

The portfolio had an EPRA topped-up net initial yield of 6.02% based on an annualised contractual rent upon expiry of lease incentives of £40.6 million. The EPRA net initial yield was 5.76% based on passing rent of £38.9 million. A schedule showing the respective NIY profiles from the unwind of portfolio assets in rent-free periods is shown in the Appendix.

Investment and asset management activity

·      On 3 July 2020, the Group completed the acquisition of a 66-bed new-build care home in Bicester, Oxfordshire, for £15 million (including costs). The high quality, 66 bed, purpose-built asset is let to Ideal Carehomes, the Group's largest tenant, on a 35-year, fully repairing and insuring, occupational lease which includes annual, upwards-only RPI-linked increases, subject to a cap and collar.

·      On 30 September 2020, the Group acquired a pre-let development site subject to a forward funding agreement to construct a 72-bed care home in Chesterfield, Derbyshire for a maximum commitment of £7 million. The development is scheduled to commence in November 2020 and take approximately 16 months to complete and is pre-let on a 35-year, fully repairing and insuring, occupational lease which includes annual, upwards-only RPI-linked increases, subject to a cap and collar.

·      Practical completion of the Group's development site in Burscough, Lancashire, in July 2020, delivering an 80-bed care home. Again, the home had been pre-let to an existing tenant on a 35-year, fully repairing and insuring, occupational lease which includes annual, upwards-only RPI-linked increases, subject to a cap and collar.

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. We are witnessing strong appetite from market participants, inclusive of some new entrants to the UK alternatives asset class. The best properties and sites continue to transact at the pricing levels seen prior to the COVID-19 pandemic.

The Investment Manager is analysing and performing diligence on a number of potential acquisitions, both near-term and earlier stage. Future acquisitions will be considered carefully, taking into account both the market outlook and the Group's available capital.

Debt facilities and swap arrangements

As at 30 June 2020, the Group's total borrowings were £152 million, giving a net LTV of 21.1% (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 2.72%, with a weighted average term to expiry of 4.0 years.

The Group has £80 million of fixed term debt facilities and £100 million of revolving credit facilities, with a diversified mix of maturities and lenders. As at 30 June 2020, the Group has drawn £80 million of fixed term debt, with interest costs fixed, and £72 million under the revolving credit facilities which carry a variable interest rate linked to three-month LIBOR.

Dividends in the period

The Group paid its fourth interim dividend for the year to 30 June 2020, in respect of the period from 1 April 2020 to 30 June 2020, of 1.67 pence per share, on 28 August 2020 to shareholders on the register on 14 August 2020. This distribution was comprised of a property income distribution (PID) of 0.0835 pence per share and an ordinary dividend of 1.5865 pence per share.

Valuation

The property portfolio was externally valued at £637.5 million at 30 September 2020.

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 September 2020 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 first interim dividend

The Company today declares its first interim dividend for the year ending 30 June 2021, in respect of the period from 1 July 2020 to 30 September 2020, 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 6.4% based on the 2 November 2020 closing share price of 105.6 pence.

The Company had 457,487,640 ordinary shares in issue at 30 September 2020 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. 

Investor relations

During the quarter, the Group published its Annual Report and Financial Statements for the year ended 30 June 2020 (including the Notice of Annual General Meeting) and this is available for download from the Group's website.

Shareholders will find the latest Group information at its website: https://www.targethealthcarereit.co.uk/

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 September 2020 comprised 75 assets let to 27 tenants with a total value of £637.5 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 Market Abuse Regulations (EU) No. 596/2014. 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 July 2020 to 30 September 2020:

The EPRA NAV provides a measure of the fair value of a company on a long-term basis. At 30 September 2020, due to the low valuation ascribed to the Group's remaining 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 107.9 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 December 2020 and the unaudited EPRA NAV per share as at 31 December 2020 is expected to be announced in January 2021.

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

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