Target Healthcare REIT

2 February 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 December 2020, together with an update on corporate activity and declares its second interim dividend for the year ending 30 June 2021.

Corporate activity highlights

NAV progression and balance sheet strength

·      EPRA NAV per share increased to 108.2 pence (30 September 2020: 108.0 pence) reflecting valuation uplifts across the portfolio from modest yield tightening and annual rental uplifts

·      NAV total return (including dividend) of 1.8% for the quarter

·      Complementing the Group's existing 12-year £50 million facility with ReAssure, the Group has extended the maturities of both the existing HSBC and RBS facilities to November 2023 and November 2025 respectively. The extended HSBC facility also benefits from two one-year extension options. In addition to the increase in tenor, the combined facilities have added an additional £40 million of committed revolving credit facilities

·      Available cash reserves of £18 million (at 31 December 2020) together with £58 million available in undrawn facilities and low net loan-to-value ("LTV") of 22.2%, provides significant operational flexibility

Portfolio performance

·      0.8% increase in the like-for-like value of the operational portfolio; total property portfolio value of £647.7 million and an EPRA topped-up net initial yield of 5.97%

·      17 rent reviews were completed at an average uplift of 1.5% per annum providing a 0.4% like-for-like growth in contractual rent. Reported contractual rent roll remains flat following a prudent adjustment to estimated future rent in relation to the Group's sole variable rental lease

·      Weighted average unexpired lease term across the portfolio of 28.7 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 1 February 2021, in line with recent quarters, demonstrating the stable and secure nature of the portfolio's cashflows

Acquisitions & asset management

·      On 5 November 2020, the Group acquired a development site for a total capped investment of £14.4 million, subject to a forward funding agreement, to construct a 66-bed care home in Droitwich Spa, Worcestershire. The home is expected to be operational in H2 2021 and is pre-let to the Group's largest tenant, Ideal Carehomes

Dividend

·      Second 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 5.8% based on the closing share price of 115.2 pence on 1 February 2021

COVID-19 update

·      As at 1 February 2021, vaccinations have been made available to residents and staff in all of the Group's care homes, with substantial uptake across each group

·      There are currently confirmed COVID-19 cases in 2.1 per cent. of total portfolio beds across eleven care homes, down from the peak of 3.2 per cent. suspected or confirmed cases of total portfolio beds across 32 care homes during the third week of April 2020

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"Real estate investment markets have been defined by the COVID-19 pandemic for almost a year now. Against this background, the UK care home asset class has performed robustly. Two things stand out at this point. The first is the resilience and character of the tenants we have backed - their devoted care for residents and operational capabilities have contributed to the robust performance of our portfolio of modern homes. Second is the incredible progress made by the scientific community in the creation of effective vaccines, which has resulted in all our homes having had access to immunisations for residents and staff. This is a transformative process which positions the sector at the very forefront of the recovery versus other real estate classes.

"As the benefits of the vaccination programme take hold, our portfolio can look forward to operating conditions shielded from the worst effects of the virus. We are confident of latent demand for our homes, while recognising that these have been hard months for our operators, particularly those focussing on privately-funded residents, and we stand ready to support them as they seek to recover to normal occupancy levels."

Net Asset Value

The Group's unaudited EPRA NAV per share as at 31 December 2020 was 108.2 pence. The total return for the quarter based on EPRA NAV was 1.8%.

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 31 December 2020, the Group's portfolio was valued at £647.7 million and comprised 76 properties, consisting of 73 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 1.6% over the quarter. This comprised 0.8% from further investment into the development portfolio and a like-for-like uplift in the operational portfolio value of 0.8%. The latter movement reflects yield tightening in the investment market for modern, purpose-built care homes, and the portfolio's inflation-linked rental reviews.

Reported contractual rent has remained steady over the quarter. Whilst the portfolio saw a like-for-like increase of 0.4% from its inflation-linked upwards-only rent reviews, which averaged uplifts of 1.5%, this reported number has been offset by the Group's prudent approach to estimating future rental receipts from the Group's one variable rental agreement.

The portfolio rent collection pattern remains consistent with recent quarters. During the quarter there have been positive asset management developments in relation to two tenants who comprise the majority of recent and ongoing rent arrears. Progress has been made towards commitments to replace one tenant operating two homes, whilst occupancy and trading is improving towards the levels anticipated by the investment case at the two immature homes operated by the other tenant. Improved rent collection is expected on these assets in the near-term.

The portfolio's weighted average unexpired lease term remained broadly flat at 28.7 years (30 September 2020: 28.9 years).

The portfolio had an EPRA topped-up net initial yield of 5.97% based on an annualised contractual rent upon expiry of lease incentives of £40.6 million. The EPRA net initial yield was 5.80% based on passing rent of £39.4 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 5 November 2020, the Group acquired a pre-let development site subject to a forward funding agreement to construct a 66-bed care home in Droitwich Spa, Worcestershire for a maximum commitment of £14.4 million. Construction on the home has commenced and is expected to be completed in the second half of 2021. The pre-let occupational lease has a term of 35-years, is fully repairing and insuring, and 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. Strong investor appetite continues, with the best properties and sites attracting offers and transacting at pre-COVID-19 pandemic pricing.

The Investment Manager is analysing and undertaking diligence on a number of potential acquisitions, with a combination of imminent, near-term and earlier stage opportunities. 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 December 2020, the Group's total borrowings were £162 million, giving a net LTV of 22.2% (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 2.81% (30 September 2020 2.72%). The extension both in the quantum and tenor of the Group's borrowings during the quarter was completed with a minimal increase in the ongoing interest costs in return for a significant lengthening of the Group's weighted average term to expiry to 5.3 years (30 September 2020: 4.0 years).

Following the increases to and refinancing of the RBS and HSBC facilities in November 2020, 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 December 2020, the Group has drawn £80 million of fixed term debt, with interest costs fixed, and £82 million under the revolving credit facilities which carry a variable interest rate linked to SONIA.

The refinancing amendments address the transition of the facilities with both HSBC and RBS to SONIA-based loans in advance of the required transition away from LIBOR which, at the time, would have been required by the end of 2021. The Group has closed out the existing hedge in relation to the term loan element of the RBS Facility and put in place a new SONIA-based interest rate swap to align with the new term loan under the RBS Facility. The one-off costs of the refinance has reduced the NAV growth in the quarter by 0.2%.

Dividends in the period

The Group paid its first interim dividend for the year to 30 June 2021, in respect of the period from 1 July 2020 to 30 September 2020, of 1.68 pence per share, on 27 November 2020 to shareholders on the register on 13 November 2020. This distribution was wholly comprised of a property income distribution (PID).

Valuation

The property portfolio was externally valued at £647.7 million at 31 December 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 31 December 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 second interim dividend

The Company today declares its second interim dividend for the year ending 30 June 2021, in respect of the period from 1 October 2020 to 31 December 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 5.8% based on the 1 February 2021 closing share price of 115.20 pence.

The Company had 457,487,640 ordinary shares in issue at 31 December 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

On 20 January 2021, the Group's manager hosted a virtual property tour and webinar. A recording of this is available via the Group's website at: https://www.targethealthcarereit.co.uk/investor-relations/virtual-property-tour-and-webinar 

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 December 2020 comprised 76 assets let to 27 tenants with a total value of £647.7 million.

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

Important information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the 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 October 2020 to 31 December 2020:

The EPRA NAV provides a measure of the fair value of a company on a long-term basis. At 31 December 2020, 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 108.1 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 April 2021 and the unaudited EPRA NAV per share as at 31 March 2021 is expected to be announced in April 2021.

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

The Group currently has two 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: