Interim Report Announcement

Target Healthcare REIT Limited

Interim Report Announcement

Target Healthcare REIT Limited ("the Company" or "Target Healthcare"), a specialist investor in UK care homes, is pleased to announce its interim report for the period from incorporation on 22 January 2013 to 31 December 2013.

 

Financial Highlights

·      Since listing on 7 March 2013, the Company has raised £95.7m gross from a combination of institutional investors, wealth managers and private investors.

·      The unaudited Net Asset Value ("NAV") per share as at 31 December 2013 was 95.9 pence.

·      The Company's share price of 105.0 pence as at 31 December 2013 represented a 9.5% premium to the unaudited NAV per share as at the same date.

·      Interim dividends of 3.5 pence per share were paid during the period. The Company also declared an interim dividend of 0.4 pence per share for the period from 1 October 2013 to 27 October 2013 and an interim dividend of 1.06 pence per share for the period from 28 October 2013 to 31 December 2013, both to be paid on 28 February 2014.

·      As at 31 December 2013 the Company owned ten care homes with a market value of £46.9m and had cash balances of approximately £45.4m. At the time of writing the cash balance had decreased to approximately £40.1m.

·      During January 2014 the Company acquired a further care home for approximately £4.3m (including acquisition costs) and has entered into advanced, non-binding legal negotiations to acquire a further £49.0m (including acquisition costs) of care home assets.

 

Malcolm Naish, Chairman of the Company, said:

"With one further care home acquisition completed during January 2014 and a strong investment pipeline of both single and multi-asset acquisitions, the Board remains confident of being able to add additional high quality assets to the portfolio. In this regard, the Company is currently in advanced, non-binding legal negotiations to acquire a further £49.0m of care home assets.

In light of the current performance of the existing portfolio and the strong investment pipeline, the Board remains confident of being able to continue to grow the Company's portfolio in line with its investment parameters and provide an attractive long-term yield proposition to shareholders."

Enquiries:

Target Advisers LLP Kenneth MacKenzie, Managing Partner	01786 406 581
Winterflood Securities Graeme Caton, Director	020 3100 0268
Quill PR Sam Emery, Account Director Fiona Harris, Managing Director	020 7466 5056 020 7466 5058

 

Chairman's Statement

Introduction

I am pleased to present the Company's interim report for the period from incorporation on 22 January 2013 to 31 December 2013.

Company Performance

Since commencement of trading on 7 March 2013 to 31 December 2013 the Company generated rental revenue from ten care homes of £2.3m.

The Company generated an operating loss of £0.8m, comprising a capital loss of £2.4m relating to the purchase costs on the ten care home assets and a revenue profit of £1.6m. The loss for this period was 1.37 pence per share.

As at 31 December 2013, the Company had cash balances of approximately £45.4m and an unaudited Net Asset Value ("NAV") per share of 95.9 pence.  At the time of writing the cash balance had decreased to approximately £40.1m.

Portfolio

The Company has successfully acquired ten care home assets located in Scotland, the North of England and the Midlands for an aggregate consideration (including acquisition costs) of £49.2m. The properties are let on long-term leases (average capital-weighted unexpired lease term 30+ years) and have three well-established, quality care operators as tenants.

The net initial yield on acquisition across the portfolio is ahead of the 7.0% blended initial yield modelled pre-launch and the rents payable are subject to annual uplifts in line with the retail prices index, subject to a cap and collar.

The Company's portfolio was externally valued as at 31 December 2013 at £46.9m.

Funding and Capital Value

The completion of the ten care home acquisitions in the period to 31 December 2013 resulted in the Company having fully invested the gross proceeds of £50.3m raised at the time of listing on 7 March 2013 and from the share issuance completed in June 2013.

 

On 9 October 2013 the Company published a prospectus in connection with the placing and offer for subscription of up to 45 million ordinary shares of no par value at an issue price of 101 pence per ordinary share. On 25 October 2013, the Company announced that the issue was over-subscribed and that gross proceeds of approximately £45.4m had been raised. Trading in these shares commenced on 28 October 2013.

 

During the reporting period, the Investment Adviser has also maintained encouraging discussions with a number of UK financial institutions with regards to the raising of a modest level of debt funding. The Company has received credit approved terms and the Investment Adviser is currently engaged in legal documentation with the selected financial institution on behalf of the Company.

The Company entered the REIT regime with effect from 1 June 2013 following its submission to HMRC.  

Dividends

During the period the Company has paid its first and second interim dividends. The first interim dividend of 2.0 pence per share in respect of the period from the Company's launch to 30 June 2013 was paid on 30 August 2013 and the second interim dividend of 1.5 pence per share in respect of the period from 1 July 2013 to 30 September 2013 was paid on 29 November 2013.

The Company has also declared its third and fourth interim dividend payments. The third interim dividend payment of 0.4 pence per share in respect of the period from 1 October 2013 to 27 October 2013 was declared on 17 October 2013. The corresponding ex-dividend date was 23 October 2013 and the dividend will be paid on 28 February 2014. The fourth interim dividend of 1.06 pence per share in respect of the period from 28 October 2013 to 31 December 2013 will also be paid on 28 February 2014.

The Company continues to target the payment of an initial dividend of approximately 8 pence per share in respect of its first financial period to 30 June 2014 (which equates to a dividend yield of 6.0 per cent. per annum on the issue price of the shares at the Company's launch).  It is the Board's policy that in paying dividends it should target a high level of dividend cover.

 

Annual General Meeting

The Company was incorporated in Jersey on 22 January 2013.  In addition to having to comply with the Listing Rules, the Disclosure and Transparency Rules, it also has to comply with the requirements of the Companies (Jersey) Law 1991 (the "Law").  Therefore, in accordance with the Law the Company must convene its first annual general meeting by no later than 18 months following its incorporation date.  Notice of the Company's first annual general meeting to be held on 15 May 2014 at 12 noon, at the office of Dickson Minto W.S., 16 Charlotte Square, Edinburgh, EH2 4DF is set out in the interim report and accounts for the period from incorporation on 22 January 2013 to 31 December 2013.

The Company intends to convene another annual general meeting following the publication of its full audited accounts which will be held on 12 November 2014 in London.

 

Outlook

Following the end of the period under review, the Company acquired a further care home asset in Glasgow for approximately £4.3m (including acquisition costs). This property is a modern, purpose-built facility and is leased to existing operator, Mossvale Care Home Limited which forms part of the Care Concern Group, further diversifying the Company's tenant-base.

In light of the current performance of the existing portfolio and the good investment pipeline, the Board remains confident of being able to continue to grow the Company's portfolio in line with its investment parameters.

The Company should benefit from the first upward-only rental reviews in the portfolio which are due in March 2014 across seven of the properties, coinciding with the first anniversaries of their acquisitions. When accompanied by the addition of further properties, the Company expects annual rental revenues to increase.

The Company is also currently in advanced, non-binding legal negotiations to acquire a further £49.0m (including acquisition costs) of care home assets and there remains a good investment pipeline of both single and multi-asset acquisitions.

Malcolm Naish

Chairman

27 February 2014

Investment Adviser's Review

Operational Highlights

·      The investment portfolio as at 31 December 2013 comprised ten modern, purpose-built care homes with three well-established and quality operators as tenants.

·      The total current annual rent roll is £3.6m and the next annual rental uplift will be in March 2014 to coincide with the anniversary of the first investment acquisition.

·      The average capital-weighted unexpired lease term as at 31 December 2013 was 31.7 years.

·      In addition, the Company maintains a good pipeline of investment opportunities.

Portfolio & Asset Management

During the period to 31 December 2013, the Company has acquired ten modern, purpose-built UK care homes for an aggregate consideration (including acquisition costs) of £49.2m.

We have continued our strategy of identifying and sourcing high quality investment opportunities and have successfully diversified the Company's tenant-base and geographic coverage during this period. All the properties in Target Healthcare's portfolio are built to excellent specifications and each benefits from generously proportioned bedrooms and public spaces. All the bedrooms across the portfolio have en-suite facilities, including wet room showers, and the homes also include additional on-site facilities, such as spacious living accommodation, hairdressing salons, libraries, cinemas and "quiet" rooms. Each of the properties is less than six years old, with the majority of the homes having been constructed in 2012 and 2013.

In the reporting period to 31 December 2013, the properties were leased to three care operators: Balhousie Care Group, Ideal Carehomes Group and, most recently, Orchard Care Homes. During our investment process we ensure that the tenants we identify and select conform to the Company's investment approach of supporting established, quality operators who demonstrate a strong focus on resident care. We believe this approach over the long-term is essential to ensuring a profitable and sustainable investment model. With the acquisition of the Glasgow care home in January 2014, this further diversifies the Company's tenant-base.

The ten leases entered into by the Company attract an annual rent roll of £3.6m and an aggregate net initial yield on acquisition in excess of the 7.0% blended initial yield modelled pre-launch. The rents payable are subject to rental reviews in line with the retail prices index, with a cap and collar, and the first rental review is expected in March 2014.

The average capital-weighted unexpired lease term as at 31 December 2014 was 31.7 years and rent has been collected in full across the portfolio during the reporting period.

Continuing the Company's investment ethos of being an actively engaged landlord, we have undertaken bi-annual inspections of each of the care homes during the period on behalf of the Company. During these visits, we draw on the substantial experience we have as a team in the elderly care sector, both as a funder and as a direct provider of care services.

Geographical Analysis

Location	% of portfolio As at 31 December 2013
Scotland	30%
East Midlands	29%
North West	23%
Yorkshire & Humberside	18%

Asset Valuations

The property portfolio was externally valued as at 31 December 2013 at open market value by Colliers International Property Consultants Limited for £46.9m.

This valuation is unchanged from the time of acquisition and is in line with our expectations given the properties were acquired within the last twelve months. A number of the properties are approaching operational maturity and consequently as they demonstrate sustainable levels of trading performance, combined with the impact of annual upward-only rental reviews, we anticipate that these changes will be reflected in the portfolio valuation.  

UK Healthcare Investment Market

The longer-term fundamentals of an ageing UK population and the limited supply of quality care home stock mean the UK elderly sector continues to attract good levels of interest from institutional investors. During the reporting period a number of successful fundraisings have been concluded, including that of Target Healthcare, which will see additional capital being allocated towards the UK healthcare sector, including elderly care. We have also seen a number of entrants attracted into the market, from both the UK and overseas, including private equity firms, financial services companies as well as the US healthcare property REITs.

Across some of the recently completed transactions in the elderly care sector, we are observing early indications that property investment yields may be hardening, albeit at this stage it is difficult to ascertain whether these are isolated instances or represent a wider trend. Notwithstanding this, our investment focus remains weighted towards ensuring that the proposed rental levels continue to match the long-term, sustainable trading performance of the Company's tenants as in many cases we believe this is more material in arriving at investment decisions than simply focusing on yield levels.

Whilst the level of new capital raised is making the competitive landscape more congested, we believe this to be particularly evident in the larger, multi-asset transactions which provide institutional investors with immediate scale. At the single asset and smaller portfolio level, we are of the opinion that we are well-placed to compete strongly in this market for the benefit of the Company.

Pipeline and Outlook

Whilst the supply of quality stock being openly marketed across the sector remains limited, we continue to successfully source a variety of single and multi-asset care home investment opportunities drawing on our well-established relationships with regional and national operators and agents alike.

In the first quarter of 2014 we are pleased to report that we are again witnessing an upturn in deal introductions following a seasonal dip in activity at the end of 2013. Consequently, we are continuing to develop the Company's acquisition pipeline and are appraising a variety of opportunities with existing tenants as well as continuing to broaden the Company's tenant base.  We are also reviewing potential transactions which would further diversify the geographical weightings of the Company's portfolio. 

 

Target Advisers LLP

Investment Adviser

 

27 February 2014

Condensed Statement of Comprehensive Income (unaudited)

For the period from incorporation on 22 January 2013 to 31 December 2013                                                                                                 

		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
Revenue
Rental income		2,291	860	3,151
Total revenue		2,291	860	3,151
Losses on revaluation of investment properties	4	-	(3,225)	(3,225)
Total income		2,291	(2,365)	(74)
Expenditure
Investment management fee	2	(487)	-	(487)
Performance fee		-	-	-
Other expenses		(321)	-	(321)
Total expenditure		(808)	-	(808)
Profit / (loss) before finance costs and taxation		1,483	(2,365)	(882)
Net finance costs
Interest receivable		93	-	93
		93	-	93
Profit / (loss) before taxation		1,576	(2,365)	(789)
Taxation		(14)	-	(14)
Profit / (loss) for the period		1,562	(2,365)	(803)
Total comprehensive profit / (loss) for the period		1,562	(2,365)	(803)
Profit / (loss) per share (pence)	3	2.66p	(4.03)p	(1.37)p

 

The total column of this statement represents the Company's 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 acquired or discontinued in the period.

 

 

 

 

Condensed Balance Sheet (unaudited)

As at 31 December 2013

	Notes	£'000
Non-current assets
Investment properties	4	46,004
		46,004
Current assets
Trade and other receivables		1,300
Cash and cash equivalents		45,354
		46,654
Total assets		92,658
Current liabilities
Trade and other payables		(1,363)
Total liabilities		(1,363)
Net assets		91,295
Stated capital and reserves
Stated capital account		92,992
Capital reserve		(2,365)
Revenue reserve		668
Equity shareholders' funds		91,295
Net asset value per ordinary share (pence)	5	95.88p

 

Condensed Statement of Changes in Equity (unaudited)

For the period from incorporation on 22 January 2013 to 31 December 2013                                                                                                 

	Stated capital account	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000
At 22 January 2013	-	-	-	-
Total comprehensive (loss) / profit  for the period:	-	(2,365)	1,562	(803)
Transactions with owners recognised in equity:
Dividends paid	(864)	-	(894)	(1,758)
Issue of ordinary shares	95,740	-	-	95,740
Expenses of issue	(1,884)	-	-	(1,884)
At 31 December 2013	92,992	(2,365)	668	91,295

 

Condensed Cash Flow Statement (unaudited)

For the period from incorporation on 22 January 2013 to 31 December 2013                         

	Notes		£'000
Cash flows from operating activities
Loss before tax			(789)
Adjustments for:
Interest receivable			(93)
Revaluation  losses on property portfolio			2,365
Increase in trade and other receivables			(440)
Increase in trade and other payables			1,300
			2,343
Interest received			93
Tax paid			-
			93
Net cash inflow from operating activities			2,436
Cash flows from investing activities
Purchase of investment properties	4		(49,229)
Net cash outflow  from investing activities			(49,229)
Cash flows from financing activities
Issue of ordinary share capital			95,740
Expenses of issue paid			(1,882)
Dividends paid			(1,711)
Net cash inflow from financing activities		92,147
Net increase in cash and cash equivalents			45,354
Opening cash and cash equivalents			-
Closing cash and cash equivalents			45,354

 

 

Notes to the Condensed Financial Statements

 

1.   Accounting policies 

(a) Basis of Preparation

A summary of the principal accounting policies, all of which have been applied consistently throughout

the period, is set out below.

 

Basis of Accounting

The condensed unaudited interim results have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU and applicable requirements of Jersey law. They do not include all of the information and disclosures required for full annual financial statements. The Directors intend to prepare the annual financial statements under IFRS as adopted by the EU.

 

Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment trust companies issued by the Association of Investment Companies ('AIC') in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

 

The notes and financial statements are presented in pounds sterling (being the functional currency and presentational currency for the Company) and are rounded to the nearest thousand except where

otherwise indicated.

 

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenue and expenses during the period. The nature of the estimation means that actual outcomes could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Significant estimates and assumptions are made in the valuation of the investment properties held. Further information on market risk and sensitivity to market changes are provided in the notes.

 

The following new standard has been issued but is not effective for this accounting period and has not

been adopted early:

 

• In October 2010, the IASB issued IFRS 9 (2010) 'Financial Instruments' and a subsequent amendment in December 2011. This represents part of a project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The objective of the standard is to enhance the ability of investors and other users of financial information to understand the accounting of financial assets

and to reduce complexity.

 

The Company does not consider that the future adoption of any new standards, in the form currently

available, will have any material impact on the financial statements as presented.

 

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

(b) Revenue Recognition

Rental Income

Rental income arising on investment properties is accounted for in the Statement of Comprehensive Income on an accruals basis.

 

Specifically:

- any rental income from fixed and minimum guaranteed rent reviews uplifts are recognised on a straight line basis over the shorter of the term to lease expiry or to the first tenant break option;

 

- lease incentives are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.

 

Where income is recognised in advance of the related cash flows, an adjustment is made to ensure that the carrying value of the relevant property including accrued rent does not exceed the external valuation.

 

Interest Income

Interest income is accounted for on an accruals basis.

 

Service Charges and Expenses Recoverable from Tenants

Income arising from expenses recharged to tenants is recognised in the period in which the compensation becomes receivable. Service charges and other such receipts are included gross of the related costs, as the Directors consider the Company acts as principal in this respect.

 

(c) Expenses

Expenses are accounted for on an accruals basis and are inclusive of VAT. The Company's investment management and administration fees, finance costs and all other expenses are charged through the Statement of Comprehensive Income and are charged to revenue.

 

Performance fees are charged through the Statement of Comprehensive Income. The annual performance fee is based on 10 per cent of the amount by which the total return of the Company's portfolio is in excess of the total return of the IPD Healthcare Index. The performance fee is measured over a rolling three year period, commencing from the acquisition of the first property.

 

(d) Dividends

Dividends are accounted for in the period in which they are paid.

 

(e) Taxation

Taxation on the profit or loss for the period not exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.

 

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted

or substantively enacted at the balance sheet date.

 

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Company will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

 

Entry to UK-REIT Regime

The Company's conversion to UK-REIT status was effective from 1 June 2013. Entry to the regime results in, subject to continuing relevant UK-REIT criteria being met, the profits of the Company's  property rental business, comprising both income and capital gains, being exempt from UK taxation.

 

(f) Investment Properties

Investment properties consist of land and buildings (principally care homes) which are not occupied for use by, or in the operations of, the Company, nor for sale in the ordinary course of business, but are held to earn rental income together with the potential for capital and income growth.

 

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and included within the book cost of the property.

 

After initial recognition, investment properties are measured at fair value, with gains and losses recognised in the Statement of Comprehensive Income. Fair value is based on the open market valuation provided by Colliers International Property Consultants Limited, Chartered Surveyors, at the balance sheet date using recognised valuation techniques appropriately adjusted for unamortised lease incentives, lease surrender premiums and rental adjustments.

 

The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets. These estimates are based on local market conditions existing at the balance sheet date.

 

On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve. Recognition and derecognition occurs on the completion of a sale between a willing buyer and a willing seller.

 

(g) Cash and Cash Equivalents

Cash and cash equivalents consist of cash in hand and short-term deposits in banks with an original maturity of six months or less.

 

(h) Rent and Other Receivables

Rents receivable, which are generally due for settlement at the relevant quarter end, are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

 

Reverse lease surrender premiums, other incentives provided to tenants and fixed or guaranteed rental uplifts are recognised as an asset and amortised over the period from the date of lease commencement to the earliest termination date.

 

(i) Property Acquisitions

Where property is acquired, via corporate acquisitions or otherwise, management considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business.

 

Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date.

Accordingly, no goodwill or additional deferred taxation arises. Otherwise, acquisitions are accounted

for as business combinations.

 

 

(j) Interest-bearing Bank Loans and Borrowings

All bank loans and borrowings are initially recognised at cost, being fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.

 

(k) Reserves

Under Jersey Company Law dividends can be paid out of any capital account of the Company subject

to certain solvency restrictions.

 

Capital Reserve

The following are accounted for in the capital reserve:

- gains and losses on the disposal of investment properties;

- increases and decreases in the fair value of investment properties held at the period end; and

- rent adjustments which represent the effect of spreading uplifts and incentives.

 

Revenue Reserve

The net profit / (loss) arising in the revenue column of the income statement is added to or deducted

from this reserve which is available for paying dividends.

 

 

2. Investment Management Fee:

	For the period from incorporation on 22 January 2013 to 31 December 2013
	£'000
Base management fee	487
Performance fee	-
Total	487

 

The Company's investment manager is R&H Fund Services (UK) Limited. The property management arrangements of the Company have been delegated by R&H Fund Services (UK) Limited, with the approval of the Company, to Target Advisers LLP ("the Investment Adviser" or "TALP").  The Investment Adviser is responsible for the day to day management of the Company.

 

3. Earnings / (Loss) per Share

 

The Company's revenue earnings per ordinary share of 2.66 pence per share is based on the net revenue for the period of £1,562,000 and on 58,618,032 ordinary shares, being the weighted average number of shares in issue during the period.

 

 

The Company's capital loss per ordinary share of 4.03 pence per share is based on the capital loss for the period of £2,365,000 and on 58,618,032 ordinary shares, being the weighted average number of shares in issue during the period.

 

The Company's total loss per ordinary share of 1.37 pence per share is based on the loss for the period of £803,000 and on 58,618,032 ordinary shares, being the weighted average number of shares in issue during the period.

 

Earnings for the period to 31 December 2013 should not be taken as a guide to the results for the period to 30 June 2014.

 

4. Investments

 

Freehold Properties

	As at 31 December 2013
	£'000
Opening carrying value	-
Purchases	49,229
Sales - proceeds	-
- gain/(loss) on sale	-
Capital expenditure	-
Revaluation movement	(2,365)
Closing market value	46,864
Movement in fixed or guaranteed rent reviews	(860)
Closing carrying value	46,004

 

Changes in the  valuation of investment properties

 

	For the period from incorporation on 22 January 2013 to 31 December 2013
Revaluation movement	(2,365)
Movement in fixed or guaranteed rent reviews	(860)
Losses on revaluation of investment properties	(3,225)

 

The properties were valued at £46,864,000 by Colliers International Property Consultants Limited ("Colliers"), in their capacity as external valuers. The valuation was prepared on a tiered fee basis, linked to the portfolio value. The valuation was undertaken in accordance with the RICS Valuation - Professional Standards, incorporating the International Valuation Standards March 2012 ('the Red Book') 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. Market Value represents the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews was £46,004,000.

 

The Company is required to classify fair value measurements of its investment properties using a fair

value hierarchy, in accordance with IFRS 13 "Fair Value Measurement". This hierarchy reflects the subjectivity of the inputs used, and has the following levels:

• Level 1 - unadjusted quoted prices in active markets;

• Level 2 - observable inputs other than quoted prices included within level 1;

• Level 3 - unobservable inputs. 

 

The Company's investment properties are valued by Colliers on a quarterly basis. The valuation methodology used is the yield model, which is a consistent basis for the valuation of investment properties within the healthcare industry. This model has regard to the current investment market and evidence of investor interest in properties with income streams secured on healthcare businesses. On

an asset-specific basis, the valuer makes an assessment of: the quality of the asset; recent and current performance of the asset; and the financial position and performance of the tenant operator. This asset specific information is used alongside a review of comparable transactions in the market and an investment yield is applied to the asset which, along with the contracted rental level, is used to derive a market value.

 

In determining what level of the fair value hierarchy to classify the Company's investments within, the Directors have considered the content and conclusion of the position paper on IFRS 13 prepared by the European Public Real Estate Association ("EPRA"), the representative body of the publicly listed real estate industry in Europe. This paper concludes that, even in the most transparent and liquid markets, it is likely that valuers of investment property will use one or more significant unobservable inputs or make at least one significant adjustment to an observable input, resulting in the vast majority

of investment properties being classified as level 3.  

 

Observable market data is considered to be that which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In arriving at the valuation Colliers will have to make adjustments to observable data of similar properties and transactions to determine the fair value of a property and this will involve the use of considerable judgement.

 

Considering the Company's specific valuation process, industry guidance, and the level of judgement

required in the valuation process, the Directors believe it appropriate to classify the Company's assets

within level 3 of the fair value hierarchy.

 

The Company's investment properties, which are all care homes, are considered to be a single class of assets. The weighted average net initial yield on these assets is 7.37%. The Directors believe that the yield on individual assets is not materially different from this average. There have been no changes to the valuation technique used through the period, nor have there been any transfers between levels. A reconciliation of movement in the level 3 investments in the period is presented below:

 

 

	As at 31 December 2013
	£'000
Opening market value	-
Market value of purchases	46,864
Closing market value	46,864
Movement in fixed or guaranteed rent reviews	(860)
Closing carrying value	46,004

 

A decrease in the investment yield applied to an asset will increase the fair value of the asset, and consequently increase the Company's reported income from unrealised gains on investments. An increase in yield will decrease the fair value of an asset and reduce the Company's income.

 

 

5. Net Asset Value

 

The Company's net asset value per ordinary share of 95.9p is based on equity shareholders' funds of £91,295,000 and on 95,221,629 ordinary shares, being the number of shares in issue at the period end.

 

6. Stated Capital Movements

 

	As at 31 December 2013	As at 31 December 2013
	Number of shares	£'000
Allotted, called-up and fully paid
Issue of 45,656,029 ordinary shares of no par value	45,656,029	45,656
Issue of 4,565,600 ordinary shares of no par value	4,565,600	4,634
Issue of 45,000,000 ordinary shares of no par value	45,000,000	45,450
Expenses of issue		(1,884)
Dividend allocated to capital		(864)
Balance as at 31 December 2013	95,221,629	92,992

 

 

7. Related Party Transactions and Investment Adviser's Fees

 

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 Company.

 

The Directors of the Company received fees for their services. Total fees for the period were £51,000 of which £9,000 remained payable at the period end.

 

The Investment Adviser received £536,000 during the period of which £49,000 related to the expenses of issue and £211,000 (inclusive of VAT) remained payable at the period end.

 

8. Operating Segments

 

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Company is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Company 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 Company. The key measure of performance used by the Board to assess the Company's performance is the total return on the Company's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the condensed financial statements.

 

9. Financial Instruments

 

The Company's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income 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.

 

Consistent with that objective, the Company holds UK care home property investments. In addition, the Company's financial instruments comprise cash and receivables and payables that arise directly from its operations. The Company does not have exposure to any derivative instruments.

 

The Company 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 Company are maintained in pounds sterling.

 

The Board reviews and agrees policies for managing the Company's risk exposure. These policies are summarised below and have remained unchanged for the period under review. These disclosures include, where appropriate, consideration of the Company's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Company'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 Company.

 

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 Company will suffer a rental shortfall and incur additional expenses until the property is re let. These expenses could include legal and surveyor's costs in re letting, maintenance costs, insurances, rates and marketing costs and will have a material adverse impact on the financial condition and performance of the Company and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Adviser monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

 

There were no financial assets which were either past due or considered impaired at 31 December 2013. All of the Company's cash is placed with financial institutions with a long-term credit rating of A or better. Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

 

Liquidity Risk

Liquidity risk is the risk that the Company will encounter in realising assets or otherwise raising funds to meet financial commitments. The Company's investments comprise UK care homes. Property and property-related assets in which the Company invests are not traded in an organised public market and may be illiquid. As a result, the Company 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 Company's liquidity risk is managed on an ongoing basis by the Investment Adviser and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Company 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. The cash held on deposits is on call and earns interest at a fixed rate for a six month period. As a consequence, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rate. The fair value of financial assets and liabilities is not materially different from their carrying value in the financial statements. When the Company retains cash balances, they are ordinarily held on interest-bearing deposit accounts. The Company's policy is to hold cash in variable rate or short term fixed rate bank accounts. Interest is received on cash at fixed rates of 0.50% and 0.65%. Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Company arising out of the investment and risk management policies.

 

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 basis of valuation of the property portfolio is set out in detail in the accounting policies and note 4.

 

 

10. Post Balance Sheet Events

 

On 31 January 2014, the Company acquired a further care home asset near Glasgow for approximately £4.3 million (including acquisition costs).

 

 

11. Further Information

All information shown for the period to 31 December 2013 is unaudited.

Certain statements in this report are forward looking statements.  By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or event to differ materially from those expressed or implied by those statements.  Forward regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future.  Accordingly, undue reliance should not be placed on forward looking statements.

 

12. Accounts

The interim report and accounts for the period from incorporation on 22 January 2013 to 31 December 2013 will posted to shareholders and made available on the website: www.targethealthcare.co.uk. Copies may also be obtained from the Company Secretary, R&H Fund Services Limited, 15-19 York Place, Edinburgh, EH1 3EB.

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist principally of investment properties and its principal risks are therefore market related. Other key risks faced by the Company relate to the REIT status of the Company, the taxation of the Company, the laws and regulations which may affect the Company, the economic environment, developments and refurbishments of properties, valuations and reliance on key individuals. These risks, and the way in which they are managed, are described in more detail under the heading 'Principal risks and risk mitigation' within the Half-Year Report and Accounts for the period from incorporation to 22 July 2013. For the remainder of the Company's financial period to 30 June 2014 it is anticipated that gearing risk will become relevant to the Company as it is expected a debt facility will be entered into. No other material changes to the Company's principal risks and uncertainties are anticipated.

 

 

 

Statement of Directors' Responsibilities in respect of the Interim Report

 

We confirm that to the best of our knowledge:

 

• the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and profit of the Company;

 

• the Chairman's Statement and Investment Advisers' Review (together constituting the Interim Management Report) include a fair review of the information required by the Disclosure and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the period and their impact on the financial statements;

 

• the Statement of Principal Risks and Uncertainties referred to above is a fair review of the information required by DTR 4.2.7R; and

 

• the condensed set of financial statements includes a fair review of the information required by DTR  4.2.8R, being related party transactions that have taken place in the period and that have materially affected the financial position or performance of the Company during the period.

 

On behalf of the Board

 

 

 

M Naish

Chairman

27 February 2014

 

Independent Review Report to Target Healthcare REIT Limited

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the Interim Report and Accounts for the period ended 31 December 2013 which comprises the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity,  the Cash Flow Statement and the Notes to the Financial Statements. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim report and accounts has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the period ended 31 December 2013 and is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Edinburgh

27 February 2014