Net Asset Value and update on corporate activity

1 August 2019

Target Healthcare REIT Limited and its subsidiaries

("Target Healthcare" or "the Group")

Net Asset Value and update on corporate activity

 

 

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 2019 and provides an update on its corporate activity during the fourth quarter.

 

Highlights

 

·      EPRA NAV per share of 107.8 pence (31 March 2019: 107.3 pence), resulting in a NAV total return (including dividend) for the quarter of 2.1%

·      0.6% increase in like-for-like value of the operational portfolio; total portfolio value of £500.9 million, 63 assets comprising 60 operational homes and three pre-let forward fund developments

·      16 rent reviews completed at an average uplift of 2.8% per annum; contractual rent roll now stands at £32.2 million per annum from 60 operational properties

·      Continued portfolio growth and income diversification through the acquisitions of two operationally mature homes and the construction completion of two development sites, where homes opened to residents during the quarter

·      £2.3 million of annual contractual rent added during the quarter with the number of tenants increasing by one to 24

·      On track to add a further two new tenants and a further £2.3 million of annual contractual rent during 2019 from the Group's three forward funded pre-let developments and commitment to acquire an additional home upon construction completion

·      Completion of two disposals since 30 June at a price more than 5% above book value. The two properties represented less than 3% of the portfolio by value 

·      Subsequent to the quarter end, the fourth interim dividend of 1.64475 pence per share was declared for the year ending 30 June 2019, an increase of 2.0% on the 2018 quarterly dividends. On an annualised basis, this reflects a payment of 6.579 pence per share and a dividend yield of 5.9% based on the closing share price on 31 July 2019

·      Shareholder approval obtained during July in relation to proposals for a revised corporate structure which places a UK-incorporated parent company at the head of the Group.

 

Kenneth MacKenzie, CEO of Target Fund Managers Limited, commented:

 

"We continue to believe that the UK has a shortage of high-quality care homes, with many care providers continuing to run their business from older, ill-equipped buildings. Uncertainty about future public sector funding doesn't help to encourage the investment necessary to modernise the real estate available. However, a central thesis of our investment case is that the UK's elderly population, as well as future generations, deserve and will demand better: 100% en-suite wetrooms for residents; inviting social space indoors and out; dementia-friendly design; and an adequately equipped environment for care providers should all be pre-requisites for sustainable long term care in the 21st century.

 

We continue to shape our portfolio, and further improve its capability to deliver a highly diversified and sustainable income stream, which is the principal objective of our investment strategy. The two newest property additions, being operationally mature homes, complement the two brand new homes constructed through our development activity, with further refinement to portfolio weightings achieved through the asset disposals completed during July.

 

The capital that we currently have available (including the proceeds of the disposals) is fully allocated to pipeline opportunties that are in advanced diligence. The ability to issue new shares, pursuant to the placing programme scheduled to be in place once the corporate restructure completes, will provide us with the flexibility to source capital over the next 12 months to fund a further pipeline of assets that we are currently assessing, should they meet our differentiated, strict investment criteria."

 

 

 

Net Asset Value

 

The Group's unaudited EPRA NAV per share as at 30 June 2019 was 107.8 pence. The total return for the quarter based on EPRA NAV was 2.1%.

 

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 2019, the Group's portfolio was valued at £500.9 million and comprised 63 assets, a combination of 60 operational care homes and three pre-let sites, which are being developed through forward funding commitments with established development partners.

 

The portfolio value has increased by 5.0% over the quarter. Of this, 4.4% is derived from acquisitions and further investment into developments, with a positive like-for-like movement in the operational portfolio value of 0.6%, primarily reflecting the impact of the annual inflation-linked rental reviews, as well as a small amount of market yield shift.

 

Portfolio contractual rent has increased by 8.4% over the quarter, of which 3.1% is from acquisitions and 4.7% from the successful completion of two developments, which are now operational homes. Where rent reviews were completed during the quarter, the average increase was 2.8%, resulting in a 0.6% like-for-like increase to the contractual rent roll.

 

The portfolio's weighted average unexpired lease term has lengthened to 29.06 years as a result of the 35-year leases newly entered into on four assets (two acquisitions and two development completions).

 

The portfolio had an EPRA topped-up net initial yield of 6.26% based on an annualised contractual rent upon expiry of lease incentives of £32.2 million. The EPRA net initial yield was 5.93% based on passing rent of £30.5 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 in the quarter

 

As announced in April and June, the Group invested £14.5 million in two new acquisitions during the quarter:

 

·      A 40-bedroom home with full en suite wet-room facilities in Formby, Merseyside which opened in late 2017. The home is let on a 35-year lease with an RPI-linked cap and collar to Athena Healthcare group, an existing tenant of the Group. The home is located in an affluent area with a shortage of alternative care options.

·      A 64-bedroom home with full en suite wet-room facilities close to the centre of Nottingham in an area of low supply. The home was purpose-built in 2013 and fully meets the Group's stringent investment criteria. The home is let to Acacia Care, a local operator which is an existing tenant of the Group, on a 35-year lease with RPI-linked cap and collar.

 

Construction has completed on the development projects in Shropshire and Kent, providing 128 bedrooms with full en suite wet-room facilities across two new homes, both of which have now opened to residents. The three assets currently under construction through pre-let forward funding agreements, and the site subject to a commitment to acquire a home upon completion, continue to progress in line with the Group's expectations and will add £2.3 million annual contractual rent.

 

Subsequent to the quarter end, and as previously announced in July, the Group disposed of two care homes in Surrey and Essex for an undisclosed price which was more than 5% above the book value.

 

Pipeline and Investment Market

 

The Group continues to progress through the advanced stages of its diligence process on a number of acquisition deals, the completion of which would fully utilise the Group's available equity and debt capital.

 

The UK care home real estate market remains active, with a mix of generalist and specialist investors continuing to transact across the yield curve, reflecting the varying quality of real estate available.

 

The Group's Investment Manager continues to use its specialist knowledge, in-house research capabilities and relationships with vendors and operators to identify and acquire the high quality, modern, fit-for-purpose assets which meet its investment criteria.

 

Debt facilities & swap arrangements

 

As at 30 June 2019, the Group's total borrowings were £108.0 million, giving a loan-to-value (LTV) of 16.2% using net debt (total gross debt less cash, as a proportion of gross property value). Gross LTV (total gross debt as a proportion of gross property value) was 21.6%.

 

Through its facilities with RBS, HSBC and FCB, the Group has £70 million of fixed term debt available, with an additional £100 million of more flexible debt available from revolving facilities. The Group has currently drawn £66 million of fixed term debt on which the interest rate has been fixed through interest rate swaps. £42 million has been drawn from the revolving facilities on which the variable interest rate is linked to 3-month LIBOR.

 

The Group's weighted average cost on its drawn debt, inclusive of amortisation of arrangement costs, is 3.0% with a weighted average term to expiry of 2.1 years. The Group is currently assessing options available from lenders which would extend the term of its facilities.

 

Dividends in the period

 

The Company paid its third interim dividend for the year to 30 June 2019, in respect of the period from 1 January 2019 to 31 March 2019, of 1.64475 pence per share on 31 May 2019 to shareholders on the register on 3 May 2019.

 

Subsequent to the quarter-end, the Company announced its fourth interim dividend for the year to 30 June 2019, in respect of the period from 1 April 2019 to 30 June 2019, of 1.64475 pence per share, payable on 2 August 2019 to shareholders on the register on 19 July 2019.

 

The Company had 385,089,448 ordinary shares in issue at 30 June 2019 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

 

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

 

LEI: 2138008VQQ5Y9QXMX749

 

 

ENDS

 

Enquiries:

 

Kenneth MacKenzie; Gordon Bland

Target Fund Managers Limited

01786 845 912

 

Mark Young; Neil Winward; Tom Yeadon

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 Limited (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 current portfolio comprises 63 assets with a total value of £500.9 million (30 June 2019), which are let to 24 tenants.  

The Group only invests in modern, purpose-built 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 April 2019 to 30 June 2019:

 

	Pence per share
EPRA NAV per share as at 31 March 2019	107.3
Revaluation gains / (losses) on investment properties	0.5
Net effect of acquisition costs and assets under construction^	0.5
Costs of corporate restructure	(0.2)
Movement in revenue reserve	1.3
Third interim dividend payment for the year to 30 June 2019	(1.6)
EPRA NAV per share as at 30 June 2019	107.8
Percentage change in the 3-month period	0.5%

 

 

The EPRA NAV provides a measure of the fair value of a company on a long-term basis. As at 30 June 2019 the EPRA NAV stated above differed from that calculated under International Financial Reporting Standards of 107.6 pence per share. This was due to the valuation of the Group's interest rate derivative contracts used to hedge its exposure to variable interest rates, which is excluded from the calculation of the EPRA NAV.

 

^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. During the quarter, two assets have reached practical completion which has contributed to a positive contribution to EPRA NAV from unwinding of the discount in these cases.

2.     Summary balance sheet (unaudited)
		Jun-19	Mar-19		Dec-18		Sep-18
		£m	£m		£m		£m
Investment properties*		500.9	477.1		463.9		403.7
Cash		26.9	21.1		28.8		24.0
Net current assets / (liabilities)*		(4.6)	(1.0)		(10.2)		(1.9)
Bank loans		(108.0)	(84.0)		(71.0)		(66.0)
Net assets		415.2	413.2		411.5		359.8
EPRA NAV per share (pence)		107.8	107.3		106.9		106.1

 

*Investment properties are stated at market value 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 September 2019 and the unaudited EPRA NAV per share as at 30 September 2019 will be announced in October 2019.

 

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

 

The Group has two assets currently 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:

 

	30 June 2019	30 September 2019	31 December 2019	31 March 2020
EPRA topped-up NIY	6.26%	6.26%	6.26%	6.26%
EPRA NIY	5.93%	6.17%	6.26%	6.26%
Contractual rent (£m)	32.2	32.2	32.2	32.2
Passing rent (£m)	30.5	31.7	32.2	32.2