Final Results

RNS Number : 0339B

Target Healthcare REIT Limited

02 October 2015

 



To: RNS

From: Target Healthcare REIT Limited

Date: 2 October 2015

Report and Results Announcement

Target Healthcare REIT Limited (the "Company" or the "Group"), a specialist investor in UK care homes, is pleased to announce its results for the year ended 30 June 2015.

Financial Highlights

·      IFRS profit for the year £9.6m, an increase of £8.8m

·      EPRA* Earnings Per Share of 5.7 pence, an increase of 36%

·      Dividend cover for year to June 2015 increased to 84% (period to June 2014: 52%)

·      Dividends declared of 6.12 pence per share, an increase of 2% from annualised 2014 period

·      EPRA NAV per share growth of 3.4% to 97.9 pence

Portfolio highlights

·      11 assets acquired during the year for £57.6m inclusive of costs

·      Like-for-like portfolio valuation growth of 6.0%

·      NAV total return increased to 10.3% from 3.5% in the period to June 2014

* European Public Real Estate Association

Portfolio Highlights

Malcolm Naish, Chairman of the Company, said:

I am pleased to present the Group's annual report for 2015, a second busy and successful period since launching in 2013. During the year the Group's portfolio has expanded to twenty-eight quality care home assets, investing funds from both equity issues and bank borrowings. We remain grateful to shareholders for their support and look forward to continuing the growth we have achieved thus far in a sustainable manner.

Performance highlights

Total NAV return for the year, being the increase in EPRA NAV per share and dividends paid, of 10.3% has significantly improved from 2014's 3.5%, demonstrating why we have such conviction in our investment strategy. EPRA earnings have increased by 124% to £6.8m (2014: £3.0m) delivering an EPRA earnings per share increase of 36% to 5.7 pence (2014: 4.2 pence).

The portfolio has increased in value by 6.0% on a like-for-like basis, primarily as a result of trading performance and rental increases at individual assets. This results from our investment manager applying a bottom-up appraisal process, identifying assets which benefit from attractive local demand/supply characteristics which can therefore support quality tenant operators installed at sustainable rental levels, rising in line with inflation.

This supports long-term investment in the assets, providing a stable yield for our shareholders and a platform for our tenants to provide a quality care service.

Dividends

The Company has declared and paid dividends of 6.12 pence per share in respect of the year. This is an increase of 2% on annualised 2014 payments, and meets our objective of a progressive dividend policy. In the absence of unforeseen circumstances, I am delighted to announce that the Board intends to increase the quarterly dividend in respect of the year ending June 2016 by 1% to 1.545 pence per share, thereby in line with inflation and providing an annual total of 6.18 pence.

Outlook

Economic uncertainty over interest rates and Chinese growth will continue to impact sentiment and pricing in the investment market. Additionally, the care sector in the UK is facing headwinds from: introduction of the living wage, which will increase the cost of providing care; uncertainty over government funding of care, and; a stronger regulatory regime. Our investment manager expands on these below.

That said, the underlying fundamentals of population demographics and supply/demand imbalance of quality UK care home stock are compelling.

Our primary challenge is in responding to the competitive acquisition landscape this has created to continue to acquire attractive assets into a portfolio balanced by region, operator and size. I am pleased to confirm that our investment manager has a strong investment pipeline in our core regional mid-market, leaving the Group on course to complete acquisitions which are accretive to shareholder value. We expect rent roll to grow as we add assets, and organically through fixed and inflation-linked rental reviews. The Group's weighted average unexpired lease term ('WAULT') of 29.5 years and annual rental uplifts, either fixed or inflation-linked, provides sustainability of returns to shareholders in the long-term.

Mr Malcolm Naish

Chairman

1 October 2015

Enquiries:

Target Advisers Kenneth MacKenzie	01786 845 912
Stifel Nicolaus Europe Limited Mark Young, Roger Clarke, Neil Winward	020 7710 7600
Quill PR Fiona Harris, Sam Emery	020 7466 5058, 020 7466 5056

 

UK Healthcare Investment Market Overview

The combination of an ageing population and paucity of quality care home stock continues to present a compelling investment opportunity. Strong levels of investment activity across the UK's elderly care sector have continued during the year, resulting in some investment yield compression and providing a competitive landscape which remains particularly congested for transactions offering scale and /or access to specific geographic locations such as the South East of England. A wide range of participants remain in the market, including generalist commercial property investors, continuing the trend noted in the prior year, though we may currently be witness to a collective "pause for breath" as a reaction to the sector-specific headwinds mentioned by your Chairman above. We expand on these below.

Whilst yields for the most hotly-contested assets reflect the desirability of these assets, with some very keen yields having been paid for the perceived strongest quality covenants, we continue to believe the best value can be found within the Group's core regional mid-market: single asset and smaller portfolios of homes; likely involving regional operators; who deliver robust trading performance often as a result of a strong care culture.

We continue to identify a variety of single and multi-asset investment opportunities as evidenced by the Group's pipeline. Near-term opportunities worth approximately £64m are currently being evaluated, of which opportunities worth approximately £20m have agreed heads of terms in place. In addition the Group is working on further transactions which it is hoping to conclude over the coming months.

Headwinds: National living wage, lifetime cap on care costs, regulatory pressures

In his Summer Budget on 8 July 2015, the Chancellor announced a new living wage which will commence in April 2016 and by 2020 will reach 60% of UK median earnings.

Typically, 50-60% of the costs of a care home are staff costs and approximately two thirds of these staff costs are paid at minimum wage levels. We welcome the announcement that care workers, who undertake what is a critical and often demanding role, will receive fair remuneration for their efforts.

That said, the government needs to ensure this is properly and adequately funded. In recent years, the fees local authorities have paid care providers have risen below cost inflation. If this trend continues, care home operators face the combined effect of wage cost inflation and Local Authority austerity. Due to this, as in previous years, the cost of care homes will almost certainly increase disproportionately for self-funded residents.

It was announced on 17 July 2015 in a written ministerial statement that the £72,000 lifetime cap on care costs will be delayed until 2020, rather than starting in April 2016 as previously expected. The official line from the government is that it remains firmly committed to the cap - and it was included as a manifesto promise at the recent general election - but notwithstanding this there are those who predict the cap will not now be introduced. For operators themselves, the care cap was something of a mixed blessing and many will be relieved that at least another tier of bureaucracy has been deferred.

Feedback from our tenants, and from operators generally, would appear to indicate that the English regulator is applying a particularly zealous approach to home inspections at present. Required responses to an adverse inspection will likely be increased costs and potentially a restriction on the ability to house new residents, which may even be the case for apparently good homes in such an environment. Time will tell if this is a temporary change in approach or the new normal, but it will impact performance of many homes within the sector.

We believe maintaining a diversified investment portfolio which draws on income from both local authority and self-funded residents provides a good investment strategy as our tenants face these uncertain times.

Additionally, the Group would be expected to benefit defensively from our continued allocation of capital to modern homes as the pressure from these headwinds hastens the retiral from the market of the many aged and inadequate homes.

Strategic Objectives

	Key Performance Measures	Performance
Objective 1: Dividend To pay a progressive dividend fully covered when Group fully invested.	-    Dividend rates -    Growth in earnings -    Dividend cover -    Control of operating costs	-    Annual dividend of 6.12p, 2% increase on 2014 annualised -    84% covered -    Ongoing charges ratio 1.58% (2014: 1.95%)
Objective 2: Total returns To maximise total returns to shareholders through a combination of dividends and capital appreciation.	-    NAV total return -    Portfolio performance relative to IPD Healthcare index benchmark -    Asset valuations	-    Annual NAV total return of 10.3% (2014: 3.5%) -    Annualised portfolio total return (excluding acquisition costs) per IPD of 11.1% (to 31 December 2014) -    Like-for-like revaluation gains of 6.0%
Objective 3: Funding To fund the business through shareholder equity enhanced by modest leverage within predetermined risk thresholds.	-    Debt/equity ratio	-    Group loan-to-value (LTV) of 21.9% (excluding effect of cash held) below 35% limit -    Gross equity of £47.8m raised during year
Objective 4: Long-term secure rental income To have high quality care providers as tenants with secure, sustainable rental income giving long term growth.	-    Rent roll increase -    Number of tenants -    WAULT	-    Like-for-like growth of 2.2% -    Increase to 8 tenant  operators (2014: 5) -    WAULT of 29.5 years (2014: 30.9)
Objective 5: Grow portfolio To acquire a diversified portfolio of high quality modern care homes providing excellent accommodation standards for residents.	-    Number of acquisitions completed	-    11 assets with total value £57.6m (inc. costs) acquired during the year -    All acquired assets are  modern, the majority being less than 4 years old -    All rooms are single occupancy

Principal Risks and Uncertainties

The principal risks faced by the Group together with the procedures employed to manage them are described in the table below:

Risk and Impact	Activity in year affecting risk rating	Mitigation
1.   Dividend -    The group has no employees and relies on third parties to effectively manage operations. Poor  performance by providers may result in poor value for money through increased costs, impacting the level of profits available to be paid as dividends -    A breach of REIT regulations in relation to payment of dividends may result in loss of tax advantages through holding REIT status	-    The Group's costs have improved to an ongoing charges ratio of 1.58% (2014: 1.95%) with dividend cover increasing to 84% -    The Group remains fully compliant with the REIT regulations	-    All key service providers are subject to performance assessment at least annually -    The Group's activities are monitored to ensure all conditions are adhered to. The REIT rules are  considered during investment appraisal and transactions structured to ensure conditions are met
2. Total returns -    Property valuations are inherently subjective and can fluctuate dependent on market and assumptions. Falls in property valuations could adversely affect the Group's borrowing capacity which is linked to the value of its properties	-    The Group's portfolio value has risen on a like-for-like basis. LTV is within the stated 35% but temporarily above modest target level of 20% whilst the Group has capital awaiting investment -    Loan covenants have been complied with throughout the year	-    Loan covenants are closely monitored with there being headroom at present -    All investments are subject to a detailed investment appraisal prior to acquisition -    The portfolio is 100% let with sustainable rental levels and upwards-only annual rental reviews which support asset values
3. Funding -    Without access to equity capital (or further debt) the Group may be unable to grow through acquisition of attractive investment opportunities, and may be unable to meet future financial commitments. This is likely to be driven by investor demand which will reflect Group performance, competitor performance and the relative attractiveness of investment in UK healthcare property -    Interest rate fluctuations could increase the Group's costs and increase the likelihood of non-compliance with lender covenants	-    The Group has successfully raised new equity funding of £47.8m during the year, widening its shareholder base in the process -    Debt facility increased from £30m to £35m on existing terms	-    The Group maintains regular communication with investors, and, with the assistance of its broker and sponsor, regularly monitors the Group's capital requirements and investment pipeline alongside opportunities to raise equity -    Liquidity available from income, equity and debt is kept under constant review to ensure the Group can meet any forward commitments as they fall due
4. Long-term secure rental income -    Changes in government policies, including specific policies affecting local-authority funding of elderly care, may render the Group's strategy inappropriate. Secure income will be at risk if tenant finances suffer from policy changes, and property valuations would be impacted in the case of a demand downturn -    Concentration risk. Significant exposure to a single tenant group may adversely affect Group performance if that tenant was to encounter financial difficulties	-    The market is facing a degree of uncertainty as a result of two recent  announcements: firstly, the delay, or possible cancellation, of the social care cap which was to be introduced in 2016; and secondly, the introduction of the National Living Wage from April 2016 which will see care costs for operators rise -    New equity has been issued which, when invested, will reduce tenant concentration	-    Government policy is monitored by the Group so as to increase ability to anticipate changes -    Tenants typically have a multiplicity of income sources, thereby not being totally dependent on government pay -    The Group's properties are let on long-term leases at sustainable rent levels,  providing security of income
5. Grow portfolio -    Lack of attractive investment opportunities and/or an inability to invest on acceptable terms in suitable timeframes will hamper the Group's growth prospects	-    The competitive landscape remains particularly congested for transactions offering scale and/or access to specific geographic locations such as the South East of England. In the Group's core regional mid-market, however, we continue to source a variety of single and multi-asset investment opportunities as evidenced by the Company's pipeline	-    The Investment Manager develops and maintains a network of relationships with property owners and developers which it is expected will provide the Group with the best possible opportunity to acquire suitable properties -    Demographics are such that many new homes require to be built to satisfy demand. The Group is well-positioned to participate in acquiring a share of these
6. General -    People. Recruitment and retention of Board members and key personnel at the investment manager with relevant and appropriate skills and experience is vital to the Group's ability to meet its objectives. Failure to do so could result in the Group failing to meet its objectives	-    Two new directors appointed during the year with specific regulatory experience	-    Directors are subject to annual performance assessment, and are subject to re-election by shareholders -    The Investment Manager is subject to regular performance appraisal; has its remuneration aligned with group performance; and, there is a key man provision within the investment management agreement between the manager and the group

Mr Malcolm Naish

Chairman

1 October 2015

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 June 2015                                                                                                        

		Year ended 30 June 2015			Period from incorporation on 22 January 2013 to 30 June 2014
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		9,898	3,760	13,658	4,517	1,824	6,341
Other income		66	-	66	-	-	-
Total revenue		9,964	3,760	13,724	4,517	1,824	6,341
(Losses) on revaluation of investment properties		-	(839)	(839)	-	(4,076)	(4,076)
Acquisition of business cost		-	(174)	(174)	-	-	-
Total income		9,964	2,747	12,711	4,517	(2,252)	2,265
Expenditure
Investment management fee	2	(1,140)	-	(1,140)	(974)	-	(974)
Performance fee	2	(466)	-	(466)	(150)	-	(150)
VAT refund on management fees		82	-	82	-	-	-
Other expenses		(880)	-	(880)	(552)	-	(552)
Total expenditure		(2,404)	-	(2,404)	(1,676)	-	(1,676)
Profit / (loss) before finance costs and taxation		7,560	2,747	10,307	2,841	(2,252)	589
Net finance costs
Interest receivable		99	-	99	221	-	221
Interest payable and similar charges		(815)	-	(815)	(11)	-	(11)
Profit / (loss) before taxation		6,844	2,747	9,591	3,051	(2,252)	799
Taxation		(39)	-	(39)	(14)	-	(14)
Profit / (loss) for the year/period		6,805	2,747	9,552	3,037	(2,252)	785
Total comprehensive profit / (loss) for the year/period		6,805	2,747	9,552	3,037	(2,252)	785
Earnings / (loss) per share (pence)	3	5.71	2.31	8.02	4.19	(3.11)	1.08

The total column of this statement represents the Group's Consolidated 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 discontinued in the year/period.

Consolidated Statement of Financial Position (audited)

As at 30 June 2015

		As at 30 June 2015	As at 30 June 2014
	Notes	£'000	£'000
Non-current assets
Investment properties	4	138,164	81,422
Trade and other receivables		2,530	796
		140,694	82,218
Current assets
Trade and other receivables		6,457	5,728
Cash and cash equivalents		29,159	17,125
		35,616	22,853
Total assets		176,310	105,071
Non-current liabilities
Bank loan		(30,865)	(11,764)
Trade and other payables		(2,530)	(796)
		(33,395)	(12,560)
Current liabilities
Trade and other payables		(3,623)	(2,293)
Total liabilities		(37,018)	(14,853)
Net assets		139,292	90,218
Stated capital and reserves
Stated capital account	6	136,846	91,516
Capital reserve		495	(2,252)
Revenue reserve		1,951	954
Equity shareholders' funds		139,292	90,218
Net asset value per ordinary share (pence)	3	97.9	94.7

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 June 2015                                                                                            

	Notes	Stated capital account	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000
At 30 June 2014		91,516	(2,252)	954	90,218
Total comprehensive profit  for the year:		-	2,747	6,805	9,552
Transactions with owners recognised in equity:
Dividends paid	1	(1,313)	-	(5,808)	(7,121)
Issue of ordinary shares		47,802	-	-	47,802
Expenses of issue		(1,159)	-	-	(1,159)
At 30 June 2015		136,846	495	1,951	139,292

For the period from incorporation on 22 January 2013 to 30 June 2014

	Notes	Stated capital account	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000
At 22 January 2013		-	-	-	-
Total comprehensive (loss) / profit  for the period:		-	(2,252)	3,037	785
Transactions with owners recognised in equity:
Dividends paid	1	(2,333)	-	(2,083)	(4,416)
Issue of ordinary shares		95,740	-	-	95,740
Expenses of issue		(1,891)	-	-	(1,891)
At 30 June 2014		91,516	(2,252)	954	90,218

Consolidated Statement of Cash Flow (audited)

For the year ended 30 June 2015                                

		Year ended 30 June 2015 Total	Period from incorporation on 22 January 2013 to 30 June 2014 Total
	Notes	£'000	£'000
Cash flows from operating activities
Profit before tax		9,591	799
Adjustments for:
Interest receivable		(99)	(221)
Interest payable		815	11
Revaluation (gains) / losses on property portfolio		(2,921)	2,252
(Increase) in trade and other receivables		(308)	(565)
Increase in trade and other payables		1,003	2,032
		8,081	4,308
Interest paid		(613)	-
Interest received		99	181
Tax paid		(47)	-
		(561)	181
Net cash inflow from operating activities		7,520	4,489
Cash flows from investing activities
Purchase of investment properties	4	(51,736)	(85,498)
Acquisition of subsidiary		(5,845)	-
Net cash outflow  from investing activities		(57,581)	(85,498)
Cash flows from financing activities
Issue of ordinary share capital		47,802	95,740
Expenses of issue paid		(1,158)	(1,888)
Drawdown of bank loan facility		19,225	11,946
Development loan		3,300	(3,300)
Dividends paid		(7,074)	(4,364)
Net cash inflow from financing activities		62,095	98,134
Net increase in cash and cash equivalents		12,034	17,125
Opening cash and cash equivalents		17,125	-
Closing cash and cash equivalents		29,159	17,125

Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews		3,760	1,824

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 30 June 2015, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement, Market Overview and Strategic Objectives include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal Risks and Uncertainties' includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Mr Malcolm Naish

Chairman

1 October 2015

Notes to the Audited Consolidated Financial Statements

1.  Dividends

Amounts paid as distributions to equity holders during the year.

	Dividend rate (pence per share)	Year ended 30 June 2015 £'000
Sixth interim dividend for the period ended 30 June 2014	1.50	1,428
First interim dividend for the year ended 30 June 2015	1.53	1,721
Second interim dividend for the year ended 30 June 2015	1.53	1,795
Third interim dividend for the year ended 30 June 2015	1.53	2,177
Total	6.09	7,121

Amounts paid as distributions to equity holders during the period.

	Dividend rate (pence per share)	For the period from incorporation on 22 January 2013 to 30 June 2014 £'000
First interim dividend for the period ended 30 June 2014	2.00	1,005
Second interim dividend for the period ended 30 June 2014	1.50	753
Third interim dividend for the period ended 30 June 2014	0.44	221
Fourth interim dividend for the period ended 30 June 2014	1.06	1,009
Fifth interim dividend for the period ended 30 June 2014	1.50	1,428
Total	6.50	4,416

It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend. The fourth interim dividend in respect of the year ended 30 June 2015, of 1.53 pence per share, was paid on 28 August 2015 to shareholders on the register on 7 August 2015 amounting to £2,177,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

2. Fees paid to Target Advisers LLP:

	Year ended 30 June 2015	For the period from incorporation on 22 January 2013 to 30 June 2014
	£'000	£'000
Base management fee	1,140	974
Performance fee	466	150
Total	1,606	1,124

Between 19 March 2013 and 21 July 2014, the Company's Investment Manager was R&H Fund Services (UK) Limited. During this period, the property management arrangements of the Company were delegated by R&H Fund Services (UK) Limited, with the approval of the Company, to Target Advisers LLP (the "Investment Adviser" or "Target"), with the Investment Adviser being responsible for the day-to-day management of the Company.

On 22 July 2014, Target became the Company's Investment Manager and was also appointed as its alternative investment fund manager (the "AIFM"). Target is entitled to an annual base management fee of 0.90 per cent of the net assets of the Group, provided that the fee shall be 0.85 per cent if the net assets of the Group are below £60 million, and an annual performance fee calculated by reference to 10 per cent of the outperformance of the Group's portfolio total return relative to the IPD UK Annual Healthcare Index ('the Index').

The first performance fee period was 8 March 2013 to 31 December 2014. Subsequent performance fee periods will be annually to 31 December, in-line with the Index. Portfolio performance is measured over three cumulative rolling performance periods whereby any performance fees paid to the Investment Manager are subject to clawback if cumulative performance underperforms the Index.

A performance fee in respect of the period from launch until 31 December 2014 totalling £506,000 has been paid of which £150,000 of this was accrued in the prior period accounts. The maximum amount of total fees payable by the Group to the Investment Manager shall be limited to 1.25 per cent of the average net assets of the Group over a financial year.

At the year-end an accrual of £110,000 (inclusive of estimated VAT) has been made based on the Group's portfolio performance and available Index data.

The performance fee is charged to revenue.

The Investment Management Agreement can be terminated by either party on six months' written notice subject to an initial minimum period of notice of three years from Admission. The Investment Management Agreement may be terminated immediately if: the Investment Manager is in material breach of the agreement; guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board has not given its prior consent.

3. Earnings per share and Net Asset Value per share

EPRA is an industry body which issues best practice reporting guidelines and the Group report an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below.

Earnings per share

The Group's revenue earnings per ordinary share of 5.71 pence per share (for the period ended 30 June 2014: 4.19 pence per share) are based on the net revenue for the year of £6,805,000 (for the period ended 30 June 2014: £3,037,000) and on 119,160,560 ordinary shares (for the period ended 30 June 2014: 72,313,773 ordinary shares), being the weighted average number of shares in issue during the year.

The Group's capital earnings per ordinary share of 2.31 pence per share (for the period ended 30 June 2014: capital loss of 3.11 pence per share) are based on the capital return for the year of £2,747,000 (for the period ended 30 June 2014: capital loss of £2,252,000) and on 119,160,560 ordinary shares (for the period ended 30 June 2014: 72,313,773 ordinary shares), being the weighted average number of shares in issue during the year.

The Group's total earnings per ordinary share of 8.02 pence per share (for the period ended 30 June 2014: 1.08 pence per share) are based on the profit for the year of £9,552,000 (for the period to 30 June 2014: £785,000) and on 119,160,560 ordinary shares (for the period ended 30 June 2014: 72,313,773 ordinary shares), being the weighted average number of shares in issue during the year.

The EPRA earnings are arrived at by adjusting the revaluation movements on investment properties and represents the revenue earned by the Group.

The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for the performance fee.

The reconciliations are provided in the table below:

	Year ended 30 June 2015	Period from incorporation on 22 January 2013 to 30 June 2014
Earnings
Earnings per IFRS Consolidated Statement of Comprehensive Income	9,552	785
Adjusted for revaluations of investment properties	(2,747)	2,252
EPRA Earnings	6,805	3,037
Adjusted for performance fee	466	150
Group specific adjusted EPRA earnings	7,271	3,187
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income	8.02	1.08
EPRA EPS	5.71	4.19
Group specific adjusted EPRA EPS	6.10	4.41

Net Asset Value per share

The Group's net asset value per ordinary share of 97.9 pence (30 June 2014: 94.7 pence) is based on equity shareholders' funds of £139,292,000 (30 June 2014: £90,218,000) and on 142,298,226 (30 June 2014: 95,221,629) ordinary shares, being the number of shares in issue at the year end.

The EPRA net asset value ('EPRA NAV') per share is arrived at by adjusting the net asset value ('NAV') calculated under International Financial Reporting Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. There were no adjustments required and the NAV is consistent with the EPRA NAV.

	As at 30 June 2015	As at  30 June 2014
Net Asset Value per financial statements (pence per share)	97.9	94.7
EPRA NAV (pence per share)	97.9	94.7

4. Investments

Freehold and leasehold properties

	As at 30 June 2015	As at 30 June 2014
	£'000	£'000
Opening market value at beginning of the period	83,246	-
Purchases	49,424	81,217
Purchase of property through a business combination	5,845	-
Acquisition costs capitalised	2,312	4,281
Acquisition costs written off	(2,312)	(4,281)
Revaluation movement	5,233	2,029
Closing market value	143,748	83,246
Opening carrying value at beginning of the period	81,422	-
Purchases	49,424	81,217
Purchase of property through a business combination	5,845	-
Acquisition costs capitalised	2,312	4,281
Acquisition costs written off	(2,312)	(4,281)
Revaluation movement	5,233	2,029
Fixed or guaranteed rent reviews movement	(3,760)	(1,824)
Closing carrying value	138,164	81,422
Opening fixed or guaranteed rent reviews at beginning of period	(1,824)	-
Fixed or guaranteed rent reviews movement	(3,760)	(1,824)
Closing fixed or guaranteed rent reviews	(5,584)	(1,824)

Changes in valuation of investment properties

	Year ended 30 June 2015 £'000	For the period from incorporation on 22 January 2013 to 30 June 2014 £'000
Net revaluation movement	2,921	(2,252)
Movement in fixed or guaranteed rent reviews	(3,760)	(1,824)
Losses on revaluation of investment properties	(839)	(4,076)

The properties were valued at £143,748,000 (2014: £83,246,000) by Colliers International Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Professional Standards, incorporating the International Valuation Standards January 2014 ('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 an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing where the parties has each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews was £138,164,000 (2014: £81,422,000). Included within fixed rent reviews is £7,000 relating to lease incentives.

5. Investment in subsidiary undertakings

The Company owns 100 per cent. of the issued ordinary share capital of Target Healthcare REIT (Mossvale) Limited ("THRM"), a company registered in Scotland. The principal activity of Target Healthcare REIT (Mossvale) Limited is that of an investment and property company.

In the prior period the Company provided a capital contribution of £4.0 million to THRM.

The Company owns 100 per cent. of the issued ordinary share capital of THR Number One PLC ("THR1"), a company registered in England & Wales. The principal activity of THR1 is that of an investment and property company.

THR1 owns 100 per cent. of the share capital of THR Number Two Limited ("THR2"), a company registered in England & Wales. The principal activity of THR2 is that of an investment and property company.

In addition to its investment in the shares of THR1, the Company has lent £1.7 million to THR1 as at 30 June 2015 (2014: £4.6 million). Interest is payable at a fixed rate of 2.5 per cent. per annum.

THR1 has lent £950k to THR2 as at 30 June 2015 (2014: £2.9 million). Interest is payable at a fixed rate of 2.5 per cent. per annum.

6. Stated Capital Movements

	As at 30 June 2015
	Number of shares	£'000
Allotted, called-up and fully paid ordinary shares of no par value
Opening balance	95,221,629	91,516
Issue of 17,244,597 ordinary shares of no par value on 25 September 2014	17,244,597	17,417
Issue of 4,832,000 ordinary shares of no par value on 26 November 2014	4,832,000	4,885
Issue of 25,000,000 ordinary shares of no par value on  6 March 2015	25,000,000	25,500
		139,318
Expenses of issue		(1,159)
		138,159
Dividends allocated to capital		(1,313)
Balance as at 30 June 2015	142,298,226	136,846

Under the Company's Articles of Incorporation, the Company may issue an unlimited number of ordinary shares.

Capital management

The Company's capital is represented by the stated capital account, capital reserve and revenue reserve. The Company is not subject to any externally-imposed capital requirements.

The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective. The Company is able to pay a dividend out of the Stated Capital Account in accordance with the requirements of the Companies (Jersey) Law 1991.

Capital risk management

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

The Board has responsibility for ensuring the Group's ability to continue as a going concern. This involves the ability to borrow monies in the short and long term; and pay dividends out of reserves, all of which are considered and approved by the Board on a regular basis.

To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company did not repurchase any ordinary shares during the period. At 30 June 2015 and at 30 June 2014, the Company did not hold any ordinary shares in treasury. On 27 August 2015, the Company issued 14,229,822 ordinary shares at a price of 99.5 pence per share. These same shares were repurchased at the same price, to be held in treasury, immediately on admission on 2 September 2015. See note 10 for further details. At 1 October 2015, the Company held 14,229,822 ordinary shares in treasury.

No changes were made in the objectives, policies or processes during the year.

7. Financial instruments

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

The Group 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 Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group'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 Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group'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 Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £29.8 million (2014: £20.8 million).

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 Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager 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 30 June 2015 and at 30 June 2014.

All of the Group'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 Group'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.

During the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across two different financial institutions and at the year-end the Group held £14.1 million (2014: £12.9 million) with The Royal Bank of Scotland plc and £15.0 million (2014: £4.2 million) with Lloyds Bank plc.

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group 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 Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group 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. Interest rate risk is the risk that future cash flows will change adversely as a result of changes in market interest rates.

The Group'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 per cent. and 0.55 per cent. and earns interest at these fixed rates for six months. Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.

The Group has a £35 million committed term loan and revolving capital facility which is charged interest at a rate of 3 month LIBOR plus a margin of 2 per cent per annum and at the year-end £31.5 million was drawn-down (2014: £12.3 million). The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate. The Group intends to hedge a proportion of this exposure through entering into a fixed rate Interest Rate Swap.

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 note 4.

8. Related Party Transactions and fees paid to Target Advisers LLP

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.

Mr G Ross is a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, which receive fees from the Company. Mrs H Jones is a director of the Company Secretary, R&H Fund Services (Jersey) Limited.

The Directors of the Company received fees for their services. Total fees for the year were £113,000 (prior period: £82,000) of which £16,000 (£9,550) remained payable at the year end.

Target Advisers LLP received £1,606,000 (prior period: £1,124,000) during the period of which £nil (2014: £49,000) related to the expenses of issue and £466,000 (prior period: £150,000) related to performance fee. £450,000 (2014: £394,000) (inclusive of VAT) remained payable at the year end.

9. Operating segments

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group 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 Group. The key measure of performance used by the Board to assess the Group's performance is the total return on the Group's net asset value. As the total return on the Group's net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Statement of Financial Position, assuming dividends are re-invested, the key performance measure is that prepared under IFRS. Therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The view that the Group is engaged in a single segment of business is based on the following considerations:

-     One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole.

-     There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the benchmark.

-     The management of the portfolio is ultimately delegated to a single property manager, Target.

10. Post balance sheet events

On 27 August 2015, the Company issued 14,229,822 ordinary shares, under the placing programme described in the Company's prospectus dated 5 September 2014, as supplemented on 7 January 2015 and 24 February 2015, at a price of 99.5 pence per share. Following admission on 2 September 2015, the Company immediately repurchased these same shares, at the same price, to be held in treasury. The net cash position of the Company, following this transaction, remained unchanged. At 1 October 2015, the Company held 14,229,822 ordinary shares in treasury.

11. Financial Statements

These are not full statutory accounts.  The report and financial statements for the year to 30 June 2015 will posted to shareholders and made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from the Administrator, R&H Fund Services Limited, 15-19 York Place, Edinburgh, EH1 3EB.

 

END

 

 

FR MTBATMBAMMJA