Final Results

RNS Number : 5259M

Target Healthcare REIT PLC

17 September 2019

 

To: RNS

From: Target Healthcare REIT plc

LEI: 213800RXPY9WULUSBC04

Date: 17 September 2019

ANNUAL RESULTS FOR THE YEAR ENDED 30 JUNE 2019

Continued focus on growing high quality and differentiated portfolio in compelling asset class underpins NAV, profit and dividend increase

Target Healthcare REIT Limited (the "Company" or the "Group"), the listed specialist investor in modern, purpose-built UK care homes, is pleased to announce its results for the year ended 30 June 2019.

Financial Highlights

·      EPRA* NAV per share up 1.7% to 107.5p (2018: 105.7p)

·    NAV total return of 8.1% (2018: 10.5%)**, reflecting dividends paid and portfolio valuation uplift

·      Progressive dividend policy:

•     Dividend increased by 2.0% to 6.579p (2018: 6.45p)

•     Proposed 1.5% increase to 6.68p for 2020

·      IFRS profit for the year up 8.2% to £29.9 million (2018: £27.6 million)

·      Dividend cover on adjusted EPRA earnings of 82% (2018: 82%). Cover of 100% based on EPRA earnings.

·      EPRA Adjusted Earnings Per Share down 1.6% to 5.45p (2018: 5.54p), reflecting the dilution from equity issuance and change in management fee arrangements

·      £50 million of equity raised in November 2018 and £40 million increase to debt facilities to £170 million (2018: £130 million)

·      Proposed placing to target gross proceeds of approximately £50 million of equity announced post period end

Portfolio Highlights

·      Portfolio value increased by 29.9% to £500.9 million (2018: £385.5 million), comprising 63 assets

·      Agreements to acquire nine assets, for a total commitment of £96 million (including costs), at yields representative of assets of similar standard and location within the Group's existing portfolio:

•     Four operational homes

•     Four forward fund developments, of which three opened to residents during the period

•     One forward commitment to acquire an operational home at completion of development works (expected to be during calendar year 2019)

·      24% increase in contracted portfolio rent to £32.2 million (2018: £26.0 million)

·      Number of tenants increased to 24 (2018: 21)

·      Weighted average unexpired lease term ('WAULT') increased to 29.1 years (2018: 28.5 years)      

·      Post period end acquisition of two operational homes for £18.6 million, as well as the disposal of two homes

Market Outlook

·    Compelling demand supply dynamics supporting both investor and operator activity in the sector, with the number of people aged 85 or over in the UK forecast to double to 3.2 million in the next 20 years

·    Company's acute focus on best in class, purpose-built homes with full en suite wet-rooms, remains an attractive differentiator. Over 75% of UK care home rooms do not currently offer en suite wet-rooms

* European Public Real Estate Association

** Based on EPRA NAVs

Malcolm Naish, Chairman of the Company, said:

"This has been another positive year for the Group, as we continue to provide shareholders with stable returns through assembling and then skilfully managing an increasingly diversified portfolio of modern care homes. Aligned with the Manager's ability to continue identifying suitable acquisition opportunities, we will seek to grow the Group in a disciplined manner, as demonstrated by our proposed placing earlier this month which we hope existing shareholders will support, as well as allowing us to welcome some new shareholders to the register.  Despite prospects for the macro environment being more bearish than a year ago, with its diversified portfolio and a capital structure which allows flexible funding routes, the Group remains well-placed to deliver on its strategy."

Introduction

On behalf of the Board, I am pleased to report on another positive year for the Group. We continue to provide shareholders with stable returns with a NAV total return of 8.1%, for the year. This is consistent with the annualised NAV total return of 7.9 per cent delivered since launch. Annualised share price total return for the same period has been 8.2 per cent. These metrics of course reflect both the progressive dividends and the modest capital appreciation we aim to achieve from our portfolio of modern care homes.

Our investment approach continues to be "bottom-up", always beginning with an assessment of the real estate quality as well as the proposed commercial approach to trading within its local market - setting suitable rent levels with adequate headroom to weather periods of poor trading are crucial. The next layer of our approach is to ensure our portfolio is diversified by tenant, geography and end-user payment profile. Our aim in assembling, then skilfully managing, such a portfolio is to achieve sustainable, long-term returns.

We manage a care home portfolio which provides places for 4,094 residents, to be cared for by our 24 tenants. We take our responsibilities seriously as a provider of capital in this sector - our tenants know we are a supportive and stable partner, there for the long-term, allowing them to invest in their businesses and encouraging improvements to care standards. However, our typical lease also provides us with the ability to change care provider should care standards and commercial returns be inadequate for an extended period.

Performance & dividend

The Investment Manager reports on the portfolio performance in more detail below.

The Group's EPRA NAV per share has increased by 1.7 per cent to 107.5 pence, with like-for-like valuation growth of the portfolio of 4.1% being the principal growth driver. Adjusted EPRA Earnings per share has declined slightly at 5.45 pence per share, supporting a dividend of 6.579 pence per share, an increase of 2.0 per cent year on year. Dividends were 82 per cent covered by adjusted earnings and 100% covered by EPRA earnings. We use the adjusted value which removes the distorting effect of IFRS accounting for our guaranteed rental uplifts and reflects a more sustainable earnings metric. We expect future dividends to be fully covered when the Group is fully invested in operational assets on a geared basis.

The Board remains committed to its strategy to provide a progressive dividend. In the absence of unforeseen circumstances, the Board intends to increase the quarterly dividend in respect of the year ending June 2020 by 1.5 per cent to 1.67 pence per share, providing an annual total of 6.68 pence. This reflects a dividend yield of 6.0 per cent on the share price of 111.2 pence as at 16 September 2019.

Financing & corporate structure

Our balance sheet has been further strengthened with £50 million of equity issuance during the year, the proceeds having been used towards new investment commitments in the year of £96 million. We added £40 million of flexible debt to our facilities during the year, and continue to invest available debt - Net LTV has increased to 16.2%, progressing towards our c.25% target. With this capital structure the Group will generate sustainable earnings sufficient to cover our proposed dividends. Full investment of available debt would provide an LTV of c.28%.

We are pleased to have completed the domicile change to the UK, as approved by shareholders in August 2019. We are already benefitting from the move which has simplified our corporate structure and administration. We hope shareholders have experienced no inconvenience and we continue to focus on achieving our objectives as before.

Outlook

Prospects for the macroeconomic environment are more bearish than when I last wrote. The political outlook heightens uncertainty at home rather than reducing it, impacting our closest trading partners; there exists the potential for global trade wars to escalate in a manner which appears to be unconstructive; and, growth rates in the larger developing economies are slowing. We are also seeing a more unpredictable approach to world leadership than we have been accustomed to, which does little to provide clarity - relations with Russia and North Korea, and the UK/EU resolution of Brexit being prime examples.

No surprise then that with this uncertainty, and its associated impact on the confidence levels of those who may otherwise be investing for growth, that consensus economic forecasts for growth and interest rates have continued their trend to "lower for longer".

Careful investment in the UK care home property market, which can offer attractive returns significantly above prevailing interest rates, and at lower risk levels than some might expect, is therefore in demand. We continue to see our shares trade at a premium, in contrast to many of the traditional property sectors, and the asset class we invest in sees continued yield stability with some modest tightening.

Residential care for the elderly and infirm is needs-based, with demographic trends suggesting demand is only going to increase. The need to adequately fund the nation's infrastructure for care services to ensure it is fit-for-purpose is well-documented and very much a talking point, however funding of the NHS is still gaining more political attention and policy initiatives - perhaps social care will follow.

The Group, with its diversified portfolio and a capital structure which allows flexible funding routes, is well-placed to deliver on its strategy. We are charged with meeting shareholders' desire for a larger company which can provide increased returns from greater scale, and increased liquidity of shares in issue. Aligned with the Manager's ability to continue identifying suitable acquisition opportunities we will seek to grow the Group in a disciplined manner, as demonstrated by our proposed placing which targets gross proceeds of approximately £50 million, which we hope existing shareholders will support as well as allowing us to welcome some new holders to the register.

Board

We continue to plan for Board succession and expect to nominate a new Director during 2020. Following completion of the change in corporate structure, Hilary Jones and Craig Stewart have resigned from the Board as their specialist knowledge of the Jersey regulatory environment is no longer required. We thank Hilary and Craig for their service and contribution.

Malcolm Naish

Chairman

16 September 2019

Enquiries:

Target Fund Managers Limited Kenneth MacKenzie, Gordon Bland	01786 845 912
Stifel Nicolaus Europe Limited Mark Young, Neil Winward, Tom Yeadon	020 7710 7600
FTI Consulting Dido Laurimore, Claire Turvey, Richard Gotla	020 3727 1000

Investment Manager's Report

Portfolio review

Valuation & returns

The portfolio continues to perform in line with our expectations, outperforming its benchmark, the MSCI UK Annual Healthcare Property Index, since IPO with an annualised total return of 12.0 per cent (benchmark 9.3 per cent).

Our upwards-only rent reviews, trading performance and market yield tightening have each contributed to a like-for-like valuation increase of 4.1 per cent in the year.

Revenue growth

Contractual rent has increased by 2.5 per cent on a like-for-like basis and by 24.0 per cent inclusive of acquisitions and portfolio management activities, now standing at £32.2 million.

Our lease structures will provide rental growth from upwards-only rent reviews, with 94% of the portfolio providing RPI-linked uplifts with caps and collars, the remaining 6% uplifts being at fixed rates.

Weighted average lease duration has increased in the year to 29.1 years.

Portfolio

We comment in detail on acquisitions and diversification levels in the Annual Report. In summary, we have continued to make progress in assembling a diversified portfolio of scale designed to provide sustainable returns. Eight assets and a commitment to acquire a further home at completion of construction have been added, for a total investment commitment of £96 million, taking the portfolio to 63 assets valued at £501 million. The portfolio contains a mix of tenants (24), geography, revenue source, care type and also a mix of mature assets and brand new, maturing assets.

The majority of the portfolio continues to perform well, with 96 per cent of properties having maintained or increased in value. Whilst this is pleasing, we are working hard with our tenants on the poorer-performing assets noting that, in our opinion, these remain compelling assets and will perform over the medium to longer term.

We also believe providing opportunities and support to smaller and 'start-up' care providers is an approach which has value, and will continue to do so - whilst recognising this will be challenging at times, but the wider portfolio can shelter any short term underperformance and will benefit from full contribution of these assets once they mature and perform consistently.

UK Care home investment market

We are proud to be a leading investor in a distinct section of the UK care home market - modern, purpose-built homes which are well-equipped for residents and their care providers. A fundamental characteristic of real estate quality in this sector, in our view, is the provision of private en suite shower or wet-rooms for all residents.

Alarmingly, only c.23% of care home places across the UK provide this standard of real estate. In England, c.100,000 rooms have no form of en suite while c.200,000 rooms are classed as 'en suite' yet provide a WC and wash basin only.

Investment yields have remained stable, at below historical averages, with a range of investors attracted to the typical long lease length, particularly for modern, purpose-built homes which benefit from supportive supply/demand imbalances. This type of demand is likely to encourage stability of yields, with modest tightening for the more desirable assets which offer private fees in affluent areas, and are run by experienced and capable operators.

Across the wider sector, a number of the larger operating groups have been for sale, some remaining so. Whilst these are generally profitable businesses, perhaps a combination of poor capital structuring, a great preponderance of poorer quality real estate within their portfolios, and a recognition that businesses of such scale are not necessarily the most appropriate vehicle to provide personal care, could be hindering the sales process.

Health and social care

'One small step'

July 2019 marked the 50th anniversary of the successful Apollo 11 mission to put man on the moon. Society has changed markedly since then; life expectancy has surged, pension age has equalised for men and women, and the 'Baby Boomer' post war children have become the wealthiest generation in recent history. That same cohort are now casting aside historic ''aged'' stereotyping and living life to the full for much longer.

One wonders what could be accomplished if the forward planning required for a moon landing could be applied to planning for the cost and resources required by a rapidly ageing society. By 2035, there will be double the number of people aged over 65 living with four or more comorbidities; the Alzheimer's Society predict those living alone with dementia will double over the next two decades, and Age UK already describes what it calls care 'deserts' where 30% of Local Authority areas have 'no access' to residential care beds and 60% have 'no access' to nursing home beds.

In recent political exchanges about how to address the issue of social care, tax cuts still featured as the favoured method of wooing voters, despite the dire warning of Local Authorities via Adass (Association of Directors of Adult Social Services), who predict that adult social care could consume 60% of local tax revenues within 15 years. Jeremy Hunt MP, previously the English Health Minister, admitted that cuts to social care had gone too far. In the recent prime ministerial election, various candidates came up with their own strategies; tax breaks for families who care for an elder at home, for example. Few were comprehensive strategies. Most at least did acknowledge the unfairness of a system that covers an individual for virtually all life-threatening disease, but excludes dementia, with the cost to families in the last two years alone being £14.47 billion spent on care according to the Alzheimer's Society.

In the absence of Governmental action to resolve the social care crisis, ideas are now coming thick and fast from all directions. Over the last few months we have seen the former Secretary of State for Work and Pensions, Damian Green MP in a paper for the Centre for Policy Studies, calling for a "universal care entitlement" paid for by a National Insurance hike for the over-50s; Jacob Rees-Mogg, MP made the case for a £5,000 per year cap on care costs; the Institute for Public Policy Research advocated for the Scottish 'Free Personal Care' model. We can add to this growing list the influential House of Lords Economic Affairs Committee, who called on the Government to immediately invest   £8 billion in adult social care, followed up by a basic entitlement to publicly funded personal care for all. Last but definitely not least, we noted an open letter from eleven of the 'experts' on the Government's own Green Paper Committee, expressing their frustrations over the delay of that initiative.

On that elusive Green Paper, Matt Hancock MP, the current English Health and Social Care Minister, blamed the delay on "narrow partisan politics" and a lack of cross-party consensus. Critics decried this excuse, noting that a Green Paper is in itself to 'provoke discussion'. One small step, it seems, is all that is needed to start that process. The winner of the election race, Boris Johnson, moved almost immediately to announce his intention to 'fix the crisis in social care once and for all', It remains to be seen whether that step will be taken. Care operators in the main, of course, carry on regardless. Demand drives occupancy, drives fees. Sadly, the loser is often those who must rely on the state to fund their care in old age, or those whose diagnosis of dementia threatens their life savings or family homes. 'Catastrophic costs' as Sir Andrew Dilnot described them.

Target Fund Managers Limited

16 September 2019

Strategic Objectives

	KPIs (2019)	Looking forward	Activity (2019)	Key risks
Objective 1: Dividend To pay a progressive dividend fully covered when capital fully invested and geared.	·      Dividend per share increased by 2.0% to 6.579 pence ·      Adjusted EPRA Earnings per share 5.45 pence (2018: 5.54 pence) ·      Adjusted EPRA cost ratio 22% (2018: 21%) ·      Ongoing charges figure 1.52% (2018: 1.48%) ·      Resultant dividend cover on adjusted earnings of 82% (2018: 82%)	·      Robust near-term pipeline to deploy available capital ·      Quality of portfolio & capital structure leaves Group well placed to deliver covered dividend when fully invested & geared ·      Inflation-linked rent reviews & increasing scale provide means to deliver progressive dividends	Adjusted earnings per share have decreased slightly, reflecting both the dilution from equity issuance and the change in management fee arrangements (converting historically high variable element to a lower effective fixed rate). This change in fee arrangements is also reflected in the increase in cost ratios which excluded the variable performance fee in prior year calculations.	·      Market opportunities or performance of Investment Manager limit efficient deployment of capital & returns from portfolio ·      Reliance on third party service providers ·      Breach of REIT regulations
Objective 2: Total Returns To complement dividends with capital growth from disciplined asset management.	·      NAV total return of 8.1% ·      Share price total return 10.8% ·      Like-for-like valuation increase of 4.1% (2018: 6.6%) ·      96% of properties value maintained or increased (2018: 96%)	·      The UK care home market is competitive, particularly for modern, purpose-built real estate. We expect valuation yields to remain broadly stable, with some modest tightening. This would be consistent with 2018's market, as forecast.	The benefits of careful asset selection within an appropriate sub-sector of the care home market continue to be apparent. The portfolio's total return of 12.7% for the calendar year to December 2018 was ahead of the benchmark MSCI UK Annual Healthcare Property Index's total return of 9.1%. The portfolio has consistently outperformed the benchmark since launch.	·      Underperformance of assets or the impact of external market/sector/ economic factors may adversely affect property values and returns
Objective 3: Business Funding To source and effectively use modest leverage.	·      Net LTV increased to 16.2% from 6.4% ·      Increased available debt facilities to £170m (2018: £130m) ·      Weighted average cost of drawn debt (inc. costs) of 2.98% (2018: 3.12%)	·      Flexible capital available, with ability to fully draw to net LTV of c.28% ·      Terms agreed with lenders for longer duration debt. Legal diligence is ongoing. ·      Continue to assess opportunities to grow the Company and improve portfolio with respect to capital availability to minimise cash drag.	During the year the Group has increased in scale and enhanced its access to flexible debt through: • £50 million gross equity issuance in November 2018 • £40 million increase to its fully revolving debt facility with HSBC Significant progress has been made toward the target gearing level of 25% whilst debt has been sourced at competitive rates and partially fixed with interest rate swaps. Net LTV: 16.2% (2018: 6.4%) Drawn Debt: £108m (2018: £66m) Cost of Debt: 2.98% (2018: 3.12%)* *on drawn debt, inclusive of amortisation of arrangement costs.	·      Refinance risk ·      Interest rate risk
Objective 4: Long-term Secure Rental Income Diversified and sustainable	·      24% increase in contracted rent to £32.2m ·      Like-for-like growth of 2.5% (2018: 3.2%) ·      Increase in number of tenants to 24 (2018: 21) ·      WAULT of 29.1 years (2018: 28.5 years)	·      Continue to consider contribution of assets to diversification metrics ·      Continue to closely manage asset performance, updating strategies as circumstances develop, particularly with regard to newer homes which can often face challenges as "start-up" businesses	Acquisitions and asset management activity have increased rent and enhanced diversification. Inflation-linked rent reviews have delivered a like-for-like rent increase of 2.5%, with tenant concentration risk continuing to decline: the largest tenant now accounts for 13.6% of rent (2018: 14.1%) and the number of tenants has increased to 24 (2018: 21). Additionally, the lease duration on one asset was extended, increasing the longevity of rental income, and a re-tenanting of one home to remove an underperforming tenant was managed with no interruption to residents, resulting in an increase in that property's value.	·      Government policies/ funding of elderly care may change
Objective 5: Grow Portfolio To assemble a diversified portfolio of modern care homes of suitable standard for 2019 and beyond.	·      Increased portfolio to 63 assets (2018: 55) ·      Portfolio value increased to £500.9m (2018: £385.5m)	·      Complete acquisitions of identified assets currently in advanced diligence ·      Continue to identify attractive pipeline assets to grow and improve the portfolio if shareholders are supportive	Completed the acquisition of eight assets, plus a forward commitment to acquire a home once construction completes, for total investment commitment of £96 million during the year. The Group's development activities have provided 5 brand new homes to their local markets in the year.	·      Lack of available properties ·      Inability to invest on acceptable terms

Risk Rating

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

Risk and Impact	Factors affecting risk rating	Risk mitigation
1.   Dividend -    The Group has no employees and relies on third parties such as the Investment Manager to effectively manage operations. Poor performance by providers may result in reduced returns to shareholders. Risk rating & change: Medium (unchanged) -    A breach of REIT regulations in relation to payment of dividends may result in loss of tax advantages derived from the Group's REIT status Risk rating & change: High (unchanged)	-    Group profitability was steady during the year with adjusted earnings per share 5.45p (2018: 5.54p). This was achieved by strong portfolio performance, an increase in gearing and ongoing cost control. Changes to management fee arrangements have removed the variable cost performance fee and introduced a tiered fee basis. -    The Group remains fully compliant with the REIT regulations.	-    All key service providers, including the Investment Manager, are subject to performance assessment at least annually. If performance is assessed as not meeting expectations the provider will either be provided feedback to facilitate improved service levels or replaced. -    The Group's activities are monitored on a continual basis to ensure all conditions are adhered to. Additionally, the REIT rules are considered during investment appraisal and transactions structured to ensure conditions are met.
2. Total Returns -    Underperformance of assets, or the impact of external market or macroeconomic factors may adversely affect property values and returns. Risk rating & change: Medium (unchanged)	-    The Group's portfolio value has increased on a like-for-like basis by 4.1 per cent, 96 per cent of properties have maintained or increased in value. Portfolio NIY tightening is consistent with high market demand for assets such as those within the portfolio. -    Trading at each home could underperform impacting value. New homes in 'start-up' phase may be slow to reach operational maturity.	-    All investments are subject to a detailed investment appraisal and approval process prior to acquisition. -    The operational portfolio is 100 per cent let with sustainable rental levels and upwards-only annual rental reviews which support asset values. -    The Manager is proactive in monitoring assets and tenants and will take supportive action to assist performance on a timely basis.

3. Business 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. Risk rating & change: Medium (unchanged) -    Debt: Interest rate fluctuations could decrease profitability and impact compliance with lender covenants; lenders may not refinance facilities at maturity. Risk rating & change: Medium (unchanged)	-    Political and economic uncertainty exists in relation to the UK's imminent withdrawal from the EU and no clarity on the details. The Group's ability to access the capital markets to meet its strategic objectives could be impacted in the longer-term. -    The Group has fixed interest costs on 100 per cent of its drawn fixed term borrowings as at 30 June 2019 until September 2021. -    LTV remains at a conservative level, increasing to 16 per cent at the end of the year with an increased number of properties in the Group against which borrowing is secured. -    Covenants for each of the three debt facilities have been complied with during the year, with adequate headroom at year-end.	-    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. -    Loan covenants are closely monitored for compliance, with headroom projected. -    The Manager actively reviews the debt market for opportunities to access optimal commercial terms.
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. Risk rating & change: Medium (unchanged)	-    Whilst the care sector continues to face challenges, the associated pressures are tending to be felt most by businesses wholly reliant on local authority funding of residents. The Group's portfolio is diversified in respect of the fee income received by its tenants, with a significant proportion being self-funded.	-    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. Risk rating & change: Medium (unchanged) -    Counterparties to forward fund arrangements do not honour their commitments to complete construction of assets. Risk rating & change: Medium (unchanged)	-    Activity levels in the market remain competitive, particularly for premium assets exclusively aimed at self-funded residents in prime locations. While there have been new entrants into the market within the last year increasing competition, the Investment Manager continues to identify opportunities that meet its criteria, and is actively pursuing these. -    The Group has increased its exposure to such assets during the year as a method of adding new build homes on long leases to its portfolio.	-    The Manager's network and reputation will provide the Group with opportunities to acquire suitable properties. -    The Board monitors the Group's pace of deployment of capital via regular reporting by the Investment Manager. -    The Group's business model is underpinned by forecast demographic data and trends. The accuracy of these are regularly reviewed and their suitability assessed. -    Deals are entered on a pre-let basis with all planning approvals in place and with development contracts capped.  The Group acquires title to the site/ asset.
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. Risk rating & change: Medium (unchanged)	-    The Manager and the Board have each retained key personnel since the Group's IPO, and have succession plans established. -    The Investment Manager has successfully hired further skilled individuals as required to bolster its resource.	-    Directors are subject to annual performance assessment, and are subject to re-election by shareholders. The Board has established a succession strategy which is subject to regular review and discussion. -    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.

Malcolm Naish

Chairman

16 September 2019

Viability Statement

The UK Code of Corporate Governance requires the Board to assess the Group's prospects, including a robust assessment of the principal risks facing the Group including those that would threaten its business model, future performance, solvency or liquidity. This assessment is undertaken with the aim of stating that the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities as they fall due over the period of their assessment.

The Board has conducted this review over a five year time horizon, which is a period thought to be appropriate for a company investing in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial model covering a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can be forecast with a reasonable degree of accuracy. The Group has a property portfolio at 30 June 2019 which has long leases and a weighted average unexpired lease term of 29.1 years. The Group has borrowings of £108.0 million, on which the interest rate has been fixed on £66.0 million at 2.70 per cent per annum (excluding the amortisation of arrangement costs) through the use of interest rate swaps, and the remaining £42.0 million carries interest at three month LIBOR plus a weighted margin of 1.60 per cent per annum (excluding the amortisation of arrangement costs). The Group has access to a further £62.0 million of available debt under committed loan facilities. The Group's committed loan facilities have staggered expiry dates with £80.0 million being committed to 29 January 2021, £50.0 million to 1 September 2021 and £40.0 million to 30 August 2022. Discussions with potential lenders do not indicate any issues with re-financing these loans on acceptable terms.

The Directors' assessment of the Group's principal risks is highlighted above. The most significant risks identified as relevant to the viability statement were those relating to:

-    Long-term Secure Rental Income. The risks are that a fall in rental income, such as due to a change in government policies including specific policies affecting local authority funding of elderly care, could impact the level of income received or the capital value of the property portfolio; and

-    Business Funding. The risks are that the Group is unable to grow through acquisition of attractive investment opportunities and may be unable to meet future financial commitments or that there is an increase in the Group's costs and/or ability to comply with its financial covenants through interest rate fluctuations.

In assessing the Group's viability, the Board has considered the key outputs from a detailed model of the Group's expected cashflows over the coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on rental receipts from the Group's tenants.

Based on the results of the scenario analysis outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment.

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 June 2019                                                                                                         

		Year ended 30 June 2019			Year ended 30 June 2018
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		27,923	6,354	34,277	22,029	6,334	28,363
Other income		-	-	-	3	-	3
Total revenue		27,923	6,354	34,277	22,032	6,334	28,366
Gains on revaluation of investment properties	4	-	6,155	6,155	-	6,434	6,434
Total income		27,923	12,509	40,432	22,032	12,768	34,800
Expenditure
Investment management fee
- base fee	2	(4,702)	-	(4,702)	(3,184)	-	(3,184)
- performance fee	2	-	-	-	(550)	-	(550)
Other expenses		(2,013)	(729)	(2,742)	(1,458)	-	(1,458)
Total expenditure		(6,715)	(729)	(7,444)	(5,192)	-	(5,192)
Profit before finance costs and taxation		21,208	11,780	32,988	16,840	12,768	29,608
Net finance costs
Interest receivable		61	-	61	67	-	67
Interest payable and similar charges		(3,165)	-	(3,165)	(2,077)	-	(2,077)
Profit before taxation		18,104	11,780	29,884	14,830	12,768	27,598
Taxation		-	-	-	12	(1)	11
Profit for the year		18,104	11,780	29,884	14,842	12,767	27,609
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate swaps		-	(592)	(592)	-	(106)	(106)
Total comprehensive income for the year		18,104	11,188	29,292	14,842	12,661	27,503
Earnings per share (pence)	3	4.91	3.19	8.10	5.25	4.52	9.77

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.

Consolidated Statement of Financial Position (audited)

As at 30 June 2019

		As at 30 June 2019	As at 30 June 2018
	Notes	£'000	£'000
Non-current assets
Investment properties	4	469,596	362,918
Trade and other receivables		37,573	27,139
		507,169	390,057
Current assets
Trade and other receivables		4,264	3,365
Cash and cash equivalents		26,946	41,400
Total assets		538,379	434,822
Non-current liabilities
Bank loans	6	(106,420)	(64,182)
Interest rate swaps		(707)	(115)
Trade and other payables		(6,361)	(4,558)
		(113,488)	(68,855)
Current liabilities
Trade and other payables		(11,802)	(7,360)
Total liabilities		(125,290)	(76,215)
Net assets		413,089	358,607
Stated capital and reserves
Stated capital account	7	372,685	330,436
Hedging reserve		(707)	(115)
Capital reserve		36,163	24,383
Revenue reserve		4,948	3,903
Equity shareholders' funds		413,089	358,607
Net asset value per ordinary share (pence)	3	107.3	105.7

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 June 2019                                                                                             

		Stated capital account	Hedging reserve	Capital reserve	Revenue reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 30 June 2018		330,436	(115)	24,383	3,903	358,607
Total comprehensive income for the year:		-	(592)	11,780	18,104	29,292
Transactions with owners recognised in equity:
Dividends paid	1	(6,658)	-	-	(17,059)	(23,717)
Issue of ordinary shares	7	50,000	-	-	-	50,000
Expenses of issue	7	(1,093)	-	-	-	(1,093)
At 30 June 2019		372,685	(707)	36,163	4,948	413,089

For the year ended 30 June 2018

		Stated capital account	Hedging reserve	Capital reserve	Revenue reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 30 June 2017		241,664	(9)	11,616	3,666	256,937
Total comprehensive income for the year:		-	(106)	12,767	14,842	27,503
Transactions with owners recognised in equity:
Dividends paid	1	(2,957)	-	-	(14,605)	(17,562)
Issue of ordinary shares	7	94,000	-	-	-	94,000
Expenses of issue		(2,271)	-	-	-	(2,271)
At 30 June 2018		330,436	(115)	24,383	3,903	358,607

Consolidated Statement of Cash Flows (audited)

For the year ended 30 June 2019

		Year ended 30 June 2019	Year ended 30 June 2018
	Note	£'000	£'000
Cash flows from operating activities
Profit before tax		29,884	27,598
Adjustments for:
Interest receivable		(61)	(67)
Interest payable		3,165	2,077
Revaluation gains on property portfolio	4	(12,509)	(12,768)
(Increase)/decrease in trade and other receivables		(2,060)	5,981
Increase in trade and other payables		2,057	806
		20,476	23,627
Interest paid		(2,374)	(1,433)
Interest received		61	67
Tax recovered/(paid)		1	(122)
		(2,312)	(1,488)
Net cash inflow from operating activities		18,164	22,139
Cash flows from investing activities
Purchase of investment properties		(99,615)	(89,981)
Net cash outflow from investing activities		(99,615)	(89,981)
Cash flows from financing activities
Issue of ordinary share capital		50,000	94,000
Expenses of issue of ordinary share capital		(1,075)	(2,271)
Drawdown of bank loan facilities		42,000	26,000
Expenses of arrangement of bank loan facilities		(300)	(1,544)
Dividends paid		(23,628)	(17,353)
Net cash inflow from financing activities		66,997	98,832
Net (decrease)/increase in cash and cash equivalents		(14,454)	30,990
Opening cash and cash equivalents		41,400	10,410
Closing cash and cash equivalents		26,946	41,400

Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives	8,664	6,892

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

In accordance with Chapter 4 of the Disclosure Guidelines 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 2019, 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, Investment Manager's Report 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;

·      'Risk Rating' 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

Malcolm Naish

Chairman

16 September 2019

Extract from Notes to the Audited Consolidated Financial Statements

1.  Dividends

Amounts paid as distributions to equity holders during the year to 30 June 2019.

	Dividend rate (pence per share)	Year ended 30 June 2019 £'000
Fourth interim dividend for the year ended 30 June 2018	1.61250	5,470
First interim dividend for the year ended 30 June 2019	1.64475	5,579
Second interim dividend for the year ended 30 June 2019	1.64475	6,334
Third interim dividend for the year ended 30 June 2019	1.64475	6,334
Total	6.54675	23,717

Amounts paid as distributions to equity holders during the year to 30 June 2018.

	Dividend rate (pence per share)	Year ended 30 June 2018 £'000
Fourth interim dividend for the year ended 30 June 2017	1.5700	3,959
First interim dividend for the year ended 30 June 2018	1.6125	4,066
Second interim dividend for the year ended 30 June 2018	1.6125	4,067
Third interim dividend for the year ended 30 June 2018	1.6125	5,470
Total	6.4075	17,562

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 2019, of 1.64475 pence per share, was paid on 2 August 2019 to shareholders on the register on 19 July 2019 amounting to £6,334,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

2. Fees paid to the Investment Manager

	Year ended 30 June 2019	Year ended 30 June 2018
	£'000	£'000
Base management fee	4,702	3,184
Performance fee	-	550
Total	4,702	3,734

The Group's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Fund Managers Limited (the 'Investment Manager' or 'Target') With effect from 1 July 2018, the Investment Manager is entitled to an annual base management fee on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.

Net assets of the Group	Management fee percentage
Up to and including £500 million	1.05
Above £500 million and up to and including £750 million	0.95
Above £750 million and up to and including £1 billion	0.85
Above £1 billion and up to and including £1.5 billion	0.75
Above £1.5 billion	0.65

In the prior year, the Investment Manager was entitled to an annual base management fee of 0.90 per cent of the net assets of the Group 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 Property Index. The performance fee ceased to apply from 1 January 2018. The maximum amount of total fees payable by the Group to the Investment Manager was limited to 1.25 per cent of the average net assets of the Group over a financial year. Where applicable, VAT was payable in addition.

The Investment Management Agreement can be terminated by either party on 12 months' written notice. Should the Company terminate the Investment Management Agreement earlier then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is 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

	Year ended 30 June 2019		Year ended 30 June 2018
	£'000	Pence per share	£'000	Pence per share
Revenue earnings	18,104	4.91	14,842	5.25
Capital earnings	11,780	3.19	12,767	4.52
Total earnings	29,884	8.10	27,609	9.77
Average number of shares in issue		368,751,632		282,464,971

The EPRA earnings are arrived at by adjusting for the revaluation movements on investment properties and other items of a capital nature and represents the revenue earned by the Group.

The Group's specific adjusted EPRA earnings adjusts the EPRA earnings for the performance fee and for development interest in respect of forward fund agreements. The Board believes that that Group's specific adjusted EPRA earnings represents the underlying performance measure appropriate for the Group's business model as it illustrates the underlying revenue stream and costs generated by the Group's property portfolio.

The reconciliations are provided in the table below:

	Year ended 30 June 2019 £'000	Year ended 30 June 2018 £'000
Earnings per IFRS Consolidated Statement of Comprehensive Income	29,884	27,609
Adjusted for revaluations of investment properties	(6,155)	(6,434)
Adjusted for cost of corporate acquisitions and other capital items	729	1
EPRA earnings	24,458	21,176
Adjusted for rental income arising from recognising guaranteed rent review uplifts	(6,354)	(6,334)
Adjusted for development interest under forward fund agreements	2,011	261
Adjusted for performance fee	-	550
Group specific adjusted EPRA earnings	20,115	15,653
Earnings per share ('EPS') (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income	8.10	9.77
EPRA EPS	6.63	7.50
Group specific adjusted EPRA EPS	5.45	5.54

Net Asset Value per share

The Group's Net Asset Value per ordinary share of 107.3 pence (2018: 105.7 pence) is based on equity shareholders' funds of £413,089,000 (2018: £358,607,000) and on 385,089,448 (2018: 339,217,889) 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. The only adjustment required to the NAV is that the EPRA NAV excludes the fair value of the Group's interest rate swaps, which were recognised as a liability of £707,000 under IFRS as at 30 June 2019 (2018: liability of £115,000).

EPRA believes that, under normal circumstances, the financial derivatives which property investment companies use to provide an economic hedge are held until maturity and so the theoretical gain or loss at the balance sheet date will not crystallise.

	As at 30 June 2019	As at  30 June 2018
IFRS NAV per financial statements (pence per share)	107.3	105.7
Valuation of interest rate swaps	0.2	-
EPRA NAV (pence per share)	107.5	105.7

EPRA guidance also recognises an EPRA NNNAV, the objective of which is to report net asset value including fair value adjustments in respect of all material balance sheet items which are not reported at their fair value as part of the EPRA NAV. At 30 June 2019, the Group held all its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements and therefore the EPRA NNNAV is the same as the IFRS NAV per financial statements set out above (2018: same).

4. Investments

Freehold and leasehold properties

	As at 30 June 2019	As at 30 June 2018
	£'000	£'000
Opening market value	385,542	281,951
Opening fixed or guaranteed rent reviews and lease incentives	(22,624)	(15,732)
Opening carrying value	362,918	266,219
Purchases	97,956	87,515
Acquisition costs capitalised	2,567	2,750
Acquisition costs written off	(2,567)	(2,750)
Revaluation movement - gains	22,202	21,852
Revaluation movement - losses	(4,816)	(5,776)
Movement in market value	115,342	103,591
Movement in fixed or guaranteed rent reviews and lease incentives	(8,664)	(6,892)
Movement in carrying value	106,678	96,699
Closing market value	500,884	385,542
Closing fixed or guaranteed rent reviews and lease incentives	(31,288)	(22,624)
Closing carrying value	469,596	362,918

Changes in the valuation of investment properties	Year ended 30 June 2019 £'000	Year ended 30 June 2018 £'000
Revaluation movement	17,386	16,076
Acquisition costs written off	(2,567)	(2,750)
Movement in lease incentives	(2,310)	(558)
	12,509	12,768
Movement in fixed or guaranteed rent reviews	(6,354)	(6,334)
Gains on revaluation of investment properties	6,155	6,434

The properties were valued at £500,884,000 (2018: £385,542,000) by Colliers International Healthcare 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 June 2017 ('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. Colliers has recent experience in the location and category of the investment properties being valued.

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 had 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 and lease incentives was £469,596,000 (2018: £362,918,000). The adjustment consisted of £27,535,000 (2018: £21,181,000) relating to fixed or guaranteed rent reviews and £3,753,000 (2018: £1,443,000) of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately recorded in the accounts as non-current or current assets within 'trade and other receivables'.

5. Investment in subsidiary undertakings

The Group included 29 subsidiary companies as at 30 June 2019 (30 June 2018: 22). All subsidiary companies were wholly owned, either directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was to act as an investment and property company. Other than four subsidiaries, of which two are incorporated in Gibraltar and two are incorporated in Luxembourg, all subsidiaries are incorporated within the United Kingdom.

The Group acquired THR Number 25 S.a r.l. ('THR25') and THR Number 26 S.a r.l. ('THR26') on       6 November 2018, acquired THR Number 27 Limited ('THR27') on 16 November 2018 and acquired THR Number 28 Limited ('THR28') on 27 June 2019. These acquisitions were accounted for as Investment Property acquisitions.

In addition, the Group established three newly incorporated companies during the year to 30 June 2019: THR Number 22 Limited ('THR22'), THR Number 23 Limited ('THR23') and THR Number 24 Limited ('THR24').

6. Bank loans

	As at 30 June 2019 £'000	As at 30 June 2018 £'000
Principal amount outstanding	108,000	66,000
Set-up costs	(3,040)	(2,644)
Amortisation of set-up costs	1,460	826
Total	106,420	64,182

The Group has a £50.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable on 1 September 2021, with the option of two further one year extensions thereafter subject to the consent of RBS. Interest accrues on the bank loan at a variable rate, based on three month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.5 per cent per annum for the duration of the loan and a non-utilisation fee of 0.75 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2019, the Group had drawn £50.0 million under this facility (30 June 2018: £30.0 million).

The Group has a £40.0 million committed term loan facility with First Commercial Bank, Limited ('FCB') which is repayable on 30 August 2022. Interest accrues on the bank loan at a variable rate, based on three month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.65 per cent per annum for the duration of the loan. The undrawn element of the facility does not incur a non-utilisation fee. As at 30 June 2019, the Group had drawn £36.0 million under this facility (2018: £36.0 million).

The Group has a £80.0 million revolving credit facility with HSBC Bank plc ('HSBC') which is repayable on 29 January 2021, with the option of two further one year extensions thereafter subject to the consent of HSBC. The quantum of the facility was increased, on unchanged terms, from £40.0 million with effect from 1 March 2019. Interest accrues on the bank loan at a variable rate, based on three month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.70 per cent per annum for the duration of the loan and a non-utilisation fee of 0.75 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2019, the Group had drawn down £22.0 million under this facility (2018: £nil).

The Group has entered into the following interest rate swaps:

Notional Value	Starting Date	Ending Date	Interest Paid	Interest Received	Counterparty
21,000,000	7 July 2016	23 June 2019	0.85%	3-month LIBOR	RBS
21,000,000	24 June 2019	1 September 2021	0.70%	3-month LIBOR	RBS
9,000,000	7 April 2017	1 September 2021	0.86%	3-month LIBOR	RBS
36,000,000	9 July 2018	30 August 2022	1.43%	3-month LIBOR	FCB

Inclusive of all interest rate swaps, the interest rate on £66.0 million of the Group's borrowings is fixed, inclusive of the amortisation of arrangement costs, at an all-in rate of 3.08 per cent per annum until 1 September 2021. The remaining £104.0m of debt, of which £42.0 million was drawn at 30 June 2019, would, if fully drawn, carry interest at a variable rate equal to three month LIBOR plus a weighted average lending margin, inclusive of the amortisation of arrangement costs, of 2.16 per cent per annum.

The fair value of the interest rate swaps at 30 June 2019 was an aggregate liability of £707,000 (30 June 2018: liability of £115,000) and all interest rate swaps are categorised as level 2 in the fair value hierarchy.

The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group ('THR1 Group') which consists of THR1 and its three subsidiaries: THR Number Two Limited, THR Number 3 Limited and THR Number 9 Limited. The FCB loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its three subsidiaries: THR Number 5 Limited, THR Number 6 Limited and THR Number 7 Limited. The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and four of its subsidiaries: THR Number 8 Limited, THR Number 10 Limited, THR Number 17 Limited and THR Number 27 Limited.

Under the bank covenants related to the loans, the Group is to ensure that:

- the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;

- the loan to value percentage for THR12 Group does not exceed 60 per cent; and

- the interest cover for each of THR1 Group, THR12 Group and THR15 Group is greater than 300 per cent on any calculation date.

All bank loan covenants have been complied with during the year.

Analysis of net debt:

	Cash and cash equivalents	Borrowing	Net debt	Cash and cash equivalents	Borrowing	Net debt
	2019	2019	2019	2018	2018	2018
	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	41,400	(64,182)	(22,782)	10,410	(39,331)	(28,921)
Cash flows	(14,454)	(41,604)	(56,058)	30,990	(24,456)	6,534
Non-cash flows	-	(634)	(634)	-	(395)	(395)
Closing balance	26,946	(106,420)	(79,474)	41,400	(64,182)	(22,782)

7. Stated capital movements

	As at 30 June 2019
	Number of shares	£'000
Allotted, called-up and fully paid ordinary shares of no par value
Opening balance	339,217,889	330,436
Issued on 7 November 2018	45,871,559	50,000
Expenses of issue		(1,093)
Dividends allocated to capital		(6,658)
Balance as at 30 June 2019	385,089,448	372,685

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

During the year to 30 June 2019, the Company issued 45,871,559 ordinary shares (2018: 87,037,038) raising gross proceeds of £50,000,000 (2018: £94,000,000). The Company did not repurchase any ordinary shares into treasury (2018: nil) or resell any ordinary shares from treasury (2018: nil). Subsequent to the year end the Company undertook a capital reduction in relation to the proposal to introduce a new UK-domiciled parent Company to the Group. See note 13 for details.

Capital management

The Group's capital is represented by the stated capital account, hedging reserve, capital reserve, revenue reserve and long-term borrowings. The Company is not subject to any externally-imposed capital requirements, other than the financial covenants on its loan facilities as detailed in note 6.

The capital of the Group 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 as permitted by 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, issue new shares or buyback shares for cancellation or for holding in treasury. The Company may also increase or decrease its level of long-term borrowings.

Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in accordance with the Company's investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding excess cash on its balance sheet over the longer term.

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

8. Financial instruments

Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, bank loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.

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 year 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 £31.1 million (2018: £44.7 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.

As at 30 June 2019, the Company had provided for overdue rental income from tenants totalling £261,000. As at 30 June 2018, the provision was £170,000, of which £170,000 was subsequently written off, £nil was recovered and £nil is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2019 (2018: nil).

All of the Group's cash is placed with financial institutions with a long-term credit rating of BBB or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed, limited or lost. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

Over the course of the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across different financial institutions. At 30 June 2019 the Group held £26.5 million (2018: £20.9 million) with The Royal Bank of Scotland plc, £0.5 million with First Commercial Bank, Limited (2018: £0.5 million) and £nil (2018: £20.0 million) with HSBC 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 a weighted average variable rate of 0.20 per cent (2018: 0.24 per cent). 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 £170 million (2018: £130 million) of committed term loans and revolving credit facilities which at 30 June 2019 were charged interest at a rate of three month LIBOR plus the relevant margin (see note 6). At the year-end £108.0 million of these facilities was drawn down (2018: £66.0 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 has hedged its exposure on £66.0 million (2018: £66.0 million) of the loans drawn down at 30 June 2019 through entering into fixed rate Interest Rate Swaps (see note 6). Fixing the interest rate exposes the Group to fair value interest rate risk. At 30 June 2019, an increase of 0.25 per cent in interest rates would have increased the fair value of the interest rate swaps and the reported total comprehensive income for the year by £0.4 million (2018: £0.6 million). A decrease in interest rates would have had an equal and opposite effect.

The Group has not hedged its exposure on £42.0 million of loans drawn down at 30 June 2019 (2018: £nil). On these loans the interest was payable at a variable rate equal to three month LIBOR plus the weighted average lending margin of 1.60 per cent per annum. This balance exposed the Group to cash flow interest rate risk as the Group's income and operating cash flows would be affected by movements in the market rate of interest.

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.

9. Capital commitments

The Group had capital commitments as follows:

	30 June 2019 £'000	30 June 2018 £'000
Amounts due to complete forward fund developments and forward acquisition commitments	12,263	19,982
Other capital expenditure commitments	2,233	2,443
Total	14,496	22,425

10. Related party transactions

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.

Hilary Jones and Craig Stewart were both directors of the Company Secretary, R&H Fund Services (Jersey) Limited, which received fees from the Company. Mr Stewart was a partner of Rawlinson & Hunter's Jersey Partnership, which in turn wholly owns R&H Fund Services (Jersey) Limited, but stood down from the partnership at the end of 2018. Secretarial fees for the year were £6,000 (2018: £6,000).

The Directors of the Company received fees for their services. Total fees for the year were £177,000 (2018: £165,000) of which £19,000 (2018: £18,000) remained payable at the year-end.

The Investment Manager received £4,702,000 (inclusive of VAT) in management fees in relation to the year ended 30 June 2019 (2018: £3,734,000). Of this amount £1,162,000 (2018: £960,000) remained payable at the year-end. Certain employees of the Investment Manager are directors of some of the Group's subsidiaries. Neither they nor the Investment Manager receive any additional remuneration in relation to fulfilling this role.

11. 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 EPRA NAV. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV is detailed in note 3.

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; and

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

12. Contingent assets and liabilities

As at 30 June 2019, nine (2018: nine) properties within the Group's investment property portfolio contained deferred consideration clauses meaning that, subject to contracted performance conditions being met, deferred payments totalling £18.75 million (2018: £16.0 million) may be payable by the Group to the vendors/tenants of these properties.

Having assessed each clause on an individual basis, the Company has determined that none of these deferred consideration clauses are more likely than not to become payable in the future and therefore an amount of £nil (2018: £nil) has been recognised as a liability at 30 June 2019.

It is highlighted that the potential deferred consideration would, if paid, result in an increase in the rental income due from the tenant of the relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the investment yield used to arrive at the valuation of the properties, any deferred consideration paid would be expected to result in a commensurate increase in the value of the Group's investment property portfolio.

13. Post balance sheet events

Property transactions

Subsequent to the year end, the Group has sold two care homes in Surrey and Essex. These disposals form part of the Group's wider asset management activity and follows offers received which combined reflect a price which was more than five per cent above the independent external valuation at which they were recognised in the financial statements. Whilst both properties were originally acquired as long-term investments, the Group continually monitors the performance of its assets at a tenant and individual property level, updating its strategy as circumstances develop and being mindful of possible asset management or divestment strategies where opportunities arise or the initial investment case has changed. The properties equated to less than three per cent of the fair value of the investment property portfolio.

Subsequent to 30 June 2019, the Group has completed the acquisition of two properties, in Ripon, Yorkshire and Stourport, West Midlands, for approximately £18.6 million, including transaction costs. Both investments fully meet the Group's strict criteria, being modern, well equipped care homes with 100% en-suite wetrooms, underpinned by supportive fundamentals. The yield is representative of assets of a similar standard and location within the Group's portfolio. The homes are let on 35-year leases with RPI-linked cap and collar to a subsidiary of Maria Mallaband Care Group, the national care home operator. As is customary for new and nearly new care homes, a short rent free period has been agreed in relation to the Wharf Care Centre which will assist the tenant's cashflows during the early trading period. Further details on the two properties acquired were:

•     The Moors Care Centre, in Ripon, was constructed in 2015 and comprises 70 bedrooms each with full en-suite wetroom facilities. The home is operationally mature and its current trading performance is delivering a strong rent cover in excess of 2.0 times; and

•     The Wharf Care Centre, in Stourport, opened in 2018 and comprises 67 bedrooms with full en-suite wetroom facilities. The home is located in a predominantly residential area, close to the centre of Stourport. The Group's demographic assessment of the local area is positive and the home is expected to perform strongly once it reaches operational maturity.

Corporate reconstruction

On 21 June 2019, the Company announced proposals to change the Group's corporate structure by establishing Target Healthcare REIT plc ("New THRL") a new English-incorporated parent company (registration number: 11990238), at the head of the Group. The Board believes that moving the Group's ultimate parent company to a UK domicile will align the Group with its UK tax jurisdiction, maintain and enhance its important relationships with UK local authorities and health services and help to reduce some of the Group's administration costs and regulatory complexities, which arise due to the requirement to operate in both Jersey and the UK.

The proposal, which required the approval of the Company's existing shareholders and the Royal Court of Jersey, was effected by way of a scheme of arrangement under article 125 of the Companies (Jersey) Law 1991 pursuant to which New THRL acquired the Company and became its ultimate parent company. New THRL replicates all of the existing arrangements and structure of the Company. It has, for example, the same management, depositary and corporate governance arrangements alongside having the same investment, gearing and dividend policies. New THRL is also a REIT for the purposes of UK taxation.

The scheme of arrangement was approved by shareholders at meetings held on 18 July 2019 and, following the agreement of the Royal Court of Jersey, the scheme became effective on 7 August 2019. The Company's existing shareholders received one new share in New THRL for every share they held in the Company at close on 6 August 2019. The Ordinary Shares of the Company ceased to be listed and the Company became a wholly owned subsidiary of New THRL on the same date. The Ordinary Shares issued by New THRL were admitted to the premium segment of the Official List and to trading on the main market of the London Stock Exchange on 7 August 2019.

The Company received notice from the Jersey Financial Services Commission on 23 August 2019 that, with effect from 7 August 2019, the Company had ceased to be a Collective Investment Fund under the Collective Investment Funds (Jersey) Law, 1988 and therefore the Company ceased to be regulated by the JFSC. As a result, the Company was no longer required to have two Jersey based Directors and therefore Hilary Jones and Craig Stewart resigned from the Board with effect from 4 September 2019.

As part of the proposals, New THRL was required to publish a prospectus which was dated 21 June 2019. In order to maximise efficiency and reduce potential future costs in drafting new documents, the prospectus included a placing programme which provides New THRL with the flexibility to issue up to 125 million new shares over the period to 19 June 2020.

Given the completion of the Scheme, from 7 August 2019, the ultimate parent of the Company is Target Healthcare REIT plc.

Proposed issue of equity

On 5 September 2019, the Group announced a proposed issue of equity, targeting gross proceeds of approximately £50 million by way of a non pre-emptive placing at 110.5 pence per share under its existing placing programme. The placing is expected to close on 25 September 2019.

14. Financial statements

These are not full statutory accounts. The statutory annual report and financial statements for the year ended 30 June 2019 has been approved and audited and received an unqualified audit report which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. The report and financial statements for the year to 30 June 2019 will be posted to shareholders and made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from Target Fund Managers Limited, Laurel House, Laurelhill Business Park, Stirling FK7 9JQ.

 

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