Net Asset Value, Corporate Update & Dividend

RNS Number : 2702K

Target Healthcare REIT PLC

21 April 2020

 

21 April 2020

Target Healthcare REIT plc and its subsidiaries

("Target Healthcare" or "the Group")

Net Asset Value, update on corporate activity & dividend declaration

Target Healthcare (LSE: THRL), the UK listed specialist investor in modern, purpose-built care homes, announces its unaudited quarterly Net Asset Value (NAV) as at 31 March 2020, together with the corporate activity during the quarter that influenced this and declares its third interim dividend. In addition, and further to its announcement on 16 April 2020, the Group is providing additional and updated commentary with regard to the impact of COVID-19 on its business and that of its tenants.

COVID-19 Update

There has been no change to our stated expectation that our tenants' cashflows will remain supported by continued demand for their beds. Our tenants continue to care for their residents with the utmost skill and compassion. As anticipated, confirmed or suspected cases of COVID-19 have increased, though still represent residents occupying fewer than 5% of the portfolio's beds.

Corporate activity highlights

NAV progression & balance sheet strength

· EPRA NAV per share of 108.0 pence (31 December 2019: 108.1 pence) reflecting the one-off costs of the debt refinancing of 0.3 pence per share which have offset the positive NAV impact from the Group's recurring activities

· NAV total return (including dividend) for the quarter of 1.5%, underpinned by revaluation gains and the Group's regular dividend

· Entered into a twelve-year committed £50 million term loan facility with an institutional lender at a fixed interest rate of 3.28%, securing long-term debt funding to complement our existing revolving credit facilities with RBS and HSBC

· Available cash reserves at the current date of £29 million as well as £38 million available in undrawn facilities, and low net LTV of 18.5% provides significant operational flexibility

Portfolio performance

· 0.6% increase in like-for-like value of the operational portfolio; total portfolio value of £613.4 million and an EPRA topped-up net initial yield of 6.05%

· 13 rent reviews completed at an average uplift of 2.6% per annum

· Contractual rent roll now stands at £38.9 million per annum generated from 71 operational properties, an increase of £1.2 million during the quarter, with a further £1.3 million increase once the Group's two forward funded pre-let developments reach completion

Acquisitions and asset management

· Successful re-tenanting of six care homes previously leased by Orchard Care Homes to two of the Group's existing operators, a strong endorsement of the Group's investment strategy

· Further progress in deploying the proceeds from the oversubscribed equity issuance in September 2019 with the acquisition of two new operating care homes in January 2020

Dividend

· Third interim dividend of 1.67 pence per share declared for the year ending 30 June 2020, representing an increase of 1.5% on the FY 2019 quarterly dividends. On an annualised basis, this reflects a payment of 6.68 pence per share and a dividend yield of 6.3% based on the closing share price of 105.8 pence on 20 April 2020

· We will continue to monitor the impact of the pandemic on the Group's portfolio and operations and will provide updates as required

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"These are unprecedented times. With each day bringing a unique set of challenges, our priority continues to be ensuring where possible that we are supporting our tenants, their employees and the residents living in our care homes. At the same time, we are acutely aware of our responsibility to our shareholders and protecting the long-term interests of the Company. The whole team has seamlessly moved to a remote working set-up and are working tirelessly in the interests of our shareholders and wider stakeholders.

"Given the fast-moving nature of the COVID-19 pandemic, it is impossible to predict with any certainty what sort of impact we may see across our portfolio.  Whilst we expect to see a small number of care homes disproportionately affected, our investment strategy has always focused on the quality and design facilities of the properties, underpinned by a forensic approach to understanding local market dynamics. Nothing has changed our conviction that this approach, coupled with the underlying demographic trends supporting strong demand for care home beds, will underpin the delivery of reliable and sustainable income over the long term.

"Over the seven years since the Company's launch we have remained steadfast in our commitment to building a highly diversified portfolio of care homes by geography, tenant and end-user profile and are confident that its defensive characteristics will serve us well during this period. At the same time, we have been consistent with our highly disciplined and prudent approach to financing, which has been further enhanced by January's new facility, securing further long-term, fixed-rate debt funding to complement the existing flexible facilities and ensuring we are robustly positioned to navigate any short-term volatility."

Net Asset Value

The Group's unaudited EPRA NAV per share as at 31 March 2020 was 108.0 pence. The total return for the quarter based on EPRA NAV was 1.5%.

A balance sheet summary and an analysis of the movement in the EPRA NAV over the quarter is presented at the end of this announcement in the Appendix.

Corporate Update

Portfolio performance

As at 31 March 2020, the Group's portfolio was valued at £613.4 million and comprised 73 properties, consisting of 71 operational care homes and two pre-let sites which are being developed through capped forward funding commitments with established development partners.

The portfolio value increased by 4.0% over the quarter. Of this, 3.4% derived from acquisitions and further investment into developments, with a positive like-for-like movement in the operational portfolio value of 0.6%, reflecting the impact of the inflation-linked rental reviews, the shortening of rent-free periods and the re-tenanting of the six former Orchard Care Home properties during the period.

Portfolio contractual rent has increased by 3.3% over the quarter, of which 2.9% is the impact of acquisitions, capex spend and the completed Orchard re-tenanting. Where rent reviews were completed during the quarter, the average increase was 2.6%. This resulted in a 0.4% like-for-like increase in the portfolio's contractual rent roll.

Due to the impact of acquisitions in the quarter being offset by the passage of time on the existing properties, the portfolio's weighted average unexpired lease term remained unchanged at 29.2 years.

The portfolio had an EPRA topped-up net initial yield of 6.05% based on an annualised contractual rent upon expiry of lease incentives of £38.9 million. The EPRA net initial yield was 5.69% based on passing rent of £36.6 million. A schedule showing the respective NIY profiles from the unwind of portfolio assets in rent-free periods is shown in the Appendix.

Investment and asset management activity

During the three months to 31 March 2020, the Group's investment activity comprised the acquisition of two care homes in Yorkshire which are leased to an existing tenant on 35-year lease terms.  The newly built properties have been fitted out to an exceptional standard in line with the Group's strategy. One is located in the North Yorkshire town of Scarborough and opened in August 2019, and the second is located in the market town of Pudsey in West Yorkshire. Providing 172 bedrooms in total, both care homes have 100% en suite wet-rooms. There is a rent-free period covering the early trading stage on both properties.

The Group completed the re-tenanting of six care-homes from Orchard to two of the Group's existing operators demonstrating a clear endorsement of the Group's investment strategy. Rental income continued to be received throughout the re-tenanting process and the new rental incentives offered have been offset by the Orchard rent deposits which were retained by the Group. On an aggregate basis there has been no material change in the contracted rental income the Group will receive from these properties once the rental incentives expire and the valuation at 31 March 2020 has resulted in a small uplift across these six homes.

Pipeline and investment market

For the majority of the quarter under review, the investment market for high-quality, modern, fit-for-purpose assets which meet the Group's investment criteria remained competitive. As a result of the COVID-19 pandemic transaction volumes have reduced and the government-imposed lockdown has virtually put a halt to those transactions that were at an earlier stage. Having said that, we are aware of a small number of transactions having progressed to completion at pricing levels agreed prior to 23 March 2020.

The Investment Manager is analysing and performing diligence on a number of near-term investment opportunities. The Board, together with its Investment Manager, thought it prudent to postpone the completion of the acquisition of two quality care homes towards quarter-end as the severity of the COVID-19 pandemic emerged. This position is under regular review and there is ongoing dialogue with the vendors. The Group will continue to consider its capital requirements with respect to these opportunities, or others that may arise, as and when they progress further. The timing of completion of any future acquisitions will be considered carefully against both the market outlook and the Group's available funds.

Existing capex commitments within the Group's property portfolio total £12 million. This is principally in relation to the development of two new care homes, construction of which has so far continued during the quarter but for which completion may ultimately be delayed by the current pandemic.

Debt facilities and swap arrangements

During January 2020, the Group entered into a new 12-year £50 million committed term loan facility with ReAssure Limited. The facility carries a fixed rate of interest of 3.28% per annum for its 12-year term. The facility was used to repay the Group's existing £40 million term loan with FCB and provided an additional £10 million of new investable capital. This facility introduced an institutional lender to the Group's existing debt capital structure whilst providing long-term, committed funds that secured longer term financing for the Group. In March 2020, the Group further extended the weighted average term to maturity on the Group's debt facilities by extending the term on its existing revolving credit facility with HSBC to January 2022.

As at 31 March 2020, the Group's total borrowings were £142 million, giving a loan-to-value (LTV) of 18.1%, using net debt (total gross debt less cash, as a proportion of gross property value). This prudent LTV is representative of the Group's strong balance sheet which included £31.1 million of cash together with £38 million of undrawn loan facilities.

The Group has £80 million of fixed term debt facilities and £100 million of revolving credit facilities, with a diversified mix of maturities and lenders. As at 31 March 2020, the Group has drawn £80 million of fixed term debt, with interest costs fixed, and £62 million under the revolving credit facilities which carry a variable interest rate linked to 3-month LIBOR. The Group's weighted average cost on its drawn debt, inclusive of amortisation of arrangement costs, is 2.99%. The Group's facilities have a weighted average term to expiry of 4.5 years.

Dividends in the period

The Group paid its second interim dividend for the year to 30 June 2020, in respect of the period from 1 October 2019 to 31 December 2019, of 1.67 pence per share, on 28 February 2020 to shareholders on the register on 14 February 2020. This distribution was paid wholly as a property income distribution (PID).

Valuation

The property portfolio was independently valued at £613.4 million at 31 March 2020. The valuation report, in accordance with industry practice, was subject to a material uncertainty clause as follows:

"The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a "Global Pandemic" on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.

Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.

Our valuations are therefore reported on the basis of 'material valuation uncertainty' as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the portfolio under frequent review."

Investment Management Arrangements

After a period of discussion, the Board has agreed an extension to the notice period provisions of the Company's investment management agreement with the Investment Manager such that, going forward, the minimum notice period will be extended from one year to two years provided that the earliest that notice could be served will be one year after the commencement of these new arrangements. This gives an initial term certain of three years. It is believed that these new arrangements will be of benefit to the Company and its shareholders as they will provide certainty of the Investment Manager's continuing service. There are no changes being made to the fee provisions in the investment management agreement.

This is deemed to be a smaller related party transaction for the purpose of Listing Rule 11.1.10R and the above statement is therefore made in accordance with Listing Rule 11.1.10R(2)(c).

Announcement of third interim dividend

The Company today declares its third interim dividend for the year ending 30 June 2020, in respect of the period from 1 January 2020 to 31 March 2020, of 1.67 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID):  1.67  pence per share 

Ex-Dividend Date:	7 May 2020
Record Date:	11 May 2020
Payment Date:	29 May 2020

This distribution will be paid wholly as a property income distribution (PID). The dividend reflects an annualised payment of 6.68 pence per share and a dividend yield of 6.3% based on the 20 April 2020 closing share price of 105.8 pence.

The Company had 457,487,640 ordinary shares in issue at 31 March 2020 and has not issued or bought back any shares since that date.

Shareholders entitled to elect to receive distributions without deduction for withholding tax may complete the declaration form which is available on request from the Company through the contact details provided on its website www.targethealthcarereit.co.uk , or from the Company's registrar. Shareholders who qualify for gross payments are, principally, UK resident companies, certain UK public bodies, UK charities, UK pension schemes and the managers of ISAs, PEPs and Child Trust Funds, in each case subject to certain conditions. Individuals and non-UK residents do not qualify for gross payments of distributions and should not complete the declaration form. 

Investor relations

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

LEI: 213800RXPY9WULUSBC04

ENDS

Enquiries:

Kenneth MacKenzie; Gordon Bland

Target Fund Managers Limited

01786 845 912

Mark Young; Mark Bloomfield

Stifel Nicolaus Europe Limited

020 7710 7600

Dido Laurimore; Claire Turvey; Richard Gotla

FTI Consulting

020 3727 1000

[e-mail]  

Notes to editors:

UK listed Target Healthcare REIT plc (THRL) is an externally managed Real Estate Investment Trust which provides shareholders with an attractive level of income, together with the potential for capital and income growth, from investing in a diversified portfolio of modern, purpose-built care homes.

The Group's portfolio at 31 March 2020 comprised 73 assets let to 27 tenants with a total value of £613.4 million.

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

Important information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

APPENDIX

1.  Analysis of movement in EPRA NAV

The following table provides an analysis of the movement in the unaudited EPRA NAV per share for the period from 1 January 2020 to 31 March 2020:

	Pence per share
EPRA NAV per share as at 31 December 2019	108.1
Revaluation gains / (losses) on investment properties	0.6
Revaluation gains / (losses) on assets under construction^	0.1
Net effect of acquisition costs	(0.1)
Net effect of early repayment of debt facility and related swap	(0.3)
Other movement in revenue reserve	1.3
Second interim dividend payment for the year to 30 June 2020	(1.7)
EPRA NAV per share as at 31 March 2020	108.0
Percentage change in the 3-month period	(0.1)%

The EPRA NAV provides a measure of the fair value of a company on a long-term basis. At 31 March 2020, due to the low valuation ascribed to the Group's remaining interest rate derivative contract used to hedge its exposure to variable interest rates, which is excluded from the calculation of the EPRA NAV, the NAV calculated under International Financial Reporting Standards was also 108.0 pence per share.

^Consistent with standard valuation practice for assets under construction, the carrying value of these assets is calculated by the valuer through application of a discount to accumulated costs to date. This discount varies depending on factors such as the remaining development time. As the asset progresses towards completion, the discount that has been applied is unwound.

2.  Summary balance sheet (unaudited)
		Mar-20	Dec-19		Sep-19		Jun-19
		£m	£m		£m		£m
Property portfolio*		613.4	589.9		511.4		500.9
Cash		31.1	31.8		116.4		26.9
Net current assets / (liabilities)*		(8.3)	7.9		(4.1)		(6.0)
Bank loans		(142.0)	(135.0)		(130.0)		(108.0)
Net assets		494.2	494.6		493.7		413.8
EPRA NAV per share (pence)		108.0	108.1		107.9		107.5

*Properties within the portfolio are stated at the market value provided by the external valuer and the IFRS effects of fixed/guaranteed minimum rent reviews are not reflected.

The next quarterly valuation of the property portfolio will be conducted by Colliers International Healthcare Property Consultants Limited during July 2020 and the unaudited EPRA NAV per share as at 30 June 2020 is expected to be announced in July 2020.

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

The Group currently has four assets with rent-free periods. As these unwind, assuming no other changes including inter alia the portfolio valuation or rental profile, the EPRA yield profiles for the portfolio will be as follows:

	31 March 2020	30 June 2020	30 September 2020	31 December 2020	31 March 2021
EPRA topped-up NIY	6.05%	6.05%	6.05%	6.05%	6.05%
EPRA NIY	5.69%	5.69%	5.77%	5.86%	6.05%
Contractual rent (£m)	38.9	38.9	38.9	38.9	38.9
Passing rent (£m)	36.6	36.6	37.1	37.6	38.9

 

END

 

 

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