Impact Health Regulatory News (IHR)

25 March 2024

The information contained in this announcement is restricted and is not for publication, release or distribution in the United States of America, any member state of the European Economic Area (other than the Republic of Ireland or the Netherlands and then only to professional investors in such jurisdictions), Canada, Australia, Japan or the Republic of South Africa.

Impact Healthcare REIT plc

("Impact" or the "Company" or, together with its subsidiaries, the "Group")

ANNUAL RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2023

Financial and operational gains with improved rent cover

Impact Healthcare REIT plc (ticker: IHR), the real estate investment trust which gives investors exposure to a diversified portfolio of UK healthcare real estate assets, with a focus on care homes, today announces the Company's annual results for the year ended 31 December 2023.

Summary of 2023

Our tenants continued to improve their performance with higher care home occupancy and increased fees to residents, as inflation peaked in the year. Our rent increases are largely capped at 4%, so this helps tenants' rent cover, and makes our income more secure. Boosted by an acquisition, our total rent roll grew strongly, and this has flowed through to both earnings and dividend growth.

Statutory profit before tax was up by 189% over the previous year, but this is flattered by revaluation movements. Adjusted earnings per share gives the best view of underlying performance, and it grew by 2.4%. We therefore met our dividend target, whilst still 108% covered by adjusted earnings.

Rental growth from the inflation-linkage in all of our leases drove up the value of our property investments by 4.1% on a like-for-like basis. This in turn grew NAV per share by 4.7% to 115.38 pence. Including the benefit of our dividend meant that total accounting return was 10.8% for the year.

Our dividend target for 2024 is 6.95 pence1, up 2.7% on 2023.

Strategic Priorities

These are our strategic priorities, with an update on how they have fared in 2023:

· Growing our business: With a net increase of five homes taking our total to 140 properties and over 7,700 completed beds and contracted rent up 13.2% to £48.8 million2. Further growth was constrained by the general economic situation and the share price.

· Working with our tenants: They have successfully increased fees and occupancy in the year broadly in line with inflation, whilst reducing their dependency on expensive agency staff. Our weighted average unexpired lease term lengthened to 20.8 years (19.7 years in 2022). We managed the transfer of one failing tenant3 as part of a recovery programme while achieving 99% rent collection across the portfolio.

· Improving the quality of our portfolio: We approved £11.7 million of new asset management projects that will increase the number of available beds and improve EPC ratings. The growing strength of our portfolio and its ability to generate stable and growing income enabled EPRA topped-up net initial yield to firm up to 6.9%.

· Maintaining the affordability of our rents: Our tenants' improved operational performance, alongside the 4% rent cap, led to rent cover4 rising to 2.0x in the year, the highest annual cover since we listed in 2017. Rent cover was 2.2x in the second half of 2023.

· Enhancing our environmental sustainability: We increased the percentage of our homes rated EPC B or higher to 57% (up from 53%). We have set a target of achieving net zero status by 2045 with an interim target of a 15% reduction in absolute carbon emissions on a like-for-like basis by 2025. 

Our strategic priorities are supported by our balance sheet with low gearing. We have £250 million of committed debt facilities and a weighted average term of 6.3 years. Drawn debt was £184.8 million at a 4.56% average cost, and 95% of our drawn debt facilities are fixed or hedged against interest rate rises. At the year-end our EPRA (net) LTV was 27.8%.

Simon Laffin, Chair, commented;

"Our aim is to work with our tenants to provide quality, affordable and sustainable care homes. The country needs a thriving and growing care home sector. The private sector can play an even more significant role in providing care for elderly people and helping the NHS, deploying capital and resources to enhance and grow affordable care home provision. By offering more step-down, nursing and residential care for elderly people, the sector has the medium-term potential to take tens of thousands of patients out of hospital beds: freeing up NHS resources and reducing costs.

As the economy recovers from 2023's high inflation and interest rate rises, and as government begins to recognise the larger role that this sector can play in the health infrastructure we believe that there will be opportunities for Impact. We are well positioned to play a larger role in helping both residents and the NHS, whilst delivering long-term sustainable returns to shareholders."

Financial Highlights

ANNUAL RESULTS PRESENTATION

A Company presentation for analysts and investors will take place today at 8.30am (UK) via an in-person meeting and a live webcast and conference call.

To attend the in-person presentation, please contact:

impacthealth-maitland@h-advisors.global

To view the live webcast, please register in advance at:

https://stream.brrmedia.co.uk/broadcast/65e9a4042cbb0478a930d370

The conference call dial-in is available using the below details:

If you would like to ask your questions verbally, please use the dial in number. Alternatively, you can type questions into the webcast question box.

The presentation will also be accessible on demand later in the day on the Company's website: www.impactreit.uk

ANNUAL REPORT

We have completely redesigned the Annual Report this year to make it more concise with less duplication, while making the key elements of the Company's strategy and its performance clearer. It can be accessed here http://www.rns-pdf.londonstockexchange.com/rns/0574I_1-2024-3-24.pdf

A copy of the Annual Report is also available on the Company's website at https://www.impactreit.uk/investors/reporting-centre/reports/. The Annual Report has also been submitted to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

2024 NOTICE OF ANNUAL GENERAL MEETING

The 2024 Notice of Annual General Meeting is now available to view on the Company's website at https://www.impactreit.uk/investors/reporting-centre/. The Company's Annual General Meeting will be held at 9:00 a.m. on Tuesday, 21 May 2024, at the offices of Travers Smith LLP, 10 Snow Hill, London EC1A 2AL.

The formal Notice of the Annual General Meeting will be posted to those shareholders who have requested that the Company should continue with postal correspondence and in accordance with Listing Rule 9.6.1 has been submitted to the Financial Conduct Authority and will shortly be available for inspection from the National Storage Mechanism at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

The Board encourages Shareholders to vote on any of the matters of business at the AGM in advance by proxy.

FOR FURTHER INFORMATION, PLEASE CONTACT:

The Company's LEI is 213800AX3FHPMJL4IJ53.

Further information on Impact Healthcare REIT plc is available at www.impactreit.uk.

NOTES:

Impact Healthcare REIT plc acquires, renovates, extends and redevelops high quality healthcare real estate assets in the UK and lets these assets on long-term full repairing and insuring leases to high-quality established healthcare operators which offer good quality care, under leases which provide the Company with attractive levels of rent cover.

The Company aims to provide shareholders with an attractive sustainable return, principally in the form of quarterly income distributions and with the potential for capital and income growth, through exposure to a diversified and resilient portfolio of UK healthcare real estate assets, in particular care homes for the elderly.

The Company's dividend policy is to maintain a progressive dividend that is covered by adjusted earnings.

On this basis, the target total dividend for the year ending 31 December 2024 is 6.95 pence per share1, a 0.18 pence increase over the 6.77 pence in dividends paid or declared per ordinary share for the year ended 31 December 2023.

The Group's Ordinary Shares trade on the main market of the London Stock Exchange, premium segment. The Company is a constituent of the FTSE EPRA/NAREIT index.

Notes

1 This is a target only and not a profit forecast. There can be no assurance that the target will be met and it should not be taken as an indicator of the Company's expected or actual results.

2 The annualised rent adjusting for: rent due following rent-free periods; underlying contractual rent on temporarily varied leases including rent due from Melrose); rent due on capex projects or profit?related deferred payments where the Group recognises a capital commitment; and post-tax income from interest received from property investments made via loans to operators for the acquisition of property portfolios.

3 These homes were transferred to Melrose Holdings Limited, an affiliate of a related party, Minster Care Group.

4 Rent cover is total annual rent divided by our tenants' EBITDARM (earnings before interest, tax, depreciation, amortisation, rent and management charges). EBITDARM is a useful approximation for our tenants' cash earnings, which they can use to pay their rent. This excludes Rent cover has been adjusted to exclude seven turnaround homes and one new home in build-up. These were also excluded in the quoted comparative adjusted rent covers.

5 This relates to the property portfolio along with property portfolios that have been invested in via loans to operators with an option for the Group to acquire.

INVESTING IN UK CARE HOMES FOR EVERYONE

2023 ANNUAL REPORT AND FINANCIAL STATEMENTS

About us

Impact Healthcare REIT plc is a specialist and responsible long-term owner of care homes and other healthcare properties across the UK.

We take a long-term view and look to generate secure and growing income. This has allowed us to offer attractive and progressive dividends to our shareholders, and the potential for capital growth.

Our purpose

Our purpose is to work with tenants to provide quality, affordable and sustainable care homes in order to deliver an attractive risk adjusted return.

Our values

· We focus on the long-term sustainability of our business.

· We are open and transparent with our stakeholders.

· We are a dependable partner who's trusted to deliver.

· We combine the strengths of a listed company with entrepreneurship.

Find us online

www.impactreit.uk

Key statistics

1 Includes Minster and Croftwood, which are subsidiaries of Minster Care Group, and Melrose, which is an affiliate of Minster Care Group.

2 Includes properties invested in via loans to operators where the Group has an option to acquire.

3 Contracted rent roll is a defined term in the Glossary, this includes contractual rent on temporarily varied leases (including Melrose).

WE'RE HELPING TO MEET THE GROWING NEED FOR CARE BEDS FOR THE ELDERLY

The UK needs more care beds for the elderly

We're a real estate company that's deeply immersed in the social infrastructure of this country.

The UK has an ageing population, with 6.5 million people aged over 75 living in the United Kingdom in 2024. That number is forecast to increase by 55%, to 10.1 million over the next 25 years, and to double over the next years. The over 75s are the fastest growing part of the UK population. These increases will happen during the lives of our long leases. Demand for care home beds is therefore rising, but supply has changed little for almost three decades. This has important implications for the care older people receive, as well as for our wider healthcare system. Many thousands of older people find themselves stuck in hospital because there are no free care home beds or step-down care places to take them. On average during 2023, there were just over 12,000 people in hospital every night who had no clinical reason to be there but could not be safely discharged. Half of those people, nearly all of them elderly, had been waiting more than 21 days to be discharged. This "bed blocking" also has a knock-on effect on other patients in the NHS, who can't be admitted to hospital without a vacant bed.

Our society needs a thriving care home sector, which can provide the care older people need and relieve the cost and bed blocking pressure on the NHS. In short, the care home sector is vital to the health and wellbeing of everyone in the UK.

Our purpose and strategy reflect the need for more care beds for the elderly

Our purpose is to work with tenants to provide quality, affordable and sustainable care homes in order to deliver an attractive risk adjusted return. This purpose and our business model determine our strategic priorities. These are to:

Grow our business

By adding assets to the portfolio while carefully managing risk, so we can invest in care home beds for more of the people who need them;

Work with our tenants

To form long-term, mutually beneficial partnerships, so we can grow together;

Focus on quality

By investing in our buildings and supporting our tenants who provide quality care to their residents;

Maintain affordability

By seeking to set initial rents at affordable levels, which our tenants can afford both now and in the long term. This in turn helps our tenants to charge fees that are likely to be more affordable to residents; and

Increase our sustainability

By continuing to improve our portfolio's social and environmental sustainability.

We have opportunities to create value

We currently own 1.7% of a highly fragmented market. Successfully implementing our strategy gives us substantial scope for long?term growth. Our focus on generating secure income from a growing portfolio allows us to offer attractive and progressive dividends, that are targeted to be fully covered, to our shareholders, alongside the potential for capital growth. In the process, we add value for our tenants by helping them to grow their businesses, so they in turn can provide high standards of care to more people.

Impact Health Partners LLP, our Investment Manager (IM), plays a vital role in our success. Its senior team has decades of experience of owning and operating healthcare real estate, and their knowledge, skills and relationships give us an important advantage in our market.

2023 IN BRIEF

Our financial performance was robust and we made further progress with our strategy

Putting our purpose into practice: delivering attractive risk-adjusted returns

Our objectives are to generate:

· a progressive dividend that's fully covered by adjusted1 earnings per share (EPS); and

· an average total accounting return of 9.0% per annum2.

Achieving these goals requires us to grow our profit, cash earnings and the value of our assets, to produce an attractive overall return.

Despite some risks materialising in the year, we were able to deliver our highest total accounting return of the past five years and a growing dividend fully covered by adjusted EPS.

Our performance highlights in 2023 included the following

· We met our dividend target for 2023 of 6.77 pence per share, with the total dividend being 108% covered by adjusted EPS and 123% by EPRA EPS.

· The value of our property investments rose by 4.1% on a like-for-like basis (2022: (8.1)% like-for-like reduction). This was mainly due to inflation-linked rental growth which contributed to NAV per share increasing by 4.7%.

· Total accounting return improved by over seven percentage points to 10.82%, reflecting more stable asset values compared with 20222.

· Our dividend target for 2024 is 6.95 pence per share, up 2.66%2.

The Group performed well in 2023, as shown below:

1 Adjusted EPS strips out non-cash and one-off items.

2 This is a target only and not a profit forecast. There can be no assurance that the target will be met and it should not be taken as an indicator of the Company's expected or actual results. Total accounting return reflects the dividend we pay and growth in the value of our assets. We expect higher valuations to mainly result from rising rents and our asset management projects, rather than relying on wider market improvements.

3 EPRA alternative performance measures have been calculated in line with EPRA best practices recommendation.

Putting our purpose into practice: growing the business so we can invest in much-needed care home beds

We continued to grow the portfolio during the year, with a net increase of five homes. This resulted from:

· buying a portfolio of six homes for £56 million, on a net initial yield1 of 7%; and

· selling one non-core asset for £1.25 million, in line with its book value.

At the year end, the key indicators of growth in our portfolio compared to the prior year were as follows:

Working with our tenants

We work closely with our tenants to identify ways we can grow together, while keeping a close eye on their financial and operational performance. During 2023:

· higher occupancy and strong fee increases (see below) contributed to improved financial performance for most of our tenants;

· one tenant, Silverline, got into financial difficulties. We took firm action and successfully transferred their seven homes to another tenant2 on variable rent. Trading in these homes has shown good signs of improvement since the transfer. Silverline's issues reduced our rental income for 2023 by £1.2 million;

· we expanded our relationship with Welford, which operates the six care homes we bought in 2023. Welford now runs 18 of our homes with 1,094 beds, making it one of our largest tenants; and

· our long-term partnership approach to our tenants is reflected in weighted average unexpired lease term (WAULT)3 of 20.8 years at 31 December 2023 (31 December 2022: 19.7 years), with the increase reflecting new 30 and 35-year leases entered into during 2023.

Putting our purpose into practice: our focus on quality

Improving the quality of our assets

We continue to invest in our assets to improve the environment for residents and staff, enable our tenants to broaden their offer (for example, by adding specialist dementia beds) and to make them more environmentally sustainable. We typically rentalise these inflation-linked investments at 8%, which means we earn an extra £8 in annual rent for every £100 we invest.

In 2023:

· we approved £11.7 million new asset management projects;

· delays to some projects resulted in our actual investment in existing asset management projects in the year being lower than expected, at £4.7 million; and

· at the year end, we had four projects in the pipeline, with anticipated funding of £9.5 million over the next two to three years.

In addition to our total accounting return and the WAULT, the quality of our portfolio is reflected in the following metrics:

· The NIY indicates the portfolio's ability to generate income, in comparison to its market value. It has improved during the year, reflecting a general trend of larger, better specified homes in our area of the market seeing improvement in their valuation yield.

· Occupancy continued to recover from the lows during the pandemic, showing our assets remain attractive to potential residents. We've seen signs that tenants are prioritising fee increases (see below) over filling empty beds, resulting in occupancy remaining around half a percent below the pre-pandemic average.

Our tenants continue to provide good care

While the quality of our assets is important, the quality of care our tenants provide to their residents is paramount: poor care in a great building is still poor care.

At the end of 2023, 80.6% of our homes were rated good or outstanding by the regulator. This was above the national average of 79% for comparable homes5.

Putting our purpose into practice: maintaining affordability

With our leases running for up to 35 years, it's vital that our rents remain affordable to tenants in the long term. We therefore look to set initial rents at sustainable levels and then increase them only with inflation each year. Almost all our leases set out minimum and maximum annual increases, which are typically 2% and 4% respectively.

We monitor affordability using the following metrics:

1 The net initial yield is the annual rent generated by the assets, less non-recoverable property costs, divided by the assets' value.

2 These leases were transferred to Melrose, an affiliate of a related party, Minster Care Group.

3 The WAULT is the average unexpired lease term of the property portfolio, weighted by annual passing rents. The passing rent is the actual rent a tenant is paying at that point in time.

4 This is the net income from the portfolio (rent less irrecoverable property costs) divided by the total amount a purchaser would have to pay to buy the assets (the market value plus the estimated costs the purchaser would incur).

5 Homes outside of England are inspected by different regulatory bodies and rated on a separate system, in our reported metric we have aligned these ratings to those used by the CQC.

6 Rent cover is our tenants' EBITDARM (earnings before interest, tax, depreciation, amortisation, rent and management charges) divided by total annual rent. EBITDARM is a useful approximation for our tenants' cash earnings, which they can use to pay their rent. This has been adjusted to exclude seven turnaround homes and one new home in build-up.

Rent cover is one of our most important key performance indicators. The increase in the year reflects improved occupancy, and in particular, our tenants' ability to continue to increase their fees in line with or ahead of inflation. The average weekly fee across the portfolio increased by 13.3% to £1,049 during 2023.

Our tenants' staff costs have benefited from reduced agency staff use, which declined from an average of 8.9% of their revenue to 4.7% in the year. The rate of inflation for other key costs such as energy and food came down in the second half of the year.

Rent reviews in the year increased rents by 4.1% on average, adding £1.6 million to the contracted rent roll.

One test to measure the sustainability of our rents over the long life of our leases is the percentage of their revenues our tenants pay in rent, with anything over 15% being potentially too high. In 2023 on average they paid 12.6% of their revenues to us in rent, down from 13.2% in 2022.

We collected 99% of rent due in respect of the year, with all tenants other than Silverline paying in full.

Putting our purpose into practice: increasing our sustainability

We continued to focus on improvements to the environmental sustainability of our portfolio with a target to achieve net zero status by 2045. During 2023, we continued to improve the energy efficiency of homes through asset management projects and improved energy performance certificate (EPC)1 ratings through further energy efficiency projects.

We are also focusing on reducing the carbon emissions per m2. During the year these increased slightly from 50kg to 54kg which is in part explained by the increased occupancy over the past two years while the improvements we are focusing on are taking time to embed. Reducing this metric remains a core focus, with an interim target to reduce by 15% by the end of 2025.

We also carried out "deep-dive" sustainability surveys of six homes, to inform our net zero delivery plan and ensure that our tenants' businesses and the care they provide can continue sustainably.

Prudently financing the business

We use debt financing to support our growth and increase returns, while making sure we have a strong balance sheet at all times.

We use the following metrics to monitor our financial position:

During 2023 we:

· increased our revolving credit facility (RCF) with NatWest by £24 million to £50 million, extended the term from 2024 to 2028, and extended the term on our £75 million RCF with HSBC by one year to 2026;

· paid off the remaining £15 million of our term loan with Metro Bank, which was our most expensive debt; and

· increased our interest rate hedging by a net £75 million.

At the year end:

· the increase in LTV during 2023 was largely to finance the acquisition of a portfolio of six care homes in January 2023. This acquisition was accretive to earnings during the year after taking into account these additional financing costs;

· we had committed bank facilities of £250 million, with a weighted average term (excluding options to extend) of 6.3 years;

· we had significant liquidity available to us, with £65.2 million of undrawn facilities and £9.4 million of cash, against commitments of £16.2 million;

· the average cost of our drawn debt was 4.56%, with 95% of our drawn facilities fixed or hedged against interest rate rises; and

· our LTV was well within the maximum in our policy of 35%.

Outlook

We're well positioned to continue to deliver long-term sustainable returns to shareholders. As the economy recovers from 2023's high inflation and interest rate rises, and as the government sees the role that this sector can play in both health and the economy, we believe that we'll see more opportunities for growth in the future.

1 An EPC rates a property's energy efficiency from A (most efficient) to G (least efficient).

2 EPRA (net) LTV is calculated using net debt to gross portfolio valuation.

THE SOCIAL NEED FOR CARE BEDS FOR THE ELDERLY

Demand for care beds for the elderly is rising

There are 6.5 million people aged over 75 living in the United Kingdom in 2024. That number is forecast to increase by 55%, to 10.1 million over the next 25 years. The over 75s are the fastest growing part of the UK population. These increases will happen during the lives of our long leases.

Care needs are becoming more complex

While rising life expectancies are good news, the downside is that most people will spend the last 15 years of their life with some ill health. Around 10% of people over 80 have care needs that make it difficult for them to live at home.

Many people end up stuck in hospital beds, which means they're in the wrong setting for the type of care they need, particularly if they have dementia, and this increases costs for the NHS. On average during 2023, there were just over 12,000 people in hospital every night who had no clinical reason to be there but could not be safely discharged. Half of those people, nearly all of them elderly, had been waiting more than 21 days to be discharged. This "bed blocking" also has a knock-on effect on other patients in the NHS, who can't be admitted to hospital without a vacant bed.

Since the COVID-19 pandemic, there's evidence that people are moving into care homes later than before, that they're more likely to be frail or ill and that their stays are shorter. This is creating a longer term shift in the industry, with increasing demand for care providers who can deliver higher acuity care.

Dementia is the most common acute condition affecting people in care homes. Around 70% of care home residents suffer from some form of memory loss, which ranges from being mildly confused to severe dementia. The Alzheimer's Society projects that the number of people with some form of dementia in the UK will rise from just over 900,000 in 2020, to over 1.2 million in 2023, with the greatest rise being amongst people who have a severe form of the condition. By 2022 dementia and Alzheimer's diseases had already replaced heart disease and cancer as the leading cause of death in England and Wales.

The number of care beds isn't responding to demand

Despite the ageing population and rising acuity, the number of available care beds for elderly care has been stagnant. Between 2012 and 2021, the number of beds in nursing and residential care homes fell from 11.3 per 100 people aged over 75 to 9.4 - a 17% decrease. Looking at longer-term trends, an estimated 25% of over 85s lived in care homes for the elderly in 1996. By 2017, this had fallen to 15%. This reflects several factors, including a shift in social care policy towards home care. It might also reflect an element of rationing in the care system, as many older people struggle to access the care they need.

Although the care home market is attractive, for existing care homes the economics make it difficult to create much new supply.

Construction costs have risen substantially over the past two years, making it difficult to deliver a high quality new care home for less than £200,000 per bed. In contrast, an older home with an established record for providing good quality care can cost less than £100,000 per bed, which we believe offers a better risk adjusted return. Given the higher capital costs of brand new homes, tenants have to pay higher rents - up to 20% of their revenues as opposed to our average of 12.6% - which means that they in turn have to pass these costs on by charging higher fees to their residents. Higher fees do not automatically translate into better quality care, which depends more on the quality and stability of the team than the building.

Staffing rotas are highly regulated and tend to be similar in new and older homes. The higher fees needed by newly built care homes limit the number of residents who can afford this, restricting the size and growth of this segment of the market.

Slightly older homes also offer opportunities to add value, by updating them, adding facilities and improving their environmental performance, which is another reason we favour this part of the market over new builds.

The market is highly fragmented

There are currently just over 12,000 registered care homes in the UK. Our market is unusually fragmented. Over the past 15 years that fragmentation has increased as the market share of the top-10 care providers in the UK has declined from a peak of 27% in 2006, to 19% in 2023. The market share of sole traders operating one or two care homes has also declined, from over 80% in the early 1990s, to under 30% today.

Where there has been growth is of mid-sized care providers operating between three and 80 homes. Developing partnerships with operators in this space has given us the opportunity to acquire good quality assets at attractive yields.

We currently own 1.7% of a highly fragmented market. Successfully implementing our strategy gives us substantial scope for long?term growth.

Government policy and funding for care is complicated

To put it mildly, government policy and funding for adult social care is a complicated field. There is no national government budget for adult social care in England. A person's care needs might be met by their local authority's social services budget or by their local NHS Trust, and the individual or their relatives may also have to contribute to the cost.

Most local authorities support their adult social care costs through a council tax levy and, in certain situations, local authority or NHS funding is means tested. The system is ripe for reform, but successive governments have failed to implement it, despite numerous white and green papers, plus industry reports. Our tenants are experienced at delivering care in this complex environment while also running sustainable businesses.

DELIVERING ATTRACTIVE RISK-ADJUSTED RETURNS | OUR BUSINESS MODEL

Our business model allows us to generate attractive returns, with managed risk.

We consider risk from many angles, from ensuring our balance sheet stays strong, to the way we pick tenants and make sure they're performing well, to our focus on sustainability and creating a positive social impact.

Our competitive advantages

Our strategy delivered by our Investment Manager is our main source of competitive advantage. In particular, we benefit from:

· our strategic focus on upper mid-market care homes which we can acquire at below replacement cost with rents at affordable rates;

· the IM's deep sector knowledge and understanding of how care businesses work, which helps with everything from buying the right assets to forming and maintaining supportive tenant partnerships;

· the IM's relationships with care-home owners who might want to sell, the agents they work with and with potential new tenants. Great relationships and a proven track record can help us to buy assets off-market or beat the competition even when we're not the highest bidder; and

· the IM's asset management and development skills, so we can identify how to improve a care home before we buy it, successfully complete each project and improve returns by developing new homes.

The value we create

Our high-quality business generates attractive and sustainable value for our stakeholders.

Tenants

Tenants can grow their business alongside ours, in a long-term relationship with affordable rents, which benefits both of us.

Residents and their carers

Residents benefit from security, stability and high-quality care and their carers benefit from a stable environment in which to receive training alongside potential career progression in a vocational sector supporting vulnerable members of their community. As a landlord we seek to support both residents and their carers through our willingness to invest in their homes to improve the spaces they live and work in to create a lasting social impact.

Lenders

Our lenders can provide long-term finance to us on attractive terms, knowing we have a secure and resilient business, with strong cash flows.

Shareholders

Our model delivers predictable and rising revenue, so we can pay a progressive, fully covered dividend. There is also the potential for capital growth, which supports an attractive total return.

Careful cost control enables us to benefit from economies of scale as we grow. Many of our costs are fixed and some variable costs will step down as our asset value rises (including the IM fee which reduces from 1.0% to 0.7% of NAV above £500 million). Along with our conservative approach to debt finance, this helps to maximise the cash we can distribute to shareholders.

1 | GROWING THE BUSINESS SO WE CAN INVEST IN MUCH-NEEDED CARE HOME BEDS FOR EVERYONE

Growing our business requires us to make strategic choices that influence our returns and the risks we face.

These choices include the types of assets we buy, where they are and how we use debt finance to finance our growth.

Strategy: choosing which assets to buy

Our investment policy allows us to invest in different types of healthcare properties. Given the growing demand for care beds for the elderly, we've chosen to focus on care homes, in particular existing homes in the mid-market. These are attractive to us because:

· they provide a good setting for quality care;

· they're affordable for many more people than high-end homes, so they have a larger target market, which should mean fewer unfilled beds for our tenants;

· they're lower risk than new developments, as the capital cost is significantly less per bed and they don't need to build their occupancy and staff team from scratch; and

· they often give us scope to add value through asset management.

In January, we invested in a portfolio of six homes in Shropshire and Cheshire, for £56 million. The homes have 438 high-quality beds, a track record of strong operational performance and good sustainability credentials. We funded 80% in cash and the remainder by issuing 9.6 million shares at 116.62 pence per share. We made the initial investment by lending the money to Welford, an existing tenant of ours.

This allowed Welford to buy the companies that owned the homes and immediately take over running them, rather than having to wait several months for Care Quality Commission1 (CQC) approval to come through. This minimised disruption for residents and made sure Welford could focus on care. The CQC approved the transfer in June, allowing us to take up our option to buy the homes from Welford and complete the 35-year leases we'd already agreed, at an initial rent of £3.9 million a year.

Approving the completion of the deal was one of the board's key decisions in the year. We also sell non-core assets, as the business model explains. During 2023, we sold Mulberry Manor, a 49-bed care home in Mexborough, which we acquired as part of the portfolio we bought following our IPO in 2017. The home wasn't a strategic fit for either us or the tenant, hence it wasn't classified as core and we disposed of it for £1.25 million, in line with its book value. We expect to make further disposals of non-core assets in 2024.

The transactions in 2023 increased our portfolio by a net five homes, from 135 at 31 December 2022 to 140 at the year end.

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Stakeholders' interests: long-term impact and the environment

We sign long leases with tenants and as directors, we require extensive due diligence, both before we start working with them and careful monitoring once they're running our homes.

In this case the directors concluded that Welford was a good partner for us, that the acquisition would further strengthen both businesses and that it was appropriate to agree 35-year lease terms.

The directors also have a keen interest in the assets' sustainability and we discussed the cost, strategy and regulations associated with decarbonising the homes and improving their energy performance certificate (EPC) ratings and alignment with our net zero delivery plans, before approving the acquisition.

1 The CQC is the independent regulator for health and social care in England.

Measuring our progress

We also use the following key performance indicators (KPIs) to monitor our returns from the portfolio.

Profits have been enhanced by rental income growing at a faster rate than expenses as shown in the Group's reducing cost ratios. However, the key driver this year has been the valuation gains reversing the fair value losses seen in the previous period.

Primarily driven by steady yields across the portfolio with rent reviews feeding directly into valuation growth.

Total NAV of the Group grew by 7.22% to £478.1 million and the NAV per share grew by 4.73% to 115.38p. The reduced growth per share is reflective of the incremental 9.6 million shares issued in January 2023 as part (£11.2 million) of the consideration for the acquisition of six care homes.

The Group's adjusted earnings (closely aligned to cash profits) continued to increase in 2023 owing to inflation-linked rent reviews improving cash revenue while administrative costs further reduced as a percentage of income and the Group's well-hedged debt position mitigated the effects of high interest rates.

Strategy: where we buy assets

We manage risk by spreading the portfolio around the UK, so we don't rely on a small number of local markets. Most of our homes are in areas where asset prices are more attractive, there's strong demand for care and often less competition. This makes our homes an even more important part of their local communities.

At 31 December 2023, we owned homes in the following locations:

Strategy: financing our growth

We can grow the portfolio more quickly and increase returns by using an appropriate amount of debt. We're very aware of the risks of having too much leverage, so our policy is to have a maximum loan-to-value1 (LTV) ratio of 35% at the time we drawdown the debt and to hedge at least 75% of our drawn debt against rising interest rates. We have also updated our hedging policy to ensure we have adequate hedging in place to manage the risk of interest rate increases within our risk tolerance. At the year end, 95% of our drawn debt was hedged against interest rate increases.

In June, we increased our revolving credit facility (RCF) with NatWest by £24 million to £50 million, and extended the term from 2024 to 2028. The interest rate on this RCF is 200 basis points above SONIA. We also extended the term of our £75 million RCF with HSBC by one year to 2026. At the same time, we agreed lower interest cover covenants with both banks.

Increasing the NatWest RCF enabled us to replace the last £15 million of our loan from Metro Bank. This was our most expensive debt, at 265 basis points above SONIA2.

To manage our interest rate costs, we took out two interest rate caps in the year. These each hedge the cost of £50 million of debt, with the first capping SONIA at 3.0% until January 2025 and the second capping SONIA at 4.0% until August 2025. In June, a hedge which capped the interest rate on £25 million of debt expired. At the year end, we therefore had either fixed rates or caps on £175 million of debt or 95% of our drawn debt, in line with our policy.

Strategy: who funds our tenants' residents

We like our portfolio to have a good balance of funding for tenants' residents, from local authorities, the NHS and private pay. This helps to make our tenants' revenues more resilient than relying on one source of fees and means, we earn a predictable income from our assets.

Funding for our tenants' fee income changed only modestly during the year and remained well balanced:

Source of tenant income

How we monitor our financing

We use the following KPIs to monitor our debt position:

The increase was predominantly due to £44.8 million cash consideration to acquire the portfolio of six assets acquired in January 2023.

Increased in the year owing to an acquisition and capital expenditure on the existing portfolio, partially tempered by growing portfolio valuation.

1 The gross LTV is our gross debt as a percentage of our gross asset value.

2 The interest costs on our variable rate debt are linked to an interest rate benchmark called the Sterling Overnight Index Average (SONIA), which in turn is driven by the Bank of England's base rate.

Engaging with our shareholders and lenders

While all our stakeholders have an interest in the growth of our business and our financial stability, our shareholders and lenders are the most directly affected.

Understanding our shareholders' interests

The IM leads our investor relations programme and, along with our corporate brokers, ensures the board is kept well informed of shareholder views.

The Chair also offered meetings to our largest shareholders in the year.

Understanding our lenders' interests

The IM also regularly engages with our debt providers, providing quarterly information that shows we're complying with the covenants in our debt facilities and reporting on the performance of the tenants and the homes the facilities are secured against. In 2023, the IM was in regular contact with NatWest and HSBC, as it negotiated the increased and extended RCFs discussed above.

During the year, the IM took the lenders to visit several of the homes in their security pool to provide full transparency of the intended asset management works and environmental criteria we are upgrading these properties to. This regular and open engagement with our lenders, along with improved familiarity with the properties, has allowed us to increase and extend these facilities efficiently.

Key board decision - refining the dividend policy

Relevant stakeholders: shareholders

Dividends are a key attraction for shareholders in real estate investment trusts (REITs), with the UK REIT rules requiring us to pay out at least 90% of the profits from our property rental business each year. Paying an attractive and progressive dividend is therefore one of our most important objectives.

In 2018, the board adopted a policy of increasing the target dividend each year in line with the inflation-linked rental growth in the previous year. The board reviewed this policy in 2023.

While the policy gave shareholders certainty about dividend growth, the directors concluded that it was in shareholders' interests for the policy to be more flexible and forward looking.

The board therefore agreed an updated policy, to seek to maintain a progressive dividend that's covered by adjusted earnings. The directors continue to see adjusted earnings as the best yardstick for dividend payments, as they more closely reflect the Company's cash earnings than the IFRS or EPRA measures.

Case study

Morris Care

What was the opportunity?

To acquire a group of six homes in Shropshire and Cheshire, with a focus upon the wider Shrewsbury catchment area. We were attracted by the high specification of the assets, their local reputation and weighting towards higher acuity care provision.

Whilst the vendor was looking for a clean exit from the elderly care market, they were keen to ensure continuity of care for the residents. Operational and local management would remain with the business post completion and Welford agreed a licence to continue to use their well-established local brand name for at least three years after completion.

The IM identified an existing portfolio tenant, Welford Healthcare, as the best fit for the transfer of the operational businesses. Welford's own due diligence aligned with the IM's assessment regarding the potential for the portfolio and as a result, we were able to provide confidence to the vendor regarding continuity of care.

How did the timeline unfold?

The transaction was agreed in principle in mid-2022, with exchange targeted for the end of September. Unfortunately, the mini-budget in September 2022 created a market-wide hiatus and the transaction was paused by joint agreement. The terms were then revised to reflect the rise in the cost of capital after the mini-budget and agreement was reached in early December 2022, with completion occurring in January 2023. Given the increase in the cost of debt, the vendors' agreement to take 20% of the consideration in new shares issued by Impact at NAV was critical to ensure that the acquisition would be accretive to our earnings in 2023.

What has gone well?

Both Welford and ourselves saw opportunity within the trading performance, focusing on fees, occupancy and staffing. In particular, by extending an overseas recruitment campaign, there was scope to reduce the use of agency staffing in the short term. Coupled with some revenue growth as refurbished beds in one of the homes were filled, the business plan was expected to improve profit, and hence rent cover to over two times, within 6 - 12 months.

The latest available data demonstrates outperformance against the original business plan, with strong rent cover in the context of the portfolio overall. As a result of trading performance, despite wider market conditions, asset value is showing a healthy return against the original purchase price.

Looking forward, there are significant potential development concepts at two of the properties, including one that incorporates planning permission for a solar farm, which will help advance our ESG strategy.

Value uplift since acquisition

£3.3m +5.8%

% of Group's portfolio by market value

9.1%

2 | WORKING WITH OUR TENANTS

We don't run our care homes, so we need to partner with tenants who will operate them well and who share our focus on providing high-quality, and increasingly higher-acuity, care.

We keep in close contact with our tenants throughout the year, receive detailed monthly and quarterly reporting from them and carefully monitor their performance.

The business model describes our process for selecting tenants. We also have important choices to make as we grow our portfolio. In particular, we need to determine the right balance between adding new tenants and growing with existing tenants, as well as deciding how long we want our tenant relationships to be.

Strategy: adding tenants and growing with them

When we buy assets, we can select a new tenant to run them or increase the number of homes an existing tenant operates. Adding new tenants manages risk by reducing our reliance on individual tenants. However, growing with an existing tenant strengthens their business and supports our long-term partnership.

The acquisition we made during the year further increased the number of assets run by Welford, which has been a tenant since 2018. Over that time, we've expanded our relationship from an initial two homes to the current 18 homes with 1,087 beds, making Welford one of our largest tenants.

There was one change to our tenant base during the year, as we replaced Silverline with Melrose1.

At the year end, our tenant base was as follows:

1 Minster and Croftwood are part of Minster Care Group. Melrose is an affiliate of Minster Care Group.

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Stakeholders' interests: business relationships

The directors must consider the Group's business relationships, including with our tenants. In addition to receiving regular updates and detailed reports from the IM on each of our tenants, the directors all took part in calls with tenants during the year.

This allowed them to hear first-hand what tenants think of the Company as a landlord, and to discuss the issues tenants are facing.

Strategy: choosing the length of our tenant relationships

The length of new leases is an important decision for us. We favour leases of 25 years or more, since this generates long-term and growing income for our shareholders, encourages tenants to take a partnership approach, and gives residents and care home staff a stable environment to live and work in. Leases of this length also require us to be very selective when signing new tenants.

During the year, new leases came into effect on 18 assets. These were:

· the 35-year leases with Welford on the six homes we acquired in January 2023; and

· 30-year leases on 12 care homes we originally invested in through a loan to Holmes. We had an option to buy the homes following regulatory approval, which we exercised in June 2023.

How we measure our progress

The portfolio's weighted average unexpired lease term (WAULT) is a KPI for us.

Monitoring our tenants' performance

The IM engages with tenants on a weekly and monthly basis and in more depth each quarter, when it receives reports from them setting out their financial and operating performance.

Three main factors affect our tenants' financial performance and their ability to pay our rents: their occupancy; the fees they charge for the care they provide; and the cost and availability of staff. Trends in occupancy and fees were positive in 2023 and most tenants reported improved financial performance and higher rent cover.

In 2022, tenants struggled to recruit permanent staff and used more agency staff as a result. Encouragingly, we've seen clear signs since that tenants are getting these issues under control.

Their spending on agency staff fell from an average high of 14% of their total spending on staff at the beginning of 2022, to an average of 8% at the end of 2023.

With our largest tenants, we can also track whether they're maintaining staffing levels. Hours worked per occupied bed were stable at 36 hours a week, showing that while costs were rising sharply as inflation surged tenants were not cutting back on their main cost, staff.

Among other important costs, food prices rose but were steady as a percentage of tenants' revenues, and energy costs fell back to more normal levels in the second half of 2023.

Key board decision - replacing Silverline with Melrose

Relevant stakeholders: shareholders, lenders, tenants, tenants' residents

Despite the generally positive backdrop for our tenants in 2023, it became apparent at the start of the year that Silverline was in financial difficulties and in January 2023 they asked us for a six?month rent holiday.

Silverline rented seven homes from us - four in Scotland and three in Yorkshire - for £1.6 million per year. The IM reviewed the situation in detail, including why the homes were underperforming, and continued to engage with Silverline about its financial position.

The board and the IM considered several options for the homes and were clear throughout these discussions that the solution had to minimise disruption for residents and staff. Ultimately, the board decided it was in the best interests of all stakeholders to replace Silverline as the operator. After running a competitive process, the board agreed with the IM's recommendation to replace Silverline with Melrose, an affiliate of a related party - Minster Care Group Limited (our largest tenant), at the beginning of June 2023. For further detail of this transfer of operations please see Note 22 to the financial statements.

The lessons learnt

Between the Company's inception in 2017 and the end of 2022 our rent collection record was 100%. This was the first time we have had a problem with rent collection. Following Silverline, we've reviewed and updated the due diligence we carry out on potential new tenants.

We first started working with Silverline when we bought the three Yorkshire homes in 2020. These homes were bought as a turnaround project on pricing that reflected their under-performance. We thought they had the potential to do much better. Silverline had a plan for turning them around but unfortunately failed to do so. Clearly the COVID pandemic made delivering a successful turnaround much more challenging. While we may buy homes that need turning around in the future, we'll only do this with an existing tenant and probably not with an operator we haven't worked with before.

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Stakeholders' interests: community impact and business reputation

The directors must consider how their decisions could affect the community, and whether they could harm the Group's reputation for high standards of business conduct. A fundamental stakeholder consideration in the board's decision making, is the conflict of interest risk as a result of the related party relationship between the Investment Manager and Minster, the Group's largest tenant. The directors take this very seriously.

These issues were relevant to Silverline. One option available to the Group would have led to the homes closing and then reopening under a new tenant. This would have caused the most disruption to the local community, given its impact on residents and staff, and could also have harmed the Group's reputation, which is important for attracting new tenants.

Case study

Silverline

Silverline was a tenant of the Group, operating three of our homes in Bradford with turnaround opportunities identified, and four in or near to Glasgow. The Bradford homes were acquired immediately prior to Covid, resulting in delays to the planned turnaround strategy at these homes. The acquisition of the four homes in Scotland was expected to help deliver growth for both Impact and Silverline; however, there were delays to the completion of this portfolio which was compounded by a material change in the broader business activity of the Silverline group. As a result, they requested a rent payment holiday for six months from the beginning of January 2023. Following a five-month period during which several solutions were considered, we decided that the best outcome for the residents, employees of the homes and our wider stakeholders was a consensual transfer of the Silverline operations to Melrose, an affiliate of a related party, Minster Group, who has been operating the homes since June 2023. In identifying the best alternative operator to partner with, both new and existing operators were approached. Ultimately, Melrose was selected due to a number of factors, including their significant experience operating mid-market homes in both England and Scotland, track record in turnarounds and the competitive cost structure offered to the Group.

To support the transfer of these operations to Melrose and the continued investment in the turnaround of the individual homes, we agreed a variable rent structure and provided a £1.6 million loan facility accruing interest at 8% on drawn funds.

Since transferring the operations of the homes, their underlying performance has improved, albeit at a faster pace in the assets located close to Glasgow than in Bradford, confirming our conviction in the quality of the homes. We will continue to work closely with all parties involved to secure the long-term future of the homes and to ensure the essential care services provided within the homes remain unaffected.

Whilst there is still a lot of hard work to do at each of the homes, we are proud to say that one year on from the failure to pay rent, the homes are now cash flow positive and each with their own future ahead. This unfortunate event helps demonstrate the positive impact we as landlord can have on the residents and staff who live and work within our buildings.

Number of beds

394

(properties: seven)

% of Group's portfolio by market value

2.6%

3 | OUR FOCUS ON QUALITY

Capex invested in improving homes for residents and staff

£4.69m

Quality has two main aspects for us: care and buildings. The quality of care is paramount for both us and our tenants.

We focus on the buildings which will best support our tenants in providing care. Both the quality of care and the building itself determine how full the homes are, how much our tenants can charge and how secure our income is.

Our strategic choices include how much capital we should allocate to asset management, what sort of improvements we should target, and the extent to which we should fund new developments. Our tenants are responsible for repairing and maintaining the buildings and for their quality of care. We monitor both of these and discuss them with our tenants on at least a quarterly basis.

Strategy: increasing quality by investing in our assets

Everyone gains from successful asset management: the residents who live in our homes; the staff who work there, our tenant who operates the home; and us as its owner. When we invest to improve our homes, the lease terms typically allow us to rentalise the investment at 8% with potential for valuation uplift on the capital invested, giving a rate of return above just the yield alone. The returns on asset management are therefore higher than on most asset acquisitions. These projects are also generally lower risk, since we and the tenant have a good understanding of the home and how the project will improve its performance.

However, we have to carefully consider how much to invest each year and which projects to favour, since:

· we want to continue to grow the portfolio and need to retain enough capital to buy assets; and

· our tenants have to balance a project's longer-term benefits with the short-term disruption to the home, which can reduce their income while rooms are upgraded and disturb residents. We therefore need our tenant's permission for a project to go ahead.

Our portfolio management process identifies homes with the potential to add value through asset management. Where we acquire homes as part of a portfolio, this may include non-core assets that have limited credentials for a long-term hold and will be earmarked for disposal. We then target projects that:

· improve the home for residents and staff, such as adding ensuite bedrooms and upgrading kitchens, laundries and other facilities;

· improve the environmental performance of the home and future-proof the home against obsolescence;

· expand the services our tenants can offer, such as adding specialist beds for dementia care; and/or

· improve the home for residents and staff, such as adding ensuite bedrooms and upgrading kitchens, laundries, outside spaces and other facilities.

We made good progress with our ongoing project at Fairview House and Court in Bristol, where we have invested £3.2 million to link the two buildings, add bedrooms and improve the environmental performance. When we bought Fairview in 2018, the rent was £356,000. After five years of inflation-linked rent increases and rentalising our investment in the home, we've grown the annual rent to £690,000. At the same time, the home's improved trading position has seen its rent cover rise.

The asset value has, as a result, grown by more than the capital investment.

Overall, however, we did not invest as much in asset management as we intended in 2023. Some larger projects were delayed, for example because increased build costs meant we needed to revisit the plans, while several smaller projects also started later than we expected. In total, we invested £4.7 million in asset management in the year.

Our pipeline currently has 24 such projects at various stages. The total funding for these projects is up to £31 million over the next two to three years, which we will support if it enhances the quality of care and environment, is accretive to shareholder returns and we have adequate financial resources available to deploy.

Our progress in 2023

During the year, we approved £11.7 million to asset management projects of which £2.2 million was spent in the year and £9.5 million remains outstanding. The largest projects are shown in the table below:

Ensuring our tenants maintain our buildings

Regular repairs and maintenance protect the value of our homes and keep them up to standard for residents and staff.

Our leases specify the minimum amount our tenants need to spend and we monitor this carefully, looking at spend in the current year and the total over the last three years. The IM regularly visits homes to inspect them and check progress, with over 110 visits taking place in 2023.

In addition, our valuer, surveyors, environmental specialists and other advisers support the IM in reviewing the quality of our buildings. Collectively, they undertook 197 home inspections in the year.

Where we identify concerns either by tenants falling behind on their repairs and maintenance commitments against our covenant requirements, or more generally a concern that the home does not meet the fully repairing standards expected, we will engage proactively with those tenants to resolve these issues.

How we measure our portfolio quality

The following KPIs reflect the overall quality of our assets. Our total return and the WAULT are also important measures of quality:

EPRA topped-up net initial yield (NIY)

2023 6.92%

2022 6.98%

The EPRA topped-up NIY has been steadily reducing over the year as the property values have stabilised following a sudden outward move at the end of 2022. This has been benefited further by the acquisition of high-quality assets during the year alongside continued improvements to the existing portfolio.

Year-end bed occupancy

2023 88.2%

2022 86.6%

Occupancy across the portfolio continued to increase during the year, although it was still around half a percent below pre-COVID levels at the year end. Tenants have prioritised passing on cost inflation rather than discounting fees to fill beds, which is reflected in the 13.3% average increase in their fees in 2023.

Impact Group average adjusted bed occupancy1

Looked at over a longer period, occupancy has steadily recovered since the COVID low point of 79% in January 2021, but has not yet fully returned to pre-covid levels of 90%.

1 Excludes one new home in build-up and three turnaround assets which have not reached maturity.

Monitoring the quality of care

The IM tracks reports and ratings from regulators, and regularly reviews customer feedback on the homes.

During 2023, the regulator inspected 27 of our homes. If the regulator rates a home as inadequate or requires improvement, the IM reviews the report in detail and discusses the findings with the tenant's operations director.

This allows us to understand the issues, the actions the tenant is taking and whether there are any broader operational concerns the tenant is looking to address. Where appropriate, we'll seek independent support to help resolve any ongoing issues.

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Stakeholders' interest: community impact and business reputation

In addition to the financial implications of building and care quality discussed above, the directors must consider how these issues can affect the community and the Group's reputation. Poor buildings or care have a direct impact on residents' quality of life and the working environment for staff and therefore the community within which they operate. Badly maintained buildings and poor care could do significant damage to tenants' reputations, which in turn could harm perceptions of the Group.

How we measure our tenants' care quality

The regulator's ratings are a KPI for us:

Home rated good or outstanding by CQC

2023 80.6%

2022 78.2%

The proportion of good or outstanding homes improved during the year and is above the sector average of 79%. At the year end, two homes were rated inadequate and 23 required improvement.

Taking account of residents' interests

Our tenants are responsible for their residents and we don't directly engage with them, except when we meet them during home visits. The main ways we look after residents' interests are through our oversight of care quality ratings and ensuring the homes are well maintained, as described above.

Case study

Asset management timeline

Mavern - refurbishment and extension in progress

We approved an extension and extensive refurbishment of Mavern in January 2023 which is due for completion in early 2024. The refurbishment will modernise the care home ensuring it can continue to provide high quality care over the term of the lease while delivering improved energy efficiency in line with our ESG strategy.

· Beds: +8 beds to 62 beds.

· New resident lounge.

· EPC improvement from C to B - including air source heat pumps and solar pv.

· Capital expenditure of £1.9 million.

· Target value uplift of £0.5 million.

"We are so pleased with the investment in our home and the wonderful new bedrooms and day spaces that have been created. We are sure that residents and staff will benefit from the improvements and further enhance our reputation locally."

Justine Old, Registered Manager

Freeland Lodge - three years on

Construction of Freeland Lodge, a 46-bed care home, was completed in 2020. Located adjacent to Freeland House the home offers nursing, dementia and residential care. Three years after opening, the home is delivering in line with projections with strong occupancy and similar fees from both self-funded and publicly funded residents, reflective of the quality of environment and care provided.

· Beds: 46.

· Capital expenditure: £5.2 million.

· Value uplift since completion £1.6 million1.

· Year-end occupancy: 93.5%.

· AWF: £1,480.

· Carehome.co.uk: 9.5/10.

· CQC: Good.

· EPC: B37.

1 This includes uplifts on the existing property, Freeland House.

"We are so pleased with the progress we have made over the last three years. Residents and staff really love the light and airy spaces and the wonderful views out over the gardens and beyond."

May Hernandez Vidal-Payne, Registered Manager

4 | OUR FOCUS ON AFFORDABILITY

Rent cover

2.0x +11.7%

2022: 1.8x

For our business to be sustainable, our tenants must be able to afford our rent and their fees must be affordable to a sufficient number of potential residents, both private and publicly funded.

Our strategic choices relate to the rents we set when we first agree leases and how we structure our rent review clauses.

Strategy: setting initial rents and ensuring sustainable rental growth

We believe that all our stakeholders will be better off in the long run if we make sure rents remain affordable. With this in mind:

· we typically set initial rents to ensure strong rent cover from day one; and

· all our leases include annual inflation-linked rental growth, with minimum and maximum increases each year. For most leases, these are set at 2% and 4% respectively.

This structure shares risk between us and our tenants. It guarantees that our income will grow every year, including when inflation is low, while protecting our tenants when inflation is high, as it has been over the last 12 to 18 months.

Impact leases inflation linkage

Percentage of Impact leases with RPI linkage 99%1

Percentage of Impact leases with CPI linkage 1%

Impact leases caps and collars

Percentage with floor 2%/cap 4% 85%1

Percentage with floor 1%/cap 5% 14%

Percentage with upwards-only inflation linkage 1%

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Stakeholders' interests: long-term impact and business reputation

The way we set initial rents and structure rent reviews are good examples of our focus on the long term. If rents become too high, we'll lose tenants and hence income, causing major disruption to residents and staff, reducing the value of our assets and risking damage to our reputation. Balancing rental growth with affordability is therefore a key part of providing sustainable returns for shareholders.

1 This includes the seven leases with Melrose which have been temporarily amended to variable rent.

How we measure affordability

Rent cover is one of the most important KPIs for our business. We also track our rental growth and the amount of rent that's overdue:

Last 12 Months (LTM) Rent cover

2023 2.00x

2022 1.80x

Rent cover increased throughout the year and was the highest we'd recorded at the year end. This reflects our tenants' success in passing on inflationary cost pressures through higher fees, and the fact that fees grew faster than rent due to the caps in our leases.

Average rental growth from rent reviews

2023 4.1%

2022 4.1%

Across both years, all the Group's care home rents had increased in line with the rent review cap in their lease.

Rent collection

2023 99%

2022 100%

In the first half of 2023 Silverline stopped paying rent, the homes were re-tenanted by June 2023, although this was partially mitigated by a rental deposit held by the Group; it resulted in £236,000 rent written off.

The chart on page 31 of the annual report shows rent cover over time, demonstrating that rents have been consistently affordable for our tenants, as well as the scale of the improvement this year

The chart on page 31 of the annual report sets out the rental growth we've achieved over the last six years and compares the percentage increase with the rate of inflation. It shows that we've received above-inflation increases for much of this period, with our tenants being protected more recently from high inflation. In total, rent reviews added £1.6 million to our contracted rent in 2023.

1 Rent cover excludes seven turnaround homes which were previously operated by Silverline and were re?tenanted in June 2023 and one new home in build-up stage. The adjustments are consistent with reporting in previous periods.

Affordability of our tenants' rent

An important indicator of whether our tenants' rent is affordable, is whether they can increase their fees at or ahead of the rate of inflation. As shown below, care home operators have a long history of achieving this:

This continued in 2023. Across our portfolio, the average weekly fee (AWF) rose by 13.3% to £1,049, contributing to rising tenant profitability and rent cover.

Case study

Q&A with our tenant - Careport

Careport summary

Number of care homes with us

9

2023 average occupancy

96%

Public/private fee split

74% / 26%

Average EBITDARM margin (since January 2020)

26%

Q: What are your main aims as a business?

A: Our principal aim is to ensure that Careport is the preferred provider of dementia care in all areas where we operate.

Q: How do you do that?

A: We need to show we can deliver on three fronts: we provide good quality care; we are a reliable partner for our staff, residents and the people paying for their care; and we manage well-invested care homes where people want to live and work.

Q: What are your plans for 2024 and beyond?

A: During the COVID pandemic we really focused on being a reliable and trusted care provider during a very challenging period. Then, in 2023, we had to concentrate on managing cost inflation. We are now moving into the next period where we are thinking about the investment required to enable our business to perform over the longer term.

Q: What kind of investments are you considering?

A: We are already quite advanced in rolling out modern digital care management tools and want to take that investment further. Our aim is not to reduce staff, but to ensure the staff we have work consistently better and have more job satisfaction.

That leads into the second major area of investment - our staff - where we are putting in place measures to be able recruit the best people, train them and offer a career with real potential.

Q: Over 75% of the residents you care for are funded by their local council or NHS on lower fees than are typically paid in the private market. Can you afford to invest?

A: We aim to deliver excellent care at affordable rates and never forget that in order to be a sustainable organisation we also need to be a profitable business. Since we started our relationship with Impact in 2018, our rent cover has been consistently better than two times during some very challenging times.

Q: There are significant capex programmes agreed with Impact due to start in 2024.What's the best project you've worked with Impact on so far?

A: The completion of the large-scale project we undertook to convert Blackwell Vale, a weak and underinvested care home bought in partnership with Impact, into what is now Riverwell Beck has been transformational. Impact supported us by envisioning the potential in Blackwell Vale and assisting us to undertake a complete overhaul of the internal layout, including a refurbishment and an extension which culminated in an additional five bedrooms and a significant improvement in the building specification and energy efficiency.

We worked with Impact to agree an affordable rent from day one which provided headroom for further investment. On Riverwell Beck, Impact challenged us to be more optimistic on the extent of the refurbishment and we are delighted we took this risk as performance has outperformed our initial expectations.

Q: And of course Impact have also worked with you on sustainability improvement programmes?

A: We are fully aware of the need for greener and more sustainable properties and have embarked on projects across our entire portfolio to enhance the energy efficiency of our buildings; a consequence of which has been lower energy costs. Impact has been instrumental in providing us with the tools and funding to improve our buildings' sustainability. This is an area of capex that we continue to explore, such as installing solar PV on many of our properties.

5 | INCREASING OUR SUSTAINABILITY

EPCs improved

12

8 of which moved up to a higher band

Carbon Intensity (kg CO2e per m2 per year)

54kg

(2022: 50kg)

Carbon intensity has increased, in part due to increased occupancy, while energy efficiency measures take time to embed.

We believe that high quality, affordable care should be accessible to all.

We were pleased to retain our EPRA sBPR Gold award for the fourth year running, demonstrating our commitment to transparent disclosure on the environmental performance of our portfolio. In 2023, our initial Carbon Disclosure Project report received a D grade. This is a good platform for a first submission and we are looking to build on this in the future. The IM is a signatory to the UN Principles of Responsible Investment (UN PRI) and has embedded those principles in its risk management and investment decision?making processes.

Care homes are an essential part of the UK's social infrastructure and have a crucial part to play in their communities. Our care homes can also free up much-needed bed space in hospitals, improving people's lives by reducing the time they spend in hospital and providing them with a more appropriate setting for community?based care. Our homes also benefit the wider community and sustain and create local employment. We believe that our long-term investment in these homes delivers positive social outcomes for residents, their families and the staff providing their care in a community setting.

Homes for publicly funded residents have traditionally had less investment than those for private payers.

As a long-term investor and partner to care home operators, ensuring our rents are at appropriate levels helps enable our tenants to provide affordable care for residents who may have less choice which aligns with our purpose.

We set rents at levels that enable operators to provide quality care and value for money to residents, irrespective of whether they are funded privately or by the local authority and NHS.

Alongside supporting tenants to deliver excellent care, we are focused on improving the environmental performance of our portfolio, by increasing our EPC ratings and by achieving net zero by 2045. We are engaging with tenants to identify areas where energy consumption can be reduced in line with our net zero milestones and targets. While the EPC rating of our homes improved in the year our energy intensity increased from 50kg CO2e/m2/year to 54kg CO2e/m2/year. This can in part be explained by the increased occupancy in our homes and increased carbon factors for energy compared to 2022. Energy efficiency measures will take time to embed, and we recognise that our 2025 interim target of a 15% like for like reduction in carbon emissions is challenging. We remain committed to identifying areas to invest in measures to achieve this and are engaging with our tenants to seek alignment of reducing energy use and carbon emissions in a managed and affordable way.

Building on our materiality assessment completed in 2022, the priorities (listed below) informed our ESG strategy, both of which we referenced in last year's report. During 2023, we have made good progress with embedding these priorities in our day-to-day operations and our decision-making, as well as setting ourselves performance targets where appropriate. Our challenge, as for many businesses, is that we do not have direct control over certain areas. We also need to ensure that everything we do is set within a commercial context.

Key pillars of our ESG framework

ESG Pillar 1 Strategic Investment in our portfolio to improve environmental impact.

Pillar 2: Having a positive impact on the people living and working in our homes.

Pillar 3: Robust Governance and transparent reporting to all stakeholders.

1 Based of English equivalent data for Scottish EPCs.

Delivering on a credible net zero delivery plan

In 2022, we published our commitment to achieving net zero by 2045, following a specialist consultancy's desktop analysis of the care homes in our portfolio, using the widely adopted CRREM toolkit. We also included interim targets for 2025 (15% reduction against 2022 baseline) and 2030 (50% reduction against 2022 baseline), mindful that it's important that we demonstrate progress in the near to medium term whilst balancing the affordability of the investment for our tenants. Over time we expect the affordability and efficiency of low carbon technologies to improve, however we are focusing on what measures can also be achieved today to help deliver against these targets.

In 2023, our CO2e emissions on a like-for-like basis increased on a m2 basis. Occupancy is a key driver of energy intensity and this has increased over the past two years, however our target remains to reduce this overall and as we implement energy efficiency measures through asset management projects we expect these emissions to fall.

During 2023, we have continued to research and refine our path to net zero to ensure that we're creating a credible net zero delivery plan. We've conducted on-site energy audits in six homes, which are representative of our portfolio. The audit results are helping us to engage more effectively with our tenants to agree a practical, sustainability-related capital expenditure programme, which takes into account our tenants' considerations.

We continue to improve our data collection for energy consumption from our tenants. We have 85% coverage, with estimates based on previous years for where we don't have up to date data. As the quality and quantity of our data improves, we're in a better position to engage with tenants to identify opportunities where we can increase energy efficiency, reduce harmful CO2 emissions and reduce running costs.

In 2023, the energy use intensity and carbon emissions of our portfolio were as follows:

Improving the energy performance of our portfolio

In 2022, we also set out our target to improve the EPC ratings across our portfolio. Our objective is to achieve a minimum B rating (or Scottish equivalent) by 2030, with an interim target of 50% by 2025.

During 2023, we continued to assess where EPC ratings can be improved through interventions such as building fabric improvements, more efficient LED lighting and more efficient heating systems. Where we have implemented measures like these, we have updated the EPC in accordance with current building regulations. As a result, we're pleased to report a positive movement in the proportion of our homes rated EPC B or higher across the portfolio.

Percentage of assets with an EPC of B or above1:

1 This data is derived using the English equivalent EPC ratings for all properties including Scotland as documented by the published EPC Certification. The full breakdown of EPCs in Scotland, based on Scottish methodology, is C (3%), D, (15%), E (59%), F (12%) and G (12%).

Charitable causes

In 2023, we were delighted to establish a partnership with the Care Workers Charity. It supports care workers in times of need, particularly with mental health support, financial grants and advocating for care workers generally. We look forward to supporting its work throughout 2024.

Satisfaction with Impact as long?term partner

Very satisfied 46%

Moderately satisfied 36%

Neutral 9%

Not satisfied at all 9%

Tenant survey

In 2023, we have again conducted a tenant survey, facilitated by an independent external body. We are pleased to report a 92% response rate of which 81% of tenants reported having a positive relationship with Impact and viewed us a good long-term partner and 91% reported satisfaction with Impact's level of engagement with them. We are always keen to get feedback from tenants and we seek to maintain and grow our positive relationships with them.

Progress with our climate resilience

In last year's report, we included our initial response to the Task Force on Climate-related Financial Disclosures (TCFD) methodology. We examined the possible physical climate change risks of three IPCC warming scenarios: RCP 2.6 (1.5-2 degrees), RCP 4.5 (2-3.5 degrees) and RCP 8.5 (4 degrees) across a representative sample of 20 properties from our portfolio and considered the wider climate transition risks and opportunities. The findings, alongside the concurrent work on our net zero strategy, helped to inform our financial planning and risk management processes.

During 2023 we have made good progress with developing our understanding, management, measurement and decision-making in regard to climate action.

The IM has established an ESG committee to drive actions and monitor progress, and improved EPC ratings. From a risk and opportunity perspective, "deep?dives" have been undertaken into four material issues, namely:

· physical risk of flooding;

· stranded assets due to an inability to satisfy MEES requirements;

· the associated costs involved in improving energy efficiency and fulfilling our net zero delivery plan; and

· initial consideration of carbon pricing mechanisms.

RISK MANAGEMENT IS INTEGRAL TO THE WAY WE MANAGE OUR BUSINESS

Our purpose is to deliver attractive risk-adjusted returns.

To achieve that, we've built risk management into everything we do.

The board sets our risk appetite, which then guides the IM's actions when implementing our strategy. While our appetite for risk will vary over time, in general we maintain a balanced overall level of risk, which is appropriate for achieving our strategic objective; working with tenants to provide quality, affordable and sustainable care homes. The board reviews our risk appetite each year.

The diagram on page 39 of the annual report shows the Group's principal risks and uncertainties, in order of the residual risk that remains after taking account of the mitigations we have in place.

As the diagram shows, two of our risks are outside our risk appetite and we're looking to mitigate them further:

· for significant tenant default, our target is for no tenant to account for more than 25% of our contracted rent. The Minster Group and its affiliates are currently 37% of our contracted rent. We aim to continue adding new tenants over time, to further diversify our income; and

· for underinvestment in care homes, the board is working with the IM to understand the cost and delivery plan for achieving our net zero carbon target by 2045. We're looking at whether we can do this by investing in the homes in return for higher rents, whether our tenants could fund the work through increased fees for residents, or, in the worst case, if it could be an irrecoverable cost for us.

Risk tolerance

Our appetite for risk has been reviewed to assess whether we are operating within our risk tolerance. Risk tolerance is a continuum and the range for some risks extends over more than one of these categories.

Risk appetite

We have defined risk appetite from high to low in the following categories: 'Accepting' (where we are focused on maximising opportunities); 'Flexible' (willing to consider all options); 'Cautious' (where we are willing to tolerate a degree of risk); 'Minimalist' (preferring options with low inherent risk); and 'Averse' (where we avoid risk and uncertainty).

Infectious diseases

Probability: Medium

Impact: Moderate

Change in the year: No change

Risk appetite: Cautious

An outbreak of a significant new infectious disease would clearly place care home residents, who are naturally vulnerable, at significant danger. It may result in lower care home occupancy, reduced tenant profitability and higher costs. All of these would impact on the ability of our tenants to pay us rent, the value our portfolio and our ability to work with tenants successfully.

How we manage this risk

COVID-19, together with other illnesses, means care home operators have experience of managing infectious diseases. Since the outbreak of COVID-19, we have increased our monitoring of occupancy statistics to a weekly format, giving us rapid feedback on this KPI. Also, having an affordable rent, and thus strong rent cover, enables our tenant operating partners to react better to unforeseen changes. In an extreme outbreak we would expect the government to support operators as they did through COVID-19; however, should they not provide this support, we have ensured that our business can sustain a delay in rent collection.

We continually work with our tenants to explore improvements to the homes, this can include ensuring the home is better protected to help with infection control, including air filtration, temperature sensors and unitisation of the home, to help with isolating outbreaks.

We believe that, especially with the learnings from the recent pandemic, the mitigations are sufficient to reduce the risk to moderate, and to be within our risk tolerance.

Opportunity

None.

Significant tenant default

Probability: Medium

Impact: Moderate

Change in the year: No change

Risk appetite: Cautious

This is the risk that either a single large tenant (more than 10% of rent roll) defaults or several smaller tenants default. Any tenant failure is likely to cost us money (as the Silverline situation shows), but some tenants are larger than others. Failure of most tenants would have a moderate impact on us, but a Minster Group failure, as by far the largest group (37% of rent, including affiliates), would be critical and is why the risk is outside of our risk tolerance. This could reduce our revenues and asset values.

How we manage this risk

Our close monitoring of tenants' performance enables us to spot issues quickly and we have shown we can replace a tenant if needed. Most tenants have seen improved profitability this year.

Our strategy is for no tenant to account for more than 25% of our contracted rent. Accordingly, we aim to continue adding new tenants over time, to further diversify our income. We also maintain close contact with Minster and the IM receives quarterly accounts which they discuss in detail with the tenant, confirming its financial health.

Opportunity

None.

Underinvestment in care homes

Probability: Medium

Impact: Moderate

Change in the year: No change

Risk appetite: Cautious

Underinvestment could occur if: tenants don't invest in maintaining the properties, which could reduce the quality of care they can provide; the market or regulation may demand enhanced or different facilities (such as limiting the size of a care home); or, failure to consider the effects of climate change which could accelerate obsolescence of our care homes (both physical and low carbon transition risks) including minimum requirements for EPCs and to meet our net zero target by 2045.

How we manage this risk

All of our leases have full repair and maintenance obligations, as described above. In extreme circumstances, we could replace a tenant who fails to comply.

We identify asset management opportunities before we buy assets and where appropriate we commit with our tenants to ensure this works begins in the first 12 to 18 months.

The board is working with the IM to understand the cost and delivery plan for achieving our net zero carbon target by 2045. We are looking at whether we can do this by investing in the homes in return for higher rents, whether our tenants could fund the work through increased fees for residents, or, in the worst case, if it could be an irrecoverable cost for us. While we continue this work and await guidance on future regulation, we have put this risk slightly outside of our risk tolerance and we keep it under close review.

Opportunity

We can fund building extensions or other improvements, in return for an increase in rent.

Economic disruption

Probability: High

Impact: Moderate

Change in the year: No change

Risk appetite: Cautious

An economic downturn could have a moderate to significant impact on the business, but we believe that our mitigations are sufficient to bring it within our risk tolerance.

Difficult economic conditions could put further pressure on local authority funding, affecting our tenants' fees and their ability to pay our rent.

High inflation has led to sharp increases in interest rates, hitting property valuations across all sectors and placing pressure on the financial covenants of our debt facilities which if breached, could result in the banks taking security over our assets. While inflation has come down, interest rates are not expected to return to the previous very low levels.

How we manage this risk

We can limit the impact of this risk by buying well, ensuring our tenants have strong rent cover and managing the assets to increase their value.

Tenant profitability and long-term affordable rents are the key to a sustainable business. We regularly assess our tenants' financial performance, particularly their rent cover. The Care Act 2014 places responsibilities upon local authorities to support individuals who need care, which helps to mitigate this risk.

The board agrees cash flow and debt levels, maintaining a cautious leverage in line with our risk appetite. Our LTV cap is 35% and we our aiming to keep our debt levels below this cap. We also have a policy to limit our exposure to increases in interest rates through fixed rate debt and interest rate caps. Our inflation-linked leases ensure our income grows every year, which supports property valuations.

Opportunity

Reduced asset valuations and/or higher debt costs may create attractive buying opportunities.

Political events

Probability: Medium

Impact: Moderate

Change in the year: No change

Risk appetite: Cautious

Changes to government in the next 12 months are likely to heighten the risk of changes in policy and funding that affect our market. Increased regulation, changes to immigration or changes to care worker pay levels alongside the risk of alternative ways of providing care could make it harder for our tenants to pay their rent, reducing the value of our properties.

How we manage this risk

We see this risk as moderate, because if government were to change regulation that increases operational costs in care homes (for whatever reason) it would have to accept that fees would rise to pay for this - the alternative being tenants losing money and homes closing, which would be politically unacceptable and disastrous for local authorities and the NHS. We have enhanced our knowledge of likely future developments in the health service and sought contact with opinion formers to increase their understanding of the sector.

Opportunity

Increased government funding could help the sector to grow and provide more opportunities for us to support adult social care.

Reputational damage

Probability: Medium

Impact: Moderate

Change in the year: No change

Risk appetite: Minimalist

Circumstances that could damage our reputation include our tenants providing poor care or breaching standards around matters like minimum wage or modern slavery. In addition, Minster Group is a related party to the IM. If there is a breakdown in trust on related party disclosures, this could damage our reputation.

We have also set targets to deliver net zero carbon by 2045, failure to deliver against our carbon reduction strategy could damage our reputation with investors and the community within which our care homes operate.

How we manage this risk

We are a responsible company and so conscious of reputational risks, which we think could be critical if unmitigated, but are minor after the measures we take. We monitor tenants carefully for the quality of the care, through regular meetings, care home visits and CQC ratings. We select only tenants with high standards.

The board ensures we transparently disclose related party activities and take decisions in the best interest of stakeholders. The board also oversees the monitoring of our progress against our ESG targets.

Opportunity

None.

Investment Manager fails

Probability: Low

Impact: High

Change in the year: No change

Risk appetite: Minimalist

We rely on the IM's capabilities to execute our strategy and support our day-to-day relationships. If the IM fails to retain the key staff, this could result in poor relationships with stakeholders and, ultimately, failure to collect rent and a reduction in value of our portfolio.

How we manage this risk

The service requirements are set out in the Investment Management Agreement which the board monitors annually through the management engagement committee and more regularly through board member interactions with the IM. The IM is a well-run partnership closely bound into the success of the Company. In the last resort, the board believes that it could find an alternative manager to take over. The net risk is therefore within our risk tolerance.

Opportunity

None.

Other risks

There are several other risks that we monitor closely but we don't believe are principal risks for us. These include:

Taxation risk - We're a UK REIT and have to comply with certain rules to maintain that status. Any change to our tax status or in UK tax legislation could make it harder to achieve our investment objectives.

Cyber security - We need to protect our customer and company data from cyber attacks. Losing sensitive information could materially harm our financial condition. We have relatively few IT systems, as the IM runs our business and the Administrator runs the accounting and banking systems. The risk committee reviews our internal controls and provides assurance to the audit committee that they're effective. The audit committee also reviews our internal controls once a year.

Financial management - There's a risk that our budgets and plans are inaccurate, that we've made unrealistic assumptions or not applied them correctly, leading to our financial position deteriorating. The board reviews our financial results and any differences to our forecasts at least once a quarter, so we can investigate any issues.

Development activity - Developments are inherently risky and can face unexpected cost overruns and delays. High inflation and global supply chain delays have increased this risk over recent years. Through careful planning, site optimisation and ensuring our forward-fund commitments are capped, we seek to ensure all developments remain accretive to investors even if risks materialise.

FINANCIAL REVIEW

Portfolio valuation reflects stabilising asset values

Cushman & Wakefield independently values our portfolio in accordance with the RICS Valuation - Professional Standard (the "Red Book").

As at 31 December 2023, the portfolio was valued at £651.3 million (31 December 2022: £532.5 million), up £118.8 million or 22.3%. The increase was made up as follows:

The like-for-like valuation increase of £21.9 million equates to 5.30 pence per share. Of this, 5.22 pence per share resulted from inflation-linked rental growth, with 0.08 pence per share due to market value movements.

Resilient financial performance

Net rental income for the year increased by 17.0% to £49.4 million (2022: £42.2 million). Under IFRS, net rental income includes some rent we're required to recognise as income before we receive it, reflecting the minimum uplift in rents over the lease terms, on a straight?line basis. Our cash rental income for the year increased by 18.5% to £42.5 million (2022: £35.9 million). The issue with Silverline resulted in written off rental income of £0.2 million for the year.

In addition to our net rental income, the total income we earned from the portfolio in the year included interest on the loans we'd made to Holmes in December 2021 and Welford in January 2023, to finance asset purchases. This income totalled £3.7 million in 2023 (2022: £3.2 million) and is included within our interest income (see below). Having exercised our options to buy the assets in June 2023, this finance income came to an end and was replaced by rental income from that date.

Our administrative and other expenses totalled £7.1 million (2022: £7.0 million), which led to a total expense ratio of 1.54% for the year (2022: 1.67%). The EPRA cost ratio reduced to 14.4% (2022: 16.6%). Adjusting revenue to include interest income from our loans to operators and exclude the Silverline rent write-off reduces the cost ratio further to 13.4% (2022: 15.4%).

Finance costs were £12.0 million (2022: £5.4 million), mainly reflecting the increase in SONIA. Interest income was £3.8 million (2022: £3.2 million), which was largely from the operator loans and also included £0.1 million of interest on deposits.

The change in the fair value of investment properties was a gain of £14.8 million (2022: £(14.5) million loss), contributing to profit before tax of £48.8 million (2022: £16.9 million).

Earnings per share (EPS) for the year was 11.79 pence (2022: 4.33 pence) and EPRA EPS was 8.33 pence (2022: 8.37 pence per share). Adjusted EPS, which strips out non-cash and one-off items, was 7.28 pence (2022: 7.11 pence).

These EPS figures are all on both a basic and diluted basis. More information on the calculation of EPS can be found in note 11 to the financial statements.

Attractive and fully covered dividends

As a REIT, the Company must distribute at least 90% of its qualifying profits each year. The Company has therefore declared four quarterly dividends of 1.6925 pence each in respect of 2023, meeting the total dividend target of 6.77 pence per share, up 3.5% on the 6.54 pence paid in respect of 2022. All four dividends were Property Income Distributions.

The details of these dividends were as follows:

The total dividend for 2023 was 123% covered by EPRA EPS and 108% covered by adjusted EPS.

At 31 December 2023, the Company had distributable reserves of £97.2 million.

1 This includes the acquisition of a portfolio of nine assets which were invested in via a loan to operator in December 2021, where the Group had an option to acquire upon certain regulatory requirements being met. This option was exercised in June 2023.

Portfolio valuation drives higher net asset value

The NAV at 31 December 2023 was £478.1 million, up 7.2% (31 December 2022: £445.9 million). NAV per share was 115.38 pence (31 December 2022: 110.17 pence per share), with the growth rate of 4.7% reflecting the share issue as part of the portfolio acquisition in January, which increased the number of shares in issue by 2.4%.

The chart on page 44 of the annual report shows the main contributors to the movement in NAV per share. As we're required to pay out the large majority of our property rental earnings, the portfolio revaluation was the largest factor.

Strong and prudent balance sheet

During the year, we increased the size and duration of our RCFs, repaid our £15.0 million term loan with Metro Bank and put further interest rate caps in place. As a result, our facilities at the year end were as follows:

With the option to extend for up to two years to June 2030, subject to NatWest's agreement.

Interest cover covenant is 175% until June 2025 after which it will increase to 200% for the remainder of the term.

At the year end, our debt facilities had an average maturity of 6.3 years (31 December 2022: 6.3 years). If we exercise the extension options on the NatWest facility, this increases to 6.7 years.

We had significant liquidity at 31 December 2023, with cash and cash equivalents of £9.4 million and undrawn debt facilities of £65.2 million. This gave us total headroom of £60.5 million, after accounting for our capital commitments.

Dividends and net interest costs fully covered by operating cashflows:

Our cash movements in the year show that our dividends and net annual interest payments are fully covered by operating activities.

GOING CONCERN

The board regularly monitors the Company and Group's ability to continue as a going concern and its longer-term viability. The going concern assessment covers the 12-month period to 31 March 2025. Summaries of the Group's liquidity position, actual and prospective compliance with loan covenants and the financial strength of its tenants are considered at the scheduled quarterly board meetings. As part of the Group's assessment, the modelling includes (but is not limited to) the identification of uncertainties facing the Group, including:

· the risks of default of the Group's tenants, taking into consideration current rent cover. We review the occupancy performance of each tenant over the preceding 12 months and then run sensitivities by the tenant, including a drop in occupancy of 5%, an increase in staff costs by 5% and other costs by 10% and the effect these sensitivities have on rent cover and appraise the risk of a tenant default as low, medium or high; and

· the risk of a fall in investment property values. This may be because of a multitude of risks. We review the resulting impact on the Group's debt covenants and the remedial action that may be taken, including the extent of the resources available to the Company to cure covenant breaches.

The Group's forecasting model includes a variety of stress tests including reduction in investment property valuations, restriction of income from tenants (i.e. non-payment of rent), the inclusion of increases in underlying costs and increases in interest rates. Reverse stress tests have been prepared to evaluate how much valuations or net income would need to fall to trigger defaults in each of the security pools.

Mitigating actions including corresponding reductions in costs as valuations fall, the use of unsecured properties to prevent covenant breaches and stopping dividends were also considered. The sensitivity scenarios reviewed by the audit committee and the board include:

· non-payment of rent for all medium and high-risk tenants for six months while increasing SONIA and bank base rates to 5.5% on variable interest rate loans;

· assessing the level of loss of rents that could be sustained within a security group before each covenant or default level is triggered; and

· assessing the loss of rents or valuation that could be sustained before the Group's unsecured assets would be fully utilised in application to cure rights within debt facilities.

The detailed scenario modelling is performed by the IM and presented to the audit committee and board for review, challenge and debate. The projections and scenarios considered in connection with the approval of this financial information had particular regard to stresses arising from rising inflation and interest rates and, in particular, the impact on the trading and financial strength of the Group's tenants as highlighted above.

Property values would need to fall by more than 38% before loan-to-value covenant breaches would arise with all facilities being fully drawn. Rental income would need to fall by 36% before interest cover covenant breaches would arise, with all facilities being fully drawn.

Going concern statement

The board has weighed up the risks to going concern set out above, together with the ability of the Company to take mitigating action in response to those risks.

The board considers that the combination of their conclusions as to the tenants' prospects, the headroom available on debt covenants and the liquidity available to the Group to deal with stressed scenarios on income and valuation outlook, leads to a conclusion that the Company and the Group are each able to continue in business for the foreseeable future.

In 2024, the Company's Articles of Association require the board to propose an ordinary resolution at the Annual General Meeting (AGM) for the Company to continue in its current form. This will be the first continuation vote since the Company's inception, if the vote is passed the Company will continue its business as presently constituted and the continuation vote will be held at every fifth AGM thereafter. If the vote is not passed the directors shall within three months after the date of the resolution, put forward proposals to members to the effect that the Company be reconstructed, reorganised or wound up. The board are not aware of any significant or material issues raised by shareholders in relation to this continuation vote but will continue to engage with shareholders as the 2024 AGM approaches. In the event that a continuation vote was not passed, and the Group instructed to wind up, there would be a process of selling off the Group's assets and exiting its current business agreements, this would be expected to take at least 12 months following the AGM so the Company would continue to be a going concern.

The board therefore consider it appropriate to adopt the going concern basis in the preparation of this financial information.

Viability statement

The period over which the directors consider it feasible and appropriate to report on the Group's viability is the five-year period to 31 March 2029. This period has been selected because it is the period that is used for the Group's medium-term business plans. The board considers the resilience of projected liquidity, as well as compliance with debt covenants, under a range of inflation and property valuation assumptions. These scenarios include stress tests and reverse stress tests consistent with those described in the paragraphs preceding the going concern statement and include a consideration of mitigating actions that may be taken to avert or mitigate potential threats to viability.

Given the longer period of assessment covered by the viability review, further analysis is conducted in order to test the reasonableness of the key assumptions made and to examine potential alternative outcomes and mitigating actions relating to those risks and assumptions.

These included:

· debt re-financings during the forecast period. In relation to additional refinancing obligations within the period of the viability assessment, the directors have reasonable confidence that extensions or replacement debt facilities will be put in place; and

· furthermore, the Group has the ability to make disposals of investment properties to meet its future financing requirements; however, this assessment did not assume any disposals took place.

Having considered the forecast cash flows and the impact of the sensitivities in combination, the directors confirm that they have 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 ending 31 March 2029.

Section 172 statement

Section 172 of the Companies Act 2006 gives the directors several duties relating to the matters shown in the table below. During 2023, the directors consider that they've acted in good faith and in the way that would be most likely to promote the Company's success for the benefit of shareholders, while also considering the broad range of stakeholders who interact with our business.

Key board decisions

The board's key decisions in the year included approving:

· the portfolio acquisition in January (page 17 of the annual report);

· the revised dividend policy (page 16 of the annual report); and

· replacing Silverline as a tenant (page 21 of the annual report).

The other significant matters the directors considered are shown on pages 52 to 54 of the annual report.

This strategic report was approved by the board on 22 March 2024 and signed on its behalf by:

Simon Laffin

Chair

STATEMENT OF RESPONSIBILITIES

Directors' statement of responsibilities

The directors are responsible for preparing the annual report and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare the Group and Company financial statements for each financial year. The Group financial statements have been prepared in accordance with UK?adopted international accounting standards. The Company financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the directors must not approve the financial statements unless they are satisfied they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the Group and Company for that year.

In preparing the financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· for the Group financial statements, state whether they have been prepared in accordance with UK-adopted international accounting standards, subject to any material departures disclosed and explained in the Group financial statements;

· for the Company financial statements, state whether they have been prepared in accordance with Financial Reporting Standard 102 (FRS 102), subject to any material departures disclosed and explained in the Company financial statements; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that its financial statements comply with the Companies Act 2006.

They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a directors' report, a strategic report, a directors' remuneration report and a corporate governance statement that comply with that law and those regulations.

Website publication

The directors are responsible for ensuring the annual report, including the financial statements, is made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website (at https://www.impactreit.uk) is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Directors' responsibility statement, pursuant to DTR4

We confirm that to the best of our knowledge:

· the financial statements have been prepared in accordance with UK-adopted international accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and

· the management report includes a fair review of the development and performance of the business and the financial position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Signed on behalf of the board by:

Simon Laffin

Chair

22 March 2024

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2023

The results are derived from continuing operations during the year, the Group had no other comprehensive income in the current or prior year.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2023

The consolidated financial statements for Impact Healthcare REIT plc (registered number: 10464966) were approved and authorised for issue by the board of directors on 22 March 2024 and are signed on its behalf by:

Simon Laffin

Chair

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2023

For the year ended 31 December 2022